Superior Court of Justice – Ontario

COURT FILE NO.: 35-1537675T

DATE: 2014/01/22

IN BANKRUPTCY AND INSOLVENCY

RE: Bank of Nova Scotia (Plaintiff)

• and-

Daniel A. Diemer o/a Cornacre Cattle Co. (Debtor)

BEFORE: A. J. GOODMAN J.

COUNSEL: J. Cooke, on behalf of the Debtor

D. Smith, for the Receiver

HEARD: January 3, 2014

ENDORSEMENT

[1] This is a motion to settle counsel’s fees in relation to the receivership of Daniel Diemer o/a Cornacre Cattle Co. (“the Debtor”). PricewaterhouseCoopers Inc., in its capacity as court-appointed receiver “(the Receiver”) of the debtor seeks an order approving the fees and disbursements of its counsel, Borden Ladner Gervais LLP (“BLG”).

[2] On October 23, 2013, I approved the Second Report as well as the activities and fees of the receiver. While BLG’s interim fees of $100,000.00 were approved, the parties were directed to return to court on January 3^rd for the purposes of a determination with respect to the approval of the balance of BLG’s fees and disbursements plus any original estimates to completion.

General Principles

[3] One of the leading authorities dealing with approval of the fees of a receiver is found in the case of Re Bakemates International Inc., [2002] O.J. No. 3659. In Re Bakemates, the Ontario Court of Appeal held that when a receiver asks the court to approve its compensation, there is an onus on the receiver to prove that the compensation for which it seeks the court's approval is fair and reasonable and a court could adjust the fees and charges of the receiver.

[4] In Re Bakemates Borins J.A. discussed the purpose in passing the receiver's accounts and opined that the process is established to afford the debtor, the security holder and any other interested person the opportunity to question the receiver's activities and conduct. On the passing of accounts, the court has the inherent jurisdiction to review and approve or disapprove of the receiver's present and past activities even though the order appointing the receiver is silent as to the court's authority. In determining what is fair and reasonable remuneration, Borins J.A. observed that there is no guideline controlling the quantum of fees.

[5] The Court of Appeal outlined principles that a court ought to adopt when passing the accounts of a receiver. They include: the accounts must disclose in detail the name of each person who rendered services, the dates on which the services were rendered, the time expended each day, the rate charged and the total charges for each of the categories of services rendered. The accounts should be in a form that can be easily understood by those affected by the receivership (or by the judicial officer), and the receiver and its solicitor’s accounts should be verified by an affidavit.

[6] In BT-PR Reality Holdings Inc. v. Coopers & Lybrand, [1997] O.J. No. 1097 (Sup. Ct.) Farley J. held at paras 22 & 23:

The issue on a s. 248(2) hearing is whether the fees charged by the receiver are fair and reasonable in the circumstances as they existed - that with the benefit of the receivership going on, not with the benefit of hindsight. I would also note that it would be an unusual receivership and an unusual receiver where a receiver was able to be up to full speed instantaneously upon its appointment. There is a learning curve for the particular case and probably a suspicion equation to solve. The receiver must demonstrate that it acted in good faith and in the best interests of the creditor as opposed to its own interest or some third party's interests. The receiver must also demonstrate that it exercised the reasonable care, supervision and control that an ordinary man would give to the business if it were his own: see Re Ursel Investments Ltd. (1992), 10 C.B.R. (3d) 61 (Sask.C.A.). The receiver is not required to act with perfection but it must demonstrate that it acted with a reasonable degree of confidence: see Ontario Development Corp. v. I.C. Suatac Construction Ltd. (1978), 26 C.B.R. (N.S.) 55 (Ont. S.C.).

While sufficient fees should be paid to induce competent persons to serve as receivers, receiverships should be administered as economically as reasonably possible. Reasonably is emphasized. It should not be based on any cut rate procedures or cutting corners and it must relate to the circumstances. It should not be the expensive foreign sports model; but neither should it be the battered used car which keeps its driver worried about whether he will make his destination without a breakdown.

