SUPREME COURT OF NOVA SCOTIA IN BANKRUPTYCY AND INSOLVENCY Citation: Melanson (Re), 2018 NSSC 279 Date: 20181102 Docket: Hfx No. 470416 (B-41611) Registry: Halifax In the Matter of the Proposal of Barclay Elmer Melanson Decision on Reopening Approval Judge: Heard: Counsel: The Honourable Justice Gerald R.P. Moir June 6, 2018, in Halifax, Nova Scotia Tim Hill Q.C., for B2B Bank Bruce Clarke Q.C., for Alan Marshall Associates Inc. as Trustee under the Proposal
Page 1 Moir, J. : [1] B2B Bank, a creditor of Barclay Melanson, moves for an order under s. 187(5) of the Bankruptcy and Insolvency Act amending a proposal made by Mr. Melanson, accepted by his creditors including B2B Bank, and approved by the court. The bank moves alternatively for an order under s. 63 annulling the proposal. [2] At the heart of these motions is the fact that one clause of the proposal releases Mr. Melanson s wife, Jennifer Melanson, who did not make a proposal of her own. She was co-liable for the debts owing to B2B Bank, about $237,000. [3] Mr. Melanson made a proposal in November, 2017. B2B Bank hired FCT Default Solutions of London, Ontario to represent it in the proposal. That same month, the bank sued Ms. Melanson through solicitor Michael Cassone, also of London. Apparently, the efforts of the collection agency were not coordinated with those of the solicitor. The representative at the agency was not made aware of the suit until after the proposal had been accepted and approved. [4] B2B voted against the proposal, but Mr. Melanson quickly amended it. B2B voted in favour of the amended proposal. The votes were cast in writing by a representative of the collection agency as proxy. She swears that she did not notice clause 7(i): As a condition of this Proposal, the joint liability of Jennifer Jo-Anne Melanson, spouse of the debtor, for the liability to the B2B Bank will be included and the
Page 2 60 monthly payments of $600 pursuant to the terms of this Proposal will be deemed to be payment in full and final satisfaction of the joint liability of Jennifer Jo-Anne Melanson. As I said, the agency was not involved in the collection against Ms. Melanson. [5] The trustee under the proposal was Alan Marshall and Associates. Ms. Francyne Myers spoke for it when I heard the motion for approval early in January of this year. She brought the unusual clause to my attention. Here is our exchange: Yes, Mr. Registrar, My Lord, Mr. Registrar. My Lord, Judge, Sir, but I am not the Registrar. No, no, I didn t think. There is one clause I would like to bring to your attention. We had added it, because it is a bit of difference in this, in this Proposal. Yeah. Than the regular clauses apart from the offers and what have you. Yes. And that is on the last page, page 7(h)(i). This is in the amendment, isn t it? Yes. This clause was originally in the original Proposal as well. Yeah. The amendment just gave the creditors a higher distribution. Okay. We switched it from $500 to $600 a month. Okay. That was the only change in the amendment. The original Proposal as well had this clause in paragraph (i) the conditions proposal including as well the joint liability. Mr. Melanson s wife, Jennifer, is also signed on the it is the B2B Bank debt is what it is which was a debt related to investments which went sour, etc.,
Page 3 etc. and that is basically is the driving force of the Proposal frankly. Right. Now Mrs. Melanson is a Real Estate Agent and did not want to risk a bankruptcy if B2B did not accept this Proposal. So we filed it on behalf of Mr. Melanson with this clause in. We made the amendments, sent it out, creditors looked at it again, got the approval, the proper votes on the Proposal, but then B2B filed an action against Mrs. Melanson, so they (a) obviously didn t I guess read the Proposal frankly or didn t think it would be binding on them any way and have started an action against Mrs. Melanson. So that s where we are left with that, so I wanted to definitely bring that to your attention. The feeling in the office frankly is that we probably wouldn t be able to enforce that clause and then we will have to do something for Mrs. Melanson. I am not sure that you wouldn t. If I thought you wouldn t be able to, then I wouldn t grant the Order. That s why I definitely wanted to bring this to your attention. No, I quite agree with that being done. But it seems to me did B2B vote on the Proposal? They approved it. We needed their vote to get through and I couldn t understand why. Don t you have a contractual relationship then between Indeed. Mrs. Melanson and B2B and any other creditor who voted in favour? Well, the other thing is That would be my suggestion. You might want to note it for the file. That if people say that clause is not effective - it is not effective under the Bankruptcy and Insolvency Act, but it may well be effective under the laws of contract. Okay. Okay. I guess what we will have to do is cross that bridge when we get there. We ll probably never get to that bridge. I hope not.
