Court File and Parties

COURT OF APPEAL FOR ONTARIO DATE: 20241202 DOCKET: COA-24-CV-0388

Trotter, George JJ.A. and Brown J. (ad hoc)

In the Matter of the Bankruptcy of River Green (Thunder Bay) Inc., a corporation carrying on business in the City of Thunder Bay, Province of Ontario

Counsel: Morris J. Holervich, for the appellant John Beals Robin A. Lepere, for the respondent BNL Contracting Ltd.

Heard: November 21, 2024

On appeal from the judgment of Justice F. Bruce Fitzpatrick of the Superior Court of Justice, dated April 19, 2023, with reasons reported at 2023 ONSC 2411.

Reasons for Decision

Introduction

[1] On April 19, 2023, River Green (Thunder Bay) Inc. (“River Green”) was adjudged a bankrupt. This was on application of one of its creditors, BNL Contracting Ltd. (“BNL”). The application was resisted by Robert Olson and John Beals, who along with another individual, had incorporated River Green and invested funds to start a cannabis cultivation business. The application judge granted standing to the appellant, Mr. Beals, as a shareholder of River Green.

[2] At the hearing of the application, all parties agreed that River Green had committed acts of bankruptcy within the previous six months: Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”), s. 42(1)(j). The application judge found that River Green could not meet its liabilities in general when they became due. He concluded, at para. 8:

In my view, in addition to the fact that the opposing parties have conceded this issue, this evidence satisfies the burden on the applicant to show that River Green was not meeting its ongoing obligations during the relevant time period.

[3] The dispute at the hearing was focused on whether the application was brought by BNL for an improper purpose, sufficient to warrant the application of s. 43(7) of the BIA, which states:

If the Court is not satisfied with the proof of the facts in the application or of the service of the application, or is satisfied by the debtor that the debtor is able to pay their debts, or that for other sufficient cause no order ought to be made, it shall dismiss the application. [Emphasis added.]

[4] The appellant relied on the underscored words of s. 43(7). He submitted that BNL’s principal, Salvatore Romeo, conspired with others to improperly obtain the assets of River Green, and that the application had been commenced solely in aid of this improper motive. It was argued that an ulterior motive constitutes “sufficient cause” for the purposes of s. 43(7): see Frank Bennett, Bennett on Bankruptcy, 23rd ed. (Toronto, LexisNexis: 2021), at p. 208.

The Reasons of the Application Judge

[5] The application judge found that the appellant failed to discharge his onus on this issue and refused to dismiss the application under s. 43(7). His conclusions are set out at paras. 19, 21-22 of his reasons:

In any event, I am not persuaded that the “evidence” which in my view is pure speculation, put forward by Beals does anything to demonstrate an improper purpose or sufficient cause not to grant the bankruptcy order requested. The “theory” or even components of it were not put to Mr. Romeo when he was cross-examined on his affidavit. The failure to raise this with Mr. Romeo seems to me to lessen the impact of an argument of improper purpose when such lines of questioning are not pursued in the evidence.

River Green is no doubt a failed enterprise. It is not meeting its obligations on a day-to-day basis. In my view the reasons for that have nothing to do with BNL’s claim. BNL is not a competitor of River Green. There is a clear contest between competing groups within River Green. However, no one appears to be in charge of River Green. It cannot even afford to retain counsel.

In my view, far from representing an improper purpose, making a bankruptcy order is one way to focus and resolve the litigation that has taken a great deal of court time to date and produced little in the way of tangible results. Granting this application will provide an orderly and fair distribution of property of River Green amongst its creditors. The claims of Beals and Olson will be determined in this process. There is no prejudice to them I can ascertain from the materials presently before the Court. [Emphasis added.]

[6] The appellant appeals the application judge’s s. 43(7) ruling. He submits that the application judge overlooked or failed to consider relevant evidence, his decision was based on wrong or inapplicable legal principles, and that his exercise of discretion was arbitrary or capricious. The following reasons explain why we do not accept these submissions and would dismiss the appeal.

Analysis

[7] The standard of review from a decision made under s. 43(7) of the BIA is highly deferential. In Medcap Real Estate Holdings Inc. (Re), 2022 ONCA 318, 468 D.L.R. (4th) 253, Zarnett J.A. said, at paras. 9-10:

Despite the mandatory language of s. 43(7) (“it shall dismiss the application”), all counsel referred to the power under it as discretionary. This accords with the description given to the power under s. 43(7) in the case law: see Ivaco Inc. (Re) (2006), 83 O.R. (3d) 108 (C.A.), at para. 37, leave to appeal granted but appeal discontinued, [2006] S.C.C.A. No. 490. In essence, the judge hearing a bankruptcy application has a discretion to determine what qualifies as sufficient cause for not making an order, thus triggering the power to dismiss an otherwise proven application.

