Akagi v. Synergy Group (2000) Inc. et al.

[Indexed as: Akagi v. Synergy Group (2000) Inc.]

Ontario Reports

Court of Appeal for Ontario,

Simmons, Blair and Juriansz JJ.A.

November 10, 2015

128 O.R. (3d) 64 | 2015 ONCA 771

Case Summary

Civil procedure — Costs — Substantial indemnity — Applicant obtaining ex parte order for appointment of receiver after obtaining default judgment based on allegations of fraud — Series of increasingly expansive ex parte receivership orders made in aid of roving "investigative receivership" into alleged large-scale tax fraud scheme involving thousands of investors — Receivership orders set aside on grounds that "investigative receivership" was misguided and that orders were impermissibly overreaching — Both applicant and receiver liable to pay costs — Costs awarded against receiver on substantial indemnity scale to express disapproval of its conduct — Costs awarded against applicant on partial indemnity scale.

Debtor and creditor — Receivers — Applicant obtaining ex parte order for appointment of receiver after obtaining default judgment based on allegations of fraud — Series of increasingly expansive ex parte receivership orders made in aid of roving "investigative receivership" into alleged large-scale tax fraud scheme involving thousands of investors — Receivership orders set aside on grounds that "investigative receivership" was misguided and orders were impermissibly overreaching — Both applicant and receiver liable to pay costs — Award of costs against receiver personally being appropriate as receiver turned itself into real litigant and impermissibly drew others into fray — Receiver's good faith irrelevant — Costs awarded against receiver on substantial indemnity scale to express disapproval of its conduct.

The applicant applied successfully for an ex parte order appointing a receiver after obtaining a default judgment in the amount of approximately $147,000 based on allegations of fraud arising out of the loss of funds he had contributed to a tax program marketed by the respondent S Inc. It became clear that the principal purpose of the receivership order was not to recover the applicant's judgment debt but to institute a broad-ranging inquiry -- a roving "investigative receivership" -- into what was alleged to be a much larger tax fraud scheme, and to do so, purportedly, on behalf of thousands of investors who were not parties to the action or the receivership application and who did not seek to have their interests protected. A number of increasingly expansive ex parte receivership orders were made. The court set aside the orders on the grounds that the receivership had proceeded on an entirely misguided course, the orders were impermissibly overreaching, and the ex parte proceedings had been tainted by certain procedural frailties, including the receiver's failure to disclose to the Commercial List judge that the Canada Revenue Agency had discontinued its investigation into the tax allocation scheme several months before the receivership was sought. The court then heard submissions on costs.

Held, both the applicant and the receiver should be liable for costs.

The applicant's involvement in the receivership proceedings was not minimal or limited to obtaining the initial order. He instituted and then supported the [page65 ]proceedings throughout. There was no reason why he should be immune from an award of costs. An award of costs against the receiver personally was appropriate as the receiver had turned itself into a "real litigator" and impermissibly drew others into the fray, forcing them to defend themselves in what amounted to a process that was extraneous to the creditor-driven receivership. It was irrelevant that the receiver acted in good faith. The receiver had undermined its neutral position as an officer of the court and turned itself into a litigant for the cause. As a litigant, it was subject to the "loser pays" costs regime. The receiver was not shielded by s. 142 of the Courts of Justice Act, R.S.O. 1990, c. C.43.

Costs should be awarded against the receiver on a substantial indemnity scale to express disapproval of its conduct. The applicant should be liable for costs on a partial indemnity scale.

In re Arthur Williams & Co., Ex parte The Official Receiver, [1913] 2 K.B. 88, consd

