Karnalyte Resources Inc v Phinney, 2021 ABQB 26

Court of Queen’s Bench of Alberta Citation: Karnalyte Resources Inc v Phinney, 2021 ABQB 26 Date: 20210111 Docket: 1801 07487 Registry: Calgary Between: KARNALYTE RESOURCES INC Plaintiff/Applicant - and - ROBIN PHINNEY, DAVE VAN DAN and DAN BROWN Defendant/Respondents _______________________________________________________ Costs Decision of the Honourable Madam Justice B.E. Romaine _______________________________________________________ I. Introduction [ 1 ] This decision addresses the issue of costs sought by two of the Respondents in the within action.

My reasons for judgement are dated February 14, 2020 and can be found at 2020 ABQB 119 . [ 2 ] The Respondent Robin Phinney seeks costs on a “solicitor-client” basis, or alternatively on a scale that is a multiple of

Schedule C costs as set out in the Rules of Court . Mr. Phinney was entirely successful in defending against the application brought by the

applicant Karnalyte Resources Inc. He seeks solicitor-client costs on the basis that the conduct of Karnalyte, including as described in my reasons, brings the fundamental issue of fairness and efficiency that underlie the Rules squarely into play and justifies an award of solicitor client costs. [ 3 ] Karnalyte opposes such an award of costs, submitting that the appropriate quantum of costs should be calculated on the basis of column 3, with appeal costs awarded for item 20(1) in accordance with item 8(1) of

Schedule C. [ 4 ] For the reasons that follow, I award Mr. Phinney solicitor-client costs inclusive of disbursements of $213, 513.19. [ 5 ] The Respondent Dan Brown also seeks costs on a solicitor-client basis for many of the same reasons. Mr. Brown submits that Karnalyte’s motivation has been to weaponize this and other litigation against the Respondents in order to cause the Respondents as much expense and hardship as possible, both professionally and financially. [ 6 ] Mr.

Brown was substantially successful in the litigation, other than my finding that one posting he made on an internet chatroom on the day the application was filed constituted an unlawful solicitation of proxies. I found that Karnalyte had suffered no damages from this solicitation, and given Mr. Brown’s subsequent conduct, no remedy need be imposed against him. [ 7 ] Karnalyte submits that Mr. Brown is not entitled to costs as he is an unsuccessful party, that each party should bear their own costs, or in the alternate, that Mr. Brown is only entitled to costs in accordance with

Schedule C, column 1. Karnalyte also seeks costs for its written submissions on costs. [ 8 ] For the reasons that follow, I award Mr. Brown solicitor-client costs of $49,649.50 inclusive of disbursements and other charges and dismiss Karnalyte’s application for costs of the costs submissions. II. Mr. Phinney’s Application [ 9 ] As Mr. Phinney was entirely successful, he is entitled to costs. The only issues are whether he is entitled to solicitor-client costs, and if so, in what amount. [ 10 ] Mr. Phinney agrees with Mr. Brown that the litigation was conducted as a “weapon” in order to ensure that Mr.

Phinney (and the other Respondents) were put to as much expense and hardship as possible, in a situation where the allegations against them were serious, as well as personally and professionally damaging. [ 11 ] Karnalyte makes much of the fact that the application was not complex and was heard in a half day. However, this fails to indicate the history of the application and the voluminous briefs and materials that were filed by the parties in advance of oral argument. [ 12 ] As noted by Mr. Phinney, the steps taken to move this matter from filing to hearing involved the following: (

a) Two Originating Applications (the second being an Amended Originating Application). Each application was about 20 pages in length and included significant allegations of wrongdoing, including allegations that Mr. Phinney attempted to obtain a personal gain because of his prior position as CEO of Karnalyte. I agree with Mr. Phinney that Karnalyte essentially alleged fraud against Mr. Phinney without using that term. The Amended Originating Application asserted that, during his tenure as Karnalyte’s President and Director, Mr.

Phinney attempted to extract significant personal benefits as part of a proposed financing transaction between Karnalyte and its strategic partner and largest shareholder. Karnalyte states in the application that this attempt was ultimately rejected by the shareholder, and partially formed one of the grounds for Karnalyte’s just cause to terminate Mr. Phinney’s employment as President. The application also asserts that Mr. Phinney’s shareholder proposal of March 27, 2018 was a clear attempt to redress past grievances, specifically Mr.

