Back

Bankruptcy and Insolvency Act - Factors to Consider When Fixing

November 23, 2020

Ontario

,

Canada

Issue

In a Fraudulent Conveyancing Act/Bankruptcy and Insolvency Act preference claim, can the pre-litigation costs (costs incurred prior to the claim being issued) incurred by either party be awarded at the conclusion of the trial on the issue of costs?

Conclusion

The costs of and incidental to any proceedings in court under the Bankruptcy and Insolvency Act are in the discretion of the court. (Bankruptcy and Insolvency Act).

Substantial indemnity costs include any services reasonably necessary for the prosecution of the action and were not limited to services rendered after the action commenced. (Mackenzie v.1785863 Ontario Ltd.).

The general principle that guides the court in fixing costs as between parties on the solicitor and client scale is that the solicitor and client scale is intended to be complete indemnification for all costs (fees and disbursements) reasonably incurred in the course of prosecuting or defending the action or proceeding. (Apotex Inc. v. Egis Pharmaceuticals).

The Court of Appeal set out four relevant principles to be observed when considering costs in the context of bankruptcy.  The four principles are:

(a)  Section 197(1) of the BIA gives the court the widest discretion;
(b)  since the BIA is a federal statute, the Court should avoid interpreting it “using local rules of practice not necessarily found in other provinces”;
(c)  since bankruptcy proceedings are quasi-criminal in nature, a harsher award of costs may be justified against someone who abuses the process for a collateral purpose; and
(d)  before making any order in relation to costs, the court should receive written submissions from the parties.

(Dallas/North Group Inc. (Re)).

The factors to be considered when fixing costs in a preferred claim under the Bankruptcy and Insolvency Act are set out in Rule 57 of the Rules of Civil Procedure and include in addition to success, the amount claimed and recovered, the complexity and importance of the matter and the principle of proportionality, the conduct of any party which unduly lengthened the proceeding, whether any step was improper, vexatious or unnecessary, or taken through negligence mistake or excessive caution, a party’s denial or refusal to admit anything, any offer to settle, the principle of indemnity, scale of costs, hourly rate claimed in relation to the partial indemnity rate set out in the Information to the Profession effective July 1, 2005, the time spent, and the amount that a losing party would reasonably expect to pay. (Eastern Ontario District Soccer Association (Re); Vertamin Inc (Re)).

As a general principle, a court should not go behind a bill of costs to scrutinize each entry, rather a court must make an order that is fair and reasonable. (Eastern Ontario District Soccer Association (Re)).

No cases were identified that specifically considered whether costs incurred prior to the outset of the litigation were allowed in the context of a preferred claim.

Law

Section 197 of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 reads:

Costs in discretion of court

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

How costs awarded

(2) The court in awarding costs may direct that the costs shall be taxed and paid as between party and party or as between solicitor and client, or the court may fix a sum to be paid in lieu of taxation or of taxed costs, but in the absence of any express direction costs shall follow the event and shall be taxed as between party and party.

Pierce J., in Mackenzie v.1785863 Ontario Ltd., 2018 ONSC 4992 (CanLII), summarized the state of the law on pre-litigation costs as follows:

[18] The defendant submitted no authorities for the proposition that time spent in advance of preparation of the statement of claim is not claimable as costs. This is not the current state of the law. In The Law of Costs, loose leaf (2017-Rel.73), vol. 1 (Toronto: Thompson Reuters Canada, 2017), at para. 203.2, Mark M. Orkin, deals with pre-action costs. He observed:

An early decision in Ontario held that an award of party-and-party costs on the solicitor-and-client scale did not include the cost of anything done before the action was commenced. Later case law held that, at least as regards solicitor-and-client, i.e. substantial indemnity costs, they included any services reasonably necessary for the prosecution of the action and were not limited to services rendered after the action commenced. The principle has also been extended to an award of costs on the party-and-party, i.e. partial indemnity scale. [citations omitted]

Henry J., in Apotex Inc. v. Egis Pharmaceuticals, 1991 CanLII 2729 (ON SC), stated the general principle guiding courts in fixing costs:

The general principle that guides the court in fixing costs as between parties on the solicitor and client scale, as is provided in my order, is that the solicitor and client scale is intended to be complete indemnification for all costs (fees and disbursements) reasonably incurred in the course of prosecuting or defending the action or proceeding, but is not, in the absence of a special order, to include the costs of extra services judged not to be reasonably necessary.
[...]

