Canada: Court Of Appeal Sounds Death Knell For Dominance Of Hourly Rate Billing In Insolvencies

Originally published in the Insolvency Newsletter published by the Insolvency Law Section of the Ontario Bar Association.

Court of Appeal Sounds Death Knell for Dominance of Hourly Rate Billing in Insolvencies

It would seem, based on the recent decision of the Ontario Court of Appeal in Bank of Nova Scotia v. Diemer that the honeymoon experienced by insolvency lawyers over the past decade with respect to the manner in which their fees can be charged, is over.[1]

The Ontario Court of Appeal, in a decision from a bench including two former members of the Ontario Superior Court Commercial List, reaffirmed its decision in Re Bakemates International Inc. (also referred to as Confectionately Yours Inc., Re)[2], and stated that insolvency lawyers should no longer expect, merely because of the endorsement of the receiver, that the Court will allow them to be paid the mathematical consequence of their hourly rate, multiplied by their time spent.[3] The other factors in Bakemates, most notably the size of the receivership, can and will have a dramatic effect on the extent to which those fees will be approved. In reaching this conclusion, the Court of Appeal has put an exclamation point at the end of an important trend in Ontario judgments in which the fees and time spent in insolvency matters is under scrutiny. [4] The court held that, "The focus of the fair and reasonable assessment should be on what was accomplished, not on how much time it took."[5] 

Diemer was a receivership of an agricultural business/farm in the vicinity of London Ontario.  An application to appoint a receiver was made by the Bank of Nova Scotia, and Toronto counsel from a National Firm was appointed counsel to the receiver, notwithstanding that the matter was in London.[6]

The Court recounts that the Receivership was mostly routine, involving a sale based on a pre-receivership marketing process for the sum of $8.3 million.[7]  On September 17, 2013, the Receiver obtained, without objection from the debtor, a court order setting aside the sales process approved in the initial appointment order, approving the agreement of purchase and sale it had negotiated, and approving the Receiver's September 11, 2013 report outlining its activities to date.[8] There were some closing complications, connected to the livestock in the sale and related to the use of property remaining on the farm post-closing, which had to be dealt with by counsel and the receiver.[9]  There was also the usual contest between creditors as to their entitlement to the proceeds.[10]

After approximately two months, the debtor asked that the Receiver be replaced.[11]  Accordingly, the Receiver brought a motion to be substituted for a smaller local firm and to approve its second report and its fees and those of its counsel.[12] 

The Receiver's fees amounted to $138,297 plus $9,702.52 in disbursements.[13]  The fees reflected 408.7 hours spent by the Receiver's representatives at an average hourly rate of $338.38.[14]  The highest hourly rate charged by the Receiver was $525 per hour.[15]  Fees estimated to completion were $20,000.[16] 

The Receiver's counsel performed a similar amount of work but charged significantly higher rates.  Its fees from August 6 to October 14, 2013 amounted to $255,955, plus $4,434.92 in disbursements and $33,821.69 in taxes for a total account of $294,211.61. [17]  The fees reflected 397.60 hours spent with an average hourly rate of $643.75.[18]  Senior counsel's hours amounted to 195.30 hours at an hourly rate of $750.00.[19]  The rates of the other 10 people on the account ranged from $950 per hour for a senior lawyer to $195 for a student and $330 for a law clerk.[20] 

The fees were not approved by the motions judge. The Court of Appeal recounted:

"The motion judge considered the hourly rates, time spent and work done.  He noted that the asset was a family farm worth approximately $8.3 million and that the scope of the receivership was modest.  In his view, the size of the receivership estate should have some bearing on the hourly rates.  He determined that the amount of counsel's efforts and the work involved was disproportionate to the size of the receivership.  After the size of the estate became known, the usual or standard rates were too high.  

The motion judge also took issue with the need for, and excessive work done by, senior counsel on routine matters.  He rejected the Receiver's opinion endorsing its counsel's fees, found that the number of hours reflected a significant degree of inefficiency, and that some of the work could have been performed at a lower hourly rate.  He concluded: "I have concerns about the fees claimed that involve the scope of work over the course of just over two months in what appears to be a relatively straightforward receivership.  Frankly, the rates greatly exceed what I view as fair and reasonable."

