Court File and Parties

COURT FILE NO.: 31-2208236 DATE: 20180718 SUPERIOR COURT OF JUSTICE – ONTARIO (IN BANKRUPTCY AND INSOLVENCY)

RE: IN THE MATTER OF THE PROPOSAL OF RAJNEESH MATHUR OF THE CITY OF TORONTO, IN THE PROVINCE OF ONTARIO

BEFORE: H.J. Wilton-Siegel J.

COUNSEL: Ian Klaiman, for the Appellant, Ranjeesh Mathur Constantine Alexiou, for the Respondent, Geoanna Investments Inc.

HEARD: April 27, 2018

Endorsement

[1] The appellant, Rajneesh Mathur (the “Debtor”), appeals the order of Master Jean dated January 5, 2018 (the “Order”) lifting a stay of proceedings that arose pursuant to s. 69.2 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”) upon the Debtor’s filing of a proposal pursuant to s. 62(1) of the BIA.

Factual Background

[2] The respondent, Geoanna Investments Inc. (the “Respondent”), advanced loans totalling $1 million to Komtech Inc. (“Komtech”) (the “Loan”). Komtech subsequently made a voluntary assignment into bankruptcy on May 19, 2011.

[3] On September 18, 2012, the Respondent commenced an action in the Superior Court (the “Action”) claiming damages against the Debtor and Peter Chatzigiannis (“Chatzigiannis”) (collectively, the “Defendants”) based on alleged false and misleading representations made by them respecting Komtech at the time of the Loan. The Respondent alleges that the Defendants made these misrepresentations and then structured the affairs of Komtech to render it insolvent and to acquire the assets of Komtech in a new corporation at distress values. The Debtor was an officer and director of Komtech. Chatzigiannis was a long-time employee of Komtech and a creditor. It appears that advances of a holding corporation of Chatzigiannis were repaid shortly after the Respondent’s loan to Komtech.

[4] The Defendants defended the Action. The Action was set down for a trial on September 20, 2016 and a pre-trial conference was booked for June 16, 2017, which has not proceeded for reasons unrelated to this appeal.

[5] The Debtor filed a proposal under Part III, Division I of the BIA (the “Proposal”) on January 18, 2017. The admitted claims of three creditors totalled approximately $452,443.81. All of these creditors accepted the Proposal. It is understood that, without inclusion of the Respondent’s claim, the Proposal would provide for a payment of approximately six cents on the dollar plus a proportion of any proceeds of a litigation claim that the Debtor proposes to pursue against the former auditors of Komtech.

[6] The Respondent’s claim was treated by the proposal trustee as a contingent claim. As such, the Respondent could attend the meeting of creditors held to consider the Proposal and could speak in opposition to the Proposal but could not vote against it.

[7] The Debtor brought an application to approve the Proposal (the “Approval Application”). The Approval Application was heard on April 11, 2017 before the Bankruptcy Court in Toronto, which adjourned the Approval Application pending the quantification of the Respondent’s claim in the Action.

[8] For this purpose, the Respondent brought a motion to lift the stay of proceedings that automatically arose pursuant to s. 69.2(1) of the BIA. The motion was heard on September 19, 2017 by Master Jean. In a decision dated January 5, 2018 (the “Decision”), the Master granted the motion lifting the stay of proceedings.

Standard of Review

[9] The standard of review on an appeal from the Registrar under the BIA has been set out in Impact Tool & Mould Inc. (Trustee of) v. Impact Tool & Mould (Windsor) Inc. (Receiver of), (2006), 2006 ONCA 7498, 79 O.R. (3d) 241, at para. 48:

An appeal of the registrar’s order will be allowed where it is demonstrated that the registrar erred in principle or in law or failed to take into account a proper factor or took into account an improper factor, which led to a wrong conclusion.

Applicable Law

[10] The Respondent sought a lifting of the stay pursuant to s. 69.4 of the BIA, which reads as follows:

69.4 A creditor who is affected by the operation of sections 69 to 69.31 or any other person affected by the operation of section 69.31 may apply to the court for a declaration that those sections no longer operate in respect of that creditor or person, and the court may make such a declaration, subject to any qualifications that the court considers proper, if it is satisfied

(a) that the creditor or person is likely to be materially prejudiced by the continued operation of those sections; or

(b) that it is equitable on other grounds to make such a declaration.

