COURT FILE NO.: BK-09-01174093-0031

COURT FILE NO.: 08-CV-351344PD1

DATE: 20120723

ONTARIO
SUPERIOR COURT OF JUSTICE

IN THE MATTER OF THE BANKRUPTCY OF ROBERT FREDERICK BYERS OF THE TOWN OF GEORGINA, IN THE REGIONAL MUNICIPALITY OF YORK, IN THE PROVINCE OF ONTARIO, Applicant

BETWEEN:

KING INSURANCE FINANCE (WINES) INC. Plaintiff - and – 1557359 ONTARIO INC. O/A WILLOWDALE AUTOBODY INC., ROBERT FREDERICK BYERS AND ALDA BYERS, Defendants

Ari B. Kulidjian, for the Applicant, Robert F. Byers

Rod Byrnes, for the Opposing Creditor, King Insurance
Hans Rizarri, for the Trustee, Soberman Inc.

HEARD: MAY 3, 2012

CUMMING J.

Background

[ 1 ] The history of this bankruptcy to January 13, 2012 is set forth in my Interim Endorsement of that date: King Insurance Finance (Wines) Inc. v. 1557359 Ontario Inc. (c.o.b. Willowdale Autobody Inc.), 2012 ONSC 335, [2012] O.J. No. 131. That Interim Endorsement refers, in para. 13, to a discrete issue, left outstanding, as to whether a costs award against a creditor of the estate in bankruptcy can properly be set-off against a proven claim in favour of that creditor. This matter is the subject of the motion now at hand brought by King Insurance Finance (Wines) Inc. (“King”).

[ 2 ] The creditor King seeks an order declaring that a $92,994.05 costs award against King in favour of the bankrupt, Robert Frederick Byers (“Mr. Byers” or the “Bankrupt”), awarded by Madam Justice Roberts in a judgment released on July 14, 2010, be set off against the $415,706.35 proven unsecured claim in favour of King in the Byers’ estate in bankruptcy.

[ 3 ] There is a secondary, follow-on matter raised by Mr. Ari B. Kulidjian, the counsel for Mr. Byers. He claims a solicitor’s lien upon the costs award monies by virtue of the common law and s. 34 of the Solicitors Act, R.S.O. 1990, c. S.15. He also claims a priority because of his lien, even if King is successful in asserting a set-off in respect of the costs award against King.

The Motion by King for an Order Declaring a Set-Off

[ 4 ] King argues it had to go to trial in all events as it had to prove part of its $439,124.30 claim in the bankruptcy proceeding arising from a personal guarantee in favour of King. In July 2011, the Trustee had admitted only $23,417.98 of the claims of King. In his Amended Defence filed on February 26, 2009, Mr. Byers had denied that he had personally guaranteed the debts of his company, 1557359 Ontario Inc. (operating as Willowdale Autobody Inc.) (“1557359”). The personal guarantee was upheld at trial.

[ 5 ] The action against Mr. Byers and 1557359 was commenced on March 25, 2008, well in advance of the assignment in bankruptcy on March 2, 2009. A judgment for $204,831.73 against 1557359 was given on January 9, 2009 by the consent order of Mesbur J.

[ 6 ] The focus in obtaining a lift of the stay of proceedings by virtue of the bankruptcy to continue the action against Mr. Byers was to advance a claim of fraud, conversion and breach of trust. (See paras. 9, 9A, 10, 11 and 12 of King’s Amended Amended, Statement of Claim.)

[ 7 ] The motion to lift the stay brought on March 12, 2009 (and affidavit of Annie Liu in support of the motion) was argued on the basis of the action being one alleging fraud, conversion and breach of trust. (See paras. 27 to 29 of the Notice of Motion.)

[ 8 ] Madam Justice Roberts allowed costs on a substantial indemnity basis on July 14, 2010. It is clear from her award of costs that it was made on a substantial indemnity basis because of the unsuccessful claim of fraud, conversion and breach of trust.

[ 9 ] King argues that the proven claim of $439,124.30 and the costs award are between the same parties. King relies upon s. 97(3) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”) which states that “[t]he law of set-off or compensation applies to all claims made against the estate of the bankrupt and also to all actions instituted by the trustee for the recovery of debts due to the bankrupt…”. See generally Warren D. Beamish Enterprises Inc. v. Innocan Inc., [1994] O.J. No. 1460, at paras. 123 and 124.

