A MIXED GRILL: 2016 Mid-Market Technical Update

Transcription

1 A MIXED GRILL: 2016 Mid-Market Technical Update Gavin MacDonald (Partner) & Courtney Barbour (Articled Clerk) Cox & Palmer for Canadian Association of Insolvency and Restructuring Professionals (CAIRP) 2016 Insolvency and Restructuring Forum Delta Halifax Halifax, Nova Scoita May 16, 2016 * /00000/ /v1

2 Table of Contents Introduction... 1 Substantive Consolidation... 1 Efficient and equitable restructuring of group companies... 1 Cross-Border Insolvency... 2 Canadian Recognition of a Foreign Main Proceeding... 2 Caesars Entertainment... 2 Wolfridge Farm Limited... 3 Statutory (and Other Trusts) in Bankruptcy... 4 Builders Lien Act Trust Valid in Bankruptcy... 4 Trust Character Retained Despite Co-Mingling with Non-Trust Funds... 4 When Constructive Trusts Are Appropriate... 6 Discharge of Receiver... 8 Factors to Consider on a Receiver s Passing of Accounts... 8 Discharge of Bankrupt... 9 BIA Section 178(1)(d) Exception To Release of Bankrupt Not Applicable Absent Fiduciary Duty 9 Costs Mortgagee Denied Solicitor-Client Costs Sale of Assets Position of All Creditors to be Seriously Considered Before Approving an Asset Sale Application for Bankruptcy Order Requirements for Granting Bankruptcy Order Survival of Judgement Following Bankruptcy Evidence of Actual Bankruptcy Required to Obtain Declaration Legal Proceedings by a Trustee Trustee can Pursue Constructive Trust Claims but not Personal Claims Proof of Claim Creditor Appeal Denied for Failure to File Within 30 Days of Service of Appeal from Disallowance Interim Receiver s Failure to Pass Accounts Justified Disallowance of Claim Trustee s Disallowance of Secured Claims Upheld by Court; Overturned on Appeal Companies Creditors Arrangement Act Protection Stay of Proceedings Extended to Non-Applicants Where Rights Affecting Non-Applicants Could Prejudice Applicants Motion to replace Monitor and Award of Costs Appearance of Conflict in Appointment of Monitor * /00000/ /v1

3 INTRODUCTION This paper offers a summary of important bankruptcy and insolvency case law from the last 12 months. Included are a variety of cases from Atlantic Cnada, Ontario, and Alberta. SUBSTANTIVE CONSOLIDATION EFFICIENT AND EQUITABLE RESTRUCTURING OF GROUP COMPANIES Gray Aqua Group of Companies, Re 1 is a case from New Brunswick that dealt with the remedy of substantive consolidation under the Bankruptcy and Insolvency Act (BIA). Historically, courts have shown reluctance in granting consolidation and it was seen as an extraordinary remedy. The group of eight aquaculture companies (the Group ) operated as an integrated enterprise with centralized management, sales and accounting all based in New Brunswick. The Group filed separate notices of intention (NOIs) and Ernst & Young was appointed as the Proposal Trustee. The Proposal Trustee sought an Order for a Consolidated Proposal, pursuant to sections 34, 66, 183 and 192 of the BIA. While the BIA is silent as to when consolidation of proceedings for corporate entities will be granted, limited case law on the point relies on the equitable jurisdiction of the Court under s Section 183(12) provides: Where in the opinion of the court the cost of preparing statements, lists of creditors or other material required by this Act to be sent with notices to creditors, or the cost of sending the material or notices, is unjustified in the circumstances, the court may give leave to omit the material or any part thereof or to send the material or notices in such manner as the court may direct. Register Natalie H. LeBlanc held that the Group was a suitable candidate for an Order for a Consolidated Proposal. There was sufficient evidence to find that the Group was integrated from a financial and practical perspective and that it functioned as a centralized company. Evidence also indicated that neither the shared nor individual creditors of the Group would be deprived of any rights and would not suffer any measurable prejudice if the Order was granted. Furthermore, accommodations were proposed under the Consolidated Proposal for a group of unsecured creditors of one member of the Group. In granting the Order, Register LeBlanc noted: The purpose of the BIA is to facilitate financial rehabilitation in a fair and structured atmosphere while protecting the integrity of the process and all of its participants, including creditors NBQB Ibid at para 18. 1

