COURT FILE NO.: CV-20-00654835-0000

DATE: 20220630

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

SIGMA CAPITAL MANAGEMENT GROUP INC.

Applicant

– and –

BENZER LIMITED, RAJNEESH MATHUR and FRIEDMAN LAW PROFESSIONAL CORPORATION

Respondents

Christopher Statham, for the Applicant

Michael Doyle and Sarah Jamshidimoghadam, for the Respondents Benzer Limited and Rajneesh Mathur

HEARD: December 9, 2021

REASONS FOR JUDGMENT

VERMETTE J.

[1] The Applicant makes application for:

a. an order directing the Respondent Friedman Law Professional Corporation (“Friedman”) to release the sum of $258,362.67, presently held in trust, in respect of funds which were paid into court by the Applicant as follows:

i. the sum of $226,584.06 to the Applicant;

ii. the sum of $31,778.61 to the Respondent Benzer Limited (“Benzer”);

b. an order directing Friedman to release the balance of $85,219.90 held in trust as proceeds of settlement from legal proceedings in which Friedman represented the Applicant and the Respondents Benzer and Rajneesh Mathur as follows:

i. the sum of $51,851.86 to the Applicant;

ii. the sum of $28,011.51 to Rajneesh Mathur and Benzer jointly;

iii. the sum of $5,356.53 to Benzer;

c. in the alternative to what is set out in (b), such orders and directions with respect to the balance of $85,219.90 as this court deems just.[^1]

[2] The funds in issue, which are being held in trust by Friedman, come from two sources:

a. a payment in the amount of $258,362.67 from the Accountant of the Superior Court of Justice to Friedman in trust. These monies represent funds (plus interest) that were originally paid into court by the Applicant pursuant to an order requiring it to post security for costs in an action commenced by the Applicant; and

b. a payment in the amount of $130,000 from KPMG LLP (“KPMG”) to Friedman in trust in respect of the settlement of two lawsuits against KPMG, one commenced by the Applicant and one commenced by Benzer and Mr. Mathur. Of this amount, the sum of $85,219.90 remains after payment of legal fees owed to Friedman.

[3] The Applicant, Benzer and Mr. Mathur disagree as to how Friedman should divide up the funds to be paid out of trust. Friedman does not take any position on this Application.

A. FACTUAL BACKGROUND

1. Claim by Komtech Inc. against KPMG

[4] On March 3, 2011, Komtech Inc. (“Komtech”) commenced an action against KPMG for professional negligence in relation to tax advice provided by KPMG to Komtech (“Komtech Action”). Komtech sought damages in the amount of $15 million.

[5] Shortly before commencing the Komtech Action, Komtech had filed a notice of intention to make a proposal under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3.

2. Claim by Benzer and Mr. Mathur against KPMG

[6] On the same day that the Komtech Action was commenced (i.e. on March 3, 2011), Benzer and Mr. Mathur commenced their own claim against KPMG, also for professional negligence in relation to the provision of tax advice (“Benzer Action”). Benzer and Mr. Mathur sought damages in the amount of $3 million. The allegations in the Benzer Action are similar to those in the Komtech Action and are based on the same tax advice that was allegedly provided by KPMG.

[7] Mr. Mathur is the president and a director of Benzer. He is also the former president and CEO of Komtech. Benzer was a minority shareholder of Komtech, owning 12.3% of Komtech.

3. Assignment Agreement

[8] In April 2011, Komtech entered into an Asset Purchase Agreement with 2279591 Ontario Inc. (“227”) which encompassed all of Komtech’s rights and claims against KPMG, including the Komtech Action.

[9] On April 26, 2011, 227 entered into an agreement with the Applicant in trust for the then shareholders of Komtech (“Assignment Agreement”). Pursuant to the Assignment Agreement, the Komtech Action was to be assigned to the Applicant upon completion of the Asset Purchase Agreement. The assignment formally took place on May 18, 2011.

[10] The Assignment Agreement contains the following provisions, among others:

2. In consideration for the KPMG Claims Transfer, the Assignees [i.e. the Applicant in trust for the shareholders of Komtech] agree to assume all of the costs and expenses pertaining to the KPMG Claims including the KPMG Action [i.e. the Komtech Action] except for $200,000 of such costs and expenses, which shall be paid for by the Company [i.e. 227], as progress payments, commencing not earlier than 45 days after satisfaction of the conditions set out in Paragraph 1 above and upon receipt by the Company of a copy of an account for legal services and disbursements regarding the KPMG Action rendered by the lawfirm having carriage of the KPMG Action. For greater certainty at no time shall the Company have any liability for payment of any costs and expenses including legal fees and disbursements exceeding the sum of $200,000, Plus Taxes, if any.

The company will promptly pay the legal bills, as presented, without any questions within 10 days of invoicing. Failing to make such payments within stipulated time frame will constitute breach of this agreement. Notification of breach will be sent by the Assignee and the Company will have 24 working hours to cure the breach.