Phinney’s termination as Karnalyte’s President, his failure to be re-elected as a Director, and his failure to obtain significant personal benefits as part of the proposed transactions between Karnalyte and its strategic partner and shareholder. These allegations of significant wrongdoing by Mr. Phinney were unnecessary in terms of the issues in the application. They did not need to be addressed in the reasons for decision, and were not proved by the evidence before me. (

b) Four affidavits sworn by representatives of Karnalyte which were many hundreds of pages in length. (

c) Two affidavits filed by Mr. Phinney. Mr. Brown filed one affidavit and the Respondent Dave Van Dam filed two affidavits. (

d) Two full days of questioning on Mr. Phinney’s affidavits (and several more days as the other Respondents were questioned on their affidavits). (

e) Questioning of three non-parties by Karnalyte without prior notice to Mr. Phinney. Karnalyte did not provide Mr. Phinney with the transcripts of two of the questionings, nor did Karnalyte include these or the questioning transcript of Stan Phinney in the record it put before the Court although the transcript was later produced and referred to in the decision. (

f) An application filed by Karnalyte to gain access to unredacted versions of Mr. Brown’s telephone records, which was dismissed with costs to Mr. Brown. (

g) A contested adjournment application wherein Mr. Phinney and the other Respondents were successful in obtaining an adjournment and costs in the cause. (

h) A Norwich application brought by Karnalyte in British Columbia without notice to Mr. Phinney and without disclosure of any

materials contained therein to him despite requests that this information be provided. (

i) A special application scheduled for a full day with lengthy briefs. In support of the application, a four-volume record was filed with the Court totalling 4100 pages. Despite this, additional material was filed before and during the hearing. [ 13 ] In addition to the complexity of the application as a reason for enhanced costs, Mr. Phinney submits that Karnalyte engaged in misconduct in the litigation, including the following: (

a) failure to advise Mr. Phinney that non-parties had been questioned, and delay in providing information about the questioning; (

b) obtaining an order without notice from the Supreme Court of British Columbia against the internet website that hosts the chatroom in order to learn the identity of “theend6543”, which Karnalyte had asserted in its application was Mr. Phinney’s alias. No party to the application received information with respect to the result of the Norwich order, which did not yield evidence that “theend6543” was Mr. Phinney or any of the other Respondents. Karnalyte refused a “with prejudice” request to disclose the material accompanying the application against the internet website and any resulting production; (

c) filing a late affidavit with the brief for the application, thus depriving Mr. Phinney of the right to cross-examine or respond; (

d) mischaracterizing the questioning evidence in its brief, as noted in the reasons for decision, not less than five times; (

e) misstating the number of telephone conversations between Mr. Phinney and Mr. Brown in its brief; and (

f) advising the Alberta Securities Commission that it would not be challenging the exemption order that had been granted to Mr. Phinney after the ASC objected on the basis of jurisdiction, and then, in its submissions, doing in effect exactly that, as I noted in the reasons for decision. [ 14 ] The parties agree that the law in Alberta relating to the awarding of solicitor-client fees is aptly set out in Secure 2013 Group Inc. v Tiger Calcium , 2018 ABCA 110 at para 15 : Solicitor-client costs are generally awarded only when there has been reprehensible, scandalous or outrageous conduct by a party ...

They are only awarded in rare and exceptional circumstances and may be available if misconduct occurs in the course of litigation ...

A careful analysis of the facts is required... [ 15 ] The Court in Tiger Calcium set out factors to be considered by a court at para 15, including the following relevant to this case: a. blameworthiness in the conduct of the litigation; b. when justice can only be done by a complete indemnification for costs; c. where there was evidence that the appellant hindered, delayed or confused the litigation; d. where there has been an attempt to conceal material documents and failure to produce material documents in a timely fashion; e. positive misconduct, where others should be deterred from like conduct and the party should be penalized beyond the ordinary order for costs; or f. untrue or scandalous charges. [ 16 ] The Rules of Court also recognize as factors to be considered in determining an award of costs conduct that unnecessarily lengthens or delays the action or any of its steps, whether a party has engaged in misconduct, and any offer of settlement made, regardless of whether or not the offer for settlement complies with

Part 4, Division 5: Rule 10.33(1) and (2). [ 17 ] Relevant to the latter, counsel for Mr. Phinney, in a “with prejudice as to costs” letter dated March 29, 2019, correctly pointed out that Karnalyte’s pending 2019 Annual General Meeting rendered the outcome of the application moot. Karnalyte disregarded this letter. [ 18 ] Given all these circumstances and factors, I find that this is one of the cases where justice can only be done by a complete indemnification of costs. Mr.