[7] In an authoritative case from New Brunswick, the Court of Appeal in Federal Business Development Bank v. Belyea (1983), N.B.J. No. 41, 46 C.B.R. 244 (NB CA), (cited with approval by the Ontario Court of Appeal in Re Bakemates), held that the underlying premise for compensation is “usually allowed either as a percentage of receipts or a lump sum based upon time, trouble and degree of responsibility involved”. The governing principle is that compensation allowed a receiver should be measured by the fair and reasonable value of his service; and while sufficient fees should be paid to induce competent persons to serve as receivers, receiverships should be administered as economically as reasonably possible.

[8] In Belyea Stratton J.A. - in referring to Williston on Contracts (3^rd ed. Vol. 10) - stated at para. 11:

…even though a professional is entitled to a fair, just and reasonable compensation measured by the reasonable value of the services rendered, the fees charged must bear some reasonable proportion to the amount of money or the value affected by the controversy or involved in the employment. Thus, in cases where a professional is aware of the amount at issue, courts will impose an underlying or implied limit or maximum on the professional fees it will allow based on what is reasonable in relation to the dollar amount involved in the particular case.

[9] The jurisprudence from Belyea advances factors that a court ought to consider in assessing the compensation of a receiver, (albeit the discussion in the case was in the context of quantum meruit). They include:

• the nature, extent and value of the assets handled;

• the complications and difficulties encountered;

• the degree of assistance provided by the company, its officers or its employees and the time spent;

• the receiver’s knowledge, experience and skill;

• the diligence and thoroughness displayed;

• the responsibilities assumed;

• the results of the receiver’s efforts; and

• the cost of comparable services when performed in a prudent and economical manner.

[11] I note a similar approach in addressing the appropriate principles and factors to be considered is found in the British Columbia Court of Appeal case of Bank of Montreal v. Nicar Trading Co., [1990] B.C.J. No. 340.

Position of the parties

[12] Mr. Smith submits that the Receiver and its counsel played an integral role in maximizing value for the assets by finalizing an agreement of Purchase and Sale for the sale of substantially all of the debtor’s assets in respect of a transaction that was entered into prior to the receiver’s appointment and which the receiver only found out about after its appointment. The receiver and its counsel took significant steps to ensure that the transaction was closed in short order so that each of the secured creditors would be repaid in order to reduce additional costs and interest in regards to their respective debts.

[13] Mr. Smith submits that the receiver faced many challenges in this proceeding as set out in the Second Report, including: being advised on Labour Day that the debtor had taken it upon himself to have 60 additional cows delivered to the farm the next day; the debtor’s delays in providing the receiver with a plan for relocating the livestock and which was required to be removed from the farm by the closing date; the conclusion of an agreement with the purchasers of the farm whereby the equipment that did not form part of the transaction would remain at the farm for a period of 60 days at no cost to the estate; dealing with the debtor’s relocation of the excluded assets to two farms owned by different parties and inquiries that had to make as a result of same; the unilateral removal of a piece of equipment by the debtor from the farm (after the close of the transaction) and inquiries that the receiver and its counsel had to make in respect of same; and responding to debtor’s counsel in respect of his instructions to bring a motion to seek a change of venue from London to Windsor. The receiver spent considerable time dealing with various steps required to obtain the consent of the Dairy Farmers of Ontario for the transfer of the milk quota to the purchaser.

[14] In addressing the McNevin affidavit, Mr. Smith argues that the affidavit provides information with respect to the rates of partners, associates, students-at-law and law clerks who are practicing in either London or Windsor, Ontario. As such, the McNevin Affidavit does not provide any information with respect to professionals practicing in Toronto, much less professionals practicing in the Toronto market in the area of insolvency and restructuring.