3. So long as the Company is not in default of its obligation to fund up to a maximum of $200,000 of the costs and expenses as provided for in Paragraph 2 above, the Assignee hereby agrees from the amounts recovered from, in connection with or out of, the KPMG Action, (i) to reimburse the Company for all amounts paid by the Company in connection with or on account of costs and expenses pertaining to the KPMG Action including, without limitation, such part of the $200,000 referred to in Paragraph 2 above as may have been paid by the Company, to a maximum of the amount of the legal costs awarded, if any [;] and (ii) in addition to the amount referred to in paragraph 3(i), to pay to the Company 15% of the net amounts recovered from, in connection with or out of, the KPMG Action, minus the legal costs awarded to the assignee. The Assignee hereby irrevocably directs and shall if requested by the Company executed [sic] a further direction directing, the lawfirm having carriage of the KPMG Action to make the aforesaid payments to the Company fotihwith [sic] upon receipt by such lawfirm of any funds derived from or in connection with the KPMG Action[.]

If the company is in default of its obligation to fund the lawsuit as in item 2 above, then within 10 days it will be liable for liquidating [sic] damages, which will be payable immediately without question, to the consignee, of the unfunded amount to a maximum amount of $200,000, plus accrued interest calculated at 1.5% per month[.] [Emphasis added.]

[11] On May 18, 2011, 227 entered into an agreement with Benzer pursuant to which: (a) 227 assigned, transferred and conveyed to Benzer absolutely all of its rights, title and interest in and to the reimbursement of the costs and expenses (to a maximum of $200,000) under the Assignment Agreement, and to the 15% of the net amount recovered from or in connection with the Komtech Action; and (b) Benzer assumed 227’s obligations regarding the payment of costs and expenses as set out in the Assignment Agreement.

[12] On June 21, 2011, an Order to Continue was obtained and the title of proceeding in the Komtech Action was amended to replace Komtech by the Applicant as the Plaintiff.

4. The litigation and the motion for security for costs

[13] On October 10, 2012, the Komtech Action and the Benzer Action were ordered to be tried together or one after the other, at the discretion of the trial judge. Further, it was ordered that the discovery in one action applied to the other action.

[14] In the fall of 2015, the two actions were transferred to Toronto. Following the transfer to Toronto, the Applicant, Benzer and Mr. Mathur retained Friedman to represent them in both actions.

[15] In late October 2016, KPMG brought a motion for security for costs against the Applicant in the Komtech Action. KPMG did not move for security for costs in the Benzer Action.

[16] The Applicant was unsuccessful on the motion and, on February 8, 2017, it was ordered to pay security for costs in the amount of $250,000 to the credit of the Komtech Action. Benzer took the position that it did not have to provide funding under the Assignment Agreement with respect to security for costs. In an e-mail to representatives of the Applicant dated February 17, 2017, Mr. Mathur stated the following:

The KPMG Motion against the Shareholders in Trust, (as they have refused to provide security for costs or full disclosure of the owners) or its lost judgement in this action has no bearing to, and nothing to do with the main case. Both legal costs and the security deposit is for shareholders to share.

[17] As a result, the Applicant raised funds from the former shareholders of Komtech in order to make the payment. Each of the shareholders of Komtech contributed to the payment into court in proportion to the extent of their shareholdings. Thus, Benzer contributed $30,750.00 (12.3% of $250,000) in its capacity as shareholder of Komtech.

[18] The Applicant also incurred other litigation expenses for both its benefit and the benefit of Benzer and Mr. Mathur in the form of fees paid to Deloitte LLP (“Deloitte”) for an expert report and other services rendered in connection with the litigation. Benzer refused to make payment beyond a small contribution as a former shareholder of Komtech, thereby leaving it to the former shareholders of Komtech as well as the Applicant, without contribution from the shareholders, to absorb this expense. The total amount paid by the former shareholders of Komtech with respect to Deloitte’s services is $15,537.50, including taxes, while the total amount paid by the Applicant without any contribution from shareholders is $13,659.37.

5. Settlement with KPMG

[19] On April 8, 2019, KPMG made an offer to settle both the Komtech Action and the Benzer Action. The offer was as follows:

a. KPMG would pay to the Plaintiffs the all-inclusive sum of $130,000 and consent to an order in the Komtech Action releasing the monies posted as security for costs to the Plaintiffs; and

b. The actions would be dismissed on a without costs basis and the parties would exchange full and final releases.

[20] Ultimately, the Applicant, Benzer and Mr. Mathur accepted KPMG’s offer.

[21] On May 24, 2019, KPMG, the Applicant, Benzer and Mr. Mathur signed a Mutual Full and Final Release (“Release”). It contains the following provisions, among others:

IN CONSIDERATION OF the payment of […] by KPMG LLP to Sigma Capital Management Group Inc., Benzer Limited and Raj Mathur (collectively, the “Plaintiffs”), the receipt and sufficiency of which is hereby irrevocably acknowledged, and other good and valuable consideration, the undersigned, KPMG LLP and each of the Plaintiffs (which term includes their respective heirs, partners, servants, agents, employees, assigns, successors and administrators, officers, directors, affiliated, associated and related companies) and their insurers do hereby Release each other with respect to any and all claims, actions, demands, manner of actions, causes of actions, suits, debts, duties, accounts, bonds, warranties, claims over, indemnities, contracts, losses, injuries, undertakings, sums of money, damages, covenants and liabilities of whatever nature and kind at law or in equity whether actual, pending or potential, which they now have or may hereafter can [sic] or shall have, jointly or severally, one against the other, for or by reason or cause of any matter or thing existing up to the present time, arising out of, connected with or in any way related to the matters raised or that could have been raised in the pleadings in Ontario Superior Court of Justice Court File No: CV-15-11225-00CL titled Sigma Capital Management Group Inc. v. KPMG LLP and Ontario Superior Court of Justice Court File No: CV-15-11227-00CL titled Benzer Limited and Raj Mathur v. KPMG LLP (together, the “Released Claims”).

