2010 ONSC 7060, 2010 ONSC 7060

CITATION : Superior Electrics, Limited (Re), 2010 ONSC 7060 COURT FILE NO.: 33-165033 DATE: 2010-12-20 SUPERIOR COURT OF JUSTICE – ONTARIO (Bankruptcy and Insolvency) RE: IN THE MATTER OF THE BANKRUPTCY SUPERIOR ELECTRICS, LIMITED OF THE CITY OF PEMBROKE IN THE PROVINCE OF ONTARIO BEFORE: Mr. Justice Stanley J. Kershman COUNSEL: Gregory G.

Bowden, counsel for the Royal Bank of Canada Fred Tayar, counsel for Superior Electrics, Limited HEARD: By Written Submissions COSTS decision [ 1 ] A Bankruptcy Order was granted to the Royal Bank of Canada (“Applicant”) against Superior Electrics, Limited (“Superior” or “Company”) on October 27, 2010.

BDO Dunwoody Limited was appointed as the Trustee in Bankruptcy. [ 2 ] In the October 27, 2010 Reasons, costs were ordered payable to the Applicant out of the bankrupt estate after taxation. [ 3 ] Counsel for the Applicant wrote to the Court requesting that submissions relating to costs be addressed, because at trial, the decision had been reserved and the parties had not had an opportunity to address the issue of costs. In that correspondence, Applicant’s counsel set out their costs submissions. [ 4 ] By correspondence to counsel dated November 16, 2010, I agreed that costs submissions could be made. Mr.

Tayar on behalf of the Company thereafter provided submissions. Issue [ 5 ] The issue is whether the costs of the trial should be paid out of the bankrupt estate or should they be paid by the former director of the Company, Mr. Harold Shifman. Applicant’s Position [ 6 ] The Applicant takes the position that the bankrupt estate has no assets and that Mr. Shifman, the former director of Superior, should have to pay them. [ 7 ] The Applicant argues that Mr.

Shifman disputed the Bankruptcy Application for a collateral purpose and that in doing so made serious allegations against the Applicant and BDO Dunwoody Limited (“BDO” or “Monitor”), including that the Applicant had worked together with the Monitor to create the insolvency of the Company. [ 8 ] The Applicant argues that the trial was used by Mr.

Shifman as a form of discovery in anticipation of a fraudulent conveyance action to be commenced by either the trustee in bankruptcy or a creditor or creditors of the Company. [ 9 ] Lastly, the Applicant argues that the leading case as to the payment of costs by a non-party in an insolvency situation is Re Party City Limited , 2002 CarswellOnt 1116 (“ Party City ”) . The Applicant argues that based on the reasoning in Party City , that the Company had nothing at stake in the proceedings since its assets had previously been sold by BDO as Receiver. The Applicant says Mr.

Shifman had something at stake since he had removed large sums of money from the Company. Company’s Position [ 10 ] The Company argues that based on the October 27, 2010 Reasons that the Company had been meeting its liabilities generally

as they became due from December 2008 to July 2009 and that in August 2009 the Company had ceased to meet its liabilities generallyas they became due. According to my findings at para. 19 of the Reasons, a series of cheques totaling $490,000 payable to Mrs. Shifmanwere negotiated from December 2008 to the end of July 2009 through the Applicant. These monies were used to repay a $600,000promissory note issued to Mrs.

Shifman in December 2008 for monies lent by her to the Company. [11] The Company argues that the leading case relating to the payment of costs by a non-party in an insolvency situation is 1730960 Ontario Ltd. (Re) (2009), 2009 ONCA 720 , 57 C.B.R. (5th) 183 (O.C.A.) (“173”). At para. 8 Juriansz J. says: … The contention that 220 was acting as a nominee or surrogate of sole shareholder, Romspen, is simply an attempt to lift the corporateveil. Cost awards against non-parties always involve the exceptional exercise of judicial discretion.

Absent fraud, abuse of the court'sprocess in general and the bankruptcy process in particular to serve a collateral purpose or similar wrongdoing, there is no basis forlooking behind a moving party's corporate legal personality to award costs against its parent. [12] The Company argues that the Applicant cannot satisfy the test in the 173 case for a number of reasons including thefollowing: 1. There were no findings in the October 27, 2010 Reasons that Mr.

Shifman had committed fraud, abused the court’s processes ingeneral, or abused the bankruptcy process in particular to serve a collateral purpose or similar wrong-doing. 2. Even if the court had found that Mr. Shifman had misbehaved, in that Superior had used the trial as a discovery for “the fraudulentconveyance action to come” and having Superior allege: (

i) that the Application had been brought to harass Mr. Shifman, and (ii) that the Applicant and the Monitor had created the insolvency, such behaviour would not rise to the standard necessary to justify an award of costs against Mr. Shifman. Analysis [13] Section 45(1) of the Bankruptcy and Insolvency Act reads as follows: Costs of application 45.

(1) If a bankruptcy order is made, the costs of the applicant shall be taxed and be payable out of the estate, unless the court otherwiseorders. [14] Accordingly, the normal practice is that costs are to be payable out of the estate unless there is some reason that the courtorders that costs be payable by someone else. [15] The Applicant argues that pursuant to the Party City case that Mr. Shifman should be liable for costs of the trial personally. Ihave reviewed the Party City case and I am satisfied that the present case is distinguishable from Party City for the following reasons: 1.

