COURT FILE NO.: CV-17-583322-A1

DATE: August 15, 2022

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Abtrex Contractors Inc., plaintiff v. Bryan Stewart and Shawna Arsenault, defendants v. Tracon Services Inc., third party;

BEFORE: ASSOCIATE JUSTICE C. WIEBE

COUNSEL: Bryan D. McLeese for the defendants;

Mark Klaiman for the plaintiff;

HEARD: August 8, 2022.

REASONS FOR DECISION

[1] The defendants bring this motion seeking an order requiring the plaintiff to post security for costs of the defendants in this action in the amount of $97,601.48. They rely on Rule 56.01(1)(d), namely the rule that says that, where it “appears” that there is “good reason to believe” the corporate plaintiff has insufficient assets in Ontario pay the costs of the defendant, the court may order security for costs “as is just.”

[2] It is well established that the defendants have the initial onus on such a motion to show that there is indeed “good reason to believe” the corporate plaintiff has insufficient assets in Ontario to pay costs. Only when the defendants have met this initial onus does the onus shift to the plaintiff to show either that it has sufficient assets to pay costs or that it does not and that its claim has merit thereby requiring the court to deny the security for costs motion as a matter of justice; see Proxema Ltd., v Birock Investments Inc., et al, 2016 ONSC 5686 at paragraph 20.

Leave

[3] In oral argument, the plaintiff conceded that the defendants have met their initial onus. There was an argument about leave under section 67(2) of the old Construction Act, R.S.O. 1990, c. C. 30 (“CA”). A motion for security for costs is not provided for under the CA. Therefore, pursuant to CA section 67(2), the defendants must obtain leave of the court, and to do so it must show that the motion is “necessary” or “would expedite the resolution of the issues in dispute.”

[4] I have held in previous decisions that on a motion for security for costs under Rule 56.01(1)(b) the test for leave under CA section 67(2) is met when the defendant meets its initial onus under Rule 56.01(1)(d) as described above; European Flooring Contract Services Ltd. v. Toddglen ILofts et al., 2013 ONSC 6445. The reason is that with the plaintiff’s claim secured by its lien on the defendant’s interest in the land, there is a “necessity” to achieve procedural fairness (ie. a level playing field) if there is “good reason to believe” the corporate lien claimant has insufficient assets to pay the defendant’s costs. By conceding the initial onus point under Rule 56.01(1)(d), I find that the plaintiff has also conceded the leave point.

[5] Mr. Klaiman pointed out that the defendants had not formally asked for section 67(2) leave in their notice of motion. This is an oversight by the defendants. But, because of the relationship between leave and the initial onus as described above, I find this oversight to be of no consequence.

Sufficiency of assets

[6] The plaintiff’s main defence to this motion is the proposition that it indeed has sufficient assets in Ontario to pay the defendants’ costs. It has the onus of proving this point.

[7] This onus is a serious one. In Health Genetic Centre Corp. v. Reed Business Information Ltd., 2014 ONSC 6449 at paragraph 5 Master Dash made the following very helpful statement of what must be proven as to sufficiency of assets:

Where the plaintiff asserts that it has sufficient assets in Ontario to pay an award of costs, the following factors apply in examining the evidence as to sufficiency of assets: (a) The court must consider critically the quality as well as the sufficiency of the assets presently held and whether they are bona fide assets of the company; (b) There must be demonstrated exigible assets. It is insufficient for the company to show that it is profitable since the focus of the rule is not on income, but rather on the nature and sufficiency of assets; (c) The court must consider the liabilities of the company as well as its assets and in particular whether the assets to which the defendant is expected to look are secured to another creditor; (d) The rule does not countenance extensive and speculative inquiries as to the future value and availability of the asset. A mere possibility that the assets may be removed at some future time is not, without more, grounds for security; (e) The failure of a plaintiff to respond to a defendant’s enquiry as to the availability of assets may raise a doubt as to the existence of assets.

