Court Appointed Receiver Liable to pay Substantial Indemnity Costs

Earlier this year ( June 9th ), I wrote about a case in which the Court of Appeal for Ontario set aside "breathtakingly broad" receivership orders that put in place an "investigative receivership".  This month, the court released its ruling on costs arising from its decision. See Akagi v. Synergy Group (2000) Inc. 2015 ONCA 771. 

 

On the appeal, the court  had set aside ex parte orders issued by Justice Colin Campbell of the Superior Court of Justice (Commercial List).  The court concluded that the orders appointing the receiver stood “on a fundamentally flawed premise” and were “unjustifiably overreaching in the powers they granted”. 

 

In the court’s view, both the judgment creditor, Mr. Akagi - who commenced the receivership proceedings without taking any initial steps to recover on his judgment - and the receiver, J.P. Graci and Associates Ltd., who took the investigative receivership too far, should bear the cost consequences of the orders having been set aside.

 

Mr. Akagi applied for the initial ex parte order appointing the receiver after obtaining a default judgment in the amount of approximately $147,000 based on allegations of fraud arising out of the loss of funds he had contributed to a tax program marketed and sold by the Synergy Group.  The program was supposed to generate tax loss allocations for him, but did not.  His judgment was against the Synergy Group and certain individuals associated with it.  The initial order made by Justice Campbell granted a receivership over all the assets and undertakings of the Synergy Group and an additional company, Integrated Business Concepts Inc. (“IBC”).   

 

It soon became clear however that the principal purpose of the receivership order was not to recover on Mr. Akagi’s judgment debt but to institute a broad ranging inquiry – a roving “investigative receivership” – into what was alleged to be a much larger tax fraud scheme, and to do so, purportedly on behalf of approximately 3,800 other investors who may have been caught in the tax scheme as well.  None of these investors were a party to the Akagi action or the receivership application, none purported to seek to have their interests protected, and Mr. Akagi and the receiver maintained throughout that they did not purport to represent the interests of those investors. 

 

Subsequently, through a series of further ex parte applications, the receivership order morphed into a wide ranging investigative receivership, freezing and otherwise reaching the assets of 43 additional individuals and entities including authorizing the registration of certificates of pending litigation against their properties.  Only three of these entities and individuals had any connection to the underlying Akagi action and only two were actually judgment debtors.

 

The Court of Appeal set aside the receivership orders on the basis that the receivership had proceeded on an entirely misguided course, the orders were impermissibly over-reaching, and the ex parte proceedings themselves had been tainted by certain procedural errors including the receiver's failure to disclose to Justice Campbell that the Canada Revenue Agency had discontinued its investigation into the tax allocation scheme several months before the receivership was sought when evidence of that inquiry had formed the basis for obtaining the orders.

 

All of the appellants, including IBC and Student Housing Canada Inc., sought their costs on a full or substantial indemnity basis against both Mr. Akagi and the receiver, jointly and severally. 

 

The receiver argued that no costs should be awarded against it because it was proceeding in good faith and simply carrying out what it understood to be its court-ordered mandate.  It’s conduct and activities pursuant to the receivership orders were approved by the court in two orders and the general rule is that a receiver is not exposed to costs against it personally in receivership proceedings.

 

Mr. Akagi argued that his involvement with the receivership had been limited solely to obtaining the initial receivership order and to defend that order throughout the receivership.  He argued against responsibility for costs incurred by the appellants subsequent to the initial order. 

 

The Court of Appeal did not accept that Mr. Akagi’s involvement in the receivership proceedings was minimal or limited to obtaining the initial order.  Mr. Akagi had tenaciously defended the subsequent ex parte orders.  Mr. Akagi’s counsel had attended and participated in various motions, scheduling appointments and examinations.  Mr. Akagi was a central participant on the appeal itself.  He instituted and supported the proceedings throughout.

 

As a result, the Court of Appeal found him responsible for costs. 

 

As for the receiver, the court held that it was also liable to pay costs.   The principle that costs are rarely awarded against the receiver applies only when the receiver is acting in his capacity as receiver in the course of the receivership.  It does not apply where the receiver turns itself into a real litigant, drawing others into the fray and forcing them to defend themselves in what amounted to a process that was extraneous to the creditor-driven receivership.

 

The court did not make a finding that the receiver acted in bad faith.  In its view however, the receiver had misconceived its role, and in the process had lost its objectivity in the notion that it was an investigative receiver.  Mr. Akagi’s claim was a relatively small one that did not justify or require the intrusive and far-reaching mareva like orders that were obtained.  In taking these steps, the receiver undermined its neutral position as an officer of the court and turned itself into a litigant for the cause.  As a litigant, it was subject to the loser pays costs regime that applies. 

 

The court awarded costs against the receiver on a substantial indemnity scale as a measure of its disapproval of its conduct. 

 

It awarded costs against Mr. Akagi on a partial indemnity basis.  It appeared to the court that the receiver was the more active litigant pushing for potential action on behalf of all 3,800 alleged victims and calling the shots on the over-reaching orders that were obtained.  In addition, the court reasoned that Mr. Akagi, as an unpaid creditor at least had some interest in pursuing the receivership.

