Society of Composers, Authors and Music Publishers of Canada v. Armitage

Society of Composers, Authors and Music Publishers of Canada v. Armitage [Indexed as: Society of Composers, Authors and Music Publishers of Canada v. Armitage]

50 O.R. (3d) 688

[2000] O.J. No. 3993

Docket No. C33597

Court of Appeal for Ontario

Charron, MacPherson and Sharpe JJ.A.

October 27, 2000

Bankruptcy -- Action against trustee administering proposal for damages for negligence -- Leave of court required to bring action against trustee with respect to any action taken pursuant to Bankruptcy and Insolvency Act -- Test for granting leave -- Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 215.

On a motion under s. 215 of the Bankruptcy and Insolvency Act for leave to bring an action against a trustee with respect to any action taken by the trustee pursuant to the Act, the motions judge exceeds his or her jurisdiction by making a final determination of the merits of the proposed action. The evidence required to support an order for leave must be sufficient to establish that there is a factual basis for the claim and that it discloses a cause of action. The evidence, however, does not have to be sufficient to enable the motions judge to make a final assessment of the merits of the proposed claim.

APPEAL with leave from the dismissal of an application under s. 215 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B- 3.

Cases referred to Bruncor Leasing Inc. v. Zutphen Bros. Construction Ltd (1994), 1994 NSCA 122, 26 C.B.R. (3d) 258, 116 D.L.R. (4th) 692, 132 N.S.R. (2d) 337, 376 A.P.R. 337 (C.A.), leave to appeal to S.C.C. refused (1995), 29 C.B.R. (3d) 154, 139 N.S.R. (2d) 320n, 185 N.R. 159n; Holley (Re) (1986), 1986 CanLII 2586 (ON CA), 54 O.R. (2d) 225, 26 D.L.R. (4th) 230, 14 O.A.C. 65, 59 C.B.R. (N.S.) 17, 12 C.C.E.L. 161 (C.A.); Mancini (Trustee of) v. Falconi (1993), 61 O.A.C. 332 (C.A.) Statutes referred to Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, ss. 37, 60(2), 193(e), 215 Authorities referred to Houlden and Morawetz, The 2000 Annotated Bankruptcy and Insolvency Act (Toronto: Carswell, 1999)

Albert G. Formosa and Krista R. Chaytor, for appellant. Steven L. Graff, for respondent.

The judgment of the court was delivered by

[1] CHARRON J.A.: -- This is an appeal with leave under s. 193(e) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B- 3 ("BIA"). The Society of Composers, Authors and Music Publishers of Canada ("SOCAN") appeals from the dismissal of its application under s. 215 of the BIA to commence an action against Norman E. Armitage (the "trustee"), a trustee responsible for administering a court-approved bankruptcy proposal made by Coultis Broadcasting Limited ("Coultis") under the BIA. This appeal turns on whether the motions court judge properly applied the threshold test for granting leave under s. 215. A subsidiary issue is raised on the appropriateness of bringing a s. 215 application for leave to commence an action rather than a s. 37 appeal to the Bankruptcy Court against an act or decision made by the trustee.

A. The Section 215 Leave Application

1. The threshold test under s. 215

[2] Section 215 of the BIA provides that no action lies against a trustee with respect to any action taken pursuant to the BIA except with leave of the court. It is common ground between the parties that the evidence required to support an order under s. 215 must be sufficient to establish that there is a factual basis for the proposed claim and that the proposed claim discloses a cause of action. However, the evidence does not have to be sufficient to enable the motions judge to make a final assessment of the merits of the proposed claim. The sufficiency of the evidence must be measured in the context of the purpose of s. 215, which is to prevent the trustee from having to respond to actions which are frivolous or vexatious or which do not disclose a cause of action: see Mancini (Trustee of) v. Falconi (1993), 61 O.A.C. 332 at p. 337 (C.A.).

