SUPERIOR COURT OF JUSTICE – ONTARIO
COMMERCIAL LIST
RE: The Bank of Nova Scotia, Plaintiff
AND:
David Allin, 1154944 Ontario Inc. carrying on business as Ambutrans and previously known as Ambutrans Inc. and 2313633 Ontario Inc. carrying on business as Ambutrans and previously known as Ambutrans Ltd., A. Farber & Partners Inc. and Farber Financial Group, Defendants
BEFORE: D. M. Brown J.
COUNSEL: A. O’Brien, for the plaintiff
N. Buhary, for the defendant trustee in bankruptcy, A. Farber & Partners Inc.
HEARD: December 17, 2013
REASONS FOR DECISION
I. Motion under s. 215 of the Bankruptcy and Insolvency Act for leave to sue a trustee in bankruptcy
[1] On February 20, 2013, the Bank of Nova Scotia (“BNS”) commenced this action seeking damages of $473,863.43 in respect of an overdraft which remained unpaid from an account in the name of Ambutrans Inc. BNS included, as defendants, A. Farber & Partners Inc., which had acted as proposal trustee and then trustee in bankruptcy for Ambutrans, as well as Farber Financial Group.
[2] Prior to commencing the action BNS did not obtain leave under section 215 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, which provides that “except by leave of the court, no action lies against…a trustee with respect to any report made under, or any action taken pursuant to, this Act”. BNS moved for leave to continue its action against Farber, which opposed the motion.
[3] For the reasons set out below, I grant the motion.
II. Background facts
[4] On November 25, 2011, Ambutrans Inc. (“Oldco”) filed a notice of intention to make a proposal (“NOI”) pursuant to BIA s. 50.4(1). A. Farber & Partners Inc. (“Farber”), acted as proposal trustee.
[5] At that time Oldco held two bank accounts at BNS: 84772 01897 15 (“9715 account”) and 84772 01823 11 (“2311 account”). Although there was no agreement to provide an overdraft facility for the accounts, in fact overdrafts did occur. On November 25, 2011, Oldco’s 9715 account had a credit balance of some $49,000.00. Five days later, on November 30, there was an overdraft of about $14,000.00. On November 25 Oldco’s 2311 account had a modest credit balance; three days previously it had been in overdraft by $14,742.
[6] David Allin was the principal of Oldco and he signed the November 25, 2011 list of creditors which accompanied Oldco’s NOI. BNS was not listed as a creditor.
[7] John Hendricks, the trustee at Farber who had carriage of the file, deposed that to Farber’s knowledge Oldco did not have an overdraft facility with BNS:
Allin advised Farber that Oldco did not have an overdraft facility with [BNS]. In fact, Allin arranged for a secured grid note for $80,000 to be funded by him during the NOI process. In fact, Oldco was only paying payroll to the extent funds were available in the Bank account. There was no reference to an overdraft facility on Oldco’s bank statements in relation to its account with the Bank…Oldco did not use any overdraft facility during the period of Farber’s Proposal Trustee Appointment.
On cross-examination Hendricks acknowledged that he had not specifically asked Allin whether Oldco’s accounts operated in overdraft from time to time. As proposal trustee Farber had monitored the state of Oldco’s accounts at the end of each reporting period
[8] On January 31, 2012, Farber obtained a court order approving the sale of Oldco’s assets, including Oldco’s cash assets. That sale closed on February 8, 2012. The purchaser was Ambutrans Ltd. (“Newco”), a party related to Oldco and of which Allin also was the principal. As a result of failing to file a proposal by February 8, 2012, Oldco was deemed to have made an assignment into bankruptcy on February 9, and Farber was appointed trustee of Oldco’s estate.
[9] The proposal period commenced on November 25, 2011 and continued until February 8, 2012. BNS filed in evidence Oldco’s bank account statements during the proposal period. They did show several overdrafts:
(i) 9715 account: November 30 - $14,299; January 11 - $22,917;
(ii) 2311 account: January 5 - $2,004; January 12 - $1,195.
[10] Since BNS was not a creditor of Oldco on the date of the NOI, Farber did not give it notice of the proposal. Farber did not give notice to BNS of the sale approval motion because, according to Farber, BNS had no security registered under the Personal Property Securities Act nor was it a creditor of Oldco. Nor did Farber include BNS in Oldco’s bankruptcy statement of affairs sent out on February 14, 2012 because BNS was not a creditor of Oldco. The evidence filed by BNS stated that it did not receive any notice of Oldco’s proposal or bankruptcy from Farber.
[11] Farber published a notice in the Globe and Mail on December 21, 2011 inviting offers for the business of Oldco. Farber also published a notice of bankruptcy in the Globe on February 21, 2012. On February 10, 2012, Farber sent Allin a document which outlined his duties as an officer of a bankrupt corporation.