For the sake of clarity I add a postscript. Whether a service is performed or engaged in contemplation of adversarial proceedings in court is essentially a matter of judgment. I have looked for the exercise of judgment, together with prudence, foresight and imagination, in assigning services to the motion in this case as the test of fairness, reasonableness and necessity in applying the guiding principles. It is not appropriate to apply the test of hindsight (20/20 vision) to determine whether a service charged for was an extra service or frill not reasonably necessary to defend the client's position. The time to view the decision to commit services to the project is before the hearing or trial -- not on the basis of hindsight which might indicate that as it turned out, the service was unnecessary. In the case at bar, I did not even call on counsel for the defendants yet it was essential that they be fully prepared in case I had done so.```````

The fixing of costs is to be governed by an overarching principle of reasonableness. This approach was summarized by the Court of Appeal in Zesta Engineering Ltd. v. Cloutier, 2002 CanLII 25577 (ON CA) as follows:

[4] [...] In our view, the costs award should reflect more what the court views as a fair and reasonable amount that should be paid by the unsuccessful parties rather than any exact measure of the actual costs to the successful litigant.[...]

In determining what costs are fair and reasonable, the Court of Appeal, in Moon v. Sher, 2004 CanLII 39005 (ON CA), incorporated the reasonable expectations of both the successful and unsuccessful parties. This includes the parties’ reasonable expectations as to potential cost recovery had they succeeded, as well as the potential costs that each party would have reasonably contemplated being exposed to had they been unsuccessful:

[33] If a lawyer wants to spend four weeks in preparing for a motion when one week would be reasonable, this may be an issue between the client and his or her lawyer. However, the client, in whose favour a costs award is made, should not expect the court in fixing costs to require the losing party to pay for over‑preparation, nor should the losing party reasonably expect to have to do so.

[34] In addition, I agree with Moon’s counsel that the motion was not complex. There were three issues that were common to both motions: (1) determining as a jurisdictional fact whether there was an agreement between Moon and the GLOI and, if so, its terms; (2) whether a letter was inadmissible on the ground of solicitor‑client privilege; and (3) whether the action should be stayed on the grounds of jurisdiction simpliciter or forum non conveniens. Indeed, the presence of factual and evidentiary issues is not unusual in motions of this nature where it is often necessary for the court to determine jurisdictional facts. Once the motion judge found that there was an agreement between Moon and the GLOI that contained a clause that “any controversy or claim, relating to, arising out of or in connection with [the] agreement…shall be determined by arbitration in Fort Myers, Florida”, the result of the motions was obvious. Motions of this nature are becoming common place. At the time the motions were heard, the law in respect to jurisdiction simpliciter had been explained by this court in Muscutt v. Courcelles (2002), 2002 CanLII 44957 (ON CA), 60 O.R. (3d) 20 and the legal principles in respect to forum non conveniens were well settled.

[35] For counsel to spend almost 270 hours, or nearly seven full weeks, on this motion, and for his law clerk and articling student to spend almost the same amount of time, must surely exceed the losing party’s reasonable expectations. This expenditure of time, in my view, bears no relationship to the amount of time that reasonably would have been contemplated by the parties, or would reasonably be required to deal with all aspects of the motion. It could not have been the reasonable expectation of Moon that if he were to be the losing party that he would be liable in costs of $141,000 to the GLOI and the Piersons. I say this mindful of the fact that Moon could have reduced his costs exposure had he not rejected the twin offers to settle the motions by consenting to an order to stay the action without costs. However, Moon’s rejection of the offers to settle does not justify an unreasonable and excessive bill of costs.

One of the leading discussions on the interpretation of s. 197 of the BIA is found in Dallas/North Group Inc. (Re), 2001 CanLII 3636 (ON CA), 27 C.B.R. (4th) 40 (Ont. C.A.).  In that case, the Court set out relevant principles to be observed when considering costs in the context of bankruptcy.  The principles are:

[11] Costs in bankruptcy proceedings are in the discretion of the court pursuant to s. 197(1) of the Act. There are no words limiting this section which, on its face, gives the court the widest discretion. The Act is a federal statute which must be interpreted within its own parameters. A court must be careful to avoid interpreting a federal statute using local rules of practice not necessarily found in other provinces.