2. The evidence relied upon by SOCAN

[3] SOCAN is both an ordinary and a post-proposal creditor of Coultis under the terms of the proposal. Its proposed action against the trustee is for negligence and for breach of fiduciary and other duties arising from the performance of the trustee's obligations under the terms of the proposal and the provisions of the BIA. SOCAN's proposed action is essentially based on an allegation that the trustee failed to receive payments for post-proposal creditors and to remit them to these creditors in breach of his duty to do so. SOCAN alleges in the affidavit evidence that certain payments were made to ordinary creditors by the debtor and by the trustee contrary to the obligation to make priority payment to post-proposal creditors.

[4] The crux of SOCAN's contention is that the trustee had an obligation under the terms of the proposal to receive those moneys from the debtor and to make those payments to the post- proposal creditors in priority to the claims of ordinary creditors. In support of this contention, SOCAN relies mainly on the interplay of paras. 6 and 9 of the proposal:

6. THAT claims arising in respect of goods supplied, services rendered or other consideration given after the date of filing of the Notice of Intention to Make a Proposal shall be paid in full in priority to the claims of ordinary creditors.

7. THAT Norman Armitage, of the City of Niagara Falls, in the Province of Ontario, shall be the Trustee under this Proposal and the moneys payable under this Proposal shall be paid to the Trustee who shall make distribution referred to in paragraphs 2 to 6 of this Proposal.

(Emphasis added)

[5] The terms referred to in para. 9 provided as follows. Paragraphs 2 to 5 provided for priority payment of preferred claims, the fees and expenses of the trustee, amounts payable under the Income Tax Act and certain amounts payable to employees. Paragraph 6 deals with post-proposal creditors which include SOCAN. Paragraph 7 then provides for a scheme of periodic payments to the ordinary creditors, "being those persons with claims not referred to in paragraphs 2 to 6 of this Proposal." SOCAN therefore contends that it is clear from these terms that the priority payments to post-proposal creditors under para. 6 were included in the trustee's obligation to distribute moneys pursuant to para. 9.

[6] SOCAN further relies on s. 60(2) of the BIA, which provides that "[a]ll monies payable under the proposal shall be paid to the trustee and, after payment of all proper fees and expenses mentioned in subsection (1), shall be distributed by him to the creditors."

3. The trustee's position

[7] The trustee's position is that SOCAN's real quarrel is with the debtor and that the trustee had no obligation to receive moneys from the debtor for payment to the post-proposal creditors or to monitor the debtor's business to ensure that post-proposal creditors were being paid in accordance with the terms of the proposal. He states that his obligations under para. 6 ended at the time the proposal was approved by the court and that his sole ongoing duty related to the payments made to the ordinary creditors under para. 7.

4. The motions court judge's decision

[8] The motions judge agreed with the trustee's position. In her reasons for decision, she stated that, if the trustee had an ongoing duty as contended by SOCAN, "then the facts as set out by SOCAN might well support a claim for negligence or other breach of that duty." She held, however, that the terms of the proposal and the provisions of s. 60(2) of the BIA both supported the trustee's position that his ongoing obligations extended only to the payment of moneys under para. 7 to the ordinary creditors. She therefore concluded that "in the absence of clear duties on his part to perform the functions SOCAN suggests he should have," the facts did not disclose a reasonable cause of action and, consequently, she dismissed the application.

5. The argument on appeal

[9] SOCAN submits that the motions court judge should have granted the application based on her finding that the affidavit evidence filed in support of the application could "well support" an action in negligence and breach of fiduciary duty. It is argued that her subsequent finding, that the trustee did not owe a duty to SOCAN as contended, was a question which could not be finally determined on this threshold application. The decision was based, first, on an interpretation of the proposal, the terms of which could reasonably support SOCAN's position, and, second, on an interpretation of relevant provisions of the BIA on the scope of a trustee's personal liability, a matter that is not fully settled at law. In these circumstances, SOCAN submits that the motions court judge, in making what was in essence a final determination of the merits of the proposed action, exceeded her jurisdiction on this s. 215 application.

