COURT OF APPEAL FOR ONTARIO

ONCA 553

DATE: 20150727

DOCKET: M44416

Lauwers J.A. (In Chambers)

In the Matter of the Proposal of Edwin Harold Morton: Ottawa Bankruptcy

BETWEEN

Menzies Lawyers Professional Corporation,

Menziesbank Corp. and Douglas G. Menzies, personally

Applicants

and

Doyle Salewski, Trustees in Bankruptcy

for Edwin Morton and the Attorney General of Canada

Respondents

Douglas G. Menzies, acting in person

Stephanie Lauriault, for the Attorney General of Canada

Heard: November 18, 2014

An application for an extension of time to file notice of appeal and for leave to appeal from the order of Justice S.J. Kershman, dated September 18, 2014, with reasons reported at 2014 ONSC 5438.

Lauwers J.A.:

[1] The Menzies Lawyers Professional Corporation, and Douglas Menzies personally, acted for many years for the bankrupt, Edwin Morton, in lengthy and protracted matrimonial proceedings. They postponed their claim for fees on a number of occasions and sought, in the application at issue, to protect their accounts out of Mr. Morton’s estate, having been completely surprised by his bankruptcy. They applied for the recognition of a solicitor’s lien for about $133,000 in respect of their representation of Mr. Morton and a charging order.

[2] Menziesbank assisted in the implementation of the matrimonial settlement. It claimed a salvage lien for $30,000, the amount it paid to clear two execution creditors’ interests so that the sale of the matrimonial home could close.

[3] The application judge refused to grant the solicitors a charging order and to grant Menziesbank a salvage lien.

[4] This motion raises two issues. First, do the applicants require an extension of time to serve the notice of appeal? Second, is leave required for the appeal itself under s. 193 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“the BIA”)?

A. IS AN Extension of Time for Leave to Appeal under the Rules REQUIRED?

[5] The applicants were under the mistaken impression that the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (“the Rules”) applied to this appeal, and so they had 30 days to appeal. In fact, since this was a decision of the Bankruptcy Court, the appeal to the Court of Appeal lies under s. 193 of the BIA. Therefore, under rule 31(1) of the Bankruptcy and Insolvency General Rules, C.R.C., c. 368, the appeal must be brought within 10 days “or within such further time as a judge of the Court of Appeal stipulates”.

[6] Since the appeal was late, I am obliged to consider the following factors in exercising discretion to extend the time for filing the notice of appeal:

a) whether the applicant had a bona fide intention to appeal before the expiration of the appeal period;

b) any explanation for the delay in filing;

c) any prejudice to the responding parties caused by the delay; and

d) the merits of the proposed appeal.

[7] Based on the affidavit material and the hotly contested nature of the dispute between the parties, I am satisfied that the applicants had a bona fide intention to appeal before the expiry of the appeal period, but they misapprehended the applicable rules, which explains the delay. There would be no prejudice to the responding parties in granting leave to appeal since the funds are in court earning interest.

[8] The remaining issue to be addressed before time can be extended turns on the merits of the appeal, which dovetail with the appellants’ appeal rights under s. 193 of the BIA.

B. Is Leave to Appeal Required under s. 193 of the BIA?

[9] Section 193 of the BIA governs appeal rights. The relevant grounds for this motion are found in paragraphs (c) and (e):

193. Unless otherwise expressly provided, an appeal lies to the Court of Appeal from any order or decision of a judge of the court in the following cases:

(c) if the property involved in the appeal exceeds in value ten thousand dollars;

(e) in any other case by leave of a judge of the Court of Appeal.

[10] The applicants were at pains to characterize the appeal as one as of right under s. 193(c), and not one for which leave is required under s. 193(e). A decision on which of the paragraphs applies depends on a consideration of the facts.

(a) The Factual Context

[11] The factual context is fairly set out in the factum of the AGC:

1. The Appellant, Douglas Menzies, represented Edwin Morton in complicated matrimonial proceedings that were eventually settled after one day of trial on terms which required the wife to pay to the husband amounts exceeding $250,000.00.

2. Mr. Morton was unable to pay as a result of the financial constraints of the multiple proceedings initiated by the wife, including criminal charges, and the retainer agreement between Menzies and Morton provided that interest would be charged on the outstanding balance at 10% with the amounts paid from the proceeds of the matrimonial home.