Medcap accepts that as the power is discretionary, this court may only intervene on limited grounds. In the absence of a palpable and overriding error of fact, an appellate court will defer to an exercise of discretion unless the application judge made an error in principle or if the exercise of discretion results in an order that is plainly wrong: Cowper-Smith v. Morgan, 2017 SCC 61, [2017] 2 S.C.R. 754, at para. 46. [Emphasis added.]

[8] The appellant has failed to identify any palpable and overriding error in the application judge’s analysis that would justify appellate intervention. After considering the evidence, the application judge rejected as speculative the allegation of a conspiracy to improperly acquire the assets of River Green. He found that the evidence did not support the conclusion that there was anything untoward or nefarious in BNL’s application.

[9] The appellant submits that the application judge overlooked important evidence adduced on this issue – evidence of a meeting in Toronto attended by Mr. Romeo where the so-called conspiracy was discussed. However, the application judge specifically identified and addressed this meeting in his reasons: see para. 14. Moreover, the application judge highlighted the critical legal distinction between Mr. Romeo and BNL at para. 18 of his reasons: “There is nothing in the materials before this Court that would suggest this is an occasion where the Court should pierce the corporate veil. BNL is the creditor, not Mr. Romeo” (emphasis added).

[10] Moreover, as the application judge noted, the conspiracy theory was not pursued with Mr. Romeo during the cross-examination on his affidavit. The appellant submits that this too was an error because he was able to make out his claim under s. 43(7) without cross-examining Mr. Romeo on this pivotal issue. He also submits that cross-examination on this issue was sure to be unfruitful, as it would have merely provided a platform for Mr. Romeo’s denials. We are not persuaded by these submissions. As the application judge said, at para. 19, the failure to cross-examine on this issue “seems to me to lessen the impact” of the improper purpose or motive argument. He was entitled to take this factor into account in concluding that the appellant had not met his onus under s. 43(7) of the BIA.

[11] The appellant further submits that the application judge’s rejection of the alleged conspiracy as speculative or mere theory is contradicted by the application judge’s decision a year earlier in which he found there was an air of reality to an alleged conspiracy to ruin River Green: see 2801100 Ontario Inc. v. River Green (Thunder Bay) Inc., 2021 ONSC 6710, (5 October 2021), Thunder Bay, CV-21-194-00 (S.C.). However, this judgment related to River Green’s successful application to set aside a default judgment in another proceeding, involving a different party and a different alleged conspiracy. It was irrelevant to the decision under appeal.

[12] The appellant’s submissions about the manner in which the application judge adjudicated the conspiracy issue raises a question of fact: Medcap, at para. 19. It is entitled to deference on appeal. There is no basis to interfere with the application judge’s findings on this issue.

[13] Lastly, the appellant submits that the application judge erred in making a bankruptcy order in the context of what was essentially a dispute among shareholders. There is no error in this approach. As the application judge said in the passage quoted above, at para. 5 of these reasons: “Granting this application will provide an orderly and fair distribution of property of River Green against its creditors. The claims of Beals and Olson will be determined in this process.” Simply because there is other litigation that may be impacted by a bankruptcy order does not mean that the purpose of the application is improper: see e.g., Castle Building Centres Group Limited v. Parkes, 2024 ONSC 3705, 14 C.B.R. (7th) 282, at paras. 69-76.

[14] In the end, the application judge correctly captured the essence of these bankruptcy proceedings at para. 24 of his reasons:

BNL is owed a debt. The evidence presented on this application demonstrates River Green is unable to pay that debt or any other debts of other creditors for that matter. The bankruptcy process in this case is not being used as a form of a collection agency. River Green has no claim against BNL. BNL asserts no greater rights than any other creditor. [Emphasis added.]

[15] We agree with this characterization. There is no basis to interfere with the application judge’s exercise of discretion under s. 43(7) of the BIA.

Disposition

[16] The appeal is dismissed. The respondent is entitled to its costs on a partial recovery basis in the agreed upon amount of $7,500, inclusive of disbursements and HST.

“Gary Trotter J.A.”

“J. George J.A.”

“Michael F. Brown J. (ad hoc)”