COURT FILE NO.: CV-12-9886-00CL
SUPERIOR COURT OF JUSTICE – ONTARIO
COMMERCIAL LIST
RE: MICHAEL G. DEGROOTE,
Plaintiff
AND:
DC ENTERTAINMENT CORPORATION, DON CARBONE ENTERTAINMENT INC. DREAM CORPORATION INC., KING SOFTWARE SOLUTIONS CORP, DREAM CASINO CORPORATION S.R.L., DREAM SOFTWARE SOLUTIONS INC., DREAM KIOSK SOLUTIONS INC., ANTONIO CARBONE, FRANCESCO CARBONE and ANDREW PAJAK
Defendants
BEFORE: Newbould J.
COUNSEL: W. Niels Ortved, Eric S. Block and Byron Shaw, for the plaintiff
Maurice J. Neirinck, for DC Entertainment Corporation, King Software Solutions Corp., Dream Corporation Inc., Dream Casino Corporation, S.R.L., Dream Software Solutions Inc., Antonio Carbone and Francesco Carbone
Ronald Flom and Robert Trifts, for Don Carbone Entertainment Inc., Dream Kiosk Solutions Inc., and Andrew Pajak
ENDORSEMENT
Background
1On November 18, 2013 I appointed a receiver over all of the books and records of the corporate defendants and ordered that the plaintiff was entitled to his costs. I have now received cost submissions of the parties.
2The plaintiff seeks costs on a partial indemnity basis of $298,428.64 inclusive of disbursements and HST. Included in the disbursements is $61,682.07 paid to Duff & Phelps Canada Limited for the work of Mr. Gary Moulton, a chartered accountant with a specialty designation in investigative and forensic accounting who reviewed documents that had been provided and who swore two affidavits used on the motion.
3The Carbone defendants took the position that the accounts should be sent for assessment because of the quantum sought, which they say is not reasonable, and because the plaintiff refused to produce the McCarthy dockets or the bills sent to the plaintiff. They also assert that the amount paid to Duff & Phelps should not be awarded because Mr. Moulton was not an “expert per se” but a fact witness, and no fees can be paid to fact witnesses. The Pajak defendants took the position that they should not have to pay any costs as the fault lay with the Carbone defendants and that in any event they had made an offer to settle that they say was reasonable and was accepted. They also say that the costs sought by the plaintiff are not reasonable.
4I am not satisfied that the Pajak defendants made an offer that was accepted. They did offer to agree to the appointment of a receiver in the form submitted by the plaintiff “subject to amendments that may suit the circumstances of this particular proceeding”. While there were discussions between counsel of proposed changes, there was never an agreement reached on what the changes should be. The offer of the Pajak defendants was open for acceptance to October 30, 2013, after which time it was open to one minute after the commencement of the hearing except that the plaintiff would have to pay partial indemnity costs after October 30, 2013. This offer was clearly not as advantageous as the result achieved by the Pajak defendants as they were not awarded costs.
Sufficiency of the Cost Outline and Dockets
5The cost outline first submitted by the plaintiff was sparse. It contained one block of description covering all work as follows:
Motion to Appoint Receiver, including drafting moving materials, drafting reply materials, attending to research, drafting factum and brief of authorities, attending to service and filing of materials; Court Appearances at Commercial List: Review of records and books; draft Bill of Costs; Preparing for motion; related correspondence and communication.
6There was then a list of five lawyers, with their year of call, one clerk and six students. Partial indemnity rates and actual rates were listed for all of them.
7This limited information was clearly insufficient for either the responding parties or the court. It does not indicate what time has been spent on any particular matter. That information should have been provided. Had no further information been provided it would not have been possible to fix the costs.
8At the request of the defendants, the plaintiff produced a particularized cost outline setting out the names of the persons and the hours spent on each particular matter, such as preparing motion materials, preparing facta, preparing for and attending cross-examinations, and the like. This information should have been contained in the cost outline first submitted to the parties and to the court.
