SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: IN THE MATTER OF the bankruptcy of Cosimo Dilollo

BEFORE: D. M. Brown J.

COUNSEL: H. Chaiton and D. Bourassa, for the moving parties, I.F. Propco Holdings (Ontario) 36 Ltd.

P. Cho, for msi Spergel Inc., Trustee in bankruptcy of the estate of Cosimo Dilollo

HEARD: January 17, 2013

REASONS FOR DECISION

I. Motion to dismiss Trustee’s fraudulent preference motion as statute-barred

[1] On August 24, 2013, msi Spergel Inc., the trustee in bankruptcy of the estate of Cosimo Dilollo, initiated a motion under section 95 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, for a declaration that $1.136 million in payments made by the bankrupt to I.F. Propco Holdings (Ontario) 36 Ltd., pursuant to minutes of settlement, constituted a preference, and the Trustee sought an order that Propco repay that sum to the Trustee (the “Preference Motion”).

[2] Propco, in turn, has brought this motion seeking an order that the relief sought by the Trustee is statute-barred by operation of the Limitations Act, 2002, S.O. 2002, c. 24, Sch. B., and its motion should be dismissed. Alternatively, Propco seeks an order that in the event the Trustee’s motion is not statute-barred, Propco is entitled to file a proof of claim in the bankrupt’s estate for the full amount of its $22,031,787.67 judgment against the bankrupt.

II. Facts

[3] The facts are not in dispute. On July 6, 2006, Propco obtained default judgment against Dilollo in the amount of $22,031,787.67 (the “Judgment”). On December 15, 2006 Propco commenced a bankruptcy application against Dilollo, which the latter opposed. Settlement discussions resulted in Propco and Dilollo entering into Minutes of Settlement on August 30, 2007 under which Dilollo agreed to pay Propco $1.2 million (the “Settlement”).

[4] Between August and December, 2007, Dilollo paid Propco $1,136,500 pursuant to the Settlement.

[5] It was a term of the Settlement that if Dilollo paid Propco the $1.2 million, both parties would consent to a dismissal of the bankruptcy application brought against Dilollo and the parties would exchange full and mutual releases. No dismissal of the bankruptcy application was obtained, and the parties did not exchange releases.

[6] As a result, come early 2008, Propco’s bankruptcy application against Dilollo remained outstanding. By order dated May 22, 2008, Es-Lea Holdings Limited, Rino De Piero and Sam Stern were added as applicants to the bankruptcy application.

[7] Morawetz, J. granted the bankruptcy application on January 11, 2010, and Schwartz Levitsky Feldman Inc. was appointed Trustee. Nine days later, on January 20, 2010, Dilollo initiated an appeal from the Bankruptcy Order. The Court of Appeal dismissed his appeal on September 27, 2010.

[8] The first meeting of creditors was held on May 31, 2011, at which time SLF was replaced as Trustee by msi Spergel Inc. On August 24, 2012 the Trustee initiated its Preference Motion to set aside the payments under the Settlement.

III. Positions of the parties on the limitations issue

[9] Propco submitted that the two-year limitation period contained in the Limitations Act, 2002 governed. Propco argued that the fact of the Settlement was known to the Trustee on January 11, 2010, the date of the Bankruptcy Order, so time started to run at that point. The two-year limitation period expired on January 11, 2012, some seven months before the Trustee initiated its Preference Motion and, consequently, that motion was statute-barred.

[10] The Trustee accepted that the limitation period to bring the Preference Motion commenced on the date of the Bankruptcy Order, but the Trustee argued that the bankrupt’s launching of an appeal of the Order suspended the running of the limitation period until the Court of Appeal disposed of the appeal. Accordingly, the Trustee submitted, the two-year limitation period did not expire until September 18, 2012, several weeks after the Trustee had initiated its Preference Motion.

