COURT OF APPEAL FOR ONTARIO

CITATION: Global Royalties Limited v. Brook, 2016 ONCA 50

DATE: 20160118

DOCKET: M45801 (C61241)

Strathy C.J.O. (In Chambers)

BETWEEN

Global Royalties Limited and Benchmark Conversion

International Limited o/a BCI

Plaintiffs (Respondents)

and

David Brook, Anna Brook, 2323593 Ontario Inc., Geoffrey Black a.k.a. Geoff Black, Griffin & Highbury Inc., Dario Beric a.k.a. Dario Beric-Maskarel, Dikran Khatcherian a.k.a. Diko Khatcherian a.k.a. Danny Matar, Leslie Frohlinger a.k.a. Les Frohlinger, Diversity Wealth Management Inc. and Diversity Wealth Management Holdings Inc.

Defendants (Appellant)

Harvey Stone, for the respondents

Frank Bennett, for the appellant

Heard: December 8 and 17, 2015

Motions for a declaration that the appellant has no right to appeal the order of Justice Michael A. Penny of the Superior Court of Justice, dated October 13, 2015, with reasons reported at 2015 ONSC 6277, under s. 193(b) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (BIA) and for leave to appeal that order under s. 193(e) of the BIA.

Strathy C.J.O.:

[1] The appellant seeks to appeal an order lifting the stay of proceedings provided him by s. 69.3 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (BIA). In my view, he has no right of appeal to this court under s. 193(b) of the BIA and should not be granted leave to appeal under s. 193(e).

A. background

[2] The appellant was deemed bankrupt on February 27, 2015 after his failed proposal.

[3] The respondents brought this action in June 2015. The statement of claim alleges that the appellant, a former employee, breached his fiduciary duties to them. He did so, they say, by establishing a competing business with the co-defendants, stealing propriety information from the respondents, and diverting their sales and revenues to himself and the co-defendants.

[4] The statement of claim seeks damages, injunctive relief and declaratory relief. The claim alleges breaches of duty before and after the date of bankruptcy.

[5] The appellant took the position that the action was invalid because, as an undischarged bankrupt, the proceedings against him were stayed by s. 69.3 of the BIA.

B. the order of the superior court

[6] The respondents brought a motion for the following relief: (a) a declaration that s. 69.3 of the BIA did not apply to stay the claims for injunctive and declaratory relief, or the claims for damages from the appellant’s post-bankruptcy conduct, because they are not claims provable in bankruptcy; and (b) an order under s. 69.4 of the BIA lifting the stay of proceedings for the damages claimed against the appellant for his pre-bankruptcy conduct.

[7] The trustee in bankruptcy did not oppose the relief sought.

[8] The motion judge granted the motion.

[9] The motion judge agreed that the claims arising after the date of bankruptcy and the claims for injunctive and declaratory relief were not stayed by s. 69.3. That is because they were not claims provable in bankruptcy under s. 121 of the BIA. He therefore found there was no need for an order lifting the stay for those claims.

[10] On the claims relating to the appellant’s pre-bankruptcy conduct, the motion judge found there were “sound reasons” to lift the stay, relying on Re Ma (2001), 2001 24076 (ON CA), 24 C.B.R. (4th) 68 (Ont. C.A.). He rejected the appellant’s claim that lifting the stay would interfere with the proper administration of the bankrupt estate. He therefore lifted the stay, but clarified that the enforcement of any judgment for damages for pre-bankruptcy conduct would remain stayed until further order. I will explain his reasons below.

[11] The appellant served a notice of appeal. He claimed he had a right to appeal under s. 193(b) of the BIA, but also sought leave to appeal, if necessary, under s. 193(e).

C. the motions in this court

[12] Each party brought a motion in this court.

[13] The first was brought by the respondent for an order that the appellant had no appeal as of right pursuant to s. 193(b) and that the stay under s. 195 of the BIA did not apply.

[14] The second, which only arose if the first motion was granted, was brought by the appellant for leave to appeal pursuant to s. 193(e).

[15] I heard the motions on separate dates – granting the first and dismissing the second. I will discuss them separately.

