Court File and Parties

Court File No.: 32-2834101 Date: 2023 02 24

ONTARIO

SUPERIOR COURT OF JUSTICE

In the Matter of the Bankruptcy of: 1947755 Ontario Ltd. of the Village of Bolton in the Regional Municipality of Peel in the Province of Ontario

Counsel:

• M. Kersten and A. Zweig, for the Moving Party, Gaspare Caruso
• M. Harris, for the Responding Party, John Hanna Nissan
• W. Jaskiewicz, appearing for the trustee in bankruptcy, BDO Canada Limited
• D. Ketelaars, for 1883203 Ontario Inc., John Visaretis and Leo Gallo
• D. Laframboise, as agent for D. Pomer, counsel for Gaspare Caruso in CV-19-130

Heard: In writing

Decision on Costs (Annulment Motion)

Emery J.

[1] Gaspare Caruso seeks his costs for the motion he brought to annul the bankruptcy of 1947755 Ontario Ltd. (“194”) under s. 181(1) of the Bankruptcy and Insolvency Act (the “BIA”). Mr. Caruso mounted that challenge as he contested John Hanna Nissan’s authority as a director of 194 to make that assignment on behalf of the corporation. I granted the motion and annulled the bankruptcy for reasons released on November 18, 2022. In those reasons, I found that the assignment Mr. Nissan had signed and filed with the trustee, BDO Canada Limited, ought not to have been filed.

[2] This decision deals with the costs arising from the annulment motion. The parties described above have each filed submissions on costs. At a Case Conference on January 25, 2023, counsel advised me that I could decide the claims for costs arising from the annulment motion on written materials. Those material now include a submission by Mr. Jaskiewicz to find that the trustee has an entitlement to costs, even though it took no position on the motion.

Positions of the main parties

[3] Mr. Caruso has filed submissions along with a Costs Outline in support of his claim for costs. He seeks costs against Mr. Nissan in the amount of $110,209.14 on a full indemnity basis, inclusive of tax and disbursements. In the alternative, he seeks $90,164.07, all inclusive, for substantial indemnity costs. In the further alternative, he seeks $70,119 for costs at a partial indemnity level.

[4] Mr. Nissan does not dispute that Mr. Caruso is entitled to costs. Mr. Nissan takes the position only that Mr. Caruso cannot recover costs at a higher level under all the circumstances and that the amount he claims on a partial indemnity scale is excessive. Mr. Nissan submits that I should exercise my discretion to fix costs in an amount that is fair and reasonable on a partial indemnity basis.

[5] Mr. Nissan attaches a Bill of Costs to his submissions in which he represents that he would have claimed a total of $39,330.77 on a substantial indemnity level, and $29,207.57 for partial indemnity costs.

Context behind the motion

[6] As I stated at the outset of the reasons for judgment, Mr. Nissan and Mr. Caruso have been litigating over which of them is the sole director and a shareholder of 1947755 Ontario Limited (“194”) for the last four years. The battlefield I refer to in the reasons is spread over several proceedings, most if not all of which were commenced in Orangeville. Mr. Caruso has held himself out as the sole director of 194 since incorporation. Mr. Caruso has taken the position that no other individual has been a director of 194, and he has made this a central issue in those proceedings. He took the same position on the annulment motion to argue that Mr. Nissan did not have legal authority as a director of 194 to make the assignment.

[7] A Case Conference was held on May 12, 2022, to determine whether Dean Bortolon and Martin Citron should be compelled to attend and be examined as to their roles in 194 under Rule 39.03 on what has become known as the “Nissan motion.” When I gave that ruling, I used the occasion to make the following observation about a gap in the findings of the court up to that point in time:

But the gap I speak of is the chain of who became a Director, if anybody else, other than Mr. Caruso, between February 2017 and April 5, 2022. And that is what the Nissan Motion is all about, who had corporate authority as a Director to instruct counsel to do anything, including filing a Notice of Change of Lawyers under Rule 15, on April 5, 2022. And therefore, on the basis of the submissions of counsel and references made in and on other motions, including the corporate challenge that Dean Bortolon may have been a Director, and Martin Citron may have been a Director during the interim period, that the parties and counsel for the parties are entitled to ask questions of those individuals. In other words, the integrity of the chain of directorships and corporate governance has become an issue on the Nissan Motion.