The Master’s Decision

[11] In the Decision, the Master held that the Respondent had satisfied both alternatives under the provisions of s. 69.4. She held that the Respondent was likely to be materially prejudiced by the continued operation of the stay on five grounds. She also held that it was equitable to make the Order on three additional grounds. The principal grounds of each finding are the subject of the Debtor’s grounds of appeal and are dealt with below.

Analysis and Conclusions

[12] The Debtor raises three grounds of appeal, which I will address in turn.

Master’s Finding of Material Prejudice to the Respondent if the Order Were Denied

[13] The Master did not purport to address the merits of the action for two reasons. First, she held that “it is difficult given the nature of the allegations, which rest in many respects on findings as to credibility, to assess the merits of the case.” Second, she held it was not necessary to consider the merits of the case given her finding as to material prejudice. The Master held that the Respondent would be materially prejudiced if the stay were not lifted. She expressed five grounds for this finding.

[14] The Debtor’s position is essentially that each of the grounds on which the Master found material prejudice is vitiated by the Master’s failure to appreciate, and to take into consideration, the absence of any merit to the Respondent’s claim in the action. In his view, the evidence demonstrates that the Action does not stand any reasonable chance of success and will not warrant an order that will survive the Debtor’s discharge from bankruptcy. He characterizes this evidence as “clear and uncontested.” He says that, if the Master had properly appreciated the evidence, she would have reached the contrary conclusion that the Respondent would not be materially prejudiced by a continuation of the stay of proceedings.

[15] The test for lifting of the stay is set out in Ma, Re (2001), 2001 ONCA 24076, 143 O.A.C. 52 (C.A.), at paras. 2-3:

In our view there is no requirement to establish a prima facie case and no inconsistency in the case law. We do not agree that Bowles v. Barber imposes a prima facie case requirement. More importantly, that requirement is not imposed by the statute. Under s. 69.4 the court may make a declaration lifting the automatic stay if it is satisfied (a) that the creditor is “likely to be materially prejudiced by [its] continued operation” or (b) “that it is equitable on other grounds to make such a declaration.” The approach to be taken on s. 69.4 application was considered by Adams J. in Re Francisco (1995), 1995 ONSC 7371, 32 C.B.R. (3d) 29 at 29-30 (Ont. Gen. Div.), a decision affirmed by this court (1996), 1996 ONCA 10233, 40 C.B.R. (3d) 77 (Ont. C.A.):

In considering an application for leave, the function of a bankruptcy court is not to inquire into the merits of the action sought to be commenced or continued. Instead, the role is one of ensuring that sound reasons, consistent with the scheme of the Bankruptcy and Insolvency Act, R.S.C. 1985, c.B-3, exist for relieving against the otherwise automatic stay of proceedings.

As this passage makes clear, lifting the automatic stay is far from a routine matter. There is an onus on the applicant to establish a basis for the order within the meaning of s. 69.4. As stated in Re Francisco, the role of the court is to ensure that there are “sound reasons, consistent with the scheme of the Bankruptcy and Insolvency Act” to relieve against the automatic stay. While the test is not whether there is a prima facie case, that does not, in our view, preclude any consideration of the merits of the proposed action where relevant to the issue of whether there are "sound reasons" for lifting the stay. For example, if it were apparent that the proposed action had little prospect of success, it would be difficult to find that there were sound reasons for lifting the stay.

[16] It is agreed that Ma sets a low threshold – a plaintiff must show no more than some chance of success. This is often expressed as a question of whether the plaintiff has pleaded facts that, if believed, would establish a claim. However, the onus on a plaintiff will depend, in part, on the extent to which a defendant adduces evidences that an action is frivolous, vexatious or has little chance of success. In such event, a court may need to have regard at least to the nature and strength of the plaintiff’s evidence bearing on the merits of the action: see Global Royalties Ltd. v. Brook, 2016 ONCA 50, 344 O.A.C. 49, per Strathy C.J.O.

[17] Having considered the material that is before the Court, the positions of the parties can be summarized as follows.

