COURT FILE NO.: CV-18-602355
DATE: July 27, 2022
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Barry Paulin and Wayne Biggar v. Jack Pinder, Victor Dusik, and Innotech Safety Solutions Inc.;
BEFORE: ASSOCIATE JUSTICE C. WIEBE
COUNSEL: Benjamin Tustain for the defendants; Douglas J. Spiller for the plaintiffs;
HEARD: July 25, 2022.
REASONS FOR DECISION
[1] The defendants bring this motion seeking an order for security for costs. Initially, when the motion was commenced in November, 2021 the defendants sought an order requiring that the plaintiffs post $350,000 in security for costs. On July 14, 2022, just 11 days before the argument of the motion, the defendants amended their notice of motion to a request for an order for security for costs in two parts, one in the amount of $200,000 for this action and the other in the amount of $100,000 for a counterclaim brought by the plaintiffs in an action commenced by the defendants on September 28, 2021 (“the Second Action).
[2] The parties are the directors and main shareholders of a start-up company called Innotech Safety Solutions Inc. (“Innotech”) set up for the purpose of developing a technology that would detect an imminent wheel loss in vehicles (“the Invention”). The plaintiffs commenced this action in 2018 seeking an oppression remedy on account of various things including the disclosure by the defendants of information about an investment by the State of Kuwait establishing a subsidiary Innotech corporation in the State of Kuwait. The plaintiffs’ succeeded in obtaining interim injunction orders from Justice Myers on August 24, 2018 and from Justice Lederer on October 16, 2018 requiring that the defendants make such disclosure. The defendants made disclosures. The interim injunction orders were dissolved by Justice Perell on April 15, 2019. By this point the Kuwait initiative was dead.
[3] The plaintiffs appealed the Perell order to the Court of Appeal and the Divisional Court without success. The proceedings before Justice Perell and the appellate courts led to a series of costs orders against the plaintiffs. This led to a garnishment proceeding by the defendants concerning the proceeds of sale of Mr. Biggar’s matrimonial home and an order by Justice Skarica on April 13, 2021 allowing those proceeds to be so garnished. The plaintiffs appealed that order to the Court of Appeal and the Divisional Court and did so, again, unsuccessfully resulting in further costs orders against the plaintiffs. In the end, the plaintiffs had unpaid costs orders totaling $153,000.
[4] After the commencement of this motion, on December 1, 2021 Mr. Biggar caused proceeds of sale in the amount of $127,034.01 to be applied to the outstanding costs order, and on January 24, 2022 Mr. Paulin paid another $24,830.22. All the costs orders were paid. However, on February 9, 2022 the Registrar of the Court of Appeal added administratively a $750 costs order when the plaintiffs failed to perfect their last appeal to the Court of Appeal. That remains unpaid.
Unpaid costs orders
[5] Rule 56.01 governs motions for security for costs. Rule 56.01(1) specifies that the court “may” award security for costs “as is just” where “it appears” certain listed grounds are established. One of these listed grounds is Rule 56.01(1)(c), namely that the defendants have costs orders against the plaintiffs that remain unpaid. The defendants rely on this ground and must prove it.
[6] While that ground may have justified this motion when it was brought initially in November, 2021, it does not do so now, as all judge-made costs orders are now satisfied. All that remains is an administrative costs order that arose during the pendency of this motion and that is only $750. This small costs order has not been demanded by the defendants. It does not justify a security for costs order, particularly when the plaintiffs have in the last seven months satisfied over $150,000 in costs orders, having delayed paying those costs orders while their appeals were pending.
Another proceeding for the same relief
[7] Another stated ground under Rule 56.01(1) is (b), namely that there is another proceeding pending in Ontario for the “same” relief. The defendants rely on this ground arguing that the plaintiffs’ counterclaim in the Second Action amounts to a proceeding for the same relief as claimed in this action. They must prove the point.
[8] I agree with Mr. Spiller that the defendants have failed to prove this ground. The counterclaim in the Second Action raises as a major allegation the claim that the defendants took illegal steps to falsely claim on a US patent application for the Invention, and indeed on other patent applications, that they were “inventors” when they were not. The allegations are pleaded to be based on revelations from the Innotech patent agent in August, 2021 concerning the US patent application. The plaintiffs claim that the original assignment of the patent to Innotech should be revoked. These allegations do not appear in this action. The relief claimed is not the “same.”