The motion judge concluded that National Firm's fees were "nothing short of excessive."  He assessed them at $157,500 from which the $100,000 allowed in his October 23, 2013 order was to be deducted.  He also allowed disbursements of $4,434.92 and applicable HST."[21]

In Bakemates, the Ontario Court of Appeal described the purpose of the passing of a receiver's accounts.[22]  There is an onus on the receiver to prove that the compensation for which it seeks approval is fair and reasonable.[23]  In order to do this, the court in Diemer restated and endorsed the following factors:

• 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.

However, the Court said, "it is evident that the fairness and reasonableness of the fees of a receiver and its counsel are the stated linchpins in the Bakemates analysis.

However, in actual practice, time spent, that is, hours spent times hourly rate, has tended to be the predominant factor in determining the quantum of legal fees."[25]

The Court then proceeded to recount that the hourly rate model is not in all cases appropriate.[26] The takeaway for counsel must be that fees based solely on hourly rates are no longer certain to be approved. 

Importantly, the Court highlighted that, "In a traditional solicitor/client relationship, there are built-in checks and balances, incentives, and, frequently, prior agreements on fees.  These sorts of arrangements are less common in an insolvency.  For example, a receiver may not have the ability or incentive to reap the benefit of any pre-agreed client percentage fee discount of the sort that is incorporated from time to time into fee arrangements in bilateral relationships."[27]

Certainly observers of the massive fees spent in the Nortel matter, for example, have to wonder whether in today's fee sensitive legal environment any client would have agreed to such a massive amount be billed without requiring some kind of discount, which almost any law firm would have provided in a matter such as that. However, in Nortel, as in Diemer, there is no client to ask for the discount. Instead, it is for the court to do so, as they did in this case.

What can professionals do to make sure their fees are paid? The court recommends that receivers consider, at the commencement of the file, the likely fees to be charged by counsel and balance it against the size of the receivership. "In selecting its counsel, the receiver must consider expertise, complexity, location, and anticipated costs. The responsibility is on the receiver to choose counsel who best suits the circumstances of the receivership."[28] Receivers would be well advised to remember that, even in Toronto, there is quite a range in of fees available. 

Another take away is that standard rates should be disclosed to the court before the counsel is approved by the court. The court remarked that this was not done in this case.[29] The Commercial List standard receivership order does not require this, by the way. It merely allows for the appointment of counsel by the Receiver. However, in light of this case, specific reference to counsel and their likely rates, would be advisable.

Even if the Receiver makes a recommendation, this case makes it clear that it is the court who holds final say. While the court says,

"In my view, it is not for the court to tell lawyers and law firms how to bill. That said, in proceedings supervised by the court and particularly where the court is asked to give its imprimatur to the legal fees requested for counsel by its court officer, the court must ensure that the compensation sought is indeed fair and reasonable.  In making this assessment, all the Belyea factors, including time spent, should be considered.  However, value provided should pre-dominate over the mathematical calculation reflected in the hours times hourly rate equation.  Ideally, the two should be synonymous, but that should not be the starting assumption."[30] [emphasis added]

The other take away is about the level of counsel involved in the matter. The Court stated, as did the court below, " in my view, it was also appropriate for the motion judge to question why a senior Toronto partner had to attend court in London to address unopposed motions and, further, to find that the scope of the receivership was modest... [and] the amount of counsel's efforts and work involved may be disproportionate to the size of the receivership."[31] 

This is not an isolated trend. The Globe and Mail and other publications have repeatedly questioned the fairness of the fees charged in Nortel. It is also in keeping with another recent decision of Justice David Brown, of the Ontario Superior Court Commercial List, who in Re TNG Acquisition Inc., slashed by more than half the $73,000 in bills from a Big Four Accounting firm and a national firm.[32] He called for capped fees for routine tasks and predicted that "we are reaching the end of the era where the fees for professional services, such as the giving of legal or insolvency advice, are calculated and billed on an hourly rate basis."[33] It seems the Court of Appeal has agreed and insolvency professionals should adjust their practice accordingly.

The author thanks Ryan Fenton for his assisting in the preparation of this article.

[1] 2014 ONCA 851, 2014 CarswellOnt 16721