3. The house was eventually sold, but an Application for a Vesting Order was required to complete the sale because the Canada Revenue Agency (CRA) had filed a claim for lien as a result of the reassessment of Mr. Morton’s taxes for 4 years. In addition, there were 2 execution creditors, the Royal Bank of Canada (RBC) and Canadian Imperial Bank of Commerce (CIBC), claiming amounts totaling $67,000.00.

4. The Appellant, Menziesbank, purchased the interests of the two execution creditors for fifty cents on the dollar. Rather than profit on this by talking an assignment of the full amount of the debt, it has claimed a salvage lien for the amount it actually paid out to discharge these claims, $30,000.00. [Footnotes omitted.]

(b) The Application Judge’s Decision

[12] After setting out the facts in detail, the motion judge found, at para. 62, that “the entire value of the monies owing from Ms. Rivard to Mr. Morton, pursuant to the Campbell Divorce Judgment, were preserved by Douglas Menzies … [and] would not have come into existence ‘but for’ the efforts of Douglas Menzies.” He added, at para. 63, “The Court finds that Douglas Menzies preserved Mr. Morton's interest in Ms. Rivard's one-half interest in the matrimonial home proceeds[^1].” Accordingly, the application judge found it equitable to lift the BIA stay of proceeding in relation to the claim for a solicitor’s lien.

[13] Despite these findings, the application judge declined to give effect to the lien by granting a charging order on equitable grounds. He noted, at para. 67, that “equity would be offended by the granting of a solicitor’s lien/charging order.” The application judge based this decision on his view, expressed at paras. 70-71, that the solicitor did not take advantage of his right to obtain a second mortgage under the divorce judgment that would have protected his interest. He concluded, at para. 74, “Given the conduct of the solicitors and the potential prejudice to competing creditors, equity weighs heavily against the granting of a charging order in this case.”

[14] The application judge also refused on equitable grounds to lift the automatic stay of proceedings under s. 69 of the BIA in relation to Menziesbank’s salvage claim, noting, at para. 38, that “Menziesbank, is not likely to be materially prejudiced by the continued operation of s. 69(1) of the BIA and it is not equitable on other grounds to make such a declaration.” He did not specify the equities on which he was relying.

(c) The Legal Argument Concerning Appeal Rights under s.193 of the BIA

[15] There are two legal issues to be decided with respect to the appeal rights under s. 193 of the BIA. The first is whether a solicitor’s lien and a charging order is a form of property for the purpose of s. 193(c) of the BIA. The second is whether this proposed appeal meets the test for leave, assuming that it must proceed under s. 193(e). I address each in turn.

(1) Is a solicitor’s lien and a charging order is a form of property for the purpose of s. 193(c) of the BIA

[16] If a solicitor’s lien and a charging order is a form of property for the purpose of s. 193(c) of the BIA, then the applicants’ appeal should be as of right, since the amounts at issue exceed $10,000.

[17] The decision of Henry J. in the bankruptcy case of Re Tots and Teens Sault Ste. Marie et al., 1975 CanLII 535 (ON SC), 11 O.R. (2d) 103, [1975] O.J. No. 2549, is relevant. Justice Henry framed the issue, at para. 1, in terms that apply to this case: “The simple issue in this application is whether a solicitor's lien for his costs in respect of his successful defence of litigation for his client, who is now bankrupt, constitutes a charge upon the fund recovered by him in the litigation, so as to give him the status of a secured creditor in the bankruptcy.”

[18] Justice Henry’s analysis is set out at para. 26:

While fully accepting the principle here declared, I have reached the conclusion that the fund at the time it was created in the hands of the Sheriff was impressed with the inchoate right of the solicitor to apply to the Court and have a declaration that it is charged as security for his costs. This was an inherent right to invoke the equitable jurisdiction of the Court to exercise its discretion in his favour by way of declaring that the fund is charged as security for his claim. As I see it, the role of the Court is to declare, not to create, the security and even though the bankruptcy has occurred, it is in my opinion still open to the proper Court, in the exercise of its discretion, as I have said, to decide if the lien shall or shall not be recognized. If the Court makes such a declaration it has the effect, as I see it, of holding that the lien attached to the fund at the moment it was created. If it had been created prior to the bankruptcy, there would be no question that the fund would stand charged; the fund having been created after the bankruptcy may, in my opinion, in the same way be made the subject of a charge by way of security, unless of course the Court comes to the conclusion that it would offend the principles of equity, either by reason of the conduct of the solicitor or unfairness to the creditors, to refuse to exercise the discretion in the solicitor's favour. On the view that I take of the matter, the lien in law attached to the fund as an inchoate right, the crystallization of the lien requiring only the pronouncement of the Court to reveal it.

