COURT OF APPEAL FOR ONTARIO
RE: IN THE MATTER OF the Bankruptcy of DONALD MALCOLM BEYNON, Technical Support Consultant of the City of Brampton, in the Regional Municipality of Peel, in the Province of Ontario
BEFORE: DOHERTY, LASKIN and JURIANSZ JJ.A.
COUNSEL: Robert G. Tanner for D. Baker Kyla E.M. Mahar for the Estate of D.M. Beynon Thomas C. Hendy for Joyce Beynon
HEARD: October 18, 2004
On appeal from the order of Justice Spence dated September 19, 2003.
E N D O R S E M E N T
Facts
1The unusual and somewhat complex facts giving rise to these proceedings are fully described in the reasons of the motion judge found at [2003] O.J. No. 3674. For the purposes of the appeal, the facts may be summarized as follows.
2Mr. Donald Beynon, the bankrupt, and his first wife Joyce Beynon were divorced by a judgment granted in August 1998. The divorce proceedings had commenced in 1991.
3Mr. Beynon and Ms. Deborah Baker began living together in 1992. In November 1994, they moved into a house at 47 Mancroft Crescent, Brampton, Ontario (the "property"). Title was registered to Deborah Baker as a tenant in common holding a 99 per cent interest and to Mr. Beynon as a tenant in common holding a 1 per cent interest. Mr. Beynon and Ms. Baker lived in the property with their two children until Mr. Beynon's death in September 2002.
4The divorce judgment granted in August 1998 awarded Ms. Beynon some $106,000.00 plus costs in the amount of about $51,000.00. A writ of seizure and sale was filed with the Sheriff of the judicial district in which the property was located. Nothing was paid on this judgment prior to Mr. Beynon's bankruptcy in 2002.
5After Ms. Beynon obtained her divorce judgment and filed the writ of seizure and sale, she commenced an action for a declaration that Mr. Beynon was the sole owner of the home at 47 Mancroft Crescent. In August 2001, Kruzick J. held that the purported transfer of 99 per cent interest in the property to Ms. Baker was a fraudulent conveyance. He held that Mr. Beynon was the sole beneficial owner of the property. Kruzick J. also held, however, that his order was "without prejudice to any claims that Ms. Baker may have against Mr. Beynon".
6The relationship between Ms. Baker and Mr. Beynon had deteriorated by January 2002 and she brought an action to enforce the terms of a settlement agreement. Mr. Beynon did not defend the action. In March 2002, Spiegel J. gave judgment awarding Ms. Baker $320,000.00 plus a declaration that "50 per cent of the interest of Donald Beynon in the property is held in trust for Deborah Baker". Ms. Beynon had no notice of these proceedings.
7As of the date of the judgment creating the trust (March 11, 2002), the property was subject to the writ of seizure and sale. Ms. Beynon had judgments totalling about $190,000.00. Of this amount, about $51,000.00 represented the costs awarded to her in the proceedings resulting in the writ of seizure and sale.
8Mr. Beynon filed an assignment in bankruptcy in May 2002. Paddon and Yorke Inc. were appointed trustees in bankruptcy.
9Both Ms. Baker and Ms. Beynon filed claims in the bankruptcy. Relying on the judgment of Spiegel J., Ms. Baker made an unsecured claim in the amount of $326,000.00. She also claimed a 50 per cent interest in the property. Ms. Beynon, relying on the judgment of Kruzick J., made an unsecured claim in the amount of some $220,000.00.
10Ms. Beynon took the position from the outset that the trustee should disallow any claim made by Ms. Baker and challenge Ms. Baker's claim to any interest in the property. In September 2002, Ms. Baker's counsel made an offer to the trustee to compromise Ms. Baker's claims. After some negotiation between counsel and the trustee, a compromise was reached. This compromise was put to the inspectors in the bankruptcy and approved with the trustee casting the deciding vote.