IT IS FURTHER AGREED AND UNDERSTOOD THAT in the event that any of the parties to this Mutual Release should hereafter make any claim or demands or commence or threaten to commence any actions or other proceedings against any other party in connection with the Released Claims, this Mutual Release may be raised as an estoppel and/or pled as a full and complete defence to any such claim, demand, action or proceeding. Each party will indemnify and hold harmless the other from any damage, loss, liability, legal costs and other expenses (including the fees and expenses of counsel and other out-of-pocket expenses) sustained or incurred as a result of any such claim, including in connection with the investigation, defending and/or settling of any such claim, or in enforcing this Mutual Release.

KPMG AGREES to consent to an order in Court File No.: CV-15-11225-00CL releasing the monies posted as security for costs to the plaintiff in that action [i.e. the Applicant]. [Emphasis in the original.]

[22] Friedman received KPMG’s payment in the amount of $130,000 on May 24, 2019.

[23] As contemplated by the terms of the settlement and the Release, the funds that were posted as security for costs in the Komtech Action were paid out of court along with accrued interest and were deposited into trust by Friedman. The amount paid out of court with accrued interest was $258,362.67 (“Security Funds”). The Security Funds were received by Friedman on August 23, 2019.

[24] A number of invoices from Friedman totaling $44,780.10 were paid out of the settlement funds. These invoices were for legal fees with respect to the Komtech Action and the Benzer Action.

[25] On November 5, 2019, one of Komtech’s former shareholders sent a letter to Friedman to ask for the return of its contribution to the amount that was posted as security for costs. Friedman subsequently took the position that in light of the dispute that had arisen with respect to the funds that Friedman was holding in trust, the parties had to retain separate counsel, and the funds would only be distributed on consent of the parties or further to a court order.

[26] It is admitted by all parties that no agreement was ever reached as to how the settlement funds were to be apportioned between the two actions.

B. POSITIONS OF THE PARTIES

1. Position of the Applicant

[27] The Applicant asks that the funds be distributed as set out in paragraph 1 above.

[28] In a nutshell, the Applicant’s position is that:

a. it is entitled to the return of the Security Funds, which should be distributed to the former shareholders of Komtech (including Benzer) in the same proportions that they contributed; and

b. the remaining funds (i.e. $130,000 less legal fees in the amount of $44,780.10 paid to Friedman = $85,219.90) should be used to pay expenses associated with the litigation (such as Deloitte’s invoices) and the balance should be divided equally between the Applicant, on the one hand, and Benzer and Mr. Mathur, on the other hand.

[29] With respect to the Security Funds, the Applicant states that it would never have agreed to have these funds considered part of the settlement proceeds and distributed as such, as argued by Benzer and Mr. Mathur. The Applicant points out that the Release provides that the funds posted as security for costs would be returned to the Applicant.

[30] The Applicant submits that Benzer is not entitled to be reimbursed for the amounts it paid on account of costs and expenses pertaining to the Komtech Action pursuant to the Assignment Agreement. This is because the Assignment Agreement provides that such reimbursement is “to a maximum of the amount of the legal costs awarded, if any”, and no legal costs were awarded.

[31] The Applicant concedes that Benzer is entitled under the Assignment Agreement to 15% of the net amounts recovered from the Komtech Action since, according to the Applicant, Benzer has now cured its default to fund the Komtech Action. However, instead of making a separate 15% payment to Benzer with respect to the Komtech Action, the Applicant proposes that Benzer and Mr. Mathur receive 50% of the net amounts recovered as between the Komtech Action and the Benzer Action combined.

[32] The Applicant’s position is that the Release does not apply to the dispute between the parties to this Application.

2. Position of Benzer and Mr. Mathur

[33] Benzer and Mr. Mathur argue that this Application is proscribed by the Release, even though they have responded to the Application. They state that the parties to the Release agreed that they would not initiate litigation as against each other in respect of the subject matter of the Release. They take the position that, based on the terms of the Release, they should be indemnified by the Applicant for their costs of this litigation.

[34] Benzer and Mr. Mathur submit that the words “to a maximum of the amount of the legal costs awarded, if any” in the Assignment Agreement do not apply to this case because the matter was settled and, as a result, there were no costs awarded. They argue that interpreting these words in a way that would make costs unrecoverable in the context of a settlement would result in an absurdity. In their view, the only reasonable interpretation of these terms is that the litigation funder cannot receive any payment above the maximum of a costs award when such an award is made.

[35] According to Benzer, there is no evidence that it was in default under the Assignment Agreement. It notes that at no point prior to the settlement with KPMG did the Applicant assert that Benzer was in default. Benzer also points to Mr. Mathur’s uncontested evidence that Friedman agreed to extend payment terms.