Other cases referred to

Akagi v. Synergy Group (2000) Inc. (2015), 125 O.R. (3d) 401, [2015] O.J. No. 2603, 2015 ONCA 368, 74 C.P.C. (7th) 45, 334 O.A.C. 279, 25 C.B.R. (6th) 260, 254 A.C.W.S. (3d) 186; Boucher v. Public Accountants Council for the Province of Ontario (2004), 2004 CanLII 14579 (ON CA), 71 O.R. (3d) 291, [2004] O.J. No. 2634, 188 O.A.C. 201, 48 C.P.C. (5th) 56, 132 A.C.W.S. (3d) 15 (C.A.); Canadian Imperial Bank of Commerce v. 437544 Ontario Inc., 1995 CanLII 362 (ON CA), [1995] O.J. No. 3379, 86 O.A.C. 241, 43 C.P.C. (3d) 216, 58 A.C.W.S. (3d) 913 (C.A.); Crossing Co. v. Banister Pipelines Inc., [2004] A.J. No. 81, 2004 ABQB 56, 50 C.B.R. (4th) 47, 129 A.C.W.S. (3d) 259; GEA Group AG v. Ventra Group Co. (2009), 96 O.R. (3d) 481, [2009] O.J. No. 3457, 2009 ONCA 619, 312 D.L.R. (4th) 160, 76 C.P.C. (6th) 3, 254 O.A.C. 198, 181 A.C.W.S. (3d) 255; Hakim Optical Laboratory Ltd. v. Phillips (2009), 2009 CanLII 34036 (ON SC), 96 O.R. (3d) 798, [2009] O.J. No. 2785 (S.C.J.); Hamilton Wentworth Credit Union Ltd. v. Courtcliffe Parks Ltd., [1995] O.J. No. 3399, 1995 CarswellOnt 3559 (Gen. Div.); Haunert-Faga v. Faga, [2013] O.J. No. 1171, 2013 ONSC 1581, 100 C.B.R. (5th) 52, 37 C.P.C. (7th) 210, 227 A.C.W.S. (3d) 113 (S.C.J.); HSBC Bank Canada v. Lechcier-Kimel, [2014] O.J. No. 4948, 2014 ONCA 721; Hunt v. TD Securities Inc. (2003), 2003 CanLII 3649 (ON CA), 66 O.R. (3d) 481, [2003] O.J. No. 3245, 229 D.L.R. (4th) 609, 175 O.A.C. 19, 36 B.L.R. (3d) 165, 39 C.P.C. (5th) 206, 124 A.C.W.S. (3d) 1033 (C.A.); Kretzschmann v. Greater Sudbury (City), [2010] O.J. No. 141, 2010 ONSC 327, 69 M.P.L.R. (4th) 114, 184 A.C.W.S. (3d) 39 (S.C.J.); Lemieux v. Canada (Attorney General), [2005] O.J. No. 3167, 141 A.C.W.S. (3d) 29, 2005 CanLII 26317 (S.C.J.); Middleton v. Highlands East (Municipality), [2013] O.J. No. 1595, 2013 ONSC 2027, 10 C.C.E.L. (4th) 275, 227 A.C.W.S. (3d) 46 (S.C.J.); Mortimer v. Cameron (1994), 1994 CanLII 10998 (ON CA), 17 O.R. (3d) 1, [1994] O.J. No. 277, 111 D.L.R. (4th) 428, 68 O.A.C. 332, 19 M.P.L.R. (2d) 286, 45 A.C.W.S. (3d) 1311 (C.A.) [Leave to appeal to S.C.C. refused (1994), 19 O.R. (3d) i, [1994] S.C.C.A. No. 150, 114 D.L.R. (4th) vii]; OGT Holdings Ltd. v. Startek Canada Services Ltd., [2010] O.J. No. 762, 2010 ONSC 1090, 185 A.C.W.S. (3d) 296 (S.C.J.); Sigurdson v. Fidelity Insurance Co. of Canada, 1980 CanLII 404 (BC CA), [1980] B.C.J. No. 488, 110 D.L.R. (3d) 491, [1980] 6 W.W.R. 315, 20 B.C.L.R. 345, 35 C.B.R. (N.S.) 75, 2 A.C.W.S. (2d) 330 (C.A.); Touche Ross Ltd. v. Weldwood of Canada Sales Ltd., 1984 CanLII 2103 (ON SC), [1984] O.J. No. 1047, 49 C.B.R. (N.S.) 284, 24 A.C.W.S. (2d) 27 (H.C.J. in Bank.); Waterloo Mechanical Contractors Ltd. (Trustee of) v. Sinclair, 1982 CanLII 1678 (ON CJ), [1983] O.J. No. 971, 49 C.B.R. (N.S.) 196 (H.C.J.)

Statutes referred to

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 [as am.], s. 197(3)

Courts of Justice Act, R.S.O. 1990, c. C.43, ss. 101 [as am.], 131 [as am.], 142 [page66 ]

Rules and regulations referred to

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rules 1.03, 37.06(a), 57.01(1), 57.03(1), Part I

Authorities referred to

Bennett, Frank, Bennett on Receiverships, 3rd ed. (Toronto: Thomson Reuters Canada, 2011)

Orkin, Mark M., The Law of Costs, 2nd ed. (Aurora: Canada Law Book, 1993)

Sharpe, Robert J., Injunctions and Specific Performance (Toronto: Thomson Reuters Canada, 2014)

RULING on costs.

Jonathan C. Lisus and James Renihan, for appellants Student Housing Canada Inc. and RV Inc.

William C. McDowell and Brian Kolenda, for appellants Integrated Business Concepts Inc. and Vincent Villanti.

Shannon M. Puddister, for appellant Ravendra Chaudhary.

Joseph M. Sereda, for appellants Synergy Group (2000) Inc., Shane Davidson Smith, Nadine Theresa Smith, Jean Breau, David Prentice and 1893700 Ontario Limited.

Jeffrey S. Leon and Ruth Promislow, for respondent J.P. Graci & Associates Ltd. in its capacity as court-appointed receiver.

Terry Corsianos, for respondent Trent Akagi.

[1] Endorsement BY THE COURT: -- On May 22, 2015, this court released its decision setting aside a series of increasingly expansive ex parte receivership orders dated June 14, June 24, June 28 and August 2, 2013, and a subsequent order on a "Comeback Hearing" dated September 16, 2013 maintaining those orders.

