1615574 Ontario Inc. et al. v. Hodgson et al.

COURT FILE NO.: CV-19-613523 CV-19-61352300A1

DATE: 2021/12/20

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 1615574 ONTARIO INC. et al., Plaintiff

AND:

HODGSON et al., Defendant

AND;

BENNINGTON FINANCIAL CORP., Third Party

BEFORE: ASSOCIATE JUSTICE RONNA M. BROTT

COUNSEL: F. Scott Turton for the Plaintiffs scott@scottturtonlaw.com

Megan J. Swan, for the Defendants Hodgson et al. swan@paveylaw.com

J. Paul Bannon, for the Defendants Coptic Orthodox et al. paul@bannonlaw.ca

Ivan Lavrence, for the Third Party Bennington Financial ivanl@benningtonfinancial.ca

ENDORSEMENT

[1] The defendants Wesley Adam Hodgson (“Hodgson”), David Charles Murray Middlemost (“Middlemost”), Sharon Harrison (“Harrison”) and 2560602 Ontario Inc., cob Crunch Fitness (“Crunch Fitness”), (collectively the “Crunch defendants”) bring this motion for an order that the plaintiffs 1615574 Ontario Inc., (“161”), Premier Fitness Clubs (Erin Mills) Inc., (”Premier Fitness EM”) and 1860331 Ontario Inc. (“186”) (“the plaintiffs”) shall pay into court the sum of $228,693.70 as security for costs through to trial.

[2] The defendant Coptic Orthodox Patriarchate of Alexandria the Church of the Virgin Mary and St. Athanasius (“the Church”), also seeks an Order that the plaintiffs pay into court $200,000.00 as security for costs.

[3] The Third Party Bennington Financial Services Corp. (“Bennington”) also seeks an Order that the plaintiffs post security for costs in the amount of $200,000.

THE FACTS

[4] John Cardillo (“Cardillo”), a non-party in this litigation, is the founder and guiding mind of a chain of fitness clubs operated under the Premier Fitness brand, and he is an officer, director and guiding mind of the plaintiffs Premier Fitness EM and 161.

[5] The Church is the owner of the commercial premises (“the premises”) in issue in this action. The plaintiffs Premier Fitness EM and 186 leased and operated a fitness club at the premises.

[6] On December 1, 2003 the Church and 161 executed a formal commercial lease agreement for the operation of a gym. John Harrison was the manager of the gym from 2003 to the time the lease was terminated for non-payment of rent in February 2017. The defendant Sharon Harrison is his former spouse.

[7] The Third Party, Bennington Financial Corp. (“Bennington”) leased fitness equipment to and was a secured creditor of the plaintiffs Premier Fitness EM and 186.

[8] 161 was routinely in default of rental payments and the Church routinely was forced to bring enforcement proceedings during the period of 2006-2014. In February 2012 the Premier Fitness companies were placed into receivership. Despite receivership being rescinded, most of the Premier club locations closed. The plaintiff Premier Fitness EM transferred all of its assets and liabilities to a new operating company, 186, which carried on business as Erin Mills Fitness. John Harrison was the sole officer, director and shareholder of 186. Cardillo had a continuing role in 186 and claims to be an officer, director and guiding mind of the plaintiff 186. He takes the position that he owned a seventy-five percent interest of Erin Mills Club and he has commenced oppression remedy litigation against the defendant John Harrison and Sharon Harrison regarding their interests in 186 and 161.

[9] 186 continued to operate the Erin Mills Club and 161 continued as the tenant under the lease. On February 4, 2017 the Church terminated the lease with 161 for failure to pay the rent. On February 5, 2017 the defendant Hodgson contacted a representative of the Church to inquire about leasing the premises. On February 8, 2017 the lease was assigned to Crunch Fitness.

[10] When the Church terminated the lease, Bennington repossessed its collateral. On February 28, 2017 the Church entered into an agreement to purchase from Bennington the membership contacts, active membership lists and all monies due from members. On December 31, 2017 Crunch Fitness entered into a purchase agreement for the equipment.

[11] The plaintiffs commenced this action alleging an elaborate conspiracy wherein Harrison and 186 allegedly conspired with Crunch Fitness and the Church to destroy the plaintiffs’ business. The plaintiffs also allege that the Crunch Fitness defendants converted membership lists, equipment and contracts belonging to the plaintiffs.

[12] Since transferring its assets to 186, Premier Fitness EM has not carried on business. 186 no longer carries on business as all of its assets were either leased or pledged to Bennington and those were sold by Bennington in 2017. John Harrison, the registered owner of all shares in 186, declared personal bankruptcy in June 2018 and listed the shares at $1.00. He is currently bankrupt.