[ 10 ] There are two kinds of set-off: “legal set-off” and “equitable set-off”. A “legal set-off” does not exist for a non-liquidated claim that sounds in damages. See Citibank Canada v. Confederation Life Insurance Co. (Liquidator of) (1996), 1996 8269 (ON SC), 42 C.B.R. (3d) 288, [1996] O.J. No. 3409 (Gen. Div.). As set out in Holt v. Telford, 1987 18 (SCC), [1987] 2 S.C.R. 193, at p. 202, legal set-off originated in England by statutory law: the Insolvent Debtors Relief Act, 1728 (U.K.), 2 Geo. 2, c. 22, made effective indefinitely by the Set-off Act, 1734 (U.K.), 8 Geo. 2, c. 24 and carried forward into the law of Ontario by the predecessor to the present s. 1 of the Property and Civil Rights Act, R.S.O. 1990, c. P.29. Section 111(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43 also expressly preserves the right to claim a set-off in an action for payment of a debt.

[ 11 ] The nature of a “legal set-off” was considered by Campbell L.J.S.C. in Trans-Lite Distributors Ltd. (Trustee of) v. Lumberland Building Materials Ltd. [1983] B.C.J. No. 1951 (S.C.), at para. 16 :

So long as there is a debt owed to the defendant by the plaintiff before the date of bankruptcy and a corresponding debt from the defendant to the plaintiff, that satisfies the mutual and cross obligation condition notwithstanding one of the debts was not actually payable at that time.

[ 12 ] In my view, there is not a “legal set-off” in the instant situation. The debt of King for costs arose after the date of the bankruptcy. There was no mutual and cross-obligation at the point in time of the inception of the bankruptcy. As well, the debt of King for costs is a debt owed to Mr. Byers personally, although it constitutes after-acquired property in terms of the bankruptcy.

[ 13 ] In contrast, the proven claim of King as a creditor of Mr. Byers is a debt of the estate in bankruptcy, not of Mr. Byers personally.

[ 14 ] King also argues that there is an “equitable set-off”. In Ontario (Workers’ Compensation Board) v. Mandelbaum, Spergel Inc. (1993), 1993 8505 (ON CA), 100 D.L.R. (4th) 742, [1993] O.J. No. 510 (C. A.), at para. 20, Grange J.A., quoting form Holt v. Telford, 1987 18 (SCC), [1987] 2 S.C.R. 193, at p. 206, stated:

Equitable set-off is available where there is a claim for a money sum whether liquidated or unliquidated… [I]t is available where there has been an assignment. There is no requirement of mutuality… [C]ourts of equity had two rules regarding the effect of a notice of assignment on the right to set-off. First, an individual may set-off against the assignee a money sum which accrued and became due prior to the notice of assignment. And second, an individual may set-off against the assignee a money sum which arose out of the same contract or series of events which gave rise to the assigned money sum or was closely connected with that contract or series of events.

[ 15 ] Equitable set-off arises where there is such a relationship between the claims of the parties that it would be unconscionable or inequitable not to permit a set-off. See generally EBF Manufacturing Ltd. v. White, 2010 NSSC 225, 68 C.B.R. (5th) 282. The creditor claiming an equitable set-off must as of the date of the bankruptcy have an entitlement to a remedy in its own right. Otherwise, the effect of giving the set-off would be to defeat the intent of the BIA by giving one creditor a preference over other unsecured creditors.

[ 16 ] It is the second rule cited above in respect of “equitable set-off” that King argues is applicable to the instant situation. King submits that it may set-off against the Trustee the $92,994.05 costs award against it because that “money sum arose out of the same contract or series of events which gave rise to the [proven claim of King]…or was closely connected with that contract or series of events”.

[ 17 ] I disagree. In my view, the claim of fraud, conversion and breach of trust, although relating to the same factual background of the business relationship between Mr. Byers, his company, 1557259, and King, is a discrete claim and the adverse costs award relates to that discrete matter.

[ 18 ] The claim of fraud, conversion and breach of trust is not sufficiently connected to the contractual relationship and series of business events as between the three parties which gives rise to the proven claim of King in the estate in bankruptcy. It is a claim of intentional tortious conduct made against Mr. Byers. Moreover, King did not have an entitlement to a remedy in its own right as of the date of the bankruptcy. It simply had, at most, a speculative cause of action.

[ 19 ] The claimed set-off in the matter at hand does not fall within the ambit of the “law of set-off” referred to in s. 97(3) of the BIA. The estate is not, of course, submitting that a “set-off applies” to a claim made against the estate of the bankrupt. Nor is this a case of an action “instituted by the Trustee for the recovery of debts due to the bankrupt…”.

[ 20 ] The objective of a set-off in a bankruptcy context is to avoid the perceived injustice to a person who has had mutual dealings with a party who has become a bankrupt in having to pay in full what the person owes to the bankrupt while having to be content with a dividend that is only a partial recovery of what the bankrupt owes to that person.