[2] We have received and reviewed the costs submissions filed by counsel since then. This is our decision with respect to the costs of the proceedings.

Background

[3] The appeal concerned what was labelled "an investigative receivership" that generated a series of orders which the court concluded stood "on a fundamentally flawed premise" and were "unjustifiably overreaching in the powers they grant[ed ]": Akagi v. Synergy Group (2000) Inc. (2015), 125 O.R. (3d) 401, [2015] O.J. No. 2603, 2015 ONCA 368, at para. 59. In our view, both Mr. Akagi (who commenced the receivership proceedings without taking any initial steps to recover on his judgment) and the receiver (who took the investigative receivership too far, essentially on the theory that an investigative receivership was akin to a criminal investigation or a public inquiry where there were [page67 ]allegations of significant fraud) must bear the cost consequences of the orders having been set aside.

[4] Mr. Akagi applied for an initial ex parte order appointing a receiver (the "initial order") after obtaining a default judgment in the amount of approximately $147,000, based on allegations of fraud arising out of the loss of funds he had contributed to a tax program marketed and sold by the Synergy Group (2000) Inc. (the "Synergy Group"). The program was supposed to generate tax loss allocations for him, but did not. His judgment was against the Synergy Group and certain individuals associated with it. The initial order granted a receivership over all the assets and undertakings of the Synergy Group and an additional company, Integrated Business Concepts Inc. ("IBC").

[5] It soon became clear, however, that the principal purpose of the receivership order was not to recover on Mr. Akagi's judgment debt, but to institute a broad-ranging inquiry -- a roving "investigative receivership" -- into what was alleged to be a much larger tax fraud scheme, and to do so, purportedly, on behalf of approximately 3,800 other investors who may have been caught in the tax scheme as well. None of these investors were a party to the Akagi action or the receivership application, none purported to seek to have their interests protected, and Mr. Akagi and the receiver maintained throughout that they did not purport to represent the interests of those investors.

[6] As we explained in our reasons, at para. 4:

Subsequently, through a series of further ex parte applications, the receivership order morphed into a wide-ranging "investigative receivership", freezing and otherwise reaching the assets of 43 additional individuals and entities (including authorizing the registration of certificates of pending litigation against their properties). None of the additional targets was a party to the receivership proceeding, only three had any connection to the underlying Akagi action, and only two were actually judgment debtors.

[7] The receivership orders were set aside on the basis that the receivership had "proceeded on an entirely misguided course" (para. 1), the orders were impermissibly overreaching and the ex parte proceedings themselves had been tainted by certain procedural frailties, including the receiver's failure to disclose to the Commercial List judge that the Canada Revenue Agency had discontinued its investigation into the tax allocation scheme several months before the receivership was sought, when evidence of that inquiry had formed the basis for obtaining the orders.

The Costs Submissions

[8] The appellants IBC and Vincent Villanti ("IBC/Villanti"), Ravendra Chaudhary, and Student Housing Canada Inc. and [page68 ]RV Inc. ("Student Housing/RV") all seek their costs on a full or substantial indemnity basis against both Mr. Akagi and the receiver jointly and severally. They rely on what the court described as the impermissibly and "breathtakingly broad" sweep and nature of the ex parte orders (paras. 38, 43), the procedural frailties in the manner in which the successive ex parte orders were obtained, and what is said to be the unduly adversarial nature of the way in which the receiver conducted itself.

[9] The receiver resists these allegations and argues that no costs should be awarded against it for the following reasons: it was proceeding in good faith and simply "carry[ing] out what it understood to be the court-ordered mandate"; its conduct and activities pursuant to the receivership orders were approved by the court in the August 2, 2013 order and the comeback order; and the general rule is that a receiver is not exposed to costs against it personally in receivership proceedings.

[10] Mr. Akagi argues that his "involvement with this receivership has been limited solely to obtaining the initial receivership order of June 14, 2013 and to defending [that] order throughout [the] receivership" (i.e., at the comeback hearing, on a motion before Feldman J.A., and on the appeal to this court). He therefore resists any responsibility for costs incurred by the appellants drawn into the proceedings by the three ex parte orders subsequent to the initial order. He also submits that costs should not be ordered because none of the appellants sought costs against him at the comeback hearing.

Discussion

Mr. Akagi and the receiver are both liable to pay costs

Mr. Akagi

[11] We do not accept that Mr. Akagi's involvement in the receivership proceedings was minimal or limited to obtaining the initial order, or that he should be immune from an award of costs against him in the circumstances.

[12] While it may be true that it was the receiver that sought and obtained the subsequent ex parte orders, Mr. Akagi tenaciously defended those orders and the initial order once the appellants received notice of them and took steps to set them aside. Mr. Akagi's counsel attended and participated in the various motions, scheduling appointments and examinations following the August 2, 2013 order and leading up to the appeal, and was a central participant on the appeal itself. In short, Mr. Akagi instituted and then supported the proceedings throughout and, as counsel for IBC/Villanti submits, permitted [page69 ]himself to be "misused as a proxy to initiate the aeimpermissible voyage' that was this receivership".