11Essentially, the compromise called for Baker to forego her $320,000.00 claim in its entirety. In return, the trustee agreed to release any claim against Baker in respect of the property and to acknowledge that the property was held in equal shares by Baker and the trustee. The proposed compromise also contained the following term:
The parties acknowledge and agree that if a final order of court is made which prohibits or prevents the trustee from carrying out the provisions of this settlement agreement, then the entire settlement agreement shall be void and of no force and effect.
12Ms. Beynon opposed the settlement. The trustee eventually brought a motion seeking the "advice and direction" of the court. The trustee asked that the court direct it to complete the settlement in accordance with its terms. Ms. Beynon brought two motions at the same time. The first sought an order expunging or reducing the proof of claim made by Ms. Baker in the bankruptcy. The second motion sought an order permitting Ms. Beynon to commence proceedings in her own name and at her own expense aimed at setting the judgment of Spiegel J. aside. This second motion was dismissed and no appeal is taken from that dismissal.
The Reasons of the Motion Judge
13In his careful reasons, the motion judge first addressed the trustee's motion. He recognized that a court will interfere with the settlement of a claim made by a trustee only if the opposing party demonstrates a lack of bona fides or that the settlement made was unreasonable. Counsel for Ms. Beynon made several arguments in support of his contention that the settlement was unreasonable. The motion judge addressed and rejected each of those arguments. He did not, however, approve the settlement. Instead, he held that he should first consider Ms. Beynon's motion to reduce the claim made by Ms. Baker in the bankruptcy. In his view, the outcome of that motion could bear on the reasonableness of the settlement made by the trustee.
14The motion judge went on to hold that Ms. Baker's interest in the property obtained as a result of the Spiegel J. judgment was subject to the writ of seizure and sale obtained by Ms. Beynon prior to that judgment. Although Mr. Beynon's assignment in bankruptcy in 2002 took precedence over that attachment, s. 70(2) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the "Act") did protect a solicitor's costs incurred in obtaining the judgment and writ. Section 70(2) provides:
One solicitor's bill of costs, including sheriff's fees and land registration fees, shall be payable to the creditor who has first … lodged with the sheriff an attachment, execution or other process against the property of the bankrupt.
15Having held that the claim for costs survived the bankruptcy of Mr. Beynon, the motion judge went on to hold that pursuant to s. 136(1)(g) of the Act, the fees and costs described in s. 70(2) had priority over payment to unsecured creditors. The motion judge then said:
There is prima facie merit to the position that the claim (Ms. Baker's claim) either in its original amount or as proposed to be compromised should not be given effect to the extent that that would preclude payment to Mrs. Beynon under s. 136.
16As we read the reasons, the motion judge effectively held that the settlement between the trustee and Ms. Baker could be reasonable only if it left undisturbed the priority given to Ms. Beynon's solicitor's costs by s. 136(1)(g) of the Act.
17The motion judge proceeded to fashion an order which in his view gave effect to the spirit of the compromise reached between the trustee and Ms. Baker while at the same time giving effect to the priority due Ms. Beynon's claim. The two relevant paragraphs of the order made by the motion judge are set out below:
THIS COURT ORDERS that the Trustee is authorized and directed to complete the Settlement after reducing, if necessary, the amount allowed for Ms. Baker's Proof of Claim to the extent necessary to pay Ms. Beynon the amount she is entitled to pursuant to section 70(2) of the BIA as a preferred creditor pursuant to section 136(1)(g) of the BIA as set out in paragraph 4 herein.
THIS COURT ORDERS that the 50% interest of Ms. Baker in the Property be subject to reduction by the amount by which (i) the amounts paid to Mrs. Beynon on account of her priority claim out of the sale by the Trustee of its 50% interest and out of any other property of the Estate exigible under section 70(2) of the BIA are less than (ii) the amount necessary to pay Mrs. Beynon her priority claim under section 136(1)(g) of the BIA, with the result that the amount of the reduction (if any) is to be realizable out of the 50% interest of Ms. Baker in the Property.
