COURT FILE NR. CV-18-78521

MOTION HEARD: October 20, 2020

SUPERIOR COURT OF JUSTICE – ONTARIO

RE: Capital Sports Management Inc., Plaintiff

AND:

TRINITY DEVELOPMENT GROUP INC., 801 ALBERT STREET INC., TIP ALBERT LIMITED PARTNERSHIP, TRINITY ALBERT LP, G. BIRD HOLDINGS INC. c.o.b. GBA DEVELOPMENT AND PROJECT MANAGEMENT, JOHN RUDDY and GRAHAM BIRD, Defendants

BEFORE: Master Kaufman

COUNSEL: Robert Brush, Clarke Tedesco and Alexandra Grishanova, for the Plaintiff

Christopher D. Bredt and Teagan Markin, for the Defendants 801 Albert Street Inc. and TIP Albert Limited Partnership

Thomas G. Conway and Kevin Caron, for the Defendants G. Bird Holdings Inc. c.o.b. GBA Development and Project Management and Graham Bird

HEARD: October 20, 2020

REASONS FOR DECISION

[1] The moving parties, 801 Albert Street Inc. and TIP Albert Limited Partnership (the “Albert Street defendants”) and G. Bird Holdings and Graham Bird (the “Bird defendants”) bring this motion to require the plaintiff to pay $5,452,890 into court as security for costs and to stay this action as against them until such security is posted.

The action

[2] The action arises from a failed joint venture to develop a site located in the Ottawa downtown core called LeBreton Flats. The project entailed the building of residential units and a sports and entertainment arena. The plaintiff, Capital Sports Management Inc. (“CSMI”) is part of the Capital Sports Group of Companies, which owns the Ottawa Senators NHL hockey team. It partnered with Trinity Development Group to form a joint venture named Rendez-Vous LeBreton Group (“RLG”). RLG responded to the National Capital Commission’s (“NCC”) request for qualifications and was declared the highest ranked proponent.

[3] Trinity was also involved in a project to develop an abutting 3-acre property situated at 900 Albert Street. The LeBreton Flats and the 900 Albert Street projects were mixed-use developments, which included residential components. CSMI alleges that the 900 Albert Street development directly competed with the LeBreton Flats project and would have destroyed its viability.

[4] The moving parties are peripherally involved in the litigation between CSMI and Trinity. 801 Albert is the Ontario Corporation that owns the property located at 900 Albert Street. It is wholly owned by TIP Albert Limited Partnership, to which Trinity Albert LP is a partner. Trinity Albert LP is an entity related to Trinity.

[5] G. Bird Holdings Inc. is a project management and development firm. It is owned by Mr. Graham Bird. CSMI initially retained Graham Bird Holdings to prepare a response to the NCC’s request for qualifications. Trinity also retained Graham Bird Holdings in late 2016 to assist it with certain infrastructure issues related to the 900 Albert Street project. CSMI alleges that, by acting as agents for Trinity on both projects, the Bird defendants placed themselves in a conflict of interest. CSMI pleads that the Bird Defendants owed it a duty of care to advance the LeBreton project in good faith, that they were aware of the 900 Albert project’s negative impact, that they failed to advise CSMI of these development plans and that they failed to require that market studies in relation to LeBreton project take the 900 Albert Street project into account.

[6] CSMI seeks 700 million dollars in damages against all defendants, jointly and severally, for alleged breaches of fiduciary duties and breaches of duties of good faith. As against Trinity and its principal John Ruddy, CSMI alleges that these defendants misused confidential information about the LeBreton project to alter and expand their plans to develop 900 Albert Street. CSMI alleges that the Albert Street defendants were aware Trinity owed it a fiduciary duty and knowingly assisted it in breaching that duty. It contends that the Bird defendants breached duties they owed to the joint venture and assisted Trinity in breaching the fiduciary duties it owed CSMI.

[7] Trinity has counterclaimed against CSMI, seeking over 1 billion dollars in damages against it and its principal, Eugene Melnyk.