[36] Benzer and Mr. Mathur submit that Deloitte’s invoices are not costs and expenses pertaining to the Komtech Action within the meaning of the Assignment Agreement. They also argue that some of the work done by Deloitte was not “specifically required” for the purposes of the Komtech Action.

[37] Benzer and Mr. Mathur take the position that the Security Funds are “amounts recovered from, in connection with or out of” the Komtech Action and, as a result, they are part of the settlement funds and should be distributed as such. As a result, the Security Funds should be used to: (a) reimburse Benzer for the costs and expenses that it paid, and (b) calculate the 15% payment to which Benzer is entitled under the Assignment Agreement. Benzer and Mr. Mathur argue that KPMG’s consent to the Security Funds being released was in exchange for the resolution and dismissal of both the Komtech Action and the Benzer Action. They further argue that no provisions were made at the time of the settlement to treat the Security Funds differently, and that these funds and the $130,000 payment were treated as a “common fund” for satisfaction of their several claims and causes of action.

[38] Mr. Mathur’s position is that he should be granted at least $26,000 from the settlement funds in respect of lost income, lost opportunity and diminished employment prospects. No explanation is provided to justify this number. While it is indicated that this amount represents 20% of $130,000, there is no support provided for the use of this percentage. It may be that the use of 20% is based on the fact that the amount of damages sought in the Benzer Action ($3 million) represents 20% of the amount of damages sought in the Komtech Action ($15 million).

[39] After payment of the sum of $26,000 to Mr. Mathur, Benzer and Mr. Mathur submit that the following amounts should be paid to Benzer: (1) legal fees paid by Benzer to Friedman ($143,245); and (2) Benzer’s contribution to the security for costs ($30,750). They further submit that the 15% payable to Benzer under the Assignment Agreement should be calculated on the remaining amount, for a total of $21,536.04. This would bring the total amount payable to Benzer to $195,531.04, and leave a balance of $122,037.53 payable to the Applicant. Benzer and Mr. Mathur do not appear to ask that, after all litigation expenses have been paid, the remaining funds be apportioned between the Komtech Action and the Benzer Action (except for the $26,000 payment to Mr. Mathur). Their proposed distribution allocates the entire balance of funds to the Applicant after a 20% payment is made to Mr. Mathur[^2] and a 15% payment is made to Benzer pursuant to section 3 of the Assignment Agreement.[^3]

C. DISCUSSION

1. Observations regarding the evidence adduced by Benzer and Mr. Mathur

[40] In his affidavit evidence, Mr. Mathur seeks to raise issues about, among other things, the Applicant’s response to KPMG’s motion for security for costs and the decision to agree to KPMG’s offer to settle. I find it unnecessary to review this evidence because, in my view, it is irrelevant to the issues that are before me. Benzer and Mr. Mathur cannot, in the context of an application for directions regarding the distribution of funds, seek to challenge the wisdom of steps taken in the litigation years ago. Benzer and Mr. Mathur have not brought a proceeding seeking any relief. Further, I note that Benzer’s obligation under the Assignment Agreement is to “promptly pay the legal bills, as presented, without any questions”.

[41] Mr. Mathur also improperly gives evidence in his affidavit regarding a mediation and settlement discussions that took place between the parties to this Application with respect to the distribution of the funds held in trust by Friedman. In my view, this information is covered by settlement privilege and should not have been put before the Court. I have ignored this improper evidence.

[42] Further, I reject the evidence of Mr. Mathur regarding the alleged advice that he received from Mr. Friedman with respect to the proposed settlement with KPMG. First, Mr. Friedman’s statements are hearsay and are inadmissible for the truth of their contents on this Application: see Rule 39.01(5) of the Rules of Civil Procedure. Second, if advice was provided by Mr. Friedman to Mr. Mathur to the exclusion of the Applicant, it may have been provided in breach of the rules governing joint retainers. Third, the Court is responsible to interpret the agreements in issue and the obligations of the parties thereunder and is not in any way bound by any opinion expressed by Mr. Friedman. Fourth, and most importantly, while surrounding circumstances can be referred to in interpreting a contract, relevant surrounding circumstances “consist only of objective evidence of the background facts at the time of the execution of the contract. . . , that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting”: see Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (“Sattva”) para. 58 [emphasis added.]. Since there is no evidence that Mr. Friedman’s alleged advice was also provided to the Applicant, it is irrelevant when interpreting the relevant agreements, as are Mr. Mathur’s subjective beliefs.

[43] Finally, I note that the evidence as to how much Benzer paid on account of costs and expenses pertaining to the Komtech Action is unclear and unsupported by any documentation. In his affidavit, Mr. Mathur states that by the time of the motion for security for costs, Benzer had incurred expenses in excess of $130,000 in funding the Komtech and Benzer Actions. He further states that Benzer was required to pay the costs of the motion for security for costs in the approximate amount of $29,000, but he admits later in his affidavit that this amount was paid at a later date from the settlement funds (i.e. more than two years later), and not by Benzer. In a chart included in Mr. Mathur’s affidavit, the amount indicated for the category “Legals paid by Benzer to Friedman” is $143,245.00, but this amount is not explained or substantiated anywhere. A different figure is found in an e-mail dated May 17, 2019 from Judy Hamilton of Friedman in which she states that Benzer had contributed $148,000 in legal fees. Again, this figure is unsupported and the fact that it is a round figure suggests that it may not be the exact amount that was contributed.

