Court File and Parties
COURT FILE NO.: 15-66979 DATE: 2021/03/10 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
Doyle Salewski Inc., in its capacity as Trustee in Bankruptcy of Golden Oaks Enterprises Inc. and Joseph Gilles Jean Claude Lacasse, Plaintiff
– and –
John and Susan McKillip et al., Defendants
COUNSEL:
Gordon Douglas and Jordan Deering, for Doyle Salewski Inc. Alyssa Tomkins and James Plotkin, for the McKillips
HEARD: In writing
COSTS ENDORSEMENT
GOMERY, J.
1On December 11, 2020, I ruled on motions to dismiss by seven of the eight remaining defendants in this action. I granted the motion by John and Susan McKillip and struck the claim against them, without leave to amend. I dismissed all of the other motions. The other defendants have reached a settlement with the plaintiff Doyle Salewski Inc. (the “Trustee”) with respect to their costs on the motions. The McKillips have not, and now seek their costs on both the motion and the action.
2For the reasons that follow, I conclude that the McKillips are entitled to $42,836 in costs, payable within 30 days of this decision. The costs shall be paid by the Estate or, if it lacks the funds to pay, by the Trustee personally.
Background
3This action arises from the ashes of a Ponzi scheme orchestrated by Jean-Claude Lacasse through his company, Golden Oaks Enterprises Inc. (“Golden Oaks”). After the company went into receivership in July 2013, Doyle Salewski Inc. (the “Trustee”) commenced numerous lawsuits in Superior Court and Small Claims Court to recover money paid to those who had dealings with Golden Oaks.
4In 2019, I granted judgment to the Trustee in seventeen of these actions (the “Unjust Enrichment Actions”), including two Small Claims Court actions against Susan McKillip. [1] I held that she was required to repay $18,000 to the Estate, the amount of usurious interest she had received on short-term loans made to Golden Oaks. I rejected the Trustee’s claims for return of commissions paid to various defendants, including a claim for a further $30,000 against Ms. McKillip, because the commission agreements that she and others had with the company constituted a juristic reason for payment of the amounts at issue. [2] Both the Trustee and the defendants have appealed my decision in the Unjust Enrichment Actions.
5In this action, the Trustee sued parties who allegedly provided services to Golden Oaks or promoted it. Despite its age, the lawsuit has not advanced past the pleadings stage.
6The action was started by notice of action issued in December 2015. In his statement of claim on January 20, 2016 (the “2016 SOC”), the Trustee claimed over $10,000,000 from fourteen defendants, including the McKillips, based on a cause of action for contribution and indemnity (the “C&I claim”). The C&I claim was the only claim made against the McKillips. Additional claims were advanced against other defendants. These included claims in negligence, breach of contract and breach of fiduciary duty, statutory claims pursuant to s. 95 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 [3] and unjust enrichment claims.
7The Trustee served and filed a Fresh Amended Statement of Claim ten days later, on February 1st, 2016 (the “Amended 2016 SOC”). The changes did not affect the size of or nature of the claim against the McKillips.
8On August 30, 2019, the Trustee served a fourth version of its pleading (the “2019 SOC”). This was the version of the statement of claim that gave rise to the first set of motions to strike. Claims for damages and for accounting and disgorgement were added to the C&I claim. The list of defendants was modified to account for the settlement of some claims and the addition of a company owned by one of the remaining defendants.
9In January 2020, I ruled on a first set of r. 21 motions presented by seven of the defendants. [4] I held that the claims for disgorgement and accounting, made against all defendants except the McKillips, were not bound to fail and so should be allowed to proceed. I held that the Trustee’s C&I claims were untenable and struck them. I also concluded that there were fundamental deficiencies with respect to the Trustee’s claim for damages: there were no allegations of a loss suffered by Golden Oaks as a result of the defendants’ alleged acts and omissions, and no allegations of material facts that could found a claim in negligence against the McKillips. I granted leave to the Trustee to amend the deficiencies besetting the damages claims. I did not grant leave to amend the facts alleged with respect to the C&I claims, as they were unsalvageable.
