Court File and Parties

COURT FILE NO: CV-20-634017 MOTION HEARD: 20220627 REASONS RELEASED: 20220928

SUPERIOR COURT OF JUSTICE – ONTARIO

BETWEEN:

SUREFIRE DIVIDEND CAPTURE, LP Plaintiff

• and-

NATIONAL LIABILITY & FIRE INSURANCE COMPANY C.O.B. AS BERKSHIRE HATHAWAY SPECIALTY INSURANCE and ARTHUR J. GALLAGHER CANADA LIMITED Defendants

BEFORE: ASSOCIATE JUSTICE McGRAW

COUNSEL: M. Sammon and S. Hale -for the Defendant Arthur J. Gallagher Canada Limited Email: msammon@litigate.com

R. Datt -for the Plaintiff, Surefire Dividend Capture, LP Email: rdatt@weirfoulds.com

R. Lester -for the Defendant, National Liability & Fire Insurance Company c.o.b. Berkshire Specialty Insurance Email: rlester@lesterassociates.ca

REASONS RELEASED: September 28, 2022

Reasons for Endorsement

I. Introduction

[1] The Defendant Arthur J. Gallagher Canada Limited (“AJG”) seeks an order requiring the Plaintiff SureFire Dividend Capture, LP (“SDC”) to post security for costs of $625,000.

II. Background

[2] SDC is a limited partnership formed under Delaware law. SDC is a special purpose vehicle created to hold investments in Broad Reach Capital LP (“BRC”), a U.S. hedge fund. As a result of a Ponzi scheme orchestrated by BRC’s principal, SDC incurred losses in excess of U.S. $46,000,000. SDC has no operations, employees or assets in Canada.

[3] This action is a coverage claim by SDC against its insurer, National Liability & Fire Insurance Company c.o.b. Berkshire Hathaway Specialty Insurance (“Berkshire”). SDC seeks damages of $46,598,676.44 from Berkshire for denying coverage for SDC’s losses related to BRC under a fidelity bond purchased in 2019 (the “Bond”). SDC commenced this action against Berkshire by Statement of Claim issued on January 8, 2020 which it amended on July 27, 2020 to add AJC, its insurance broker. SDC alleges that Berkshire represented that the Bond would cover theft or fraud committed by sub-advisors such as BRC. SDC further alleges that in the event that its losses are not covered by the Bond then AJG is liable for $46,598,676.44 for failure to arrange for appropriate coverage. Berkshire and AJG defended the claim on February 10 and October 28, 2020, respectively.

[4] Examinations for discovery took place on January 11, 13 and 15, March 29 and April 1, 2021. The matter was set down for trial on May 19, 2021. During examinations for discovery, Ariel Shlien of SDC confirmed that SDC has no operations, employees or assets in Canada and was created solely to pursue the BRC investment which was its only asset. Mr. Shlien disclosed that SDC’s general partner is a Delaware limited partnership named SureFire Dividend Capture Management whose general partner is 8569606 Canada Inc. (“856”), a Montreal-based corporation with no employees.

[5] Mr. Shlien also deposed that a U.S. entity named Bluestone Capital Management (“Bluestone”), another BRC investor, transferred its pre-existing $42,000,000 investment in BRC to SDC on February 27, 2019 to, in part, obtain access to SDC’s coverage under the Bond. SDC received no monetary consideration. Around the same time, 856 increased coverage under the Bond from $25,000,000 to $50,000,000 and added SDC as a named insured. By then, the BRC investments transferred to SDC totaled approximately $46,600,000. Mr. Shlien also deposed that Bluestone indemnified SDC for any losses related to the BRC investments and therefore has an interest in the outcome of this action and has been assisting SDC in advancing the litigation.

[6] On August 6, 2021, SDC delivered its answers to undertakings and under advisements. In its answers, SDC advised that it has two existing civil claims in the U.S. seeking the same damages related to the BRC investments as in this action (the “U.S. Actions”). One claim is against BRC’s principal and other individuals and companies and the other is against Industrial and Commercial Bank of China Financial Services LLC. AJG is not named in the U.S. Actions. Three days later, on August 9, 2021, AJG brought this motion.

[7] On October 26, 2021, Wilson J. ordered a timetable and confirmed a 15-day trial commencing January 16, 2023.

III. The Law and Analysis

[8] For the reasons that follow, I conclude that it is just in the circumstances to order security for costs.

