Soberman Isenbaum Colomby Tessis Inc., in its capacity as trustee in bankruptcy of the estates of each of Illidge et al. v. St. James Securities Inc. et al.

[Indexed as: Illidge (Trustee of) v. St. James Securities Inc.]

60 O.R. (3d) 155

[2002] O.J. No. 2174

Docket Nos. C37625, M28390 and C37685

Court of Appeal for Ontario,

Doherty, Goudge and Armstrong JJ.A.

June 4, 2002

Appeal -- Jurisdiction -- Final or interlocutory order -- Receiver sought appointment by way of application rather than on interlocutory motion -- Issues in dispute on application were finally determined by application judge in appointing receiver -- Order appointing receiver was final rather than interlocutory.

Bankruptcy -- Receivers -- Conflict of interest -- Appellant sought to set aside appointment of receiver on basis of conflict of interest -- Receiver had taken position in litigation involving other parties for which it was trustee in bankruptcy which was in conflict with position and interests of appellant -- Order appointing receiver set aside on basis of conflict of interest.

The appellant sought an order setting aside the appointment of the respondent as receiver of SJS Inc. and SJH Inc. on the basis of an alleged conflict of [page156] interest by reason of the respondent's role as trustee in bankruptcy for other parties. Counsel for the appellant sought leave to introduce fresh evidence on appeal in the form of a statement of defence delivered by the respondent in another action involving the other parties for which it was the trustee in bankruptcy. The respondent argued that the Court of Appeal lacked jurisdiction to hear the matter because the order appointing the receiver was interlocutory and not final.

Held, the appeal should be allowed.

The respondent had sought the appointment as receiver by way of application rather than on interlocutory motion. Orders that finally determine the issues raised in an application are final orders. The issues in dispute on the application in this case, that is, the suitability of the respondent to serve as receiver in the face of an alleged conflict, and the priority of the receiver's fees, were finally determined by the applications judge. Thus, the order was a final one and an appeal lay directly to the Court of Appeal.

The fresh evidence should be admitted. The statement of defence delivered by the respondent in the other action as trustee in bankruptcy for other parties advanced a position which was inconsistent with the appellant's interests. The statement of defence crystallized the respondent's conflict. This was not a case where the receiver could look to an outside party to take over a limited role in order to avoid the conflict. The conflict was too pervasive. The order appointing the respondent as receiver should be set aside.

APPEAL from an order appointing a receiver.

Cases referred to Federal Trust Co. v. Frisina (1976), 1976 627 (ON SC), 20 O.R. (2d) 32, 86 D.L.R. (3d) 591, 28 C.B.R. (N.S.) 201 (S.C.); Hendrickson v. Kallio, 1932 123 (ON CA), [1932] O.R. 675, [1932] 4 D.L.R. 580 (C.A.); Sengmueller v. Sengmueller (1994), 1994 8711 (ON CA), 17 O.R. (3d) 208, 111 D.L.R. (4th) 19, 1 L.W.R. 46, 25 C.P.C. (3d) 61, 2 R.F.L. (4th) 232 (C.A.) Statutes referred to Courts of Justice Act, R.S.O. 1990, c. C.43, s. 101(1)

Lisa S. Corne, for 1187264 Ontario Inc. Robert A. Klotz, for Robert Salna, appellant. Raymond M. Slattery, for Soberman Isenbaum Colomby Tessis Inc., respondent.

The judgment of the court was delivered by

ARMSTRONG J.A.: --

The Appeals

[1] The appellant 1187264 Ontario Inc. ("118") seeks an order setting aside the appointment of Soberman Isenbaum Colomby Tessis Inc. ("Soberman") as receiver of St. James Securities Inc. ("Securities") and St. James Holdings Inc. ("Holdings") on the basis of an alleged conflict of interest by reason of Soberman's role [page157] as trustee in bankruptcy for other parties. In addition, the appellant, Robert Salna ("Salna"), who claims to be a secured creditor of Securities, seeks to set aside a provision in the receivership order which grants priority to the receiver's fees and disbursements.

[2] There are two preliminary issues which must be disposed of before dealing with the appeals. The first is the jurisdiction of the Court of Appeal, which involves the vexed question of whether the order appealed from is final or interlocutory. The second involves an application to admit fresh evidence.

Is the order of Greer J. final or interlocutory?

