Court File and Parties

COURT FILE NO.: CV-14-0274-00 DATE: 2016-09-15

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

2403177 Ontario Inc. Michael Strickland, for the Applicant Applicant

- and -

Bending Lake Iron Group Limited Robert MacRae, for the Respondent Respondent

Kenneth Kraft, for A. Farber & Partners Inc. Paul Denton the Receiver Caitlin Fell, for Legacy Hill Resources Ltd.

HEARD: May 30, 2016 and by way of written submissions received at Thunder Bay, Ontario

Regional Senior Justice D. C. Shaw

Decision On Costs

[1] On September 11, 2014, Bending Lake Iron Group (“BLIG”) went into receivership on the application of its secured creditor, 2403177 Ontario Inc. (the “Secured Creditor”). A. Farber and Partners Inc. (the “Receiver”) was appointed receiver over BLIG’s property pursuant to s. 243(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c.B-3. On November 27, 2014, the court approved, on consent of BLIG, a Sales and Investor Solicitation Process for BLIG’s property (the “SISP Order”).

[2] In December 2015 the Receiver moved for court approval of an asset purchase agreement (the “Sale Agreement”) with Legacy Hill Resources Ltd. (“Legacy Hill”) for the purchase and sale of substantially all of BLIG’s property consisting of an undeveloped iron ore site located northwest of Thunder Bay.

[3] BLIG opposed the motion and brought its own cross-motion requesting, among other relief, postponement of the sale.

[4] On January 8, 2016, I approved the Sale Agreement and ordered that the property of BLIG be vested in Legacy Hill upon the filing of a receiver’s certificate (the “Approval and Vesting Order”). I dismissed BLIG’s motion to postpone the sale and for other relief.

[5] Following my decision, the Receiver prepared draft orders which were circulated to the parties. Despite several requests, counsel for BLIG declined to approve the draft orders or to identify any issues with them. An appointment was taken out by the Receiver to settle the orders. At the hearing to settle the orders, counsel for BLIG agreed to approve the draft orders as prepared by the Receiver. Costs of that hearing were reserved to be assessed together with the assessment of the costs relating to the motion to approve the Sale Agreement and the motions by BLIG to postpone the sale.

[6] The Receiver, the Secured Creditor and Legacy Hill now seek their costs of the motions and the hearing to settle the orders. The costs of the motions are over and above the costs that would otherwise have been incurred in an uncontested Sale and Approval motion.

[7] The Receiver and the Secured Party request their costs on a substantial indemnity basis. The Receiver seeks $33,468.66, all inclusive. The Secured Party seeks $13,499.00, all inclusive. In the alternative, the Receiver requests partial indemnity costs of $22,681.88, all inclusive, and the Secured Party requests partial indemnity costs of $8,700.00, all inclusive.

[8] Legacy Hill does not seek substantial indemnity costs, but it requests partial indemnity costs of $25,771.59, all inclusive.

[9] At the costs hearing, Mr. Robert MacRae, counsel for BLIG and Mr. Wetelainen, advised that he did not oppose the quantum of either the substantial indemnity or partial indemnity costs requested by the Receiver and by the Secured Creditor, but he opposed the principal of awarding costs on a substantial indemnity basis. He objected to the quantum of partial indemnity costs requested by Legacy Hill, on the basis that they were excessive, and submitted that they be awarded at a sum equal to the partial indemnity costs of the Secured Creditor.

[10] Mr. MacRae requested time to file written material on behalf of Mr. Wetelainen, to oppose the request that Mr. Wetelainen pay the costs personally. Because Mr. Wetelainen may not have had effective notice of the claim made against him personally for costs, I gave Mr. MacRae time to file written material on that issue and gave the other parties time to respond to those materials if they wished. Written submissions were subsequently received on behalf of Mr. Wetalainen. The other parties elected to rely on the material that they had filed on the costs hearing and not to file further material responding to Mr. Wetelainen’s submissions.

[11] There are, therefore, two main issues:

(1) What scale of costs should be awarded? (2) Should BLIG and Mr. Wetelainen be jointly and severally responsible for the costs?

[12] A third issue is the amount of partial indemnity costs to which Legal Hill is entitled.

Submissions of the Parties Seeking Costs

1. Scale of Costs

[13] First, the Receiver and the Secured Creditor submit that BLIG brought numerous motions in an attempt to delay, undermine and ultimately frustrate the Sale Agreement. They submit that those motions were unfounded and unnecessarily ran up the cost of litigation.

[14] Second, it is submitted that the allegations in the motions brought by BLIG, in affidavits sworn by Mr. Wetelainen, impugned the conduct of the Receiver by claiming the Receiver had acted in an unfair, prejudicial manner, deceiving Mr. Wetelainen and acting solely as agent for Legacy Hill. These allegations were unfounded and rejected by the court.