[9] Rule 56.01(1) 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,

(a) the plaintiff or applicant is ordinarily resident outside Ontario;

(b) the plaintiff or applicant has another proceeding for the same relief pending in Ontario or elsewhere;

(c) the defendant or respondent has an order against the plaintiff or applicant for costs in the same or another proceeding that remain unpaid in whole or in part;

(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;

(e) there is good reason to believe that the action or application is frivolous and vexatious and that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent; or

(f) a statute entitles the defendant or respondent to security for costs.

[10] Rule 56.01(1) does not create a prima facie right to security for costs but rather triggers an enquiry whereby the court, using its broad discretion, considers multiple factors to make such order as is just in the circumstances including the merits of the claim, the financial circumstances of the plaintiff and the possibility of an order for security for costs preventing a bona fide claim from proceeding (Stojanovic v. Bulut, 2011 ONSC 874 at paras. 4-5). The court has broad latitude to make any order that is just in the circumstances (Yuen v. Pan, 2018 ONSC 2600 at para. 14).

[11] The Court of Appeal provided thorough guidance regarding the justness of a Rule 56 order in Yaiguaje v. Chevron Corp., 2017 ONCA 827:

“23 The Rules explicitly provide that an order for security for costs should only be made where the justness of the case demands it. Courts must be vigilant to ensure an order that is designed to be protective in nature is not used as a litigation tactic to prevent a case from being heard on its merits, even in circumstances where the other provisions of rr. 56 or 61 have been met.

24 Courts in Ontario have attempted to articulate the factors to be considered in determining the justness of security for costs orders. They have identified such factors as the merits of the claim, delay in bringing the motion, the impact of actionable conduct by the defendants on the available assets of the plaintiffs, access to justice concerns, and the public importance of the litigation. See: Hallum v. Canadian Memorial Chiropractic College (1989), 1989 4354 (ON SC), 70 O.R. (2d) 119 (H.C.); Morton v. Canada (Attorney General) (2005), 2005 6052 (ON SC), 75 O.R. (3d) 63 (S.C.); Cigar500.com Inc. v. Ashton Distributors Inc. (2009), 2009 46451 (ON SC), 99 O.R. (3d) 55 (S.C.); Wang v. Li, 2011 ONSC 4477 (S.C.); and Brown v. Hudson's Bay Co., 2014 ONSC 1065, 318 O.A.C. 12 (Div. Ct.).

25 While this case law is of some assistance, each case must be considered on its own facts. It is neither helpful nor just to compose a static list of factors to be used in all cases in determining the justness of a security for costs order. There is no utility in imposing rigid criteria on top of the criteria already provided for in the Rules. The correct approach is for the court to consider the justness of the order holistically, examining all the circumstances of the case and guided by the overriding interests of justice to determine whether it is just that the order be made.”

[12] Determining the order which is just in the circumstances requires a balancing between ensuring that meritorious claims are allowed to go forward with the consequences of being unable to collect costs where a party pursues an unsuccessful claim and the prospect of an unenforceable costs judgment (Ascent Inc. v. Fox 40 International Inc., [2007] O.J. No. 1800 at para. 3; Rosin v. Dubic, 2016 ONSC 6441 at para. 39; Lipson v. Lipson, 2020 ONSC 1324 at paras. 47-48). In some cases, security is required to correct the imbalance of a plaintiff having security for a successful claim while a defendant has no security for a successful defence and to prevent a plaintiff from going to trial without posting security, be unsuccessful at trial then avoid paying costs (2232117 Ontario Inc. v. Somasundaram, 2020 ONSC 1434 at para. 27; DK Manufacturing Group Ltd. v. Co-Operators Insurance, 2021 ONSC 661 at para. 26).

[13] The initial onus is on the defendant to show that the plaintiff falls within one of the enumerated categories in Rule 56.01(1). The plaintiff can rebut the onus and avoid security for costs by showing that they have sufficient assets in Ontario or a reciprocating jurisdiction to satisfy a costs order; the order is unjust or unnecessary; or the plaintiff should be permitted to proceed to trial despite its impecuniosity should it fail (Travel Guild Inc. v. Smith, 2014 CarswellOnt 19157 (S.C.J.) at para.16; Coastline Corp. v. Canaccord Capital Corp., 2009 21758 (ON SC), [2009] O.J. No. 1790 (ONSC) at para. 7; Cobalt Engineering v. Genivar Inc., 2011 ONSC 4929 at para. 16). This was summarized by Master Glustein (as he then was) in Coastline:

“7…

(i) The initial onus is on the defendant to satisfy the court that it "appears" there is good reason to believe that the matter comes within one of the circumstances enumerated in Rule 56;

(ii) Once the first part of the test is satisfied, "the onus is on the plaintiff to establish that an order for security would be unjust";

(iii) The second stage of the test "is clearly permissive and requires the exercise of discretion which can take into account a multitude of factors". The court exercises a broad discretion in making an order that is just;

(iv) The plaintiff can rebut the onus by either demonstrating that:

(a) the plaintiff has appropriate or sufficient assets in Ontario or in a reciprocating jurisdiction to satisfy any order of costs made in the litigation,

(b) the plaintiff is impecunious and that justice demands that the plaintiff be permitted to continue with the action, i.e. an impecunious plaintiff will generally avoid paying security for costs if the plaintiff can establish that the claim is not "plainly devoid of merit", or

(c) if the plaintiff cannot establish that it is impecunious, but the plaintiff does not have sufficient assets to meet a costs order, the plaintiff must meet a high threshold to satisfy the court of its chances of success;”

[14] I am satisfied that AJG has met its onus that one or more of the factors under Rule 56.01(1) are present. It is not disputed that SDC is not ordinarily resident in Ontario (Rule 56.01(a)). Further, I conclude that AJG has also established under Rule 56.01(1)(b) that SDC is seeking the same relief in the U.S. Actions, namely the same amount of damages. The fact that AJG is not a defendant in the U.S. Actions does not preclude this finding (Wilson Young & Associates Inc. v. Carleton University et al., 2020 ONSC 4542 at para. 54).

[15] I am also satisfied that AJG mas met the light onus under Rule 56.01(d) to show that there is good reason to believe that SDC does not have sufficient assets in Ontario or a reciprocating jurisdiction to satisfy a costs award (Georgian Windpower Corp. v. Stelco Inc., [2012] O.J. No. 158 (ONSC) at para. 7; Coastline at para. 7). SDC concedes that it has no assets in Ontario but is not asserting that it is impecunious. SDC submits that it has sufficient assets in a reciprocating enforcement of judgments jurisdiction as a result of potential recoveries in BRC’s U.S. receivership proceedings which are sufficient to cover the security sought by AJG (Providence Grace Inc. v. Yardistry, 2021 ONSC 3991 at para. 13; aff’d 2022 ONSC 3983). In June 2020, after BRC’s principal pleaded guilty to securities fraud, a Receiver was appointed in the Southern District of New Jersey to seize and preserve the assets of BRC, its principal and related entities. According to the Receiver’s Report dated May 2, 2022, the Receiver has recovered approximately U.S.$$6,870,777.21 to date. BRC’s investors are still owed approximately U.S.$60,000,000 and SDC has submitted a claim in the amount of U.S.$31,240,000. SDC estimates that even if all liabilities are valid, SDC would recover approximately U.S.$1,377,801.04 on a prorated basis.

[16] A plaintiff’s financial disclosure requires “robust particularity” which includes the amount and source of all income; a description of all assets (including values); a list of all liabilities and other significant expenses; an indication of the extent of the ability of the plaintiffs to borrow funds; and details of any assets disposed of or encumbered since the cause of action arose (General Products Inc. v. Actiwin Company Limited, 2015 ONSC 6923; Al Masri v. Baberakubona, 2010 ONSC 562 at para. 19). The rule on security for costs does not countenance extensive and speculative inquiries as to the further value and availability of assets (General Products at para. 19).

[17] Accepting that New Jersey and Delaware are reciprocating jurisdictions, I cannot conclude that SDC’s estimated recoveries in the receivership establishes that it has sufficient assets to satisfy a costs award. SDC relies on the advice of U.S. counsel and the Receiver’s Report contained in an affidavit from counsel. I am not satisfied that this provides sufficient disclosure and particularity with respect to SDC’s assets especially in the context of this receivership. As the Receiver’s Report reflects, there are numerous factors which could materially impact SDC’s estimated recoveries including liabilities, lawsuits and other claims. In my view, the existence and amount of SDC’s potential recovery, based on its own estimate and subject to numerous contingencies, is too speculative to conclude that SDC has sufficient assets. Without more, I can only conclude that SDC has a contingent claim which it may realize upon at some undetermined time in the future in an undetermined amount.