4 Gray Aqua Group of Companies, Re is valuable as it shows the expectations of the Court in granting an Order for a Consolidated Proposal. The right balance of efficiency and equity is essential, with evidence to show that a Consolidated Proposal serves to streamline the proposal process, create savings for all parties, and facilitate a faster restructuring on the whole without unduly prejudicing the legal rights of stakeholders. Interestingly, the Court did not consider whether the same effect could have been achieved through procedural consolidation. CROSS-BORDER INSOLVENCY CANADIAN RECOGNITION OF A FOREIGN MAIN PROCEEDING The significance of whether a foreign proceeding is a foreign main proceeding or a foreign non-main proceeding is that there is an automatic stay provided in s. 271(1) of the BIA if the proceeding is a foreign main proceeding whereas if it is a foreign non-main proceeding, then an application must be made for a stay. Section 268(1) defines a foreign main proceeding as a proceeding in a jurisdiction where the debtor has the centre of the debtor s main interests (referred to in the caselaw as COMI ). This definition is the same as that found in s. 45(1) of the Companies Creditors Arrangement Act (CCAA). There is a rebuttable presumption that a debtor s COMI is in the jurisdiction where its registered office is located. CAESARS ENTERTAINMENT In Caesars Entertainment Operating Co., Re 3 the Ontario Superior Court of Justice granted an Initial Recognition Order and a Supplemental Order to a foreign representative. In doing so, the Court reviewed the factors to be considered in determining a debtor s COMI. Caesars Entertainment Operating Company Inc. ( CEOC ) and certain of its subsidiaries (collectively, the Chapter 11 Debtors ) filed voluntary petitions in Illinois for Chapter 11 reorganization proceedings under the United States Bankruptcy Code. Prior to this, competing involuntary petitions in respect of CEOC, but not its subsidiaries, had been filed by creditors in Delaware. The Delaware court ordered a stay of the Illinois proceeding pending determination of the proper venue. Caesars Windsor Entertainment Limited ( CEWL ), the applicant in this case, was an Ontario corporation and an indirect subsidiary of CEOC. CEWL intended to continue operating in Canada and had no intentions to restructure. CEWL brought an application in Ontario under the CCAA for an order recognizing the Illinois proceeding as a foreign main proceeding, declaring CEWL to be a foreign representative, and staying proceedings against all Chapter 11 Debtors. Pursuant to a written resolution of its sole shareholder, CEWL was authorized to act as the foreign representative of all Chapter 11 Debtors for the purposes of recognizing the Chapter ONSC

5 11 Proceeding in Canada. The Application was granted, recognizing the Illinois proceeding as a foreign proceeding for the purposes of the CCAA. Under s. 46(1) of the CCAA, CEWL was authorized to apply to the Court for recognition of a foreign proceeding in respect of which it was a foreign representative. Regional Senior Judge Morawetz observed that CEWL was authorized to act as the foreign representative pursuant to the shareholders resolution. In noting that there is no language in Part IV of the CCAA requiring a foreign representative to be appointed by the Court. Authorization by the parent company and the sole shareholder was sufficient to give CEWL such status. 4 Despite Ontario being the jurisdiction of CEWL, the Court found that the Illinois proceeding was a foreign main proceeding and granted the requested relief, including a stay. WOLFRIDGE FARM LIMITED In Wolfridge Farm Ltd., Re 5 the Nova Scotia Supreme Court declined to recognise a United States bankruptcy proceeding as a foreign main proceeding. The Court found that the presumption that the COMI was in the United States was displaced, and that the COMI was, in fact, in Nova Scotia. Wolfridge Farm Ltd. ( Wolfridge ) applied for an order recognizing its United States bankruptcy proceeding as a foreign main proceeding under s. 270 of the BIA. Wolfridge also sought recognition of Mr. John T. Early III ( JE ) as its foreign representative. Wolfridge Farm Limited ( WFL ) was originally incorporated as a Nova Scotia corporation, with its head office in Nova Scotia. Its president was JE s spouse, Lydia Early ( LE ). WFL purchased a property in Nova Scotia from the Bonangs in 2003 with a vendor takeback mortgage. An order for foreclosure and sale was granted in A series of Sheriff s Sales took place, with the first three sale attempts falling through. In each of those three attempts, the successful bidder was either JE or a JE/LE company. A fourth and final sale occurred and the property was successfully sold to the Bonangs. WFL had also acquired another Nova Scotia property in WFL fell into arrears on its mortgage for that property. The lender, Farm Credit Canada ( FCC ) initiated foreclosure proceedings. In January 2015 WFL continued its existence from Nova Scotia to Delaware. Its name was changed from WFL to Wolfridge, its registered office was in Connecticut, and it was registered in Nova Scotia as a foreign corporation. In March 2015, Wolfridge filed a Chapter 11 application in the District of Connecticut. Wolfridge reported its principal assets as being in Nova Scotia and Florida. The majority of unsecured claims were held by creditors in Nova Scotia. 4 Ibid paras NSSC

6 While Wolfridge s registered office was in Connecticut, making it the presumptive COMI, Justice LeBlanc noted that this presumption could be rebutted by considering objective factors. These factors include the location of assets, the location of the creditors, where the business operates from, the location of bank accounts, and the residence of the principals of the corporation, such as the directors and officers. Justice LeBlanc concluded that, based on these objective factors, the presumption that WFL s COMI was located in the United States was displaced. With the COMI established as Nova Scotia, Justice LeBlanc found that the US proceeding should not be recognized as a foreign main proceeding but as only a foreign proceeding, no stay was issued, and the foreclosure could continue. STATUTORY (AND OTHER TRUSTS) IN BANKRUPTCY BUILDERS LIEN ACT TRUST VALID IN BANKRUPTCY The Supreme Court of Canada released an important decision this April that will set the tone for how statutory trust provisions are applied in situations of bankruptcy. In Iona Contractors Ltd. v Guarantee Company of North America, 6 the SCC dismissed the application for leave to appeal by the Trustee in Bankruptcy (the Trustee ) of the bankrupt, Iona Contractors Inc. ( Iona ). The application for leave arose from the decision of the Alberta Court of Appeal, Iona Contractors Ltd. (Receiver of) v Guarantee Co. of North America. 7 The Alberta Court of Appeal looked at the statutory trust provisions created by s. 22 of Alberta s Builders Lien Act ( BLA ) and determined that it did not conflict with the priority regime of the federal BIA. The Court held that in a situation where a contractor goes bankrupt and the bonding company pays the subcontractors, the bonding company, not the contractor s trustee in bankruptcy, is entitled to the holdback funds held by the owner. A valid common law trust existed and was not impacted by the subsequent bankruptcy. Iona centered on the dispute between the surety, The Guarantee Company of North America ( the Surety ), subrogated to the rights of BLA trust claimants, and the Trustee over entitlement to unpaid contract funds. The Court of Appeal found that, based on the facts, a valid common law trust was created. As a result, the Court ordered that the trust funds be paid to the Surety in its subrogated capacity to the position of the trust claimants. The Court of Appeal decision and the SCC s denial of the application for leave to appeal is of great importance to construction law and bankruptcy. Iona provides comfort to subcontractors and suppliers that the trust provisions of provincial lien legislation will likely remain operative in the face of federal bankruptcy legislation. Holdback funds remain protected even in bankruptcy. TRUST CHARACTER RETAINED DESPITE CO-MINGLING WITH NON-TRUST FUNDS Kel-Greg Homes Inc., Re, 8 is a Nova Scotia case involving a bankrupt residential housing general contractor. At the time of bankruptcy, the contractor had a single bank account CarswellAlta 660 (WL Can) (SCC) ABCA NSSC

