SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: IN THE MATTER OF THE BANKRUPTCY OF Kristin Hronn Gudmundsdottir

BEFORE: D. M. Brown J.

COUNSEL:
A. O’Brien, for the Business Development Bank of Canada

M. Khan, for the Bank of Nova Scotia

J. Amourgis, for John Weisdorf

R. Regan, for the Bankrupt and her husband, Benny Clausen

HEARD: April 10, 2013

REASONS FOR DECISION

I. Costs of abandoned bankruptcy annulment motion and other motions concerning the Bankrupt, her husband and a related company

Background events

[1] On May 1, 2012, the bankrupt, Kristin Gudmundsdottir, made an assignment in bankruptcy under which msi Spergel Inc. was appointed trustee in bankruptcy. At the time the Bankrupt was the sole shareholder and director of Technoplast Packaging Inc., a company which appears to have ceased operating in August, 2011.

[2] The bankrupt has taken the position, which was supported by an affidavit from her husband, Benny Clausen, that the latter managed the day-to-day affairs of Technoplast.

[3] The Bankrupt guaranteed loans taken out by Technoplast from the Business Development Bank of Canada. On September 28, 2011, BDC commenced an action against Technoplast, the bankrupt and Clausen to recover the indebtedness. BDC obtained default judgment against the bankrupt and Clausen on October 31, 2011 in the amount of $314,709.53.

[4] The Bankrupt guaranteed loans taken out by Technoplast from The Bank of Nova Scotia. The BNS sued to collect, and on January 26, 2012, BNS obtained default judgment against Technoplast and the Bankrupt in the amount of $986,123.00 (the “First BNS Default Judgment”).

[5] On August 13, 2012, Technoplast moved to set aside the First BNS Default Judgment. Mr. Regan acted for that defendant. I would note that at the time of the motion the sole shareholder of Technoplast – the Bankrupt – was just that, bankrupt, and the Trustee, into whose hands the bankrupt’s property vested, including her shares in Technoplast, had not authorized Technoplast to bring the motion.

[6] By Reasons released August 20, 2012 (2012 ONSC 4766) Morgan J. set aside the Frist BNS Default Judgment. Despite its success on that motion, Technoplast failed to file a statement of defence. On October 1, 2012, BNS secured default judgment against Technoplast in the amount of $1,016,887.87 (the “Second BNS Default Judgment”).

[7] In his Reasons Morgan J. awarded BNS costs of $10,191.29 and required Technoplast’s former solicitor, Mr. John Weisdorf, to pay those costs personally.

[8] In late November, 2012, the Bankrupt served a motion to annul her bankruptcy. On February 14, 2013, the Bankrupt abandoned her motion.

[9] Finally, by way of background, Mr. Clausen has booked an appointment on the Civil List Motions Scheduling Court for May 13, 2013 at which time he wants to secure a date for a 2-hour motion to set aside the BDC Default Judgment.

[10] Let me proceed to deal with each matter which was before me.

II. Motion by Mr. Weisdorf to set aside the cost award made by Morgan J.

[11] Rule 57.07(2) of the Rules of Civil Procedure provides that no cost order can be made against counsel for a party “unless the lawyer is given a reasonable opportunity to make representations to the court”. Mr. Weisdorf submitted that he was not given such an opportunity before Morgan J. made his cost order of August 20, 2012.

[12] Counsel for BNS had no objection to setting aside the cost award made by Morgan J. against Mr. Weisdorf. However, he advised that no order has yet been taken out in respect of that August 20 decision. Since there is no issued or entered order, Morgan J. remains seized of the matter, and I direct the parties to contact the office of Morgan J. to arrange an appointment to deal with this issue before him.

III. BIA section 163(2) examination of Wolter Tencate

[13] BDC/Trustee seeks an order under section 163(2) of the Bankruptcy and Insolvency Act to examine Mr. Wolter Tencate, apparently the principal of the corporation which leased some equipment storage space to Technoplast. Since no request had been made of Mr. Tencate to attend such an examination, nor was he served with the motion record, I am not prepared to grant the order sought until he is served. The motion shall be brought back on my list.

IV. BIA section 163(2) examination of Benny Clausen

[14] Mr. Clausen had agreed to submit to a BIA s. 163(2) examination, but advised that matters in Europe would require him to re-schedule. He will be back in Canada by early May. I order Mr. Clausen to attend a section 163(2) examination on May 17, 2013. Although yesterday during the hearing I directed the parties to book a 9:30 appointment before me for May 20, 2013, since that is Victoria Day, as well as a non-sit week for me, they should book the appointment for Monday, May 27, 2013. If any issue arises concerning Mr. Clausen’s attendance at or participation in the section 163(2) examination, I wish to deal with them at once.