[9] I add another comment. It would be “unjust” in my view to require security for costs on this ground. The defendants have not defended or counterclaimed in this action. Such a counterclaim may have detracted from the defendants’ ability to get security for costs. Instead, they commenced the Second Action claiming damages from the plaintiffs due to alleged oppression concerning the Kuwait negotiations. This triggered the counterclaim which the defendants are now using to try to get security for costs on the basis that this is another proceeding for the same relief. The defendants triggered this counterclaim.
[10] I also note that the Second Action itself appears to be highly dubious. It appears to have been commenced by the defendants after the expiration of the limitation period. As stated above, the Second Action is an oppression action concerning the Kuwait negotiations. By the time of the Perell decision on April 15, 2019, those negotiations were over. The Second Action was commenced on September 29, 2021, 29 months later.
Frivolous and vexatious
[11] Another stated ground under Rule 56.01(1) is (e), namely that there is “good reason to believe” that the action is “frivolous and vexatious” and that the plaintiffs have insufficient assets in Ontario to pay the defendants’ costs. The defendants rely on this ground and must prove it.
[12] Concerning the first part of the test, is this action frivolous and vexatious? The issue of frivolousness concerns the merits of the action. Master MacLeod (as he then was) stated in Ilitchev v. Yevstigneev, 2004 CanLII 33021 (ON SC) at paragraph 18 that “in my view a frivolous action is an action that appears so highly unlikely to succeed that it is apparently devoid of practical merit.” Is there “good reason to believe” that this action is frivolous?
[13] The defendants primary argument is that, with the demise of the Kuwait initiative, there is only one real claim left in this action, namely that of the alleged misappropriation of the Invention through the naming by the defendants of themselves as “inventors” in the US patent application. They argue that this is not a proper basis for an oppression action, as the Invention belongs to the company. For an oppression action, the alleged conduct must be shown to affect the plaintiffs in a peculiar way that is distinct from other shareholders; see Pasnak v. Churna, 2004 BCCA 221 at paragraph 27. They argue that the misappropriation claim should be brought as a derivative action, thereby rendering this oppression action frivolous.
[14] I do not accept this argument. First, this action as originally brought clearly had merit. It led to two successful interim injunction orders concerning the Kuwait negotiations. Now with the demise of the Kuwait negotiations, the issue is whether anything remains to be determined.
[15] Second, as argued by Mr Spiller, the issue of the US patent is not pleaded in this action. It is pleaded in the Second Action. Therefore, Mr. Tustain’s point about derivative actions does not pertain to this action.
[16] Third, there are allegations in this action other than those relating to the Kuwait negotiations that have not been shown to be without merit. There are the allegations that the defendants ousted the plaintiffs as officers and directors, hired people without authority to do so, engaged in unauthorized management of the company and made deals with other third parties that disadvantaged the plaintiffs. These allegations are also raised in the counterclaim in the Second Action. The defendants have not asked for particulars of these pleadings or moved to get them. These issues have not been shown to be without merit.
[17] Fourth, I am not convinced of Mr. Tustain’s derivative claim argument as it may apply to the US patent issue pleaded in the counterclaim in the Second Action. There is evidence on this motion from plaintiffs that the Invention originally belonged to the plaintiffs as the true inventors, and was improperly assigned to Innotech in 2013 through an assignment document (created by the defendants) showing the individual defendants as inventors as well. The allegation appears to be that this led to the improper US patent application. This evidence suggests that the plaintiffs, the original inventors, could in fact be uniquely harmed by the conduct of the defendants and the company, thereby justifying an oppression action and not a derivative action.
[18] Mr. Tustain also argued that the counterclaim in the Second Action is statute-barred, thereby rendering that action frivolous. He argued that the plaintiffs should have known about the misappropriation claim as early as 2013 when the assignment was signed. I also do not accept that argument as the plaintiffs pleaded in the counterclaim in the Second Action that they only became aware of the import and breadth of the “inventor” issue in the summer of 2021 when the patent agent made his disclosure. The issue of the discovery or discoverability of this cause of action would appear to be a real one that merits exploration.