[15] In furtherance of his argument, Mr. Smith provided various affidavits in support of BLG’ counsel’s fees claimed for this receivership. These included, amongst others, the affidavit of Melaney J. Wagner sworn July 4, 2013, in support of a motion for the approval of the fees and disbursements of Goodmans LLP in connection with the insolvency proceedings commenced by Extreme Fitness, Inc. under the Companies’ Creditors Arrangement Act. Ms. Wagner’s hourly rate is $775.00 per hour. The affidavit of Adam M. Slavens sworn October 12, 2011 in support of a motion for the approval of the fees and disbursements of Torys LLP in connection with the receivership proceedings of Voyageur Maritime Trading Inc. As the Slavens Affidavit discloses, David Bish, a partner at Torys practicing in the area of insolvency and restructuring has an hourly rate of $800.00. The affidavit of Robin B. Schwill sworn December 3, 2012, in support of a motion for the approval of the fees and disbursements of Davies Ward Phillips & Vineberg LLP in connection with proceedings under the Business Corporations Act for the winding-up of Coventry Inc. As a partner, Mr. Schwill’s hourly rate is $825.00 per hour and he practices in the area of insolvency and restructuring. The affidavit of Derek Powers sworn July 15, 2013 in support of a motion for the approval of fees and disbursements of BLG in respect of a receivership of Interwind Corp. Mr. Power’s rate is $750.00 per hour. The affidavit of Mary Arzoumanidis sworn November 13, 2013 in support of a motion for the approval of fees and disbursement of BLG under insolvency proceedings commenced by TBS Acquiereco. Ms. Arzoumanidis’ hourly rate is $750.00.

[16] Mr. Jaipargas, BLG’s principal counsel on the file submitted an affidavit wherein he states, inter alia, “the Original Estimate to Completion needs to be revised such that the estimate to completion is $30,000.00, plus disbursements. He goes on to state that “the last date that I entered a docket on this matter was October 14, 2013. Since that date I have done additional work on this matter including, but not limited to, the following: finalizing the motion materials in respect of the motion heard by the Court on October 23, 2013; (ii) dealing with the issues arising at the hearing on October 23, 2013; (iii) dealing with an issue raised by counsel for the Debtor in respect of the scope of the Approval and Vesting Order dated September 17, 2013 of Madam Justice Leitch made in these proceedings; and (iv) preparing this affidavit in response to the McNevin Affidavit. I have not entered a docket for dealing with all of these matters, nor do I intend to do so. Further, I do not intend to record any further time in connection with this matter, unless there is significant additional work required by BLG in connection with the motion returnable before Mr. Justice Goodman on January 3, 2014.”

[17] Mr. Cooke submits that receiver and receiver’s counsel effectively completed their task without delay or significant problems. While Mr. Cooke does not take issue with the work performed by counsel, he submits that the rates charged by counsel and his firm are excessive and unreasonable. Although Mr. Cooke takes specific issue with BLG counsel’s rates, I glean from submissions that the thrust of his argument evolved from a complaint about the rates being charged to an overall dispute of the unreasonableness of the entirety of the fees (and by extension- the hours) submitted for reimbursement.

Analysis

[18] As a general principle, the assessment of fees are in the discretion of the court. There is no fixed rate or tariff for determining the amount of compensation to pay a receiver or receiver’s counsel. Similar to the approach in assessing costs, in approving a receiver’s accounts, a determination should be made as to whether the remuneration and disbursements incurred in carrying out the receivership were fair and reasonable, rather than an amount fixed by the actual costs charged by receiver’s counsel. The court must, first and foremost, be fair when exercising its discretion on awarding fees.

[19] In my view, in an assessment of fees, there must be practical and reasonable limits to the amounts awarded and those amounts should bear some reasonable connection to the amount that should reasonably have been contemplated. It is not necessary for me to have to go through the dockets, hours, the explanations or disbursements, line by line, in order to determine what the appropriate fees are. Nor is the court to second-guess the amount of time claimed unless it is clearly excessive or overreaching. The appellate courts have directed that judges should consider all the relevant factors, and should award costs (or fees) in a more holistic manner. However, when appropriate and necessary, a court ought to analyze the Bill of Costs or dockets in order to satisfy itself as to the reasonableness of the fees submitted for consideration.

[20] Indeed, the fixing of costs is not an unusual task for the court. Superior Court judges are expected to fix costs following not only routine motions but also lengthy trials. Although the factors for assessing costs may be different, the type of analysis required for assessing fees is similar in approach. The assessment of counsel’s fees should not just be a matter of calculating the number of hours spent times a reasonable hourly rate. There should be some correlation of the costs to the benefits derived from the receivership. This cost-benefit analysis need not be precise or based upon the advice of expert analysis.

[21] When a receiver is appointed, the receiver may find the debtor's business affairs somewhat chaotic and the receiver may have to spend considerable time, organizing the affairs of the business in order to be in a position to administer the receivership properly. Accordingly, the time spent must be viewed in the context of the receiver's duty to preserve the assets of the debtor and realize on those assets and administer the estate and the rreceiver’s ability to retain the services of legal counsel to assist in those duties as required. However, as I will discuss momentarily, that is not the case here.