[15] In a letter after the hearing counsel for BDC suggested that the examination be moved to May 21, instead of the Friday before the long weekend. I have received no agreement to that change from other counsel. Given the evidence lack of co-operation amongst counsel on this matter, I am not prepared to change the May 17 examination date absent an agreement amongst all counsel.

V. BNS examination-in-aid on BNS Second Default Judgment against Technoplast

[16] BNS wishes to examine Mr. Clausen and the Bankrupt as representatives of Technoplast in aid of execution of its BNS Second Default Judgment. Counsel for the Bankrupt and Mr. Clausen raised concerns about the possible duplication of questions. The Bankrupt was the sole shareholder and director of Technoplast. On her section 163 examination she professed to know little about the workings of the company and, more specifically, the location of equipment assets of the company. Clausen filed an affidavit earlier in these proceedings deposing that he had managed the company.

[17] BNS is entitled to secure responsive answers to questions posed on an examination-in-aid of execution of Technoplast. In the circumstances, I consider it appropriate to order that Clausen attend on May 17, 2013 to be examined by BNS and that the Bankrupt also attend to be examined after Clausen. To be clear, the examination of Clausen on May 17 shall constitute both an examination under BIA section 163(2) and an examination in aid-of-execution. It makes no sense whatsoever to put Clausen through two separate, but likely identical, examinations by different counsel. Accordingly, the answers he gives to questions posed on the section 163(2) examination shall stand as answers given on the examination-in-aid of execution, and vice-versa.

[18] The examination of the Bankrupt in aid-of-execution on the BNS Second Default Judgment shall follow immediately after the examination of Clausen on May 17. There should be no posing of duplicative questions to the Bankrupt provided – and I emphasize the word “provided” – Clausen gives fully responsive answers to the questions. If he does not, the questions may be asked of the Bankrupt.

VI. Motion to set aside BDC Default Judgment

[19] The BDC Default Judgment resulted from an action commenced on the Civil List: CV-11-436069. Clausen has obtained a May 13 appointment on the Civil Motions Scheduling Court to secure a date for a motion to set aside the BDC Default Judgment. That judgment was related to the affairs of Technoplast. All Technoplast-related litigation should be managed together: the BNS action; the BDC action and the bankruptcy. Otherwise, delays will result from the “gap” which separates 393 University from 330 University. Accordingly, I order Action No. CV-11-436069 to be transferred to the Commercial List, and I will manage it together with the other two proceedings. As to the motion to set aside the default judgment, the following schedule applies:

(i) Clausen to deliver motion record by April 26, 2013;

(ii) BDC to deliver responding record by May 3, 2013;

(iii) Any cross-examinations to be completed by May 10, 2013, with a time limit of 2 hours per cross-examination;

(iv) Motion to be heard on my list on May 13, 2013, for two hours, peremptory to all parties.

VII. Undertakings, refusals and advisements from Bankrupt’s examination

[20] The Bankrupt brought a motion to annul her bankruptcy (which was an assignment in bankruptcy). In support of her motion she swore affidavits dated November 3, 2012 and January 17, 2013. She was cross-examined on February 5, 2013. With the abandonment of her motion, the examination essentially stands as her section 163(1) examination. BDC/Trustee seek an order requiring the Bankrupt to answer certain undertakings given and refusals/advisements made on that examination.

[21] As to the undertakings, answers to the following questions remain outstanding: QQ. 171, 358(2), 381(3), 393, 542, 553, 550, 774 and 799. The Bankrupt must provide answers to those questions no later than May 3, 2013. As to Q. 171, the Bankrupt must disclose the name and address of the accountant for the family and Technoplast for the years 2008, 2010 and 2011.

[22] As to the refusals/advisements, many of the questions can be put to Clausen on his section 163(2) examination. As to the following:

(i) QQ. 178: The answers given by the Bankrupt at Items 4 and 5 of her refusals chart are inadequate and unresponsive on the issue of what happened to Technoplast’s equipment. The Bankrupt was the sole shareholder and director of Technoplast. The equipment owned by Technoplast had potential value to the company as assets and, as such, had potential value to the Bankrupt’s shares in the company. The Trustee has been unable to obtain from the Bankrupt or Clausen specific, useful, particularized information about what happened to that equipment. Section 158(a) of the BIA requires a bankrupt to “make discovery of” her property. In the circumstances of this case, that would include making discovery of the location of the equipment of Technoplast – i.e. stating what happened to each individual piece of equipment: when, where, etc. The answers given by the Bankrupt were wholly inadequate in that regard and failed to discharge her duty under BIA s. 158(a);