Regards,

Blair

Ontario Courts Refuse to Stay Action Against Nigerian Defendants

The Court of Appeal for Ontario released its decision in James Bay Resources Limited v. Mak Mera Nigeria Limited, 2015 ONCA 781  this week.  This is an appeal by Nigerian appellants who had lost a motion to stay an action brought by James Bay Resources Limited (“James Bay Resources”) on the ground that the Ontario courts lacked “jurisdiction simpliciter” and Ontario was not the convenient forum for the determination of the dispute between the parties. 

 

James Bay Resources entered into a Memorandum of Understanding (“MOU”) with the appellant, Adewale Olorunsola (“Sola”) on March 3, 2011.  The MOU was negotiated and signed in Ontario.  It set out an arrangement between the parties with respect to the acquisition of Nigerian oil and gas assets. 

 

On February 12, 2012, James Bay Resources and the appellant, Mak Mera Limited (“Mak Mera”) entered into a letter agreement which replaced the MOU (“Agreement”).  The Agreement was far more detailed than the MOU.  Sola signed both the MOU and the Agreement.

 

A dispute arose between the parties in respect of the contractual arrangements.  The dispute was fueled by a letter sent by Mak Mera to Royal Dutch Shell PLL on July 2, 2014.  The letter was copied to James Bay Resources, as well as to many others, including the Nigerian Ambassador to Canada and a number of officials of the Nigerian government.  Madam Justice MacFarland of the Court of Appeal found that absence truth, the statements made in the letter were "quite clearly defamatory" of James Bay Resources.

 

On September 4, 2014, James Bay Resources commenced proceedings against Mak Mera and Sola in Ontario.  On September 16, 2014, Mak Mera, Sola and Sola’s father-in-law (a Nigerian resident and Chairman of Mak Mera), commenced an action in Nigeria against numerous parties including James Bay Resources and its CEO, Stephen Shafsky.  Some of the claims in the Nigerian action were similar to those in the Ontario action. 

 

James Bay Resources moved in The Federal High Court of Nigeria to strike the Nigerian action on the grounds that the Nigerian court lacked jurisdiction.  It was unsuccessful.  James Bay Resources is appealing that order.

 

On March 2, 2015, Mak Mera and Sola moved to strike or permanently stay the Ontario action.  Justice Paul Perell of the Ontario Superior Court of Justice concluded that Ontario had jurisdiction simpliciter and identified several presumptive factors that would apply, including that Sola is an Ontario resident and both the MOU and the Agreement were negotiated and signed in Ontario.  Justice Perell also found that the Agreement provides that it is governed by Ontario law and contains a choice of forum clause that names Ontario as the jurisdiction where any disputes would be resolved.  He noted, “Neither Mak Mera nor Mr. Sola has advanced any cogent argument that there is a rebuttal of the contractual connection as a presumptive factor.  Their arguments may be relevant to the issue forum conveniens, but jurisdiction is not rebutted.”.  Mak Mera and Sola appealed to the Court of Appeal. 

 

The appellants made no oral submissions rebutting the contractual connection as a presumptive factor.  Justice MacFarland held that the arguments raised on appeal went to the merits of the claims, not to jurisdiction of the Ontario courts.  Those issues did not displace or challenge the fact that both agreements (the MOU and the Agreements) were negotiated and signed in Ontario and that Sola is an Ontario resident – both are strong, presumptive factors.   

 

The appellants also argued that Justice Perell had erred in law by failing to specifically consider comity in his analysis.  Justice MacFarland embarked on a detailed analysis of the goal of comity in jurisdictional motions.  She referred to the decision of the Supreme Court of Canada in Van Breda v. Village Resorts, [2012] 1 SCR572:

 

The goal of the modern conflicts system is to facilitate exchanges and communications between people in different jurisdictions that have different legal systems.  In this sense it rests on the principle of comity.  But comity itself is a very flexible concept.  It cannot be understood as a set of well-defined rules, but rather as an attitude of respect for and deference to other states and, in the Canadian context, respect for and deference to other provinces and their courts.  Comity cannot subsist in private, international law without order, which requires a degree of stability and predictability in the development and application of the rules governing international or inter-provincial relationships.  Fairness and justice are necessary characteristics of a legal system, but they cannot be divorced from the requirements of predictability and stability which assure order in the conflicts system.   In the words of LaForest J., in Morguard, “what must underlie a modern system of private, international law and principles or order and fairness, principles that ensure security of transactions with justice”.

 

Accordingly, Justice MacFarland found that comity is not a stand-alone factor.  She held that it was part and parcel of the forum non conveniens assessment in a given case.  In dismissing the appeal, Justice MacFarland held that Justice Perell had considered the issue of comity in his analysis.  He had done so implicitly when he outlined and considered all of the relevant factors in coming to his conclusion that Nigeria was not the more convenient forum. 

 

Justice Perell was aware of the Nigerian litigation which was started after the Ontario action.  He was aware that James Bay Resources had filed a statement of defence in that action, and brought an unsuccessful motion to strike and was appealing the dismissal of its motion.  The appellants had cited no law for their argument that by filing a statement of defence in the Nigerian action, James Bay Resources had attorned to the jurisdiction of the Nigerian courts. 

 

Justice MacFarland agreed with Justice Perell’s conclusion that “balancing all factors, Nigeria is not clearly the appropriate forum for the dispute and Ontario is not forum non conveniens.”.

Regards,

Blair