SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: 31-OR-207905-T

DATE: 20140801

RE: IN THE MATTER OF THE BANKRUPTCY OF RITA DI NARDO, OF THE TOWN OF MILTON, PROVINCE OF ONTARIO

BEFORE: Mr. Justice H.J. Wilton-Siegel

COUNSEL:
Louis Brzezinski, for the Applicant

Richard A. Campbell, for the Respondent

BY WRITTEN SUBMISSIONS

ENDORSEMENT ON COSTS

[1] On the eve of trial, the applicant successfully sought a stay in this proceeding pending the criminal trial of the respondent. He then withdrew his application, with leave to bring it back on after the respondent’s criminal trial, acknowledging that without evidence of fraud from the criminal trial he could not establish a debt due to him. The withdrawal of his application was granted subject to argument as to costs.

Positions of the Parties

[2] The respondent seeks costs on a substantial indemnity basis, which is also on a full indemnity basis, totaling $51,001.61, including legal fees of $41,891.25. The applicant suggests that no costs should be awarded to either party on the basis of the following submissions.

[3] First, he says the respondent acted in bad faith by misrepresenting the true state of affairs of her criminal proceeding and her intentions regarding a settlement proposed by her counsel. While the communications of counsel for the respondent may have created confusion that resulted in an adjournment of the trial on one occasion, his actions did not constitute bad faith misrepresentations. They also do not explain the further adjournment and withdrawal of the application requested by the applicant.

[4] Second, the applicant says the issue was an open issue and therefore novel. I do not agree. The issue in this proceeding was whether a party can commence a bankruptcy application prior to having evidence to establish the requirements under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “Act”) in order to preserve the right to assert a claim under s. 95 of the Act. The absence of case law does not necessarily mean this is a novel issue in the sense of an arguable issue. Moreover, in this case, the applicant has not demonstrated that his claim under s. 95 was either necessary or viable.

[5] Third, the applicant says he is impecunious. While the respondent denies this, I think the applicant’s financial position is established on the evidence before the Court in this proceeding. His income tax returns for 2011 and 2012 confirm his assertion that his only income is his pension income, apart from a modest amount of rental income from an unspecified asset. While unusual for a costs award, I accept this evidence given its nature. It is not disputed that he is unemployed or that he lost a considerable amount of money that he mortgaged his home to obtain. In addition, the evidence suggests that his bank account has been depleting but I place less reliance on this. I agree with the applicant that his impecuniosity is a factor that can be considered in a costs award. I also agree that this is a particularly relevant consideration in the present circumstances where the respondent assisted in a Ponzi scheme that resulted in the applicant's current financial circumstances.

[6] As a related matter, the applicant also says that he could not afford the costs of an investigation into the Ponzi scheme. He suggests that this fact justified the course of action adopted in this proceeding. I am not persuaded that it should have any impact on the costs award, given the Court's determination that the applicant's actions were inconsistent with the policy of the Act.

[7] Lastly, the applicant says that there is no basis for an award of substantial indemnity costs, with which I agree. The applicant's withdrawal of the proceeding was necessitated by the timing of the criminal proceedings, which proceeded more slowly than the parties anticipated. The applicant’s conduct was not in accordance with the policy of the Act but I do not think that commencement of the action constituted an abuse of the judicial system by itself. I address the respondent’s submission regarding his failure to withdraw the application below.

[8] He also suggests the costs are excessive. However, when the costs claimed by the respondent on a substantial indemnity basis are translated to a partial indemnity scale using an appropriate rate (which is lower than the maximum contemplated by the tariff given the nature and complexity of this proceeding), I think the costs generally fall within the range of reasonable costs for the work involved. The applicant has not provided a costs outline which would suggest otherwise. This conclusion is, however, subject to one qualification. I am not persuaded that the amount of time claimed for trial preparation of the respondent as a witness was appropriate in the circumstances.

Analysis and Conclusions

[9] The respondent was the successful party. Absent special circumstances, she is entitled to her costs on a partial indemnity basis. There are, however, unique circumstances in this case to be considered.

[10] While the applicant was unable to establish fraud on the part of the respondent, she remains subject to criminal proceedings. It cannot be said that the application for a bankruptcy order contributed in any meaningful way to any loss of reputation that she may have suffered in her community.

[11] Further, the extent of the respondent's knowledge of the Ponzi scheme has not been established. However, it does appear that she benefitted from the Ponzi scheme for a period of time.

[12] Moreover, as mentioned, the respondent is impecunious as a result of the Ponzi scheme. The only basis for an award of costs against him is the commencement of his proceeding prior to having proof of his allegations, which was done on the incorrect assumption that such evidence would arise from the criminal proceedings. The Court cannot disregard the fact that this may well occur, in which event it would be unjust to have awarded significant costs in the respondent's favour. Unfortunately, however, I do not think that the Court can make costs dependent upon the outcome of the criminal proceedings.

[13] On the other hand, the respondent undoubtedly incurred some costs thrown away in trial preparation that could have been avoided if the applicant had provided suitable notice of his intention to withdraw his application after it had become clear that the criminal proceedings would not have been completed before trial. In most circumstances, such actions would call for a sanction in the form of a significant costs award. If there were evidence that the other parties who the respondent alleges are participating in this proceeding with the applicant were obligated to pay any costs award collectively, I would make such an order. However, I do not think I can draw this inference on the record before the Court.

[14] Balancing the equities in these circumstances, I consider that an individual who is a party to a Ponzi scheme should reasonably anticipate enforcement proceedings against him or her by investors introduced to the scheme by that individual. The applicant was foolish to have invested. The respondent was foolish to have participated. But she was closer to the perpetrators and was involved in assisting the scheme long enough to know that the returns were well beyond returns available in the market. Moreover, she benefitted from the scheme for at least a period of time in terms of returns. While I suspect she also received a commission on new "sales", I do not think this has been established and I do not make my decision on this basis. I also consider that a costs sanction is appropriate in some amount to signal the fact that, given the absence of any evidence to support the application from the outset, the applicant should have advised the respondent of his intention to withdraw the application in timely fashion to avoid wasted trial preparation on the part of the respondent. An application for bankruptcy cannot be used for collection purposes on a cost-free basis.

[15] Given the foregoing considerations, I conclude that costs in the amount of $3,000 should be payable by the applicant to the respondent.

Wilton-Siegel J.

Date: August 1, 2014