THE MOTION

[13] On Rule 56 motions the initial onus is on the moving party to satisfy the court that it appears there is a good reason to believe that the matter comes within one of the enumerated areas noted in Rule 56.01. The relevant provision on this motion is Rule 56.01(d) which states:

The court, on motion by the defendant or respondent in a proceeding, may make such order for security for costs as is just where it appears that,

(d) the plaintiff or applicant is a corporation or a nominal plaintiff or applicant, and there is good reason to believe that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent;

[14] Once the first step is satisfied, the onus shifts to the responding party to establish that an order for security for costs would be unjust. The plaintiffs can meet that onus by demonstrating one of the following:

1. It has appropriate or sufficient assets in Ontario or in a reciprocating jurisdiction to satisfy any order of costs made in the litigation;

2. It is impecunious and that its claim “is not plainly devoid of merit”; or

3. If the plaintiffs cannot establish that it is impecunious, but it does not have sufficient assets to meet a costs order, that its claim has a “good chance of success” on the merits. (2311888 Ontario Inc. v Ross, 2017 ONSC 1295, Coastline Corp. v Canaccord Capital Corp. 2009 CanLII 21758 (ON SC), [2009] O.J. No. 1790).

The first stage

[15] The plaintiffs are Ontario corporations incorporated by Cardillo to operate Premier Fitness EM gym at the premises. In 2012 Premier Fitness EM ceased operations and transferred all of its assets to 186. 186 ceased operations when Bennington enforced it security in 2017.

[16] The plaintiff 161 was routinely in default for non-payment of rent. In 2012 the Premier companies were placed in receivership. The receivership was set aside but both Premier Fitness EM and 186 relied on 161 as the tenant and that lease was terminated in 2017 by the Church for on-going non-payment issues.

[17] In my view there is very good reason to believe that the plaintiffs have insufficient assets to pay the costs of the defendants and thus there is a prima facie basis for an order for security for costs. To discharge that onus the plaintiffs must show either:

1. That they have sufficient assets in Ontario or in a reciprocating jurisdiction to satisfy any costs order made in the litigation or;

2. That they are impecunious and justice demands that the action proceed without it posting security for costs. And, if not impecunious, and they do not have sufficient assets to satisfy a costs order, that they have a good chance of success on the merits.

The second stage

Sufficiency of assets

[18] For the responding party to satisfy the onus that they have sufficient assets, that evidence must be described with “robust particularity”.(General Products Inc. v Actiwin Co.(2015),260A.C.W.S.(3d)701(S.C.J.)

[19] The only evidence put forth by the plaintiffs on this motion is a four-paragraph affidavit of the former CFO of Premier Fitness who held that position in 2003. The plaintiffs assert that they have sufficient assets to satisfy any costs order because they allege that Premier Fitness did not transfer its chattels to 186 and further, that the defendants misappropriated those chattels.

[20] The plaintiffs do not address what assets are held by the corporations. There is no evidence of exigible assets. The plaintiffs cannot both demand in the Amended Statement of Claim the return of the chattels and then at the same time, claim that those chattels are available to satisfy security for costs. The plaintiffs’ pleading also admits to their failure to pay rent and to default under the equipment lease.

[21] In their responding factum the plaintiffs submit that Section 249(3) of the Ontario Business Corporations Act, R.S.O. 1990, c. B. 16 (“OBCA”) precludes the moving parties from being granted an order for security for costs against certain plaintiffs as it states that complainants in derivative actions are not required to post security for costs. The core of the within action is a claim for breach of contract, conspiracy, conversion and inducement. The plaintiffs amended their claim to plead in the alternative to the derivative claim, that Cardillo became the sole director of 186, that the claim no longer has a derivative component to it. Even if the amendment is found not to remove the derivative claim, the core nature of the action is with respect to the other separate issues to which security for costs orders are appropriate.

[22] I accordingly find that the plaintiffs have not demonstrated that they have sufficient assets in the jurisdiction or reciprocating jurisdiction to satisfy a costs order made in this litigation.

Impecuniosity

[23] Given the plaintiffs’ failure to demonstrate sufficiency of assets, the burden is on them to prove impecuniosity and to show that an injustice would result if they were not allowed to proceed with the action. (Smith Bus Lines Ltd. v Bank of Montreal, 1987 CanLII 4190 (ON SC), [1987] O.J. No. 1197 (H.C.J.).

[24] The plaintiffs have not alleged impecuniosity. Accordingly, it falls upon them to satisfy a high threshold regarding the merits of the action by demonstrating to the court that they have a ‘good chance of success’.