[ 21 ] However, because the effect of the set-off is to prefer one creditor over the general body of creditors (inasmuch as the effect is to give the setting-off creditor a full recovery of the amount set-off) the permissible set-off is confined within narrow limits. The costs award constitutes after acquired property of the Bankrupt. That is, it is property acquired by the undischarged Bankrupt after commencement of the bankruptcy proceeding. The Trustee would have the right to claim such property for the estate in bankruptcy in the absence of a successful set-off claim by King.

Disposition

[ 22 ] For the reasons given, the motion of King for a declaration that it is entitled to a set-off is dismissed.

The Claim of a Solicitor’s Lien and Charging Order

[ 23 ] I turn now to the claim of counsel for Mr. Byers for a solicitor’s lien and charging order in respect of the $92,994.05 costs award made by Madam Justice Roberts.

[ 24 ] There is a distinction between the common law right to a solicitor’s lien and the right to a charging order. See Booth v. Smith, Graham, Hunt, Buck, [1985] O.J. No. 1286 (H.C.), at paras. 12 and 13.

[ 25 ] The Solicitors Act, R.S.O. 1990, c. S.15, s. 34 provides that the court may, on motion, declare a solicitor to be entitled to a charge on property recovered or preserved (that is, be entitled to a charge upon the benefits of the action resulting from the efforts of the solicitor).

[ 26 ] A common law solicitor’s lien arises as work is done for a client within the perimeter of the solicitor’s retainer. Where a legal account is left unpaid, the solicitor may be entitled to either or both a ‘special lien’ on the “fruits of the action” or a ‘general retaining lien’ on the contents of the client’s file. Rule 15.03(4) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, allows a party’s former lawyer of record to move for an order determining whether and to what extent the lawyer has the right to a solicitor’s lien.

[ 27 ] A solicitor’s general lien usually gives rise to the entitlement to possess client documents where the solicitor has been discharged without cause by his client. Re Gladstone, 1971 500 (ON CA), [1972] 2 O.R. 127 (C.A.); Linauskas v. Linauskas (No. 2), 1998 14657 (ON SC), [1998] O.J. No. 424 (S.C.). The lien is intended to function as a form of security for the debt owed.

[ 28 ] The pertinent issue in the case at hand is whether it is appropriate to give a charging order pursuant to s. 34(1) of the Solicitors Act in favour of Mr. Kulidjian in respect of the $92,994.05 costs award.

[ 29 ] The record establishes that Mr. Kulidjian, having conducted the successful defence of Mr. Byers at the trial before Madam Justice Roberts, and being unpaid in respect of those services, is entitled to a solicitor’s special lien at common law in respect of the costs award in Mr. Byers’ favour. Mr. Byers has consented to the payment of those costs to Mr. Kulidjian. In a letter to counsel for King dated August 29, 2010, Mr. Kulidjian asserted, with the consent of Mr. Byers, a charging order against the costs award.

[ 30 ] The costs award would not have come into existence but for the efforts of Mr. Kulidjian. The Trustee has not raised any issue as to the validity of the lien or the appropriateness of a charging order.

[ 31 ] In my view, given the solicitor’s lien, Mr. Kulidjian’s claim to the costs award has priority to any claim by the creditors of the estate in bankruptcy. Mr. Kulidjian is a “secured creditor” within the meaning of the BIA because of his solicitor’s lien and by s. 136(1) his rights as a secured creditor have priority over unsecured creditors.

Disposition

[ 32 ] For the reasons given, an order will issue pursuant to s. 34(1) of the Solicitors Act in respect of the outstanding costs award, whereby it is declared that Mr. Kulidjian’s firm is entitled to a charge in respect of the costs award existing by reason of the order of Madam Justice Roberts.

[ 33 ] No submissions were made as to costs in respect of the motions at hand. Costs normally follow the event. However, in my view, given the circumstances seen to date in the history of this bankruptcy, coupled with the relatively unique issues under present consideration, there should not be costs to any party.

CUMMING J.

Released: July 23, 2012

COURT FILE NO.: BK-09-01174093-0031
COURT FILE NO.: 08-CV-351344PD1

DATE: 20120723

ONTARIO SUPERIOR COURT OF JUSTICE
IN THE MATTER OF THE BANKRUPTCY OF ROBERT FREDERICK BYERS OF THE TOWN OF GEORGINA, IN THE REGIONAL MUNICIPALITY OF YORK, IN THE PROVINCE OF ONTARIO, Applicant

BETWEEN:

KING INSURANCE FINANCE (WINES) INC. Plaintiff - and – 1557359 ONTARIO INC. O/A WILLOWDALE AUTOBODY INC., ROBERT FREDERICK BYERS AND ALDA BYERS Defendants

REASONS FOR DECISION

CUMMING J.

Released: July 23, 2012