COURT FILE NO.: CV-18-00601425-0000
DATE: 20230103
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
ACASTA CAPITAL INC.
Plaintiff/Defendant by Counterclaim
F. Paul Morrison, for the Defendant/Plaintiff by Counterclaim
-and-
ACASTA ENTERPRISES INC.
Defendant/Plaintiff by Counterclaim
AND BETWEEN:
ACASTA ENTERPRISES INC.
Plaintiff by Counterclaim
-and-
Dan Rosenbluth, for the Plaintiff/Defendant by Counterclaim
ACASTA CAPITAL INC. and MICHAEL LIEBROCK
Defendants by Counterclaim
HEARD: May 25, 2022 (Supplementary submissions, September 17, 2022)
ASSOCIATE JUSTICE: D. MICHAEL BROWN
REASONS
Overview
[1] The defendant brings this motion seeking an order for security for costs pursuant to Rule 56.01(d). For the reasons given below, the motion is dismissed on the basis that there is not good reason to believe that the plaintiff has insufficient assets in Ontario to pay the defendant’s costs and that an order for security for costs would not be just in the circumstances of this case.
[2] This is an action by the plaintiff for breach of contract, seeking payment from the defendant of amounts outstanding under a one-page “Reimbursement Agreement” relating to expenses incurred by the plaintiff in connection with funding the start-up of the defendant as a special purpose acquisition company (referred to as a SPAC). The defendant has paid to the plaintiff $2,987,699 under the Reimbursement Agreement. The plaintiff claims $417,903.88 which it alleges remains outstanding under the Reimbursement Agreement.
[3] In its amended statement of defence and counterclaim the defendant pleads that the Reimbursement Agreement is null and void for lack of consideration. It describes the Reimbursement Agreement as “a fiction created by the principals of [the plaintiff] who – at the time – were also employees of [the defendant], with a view to improperly diverting the Company’s assets to [the plaintiff] and its employees.” The defendant also alleges that the amounts paid or claimed under the Reimbursement Agreement are unreasonable given that the SPAC acquisitions negotiated by the principals of the plaintiff were “financially disastrous” for the defendant.
[4] The defendant has counterclaimed against the plaintiff and against Michael Liebrock, as an added defendant by counterclaim. During the relevant period Liebrock was both an employee of the defendant and a principal of the plaintiff. The defendant seeks damages against the plaintiff and Liebrock in the amount of $4,687,562.91 for breach of contract and unjust enrichment in relation to amounts alleged to have been improperly authorized by, and paid to, the plaintiff and Liebrock, including all amounts previously paid to the plaintiff under the Reimbursement Agreement.
[5] This action is being litigated in tandem with another action commenced by Liebrock against the defendant seeking damages of $2 million in relation to the termination of his employment with the defendant. The defendant has counterclaimed against Liebrock in that action seeking damages of $50 million for breach of fiduciary duty, negligence and breach of contract.
[6] The defendant is represented by the same counsel in both this action and the Liebrock action and counsel for the plaintiff in this action acts for Liebrock as plaintiff in the Liebrock action. The parties in both actions agreed to a joint discovery plan and the defendant and the plaintiff/Liebrock each exchanged a single set of documentary productions for both actions. The parties also conducted joint examinations for discovery over four days in January and February 2021, in which Liebrock and the discovery representatives for the plaintiff and the defendant were examined for discovery in both actions. The defendant has not sought security for costs against Liebrock in the Liebrock action.
Sufficiency of Assets in Ontario
[7] Rule 56.01 provides:
56.01(1) 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;
[8] The question of whether the plaintiff has sufficient assets to pay the defendant’s cost requires an assessment of both the value of the plaintiff’s assets and the amount of costs that might be payable to the defendant in the action. The higher the potential costs exposure, the more assets that will be required to satisfy a potential award. In this case, the defendant seeks security for costs of the action totaling $462,482.03. This is an extraordinary amount given that it exceeds the total damages claimed by the plaintiff in the statement of claim.