(ii) QQ. 270-1; 272, 278, 279, 284, 295, 296 and 297: These related to a trip to Europe taken by the Bankrupt within the five years prior to her bankrupty and, as such, they were proper questions about her affairs and must be answered;

(iii) Q. 353: The Bankrupt must produce for inspection the passport(s) she has held since the date of bankruptcy so that the Trustee can ascertain whether she has travelled outside of Canada during that period of time. Since the Bankrupt states she has no source of income, her ability to finance any such trips would be relevant;

(iv) QQ. 354 and 355: Whether the Bankrupt has had family in Iceland since the date of her bankruptcy and whether she has phoned them are matters relevant to the affairs of the bankrupt given her position that she has no source of income. These questions must be answered.

[23] The Bankrupt must provide answers to those refusals by May 3, 2013.

VIII. Costs of the abandoned annulment motion

[24] BDC and BNS both claim substantial indemnity costs in respect of the Bankrupt’s abandoned motion to annul her assignment. BDC claims slightly in excess of $25,000 in costs, while BNS claims $34,534.92. BDC seek costs against the Bankrupt, her husband, Clausen, and as against their lawyer, Mr. Regan. It is the position of BDC that the annulment motion had no merit because there was no real evidence of the Bankrupt’s solvency. BNS submitted that the motion was brought for an improper purpose – i.e. to regain control over the shares of Technoplast which the Trustee mistakenly had sold to Clausen, a transaction that was later rescinded.

[25] The Bankrupt submitted that no costs should be awarded or, alternatively, only partial indemnity costs of $5,000.00 in total.

[26] Section 181(1) of the BIA provides that a court may annul a bankruptcy if, in the opinion of the court, “a bankruptcy order ought not to have been made or an assignment ought not to have been filed”. An annulment of an assignment only will be granted where it is shown that, when the debtor made the assignment, the debtor was not an insolvent person or abused the process of the court or committed a fraud on his or her creditors.[^1]

[27] An annulment is sought by way of a motion brought in the bankruptcy court. The Bankruptcy and Insolvency General Rules do not contain a specific provision dealing with the cost consequences of withdrawing a motion, so the Ontario Rules of Civil Procedure apply to the extent that the procedure contained therein is not inconsistent with the BIA or its Rules: Bankruptcy Rules, s. 3. Accordingly, Rule 37.09(3) of the Ontario Rules of Civil Procedure applies, and it provides as follows:

37.09(3) Where a motion is abandoned or is deemed to have been abandoned, a responding party on whom the notice of motion was served is entitled to the costs of the motion forthwith, unless the court orders otherwise.

[28] Under Rule 37.09(3) a moving party must demonstrate that some good cause exists for a court to order “otherwise” – i.e. not to grant costs to the responding parties on whom the motion had been served. In the present case the evidence disclosed no such good cause. The Bankrupt’s motion was served in November, 2012. Her affidavit of November 3, 2012 was not a typical affidavit of solvency. Instead, the Bankrupt took the position that she was not actually indebted to BDC or BNS under her guarantees, notwithstanding the default judgments. Her position was that her previous lawyer, Mr. Weisdorf, had given her bad advice and she was not “aware of the details” of any dealings between Technoplast and the two lenders.

[29] As a result of an appearance before Master Short on December 4, 2012, the Bankrupt was ordered to file an affidavit of solvency by the end of the year and to submit to cross-examination. On January 17, 2013, the Bankrupt filed a further affidavit. She continued with her position that her obligations under the guarantees given to BDC and BNS should not be taken into account in determining her liabilities, and she contended that she would be able to meet her other liabilities because “following the bankruptcy and up to the date of making this affidavit, my husband has continued to either provide me with monies and make payments on my behalf as they have been required…” The Bankrupt was cross-examined at length on February 5, and just over a week later she abandoned her annulment motion.

[30] From this sequence of events I conclude that the Bankrupt gave the annulment motion “a shot”, discovered that her evidence would not persuade a court to annul the assignment, and so withdrew her motion. These facts disclose no reason not to grant the responding parties their costs of her abandonment.

[31] As to who should pay those costs, at the hearing I rejected the submission of BDC that Mr. Clausen should bear any responsibility. He did not file any evidence on the motion. A non-party cannot be made liable for costs solely on the basis that the moving party deposed that she believed her husband would continue to support her.

