Court of Appeal for Ontario

Date: May 25, 2018

Docket: C64275

Judges: Strathy C.J.O., Roberts and Paciocco JJ.A.

In the Matter of the Proposal of Emery Silfurtun Inc. of the Town of Markham, in the Province of Ontario

Counsel:

• Catherine Francis, for the appellant, Emery Silfurtun Inc.
• Peter I. Waldmann, for the respondent, Warburg-Stuart Management Corporation

Heard: March 29, 2018

On appeal from: The order of Justice Frederick L. Myers of the Superior Court of Justice, dated August 28, 2017, with reasons reported at 2017 ONSC 5768, 52 C.B.R. (6th) 144.

Roberts J.A.:

A. Overview

[1] The appellant, Emery Silfurtun Inc., appeals from the order of the motion judge requiring the appellant and the trustee of the appellant's bankruptcy proposal to disclose to the respondent, Warburg-Stuart Management Corporation, all documents and communications that set out any and all terms of the appellant's settlement with its creditor, Zodax. The Zodax settlement is important to the respondent because the appellant contends that its settlement with Zodax discharged the respondent's security interest, which the respondents rely upon in their bankruptcy claim.

[2] A brief procedural history is useful to understand the context of this appeal. While many of the key facts were contested before the motion judge, how the motion came to be heard is not in dispute.

[3] On May 5, 2016, the appellant filed a proposal to its unsecured creditors under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA"). On October 28, 2016, the appellant and its creditor, Zodax, entered into a settlement of Zodax's claims. The appellant's proposal was approved by a majority of its creditors on October 31, 2016. The trustee made its motion for approval on notice to all creditors who filed proofs of claim in the proposal for court approval. The respondent had registered a general security agreement against the appellant's assets to secure its claim for professional services allegedly rendered by the appellant, and was given notice. None of the creditors opposed court approval of the proposal. On November 22, 2016, Master Mills approved the proposal. The appellant fully performed the proposal as of December 6, 2016, and its trustee issued a Certificate of Full Performance of Proposal.

[4] The appellant subsequently attempted to resolve the respondent's asserted secured claim. Negotiations failed.

[5] On February 10, 2017, the appellant commenced an application to set aside the respondent's security on the basis of the settlement concluded with Zodax.

[6] On March 20, 2017, the respondent commenced an action against the appellant to enforce its security by appointing a receiver and manager over the assets and undertaking of the appellant.

[7] On June 27, 2017, the respondent brought a motion to annul the appellant's proposal in the bankruptcy proceedings pursuant to s. 63(1) of the BIA. The respondent alleges that the appellant entered into a secret settlement agreement with Zodax, the particulars of which were not disclosed to the appellant's creditors. This was allegedly an attempt to circumvent the bankruptcy process and fraudulently obtain court approval of the proposal. In particular, the respondent alleges that by the settlement, Zodax released its unsecured claim and should not have been permitted to vote on the proposal, for, without Zodax, the proposal would have been defeated. The respondent also alleges negligence against the trustee in its treatment of Zodax's unsecured claim.

[8] On July 13, 2017, Conway J. ordered, pursuant to the parties' agreement, that the respondent's motion to annul the bankruptcy proposal would proceed before the applications. She also directed that the respondent's production motion be heard before the other proceedings. No appeal was taken from Conway J.'s order.

[9] The motion judge determined that he could not resolve the contested facts on the record before him, which included whether the appellant had disclosed the Zodax settlement at the October 31, 2016 meeting of the creditors. He concluded that the respondent's allegations gave rise to serious questions about the propriety of the proposal process. He determined that production of the settlement documentation and communications was necessary because "the interests of justice in the integrity of the BIA proposal process overwhelm any need to encourage settlement by recognizing privilege in this case." He also found that the appellant had waived any privilege by relying on its settlement with Zodax in support of its application to set aside the respondent's security and in response to the respondent's annulment motion and action.

[10] While not necessary for the disposition of the motion before him, the motion judge stated the following as a general proposition that should apply to all restructuring and bankruptcy proposal processes:

In my view, settlement privilege cannot apply to the contents of claims settlements between creditors and a debtor in a CCAA or BIA proposal process. Secrecy of deal terms is inconsistent with the necessity of scrutiny of such agreements by other creditors and the court.

