Court File No.: 31–OR–207514–T
Date: 20120103
ONTARIO
SUPERIOR COURT OF JUSTICE
In Bankruptcy and Insolvency
(Commercial List)
IN THE MATTER OF THE BANKRUPTCY OF TNG ACQUISITION INC.
(successor estate of NEXINNOVATIONS INC., a bankrupt)
David S. Ward, Eleonore L. Morris for the Trustee of the Estate of TNG Acquisitions Corp.
David R. Rothwell for Brains II Canada Inc. (6855911 Canada Inc.)
Heard: November 9, 2011
C. CAMPBELL J.:
REASONS FOR DECISION
[1] Brains II Canada Inc. ("Brains"), the purchaser of a part of the business of the predecessor of the bankrupt TNG Acquisition Inc. ("TNG"), appeals from a claims disallowance by the Trustee of various claims relating to its asset purchase.
[2] The Court established a process for dealing with the Brains claims by Order dated August 25, 2011. This appeal deals with one of three issues between the Trustee and the purchaser on the record of disallowance by the Trustee.
[3] Counsel agreed that the standard of review is correctness in respect of matters of law and reasonableness with respect to matters of fact.
[4] There are some 34 items in the claims, ranging in amount but totalling over $3 million.
History
[5] NexInnovations (“Nex” or “the Company”) was granted protection under the Companies’ Creditors Arrangement Act (the “CCAA”) on August 10, 2006 (“CCAA No. 1”). Ernst & Young Inc. was appointed as Monitor in connection with CCAA No. 1.
[6] Nex emerged from CCAA protection on January 1, 2007 through a Plan of Compromise or Arrangement that was accepted by Nex’s creditors and sanctioned by the Court in an Order made on December 8, 2006. Financial information from the 1st CCAA proceeding was available in the 2nd CCAA proceeding through Nex’s controller.
[7] Nex was again granted protection under the CCAA in an Order made on October 2, 2007 (“CCAA No. 2”), in which Mintz & Partners Limited was appointed as CCAA Monitor, and Prowis Inc. (“Prowis”) was appointed as Nex’s Chief Restructuring Officer (“CRO”). In the CCAA No. 2 Initial Order, the CRO was given the exclusive authority to manage Nex’s day-to-day business.
[8] A Bankruptcy Order was made April 8, 2008 in which A. Farber & Partners Inc. was appointed Trustee of TNG [originally TNG Services Inc., which subsequently became TNG Acquisition Inc.]
[9] A Statement of Claim in court file no. 08-CV-350252 PD1 (Toronto) was issued by Brains on March 5, 2008, during an interval from an endorsement until the Order of March 10, 2008, when extension of a CCAA stay was not apparent but indeed was granted on March 10. The First Report of the CRO commented about the claims of Brains and some grounds asserted by the CRO for dispute or denial, but without the Brent Schedule and Exhibits. There has been no adjudication to date. There is no Limitations Act issue.
[10] Brains was the successful bidder in a very time-compressed process for the Service Business of Nex pursuant to an Asset Purchase Agreement, approved by the Court on October 15, 2007 which was also the date for allocation of expenses, a number of which are at issue on this appeal.
[11] At paragraph 12 of its factum Brains summarizes its position:
[12] The primary claims of Brains II are the huge damages from the concealment of administrative expenses, over-billing for operations during the transition period and other major items, such as severances, lock box property, parts and inventory.
[12] A major part of the claim by Brains is against the $2 million portion of the purchase price remaining in Court is for a set off for expenses incurred by Brains in the period immediately following the purchase, which Brains asserts it should not have had to incur and would not have incurred but for the misrepresentation by the CRO.
[13] The position of the Trustee is set out at paragraph 5 of the Trustee's factum. The Brains claims are a mix of damages claims and claims for reimbursement of amounts paid (or not paid, as the case may be) to Nex in 2007 and 2008. Additionally, Brains seeks to set-off all of its claims against the $2,000,000 unpaid portion of the $6,000,000 purchase price (the $2,000,000 is now in Court). Although there is some overlap, the grounds for disallowance that the Trustee is asking be sustained on this appeal may be categorized as follows:
(a) certain of the claims are disallowed in view of the numerous contract provisions in the Asset Purchase Agreement (the “APA”) that operate in favour of Nex as vendor. This was an “As, is; Where is” sale from an insolvent company, made without representations and warranties;
(b) certain of the claims violate principles of res judicata and constitute a collateral attack on orders of the Ontario Superior Court of Justice that approved the APA, approved the activities of the Monitor and Prowis Inc. as CRO, and discharged and released the Monitor and the CRO;
(c) certain of the claims relate to “reimbursements” that Brains is claiming for transition services costs invoiced by the CRO and paid by Brains back in 2008. The Trustee reviewed these claims and concluded that the charges were proper and ought not to be reimbursed;
(d) certain of the claims relate to “reimbursements” that Brains is claiming for transition services costs invoiced by the CRO and not paid by Brains. The Trustee reviewed these claims and concluded that Brains was indebted to the estate for these claims, not the other way around; and
(e) certain of the claims are “Lock Box claims.” Lock Box claims are not claims in the bankruptcy estate. They relate to amounts that have been segregated in a bank account to be settled by the stakeholders (Brains, SoftChoice Corporation, Nex), or distributed in accordance with further order of the Court.
[14] The specific heads of claim of Brains are set out and summarized in the Appeal Book at tab 30, which also contains the response of the Trustee to each item.
