



COURT OF APPEAL FOR ONTARIO

CITATION: Menzies Lawyers Professional Corporation v. Morton,
    2015

ONCA 553

DATE: 20150727

DOCKET: M44416

Lauwers J.A. (In Chambers)

In the Matter of the Proposal
    of Edwin Harold Morton: Ottawa Bankruptcy

BETWEEN

Menzies
    Lawyers Professional Corporation,

Menziesbank
    Corp. and Douglas G. Menzies, personally

Applicants

and

Doyle
    Salewski, Trustees in Bankruptcy

for
    Edwin Morton and the Attorney General of Canada

Respondents

Douglas G. Menzies, acting in person

Stephanie Lauriault, for the Attorney General of Canada

Heard:  November 18, 2014

An application for an extension of time to file notice of
    appeal and for leave to appeal from the order of Justice S.J. Kershman, dated September
    18, 2014, with reasons reported at 2014 ONSC 5438.

Lauwers J.A.:

[1]

The Menzies Lawyers Professional Corporation, and Douglas Menzies
    personally, acted for many years for the bankrupt, Edwin Morton, in lengthy and
    protracted matrimonial proceedings. They postponed their claim for fees on a
    number of occasions and sought, in the application at issue, to protect their
    accounts out of Mr. Mortons estate, having been completely surprised by his
    bankruptcy. They applied for the recognition of a solicitors lien for about
    $133,000 in respect of their representation of Mr. Morton and a charging order.

[2]

Menziesbank assisted in the implementation of the matrimonial
    settlement. It claimed a salvage lien for $30,000, the amount it paid to clear
    two execution creditors interests so that the sale of the matrimonial home
    could close.

[3]

The application judge refused to grant the solicitors a charging order
    and to grant Menziesbank a salvage lien.

[4]

This motion raises two issues. First, do the applicants require an
    extension of time to serve the notice of appeal?  Second, is leave required for
    the appeal itself under s. 193 of the
Bankruptcy and Insolvency Act
,
    R.S.C. 1985, c. B-3 (the
BIA
)?

A.

IS AN Extension of Time for Leave to Appeal under the Rules REQUIRED?

[5]

The applicants were under the mistaken impression that the
Rules of
    Civil Procedure
, R.R.O. 1990, Reg. 194 (the
Rules
) applied to
    this appeal, and so they had 30 days to appeal. In fact, since this was a
    decision of the Bankruptcy Court, the appeal to the Court of Appeal lies under
    s. 193 of the
BIA
.  Therefore, under rule 31(1) of the
Bankruptcy
    and Insolvency General Rules
, C.R.C., c. 368, the appeal must be brought
    within 10 days or within such further time as a judge of the Court of Appeal
    stipulates.

[6]

Since the appeal was late, I am obliged to consider the following
    factors in exercising discretion to extend the time for filing the notice of
    appeal:

a)

whether the applicant
    had a
bona fide
intention to appeal before the expiration of the
    appeal period;

b)

any explanation for
    the delay in filing;

c)

any prejudice to the
    responding parties caused by the delay; and

d)

the merits of the
    proposed appeal.

[7]

Based on the affidavit material and the hotly contested nature of the
    dispute between the parties, I am satisfied that the applicants had a
bona
    fide
intention to appeal before the expiry of the appeal period, but they
    misapprehended the applicable rules, which explains the delay. There would be
    no prejudice to the responding parties in granting leave to appeal since the
    funds are in court earning interest.

[8]

The remaining issue to be addressed before time can be extended turns on
    the merits of the appeal, which dovetail with the appellants appeal rights
    under s. 193 of the
BIA
.

B.

Is Leave to Appeal Required under s. 193 of the
BIA
?

[9]

Section 193 of the
BIA
governs
    appeal rights. The relevant grounds for this motion are found in paragraphs (c)
    and (e)
:

193.   Unless otherwise expressly provided, an appeal lies to
    the Court of Appeal from any order or decision of a judge of the court in the
    following cases:

(c)     if the property involved in the appeal exceeds in
    value ten thousand dollars;

(e)     in any other case by leave of a judge of the Court
    of Appeal.

[10]

The
    applicants were at pains to characterize the appeal as one as of right under s.
    193(c), and not one for which leave is required under s. 193(e).  A decision on
    which of the paragraphs applies depends on a consideration of the facts.

(a)

The Factual Context

[11]

The
    factual context is fairly set out in the factum of the AGC:

1.       The Appellant, Douglas
    Menzies, represented Edwin Morton in complicated matrimonial proceedings that
    were eventually settled after one day of trial on terms which required the wife
    to pay to the husband amounts exceeding $250,000.00.