[8] The plaintiff’s core evidence on this point was the following: three tax returns from Abtrex Contractors Inc. (“Abtrex”) for the years ending May 31, 2019, May 31, 2020 and May 31 2021; an unaudited Abtrex Comparative Financial Statement for the year ending May 31, 2021; and two profit and loss statements that were generated internally by Abtrex, one for the period May, 2021 to November, 2021 and the other for the period June, 2021 to May, 2022. Abtrex’s year-end is May 31. I was advised that the tax returns were delivered during the cross-examination of the principal of Abtrex, Chester Konwisarz. The other documents were exhibits to Mr. Konwisarz’s responding affidavit in the motion.

[9] I do not find that these documents meet the plaintiff’s onus. The documents show that Abtrex does not own many “hard” assets. It does not own real estate, a point that Mr. Klaiman conceded. The documents also show that Abtrex leases equipment and purports to own a considerably larger amount of other equipment. But I was advised that the PPSA search the defendants obtained (ie. apparently some 30 pages of registrations) apparently shows that this owned equipment was largely financed and subject to security. I did not see the PPSA documents, but the point was not disputed.

[10] Most importantly, however, was the information in the tax returns and financial statements concerning profits and deficits. They show the following information:

• The tax return for the year ending May 31, 2019 shows a deficit, namely liabilities over assets, of $16,086.

• The Comparative Financial Statements show that in the year ending May 31, 2020 Abtrex generated a net profit of only $49,895 and retained earnings, namely assets over liabilities, of only $27,735.

• The Statements then show that in the following year, the year ending May 31, 2021, the year of the Covid-19 pandemic, there was a significant drop in earnings. There was a net loss of $150,106 plus a deficit of $125,371.

[11] Repeated deficits like this were what convinced Master Dash in Health Genetic Centre paragraphs 13 to 16 to state that the defendants had proven a “good reason to believe” that the plaintiff had insufficient assets to pay costs.

[12] Mr. Klaiman argued that the critical documents were the two more recent profit and loss statements that Abtrex produced. He argued that these documents showed that Abtrex has turned its fortunes around after the pandemic and is now making money.

[13] To his affidavit Mr. Konwisarz appended a monthly profit and loss schedule for the period May, 2021 to November, 2021. This document was generated from internal accounting records at Abtrex and showed a steady increase in revenue in the latter part of 2021 to the point where there was a profit of $202,905.80 at the end of November, 2021. The second document was a profit and loss statement for the entire year of June, 2021 to May, 2022. It was also generated from internal Abtrex accounting records. It shows a gross income of over $1.68 million and a profit of $259,876.11. In addition, Mr. Konwisarz swore in his affidavit that going forward Abtrex is now involved in two projects with “a contract value to Abtrex of approximately $1.6 million dollars.” He did not produce corroboration of these two contracts.

[14] I do not find that these documents meet the plaintiff’s onus. They concern income, profit and losses. As stated by Master Dash in Health Genetic Centre, this is not the kind of asset the courts looks for on such a motion. There is good reason for this skepticism. Income can be fleeting. The vagaries of expenses and the business cycle determine whether any income will be available whenever the plaintiff may be required to pay costs in this action.

[15] For instance, in this case I note that Abtrex actually had its highest income earning year in the last four years in the year ending May 31, 2019. In that year, Abtrex had gross income of over $2.64 million. Yet, the plaintiff showed in the end a deficit of $16,086. This was due to high expenses, one of which was payroll which was probably controlled to some degree by Abtex itself. Therefore, even if Abtrex makes a profit of $259,876.11 in 2022 and gets the $1.6 million worth of contracts in the coming years, there is no certainty any of it will be available to pay costs given the turbulent financial history of the company.

[16] Furthermore, these documents are internally generated. There is an issue as to their accuracy. Mr. McLeese pointed out that in cross-examination Mr. Konwisarz admitted that these internal records did not accurately reflect the company’s profit and loss position as reported for tax purposes for two years.

[17] I, therefore, find that the defendants are entitled to security for costs of this action.

Delay

[18] There was some discussion about delay in bringing the motion. Delay can be a factor on such a motion if it prejudices the plaintiff.