[15] The position advanced on behalf of Brains seeks redress for what it claims were misrepresentations during the currency of the regime by the CRO, which preceded Court approval of the APA. In addition, Brains asserts that it incurred additional expenses that were anticipated they would be able to offset as against the remaining purchase price.
[16] The Trustee gave a legal basis for disallowance of each of the claims and in addition disallowed the quantum of most claims on the basis that they had not been particularized with evidence capable of being verified.
[17] Brains urged that liability be determined for the areas claimed in the nature of the determination under Summary Judgment Rule 20 and a trial directed to determine the precise quantum.
[18] I agree that if it were necessary to deal with the quantum issue, a trial or reference might be required.
[19] I have concluded that the appeal fails on the liability issue for the reasons set forth by the Trustee in its disallowance.
[20] There are some 39 items in the appeal. I propose to deal in these Reasons with only three of those items in four categories as they encompass the vast majority of the total amounts claimed.
[21] The remaining items would appear to still be open for reconciliation as “lockbox” items.
Brains' Claims made in Alleged Reliance on Unaudited Internal Financial Statements
[22] Claim No. 19. Brains claims reimbursement of $77,803.76 in premium costs for insurance incurred in the period October 2007 to February 2008 not disclosed in the Unaudited Internal Financial Reports.
[23] Claim No. 22. Brains claims reimbursement of $190,734.26 in rent for use of premises from October 2007 to February 2008. (Only part of that sum has been paid by Brains). The basis of the claim is that the Unaudited Internal Financial Reports did not mention rent and Brains should not have to pay.
[24] Claim No. 23. Payroll expense in the sum of $794,505.48 for the cost of former Nex Finance and Accounts Payable employees hired by Brains in the period October 2007 to February 2008.
[25] For each of the three above noted claims, the Trustee provides the same response, namely that the APA provided in s. 3.03 that the sale to Brains was on an “as is, where is” basis and without any representation or warranty. Further, s. 7.04 of the same Agreement contains an “entire agreement” clause. Further, the Trustee's position is that it has not been provided with any evidence to suggest that the Unaudited Internal Financial Reports were represented to have included an allocation of corporate costs such that it was reasonable in the circumstances for a prospective buyer to place reliance on those statements.
[26] Counsel for Brains submits that it was only reasonable in the context of the timeframe of an accelerated purchase and the inability of his client to do a full due diligence that there would have to be an after-the-fact cost allocation to enable Brains to take over and run the Service Business.
[27] Given the specific terms of the APA and lack of any specific evidence to the contrary, I conclude that the dismissal of the claims by the Trustee was reasonable in the circumstances. There does not appear to be any written or oral communication to support the position now advanced.
Brains Damage Claims
[28] Claim No. 51 - Logistics Staff. Brains claims $529,670.32 for expenses incurred with respect to the hiring following the closing of the sale on October 19, 2007 of former Nex employees.
[29] Claim No. 52 - Finance and A.P. Staff. $94,145.93 - this claim asserts that the hiring of former Nex employees following the closing of the sale on October 19, 2007 would not have been necessary or incurred by Brains if material information concerning such staff had not been omitted from the Unaudited Internal Financial Reports provided.
[30] Claim No. 53. Severance and Notice Pay of $419,888.60 is based on the alleged misrepresentation of the Payroll Expense, necessitating more employees than expected to be hired and represents the termination costs which ought not to have been incurred.
[31] For each of these the Trustee again relies on the wording of the APA but also submits that Brains was given the list of employees before the date of closing to enable it to know whom it might want to hire and it had 30 days to terminate employees without any responsibility for termination or severance payments.
[32] In addition to relying on the terms of the APA, counsel for the Trustee submits that the issues raised by Brains are now res judicata, since the terms of the sale were approved on notice to Brains which did not raise any issues concerning the sale process, the transaction or the APA at the time of the approval or at the granting of the Discharge Order when the CRO was specifically released in respect of matters that could have been raised.
[33] Brains' position is succinctly stated at paragraph 59 of the factum, which reads:
[59] Trial is required to assess what the CRO knew about the financial information provided and whether misrepresentation was intentional or negligent or innocent, whether there was reliance, whether reliance was reasonable, whether there was any contributory negligence by Brains II or those advising it, and whether liability is excluded or limited and whether policy grounds exist for finding the CRO and hence the Trustee liable for consequences.
[34] In my view the Trustee did not err in law when it concluded that given the APA, the sale approval process and the Discharge Order, the claim of Brains should be disallowed. There is no evidence to suggest misrepresentation. The inquiry proposed by Brains is not warranted.
[35] One can readily understand the consternation of Brains that it did not get what it thought it had purchased. Absent a precise allegation of fraud and the circumstances of unaudited financial statements that were not the direct responsibility of the CRO, and the precise terms of the APA, vague allegations of negligence are not in my view sufficient to permit the direction of a trial on the issues raised.
[36] For the above reasons, the appeal of Brains is dismissed. In so doing I recognize that there are certain accounting issues in respect of monies yet to be paid or unpaid, which the Court will have to deal with when the “Lock Box” issues are brought forward.
C. CAMPBELL J.
Released: January 3, 2012
Court File No.: 31-OR-207514-T
Date: 20120103
SUPERIOR COURT OF JUSTICE
In Bankruptcy and Insolvency
(Commercial List)
IN THE MATTER OF THE BANKRUPTCY OF TNG ACQUISITION INC.
(successor estate of NEXINNOVATIONS INC., a bankrupt)
REASONS FOR DECISION
C. CAMPBELL J.
RELEASED: January 3, 2012