Page 4 But I do want to put it on record that I regard it as having created a contractual relationship with Ms. Melanson. All right. Thank you, My Lord. Okay, with that observation, and noting that all people need to be served, have been served, and that there is nobody present to oppose it, I am satisfied that the statutory conditions have been proven and the Order is granted. Thank you, My Lord. [6] As this exchange shows, I approved the proposal on the basis that B2B had been given notice of the motion and clause 7(i) may well be effective under the laws of contract and it created a contractual relationship with Ms. Melanson. And, I would not have granted the order if I thought clause 7(i) was unenforceable. [7] Quite persuasively, B2B makes an argument that my decision of last January was wrong. [8] First, the bank relies on the third party beneficiary rule. Even if we ignore the collection agency s mistake (and, it is argued, its lack of authority) the contract has to be between Mr. Melanson and his creditors. Ms. Melanson must be a third party. [9] The bank refers me to Brown v. Belleville 2013 ONCA 148 and its discussion of the principled exception to the rule at paras. 98 to 100. The principles were worked out by London Drugs Ltd. v. Kuehne & Nagel
International Ltd., [1992] 3 S.C.R. 299 and Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., [1999] 3 S.C.R. 108. Page 5 [10] For the bank, Mr. Hill helpfully summarizes the principles as follows: 1. The third party must show that the contracting parties intended to extend the benefit of the contract to the third party; and 2. The third party must show that the benefit to the third party comes within the general scope of the contract in question. The first of these is a threshold, the second the main proposition if the threshold is crossed. [11] The trustee responds the release of Jennifer Melanson may well be binding as a contract between the parties. As will be seen, I am not going to revisit my decision. I said clause 7(i) may be effective under the laws of contract and it created a contractual relationship between the bank and Ms. Melanson. I did not say what areas of contract law had application. Implied contract and estoppel come to mind, but it s too late for me to say. [12] The second argument put forward by B2B Bank has to do with s. 62(3) of the Bankruptcy and Insolvency Act. It provides that the acceptance of a proposal does not release a person who is not released under the Act by discharge of the debtor. A person jointly bound is not released by a discharge: s. 179.
Page 6 [13] There are conflicting decisions on the question of whether a third party release in a proposal can be effective. An example on the negative is Cosmic Adventures Halifax Inc. (Re), [1999] 13 C.B.R. (4 th ) 22 (N.S. Registrar Hill). Opposite is Kitchener Frame Ltd. (Re) 2012 ONSC 234 (Morawetz, J.). Respected jurists, well known in the insolvency field. [14] My short reasons of last January sided with the negative: [the release] is not effective under the Bankruptcy and Insolvency Act, but it may well be effective under the laws of contract. [15] To the extent that the bank relies on the collection agency s mistake, even a supposed lack of authority, the trustee relies on ostensible authority. It refers to Rockland Industries, Inc. v. Amerada Minerals Corp. of Canada Ltd., [1980] 2 S.C.R. 2 at para. 41. I find the agency had ostensible authority. The bank was bound by the agency s proxy vote. And the bank received notice of the motion for approval by virtue of the notice to its collection agency. [16] The main thrust of the Trustee s response on both the main motion and the alternate motion is that the powers to amend or annul a proposal are inapplicable. The bank s remedy is an appeal.
Page 7 [17] To some extent, subsection 187(5) overrides the principle of finality, functus officio, in bankruptcy proceedings: Every court may review, rescind or vary any order made by it under its bankruptcy jurisdiction. Mr. Clarke submits for the trustee: The powers given to the Court under BIA section 187(5) are not intended to relieve a creditor from a poor decision made in the past. The provision is intended to allow the court to rescind a proposal where there is a change in circumstances which makes the proposal unworkable in its current form. [18] The reasons of Justice LeBel writing for the Court in Schreyer v. Schreyer 2011 SCC 35 include a comment about s. 187(5). That case decided the effects of bankruptcy on a matrimonial property claim in an equalization jurisdiction. [19] When commenting on the limited remedies under the Bankruptcy and Insolvency Act available to the claiming spouse in equalization jurisdictions, Justice LeBel wrote at para. 36: It should be noted that s. 187(5) BIA is a residual section that applies to all orders made by the bankruptcy court. As such, it serves to complement the more specific provisions of the BIA, not to create an exception to them. This gives us some indication of the interpretation of the subsection. [20] Justice Schwann reviewed authorities on s. 187(5) extensively in Vince v. Cinezeta Internationale Filmproduktionsgesellschaft Mhb & Co. Kg 2013 SKQB 423. She provided summaries of the various holdings at para. 26 and 27. She
Page 8 expressed what I regard as the central point of the jurisprudence on the subsection this way at para. 32: The rescission remedy contemplated by s. 187(5) has been recognized as conceptually different from other remedies available under the BIA. Unlike an appeal (ss. 192 and 193) which seek[s] to reverse the decision-maker for reversible error, or an annulment (s. 181) to set aside a receiving order or bankruptcy assignment which ought not to have been made, s. 187(5) is designed to vary or rescind orders in circumstances where new evidence has come to light subsequent to the initial order. It permits courts to deal with an ongoing bankruptcy by adjusting to a changed circumstance. [21] The conception of s. 187(5) as a discretion for use in an ongoing bankruptcy (or proposal) proceeding to adjust previous orders only in changed circumstances is in line with the remark in Schreyer. By distinguishing changed circumstances from appeals and annulments, this conception serves the principle of internal coherence, particularly To say that each component of a statute must be considered in the light of the means that it is necessary to refer to other provisions of the statute in question and avoid interpretations which would render these latter ineffective or useless. Coté, Beaulac, and Devinat The Interpretation of Legislation in Canada 4 th ed. (Carswell, Toronto, 2011) at p. 328. [22] The bank has shown no changed circumstance. It voted for the proposal when the third party release was plain for the bank to see, it received notice of the motion for approval, it let the motion go without contest. Nothing has changed since last January when I approved the proposal. Whether I was right or wrong is for an appeal, not the exercise of the discretion under s. 187(5).
