SUPERIOR COURT OF JUSTICE - ONTARIO

RE:

MIRKAIS INVESTMENTS INC.

Plaintiff

-AND-

ROBERT A. KLOTZ

Defendant

BEFORE: F.L. Myers J.

COUNSEL: Jeffrey Radnoff, for the Plaintiff

Michael R. Kestenberg, for the Defendant

HEARD: November 27, 2014

endorsement

[1] The defendant moves for summary judgment dismissing this lawyer’s negligence case against him. For the brief reasons that follow the action is dismissed.

[2] With focused simplicity, Mr. Kestenberg argued one point only. He invited the court to assume for this motion that the defendant was negligent in failing to appeal the disallowance of the plaintiff’s proof of secured claim in the bankruptcy of Morris Kaiser. Mr. Kestenberg then argued that there is no issue requiring a trial on the question of whether the defendant’s negligence caused the plaintiff to suffer any damages. Absent proof of causation and damages, the plaintiff’s action must fail.

[3] Mr. Kestenberg argued that even if the plaintiff had valid security over property of the bankrupt, Morris Kaiser, it has not shown that the funds that it seeks were subject to its security. Therefore, even if the plaintiff’s security had been enforced on an appeal from the disallowance by the trustee in bankruptcy, the plaintiff still would not have received any money.

[4] There are no facts in dispute on this issue. It is a narrow issue that can be readily resolved on the material before the court. I have confidence that I can find the necessary facts and apply the relevant legal principles to resolve this dispute. Doing so is in the interests of justice and promotes the most efficient, affordable and proportionate resolution of the dispute on the merits. Hryniak v. Mauldin, 2014 SCC 7, at para. 66 et seq.

[5] There are three tranches of funds that the plaintiff says were or ought to have been subject to its security:

a. funds paid to creditors (and their lawyers in trust) pursuant to the order of C. Campbell J. dated November 23, 2012;

b. $100,000 paid to the trustee as part of an agreement for the trustee to refrain from intervening in a lawsuit; and

c. $50,000 paid to the trustee to facilitate the discharge of the bankrupt.

[6] In order for the plaintiff to have a security interest in property, the property must be part of the collateral described in the plaintiff’s security agreement. If the property is part of the collateral secured by the agreement, then, under clause 20(1)(b) of the Personal Property Security Act, R.S.O. 1990, c.P.10, the security interest over the collateral must be perfected under the statute in order for it to take priority over the interest of the trustee.

[7] The plaintiff argues that under clause 2(vi) of the security agreement that was assigned to the plaintiff, the plaintiff has a security interest in “present and future debts, accounts, claims, moneys and choses in action”. The funds referred to above all fit those descriptions, the plaintiff argues. But it ignores the remainder of the paragraph that requires that the property (debts, claims, moneys etc.) must be “held or owned by or on behalf of the undersigned” i.e. Morris Kaiser. Mr. Kaiser granted security over his own property including his receivables. Is there any basis to say that the funds referred to above were property of Morris Kaiser or that he had an interest in them or rights over them?

[8] Before answering that question, I set out the second aspect of the legal argument referred to in paragraph [6] above. Section 19 of the PPSA requires that in order for a security interest to be perfected (and hence trump the priority of a trustee in bankruptcy) it must have first “attached”. Subsection 11(2) of the PPSA provides that, among the requirements, for a security interest to attach the debtor must have rights in the collateral.

[9] Mr. Kestenberg argues that because the tranches of funds over which the plaintiff seeks to enforce its security were not the funds of Morris Kaiser, they do not fall under the security agreement or, alternatively, no security interest under that agreement attached or became perfected under the PPSA. If the defendant had appealed from the trustee’s disallowance of the plaintiff’s secured claim and even if the plaintiff had won that appeal, there would still not have been any recovery to the plaintiff because whatever security interest it had under the security agreement, would not have given it a priority claim to the three tranches of funds because none was owned or held by Morris Kaiser and he had no rights in them or interests over them.

