Spectrum Centre for Physical Therapy and Athletic Rehabilitation Ltd. v. Filipenko, 2011 ABQB 340

Court of Queen ’ s Bench of Alberta Citation: Spectrum Centre for Physical Therapy and Athletic Rehabilitation Ltd. v. Filipenko, 2011 ABQB 340 Date: 20110520 Docket: 0401 18840 Registry: Calgary Between: Spectrum Centre for Physical Therapy and Athletic Rehabilitation Ltd. Plaintiffs - and - Lynda Filipenko, Linda Backhand and Apex Credit Union Ltd. Defendants _______________________________________________________ Memorandum of Decision of K.R.

Laycock, Master in Chambers _______________________________________________________ [ 1 ] The plaintiff alleges in the statement of claim that its employee, the defendant Filipenko, embezzled funds from it over a number of years. [ 2 ] The plaintiffs further allege that the defendant Apex Credit Union Ltd. (Apex) allowed Filipenko to open an account in its branch as “Lynda Filipenko, operating as Spectrum Centre”.

It is alleged that Apex owed a duty of care to the plaintiff and that it breached its duty of care in allowing Filipenko to maintain the account, deposit funds to the account and withdraw funds to her own benefit. [ 3 ] Apex has filed a statement of defence and now applies for an order for security for costs pursuant to the Alberta Business

Corporations Act , R.S.A. 2000, c. B-9 s. 254 and rules 4.22 and 4.23. [ 4 ] The security for costs provision in the Business Corporations Act s. 254 states: In any action or other legal proceeding in which the plaintiff is a body corporate, if it appears to the court on the application of a defendant that the body corporate will be unable to pay the costs of a successful defendant, the court may order the body corporate to furnish security for costs on any terms it thinks fit. [ 5 ] In support of its application, Apex argues that the plaintiff has sold its assets and ceased carrying on business.

Therefore the plaintiff would be unable to pay any costs to Apex at the conclusion of these proceedings. [ 6 ] Under the new Rules of Court, security for costs is governed by Rule 4.22 which states: The Court may order a party to provide security for payment of a costs award if the court considers it just and reasonable to do so, taking into account all of the following: (

a) whether it is likely the applicant for the order will be able to enforce an order or judgment against assets in Alberta; (

b) the ability of the respondent to the application to pay the costs award; (

c) the merits of the action in which the application is filed; (

d) whether an order to give security for payment of a costs award would unduly prejudice the respondent’s ability to continue the action; (

e) any other matter the Court considers appropriate. [ 7 ] In Attila Dogan Construction v. AMEC Americas Ltd. [2011] A.J. No. 308, 2011 ABQB 175 , Wittmann C.J. considered a defendant’s application for security for costs and reviewed new Rule 4.22. He concluded that the court was required to take into account the five itemized factors in Rule 4.22 to determine whether an order to provide security would be just and reasonable in the circumstances. At paragraphs 24 and 25 he set forth a two-step inquiry process. [ 8 ] The first step is to review the factors set out in Rule 4.22 (a-

e) and the second step is to ask whether it is just and reasonable to grant an order for security, having taken into account the factors in Rule 4.22. Rule 4.22 Factors: Likelihood of Enforcing an Order or Judgment Against Assets in Alberta

[9] In October 2004 the plaintiff sold all of its assets to one of its employees. There is no evidence as to whether the saleproceeds remain in the plaintiff’s bank account, whether they were used to pay off debt or merely distributed to shareholders. There is noevidence that the plaintiff currently has any assets. Ability to Pay Costs [10] The plaintiff ceased carrying on any operations by December 2004. Since there is no evidence that the plaintiff has any assetsin the province and it is not carrying on any operations, it has no ability to satisfy an award of costs.

Merits of the Action [11] The parties have gone to great lengths to provide evidence as to the merits of the claim and defence. [12] The plaintiff alleges in the statement of claim that Apex owed the plaintiff a duty of care and that Apex breached its duty ofcare in opening up an account for the defendant Filipenko. Apex, among other defences, denies that it owed the plaintiff a duty of careand denies that it knew or ought to have known that Filipenko was not authorized to open and operate such an account.

Apex argues thatthey have a meritorious defence. [13] In response to the argument by Apex that it has a meritorious defence, the plaintiff relies upon J & F Transport Ltd. v.Markwart (SK KB), 1982 CarswellSask 516, 136 D.L.R. (3d) 204 and Richmond Raiders Football Club v.Richmond Savings Credit Union 1993 CarswellBC 2191.

In both cases the court found the bank was negligent in the manner in which itopened an account without making proper inquiry. [14] The plaintiff further submits that during the criminal trial of Filipenko, the trial judge commented on the tellers inexperienceand poor training in opening and operating the Filipenko account and the failure of Apex to follow its own banking procedures. Theplaintiff argues that this is strong evidence in support of their claim. [15] In Trang v. Alberta ( Director of Edmonton Remand Centre) [2002] A.J.