9I do not agree with the Carbone defendants that the plaintiff should have produced their dockets. Dockets are not always produced when costs are sought. It is the exception rather than the norm. Form 57B is to be used after a step such as a motion has been brought. The form simply refers to “Fees (as detailed below)”. This is different from Form 57A, which is to be used after a trial or motion that disposes of the proceeding, which states “In support of the claim for fees, attach copies of dockets or other evidence.” Thus even in that case, dockets are not required if other evidence is. While the reason for the difference in the forms is not provided, I expect that the thinking is that a cost request after a trial or other termination of the proceeding can be expected to be much larger than a cost request for one step in that proceeding.
10The particularized cost outline provided by the plaintiff in this case is sufficient to determine whether the costs claimed are reasonable and in accordance with the requirements of rule 57.01(1).
11Regarding the request for a copy of the accounts sent to the plaintiff, they could not possibly be more helpful than the particularized cost outline provided by the plaintiff. So far as the suggestion that the accounts are required to ensure that the costs claimed are not in excess of the amounts billed to the plaintiff, the cost outline as signed by Mr. Shaw provided a column for the rates “actually charged by the party’s lawyer”, which is in conformity with Form 57B which directs that for the actual rate column, the rate being charged to the client for each person is to be specified.
12In this case, for each person, the actual rate charged to the plaintiff was far in excess of the amount claimed in the cost outline. The bulk of the work was done by Messrs. Ortved (called in 1973), Block (called in 2003) and Shaw (called in 2009) whose partial indemnity rates claimed were $350, $225 and $175 as against the rates actually charged to the plaintiff of $895, $830 and $560.
Quantum of Fees
13In dealing with costs on a partial indemnity basis, rule 57.01(1) provides that a court may consider a number of factors. While the language is “may” rather than “shall”, generally most or all of these factors enter into the equation in any case. Overall the objective is to fix an amount that is fair and reasonable to the unsuccessful party. See Boucher v. Public Accountants Council (Ontario) (2004), 2004 14579 (ON CA), 71 O.R. (3d) 291 (C.A.) at para. 26. It is not a line by line exercise.
14The fees claimed are $196,530. The amount charged to the plaintiff was approximately $530,000. The Carbone defendants’ argument states that a key factor in assessing what is fair and reasonable for a losing party to pay may be what it paid its own counsel, and further states that their fees to their counsel for the motion are “approximately $150,000 plus HST”. It then asserts “As such, this is consistent with their position that DeGroote’s partial indemnity costs should be fixed in the amount of $80,000 plus HST”. No information whatsoever is provided as to how the $150,000 or $80,000 amounts were arrived at. Without such information, the statement adds little.
15None of the defendants have provided any information as to the hours spent by their counsel on any particular task for the billing rates actually charged. In Frazer v. Haukioja, 2010 ONCA 249, this was criticizec. LaForme, J.A. for the court stated:
Dr. Haukioja argued before the trial judge that Grant Frazer's counsel docketed almost twice as much time as his own. This, he says is relevant to Dr. Haukioja's reasonable expectations and establishes that he could not reasonably have expected Mr. Frazer's counsel to have invested so much more time than his own.
The answer to this argument is found in the submissions of Grant Frazer that were made to this court.
In making his finding with respect to the application of that part of rule 57.07(1)(0.b) “the amount of costs that an unsuccessful party could reasonably expect to pay…” the trial judge noted Mr. Haukioja’s failure to provide adequate information as to his own legal costs incurred. He also agreed with the observations of Nordheimer J. in Hague v. Liberty Mutual Insurance Co., 2005 13782 (ON SC), [2005] O.J. No. 1660 at para.16 that, “the failure to volunteer that information may undermine the strength of the unsuccessfully part’s criticisms of the successful party’s requested costs.” In that regard, his decision is entirely consistent with the authorities, and in particular the dicta of the Divisional Court in Andersen, “the inference must be that the [unsuccessful] Defendants devoted as much or more time and money” as did the successful Plaintiffs: Andersen v. St. Jude Medical Inc., 2006 85158 (ON SCDC), [2006] O.J. No. 508 (Ont. S.C.J.) at paras. 24 to 27.
16See also the comments of Winkler J. (as he then was) in Risorto v. State Farm Mutual Automobile Insurance Company (2003), 2003 43566 (ON SC), 64 O.R. (3rd) 135.