2.       Mr. Morton was unable to pay
    as a result of the financial constraints of the multiple proceedings initiated
    by the wife, including criminal charges, and the retainer agreement between
    Menzies and Morton provided that interest would be charged on the outstanding
    balance at 10% with the amounts paid from the proceeds of the matrimonial home.

3.       The house was eventually sold,
    but an Application for a Vesting Order was required to complete the sale
    because the Canada Revenue Agency (CRA) had filed a claim for lien as a result
    of the reassessment of Mr. Mortons taxes for 4 years. In addition, there were
    2 execution creditors, the Royal Bank of Canada (RBC) and Canadian Imperial
    Bank of Commerce (CIBC), claiming amounts totaling $67,000.00.

4.       The Appellant, Menziesbank,
    purchased the interests of the two execution creditors for fifty cents on the
    dollar. Rather than profit on this by talking an assignment of the full amount
    of the debt, it has claimed a salvage lien for the amount it actually paid out
    to discharge these claims, $30,000.00. [Footnotes omitted.]

(b)

The Application Judges Decision

[12]

After
    setting out the facts in detail, the motion judge found, at para. 62, that
    the entire value of the monies owing from Ms. Rivard to Mr. Morton,
    pursuant to the Campbell Divorce Judgment, were preserved by Douglas Menzies  [and]
    would not have come into existence but for the efforts of Douglas Menzies.
    He added, at para. 63, The Court finds that Douglas Menzies preserved Mr. Morton's
    interest in Ms. Rivard's one-half interest in the matrimonial home proceeds
[1]
.
    Accordingly, the application judge found it equitable to lift the
BIA
stay of proceeding in relation to the claim for a solicitors lien.

[13]

Despite
    these findings, the application judge declined to give effect to the lien by
    granting a charging order on equitable grounds. He noted, at para. 67, that
    equity would be offended by the granting of a solicitors lien/charging
    order. The application judge based this decision on his view, expressed at
    paras. 70-71, that the solicitor did not take advantage of his right to obtain
    a second mortgage under the divorce judgment that would have protected his
    interest. He concluded, at para. 74, Given the conduct of the solicitors and
    the potential prejudice to competing creditors, equity weighs heavily against
    the granting of a charging order in this case.

[14]

The
    application judge also refused on equitable grounds to lift the automatic stay
    of proceedings under s. 69 of the
BIA
in relation to Menziesbanks
    salvage claim, noting, at para. 38, that Menziesbank, is not likely to be
    materially prejudiced by the continued operation of s. 69(1) of the
BIA
and it is not equitable on other grounds to make such a declaration. He did not
    specify the equities on which he was relying.

(c)

The Legal Argument Concerning Appeal Rights under s.193 of the
BIA

[15]

There
    are two legal issues to be decided with respect to the appeal rights under s.
    193 of the
BIA
. The first is whether a solicitors lien and a charging
    order is a form of property for the purpose of s. 193(c) of the
BIA
. The
    second is whether this proposed appeal meets the test for leave, assuming that it
    must proceed under s. 193(e). I address each in turn.

(1)

Is a solicitors lien and a charging order is a form of property for the
    purpose of s. 193(c) of the
BIA


[16]

If
    a solicitors lien and a charging order is a form of property for the purpose
    of s. 193(c) of the
BIA
, then the applicants appeal should be as of
    right, since the amounts at issue exceed $10,000.

[17]

The
    decision of Henry J. in the bankruptcy case of
Re Tots and Teens Sault Ste.
    Marie et al
., 11 O.R. (2d) 103, [1975] O.J. No. 2549, is relevant. Justice
    Henry framed the issue, at para. 1, in terms that apply to this case: The simple
    issue in this application is whether a solicitor's lien for his costs in
    respect of his successful defence of litigation for his client, who is now
    bankrupt, constitutes a charge upon the fund recovered by him in the
    litigation, so as to give him the status of a secured creditor in the
    bankruptcy.