No. 890, 2002 ABQB 658, [2003] 2 W.W.R. 79, 8 Alta L.R. (4th) 303, 322 A.R. 212, 26 C.P.C. (5th) 340, 54 W.C.B. (2d) 609 Mardceau J. held that the weight to be given to evidence fromanother judicial proceeding will vary along a spectrum. The evidence may be afforded a high degree of deference or it may serve as mereevidence to be assigned weight. [16] The Provincial Court Judge was dealing with a criminal charge of fraud against Filipenko. While a number of employees ofApex gave evidence at the trial, the issue of Apex’s negligence was not before the Judge.

The comments are acknowledged, but cannotbe considered to be proof of negligence. [17] The plaintiff argues that if I conclude there is merit to the action I should not order security for costs. The plaintiff seems tosuggest that the court should only inquire into the plaintiff’s claim, with no regard to the defence raised. Counsel suggests that if theclaim is not certain to fail, a costs award should not be granted. [18] In Axilla Dogan, Wittmann C.J. concluded that the court does not inquire into which party has a stronger case.

He stated, inpart, at para. 17: What Rule 4.22 requires is an inquiry into the merits. In my view, this suggests that a reasonably meritorious defence, when consideredtogether with the other factors set out in Rule 4.22, is sufficient to weigh in favour of granting security for costs. It is neither possible, nor

desirable, for the Court at this stage to determine which party’s case is stronger. [19] This indicates that an in-depth analysis of the plaintiffs action is unnecessary. It may be enough to consider only the nature ofthe action and whether the defendant can satisfy the court, on a review of the pleadings and affidavit evidence, that it has an arguable ormeritorious defence. At this stage I conclude that there is an arguable defence, it is not filed for mere delay nor is it frivolous.

Undue Prejudice [20] The plaintiff’s corporate officer has sworn in paragraph 21 of his affidavit that “an award of security for costs would preventSpectrum from continuing with this litigation.” [21] While it may be that the plaintiff has no assets or income from which it could pay an order for security for costs, there is noevidence that the principal shareholder, who describes himself as a physiotherapist, would be unable to fund an order for security forcosts. [22] In Calmont Leasing Ltd. v. 32262 B.C.

Ltd. (2002) 2002 ABCA 290 , 317 A.R. 331 (C.A.) Cote J.A. observed thatin the case of a limited liability company, it is important that there be sworn evidence that the plaintiff has no way to raise money forsecurity for costs. In this case, no evidence has been led about the financial circumstances of the principal shareholder and director or theability of the plaintiff to access assets for security. [23] Cote J.A. further commented in Sprung Enviroponics Ltd. v. City of Calgary (1990) 1990 ABCA 23 , 72 Alta.

L.R.(2d) 237 (C.A.) at p. 254: The short answer is that there is no evidence whatever that the plaintiff corporation could not post security. It apparently lacks funds andis out of business, but that does not mean that it lacks all access to assets anywhere, nor that it lacks every way to raise funds. Other Matters [24] The plaintiff states that the company was incorporated in 2000 for the purpose of providing physical therapy and athleticrehabilitation services. Filipenko was hired in September 2001 and opened a bank account with Apex in November 2001.

The businessmade a profit until early in 2004, however less profit than anticipated. The plaintiff actually began losing money despite moving tosmaller premises and reducing its expenses. Accordingly, the plaintiff hired Wendy Neihardt to review the plaintiff’s business practices.In September 2004 the plaintiff discovered the misappropriation of over $400,000.00 by Filipenko. Shortly thereafter the plaintiff ceasedcarrying on operations. [25] The plaintiff relies upon JV Mechanical Ltd. v. Steel case Construction Inc. 2008 CarswellOnt 9062, 85 C.L.R. (3d) 276;Lysko v.

Maxbean Company et al. 2010 ONSC 6523; and Law Society of Alberta v. Stinchcombe 2009 ABQB 27 for the proposition that if a plaintiff is impecunious, so long as a claim hassome chance of success it should be allowed to proceed. However what Clark J. commented on in Stinchcombe was the balancing that a court must consider in a costs application. On the onehand is the concern about a meritious claim of an impecunious plaintiff and on the other hand, the concern that an impecunious plaintiffcan win damages if successful, and hide from costs if they lose.

[26] Clark J. commented at para. 26 that some evidence is necessary to establish that an order for security for costs will actuallystop a plaintiff’s claim. Clark J. further commented that corporate plaintiffs are awarded less sympathy than individual plaintiffs inorders for security for costs. More about this issue will be discussed later. [27] The plaintiff argues that a contributing cause of their impecuniousity is the negligence of Apex in allowing Filipenko tooperate her account. Master Breitkreuz in Golden Sing Restaurant Ltd. v.

Re/Mas Real Estate (Edmonton) Ltd. (1991) 115 A.R. 299(Q.B.) found that the plaintiff’s impecuniousity may have been caused by the defendant’s conduct and found this to be one of 2significant extenuating circumstances in dismissing an application for security for costs. [28] Lee J. in Jorgensen v. San Francisco gifts. Ltd. (AB KB), 1997 CarswellAlta 790, 207 A.R. 135, 54 Alta. L.R. (3d) 288, 13 C.P.C. (4th) 260, [1998] 3 W.W.R. 239, [1997] A.J. No. 881 (Q.B.) noted that the plaintiff’s impecuniosity arosein whole or in large part from the defendant’s alleged wrongful termination.