The applicable Rule

[8] Rule 56.01(1)(d) provides that the court may make such order for security for costs as is just where it appears that the plaintiff is a corporation or nominal plaintiff and there is good reason to believe that the plaintiff has insufficient assets in Ontario to pay the defendants’ costs.

The issues

[9] This motion raises three issues:

1. Have the moving parties shown that there are good reasons to believe that CSMI does not have sufficient assets to satisfy a costs award?

2. If so, has the plaintiff demonstrated that is has sufficient assets to satisfy a cost award?

3. Is an Order for security for costs just in the circumstances of this case?

1. There are good reasons to believe that CSMI does not have sufficient assets to satisfy a costs award

[10] On a motion under paragraph 56.01(1)(d), the defendants have the initial onus of establishing that there is good reason to believe that the corporate plaintiff has insufficient assets.[^1] The defendants need not prove that the plaintiff has insufficient assets.[^2] The defendants’ onus on the first step of this enquiry has been described as “light”.[^3] All they must prove is that there is a genuine concern that the plaintiff does not have sufficient assets.[^4] With this onus in mind, I now consider CSMI’s financial position.

CSMI’s financial position

[11] CSMI is an operating corporation. It was incorporated in 2004 and operates the Capital Sports Group of Companies’ non-Senators and non-Canadian Tire Centre activities. Its core business is to manage three “Sensplex” recreational facilities in the Ottawa area. CSMI has also been engaged in other activities unrelated to the Ottawa Senators, such as the Rendez-Vous LeBreton venture and other development projects. It provided its financials statements for the period of 2014 to 2020.

[12] CSMI generates substantial revenues from the Sensplexes. It earns these revenues by providing management services to Ottawa Community Ice Partners, the Ottawa municipal corporation that operates the Sensplexes. CSMI also receives management fees through ice time rented to the city of Ottawa and to third parties for the purpose of hockey tournaments. Since 2014, CSMI’s revenues from the management of the Sensplexes has averaged $1,040,163 per year. In the fiscal year ending June 30, 2019, CSMI’s total revenues were $1,145,836 but they decreased to $565,307 in 2020 due to the pandemic.

[13] CSMI’s expenses totalled $1,598,692 in 2019 and $1,795,256 in 2020. These expenses include the legal fees incurred as part of this litigation, but CSMI did not disclose the amount it has spent on legal fees. I accept that once this litigation is over, CSMI’s expenses will decrease, but it is not possible to quantify the amount of the projected decrease with any precision. CSMI’s expenses also include salaries, wages and benefits. These expenses are significant ($677,145 in 2020 and $643,111 in 2019), but CSMI explains that the Capital Sports Group of Companies allocate a percentage of certain employees’ wages to CMSI based on the amount of work these employees perform for CSMI in any given year. Accordingly, these salary expenses are not actual cash expenses, but the result of an accounting exercise pursuant to which the salaries of other Capital Sports/Ottawa Senators entities are allocated to CSMI.

[14] While it earns substantial revenues every year, CSMI is also heavily indebted to its controlling shareholder, Mr. Melnyk, through a $13,119,074 loan. On July 20, 2020, Mr. Melnyk entered into a subordination agreement with CSMI by which he agreed to subordinate the debt CSMI owes him to any costs award made in favour of the defendants in this action. CSMI agrees to make the subordination agreement enforceable through an order of this Court.

[15] CSMI argues that the moving parties have not met their initial onus to show that there are good reasons to believe that CSMI does not have sufficient assets to satisfy a costs award. Relying on City Commercial v. Bakick,[^5] it argues that it has intangible assets, and that the moving party must show indicia of financial difficulties, such as a failure to meet liabilities, to make corporate filings, the presence of unpaid judgments or a significant disposition of assets outside the ordinary course of business.

[16] In City Commercial, the defendants sought an order for security for costs and relied on the nature of the plaintiff’s business (a real estate brokerage) without providing any specifics about the plaintiff’s finances. While the Court of Appeal mentioned that the moving parties had not alleged that the plaintiff failed to meet its liabilities or presented other indicia of insolvency, I do not interpret this statement as imposing a requirement on defendants to show indicia of financial difficulty before they can meet their onus on the first part of the test. Proving indicia of financial difficulty is one way of showing that there is a “good reason to believe” that a corporation may not be able to meet a costs award.