2. Principles applicable to contractual interpretation

[44] Most of the issues raised in this case are issues of contractual interpretation.

[45] The Supreme Court of Canada set out the current approach to contractual interpretation in Sattva. In a nutshell, courts are to read a contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. While the meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement, the surrounding circumstances must never be allowed to overwhelm the words of that agreement. Thus, even though the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement. Relevant surrounding circumstances consist only of objective evidence of the background facts at the time of the execution of the contract, that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting. See Sattva at paras. 47-48, 57-58 and Corner Brook (City) v. Bailey, 2021 SCC 29 at para. 20 (“Corner Brook”).

[46] These general principles of contractual interpretation apply to releases: Corner Brook at para. 21. While releases signed in the course of a settlement of a dispute are often worded in a broad and general fashion, they must be considered in the context of the dispute: see Corner Brook at para. 36.

[47] I have reviewed the cases cited by the parties, but their usefulness is very limited given that all of them are fact-specific and contract-specific. They do not provide assistance as to how the specific agreements before me should be interpreted in light of the circumstances of this case.

3. Specific issues to be determined

[48] The issues to be determined can be summarized as follows:

a. Does the Release proscribe the bringing of this Application and require that the Applicant indemnify Benzer and Mr. Mathur?

b. Is Benzer entitled under section 3(i) of the Assignment Agreement to be reimbursed for the costs and expenses pertaining to the Komtech Action that it paid, even though no legal costs have been awarded?

c. Are the Security Funds “net amounts recovered from, in connection with or out of” the Komtech Action, within the meaning of section 3(ii) of the Assignment Agreement?

d. Is the Applicant entitled to be reimbursed with respect to the invoices of Deloitte that it paid?

e. What is the appropriate distribution of funds, based on the applicable agreements and the answers to the previous questions?

[49] The list of issues above does not include the issue of whether Benzer was in default of its obligations under the Assignment Agreement as the Applicant no longer appears to argue that Benzer was. If such an argument had been made, I would have had to reject it. Paragraph 2 of the Assignment Agreement requires that a notice of default be provided and gives the defaulting party twenty-four hours to cure the default after notification. Whether or not Benzer was in default of its obligations, there is no evidence that any notice of default was provided to Benzer and that Benzer was given the opportunity to cure any alleged default.

a. Whether the Release applies to this Application

[50] In my view, the Release was only intended to apply between KPMG, on the one hand, and the Plaintiffs in the Komtech Action and the Benzer Action, on the other hand. It was not meant to apply among the Plaintiffs to the Komtech and Benzer Actions, i.e. among the Applicant, Benzer and Mr. Mathur.

[51] Many factors lead me to this conclusion, including the following:

a. As stated above, while a release may be worded in a broad and general fashion, it has to be considered in the context of the dispute to which it relates. The Release was part of a settlement offer made by KPMG to the Applicant, Benzer and Mr. Mathur collectively. Its purpose was to end litigation between KPMG, on the one hand, and the Applicant, Benzer and Mr. Mathur, on the other hand. There is no evidence that the parties to the Release, including KPMG, intended the Release to apply to disputes among the Applicant, Benzer and Mr. Mathur that did not involve KPMG and of which KPMG was unaware.

b. The Release refers in its first paragraph to consideration paid by KPMG. There is no reference to consideration provided by the Plaintiffs to each other.

c. The defined term “Released Claims” refers to the matters raised or that could have been raised in the pleadings in the Komtech Action and the Benzer Action. In my view, the issues raised in this Application are not “Released Claims”. The dispute that has arisen as between the Applicant, Benzer and Mr. Mathur regarding the distribution of funds could not have been pleaded in the Komtech Action or the Benzer Action. The only Defendant in both actions was KPMG. Further, the nature of the dispute that is the subject matter of this Application is not related in any way to the issues in the Komtech and Benzer Actions, which concerned KPMG’s relationship with Komtech, Benzer and Mr. Mathur and whether KPMG provided negligent tax advice to Komtech.

d. Had the Release been intended to operate as between the Applicant, Benzer and Mr. Mathur, an issue would have arisen with respect to the fact that they were all represented by the same law firm. One would have expected, at a minimum, that they would have been advised to seek independent legal advice regarding the Release. There is no evidence that this happened.

[52] I also note that Benzer and Mr. Mathur have not indicated how the dispute between the parties could be resolved if, in fact, it could not be resolved by way of a proceeding because of the Release. If the parties are unable to agree and to resolve their dispute and a proceeding is not available, the only alternative appears to be that the funds would remain in Friedman’s trust account forever.

[53] As a result, I reject the argument of Benzer and Mr. Mathur that this Application is somehow proscribed by the Release and that they are entitled under the Release to be indemnified by the Applicant in relation to this Application.

b. Whether Benzer is entitled to be reimbursed for the costs and expenses pertaining to the Komtech Action

[54] The parties disagree as to the meaning that should be given to the words “to a maximum of the amount of the legal costs awarded, if any” in section 3(i) of the Assignment Agreement. As stated above, Benzer and Mr. Mathur argue that these words should only apply when a costs award has been made.