[18]

Justice
    Henrys analysis is set out at para. 26:

While fully accepting the principle here declared, I have
    reached the conclusion that the fund at the time it was created in the hands of
    the Sheriff was impressed with the inchoate right of the solicitor to apply to
    the Court and have a declaration that it is charged as security for his costs.
    This was an inherent right to invoke the equitable jurisdiction of the Court to
    exercise its discretion in his favour by way of declaring that the fund is
    charged as security for his claim. As I see it, the role of the Court is to
    declare, not to create, the security and even though the bankruptcy has
    occurred, it is in my opinion still open to the proper Court, in the exercise
    of its discretion, as I have said, to decide if the lien shall or shall not be
    recognized. If the Court makes such a declaration it has the effect, as I see
    it, of holding that the lien attached to the fund at the moment it was created.
    If it had been created prior to the bankruptcy, there would be no question that
    the fund would stand charged; the fund having been created after the bankruptcy
    may, in my opinion, in the same way be made the subject of a charge by way of
    security, unless of course the Court comes to the conclusion that it would
    offend the principles of equity, either by reason of the conduct of the
    solicitor or unfairness to the creditors, to refuse to exercise the discretion
    in the solicitor's favour. On the view that I take of the matter, the lien in
    law attached to the fund as an inchoate right, the crystallization of the lien
    requiring only the pronouncement of the Court to reveal it.

[19]

Justice
    Perell summarized the import of
Tots and Teen
s
in
Thomas Gold Pettingill LLP v.
    Ani-Wall Concrete Forming Inc
., 2012 ONSC 2182, [2012] O.J. No. 2109, at
    para. 101
:


[T]he three points to note from Justice Henry's decision in
Re
    Tots and Teens Sault Ste. Marie
about a charging lien made under the
    court's inherent jurisdiction are: first,
the charging lien creates the
    proprietary interest of a secured creditor
; second, subject to being
    declared, the charging lien is an inchoate interest that pre-dates the court's
    declaration; and third, the charging lien is intrinsically declaratory in
    nature. [Emphasis added.]

[20]

The
    respondent relies on
Ontario Wealth Management Corporation v. Sica Masonry
    and General Contracting Ltd
., 2014 ONCA 500, [2014] O.J. No. 3051 (Strathy
    J.A. (In Chambers)), which addressed the scope of s. 193(c), at para. 41,
    and added, at para 42:

The issue before the motion judge was simply a matter of which
    claim had priority. This is the daily fare of judges in bankruptcy proceedings.
    To provide an appeal as of right from such decisions would negate the court's
    gatekeeping function under s. 193(e) and would tie up bankruptcy proceedings in
    interlocutory appeals over routine issues.

[21]

In
    my view, the reasoning in
Ontario Wealth Management
does not apply on
    the facts of this case, which instead involves the assertion of a proprietary
    interest in the form of a solicitors lien and its appropriate valuation.

[22]

The
    same logic applies to Menziesbanks claim. I find that, consistent with
Tots
    and Teens
, it is more than arguable that s. 193(c) is the basis for the
    courts appeal jurisdiction; the appellants would not have required the courts
    leave if the appeal had been brought in time.

[23]

In
    any event, I would have granted leave to appeal under s. 193(e) of the
BIA
.

(2)

The proposed appeal meets the test for leave under s. 193(e) of the
BIA

[24]

The
    test for leave to appeal under s. 193(e) of the
BIA
was set by this
    court in
Canada (
Superintendent of Bankruptcy) v. 407 ETR Concession Co.
,
    2012 ONCA 569, [2012] O.J. No. 4089, at para. 47:

Generally speaking, the factors to be considered on an application
    for leave to appeal are:

a)

whether the point of
    appeal is of significance to the practice;

b)

whether the point
    raised is of significance to the action itself;

c)

whether the appeal is
prima
    facie
meritorious or, on the other hand, whether it is frivolous; and

d)

whether the appeal
    will unduly hinder the progress of the action.

This test is similar to Blair J.A.s formulation in
Business Development Bank of Canada v. Pine Tree Resorts Inc.,
2013 ONCA
    282, [2013] O.J. No. 1918, at para. 29.

[25]

I
    am satisfied that an appeal will not unduly hinder the progress of the
    bankruptcy/insolvency proceedings under para. (d).

[26]

The
    question is whether the appeal raises an issue or issues of general importance
    to the practice in bankruptcy/insolvency matters and to the action itself, and
    whether the appeal is
prima facie
meritorious.

[27]

In
    my view, there are two issues of law presented by the proposed appeal: Did the
    application judge make a palpable and overriding error in his apprehension and
    application of the relevant legal principles in deciding not to:

i.

grant a charging order against the estate in favour of Douglas G.
    Menzies and Menzies Lawyers Professional Corporation, having found the
    existence of valid solicitors lien?

ii.

grant a salvage lien to Menziesbank under s. 69 of the
BIA
?

[28]

I
    find that these are issues of broader application and therefore of general
    importance to the practice in bankruptcy/insolvency matters. There is a need
    for this court to consider afresh the principles referred to by Henry J. in
Tots
    and Teams
and the discretionary factors that would lead a court to deny a
    charging order. It would also be helpful to the practice to identify the
    circumstances in which a salvage lien is properly obtained and the
    discretionary factors that would lead a court to deny a salvage lien.