[9] Based on the bill of costs filed, the amount claimed by the defendant as security for costs includes fees already incurred of approximately $85,000 and fees estimated to be incurred in the future of approximately $335,000, both at a partial indemnity rate, inclusive of HST. The bulk of the incurred costs claimed relate to documentary and oral discovery. In support of the quantum of costs claimed, the defendant relies on the affidavit of an associate lawyer with the defendants’ firm, Amanda Perumal. Perumal states that the Costs Outline only reflects’ the defendant’s legal fees relating to its defence of the plaintiff’s claim and does not reflect fees related to the counterclaim. However, the affidavit contains no explanation as to how incurred fees and estimated fees were segregated and allocated as between the claim and counterclaim nor as between this action and the Liebrock action, even though oral and documentary discoveries were conducted jointly for the claims and counterclaims in both actions.
[10] The evidence on cross-examination of Perumal is that she was not personally involved in the process of segregating out the legal fees associated with the plaintiff’s claim, and that the lawyer Perumal had relied on for her evidence in that regard was also not directly involved in that process, but had obtained their information from a third lawyer who had overseen the segregation. Perumal’s evidence that the defendants’ costs outline only includes fees associated with the plaintiff’s claim against the defendant is therefore impermissible double hearsay.
[11] Given the weaknesses in the defendant’s evidence on the allocation of the legal costs as between the claims and counterclaims in the two actions and given the fact that the partial indemnity costs to trial estimated by the defendants exceeds the total damages claimed by the plaintiff against the defendant in this action, I find that the defendants’ evidence on its estimated legal costs to be unreliable and those estimated legal costs to be unreasonable.
[12] On a typical security for costs motion, the court might look to the responding party’s evidence of its own legal costs to assess the reasonableness of the costs claimed by the moving party as security. In this case, the plaintiff did file a bill of costs purporting to show legal costs incurred to date in relation to both the claim and counterclaim that are substantially less than the costs claimed by the defendant in relation to the plaintiff’s claim alone. However, the plaintiff’s bill of costs was served less than a week before the hearing of this motion and was not attached to an affidavit nor subject to cross-examination. I have therefor given the plaintiff’s bill of costs no evidentiary weight and I have not relied on it in my decision.
[13] Absent reliable evidence from the parties on the defendant’s potential costs to trial, I looked for guidance to previous decisions of this court granting security for costs in actions involving claims and/or counterclaims similar to this case. The plaintiff identified three previous decisions that I find are helpful:
a) Sheridan v. Goldstone Resources Inc., 2011 ONSC 1034: Master Muir awarded $40,950 security for costs against a plaintiff with a $1.4 million claim in a case that included a $1 million counterclaim.
b) 1923731 Ontario Ltd. v. Co-operators General Insurance Co., 2022 ONSC 2189: Associate Justice Kaufman ordered security for costs of $90,000 in relation to a claim for between $1 million to $1.3 million, with no counterclaim;
c) Premium Host Inc. v Paramount Franchise Group Inc., 2021 ONSC 5691: Associate Justice La Horey ordered plaintiffs to post security for costs of between $45,000 and $76,000 each in respect of claims ranging from approximately $2.7 million to $3 million, all involving counterclaims for 10% to 15% of the value of the claims.
[14] The quantification of the costs to be posted as security for costs is, of course, dependent not only the value of the claim, but also on the specific nature and complexity of the litigation, which will differ from one case to the next. However, in my view, the above referenced security for costs awards provide guidance in determining the minimum value of the plaintiff’s current Ontario assets that would be sufficient to pay the costs of the defendant in accordance with Rule 56.01(1)(d).
[15] Each of the security for costs decisions referenced above involves a claim that is more than double the value of the plaintiff’s claim in this case. The amounts ordered as security for costs in those cases range from $40,000 to $90,000. In this case, I find that in order to satisfy the sufficient assets in Ontario test, the plaintiff need only prove assets in the lower end of that range, from $40,000 to $60,000.
[16] At the time of the hearing of this motion, the plaintiff maintained a bank account with over $97,000 cash on deposit. The uncontested evidence of the plaintiff is that it has maintained at least that amount in its bank account since December, 2020. While the defendant does not dispute the current value of the plaintiff’s bank account, it argues that this is a liquid asset that could easily be dissipated “in a single keystroke” if the plaintiff was unsuccessful at trial. There is no evidence that the plaintiff intends to dissipate the funds in the bank account, to frustrate a costs award or otherwise. The unchallenged evidence of the plaintiff’s witness is that it intends to maintain significant cash on hand in the bank account going forward. In any event, the fact that the plaintiff’s assets are liquid means that they would be readily available to pay a costs award. It enhances the sufficiency of the plaintiff’s assets rather than detracting from it.