[55] I reject the interpretation proposed by Benzer and Mr. Mathur, which would have the effect of reading out these words in circumstances where no award of costs is made. This proposed interpretation is problematic for a number of reasons. Among other things:

a. The words “if any” suggest that the parties to the Assignment Agreement contemplated the possibility that there could be no costs award in certain circumstances.

b. Contrary to the argument made by Benzer and Mr. Mathur, rejecting their proposed interpretation does not result in an absurdity. Giving the words “to a maximum of the amount of the legal costs awarded, if any” their ordinary meaning does not deprive Benzer of all the benefits that it could be entitled to receive under section 3 of the Assignment Agreement. Section 3(ii) of the Assignment Agreement provides that Benzer has the right to receive a payment equivalent to 15% of the net amounts recovered from the Komtech Action. Given that Komtech was seeking $15 million in damages in its action, the 15% payment could have been a substantial one, well in excess of the maximum of $200,000 that Benzer was required to pay with respect to the costs and expenses pertaining to the Komtech Action. Thus, the possibility that a substantial payment may have to be made under section 3(ii) of the Assignment Agreement would have been within the contemplation of the parties when the Assignment Agreement was executed, especially since the Assignment Agreement was entered into less than two months after the Komtech Action was commenced. Therefore, interpreting the words “to a maximum of the amount of the legal costs awarded, if any” in a way that limits Benzer’s ability to be reimbursed for costs and expenses when there is no costs award does not result in an absurdity. Benzer was getting other benefits under the Assignment Agreement.

c. The absence of a costs award can also have a negative impact on the Applicant under the Assignment Agreement. If legal costs are awarded, the words “minus the legal costs awarded to the assignee” in section 3(ii) allow the Applicant to deduct the amount of the costs award from the amount on which Benzer’s 15% payment is calculated. In the absence of a costs award, the Applicant cannot make such a deduction.

d. Costs awards almost never cover the entire amount of costs paid by a party to their own lawyer because costs awards are usually on a partial indemnity basis. If the proposed interpretation of Benzer and Mr. Mathur were to be accepted: (i) Benzer would not be entitled to receive more than the amount of a costs award when a costs award is made, even though such costs award only covers part of the real costs of the litigation, but (ii) Benzer would be entitled to recover the entire amount of litigation costs and expenses that it incurred in the absence of a costs award. This would be an odd result.

e. As stated in Sattva, surrounding circumstances and the interpretive process cannot be used to overwhelm the words of an agreement and deviate from the text such that the court effectively creates a new agreement. The words “to a maximum of the amount of the legal costs awarded, if any”, including the words “if any”, cannot be ignored.

[56] I also note that the settlement with KPMG expressly provided for the dismissal of the actions on a without cost basis. It was open to the parties to negotiate the allocation of part of the settlement amount to costs, but they did not do so.

[57] Consequently, I conclude that in the absence of an award of legal costs in the Komtech Action, Benzer is not entitled to receive any amount as reimbursement for the costs and expenses pertaining to the Komtech Action that it paid.

c. Whether the Security Funds are “net amounts recovered from, in connection with or out of” the Komtech Action

[58] Now that I have found that Benzer is not entitled to a reimbursement under section 3(i) of the Assignment Agreement in the absence of a costs award, Benzer’s entitlement under section 3(ii) of the Assignment Agreement must be addressed. The main issue in this regard is whether the Security Funds are covered by this provision. Section 3(ii) provides that the Applicant agrees to pay to Benzer “15% of the net amounts recovered from, in connection with or out of, the [Komtech Action], minus the legal costs awarded to the [Applicant].”

[59] In my view, the Security Funds are not “net amounts recovered from, in connection with or out of” the Komtech Action.

[60] I note that the Security Funds are not funds that the Applicant recovered from KPMG. KPMG never received the Security Funds and, given that no costs were awarded to KPMG, it did not have any rights to the Security Funds. Upon a dismissal of the Komtech Action without costs, the Applicant would have been able to obtain an order for the return of the Security Funds, whether or not the settlement terms included the requirement that KPMG consent to an order releasing the Security Funds.

[61] Admittedly, the language used in section 3 of the Assignment Agreement is broader than “amounts recovered from KPMG”. It refers to amounts recovered from, in connection with or out of the Komtech Action. However, I find it unnecessary to express an opinion as to whether this language could include the Security Funds because section 3(ii) specifically refers to net amounts and I have come to the conclusion that the Security Funds are not part of the net amounts recovered from the Komtech Action.

[62] In my view, the expression “net amounts” should be given its ordinary meaning, i.e. amounts recovered by the Applicant from the Komtech Action minus the expenses that were incurred by the Applicant in relation to the Komtech Action. There are no considerations or surrounding circumstances that would point to a different interpretation. From a commercial perspective, it makes sense that the sharing of the proceeds of the litigation would be based on the “net” proceeds. For instance, if the Komtech Action had not settled and gone to trial and the Applicant had incurred $350,000 in additional costs until the end of the trial,[^4] it would be a reasonable expectation that these expenses would be subtracted from the proceeds received before any sharing of the litigation “profits” would take place.