7 through which all its operations were conducted. Both trust and non-trust funds were blended together, and the contractor had failed to maintain distinct accounts for each construction project on which it was the general contractor. Funds were co-mingled and there was no way to distinguish between the funds. Some subcontractors who remained unpaid at bankruptcy registered builders lien, and asserted trust claims to funds held by the trustee. The Court was asked to direct whether the funds in the bankrupt s bank account and additional amounts collected by the trustee from two construction projects had the status of trust funds. The Court held that the funds at issue were trust funds within the meaning of s. 67(1)(a) of the BIA and therefore were not part of the bankrupt s estate. Section 67(1)(a) of the BIA states that: The property of a bankrupt divisible among his creditors shall not comprise property held by the bankrupt in trust for any other person. While the trust funds in question where co-mingled with other funds, the Court held that this did not necessarily result in the loss of the certainty of subject matter common law element of trust funds. Justice Peter Rosinski noted: For trust monies to retain their trust character in circumstances such as in the case at bar, they must exhibit the three pre-conditions of a trust : certainty of intention, object and subject matter. Only the latter is in issue [here]. 9 Critical to the finding that the funds in question had retained certainty of subject matter was the fact that the funds in the account could be traced to their source. Furthermore, Justice Rosinski relied on the principle in Hallett s Estate, Re (1880), 13 Ch D 696 (Eng CA) that the contractor, as a trustee, could be presumed to have expended all of its non-trust monies before expending any trust monies, and that the onus was on the trustee to rebut such presumption by identifying its own funds. The trustee failed to rebut the presumption in this case since the trustee lacked the required factual specific knowledge. The amounts collected by the trustee also remained exempt from trust funds despite being deposited along with other funds in the trustee s account. Kel-Greg Homes Inc., Re is a valuable case, as it provides authority to protect the rights of subcontractors and suppliers as lienholders in situations where a general contractor is bankrupt. Lien holders should remember that in such a case, the Courts will still look for evidence to establish the presence of the common law elements of trust funds. However, the presumptions referred to by the Court make that job much easier. Left unresolved in this decision was whether the trust funds could be traced to those receiving them prior to the trustee. For example, would a secure creditor lender have to repay amounts set-off against its debts. 9 Ibid at para 7. 5

8 WHEN CONSTRUCTIVE TRUSTS ARE APPROPRIATE The Ontario case Redstone Investment Corp., Re, 10 is an important decision for insolvency law practitioners as it highlights when a constructive trust will be imposed on proceeds held by a receiver, and provides obiter commentary on the principles of Quistclose trusts. In Redstone, two companies Redstone Investment Corporation ( RIC ) and Maplebrook Capital Corp. ( Maplebrook ) were involved in a loan assignment arrangement. Maplebrook carried on business as a short-term lender to small and medium sized Canadian businesses. RIC was in a similar business. In 2013 RIC sourced five short-term loan transactions which Maplebrook agreed to finance. Maplebrook appointed RIC as its agent to collect and enforce on the assigned loans. However, the assignment documentation was silent with respect to any mechanics dealing with collection of proceeds and payment to Maplebrook. It did not expressly state that funds collected by RIC would be held in trust on Maplebrook's behalf. In addition, Maplebrook advanced funds to RIC so that RIC could make a loan to a certain borrower, but the transaction was aborted. Those particular funds were returned to and deposited with RIC. In March 2014, RIC and a related company obtained an Initial Order under the Companies Creditors Arrangement Act (CCAA). The Initial Order appointed a monitor and contained the typical broad stay of proceedings. RIC stopped remitting payments to Maplebrook for the assigned loans. In August 2014 the CCAA proceedings were converted into receivership proceedings and the monitor was appointed as receiver (the Receiver ). RIC continued to receive repayment on several of the assigned loans, even after the filing of the Initial Order. These receipts were deposited into RIC's general account and no payments were made to Maplewood. The remaining assigned loans went into default. Maplebrook made demand for an accounting of proceeds received with respect to the transactions and for payment of amounts received. The Receiver refused to pay. Maplebrook brought a motion seeking to compel the Receiver to return funds, including post-ccaa collections. The Court granted the order. Regional Senior Judge Morawetz held that the funds were held in trust for Maplebrook. Because of the CCAA stay, Maplebrook could not terminate its agency arrangements with RIC, revoke RIC s authority as agent, retake the assigned loans, or ensure that it received post- CCAA collections directly from borrowers. RIC was not at liberty during the status quo period to negate the parties proprietary rights by receiving post- CCAA collections directly from the borrowers. Furthermore, the mere absence of an agreement to hold funds in separate accounts is not necessarily determinative of whether a debtor-creditor relationship is established. Imposing a constructive trust in Maplebrook s favour, the Court held that RIC had no beneficial entitlement to the funds, and neither the Receiver nor RIC s creditors could have any higher claim to the assets. The funds collected were not intended to form part of RIC s assets. If the funds were made part of those assets, then RIC s creditors would receive a ONSC