[18] The Respondent’s position is set out in the pleadings in the statement of claim in the action. The Respondent alleges that the Defendants were aware of, and took advantage of, the “lack of sophistication and virtual illiteracy” of George Giannopoulos (“Giannopoulos”), the shareholder of the Respondent, in influencing him to cause the Respondent to lend money to Komtech without independent legal advice. The Respondent alleges that the Defendants did so in breach of a fiduciary duty owed to Giannopoulos, having deliberately cultivated a relationship of trust and confidence between them. In addition, the Respondent alleges that the Defendants knowingly misrepresented Komtech’s financial status, and its ability to repay the loans, as well as, among other things, their intention to replace their personal loans to Komtech with the Respondent’s loan. The Respondent says that Komtech was insolvent, or near insolvency, at the time the loans were made.

[19] The Debtor’s position is set out in four paragraphs in an affidavit dated August 23, 2017 of the Debtor. He says that Chatzigiannis, who was a friend of the Giannopoulos family, handled all negotiations with Giannopoulos and Geoanna in respect of the loans made to Komtech. The Debtor denies making any representation to Geoanna, says he did not participate in any pre-loan discussions, and says further that he met the principals of Geoanna for the first time over two years after the loans were advanced. He asserts that he “was not in any way, privy to or involved with any of those discussions.”

[20] For present purposes, I think a critical consideration is that the determination of the Respondent’s claim against the Debtor will require the evidence of both Defendants for the purpose of establishing the following: (1) Peter’s actions and a determination of whether they are actionable by way of a breach of a fiduciary duty or fraudulent misrepresentation; and (2) the Debtor’s knowledge of, and participation in, Peter’s actions. The determination of the Respondent’s claim against the Debtor is not simply a matter of the receipt and acceptance of the Debtor’s denial of any communication with the Respondent prior to the Respondent’s loan to Komtech.

[21] Given the foregoing facts before the Master, the Master was entitled to draw the following two conclusions: (1) that the merits of the Respondent’s claim depended largely on issues of credibility that were not to be decided on the motion before her; and (2) to the extent she was required to consider the merits of the Respondent’s case, the Respondent satisfied the obligation to establish some chance of success.

[22] In respect of the first conclusion, the Respondent specifically denies the Debtor’s allegation that he met George and his wife for the first time two years after the loan. This raises a legitimate credibility issue. More importantly, the issue of the Debtor’s knowledge of any circumstances giving rise to a fiduciary relationship and any breach thereof by Peter, or of any fraudulent misrepresentations on his part, will inevitably raise issues of credibility.

[23] In respect of the second conclusion, the following considerations are relevant. While the Debtor says he was not privy to Chatzigiannis’ discussions with Giannopoulos, this is a bald assertion for which the evidence is not definitive. In any event, even if true, the mere fact that the Debtor did not physically interact with Giannopoulos until two years after the loans were made does not exclude a claim against him as a joint tortfeasor or in conspiracy. The critical question is, as mentioned, the extent of his knowledge of, and participation in, any actions on the part of Chatzigiannis that might have constituted breach of a fiduciary duty owed to Giannopoulos or a fraudulent misrepresentation. This is not addressed in the Debtor’s affidavit in the motion record nor is it otherwise addressed in the materials before the Court on this appeal.

Master’s Finding Regarding Section 135 of the BIA

[24] The Master held that it was equitable to make the Order on three grounds that pertain to the fact that the Respondent’s claim has not yet been valued. In this regard, it is significant that the Respondent asserts a claim of approximately $1 million, which would make it the preponderant creditor if its claim were sustained. The Master gave the following three reasons for her finding.

[25] The Master considered that it was unfair to the other creditors who voted for the proposal without knowledge of the quantum of the Respondent’s claim. She also held that the proposal trustee would be unable to conclude the administration of the Proposal until the Respondent’s claim was determined and quantified. Both of these grounds support an adjournment of the Proposal to permit a quantification of the Respondent’s claim. However, they are not directly relevant to the lifting of the stay of proceedings because they beg the question of the appropriate forum for determination of the claim. That issue is raised by the Debtor’s second ground of appeal and the Master’s third ground for her finding.