[13] We also do not accept Mr. Akagi's submission that no costs should be awarded with respect to the comeback hearing because none of the appellants sought costs against him in their notices of motion or appeal. In our view, this is not fatal to the claim for costs.

[14] Costs of a proceeding and a step in the proceeding are within the discretion of the court: see Courts of Justice Act, R.S.O. 1990, c. C.43, s. 131. The default "loser pays" rule is well-recognized and it is the usual expectation of parties that costs will be sought by a successful party. Indeed, rule 57.03(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 requires the court to order costs unless it is satisfied that a different order would be more just. Although rule 37.06(a) requires a party to set out the relief sought in the notice of motion, a costs award is incidental to the substantive relief claimed and -- absent prejudice to the losing party -- we see no reason why the failure to ask for costs in the notice of motion should, in itself, preclude the court from making such an order where costs are requested at the hearing. See Kretzschmann v. Greater Sudbury (City), [2010] O.J. No. 141, 2010 ONSC 327, 69 M.P.L.R. (4th) 114 (S.C.J.), at para. 10; Lemieux v. Canada (Attorney General), [2005] O.J. No. 3167, 2005 CanLII 26317 (S.C.J.), at para. 7; and Hakim Optical Laboratory Ltd. v. Phillips (2009), 2009 CanLII 34036 (ON SC), 96 O.R. (3d) 798, [2009] O.J. No. 2785 (S.C.J.), at paras. 4-7.

[15] Here, the appellants were unsuccessful at the comeback hearing and therefore it never became necessary to address the issue. They seek costs now. We see no prejudice to Mr. Akagi in awarding costs against him for that proceeding.

[16] For these reasons, Mr. Akagi is responsible for costs.

The receiver

[17] In the circumstances of this case, the receiver is liable to pay costs as well, in our view.

[18] The receiver argues that costs are only awarded against a receiver personally in rare cases, relying upon Hamilton Wentworth Credit Union Ltd. (Liquidator of) v. Courtcliffe Parks Ltd., [1995] O.J. No. 3399, 1995 CarswellOnt 3559 (Gen. Div.), at para. 16. That principle applies, however, when the receiver is acting in its capacity as receiver in the course of the receivership. It does not apply where the receiver turns itself into a "real litigator", impermissibly drawing others into the fray and forcing them to defend themselves in what amounts to a process that is extraneous to the creditor-driven receivership. [page70 ]

[19] We do not say that the receiver was acting in bad faith. In our view, however, it misconceived its role, and in the process lost its objectivity in the heady notion that it was an "investigative receiver" entitled to use a single-creditor receivership process to pursue a larger public "cause" on behalf of all 3,800 alleged victims of the tax scheme and with a view to gathering evidence that would support an eventual lawsuit on their behalf. Mr. Akagi's claim was a relatively small one that did not justify, or require, the intrusive and far-reaching Mareva-like orders that were obtained. In taking these steps, the receiver undermined its neutral position as an officer of the court and turned itself into a litigant for the cause. As a litigant, it is subject to the "loser pays" costs regime that applies in this jurisdiction.

[20] If any further confirmation is necessary to demonstrate that the extraordinary ex parte orders sought by the receiver in 2013 were obtained as part of a roving receivership conducted in contemplation of pending litigation in which the receiver would be authorized to pursue what would have been, in effect, a class action in the guise of a receivership, it is found in the receiver's seventh report, dated August 28, 2014, at paras. 27-28:

It is contemplated by the Receiver that if the forensic work confirms the conclusions reached by CRA and the RCMP, the Receiver will recommend that an action be commenced by the Receiver (without security for costs) on behalf of the 3800 investors against the following individuals, claiming damages for fraud, an accounting and tracing and other related relief: Villanti, Chaudhary, Loschiavo, Shane Smith, Prentice and Lloyd. Additional potential defendants would be added as appeared appropriate based on further information as to the flow of funds that recently became available.

It is further contemplated that the Receiver may recommend that it be directed to commence actions against the various individuals and entities that earned the commissions from the sale of this tax scheme. Further examinations are necessary (including those which the Receiver is currently trying to schedule) in order to further report to the Court on this matter.

[21] This is not a case of bankruptcy proceedings in which a trustee enjoys a presumption that, in an action commenced by or against it under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended, the trustee is not personally liable for costs unless the court directs otherwise: see s. 197(3). Here, the receiver was appointed under s. 101 of the Courts of Justice Act, as amended, and, under its appointing order, had the authority, but was not obliged, to take further legal proceedings.