9 windfall. Morawetz RSJ found that the relationship between Maplebrook and RIC was not one of debtor-creditor. The evidence before the Court included RIC s concession that the loans in default were the property of Maplebrook. From there, Morawetz RSJ held that RIC had recognized the assignment in favour of Maplebrook and there was no basis to alter this recognition after the CCAA filing. To alter this relationship would be inconsistent with the principle that the purpose of the CCAA is to preserve the status quo. With respect to the proceeds relating to the aborted loan transaction, the Court held that the three certainties required to establish the existence of a trust, i.e. (1) an intention to create a trust; (2) the subject matter of the trust; and (3) the trust objects or purposes, had been established with respect to this transaction. Although there was no express obligation requiring RIC to hold the advance for that loan in trust or to segregate those funds, there was no question that funds were intended for, and could only be used for, one purpose: to fund the loan to that particular borrower. In obiter, the Court commented that the requirements for a Quistclose trust had also been met. A Quistclose trust (as enunciated by the English House of Lords in Barclays Bank Ltd. v Quistclose Investments Ltd. 11 ), arises when funds are advanced for a specific purpose but cannot be or are not used for that purpose. The Court noted that in Ontario (Minister of Training, Colleges and Universities) v Two Feathers Forest Products LP 12 the Ontario Court of Appeal commented that the Quistclose trust principle had not yet been adopted in Ontario and warned against the potential negative impact that such trust may have on creditors who have no notice that a debtor's funds are not available to general creditors. However, the Court ruled that in this case, with the loan being provided to RIC and forwarded to RIC s counsel expressly for the purpose of being held by counsel pending the completion of the transaction, and then being returned to RIC subsequent to the filing of the CCAA proceedings, that there did not appear to be any opportunity for any creditor of RIC to have been misled or in any way detrimentally affected by having the knowledge that the funds were subject to a trust and not available to general creditors. While Quistclose trusts has not yet been adopted in Ontario, and therefore clearly obiter, the Court was prepared to apply Quistclose trust principles. Morawetz RSJ stated at paragraph 84 that: I am mindful of the comments of the Ontario Court of Appeal in Two Feathers to the effect that Quistclose has not yet been adopted in Ontario. In my view, it is not necessary to determine this issue as I have determined that the Pro-Hairlines Advance is being held in a trust obligation in favor of Maplebrook. However, if I am in error in reaching the conclusion, I am also of the view that this is a situation where the 11 [1968] 2 All ER 651, [1968] UKHL ONCA

10 requirements for a Quistclose trust have been met. In reaching this conclusion, I have taken into account that: 1. The funds were advanced by Maplebrook for a specific purpose; 2. The funds were returned to RIC at a time when RIC was operating under Court supervised creditors' protection and under the supervision of the Monitor; and 3. If the funds are returned to Maplebrook, there is no effect on the other creditors of RIC. The funds were never the property of RIC and the creditors of RIC have no entitlement to the funds in question. The imposition of a remedial constructive trust in an insolvency environment is, generally, problematic as it can have the effect of reordering priorities and seeing an otherwise "unsecured creditor" receiving payment in full. However, in situations such Redstone, there was no dispute that the assigned loans were the property of Maplebrook and that, but for the insolvency proceedings and technical trust law arguments, the proceeds of those loans were also the property of Maplebrook. It was clear that if the Court accepted the technical trust arguments of the Receiver that the creditors of RIC would have received an unjust enrichment. There was no expectation on the part of the creditors that the proceeds relating to the repaid assigned loans or the aborted loan transaction were their proceeds. If the Court had accepted the Receiver s argument, then there would be a corresponding deprivation of Maplebrook. Making the use of a constructive trust appropriate in these circumstances. DISCHARGE OF RECEIVER FACTORS TO CONSIDER ON A RECEIVER S PASSING OF ACCOUNTS In the Nova Scotia decision, The Toronto-Dominion Bank v Karlsen Shipping Company Limited, 13 the Court held that a former receiver was entitled to the fees and disbursements billed to the creditor for the period from its appointment to its discharge. The case reassures receivers and counsel that, provided fees are reasonable and attest to bona fide efforts to administer debtor assets, undertakings, and properties, payment is deserved even if the receiver is discharged. PricewaterhouseCoopers Inc. ( PwC ) was appointed Receiver of Karlsen Shipping Company Limited ( Karlsen Shipping ) by virtue of a Receivership Order. After 16 months and at the request of a creditor which had acquired the debts and security of the bank by way of NSSC