[32] As to the claim for costs against Robyrt Regan, counsel for the Bankrupt on the motion, I am not satisfied that his conduct rose to the level that he “caused costs to be incurred without reasonable cause or to be wasted by undue delay, negligence or other default”: Rule 57.07(1) of the Rules of Civil Procedure. First, the BIA does enable a bankrupt to move to annul her assignment. The motion brought therefore was one contemplated by the BIA. Second, although in her affidavits the Bankrupt relied, in part, on advice she had received from Mr. Regan about her chances of setting aside the default judgments against her, reliance on a lawyer’s advice, even if it proves to be incorrect, is not a sufficient basis in this case to impose the costs of a motion on the lawyer. Finally, although the evidence disclosed that after the Trustee had mistakenly sold the Bankrupt’s shares in Technoplast to Clausen, the latter in turn had transferred them to Regan as security for his fees, and the sale to Clausen subsequently was reversed - meaning that Regan lost his security - the evidence did not go so far as to indicate that the motive for the annulment motion was Regan’s desire to set aside the bankruptcy to recover access to those shares. I say that because it strikes me as a high risk, low benefit strategy for a lawyer to seek to annul a client’s bankruptcy so that he could hold as security the shares in a company which no longer operated. I appreciate there is a fight over where that company’s assets may have gone, but the evidence did not support a finding that the motion was caused by the lawyer for improper motives. Consequently, I am not prepared to find Regan liable for the costs.

[33] That said, based upon my review of the record, including the correspondence passing between counsel and the positions taken by Mr. Regan on the Bankrupt’s cross-examination, it appears there were times when Mr. Regan forgot that his client owed serious statutory duties under BIA s. 158, in particular the duty to “make discovery of and deliver all his property that is under his possession or control to the trustee…” Failure to comply with a section 158 duty, without reasonable cause, constitutes an offence under BIA s. 198(2). I will remain seized of this bankruptcy proceeding and the two Technoplast actions, and through that case management process I will want to see that the Bankrupt is complying with her statutory duties.

[34] Turning then to the quantum of costs to be awarded against the Bankrupt, in my view the partial indemnity scale is the appropriate one. Elevated costs may only be awarded in cases of reprehensible litigation conduct: Davies v. Clarington (Municipality) (2009), 2009 ONCA 722, 100 O.R. (3d) 66 (C.A.). While the relentless pursuit of a meritless matter to its end may constitute reprehensible litigation conduct, in the present case when the responding parties called the bluff of the Bankrupt’s weak motion, she folded her cards. I cannot conclude that such conduct, in the circumstances of this case, crossed the line into reprehensible litigation conduct. Elevated costs therefore are not justified.

[35] As to the quantum of the partial indemnity costs, I have considered the Costs Outlines submitted by BDC and BNS. As well, I have taken into account the factors enumerated under Rule 57, including the time spent, the result achieved, and the complexity of the matter, as well as the application of the principle of proportionality: Rule 1.04(1). In addition, I have considered the principles set forth by the Court of Appeal in Boucher v. Public Accountants Council for the Province of Ontario (2004), 2004 14579 (ON CA), 71 O.R. (3rd) 291 (C.A.) and Davies v. Clarington (Municipality) (2009), 2009 ONCA 722, 100 O.R. (3d) 66 (C.A.), specifically that the overall objective of fixing costs is to fix an amount that is fair and reasonable for an unsuccessful party to pay in the particular circumstances, rather than an amount fixed by actual costs incurred by the successful litigant.

[36] The Bankrupt’s initial affidavit was brief (4 pages) and her supplementary affidavit was the same length. An attendance was required before Master Short for directions. The cross-examination of the Bankrupt by BDC and BNS took about two-thirds of a day. The remaining costs incurred by the claimants related to arranging the hearing of their request for costs.

[37] Some of the costs claimed by BDC and BNS related to matters other than the costs of the abandoned motion.

[38] On my review of the Bills of Costs, the amounts claimed are excessive. I think a fair and reasonable allowance of legal time for the work related to the abandoned motion would be 15 hours for each of BDC and BNS. I will use a rate of $300/hour for the senior counsel of each claimant. That results in a fees award of $4,500.00 for each claimant. When the different disbursements incurred by each and taxes are taken into account, I conclude that an award of costs in the amount of $6,500.00 in favour of BDC against the Bankrupt would be a reasonable one in the circumstances, as would an award of costs of $5,000.00 in favour of BNS against the Bankrupt.

D. M. Brown J.

Date: April 11, 2013

[^1]: Re Wale (1996), 1996 8275 (ON SC), 45 C.B.R. (3d) 15.