[22] In such non-bankruptcy situations, the law is clear that a receiver or trustee assuming the role of a "real litigator" runs the risk of being personally liable for costs, as is any unsuccessful litigant, and litigates at its peril in the absence of a source of indemnity available to it -- generally the assets of the estate or [page71 ]a contract of indemnity with the creditor or creditors: see Frank Bennett, Bennett on Receiverships, 3rd ed. (Toronto: Thomson Reuters Canada, 2011), at pp. 259-60; Haunert-Faga v. Faga, [2013] O.J. No. 1171, 2013 ONSC 1581, 100 C.B.R. (5th) 52 (S.C.J.), at paras. 12-16 and the authorities cited therein; Touche Ross Ltd. v. Weldwood of Canada Sales Ltd., 1984 CanLII 2103 (ON SC), [1984] O.J. No. 1047, 49 C.B.R. (N.S.) 284 (H.C.J. in Bank.), at pp. 286-88 C.B.R. (N.S.); Waterloo Mechanical Contractors Ltd. (Trustee of) v. Sinclair, 1982 CanLII 1678 (ON CJ), [1983] O.J. No. 971, 49 C.B.R. (N.S.) 196 (H.C.J.), at pp. 203-204 C.B.R. (N.S.); Crossing Co. v. Banister Pipelines Inc., [2004] A.J. No. 81, 2004 ABQB 56, at para. 19; Sigurdson v. Fidelity Insurance Co. of Canada, 1980 CanLII 404 (BC CA), [1980] B.C.J. No. 488, 110 D.L.R. (3d) 491 (C.A.), at pp. 495-96 D.L.R.; and Canadian Imperial Bank of Commerce v. 437544 Ontario Inc., 1995 CanLII 362 (ON CA), [1995] O.J. No. 3379, 86 O.A.C. 241 (C.A.), at para. 14.

[23] It does not matter that the receiver or trustee was acting in good faith or that it appeared desirable to the receiver or trustee to pursue the proceeding; as an unsuccessful litigant, they may still be liable for costs. In Sigurdson, at p. 495 D.L.R., the British Columbia Court of Appeal cited with approval the following passage from an early English case, In re Arthur Williams & Co., Ex parte The Official Receiver, [1913] 2 K.B. 88, at pp. 94-95, which we also find persuasive:

The question in this appeal is one that is so familiar and so well settled with reference to other jurisdictions that I confess I was surprised to learn that it was thought capable of being argued in bankruptcy. If trustees of a settlement, or executors, or administrators of a deceased person, or a receiver, or a liquidator, raise a contest with another person and bring him into Court to defend himself in respect of some claim which is set up against him, and the claim fails, the trustees, or executors, or receiver, or official liquidator, are personally liable to pay the costs. It is immaterial that in making the claim they acted bona fide in the belief that they were doing that which was for the benefit of the estate which they represented. They are personally liable as between them and the defendant; they are entitled to an indemnity out of the estate which they are representing unless they have been guilty of misconduct. The question of misconduct is not relevant at all in these circumstances as between the plaintiffs and the defendant whom they have brought into Court; it does not matter whether they have acted bona fide or not; they brought an action and failed, and they are personally liable to pay costs, but in a proper case they are, as I have said, entitled to an indemnity.

(Emphasis added)

[24] The receiver raises two additional arguments. First, it relies upon s. 142 of the Courts of Justice Act, which provides that "[a] person is not liable for any act done in good faith in accordance with an order or process of a court in Ontario". Second, it seeks to shelter under the protection provided in the August 2, 2013 order, which states: [page72 ]

THIS COURT ORDERS that the Receiver, its counsel and any agents or advisors appointed by the Receiver to assist the Receiver in carrying out its duties, obligations and activities in connection with matters relating to the exercise of its powers and any ancillary matters in respect thereof including, without limitation, pursuant to this Order, Prior Receivership Orders or further Orders of this Court, shall have no liability with respect to carrying out such duties, obligations and activities.

[25] We would not give effect to either of these contentions. First, a receiver cannot obtain a series of ex parte orders for an impermissible and extraneous purpose -- as was the case here -- and then seek to be shielded by s. 142 of the Courts of Justice Act on the basis that it was simply acting in accordance with those orders. Second, we read the provision of the order, cited above, as providing a buffer for the receiver against a lawsuit that might be commenced concerning its conduct of the receivership. We do not read it as providing the receiver with immunity from the costs consequences of entering the arena as a "real litigator" -- particularly in respect of a cause that it was not entitled to pursue.

The Scale and Quantum of Costs by Participant

[26] We now turn to the question of the scale and quantum of costs payable to the appellants. Counsel for the receiver and for each of the appellants have filed comprehensive submissions, and appellants' counsel have included their respective costs outlines. We have reviewed the submissions and the costs outlines carefully.

The scale of costs

[27] We turn first to the appropriate scale of costs to be awarded.