10The Trustee served a fourth version of the Statement of Claim on April 3, 2020 (the “2020 SOC”). The claim for damages was increased to $14,000,000. Allegations in support of the claim for damages, and additional allegations against the McKillips, were added. The C&I claims, and some of the material facts alleged in support of them, were abandoned.
11In December 2020, I granted the McKillips’ second motion to strike. Notwithstanding the additional allegations against them, I found that the 2020 SOC did not give rise to a reasonable cause of action against them in negligence. I dismissed the motions to strike brought by the other defendants, without prejudice to their right to bring further motions based on limitations arguments.
What costs are the McKillips entitled to recover?
12The McKillips seek costs of $48,835.79 in the action. They say they are entitled to substantial indemnity costs prior to the filing of the 2019 SOC because, in earlier versions of the statement of claim, the Trustee alleged that they had engaged in fraud. They claim partial indemnity costs for the sixteen-month period between the issuance of the 2019 SOC and the December 2020 decision on the McKillips’ second motion to strike.
13The Trustee concedes that the McKillips are entitled to recover the reasonable costs of the action but argues that amount claimed is excessive. He denies that substantial indemnity costs should be awarded. He proposes costs in the range of $15,000 to $20,000.
14I conclude that the McKillips are entitled to recover more than the range proposed by the Trustee, but less than what they have claimed.
15In exercising discretion to award costs, a court must consider the factors set out in r. 57.01(1). Ultimately, however, a cost award must be fair, reasonable and proportionate in the circumstances of the case. [5]
Substantial indemnity or partial indemnity?
16Turning first to the scale of costs, I find that it is appropriate to award the McKillips costs on a substantial indemnity basis for the period prior to the issuance of the 2019 SOC, and partial indemnity costs thereafter.
17In the 2016 SOC, in a section entitled “Fraud”, the Trustee alleged that the defendants knew, or ought to have known, that Golden Oaks was being used to operate a Ponzi Scheme, and that their promotion of the company aided and abetted a fraud against investors. This section was unchanged in the Amended 2016 SOC. The claim for contribution and indemnity was based on the proposition that the McKillips were responsible for a Ponzi scheme that caused millions of dollars in losses to innocent creditors and investors.
18A court awards costs on a substantial indemnity basis to indicate its disapproval of inappropriate litigation tactics and to discourage other litigants from engaging in them. Unproved allegations of fraud fall into the category of such tactics: [6]
Cost sanctions are imposed for these kinds of unproved allegations because they are rooted in assertions of dishonesty and deceit and go to the heart of a person’s integrity: Bargman v. Rooney (1999), 30 C.P.C. (4th) 259 (Ont. Gen. Div.) at pp. 268-269; Dyer v. Mekinda Snyder Partnership Inc. (1998), 21 O.R. (3d) 180 (Gen. Div.) and see cases referred to at pp.184-185. Where serious allegations of dishonest or illegal acts are made, but are so inadequately pleaded that they are not permitted to go forward, costs consequences should likewise follow. These allegations have stood in the public record and over the heads of the defendants.
19The Trustee argues that substantial indemnity costs should not be awarded because fraud was not clearly pleaded. He notes that, in their costs submissions, the McKillips argue that the 2016 SOC and Amended 2016 SOC contained “nebulous allegations” that did not clearly identify the causes of actions the Trustee sought to advance. He questions why, in these circumstances, the McKillips would not have made a demand for particulars. In any event, the Trustee argues, it was apparent, as of November 2018, that he was not alleging that the McKillips themselves engaged in fraud.
20I begin by observing that fraud was clearly alleged. There was a section entitled “Fraud” in the 2016 SOC and the Amended 2016 SOC. Any reasonable person reading the pleading would understand that the Trustee had evidence to prove that the McKillips either knowingly participated in a Ponzi Scheme to defraud investors or that they were willfully blind as to its existence, and that they engaged in this conduct for their financial benefit.
21I do not agree that the Trustee’s failure to provide particulars of the McKillips’ conduct immunizes it from enhanced costs. If anything, the lack of particulars underscores the Trustee’s recklessness in lobbing the fraud grenade. This regrettable approach is further highlighted by the Trustee’s inability, following the first successful motions to strike, to add allegations of material facts to the statement of claim that would support even a claim in negligence against the McKillips. This shows the lack of basis he ever had to make a claim of any intentionally dishonest wrongdoing against them.