Phinney’s claim for solicitor-client costs totals $213,513.19 inclusive of fees, disbursements and GST. [ 19 ] Karnalyte submits that this amount is too high, and proposes a lower amount.

It is noteworthy that Karnalyte’s 2018 “Management Discussion and Analysis” published on the SEDAR website discloses the following under the heading “Accounting and Legal”: ... expenses for the year ended December 31, 2018, ... [saw] an increase of $841,000 ... the legal expenses were principally incurred ... with respect to the filing by the Company of an originating application with the Alberta Court of Queen’s Bench seeking declarations from the court that the Respondents acted jointly and in concert to conduct various activities, including an illegal proxy solicitation, in connection with the 2018 AGM in contravention of the provisions of the Canadian corporate and securities laws, and that those proxies should therefore be disallowed. (emphasis added) [ 20 ] Karnalyte’s submission that Mr.

Phinney’s fees are unreasonable is untenable in the circumstances, particularly given that its own fees and disbursements appear to be considerably higher. Its complaint about the size of Mr. Phinney’s legal team is also not justified. I accept Mr. Phinney’s evidence that, between June 7, 2008 and May 5, 2020, he was represented first by Southern Alberta Law Offices, then Enernext Counsel and finally Borden Ladner Gervais LLP. Mr. Phinney was defending himself against serious allegations relating to his personal and professional ethics and entitled to counsel appropriate to the escalating litigation.

I therefore award Mr. Phinney costs in the amount of $213,513.19.

[ 21 ] Given my decision, it is not necessary to consider the alternatives suggested by either Mr. Phinney or Karnalyte. III. Mr. Brown’s Application [ 22 ] Mr. Brown relies on many of the same factors that I have found justify an award of indemnification costs to Mr. Phinney. He also notes the following relevant factors: (

a) It is apparent from the evidence that Mr. Brown made repeated attempts to resolve issues with Karnalyte without resort to litigation. Months prior to the application, his counsel provided Karnalyte with redacted copies of Mr. Brown’s cell phone and home phone records for the material time period between May 1, 2018 and June 7, 2018, and a thorough explanation of any communications between Mr. Brown and Mr. Phinney on a without prejudice basis. Karnalyte applied for unredacted copies of the records, and was unsuccessful in that application, with costs levied against it payable “forthwith”. Despite repeated requests, Karnalyte has not paid the cost award. (

b) The single posting that I found to be an unlawful solicitation of proxies was never mentioned in Karnalyte’s Amended Originating Notice. It was followed by Mr. Brown’s fulsome public apology. (

c) On June 29, 2018, Karnalyte filed a statement of claim against Mr. Brown claiming damages of approximately $1.4 million on the basis of defamation. As was the case with Mr. Phinney, Karnalyte alleged many of the same allegations in the application that it pleads against Mr. Brown in the defamation action. As in Mr. Phinney’s case, many of these allegations were unnecessary to the application, and unproven by the evidence before me. (

d) As Karnalyte failed to provide an affidavit of records in a timely manner in the defamation action, Mr. Brown brought an application to compel it to produce its affidavit of records and was successful, including with an award of costs payable “forthwith”. Again, Karnalyte has not paid the costs. Karnalyte submits that events connected with a separate application are not relevant to this application, but it is clear from the fact that the allegations set out in the defamation action were repeated in this application that the actions are related. Karnalyte alleged in the application that Mr.