[22] The relevant clauses in Carey J.’s order of August 20, 2013 include:

17. THIS COURT ORDERS that the Receiver and counsel to the Receiver shall be paid their reasonable fees and disbursements, in each case at their standard rates and charges, and that the Receiver and counsel to the Receiver shall be entitled to and hereby granted a charge (the “Receiver’s Charge”) on the Property, as security for such fees and disbursements, both before and after the making of this Order in respect of these proceedings, and that the Receiver’s Charge shall form a first charge on the Property in priority to all security interests, trusts, liens, charges and encumbrances, statutory or otherwise, in favour of any Person, but subject to sections 14.06(7), 81.4(4), and 81.6(2) of the BIA.

18. THIS COURT ORDERS that the Receiver and its legal counsel shall pass its accounts from time to time, and for this purpose the accounts of the Receiver and its legal counsel are hereby referred to a judge of the Ontario Superior Court of Justice.

[23] The Order is clear and unambiguous. The Order contemplates standard rates, namely the hours expended times the lawyer’s rate.

[24] As outlined in the discussion in both Belyea or Nicar, the factors in play for my consideration include, a) the nature, extent and value of the assets handled; b) the complications and difficulties encountered; c) the degree of assistance provided by the company, its officers or its employees, and d) the cost of comparable services when performed in a prudent and economical manner.

[25] In this receivership we are talking about a family farm of an approximate value of $8.3 million. The secured creditors have been paid out in full and there are excess funds remaining from the receivership. Unsecured creditors have filed claims and that process is now engaged and ongoing.[^1]

[26] Mr. Smith argues that Mr. Cooke did not employ the “come-back” provision to vary the terms of the rates. In response, Mr. Cooke submits that he placed BLG on notice about his concerns about the escalation of fees very early on in the receivership. Mr. Smith takes no issue with that assertion and I am satisfied that BLG was put on notice about this issue. In any event, It seems to me that the very limited duration of this receivership nullifies the impact of this submission.

[27] In a similar vein, Mr. Cooke complains that the quantum of the fees of receiver’s counsel has caught his client by surprise, as no accounts were rendered. The same limited duration of this receivership also addresses, to a degree, this argument. However, while there is no obligation on receiver’s counsel to come to the court often in order to seek approval of fees, when counsel waits for several months to do so, particularly in a case like this where significant costs are running up relative to the size of the estate, counsel for the receiver is at risk that when they do come to court, the fees incurred may legitimately be criticized. This is true especially in a case such as this where the tenure of the receivership is limited and the involvement of the receiver and counsel had a ‘shelf-life’ of approximately two months.

[28] In my view, it is not enough in these circumstances to rely on the fact that the work done was approved in a general way by an order of the court with the acknowledgment that the term “standard rates” is included. When counsel wait to bring their accounts to the court for approval, they do so at their own risk.

[29] Turning to the various affidavits filed in support of BLG’s fees, I find the rates charged by other counsel as outlined in the materials referring to other insolvency work conducted by Toronto firms to be unhelpful in my assessment. For example, in the Extreme Fitness case Mr. Cooke advised that this case involved an estate of a value of $57 million and the business had 900 employees. In the winding-up of Coventry Inc. there were $73 million in assets and the fees were $139,000.00. In the Commercial list matter of Interwind Corp the assets were $311 million and there was over 6 months of involvement in the receivership with fees of $131,000.00. In the TBS Acquireco matter, the estate was valued at $147 million with 8 months of work required and the fees were $556,000.00. Interestingly, I am advised by counsel that the Voyager Maritime case is very similar in nature to the one before me with legal fees assessed at $73,000.00. Mr. Smith did not dispute any of Mr. Cooke’s assertions about these accounts. As mentioned, this particular case deals with $8.3 million in assets. The quantum and scale of effort required in the other cases presented for comparative purposes pale significantly in comparison to this receivership.

[30] In my view, the assumption that the court will automatically approve a "usual" hourly rate for Receiver's counsel, whether it stems from the commercial list practice or from a geographical region like Toronto is a faulty one. As Spies J. opined in Pandya v. Simpson, [2006] O.J. No. 2312, the court, with the assistance of opposing counsel, has to play the role of what a client would ordinarily do, namely consider whether the hourly rate is fair and reasonable in light of the nature of the work involved and the amounts in issue.