Page 9 [23] The Bankruptcy and Insolvency Act provides a discretion in s. 63(1) for the court to annul a proposal. Subsection 63(6) prescribes the consequence of an annulment. The debtor becomes bankrupt. [24] The discretion to annul a proposal is designed to cover the usual ground for setting aside an order in ordinary proceedings and to extend it in light of the nature of a proposal. The usual ground by which the court may annul the proposal under s. 63(1) is the approval of the court was obtained by fraud. [25] Other grounds are necessitated by the ongoing nature of a proposal. The legislative scheme would not work if there was no remedy for a default under a proposal. Section 62.1 recognizes that default can be waived by the inspectors or creditors or be remedied by the debtor. [26] In a consumer proposal, default may lead to an automatic annulment under s. 66.31. Otherwise, the remedy for a default that is not waived, that is not remedied, and that is reported by the trustee is in s. 63(1) where this ground is provided: default is made in the performance of any provision in a proposal. [27] Another ground also results from the ongoing nature of a proposal. Because of that, unforeseen delay is a possibility. So, s. 63(1) includes it appears to the court that the proposal cannot continue without undue delay.
Page 10 [28] Finally, there is the ground in question on the present motion. As will be seen, it resembles the usual ground in one way and the others in another way. It can be based on circumstances that existed when the proposal was approved or on circumstances that arise afterward in the ongoing course that is a proposal. [29] The ground relied on by B2B Bank to annul Mr. Melanson s proposal is it appears to the court that the proposal cannot continue without injustice. [30] In Garritty (Re) 2006 ABQB 545, Justice Topolniski had to decide whether the continuing injustice ground in s. 63(1) applied to an injustice that had been apparent at the time two proposals were accepted and approved. She interpreted s. 63(1) to mean that annulment may be available where an injustice created before the Court approved a proposal continues after its approval (para. 20). I agree. The statute does not restrict itself to an injustice that arises after approval, such as an injustice arising from events unforeseen when the proposal was made or approved. [31] She says at para. 22, To discharge its burden, Kingsway must establish that the proceedings leading up to the Proposal Orders were unfair and that to allow the Proposals to stand would continue that unfairness. Procedural unfairness was the basis in Garritty. Other kinds of continuing injustice may found an annulment in other cases.
Page 11 [32] Justice Topolniski discussed annulment generally at paras. 18 to 29, then at para. 30 she listed six factors which I consider to be relevant to the present application : 1. timeliness of the application; 2. debtor misconduct; 3. trustee misconduct; 4. prejudice; 5. whether, in the absence of the procedural flaws, the outcome of the application to approve the proposal would have been different; and 6. benefits to the creditors and the creditors wishes. [33] Houlden, Morawetz, and Sarra The 2015-2016 Annotated Bankruptcy and Insolvency Act (Carswell, Toronto) at p. 292 refer to these six factors as relevant to the annulment application. B2B Bank s submission follows these factors. [34] I do not think Justice Topolniski proposed factors covering all annulment motions made on the ground of continuing injustice. Rather, they were relevant to the present application. In my view, justice is too deep to be confined in all cases to a set of factors. Rather, Justice Topolniski articulated the subjects that were relevant to the question of continuing injustice on the facts of her case. [35] B2B Bank submits the continuing injustice in Mr. Melanson s proposal consists in the provision for an impermissible release of a third party. In my assessment, B2B Bank suffers no injustice.
[36] First, it is not clear that the release is impermissible. See paras. 8 to 15. Page 12 [37] Secondly, B2B Bank allowed what it now claims to have been impermissible. It had the proposal for study, it caused an amended proposal that improved its recovery to be made, it voted in favour of the amended proposal, it had notice of the motion for approval, and it let the motion be heard without contest. [38] The affidavit evidence provided by B2B Bank attempts to distance it from its agents. It only acts through agents. So, when the agent failed to read or understand a term in the proposal, that was the bank s failure. When the collection agent collecting from Mr. Melanson was out of touch with the lawyer suing Ms. Melanson, it was a result of B2B Bank s failure to coordinate its agents or act through a single agent to enforce related liabilities. [39] It would be unjust to annul the proposal allowed by B2B Bank on the ground that B2B Bank now understands what it voted for. [40] I will dismiss the motion for an amendment to Mr. Melanson s proposal and the alternative motion for an annulment. If necessary, counsel may deliver written submissions on costs.