22The Trustee’s recklessness in making the fraud allegation is not absolved by the McKillips’ decision not to seek particulars. They chose instead to bring a motion to strike so that they could remove themselves entirely from the litigation. This was a perfectly legitimate response.
23Finally, I do not accept that the McKillips’ entitlement to substantial indemnity costs should have ended when the Trustee’s representative advised, in a cross-examination in November 2018, that the action was “not a claim of fraud; it’s a claim for contribution and indemnity arising out of a Ponzi scheme that was a fraud” in which the defendants “negligently or intentionally assisted”. I, frankly, do not see much difference between alleging that someone engaged directly in a fraud and alleging that they intentionally assisted in perpetrating a fraud. In any event, the fraud allegations remained “in the public record and over the heads of the defendants” until the end of August 2019, when the statement of claim was amended to strike the contribution and indemnity claim. The suggestion that the McKillips knowingly participated in a fraud was abandoned at that point not because the Trustee chose to clarify his allegations against the McKillips, but because the C&I claim was struck by the court, leaving only a claim in negligence against them.
Are the fees claimed reasonable and proportionate?
24The amount claimed is based on the McKillips’ share of the total fees billed by their counsel, Caza Saikaley LLP, in the action. The firm has submitted detailed dockets. It billed over $150,000 in fees and disbursements in this case. Some of these fees and disbursements were incurred on behalf of other clients who either settled with the Trustee in 2018 or retained new counsel in December 2020. As a result, until November 19, 2018, the McKillips were responsible for only 1/7 or 14.3% of the firm’s bills in respect of the action. They were responsible for 50% of Caza Saikaley’s fees and disbursements between November 20, 2018 and December 10, 2019. They have been the only defendants represented by the firm since December 11, 2020.
25Based on this calculus, the McKillips’ share of the total fees and disbursements over the history of the action is $66,437.22. This would support their claim for $48,835.79 in mixed partial and substantial indemnity costs, if I accept that the fees billed for all components of the work were reasonable.
26I find that Caza Saikaley’s rates were reasonable. The hourly rates charged were consistent with the local market and well below what might have been charged by a bigger firm, especially given the complexity of this case and the novel questions of law raised in the action. Work on the file was appropriately split between lawyers of varying vintages and supplemented by the efforts of law clerks and articling students.
27I find that this was an important case, whether measured in terms of its impact on the McKillips or the implications of the outcome for other similar claims. The Trustee sued for millions of dollars based primarily on a novel C&I claim and then, as of August 2019, a claim for damages and an accounting. He should have expected that the action would be vigorously defended, particularly given the fraud allegations in the 2016 SOC and Amended 2016 SOC.
28The Trustee contends that the fees billed contradict Caza Saikaley’s assertion that it was able to reduce costs by working collaboratively with other defence counsel. It says that the quantum of fees suggests, on the contrary, that the firm took on a leadership role on the defence team in conducting legal research, drafting motion materials and preparing legal arguments.
29I am always surprised when a party tries to argue that opposing counsel has generated excessive fees when that party has not disclosed their own costs. That is the case here. The Trustee’s failure to file their own dockets leads me to infer that the Trustee’s counsel spent at least as much time as the McKillips’ lawyers in this litigation. [7]
30I also do not know how Caza Saikaley’s invoices compare with those billed by other defence counsel. I would not be surprised if its fees were higher, given the number of defendants it represented through the history of the litigation. The Trustee is benefitting from this arrangement, because the fees claimed by the McKillips are based only on their share of fees and disbursements. In any event, my role in fixing costs is not to assess whether costs claimed are as low as those billed by other law firms, but rather whether they are reasonable.
31I conclude that, for the most part, the work done was proportionate to the required effort to defend a case of this size and nature. The one aspect of the costs claimed that I cannot accept relates to the fees for the second motion to strike.