[11] The narrow issue for determination, therefore, is whether the stay of proceedings on the filing of an appeal contained in section 195 of the BIA operated to suspend the running of the limitation period under the Limitations Act, 2002 for the Trustee’s Preference Motion.

IV. Analysis on the limitations issue

[12] General limitation periods in provincial statutes apply to bankruptcy proceedings,[^1] and the Court of Appeal has held that no conflict exists between the general limitations provision contained in section 4 of the Limitations Act, 2002 and section 95 of the BIA.[^2] Section 4 of the Limitations Act, 2002 provides:

Unless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.

The discoverability rules are set out in section 5 of the Limitations Act, 2002. As mentioned, the Trustee accepted that the claim was discovered on, and the limitation period began to run on, January 11, 2010, the date of the Bankruptcy Order. In his Reasons released that date, Morawetz J. specifically referred to the fact of the Settlement between Propco and the bankrupt.[^3]

[13] Section 195 of the BIA provides for a stay pending an appeal from an order or judgment made under the BIA:

Except to the extent that an order or judgment appealed from is subject to provisional execution notwithstanding any appeal therefrom, all proceedings under an order or judgment appealed from shall be stayed until the appeal is disposed of, but the Court of Appeal or a judge thereof may vary or cancel the stay or the order for provisional execution if it appears that the appeal is not being prosecuted diligently, or for such other reason as the Court of Appeal or a judge thereof may deem proper.

Does the stay of an order pending appeal pursuant to BIA s. 195 affect the running of the limitation period under the Limitation Acts, 2002?

[14] Two provisions of the Limitations Act, 2002 consider the impact of limitation periods contained in other legislation on the running of limitation periods prescribed by that Act. Specifically, sections 19(1) and 20 provide:

19.(1) A limitation period set out in or under another Act that applies to a claim to which this Act applies is of no effect unless,

(a) the provision establishing it is listed in the Schedule to this Act; or

(b) the provision establishing it,

(i) is in existence on January 1, 2004, and

(ii) incorporates by reference a provision listed in the Schedule to this Act.

20. This Act does not affect the extension, suspension or other variation of a limitation period or other time limit by or under another Act.

[15] Section 19 does not apply in this case because the Schedule to the Limitations Act, 2002 does not refer to the BIA. Turning to section 20, does section 195 of the BIA provide for the suspension of a limitation period? The Trustee submitted that the automatic stay of proceedings under BIA s. 195 tolled the operation of the limitation period because the stay meant that no person could take any step in respect of the bankrupt’s estate, including bringing the Preference Motion.

[16] I disagree. To engage section 20 of the Limitations Act, 2002 requires that some other statute provides for a limitation period and also provides for the “extension, suspension or other variation of a limitation period or other time limit by or under another Act”.[^4] Section 195 of the BIA does not contain any limitation period or provide for the “extension, suspension or other variation” of a limitation period. Since BIA s. 195 does not purport to extend, suspend or vary a limitation period contained in the BIA, section 20 of the Limitations Act, 2002 does not apply. Since no other suspension provision contained in the Limitations Act, 2002 would apply in the circumstances of this case, the basic two year limitation period set out in section 4 governs. The parties agreed that time started to run on the day the Bankruptcy Order was made, so the basic two-year limitation period expired on January 11, 2012, well before the Trustee initiated the Preference Motion. That motion, therefore, is statute-barred.

[17] That a stay pending appeal might prevent a person from taking some step does not alter that conclusion. A stay of proceedings pending the hearing of an appeal is not the functional equivalent of a limitation period. Limitation periods set deadlines by which a person must initiate legal process in respect of a cause of action. Stays pending appeal are engaged following the initial disposition of the legal process in which the cause of action was asserted. Limitation periods and stays pending appeal conceptually are quite different creatures. If a stay might operate to prejudice a person’s legal rights, recourse generally is available to seek a lifting of the stay from the court. Section 195 of the BIA specifically provides that “the Court of Appeal or a judge thereof may vary or cancel the stay…for such other reason as the Court of Appeal or judge thereof may deem proper”. In the present case it was always open to the Trustee to seek a lifting of the stay from the Court of Appeal if the Trustee thought that its ability to initiate a preference motion might be prejudiced by the appeal.[^5] As matters transpired, the Trustee was left with ample time following the dismissal of the appeal to commence its Preference Motion.