11 assignment, PwC was discharged and Grant Thornton Limited ( GTL ) was substituted to assume the role of Receiver. In this application, PwC sought approval of its fees and disbursements as Receiver, along with those of its legal counsel. PwC filed a series of reports which set out the work it carried out over the 16 month period. The creditor opposed granting an order to approve the fees of the former Receiver, submitting that the fees sought were excessive, unreasonable, and [bore] no resemblance to the size of the state and the revenues realized solely through the efforts of the receiver and its counsel. 14 In granting the application, the Court held that PwC had made bona fide efforts to maximize revenue for distribution to the creditors. As noted by Justice McDougall: It is easy to criticize PwC, in hind-sight, for having nothing to show for their efforts. But is it fair? I do not believe it is. If the Receiver had not pursued these assets without first doing their due diligence then, yes, they could be criticized. By doing the prudent and correct thing they should not now be expected to forego remuneration for its bona fide efforts in trying to maximize revenues for distribution among company creditors. 15 Justice McDougall held that it was standard practice for a Receiver to retain the services of qualified brokers or agents to sell company assets after first attempting to solicit offers on their own. To try and sell assets such as real estate and yachts without the advice and guidance of industry experts would open up a Receiver to legitimate criticism and potential allegations of negligence. As for the legal counsel fees and disbursements, the Court accepted and approved the amounts charged given the complexity of the matter. Justice McDougall held that the fees and time and effort expanded were neither excessive nor unreasonable. There was evidence of the complexity of issues which necessitated multiple lawyers to work on the file. Furthermore, the lawyers had agreed to reduce their regular hourly fees in an effort to address a concern raised by the bank, and these savings were passed on for distribution to the creditors. DISCHARGE OF BANKRUPT BIA SECTION 178(1)(D) EXCEPTION TO RELEASE OF BANKRUPT NOT APPLICABLE ABSENT FIDUCIARY DUTY In Korea Data Systems (USA),Inc. v Aamazing Technologies Inc., 16 Korea Data Systems (USA), Inc. ( Korea ) appealed from a decision of the trial judge where the Court declined to issue a declaration that the debt owed to the plaintiff Korea survived the defendant s discharge from bankruptcy. In an earlier proceeding, the plaintiff had successfully sued the defendant company and damages were awarded against the individual defendant personally as an alter ego of the company. The individual defendant filed for bankruptcy, 14 Ibid at para Ibid at para ONCA

12 listing the judgement against him as a liability. The appeal concerned the scope of the exception in s. 178(1)(d) of the BIA and the trial judge s interpretation of the scope. As noted by Justice E.A. Cronk, the BIA is a comprehensive code relating to insolvent persons. It seeks to achieve twin goals: the equitable distribution of a bankrupt s assets among the bankrupt estate s creditors and the financial rehabilitation of insolvent individuals. In furtherance of these objectives, s. 178(2) of the BIA provides that an order of discharge releases the bankrupt from all claims provable in bankruptcy. There are limited exceptions to this general rule. These exceptions are designed to ensure that purposeful wrongdoers cannot take unjustified advantage of the bankruptcy regime s protections. Section 178(1)(d) of the BIA reads: An order of discharge does not release the bankrupt from.. Any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity or, in the Province of Quebec, as a trustee or administrator of the property of others. At trial the Court found that s. 178(1)(d) of the BIA applies only if the bankrupt owed a fiduciary duty to the creditor who seeks to obtain declaratory relief under s. 178(1)(d). In other words, s. 178(1)(d) requires the fiduciary duty in question to have been one that the bankrupt owed directly to the claiming creditor. Since the individual defendant owed no duty to Korea, the trial judge held that s. 178(1)(d) was not available to Korea to obtain a declaration that the defendant s debts under the earlier judgement would survive his discharge from bankruptcy. On appeal, Korea argued that the trial judge s interpretation of s. 178(1)(d) undermined, rather than advanced the policy objective of s Korea further submitted that the defendant breached his fiduciary obligations to the defendant company, Aamazing Technologies Inc. ( Aamazing ), and used Aamazing to further his fraudulent scheme, thereby defrauding Korea. With extensive reference to Simone v Daley, 17 Justice Cronk found Simone to be instructive. She commented that Simone instructs that a bankrupt's wrongdoing or improper conduct is not itself sufficient to bring a debt within the ambit of the section. Rather, the impugned conduct must relate to the fiduciary relationship itself. In other words, it is the relationship between the claimant creditor and the bankrupt, as well as the nature of the bankrupt's conduct that anchors s. 178(1)(d). Justice Cronk rejected Korea s argument. In her view, a creditor cannot bring its claim within the exception set out in s. 178(1)(d) when that claim arose out of the bankrupt's breach of a fiduciary duty to a third party. To hold otherwise would expand the reach of s. 178(1)(d) well 17 [1999] OJ No 571, 118 OAC 54 (ONCA). 10