Making the orders that follow under Rule 37.15(1.2), which reads:

"A judge who is directed to hear all motions under (1)..." that is me "...may give such directions and make such procedural orders as are necessary to promote the most expeditious and least expensive determination of the proceeding."

I consider the relevance of the chain of corporate governance for 1947755, between February 2017 and April 5, 2022, to be germane to the Nissan Motion, but also it has greater relevance to the proceedings where that issue is also unresolved.

At one point or another, the parties will be asking this court to make Rulings on the issue of who was the director at what time between the two dates in time indicated. It might as well be now.

[8] The Nissan motion, in my view, was Mr. Nissan’s opportunity to obtain evidence and to have the court address the very issue that is central to this litigation. There is also the “mini-trial” I ordered to complete the recent motion for summary judgment in CV-17-82. This “mini-trial” of identified issues would allow the parties to call evidence on whether Mr. Nissan was a shareholder at relevant times after February 2017. If he should ever prove that fact to the satisfaction of the court, his rights as a shareholder would presumably entitle him to call a meeting of shareholders of 194 to replace or elect directors. Instead, Mr. Nissan took the steps he did to have 194 make an assignment in bankruptcy to bring proceedings to a halt.

Analysis

[9] In Ontario, costs generally follow the event with the court awarding costs to the successful party unless there is good reason to order otherwise. Here, there is no good reason to depart from the general rule. Mr. Caruso was clearly the successful party on the annulment motion and is entitled to his costs. He was successful at “righting the ship” at great expense to bring 194 out of bankruptcy, subject to any disposition on appeal.

Scale

[10] Costs are ordinarily awarded on a partial indemnity basis to enhance access to justice for litigants in the civil justice system. There are circumstances where an offer to settle has been served that entitles the party claiming costs to seek those costs on an elevated scale under the Rules, or enabled by statute, regulation or a contract.

[11] There is no offer to settle applicable on this motion. Otherwise, costs at an elevated level are not normally awarded unless the party claiming costs can establish there are special circumstances that warrant an award of costs at a higher level. One such circumstance may arise where the party against whom costs are claimed has behaved in a reprehensible or egregious manner to the point of offending the sensibilities of the court.

[12] These factors must be considered the threshold for awarding costs at that higher level: Mortimer v. Cameron, reviewed with approval in Davies v. Clarington (Municipality of), 2009 ONCA 722. The Court of Appeal confirmed these principles recently in Bayford v. Boese, 2021 ONCA 533 at para. 4. The decision in Mars Canada Inc. v. Bemco Cash & Carry Inc. 2018 ONCA 239 at para. 43 reaffirmed the authority of the court to award costs on a substantial indemnity level to sanction the conduct of a party found to be reprehensible, scandalous or outrageous. These are circumstances where the court considers it appropriate to award costs at a higher level where that conduct is considered abusive or otherwise deserving of chastisement.

[13] In the context of a bankruptcy, it was held by Steel J. in Re Moss (1999), 12 C.B.R.(4th) 62 (Manitoba Q.B.) that the conduct of a debtor is relevant to drawing an inference of an assignor’s motive for making an assignment. This motive can be critical evidence to find that making the assignment was an abuse of process.

[14] I found in the reasons for judgment that the assignment of 194 into bankruptcy was “made under the shroud of secrecy as the parties marched towards the Nissan motion.” I found that the timing of the assignment had all the hallmarks of a strategic manoeuvre driven by Mr. Nissan’s own interest. Mr. Nissan took this step to stop the legal fees he was paying for 194 at a time when parties and witnesses were just about to give their evidence at examinations as directed by the court. I concluded that the act of making the assignment put 194 and those witnesses beyond the reach of the litigation process. This was an improper use of the BIA.