[18] For these reasons, I grant the motion of Propco, declare that the Preference Motion is statute-barred by operation of the Limitations Act, and I dismiss the Preference Motion.

V. Alternative Issue: The effect of voiding the Settlement as a preference

A. The issue stated

[19] That conclusion is sufficient to deal with Propco’s motion. However, both parties filed and made extensive arguments on the alternative issue – the effect of a voiding of the Settlement on Propco’s ability to file a proof of claim. The Trustee did not take the position that it would be premature to consider that issue nor did it oppose the determination of that issue at this time. From the materials I gleaned that the reason for the Trustee’s position was that the estate lacks any funds, and if Propco could file a proof of claim for the amount of its Judgment, its pro rata share of any distribution essentially would overwhelm the shares of the other creditors. Consequently, the practical reality of the financial circumstances of the estate supports proceeding to determine the alternative issue, so I will decide that issue in the event that it is later found I erred in my determination of the limitations issue.

[20] To recall the facts, Propco obtained a $22,031,787.67 Judgment against Dilollo, which it compromised in the Minutes of Settlement for payments totaling $1.2 million. Propco submitted that in the event the Trustee succeeded in voiding the Settlement under BIA s. 95, then Propco should be entitled to file a proof of claim in the bankruptcy for the full amount of its Judgment. The Trustee disagreed, arguing that in the event the payment of $1,136,500 under the Settlement was declared void, then Propco would be limited to filing a proof of claim for the amount of the Settlement, not the much larger amount of the Judgment.

B. The legal positions of the parties

[21] The Trustee submitted that a finding that a payment made to a creditor was void as against the trustee as a preference under section 95 of the BIA did not affect the transaction as between the parties to it – the creditor and the bankrupt - with the result that the parties to the transaction remained bound by the bargain which they had struck. Accordingly, in the event that the payment made under the Settlement was found to be void as against the Trustee and the payment ordered returned, the Trustee argued that the other terms of the Settlement between Propco and the bankrupt would remain valid and binding. The Trustee submitted that one such term would include Propco’s compromise of its claim under its $22 million Judgment down to $1.2 million.

[22] On its part, Propco contended that if the payment made under the Settlement were to be declared void and set aside as a preference, then the Settlement would be void for all purposes. As a result, upon the repayment of the Settlement amount to the Trustee, Propco would be entitled to file a claim for the full amount of its Judgment.

[23] Counsel stated they had been unable to find any authorities bearing directly on this issue.

C. Analysis

C.1 The purpose of the BIA’s preference provisions

[24] Section 95 of the BIA is one of several sections comprising a system under which a court can review transactions entered into between a debtor and its creditors in the period just prior to formal insolvency proceedings.[^6] The Supreme Court of Canada described the place of the BIA’s preference provisions in the overall bankruptcy scheme as follows:

The object of the bankruptcy law is to ensure the division of the property of the debtor rateably among all his creditors in the event of his bankruptcy. Section 112 of the Act provides that, subject to the Act, all claims proved in the bankruptcy shall be paid pari passu. The Act is intended to put all creditors upon an equal footing. Generally, until a debtor is insolvent or has an act of bankruptcy in contemplation, he is quite free to deal with his property as he wills and he may prefer one creditor over another but, upon becoming insolvent, he can no longer do any act out of the ordinary course of business which has the effect of preferring a particular creditor over other creditors. If one creditor receives a preference over other creditors as a result of the debtor acting intentionally and in fraud of the law, this defeats the equality of the bankruptcy laws.[^7]

[25] As put by the Alberta Court of Queen’s Bench in Piikani Nation v. Piikani Energy Group:

The aim of s. 95 of the BIA is to prevent one creditor or group of creditors from getting an unfair advantage over other creditors when a debtor is insolvent. The remedy is not to "punish" the benefiting creditor, but rather to require it to repay the monies received so that payments out of the debtor's estate can be made respecting priorities and shared properly amongst all creditors.[^8]

In Tucker v. Aero Inventory (U.K.) Ltd., Morawetz J. stated:

The s. 95 cause of action remedy is designed to ensure that there is pari pasu treatment as between unsecured creditors. The recipient of a preferential transfer is not entitled to keep the preferential proceeds if the elements of s. 95 are proven. The subject of the preference is returned to the estate but subject to the rights of secured creditors.[^9]

[26] The cause of action to declare a transaction void as a preference rests with the trustee.[^10] The right of the trustee in respect of a preferential payment is “to have such payment declared void and the consequential right to recover the amount of the payment”.[^11] A fraudulent preference claim by a trustee is not a claim that sounds in damages but rather, pursuant to s. 95(1) of the BIA, to a declaration that such payments be deemed fraudulent and void as against the trustee.[^12]

C.2 The case law on the effect of voiding a preference-type transaction

[27] By its terms section 95(1)(a) of the BIA renders an offending transaction void as against the Trustee:

95. (1) A transfer of property made, a provision of services made, a charge on property made, a payment made, an obligation incurred or a judicial proceeding taken or suffered by an insolvent person

(a) in favour of a creditor who is dealing at arm’s length with the insolvent person, or a person in trust for that creditor, with a view to giving that creditor a preference over another creditor is void as against - or, in Quebec, may not be set up against - the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the day that is three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy…

[28] If section 95 of the BIA is designed to ensure the class equality of the bankruptcy laws and to prevent a form of “queue-jumping” amongst unsecured creditors during a stipulated period prior to the date of the bankruptcy, what happens when the trustee successfully challenges the queue-jumper under section 95, requires it to repay the preference it received and, in effect, forces it to go back and stand, pari passu, with the other creditors of the debtor to await a distribution of the estate under BIA s. 136? The parties brought to my attention three sets of cases.

Whether secured creditors share in the proceeds of a voided preference

[29] First, Propco referred to the decision of Morawetz J. in Tucker v. Aero Inventory (UK) Ltd., and the Trustee referred to the Nova Scotia Court of Appeal decision in Homburg v. S-Marque Inc.,[^13] (which Morawetz J. considered in the Tucker case), but those cases principally dealt with the question of the entitlement of secured creditors to the proceeds obtained by a trustee as a result of a successful preference claim. Those cases did not consider the position of an unsecured creditor who has been required to return a payment found to be a preference.

Reviving rights in the property of a voided transaction: the Bray and Lawrason’s cases

[30] Second, the Trustee pointed to the Court of Appeal decision in Bank of Montreal v. Bray[^14] for the proposition that the voiding of a transaction as a fraudulent one does not affect the transaction as between the parties to the transaction. That case involved a proceeding under section 2 of the Fraudulent Conveyances Act (“FCA”) which rendered a conveyance of real property made with the intent to defeat creditors “void as against such persons and their assigns”. The husband, Mr. Bray, had guaranteed the indebtedness of his company to a bank. His company encountered financial difficulties. Mr. Bray held title to the matrimonial home as a joint tenant with his wife. He conveyed his interest in the matrimonial home to his wife for one dollar thereby severing the joint tenancy. Several months later the bank made a demand on his guarantee and then commenced an action under the FCA. Mr. Bray died. The bank obtained default judgment on the guarantee. The parties agreed that the conveyance contravened the FCA. The issue then became: if the conveyance was set aside under the FCA, was Mr. Bray’s one-half interest available for execution by the bank, or did Mrs. Bray enjoy title to the matrimonial home on the basis that by setting aside the fraudulent conveyance, the joint tenancy was restored?