[17] Showing that a corporation’s liabilities surpass its assets has normally been enough to meet the first part of the test.[^6] In JoBro Film Finance Ltd. v. National Bank of Canada, this Court held that it was an error to conclude that a corporation’s insolvency was insufficient to meet the defendant’s light onus of a “good reason to believe” or a “genuine concern” that a corporation does not have sufficient assets to meet a costs order.[^7]

[18] CSMI’s liabilities exceed its assets. Even if its loan to Mr. Melnyk was disregarded, CSMI’s financial statements show a $1,222,039 loss in 2020 and a $459,856 loss in 2019. I agree with the moving parties: this evidence satisfies their low burden of establishing that there are good reasons to believe CSMI has insufficient assets in Ontario to pay their costs.

2. The plaintiff has not demonstrated that it has enough assets to satisfy a cost award

[19] At the second step of the analysis, the onus shifts onto the plaintiff to either demonstrate impecuniosity or prove sufficient assets to respond to a costs order. The plaintiff does not plead that it is impecunious. To the contrary, the plaintiff asserts that it would be able to post security, if required. There are accordingly no concerns that an order for security for costs would deny it access to the Court.

[20] In assessing the sufficiency of the plaintiff’s assets, a plaintiff corporation must present convincing evidence.[^8] The court should consider the corporation’s assets, but not accept them uncritically. The court must assess the quality and sufficiency of the assets and whether they are bona fide. There is, however, a limit to the inquiry. The rule does not countenance extensive and speculative enquiries about what the future value and availability of the plaintiff’s assets is likely to be.[^9]

[21] A corporation’s assets may be tangible or intangible, but they must be of such a nature that their realizable net value meets the amount of costs to be secured.[^10] The plaintiff’s assets must be exigible, meaning that they can be readily converted to cash to generate the funds needed to meet a costs order without having resort to extraordinary measures.[^11]

[22] CSMI’s relies on its contracts to manage the Sensplexes, which it says virtually guarantee it substantial revenues for decades to come. It calculates that it can expect to earn $19,229,406 in the life of these contracts. CSMI adds that these guaranteed revenues can be garnished.

[23] I am not persuaded that a future revenue stream alone satisfies a plaintiff’s onus under Rule 56.01(d). The plaintiff must demonstrate that it presently has sufficient assets to pay a costs order, or at very least will have sufficient assets when the order is to be made. By the time a cost award is made, the moving parties will have already incurred significant costs. It does not appear reasonable to expect them to recoup these costs over what could be a very lengthy period. I was presented with no authority for the proposition that garnishable future revenues can constitute sufficient assets to meet a costs award. Moreover, the focus of the rule is on assets, not on income.[^12]

[24] To the extent that CSMI argues that its contracts to manage the Sensplexes are intangible assets, they are not of a nature that makes them exigible. On their terms, these contracts cannot be assigned. Unlike other kinds of intangible assets, they are not the kind of assets the defendants can seize and sell.

[25] CSMI argues that if the defendants obtained a costs judgment and CSMI did not pay it, the defendants could petition CSMI into bankruptcy. Accordingly, the defendants would have significant leverage to force CSMI to either borrow funds or to obtain them from its controlling shareholder to avoid losing the significant revenue stream these contracts generate. I accept that the defendants could use the remedies available to them under the Bankruptcy and Insolvency Act for leverage. However, the purpose of Rule 56 is to ensure that a successful defendant can recover its costs without having to resort to such extraordinary measures.[^13] Moreover, CSMI’s ability to pay a costs award in full ultimately depends on its ability to either borrow funds from third parties, from its shareholders, or from affiliated companies. There is no evidence on the record about the assets of the persons who would ultimately pay the moving parties’ costs.

[26] I have considered the fact that CSMI’s most recent financial statement shows that a significant portion of its assets ($323,906) are cash or cash equivalents. I conclude that CSMI does not have sufficient exigible assets to fully satisfy a costs award should one be awarded.

