COURT OF APPEAL FOR ONTARIO
WEILER, MACPHERSON and LAFORME JJ.A.
BETWEEN:
MORRIS J. WAXMAN
Applicant (Appellant)
and
CHESTER WAXMAN, ROBERT WAXMAN, GARY WAXMAN, WARREN WAXMAN, LIGHTNING DISTRIBUTION INC., CHW HOLDINGS INC., CHESTERTON INVESTMENTS LIMITED, GAWIX FINANCIAL CORPORATION, WAXTEK METALS INC., BAILEY WAXMAN, I. WAXMAN & SONS LIMITED and CHESTER WAXMAN, WAYNE LINTON and GARY WAXMAN in their capacities as TRUSTEES OF THE CHESTER WAXMAN FAMILY TRUST
Respondent
APPLICATION under sections 106, 207 and 248 of the Business Corporations Act (Ontario)
Richard Swan and Gideon Forrest for the appellant
Edward Babin for the respondent
HEARD: April 5, 2007
On appeal from the order of Justice Nancy J. Spies of the Superior Court of Justice dated June 28, 2006, with reasons reported at [2006] O.J. No. 2621.
A. INTRODUCTION
1The appellant, Morris Waxman (“Morris”), appeals from the order of Spies J. dated June 28, 2006 in which his brother, the respondent Chester Waxman (“Chester”), was successful in obtaining $370,000 from frozen accounts to fund his legal fees for a component of the long running and expensive family legal saga that has occupied the brothers, their families, their companies and the courts of Ontario for many years.
2The appeal raises three issues: whether the motion judge had jurisdiction to make the order sought in light of the fact that Farley J. had made a previous order relating to Chester’s legal costs in the proceedings; whether the motion judge should have exercised her discretion to make the order given that an appeal of Farley J.’s order was pending in this court; and whether the relief sought (an order allowing Chester to access further funds to pay for his legal fees) ought to have been granted.
B. FACTS & PROCEDURAL HISTORY
3There is a long and complicated procedural history in this case that must be described briefly in order to understand the nature of the present appeal.
4Morris and Chester Waxman have been involved in lengthy litigation against each other, principally concerning the ownership of their family scrap metal business, I. Waxman & Sons Limited (“IWS”). In 2002, Sanderson J. released her decision in the main litigation and restored Morris as a 50% shareholder of IWS. Morris was awarded damages against Chester, Chester’s sons and IWS, the precise amount of which was to be determined on a reference to a Master. Solid Waste Reclamation Inc. (“SWR”), a company controlled by Morris’ sons, was also awarded damages. The trial judgment was upheld on appeal, save for minor variations, and leave to appeal to the Supreme Court of Canada was refused.
5Throughout the litigation, IWS had paid virtually all of Chester’s and his sons’ legal fees. In January 2003, Chester and his sons were ordered to repay these fees to IWS.
6After the trial judgment was rendered, Morris commenced an oppression application against Chester and others with respect to the management of IWS.
7In January 2004, Farley J. (who was case managing the oppression application and was appointed the r. 37.15 judge) ordered that IWS be restrained from paying Chester’s legal fees. IWS was also enjoined from repaying any loans to Chesterton Investments Limited (“Chesterton”), a company solely owned by Chester. The amount that is said to be owing to Chesterton is being held in a notional account at IWS, referred to as the Chesterton Loan Account.
8In an effort to preserve the assets that would be available to satisfy the main judgment, Morris sought further relief from Farley J. in November 2004. By order dated November 3, 2004, Farley J. froze all of the assets of Chester and his sons, with the exception that they could have access to $100,000 per month for their employment with IWS. This order did not provide for the payment of legal fees and in a subsequent order dated March 2, 2005, Farley J. stated that Chester and his family could use the frozen funds to pay for reasonable legal fees. A protocol was established for the payment of these fees.
9On September 1, 2005, Farley J. released his judgment in the oppression application. In that judgment, his previous freezing orders were continued. The protocol for the payment of legal fees was also continued.
10In November 2005, by ex parte application, SWR obtained notices of garnishment and served them on a number of banks with whom Chester held accounts. The practical result was that Chester and his family could no longer access the frozen funds to pay their reasonable legal fees. Chester brought a motion to have the notices of garnishment vacated. On December 23, 2005, Farley J. ordered that the notices of garnishment were to be vacated only to the extent necessary to allow Chester and his family to repay certain legal fees to IWS and to access up to a maximum of $250,000 for the payment of legal fees for the Reference for damages. Additionally, Farley J. ordered that if the frozen funds were insufficient to fund these amounts, the Chesterton Loan Account could be accessed.