Brown posted defamatory messages “in furtherance of his strategy to support his improper solicitation of proxies”. (

e) Mr. Brown made a formal offer to Karnalyte for a consent dismissal order in regards to the remedies sought against Mr. Brown on January 25, 2019, on the basis that Karnalyte would pay Mr. Brown’s costs pursuant to

Schedule C, column 2. Karnalyte did not accept the offer. Karnalyte submits that this offer is irrelevant as it was partially successful against Mr. Brown. Although the offer does not support an award of double costs, when combined with Mr. Brown’s other conduct in the litigation, it illustrates his attempts to shorten or avoid the action. [ 23 ] I note that Karnalyte claimed the following relief against Mr. Brown in its Amended Originating Notice: (

a) a declaration that Mr. Brown had engaged in improper proxy solicitation; (

b) a declaration that Mr. Brown was acting in concert with Mr. Phinney and Mr. Van Dam; (

c) a declaration that Mr. Brown failed to discharge his obligation to comply with the early warning system set out in securities regulation; (

d) a declaration that Mr. Brown failed to comply with the requirements of corporate and securities regulations with respect to solicitation of proxies, disposition of shares, filing of early warning disclosure, dissident proxy circulars, continuous disclosure obligations, proxy forms and collective and joint communications; (

e) a declaration that any votes cast that were obtained by improper proxy solicitation were invalid and a nullity and to be disregarded with respect to the counting of votes at the 2018 AGM; and (

f) a declaration that Karnalyte shall be entitled to recount all votes and adjust the recording and publication of voting results for the 2018 AGM. [ 24 ] As noted, the only relief sought by Karnalyte with respect to Mr. Brown’s conduct that was successful was my finding that Mr. Brown had published an improper proxy solicitation on May 28, 2018. I found that the posting was the only evidence against Mr. Brown relating to proxy solicitation, that it was not evidence that Mr. Brown was acting in concert with Mr.

Phinney before the posting and that Karnalyte suffered no damages from this solicitation. [ 25 ] With respect to the other relief sought, I concluded that there was no evidence of Mr. Brown and Mr. Van Dam acting jointly or in concert in any way and that the uncontradicted and credible evidence of both was that they had never met, and had never communicated with each other. I found that there was no persuasive evidence that Mr. Brown and Mr. Phinney were acting jointly or in concert with each other. [ 26 ] I further noted that, given that Mr.

Brown had issued a full public apology prior to the AGM, had refrained from posting any further negative comments about Karnalyte’s management nominees and in fact had posted a message to the chatroom requesting that other parties not display the names of any Karnalyte directors, management or any other party involved in the forum in a negative light, no further remedy was necessary against Mr. Brown. I commented that Mr. Brown was caught up in a vicious battle among old enemies. [ 27 ] Therefore, despite Karnalyte’s marginal success in the application, I find that, given Karnalyte’s conduct during the litigation

and Mr. Brown’s attempts to shorten or avoid the litigation against him, it is in the interest of justice that Mr. Brown be awarded solicitor-client costs in the amount of $49,649.50 inclusive of disbursements and other charges. [ 28 ] Again, it is not necessary to address the alternative relief sought. IV. Other Relief [ 29 ] Mr. Phinney applies for an order that the Karnalyte action 1801-09478 against him filed on July 4, 2018, which sets out many of the same allegations against Mr.

Phinney that were made in the application and claims damages of $5 million plus punitive, exemplary and aggravated damages, be stayed until such time as any cost award made with respect to this action is paid in full. [ 30 ] Mr. Brown seeks the same relief with respect to the collateral defamation action that Karnalyte filed against him on June 29, 2018. [ 31 ] Given that Karnalyte has failed to pay costs awards made against it in favour of Mr. Brown with respect to two applications in which Mr.

Brown was successful, despite directions to do so “forthwith”, I find this relief to be appropriate, and I grant it. [ 32 ] Mr. Phinney and Mr. Brown have been entirely successful in this application for costs. In order to avoid further litigation on the point, I direct that they are each are entitled to their costs of the application in the amount of $3,000.00. Dated at Calgary, Alberta this 11 th day of January, 2021 . Justice B.E. Romaine J.C.Q.B.A. Appearances: Ariel Breitman for the Plaintiff/ Applicant Karnalyte Resources Inc.

William Katz and Geoffrey Boddy for the Defendant/ Respondent Dan Brown Matthew J. Epp / Matthew Schneider for the Defendant/ Respondent Robin Phinney Oliver Hanson for the Defendant/ Respondent David Van Dam