[15] In keeping with the principles set out in Re Moss, I found there was an evidentiary basis to draw the inference that Mr. Nissan’s motive behind having 194 make the assignment was to defeat the rights of others in the litigation. The assignment of 194 into bankruptcy effected not only the examinations on the Nissan motion, but all other proceedings in which 194 is a party. The assignment of 194 in bankruptcy amounted to an abuse of the process of the court as it would bring the administration of justice into disrepute if not rectified.

[16] These findings of fact lead to the conclusion that Mr. Nissan has conducted himself in a manner that, if not motivated by malice, was driven by self interest. In either case, his conduct had the foreseeable effect of costing interested parties time and expense.

[17] The decision of the Alberta Court of Queen’s Bench in Lazic v. Lazic at 2015 ABQB 691, provides persuasive authority for this court to award full indemnity costs to make an effected party whole. Erb J. found that Lexus Energy Group Inc. in that case had made an assignment in bankruptcy filed by Mr. Lazic three days after an interim Order has been made prohibiting Mr. Lazic from making corporate changes. Erb J. also found that Lexus Energy was solvent on the date the assignment was made. The court had no difficulty in concluding that Mr. Lazik had assigned Lexus Energy into bankruptcy with the singular objective to frustrate the efforts of his estranged spouse in the family law proceeding between them. Under the circumstances, the court in Lazic awarded costs to Ms. Lazic on a solicitor and own client, full indemnity basis.

[18] In my view, the circumstances on the annulment motion are closer to those in Lazic than they are to Kormos v. Fast, 2019 ONCA 430 relied upon by Mr. Nissan. In Kormos, the Court of Appeal found (at para. 9) that the application judge had erred by finding that the bankrupt was not an insolvent person. In view of reversing the application judge on that ground, the Court found it unnecessary to determine whether the initiation of the bankruptcy proceeding had been an abuse of process worthy of sanction.

[19] The availability of a costs award at the highest scale of full indemnity costs is significantly distinct from costs on a substantial indemnity level. In Net Connect Installation Inc. v. Mobile Zone Inc., 2017 ONCA 766, the Court of Appeal described how the court normally resorts to the latter category of costs to show its disapproval of the conduct of a party to the litigation. On the other hand, conduct that attracted full indemnity costs would have to be “especially egregious” to justify that show of disapproval from the court.

[20] Mr. Nissan’s conduct, while self serving, was not especially egregious to warrant full indemnity costs. He made a strategic decision that did not advance his position and has cost himself and others significant time and expense. I am therefore of the view that Mr. Caruso is entitled to his costs of the annulment motion on a substantial indemnity basis. However, even on that elevated scale, those costs must still be fair and reasonable.

Amount

[21] I have the discretion to award the costs to any step of a proceeding under s. 131(1) of the Courts of Justice Act. This discretion is subject to any provisions of a statute, or rules of court, which include the Rules of Civil Procedure. Rule 57.01(1) contains factors that guide the exercise of that discretion. The following factors are engaged by Mr. Caruso’s claim for costs.

[22] First, it is not disputed that Mr. Caruso was the successful party on the motion.

[23] Second, the motion was legally complex. It was also remarkable for its factual density having regard to the context in which the motion was brought. The nature of history behind 194, the mechanics of the alleged abuse of process, proof of the documents at issue and an overview of the litigation background required a greater than normal number of billable hours to document in the materials.

[24] The motion was of obvious importance to both parties. Mr. Caruso required the Order to perform what he considers to be his duty as a director of 194 to protect the corporation. It was important for him to annul an improper assignment of 194 into bankruptcy. This importance, combined with the complexity of the issues, magnified the requirement for Mr. Caruso’s legal team to spend significant time and resources to bring the motion.

[25] The need to bring the motion is evident from the reasons for judgment. Mr. Nissan sought to avoid further involvement in the litigation by assigning 194 into bankruptcy. Taking this step has created delay and expense to reinstate the rights of the parties involved in the general litigation. The motion for the annulment was necessary under all those circumstances.