[12] Under Newco’s purchase agreement approved by the Court, the assets of Oldco purchased by Newco included “all cash…wherever situate”.
[13] In its statement of claim BNS pleaded that after the sale of assets from Oldco to Newco, Allin continued to operate Oldco’s bank accounts and proceeded to place them into an overdraft of $273,628.24. The account statements filed by BNS disclosed that the overdrafts began around late April, 2012. In addition to claiming damages for this overdraft, BNS pleaded that Allin engaged in a cheque kiting scheme in connection with Newco’s account, which result in an unauthorized overdraft in Newco’s account of $200,235.90. According to its statement claim, BNS seeks to recover both amounts from Farber, as well as Allin and Newco.
III. Governing legal principles
[14] The Supreme Court of Canada reviewed and re-confirmed the test for granting leave under BIA s. 215 in its decision in GMAC Commercial Credit Corp. – Canada v. T.C.T. Logistics Oldco[^1] As stated by the majority:
For almost 150 years, courts and commentators have been universally of the view that the threshold for granting leave to commence an action against a receiver or trustee is not a high one, and is designed to protect the receiver or trustee against only frivolous or vexatious actions, or actions which have no basis in fact. As L. W. Houlden, G. B. Morawetz and J. Sarra stated in Bankruptcy and Insolvency Law of Canada (3rd ed. (loose-leaf)), vol. 3, at p. 7-118.2:
The court will not refuse leave unless there is no foundation for the claim or the claim is frivolous and vexatious . . . .
Essentially, unless the claim is without merit, the gate to a litigated determination has usually been opened under s. 215 and its statutory predecessors…[^2]
[15] The purpose of the gate-keeping function, according to the Supreme Court of Canada, is to prevent the trustee:
…from having to respond to actions which are frivolous or vexatious or from claims which do not disclose a cause of action”…so that the bankruptcy process is not made unworkable. On the other hand, it ensures that legitimate claims can be advanced.
[16] The Supreme Court of Canada confirmed that the principles articulated by the Ontario Court of Appeal in Mancini (Bankrupt) v. Falconi[^3] continue to guide a court’s analysis under BIA s. 215:
In the leading case of Mancini, the Court of Appeal summarized the accepted principles as being the following:
Leave to sue a trustee should not be granted if the action is frivolous or vexatious. Manifestly unmeritorious claims should not be permitted to proceed.
An action should not be allowed to proceed if the evidence filed in support of the motion, including the intended action as pleaded in draft form, does not disclose a cause of action against the trustee. The evidence typically will be presented by way of affidavit and must supply facts to support the claim sought to be asserted.
The court is not required to make a final assessment of the merits of the claim before granting leave.
[17] The Supreme Court of Canada then described the degree of scrutiny which a motions court must apply to the proposed claim:
Although the Mancini test calls for an investigation into whether the proposed litigation discloses a cause of action, the focus of that inquiry is not a determination of the merits…As the court said in Mancini, at para. 16 “[o]n a continuum of evidence ranging from no evidence to evidence which is conclusive, the evidence required to support an order under [the predecessor of s. 215] must be sufficient to establish that there is a factual basis for the proposed claim and that the proposed claim discloses a cause of action.”…[^4]
IV. Analysis
[18] BNS has adduced evidence to establish a factual foundation for its claim: Oldco held accounts at BNS; Farber did not give notice of the proposal, sale or bankruptcy to BNS; although on the date of the NOI and the date of the bankruptcy order neither of Newco’s accounts were in overdraft, some overdrafts did arise during the proposal period.
[19] From my reading of the evidence and the pleading, the dispute between BNS and Farber consists not so much in what, in fact, happened, but the legal consequences which flow from those events. Specifically, whether any legal consequences flowed from Farber’s failure to provide notice of the proposal, sale or bankruptcy to BNS.
[20] The materials filed on this motion set out two conflicting views of the legal consequences of the facts. BNS pleaded in its statement of claim that Farber owed it a duty of care and it had breached that duty by failing to provide it with notice of the proposal, sale and bankruptcy:
As proposal trustee and then as trustee in bankruptcy, Farber had a duty of care to Oldco’s creditors to ensure that the necessary minimum level of inquiry and due diligence was performed at the time the proposal was prepared and at the time of the deemed assignment which included, without limitation, the duty to ask Allin as principal of Oldco what financial institutions Oldco banked with and to obtain confirmation of same. Had the same been done Farber would have learned that the Bank was a creditor of Oldco and would have subsequently ensured the Bank received notice of the proposal and bankruptcy proceedings. In the alternative, if Farber did not discharge its duty as aforeplead, it was negligent in that it failed or refused to advise the Bank of Oldco’s insolvency proceedings.