[19] Justice Perell summarized the import of Tots and Teens in Thomas Gold Pettingill LLP v. Ani-Wall Concrete Forming Inc., 2012 ONSC 2182, [2012] O.J. No. 2109, at para. 101:

[T]he three points to note from Justice Henry's decision in Re Tots and Teens Sault Ste. Marie about a charging lien made under the court's inherent jurisdiction are: first, the charging lien creates the proprietary interest of a secured creditor; second, subject to being declared, the charging lien is an inchoate interest that pre-dates the court's declaration; and third, the charging lien is intrinsically declaratory in nature. [Emphasis added.]

[20] The respondent relies on Ontario Wealth Management Corporation v. Sica Masonry and General Contracting Ltd., 2014 ONCA 500, [2014] O.J. No. 3051 (Strathy J.A. (In Chambers)), which addressed the scope of s. 193(c), at para. 41, and added, at para 42:

The issue before the motion judge was simply a matter of which claim had priority. This is the daily fare of judges in bankruptcy proceedings. To provide an appeal as of right from such decisions would negate the court's gatekeeping function under s. 193(e) and would tie up bankruptcy proceedings in interlocutory appeals over routine issues.

[21] In my view, the reasoning in Ontario Wealth Management does not apply on the facts of this case, which instead involves the assertion of a proprietary interest in the form of a solicitor’s lien and its appropriate valuation.

[22] The same logic applies to Menziesbank’s claim. I find that, consistent with Tots and Teens, it is more than arguable that s. 193(c) is the basis for the court’s appeal jurisdiction; the appellants would not have required the court’s leave if the appeal had been brought in time.

[23] In any event, I would have granted leave to appeal under s. 193(e) of the BIA.

(2) The proposed appeal meets the test for leave under s. 193(e) of the BIA

[24] The test for leave to appeal under s. 193(e) of the BIA was set by this court in Canada (Superintendent of Bankruptcy) v. 407 ETR Concession Co., 2012 ONCA 569, [2012] O.J. No. 4089, at para. 47:

Generally speaking, the factors to be considered on an application for leave to appeal are:

a) whether the point of appeal is of significance to the practice;

b) whether the point raised is of significance to the action itself;

c) whether the appeal is prima facie meritorious or, on the other hand, whether it is frivolous; and

d) whether the appeal will unduly hinder the progress of the action.

This test is similar to Blair J.A.’s formulation in Business Development Bank of Canada v. Pine Tree Resorts Inc., 2013 ONCA 282, [2013] O.J. No. 1918, at para. 29.

[25] I am satisfied that an appeal will not unduly hinder the progress of the bankruptcy/insolvency proceedings under para. (d).

[26] The question is whether the appeal raises an issue or issues of general importance to the practice in bankruptcy/insolvency matters and to the action itself, and whether the appeal is prima facie meritorious.

[27] In my view, there are two issues of law presented by the proposed appeal: Did the application judge make a palpable and overriding error in his apprehension and application of the relevant legal principles in deciding not to:

i. grant a charging order against the estate in favour of Douglas G. Menzies and Menzies Lawyers Professional Corporation, having found the existence of valid solicitors’ lien?

ii. grant a salvage lien to Menziesbank under s. 69 of the BIA?

[28] I find that these are issues of broader application and therefore of general importance to the practice in bankruptcy/insolvency matters. There is a need for this court to consider afresh the principles referred to by Henry J. in Tots and Teams and the discretionary factors that would lead a court to deny a charging order. It would also be helpful to the practice to identify the circumstances in which a salvage lien is properly obtained and the discretionary factors that would lead a court to deny a salvage lien.

