590863 Alberta Ltd. Plaintiff - v. -, 2012 ABQB 98

Court of Queen ’ s Bench of Alberta Citation: 590863 Alberta Ltd. v. Deloitte and Touche Inc., 2012 ABQB 98 Date: 20120210 Docket: 0403 23792 Registry: Edmonton Between: 590863 Alberta Ltd. Plaintiff - and - Deloitte and Touche Inc., Gordon Smith, Bank of Nova Scotia, and Crystal Mountain Water Cooler Corporation Defendants _______________________________________________________ Memorandum of Decision of W. S. Schlosser, Master in Chambers _______________________________________________________ [ 1 ] This is an application for security for costs.

The circumstances are unusual. [ 2 ] The Plaintiff (“590”) owned 100 shares of the Defendant, Crystal Mountain. The shares were initially held in trust for 590 by two individuals. [ 3 ] 590 attempted to transfer its shares in Crystal Mountain to Polar Bear Water Distiller Manufacturing Company. However, the by-laws of Crystal Mountain provided:

20 (

a) No shareholder shall be entitled to sell, transfer or otherwise dispose of any share or shares in the capital of the corporation without the prior approval of the directors of the Corporation expressed either by a resolution passed by the votes of a majority of the directors present at a meeting of the directors or by a written instrument signed by a majority of the directors. (

b) such approval may be refused by the directors without them assigning any reason thereto but they shall, within a reasonable period after the date upon which the transfer for the applicant shares was lodged with the Corporation, send to the transferee a notice of such refusal. [ 4 ] Approval for the transfer was considered and rejected by the directors of Crystal Mountain. [ 5 ] It is not known whether Polar Bear paid 590 for the shares. [ 6 ] Polar Bear commenced proceeding to have the shares transferred and this was opposed by Crystal Mountain. [ 7 ] Polar Bear then defaulted on a loan to the Defendant Bank of Nova Scotia.

The Bank exercised its general security agreement. Deloitte and Touche Inc. was appointed Receiver Manager and, subsequently, as Trustee in Bankruptcy of Polar Bear. [ 8 ] Crystal Mountain then did an about face and took the position that the shares belonged to Polar Bear after all. It sought to purchase the shares. However, the offer provided: This agreement will be of no force and effect until approved by Order of the Court of Queen’s Bench of Alberta.

The Vendor shall, promptly after execution of this Agreement, make application for such approval and the corporation shall assist in such application, as required. [ 9 ] Deloittes applied to the Court for approval. 590 opposed. Ritter, J. (as he then was) refused. [ 10 ] The Court found that the deal was tainted. The financial information examined by the Defendant, Gordon Smith, disclosed that nearly one and half million dollars in excess fees were taken out by the directors of Crystal Mountain.

If Polar Bear was indeed the owner of the shares during that time, it might have been entitled to the benefit of some of those funds which, in turn, might have prevented its insolvency. Mr. Justice Ritter appears to have taken the view that Crystal Mountain or its principals were attempting to buy the shares with funds that contributed to Polar Bear’s insolvency. There was also a triable issue about ownership of the shares. [ 11 ] Deloittes appealed the Order of Mr. Justice Ritter but later abandoned their appeal. Mr.

Justice Ritter was elevated from Queen’s Bench to the Court of Appeal in April, 2002. [ 12 ] Despite the findings of the Court, Deloittes sold the shares to Crystal Mountain for $600,000.00. The receiver was, no doubt, anxious to realize upon its security and maximize the value of this asset. 590 had argued that the shares were worth more. The Receiver countered that the cost of litigation was factored into the price. The Bank got the money. 590 sued.

Now the Defendants seek security for costs. [ 13 ] If the ownership question came out in favour of 590 by virtue of the refusal of the directors of Crystal Mountain to approve the sale, then 590 would have retained this asset. It might also have been entitled to some of the funds the directors took out. If the shares belonged to Polar Bear and 590 was not paid by Polar Bear, 590 would only have ranked as an unsecured creditor in Polar Bear’s insolvency, which likely meant that it got nothing.

[ 14 ] Rule 4.22 provides: 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 [ 15 ] Fortunately, we have the benefit of the consideration of this new Rule by the Court of Appeal, Chief Justice Wittmann and Hall J. in: Autoweld Systems Limited v. CRC-Evans Pipeline International Inc. , 2011 ABCA 243 (C.A.) ; Attila Dogan Construction and Installation Co. v. AMEC Americas Limited , 2011 ABQB 175 (per Wittmann C.J.Q.B.) and Xpress Lube & Car Wash Ltd. v. Gill , ABQB 457 (per Hall J.). [ 16 ] The starting point when a company is the respondent is s. 254 of the Alberta Business Corporations Act , R.S.A. 2000, c.

B-9 : 254 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. [ 17 ] Then Rule 4.22 comes into play. Both

section 254 and Rule 4.22 are discretionary. New Rule 4.22 and the decided cases show how the discretion should be exercised. There are five factors to consider. Rule 4.22 essentially codifies the decided cases relating to security for costs. [ 18 ]

Section 254 and Rule 4.22 (

a) and (

b) involve similar considerations. Mr. Justice Hall observes that the requirements of Rule 4.22 (

a) and (

b) may be less stringent than the test set out in s. 254 but I need not comment on that. 590 Ltd. is a shell company. It is established and (and conceded) that it would not be able to respond to a costs award. That takes care of 4.22 (

a) and (b), and s. 254 of the Alberta Business Corporations Act . [ 19 ] In this case, there is no evidence that a security for costs award would unduly prejudice 590's ability to continue the action. So that takes care of 4.22 (d). [ 20 ] As Chief Justice Wittmann observed in the Attila case (at para. 17): ... Rule 4.22 requires is an inquiry into the merits. In my view, this suggests that a reasonably meritorious defence, when considered

together 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 nordesirable, for the court at this stage to determine which party’s case is stronger. [21] That is not to say that the merits have little weight. The purpose of the Rule is to prevent unmeritorious lawsuits from beingprosecuted with impunity. In the past, Defendants would use the security for costs rule strategically to create an obstacle they hoped thePlaintiff could not overcome.

