Jabneel Development Inc v Lamont (Town), 2017 ABQB 566

Court of Queen’s Bench of Alberta Citation: Jabneel Development Inc v Lamont (Town), 2017 ABQB 566 Date: 20171011 Docket: 1003 11076 Registry: Edmonton Between: Jabneel Development Inc. and Construction Jabneel Inc. Plaintiffs/Respondents - and - The Town of Lamont and Tom Miller also known as Thomas George Miller Defendants/Appellants _______________________________________________________ Reasons for Judgment of the Honourable Mr.

Justice Donald Lee _______________________________________________________ Introduction [ 1 ] The Town of Lamont (“Lamont”) appeals the decision of the Master denying the Town’s application for security for costs against the Plaintiffs, Jabneel Development Inc. and Construction Jabneel Inc. (“Jabneel”), pursuant to

Section 254 of the Alberta Business Corporations Act , RSA 2000, c. B-9 (“ABCA”) and Rule 4.22 of the Alberta Rules of Court . [ 2 ]

Section 254 of the ABCA reads as follows: 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. [ 3 ] Rule 4.22 states as follows: 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 heard; (

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. [ 4 ] In dismissing Lamont’s application, the Master decided in his oral reasons issued on December 9, 2016: 22 It seems to me that this is a practically unique case, and I, mean, if it were not for the 23 funds being held by Lamont, this plainly would be a case where Jabneel would have to 24 post security… 29 The big difficulty I have with this case, and I am being particularly mindful of the 30 decision and the reasons of Mr.

Justice Nielsen, is that I am not entirely convinced that it 31 has been proved to the Court’s satisfaction that the Town of Lamont will certainly use up 32 all of the money presently held in trust. … 38 …the balance, I guess in a sense, would serve as security.

Background [ 5 ] In December 2006, Jabneel Development Inc. and the Town of Lamont entered into a Development Agreement and a Master Sale Agreement for subdivision, development and sale of residential properties in an area of Lamont referred to as the Edna Lands. [ 6 ] On September 17, 2009 Lamont terminated the Development Agreement and the Master Sale Agreement. [ 7 ] Jabneel Development Inc. and Construction Jabneel Inc. commenced this action on June 29, 2010 for damages to recover losses allegedly resulting from the failed development agreements made with Lamont in 2006.

Construction Jabneel Inc. was not a party to the Agreements between Lamont and Jabneel. [ 8 ] Lamont sought security for costs in an application originally filed on January 19, 2016, but adjourned by Order of the Master on February 3, 2016 pending the decision of my colleague Justice Nielsen. Lamont’s application for security for costs was re-filed on August 9, 2016, and after three further adjournments at Jabneel’s request, the application was heard by the Master on December 9, 2016.

Lamont now appeals the decision of the Master. [ 9 ] Lamont relies upon the aforesaid Development Agreement as governing the rights and obligations of the parties in this matter. [ 10 ] At pages 4, 11 and 18 of the transcript of the proceedings from the impugned Application (the “Transcript”), the Court noted the applicable test prescribed by Rule 4.22 and

section 254 of the ABCA , and also noted the reasons of the Justice Wakeling, as he then was, in Amex Electrical Ltd. v 726934 Alberta Ltd. , 2014 ABQB 66 (“ Amex ”). [ 11 ] The history of this litigation was also noted by the Court below at the time of the Defendants’ Application. That history was reported in two prior decisions, one issued by the Master Jabneel Development Inc v Lamont (Town) , 2015 ABQB 488 , and then a subsequent Appeal from the decision of the Master was issued by Justice Nielsen Jabneel Development Inc v Lamont (Town) , 2016 ABQB 161 .

The former decision provided for the return of funds belonging to the Plaintiffs, but held by the Defendants, save for the sum of $100,000.00. The basis for that result was a finding that the sum of $406,500.00 was “grossly disproportionate to any conceivable loss or exposure” on the part of the Defendants. The subsequent Appeal overturned the result. [ 12 ] Since the dismissal of the Application, the Defendant, Tom Miller, has been convicted of criminal fraud charges connected to his activities with the Plaintiffs. The Contract Provisions [ 13 ] Pursuant to

Article 22.3 of the Development Agreement, Jabneel was obligated to post security in favour of the Town, by performance bond or such other security as the Town deemed acceptable, in order to ensure full compliance by the Developer with the terms, covenants and conditions of the Agreement. [ 14 ] Articles 22.10, 22.11 and 22.12 are relevant to this Application:

22.10 In the event that the Municipality is of the opinion that: … (

d) the Developer by any act or omission is in default of any term, condition or covenant of this Agreement; (

e) the security … is due to expire within a period of Sixty (60) days and the Developer has not deposited with the Municipality a renewal or replacement of such security in terms and form acceptable to the Municipality’s solicitors; the Municipality may invoke the provision of this Section, and make demands as payee and beneficiary… 22.11 In the event that the Municipality has negotiated or called upon the security to be deposited by the Developer with the Municipality in circumstances where the said security was due to expire within the said Sixty (60) day period, then the Municipality shall be entitled to hold any funds thereby obtained in lieu of the security which has been negotiated or called upon. 22.12 In the event that the Municipality has negotiated or called upon the security … the Municipality may, at its option and discretion, use any funds thereby obtained in any manner the Municipality deems fit to discharge the obligations of the Developer pursuant to this Agreement . [ 15 ] Overall, and in the context of this Application,

Article 2.2(

e) of the Development Agreement applies: 2.2 … (

e) that in the event that the Municipality terminates this Agreement in whole or in part pursuant to the provisions of this paragraph, it is understood and agreed that any financial obligations of the Developer to the Municipality shall survive as to the development already undertaken. [ 16 ] The Development Agreement also included a general indemnity clause: 22.1 The Developer shall indemnify and save harmless the Municipality from any and all losses, costs, damages, actions, causes of action, suits, claims and demands resulting from anything done or omitted to be done by the Developer in pursuance or purported pursuance of this Agreement.

The Security [ 17 ] Security was posted in the form of a letter of credit by Pascal Terjanian, who, at that time was a 50% shareholder in Jabneel. The Call on the Security/Letter of Credit [ 18 ] On October 29, 2008, Lamont notified Jabneel that a lien had been filed by Montcalm Ltd. on land in the Edna subdivision. [ 19 ] By letter dated October 8, 2008, CIBC notified Lamont that the Letter of Credit would not be renewed.

On October 14, 2008, Lamont asked that Jabneel provide replacement security by November 19, 2008. [ 20 ] Jabneel failed to provide replacement security when requested to do so. [ 21 ] On November 6, 2008 Lamont called upon the Letter of Credit as security in accordance with its provisions and the terms of the Development Agreement. [ 22 ] The following liens and claims were subsequently filed by other creditors of Jabneel:

a) John Lamer – caveat with reference to vendor’s lien – filed November 13, 2008

b) McGregor Construction – builder’s lien – filed April 7, 2009

c) Aggregate Investments – caveat – filed April 14, 2009 d) 6797415 Canada – builder’s lien – filed April 22, 2009 The Deficiencies and Costs [ 23 ] Lamont arranged for an inspection of the development by its engineer, which inspection was conducted on November 19, 2008 and resulted in a list of deficiencies.

On June 29, 2009, Lamont, through its solicitors, sent a notice of default to Jabneel in respect of the Development Agreement and the Master Sale Agreement, providing a period of 30 days to rectify the defaults. [ 24 ] The Affidavits of Bob Hanewich, Sandi Maschmeyer, and Bill Skinner outline the remedial work undertaken by Lamont since the termination of the Jabneel Agreements, the further remedial work required, and the costs incurred and to be incurred by Lamont. [ 25 ] The total amounts incurred or to be incurred which remain liabilities of Jabneel and properly secured with the funds posted as contractual security are: Repair and safety measures $ 49,448.70 Repair of additional deficiencies $ 16,950.00

Posts (lot corners) $ 9,200.00 Lane $ 11,392.50 Storm drainage system correction $ 450,000.00 (excluding lift station) Legal costs $ 265,366.27 Total: $ 802,357.40 Issues [ 26 ] 27. The issues being raised by Lamont on this Appeal are: (

a) Whether the Master erred in failing to address the contractual provisions governing use of the security funds held by Lamont; and (

b) Whether the Master erred in failing to order security for costs to be posted by Jabneel. Analysis Standard of review on appeal from a Master [ 27 ] Rule 6.14(3) states: An appeal from a master’s judgment or order is an appeal on the record of proceedings before the master and may also be based on additional evidence that is, in the opinion of the judge hearing the appeal, relevant and material. [ 28 ] The hearing of an appeal from the decision of a Master is de novo , and the standard of review is correctness.

The Rule 4.22 Factors 1st factor: The Ability of Lamont to enforce a costs award [ 29 ] It is clear from the uncontradicted evidence of Mr.

