Court File and Parties

COURT FILE NO.: CV-20-00638503-00CL DATE: 2021-09-22

SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)

RE: 2056706 ONTARIO INC., KOZO HOLDINGS INC., CANCOR DEBT AGENCY INC., Applicants AND: PURE GLOBAL CANNABIS INC., PURESINSE INC., 237A ADVANCE INC., 237B ADVANCE INC., SPRQ HEALTH GROUP CORP. AND THE GREAT CANADIAN HEMP COMPANY, Respondents

BEFORE: S.F. Dunphy J.

COUNSEL: Jeffrey Levine, for the Secured Debenture Holders Ryan Atkinson and Saurabh Singhal, for TS Pharmaceuticals Ltd. Leanne M. Williams and Mitchell W. Grossell, for the Receiver, Thornton Grout Finnigan LLP Hylton Levy and Paul Denton, Court-Appointed Receiver, A. Farber & Partners Inc.

HEARD at Toronto: June 28, 2021

REASONS FOR DECISION: COSTS

[1] On June 28, 2021[^1], I dismissed the motion of the purchaser TS Pharmaceuticals Ltd. against the Receiver alleging breaches by the Receiver of its covenants under an Asset Purchase Agreement. The parties were provided a window of opportunity to settle the amount of the claimed costs failing which written submissions were required to be delivered to me for decision. I have received and reviewed those submissions and my decision and reasons therefor follow.

[2] I ordered costs payable on a partial indemnity scale until the date of an offer to settle and thereafter on a full indemnity basis until the date of the hearing.

Background Facts

[3] The Receiver was appointed by this court on May 1, 2020 as receiver of the respondent corporations following their unsuccessful attempt at a restructuring pursuant to the Companies’ Creditors Arrangement Act, R.S. C. 1985, c. C-36. The Receiver’s primary task was to supervise the liquidation of the debtors’ assets and to distribute same to their creditors.

[4] The debtors operated in a heavily regulated industry – the cannabis business. Given the complexities of obtaining the numerous licenses required to grow and distribute cannabis legally in this country, the non-transferable licenses and permits possessed by the respondent Puresinse Inc. represented a potentially significant source of value if able to be used by a purchaser of the hard assets of the business. Valuable though the opportunity may have been, it was not an “asset” the Receiver was empowered to sell or take possession of in any way. The order appointing the Receiver carefully excluded cannabis assets and any permits or licenses connected with that business from the assets administered by the Receiver to avoid breaching Federal and Provincial regulations and did so in a “belts and suspenders way”.

[5] The APA giving rise to this application by the purchaser sold the related hard assets to the purchaser and agreed to use best efforts to assist the purchaser in pursuing a relatively complex “change of control” transaction that might potentially have preserved the potential value of the licenses for exploitation by the purchaser, but did so without representations or warranty regarding the prospects for success of the effort. Unfortunately, none of the parties – including the purchaser who was responsible for doing its own due diligence – focused on the fact that the crucial permit was scheduled to expire in accordance with its terms before court approval of the APA could even be sought. The permit in question was in the data room in addition to being a publicly available document.

[6] The purchaser’s motion sought damages from the Receiver for loss of the opportunity to salvage the permits in a change of control transaction alleging a breach of the Receiver’s duty to use best efforts in facilitating that transaction. The purchaser alleged the Receiver was required to take steps to renew the permit prior to its expiry despite the express court order prohibiting the receiver from exercising any control over the various cannabis business permits or licenses. The parties agreed that the purchaser’s damages claim – if successful – would be capped at $350,000 although the initial claim advanced was in excess of $1 million. That is the application that I dismissed on June 28, 2020 with reasons delivered on August 16, 2020.

[7] I have engaged in this preamble only to place the dispute and its stakes in some context when assessing the reasonableness of the competing positions advance regarding costs.

[8] The costs claimed by the Receiver are as follows:

a. Fees at partial indemnity from May 1 to June 11 (inclusive of HST) $37,451.59;

b. Fees at full indemnity from June 12 to 28 (inclusive of HST) $ 87,391.37;

c. Lawyer’s fee for appearance at full indemnity (inclusive of HST) $ 6,904.30;

d. Disbursements (incl. HST) $ 2,440.91

Total $ 134,188.17.