11Chester appealed the December 23, 2005 order. While the hearing of the appeal was pending, Chester brought a motion before Spies J. (she had replaced Farley J. as the r. 37.15 judge in this matter) to allow him and his sons to access further funds in order to pay for the ongoing Reference. The $250,000 allowed by Farley J. had been exhausted and Chester sought an additional $370,000 to be able to complete the Reference.
12At the time the motion before Spies J. was heard, the damages Reference was well under way before Master Linton. In oral argument before Spies J., the motion was framed as a motion to vary the December 23, 2005 order of Farley J., then under appeal by Chester. In an order dated June 28, 2006, Spies J. granted the requested relief and ordered that Chester be permitted to access up to a further $370,000 from the frozen funds or the Chesterton Loan Account to pay for the reasonable legal fees of the Reference. This is the order that is currently under appeal before this court.
13To provide further context to this appeal, it is worth noting some of the subsequent procedural history. The appeal of Farley J.’s December 23, 2005 order was dismissed by this court on October 25, 2006. Further, after 25 days of hearing, Master Linton released his report on the Reference on January 4, 2007 assessing the damages owed to Morris, at approximately $52,000,000.
C. THE MOTION JUDGE’S DECISION
14The motion judge held that she had jurisdiction to vary Farley J.’s order. She concluded that in light of the fact that Farley J. had been the case management judge for some time and that the parties had been before him as many as twenty times, “there is no basis upon which I could determine that the intention of Farley J. was to choose a figure for legal costs that was not subject to variation.”
15The motion judge then considered whether Chester’s appeal of Farley J.’s order should incline her to exercise her discretion and not hear Chester’s motion until the appeal was heard and determined. She carefully reviewed Chester’s appeal and concluded that the gist of the appeal was Chester’s claim that Farley J. erred by not determining that the notices of garnishment were invalid; in contrast, Chester’s appeal did not attack the $250,000 quantum that Farley J. had excepted from garnishment to pay for Chester’s legal costs connected to the Reference. She stated that “in principle, there is no reason why [Chester] cannot both pursue an appeal of the order of Farley J. and move to vary the order, provided the proposed variation does not affect the substance of the appeal.” She concluded that the proposed variation did not affect the substance of the appeal and that it was, therefore, preferable that she deal with the motion on its merits.
16On the merits, the motion judge granted the relief sought by Chester, which permitted him to access a further $370,000 to fund his legal fees associated with the Reference. In her reasons, the motion judge analyzed whether the relief should be granted on two bases. First, she considered it from the viewpoint that Chester was seeking a motion to vary Farley J.’s December 23, 2005 order. Second, she considered the matter de novo.
17In the first part of her analysis, the motion judge held that there were new facts that had arisen that justified a variation of the order under rule 59.06(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. First, the Reference had taken longer than anticipated and second, additional frozen funds had become available for the payment of legal fees. The motion judge then considered what financial resources were available to Chester and his family and observed that questions on this subject were refused by Chester’s son Robert during the cross-examination on his affidavit. The motion judge then drew an adverse inference that other family assets (other than the monthly $100,000.00 sum and the frozen funds) were being used to finance the litigation. However, the motion judge refused to give effect to that adverse inference. She stated that the availability of other family resources had not been considered as relevant by Farley J. and, in an effort to keep her decision consistent with his, she declined to attach any relevance to that fact either. As the motion judge held that there were no new arguments that had not been raised before Farley J., she determined that the only issue was whether the amount sought by Chester was reasonable. She held that it was and concluded that the relief could be granted on the basis that she was varying Farley J.’s prior order.
18In the second part of the motion judge’s analysis, she considered the matter de novo. Here, the motion judge held that the question of whether provision should be made for the payment of legal fees should be determined on the basis of proprietary injunction principles. Relying on Canadian Imperial Bank of Commerce v. Credit Valley Institute of Business and Technology, 2003 12916 (ON SC), [2003] O.J. No. 40 (S.C.J.), the motion judge held that the test for determining whether a defendant ought to be allowed to access funds subject to a proprietary injunction involves finding that (1) the defendant has no other assets available to him and (2) the injustice of permitting the use of the funds by him is outweighed by the possible injustice to the defendant if he were denied access to those funds. On the first part of the test, the motion judge held that Chester did not have to establish that no other family members could assist him financially. The question was whether Chester personally had funds available to him. Next, the motion judge held that the possible injustice to Chester if he was denied access to additional funds would be the inability to defend himself on the Reference.