[31] The Court of Appeal held that the conveyance from Mr. Bray to his wife severed the joint tenancy. The Court noted that section 2 of the FCA made a fraudulent conveyance void as against the debtor’s creditors, but the section did not render the transaction void as against the parties to the transaction. Section 2 of the FCA rendered a transaction voidable; the impugned transaction was not void ab initio. The Court of Appeal stated:

Cartwright J. writing for the Court in Re Bernard Motors Ltd., 1960 57 (SCC), [1960] S.C.R. 385 at 390 considering language in the former s. 64(1) of the Bankruptcy Act, which deemed certain transactions "fraudulent and void as against the trustee in the bankruptcy", adopted the following statement from Halsbury, 3rd ed., vol. 2, p. 560:

If a payment or other disposition of property, otherwise valid, be made in circumstances that amount to a fraudulent preference, the payment, at the time it is made, is a good payment, and so remains unless and, until it is set aside as a fraudulent preference.[Emphasis added.]

Similarly, in this case the transaction although void against creditors was otherwise valid and remained so until it was set aside. Accordingly, I am unable to adopt the course suggested by Schulman J. and in effect notionally reinstate the joint tenancy between Mrs. Bray and her deceased husband so as to allow Mrs. Bray to take the property as the surviving joint tenant free of any claim by the Bank. To do so, in my view, would stretch the concept of legal fiction beyond all reasonable bounds.[^15]

[32] The Nova Scotia Court of Appeal, in the Homburg v. S-Marque Inc. case, also held that when a transaction is found to constitute a preference, the transaction is voidable, not void ab initio, with the result that the transactions were valid as between the parties “until set aside”.[^16]

[33] Building on the Bray case, the Trustee relied on the decision of the Court of Appeal in Hydrotech Chemical Corporation v. Min-Chem Canada Ltd. (Re Lawrason’s Chemicals).[^17] The bankrupt company, Lawrason’s Chemicals Ltd., owed money to Min-Chem. Pursuant to a general security agreement, the latter held a security interest in all of Lawrason’s assets, including trademarks. Lawrason’s transferred a trademark to Min-Chem for nominal consideration. Within a year a petition had been filed against Lawrason’s and subsequently a receiving order was made. Min-Chem sold all of Lawrason’s assets pursuant to its security; Min-Chem contended that it had suffered a shortfall. Another creditor of Lawrason’s, Hydrotech Chemical, obtained a BIA s. 38 order to commence an action to set aside the transfer of the trademark. Min-Chem consented to an order finding that the transfer of the trademark was void as against creditors under the Fraudulent Conveyances Act. The parties agreed to sell the trademark at public auction.

[34] Min-Chem took the position that in the event the transfer of the trademark was set aside, then its former security interest in the trademark would revive. Hydrotech argued that although the transfer was void under the FCA, it was still a valid and subsisting transfer between the original parties to it. The Court of Appeal agreed with Hydrotech’s position, following its earlier decision in Bray:

If the trustee had sued and recovered pursuant to the provisions of s. 2 of the Fraudulent Conveyances Act, he could only have sued on behalf of those creditors whose interests were defeated, hindered, delayed or defrauded by the transfer of the trademark. However, because of the specific provisions of s. 38(3), the benefit derived from the action would belong to the estate to be shared by all creditors, and not just those whose interests were affected. As between the parties to the transaction, the transfer would be a good and valid one. That being the case, there could be no revival of the respondent's security interest in the trademark: it could not be the owner of and a secured creditor in the same property. Nonetheless, in my opinion, it would be entitled to share in the estate as an unsecured creditor.[^18]

In the result, the Court of Appeal found that Min-Chem did not have a security interest in the proceeds of the sale of the trademark, but Min-Chem was entitled to claim as an unsecured creditor for any amount of the indebtedness to it not recovered on the realization of other assets over which it held security.