[18] I also conclude that SDC is a nominal plaintiff under Rule 56.01(1)(d). In my view, the transfer of Bluestone’s BRC investment for no monetary consideration and indemnification of SDC confirms that Bluestone is the party with the ultimate interest in this action. No evidence has been filed with respect to Bluestone’s ability to post security or satisfy a costs award.

[19] SDC submits that it would be unjust to order security because this is a tactical motion which AJG delayed bringing to impede SDC’s ability to litigate its claim which caused SDC to incur significant costs. SDC argues that AJG’s undue delay is fatal to the motion. I cannot conclude that this motion is tactical or that there has been any undue delay.

[20] In my view, it was reasonable in the circumstances for AJG to wait until they obtained Mr. Shlien’s testimony and answers to undertakings before bringing this motion. Given how SDC and related parties ordered their affairs and transactions, discoveries and undertakings were necessary to obtain evidence which is material to this motion. Mr. Shlien’s evidence and the answers to undertakings confirmed the corporate and financial status of SDC and related parties, particularly their lack of sufficient assets, and disclosed the U.S. Actions and Bluestone’s transfer of its BRC investment. This does not support SDC’s assertion that the necessary information for AJG to bring the motion was available in its Statement of Claim. After receiving SDC’s answers to undertakings, AJG moved expeditiously bringing this motion within 3 days.

[21] I also reject SDC’s submission that it is not just to order security for costs because AJG is a billion-dollar company that does not need security. This is not public interest litigation. This is significant, complex insurance litigation between sophisticated commercial parties in which SDC claims over U.S.$46,000,000 in damages. Further, SDC has confirmed that it is not taking the position that an order for security for costs would prevent it from proceeding to trial.

[22] SDC has not made any submissions or led any evidence regarding the merits including whether its claims have a good chance of success (Coastline at paras. 3 and 7). Although the merits are a consideration on every security for costs motion, the court is not required to embark on an analysis such as in a motion for summary judgment and if the case is complex or turns on credibility, it is generally not appropriate to make an assessment of the merits at the interlocutory stage (Coastline at para. 3). Given the complexity of this litigation, I decline to make any conclusions on the merits.

[23] Applying a holistic approach, considering all of the relevant factors and balancing the parties’ interests, I conclude that it is just in the circumstances that security for costs be ordered. SDC has confirmed that an order of security for costs will not prohibit it from proceeding to trial and in the absence of sufficient assets, an order of security will provide AJG with some reasonable protection from an unenforceable costs award.

[24] Determining the order which is just in the circumstances extends to the quantum of security which should not be so onerous as to block a party’s access to the courts (Rosin at paras. 38-39; Lipson at para. 48). The court has broad discretion to determine a fair and reasonable amount of security which is substantially similar to the exercise of its discretion in fixing costs of a proceeding pursuant to Rule 57.01 (Canadian Metal Buildings Inc. v. 1467344 Ontario Limited, 2019 ONSC 566 at para. 27). The quantum should reflect a number that falls within the reasonable contemplation of the parties, what the successful defendant would likely recover and the factors set out in Rule 57.01 (720441 Ontario Inc. v. The Boiler et al, 2015 ONSC 4841 at para. 56; Marketsure Intermediaries Inc. v. Allianz Insurance Co. of Canada, 2003 CarswellOnt 1906 at paras. 17-20). In most cases, security for costs will be ordered on a partial indemnity scale (Marketsure at paras. 13-18).

[25] AJG requests $625,000 on a partial indemnity scale. AJG submits that to date it has incurred fees of $232,518.32; disbursements of $13,572.27; and expert fees of $35,392.94. AJG estimates additional costs of $636,098.25 plus HST and disbursements including $30,850 for the pre-trial; $287,715.75 for trial preparation; $295,542.50 for attendance at trial; and additional expert fees of $21,900. The amount of security must reasonably reflect the complexity of this litigation, the amount claimed and the length of trial. However, I conclude that the amount sought by AJG should be reduced to more reasonably reflect the time necessary for trial preparation and attendance at trial and to account for overlap between counsel.

[26] Having considered the relevant factors, I am satisfied that it is fair and reasonable, within the parties’ reasonable expectations, reflective of the nature and complexity of the action, proportionate and just in all of the circumstances for SDC to post security for costs of $525,000 on a partial indemnity scale within 30 days.

IV. Disposition and Costs

[27] Order to go on the terms set out above. If the parties cannot agree on the costs of this motion, they may file written costs submissions not to exceed 3 pages (excluding Costs Outlines) on a timetable to be agreed upon by counsel.

Released: September 28, 2022

Associate Justice McGraw