In the Superior case, there were no allegations by the Company or Mr. Shifman tantamount to fraud, while in the Party City casethere were allegations made by the creditor which were tantamount to fraud. 2. In the Superior case, neither Superior nor Mr. Shifman commenced the process. The process was commenced by the Applicant byway of a Bankruptcy Application. The Company filed a Dispute in response to the Bankruptcy Application in accordance with theprovisions of the Bankruptcy and Insolvency Act and the Bankruptcy Rules.

In the Party City case, the creditor brought a motion to setaside or vary the order opposing the sale of the assets. [16] In the 173 case, Juriansz J.A. cited Dallas/North Group Inc., Re. In para. 6 of the case, he cites an example of the kind ofabuse that did justify the award of costs against non-parties. He says: 6 The standard for awarding costs against a non-party is set out in Dallas/North Group Inc., Re, (ON CA), [2001]O.J. No. 2743 (Ont. C.A.), which Cumming J. relied upon in Party City. In Dallas this court upheld the order of the bankruptcy judge, (ON SC), [1999] O.J.

No. 5744, awarding costs against non-parties. The bankruptcy judge had concluded that thebankruptcy proceeding had been brought for an improper collateral purpose. The true purpose of the proceeding was not to attain thedistribution of assets but to remove an officer and director of a third-party company and reduces shareholdings. Labrosse J.

A. noted atpara. 6: The trial judge further concluded that it was apparent that there had been a concentrated effort orchestrated by [the non-parties] ofbullying, harassment and intimidation against [one of the litigation parties] and that it was difficult to think of a clearer example ofpetitions in bankruptcy having been brought for an improper collateral purpose. The barrage of proceedings brought against [one of thelitigation parties] and [Dallas/North Group Inc.] constituted an abuse of process and was orchestrated by [the non-parties].

The trialjudge found it most disturbing that the misconduct of [the non-parties] was carried out using the court system as a vehicle and that alawyer participated in the scheme. [17] In XLO Investments Ltd. v. Hurontario Management Services (Mutual Trust Co. v. Stornelli), (1999) 170 D.L.R. (4th) 371(Ont.C.A.) the court of appeal considered the trial decision which had awarded costs against a Mr. Kerr, a non-party, who was a solicitorwith an interest in the relevant companies and who had been the only witness for the companies at trial. The court of appeal upheld thetrial judge’s decision that Mr.

Kerr’s companies had participated in a fraudulent conveyance (paras. 3 and 5). At trial, costs were awarded

against Mr. Kerr, a non-party. [18] On appeal, the court set aside the costs award against Mr. Kerr. At para. 6 the court said: 6 As noted, Kerr also seeks leave to appeal the order for costs against him. In our view leave should be granted and the appealallowed. The "straw man" principle enunciated in Re Sturmer and Beaverton (1912), (ON SCDC), 2 D.L.R. 501 (Div.Ct.) has no application in this case. There is no evidence that the corporation is a sham or that Kerr acted through the corporation in orderto avoid liability for costs. In Television Real Estate Limited v. Rogers Cable T.V.

Limited (1977), (ON CA), 34 O.R.(3d) 291, this court confirmed that costs could only be ordered against a non-party under the Sturmer principle where the test set out inSturmer, as applied in the case of Rockwell Developments Ltd. v. Newtonbrook Plaza Ltd., (ON CA), [1972] 3 O.R.199 (C.A.) is met.

Nor is this a case of a solicitor having been found guilty of misconduct in the proceedings. [19] In the Superior case, there was no evidence or finding of bullying, harassment, intimidation, improper purpose, impropercollateral purpose or abuse of process. [20] In addition, the actual shareholder of Superior was 1119434 Ontario Inc. and not Mr. Shifman. Mr. Shifman had been aformer director of Superior and was a shareholder of 1119434 Ontario Inc. [21] Furthermore, there was no finding at trial that the payment of funds to Mrs. Shifman by the Company was inappropriate.

Thatis a matter for a future proceeding, to be commenced by either the trustee in bankruptcy or the creditors of the estate. [22] In addition, while it is alleged by the Applicant that Mr. Shifman received the monies, the evidence at trial was that a majorityof the monies, about $490,000 was paid to Mrs. Shifman and not Mr. Shifman. [23] As to the argument that Superior had no assets and had nothing at stake, the Applicant was fully aware of this when itcommenced the Bankruptcy Application. It had been involved with Superior as its lender, and then it installed the Monitor andsubsequently the Receiver.

The Applicant chose to bring the Bankruptcy Application knowing full well that the Company hadno assets. [24] In my view, there was nothing improper in the Dispute filed by the Company. [25] While time was spent at trial dealing with the issue of returned cheques and non-payment of the GST, those did not amount tothe behaviour which could be described as bullying, harassment, intimidation, improper purpose, improper collateral purpose or abuse ofprocess. [26] As to the allegations about the Applicant and/or the Monitor, I am satisfied that they did not amount to behaviour which couldbe described as bullying, harassment, intimidation, improper purpose, improper collateral purpose or abuse of process. [27] The ordering of costs against a non-party is an exceptional exercise of judicial discretion.

I find that the conduct in this casewas not such that costs should be awarded against Mr. Shifman. As such, I decline to exercise my discretion to order costs personallyagainst Mr. Shifman. Conclusion [28] For the reasons set above, I find that there is no basis to order costs payable against Mr. Shifman personally. [29] The October 27, 2010 Reasons as they relate to costs shall stand, i.e. that the Applicant shall be entitled to its costs payableout of the estate after taxation. [30] There is no order as to costs as it relates to this Costs Decision. [31] Order accordingly. Mr. Justice Stanley J.

Kershman Date: December 20, 2010