Filiatreault of Jabneel that it has no assets in Alberta to satisfy an adverse costs award. [ 30 ] Justice Nielsen also noted that counsel for Jabneel had conceded that Jabneel is insolvent. [ 31 ] Therefore it appears that Lamont has no ability to enforce a successful award of costs. 2nd factor: The Ability of Jabneel to pay a costs award [ 32 ] Jabneel has demonstrated the ability to finance this litigation, including interlocutory applications for amendments to the Statement of Claim and for return of the contractual security, and responding to applications for orders compelling Jabneel to respond to undertakings, but it fails to pay costs when it is unsuccessful. [ 33 ] As a result of these applications, Jabneel owes Lamont total costs of $28,993.57. 3rd factor: The Merits of the action [ 34 ] Jabneel’s action is based on allegations that Lamont improperly terminated the Agreements between the parties, and claims damages of $120,000,000.00, plus punitive damages of $5,000,000.00. [ 35 ] While the damages alleged by Jabneel for loss of sales and profits have been set out in its Amended Statement of Claim and quantified at $120 million, Jabneel admittedly only performed limited works in a small portion of the Edna Subdivision (identified as Edna 3A and 3B), including the development of one partial home. [ 36 ] Its claim is largely prospective and its damages claim somewhat speculative.

Justice Nielsen’s view, set out at paragraph 48 of his Reasons for Judgment, is that “it could not be said that Jabneel’s position is ‘unassailable’. Jabneel’s position is not ‘so compelling that the likelihood of success is very high’.” [ 37 ] Lamont has incurred, and will incur, substantial costs as a result of Jabneel’s failure to complete the servicing, including

additional engineering costs, and related legal costs. Those costs, as set out in the various affidavits of Bill Skinner, Sandi Maschmeyer, and Bob Hanewich, are presently estimated to total $802,357.60, and include Lamont’s legal costs of over $126,000 related to obtaining discharge of the liens filed by creditors of Jabneel and the discharge of Jabneel’s caveats. [ 38 ] Lamont filed a Counterclaim in the amount of $1,000,000.

As the Counterclaim relates directly to costs to complete the servicing set out in the Development Agreement, it does not add to the complexity of this action and will not prolong questioning or trial.

Lamont’s Counterclaim seeks to quantify the special damages directly arising from the contractual defaults of Jabneel, in the event that such damages exceed the contractual security of $406,500.00 held by Lamont. [ 39 ] Therefore, and when considering the merits as a whole, the evidence militates against Jabneel’s unsupported claim for $120,000,000.00, while favouring the defence and counterclaim of Lamont. [ 40 ] During the course of proceedings before the Master, counsel for Jabneel raised the issue of the Defendant Tom Miller’s conduct in 2012.

While this may go to witness credibility, it is not directly relevant to the merits of this action, filed two years prior to that as I described in Jabneel Construction Inc. v Lamont (Town) , 2013 ABQB 648 . The Court has also dismissed an application by Jabneel to amend its statement of claim to add such allegations against Mr.

Miller, who was Lamont’s former Town Manager. 4th factor: Is there any undue prejudice to Jabneel [ 41 ] The only evidence indicating that an Order requiring Jabneel to post security for payment of a costs award would unduly prejudice their ability to continue their claim comes from Jabneel itself which asserts that it cannot pursue its claim if security for costs is ordered. [ 42 ] While stating under oath that Jabneel has not assets or funds, Mr.

Filiatreault also stated during questioning in December 2014 that the company was not insolvent, and that the company remains available, willing and able to perform work and re-engage business. This suggested at that time that the company was actively avoiding opportunities to continue with works and developments to protect itself from an adverse judgment in this action, as opposed to carrying on bona fide business and accruing assets, and accounts receivable, as the case may be. The direct evidence from Mr.

Filiatreault was that funds ‘could’ be available, if the company so chose to pursue it. 5th factor: Other matters the Court considers appropriate [ 43 ] In all the circumstances, Lamont has not delayed in applying for security for costs, which application was originally filed in January 2016, and was subject to various adjournments. Subsequent to Jabneel’s filing of an Amended Statement of Claim in late 2014, Mr.

Filiatreault’s long delay in providing any responses to undertakings given in December 2014, and various interlocutory applications in 2015, it became apparent that the litigation would be protracted and that costs were escalating. [ 44 ] Lamont’s draft Bill of Costs of $39,228.00, attached as Exhibit “H” to the Affidavit of William Skinner sworn on January 11, 2016, does not contemplate additional time or expense in relation to the Counterclaim, or time spent to question on the counterclaim by either party. [ 45 ] Furthermore, Lamont has limited the amount of security sought in this initial application, and is not seeking security for costs for an anticipated trial at this time.

Lamont is also not seeking security for costs in respect of steps taken prior to its security for costs application. Conclusion Security for Costs [ 46 ] Lamont has a statutory right to bring an application for security for costs as set out in the ABCA , which addresses security for costs in

section 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. [ 47 ] Rule 4.22 also addresses security for costs as follows: 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 heard; (

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. [48] The interaction between s. 254 and Rule 4.22 was addressed by Justice Wakeling in Amex Electrical Ltd. v. 726934 AlbertaLtd.: [73] There is a difference between the nature of the discretion exercisable in a s. 254 and a r. 4.22 application. It turns on the fact thatthe marker in a s. 254 is onerous in nature and very specific. The standard in r. 4.22 is abstract and arguably less demanding.