[15] BLIG responds that there was a genuine issue to be determined on its motions. Although the court found that BLIG’s position was wrong, it is submitted there was no finding that BLIG was “on the side of wrong” or that its actions were abusive. BLIG submits that there was no finding that any of BLIG’s principals acted to deprive BLIG of any assets. There was also no finding that BLIG’s motions were vexatious or frivolous.

2. Liability of Mr. Wetelainen for costs

[16] The Receiver, the Secured Party and Legacy Hill submit that Mr. Wetelainen, the primary affiant for BLIG, made various unproven, scandalous allegations impugning the Receiver’s reputation and conduct in the sale process. It is submitted that Mr. Wetelainen caused BLIG to oppose the Sale Approval Motion primarily to allow himself and other BLIG shareholders the opportunity to refinance the property instead of allowing the sale to Legacy Hill to go through. In this regard, it is alleged that BLIG was merely acting as the “nominee and surrogate” for Mr. Wetelainen. It is noted that BLIG will be unable to pay a costs award and that if costs are not awarded against Mr. Wetelainen, the Secured Creditor will ultimately bear the costs of the Receiver’s counsel and its own counsel.

[17] The parties requesting costs against Mr. Wetelainen refer to s. 131(1) of the Courts of Justice Act and submit that it gives the court jurisdiction to hold a non-party liable for costs where it is found to be the “real litigant” behind the action:

s. 131(1) Subject to the provisions of an Act or rules of the court, the costs of and incidental to a proceeding are in the discretion of the court, and the court may determine by whom and to what extent the costs shall be paid.

[18] The parties seeking costs submit that a court should generally apply a three-fold test, citing Television Real Estate Ltd. v. Rogers Cable T.V. Ltd. (1997), 34 O.R. (3d) 291 (C.A.), at para. 16:

(a) the non-party must have status to bring the action; (b) the plaintiff must not have been the true plaintiff; and (c) the plaintiff must have been “a man of straw” put forward to protect the true plaintiff from liability for costs.

[19] The parties seeking costs also refer to the wider discretion that the court has to award costs under s. 197(1) of the Bankruptcy and Insolvency Act:

s. 197(1) Subject to the Act and to the General Rules, the costs of and incidental to any proceedings in court under this Act are in the discretion of the court.

[20] As such, it is submitted that it is not strictly necessary for the court to apply the three part test set out in Television Real Estate to exercise its discretion to award costs against a non-party, although such awards should still be reserved for “exceptional cases”. It is submitted that this is an “exceptional case” because Mr. Wetelainen acted in contravention of the SSIP Order by trying to run a parallel sales process unbeknownst to the Receiver and because he made unfounded allegations impugning the Receiver’s conduct.

[21] Mr. Wetelainen submits that there is no evidence that BLIG was not the true respondent in the action. Mr. Wetelainen submits that at all times BLIG’s management acted on behalf of all shareholders, stakeholders, creditors and affected aboriginal communities. Mr. Wetelainen accepts that he would have benefitted personally from a successful restructuring of BLIG. However, he points out that there were approximately another 185 shareholders of the company. Mr. Wetelainen submits that his actions as a member of BLIG’s management were not those of a nominee or surrogate for any party expect BLIG proper.

Discussion

[22] I have determined that costs should be payable to the Receiver on a substantial indemnity basis.

[23] I agree with the submission that the allegations against the Receiver by BLIG essentially amounted to a claim that the Receiver acted partially towards Legacy Hill. The Receiver is an officer of the court. The allegations were unfounded attacks about the Receiver’s integrity and reputation.

[24] With respect to the Secured Creditor, costs will be awarded on a partial indemnity scale. The Secured Creditor was not subject to an attack on its integrity and reputation by BLIG.

[25] Costs are therefore assessed against BLIG in favour of the Receiver in the sum of $33,468.66, on a substantial indemnity basis. Costs are assessed against BLIG in favour of the Secured Party in the sum of $8,700.00 on a partial indemnity basis.

[26] As noted above, although BLIG does not contest the quantum of substantial indemnity costs claimed by the Receiver and the quantum of partial indemnity costs claimed by the Secured Creditor, it does contest the quantum of partial indemnity costs claimed by Legacy Hill, namely, $25,771.52 and submits that Legacy Hill should receive no more than the partial indemnity costs sought by the Secured Creditor.

[27] Legacy Hill submits a Bill of Costs. The hours docketed by the solicitors for Legacy Hill and the partial indemnity hourly rates are, generally, reasonable.

[28] The proceeding was relatively complex. The proceeding was important to Legacy Hill, both to secure the purchase and to protect its reputation which BLIG attacked. BLIG’s opposition to the motion and its cross-motion unduly lengthened the proceeding. BLIG should have reasonably expected that in the event it was unsuccessful, there would be a significant cost award in favour of Legacy Hill. In my view, the sum of $8,700 which the Secured Creditor has accepted for partial indemnity costs would not be an appropriate yardstick for determination of Legacy Hill’s partial indemnity costs. I find the sum of $8,700 to be modest in the circumstances of this case. However, I also have the partial indemnity costs of the Receiver, namely $22,681.88, as a comparative amount. Counsel for the Receiver carried the bulk of the argument for the parties opposed to BLIG. Having regard to the relative roles played by the Receiver and Legacy Hill on the motions, the partial indemnity costs of Legacy Hill, in my view, are fairly set at $13,500.00, all inclusive, which is approximately 60% of the Receiver’s partial indemnity costs.