19Therefore, on the basis of the proprietary injunction test, the motion judge determined that Chester and his sons should be able to access the requested $370,000 to continue with the Reference.
D. ISSUES
20The appellant advances three issues on the appeal:
(1) Did the motion judge have jurisdiction to vary the order of Justice Farley?
(2) If the answer to (1) is ‘Yes’, did the motion judge err by hearing and determining the motion when the moving party’s own appeal of Farley J.’s order was pending in this court?
(3) If the answer to (2) is ‘No’, did the motion judge err by granting the motion and ordering a freeing up of the frozen funds to allow Chester to receive an additional $370,000 to pay for his legal costs associated with the Reference?
E. ANALYSIS
(1) Jurisdiction
21The appellant contends that Farley J.’s December 23, 2005 order allowing Chester to access up to $250,000 from frozen funds to pay his legal costs related to the Reference was a final order and, therefore, could not be varied by the motion judge.
22I disagree. The complicated and expensive Waxman litigation was case‑managed by Farley J. for several years. The parties appeared in front of him at least twenty times on a variety of issues. Legal costs relating to Chester were dealt with by Farley J. on at least three occasions ― a January 2004 order restraining IWS from paying Chester’s legal fees, a March 2005 order establishing a protocol for the payment of Chester’s legal fees, and the December 2005 order releasing an additional $250,000 from frozen funds to pay for Chester’s legal costs relating to the Reference.
23In this context ― a long running case management process and several orders over almost three years dealing with legal costs ― it makes no sense to conclude that Farley J.’s December 23, 2005 order was the final word on the question of funding the litigation. In my view, there can be no doubt that in May 2006 Farley J. could have heard a motion to vary his December order dealing with Chester’s legal costs for the Reference. Farley J.’s retirement in April 2006 and his replacement as case management judge by the motion judge did not change the picture in the least. The motion judge had jurisdiction to hear and determine the motion. I agree with her analysis and conclusion on this issue.
(2) Discretion ― the pending appeal
24The appellant submits that the motion judge erred, in the exercise of her discretion, by hearing Chester’s motion in the face of Chester’s appeal of Farley J.’s order to this court, especially since this court had already set a date (October 6, 2006) for the appeal hearing.
25I disagree. The principal issue on the appeal of Farley J.’s order was unrelated to the quantum of legal costs for Chester to fund his participation in the Reference. Moreover, the Reference was rolling forward by May 2006.
26It is true that the motion judge could have exercised her discretion in a different way. She could have adjourned Chester’s motion until the appeal of Farley J.’s order had been determined. She could even have suggested that Chester take steps to expedite the appeal which, I observe, could have been easily accomplished. However, in spite of this option, I cannot say that the path chosen by the motion judge ― hearing and determining the motion on the merits while the Reference was actually proceeding ― constitutes an erroneous exercise of her discretion as case management judge.
(3) The merits
27In my view, this is the crucial issue in this appeal.
Positions of the parties
28Before this court, the parties argued over which test should be used to determine whether Chester and his sons should have been allowed to access further funds to pay their legal fees on the Reference, given that their assets had been frozen and certain bank accounts had been garnished.
29Counsel for Morris argued that special considerations applied since Morris had already been successful in the main litigation and all that had to be determined was the precise amount that was owed to him. In other words, this was not the same situation as one in which a defendant was subject to an interlocutory injunction pending the outcome of a trial. As such, it was argued that any money that was accessed by Chester was actually Morris’ money and that Morris should not be forced to pay for Chester’s defence absent exceptional circumstances. Specifically, counsel for Morris argued that the test laid out by the Supreme Court of Canada in Little Sisters Book and Art Emporium v. Canada (Commissioner of Customs and Revenue), 2007 SCC 2, 2007 S.C.C. 2, should apply in a post-judgment context.
30In Little Sisters, the Supreme Court of Canada considered the question of when an advanced costs award should be ordered in public interest cases. Essentially, the majority adopted the approach from British Columbia (Minister of Forests) v. Okanagan Indian Band, 2003 SCC 71, [2003] 3 S.C.R. 371. First, the majority stated that the person seeking costs must establish that the case is “special enough to merit this exceptional award”: para. 46. In other words, the party must establish prima facie merit and public importance. Second, the party must establish that it is impecunious and that, without the award for interim costs, the litigation would be unable to proceed. Counsel for Morris argued that Chester had failed to satisfy this test. It was argued, therefore, that the motion judge erred in allowing Chester to access additional money to pay for his legal fees.