Thisdifference means that a court which has concluded that an applicant has established on a balance of probabilities that therespondent will be unable to pay a costs award should be reluctant to exercise its discretion against the applicant unless otherfactors clearly indicate that it would be unfair to impose an obligation on the respondent to furnish security. [Emphasis Added] [49] With respect to Rule 4.22, in the Autoweld Systems Limited v CRC-Evans Pipeline, 2011 ABQB 265 decision, at paragraph23, the following is quoted from the Court of Appeal’s decision in Calmont Leasing Ltd. v. 32262 B.C.

Ltd. (2002), 2002 ABCA 290, 317 A.R. 331: …In the case of a limited liability company, it is particularly important that there be sworn evidence that the … plaintiff has no way toraise any kind of security of any description.

That is because an impecunious company with a cause of action is a one-way valve whichallows money to flow from a successful lawsuit through the company to its creditors or shareholders (or both), but prevents any moneyfrom flowing in the opposite direction. [50] The Master concluded that the Plaintiffs had an asset in Alberta, namely the $406,500.00, the value of which exceeds thecosts that were sought by the Defendants, and that the Defendants remain in possession of that asset. [51] Jabneel argues that the evidentiary picture before this Court is unchanged in terms of the merits on which the Defendants’Application was denied: their claim to the security they hold, which they characterize as contractual in nature, falls short of depletingthose funds.

Jabneel submits Lamont holds a windfall that exceeds the costs they wish to have the Plaintiffs post accordingly, and thatthis Appeal is less about any error made in the Court below than it is about exerting economic leverage to deprive the Plaintiffs of theirday in Court. [52] This is a de novo hearing, and the standard of review is correctness.

While the granting or dismissing a Security for Costsapplication is discretionary, even if this was a traditional appeal in which this Court would not generally interfere with the discretion ofthe Master below, that would still be subject to an error in principle or the decision of the Master below being clearly wrong. [53] In this case I conclude that the discretion that was exercised by the Master was based on an incorrect

interpretation of theadequacy of the $406,500.00 Lamont is presently holding in trust. Legal costs already incurred and paid for by Lamont amount to$265,366.27, and Jabneel also owes Lamont $28,993.57 in unpaid court costs. Additionally Lamont has or will incur major servicing andengineering costs, for a total amount of over $800,000.00.

Therefore it was incorrect for the Master to have concluded that the$406,500.00 plus interest presently still held by Lamont is adequate since these monies have already all been accounted for and arguablyhas all been used up pursuant to the contract between the parties. [54] This is plainly a case where Security for Costs should be ordered under Rule 4.22, and there are no other considerationsfavourable to Jabneel to be taken into account. The security that was posted was actually posted by a previous 50% shareholder ofJabneel in 2007.

Accordingly if the Security for Costs application is not granted, Jabneel suffers nothing from the forfeiture of the$406,500.00 security, all the while being able to continue to run up unpaid costs in its actions against Lamont. Any undue prejudicebeing alleged by Jabneel in its ability to pursue its 120 million dollar lawsuit against Lamont appears to be disingenuous. At the end of2014 Questioning, it appears that Jabneel could pursue work but chose not to, and appeared also to have access to funds.

There is noevidence before me that either situation currently has materially changed. [55] Jabneel is a Quebec based corporation which clearly has no assets in Alberta. In fact various third party contractors have filedliens and claims against Jabneel in Alberta. [56] Lamont is only seeking Security for Costs to conclude Questioning prior to trial, in the amount of $39,228.00. I find theamount to be reasonable in the circumstances of this protracted litigation, particularly since Jabneel already owes Lamont $28, 993.57 inunpaid costs. No costs of the possible trial are being sought at this time.

Disposition [57] The Master’s decision is set aside and Lamont’s application for security for costs in the sum of $39,228.00 is granted, withcosts of this Appeal awarded and payable forthwith to the Town of Lamont. Jabneel will pay $39,228.00 into Court for the benefit ofLamont within 90 days of this decision, failing which Jabneel’s Amended Statement of Claim shall be dismissed. Heard on the 15th day of September, 2017. Dated at the City of Edmonton, Alberta this 10th day of October, 2017.

Donald Lee J.C.Q.B.A. Appearances: Jonathan W. McCully Sharek & Co. for the Plaintiffs/Applicants Matt A. Pruski Rackel Belzil LLP for the Defendants/Respondents