[29] I find that the proposed appeal is not in any sense frivolous, and that it is of significance both to the parties and in respect of the proceeding.

[30] With respect to the merits, in Pinetree Resorts, Blair J.A. noted, at para. 23, that “Ontario decisions have traditionally leaned toward” the factors expressed by Goodman J.A. in R. J. Nicol Construction Ltd. (Trustee of) v. Nicol, [1995] O.J. NO,. 48 (C.A., In Chambers), at para. 6. He thought that these factors ought to be considered in determining whether an appeal is prima facie meritorious, explaining at para. 31:

A proposed appeal in which the judgment or order under attack (a) appears to be contrary to law, (b) amounts to an abuse of judicial power, or (c) involves an obvious error causing prejudice for which there is no remedy, will be a proposed appeal that is prima facie meritorious. I recognize that the Power Consolidated ‘prima facie meritorious’ criterion is different than the ‘arguable point’ notion referred to by Osborne J.A. in Baker and by Armstrong J.A. in Fiber Connections. In my view, however, the somewhat higher standard of a prima facie meritorious case on appeal is more in keeping with the incorporation of the R.J. Nicol factors into the test.

[31] I do not, with respect, discern a meaningful difference between the interpretations to which Blair J.A. referred. In Power Consolidated (China) Pulp Inc. v. British Columbia Resources Investment Corp. (1988), 19 C.P.C. (3d) 396, [1988] B.C.J. No. 1403, McLachlin J.A. held that the appeal was “prima facie meritorious”, on the basis that: “the appeal is not without merit in the sense that an argument can be made” that the judge erred in the application of a legal test. In both Baker (Re), 1995 CanLII 353 (ON CA), 22 O.R. (3d) 376, [1995] O.J. No. 580, at para. 24, and SVCM Capital Ltd. v. Fiber Connections Inc. 2005 CanLII 15454 (ON CA), 10 C.B.R. (5th) 201, [2005] O.J. No. 1845, at para. 20, Osborne J.A. and Armstrong J.A., respectively, simply stated that the “prima facie meritorious” criterion is met where “there are arguable grounds of appeal”. They were both uncomfortable with expressing a view that the appeal would succeed, despite the wording of the test.

[32] Perhaps it would be better if the third step of the test – expressed most recently by a panel of this court in 407 ETR Concession Co as “whether the appeal is prima facie meritorious or, on the other hand, whether it is frivolous” – were revised, in the words of Osborne and Armstrong JJ.A., to provide: “whether there are arguable grounds of appeal or, on the other hand, whether it is frivolous”.

[33] In my view, it would be helpful to the profession and the practice if there were more guidance given by this court on the interpretation of the phrase “prima facie meritorious”.

[34] I turn now to apply the criterion of “prima facie meritorious” to this appeal, without expressing a view as to whether the appeal will succeed, according to the approach taken by Osborne and Armstrong JJ.A. It seems to me arguable that the application judge did not set out a principled basis for refusing to grant a charging order in favour of the solicitors, having found a valid solicitor’s lien. The solicitors were working with the bankrupt to assist him and decided not take a second mortgage securing their legal fees. It is not clear why this should prejudice them when, had they taken out the second mortgage, the amount of money represented thereby would not have fallen into the estate.

[35] I take a similar view of his refusal to grant salvage lien to Menziesbank. The application judge simply asserted that he was applying the equities but he did not explain his thinking in any meaningful way.

[36] It is therefore arguable that the application judge made that have prejudiced the appellants. For these reasons, I would find that the criterion of an appeal that is “prima facie meritorious” has been satisfied in this case. This finding is also sufficient to satisfy the remaining criterion of the merits of the proposed appeal for the purpose of determining whether to extend the time for leave to appeal under the rules.

C. Disposition

For the reasons set out above, I extend the time for the applicants to file the notice of appeal to October 30, 2014 to validate its filing nunc pro tunc, and grant their application for leave to appeal under s. 193(e) of the BIA. Since the applicants are seeking an indulgence, it is reasonable to make a costs award in favour of the respondent, which I fix at $1,500.

“P. Lauwers J.A.”

[^1]: The application judge declined, at paras. 64-65 to provide similar recognition to the work of Menzies Lawyers Professional Corporation, but it is not clear whether that materially affects the claims.