31In response, counsel for Chester submitted in oral argument that the Mareva injunction test should apply to the case at hand. Counsel for Chester framed his argument as follows. The remedy sought before the motion judge was permission to use funds in the Chesterton Loan Account to pay its legal fees on the Reference. The Chesterton Loan Account was subject to a freezing order in the nature of a Mareva injunction (Morris had no proprietary interest in the Chesterton Loan Account and it had not been garnished). Therefore, the proprietary injunction test employed by the motion judge was inapplicable and the test for determining whether a Mareva injunction should be varied to allow for the payment of reasonable legal fees should apply. This test involves determining whether the defendant has no other assets from which to make the payments. Counsel for Chester argued that this test had been satisfied and that the motion judge was correct to grant the relief. In the alternative, counsel for Chester argued that the more onerous proprietary injunction test had also been met.
Which test should be applied?
32The issue before this court is which test should be used to determine whether frozen funds can be accessed to pay reasonable legal fees in a post-judgment context. The appropriate test must then be applied to determine whether the motion judge erred in granting the relief in the order under appeal.
33Counsel for Morris urged this court to adopt the test from Okanagan and Little Sisters. They argued that the proprietary injunction test employed by the motion judge was inappropriate in the present case because it required a balancing of the relative strengths of each party’s case. It was submitted that this should not be done in the present case where it has already been determined that Chester is liable to Morris. In my view this argument is not persuasive. First, application of the Okanagan/Little Sisters test would not address the concern raised by Morris’ counsel. Specifically, this test also requires an analysis of the merits of the case: see Little Sisters at paras. 37 and 51 and Okanagan at para. 40. Both the proprietary injunction test used by the motion judge and the Okanagan/Little Sisters test suggested by Morris’ counsel start from the viewpoint that the litigation has not yet been determined.
34Second, the Okanagan/Little Sisters test for interim costs awards is concerned specifically with public interest litigation. The present litigation clearly does not fall under this category.
35Therefore, I conclude that the Okanagan/Little Sisters framework is not applicable to the case at hand.
36It next must be considered if the motion judge erred in applying the proprietary injunction test or if the Mareva injunction test would have been more appropriate. These tests were fully explained by Molloy J. in Credit Valley, supra. In that case, Molloy J. had to determine if various injunction orders should be varied to allow the defendant to pay certain expenses, including legal fees. Because some of the injunctions were proprietary and others were Mareva injunctions, Molloy J. considered the principles that apply to both situations. After canvassing the authorities, Molloy J. held that when granting relief from a Mareva injunction, the defendant must satisfy the court that he has no other assets from which to make the required payments: para. 19. In the case of a proprietary injunction, however, the inquiry must go farther. Molloy J. stated at para. 20: “It is one thing to permit payment of ordinary expenses out of money belonging to the defendant but which is frozen by a Mareva injunction. It is another thing altogether to permit the defendant to use the plaintiff’s money for the purpose of attempting to defeat the plaintiff’s claim”. She continued at para. 21:
The test to be applied in determining whether a defendant ought to be permitted to make payments out of funds subject to a proprietary injunction begins (as does the variation of a Mareva injunction) with a consideration of whether the defendant has established on proper evidence that he has no other assets available to him to pay the expenses. If the defendant passes that hurdle, the court must engage in a balancing exercise “as to whether the injustice of permitting the use of the funds by the defendant is out-weighed by the possible injustice to the defendant if he is denied the opportunity of advancing what may of course turn out to be a successful defence”. [Citation omitted.]
37Justice Molloy summarized the applicable test at para. 26 as follows:
(i) Has the defendant established on the evidence that he has no other assets available to pay his expenses other than those frozen by the injunction?
(ii) If so, has the defendant shown on the evidence that there are assets caught by the injunction that are from a source other than the plaintiff, i.e. assets that are subject to a Mareva injunction, but not a proprietary claim?
(iii) The defendant is entitled to the use of non-proprietary assets frozen by the Mareva injunction to pay his reasonable living expenses, debts and legal costs. Those assets must be exhausted before the defendant is entitled to look to the assets subject to the proprietary claim.
(iv) If the defendant has met the previous three tests and still requires funds for legitimate living expenses and to fund his defence, the court must balance the competing interests of the plaintiff in not permitting the defendant to use the plaintiff's money for his own purposes and of the defendant in ensuring that he has a proper opportunity to present his defence before assets in his name are removed from him without a trial. In weighing the interests of the parties, it is relevant for the court to consider the strength of the plaintiff's case, as well as the extent to which the defendant has put forward an arguable case to rebut the plaintiff's claim.