3. Is an Order for security for costs just in this case?

[27] Even where the requirements of the Rules have been satisfied, the court must still determine if an order for security for costs would be just in the circumstances of the case. The court has broad discretion in deciding whether security for costs is just. The Rule should be applied with due regard not only to its purpose of affording defendants a reasonable measure of protection for their costs but also with regard to their potential impact on plaintiffs.[^14] An order would be inappropriate if it would deny justice to a plaintiff with a legitimate action.

[28] I conclude that it would be just to make the order sought for the following three reasons.

[29] Firstly, having decided to commence this litigation through CSMI, Mr. Melnyk and the Capital Sports Group of Companies should not be permitted to reap the rewards of successful result without exposing themselves to costs in the event that they lose.

[30] The Capital Sports Group of Companies chose to bid on the LeBreton Flats project through CSMI. There is nothing improper about this, and it is consistent with the Capital Sports Group of Companies’ past practice of bidding on projects through CSMI. However, the Capital Sports Group of Companies would stand to benefit if CSMI was successful in this action. As things stand, it would not be liable for costs if CSMI lost. At the hearing, I enquired as to whether either Mr. Melnyk or the Capital Sports Group of Companies would be willing to provide an undertaking in their own name to pay the defendants’ costs if awarded. Such an undertaking could have been enforced in the current proceedings without the necessity of adding parties and without commencing separate proceedings to enforce the undertaking.[^15] Mr. Brush, for CSMI, would have been open to this solution. Mr. Bredt responded that Mr. Melnyk is a resident of Barbados, and that there was no evidence on the record about his or the Capital Sports Group of Companies’ assets or creditworthiness. Accordingly, Mr. Bredt did not have the opportunity to challenge the sufficiency of such an undertaking. I agree that, without this evidence, it would not be just to order such an undertaking as a form of security for costs.

[31] Secondly, CSMI’s ability to pay a costs order depends on Mr. Melnyk or the Capital Sports Group of Companies’ ability to pay them. As mentioned above, there is no evidence on the record about that ability or lack thereof.

[32] Thirdly, the moving parties are minor players in an action that primarily pits CSMI against Trinity. The moving parties are being sued for 700 million dollars jointly and severally and have spent considerable sums defending themselves to date. GBA is a relatively small company that employs between 8 and 10 people. To date, it has incurred $283,449 in legal costs and disbursements, while the Albert Street defendants have incurred $701,707 in costs and disbursements. Discoveries in this action have not yet been completed and the moving parties will incur considerably more costs should the matter proceed to trial. CSMI states that it is not impecunious and that it is able to post security for costs without affecting its ability to pursue its claims. On these facts, I prefer to exercise my discretion to afford the defendants a reasonable measure of protection for their costs. While I accept that posting security will affect CSMI’s ability to allocate money to other uses, it did not provide any evidence about the extent of such prejudice. That prejudice could be minor. On the other hand, I accept that the moving parties would be significantly prejudiced if they did not recover their costs.

Amount of security

[33] I agree with CSMI, and the moving parties have conceded, that security is customarily calculated on the partial indemnity scale.[^16] CSMI argues that the costs claimed are excessive and that the plaintiff should not be required to post security for “Cadillac service”. CSMI also objects to posting any amount of costs for motions for refusals because it is unclear that these motions will be necessary. Furthermore, they argue, costs on such motions are generally fixed at the end of the motion and payable within 30 days.

[34] The moving parties have provided affidavits that address the amount of costs they have incurred to date and the estimated costs they will incur until the completion of trial. The Albert Street defendants have incurred costs in the approximate amount of $701,707 and the Bird defendants approximately $283,449. CSMI contends that the moving parties have not provided evidence that these fees have actually been paid. The moving parties’ sworn evidence is that they have incurred these costs, which means that they have either paid them or become liable for them. In my view, nothing turns on whether the moving parties have already paid these costs or are indebted to their counsel. CSMI has provided no authority that such a distinction ought to be made.