[28] The appellants seek their costs on a full indemnity or substantial indemnity basis. In support of this position, they variously argue the following:

(a) Mr. Akagi and the receiver knew they were embarking on a process that was fraught with legal risk and which had an incredibly damaging effect on the appellants;

(b) the receivership appears to have been instituted in order to circumvent the customary procedural safeguards relating to a claim for Mareva-like interlocutory injunctive relief or other similar pre-trial relief;

(c) in the circumstances of this case, the ex parte orders constituted not only execution before judgment but, in fact, execution before the commencement of any claim; [page73 ]

(d) Mr. Akagi and the receiver continued to press forward with the process even after Feldman J.A. had expressed reservations about the procedural flaws in November 2013, and Penny J. did the same in May 2014;

(e) offers to settle -- at least on the part of Student Housing/RV -- were vigorously rebuffed (even in the face of the procedurally flawed registration of certificates of pending litigation following the August 2, 2013 order);

(f) at least in the cases of Mr. Chaudhary and Student Housing/ RV, neither was a party to the receivership proceedings, neither had any connection to the underlying Akagi action, and neither was indebted to Mr. Akagi or to any other of the 3,800 alleged victims, nor had any claim ever been commenced against them or evidence of wrongdoing on their part ever put forward;

(g) in spite of the foregoing, Mr. Akagi and the receiver insisted on pursuing far-reaching demands for production, compelled the examinations of various appellants and members of their families, brought a contempt motion against the solicitor for one of the appellants, and prevented the appellants from doing business with their banks by sending copies of the various orders to every bank the receiver identified as dealing with the appellants and individuals related to them; and finally,

(h) the receiver failed to make full and complete disclosure by not advising the court that the CRA investigation (upon which Mr. Akagi and the receiver relied to obtain the orders) had been discontinued three months before the initial order was obtained (although, in fairness, the RCMP was by that time conducting a criminal investigation).

[29] In short, the appellants say, the receivership was overreaching, harassing and abusive. Costs should be awarded on a full or substantial indemnity basis.

[30] A review of this court's earlier reasons will reveal that there is some substance to these submissions. The attempted use of the receivership process by the receiver was misguided. Its goal was to utilize the machinery of a receivership, and the status and position of the receiver as an officer of the court, to freeze and otherwise tie up the assets of over 40 far-flung, non-party individuals and entities (only three of which had any connection to the Akagi proceedings) -- all with a view to putting forward a future claim on behalf of 3,800 alleged victims of the [page74 ]tax scheme, none of whom expressed any desire to be represented or came forward to join in the receivership proceedings. The ex parte orders obtained were akin to Mareva injunctions,[^1] Anton Piller orders[^2] and Norwich orders[^3] combined, but with none of the procedural protections usually afforded to defendant litigants in such cases and none of the obligations usually required of plaintiffs.[^4]

[31] The general rule is that costs are awarded on a partial indemnity basis. In some -- generally rare -- circumstances, however, the level of costs may be increased to substantial indemnity or even a full indemnity basis. One of those circumstances is where it is necessary "to mark the court's disapproval of the conduct of the party in the litigation": Mark M. Orkin, The Law of Costs, looseleaf (2015-Rel. 54), 2nd ed. (Aurora: Canada Law Book, 1993) vol. 1, at p. 2-217, cited by this court with approval in Hunt v. TD Securities Inc. (2003), 2003 CanLII 3649 (ON CA), 66 O.R. (3d) 481, [2003] O.J. No. 3245 (C.A.), at para. 123. See, also, Mortimer v. Cameron (1994), 1994 CanLII 10998 (ON CA), 17 O.R. (3d) 1, [1994] O.J. No. 277 (C.A.), at p. 23 O.R., leave to appeal to S.C.C. refused (1994), 19 O.R. (3d) i, [1994] S.C.C.A. No. 150.

[32] In our view, this is one of those cases. For all of the reasons outlined above, the receiver took a useful concept -- that of the "investigative receivership" -- and ran too far with it for an extraneous purpose, losing sight in the process of its role as an officer of the court, bound to protect the interests of every individual or entity involved. We conclude that the extension [page75 ]of the orders, on an ex parte basis, against Mr. Chaudhary and Student Housing/RV was particularly egregious in the circumstances.

[33] That said, we do not propose to make an award of costs against the receiver on a full indemnity scale. We do, however, award costs against the receiver on a substantial indemnity scale as a measure of our disapproval of its conduct.

[34] Mr. Akagi (narrowly) escapes that sanction, although he will be liable for the appellants' costs on a partial indemnity basis, for the reasons outlined above. Although the appellants are correct in submitting that Mr. Akagi lent his name as proxy to the roving receivership and supported it all along, it appears to us from the record that it was the receiver that was the more active "litigant", pushing for the potential action on behalf of all 3,800 alleged victims and calling the shots on the overreaching orders that were obtained. In addition, Mr. Akagi is an unpaid creditor and at least had some interest in pursuing the receivership.

The quantum of costs

[35] In addressing the question of quantum of costs, we have carefully considered counsel's submissions and the costs outlines filed. Having done so, we make the following preliminary observations.

Adjusting factors

[36] First, the receivership and the proceedings it generated were complex and far-reaching. Subject to some submissions about overlapping efforts, neither Mr. Akagi's counsel nor the receiver's quarrel with the time spent by the various counsel in dealing with the matter, or with the hourly rates put forward. Nor do we.

