Executive Summary: Key Legal and Evidentiary Issues

• Allocation of a $5 million payment between multiple debts turned on strict common law rules requiring a debtor’s allocation to be “plain and irrevocable,” failing which the creditor may apply the funds as it chooses.
• The court rejected inferential or contextual arguments about debtor intent, holding that multi-million-dollar payments demand clear, express allocation directions rather than hints drawn from email chains.
• OSI’s allocation of part of the $5 million to outstanding legal fees and receivables was upheld, with the court finding those debts existed and that Hillcore owed indemnity for reasonable enforcement costs.
• The “Critical Information Delay Fee” of $5,000 per day per document was characterized as an arbitrary, punitive penalty clause, not a genuine pre-estimate of loss, and was therefore void and unenforceable.
• Hillcore’s attempt as a non-client third party to send Goodmans’ legal fees for assessment failed, because it had been given adequate non-privileged summaries and the court found it was using assessment rights to stall payment, not to challenge fees in good faith.
• Overall success was mixed: OSI prevailed on allocation and legal fees, while Hillcore succeeded in invalidating the delay fee; the final amounts outstanding and any costs award remained to be recalculated and determined at a later stage, so no precise net monetary success could yet be identified.

Factual background

OSI CEDA Investment Management Inc. (OSI) was a substantial unsecured creditor of the Hillcore group, with exposure approaching $80 million. The parties had previously entered into a share purchase arrangement under which Hillcore was obliged to pay OSI $25 million. Hillcore defaulted on its payment obligations, leading the parties first to negotiate forbearance terms and then to a consent judgment in OSI’s favour when Hillcore failed to comply with the forbearance regime. OSI then pursued enforcement efforts across Western Canada to collect on the judgment. In the course of that enforcement landscape, OSI and Hillcore engaged in further negotiations about payments and disclosure obligations, including arrangements for Hillcore and an associated entity, Hillcore Management, to make significant payments to reduce outstanding obligations and to comply with reporting requirements. One payment of $2 million was clearly allocated by Hillcore, through its counsel, toward reduction of the consent judgment. Later, a larger $5 million payment was made on 25 September 2025 by Hillcore Management, acting as agent for the Hillcore debtors. That $5 million payment lay at the centre of the dispute, because Hillcore attempted to characterize it as having been intended to go exclusively toward the consent judgment, while OSI allocated it among other debts related to legal fees, collected receivables and a contractual “Critical Information Delay Fee.”

Contractual framework and “critical information delay fee”

The parties had negotiated a contractual provision under which Hillcore was required to provide OSI with financial information and disclosure of loan applications and communications with lenders or potential lenders whenever Hillcore sought financing. OSI, as a large unsecured creditor, wanted timely insight into refinancing plans that might introduce new secured creditors and potentially erode OSI’s recovery in an insolvency or enforcement scenario. To strengthen compliance, the parties agreed on a “Critical Information Delay Fee” of $5,000 per day for each day defined disclosure was late. The fee was expressly in addition to OSI’s out-of-pocket expenses and consultant costs involved in chasing and analysing the late information. Over time, OSI adopted an expansive interpretation of this fee. It decided that the $5,000 per day could be charged not only on business days but also on weekends, even though there was no evidence of weekend work or loss tied to Saturday and Sunday delays. OSI also concluded that the fee applied per document per day. Consequently, where several loan applications or lender communications were all outstanding on the same day, the nominal $5,000 daily fee multiplied, becoming $10,000, $15,000 or as much as $30,000 per day when six matters were late. These interpretations led OSI to assert a Critical Information Delay Fee approaching $1.8 million. Hillcore did not dispute that it had been late in providing disclosures, but it challenged the nature and enforceability of the fee itself, arguing that it was a penalty clause disconnected from any genuine estimate of OSI’s loss.

Allocation of the $5 million payment

At common law, where a debtor owes multiple debts to a creditor, the debtor has the first right to “appropriate” or allocate a payment among those debts as it chooses, provided the allocation is clearly communicated at the time of payment. If the debtor does not make a clear allocation, the creditor then has the right to allocate the payment as it sees fit. The court canvassed the authorities, including Waisman, Cory Brothers and Clayton’s Case, emphasizing that a debtor’s allocation must be a “plain and irrevocable expression of intention,” and that once the payment is made without such allocation, the creditor’s allocation right vests. In this case, the court accepted that Hillcore had previously made a plain allocation of an earlier $2 million payment to reduce the consent judgment. However, for the later $5 million payment made on 25 September 2025, there was no explicit instruction allocating that payment to the judgment or to any specific debt. Hillcore’s counsel relied on email chains in which future payments were discussed and suggested that references to continuing to make arrangements for payments should be read as impliedly continuing to pay down the consent judgment. The court found that this inferential approach was inadequate, particularly in the context of multi-million-dollar transfers where business certainty requires explicit allocation instructions. One email from 12 September 2025 mentioned that Hillcore planned to make another significant payment the following week, but it said nothing about allocation, and in any event, no payment was made that next week. At the same time, OSI’s counsel was repeatedly pressing for payment of over $400,000 in legal fees, for payment of receivables that Hillcore had collected on OSI’s behalf without remitting, and for the Critical Information Delay Fee. The judge concluded that, whether Hillcore intended to allocate or not, it had not in fact made any plain and irrevocable allocation of the $5 million payment to the consent judgment. Hillcore had the unilateral right to allocate at the time of payment but chose not to exercise that right clearly and therefore could not later complain that OSI exercised its own allocation entitlement. On 3 October 2025, OSI allocated approximately $2.1 million of the $5 million to other outstanding amounts, including legal fees, receivables and the Critical Information Delay Fee. Only on 7 October 2025 did Hillcore purport to direct that the full $5 million should be allocated to the consent judgment. The court held this was too late. Once the payment was made with no allocation, OSI as creditor could allocate whenever it chose, while any debtor allocation right expired at the moment of payment. The court rejected arguments that a non-debtor payor such as Hillcore Management had any greater or later-arising allocation power; it was merely an agent paying on the debtors’ behalf and could not alter or diminish OSI’s creditor rights.