The recognition of a blanket privilege for claims settlements under the CCAA and BIA is inconsistent with the transparent statutory processes that require scrutiny of such agreements. In my view settlement privilege does not apply to claim settlements in a CCAA or BIA proposal process.

[11] The appellant makes two principal submissions on appeal:

1. The motion judge erred in failing to determine whether the respondent's annulment motion was an abuse of process before he heard and disposed of the production motion.

2. The motion judge erred in concluding that settlement privilege did not apply generally or specifically, or that it had been waived by the appellant.

Before considering these submissions, I will examine whether leave to appeal is required and if it should be granted.

B. Analysis

(1) Leave to Appeal

[12] The appellant submits that leave to appeal is not required under s. 193 of the BIA. If leave is required, the appellant submits that it should be granted because the application of settlement privilege to CCAA and BIA proposal processes raises a significant issue of public importance.

[13] In my view, leave is required because the motion judge's production order does not involve future rights nor is it likely to affect other cases of a similar nature in the bankruptcy proceedings: see s. 193(a) and (b) of the BIA; and Ravelston Corp., Re, 24 C.B.R. (5th) 256 (Ont. C.A.), at para. 18.

[14] I would grant the appellant leave to appeal under s. 193(e) of the BIA. The appeal raises the important issue of the applicability of settlement privilege to CCAA and BIA proposal processes. This issue is of general importance to bankruptcy and insolvency matters, and to the administration of justice as a whole. The appeal on this issue is also prima facie meritorious in that it raises an arguable ground of appeal, and it would not unduly hinder the progress of the bankruptcy proceedings: Business Development Bank of Canada v. Pine Tree Resorts Inc., 2013 ONCA 282, 115 O.R. (3d) 617, at para. 29.

(2) Did the Motion Judge Err in Determining the Production Motion Before the Annulment Motion?

[15] The appellant argues that the motion judge should have determined whether the annulment motion was an abuse of process before hearing the production motion. According to the appellant, the respondent should have appealed from the approval order of Master Mills. Moreover, the trustee and the respondent, along with the other creditors who attended the October 31, 2016 proposal approval meeting, were apprised of the appellant's settlement with Zodax.

[16] I do not accept these submissions.

[17] First, there was a clear direction order from Conway J. requiring the motion judge to hear the production motion before the other applications. As the motion judge noted in his reasons, the production motion was the only matter before him. No appeal was taken from the order of Conway J. nor was there any attempt to have it set aside or modified.

[18] Further, the motion judge correctly determined that he could not resolve the issue as to whether the respondent's annulment motion was an abuse of process because of the conflicting evidentiary record before him. I agree that the record presents differing accounts as to whether the trustee, the respondent, and the other creditors were aware of the material particulars of the settlement. This cannot be reconciled on a paper record.

[19] Finally, I do not agree that the respondent should have appealed from Master Mills' approval order. The respondent's annulment motion was authorized under s. 63(1) of the BIA, which provides as follows:

Where default is made in the performance of any provision in a proposal, or where it appears to the court that the proposal cannot continue without injustice or undue delay or that the approval of the court was obtained by fraud, the court may, on application thereto, with such notice as the court may direct to the debtor, and, if applicable to the trustee and to the creditors, annul the proposal.

[20] The respondent alleges that the appellant and Zodax entered into a secret deal to fraudulently conceal their agreement from the trustee and the creditors in order to obtain approval of the proposal. As such, the allegations in the respondent's annulment motion meet the highlighted criteria under s. 63(1) of the BIA. See for example: Amertek Inc., Re, 4 C.B.R. (4th) 23 (Ont. C.J.) and Proposition de 3245951 Canada inc., 2017 QCCS 2659, 281 A.C.W.S. (3d) 247. Whether or not the annulment motion will ultimately succeed was not the issue before the motion judge or on this appeal.

(3) Did the Motion Judge Err in Ordering Production of the Settlement Documentation and Correspondence?