32The summary of legal fees submitted by Caza Saikaley does not distinguish between time recorded on the first and second motions to strike. In the interest of avoiding a line-by-line review of the dockets, and given that my decision on the first set of motions was released in January 2020, I will assume that all of the work ascribed in the time charges to a motion to strike in 2019 related to the first motion and all of the work in 2020 to the second. The McKillips’ share of the fees on the first motion, on a full indemnity basis and including HST, amounted to $14,291, while their share of the fees on the second totaled $24,460.
33No explanation has been provided for the significantly greater cost on the second motion. Hourly rates charged by the McKillips’ lawyers increased marginally in 2020, but not nearly enough to account for the discrepancy. The second motion was heard in writing, and involved a narrower set of issues, since the arguments regarding the C&I claims and disgorgement/accounting claims had been fully adjudicated on the first motion. As a result, it should have required less effort.
34I can only conclude that the cost of the second motion reflects, at least in part, the decision by the McKillips’ counsel to advance arguments on the second motion that they had conceded on the first set of motions. I held that this strategy was abusive and unfair to the plaintiff and declined to consider the arguments at issue.
35In these circumstances, I conclude that the amount awarded on the second motion should be reduced to bring it in line with the costs on the first motion. As a result, I am reducing the McKillips’ award by $6000, which is roughly 60% of the difference between the fees generated on each of the two motions.
36Taking all of this into account, I conclude that the McKillips are entitled to costs of $42,836 in the action. Considering the fraud allegations, the work reasonably done to bring two successful motions to strike, and the importance of the outcome to all concerned, these costs are fair and proportionate.
Should costs be payable by the Estate or the Trustee?
37The McKillips ask the court to order that, if the Estate cannot pay the costs awarded, the Trustee should pay it personally. They argue that this is not an action where, pursuant to s. 197(3) of the BIA, the Trustee is presumptively immune from a costs order.
38The Trustee contends that there is no basis to depart from the usual rule, in a proceeding like this, that a costs award against the Trustee should be payable by the Estate. He also says that this is a moot issue, since the Estate has enough money to pay a reasonable award. Since I have already determined that the McKillips are entitled to costs above the Trustee’s proposed range, however, I must address the issue.
39The Trustee relies on the 1995 decision by the Court of Appeal in Canadian Imperial Bank of Commerce v. 437544 Ontario Inc. [8] to argue that costs awards against a trustee personally are only made exceptionally. The decision establishes that “a trustee in bankruptcy will be personally liable for costs where a trustee brings an action and the estate has insufficient assets to pay the costs in the event the trustee is unsuccessful”. It does not stand for the proposition, as stated in the Trustee’s submissions, that such awards are otherwise made only “where the trustee or receiver has acted irresponsibly or is guilty of some misconduct”.
40As held by the Court of Appeal more recently in Akagi v. Synergy Group (2000) Inc., 2015 ONCA 77 [9]: “It does not matter that the receiver or trustee was acting in good faith or that it appeared desirable to the receiver or trustee to pursue the proceeding; as an unsuccessful litigant, they may still be liable for costs”. The general rule set out in Akagi is as follows:
In … non-bankruptcy situations, the law is clear that a receiver or trustee assuming the role of a “real litigator” runs the risk of being personally liable for costs, as is any unsuccessful litigant, and litigates at its peril in the absence of a source of indemnity available to it – generally the assets of the estate or a contract of indemnity with the creditor or creditors
41In other words, the ordinary costs rules in civil proceedings apply to litigation with a trustee that is not subject to the presumption at s. 197(3) of the BIA. As a result, a party who obtains the dismissal of an action by a trustee is entitled to recover their costs on the standard “loser pays” model. The trustee will be indemnified by the estate, if there are funds in the estate to pay the cost award. If, however, there are not sufficient funds, the trustee must pay the award personally.
42The facts in Akagi are readily distinguishable from this case. It involved a receiver who was found to have lost all objectivity and embarked on a personal crusade to obtained evidence of a tax fraud by obtaining a series of ex parte orders with sweeping investigatory powers. The Trustee in this case, by contrast, took legal action only after obtaining approval, first from estate inspectors and then from the court, following a show cause hearing.
