COURT FILE NO: CV-20-636573

MOTION HEARD: 20220824

REASONS RELEASED: 20221130

SUPERIOR COURT OF JUSTICE – ONTARIO

BETWEEN:

10948420 CANADA INC.

Plaintiff

• and-

CY BEST GROUP INC., JIN YANG (a.k.a. JOYCE CHEN), XIAN LI CHEN (a.k.a. JIMMY CHEN), OI HONG (a.k.a. SIMON HONG), and CHERYL KWAN

Defendants

BEFORE: ASSOCIATE JUSTICE McGRAW

COUNSEL: K. MacDonald

-for the Defendants CY Best Group Inc., Joyce Chen, Jimmy Chen and Simon Hong

Email: Kenmacdonald@hkhlawyers.com

A. Postelnik

-for the Defendant Cheryl Kwan

Email: aaron@ksalaw.com

R. Rueter

-for the Plaintiff

Email: robert.rueter@rueterlaw.com

REASONS RELEASED: November 30, 2022

Reasons for Endorsement

I. Introduction

[1] This is a motion by the Defendants for security for costs. The Defendants CY Best Group Inc. (“CYB”), Joyce Chen, Jimmy Chen and Simon Hong (collectively, the “CYB Defendants”) seek an order requiring the Plaintiff 10948420 Canada Inc. (“109”) to post security in the amount of $82,778.50 and the Defendant Cheryl Kwan seeks $63,542.10, all on a partial indemnity scale.

II. Background

[2] 109 was incorporated to operate a table tennis club under the name Ace Table Tennis (“ATT”). On or about November 26, 2018, 109 entered into a lease (the “Lease”) for a unit (the “Unit”) at premises owned by CYB in Markham where it operates a warehouse. 109 planned to operate ATT at the Unit as an elite table tennis club.

[3] The Defendants Jimmy Chen and Joyce Chen are directors and shareholders of CYB and the Defendant Simon Hong is an officer and director of CYB. The Defendant Cheryl Kwan is a real estate agent with Living Realty Inc. who represented CYB with respect to the lease of the Unit.

[4] 109 alleges that it entered into the Lease in reliance on misrepresentations made by Ms. Kwan on behalf of the other Defendants that the Unit was a demised space ready for occupancy where ATT could operate the club, the only permitted use under the Lease. 109 claims that after executing the Lease, paying the deposit and entering into a contract for renovations, it discovered that the Unit was not properly demised and that contrary to the Building Code, there were no proper firewalls separating the units.

[5] 109 further alleges that Mr. Chen and Mr. Hong represented at a meeting on February 20, 2019 that the demising and Building Code issues were CYB’s responsibility and that CYB would demise the Unit and remedy the firewalls quickly to avoid business disruption. They also advised that CYB would extend the rent-free period under the Lease until the issues were fully resolved and asked 109 to amend its building permit application to provide for a new fire barrier and to obtain a quote from ATT’s contractor for the firewall work. In reliance on these representations, 109 continued renovating and made prepaid rent payments to assist CYB with cash flow issues in completing its own remediation. 109 claims that by November 2019, the demising walls were not complete and ATT could still not open. 109 vacated the Unit at the end of November 2019.

[6] In its Amended Statement of Claim dated December 22, 2020 (the “Amended Claim”) 109 claims damages of $1,791,367.20 for negligent misrepresentation or alternatively, breach of contract and breach of fiduciary duty; $480,000 for conversion and unjust enrichment; a declaration that the Lease was repudiated by CYB and at an end; and punitive damages of $100,000.

[7] This matter first came before me at a telephone case conference on March 11, 2022 where I scheduled the motion for June 9, 2022. The motion was confirmed late and only for 20 minutes and was adjourned to August 24, 2022 for 2 hours.

III. The Law and Analysis

[8] For the reasons that follow, I conclude that it is just in the circumstances to order 109 to post security for costs on the terms set out below.

[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

(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;”

[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 the following guidance 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 CanLII 4354 (ON SC), 70 O.R. (2d) 119 (H.C.); Morton v. Canada (Attorney General) (2005), 2005 CanLII 6052 (ON SC), 75 O.R. (3d) 63 (S.C.); Cigar500.com Inc. v. Ashton Distributors Inc. (2009), 2009 CanLII 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 CanLII 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] 109 concedes that it cannot pay the security sought by the Defendants. 109 confirms that it not asserting that it is impecunious and that it has only one asset, $3,040.53 on deposit in a bank account. 109 characterizes its financial status as “impoverished” and has not argued that it otherwise has any assets to pay a costs award. Accordingly, I conclude that the Defendants have met the light onus under Rule 56.01(d) that it appears there is good reason to believe that 109 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).