[31] It is also important to note that the receiver and its counsel have been assisted by the fact that the debtor has cooperated. In fact, in this receivership, the debtor continued to operate the farm pursuant to an agreement made on August 30, 2013. There was little involvement expended by the receiver or counsel requiring the day-today management of the business or seeking out a potential purchaser. The agreement of Purchase and Sale had already been completed and was substantially finalized prior to the receiver’s involvement.

[32] I find that the entire scope of the receivership here was modest. All of the secured claimants have recovered and early on in the receivership receiver’s counsel should have considered whether or not the firm's usual hourly rates were suitable for this receivership. In fact, the usual rates, (which Mr. Cooke argues are at the extreme "high end" of the scale), are in my view, not even warranted from the outset. As Farley J. opined in BT-PR Realty, an agreement or order respecting a receivership “is not a licence to let the taxi meter run without check”.

[33] With this background in mind, I have considered both the hourly rates charged by the Receiver's counsel, the time spent and the work done, in assessing the reasonableness and fairness of the accounts. Clearly, the size of the receivership estate should have some bearing on the hourly rates of counsel.

[34] In this matter, I am persuaded that the amount of counsel’s efforts and work involved may be disproportionate to the size of the receivership. I am of the view that an adjustment ought to be made to reflect the fact that, particularly after the size of the estate became known, the "usual" or “standard” rates of counsel were too high relative to the size of the estate.

[35] Many of the matters listed such as the sale and disposition of the property, and communication with various Boards or interested parties and matters of that sort is work that I would have expected the receiver’s junior lawyers or staff to take care of at a lower cost. I query why a senior partner had to travel from Toronto to attend court in London when the motions were unopposed by all interested parties. The only dispute in this case was whether Windsor or London was the appropriate venue, an issue that was quickly addressed and resolved.

[36] Mr. Prince on behalf of the receiver deposed that he had reviewed the fees, and he relied on his knowledge that the rates charged by the receiver and BLG are comparable to the rates charged for the provision of similar services by other accounting and law firms. I do not fully accept Mr. Prince’s opinion endorsing the fees rendered by BLG as outlined in para 10 and 12 of his affidavit.

[37] While, an assessment of the fees in this matter is a difficult task given the information that I have to consider and the breadth of materials filed, it is not impossible. It would have been preferable, if time and expense would permit, to have opposing counsel cross-examine Mr. Jaipargas on his affidavit with respect to the accounts.

[38] I do not accept the assertions raised in Mr. Jaipargas’ affidavits. In my review of the fees found in Appendix “X” of the October 23^rd Motion Record, there appears to be excessive work done by senior counsel on routine matters. I also have concerns about the amount of hours expended for matters that on the face of the dockets appear to be administrative and not requiring the amount of hours docketed. I also note that senior real estate partner was engaged to conduct what appears to be relatively modest or routine work on this file.

[39] The fact work was done by lawyers at higher hourly rates exacerbates the problem of the fees, as the rates claimed for senior lawyers involved in this case are as high as $750.00 and $760.00 per hour. In my view, other lawyers should have done much of this work at significantly lower rates.

[40] Mr. Smith qualified his submission by claiming that while this receivership was not complex, there were “challenges raised by the debtor”. I reject his assertions about any difficulties or complexities which arose in this receivership. In my view, the materials filed and counsel’s submissions were an attempt to exaggerate and justify the fees by asserting a degree of complexity or difficulty that clearly did not arise in this case. This receivership was unlike a case where the receiver steps in as an administrator or manager and runs the business. We have the divestment of the farm and assets with some modest ancillary work.

[41] Bills for legal fees have been submitted to the date of the hearing. I reject Mr. Jaipargas’ contention that there was a substantial write-down or reduction of fees. BLG claims approximately $30,000.00 for matters as yet unascertained or contingent. Frankly, this position is not only conflicting to Mr. Jaipargas’ assertion that he had foregone additional work post October 2013, but in view, the entire submission is somewhat disingenuous.