Legal fees, receivables and assessment dispute

Given OSI’s allocation of part of the $5 million to legal fees and receivables, the court examined whether those debts validly existed when OSI allocated the payment. As to legal fees, the Solicitors Act contemplates that even paid fees can later be assessed and partially refunded, but that does not mean no fees are due until assessment. Hillcore did not seriously deny that OSI had incurred legal fees in enforcing the share purchase agreement, the forbearance arrangement and the consent judgment. Instead, Hillcore insisted on more back-up documentation and reserved its position, saying it would review any materials in good faith. OSI’s counsel, Goodmans, initially rendered a fairly bare invoice, but in response to Hillcore’s concerns and while trying not to run up additional unrecoverable time, eventually provided detailed summaries setting out hours, timekeepers, rates and the general nature of the work done, while preserving solicitor-client privilege. The court held these summaries complied with the guidance from Plazavest on how a client can inform a third-party payer without breaching privilege. Hillcore, a non-client third party who had agreed to indemnify OSI’s legal fees, applied for an order sending Goodmans’ fees (over $800,000) to assessment. OSI cross-applied for judgment on those fees, arguing there was no bona fide dispute. The judge found Hillcore had not approached the fee issue in good faith. Despite receiving detailed summaries and undertaking to review them, Hillcore had not identified any specific concern, questioned any particular time entry, or even agreed to pay any portion of the accounts. It simply demanded privileged dockets and signalled an intention to try to assess all future accounts “sight unseen.” The judge concluded this was an inequitable use of the assessment process to stall payment, especially in a dispute between sophisticated commercial parties over tens of millions of dollars. Observing that he had never previously declined a client’s request for assessment, the judge emphasized that Hillcore was not the client and that its right to assessment was narrower. He held that it was neither fair nor reasonable to refer the fees to assessment on the thin record presented and instead found the Goodmans’ fees, as summarized, to be fair and reasonable in light of the extensive enforcement efforts OSI had been forced to undertake. Receivables that Hillcore had collected on OSI’s behalf but not remitted were also undisputedly owed and thus proper subjects of OSI’s allocation.

Penalty characterization of the critical information delay fee

The court then turned to whether OSI could allocate any part of the $5 million payment to the Critical Information Delay Fee. Analysing the clause through the lens of Peachtree and related authorities, the judge distinguished between genuine liquidated damages and penalties. The fee here was expressly in addition to OSI’s actual out-of-pocket costs, which already covered the real damage caused by late disclosure: the expense of chasing documents and engaging consultants to review them. The incremental $5,000 per day per document served purely as a financial stick to compel compliance, not as a pre-estimate of any quantifiable loss. The way OSI later interpreted and applied the clause underscored its punitive nature. Charging the fee on weekends, despite no evidence of actual activity or loss on those days, showed that the amount bore no relation to real damage. Likewise, multiplying the fee by the number of late documents meant the same lateness period could cost $5,000 or $30,000 per day depending solely on how many separate applications or communications were outstanding, even though OSI’s underlying risk or loss did not vary in that way. The court held that the fee was “extravagant and unconscionable in amount in comparison with the greatest loss that could be conceivably proved” from late disclosure of lenders’ communications. There was no causative link between delayed notice of refinancing discussions and the eventual, contingent possibility of OSI suffering a shortfall years later in a future insolvency. The fee was therefore a classic penalty: an arbitrary sum payable on breach, disconnected from any rational attempt to price the likely damage. Although modern unconscionability doctrine often focuses on inequality of bargaining power and improvidence, the judge found that here the parties were sophisticated and of equal strength, but the clause still offended the traditional penalty rule. As a result, the Critical Information Delay Fee was declared unlawful and void, and OSI could not properly allocate any part of the $5 million payment toward it.

Ruling and overall outcome

In the result, the court drew a sharp distinction between the different components of OSI’s allocation of the $5 million payment. OSI was entitled to allocate portions of that payment to valid debts such as its reasonable enforcement-related legal fees and receivables that Hillcore had collected and failed to remit. Hillcore’s attempt to retroactively direct the full $5 million to the consent judgment after OSI had already exercised its allocation right was rejected as contrary to settled debtor–creditor law. Hillcore’s application to send Goodmans’ fees to assessment was dismissed, and the judge found those fees fair and reasonable based on the non-privileged summaries provided. However, the court struck down the Critical Information Delay Fee as an unlawful penalty. OSI was therefore not permitted to allocate any of the $5 million payment to that fee. Instead, the judge ordered that the amount OSI had previously allocated to the invalid fee must be re-applied to the consent judgment as of 3 October 2025, with interest and subsequent costs to be recalculated to determine whether the consent judgment had been fully satisfied and what, if anything, remained outstanding. Because OSI succeeded on allocation and legal fees but failed on the enforceability of the delay fee, and because the financial impact of reallocating the disallowed fee back to the judgment still needed to be worked through, the court expressly found that it could not yet determine who “truly succeeded,” if anyone, overall in monetary terms. The parties were directed to return for a case conference to address the form of order and argue costs based on further written submissions. As a result, while OSI prevailed on important enforcement and fee issues and Hillcore succeeded in eliminating a claimed $1.8 million penalty, no final net monetary award or total amount in favour of a single “successful party” was fixed in this endorsement, and the precise figure—if any—ultimately awarded or remaining owing could not be determined from this decision alone.