The Errors
18With respect, we think the motion judge fell into three errors. First, he could not amend the settlement brought to him by the trustee and Ms. Baker and then impose the amended settlement on those parties. The proposed settlement reflected the compromise reached between the trustee and Ms. Baker. Both the trustee and Ms. Baker had made concessions in exchange for the certainty brought about by settlement. The motion judge's only authority was to consider the reasonableness of the settlement. If he concluded that the settlement was unreasonable, he should have given advice to that effect and it would not have proceeded. It was not for the motion judge to fashion what he thought was a reasonable settlement and impose that settlement on the parties. Nor does s. 135(5) of the Act, the basis for Ms. Beynon's motion, provide any support for the order made by the motion judge. The order made by the motion judge does not in any way reduce the proof of claim filed by Ms. Baker, but instead compromises it in a manner not agreed to by Ms. Baker.
19The second error made by the motion judge relates to the first. He took the position that "fairness" required that the priority scheme described in s. 136 of the Act should be preserved under any settlement or compromise made by the trustee and a creditor. In our view, the settlement of a particular claim by the trustee may well affect other creditors in a negative way. This negative effect does not mean that the compromise is unreasonable and, therefore, should be set aside by a court. The effect of the proposed settlement on other claims is one factor to be considered in determining whether the trustee has acted reasonably. The trustee will have to address a wide variety of considerations before deciding whether to accept a settlement of a particular claim.
20The third error relates to the priority that the order made by the motion judge gave Ms. Beynon's s. 70(2) claim. Under the terms of the order, that claim has priority over other claims described in s. 136(1) of the Act, which according to the Act should have priority over Ms. Beynon's claim. In addition, the motion judge gave Ms. Beynon's claim priority in respect of a specific asset of the bankrupt's estate (the proceeds of the sale of the property). Priorities are determined in relation to the proceeds realized from the entirety of the property of the bankrupt.
The Appropriate Order
21The motion judge should have determined whether the settlement was reasonable in all of the circumstances. Those circumstances included the possible negative effect of the settlement on part of Ms. Beynon's claim.
22We do not think that the settlement was unreasonable. As observed by the motion judge, Ms. Baker significantly discounted her claim for the purpose of the compromise. This claim was based on a judgment. No doubt, the trustee saw a very real prospect of lengthy litigation over property that was occupied by Ms. Baker and her children unless some compromise could be reached. In considering the possibility of litigation, the trustee had to have regard to the existence of and the terms of the order of Spiegel J. Arguably, her order was open to two different interpretations. It could be read as giving Ms. Baker a 50 per cent interest in the property, or it could be read as giving her a 50 per cent interest in Mr. Beynon's interest in the property.
23The trustee appreciated these possible interpretations of the order. The settlement accepts the interpretation of the order that is more favourable to Ms. Baker. It does so, however, in the context of rejecting entirely the rest of her claim.
24The trustee was entitled to conclude that absent settlement with Ms. Baker, litigation was certain. The outcome of that litigation was far from certain.
25It is also by no means clear that Ms. Beynon had a claim under s. 70(2) of the Act. It is noteworthy that no claim was made by her under s. 70(2) prior to the hearing of the motion.
26The trustee had to consider and weigh all of these factors. His decision to compromise Ms. Baker's claim on the terms proposed was not unreasonable.
Conclusion
27We would allow the appeal and vary the order of the motion judge dated September 19, 2003 by amending para. 1 to read:
This court orders that the trustee is authorized and directed to complete the settlement in accordance with its terms.
28Paragraph 4 of the motion judge's order should be deleted.
29The trustee should be fully indemnified for its costs both on the motion and on the appeal out of the estate. Ms. Baker is entitled to her costs on the motion. The motion judge has not yet fixed those costs and it is appropriate that he should do so having regard to the variation of his order made in this court. Ms. Baker is entitled to her costs on a partial indemnity basis on the appeal. Those costs are fixed at $7,500.00, inclusive of disbursements and GST.
"Doherty J.A."
"John I. Laskin J.A."
"R.G. Juriansz J.A."