Alberta Treasury Branches v. Valerio, 2011 ABQB 580

Court of Queen ’ s Bench of Alberta Citation: Alberta Treasury Branches v. Valerio, 2011 ABQB 580 Date: 20110927 Docket: 0203 04412 Registry: Edmonton Between: Alberta Treasury Branches Appellant - and - Emilio Valerio Respondent _______________________________________________________ Memorandum of Decision of the Honourable Madam Justice J.M. Ross _______________________________________________________ Appeal from the Memorandum to the File and Lawyers by W. Breitkreuz, Master in Chambers Dated the 8 th day of December, 2010

Introduction [ 1 ] The Appellant, Alberta Treasury Branches (“ATB”), appeals the decision of Master Breitkreuz awarding the Respondent a net global figure of $50,000 in costs. Facts [ 2 ] The Respondent, Mr. Valerio, was the Manager of the St. Albert Branch of ATB until his termination in May 2000. [ 3 ] Between February and March of 2000, Mr. Valerio executed a series of documents called “Certificates of Safekeeping”, instruments stating that ATB was holding “irrevocable assignment of title totaling Seven

(7) Billion five

(5) Hundred million United States Dollars of United States Government Securities”. It was later established that these instruments were intended by third parties to be used for the purpose of raising money upon the strength of the statements made in the certificates. [ 4 ] On March 4, 2002, ATB commenced an action against Mr. Valerio, seeking damages in the amount of $140,000, punitive damages in the amount of $1,000,000, and costs on a solicitor and own client basis. [ 5 ] ATB alleged that by executing the Certificates of Safekeeping, Mr.

Valerio participated in a fraud called “Prime Bank Instrument Fraud” against ATB. [ 6 ] Mr. Valerio denied the allegations and counterclaimed for wrongful dismissal and defamation. [ 7 ] Both the main action and the counterclaim were eventually dismissed by agreement. [ 8 ] On September 20, 2010, Mr. Valerio brought an application before Master Breitkreuz, seeking costs against ATB on a solicitor and client basis. [ 9 ] On December 8, 2010, Master Breitkreuz issued a Memorandum to the File and Lawyers awarding a net global figure of $50,000 in costs to the Respondent. [ 10 ] Mr.

Valerio’s actual solicitor-client costs to that date were $33,725.00. [ 11 ] ATB now appeals Master Breitkreuz’s decision, alleging that an award of $50,000 was unreasonable, and seeks to set aside the award in its entirety. Issues [ 12 ] This appeal raises four issues: 1. Was the Master’s decision to award costs to the Respondent reasonable?

2. If so, was the amount of costs awarded to the Respondent reasonable? 3. If the amount of costs were unreasonable, am I permitted to substitute my discretion for that of the Master? 4. What is the appropriate amount of costs? Discussion [13] At the hearing before me, both parties agreed that the applicable standard of review is reasonableness. 1. Was the Master’s decision to award costs to the Respondent reasonable? [14] It is well established that solicitor-client costs are generally awarded only where the conduct of the party has beenreprehensible, scandalous, or outrageous: Young v.

Young, (SCC), [1993] 4 S.C.R. 3 at para. 251, 108 D.L.R. (4th) 193. [15] Solicitor and client costs are not to be automatically ordered on unproven allegations of impropriety: Davis v. 850015 AlbertaLtd., 2003 ABPC 68 at para. 34, 335 A.R. 172. Unproven allegations of misconduct may attract higher costs, but these costs will notnecessarily rise to the level of solicitor-client costs. Ultimately, each case is to be decided on its own facts and requires discretion to beexercised judicially by the trial judge: Davis, supra at para. 35. [16] In College of Physicians and Surgeons v.

J.H., 2009 ABQB 48 at para. 27, 3 Alta L.R. (5th) 333, this court held that thefollowing seven factors should guide the discretion to award increased costs for unproven allegations: (

a) The nature of the allegation made, and whether the particular circumstances of the party against whom the allegation was madewere such as to make the implication of the allegation more serious. (

b) What, if any, information supportive of the allegation was known to the party making the allegation. (

c) The strength and reliability of that information as it was known, or should have been known, by the party making the allegation. (

d) The steps taken by the party making the allegation to verify the information upon which the allegation was based. (

e) When the information was made known to the party making the allegation, whether additional information subsequently becameknown, and whether the allegation was modified, or withdrawn, to reflect the new information. (

f) The timeliness of any such modification or withdrawal. (

g) Whether the party making the allegation knew, or should have reasonably known, the allegation's implications for the partyagainst whom it was made.