[26] Mr. Caruso seeks $90,164 on a substantial indemnity basis. In his Costs Outline, he breaks that amount down to $70,956 for fees, $9,224.28 for HST on those fees, and disbursements of $9,983.79.

[27] Mr. Nissan has also filed a Bill of Costs in which he shows the substantial indemnity costs he would claim on the motion totals $39,330.77. This amount is comprised of $27,000 for fees, disbursements of $7,886.78 and all applicable HST.

[28] Mr. Nissan submits that the amount the court awards for costs must be fair and reasonable: Boucher v. Public Accountants Council for the Province of Ontario. These costs should be measured with reference to what amount the unsuccessful party could reasonably expect to pay in costs.

[29] In terms of fundamental principles when setting an amount for costs, Mr. Nissan has set those principles out correctly. However, I agree with Mr. Caruso in paragraph 8 of his main submission that Mr. Nissan’s maneuvers have unnecessarily run up his costs. As Mr. Caruso had the burden of proof, the time his counsel spent on the motion was more involved in developing the evidentiary record than the time demanded of Mr. Nissan’s counsel. Given the complexity of the factual matrix and the volume of material Mr. Caruso’s counsel prepared, Mr. Nissan’s estimated costs do not necessarily reflect his reasonable expectation of what Mr. Caruso can justifiably seek for costs. See: Srebrolow Lebowitz Spadafora PC v. PW Lawyers Professional Corp., 2017 ONSC 3045 (SCJ) at paras. 41 and 42.

[30] I have reviewed the Bill of Costs that Mr. Nissan has filed to determine what amount would be fair and reasonable to award. I have used the $27,000 proposed by Mr. Nissan to award for fees on a substantial indemnity basis as a starting point. On conducting this review, I have taken the relevant factors under Rule 57.01(1) into account and applied a generous serving of common sense.

[31] I find the hourly rates charged on a partial indemnity level for each member of Mr. Caruso’s legal team in relation to the motion are reasonable for the experience and years of practice of each lawyer. The effective hourly rates of Mr. Kersten at $400 and Mr. Zweig at $350 respectively, compare favourably to the $400 an hour that Mr. Harris has given for his actual rate. I find the rates of counsel to be reasonable for their various years of call between 2013 for Mr. Harris, 2015 for Mr. Kersten and 2018 for Mr. Zweig. It is the time claimed for the preparation of the motion material that I take some issue with, and the value of that time asserted for costs.

[32] There is nothing wrong with counsel employing a team approach on a large file, and to take whatever time counsel consider appropriate to represent the client fully and to the best of that counsel’s ability. It is another matter to claim all those costs from the unsuccessful party.

[33] In Moon v. Sher, Borins J.A. wrote that where a lawyer expends (greater time) for the work to achieve a result than what might be seen as reasonable, that is between the lawyer and the client. However, it would not be reasonable to expect the unsuccessful party to pay those costs (if excessive), nor would it be reasonable for that party to expect to pay (at para. 33).

[34] I commend counsel who employ members of a legal team efficiently and according to their level of experience and hourly rate. However, it is difficult to award costs on a partial indemnity basis where costs are claimed in excess of $11,500 for the receipt, review and drafting of motion materials, or $12,750 for legal research, to use two examples. There are also time entries for the review of materials in other categories and preparation time incurred by different members of Mr. Caruso’s legal team for examinations and case conferences. This makes it difficult for the court to determine if there has been a duplication of time or effort that ought not to be claimed, even though the time was actually incurred and the accurately recorded.

[35] This observation is necessary to make because a costs award must not only be reasonable, but also proportionate to the nature of the step for which costs are sought. Despite the hours expended, this was still a motion based on one section of the BIA with relatively few authorities on which submissions were made, and which took essentially one day to argue.