[35] The decisions in Brady and Lawrason’s are binding on me. I would note, however, that the Alberta Court of Appeal has expressed a somewhat different view about the effect of a declaration that a transaction is void under BIA s. 95, albeit in quite different circumstances than those considered in the Brady and Lawrason’s cases. The case of Principal Group Ltd. (Trustee of) v. Anderson involved the payment out by an investment fund of monies to investors less than three months before the fund went into bankruptcy. The trustee sued to recover the payments as preferences. Some investors argued that it would be inequitable to permit the recovery of such funds because they had changed their position by spending or disposing of the payments before the trustee had initiated suit. In the course of rejecting such a defence to a preference action the Alberta Court of Appeal stated:

The Act does more than forbid preferences and allow a suit to recover them. It makes such payments fraudulent and void: s. 95(1). If they are void, then no property passed, and the payees are in possession of some of the bankrupt's property. The duty of the trustee to collect the property of the bankrupt is elementary.[^19]

The Alberta Court of Appeal did not discuss what recourse the investors might have against the estate of the bankrupt fund after having repaid the preference amounts.

Remedies available to the creditor in a voided preference: Re Bernard Motors

[36] Finally, Propco referred to the decision of the Supreme Court of Canada in Re Bernard Motors.[^20] In that case a company had borrowed money from a bank on the strength of a promissory note. Four individual guarantors provided a guarantee to the bank of the company’s indebtedness. At a time when the company was insolvent, it deposited money into its bank account sufficient to satisfy the company’s indebtedness to the bank. Two of the guarantors, who were involved in the management of the company, asked the bank to satisfy what was owed to it out of the company’s bank account and then to return the guarantee to them. The bank did so. About two months later the company went into bankruptcy. The trustee sought to set aside the payment to the bank as a preference under the BIA.

[37] In light of the positions taken by the parties on the disposition of the issues by the lower courts, the Supreme Court of Canada held that since it was res judicata as between the bank and the trustee that the payment was good, then the guarantors were discharged because the debt to the bank for which they stood as sureties had been paid in full. In obiter, however, the Supreme Court of Canada stated:

With respect, I incline to the view that it having been found as a fact that the intention of the insolvent was to prefer both the bank and the guarantors and that the intention of the latter, although not of the former, was to be preferred, it should have been held that the payment was void, the bank should have been ordered to repay the $10,000 to the trustee and left to exercise its rights against the guarantors. I do not, however, have to reach a final conclusion as to this because it is too late to make any such order.

This obiter would suggest that having repaid the preference amounts to the trustee, the debtor’s indebtedness to the bank would remain, and the bank could proceed to recover that debt from the guarantors. The Supreme Court of Canada made no comment on what rights the bank would have to file a proof of claim in the bankrupt’s estate.

C.3 Application to the facts of the present case

[38] As the cases reveal, section 95(1)(a) of the BIA creates a mechanism by which a trustee may recover property of the bankrupt which had been transferred or paid out to an arm’s-length creditor, in preference to other creditors, during the period which starts three months immediately prior to the date of the initial bankruptcy event and ends on the date of the bankruptcy. The property or payment recovered then stands available for sharing by all unsecured creditors, on a pari passu basis, subject to the rights of secured creditors as described in the Tucker v. Aero Inventory case.

[39] For the purpose of this part of the motion Propco has accepted that the payments made to it by Dilollo under the Settlement constituted a preference pursuant to section 95(1)(a) of the BIA. In those circumstances Propco would be required to repay the settlement amounts to the Trustee.

[40] What claim would Propco then have against the estate? Under the analysis set out in the Bray and Lawrason’s cases, the Settlement was voidable and therefore remained valid up until the time it was set aside. Unlike the transactions at issue in the Bray and Lawrason’s cases, in this case the impugned transaction – the Settlement - did not convey title in real or personal property. Instead, under the Settlement Propco agreed to compromise its claim against Dilollo, and Dilollo agreed to pay $1.2 million to Propco. When he did so, Propco would consent to the dismissal of the bankruptcy application and Propco would provide Dilollo with a full, mutual release. Although Dilollo did not pay the full $1.2 million, Propco accepted what he did pay as the full discharge of his payment obligations, as can be seen from the letter dated April 11, 2011 from counsel for Propco which stated that:

On December 18, 2007, Propco received a CIBC bank draft in the amount of $85,000 which it agreed to accept in lieu of the $150,000 which Dilollo previously agreed to pay.