13 beyond what it exists to protect: the relationship between a vulnerable creditor and a fiduciary debtor. When properly read, the purpose of s. 178(1)(d) is to prevent a bankrupt from avoiding his or her just debts and liabilities to a vulnerable creditor where the bankrupt was entrusted, in a fiduciary capacity, with monies or property that belonged to that creditor. Justice Cronk noted that both the fiduciary's duty of loyalty and a beneficiary's peculiar vulnerability to the fiduciary are acutely beneficiary-specific. She agreed with the trial judge's conclusion that s. 178(1)(d) is available to a creditor of a bankrupt if the bankrupt has abused his or her fiduciary position with the claimant creditor by incurring a debt to the creditor through fraud, embezzlement, misappropriation or defalcation, in violation of the bankrupt's fiduciary duty to the claiming creditor. This case is useful as it is consistent with the Supreme Court of Canada s jurisprudence on the law of fiduciaries. The legal obligations of fiduciaries are no different in situations of bankruptcy they are imposed for the purpose of protecting only those beneficiaries to whom fiduciary obligations are owed. COSTS MORTGAGEE DENIED SOLICITOR-CLIENT COSTS In Manufacturers Life Insurance Co. v Alberta Ltd., 18 The Manufacturers Life Insurance Company ( the Mortgagee ) sought solicitor-client costs in relation to its application for appointment of a receiver to manage the mortgaged property Alberta Ltd ( the Mortgagor ) and the Mortgagee first entered into a mortgage agreement in 2009 for an initial term of three years. The mortgage loan was extended three times with a final maturity date in The Mortgagee declined to extend the mortgage further. The Mortgagor failed to repay all amounts owing to the Mortgagee on or before the final maturity date. The Mortgagee demanded payment of the amount outstanding under the mortgage in full, and served notice of its intention to enforce the security pursuant to s. 244 of the BIA. The Mortgagee filed an application with the Court to appoint a receiver-manager of the mortgaged property. The application was adjourned twice and finally set to be heard in June At the end of May 2015, the Mortgagor obtained alternate financing and was able to repay its indebtedness. A clause in the mortgage agreement provided for the Mortgagee s recovery of certain costs, charges, and expenses which would be added to and form part of the principal sum secured by this mortgage and shall be a charge upon the Lands. Included in that clause was reference to the recovery of all solicitors [...] fees, expenses and costs of and incidental to [...] protecting the Mortgagee s security ABQB

14 The Mortgagee s application seeking solicitor-client costs related to its application for the appointment of a receiver was dismissed. Justice K.D. Yamauchi cited Alberta Rules of Court 10.9, 10.29(1)(a), and in finding that there can be no doubt that the Court retains discretion to award costs, even in the face of a document that says that one party must pay the other s costs. The Court recognized that the Mortgagor had made efforts to obtain financing. The Court held that a better approach might have been for the Mortgagee to commence the action, then determine whether the Mortgagor might be willing to provide consent to a receivership order if the refinancing did not materialize. Under this approach, the Mortgagee would have continued to receive rents from tenants which exceeded the payment amounts pursuant to the mortgage. There would also have been no risk or prejudice to the Mortgagee. In the end, the Court found that the Mortgagee was not entitled to its client-solicitor costs. The Mortgagor conceded that the Mortgagee was entitled to solicitor-client costs for commencing the action and for duties surrounding the net rentals of the property. The Court also allowed the Mortgagee its solicitor-client costs for the issuance of demand letters and a notice of intention to enforce the security pursuant to s. 244 of the BIA. Taking into consideration the cumulative effect of the factors before the Court, Justice Yamauchi found that the Mortgagee was not entitled to its solicitor-client costs beyond those steps. SALE OF ASSETS POSITION OF ALL CREDITORS TO BE SERIOUSLY CONSIDERED BEFORE APPROVING AN ASSET SALE The case of Royal Bank of Canada v Wapiti Waste Management Inc., 19 is interesting as it demonstrates that Courts take the position of all creditor groups seriously when hearing an application for approval of the sale of a bankrupt s assets. In a receivership proceeding, Justice J.B. Veit was asked by the appointed Receiver to approve the sale of the bankrupt company s last asset. The proposed sale was for $535,000, a price far below the price at which the property was originally listed for sale two years prior. The only remaining unpaid class of creditors was that of unsecured creditors, who held approximately $1.4 million in unsecured claims. The largest of these unsecured creditors opposed the sale of the remaining asset, raising a number of questions. That creditor argued that because the value of the unsold asset was primarily dependent on the environmental problem it posed, no final sale should be made until the receiver was able to locate the bankrupt s insurance policy and determine if a claim could be made under that policy. Absent the policy itself, the Court held that he insurer s apparent refusal of the receiver s claim on the grounds that the claim was not made in time could not be evaluated. The Court denied the Receiver s application for the time being given the unanswered questions posed by the largest creditor. Justice Veit noted that not approving the proposed ABQB