[3] At the outset of the appeals, counsel for Soberman argued that the court lacked jurisdiction to hear this matter because the order appointing the receiver was interlocutory and not final. Counsel relied on s. 101(1) of the Courts of Justice Act, R.S.O. 1990, c. 43 as amended which provides that "a receiver . . . may be appointed by an interlocutory order, where it appears . . . just or convenient to do so". He further argued that the order under appeal is in substance an interlocutory order as it contains a "comeback clause" enabling the parties to re-attend before the judge to request a variation should changing circumstances require it.

[4] I disagree. At the initial proceeding, Soberman sought the appointment as receiver by way of application rather than on interlocutory motion. As stated by this court in Hendrickson v. Kallio, 1932 123 (ON CA), [1932] O.R. 675, [1932] 4 D.L.R. 580 (C.A.), and in numerous subsequent cases, orders that finally determine the issues raised in an application are final orders. Nevertheless, counsel for Soberman argued, relying on the language of s. 101(1), that the matters decided made the order interlocutory in any event. In my opinion, the issues in dispute on the application (the suitability of Soberman to serve as receiver in the face of an alleged conflict, and the priority of his fees) were finally determined by Justice Greer. Thus, the order is a final one and an appeal lies directly to this court.

Fresh evidence

[5] On appeal, counsel for 118 sought leave to introduce fresh evidence. The evidence consists of a statement of defence delivered by Soberman in another action involving the other parties for which it is the trustee in bankruptcy. The statement of defence was delivered after Greer J. made her order in this case and therefore was not part of the record before her. Counsel sought leave to introduce the statement of defence on the basis that it "crystallized" Soberman's alleged conflict of interest. [page158]

[6] While it may be unusual to admit evidence on appeal which was not in existence at the time the matter was heard by the judge of first instance, I am persuaded on the basis of the exception articulated by McKinlay J.A. in Sengmueller v. Sengmueller (1994), 1994 8711 (ON CA), 17 O.R. (3d) 208, 111 D.L.R. (4th) 19 (C.A.) to admit the statement of defence as fresh evidence. As McKinlay J.A. stated at p. 211 O.R.:

Most of the cases dealing with the admission of fresh evidence on appeal involve evidence which, though in existence prior to trial, for some reason other than lack of diligence, was not tendered at trial. This case involves evidence which did not exist prior to trial. One obvious problem with admitting on appeal evidence which did not exist at the time of trial is that such evidence could not possibly have influenced the result at trial. It is argued for the appellant that admitting such evidence on appeal would result in there being no finality to the trial process, that it would tend to turn appeal courts into trial courts, and that it would unacceptably protract legal proceedings. All of these objections are valid and compelling. However, in a case where the evidence is necessary to deal fairly with the issues on appeal, and where to decline to admit the evidence could leave to a substantial injustice in result, it appears to me that the evidence must be admitted. In my view in the particular and unusual circumstances of this case, this is such a case. This court admitted evidence not in existence at the time of trial in Mercer v. Sijan (1976), 1976 654 (ON CA), 14 O.R. (2d) 12 at p. 17, 72 D.L.R. (3d) 464 (C.A.), stating:

The competing considerations, on the one hand, are the public interest in finality to litigation, and, on the other hand, the affront to common sense involved in a Court shutting its eyes to a fact which falsifies the assessment.

Soberman's alleged conflict

[7] Prior to its appointment as receiver of Securities and Holdings, Soberman was appointed trustee in bankruptcy of John J. Illidge ("Illidge"), St. James Capital Corporation ("Capital") and Conquest Capital Limited ("Conquest"). Prior to his bankruptcy Illidge was the sole officer and director of Securities and Holdings. It is alleged that it was he who was instrumental in borrowing $4 million from Salna secured by the assets of Securities -- some 20 TSE shares. It is also alleged that the proceeds of the loan were paid into brokerage accounts of Illidge, Capital, Conquest and Elkhorn Investments Limited.

[8] Holdings owns all the shares of Securities. 118 is a substantial shareholder of Holdings and therefore has a derivative interest in the assets of Securities. 118 commenced an oppression action against Illidge, Capital, Securities, Holdings and others in order inter alia to set aside the security interest in the TSE shares purportedly granted by Securities to Salna.