There are instances of the Court allowing a poor Plaintiff with a good suit to continue (e.g. Keller (nextfriend of) v. Penkoske, [1994] AJ No. 1249 per Funduk M.). Now there is Rule 4.22 (d). Merits are central to the decision but often theapplication is made early, when it would be impossible to look deeply into the strength of both cases. [22] In this case court approval for the sale was sought and refused. What Mr. Justice Ritter’s analysis shows is that there are, tosay the least, significant triable issues. It is not for the Court at this stage to weigh or decide these issues.

A reasonably meritoriousdefence is simply one of the considerations involved in determining whether security for costs ought to be ordered. I might observe, inpassing, that the Defendant, Gordon Smith, seems to have the strongest position in that it is not obvious from the facts or the pleadingswhy Mr. Smith should be personally liable. [23] That leaves the ‘other matters’ in Rule 4.22 (e). [24] In this case, the Defendants went ahead despite the adverse decision of the Court and the claims of 590, for the immediatebenefit that accompanied the sale.

What’s more, the costs of litigation had been factored into the sale price. [25] These factors are compelling. [26] Mr. Justice Côté said in Crothers v. Simpson Sears Ltd., (Alta. C.A.) 1988 ABCA 155 , [1988] A.J. No. 408: F. General “discretion” of the court Courts should not automatically order security for costs. The history of the [previous] Rule is carefully reviewed in Launer v.Sommerfeld, (1964) (BC SC), 48 W.W.R. 224 (B.C.).

Since the 1700's the courts have given or withheld securitybecause of the justice of the individual case, and the modern Rule was worded to reverse a decision casting doubt on that principle: ibid.The word “may” in R. 593(1) is permissive not mandatory: Alberta

Interpretation Act ss. 25(1)(e), 25 (2)(c); (English) Supreme CourtPractice para. 2003; A.-G. v. Emerson (1889) 24 O.B.D. 56, 58 (C.A.); Parkinson v. Triplan, [1973] 2 All E.R. 273, 285 (C.A.). Manyauthorities hold that security is “discretionary”, i.e. that the court looks at the justice of the individual circumstances. See for exampleMackley v. U. of A., supra, at 332, 341; Vollenga v. Berry (1962) (AB KB), 39 W.W.R. 319, 320 (Alta. C.A.); Aukemav.

Bernier Kitchen Cabinets (AB KB), [1987] 5 W.W.R. 122, (Alta.); 1 Williston & Rolls, Law of Civil Procedure 577 (1970); 37 Halsbury’s Laws 230-31 (para. 304) (4th ed.); Aeronave v. Westland, supra; 2 Holmested & Gale R. 373 3, 4; Orkin at 502;(English) Supreme Court Practice 23/1-3/2A, 3. [27] The justice of the case governs the exercise of discretion and provides a framework for the application of 4.22(e). [28] Deloittes, the Bank of Nova Scotia, and Crystal Mountain have all enjoyed the benefits of dealing with the shares as they sawfit, contrary to the claims and interests of 590. They took a calculated risk.

In the circumstances, they can hardly complain about thelawsuit. [29] If it weren’t for the special considerations that apply to a shell company that is admittedly unable to respond to a costs award,I would be disinclined to order security for costs based on the justice of the case under Rule 4.22 (e). [30] In these circumstances, the next question is the amount and whether any conditions should apply. The conditions can rangefrom a simple undertaking by shareholders, to guarantees, bonds, or letters of credit, or cash paid into court.

[ 31 ] The Bank’s lawyer provided a pro forma Bill of Costs estimating roughly $75,000.00 to go to trial. When determining what security is appropriate it is tempting to tie the amount to the merits, starting with the pro forma amount and discounting to reflect the strength of the Plaintiff’s case. The learned authors of the Civil Procedure Handbook and Encyclopedia point out that this is flawed logic, using the picturque comparison: ‘like awarding half an umbrella on the chance it might not rain’ (CPE

chapter 34-G4). The merits go to whether the security should be made, not how much. The Order is not like an insurance premium with a deductable that increases with the strength of the Plaintiff’s case. [ 32 ] I accept the accuracy of the pro forma Bill of Costs. However, in the somewhat compelling circumstances of this case, I am content to require the shareholders of 590 Ltd. to provide a personal undertaking to jointly and severally respond to any cost award 590 might be exposed to in this litigation up to the amount set out in the pro forma Bill of Costs.

The action is stayed until the undertaking is provided. [ 33 ] The Plaintiff is directed to provide a litigation plan within 30 days of the date of the Order. [ 34 ] Costs of this application will be in the cause. Heard on the 23 th day of January, 2012. Dated at the City of Edmonton, Alberta this 10 th day of February, 2012. W. S. Schlosser M.C.C.Q.B.A. Appearances: Murray Engelking Engelking Wood for the Plaintiff Michael McCabe, Q.C. Reynolds Mirth Richards & Farmer LLP for the Defendant, Crystal Mountain Water Cooler Corporation

Edward Feehan Duncan & Craig LLP for the Defendants, Deloitte and Touche Inc., Gordon Smith and the Bank of Nova Scotia