[35] The Albert Street defendants estimate that they will incur a further $3,251,183 while the Bird defendants estimate $1,213,064, including HST and disbursements. These costs are broken down as follows:

Albert Street Defendants

Bird Defendants

Continued examination for discovery

$54,280

$6,800

Review and completion of answers to undertakings

$11,050

$7,000

Preparation and attendance for motions for undertakings / refusals

$20,260

$11,000

Further examinations for discovery

$126,600

$27,200

Answers to further undertakings

$39,120

$19,625

Pre-trial

$65,500

$30,200

Preparation for trial

$984,000

$416,000

Trial

$1,443,600

$510,000

Disbursements

$150,000

$51,622

[36] The amount of security ordered should be as the court thinks just in all the circumstances of the case. The moving parties estimate that the trial will last 60 days. CSMI does not agree with that estimate, but it did not provide an estimate of its own. It is difficult to estimate the length of the trial at this stage with any accuracy. However, based on a review of the allegations in the pleadings, the fact that this is a complex commercial claim between sophisticated parties, and considering the amounts at stake, I will assess the moving parties’ estimated future costs on the basis of a 50-day trial.

[37] I assess the amounts to be posted for security for costs on a partial indemnity basis and inclusive of HST as follows:

1. For the costs incurred to date: $192,177 for the Bird defendants and $479,147 for the Albert Street defendants. I accept their fees as claimed, and I calculate partial indemnity at 60% of actual costs. CSMI argues that the moving parties have not provided dockets or particularized these costs. CSMI could have provided evidence of the legal fees it incurred to date if it wished to challenge the moving parties’ costs as unreasonably high. I draw an adverse inference from its failure to lead this evidence, and I assume that its own costs thus far have been comparable, if not higher.

2. For the steps up to the completion of discoveries: $155,940 for the Albert Street defendants and $41,103 for the Bird defendants. I am not including any costs for motions for refusals. I agree with CSMI that if these motions are brought, costs would normally be awarded to the successful party at the conclusion of the motion.

3. For trial preparation and trial, the amount of security is calculated as follows: 2 hours of preparation for each hour of trial at 6 hours of trial per day. The amount of security is based on three counsel for the Albert Street defendants (Mr. Bredt, Ms. Wagner and Ms. Markin) and two counsel for the Bird defendants (Messrs. Conway and Caron). On a partial indemnity basis, the Albert Street defendants’ security for costs totals $1,480,940 and $518,670 for the Bird defendants, inclusive of HST.

[38] I agree with CSMI that security should be posted on an instalment or “pay as you go” basis. I also give CSMI a $323,000 credit on account of the cash and cash equivalent it has on hand. In consideration for this substantial credit, Mr. Melnyk’s subordination agreement with CSMI shall be made enforceable as an order of this Court, as CSMI has invited me to do.

[39] Based on the foregoing, the Court orders that:

1. CSMI shall post with the accountant of the Superior Court of Justice by cash, bond or letter of credit:

i. Within the next 30 days, $545,366[^17] for the costs incurred to date and those that will be incurred to complete discoveries, of which $138,633[^18] will constitute the Bird defendant’s security for costs and $406,733 the Albert Street defendants’ security for costs.

ii. Upon the setting the matter down for trial, $999,805, of which $740,470 will constitute the Albert Street defendants’ security for costs and $259,335 the Bird defendants’ security for costs.

iii. No later than 60 days before trial, $999,805, of which $740,470 will constitute the Albert Street defendant’s security for costs and $259,335 the Bird defendants’ security for costs; and

2. The subordination agreement dated July 20, 2020 shall be enforceable as an Order of this Court.

Costs of this motion

[40] The parties provided costs outlines. The Albert Street defendants claim $46,891.42 on a partial indemnity basis, while the Bird defendants claim $15,277.81. CSMI’s claims $47,914.88, also on a partial indemnity scale.