(1) Appeal under s. 193(b)

[16] This motion was heard on December 8, 2015. At the conclusion of oral argument I granted the motion, declaring that the appellant had no right of appeal under s. 193(b), with reason to follow. These are those reasons.

[17] A judge of this court has jurisdiction to make an order directing that the appellant does not have a right to appeal pursuant to s. 193(b) of the BIA: see Re Robson Estate (2002), 2002 53241 (ON CA), 33 C.B.R. (4th) 86 (Ont. C.A. [In Chambers]).

[18] Subsection 193(b) provides that an appeal lies to this court “if the order or decision is likely to affect other cases of a similar nature in the bankruptcy proceedings.” There is no dispute that the governing authorities are those set out in L.W. Houlden, G.B. Morawetz & Janis Sarra, Bankruptcy and Insolvency Law of Canada, loose-leaf (2015-Rel. 4), 4th ed. revised (Toronto: Carswell, 2013), vol. 3 at para. I-59. Those authorities were recently discussed by the Court of Appeal for British Columbia in Wong v. Luu, 2013 BCCA 547, 10 C.B.R. (6th) 318 (In Chambers),at paras. 15-19.

[19] The governing authorities stress that s. 193(b) concerns “real disputes” likely to affect other cases raising the same or similar issues in the same bankruptcy proceedings: see e.g. Wong v. Luu, at para. 21; Lemay v. Lamarre (1934), 16 C.B.R. 189 (Que. C.A.).

[20] Here, the appellant submitted that the crossclaims against him by the co-defendants raise similar issues of whether the stay of proceedings under the BIA ought to be lifted.

[21] In my view, this is a matter of pure speculation. Although counsel for the co-defendants was given notice of the motion to lift the stay, he did not appear on the motion and expressly disclaimed any intention to respond.

[22] In addition, the statement of defence and crossclaim pleads the relationship between the co-defendants and the appellant took place after the bankruptcy. It seems arguable then that the stay would not apply to the crossclaim in any event.

[23] Moreover, none of the grounds of appeal set out in the notice of appeal provide a basis to conclude that the order below would impact related cases in the bankruptcy.

[24] I was therefore unable to find that the decision under appeal would “likely” affect another case raising the same or similar issues in the appellant’s bankruptcy proceeding. I granted the motion and declared that the appellant does not have a right to appeal to this court under s. 193(b) of the BIA.

[25] The motion for leave to appeal under s. 193(e) was then directed to proceed before me on December 17, 2015.

(2) Leave to appeal

[26] The test for leave to appeal under s. 193(e) was set out in Business Development Bank of Canada v. Pine Tree Resorts, 2013 ONCA 282, 115 O.R. (3d) 617 (In Chambers). In that case, at para. 29, Blair J.A. noted that granting leave under s. 193(e) is discretionary and must be exercised in a flexible and contextual way. The prevailing considerations are whether the proposed appeal

(a) raises an issue that is of general importance to the practice in bankruptcy/insolvency matters or to the administration of justice as a whole

(b) is prima facie meritorious, and

(c) would unduly hinder the progress of the bankruptcy/insolvency proceedings.

[27] The appellant’s proposed appeal challenges the motion judge’s lifting of the stay under s. 69.4 of the BIA. That section provides that a creditor who is affected by the stay under s. 69.3 may apply to the court for a declaration that the stay no longer operates against it. The court may make that declaration if satisfied that the creditor is likely to be materially prejudiced by the stay or that it is equitable on other grounds to do so. The governing authority, and that relied on by the motion judge, is Re Ma.

[28] The appellant’s core argument in support of his leave application is that the test in Re Ma requires clarification. He submits that Re Ma’s requirement of “sound reasons” to lift the stay must include an analysis of the merits of the creditor’s claim. To the extent Re Ma leaves this question uncertain, he says, the test requires clarification.

[29] If granted leave, the appellant will argue that the motion judge failed to engage in any analysis of the merits of the respondent’s claim. Instead, he focussed on the allegations in the pleading without examining the underlying evidence. The appellant further argues that the motion judge also failed to make adverse findings from the respondent’s representative’s failure to answer questions on examination.

