Restructuring

NORTH OF THE BORDER UPDATE

This article has been contributed to the blog by Mary Paterson, Dave Rosenblat and Waleed Malik. Mary Paterson is a partner in the litigation group of Osler, Hoskin & Harcourt LLP, Dave Rosenblat is an associate in the insolvency & restructuring group and Waleed Malik is an articling student.
We have previously commented on the decision of the Ontario Superior Court of Justice (the “Ontario Court”) in Bank of Nova Scotia v Diemer, 2014 ONSC 365, in which Justice Goodman held that the fees charged by counsel (the “Counsel”) retained by a court-appointed receiver (the “Receiver”) were not fair and reasonable. That decision was appealed to the Court of Appeal for Ontario by the Receiver. In a judgment reported at Bank of Nova Scotia v Diemer, 2014 ONCA 851, Justice Pepall dismissed the Receiver’s appeal. The Court of Appeal’s decision provides guidance to courts and legal professionals evaluating the fairness and reasonableness of legal fees in the context of a court-supervised insolvency proceeding.  
Decision of the Ontario Superior Court
The court order appointing the Receiver (the “Appointment Order”) obliged the Receiver to obtain court approval for its accounts. The Receiver brought a motion in October 2013, seeking, inter alia, approval for Counsel’s fees. According to the accounts presented to the court, Counsel’s fees amounted to $255,955 in legal fees plus $4,434.92 in disbursements and $33,821.69 in taxes for a total amount of $294,211.61 (the “Legal Fees”). The receivership had lasted for approximately two months.
Justice Goodman found that the Legal Fees were not fair and reasonable for a number of reasons. First, he found that the debtor had co-operated with the Receiver. Therefore, the Receiver and Counsel had little involvement in the day-to-day management of the business and in the identification of a potential purchaser. Second, Justice Goodman concluded that the work carried out by Counsel was disproportionate to the modest size of the estate. Third, Justice Goodman took issue with how Counsel had carried out its work. In particular, he took issue with the amount of work done by senior lawyers, who billed at a higher rate, on routine matters. As a result, Justice Goodman did not approve the Legal Fees and instead reduced the fees requested by the Receiver to $157,000. He also allowed disbursements of $4,434.92 and applicable HST.
Decision of the Court of Appeal
Referring to a previous decision of the Court of Appeal in Re Bakemates International Inc (2002), 164 OAC 84, Justice Pepall noted that there is an onus on a court-appointed receiver to prove that the compensation claimed by it, including compensation claimed on behalf of its counsel, is fair and reasonable. Justice Pepall also referred to a decision of the New Brunswick Court of Appeal in Federal Business Development Bank v Belyea (1983), 44 NBR (2d) 248, where that court outlined a number of factors that have subsequently been used by courts when examining the fairness and reasonableness of a receiver’s compensation. The factors, commonly called the Belyea factors, are:

• the nature, extent, and value of the assets;
• the complications and difficulties encountered;
• the degree of assistance provided by the debtor;
• the time spent;
• the receiver’s knowledge, experience, and skill;
• the diligence and thoroughness displayed;
• the responsibilities assumed;
• the results of the receiver’s efforts; and
• the cost of comparable services when performed in a prudent and economical manner.

Justice Pepall noted that the time spent, specifically the hours spent times the hourly rate of the lawyer providing legal services, is the predominant factor used when determining fees for legal services. She stated that, when determining the reasonableness of legal fees in an insolvency proceeding, all the Belyea factors, including time spent, should be considered. However, she stated that the value provided by counsel should pre-dominate over the mathematical calculation reflected in the hours times hourly rate equation. As Justice Pepall stated, “[t]he focus of the fair and reasonable assessment should be on what was accomplished, not on how much time it took.”
The Receiver advanced three main arguments on appeal, each of which were rejected by the Court of Appeal. First, the Receiver argued that Justice Goodman had made an error by not approving the Legal Fees on the basis of provisions in the Appointment Order permitting Counsel to charge its standard fees. Justice Pepall rejected this argument because she concluded that the Appointment Order did not oust the need for the court to consider whether the fees claimed were fair and reasonable at the end of the day. Furthermore, she also noted that there was no evidence that Counsel’s standard rates had ever been disclosed to the court prior to the appointment of the Receiver.
Second, the Receiver argued that Justice Goodman had erred in fact when concluding that the Legal Fees were not fair and reasonable. However, Justice Pepall concluded that, based on the evidence before him, it was appropriate for Justice Goodman to conclude that the debtor had cooperated with the Receiver, that the estate in question was a modest one, and that it was inappropriate for a senior lawyer to attend to routine matters. Therefore, she found that Justice Goodman did not make any errors in fact that would justify overturning his decision.
Third, the Receiver argued that Justice Goodman had erred by adopting a purely mathematical approach when determining the quantum of fees that would have been fair and appropriate. Justice Pepall agreed that the use of a purely mathematical approach was inappropriate. However, she found that Justice Goodman would have arrived at the same result using a different method. She also concluded that Justice Goodman had been informed by the correct legal principles, namely the Bayela factors, and that his analysis had been driven by the “overall reasonableness of the fees.” Therefore, Justice Pepall upheld the decision finding that the Legal Fees were not fair and reasonable.
Conclusion
Courts have a significant role, derived from both legislation and their inherent jurisdiction, in supervising the accounts of a court-appointed receiver. In insolvency proceedings, parties with little or no influence on fees may ultimately be the ones bearing the burden of paying for services provided by a receiver and its counsel. Therefore, while it is the duty of the receiver to retain and then monitor the fees charged by its counsel in the first place, there is a responsibility on courts to review and pass judgment on the fairness and reasonableness of any fees charged.
The Court of Appeal’s decision demonstrates that courts are willing to scrutinize the accounts of a receiver and its counsel in a court-supervised insolvency proceeding. The decision also provides valuable lessons that receivers and lawyers working in court-supervised insolvency proceedings should keep in mind. In particular, the decision emphasizes the importance of considering whether the fees being charged, even if they are standard fees, are appropriate in the context of a particular receivership. Furthermore, the decision highlights the importance of being able to show the value created as a result of legal services rendered by counsel when seeking court approval for legal fees.

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