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

Court of Appeal Sets Aside "Breathtakingly Broad" Receivership Order

Akagi v Synergy Group (2000) Inc., 2015 ONCA 368, 14/4731,

 

In this case, the Ontario Court of Appeal overturned  a series of ex parte orders that put in place an investigative receivership over three judgment debtors from an initial fraud proceeding between Mr. Trent Akagi and Synergy Group ("Synergy"). The orders were overturned for two main reasons: first, they were deemed to be "breathtakingly broad" because while the initial proceeding involved only one plaintiff and three defendants, the applications for receivership listed 43 non-party "Alleged Offenders", and appeared to be concerned with the interests of over 3800 victims of potential fraud. Second, the applications were granted ex parte without full and fair disclosure from the Receiver. 

From 2006 to 2008, Mr. Akagi invested approximately $210,000 into small businesses managed by Integrated Business Concepts ("IBC") as part of a tax loss allocation program marketed and sold by Synergy Group ("Synergy"). Representatives of Synergy told Mr. Akagi that IBC's businesses would generate legitimate losses, thereby allowing him to claim his proportionate share of those losses on his tax returns in order to achieve tax savings. However, in 2008 the CRA and the RCMP launched fraud investigations into Synergy's tax allocation program. Mr. Akagi was disallowed from claiming the IBC tax losses, amounting to $104,000, on his 2006 tax return. He was required to pay approx. $55,000 in penalties to the CRA and sued Synergy and certain individuals associated with it for fraud. Mr. Akagi obtained summary judgment against Synergy, Shane Smith (president of Synergy), and David Prentice (vice-president). At the time of the ex parte orders that followed, there remained $182,000 outstanding in damages and costs from this initial action. Of that amount, the defendants had already paid $60,000 into court to the credit of the action pending the outcome of the proceedings, and so the remaining amount that Mr. Akagi could claim against the defendants was $122,000.

Less than two months following the judgment in the initial action, Mr. Akagi applied for and obtained an ex parte order appointing a Receiver over all assets, undertakings, and property of Synergy and IBC (note that IBC was not a party to the initial Akagi action). The ex parte order was obtained on the basis of affidavits from Mr. Akagi and from three CRA employees. The materials did not disclose that the CRA investigation had been terminated four months prior.

 

Following the initial ex parte receivership application, the order morphed into an wide-ranging "investigative receivership" which froze and otherwise reached the assets of 43 additional individuals and entities who were deemed to be "Alleged Offenders". The investigative receivership no longer acted solely in Mr. Akagi's interests, but rather in the interests of Synergy's some 3800 investors, none of whom had made efforts to advance their own claims and none of whom were parties to the initial action. The subsequent three orders empowered the Receiver to direct financial institutions to disclose information and documentation regarding payment and transfers of money not only by Synergy and IBC, but also by the list of "Alleged Offenders", any affiliates of those individuals, any corporations directly indirectly controlled by those individuals, any corporation in respect of which the listed individuals were entitled to conduct financial transactions, and any entity with a registered head office at the premises occupied by Synergy and IBC. The final order froze the accounts of these individuals and granted the Receiver a $500,000 borrowing charge against frozen funds to fund its activities, despite the fact that the maximum amount owing to Mr. Akagi from the initial action was $122,000. These ex parte applications were made with no notice of motion or application, no further evidence, and no factum. The appellants moved in a "come-back proceeding" to set aside the receivership orders. That application was dismissed.

In this case, Justice Blair clarified the concept of an "investigative receivership". He noted that the appointment of a Receiver under s. 101 of the Courts of Justice Act is "an extraordinary and intrusive remedy" which should "be granted only after a careful balancing of the effect of such an order on all of the parties and on others who may be affected by the order." Justice Blair makes specific reference to the case in Loblaw Brands Ltd. v Thornton [2009] O.J. No. 1228 (S.C.), in which the investigative Receiver's mandate was to "locate, investigate, and monitor". It was not empowered to seize and freeze assets, as the Receiver was in this case. Justice Blair asserts that, "the investigative receivership must be carefully tailored to what is required to assist in the recovery of the claimant's judgment while at the same time protecting the defendant's interests, and go no further than necessary to achieve these ends." This was misapplied here because (i) there was no indication that Mr. Akagi's right to recover on the initial judgment was in jeopardy, and (ii) there was no evidence of a "dramatic disparity" between the assets of Synergy, Smith, and Prentice, and the amount of the outstanding judgment. Justice Blair emphasized that the investigative receivership should not have the effect of creating a criminal investigation or public inquiry, as it did here.

 

On the issue of the orders being granted ex parte, Justice Blair states that the failure to disclose that the CRA investigation had been discontinued "sailed close to the line of failing to make full and fair disclosure." He reasons that ex parte proceedings are to "be taken sparingly" and "only where it is demonstrated that notice to other parties would undermine the purpose of the proceeding." This was not the case here. Thus, even if the receivership was not unnecessarily wide, it would fail on the grounds that it should not have been granted ex parte.

Regards,

Blair