17There is another factor here that looms large. In many commercial cases, it is more difficult for a plaintiff to construct a case than to defend it. The plaintiff is outside looking in whereas the defendant knows what he or she has been about. In this case the problem has been exacerbated by the complete lack of accounting that should have been provided to the plaintiff and by the steps taken to thwart the plaintiff and his advisors from reviewing relevant records both before and after this action was commenced. These were referred to in some detail by me in my endorsement of November 18, 2013 in which I held that the plaintiff had established a strong case in fraud and very serious breaches of agreement.
18What is at stake is the investment by the plaintiff of some USD $112 million. The defendants had to know that the plaintiff would take every step possible to find out where the money has gone. The fact that the plaintiff has spent much more than the Carbone defendants (what the Pajak defendants were charged by their counsel has not been provided) is not as important as it might be in different circumstances where the playing field would be somewhat more level.
19In this case, there were eight affidavits filed on behalf of the plaintiff, including three of Mr. DeGroote and two of the investigative accountant Mr. Moulton. There were five affidavits filed by Mr. Antonio Carbone and two by Mr. Pajak. Several of these affidavits were lengthy. The Carbone defendants are critical for the 194 hours spent by the McCarthy lawyers (excluding students time that has not be claimed) for drafting and reviewing motion materials, preparing affidavits and other evidence, reviewing and responding to evidence from all parties, including meeting with, retaining and reviewing all expert evidence and reports. They say the time spent is inconceivable. I do not see it that way. This was no easy task to put the case together. The defendants were not playing by the Marquess of Queensberry rules.
20The Carbone defendants are also critical of the 69.4 hours claimed for four cross-examinations, which took a little less than 6 hours. However, the fact that the cross-examinations took only 6 hours does not mean that the preparation required was not considerable, particularly when as here there were allegations of improper conduct. A good deal of useful preparation can result in a short cross-examination.
21It is also contended that 326.1 hours claimed for “correspondence and meetings” is an egregious overbilling. The description is somewhat unfair. In the particularized cost outline, the description runs to half a page and includes dealing with counsel for KPMG, who was eventually appointed the receiver. A number of matters were covered. I agree that the amount of time looks high, but again, taken that the plaintiff was in a position caused by the defendants of not knowing what had happened to his money and to the efforts to prevent him from finding out, I can well understand how a great deal of thinking and strategizing was required.
22I see no great difficulty in three counsel appearing for the plaintiff on the motion. Each of the Carbone and Pajak defendants had two counsel. The record before me was voluminous.
23The fact that the hearing of the motion took just under one day does not mean that the matter was a simple dispute. It took as little time as it did because of the exemplary way in which the material for the plaintiff was organized. A less well prepared plaintiff causing a longer hearing of a motion should not produce a higher award of costs. The opposite is the case.
24There is another matter that I take into account. The hourly rates claimed are those rates set out as guidance in the practice note of the Costs Subcommittee of the Civil Rules Committee. I have considerable difficulty with these rates as being far too low and unrealistic for downtown Toronto matters. I have commented on this in a number of cases. In Stetson Oil & Gas Ltd v. Stifel Nicolaus Canada Inc. 2013 ONSC 5213, [2013] O.J. No. 3702 I stated:
Regarding the use of the rates recommended in the practice direction of the Costs Subcommittee of the Civil Rules Committee, I have considerable difficulty with the rates in that practice direction. They were the rates contained in the cost grid introduced in January, 2002. When the cost grid was abolished on July 1, 2005, they were continued in the practice direction. These rates are completely outdated and unrealistic for an action fought by two major downtown Toronto law firms.
The practice direction is not a binding rule enacted as a regulation. It states that it "may provide some guidance to the profession as these changes are implemented". It is apparent that other courts agree that the rates are not realistic. I agree with R.J. Smith in First Capital (Canholdings) Corp. v. North American Property Group 2012 ONSC 1359, [2012] O.J. No. 885 that the rates should be adjusted to account for inflation, but I would go further.