[12] In Rockwell Developments Ltd. v. Newtonbrook Plaza Ltd., 1972 CanLII 531 (ON CA), [1972] 3 O.R. 199 (C.A.), the court was interpreting s. 131 of the Courts of Justice Act (Ontario) which has different wording than s. 197(1) of the Act. See also Oasis Hotel Ltd. v. Zurich Insurance Co. (1981), 1981 CanLII 433 (BC CA), 124 D.L.R. (3d) 455 (B.C.C.A.).

[13] In Re Sturmer & Town of Beaverton (1912), 1912 CanLII 588 (ON SCDC), 25 O.L.R. 566 (Div. Ct.) was properly applied by the trial judge. He recognized that the criteria of the "man of straw" exception could not be met and that it was not technically a case of maintenance. Unlike certain authorities referred to by the appellants (Rockwell Developments Ltd. v. Newtonbrook Plaza Ltd., supra; Television Real Estate Limited v. Rogers Cable T.V. Limited (1997), 1997 CanLII 999 (ON CA), 34 O.R. (3d) 291 (C.A.); XLO Investments v. Hurontario Management Services (1999), 1999 CanLII 1058 (ON CA), 118 O.A.C. 258 (C.A.) the principles that are applicable in the present case are principles about costs involving duplicity and abuse of the court.

[14] There are special policy considerations to take into account when dealing with abuse of process in bankruptcy court because bankruptcy proceedings are quasi-criminal in nature and a petition in bankruptcy can destroy a person's financial standing and reputation. A harsher consequence in costs against a person who misuses the bankruptcy court for an improper collateral purpose is therefore justified.

[15] In the present case, extensive evidence was led concerning all of the vexatious steps taken against Pangia and D/NG. The trial judge was fully informed in that regard. The trial judge invited and received written submissions on both the law and the bill of costs, as submitted. Although we recognize that the power to assess costs against non-parties must be used sparingly, we are of the view that the special circumstances of this case warranted the costs order against Mazza and Axton.

In Keith G. Collins Ltd. v. Moss et al., 2011 MBQB 110 (CanLII), the Court allowed substantial preparatory costs:

[28] Turning to what I consider to be the central issue as to costs [the requests by the Trustee and BMO for significant increases for preparatory costs (tariff item 3(2)(k))], I agree with the submissions of counsel for the Trustee and BMO to the effect that the prescribed tariff allowance for preparatory work is simply not adequate in this case. However, accepting the submissions of both counsel that at least some of the preparatory work was shared rather than duplicated (that is, there was not a complete duplication of efforts by counsel for BMO and for the Trustee), it is not possible, on the evidence before me, to quantify either the time or the value of some of the services which were duplicated. Any attempt to quantify this time or value would be speculative, if not arbitrary.

[29] In assessing costs in these actions and attempting to apply the authorities herein referred to, I would point out:

(i) without regard to its claim for “double costs”, the Trustee is seeking an increase in trial preparation costs to approximately $56,000 (approximately two-thirds of its solicitor and own client costs for trial preparation); and

(ii) BMO is also seeking an increase in its pre-trial preparation costs up to $60,000, approximately two-thirds of its solicitor-client preparation costs of $91,000. This is based on a billing for approximately 411 hours of preparation; significantly more time than was spent by counsel for the Trustee when one considers that the amount in issue in the BMO action was only slightly more than one-half of the amount in issue in the Trustee’s action.

[30] In conclusion, I am satisfied that the Trustee’s bill of costs is reasonable and that $60,000 for preparation in the BMO action on a party-and-party basis would be oppressive. A review of the time records placed in evidence by counsel for the successful parties evidences a significant amount of consultation and cooperation in which there was obviously some duplication.

In Eastern Ontario District Soccer Association (Re), 2017 ONSC 4932 (CanLII), the Court held that the facts set out in rule 57.01 as well as the principle of reasonableness apply to bankruptcy proceedings:

[13] In my view section 197 of the BIA does in fact govern the issue of costs on this motion but it does not do so in a vacuum. There is ample case law in bankruptcy proceedings applying the factors set out in rule 57.01(1) in the determination of costs.
[...]