This was one important factor in reducing the Master’s orderfor security from $7,500.00 to $1,000.00. [29] Master Groves in Scotford Electrical et al v. Blue Mountain Log Sales et al, 2005 BCSC 538 referred to a number of BritishColumbia decisions and the English Court of Appeal decision Keary Developments Ltd. v. Tarmac Construction Ltd., [1995] 3 All E.R.534 dealing with security for costs.

The English Court of Appeal concluded that the defendants role in the plaintiff’s impecuniosityshould go to a determination of the quantum of an award of security, rather than a determination of whether to award security at all. TheMaster granted an order for security in the amount of $6,000.00 rather than the $25,000.00 requested by the defendants. [30] In Ragged Runner Enterprises Ltd. v.

Victoria Sports Traders Inc., BCSC) the court considered theplaintiff’s impecuniousity may have been brought about by the defendant’s alleged conduct and considered that as a factor in decidingwhether or not to order security for costs.

The court reduced the amount ordered to be paid for security for costs from $45,000.00 to$25,000.00, so as not to deprive the plaintiff of an opportunity to proceed trial. [31] These cases suggest that the defendant’s contribution to the plaintiff impecuniosity is a significant circumstance to consider ineither reducing the amount of security or denying an application entirely. [32] Apex submits that if the plaintiff suffered a loss, it was caused by Filipenko. Certainly the direct cause was Filipenko’smisappropriation of funds from the plaintiff.

Arguably the secondary cause could be Apex’s alleged negligence. [33] Apex notes the comments made by the court in Pocklington Foods Inc. v. Alberta (Provincial Treasurer), (AB KB), [1994] A.J. No. 313 at para. 12: However, an order for security for costs may be granted even when the impecuniousity of the plaintiff allegedly results from thedefendant’s actions of which the plaintiff complains: First Avenue Research Corp. v.

Dow (sic) Chemical Ltd. (1987), (BC SC), 16 C.P.C. (2d) 148, 11 B.C.L.R. (2d) 136 (B.C.S.C.). [34] Golden Sing Restaurant Ltd. supports the proposition that the involvement of the defendant in causing the plaintiff’simpecuniosity is to be considered in the court exercising its discretion in either making or not making a security for costs order. Theother cases suggest that the degree of involvement of the defendant is to be considered in reducing the amount of a security for costsorder. Just and Reasonable [35] The factors considered in Rule 4.22 (a-

e) weigh in favour of granting the application for security for costs. It is unlikely thatApex would be able to enforce an order for costs against assets of the plaintiff in Alberta and since the plaintiff has ceased carrying onbusiness it would have no ability to pay costs award. The defendant has an arguable defence to the plaintiffs claim. I am not satisfied thatthe corporate plaintiff would be unable to obtain funds from its principal shareholder and director to pay an order for security for costs.

[ 36 ] The second step in the process is for the court to consider if it is just and reasonable to grant an application for security for costs. The only circumstance in this case that supports a reduction or denial of an order for security for costs is the defendants role in bringing about the plaintiff’s impecuniosity. If the applicant were Filipenko, who was the direct cause of the plaintiff’s financial collapse, I would consider it unjust and unreasonable to order security. [ 37 ] Apex is in a different position than Filipenko.

It has an arguable defence and, at the very worst, may be found to be only indirectly responsible for the plaintiffs financial loss. It is my conclusion that it is just and reasonable for the plaintiff to provide security for costs in this matter. Conclusion [ 38 ] Apex has drafted a proposed bill of costs in the amount of $49,703.91, which includes fees for second counsel. The plaintiff justifiably objects to the inclusion of second counsel fees in this action. After deducting second counsel fees, the reduced bill of costs would be $43,115.16.

Apex’s secondary role in contributing to the plaintiff’s loss and impecuniosity justifies a further small reduction in the amount of costs to $35,000.00. [ 39 ] I would allow the security to be paid in 2 payments. $17,500.00 shall be paid into the credit of this action within 2 months after the date of the order pursuant to rule 4.23(1)(b).The action against Apex shall be stayed until the security is paid into court and if the security is not paid within time, the action against Apex shall be dismissed without further order.

The second payment must be paid before entry of this matter for trial. [ 40 ] The plaintiff may apply for a variation of this order to provide another form of security. [ 41 ] Apex shall be entitled to costs of this application in the amount of $1,750.00, payable forthwith. Heard on the 27 th day of April, 2011. Dated at the City of Calgary, Alberta this 20 th day of May, 2011. K.R. Laycock M.C.C.Q.B.A. Appearances: John R. Cusano L. Aufricht Gowling Lafleur Henderson LLP for the Defendant Apex Credit Union Ltd.

H. Meldrum Parlee McLaws LLP for the Plaintiffs