[41] In exercising the discretion to award costs, the court should be mindful of two touchstone considerations: reasonableness and proportionality.[^19] Costs are to be guided by the factors set out in Rule 57.01 and the Court should strive to fix an amount that is fair and reasonable for the unsuccessful party to pay having regard to the particular circumstances of the case.[^20]

[42] The moving parties were substantially successful on this motion and are entitled to their costs. CSMI’s costs are very similar to those claimed by the Albert Street defendants. It would be reasonable for CSMI, as the unsuccessful party, to expect to pay costs comparable to the fees charged by its lawyer on this motion. The parties conducted themselves reasonably, the costs claimed are proportional to the importance of the issues raised and there were no offers to settle. I fix costs in the amount of $45,000 for the Albert Street defendants and $15,000 for the Bird defendants, payable by CSMI within 30 days.

[43] I thank all counsel for their excellent and helpful submissions.

Master Kaufman

Date: November 26, 2020

[^1]: R. 56.01(1)(d), Rules of Civil Procedure, R.R.O. 1990, Reg 194.

[^2]: Health Genetic Center Corp. v. Reed Business Information Ltd., 2014 ONSC 6449 [2014] O.J. No 5395 at para. 4 (Ont. Master).

[^3]: Ibid, at para. 5.

[^4]: JoBro Film Finance Ltd. v. National Bank of Canada, 2020 ONSC 975, at para 26.

[^5]: 2005 CarswellOnt 10512, [2005] O.J. No. 6443 (Ont. C.A.). [City Commercial].

[^6]: Health Genetic Center Corp. v. Reed Business Information Ltd., 2014 ONSC 6449, at para. 13; JoBro Film Finance Ltd. v. National Bank of Canada, 2020 ONSC 975, at para. 25; Automotive Professionals Inc. v. Pentamark/Worldwide Canada Inc., 2006 CarswellOnt 6726, [2006] O.J. No. 4363, at para. 18; Legendary Log Homes, Inc. v. Courtice Auto Wreckers Limited, 2008 53119 at para 2.

[^7]: JoBro Film Finance Ltd. v. National Bank of Canada, 2020 ONSC 975, at para. 26.

[^8]: General Products Inc. v. Actiwin Co., 2015 ONSC 6923 at para. 18.

[^9]: 671122 Ontario Ltd. v. Canadian Tire Corp, 1993 8606 (ON CA), 15 O.R. (3d) 65, 107 D.L.R. (4th) 207 (Ont. C.A.).

[^10]: City Commercial Realty (Canada) Ltd. v. Bakich, 2005 CarswellOnt 10512, [2005] O.J. No. 6443 at para. 9.

[^11]: Bluefoot Ventures Inc. v. Ticketmaster, 2008 CarswellOnt 8788, [2008] O.J. No. 5690, 71 C.P.R. (4th) 273 at para. 6 (Ont. Master).

[^12]: Health Genetic Center Corp. v. Reed Business Information Ltd., 2014 ONSC 6449 at para. 5.

[^13]: Bluefoot Ventures Inc. v. Ticketmaster, 2008 CarswellOnt 8788, [2008] O.J. No. 5690, , 71 C.P.R. (4th) 273 at para. 6 (Ont. Master).

[^14]: 671122 Ontario Ltd. v. Canadian Tire Corp., 1993 8606 (ON CA), 15 O.R. (3d) 65, 107 D.L.R. (4th) 207 (Ont. C.A.).

[^15]: Printing Circles Inc. v. Compass Group Canada Ltd. (2007), 2007 57095 (ON SC), 88 O.R. (3d) 685 (S.C.J.), 288 D.L.R. (4th) 314 at para. 47.

[^16]: Lipson v. Lipson, 2020 ONSC 1324 at para. 49.

[^17]: This amount is calculated as follows: $192,177 + $479,147 – $323,000 (CMSI’s cash or cash equivalents) + $155,940 + $41,103.

[^18]: The total security for the costs incurred to date is $671,324. After deducting CMSI’s $323,000 credit, the amount of security is $348,324 of which $97,530 is the Bird defendant’s pro-rated share and $250,793 is the Albert defendants’ share of the total.

[^19]: Beaver v. Hill, 2018 ONCA 840, 143 O.R. (3d) 519 at para. 4.

[^20]: Boucher v. Public Accountants Counsel for Ontario, 2004 14579, 71 O.R. (3d) 291 (Ont. C.A.).