[63] This interpretation may, on the surface, appear unfair to Benzer as it allows the Applicant – as the party recovering amounts from the Komtech Action – to deduct/be reimbursed for its expenses related to the litigation from the recovered amounts, while Benzer – who is not a party to the Komtech Action and, therefore, does not directly recover any amounts from this action – does not have the right to be reimbursed for the litigation expenses it paid in the absence of a costs award. However, it is important to remember the following:

a. Contrary to the Applicant, Benzer was not a party to the Komtech Action. Thus, in the event the Komtech Action was unsuccessful, the Applicant alone had exposure with respect to a costs order. As demonstrated by the amount ordered as security for costs, this was a substantial exposure.

b. Benzer was in a position similar to a litigation funder. Benzer, in effect, purchased an interest in the litigation (i.e. 15% of the net amounts recovered) in exchange for a maximum of $200,000. This “investment” was not without risk. Among other things, Benzer accepted the risk that it would not receive anything out of the litigation if it was unsuccessful. However, contrary to the Applicant’s exposure, Benzer’s risk was capped at $200,000.

c. As a non-party to the Komtech Action, Benzer’s rights are governed by the terms of the Assignment Agreement. These terms were negotiated by 227, who acquired Komtech’s assets and whose motivation and objectives may have been different than Benzer’s. Pursuant to an agreement with 227, Benzer stepped into 227’s shoes in the Assignment Agreement, and took the Assignment Agreement as it was.

[64] When considering the wording of the Assignment Agreement in light of the above context and “surrounding circumstances”, I see no valid reason to interpret the words “net amounts” in a way that would allow Benzer to calculate its 15% payment on an amount that is not net of the litigation expenses incurred by the Applicant.

[65] The monies paid into court as security for costs clearly were a “litigation expense” incurred by the Applicant. Thus, the Security Funds do not constitute net amounts recovered from, in connection with or out of the Komtech Action. As a result, they cannot be taken into consideration when calculating the amount of Benzer’s 15% payment under section 3(ii) of the Assignment Agreement. The Security Funds are to be returned to the Applicant, subject to the contribution made by Benzer as a shareholder of Komtech.

d. Whether the Applicant is entitled to be reimbursed with respect to Deloitte’s invoices

[66] In my view, there is no support whatsoever for the position taken by Benzer and Mr. Mathur that the invoices of Deloitte were not expenses pertaining to the Komtech Action. Both the report prepared by Deloitte and Deloitte’s invoices show that Deloitte’s work was related to the litigation.

[67] Further, the report was to the benefit of both the Komtech Action and the Benzer Action. Benzer and Mr. Mathur claimed in the Benzer Action that they had “lost their entire investment in Komtech”. In order to calculate the value of their lost investment, it was necessary to value Komtech, which is what Deloitte was retained to do. In addition, a number of the invoices issued by Deloitte show that, at different times, Deloitte did work to answer questions from Friedman, who was acting in both actions and representing the Applicant, Benzer and Mr. Mathur jointly.

[68] As set out above, Benzer is entitled to receive 15% of the net amounts recovered from the Komtech Action. In order to obtain the net amount, the amount paid to satisfy Deloitte’s invoices needs to be deducted from the recovered amount as it constitutes an expense related to the litigation that was incurred for the benefit of both actions. Therefore, the Applicant is entitled to be reimbursed with respect to the invoices of Deloitte that it paid before the net amounts recovered from the litigation are distributed.

e. What is the appropriate distribution of funds?

[69] Before turning to the appropriate distribution of funds in light of the conclusions that I reached above, I wish to comment on briefly on the distribution of funds that was proposed by Benzer and Mr. Mathur. In my view, their proposed distribution did not make sense and ignored the terms of the Assignment Agreement. In addition to some of the issues discussed above, the following are other issues raised by their proposed distribution:

a. Benzer and Mr. Mathur proposed that a $26,000 payment be made to Mr. Mathur in priority to everything else, except for the payment of Friedman’s legal fees, which had already been paid. There is no basis to: (a) give any priority to a payment to Mr. Mathur, and (b) make such a payment before the payment of the costs and expenses related to the litigation.

b. They proposed to repay Benzer’s contribution to the security for costs payment, but not the contributions of the other former shareholders of Komtech, before calculating Benzer’s 15% payment. This does not make any sense. If Benzer correctly took the position that security for costs was not part of the costs and expenses that Benzer was responsible to pay (which I do not have to decide on this Application), then Benzer is not entitled to be reimbursed for its contribution as a shareholder of Komtech in priority to the other shareholders.

[70] I now turn to the issue of the appropriate distribution of funds in light of the discussion above. Dealing first with the Security Funds, they should be returned to the Applicant. However, the Applicant agrees to have an amount proportional to Benzer’s contribution paid directly to Benzer, i.e. 12.3% of the Security Funds ($31,778.61).

[71] With respect to the balance of the $130,000 payment received from KPMG after payment of Friedman’s legal fees, i.e. $85,219.90, the following expenses need to be paid first:

a. $27,285.76 are payable to the Applicant for the invoices of Deloitte that it paid; and

b. $1,911.11 is payable to Benzer for its contribution to the payment of some of Deloitte’s invoices.

[72] This leaves a balance of $56,023.03. This amount relates to the settlement of both the Komtech Action and the Benzer Action.