[36] I have multiplied the $27,000 for fees estimated by Mr. Harris on a substantial indemnity level for the motion by 1.5 to arrive at $40,500 to award for the fee component of the costs claimed. This multiple is applied to recognize the additional time it would take for Mr. Kersten and Mr. Zweig to prepare materials and submissions to discharge Mr. Caruso’s burden of proof. In view of the nature and time for the work described in Mr. Caruso’s Costs Outline, I consider costs for the fees incurred to be fair, reasonable and proportionate. In addition, I award HST of $5,265 on those fees and disbursements in the amount of $9,984 as presented. Mr. Caruso is therefore awarded a total of $55,750 for the costs of the annulment motion.

Costs to BDO Canada Limited

[37] Mr. Jaskiewicz essentially seeks a declaration that the trustee is entitled to costs, which it can then tax in accordance with the BIA.

[38] When 194 was in bankruptcy, the trustee had standing on the motion and was represented by Mr. Jaskiewicz. In making submissions at the motion, Mr. Jaskiewicz stated that it is the bankrupt who selects the trustee with whom to file the assignment. He explained that the BIA is court driven, with events taking place in the bankruptcy proceeding under the statute. This process includes calling for the filing of proof of claims and the assessment of those claims through various mechanisms. The trustee by its counsel was present in a neutral capacity to assist the court. The submissions of Mr. Jaskiewicz were most helpful in this respect.

[39] Aside from advising the court on the operation of the BIA and the role of a trustee, BDO Canada did not ask counsel to take any position, file materials or to make submissions for or against the motion.

[40] The trustee refers to the decision of the Manitoba Court of Queen’s Bench in The Bankruptcy of Stanley Frank Ostrowski, 2020 MBQB 147 where the court ordered that the annulment in that case be granted on the condition that the trustee’s fees and disbursements be paid forthwith. However, Mr. Caruso has distinguished that case by pointing out that the court in Ostrowski ordered the assignor to pay those expenses to the trustee, and not a party challenging the assignment.

[41] The award of costs on an annulment motion are distinct from the term of an order annulling a bankruptcy that one party or another pay the trustees fees and disbursements. In Ostrowski, the bankrupt himself had brought the motion to annul the bankruptcy owing to his mistaken belief that the assignment he initially made would not preclude him from bringing an action as against a third party. Registrar Goldenberg granted Mr. Ostrowski’s motion, but on the condition that he pay the trustee’s fees and disbursements expended during the administration of the estate. No costs in relation to the motion were awarded.

[42] The case of Hervias (Re) at 2018 BCSC 1579 illustrates this point. In Hervias, the court ordered that the annulment should be subject to the payment of the trustee’s fees and disbursements, subject to taxation, for the reason that it would be inappropriate to make the trustee an unsecured creditor insofar as the fees were concerned. The court in Hervias held that the responsibility for the trustee’s fees was on the person making the assignment.

[43] I did not make it a term of the Order annulling the bankruptcy of 194 that it be conditional on the payment of the trustee’s fees and disbursements in any event. That condition is an essential element to the orders made in the authorities cited by the trustee. An Order of that nature might be appropriate where the trustee did not have a retainer on deposit (which BDO Canada obtained in this case) to protect its fees, disbursements and HST.

[44] In this case, the assignor would be Mr. Nissan. Although the trustee takes the position that 194 made the assignment, it is clear from the evidence filed on the annulment motion that the identity of the person having the authority of a director on May 30, 2022, is a fact not yet determined by the court. As Mr. Nissan took it upon himself to select BDO Canada as the trustee and to file for bankruptcy on behalf of 194 with that question unresolved, he would be the person making the assignment. According to the Third Party Guarantee Agreement, Nissan Contracting Inc. has already paid a deposit of $25,000 plus HST to the trustee from which its fees and disbursements may be paid. Any further fees would be on Mr. Nissan’s account, as guaranteed by his corporation.

[45] I therefore hold that no costs for the motion are awarded to or against BDO Canada Limited as the trustee.

Order

[46] Order to go accordingly. The Order, however, shall not be issued pending any appeal of the Reasons for Judgment or this decision on costs pursuant to s. 182(1), or the stay of the Judgment or this Order by operation of s. 195 of the BIA.

Emery J.

Released: February 24, 2023