[9] In the statement of defence delivered by Soberman as trustee in bankruptcy on behalf of Illidge and Capital, Soberman denied that Illidge and Capital are indebted to Securities in an [page159] amount in excess of $2.4 million, disputed the number of shares 118 claimed are owned by each of the shareholders of Holdings, and denied that Illidge has acted in an oppressive manner. The pleadings therefore disclose a clear conflict between the position Soberman has advanced as trustee in bankruptcy on behalf of Illidge and Capital and the position advanced by 118, whose interests Soberman is obligated to take into account as receiver of Holdings and Securities.

[10] In Federal Trust Co. v. Frisina (1976), 1976 627 (ON SC), 20 O.R. (2d) 32, 86 D.L.R. (3d) 591 (S.C.), Galligan J. stated, at p. 35, that a court appointed receiver must "be impartial, disinterested and able to deal with the rights of all interested parties in a fair and even-handed manner . . .". Justice Greer was of the view that Soberman met the aforesaid test and her judgment is entitled to considerable deference in this court.

[11] Counsel for 118 argued, contrary to Justice Greer's findings, that the evidence available at the time of the hearing before her disclosed a conflict of interest on the part of Soberman or at the very least a reasonable and apparent probability that such a conflict of interest would arise in the future. However, we in this court, having admitted the fresh evidence, are now in a different and presumably better position than Justice Greer. I accept the submission of counsel for 118 that the statement of defence crystallizes Soberman's conflict, and is of such a broad scope that it cannot be said that Soberman is able to act impartially in regard to all the interested parties. In the circumstances, I do not think this is a case where the receiver could look to an outside party to take over a limited role in order to avoid the conflict. The conflict is simply too pervasive. I would therefore set aside the order appointing Soberman as receiver of Holdings and Securities.

Priority of the receiver's fees and disbursements

[12] Justice Greer in concluding that the receiver's fees should have priority stated:

The Receiver's fees should have priority. Generally, they do not have priority over a prior secured creditor unless the Receiver is appointed, with the consent of the secured creditor or for his benefit, or unless the expenses are necessary for the protection of the property for the benefit of the creditors including the secured creditor. See Robert F. Kowal Investments Ltd. et al. v. Deeder Electric Ltd. (1975), 1975 681 (ON CA), 9 O.R. (2d) 84.

[13] Counsel for Salna argued that in granting priority to the receiver over Salna the learned judge's exercise of discretion was based on an incorrect principle. While she recognized the requirement that priority over Salna should only be granted if he benefited from the receivership, she neither identified nor [page160] weighed any such benefit. Counsel further argued that the truly interested parties had not been solicited, nor did they offer to fund or indemnify the costs of the receivership.

[14] Counsel for Soberman argued, that in the circumstances of a case like this, the only practical means for the receiver to receive payment is to provide a charge for its reasonable fees and expenses.

[15] It was pointed out in argument that the status of Salna as a secured creditor is subject to challenge in another action. Also the receiver is investigating assets of Securities other than the TSE Shares to which no value has yet been ascribed. It is therefore arguable that the activities of a new receiver, if it takes up where Soberman left off, will benefit Salna.

[16] A review of Justice Greer's reasons does not disclose any elaboration of the basis upon which she determined that priority was appropriate. There appear to be cogent arguments supporting both sides of this issue. In view of the fact that this matter must go back to the Commercial List Court for the appointment of a new receiver, I would set aside that part of the receivership order which grants priority to the receiver's fees and disbursements. This issue can then be revisited on the new application if the parties are so inclined.

Disposition and Costs

[17] Counsel for 118 requested that we appoint Horwath Orenstein as receiver in place of Soberman. However, I decline to do so. I think the appropriate way to proceed is to refer the matter back to the Commercial List Court. As a result, the order appointing Soberman as the receiver of Securities and Holdings is set aside and the matter is referred back to the Commercial List Court for the appointment of a new receiver. The provision in the order granting priority to the receiver for its fees and disbursements is set aside without prejudice to raise this issue on the application for a new receiver. Counsel for the parties advised us on the argument of the appeal that there was agreement among them that Soberman would be entitled to priority for its fees and disbursements up to the date of this order should the court set aside the priority provision. This order does not disturb that agreement.

[18] The appellants 118 and Salna are entitled to their costs on a partial indemnity scale payable out of the assets of the receivership. I fix the costs of 118 at $17,500, plus disbursements and GST. I fix the costs of Salna at $9,000 plus disbursements and GST. In regard to the proceedings before Justice Greer, I would not disturb her costs order.

Appeal allowed.