Farber failed to discharge their duty to the Bank as aforeplead and as a result thereof the Plaintiff has sustained damages for which Farber is liable.
Farber was negligent, breached its obligations due and owing to the Plaintiff and failed to possess and exercise the knowledge, skill, care and attention required of it as a proposal and bankruptcy trustee and failed to perform its services in a diligent and competent manner and to act in the best interest of Oldco’s creditors.
The defendant knew or ought to have known that the operating accounts held with the Bank had overdraft facilities and that Oldco could, as a result of the failure of the trustee to complete its due diligence and notify the Bank, continue to operate those accounts without interruption.
The plaintiff pleads that Farber was also negligent and failed to comply with its duties as officers of the Court in that not only did it fail to perform the minimum level of due diligence which would have revealed the Bank as a creditor, it assisted the Defendant Allin in allowing him to roll the assets of Oldco into Newco through a Court approved process to the detriment of the Bank.
It is respectfully submitted that Farber knew or ought to have known that allowing the aforeplead conduct without any notice to the Bank could expose the Bank to damages and that had they simply advised the Bank of the insolvency proceedings the Bank would have averted any losses.
[21] Farber submitted that its obligations to BNS, or to any creditor, were to comply with the duties of a trustee enumerated in the BIA. Since the BIA only required that notice be given to creditors or secured creditors, it was not required to give BNS notice at the time of the NOI, sale or bankruptcy because BNS was not a creditor on those dates.
[22] The parties only put one case before me which dealt with the issue of the failure of the trustee to give notice in the context of founding a claim for which leave was sought granted under BIA s. 215. That case – Burton v. Kideckel[^5] – did not involve any dispute that the claimant, Burton, was in fact a creditor to whom notice of the discharge hearing should have been given. Leave was granted under BIA s. 215.
[23] However, BNS filed opinion evidence on this motion. Philip Gennis, a trustee in bankruptcy who practices in Toronto, filed an affidavit in which he deposed:
I am advised that although there were overdrafts on the account from time to time, that at the time of the initial issuing of the proposal, the conversion of the proposal into a Bankruptcy and the sale of the assets, that there was a modest positive balance in the operating account and therefore the Trustee of the proposal takes the position that there was no requirement that notice be given to The Bank of Nova Scotia as the Banker for the operating account for the company.
I take issue with this position as at the time of the Bankruptcy there is a positive obligation on the Trustee to contact the Bankrupt’s Bank. Where the operating account is in overdraft the Bank is a creditor. Where there is a positive balance in the account the Bank is the holder of an asset of the company and the account should be frozen and made available to the Trustee for the benefit of creditors. In either case the Bank would then have received notice of the Bankruptcy.
It was the evidence of Mr. Hendricks from Farber on cross-examination that even though the bank account remained owned by Oldco after the sale, as the bankruptcy trustee Farber had no obligation to tell BNS - where the account resided - that Oldco had become bankrupt.
[24] While the evidence from Mr. Gennis does not assist BNS in its argument about the failure of Farber to give notice of the NOI and sale, the evidence BNS filed showed that the overdraft for which it seeks damages arose after the bankruptcy order was made. Mr. Gennis’s opinion provides some factual foundation for the claim of BNS regarding Farber’s failure to provide it with notice of the bankruptcy. What effect the fact that the purchase agreement included all the cash assets of Oldco might have on the trustee’s duty to inquire of and give notice to a bank where the debtor’s cash reposed is a matter for consideration in light of all of the facts, in particular if the language of the vesting order did not purport to convey the ownership of a specific bank account to the purchaser.
[25] On the evidence filed, and in light of the claims asserted by BNS, I cannot say that its claim against Farber is frivolous or vexatious, so I grant the motion of BNS for leave to continue its action against Farber pursuant to BIA s. 215. Costs of this motion shall be to BNS in the cause of the action.
D. M. Brown J.
Date: December 21, 2013
[^1]: 2006 SCC 35, [2006] 2 S.C.R. 123. [^2]: Ibid., paras. 55 and 56. [^3]: (1993), 61 O.A.C. 332. [^4]: GMAC, supra., para. 60. Although in the preceding paragraph the Supreme Court of Canada stated that the “evidence must disclose a prima facie case”, given its admonition that the motions court should not inquire into the merits of the case and, instead, should focus on the factual foundation for the case, I do not read that portion of the GMAC decision as departing from the stated purpose of BIA s. 215 as protecting a trustee from frivolous or vexatious claims. [^5]: 1999 15010 (ON S.C.).