[17] The $97,000 in the plaintiff’s bank account is more than sufficient to cover a potential adverse costs award in respect of the plaintiff’s claim. I find that there is not good reason to believe that the plaintiff has insufficient assets in Ontario to pay the costs of the defendant, and would dismiss the defendant’s motion on that basis alone. However, if I am wrong in that regard, I also find that an order for security for costs would not be just in the circumstances of this case.
Justness of the Order Sought
[18] In Yaiguaje v Chevron Corp., the Court of Appeal provided guidance on the test on a motion for security for costs:
[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 Rules 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, [1989] O.J. No. 1399 (H.C.J.); Morton v. Canada (Attorney General) (2005), 2005 6052 (ON SC), 75 O.R. (3d) 63, [2005] O.J. No. 948 (S.C.J.); Cigar500.com Inc. v. Ashton Distributors Inc. (2009), 2009 46451 (ON SC), 99 O.R. (3d) 55, [2009] O.J. No. 3680 (S.C.J.); Wang v. Li, [2011] O.J. No. 3383, 2011 ONSC 4477 (S.C.J.); and Brown v. Hudson's Bay Co., [2014] O.J. No. 795, 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.[^1]
[19] The defendant seeks for security for costs only in relation to the plaintiff’s claim in this action. The defendant has not sought security for costs in the Leibrock action and it is not entitled to security for costs in respect of its counterclaim in either action. An important factor in assessing the justness of the requested order in this case is the relative significance (or insignificance) of the plaintiff’s claim to the litigation. In my view, where the claim for which security for costs is sought is but a small piece of the litigation as a whole, the justness of the case will rarely “demand” that security for costs be ordered, particularly where the moving defendant has a counterclaim that greatly exceeds the plaintiff’s claim. Unlike the typical case where the defendant is an unwilling participant in the action, a defendant with a much larger counterclaim has effectively signaled an intention to join in litigation with the plaintiff regardless of the plaintiff’s claim. In those circumstances, it will be more difficult for the moving defendant to demonstrate that it would be unjust or unfair to the defendant to allow the litigation to continue absent an order for security for costs.
[20] The existence of a counterclaim also militates against an order for security for costs when the counterclaim is based is in large part on the same facts and circumstances raised in the plaintiff's claim. This stems from the principle that a defendant (or defendant by counterclaim) should not have to post security to defend itself.[^2]
[21] The impact of a significant counterclaim on a defendant’s motion for security for costs was recently considered by Justice Penny in Paramount Franchise Group et al. v. Mian et al.[^3] In Paramount, the plaintiff claimed damages for breach of contract and other relief in the amount of $5.65 million and the defendant counterclaimed for $2.65 million. In denying the defendant’s motion for security for costs, Justice Penny found as follows:
[12] Here, the Defendants’ counterclaim is inextricably connected to both the claim and their defence to the claim. The Defendants’ counterclaim does not really raise any independent factual issues. Adjudication of the counterclaim will necessarily involve and require factual findings on exactly the same events, circumstances and interactions as those giving rise to the Plaintiffs’ claim and the Plaintiffs’ defence to the counterclaim. The Plaintiffs’ action put the entirety of the relationship of the parties between 2016 and 2018 in issue. The counterclaim presents the Defendants’ version of that relationship and the events that took place between 2016 and 2018. This close connection between the counterclaim and the original claim, therefore, militates against an exercise of this court’s discretion to award security for costs against the Plaintiffs.[^4]
[22] The defendant argues that the existence of a counterclaim is not a relevant factor on a motion for security for costs and points to the decision of the Ontario Divisional Court in Wilkings v. Velocity Group Inc.[^5] In that case, the Divisional Court allowed the defendants’ appeal of the dismissal of their security for costs motion. The motions judge had dismissed the defendants’ motion primarily on the basis that there was a counterclaim. The Divisional Court distinguished between motions for security for costs brought by a defendant against an initiating plaintiff from those brought by a defendant by counterclaim against a plaintiff by counterclaim:
[23] The existence of a counterclaim raising the same issues as the defence to the initiating plaintiff's claim is a relevant fact to be considered in the exercise of discretion when considering whether to order security for costs against the plaintiff by counterclaim. See ICC, supra.