[37] Second, because of the evolving nature and complexity of the receivership, the Synergy Group and IBC (and, to a certain extent, Mr. Villanti), who were the initial targets, were undoubtedly required to invest more time and resources in ultimately defending their positions than would have been the case had the receivership not been extended to ensnare the 40 or so additional non-parties to the receivership. For that reason, the Synergy Group and IBC/Villanti are entitled to their costs on a substantial indemnity basis against the receiver and on a partial indemnity basis against Mr. Akagi, even though they are the appellants who might be said to have had the most direct connection with the underlying Akagi action. [page76 ]

[38] Third, because each of the appellants -- except for the Synergy Group -- changed counsel at some point between the comeback hearing and the argument of the appeal, there is an inevitable overlap in preparation time spent by counsel. This overlap is reflected in the costs outlines submitted, requiring the amounts claimed to be adjusted accordingly.

[39] Finally, a significant amount of the time logged related to motions before Penny J. in the Superior Court, while the appeal was pending, and to the motion before Tulloch J.A. in this court to set aside the registrar's order dismissing the appeal for delay, as well as the subsequent motion before the panel that reinstated the appeal. Costs were dealt with by Penny J. (costs to Mr. Akagi and the receiver jointly, fixed at $7,500) and his orders were not appealed. The costs of the proceedings in this court relating to the reinstatement of the appeal were also dealt with by the panel ($15,000 to Student Housing/RV and $15,000 to IBC/Villanti). These orders stand and, as a result, the time devoted to those particular proceedings cannot form part of the costs order being made at this time.

Quantum (partial and substantial indemnity)

[40] The appellants are entitled to their costs against Mr. Akagi on a partial indemnity basis and against the receiver on a substantial indemnity basis, in the amounts set out below with respect to the comeback hearing, the stay motion before Feldman J.A. (who reserved costs to the panel) and the appeal (including submissions as to costs). In addition, they are entitled to their disbursements as set out below.

The comeback hearing

[41] Costs are awarded for the comeback hearing as follows:

[Editor's Note: This table could not be reproduced online.]

Stay motion

[42] The stay motion was important and no doubt reasonably complex. However, it is with respect to this proceeding that we have had to reduce some of the time claimed by counsel. It [page77 ]appears that a certain amount of time has been accounted for in the same portions of their costs outlines with respect to both the stay motion and other proceedings that occurred around that period, up to the point when it became necessary to deal with the reinstatement of the appeal.

[43] Albeit that the appellants were unsuccessful before Feldman J.A., we are satisfied that they should receive their costs in relation to that proceeding. Justice Feldman expressed serious reservations about the procedure employed to appoint and maintain the receivership; the appellants were fully successful on the appeal, partly because those concerns were determined to have merit.

[44] It appears that Mr. Chaudhary did not file materials in relation to the stay motion or appear on it. He is therefore not entitled to costs for that proceeding.

[45] The following award of costs is made with respect to the stay motion:

[Editor's Note: This table could not be reproduced online.]

The appeal

[46] We have determined that $37,500 represents a reasonable amount at which to fix costs of the appeal on a partial indemnity basis for all appellants except the Synergy Group, for reasons we will explain below, which is roughly what counsel for Student Housing/RV and IBC/Villanti claimed in their submissions. Counsel for the trustee accepts this as reasonable. We have also "topped up" this amount to include a small sum representing costs in relation to these costs submissions.

[47] The Synergy Group is not entitled to the same amount for the costs of the appeal as are the other appellants because it did not fully participate in the proceeding. By the time of the appeal, IBC and Mr. Villanti had changed counsel from Mr. Sereda to the Lenczner Slaght firm. Mr. Sereda continued to represent the Synergy Group. Mr. Sereda filed materials on the appeal, but he did not attend on the argument, instead instructing an agent who [page78 ]attended and simply advised the court that the Synergy Group was adopting the submissions of the other appellants.

[48] Accordingly, we fix the costs of the appeal payable to the Synergy Group on a partial indemnity basis at $15,000, taking these factors into account and recognizing as well that there was a certain amount of duplication in preparation time as between Mr. Sereda and newly retained counsel for IBC/ Villanti.

[49] For reasons already explained, we award costs of the appeal against Mr. Akagi on a partial indemnity basis and against the receiver on a substantial indemnity basis.

[50] Costs of the appeal (and of the submissions relating to these costs) are therefore fixed in the following amounts:

[Editor's Note: This table could not be reproduced online.]

Disbursements

[51] The appellants are entitled to their disbursements, paid jointly and severally by Mr. Akagi and the receiver, in the following amounts, which are inclusive of HST:

[Editor's Note: This table could not be reproduced online.]

[page79 ]

The substantial indemnity quantum

[52] Some explanation of the way in which we arrived at the substantial indemnity amounts referred to in the charts above may be helpful.

[53] In seeking substantial indemnity costs, counsel appear to have proceeded on the basis that substantial indemnity costs represent 90 per cent of full indemnity. While that may be so in some circumstances, we do not think that is an accurate general principle of law.