In Canadian National Railway v. Royal & Sun Alliance Insurance Co. of Canada, 2007 ONCA 531, the Court of Appeal awarded trial costs on a partial indemnity basis of 65% of the fees charged to the client. In Eastern Power v. Ontario Electricity Financial Corporation, 2012 ONCA 366, the Court of Appeal awarded trial costs on a partial indemnity basis at 60% of actual rates charged the client. The trial judge, 2008 48132 (ON SC), [2008] O.J. No. 3722, had included a substantial indemnity cost award as a result of an offer at 90% of actual rates charged, and while this was set aside as the offer was not better than the results of the appeal, the Court of Appeal made no suggestion that the 90% figure would not have been appropriate if the costs were awarded on a substantial indemnity basis.
I think it appropriate to award costs at 60% of the time charged for partial indemnity costs ...
25Had the plaintiff not claimed at the rates in the subcommittees guidance, I would have been prepared to set the costs at 60% of the rates actually charged the plaintiff in this case, which would have considerably increased the amount claimed.
26After taking into account the factors contained in rule 57.01(1), including what amounts the unsuccessful defendants in this case could reasonably expect to pay, and considering what is fair and reasonable to the defendants, I fix the fees to be paid to the plaintiff at $180,000 plus HST.
Disbursements
27Regarding the disbursement of $61,682.07 paid to Duff & Phelps for the work of Mr. Mouton, in my view it should be paid as claimed. Mr. Moulton was not a fact witness in the sense that he was someone involved in the facts leading to the dispute. He was an expert retained for this litigation to review what records were available and to opine on what those records did or did not reveal. In any event, it is not the case that fact witnesses who are professional people may not be paid for their time involved in a case. See Canada Trust Company v. Russell Browne et al, 2011 ONSC 4400 and Guttman et al v. Dube et al, 2013 ONSC 7573.
28The account of Duff & Phelps was provided to the defendants. While a breakdown of the account was not, it seems to me that the amount charged was reasonable, taking into account the need for the expert to be brought up to speed and for him to determine what he needed to review. He was able to review what records were provided and to opine on them, and it is difficult to expect that he could have done the work for less than was charged, given the actions and attitude of the defendants.
Liability of the Pajak Defendants
29The Pajak defendants say they should not be charged anything and that all of the costs should be paid by the Carbone defendants. The plaintiff contends that all of the defendants should be ordered to pay the costs on a joint and several basis.
30The basic argument of the Pajak defendants is that it was the Carbone defendants who caused all of the difficulty and who opposed the receivership on the merits.
31I would first note that the material filed on behalf of the Pajak defendants on the motion, and their argument at the hearing of the motion, was that no receivership order should be made. It was an argument made on the merits.
32The Pajak defendants point out that in the other motion I heard in the Pajak v. Carbone action, I concluded that the Carbones have likely failed in their obligations to have records delivered to Mr. Pajak. This of course is a matter between them and not between Mr. Pajak and Mr. DeGroote. What caused Mr. DeGroote’s money to go missing, and who was responsible, is not yet known, and it is entirely possible that Mr. Pajak has had some role to play in that.
33In an expert report dated November 1, 2013 obtained by the Carbone’s from an expert forensic accountant and filed in the Pajak v. Carbone action, the expert reported that it appeared that $4.8 million had been improperly taken from Dream Corporation Inc. by Mr. Pajak and associated persons without the knowledge of the Carbones. Whether of course this will be proven to be the case remains to be seen. But at this stage the report cannot be lightly disregarded. It is quite evident that Mr. Pajak and the Carbone defendants have had a falling out. When that occurred, and what caused it, is not before the court and there are allegations going every which way. I do not have any record that would establish that the Carbones are the only ones to blame for the lack of financial information not going to Mr. DeGroote as required from the outset by the various agreements. I did find in my endorsement that there were requests for documents made of the Pajak defendants to their then solicitor Mr. Neirinck that went unanswered. At that time, Mr. Neirink acted for both the Pajak defendants and the Carbone defendants.
34In the circumstances, I see no reason why the usual rule that costs should follow the event should not govern.
Disposition
35In the result, I fix the costs of the plaintiffs at $180,000 plus HST for fees and $67,566.14 for disbursements and applicable HST. These costs are to be paid by the defendants on a joint and several basis within 30 days.
Newbould J
Date: January 6, 2014