[24] However, the fact of a counterclaim should not be a relevant factor for consideration by the court in exercising discretion in respect of a motion for security for costs against an initiating plaintiff in the main action.
[23] The Divisional Court goes on to describe the motion judge’s reliance on the counterclaim in dismissing the motion as an “error in law”. The defendant argues that Justice Penny similarly erred in law in considering the existence of the counterclaim in Paramount, and that I am likewise precluded from considering the existence of the counterclaim in my exercise of discretion on this motion. I disagree.
[24] First, I note that the facts in Wilkings differ significantly both from Paramount and the present case. In Wilkings, there were thirteen defendants who moved for security for costs, only two of whom had brought counterclaims against the responding plaintiffs. Further, the counterclaims appear to be insignificant and only tangentially related to the claims in the main action, having been brought only in support of an equitable tracing order against the plaintiffs. Wilkings was not a case where the claims and counterclaims were “inextricably connected” as in Paramount, nor where the value and complexity of the counterclaims greatly exceeded that of the plaintiff’s claims as in the present case.
[25] I agree with the plaintiff’s submission that Wilkings should not be read to hold that counterclaims are always and entirely irrelevant to the court’s exercise of discretion on a motion for security for costs. Wilkings only held that the mere fact of a counterclaim is not determinative: “the existence of the counterclaim does not in itself automatically prevent a defendant/plaintiff by counterclaim from obtaining an order for security”.[^6] The Divisional Court overturned the motion judge specifically because “his decision appear[ed] to suggest that a plaintiff will be protected from posting security for costs any time a defendant raises a counterclaim.”[7][my emphasis]
[26] In my view, the defendant’s reading of Wilkings as providing for a blanket prohibition on the consideration of a counterclaim on a defendant’s motion for security for costs is overbroad. Such a reading is inconsistent with the Court of Appeal’s decision in Yaiguaje. The Court of Appeal directed the court to “consider the justness of the order holistically, examining all the circumstances of the case” and clearly warned against imposition of “rigid criteria” such as the blanket prohibition asserted by the defendant.[^8] If I am wrong, and the defendant’s broad reading of Wilkings is correct, then I find that Wilkings has been overruled in this regard by Yaiguaje, by which I am bound.
[27] In this case, not only are the facts and issues in the claim and counterclaim inextricably linked, the facts relevant to the plaintiff’s claim are essentially subsumed within the much broader counterclaims brought by the defendant in this action and the Liebrock action. The damages sought by the plaintiff in its breach of contract claim are less than 10% of the damages sought by the defendant against the plaintiff in its counterclaim, and represent less than 1% of the total damages claimed by claim and counterclaim in the two actions.
[28] The plaintiff’s claim is a relatively straightforward breach of contract claim seeking the balance owing under a contract that has already been substantially performed by both sides. The defendant’s counterclaim, on the other hand, puts into issue the entirety of the relationship between the parties since long before the contract was entered into and raises issues that extend far beyond the parties’ respective rights and obligations under the agreement. The defendants’ counterclaim is the true driver of this litigation, not only in terms of the quantum of damages claimed but also in relation to the complexity of the facts and issues and the related legal costs. This factor weighs heavily against granting the order for security for costs.
[29] The defendant’s delay in bringing this motion is also relevant to the justness of the requested order. Much of the evidence relating to the status of the plaintiff’s business that was relied on by the defendant in support of this motion was obtained from examinations for discovery conducted in January and February of 2020. I am not satisfied that this motion was brought without undue delay. The defendant waited until May 21, 2021 to indicate that intended to bring a motion for security for costs, advising at that time that it would not be delivering its answers to undertakings until after the motion was heard. As such, this motion appears to have been originally brought for tactical reasons in an attempt to delay or avoid the defendant’s discovery obligations. This was the conclusion reached by Associate Justice Brott on a case conference convened to deal with outstanding undertakings in this action in October 2021:
A brief history shows that on March 25, 2021 counsel agreed to mutually exchange the answers to undertakings arising from the examination for discovery on January 19-21, 2021 of Mr. Wachsberg (the plaintiff's representative) and from the continued examinations of Mr. Liebrock and Mr. Melman, by May 28, 2021.