[10] Morris Kaiser has steadfastly denied throughout his bankruptcy that he has or had any assets. His wife, Miriam Kaiser, is the sole officer and director of the plaintiff. She has sworn that when she married Morris Kaiser some 20 years ago he had no assets but he had $25 million in debts. He has not worked or acquired any assets since then. The trustee adduced evidence in the proceeding that led to the tranche 4(a) funds above, that Morris Kaiser continued to live in the same manner after as before bankruptcy “and he has spent thousands of dollars at casinos often appearing on an almost daily basis”. Morris Kaiser says that he has had a number of friends or colleagues who just give him money.

[11] Mr. and Mrs. Kaiser were present in court for this motion. Neither gave any evidence to establish that the funds in the three tranches set out above belonged to Morris Kaiser or were money due to him or over which he had any rights or causes of action. In fact, throughout the bankruptcy and its various proceedings, Mr. Kaiser and his friends and colleagues through whom money flowed to Mr. Kaiser denied that any money or assets belonged to Mr. Kaiser.

[12] The funds referred to as tranche 4(a) above, were the proceeds of a settlement of litigation commenced by the trustee, supported by two funding creditors, against Cecil Bergman. The trustee claimed, among other things, that a 76 unit townhouse project in Brampton, Ontario that was sold for over $11 million belonged to Mr. Kaiser and was held by Mr. Bergman as a front for Mr. Kaiser. Mr. Bergman and Mr. Kaiser denied the allegations. Pursuant to minutes of settlement signed by Mr. Kaiser and others, Aspen Acquisitions Inc., a company which Mr. Kaiser denies owning, paid sums to buy the claims in bankruptcy of the two supporting creditors and paid funds to lawyers on account of legal fees incurred by the creditors and the trustee. By order of C. Campbell J., on consent, the court approved the flow of funds directly to the creditors to buy their claims and to the lawyers outside the bankruptcy estate. This is a typical structure for third parties to make payments in respect of a bankruptcy. There are many, varied reason why parties may want to structure a transaction to flow funds outside of a bankrupt estate. Whatever the reason the payments were made outside the estate in this case, with Mr. Kaiser’s consent and the court’s approval, there is no evidence to suggest that Mr. Kaiser had any right to those funds and all concerned denied that he had such rights at the time. There was no finding made by a court that Mr. Kaiser had any rights to the funds. There was an allegation that Morris Kaiser denied. The plaintiff has led no evidence to contradict Morris Kaiser’s denial despite his availability to the plaintiff.

[13] The funds that account for tranche 4(b) above, were paid to the trustee to settle a motion that it threatened to bring to intervene in an appeal in an unidentified piece of litigation. The trustee was investigating and looking to find sources of assets of the bankrupt and in doing so, was offered $100,000 to keep away from a particular appeal. There is no evidence that this money was money in which Mr. Kaiser had any rights. There was no finding that the trustee or Mr. Kaiser had any rights. Some third party paid money to the trustee to keep it from looking into a lawsuit that had succeeded against Mr. Kaiser at trial. The plaintiff led no evidence that Mr. Kaiser owned the money paid by a third party as settlement funds or that he had any rights to it. Doing so would have been wholly inconsistent with the Kaisers’ sworn claims throughout denying that Morris Kaiser has assets.

[14] Finally, the funds that account for tranche 4(c) above were paid to the trustee as part of Morris Kaiser’s efforts to obtain his conditional discharge from bankruptcy in 2013. There is no evidence as to who paid those funds. The plaintiff has put forward no evidence to show that Morris Kaiser paid them or that he had any interest or rights in them at all. Doing so would have been wholly inconsistent with the Kaisers’ sworn claims throughout denying that Morris Kaiser has assets.

[15] The burden of proof on causation and damages in the lawsuit is on the plaintiff. The motion for summary judgment was adjourned for a year in order to require the defendant to amend his statement of defence to plead more clearly the issue of attachment under the PPSA. In that time, if not before, the plaintiff has had full knowledge that proof of Morris Kaiser having some rights in the funds at issue would be the single key issue for this motion. The defendant relied on the Kaisers’ own evidence in the bankruptcy. The plaintiff had every opportunity to put forward a simple affidavit from Mr. Kaiser or Mrs. Kaiser confirming that Morris Kaiser owned or had rights to the funds in issue. Whether doing so would have exposed either or both of them to a bevy of criminal and BIA charges is not an issue for this motion. But, it is not enough for the plaintiff to argue that money came to the trustee or others as a result of allegations that Morris Kaiser had rights. Those allegations were never proved. They were denied at all times by Mr. Kaiser and those associated with him. There are any number of reasons why people settle lawsuits. The mere settlement is not evidence that Morris Kaiser had rights in the settlement funds paid by third parties. Nor is there any basis at all to ignore or look behind the court ordered bankruptcy remote structure of the tranche 4(a) settlement.