[15] As 109 is not impecunious and does not have sufficient assets to satisfy a costs award, to rebut this onus 109 must demonstrate that its claims have a good chance of success or a real possibility of success (Coastline at paras. 3 and 7; Chalhal v. Abdullah et al, 2022 ONSC 1727 at paras. 47-50; Chill Media Inc. v. Brewers Retail Inc., 2021 ONSC 1296 at para. 14). In considering the merits, the court is not required to embark on an analysis such as on a summary judgment motion (Coastline at para. 7; Horizon Entertainment Cargo Ltd. v. Marshall, 2019 ONSC 2081 at para. 3). The analysis is primarily on the pleadings with recourse to evidence filed on the motion 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. 7; Horizon at para. 3). An assessment of the merits should be decisive only where the merits may be properly assessed on an interlocutory application and success or failure appears obvious (Coastline at para. 7; Horizon at para. 3).

[16] 109 submits that it would be unjust to order security because its claims have a good chance of success. As reflected in the Amended Claim and 109’s submissions, this action is largely grounded in 2 alleged misrepresentations. With respect to first alleged misrepresentation, made by Ms. Kwan, 109 argues that it is uncontradicted that CYB did not submit an application to the City of Markham to demise the premises into individual units in compliance with the Building and fire codes. CYB also asserts that Ms. Kwan has not filed any evidence on this motion to contradict the alleged misrepresentations she made that the Unit was demised, legal and ready for occupancy to operate ATT. With respect to the second misrepresentation, 109 submits that contemporaneous emails demonstrate that the CYB Defendants agreed to complete the firewall remediation quickly as required by the Lease to avoid business disruptions. 109 argues that it reasonably relied on these misrepresentations to incur $525,000 in renovations and prepaid rent and would not have done so otherwise. 109 also asserts that photographs filed on this motion taken in November 2019 show that the walls did not comply with the Building Code when it vacated the Unit.

[17] The Defendants deny that there were any misrepresentations or that 109 could have reasonably relied on them if there were. The Defendants submit that since the property was a single warehouse space which 109 planned to renovate, it was apparent to 109, represented by its own real estate agent, that the Unit was not ready for occupancy and the operation of ATT. The Defendants also note that the Lease provides that CYB leased the Unit to 109 on an “as is, where is” basis. The Defendants acknowledge that they agreed to repair the firewalls to help 109 get established even though they were unsure if CYB was responsible under the Lease but dispute 109’s characterizations of the email correspondence. The Defendants also allege that 109 caused delays by taking 3-4 months to obtain a quote from its contractor which CYB rejected, commencing renovations without a building permit causing the City of Markham to issue an Order to Comply and a Stop Work Order and refusing to permit contractors to work concurrently. The Defendants also state that the City of Markham’s last inspection in October 2019 identifies outstanding deficiencies not remedied by 109 but does not refer to the firewalls. The Defendants also allege that 109’s website and the presence of individuals using the Unit suggest that ATT was operating its business.

[18] In my view, given the number of disputed issues, many of which require findings of credibility, I cannot conclude on the record before me that 109’s claims have a good chance of success. It is not possible and would not be appropriate to draw the conclusions and make the findings urged upon me by 109 based on the pleadings and the evidence on this interlocutory motion. This would require a more fulsome record and an inquiry similar to a summary judgment motion. In particular, the alleged misrepresentations are largely oral and disputed including what Ms. Kwan represented and what was discussed and represented at the February 20, 2019 meeting and afterwards. Even where the parties rely on documentation in support of their positions, a more complete documentary record and full examinations are required. In addition to whether the misrepresentations were made, it must be determined if 109 relied on them, if such reliance was reasonable and the other necessary elements of 109’s claims of negligent misrepresentation, all of which must be canvassed at trial (Queen v. Cognos Inc., 1993 CanLII 146 (SCC), [1993] S.C.J. No. 3). I also cannot conclude that 109’s other causes of action including breach of contract and breach of fiduciary duty have a good chance of success.