[26] The Master stated that “[i]t seems to me that the summary procedure for valuing claims under the BIA may not be well-suited to the type of claim advanced by [the Respondent] in the Action.” The Debtor argues that the Master erred in failing to find that the summary procedure in s. 135 of the BIA was the appropriate procedure for the determination of the Respondent’s claim. The Debtor says that the Respondent should have availed itself of this procedure and that, having failed to do so, it cannot seek a stay to permit a valuation pursuant to the Action.

[27] In my opinion, the Master did not err in reaching her conclusion for a number of reasons.

[28] First, and most important, elsewhere in the Decision, the Master concluded that “it is necessary for the trial judge in the Action to have all necessary parties before him or her to assess credibility and determine the [D]efendants’ respective liabilities upon a full and proper adjudication.” While this statement appears to have been made in respect of a determination of the Respondent’s claim against Chatzigiannis in the Action, it is equally true in respect of determination of the Defendant’s claim against the Debtor. As discussed above, given that the Respondent’s claim against the Debtor requires a determination of liability against Chatzigiannis, it is necessary to address the claims against both of the Defendants in the same proceeding. A separate determination of the claim against the Debtor under s. 135 runs the risk of inconsistent findings on the issue of Chatzigiannis’ liability.

[29] Second, in addition, if the claim against the Debtor were to proceed separately under s. 135, there is no certainty that Chatzigiannis would testify at the hearing. As Chatzigiannis’ evidence may be relevant to the Respondent’s claim against the Debtor, this could result in prejudice to the Respondent.

[30] Third, there is no rule that a civil action must proceed under s. 135 unless the plaintiff seeks a judgment that will survive bankruptcy as the Debtor argues.

Proportionality

[31] The Debtor’s third ground of appeal is that proportionality considerations dictate that the Respondent’s claim should proceed under s. 135 for the following reasons.

[32] First, as mentioned, the Debtor argues that, where no claim is asserted that would survive bankruptcy, common sense dictates that the claim should be determined under s. 135.

[33] Whether or not this is generally true as a matter of practicality, there is no rule of law to this effect. I think there are other considerations in this case that support the Master’s decision. In particular, given the conclusion above regarding the need to determine the Respondent’s case against each of the Defendants in the same action, and given that this action is ready to proceed to trial, there is likely to be little difference in the trial time under either procedure. Moreover, there is likely to be little difference in the ability to schedule a trial date in the near future as the civil action is proceeding in Ottawa.

[34] In these circumstances, I do not think it is reasonable to say that lifting the stay would have the result of undermining the Proposal any more than would the acknowledged need to have the Respondent’s claim addressed under s. 135.

[35] Second, the Master addressed the proportionality issue in terms of the Debtor’s argument that he will suffer financial peril if he is required to defend the Action. She concluded this argument is irrelevant as the issue of prejudice pertains only to the creditors. She also found that, in any event, there was good reason to doubt that the Debtor would, in fact, experience financial peril given his intention to bear the legal expenses of the action against Komtech’s former auditors. Each of these conclusions is reasonable.

[36] On this appeal, the Debtor says that the creditors will be prejudiced insofar as a lifting of the stay will prevent implementation of the Proposal and will imperil it by preventing the Debtor from making the payments thereunder. I do not accept either of these arguments.

[37] With respect to the first submission, the Debtor acknowledges that the Proposal cannot be implemented until the Respondent’s claim is quantified. I have addressed the timing considerations regarding a civil trial versus a hearing under s. 135 of the BIA above. With respect to the second submission, it is a variant of the argument raised before the Master. Her reasoning and conclusion that, as a factual matter, there was reason to doubt that the Debtor would experience financial peril is equally applicable to this submission.

[38] Lastly, the Action has proceeded to the point where it is ready for trial. The Debtor can bring a summary judgment motion in the Action, if he is correct that the Respondent has no claim against him, to obtain substantively the same relief that he envisages in a proceeding under s. 135.

Conclusion

[39] Accordingly, the appeal is dismissed. Costs in the agreed amount of $4,885 are awarded in favour of the Respondent.

Wilton-Siegel J. Date: July 18, 2018