[42] Consideration must be given to the number of hours docketed to accomplish particular tasks. Nonetheless, in considering the number of hours and the nature of the work done on this matter, I am of the view that the sheer number of hours put in, given the nature and scope of this receivership, reflects a significant degree of inefficiency when I consider what work has been done. Part of my concerns about the inefficiencies and whether all of the work done was warranted, can be explained by the fact that 11 different lawyers charged time to the file. Although some of that can be justified on the basis that different expertise was needed (particularly insolvency versus real estate), this always raises a concern about duplication of effort. In that regard, I reviewed and considered the dockets of M.B. Shopiro, M. Arzoumanidis and R. Jaipargas found in Appendix “X” of the motion materials filed for the October 23^rd hearing. In my view, some of the work could have been done at a lower hourly rate and with due regard to the hours being expended on various tasks.

[43] To illuminate his point, Mr. Cooke calculated the average fee rate for counsel juxtaposed with the total amounts charged by BLG. He submits that the entire quantum sought by BLG as reflected in the dockets would translate to 5.76 hours of work a day for each and every single day of the 69 day receivership; or $3,700.00 per day for an $8.3 million estate with $500,000.00 in assets remaining to be distributed.

[44] As mentioned, in this case, I have concerns about the fees claimed that involve the scope of work over the course of just over two months in what appears to be a relatively straightforward receivership. Frankly, the rates greatly exceed what I view as fair and reasonable.

[45] Although I could have easily reduced the entire amount of hours charged to arrive at a just result, I accept Mr. Cooke’s analysis and approach to the quantum of fees to be assessed in relation to counsel’s activities for this receivership. As there are several methods to achieve what I believe is a reasonable amount for receiver’s counsel’s fees, in arriving at such an approach, I accept the affidavit of Tanya McNevin. I find that comparable rates charged by counsel and law clerks in London and environs, as illustrated in the affidavit, to be applicable in arriving at a just compensation. Frankly, in this case, it matters little whether I reduce the fees based on the rates charged or cut the overall number of hours expended. The net result is the same, which is to address the lack of proportionality and reasonableness of BLG’s fees in this case.

[46] Hence, I adopt the average London rate of $475.00 for lawyers of similar experience and expertise as proffered by Mr. Cooke and apply it to reduce the amounts claimed accordingly. Indeed, the application of these rates to my overall assessment is not an exact science. I pause to add that had Mr. Cooke not provided an approach to the quantum, I may have been persuaded to further reduce counsel’s fees to reflect what I find are just and reasonable.

[47] My decision is not be construed in any fashion to express that the rates charged by lawyers in Toronto have no applicability in matters arising in the Southwest Region. Nor am I discounting the sage and instructive principles that are provided by authorities arising out of the Commercial List in Toronto on the subject of appropriate remuneration for counsel involved in insolvency matters. However, I have not lost sight of the importance that the position of the receiver and its counsel and their correlative responsibilities should not be made into a means of absorbing money of creditors, debtors and others whose interest this court must protect. This case is fact specific and I am considering the overall reasonableness of the fees presented here.

Conclusion

[48] This receivership deals with the life savings of a farmer. All secured creditors have been fully reimbursed. No doubt, the debtor will be impacted by the legal fees charged and, at the end, there will be very little left for him. In considering the ambit of Carey J.’s order and having conducted a review of the scope of BLG’s fees in the context of this receivership, it seems to me that BLG had not assessed their reasonableness of their fees and had failed to minimize duplication or effect efficiencies.

[49] In my opinion, BLG’s claim of $255,955.00 for its fees in this relatively straightforward receivership with the actual amount of work involved here is nothing short of excessive. A significant reduction of receiver’s counsel’s fees is warranted. Fees claimed for any revised estimates to completion are denied.

[50] In the exercise of my discretion, BLG’s fees are assessed in the total amount of $157,500.00 (all inclusive). From this total, the amount of $100,000.00 is to be deducted as provided in the October 23^rd Order approving BLG’s interim payment. BLG is entitled to its disbursements of $4,434.92 plus applicable HST.

[51] Given the nature of this hearing, and my reticence to have any costs extracted out of the remainder of the estate, it is my view that each party shall bear their own costs of this motion.

”A. J. Goodman J.”

A. J. Goodman J.

Date: January 22, 2014

[^1]: In my October 23, 2013 order I substituted BDO Canada Limited as receiver.