[19] But I have decided that this issue will not stand in the way of the motion. This reference began on December 2, 2019. At that time, on consent of both parties, I ordered a mediation with Stephen Brunswick. The mediation took place on April 14, 2020. As a result of that mediation, the parties jointly hired an expert to determine the key issue in this case, the defective retaining wall. The engineer was brought into the proceedings as were the insurers for Abtrex and the engineer. Protracted negotiation took place, and that issue was eventually resolved with an insurance payout to the defendants in September, 2021. The reference stalled while these negotiations took place. Abtrex does not complain about this delay in which it acquiesced.

[20] Mr. Klaiman did raise briefly the subsequent delay after September, 2021. At the trial management conference on January 10, 2022 the defendants did not raise the issue of security for costs, and I scheduled the completion of the delayed discoveries and expert reports. The defendants then refused to proceed with the ordered discoveries because of their concern about security for costs. The discoveries did not take place. Given that I now find merit in their concern about security for costs, I will not interfere with their entitlement because of this conduct.

Merit

[21] There was some discussion about the merit of the parties respective cases. As the plaintiff is not alleging impecuniosity, I do not view this as a big factor in this motion; see Nieh v. Sea Land Holding Corp., 2006 CanLII 38362 (ON SC).

[22] In any event, the question of the merits of the plaintiff’s case is unclear. The defendants allege that, despite receiving the insurance payout, they remain with significant damages concerning the retaining wall, damages that they are seeking to have the plaintiff pay by way of set-off. The plaintiff on the other hand alleges that that the wall failure was the result of poor materials chosen by the defendants and others. The fact of the insurance payout lends some credence to the defendants’ position, although the reasonableness of the settlement will be an issue. Where this leaves the parties respective positions is unclear. I have, therefore, decided that the merits of the plaintiffs’ case will not be a factor in this decision.

Quantum

[23] The defendants want $97,601.48 in partial indemnity security for costs. They filed a Bill of Costs – Actual and Anticipated Fees and Disbursements.

[24] The prominent feature of this Bill of Costs is the way the defendants treated the costs they incurred to date. The defendants totaled the costs of the fees and disbursement to date, $103,710.83, and took 30% of that as the figure, $31,113.25 x 1.13 = $35,157.97. They assert that this is a proper reflection of the costs they have incurred to date for which they have not been compensated by the insurance settlement. I have no way of assessing this position as I am not aware of the particulars of the expert determination, the insurance negotiation and the settlement.

[25] Concerning their future costs, the defendants want $7,125 for discoveries, $2,850 for trial management conferences, $30,150 for the preparation for and attending at a four day trial and $15,000 for expert fees for a total of $55,125 x 1.13 = $62,291.25.

[26] I have trouble accepting the defendants position as to quantum. With the insurance settlement, the core issue in this case is largely resolved. The Abtrex claim is no more than $81,947.65 and concerns unpaid invoices. In argument, Mr. McLeese conceded that the defendants will be asserting a set-off only and no independent counterclaim. The doctrine of proportionality needs to be applied to take proper account of the present state of this case.

[27] Also, I find some of the proposed future costs excessive. For instance, I fail to see how an expert who has already prepared his or her report will cost $15,000 to attend a trial. I fail to see why the trial needs to be more than three days. I fail to see why the discoveries will require 25 hours of lawyer time given the issues that appear to remain.

[28] Mr. Klaiman argued that an order requiring $40,000 in security for costs would be reasonable. I think this is a little light. The proper quantum is $50,000 in partial indemnity costs.

Conclusion

[29] I have, therefore, decided to order that the plaintiff post $50,000 in security for the defendants’ costs of the entire action, $25,000 of which must be posted within 30 days of my future direction scheduling the delayed discoveries and $25,000 of which must be posted within 30 days of my future direction scheduling the trial hearing. That is what I order.

[30] Concerning the costs of this motion, counsel advised my Assistant Trial Coordinator by email on August 9, 2022 that the parties have agreed that the successful party be awarded $3,000 in costs. The successful party is the defendants. They are, therefore, awarded $3,000 in costs for this motion.

[31] The next trial management conference needs to be scheduled. I will make a peremptory schedule for the completion of discoveries and any further expert reports at this next trial management conference. I schedule that it take place by teleconference on Monday, August 29, 2022 at 10 a.m. using the following coordinates: phone: 866-500-5845; ID#: 3232044.

DATE: August 15, 2022

ASSOCIATE JUSTICE C. WIEBE