Position of the Parties

[9] The Receiver submits that its outline of represents a fair and reasonable claim that itself is significantly below its actual costs of responding to the claim of the purchaser that was ultimately confirmed to be without merit. The Receiver submits that its costs were necessary and reasonable having regard to the number and nature of the collateral issues raised on a simple contractual interpretation matter and various procedural mis-steps of the moving party that the Receiver was required to respond to.

[10] The unsuccessful moving party submits that the amount claimed is unreasonable having regard to all of the circumstances including the amounts at issue and the reasonable expectations of the unsuccessful party. The purchaser suggests that costs in the order of $60,000 would be fair and reasonable in the circumstances. It pleads that its own actual costs were less than half of even that amount.

Analysis and Decision

[11] There is some merit in the positions of both parties.

[12] The claim advanced by the Receiver includes hourly charges for the Receiver’s staff instructing counsel, reviewing affidavits and similar matters. An award of costs in favour of a party represented by counsel (as the Receiver was here) contemplates a reimbursement in whole or in part of the legal expenses incurred by the party – whether of fees or disbursements. It does not normally include an element referable to the hourly costs of the party’s own staff. The Receiver is of course a firm of professionals appointed by the Court to oversee the affairs of the respondents. The hourly charges of the Receiver’s personnel are a direct cost of the insolvency process. Nevertheless, there was no specific order authorizing the Receiver’s own professional fees (as opposed to legal fees and disbursements) to be charged to the unsuccessful moving party. Those costs – more than $13,000 (including HST) - must be deducted from the costs claimed by the Receiver.

[13] Turning to the balance of the dispute, I am disinclined to engage in hindsight armchair quarterbacking of the staffing of this file by the Receiver or the amount of time spent researching or responding to this or that issue. I generally agree with the Receiver that the allegations raised by the moving party purchaser brought into play a variety of fact-specific issues that did little to advance the purchaser’s case (which was fundamentally a contractual interpretation matter) but which nevertheless had to be investigated, tracked down and responded to. The amount claimed was initially more than $1 million, a material sum to which the Receiver was required to devote adequate resources to protect the estate. What I might characterize as the “forensic” side of the process of responding to this motion fell asymmetrically upon the Receiver as it was the Receiver’s actions that were placed in the moving party’s cross-hairs. As well, the significant number of relatively collateral issues pursued gave rise to more complex cross-examinations and further expenses tracking down undertakings.

[14] I agree that the relatively broad scope of the purchaser’s attacks necessitated a full-spectrum response from the Receiver and that in turn drove up the costs of the process.

[15] On the other hand, costs claimed must be assessed in terms of their reasonableness and proportionality. It remains relevant to have regard to the amounts at issue ($350,000 for the bulk of the time during which the expenses were incurred) and the reasonable expectations of the unsuccessful party. The purchaser’s legal team was a fraction the size of team deployed by the Receiver and its actual legal expenses were proportionately smaller.

[16] I do not wish to suggest in any way that the costs incurred by the Receiver were unreasonable per se from the perspective of the receivership itself. Those expenses are, at all events, subject to a different review process. However, the expenses that may be fairly charged to the unsuccessful party in a specific legal proceeding must be assessed from the somewhat narrower perspective of the proceeding giving rise to the award of costs in the first place. Viewed from that vantage point, I consider the amount claimed to be, in the aggregate, an unreasonable amount to ask the unsuccessful party to shoulder for having raised the issue in the first place. I do agree that the purchaser was to some extent the author of its own misfortune. Any adjustment to the Receiver’s claim must of course take that into account as well. A simple contractual interpretation disagreement might well have been presented for a hearing at a fraction of the cost and in a fraction of the time had proper focus been shown at the outset if indeed the claim were judged sufficiently meritorious to be pursued. The purchaser chose a broader front on which to attack and doubtless did so for its own tactical reasons, aiming as it did to procure a significant reduction in the purchase price.

[17] I have already found that the Receiver’s claimed costs ought to be reduced to reflect the professional but non-legal time of the Receiver’s personnel charged to the account of the purchaser. Having regard to that reduction and my overall consideration of proportionality and reasonableness, I would fix the aggregate costs to be paid by the unsuccessful moving party purchaser at $105,000 in total, including disbursements and HST.

Disposition

[18] For the foregoing reasons, the Receiver’s costs payable by the purchaser are fixed at $105,000 including disbursements and HST.

S.F. Dunphy J.

Date: September 22, 2021

[^1]: Reasons were released on August 16, 2021