43On the other hand, I do not see why the McKillips should face the prospect of being unable to recover a reasonable portion of their costs. The McKillips were sued by the Trustee for millions of dollars in a lawsuit in which they were publicly accused, for almost four years, of having committed fraud. They brought two motions to strike, both successful, which resulted in all claims against them being struck. To the extent that there is any risk that the Estate may have insufficient funds to indemnify them for some of their legal costs, it seems to me that this risk should be borne by the party who brought the lawsuit.
44I accordingly conclude that the Estate should pay the costs award but that, if it lacks the funds to do so, the Trustee should pay it personally.
Should the costs award be set off against amounts that Susan McKillip must pay in the Unjust Enrichment Action?
45The Trustee asks that costs awarded to the McKillips in this action should be set off against $24,450 that Susan McKillip has been ordered to pay in the Unjust Enrichment Action, [10] as well as any additional amounts that she may be required to pay if the Trustee’s appeal of my judgment in that Action succeeds. In line with this argument, the Trustee says that the payment of costs to the McKillips ought to be suspended pending the outcome of the appeal in those actions. No authority is advanced in support of this position.
46The Trustee has not established a right to equitable set-off. [11] In the Unjust Enrichment Action, Ms. McKillip was sued as a lender to Golden Oaks. I held that she was unjustly enriched by interest remitted to her by the company and so she had to return it. In this action, she was sued as a promoter of the company, based on causes of action for contribution and indemnity and negligence. The claims advanced against her in the two actions were based on different legal theories and facts. John McKillip was furthermore not a party to the Unjust Enrichment Action. There is no reason why his recovery of costs in this action should be delayed pending the outcome of an appeal in another lawsuit in which he was not involved.
47I accordingly will not order that the costs payable to the McKillips in this action be subject to set-off of amounts she has been ordered to pay, or may be ordered to pay, in the Unjust Enrichment action, nor will I suspend enforcement of the costs order in this case.
Disposition
48The McKillips are entitled to $42,836 in costs, payable within 30 days of this decision. The costs shall be paid by the Estate or, if it lacks the funds to pay, by the Trustee personally.
Justice Sally Gomery
Released: March 10, 2021
COURT FILE NO.: 15-65108 or 66979 DATE: 2021/03/10 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
Doyle Salewski Inc., in its capacity as Trustee in Bankruptcy of Golden Oaks Enterprises Inc. and Joseph Gilles Jean Claude Lacasse, Plaintiff
– and –
Susan and John McKillip et al., Defendants
COUNSEL:
Douglas Law and Jordan Deering, for the plaintiff Alyssa Tomkins and James Plotkin, for the defendants
COSTS ENDORSEMENT
Justice S. Gomery
Released: March 10, 2021
Footnotes
1Doyle Salewski Inc. v. Scott, 2019 ONSC 5108.
2Although my reasons on the seventeen actions refer at the outset to a claim for commission payments against Susan McKillip, the section of my reasons dealing with claims for commission payments does not mention that claim against her. This appears to have been an oversight on my part. However, the same reasoning that led to the disallowance of claims for repayment of commission made to other defendants applies to the claim for return of commissions paid to Ms. McKillip.
3R.S.C. 1985, c. B-3 (the “BIA”).
4Doyle Salewski Inc. v. Scott, 2020 ONSC 682.
5Boucher v. Public Accountants Council for the Province of Ontario (2004), 71 O.R. (3d) 291 (C.A.); Elbakhiet v. Palmer, 2014 ONCA 544, at para. 36.
6Manning v. Herb Epp, at para. 8; see also CBS Outdoor Canada v. Clarity Outdoor Media Inc., 2012 ONSC 3702, at para. 21.
7Frazer v. Haukioja, 2010 ONCA 249, at para. 73; Bieberstein v Kirchberger, 2015 ONSC 6136, at para. 6.
8Canadian Imperial Bank of Commerce v. 437544 Ontario Inc..
9Akagi v. Synergy Group (2000) Inc., 2015 ONCA 77, at para. 23.
10This includes the $18,000 in usurious interest plus $6450 in costs that she has been ordered to pay.
11Holt v. Telford, [1987] 2 SCR 193, at para. 35; Speciale v. Giardino, 2012 ONSC 1876, at para. 27.