From this it follows that Dilollo fulfilled his promises to pay the settlement amount as set out in sections 1 and 2 of the Settlement.

[41] Although the parties to the Settlement never exchanged mutual releases, under the terms of the Settlement Propco was obligated to deliver, and Dilollo was entitled to receive, a full release. That would have included a release of the amounts due under the Judgment. In light of that obligation of Propco, I think the analysis must proceed on the basis that upon receipt of the $1.136 million Propco must be taken to have released Dilollo from the amount of the Judgment.

[42] In sum, the Settlement enabled Propco, during the period beginning three months before the date of the initial bankruptcy event and ending on the date of bankruptcy, to jump the queue over other creditors and obtain a preference by securing payment of part of Dilollo’s indebtedness to it. To achieve that result Propco was prepared to compromise its Judgment by a significant amount. Propco received some value for its Judgment, while the amount of the bankrupt’s property available for other creditors was reduced.

[43] The effect of a declaration that the Settlement payment was void under BIA s. 95(1) should be to return Propco to the position it was in before it received the preferential payments. That is, Propco would be denied the preferential benefit represented by the settlement payments because it would have to return those payments to the Trustee. But, as stated in the Piikani Nation case, the purpose of section 95 is not to punish a benefiting creditor, but to prevent that creditor from securing an unfair advantage over other creditors. Requiring the preferred creditor to repay the monies achieves that goal, and then “payments out of the debtor's estate can be made respecting priorities and shared properly amongst all creditors.”[^21]

[44] Following that reasoning, if the Settlement payments were voided as preferences under BIA s. 95(1)(a), then the Settlement as a whole would be void, and Propco then would be left to file a proof of claim, like all other unsecured creditors, for the amount of the debt it was owed. That would mean that Propco could submit a proof of claim for the amount of its Judgment which the Trustee would then have to review in the ordinary course of the administration of the estate with the other proofs of claims filed by unsecured creditors.

[45] The Trustee submitted that any proof of claim by Propco should be limited to the amount agreed upon in the Settlement. I do not accept that submission for three reasons. First, the Trustee, in which all property of the bankrupt has now vested, cannot seek to set aside part of a transaction in order to recover some of the bankrupt’s property, but then attempt to rely on another part of the impugned transaction to block or reduce a claim against the estate by the creditor. That would smack of cherry-picking.

[46] Second, when I asked Trustee’s counsel during argument whether the Trustee’s position that Propco must be held to its compromise meant that effect had to be given to the full release of the Judgment agreed to in the Settlement and therefore Propco should not be allowed to file a proof of claim for any amount, the Trustee stated it was not taking that position. That was a reasonable submission by Trustee’s counsel. It would be a very harsh result indeed were a creditor required to repay the entire consideration for its compromise of rights, yet be held strictly to its release of those rights. The purpose of section 95 of the BIA would be fulfilled simply by denying the creditor the benefit of the preference transaction and requiring the creditor to assert the amount of its pre-preference transaction claim by way of proof of claim with the other unsecured creditors. That would unwind the queue-jumping engaged in by the preferred creditor.