[17] While as a general principle, a court should not go behind a bill of costs to scrutinize each entry, a court must make an order that is fair and reasonable (see Boucher v. Public Accountants Council for the Province of Ontario 2004 CanLII 14579 (ON CA), at p. 302). The overall objective of a costs order is "to fix an amount that is fair and reasonable for the unsuccessful party to pay in the particular proceeding, rather than an amount fixed by the actual costs incurred by the successful litigant" (Boucher paras. 24, 26). The costs outline submitted by Oz, in my view, significantly exceeds what an unsuccessful party might reasonably expect to pay. To order costs on that basis would neither be reasonable or fair. In total, Oz claims that it spent over 120 hours to file its proof of claim, communicate with the trustee and its counsel, and to prepare this motion material. The bill of costs includes 50 hours for research by Mr. Marks, 8 hours to draft the notice of motion, 15 hours to draft an affidavit in support that attaches a large volume of exhibits, and 15 hours to draft a factum. The affidavit in support of the proof of claim was only 6 paragraphs and attached 4 exhibits. The Notice of Motion was, in my estimation, neither complicated nor lengthy and was supported by a 10-page affidavit that essentially outlined the facts relating to the litigation and demonstrating that the EODSA might have acted improperly in filing its Notice of Intention to Make a Proposal. Voluminous exhibits were attached to the affidavit, which were largely either unnecessary or irrelevant.

[18]  In all of the circumstances, and taking into account the factors set out in rule 57.01(1), in my view, it is appropriate to order costs payable by the EODSA to Oz in the sum of $8,000.00 including HST, within 60 days of today’s date.

In Murphy v. Buote (Estate of), 1998 CanLII 4329 (PE SCTD), the deceased died without will, and his wife consulted a law firm in relation to the estate. The wife was granted leave to make an assignment of the estate's assets for the general benefit of creditors under the Bankruptcy and Insolvency Act. The Court held:

[9] Section 197(4) of the Act provides that no legal costs shall be paid out of the estate of a bankrupt unless they have been authorized by the trustee in writing. It has long been held, however, that the costs associated with the preparation of an authorized assignment are allowable on the ground that the trustee cannot authorize such costs not having yet been appointed (see, e.g.Jacobson, Re (1927), 8 C.B.R. 258(N.B. S.C.)). I think it is beyond dispute that in cases such as this there is much necessary legal work preceding an assignment in the nature of negotiations, attendances and consultations with a view to determining the necessity for an assignment and, in that event, putting the affairs of the insolvent estate in such a position so as to be intelligible to the Trustee. A reasonable charge must be allowed for such service.

[10] I do not accept respondent counsel's contention that the first five items in the account were of no value to the Trustee. Those are all matters which led to the eventual assignment and were necessary in the preparation of the estate documents and the assignment. I note that in her affidavit Mary Perry Buote states there were some matters in relation to which she was provided legal advice in her personal capacity and she has personally been invoiced and has paid for those services.

[11] In my opinion, the services provided by the appellant, other than those provided to Mary Perry Buote personally, all were of benefit to the bankrupt estate. I cannot conclude that any of the individual charges in the account are unreasonable in the circumstances and I would allow it as submitted.

In a preferred claim under the Bankruptcy and Insolvency Act, RSC 1985, c B-3, the Court will consider the following factors:

[3] The factors to be considered when fixing costs are set out in Rule 57 of the Rules of Civil Procedure and include in addition to success, the amount claimed and recovered, the complexity and importance of the matter and the principle of proportionality, the conduct of any party which unduly lengthened the proceeding, whether any step was improper, vexatious or unnecessary, or taken through negligence mistake or excessive caution, a party’s denial or refusal to admit anything, any offer to settle, the principle of indemnity, scale of costs, hourly rate claimed in relation to the partial indemnity rate set out in the Information to the Profession effective July 1, 2005, the time spent, and the amount that a losing party would reasonably expect to pay.

Rule 58.06 of the Rules of Civil Procedure, RRO 1990, Reg 194 sets out the factors to be considered on assessment:

58.06 (1) In assessing costs the assessment officer may consider,

(a) the amount involved in the proceeding;
(b) the complexity of the proceeding;
(c) the importance of the issues;
(d) the duration of the hearing;
(e) the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding;
(f) whether any step in the proceeding was,

(i) improper, vexatious or unnecessary, or
(ii) taken through negligence, mistake or excessive caution;

(g) a party’s denial of or refusal to admit anything that should have been admitted; and
(h) any other matter relevant to the assessment of costs. R.R.O. 1990, Reg. 194, r. 58.06 (1).

(2) In assessing costs the assessment officer is bound by the court’s direction or refusal to make a direction under rule 57.02, but is not bound where the court declines to make a direction and leaves the matter to the assessment officer’s discretion. R.R.O. 1990, Reg. 194, r. 58.06 (2).
Alexsei publishing date:
15