It was only on May 21, 2021, one week prior to the deadline and after having received the plaintiff's undertakings, that the solicitor for the defendant for the first time took the position that "after a closer review and consideration of the evidence" he wished to bring a security for costs motion.
The defendant failed to, on a timely basis, ever seek a further extension of time in order to comply with its obligations to answer undertakings. Rather, it sought to avoid the obligation by bringing a motion for security for costs.[^9] [my emphasis]
[30] The relatively insignificant contribution of the plaintiff’s claim to the complexity and legal cost of the litigation as a whole also supports a finding that the defendant’s motion is tactical in nature. In my view, the defendant has pursued this motion for the purpose of delaying and/or frustrating the plaintiff’s prosecution of its claim rather than out of any genuine concern over securing the small proportion of the defendant’s legal costs that might reasonably be allocated to the defence of that claim. In Yaiguaje, the Court of Appeal directed courts to be vigilant to ensure orders for security for costs are not being sought for such tactical purposes, even in circumstances where the provisions of Rule 56 have otherwise been met.[^10] This factor also militates against exercise of the court’s discretion to order security for costs.
[31] Given the nature and scope of the defendant’s counterclaim and the substantial overlap with the plaintiff’s claim, the worth and significance of the plaintiff’s claim in this action in relation to the litigation of the claims and counterclaims in the two actions as a whole, the defendant’s delay in seeking security for costs, and the tactical nature of this motion, I find that it would not be just in the circumstances to order security for costs. Accordingly, even if I am wrong in my finding that there is not good reason to believe that the plaintiff has insufficient assets in Ontario, I exercise my discretion not to order security for costs.
Conclusion
[32] For these reasons the defendant’s motion for security for costs is dismissed.
Costs
[33] Unless the parties can agree on costs, they may make written submissions on costs of no more than two pages in length (exclusive of any costs outline), to be filed by email through my assistant trial coordinator. The plaintiff shall deliver its’ costs submissions by no later than January 16, 2023. The defendant shall deliver its costs submissions by no later than January 23, 2023.
ASSOCIATE JUSTICE D. MICHAEL BROWN
Released: January 3, 2023
COURT FILE NO.: CV-18-00601425-0000
DATE: 20230103
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
ACASTA CAPITAL INC.
Plaintiff/Defendant by Counterclaim
-and-
ACASTA ENTERPRISES INC.
Defendant/Plaintiff by Counterclaim
AND BETWEEN:
ACASTA ENTERPRISES INC.
Plaintiff by Counterclaim
-and-
ACASTA CAPITAL INC. and MICHAEL LIEBROCK
Defendants by Counterclaim
REASONS
ASSOCIATE JUSTICE D. MICHAEL BROWN
Released: January 3, 2023
[^1]: Yaiguaje v. Chevron Corp., 2017 ONCA 827 at paras. 23-25
[^2]: European Flooring Contract Services Ltd. v. Toddglen ILofts Ltd., [2013] O.J. No. 4696 at para. 33 ; ICC International Computer Consulting & Leasing Ltd. v. ICC Internationale Computer and Consulting GmbH, 1989 9525 (FC), [1989] OJ No. 70 at p. 3; Paramount Franchise Group et al. v. Mian et al., 2022 ONSC 4533 at paras. 11-12
[^3]: 2022 ONSC 4533. The Paramount decision was released after the hearing of oral argument on this motion and only came to my attention some time later. At my request, the parties delivered brief supplementary written submissions on the Paramount decision, specifically as it relates to the relevance of a counterclaim on a motion for security for costs.
[^4]: Paramount, supra at para. 12
[^5]: 2008 12500 (Ont. Div. Ct.)
[^6]: Wilkings, supra at para. 20
[^7]: Ibid. at para. 16
[^8]: Yaiguaje, supra, at para. 25
[^9]: Acasta Capital v. Acasta Enterprises, CV-18-601425, October 7, 2021, Endorsement of Associate Justice Brott (unreported)
[^10]: Yaiguaje, supra, at para. 23