[17] In order to assess whether the Master’s exercise of discretion was reasonable, I will apply each of these factors to theallegations brought by ATB against Mr. Valerio. (

a) Nature of the allegation [18] This factor tends to support the Master’s decision. The allegation of fraud is recognized as one of the most serious allegationsin a civil law context: Cartwright v. Benke, 2011 ONSC 2011 at para. 24, [2011] O.J. No. 2511. Allegations of fraud are particularlyserious when fraud is alleged against a visible lending institution, such as ATB: Royal Bank of Canada v. Kwiatkowski (1989), (SK KB), 81 Sask. R. 241 at 250-51, 19 A.C.W.S. (3d) 308 (Q.B.). In this case, ATB’s allegations are all the moresignificant because they suggest fraud against Mr.

Valerio’s employer and a breach of Mr. Valerios’ fiduciary duty to ATB. [19] Nevertheless, I am mindful of the fact that Mr. Valerio was, to a significant extent, the author of his own misfortune. Mr.Valerio signed Certificates of Safekeeping stating that ATB was holding an irrevocable assignment of $7.5 Billion US dollars worth ofUS Government Securities. To sign such an outrageous document was clearly negligent, even grossly negligent, as conceded by counselfor Mr. Valerio. [20] Yet, however negligent Mr.

Valerio’s conduct was, it does not amount to proof that he participated knowingly or recklessly ina fraud involving the use of those instruments to raise funds. As a result, I conclude that, on balance, the first factor tends to support theMaster’s decision. (

b) Information known to ATB [21] ATB’s primary ground for advancing the allegation was the fact that Mr. Valerio signed the Certificates of Safekeeping.There was nothing improper in ATB’s actions. One can plead fraud where the allegation is made in good faith and there is someevidence to support it: Apex Corporation v. Ceco Developments Ltd., 2006 ABQB 584 at para. 22, 406 A.R. 243. Indeed, MasterBreitkreuz, in his reasons, explicitly recognized that ATB had acted in good faith. [22] However, the Master also recognized that ATB had ultimately failed to prove fraud. He found that Mr.

Valerio’s signaturesuggested that he was guilty of negligence, but that negligence alone is not enough to prove fraud. The problem with ATB’s claim, as theMaster saw it, was not that the claim was not brought in good faith. It was that Mr. Valerio’s signature alone was not sufficient to provefraud, and that ATB was apparently unable to secure evidence of fraud, ultimately abandoning its action. [23] It is clear that the Master was aware of the competing considerations arising from the information known to ATB. Thus, thisfactor tends to support the decision of the Master. (

c) The strength of the information known to ATB [24] I need not discuss this factor at length in light of the comments under (

b) above. It is enough to say that the presence of Mr.Valerio’s signature on the Certificates of Safekeeping was sufficient to give ATB “some evidence” required to support an allegation offraud, but was not sufficient to prove fraud. I conclude that this factor also tends to support the Master’s decision. (

d) Steps taken to verify the information [25] ATB did not proceed beyond conducting “some” examinations for discovery. ATB did not gather further evidence of fraudbeyond Mr. Valerio’s signature. In fact, it continued to rely on Mr. Valerio’s signature in its argument before me. This factor, again,weighs in favour of awarding costs.

(

e) Additional information and modification of allegation [ 26 ] The only material information that subsequently came to light was the fact that Mr. Valerio did not receive any benefit from signing the Certificates of Safekeeping. [ 27 ] Despite this information and the lack of evidence of fraud, there was no modification of the allegation. While ATB has formally abandoned its claim, it continues to maintain that the allegation of fraud against Mr. Valerio is justified. In the appeal before me, counsel for ATB relied on Mr.

Valerio’s alleged recklessness as equivalent to fraud and therefore a basis for denying an award of costs. I conclude that this factor tends to justify an award of costs against ATB. (

f) Timeliness of modification of allegation [ 28 ] This factor is not applicable as there has been no modification of the allegation. (

g) Whether ATB should have known the implications of allegation [ 29 ] ATB should have known that an allegation of fraud would result in a significant adverse impact on Mr. Valerio’s reputation. [ 30 ] Counsel for ATB argued that the negative publicity surrounding Mr. Valerio came out before this action was commenced. This is not the test. This factor simply looks to whether ATB should have reasonably known the allegation’s implications for Mr. Valerio.