[73] As stated above, the parties admit that there is no agreement governing the apportionment of the settlement funds between the Komtech Action and the Benzer Action. It appears from the record that these two actions were litigated jointly and as one. The same counsel represented the Plaintiffs in both actions. The Applicant proposes a 50-50 apportionment between the two actions, but the Applicant’s calculations subsume Benzer’s 15% entitlement under the Assignment Agreement into the 50% share allocated to Benzer and Mr. Mathur. Benzer and Mr. Mathur appear to propose an apportionment that is based on the proportionate amounts of damages sought in each action, i.e. 20% in favour of Mr. Mathur and the balance to the Applicant.

[74] Based on the pleadings, it appears to me that the Benzer Action was largely, if not entirely, dependent upon and derivative of the Komtech Action. To the extent that it was, I have serious doubts regarding the chances of success of the Benzer Action given the legal principle that shareholders, directors and employees cannot recover losses sustained by them in those capacities that are consequent and secondary to a loss suffered by the company (see, e.g., Re Royal Bank of Canada, 2004 ONSC 26625 at paras. 7-8 (Ont. S.C.J.)). Further, it seems to me that it would not have been an easy task for Benzer and Mr. Mathur to establish that KPMG owed contractual obligations and/or a duty of care to Mr. Mathur and Komtech’s shareholders directly, as opposed to Komtech only. However, these preliminary views are based on the pleadings only. Given that the parties did not make submissions and did not adduce evidence with respect to the relative merits of the two actions, I conclude that the only appropriate apportionment of the remaining funds between the two actions is on a 50-50 basis. i.e. $28,011.52 to the Applicant with respect to the Komtech Action and $28,011.52 to Benzer and Mr. Mathur jointly with respect to the Benzer Action. I reject Mr. Mathur’s request for a separate payment to him for which there is no basis or support.[^5]

[75] Under the Assignment Agreement, Benzer is entitled to receive 15% of the net amounts recovered from the Komtech Action, i.e. $4,201.73 (15% of $28,011.52). In my view, Benzer’s 15% payment is a contractual entitlement that it obtained in exchange for funding part of the Komtech Action and, as a result, it should not be subsumed into the share of the proceeds that Benzer and Mr. Mathur are entitled to receive as the Plaintiffs in the Benzer Action, as suggested by the Applicant. Thus, the Applicant’s share is reduced from $28,011.52 to $23,809.79.

[76] Accordingly, from the remaining $85,219.90, the Applicant is entitled to receive $51,095.55, Benzer is entitled to receive $6,112.84, and Benzer and Mr. Mathur are entitled to receive jointly $28,011.52.[^6]

D. CONCLUSION

[77] The Application is granted.

[78] I order the following:

a. Friedman is to release the sum of $258,362.67, presently held in trust, in respect of funds which were paid into court by the Applicant as follows:

i. the sum of $226,584.06 to the Applicant;

ii. the sum of $31,778.61 to Benzer;

b. Friedman is to release the balance of $85,219.90 held in trust as proceeds of settlement from the Komtech Action and the Benzer Action as follows:

i. the sum of $51,095.55 to the Applicant;

ii. the sum of $28,011.52 to Rajneesh Mathur and Benzer jointly;

iii. the sum of $6,112.84 to Benzer.

[79] If costs cannot be agreed upon, the Applicant shall deliver submissions of not more than three pages (double-spaced), excluding the bill of costs, within 14 days of the date of this decision. Benzer and Mr. Mathur shall deliver their responding submissions (with the same page limit) within 14 days of their receipt of the Applicant’s submissions. The submissions of all parties shall also be sent to my assistant by e-mail and uploaded onto CaseLines.

Vermette J.

Released: June 30, 2022

COURT FILE NO.: CV-20-00654835-0000

DATE: 20220630

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

SIGMA CAPITAL MANAGEMENT GROUP INC.

Applicant

– and –

BENZER LIMITED, RAJNEESH MATHUR and FRIEDMAN LAW PROFESSIONAL CORPORATION

Respondents

REASONS FOR JUDGMENT

VERMETTE J.

Released: June 30, 2022

[^1]: The numbers set out in this paragraph do not reflect the numbers included in the Notice of Application. Rather, they reflect the numbers included in the last affidavit of the Applicant’s affiant, with some mathematical corrections to make the numbers balance. [^2]: 20% of $130,000. i.e. the settlement payment made by KPMG. Mr. Mathur does not include the Security Funds in this calculation. [^3]: The 15% payment claimed by Benzer is 15% of $143,573.57, which is calculated as follows: Security Funds + $130,000 – Friedman’s fees – legals paid by Benzer – Benzer’s contribution to security for costs. [^4]: The evidence shows that if the Komtech Action had not settled, the Applicant would have soon had to start paying the costs and expenses pertaining to the action as the maximum amount payable by Benzer had almost been reached. [^5]: In the Statement of Claim in the Benzer Action, the Plaintiffs make a joint claim for general damages in the amount of $3 million. There is no separate amount claimed by Mr. Mathur only. [^6]: Because the numbers were rounded to the nearest cent in the calculations, the total of these numbers is $85,219.91 instead of $85,219.90. I trust that the parties will be able to reach an agreement with respect to the extra $0.01.