Merits

[25] The plaintiffs have failed to adduce any evidence of the merits of this action. The only evidence before the court is, as noted above, a four-paragraph affidavit of a former CFO, listing some assets of Premier Fitness EM back in 2003. It is silent with respect to the claims of conspiracy, inducing breach of contract or conversion. Further, the plaintiffs Amended Statement of Claim admits to its failure to pay rental arrears and further, admits that the Church was entitled to terminate the lease.

[26] 186 leased a substantial portion of the equipment from Bennington, and it granted a General Security Agreement over any remaining assets that it actually owned. 186 defaulted in payments to Bennington, so Bennington terminated the equipment leases and sold the equipment to the Crunch defendants. The equipment lessor is entitled to enforce its remedies under the PPSA. Further, even if the court were to accept the allegations of conspiracy, the claim is still devoid of merit as the claim for conversion against Bennington is statute barred.

[27] The Divisional Court is clear that the plaintiffs bear the onus of leading evidence to establish the merits. If the plaintiffs lead no evidence as to the merits then it has not established either standard (a “good chance of success” or that the claim is “not devoid of merit”) (Zaitoun v Economical Insurance Group, 2008 CanLII 20996 (ON SCDC), 2008 CarswellOnt 2576, 236 O.A.C. 76 (Div. Ct.)

[28] In my view, there is good reason to believe that the plaintiffs lack adequate assets to pay the costs of the defendants and the Third Party. There is no evidence of impecuniosity. This court has found that the evidence on this motion fails to disclose that the plaintiffs have a good chance of success. While any Order for security for costs is highly discretionary, on the evidence before this court, it is clear that the defendants need protection from the risk of not being able to collect their costs.

Quantum

[29] The quantum of costs to be posted is generally an amount which can be reasonably expected as a costs award, should the plaintiffs’ claims fail. To date there have not yet been examinations for discovery. The scope of those discoveries will be complex and extensive given the intermingling of the plaintiff corporations as well as their allegations of conspiracy as against the defendants.

[30] The plaintiffs assert that the defendants’ materials are inadequate to permit the court to fix quantum. With respect, it is clear that in light of the numerous claims advanced by the plaintiffs, the numerous agreements in issue as well as the number of parties, this action will be complex and lengthy. Further, the plaintiff did not file a draft Bill of Costs and given that Mr. Cardillo is no stranger to litigation, he must be well aware of the costs of litigation.

[31] In my view, examinations for discovery will be more lengthy than in the average action. It is highly likely that leave will be required for additional discovery time. The issues of conspiracy and the derivative action and the claims for conversion are complex. There is allegedly $8 million in dispute. While each of the defendants have submitted Bills of Costs estimating costs in or around $200,000.00, it is ordered that the plaintiffs pay into court as security for costs to each of the Crunch defendants and the Church defendant, the sum of $80,000.00.

[32] On the issue of Bennington’s request for costs, as a general rule, an unsuccessful party will not be ordered to pay costs of a third party; the reasoning being that the plaintiff did not sue the third party. However, courts have acknowledged that there are circumstances that warrant payment of costs by a plaintiff to a third party when fairness so dictates. Guarantee Co. of North America v Resource Funding Ltd. (2009), 82 C.P.C. (6th) 258 (Ont. S.C.J.) sets out that test as follows:

1. Where the main issue litigated was between the plaintiff and the third party;

2. The third party was brought or kept in the matter by reason of the act or neglect of the plaintiff;

3. Where the case involves a string of contracts in substantially the same terms for the sale of goods; or

4. Where the third-party proceedings follow naturally and inevitably upon the institution of the plaintiff’s action, in the sense that the defendant had no real alternative but to join the third parties.

[33] The list above is not exhaustive and the court has discretion to order a third party’s costs.

[34] In this action, Mr. Cardillo was well aware of Bennington’s actions. He received the notice of termination of the lease and he acknowledged the PPSA registration. In 2017-2018 Bennington and Premier Fitness EM were involved in separate litigation involving whether Bennington was entitled access to the property to seize its equipment. Given the conversion allegations, it was inevitable that the third party claim against Bennington would be brought. Accordingly, the third party is entitled to security for costs. The plaintiffs shall pay to the third party Bennington security for costs in the amount of $80,000.00.

[35] The plaintiffs shall not take any further steps in this litigation until these costs have been paid.

[36] Counsel shall attempt to resolve the issue of costs within thirty (30) days following release of the Endorsement. If unable to come to an agreement on costs, the moving parties shall serve and file brief submissions (1-2 pages) and Costs Outlines within 15 days, and within 15 days thereafter, the responding parties shall serve and file its submissions and Costs Outline. There shall be no reply submissions on the issue of costs of this motion without leave of the court.

ASSOCIATE JUSTICE RONNA M. BROTT

Date: December 20, 2021