[19] As a result, I do not find that there is “good reason to believe” that this action or the counterclaim in the Second Action are frivolous. I note incidentally that Justice Perell stated in paragraph 25 of his Reasons for Decision dated April 15, 2019 that “the Plaintiffs may have a meritorious claim for an oppression remedy.” This comment bolsters my confidence in this decision.
[20] The issue of vexatiousness concerns process. A proceeding becomes vexatious when it amounts to an abuse of process. In Howie, Sachs & Henry LLP v. Wei Chen, 2015 ONSC 2501, Justice Dow described a vexatious litigant to include two characteristics that the defendants rely upon - failing to pay costs and persistent unsuccessful appeals from judicial decisions. The defendants argue that this is what the plaintiffs did in this case, namely failed to pay ordered costs and launched repeated unsuccessful appeals of judicial decisions.
[21] I am not convinced of this position. The underlying action had merit, and, as stated above, still appears to have merit. The plaintiffs were successful in obtaining two interim injunction orders requiring disclosure about the Kuwait negotiations. After disclosure, when Justice Perell denied the plaintiffs internal contempt motion and dissolved the injunctions, it stands to reason that the plaintiffs were disappointed and exercised their appeal rights accordingly. They appear to have chosen wrong appeal routes on two occasions.
[22] When the defendants took steps to garnish assets to collect the ordered costs, the plaintiffs resisted. In his affidavit in this motion, Mr. Paulin stated that this resistance was based on legitimate family law issues concerning the funds in question, namely that the funds were trust funds and that the rights of the spouses to the funds had not been determined. These facts were not challenged. In the end, in December, 2021 and January, 2022, the plaintiffs paid the entirety of their cost obligations and ceased their appeals.
[23] This is not, in my view, abusive conduct. It is the conduct of parties who aggressively exercised their appeals rights to protect and sustain the interim injunction they obtained, and who had a legitimate position resisting garnishment.
[24] As a result, I do not find that there is “good reason to believe” that this action or the counterclaim in the Second Action are vexatious.
Insufficient assets to pay costs
[25] These findings bring an end to this motion. The test in Rule 56.01(1)(e) is conjunctive, namely both elements must be established, namely that there is “good reason to believe” that the action is frivolousness and vexatiousness and that the plaintiff has insufficient assets in Ontario to pay the defendants’ costs.
[26] As to the issue of insufficiency of assets, I will make a brief comment. The defendants evidence in this regard is sparse. They rely on the evidence that came out of the garnishment proceedings. The evidence concerning Mr. Biggar is that he is retired, lives on Canada Pension and Old Age Security, has a truck and has the proceeds of sale of the matrimonial home tired up in matrimonial litigation. The evidence concerning Mr. Paulin is that he has a house on Oro-Medonte, Ontario that is encumbered to the extent of $470,000.
[27] I do not find this evidence of a “good reason to believe” that the plaintiffs have insufficient assets in Ontario to pay the defendants’ costs. Given the real estate market of the last few years in Ontario, the court would require a much clearer picture of the present equity in Mr. Paulin’s Oro-Medonte property, and an exact quantification of the proceeds of sale that remain in the possession of Mr. Biggar. After all, the plaintiffs just six months ago paid the defendants over $150,000 in costs awards. This is half the amount of what the defendants claim in security for costs.
Conclusion
[28] I, therefore, do not find in the circumstances that it would be fair and just to award the defendants security for costs, particularly since the plaintiffs have recently paid a series of significant costs orders in this action. Also, despite the dissolution of the interim injunction, this action and the counterclaim in the Second Action continue to have real issues that need to be determined. I dismiss the motion.
[29] As directed, the parties filed costs outlines for the motion. The plaintiffs costs outline shows partial indemnity costs of $6,798.53. The defendants’ costs outline appears to show full indemnity costs of $14,937.50.
[30] If the parties cannot agree on costs for this motion, I require that on or before August 2, 2022 the defendants serve and file written submissions of no more than one page addressing why I should not order partial indemnity in favour of the plaintiffs in the amount of $6,500 given these costs outlines and the result. If the defendants believe that another amount or a different award are appropriate, they must state that amount and the award, and give the reasons for it. In that event, the plaintiffs may serve and file very brief reply written submissions on or before August 4, 2022.
DATE: July 27, 2022 _____________________________
ASSOCIATE JUSTICE C. WIEBE