15 sale could turn out to be costly to the unsecured creditors: an adjournment could cause the loss of the current offer, the market could deteriorate further, and the policy, when eventually able to be assessed, may not provide any answer to the need for remediation. Despite these negative potential outcomes, the Court denied the application, with Justice Veit stating: However, when the largest by far of the unsecured creditors indicates that he is willing to take this risk, and when the policy itself has not yet been able to be studied, the unsecured creditor s position must be taken seriously. 20 Denial of the application was only for the time being. The Court held that the Receiver could reapply for approval of the sale of assets once the queries of the unsecured creditor were answered. APPLICATION FOR BANKRUPTCY ORDER REQUIREMENTS FOR GRANTING BANKRUPTCY ORDER In the Nova Scotia case Witch s Glen Gold Inc., Re 21 the sole creditor, Steve Furlotte, brought an application pursuant to s. 43 of the BIA seeking a bankruptcy order against the debtor Witch s Glen Gold Inc. ( WGC ). Mr. Furlotte had owned the single issued share in Flex Mining & Exploration Limited ( Flex ). In 2013 Mr. Furlotte reached an agreement for sale of the share and debt owed to him by Flex to WGC. The purchase price of $2 million was to be paid in three instalments, secured by a Share Pledge Agreement ( SPA ). WGC failed to make payment on the first note when it became due. An extension to the payment date was granted and WGC subsequently provided a cheque to Mr. Furlotte. However, when Mr. Furlotte presented the cheque for payment, he was advised that there were insufficient funds in WGC s account. WGC failed to make payment on the first note when it became due. There was an agreement that the payment date would be extended to June 1, A cheque for the balance was provided by WGG to Mr. Furlotte in early July 2014 but when he presented the cheque for payment on October 3, 2014, he was advised that there were insufficient funds in WGG's account. Early in August 2014, Mr. Furlotte s lawyer prepared an Amending and Acknowledgement Agreement (AAA), which amended certain provisions in the purchase agreement and the SPA. The AAA stipulated that in event of default, the creditor intended to rely on s. 62 of the Personal Property Security Act (PPSA) and a parallel provision in the SPA to take ownership of the share in full satisfaction of the bankrupt s obligations. It was executed by Mr. Furlotte, WGG and Flex. About the same time, a further payment of $50,000 was made reducing the 20 Ibid at para NSSC

16 amount owing on the first note to $350,000, bringing the total debt to $1,850,000. No further payments were made. Registrar Cregan reviewed the SPA and the AAA. He also referenced the acceptance of collateral provisions of s. 62 of the PPSA. Section 62 of the PPSA provides a secured creditor with the statutory remedy of foreclosure. Once exercised, the creditor has no right to claim a deficiency. Once the notice is sent and no objection is filed, the debt is extinguished and the creditor acquires the collateral. This is an alternative to the remedy of seizing the collateral, selling it and making a deficiency claim. Registrar Cregan noted that it is very clear that before s. 62 of the PPSA is operative, the creditor must strictly comply with the statutory requirements. There must first be default followed by the secured party proposing to take the collateral in full satisfaction of the debt and giving notice thereof to the debtor and certain subordinate creditors. Registrar Cregan was satisfied that Mr. Furlotte could not be deemed to have made a proposal under s. 62. In considering the provisions of the SPA that paralleled s. 62 of the PPSA, the Register concluded that to activate the election to retain ownership of the collateral required written notice clearly stating the rat that was what Mr. Furlotte intended to do. Reviewing the evidence, Register Cregan found that all Mr. Furlotte did with the share were the things contemplated by the SPA. He did not elect to retain ownership of the pledged share for himself in complete, full and final satisfaction of the indebtedness. The Registrar noted further that s. 43 of the BIA requires for a bankruptcy order that the applicant prove that the unsecured debt of the debtor owed to it amounts to $1,000 and that the debtor within six preceding months has committed an act of bankruptcy as defined in s. 42(1) of the BIA. Register Cregan found there to be sufficient evidence to establish that the valuation of the security was such that an unsecured debt in excess of $1000 was owed by the debtor. Moving on to the acts of bankruptcy as defined in s. 42 of the BIA, the Registrar found that the facts surrounding the presentation of the cheque that could not be processed due to insufficient funds, and comments relating to the failure to make the payment, proved that notice of suspension of payment had been given. The Registrar considered the second act of bankruptcy ceasing to meet liabilities generally as they become due. As this was a situation where there was only one creditor, the Registrar looked to the law from Holmes, Re 22 where Justice Henry stated a receiving order on the basis of a default to one creditor was appropriate when the creditor is the only creditor of the debtor, and the debtor has failed to meet repeated demands of the creditor. With evidence of a series of demands, negotiation, extensions and amendments respecting payment during the six months before the application all to limited avail, the Registrar concluded that there was an implied admission that not only could the debtor not pay Mr. Furlotte, it was without funds to address other debts, though not specified. Thus, Registrar Cregan concluded that the second act of bankruptcy was proved. 22 (1975), 20 CBR (NS 111, 60 DLR (3d)

17 Satisfied that WGC owed Mr. Furlotte in excess of $1,000 and that it had committed two acts of bankruptcy, Registrar Cregan found that the requirements for a bankruptcy order were met and the order was issued. SURVIVAL OF JUDGEMENT FOLLOWING BANKRUPTCY EVIDENCE OF ACTUAL BANKRUPTCY REQUIRED TO OBTAIN DECLARATION In Sorensen v LeBlanc, 23 the Ontario Superior Court of Justice addressed the issue whether a declaration at trial that judgment would survive a future bankruptcy of the defendant was appropriate. The plaintiff brought an action against the defendant for damages for negligence, breach of contract, negligent/fraudulent misrepresentation, assault, and for punitive and exemplary damages. Justice Minnema awarded damages in part for some of the claims. During the course of proceedings, the defendant indicated his intention to declare bankruptcy. At trial, the plaintiff focused on establishing that the circumstances met the requirements of s. 178 of the BIA, such that whatever award was made would not be released in a subsequent bankruptcy. The plaintiff sought a declaration from the Court to that effect. The Court allowed the action in part but no declaration was granted. Justice Minnema indicated that he had some difficulty with the process advanced by the plaintiff. The Court accepted that following a judgment and a subsequent bankruptcy, creditors can obtain a declaration that the debt in question survives the bankruptcy, relying on s. 178 of the BIA. However, Justice Minnema held that there was no evidence that the defendant had actually gone bankrupt. Justice Minnema noted that the case referred to by the plaintiff, Winfield v Lomas, 24 established that whether a debt is released by operation of s. 178 of the BIA is not a question for the bankruptcy court. Rather is a question for the court with jurisdiction over the claim. However, he was of the view that Winfield did not say that this was a question for courts to routinely consider at the trial stage in anticipation of but before there is an actual bankruptcy. Justice Minnema concluded that the timing of plaintiff's request was not appropriate. While a judgement for the breach of contract claim was granted to the plaintiff, the Court was not prepared to make a declaratory order under the BIA that the plaintiff was seeking ONSC BCSC