ATB clearly should have known that an allegation of fraud levelled against a former bank manager in relation to his employment would have serious implications for his reputation. Given that the allegation remains unproven, this factor tends to support an award of costs. [ 31 ] Based on the above analysis, I conclude that Master Breitkreuz exercised his discretion to award costs in line with the seven factors enunciated by this court in College of Physicians and Surgeons v. J.H. , supra . I find that Master Breitkreuz’s decision to award costs to Mr. Valerio was reasonable. 2.

Was the amount of costs awarded to the Respondent reasonable? [ 32 ] Having found that the award of costs was reasonable, I must now determine whether the quantum of costs was also reasonable. [ 33 ] It is clear that Master Breitkreuz did not consider it appropriate to elevate the costs award to the level of solicitor-client costs. In his reasons, Master Breitkreuz explicitly declined to characterize his costs award as solicitor-client costs. [ 34 ] Solicitor-client costs for misconduct must relate to conduct during the suit, not the pre-suit conduct sued over: Polar Ice Express Inc. v.

Arctic Glacier Inc. , 2009 ABCA 20 at para. 21 , 446 A.R. 295. In his reasons, the Master correctly recognized that there was no misconduct on the part of ATB during the proceedings that would warrant costs on a solicitor-client basis. Master Breitkreuz was clearly aiming for something less. [ 35 ] The Master was compelled to make a decision with respect to quantum in a factual vacuum. Mr. Valerio’s counsel never submitted a bill of costs. During argument, the Master suggested a range “somewhere between $20,000 and $50,000”, which was accepted by Mr. Valerio’s counsel.

[36] The actual costs incurred by Mr. Valerio by the time he appeared before Master Breitkreuz were $33,725. An award of$50,000 contradicts the Master’s manifest intention to grant something less than solicitor-client costs. On this basis, I conclude that anaward of $50,000 was unreasonable. 3. Am I permitted to substitute my discretion for the Master’s? [37] Until recently, it was settled law in Alberta that a superior court judge had unrestricted ability to substitute his/her discretionfor that of the Master: Wright v. Disposal Services Ltd. (1977), (AB KB), 8 A.R. 394 at para. 13, 4 Alta.

L.R. (2d) 173(Q.B.); Bank of Montreal v. Grotski (1992), (AB KB), 9 Alta L.R. (3d) 47 at paras. 4-5, [1992] A.J. No. 1274 (Q.B.);Kuhberg v. Slave Lake Native Friendship Centre Society, 2003 ABQB 514 at paras. 13, 15, 123 A.C.W.S. (3d) 991. [38] The Alberta Court of Appeal explained this rule in 274099 Alberta Ltd. v. West Edmonton Mall Shopping Centre Ltd.(1990), 1990 ABCA 294 , 114 A.R. 57, 75 Alta. L.R. (2d) 389 (C.A.) at para. 1: ... in Alberta an appeal from a Master to a Judge is de novo. The Judge exercises any discretion anew.

New evidence may be put beforehim for that reason, and because he has original jurisdiction as well. He is not just an appellate tribunal. [Emphasis added]. See also: Guaranty Trust Company of Canada v. Berger (1972), 27 D.L.R. (3d) 236 at para. 1, (Alta. Q.B.); R & SIndustries Inc. v. Hildebrand Industries Ltd., 2002 ABQB 965 at para. 1, 118 A.C.W.S. (3d) 195; Alberta Treasury Branches v.Cieslik, 2010 ABQB 113 at para. 27, 488 A.R. 80. [39] The new Alberta Rules of Court, Alta. Reg. 124/2010 (“New Rules”) render this reasoning obsolete. Appeals from Masters’decisions are now on record.

This requires me to reconsider whether superior court judges still have the ability to substitute their owndiscretion whenever the Master’s exercise of discretion is unreasonable. [40] The issue is novel in Alberta. Thus it is instructive to turn to the experience of other jurisdictions. [41] In Manitoba, an appeal from a Master’s decision is on record. The appellant is required to file an appeal brief containing theMaster’s order and all material that was before the Master: Court of Queen's Bench Rules, Man. Reg. 533/88, r. 62.01(8).

The appellantmay not adduce further evidence, except with leave of the judge hearing the appeal: Court of Queen's Bench Rules, r. 62.01(13). [42] Despite this, in Shore-Kalo v.