[21] The appellant submits that the motion judge erred in determining that settlement privilege did not apply to CCAA and BIA proposals. This error in principle affected the motion judge's analysis such that he incorrectly distinguished and failed to apply the test for common law settlement privilege set out by the Supreme Court in Sable Offshore Energy Inc. v. Ameron International Corp., 2013 SCC 37, [2013] 2 S.C.R. 623.[1]

[22] I agree that the motion judge erred in stating as a general proposition that settlement privilege should not apply to CCAA and BIA proposals. The motion judge cited no authority for this blanket statement. It runs contrary to long-standing and well-established common law principles relating to settlement privilege. Specifically, whether or not settlement privilege applies in any given case remains a contextual, fact-specific analysis requiring that certain conditions be met: R. v. Delchev, 2015 ONCA 381, 126 O.R. (3d) 267, at para. 24.

[23] The Supreme Court in Sable confirmed the existence of and important public interest in preserving common law settlement privilege. It furthers the imperative goals of reducing the "personal and public expense and time involved in litigation" and "the strain upon an already overburdened provincial court system", at para. 11. In particular, at para. 12, the Court reiterated the principle and its rationale as follows:

Settlement privilege promotes settlements. As the weight of the jurisprudence confirms, it is a class privilege. As with other class privileges, while there is a prima facie presumption of inadmissibility, exceptions will be found "when the justice of the case requires it". [Citations omitted.]

[24] Although the motion judge may have gone farther regarding the scope and applicability of settlement privilege than required to dispose of the production motion, he nevertheless reasoned in the alternative and went on to consider the outcome if settlement privilege did apply to CCAA and BIA proposals. It is clear he then referenced and applied the principles articulated in Sable. He assessed whether the present case stood as an exception to settlement privilege because the respondent had demonstrated that on balance "a competing public interest outweighs the public interest in encouraging settlement." In particular, the motion judge determined that the countervailing interests to the public interest in settlement privilege included the respondent's allegations of impropriety on the part of the appellant and their potential effect on the integrity of the proposal process. Absent production of the settlement documentation and communications, the motion judge concluded that it was impossible to determine whether the conduct of the parties and the terms of the settlement were bona fide or improper. I see no error in the motion judge's determination of this issue.

[25] The appellant submits that the motion judge erred by failing to consider whether some measure short of full production of all settlement documents and communications could have struck a more appropriate balance between the competing public interests. It contends that having determined that settlement privilege did not apply, the motion judge erred in failing to consider whether disclosure of the settlement documents and communications should be subject to confidentiality terms and conditions pending the determination of their relevance by the motion judge. I do not agree.

[26] In his reasons, the motion judge refers to this issue as follows:

Perhaps the proposal trustee might have been asked to perform a role in reviewing and providing some assurances about the contents were they truly sensitive, confidential material. No one asked the proposal trustee to take on that task however. [Emphasis added.]

[27] This reference shows that the motion judge was alert to the possibility of making an order requiring less than full disclosure of the settlement documents and communications. This determination was not mandatory but discretionary. As highlighted, one of the relevant factors that the motion judge considered was whether the contents of the settlement materials were "truly sensitive" and "confidential".

[28] The difficulty with the appellant's position is that there is no evidence that the settlement materials contained "truly sensitive" and "confidential" provisions that would cause prejudice to the appellant if disclosed. Rather, the appellant's submissions that disclosure will cause prejudice are belied by its initial argument that the annulment motion is an abuse of process because it had previously disclosed the material particulars of the settlement with Zodax to the trustee, the respondent, and the other creditors. Moreover, I do not accept the appellant's argument that court-ordered mandatory disclosure could constitute a breach of its settlement agreement with Zodax.

C. Disposition

[29] Accordingly, while I would grant leave to appeal, I would dismiss the appeal.

[30] I would allow the respondent its partial indemnity costs in the amount of $8,800, inclusive of disbursements and applicable taxes.

Released: May 25, 2018

"L.B. Roberts J.A."

"I agree G.R. Strathy C.J.O."

"I agree David M. Paciocco J.A."

[1] Given my proposed disposition of this issue, it is not necessary to determine whether the motion judge erred in finding that the appellant waived settlement privilege. This was not the main focus of the argument on appeal. As a result, I should not be taken as endorsing the motion judge's conclusions with respect to whether privilege was waived.