Failure to make full and fair disclosure can result in a full indemnity costs

By Michael Nowina on August 10, 2023

In Ontario, as a general rule, partial indemnity, which ranges from approximately 40-60% of the actual costs incurred by a party, is awarded to the successful litigant. Full indemnity, which comprises 100% of the costs incurred, is granted only in exceptional and rare circumstances. An order for full indemnity is even more unusual if the action has been discontinued.

However, in 781526 Ontario Inc. et al v Elliott Gerstein et al, 2023 ONSC 4313 the Ontario Superior Court of Justice found that on an ex parte motion without notice (1) the failure to make full and fair disclosure of material information, (2) the misrepresentation of pertinent facts, and (3) an unsupported claim of fraud, constitute sufficient grounds to merit an award of costs on a full indemnity basis.

BACKGROUND

The successful parties in this case are Alexander and Ethan Gerstein, who are the sons of the divorced couple, Elliott Gerstein and the late Iris Gerstein. This case arose out of an earlier action where a corporate plaintiff (Brenthall Apartments Limited) obtained summary judgment against Elliott Gerstein for roughly $1.75 million after claiming a breach of fiduciary duty, breach of trust, fraud and misappropriation of funds. The earlier action had also named Iris Gerstein. However, the Court did not grant leave to issue a certificate of pending litigation (“CPL”) against the matrimonial home owned by Iris and Elliott Gerstein and the judgment against Elliott expressly excluded the ability to pursue tracing remedies into the matrimonial home. In 2013, Iris purchased a new property and later received 50% of the proceeds from the sale of the matrimonial home. On the day she passed away in 2016, the new property was transferred to her sons.

In 2017, Brenthall commenced an action against Alexander and Ethan Gerstein, the estate of the late Iris Gerstein and Elliot Gerstein, seeking a declaration that the transfer of the new property from their late mother was a fraudulent conveyance and a CPL. Registering a CPL on title has the practical effect of restraining all dealings with the property. The Plaintiffs brought an ex parte motion for a CPL on the new property which was granted.

In 2021, the claims in the action were assigned to two of Brenthall’s shareholders and the action was continued in their name. In that same year, the sons brought a motion to dismiss the action for delay and to lift the CPL. After exchanging motion materials, the Plaintiffs discontinued the action and agreed to vacate the CPL. The only remaining issue was the costs to be paid by the Plaintiffs which the parties could not agree upon.

DECISION

On an ex parte motion, Rule 39.01(6) of the Rules of Civil Procedure requires the moving party to make full and fair disclosure of all material facts. Failure to comply with such a rule is sufficient ground for setting aside any order obtained on the motion.

The court found that Rule 39.01(6) had been breached when the CPL was obtained with numerous and significant failures to make full and fair disclosure including that the Plaintiffs failed to disclose:

that an attempt to obtain a CPL on the matrimonial home had been dismissed and that the judgment against Elliott Gerstein excluded rights against the matrimonial home;
relevant information regarding the funds used to purchase the new property;
that the plaintiffs were not judgment creditors of the late Iris Gerstein;
that the action by the plaintiffs may not have been properly authorized in the first place due to an internal shareholder dispute; and
that Elliott Gerstein had filed for bankruptcy and approximately $1.4 million had already been collected.

Following earlier 2010 and 2011 decisions, the court found these failures amounted to a material misrepresentation of the facts presented to the court and that these circumstances were “sufficiently egregious and reprehensible so as to merit an award of costs on a full indemnity basis.”

TAKEAWAYS

This decision is a reminder that despite being unusual, even after a party discontinues an action, courts still have the discretion to award full indemnity awards if the conduct of such party amounts to egregious and reprehensible. Parties should also be aware that allegations of fraud without proof, and omissions of material facts can amount to egregious and reprehensible conduct.

** With thanks to Juliana Orlando Rohr for her assistance with this article.