[54] Counsel have referred us to two Superior Court decisions in which judges have concluded that a substantial indemnity hourly rate may fairly represent 90 per cent of the full indemnity hourly rate. They have come to this conclusion based on the premise that a fair partial indemnity hourly rate represents approximately 60 per cent of full indemnity. Applying a factor of 1.5 -- the factor set out in the definition of substantial indemnity costs in rule 1.03 -- the judges arrived at a substantial indemnity hourly rate of 90 per cent of full indemnity. See OGT Holdings Ltd. v. Startek Canada Services Ltd., [2010] O.J. No. 762, 2010 ONSC 1090 (S.C.J.); and Middleton v. Highlands East (Municipality), [2013] O.J. No. 1595, 2013 ONSC 2027 (S.C.J.).

[55] It is well established, however, that fixing costs of a proceeding or of a step within a proceeding on a partial indemnity basis pursuant to Part I of Tariff A of the Rules of Civil Procedure is not simply an exercise of multiplying hourly rates by the amount of time expended. The court must balance the discretionary factors set out in rule 57.01(1) and, in the end, arrive at an amount that is reasonable and fair in the circumstances and that bears some relationship to the amount that an unsuccessful party could reasonably expect to pay: see Boucher v. Public Accountants Council for the Province of Ontario (2004), 2004 CanLII 14579 (ON CA), 71 O.R. (3d) 291, [2004] O.J. No. 2634 (C.A.), at paras. 26, 37-38. That the receiver itself had accumulated fees and disbursements exceeding $300,000 as at the comeback hearing is confirmation of what would have reasonably been contemplated in the eyes of the receiver. It is on that basis that we have arrived at the partial indemnity amounts awarded above.

[56] Costs awarded on a substantial indemnity basis are not a function of full indemnity rates, however, or of full indemnity costs where full indemnity rates are reasonable. Under the Rules, substantial indemnity costs are a function of the costs awarded on a partial indemnity basis. Rule 1.03 is quite clear on this:

"Substantial indemnity costs" mean costs awarded in an amount that is 1.5 times what would otherwise be awarded in accordance with Part I of Tariff A, and "on a substantial indemnity basis" has a corresponding meaning. [page80 ]

[57] In short, costs awarded on a substantial indemnity scale are to be determined on the basis of applying a factor of 1.5 to the amount of the partial indemnity costs as fixed (or that would otherwise have been fixed) in accordance with the Rules and Tariff A. The substantial indemnity costs we have awarded, as set out in the charts above, have been arrived at in this fashion.

Joint and several liability

[58] We are satisfied that, in the circumstances, Mr. Akagi and the receiver should be jointly and severally liable for the partial indemnity costs and the disbursements, as set out above. The receiver shall be severally liable for the difference between the partial indemnity amounts and the substantial indemnity amounts as shown. HST is payable on the costs amounts awarded. The disbursements awarded are inclusive of HST.

[59] We have not been provided with any information about whether the receiver has an indemnity agreement from Mr. Akagi. If such is the case, however, we order that the receiver is not to be indemnified for more than the partial indemnity costs awarded. In addition, the receiver shall not be entitled to be indemnified out of the assets of the receivership estate: see HSBC Bank Canada v. Lechcier-Kimel, [2014] O.J. No. 4948, 2014 ONCA 721, at para. 19.

Disposition

[60] An order will go fixing the costs of the comeback motion, the stay motion before Feldman J.A. and the appeal in the amounts set out above.

Order accordingly.

Notes

[^1]: A Mareva injunction operates to restrain a party from disposing of his or her assets pending a trial: see Robert J. Sharpe, Injunctions and Specific Performance, looseleaf (2014-Rel. 23) (Toronto: Thomson Reuters Canada, 2014), at paras. 2.750, 2.800.

[^2]: An Anton Piller order gives "the plaintiff access to the defendant's premises to inspect documents and remove items to which the plaintiff asserts a proprietary claim": Sharpe, at para. 2.1100.

[^3]: A Norwich order -- which is similar to, but distinct from, an Anton Piller order -- authorizes pre-action discovery: see GEA Group AG v. Ventra Group Co. (2009), 96 O.R. (3d) 481, [2009] O.J. No. 3457, 2009 ONCA 619, at para. 41. More specifically, it allows the plaintiff to "gain disclosure of facts required to bring an action" where he or she can demonstrate that such disclosure is necessary in all the circumstances: Sharpe, at para. 2.1197.

[^4]: To obtain a Mareva injunction, the plaintiff must generally meet the following requirements: (i) make full and frank disclosure; (ii) give sufficient particulars of the claim, so that a defence can be put forward; (iii) provide evidence that the defendant has assets and that there is a risk of those assets being removed from the jurisdiction or otherwise improperly dealt with; and (iv) give an undertaking as to damages: see Sharpe, at paras. 2.850 to 2.900.

[^5]: A portion of these disbursements were incurred while Mr. Sereda was representing IBC/Villanti. We leave it to counsel to make any allocation that may be appropriate.

End of Document