[16] The law is not in dispute in this matter. If the plaintiff had a valid, perfected security interest in identified collateral then, under s.136 of the BIA, the plaintiff’s rights in that collateral would trump the rights of the trustee. In response to a motion for summary judgment, the responding party is under an obligation to lead evidence to establish a triable issue on its claim. The law requiring a responding party to lead trump or risk losing is well understood. 1061590 Ontario Ltd. v. Ontario Jockey Club (1995), 1995 CanLII 1686 (ON CA), 21 O.R. (3d) 547, [1995] O.J. No. 132 (C.A.) and Dawson v. Rexcraft Storage and Warehouse Inc., 1998 CanLII 4831 (ON CA), [1998] O.J. No. 3240, 164 D.L.R. (4th) 257 (C.A.), at p. 265 D.L.R.

[17] The only evidence at all concerning whether Morris Kaiser owned or had rights in the funds are his own denials commencing in his sworn Statement of Affair and continuing throughout the bankruptcy proceeding and the related litigation proceedings and Mrs. Kaiser’s evidence that he had and has no assets. The plaintiff simply failed to put forward any evidence contradicting the evidence of the Kaisers to raise a triable issue on whether Morris Kaiser had rights in or over the three tranches of funds. There is no basis for it to say that even if it had a security interest, its interest would have entitled it to receive the funds to which it refers.

[18] Therefore the plaintiff has not and cannot show that the defendant’s negligence caused it to suffer any damages. Its cause of action against the defendant cannot succeed and its action must be dismissed.

[19] The fixing of costs is a discretionary decision under section 131 of the Courts of Justice Act. That discretion is generally to be exercised in accordance with the factors listed in Rule 57.01 of the Rules of Civil Procedure. These include the principle of indemnity for the successful party (57.01(1)(0.a)), the expectations of the unsuccessful party (57.01(1)(0.b)), the amount claimed and recovered (57.01(1)(a)), and the complexity of the issues (57.01(1)(c ). The Court must consider as well as the application of the principle of proportionality (Rule 1.04(1)). Overall, the court is required to consider what is “fair and reasonable” in fixing costs, and is to do so with a view to balancing compensation of the successful party with the goal of fostering access to justice: Boucher v. Public Accountants Council (Ontario) 2004 CanLII 14579 (ONCA), (2004), 71 OR (3d) 291 (Ont CA), at paras 26, 37.

[20] The defendant seeks costs in respect of the entire action which is dismissed by this decision. Its costs on a partial indemnity basis amount to $95,746.59. In its statement of claim, the plaintiff claims “not less than $18 million” in this action. The issues were important and the circumstances were unusual and complex. The defendant was entitled to utilize the services of senior counsel. Mr. Kestenberg’s rates are heavily discounted for the defendant’s insurer. As I noted above, this motion was argued on a single, neat question. That does not mean that there are not a number of other issues in the lawsuit that were deserving of consideration by counsel. Counsel are to be commended for simplification. It would be wrong to say that because this motion was argued on a single issue, the case is simple. Rather, it was Mr. Kestenberg’s effort and industry in analyzing and preparing his client’s case that allowed the issues to be rationalized and reduced to the one factual question underlying two legal grounds of resolution. During the motion I raised a number of questions that had occurred to me as I read the material only to be told by Mr. Kestenberg that, in fairness, the motion had been brought on a singular basis and that that was how it should be considered. His efforts led to a very focused and efficient resolution of a more complex matter. In my view, the rates and hours claimed by Mr. Kestenberg are reasonable in light of the amount in issue and the nature of the issues. These costs are not an impediment to access to justice as the plaintiff ought to have expected a full-on, aggressive, incredulous defence to its claims. The action is dismissed with costs payable by the plaintiff to the defendant in the amount of $95,746.59.

________________________________ F.L. Myers J.

Date: November 28, 2014