Background
The case is a little stale, dealing with a dollar store (a franchise of "Dollar Plus") operated by the numbered company (run by John Serrago) at Newmarket Plaza from 1991 until 2002.
Remember BiWay Stores? There was one at Newmarket Plaza, and when they became bankrupt in summer of 2001, the trustee in bankruptcy assigned some of its leases to the Dollarama chain. Thus, a larger and better-established direct competitor of Dollar Plus opened in Newmarket Plaza in April 2002, causing Dollar Plus' revenues to plummet, and Dollar Plus fell behind on its rent. In August 2002, the landlord served a notice of 'distress' claiming arrears of over $33,000. Then, in October, the landlord gave notice to terminate and changed the locks.
In 2003, the numbered company begin legal proceedings against Newmarket Plaza, alleging wrongful termination of the lease and 'breach of good faith' based on conduct leading to the termination. Newmarket Plaza counterclaimed for arrears of rent.
In examinations for discovery, Serrago gave evidence that the numbered company "had had no business or income since 2002", and Newmarket Plaza brought a successful motion for security for costs, which meant that $15,000 had to be paid into court before the action could continue. Serrago paid these funds out of his own pocket. (This is a mechanism to protect against frivolous lawsuits by impecunious litigants - otherwise, a corporation with no assets would have nothing to lose by bringing a law suit. Rather, in such a case, the defendant may be able to compel the plaintiff to cough up some money up front, in case they're ultimately required to pay costs.)
The Trial Decision
The matter went to trial in 2006 (decision here). The numbered company was largely unsuccessful: The bottom line is that the lease didn't prevent the landlord from permitting Dollarama to set up a store. Justice Loukidelis wasn't impressed with Newmarket Plaza's "lack of forthrightness", saying that they were "somewhat callous", but "there is no denying that it had the right to lease the vacated premises to any dollar-type store." That said, it was improper for the landlord to exercise its right of re-entry while the Notice of Distress was still in effect, and accordingly the numbered company was awarded $10,000 in general damages.
However, the defendant was also successful in its counterclaim (or at least partly successful), obtaining a judgment against the numbered company for over $36,000.
However, there was no order as to costs. And there's the rub.
The New Decision: What Happens to the Money Held as Security for Costs?
The $15,000 paid into court as security for costs had never been dealt with. Newmarket Plaza argued that, as an execution creditor of the numbered company, it should be entitled to the money. Serrago argued that the money was his, that it was to be applied against any costs order in favour of Newmarket Plaza, and that since there was no such costs order, the money should be returned to him.
The Divisional Court agreed with Serrago: The money had never really belonged to the numbered company, and so has to be returned to him.
Commentary
It may seem a little unjust at first glance - Newmarket Plaza got a judgment, but no costs order; and the principal of the numbered company gets to hide behind the corporate veil to get his money back.
But I think the decision is ultimately correct, and I would be concerned had it gone otherwise: You see, the "security for costs" provisions in the Rules only allow a defendant to seek security for costs from a plaintiff, and not the other way around. If I'm suing you, I can't seek to block you from defending without security for costs. In this way, it's clear that the provision is not intended to stand as (and shouldn't be used as) 'security for judgment'. (This is by contrast, for example, to the review process for orders to pay under the Employment Standards Act. Let's say my employee claims unpaid wages, and I am ordered to pay. I can go to the OLRB to challenge the order, but in order to do so I need to provide the money first to the Director of Employment Standards in trust. In this way, the process ensures that the Ministry and the employee won't have to fight appeals and nonetheless be unable to collect if successful.)
The fact of the counterclaim is more or less unrelated to the order for security for costs. Success on the counterclaim shouldn't give Newmarket Plaza access to funds held as security for costs, any more than it would give access to any of the numbered company's other creditors.
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This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.
The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.
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