[29]

I
    find that the proposed appeal is not in any sense frivolous, and that it is of
    significance both to the parties and in respect of the proceeding.

[30]

With
    respect to the merits, in
Pinetree Resorts
, Blair J.A. noted, at para.
    23, that Ontario decisions have traditionally leaned toward the factors
    expressed by Goodman J.A. in
R. J. Nicol Construction Ltd. (Trustee of) v.
    Nicol
, [1995] O.J. NO,. 48 (C.A., In Chambers), at para. 6.  He thought
    that these factors ought to be considered in determining whether an appeal is
prima
    facie
meritorious, explaining at para. 31:

A proposed appeal in which the judgment or order under attack
    (a) appears to be contrary to law, (b) amounts to an abuse of judicial power,
    or (c) involves an obvious error causing prejudice for which there is no
    remedy, will be a proposed appeal that is
prima facie
meritorious.
    I recognize that the
Power Consolidated

prima facie
meritorious
    criterion is different than the arguable point notion referred to by Osborne
    J.A. in
Baker
and by Armstrong J.A. in
Fiber
    Connections
. In my view, however, the somewhat higher standard of a
prima
    facie
meritorious case on appeal is more in keeping with the
    incorporation of the
R.J. Nicol
factors into the test.

[31]

I
    do not, with respect, discern a meaningful difference between the
    interpretations to which Blair J.A. referred. In
Power Consolidated
(China)
    Pulp Inc. v. British Columbia Resources Investment Corp.
(1988), 19
    C.P.C. (3d) 396
, [1988] B.C.J. No. 1403, McLachlin J.A. held that the
    appeal was 
prima facie
meritorious, on the basis that:  the appeal
    is not without merit in the sense that an argument can be made that the judge
    erred in the application of a legal test. In both
Baker (Re)
, 22 O.R.
    (3d) 376, [1995] O.J. No. 580, at para. 24, and
SVCM Capital Ltd. v. Fiber
    Connections Inc.
10 C.B.R. (5th) 201, [2005] O.J. No. 1845, at para. 20, Osborne J.A.
    and Armstrong J.A., respectively, simply stated that the 
prima facie
meritorious criterion is met where there are arguable grounds of appeal. They
    were both uncomfortable with expressing a view that the appeal would succeed,
    despite the wording of the test.

[32]

Perhaps
    it would be better if the third step of the test  expressed most recently by a
    panel of this court in
407 ETR Concession Co
as whether the appeal is
prima facie
meritorious or, on the other hand, whether it is frivolous
     were revised, in the words of Osborne and Armstrong JJ.A., to provide: whether
    there are arguable grounds of appeal or, on the other hand, whether it is
    frivolous.

[33]

In
    my view, it would be helpful to the profession and the practice if there were
    more guidance given by this court on the interpretation of the phrase 
prima
    facie
meritorious.

[34]

I
    turn now to apply the criterion of 
prima facie
meritorious to this
    appeal, without expressing a view as to whether the appeal will succeed,
    according to the approach taken by Osborne and Armstrong JJ.A. It seems to me arguable
    that the application judge did not set out a principled basis for refusing to
    grant a charging order in favour of the solicitors, having found a valid
    solicitors lien. The solicitors were working with the bankrupt to assist him
    and decided not take a second mortgage securing their legal fees. It is not
    clear why this should prejudice them when, had they taken out the second
    mortgage, the amount of money represented thereby would not have fallen into
    the estate.

[35]

I
    take a similar view of his refusal to grant salvage lien to Menziesbank. The application
    judge simply asserted that he was applying the equities but he did not explain
    his thinking in any meaningful way.

[36]

It
    is therefore arguable that the application judge made that have prejudiced the
    appellants. For these reasons, I would find that the criterion of an appeal
    that is 
prima facie
meritorious has been satisfied in this case.
    This finding is also sufficient to satisfy the remaining criterion of the
    merits of the proposed appeal for the purpose of determining whether to extend
    the time for leave to appeal under the rules.

C.

Disposition

For the reasons set out above, I extend the time for
    the applicants to file the notice of appeal to October 30, 2014 to validate its
    filing
nunc pro tunc
, and grant their application for leave to appeal
    under s. 193(e) of the
BIA
. Since the applicants are seeking an
    indulgence, it is reasonable to make a costs award in favour of the respondent,
    which I fix at $1,500.

P.
    Lauwers J.A.





[1]

The application judge declined, at paras. 64-65
    to provide similar recognition to the work of Menzies Lawyers Professional
    Corporation, but it is not clear whether that materially affects the claims.