[29] The issue remains as to whether Mr. Wetelainen should be jointly and severally liable for the costs awards.

[30] In my view, the governing legislation for costs is s. 197(1) of the Bankruptcy and Insolvency Act. As noted by the Court of Appeal in Dallas/North Group Inc., Re, [2001] O.J. No. 2743 (C.A.), at para. 11, because there are no limiting words, the court is given the widest discretion. Because it is a federal statute, a court must interpret it within its own parameters and avoid using provincial rules of practice.

[31] In 1730960 Ontario Ltd., Re, 2009 ONCA 720, Juriansz J.A. held that the standard for awarding costs against a non-party in proceedings under the Bankruptcy and Insolvency Act is set out in Dallas/North Group Inc., Re.

[32] In Dallas/North Group Inc., Re, the key to awarding costs against the non-party was the finding that the bankruptcy proceeding had been brought for a wrongful collateral purpose and was an abuse of the bankruptcy process. The true purpose of the proceeding was not to obtain the distribution of assets but to remove an officer and director of a third-party company and reduce shareholdings.

[33] In 1730960 Ontario Ltd., Re, Juriansz J.A. found that the case before him was quite different. He described the circumstances surrounding the non-party’s involvement in the case before him. In many respects those circumstances are similar to the circumstances surrounding Mr. Wetelainen’s involvement in the case before me. It was alleged that the non-party, Rompson Investment Corporation, was at all times the real moving party, that Rompson’s principal, who was the affiant for all the affidavits of the moving party, 2205305 Ontario Inc., referred to Rompson and 220 interchangeably in the affidavits, that Rompson and not 2205305 had the largest economic stake in the outcome and that any cost order made against 2205305 on the motion would be an “empty order” because 220 had no assets.

[34] At para. 8, Juriansz J.A. referred to the abuse of the bankruptcy process in Dallas/North Group Inc., Re, and stated:

[8] The case before me is quite different. Accepting that 220 was incorporated for the specific purpose of purchasing the property of the bankrupt, its bringing of the motion is consistent with attempting to achieve its corporate purpose. The contention that 220 was acting as a nominee or surrogate of the sole shareholder, Romspen, is simply an attempt to lift the corporate veil. Cost awards against non-parties always involve the exceptional exercise of judicial discretion. Absent fraud, abuse of the court’s process in general and the bankruptcy process in particular to serve a collateral purpose or similar wrongdoing, there is no basis for looking behind a moving party’s corporate legal personality to award costs against its parent.

[35] Apply the criteria set out by Juriansz J.A., I have concluded that I am unable to find Mr. Wetelainen personally liable for costs. I am well aware that the costs award against BLIG will not be effectively enforceable.

[36] There is no allegation that Mr. Wetelainen was guilty of fraud in these proceedings. Further, although I have previously found that Mr. Wetelainen was in breach of the Sales and Investor Solicitation Process order, by personally engaging in negotiations with Legacy Hill without the consent or knowledge of the Receiver, I do not find that this breach, and the subsequent opposition by BLIG to the Receiver’s motion for approval of the Sale Agreement and BLIG’s motion to postpone the sale, constituted a misuse of the court and the court process for an improper collateral purpose.

[37] On the authority of 1730960 Ontario Ltd., Re, without proof of fraud or abuse of the court’s process or the bankruptcy process for a wrongful collateral purpose, the court should not go behind the moving party’s corporate veil to award costs against its principal shareholder who is directing the litigation and who stands to personally benefit from its outcome.

[38] I have considered the decision of Cumming J. in Party City Ltd., Re (2002), 32 C.B.R. (4th) 286 (Ont. S.C.J.). As discussed by Juriansz J.A. in 1730960 Ontario Ltd., Re, the decision of Cumming J. to award costs against a non-party was based on a finding that the non-party had made a meritless allegation of actual fraud on the part of the receiver. Although Mr. Wetelainen alleged that the Receiver had shown a lack of impartiality in its conduct with Legacy Hill, that allegation did not, in my view, rise to the level of an allegation of actual fraud. Although the impugning of the Receiver’s conduct warranted a substantial indemnity costs order, it does not warrant the exceptional order of a non-party costs award.

Conclusion

[39] For the reasons given, BLIG is ordered to pay the following costs, all inclusive:

(a) To the Receiver, on a substantial indemnity basis - $33,468.66; (b) To the Secured Creditor, on a partial indemnity basis - $8,800.00; and (c) To Legacy Hill, on a partial indemnity basis - $13,500.00.

Regional Senior Justice D. C. Shaw

Released: September 15, 2016