[19] For similar reasons, I reject 109’s assertion that that the insufficiency of its assets and inability to post security is a direct result of the Defendants’ conduct as alleged in this action or the sole cause of its impoverishment as 109 argues (Cigar500.com Inc. v. Ashton Distributions Inc., 2009 CanLII 46451 (ON SC), [2009] O.J. No. 3680 (S.C.J.) at para. 40; Mazzika Arbika Ltd. v. Aviva Insurance Company of Canada, 2017 ONSC 6801 at paras. 21-27). 109 submits that its reliance on the Defendants’ misrepresentations and CYB’s failure to remedy the firewall deficiencies prevented ATT from operating and earning income while depleting its assets and start-up capital. The Defendants submit that 109’s lack of assets is due to insufficient capitalization, inexperience and its own renovation delays. Similar to the merits, I cannot conclude on the record before me that 109’s lack of assets is a result of the alleged conduct of the Defendants. In addition to all of the disputed issues on the merits, the fact that 109 was starting a new business raises additional issues. The present case is not like Mazzika where the defendants did not file any evidence or challenge the plaintiff’s position on the merits or the defendant’s failure to pay a liquidated debt as in Cigar500.

[20] 109 also submits that the Defendants’ delay in bringing this motion is fatal to its success (Chalhal at paras. 33, 51-55; Wilson Young & Associates v. Carleton University et al, 2020 ONSC 4542 at para. 59). I cannot conclude that there was any material delay. Further, 109 has not demonstrated that the timing of the motion and the relief if granted would cause any prejudice and I am satisfied that the Defendants’ explanation of the timing is sufficient (Wilson at para. 59). This is not a case of the Defendants waiting until later in the litigation after 109 has incurred significant costs (Wilson at para. 59). This action is in its early stages and examinations for discovery have not been conducted. 109 has also confirmed that it does not take the position that an order of security for costs would prevent it from continuing the litigation (Chill Media at para. 14). The Defendants advised 109 as early as July 2020 that they intended to seek security for costs but waited until after the court’s disposition of a motion to strike 109’s claims against CYB’s principals in November 2020. In my view, it was reasonable for the Defendants to do so given the potential impact of the pleadings motion on the security for costs motion. The Defendants then took steps to schedule this motion in July 2021 experiencing some scheduling delays. While the Defendants could have moved sooner to bring the motion, I am unable to conclude that the delay was material or caused any prejudice.

[21] Applying a holistic approach, taking a step back to consider all of the relevant factors and balancing the parties’ competing interests, I conclude that it is just in the circumstances to exercise the court’s discretion to order security for costs. Given 109’s lack of assets, an order of security on reasonable terms will provide the Defendants with some reasonable protection from an unenforceable costs award while not preventing 109 from proceeding with its action.

[22] 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). When an action is in its early stages, an instalment (also known as "pay-as-you-go") order for security for costs is usually the most appropriate (Coastline at para. 7).

[23] 109 asserts that the amount of security requested by the Defendants is excessive, overinflated and includes amounts to litigate the CYB Defendants’ Counterclaim and Ms. Kwan’s Crossclaim. The CYB Defendants have confirmed that they are not seeking any amounts for their Counterclaim or the Crossclaim. I have considered these submissions in determining an amount and terms which are fair and reasonable.

[24] The amount of security must reasonably reflect the relative complexity of this litigation, the amounts claimed by 109 and the personal claims against four individual Defendants. I am also satisfied that security should be paid in instalments, starting with an amount up to and including examinations for discovery. Reviewing the Defendants’ Bills of Costs, I conclude that the amounts sought should be reduced to more reasonably reflect the time necessary for claims of this nature, that no junior counsel has been incorporated and to account for overlap between Defendants’ counsel.

[25] Having considered the relevant factors, I am satisfied that it is fair and reasonable, within the parties’ reasonable expectations, proportionate and just in all of the circumstances for 109 to post security for costs of $30,000 with respect to the CYB Defendants and $15,000 with respect to Ms. Kwan, up to and including examinations for discovery (including motions arising from examinations for discovery), all on a partial indemnity scale. This is without prejudice to the Defendants’ rights to move for additional security for subsequent steps in the litigation. 109 shall take no further steps in this action until the security is paid.

IV. Disposition and Costs

[26] 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: November 30, 2022

Associate Justice McGraw