38It is therefore apparent that regardless of whether the injunction is proprietary or a Mareva injunction, the first inquiry is always the same – has the defendant established that he has no other assets from which to pay the expenses? In my view, the present appeal turns on this question. Therefore, it is not necessary to determine whether the source of the funds in the present case was subject to a proprietary injunction (as found by the motion judge) or a Mareva injunction (as urged by counsel for Chester).
39It is clear from Credit Valley that the defendant has the onus of proving that he has no assets, other than those frozen, from which to pay his legal fees. As noted above, the defendant must establish “on the evidence” that he has no other assets: Credit Valley at para. 26. In the present case, Chester attempted to meet this burden through the affidavit of his son, Robert Waxman. In that affidavit, Robert stated that “Chester’s resources for satisfying legal fees are very limited” (para. 28) and that “since January [2006], my father and I have worked very hard to find an arrangement to fund the outstanding legal fees … and the fees likely to be incurred during the remainder of the Reference” (para. 29). Robert further deposed that due to Chester’s recent diagnosis of late-stage cancer, “all of our family’s resources are being conserved to fund Chester’s medical treatment” (para. 30). Robert stated that there was an “absence of any third party sources of funds with which to pay Chester’s legal and professional expenses in connection with the Reference” (para. 32).
40Robert was cross-examined on this affidavit. He refused virtually all questions regarding what resources were available to him and his father. The motion judge noted as follows:
Questions about these other financial resources [i.e. family resources that Chester’s wife Bailey or his grandchildren’s trust might or might not have] were refused on the cross-examination of Robert Waxman including questions about whether or not any of Chester, Robert or Warren’s spouses or children have assets which could be used to pay legal fees, whether they would lend them monies to pay the legal fees, whether anyone other than Chester has paid any of Davies’ accounts in respect of the Reference (beyond confirming that neither Robert nor Warren have paid anything in respect of the fees on the Reference) and who is paying for Brian Greenspan’s fees for Robert’s criminal charges and Alan Lenczner’s fees for Robert’s OSC hearing (beyond advising that the monies are not coming from frozen or non-frozen funds of Chester, Robert or Warren).
41The motion judge then drew an adverse inference “that these other family sources have assets and that they have provided financial assistance with respect to the Reference and other legal costs being incurred by Robert.” The motion judge concluded, however, that it was not necessary for Chester to establish that there were no family resources available to pay his legal fees; he just had to establish that he personally did not have any assets from which to pay these fees. There is support for this position in Insurance Corp. of British Columbia v. Dragon Driving School Canada Ltd., [2004] B.C.J. No. 2503 (S.C.), where the court held at para. 10:
The plaintiff suggests that Mr. Chiu must show not only that he has no assets that are not frozen, but also that he has no other means of paying expenses, such as available lines of credit, or third parties who might voluntarily pay his expenses. I have significant doubt that the test should be expanded in that fashion.
42In the present case, the motion judge held that it would be an “impossible task” to try to determine if any other family members had available assets before an order could be made varying an injunction for the payment of legal fees. With respect, it appears as though the motion judge proved that it was not an impossible task after all, as she drew the inference that in this particular case other family resources had been used to pay for Chester’s and Robert’s legal fees.
43In addition, even if it were inappropriate to look beyond the assets of Chester and his sons to determine whether any funds were available for the payment of legal fees, it can be said that in this case Chester and his sons did not meet the onus of establishing on proper evidence that they personally had no other assets available to them. While Robert stated in his affidavit that he and his father had made efforts to arrange for funding of legal fees, in cross-examination he refused to answer any questions beyond stating that the $100,000 monthly sum was insufficient. I observe that this statement, on its face, would be highly dubious in the eyes of almost any reasonable Canadian. Further, Robert refused to answer any questions about what family resources were being conserved for the payment of Chester’s medical fees.
44Given the motion judge’s adverse inference and the many refusals made by Robert, it cannot be said that Chester established on the evidence that he had no assets available to him to pay for his legal fees, other than those frozen by the injunctions. In my view, the motion judge erred to the extent that she held otherwise.
45Chester therefore did not establish that additional funds should have been made available for the payment of his legal fees on the Reference.
F. DISPOSITION
46I would allow the appeal, set aside the order of the motion judge, and dismiss the underlying motion. The appellant is entitled to his costs of the appeal which I would fix at $12,000 inclusive of disbursements and GST.
RELEASED: May 2, 2007 (“KMW”)
“J. C. MacPherson J.A.”
“I agree K. M. Weiler J.A.”
“I agree H. S. LaForme J.A.”