18 LEGAL PROCEEDINGS BY A TRUSTEE TRUSTEE CAN PURSUE CONSTRUCTIVE TRUST CLAIMS BUT NOT PERSONAL CLAIMS The Alberta Court of Appeal in BDO Canada Ltd. v Dorais 25 involved a trustee in bankruptcy that sought to pursue claims on behalf of a bankrupt estate. Ultimately the Court held that trustees in bankruptcy may pursue claims on behalf of the bankrupt estate, including those brought by creditors, but may not pursue the claims of individual creditors that benefit them individually. In Dorais, the deceased, Michel Dorais, and a number of companies previously controlled by him were found bankrupt. While the companies were still operating, they took funds from investors who subsequently alleged that they made their investments based on negligent or fraudulent misrepresentations. There were also allegations that the companies purchased a significant amount of life insurance on the deceased s life, the proceeds of which were improperly diverted to the Respondent Shauna Dorais, or to the Respondent, Grant Dewar, one of the deceased s creditors. It was further alleged that real estate bought with funds from the companies was placed in the name of Ms. Dorais. Two groups of creditors started actions seeking personal remedies including rescission of their investment contracts, and damages. They also alleged a fraudulent preference in the transfer of an insurance policy to Mr. Dewar, and alleged that property in the name of Ms. Dorais was impressed with a constructive trust. After Mr. Dorais died, a receiver was appointed for many of his companies. In May 2011, the receiver commenced an action alleging fraudulent preferences with respect to the dealings in the insurance policies. In December 2011 the creditors and receiver s actions were stayed during case management, and the receiver was directed to assign the estate and the companies into bankruptcy. The Appellant Trustee, BDO Canada Limited, was appointed in January The Respondents argued they were never served with the receiver s statement of claim, and there were potential limitation problems with respect to any new action by the trustee in bankruptcy. In early 2014, the creditors assigned their actions to the Appellant, who proposed to prosecute them on behalf of the bankrupt estates. The Appellant applied to lift the stays imposed during case management. The Respondents took the position that a trustee in bankruptcy has no capacity to prosecute claims of individual creditors. The case management judge agreed and refused to lift the stays. The Court allowed the appeal in part. It found that that the case law establishes that a trustee may pursue claims on behalf of the bankrupt estate, but may not pursue the claims of individual creditors. The Appellant argued that claims for fraudulent preferences are advanced on behalf of all the creditors, not just any individual plaintiff creditor ABCA

19 The Court considered the claims of the groups of creditors who had assigned their actions to the Appellant, and found that to the extent those claims were personal alleging misrepresentations to themselves personally, investments they made in reliance on those misrepresentations, and resulting personal loss the Appellant could not pursue the claims on their behalf. The Appellant conceded this point. Despite this, the Appellant argued that the collective components of the creditors claims, such as the assignment of one of the insurance policies to Mr. Dewar at a time when the assignor was bankrupt, and the use of the bankrupt companies funds to purchase property for Ms. Dorais and life insurance accruing to her benefit, benefit all the creditors and not just the individual named plaintiffs. The Appellant argued that the case management judge should have lifted the stay with respect to these collective components of the creditors actions. The Court considered that should those claims succeed, the assets would revert back to the original owner, not to the individual plaintiffs seeking the declaration. None of the creditors would receive any preferential payment or treatment. Furthermore, if the Respondents held property in trust for one or more of the bankrupt companies, the Appellant had a duty to attempt to recover it. The Court went on to consider whether the stay could be lifted only with respect to the collective components of the creditors claims. The Court found that it could be, and that the stay should be lifted to the extent of permitting the Appellant to pursue the fraudulent preference and constructive trust claims. PROOF OF CLAIM CREDITOR APPEAL DENIED FOR FAILURE TO FILE WITHIN 30 DAYS OF SERVICE OF APPEAL FROM DISALLOWANCE In Lomas, Re (2015) 26 the Ontario Superior Court of Justice reversed the decision of the Master and held that he trustee s determination of the creditor s proof of claim was final and conclusive. The Court reaffirmed that a creditor s appeal from a disallowance of a proof of claim must be both served and filed with the court within 30 days of service of disallowance. In the earlier case of Lomas, Re ( ) which was decided by Master Jean, the trustee in bankruptcy had disallowed a creditor's claim against the bankrupt for lack of documentary support for the claim. The creditor later provided documentary information in the form of cheques. The creditor began an appeal of the trustee s disallowance. A hearing was held regarding the timeliness of the creditor s appeal, and Master Jean determined that the appeal was not out of time. The Creditor had technically complied with the requirements of the BIA in that he had filed the motion for appeal within 30 days and thereafter served notice of the motion and affidavit on the trustee, albeit short served for the initial return date of the motion. The CarswellOnt 6413, 253 ACWS (3d) CarswellOnt 19020, 252 ACWS (3d)