Legal Blog

Collection Costs

A wronged plaintiff brings an action against a defendant and after three years, with money spent in costs, time wasted, indecision, and heartache, the plaintiff is finally successful and obtains a monetary judgment. The defendant, now the judgment debtor, refuses to or cannot pay. After another year or three of collection proceedings, the plaintiff, now the judgment creditor, finally collects on the judgment. However, when it seeks compensation for its significant collection costs, a judge rules that the court only has jurisdiction to allow collection costs for some very specific and limited categories, which amount to almost nothing. Worse yet, the court tells the creditor that, in effect, it should have settled for a lesser amount long ago. This is what the motion judge decided in MCAP Service Corporation v. LPIC v Mangat (third parties), a 2020 Ontario Superior Court of Justice decision.

As creditor’s counsel, this decision did not please us. We applied for and received leave to appeal it. Ultimately, the Divisional Court heard the appeal and, in 2022, rendered its decision in Lawyers’ Professional Indemnity Company v. Mangat.

Philosophy

In our collection practice, we do whatever is reasonably required to collect judgment debts. Although our actions are typically constrained by the amount in issue, in some cases – depending on the manner in which the judgment debt arose – they are not. For example, we are not going to spend $100,000 in fees and disbursements (costs) to collect a $10,000 award. But we may well spend $100,000 in costs to collect a $50,000 award, which recognized that the judgment debtors were fraudulent; fraudulent debtors should not be allowed to get away with their fraud.

That said, we are also realistic. Sometimes, a judgment debtor simply does not have either assets or money to pay the debt and does not appear to have acted improperly by way of hiding assets. We may well stop and, depending upon the circumstances, either park the collection efforts (e.g., judgment debtor is 25 years old and has good earning potential) or discontinue them altogether (e.g., judgment debtor is 70 years old and has no income other than CPP and OAS).

Rules

When negotiating with a debtor, we always take the position that the debtor is liable to pay our client’s collection costs. Sometimes, we negotiate full collection costs; other times, partial collection costs. We used to conduct these negotiations realising that Rules 60.02 and 60.19, if interpreted incorrectly, might result in our client having no right to receive anything other than nominal reimbursement for collection costs. Rather than test the interpretation in court, we often reduced the amount that we were willing to accept from the judgment debtor for collection costs. No more.

In Mangat, the collection costs were so substantial and the amount the debtors offered so small that we finally had to obtain a decision on the interplay between section 131(1) of the Courts of Justice Act (the Act) and Rules 60.02 and 60.19 of the Rules of Civil Procedure. Section 131(1) is very wide. It allows a court to assess, in its discretion, costs incidental to a proceeding. Rules 60.02 and 60.19 set out some very specific and limited items of work that may be compensated. The issue in Mangat was whether the Rules restrict the court’s discretion under the Act.

Background

In 2008, MCAP Service Corporation commenced a professional negligence action against a lawyer to recover a loss that MCAP had sustained as a result of the registration of a fraudulent mortgage. LPIC, the lawyer’s insurer, defended the action and commenced a third party action against father and son (the debtors) alleging that they had orchestrated the fraud.

In 2010, LPIC settled MCAP’s action against the defendant lawyer. In 2012, the remaining parties settled the third party action. The settlement ultimately resulted in a judgment in favour of the lawyer against the debtors for  $70,000 and costs (later settled at $35,000) of the third party action. The lawyer assigned the judgment to LPIC.

LPIC’s trial lawyers examined father in aid of execution. In that examination, father admitted that he and his spouse granted a $111,000 third mortgage on the matrimonial home. When? On the exact date the debtors were to pay the settlement amount to the lawyer. Why? Because, father said, he had borrowed that money from friends in 2002, had been unable to make payments since August 2011, and decided in March 2013 that it might be a really good idea to provide his friends with mortgage security. It did not matter to father that there was no consideration for that security and that the debt, if there was one, was probably unenforceable due to a limitation period expiry.

The debtors had paid nothing towards the judgment and we took on the collection matter. We obtained and filed writs of seizure and sale and issued notices of garnishment. One garnishment netted approximately $25,000, but collecting the remainder of the debt was more problematic.

The motion judge repeated our collection approach as follows: “… understanding the debtor before any enforcement step is taken. This understanding means getting to know the debtor throughout his or her life to the present time. SNF obtains this understanding from piecing together information from various sources, such as an extensive review of the underlying action in which the judgment or debt arose and conducting various public searches.”

We decided that the best way to collect the remainder of the debt was to commence an action (the FCA) under the Fraudulent Conveyances Act attacking the third mortgage, which had wiped out the matrimonial home’s equity, as fraudulent. If we were successful, father had sufficient equity in the matrimonial home to satisfy the judgment debt. Within four months of commencing that action, the debtors paid the remaining amount of the judgment and ultimately paid the settled costs of the third party action. However, they paid nothing towards the costs of collection, including the FCA and the certificate of pending litigation that we obtained and registered against the matrimonial home. These costs included time in analysing and rejecting multiple proposals under the BIA.

Motion

We were left with an FCA with no purpose. The judgment debt had been paid; LPIC only had an unmonetized claim for costs relating to the collection proceedings. We therefore brought a motion to monetize that claim.

The motion judge held that LPIC was limited to the trivial amounts that might have been garnered pursuant to the Rules and that he did not have jurisdiction to award our claimed costs. He came to this conclusion notwithstanding “how distasteful the conduct of the (the debtors) may have been” and “putting aside the remarkably competent enforcement work that was done by counsel on behalf of (the creditor).”

He was also quite content with this decision based on his philosophy of the litigation process. He felt that the Rules were entirely “compatible with the value that our justice system places on settlements, which agreements often include money actually exchanging hands. Such a settlement is attractive to a creditor because it means certain money as opposed to a judgment and limited recoverability of enforcement costs down the road.”

Appeal

The Divisional Court panel disagreed. As a technical interpretation matter, it held that the Act governed and that the court had jurisdiction to award full collection costs. It noted that “it makes no sense, for example, that a judgment debtor could, through deliberate and improper actions, attempt to avoid payment causing the judgment creditor to incur additional and unnecessary costs, without a remedy being available.”

The panel decided that the BIA costs were not collectible, but that all other costs – for settlement discussions, the garnishment, the investigation, and the FCA – were collectible. It reduced those costs from $42,000 to $30,000 based on the concept of proportionality. It also ordered the debtors to pay costs of the motion of $10,000, costs of the motion for leave to appeal of $5,000, and costs of the appeal of $7,500.

We now have a definitive precedent allowing an award for all reasonable collection costs and will, in future, negotiate accordingly.

 

Image courtesy of eak_kkk.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.