Court File and Parties

COURT FILE NO.: 31-OR-208055-T DATE: 20160630 SUPERIOR COURT OF JUSTICE – ONTARIO IN BANKRUPTCY

IN THE MATTER OF THE BANKRUPTCY OF MICHAEL ANTHONY WEKERLE OF THE CITY OF TORONTO IN THE PROVINCE OF ONTARIO

RE: Rohit Sehgal, Applicant AND: Michael Wekerle, Respondent

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

COUNSEL: Catherine Francis, for the Applicant Deborah Palter, for the Respondent

HEARD: In Writing

Endorsement

[1] The applicant in this bankruptcy application, Rohit Sehgal (the “applicant”), seeks his costs of the application totaling $39,778.83 on a partial indemnity basis. The respondent, Michael Wekerle (the “respondent”), paid the applicant an amount on the day before the hearing of the bankruptcy application. The bankruptcy application was subsequently dismissed on consent of the applicant. The respondent seeks his costs of $60,555 on a substantial basis.

Background

[2] The applicant, the respondent and a third party entered into an arrangement under which the three parties invested in a New York condominium, which was registered in the name of the respondent, with equal contributions from the applicant and the third party and a lesser contribution from the respondent. The parties had an agreement with respect to the split of any proceeds on the sale of the condominium. The respondent later agreed to purchase the applicant’s interest but failed to complete that transaction. The applicant subsequently learned of a mortgage on the property and the respondent’s listing of the property for sale. The applicant commenced an action seeking, among other things, an accounting of the proceeds of the mortgage. The sale apparently closed on October 2014 and the third party, but not the applicant, received an amount out of the proceeds of sale at that time. The applicant repeatedly sought confirmation that he would receive his share of the sale proceeds, as well, apparently, as his share of the furnishings, which the respondent disputed. Based on information and searches that the applicant caused to be conducted regarding the respondent and his property, the applicant commenced a bankruptcy application on November 26, 2014. He also amended the statement of claim in his action to seek a declaration that the debt would survive bankruptcy. As mentioned, the respondent paid an amount to the applicant on the eve of the hearing of the bankruptcy application, which was the same amount as the amount paid to the third party. The applicant’s action against the respondent remains outstanding.

Applicable Costs Provisions

[3] Both parties rely on the provisions of section 197(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”) and Rule 3 of the General Rules under the BIA, which provides that courts shall apply their “ordinary procedure” (in this case, the provisions of Rule 57.01 of the Rules of Civil Procedure) to the extent such procedures are not inconsistent with the BIA or the General Rules.

The Applicant’s Claim for Costs

[4] There is no express costs regime in the BIA or Rule 57.01 that applies in this situation to the applicant’s claim for costs. Moreover, the applicant consented to the dismissal of the bankruptcy application. In his costs submissions, the applicant makes two principal arguments.

[5] First, he asserts that the respondent was a fiduciary in his favour. This has not been determined in any legal proceeding. Moreover, on its face, it would appear that the parties had a contractual debtor/creditor relationship, there being no documentary evidence before the Court establishing a trust relationship or a duty of loyalty.

[6] Second, he suggests that the respondent “did not behave in a manner befitting a friend… an allegedly honourable businessman and a public figure.” He suggests that the respondent deliberately forced the applicant to run up costs needlessly. The applicant’s allegations regarding the respondent’s character cannot be the basis of an award of costs and, in any event, there has been no determination of the truth of his assertions.

[7] More significantly, the applicant appears to have used the bankruptcy application as a means of collecting his debt and complains that the respondent forced him to incur these costs by not paying him when he commenced the application. A party commencing a bankruptcy application must do so on the basis of a good faith belief in the insolvency of the debtor at the time of commencement of the application and the consequential need for an orderly and fair distribution of the debtor’s assets on a pro rata basis to all of the debtor’s creditors. I am proceeding on the basis that the applicant had such a belief. However, on that basis, he cannot reasonably argue that the respondent ran up his costs of a collection action. Any claim for costs based on the respondent’s actions must therefore be pursued in a different proceeding.

[8] Accordingly, the applicant’s request for costs is denied.

The Respondent’s Claim for Costs

[9] The respondent argues that he is entitled to substantial indemnity costs for three reasons.

[10] First, he says the application was improper and constituted an abuse of process. He says the application was brought to collect a civil debt without any personal knowledge or evidence of an act of bankruptcy and not with a view to an orderly and fair distribution of the debtor’s assets among its creditors. He suggests this action is deserving of the Court’s rebuke.

[11] There is, however, no judicial determination in this proceeding that the applicant knew that the respondent was not insolvent. Moreover, the respondent is, to a large extent, the author of his own misfortune in failing to keep the applicant properly informed of developments with respect to the condominium. There is also no explanation for his failure to pay the applicant at the same time as he paid the third party. This apparent preferential payment prompted the applicant to commence the application, among other reasons, to crystallize the date for a review of this payment, if it became relevant. The respondent’s actions — combined with evidence of financial pressures on the respondent, who required refinancing of assets to address his personal financial situation — provided a basis for a bona fide belief in the respondent’s insolvency. Accordingly, although it turned out that the respondent was able to satisfy his liabilities as they came due and was not insolvent, the evidence before the Court in this proceeding does not support a finding of bad faith on the part of the applicant in the commencement of the bankruptcy application. Whether, in fact, the applicant was acting in bad faith would require a trial in another proceeding.

[12] Second, the respondent says that a bankruptcy order would have had significant and lasting implications on him from a financial and business perspective. However, there is no evidence that this proceeding actually had any such impact.

[13] Third, the respondent says that the applicant’s actions unnecessarily increased the costs of this proceeding. While the applicant’s actions pertaining to the motion to compel the examination of the respondent may be questionable in this regard, the actual time involved was not sufficiently material to warrant any sanction in the form of a costs award in favour of the respondent. More importantly, as mentioned, the respondent could have avoided the procedural wrangling if he had communicated with the applicant about the condominium and paid him at the same time as he paid the third party.

[14] Based on the foregoing, I also see no basis for an award of costs in favour of the respondent. Accordingly, each party should bear their own costs of this proceeding.

Wilton-Siegel J. Date: June 30, 2016