[47] Third, I do not see this result as inconsistent with the reasoning of the Court of Appeal in the Bray and Lawrason’s cases. In both those cases the impugned conveyances were done for nominal consideration, whereas the present case involved the compromise of approximately $20 million in debt. Care must be taken when analogizing from the well-established legal consequences of severing a joint tenancy to the effect of other transactions which may be found void as a fraudulent conveyance or a preference. Moreover, Bray involved an action under the Fraudulent Conveyances Act where the impugned transaction was rendered void as against other creditors. In the present case, a finding of a preference under section 95 of the BIA would void the Settlement as against the Trustee, the person in whom all property of the bankrupt has vested. It is interesting to observe that in the Lawrason’s case that while the Court of Appeal was not prepared to unwind the transfer of the trademark so as to restore Min-Chem’s original position as possessing a security interest in the trademark, it did state that Mid-Chem would be entitled to share in the estate as an unsecured creditor to the extent of its shortfall. Since the transfer of the trademark was done for nominal consideration, no issue arose about Min-Chem’s ability to file a claim for the consideration it had paid for the trademark.

[48] For these reasons, I conclude that in the event the Trustee’s claim under section 95(1)(a) of the BIA was not statute-barred and in the event it was found that the Settlement was void under that section, then Propco would be entitled to file, for review by the Trustee, a proof of claim for the full amount of its Judgment, together with applicable interest.

VI. Summary and Costs

[49] By way of summary, I grant Propco’s motion and dismiss the Trustee’s Preference Motion as statute-barred.

[50] As part of its motion Propco requested an order that the Trustee should be liable personally for costs awarded against it in the Preference Motion. I deferred argument on that point. Having now determined the first two issues raised by Propco, I would encourage the parties to try to settle the costs of this motion. I would observe that both issues raised by Propco were novel in the sense that neither counsel was able to find any cases directly on point. The parties might well wish to take into account the novelty of the issues in their discussions about the costs of the motion. If the parties cannot agree on costs, Propco may serve and file with my office written cost submissions, together with a Bill of Costs, by February 8, 2013. The Trustee may serve and file with my office responding written cost submissions by February 22, 2013. The costs submissions shall not exceed three pages in length, excluding the Bill of Costs.

D. M. Brown J.

Date: January 29, 2013

[^1]: Gingras v. General Motors, [1975] 1 S.C.R.; Employers Liability Assurance Corp. v. Ideal Petroleum, 1976 142 (SCC), [1978] 1 S.C.R. 230.

[^2]: Edwards Estate v. Food Family Credit Union, 2011 ONCA 497, para. 6.

[^3]: 2010 ONSC 129, paras. 58 and 73.

[^4]: Joseph v. Paramount Canada’s Wonderland, 2008 ONCA, paras. 8 and 9.

[^5]: Lakehead Newsprint (1990) Ltd. v. 893499 Ontario Ltd., 2001 28443 (ON SC); Canada (A.G.) v. Fekete, 1999 ABQB 262; Re Mawji, 2011 ONSC 1432.

[^6]: Tucker v. Aero Inventory (UK) Ltd., 2011 ONSC 4223, para. 163.

[^7]: Hudson v. Benallack, 1975 158 (SCC), [1976] 2 S.C.R. 168, para. 21.

[^8]: Piikani Nation v. Piikani Energy Group, 2012 ABQB 187, para. 118.

[^9]: Tucker, supra., para. 138.

[^10]: Ibid., para. 137.

[^11]: Re Bernard Motors, 1960 57 (SCC), [1960] S.C.R. 385, at 390.

[^12]: C.C. Petroleum Ltd. v. Steinberg, Morton & Frymer (2003), 2003 9253 (ON SC), para. 3.

[^13]: 1999 1591 (NS CA).

[^14]: 1997 545 (ON CA).

[^15]: Bank of Montreal v. Bray, supra., paras. 26 and 27.

[^16]: Homburg, supra., para. 83.

[^17]: 1999 4635 (ON CA).

[^18]: Ibid., para. 8.

[^19]: Principal Group Ltd. (Trustee of) v. Anderson (1997), 1997 ABCA 199, para. 11.

[^20]: [1960] S.C.R. 387.

[^21]: Piikani Nation v. Piikani Energy Group, 2012 ABQB 187, para. 118.