Kalo, 2008 MBQB 274 at para. 36, 234 Man.R. (2d) 65, Allen J. of the Manitoba Court ofQueen’s Bench held that in certain circumstances, a superior court judge may substitute his or her discretion for the Master’s: I note that I may substitute my discretion for the master’s where there is some “blatant want or excess of jurisdiction or some clear errorin law or if the findings of the master are not supported by the evidence.” [43] The same approach was adopted in British Columbia in Ralph's Auto Supply (B.C.) Ltd. v. Ken Ransford Holding Ltd., 2011BCSC 999 at para. 17, [2011] B.C.J.

No. 1419: There is no functional value in assigning a task to a particular judicial officer with the reservation that a different judicial officer at ahigher point in the hierarchy may substitute his or her view solely by reason of his place in the hierarchy and without some demonstrateddeviation in the original decision from the applicable legal principles or some misapprehension of the facts and the evidence that affects

the soundness of the result. [44] The passage quoted above is adopted from a decision in Zeitoun v. Economical Insurance Group, atpara. 36 (Ont. Sup. Ct. J. Div. Ct.), affirmed by a five-judge panel of the Ontario Court of Appeal in Zeitoun v.

Economical InsuranceGroup, 2009 ONCA 415, 96 O.R. (3d) 639. [45] Thus the courts of three provinces agree that even where an appeal is on record, it is appropriate for the superior court judgeto substitute his/her discretion for that of the Master, if the findings of the Master are wrong in law or not supported by the evidence. [46] In this case, the Master’s decision was not supported by evidence. The Master had no evidence of costs.

The actual bill ofcosts turned out to be significantly less than the Master’s award, which the Master had apparently intended to be less than full indemnitycosts. [47] On this basis, it is appropriate for me to substitute my discretion for that of Master Breitkreuz. [48] Apart from precedent, I conclude that it is appropriate under the New Rules that I substitute my discretion for the Master’s. Ihave found that the Master’s decision with respect to the amount of costs was unreasonable. An unreasonable decision cannot stand.

Itmust either be corrected by the reviewing judge or sent back for re-determination. [49] According to rule 1.2(1), the purpose of the New Rules is “to provide a means by which claims can be fairly and justlyresolved in or by a court process in a timely and cost effective way.” Rule 1.2(1) is a foundational rule meant to inform the wholeconduct of civil litigation. [50] It would be an affront to the principles of timeliness and cost-effectiveness to send these parties back to Master’s Chambersfor another hearing on the same issue.

I conclude that it is appropriate that I substitute my discretion for his, so that this litigation canproceed in accordance with the very purpose and intent of the New Rules. 4. What is the appropriate amount of costs? [51] There are two competing considerations with respect to costs. [52] On the one hand, an allegation of fraud is the most serious allegation in the civil context. Although I find that ATB broughtthis allegation in good faith, ATB was ultimately unable to prove it. Moreover, ATB continues to allege that Mr. Valerio has directlyparticipated in fraud against ATB.

Master Breitkreuz found, and I agree, that these proceedings have had significant social and financialconsequences for Mr. Valerio. This would justify awarding higher costs against ATB. [53] On the other hand, Mr. Valerio was, to a significant extent, the author of his own misfortune. The allegation of fraud arosefrom the fact that Mr. Valerio has signed the Certificates of Safekeeping representing that ATB held an assignment of $7.5 Billion worthof US Government Securities, more than ATB’s entire capital at the time.

To sign such an outrageous document was, as counsel for Mr.Valerio has admitted, “manifestly stupid.” It would be unreasonable to indemnify Mr. Valerio where the action arose from his ownnegligence. [54] Master Breitkreuz was clearly cognizant of these competing considerations when he refused to award solicitor-client costs. Iagree with the Master that the combination of ATB’s allegations and Mr. Valerio’s own conduct warrants something less than fullsolicitor-client costs. [55] I conclude that Mr. Valerio shall have 50% of his solicitor-client costs incurred up to the time of his appearance before the

Master. As to this appeal, since success has been divided, the parties shall bear their own costs. Conclusion [ 56 ] The appeal is allowed in part. The Respondent’s costs shall be reduced to 50% of his solicitor-client costs incurred until his appearance before the Master. Heard on the 30 th day of August, 2011. Dated at the City of Edmonton, Alberta this 27 th day of September, 2011. J.M. Ross J.C.Q.B.A. Appearances: Michael J. McCabe, Q.C. Reynolds, Mirth, Richards & Farmer LLP for the Appellant Barry M. King Strathcona Law Group for the Respondent