[30] The appellant says that this was unfair to him because it exposed him to potentially frivolous litigation outside the bankruptcy, without a preliminary showing that the claim had merit. Without some sort of hard look at the case, he says, a plaintiff could meet the test by simply dressing up a pleading with allegations of fraud, adding multiple parties and pleading a complex cause of action.

[31] The appellant says that this issue is a matter of general importance in bankruptcy and insolvency, his appeal has merit and granting leave to appeal would not interfere with the administration of the bankruptcy.

[32] As I mentioned earlier, the motion judge relied on Re Ma. He noted that in that case the bankrupt defendant had argued that the creditor seeking to lift the stay had to establish a prima facie case on the merits. The Court of Appeal held otherwise. The motion judge addressed this point at paras. 18-19:

In Re Ma the Court of Appeal for Ontario upheld the decision of the registrar lifting the stay to permit the TD Bank to continue an action against the bankrupt. The bankrupt argued that the creditor had to establish a prima facie case on the merits by providing evidence of the facts giving rise to the proposed claim. The registrar held that the test to be applied is whether the type of claim which the creditor seeks to advance against the bankrupt is the type of claim that should be allowed to proceed. She held that it was not the function of the court on a motion to lift the stay to embark upon a scrutiny of the merits of the proposed action.

The Court of Appeal pointed out that lifting the statutory stay is far from a routine matter. The Court of Appeal affirmed, however, that there was no obligation on the part of the moving party to establish a prima facie case on the basis of evidence. The gloss on the previous law provided by the Court of Appeal in Re Ma is that the court is not precluded from any consideration of the merits where relevant to the issue of whether there are "sound reasons" for lifting the stay. The court used the example that, if the proposed action had little prospect of success, it would be difficult to find that there were sound reasons for lifting the stay.

[33] The motion judge then considered what a creditor must show to establish “sound reasons” for material prejudice or other equitable grounds under s. 69.4 of the BIA. The grounds identified by the plaintiffs in this case were the following: (i) actions against the bankrupt for a debt for which a discharge would not be a defence (s. 178); (ii) actions of sufficient complexity to make the summary procedure under s. 135 of the BIA inappropriate; and (iii) actions in which the bankrupt is a necessary party for the complete adjudication of matters at issue involving other parties: see Re Advocate Mines Ltd. (1984), 52 C.B.R. (N.S.) 277 (Ont. S.C. [Reg.]).

[34] The motion judge noted that fraud, misappropriation, and fraudulent misrepresentation had been alleged in the pleading. He referred to the observation of Morawetz J. in Re Ieluzzi, 2012 ONSC 1474, 88 C.B.R. (5th) 215, that “the moving creditor need only plead specific facts which show that there are sound reasons to lift the stay, such as a set of facts which, if believed, would fall within the ambit of s. 178(1)(d)." He said that while the appellant[^1] complained, as he does here, that the allegations were unproven, “[t]hat, however, is clearly not the test.”

[35] In my view, it has been settled law in this province, for at least 20 years, that on a motion to lift the stay the bankruptcy court is not required to look into the merits of the action: see Re Francisco (1995), 1995 7371 (ON SC), 32 C.B.R. (3d) 29 (Ont. Gen. Div.), at para. 1, aff’d (1996), 1996 10233 (ON CA), 40 C.B.R. (3d) 77 (C.A.), referred to with approval in Re Ma. As this court noted in Re Ma, at para. 3, this does not mean that the merits of the action can never be relevant. If, for example, the defendant wishes to argue that the action is frivolous, vexatious, or otherwise has little prospect of success, it may well adduce evidence to that effect.

[36] I do not find that the proposed appeal raises an issue of general importance in bankruptcy and insolvency matters. Nor has the appellant satisfied me that the proposed appeal is prima facie meritorious. I, therefore, deny the appellant leave to appeal.

D. Conclusion and order

[37] For these reasons, the appellant has no right of appeal and the motion for leave to appeal is dismissed. Costs of both motions shall be payable to the respondents and fixed at $13,750.00, inclusive of all applicable taxes and disbursements.

“G.R. Strathy C.J.O.”

[^1]: The motion judge referred to the appellant/defendant as “the plaintiff”, but in context it is clearly a typographical error.