[10] Counsel for the trustee did not make any serious attack on the motions court judge's observation that, if the trustee had duties as contended by SOCAN, "then the facts as set out by SOCAN might well support a claim for negligence or other breach of that duty." His submissions on the sufficiency of the evidentiary foundation were essentially directed at the scope of a trustee's duties rather than on the specific factual allegations related to the breach. Counsel for the trustee made additional submissions on the quantum of damages resulting from the alleged breach in an effort to show that they would be minimal, but I did not understand his position to be that the s. 215 application should be dismissed for lack of an evidentiary foundation with respect to damages. Hence the question raised by this appeal, whether the test under s. 215 was met, really turns on the appropriateness of the motions court judge's finding on a threshold application that the trustee did not have the obligations conten ded by SOCAN.

6. Conclusion

[11] I agree with SOCAN's position that the motions court judge, in disposing of this leave application, made final determinations on the merits of the proposed claim and, in doing so, she exceeded her jurisdiction. On its face, the proposal supported SOCAN's position that the payments to the post-proposal creditors under para. 6 would form part of the moneys received by the trustee and distributed by him pursuant to the direction contained in para. 9. There is no question that a binding contract results from the acceptance of a debtor's proposal by the creditors and its approval by the court. Counsel for the trustee submits, however, that the trustee is not a party to this contract. While counsel for the trustee is correct in this assertion, it does not follow that the trustee is at liberty to disregard the terms of the proposal. The trustee is bound, rather, to act so as to give effect to its terms: see, for example, Bruncor Leasing Inc. v. Zutphen Bros. Construction Ltd. (1994), 1994 NSCA 122, 26 C.B.R. (3d) 258, 116 D.L.R. (4th) 692 (N.S.C.A.). Further, it is not clear that s. 60(2) provides support solely for the trustee's position that his ongoing obligations extended only to the payment of moneys under para. 7 to the ordinary creditors as found by the motions court judge.

[12] I therefore find that, on the motions court judge's own assessment of the sufficiency of the factual record, leave should have been granted under s. 215.

B. The Failure to Bring a Section 37 Application

[13] Section 37 of the BIA provides as follows:

37. Where the bankrupt or any of the creditors or any other person is aggrieved by any act or decision of the trustee, he may apply to the court and the court may confirm, reverse or modify the act or decision complained of and make such order in the premises as it thinks just.

[14] The trustee submits that, regardless of the sufficiency of the record, leave under s. 215 should not have been granted in this case because of SOCAN's failure to proceed under s. 37. He submits that where the allegations relate entirely to the acts of a trustee within the BIA, it is generally inappropriate to grant leave under s. 215 to commence an action in the regular courts. Rather, the appropriate route is to proceed under s. 37 of the BIA and apply for a trial in the Bankruptcy Court. He submits that leave should only be granted under s. 215 where the applicant demonstrates that the issue can be dealt with more advantageously in the ordinary courts without disadvantage to the administration of the estate. In support of his argument, counsel for the trustee relies generally on some of the case law annotated under the relevant provisions of the BIA in Houlden and Morawetz, The 2000 Annotated Bankruptcy and Insolvency Act (Toronto: Carswell, 1999).

[15] In order to give effect to the trustee's submission on this point, this court would essentially have to find that s. 215 and s. 37 are mutually exclusive. It is not at all clear that the case law referred to by counsel would support such a finding. Furthermore, it is not clear that SOCAN's proposed claim falls entirely within the scope of a s. 37 proceeding. In particular, I note that SOCAN claims damages. Although the trustee's position appears to be otherwise on appeal, it is apparent from the record that counsel for the parties before the motions judge were in agreement that s. 215 was the appropriate procedure where the claim was one for damages. I note further that some of the allegations do not necessarily relate to "an act or a decision of the trustee" but rather to inaction on his part. It has been held that s. 37 has no application in such circumstances: see, e.g., Re Holley (1986), 1986 CanLII 2586 (ON CA), 54 O.R. (2d) 225, 26 D.L.R. (4th) 230 (C.A.). In any event, and more importantly, it would be unfair to dispose of this appeal on this subsidiary issue when it is apparent from the record that counsel before the motions court judge were in agreement that the application turned on the sufficiency of the evidentiary foundation for the claim. For these reasons, I would not give effect to the trustee's submission on this point.

C. Disposition

[16] I would therefore allow the appeal, set aside the judgment below and substitute an order under s. 215 of the BIA granting SOCAN leave to commence its action against the trustee.

Order accordingly.