COURT FILE NO.: 31-2107857
SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)
IN THE MATTER OF THE PROPOSAL OF EMERY SILFURTUN INC.
BETWEEN:
Warburg-Stuart Management Corporation, Moving Party
AND
Emery Silfurtun Inc. and MacPherson & Associates Inc., Responding Parties
BEFORE: Penny J.
COUNSEL: Peter Waldmann for the Moving Party, Warburg-Stuart Management Corporation Colby Linthwaite for the Proposal Trustee Catherine Francis for Emery Silfurtun Inc.
HEARD: June 28, 2019
ENDORSEMENT
Overview
1Warburg-Stuart Management Corporation claims to be a creditor of Emery Silfurtun Inc. This is denied by Emery and there are proceedings outstanding in which this issue will be resolved. Suffice to say at this point that there is a serious issue about whether Warburg is an Emery creditor.
2In this motion, Warburg seeks to annul a proposal that was accepted by the creditors, approved by the Court and certified complete by the Proposal Trustee. The motion is brought under s. 63(1) of the Bankruptcy and Insolvency Act, RSC 1985 c. B-3 which provides:
Where default is made in the performance of any provision in a proposal, or where it appears to the court that the proposal cannot continue without injustice or undue delay or that the approval of the court was obtained by fraud, the court may, on application thereto, with such notice as the court may direct to the debtor, and, if applicable to the trustee and to the creditors, annul the proposal.
3In this motion, Warburg seeks to annul the proposal on the basis of alleged injustice and fraud.
4Emery and the Proposal Trustee take the position that this motion is an abuse of process and is, in any event, not warranted on the evidence.
5I agree with Emery and the Proposal Trustee. For reasons that follow, the motion to annul the proposal is dismissed.
Background
6Emery is a Canadian company which designs and manufactures machines that turn waste paper into moulded products. Emery’s sole shareholder, Fridrik Jonsson, resides in Iceland.
7Between 2011 and 2015, Emery became the defendant in a number of significant litigation claims relating to alleged breaches of contract and misappropriation of intellectual property. These included claims by Zodax, LEI and Pulp Moulding. Emery also failed to conclude negotiations for a number of contracts to manufacture machines for third parties. As of April 2016, Emery had no revenue and had been locked out of its premises by the landlord for non-payment of rent.
8Emery filed a proposal on May 5, 2016. Zodax, LEI and Pulp Moulding filed contingent claims in the proposal:
(a) LDI initially filed a proof of claim for $12,825,000. After discussions with the Proposal Trustee, LDI agreed to reduce its claim to $5 million;
(b) Zodax initially filed a secured and unsecured claim of USD $352,000. Zodax later revised its claim to include an unsecured claim of $2,750,000, being the damages claimed in the Zodax lawsuit;
(c) Pulp Moulding filed a claim of $2 million in respect of its claim alleging misappropriation of intellectual property.
9After Emery filed its proposal, Emery Silfurtun EHF, a related Icelandic company, entered into a contract with a Mexican company for the purchase of an “Emery” machine. In order to get this contract, Emery EHF had to provide a secured $3.2 million letter of guarantee. The evidence before the court on this motion is that this contract was simply not available to Emery at the time. Emery was non-operational, having been locked out of its premises, and had no means of posting a secured $3.2 million letter of guarantee.
10Emery EHF ultimately funded Emery’s proposal in the amount of $300,000. Emery EHF also funded the rent arrears owing to Emery’s landlord in excess of another $300,000.
11At a meeting of creditors held on August 30, 2016, Emery disclosed the Mexican contract. Warburg and others alleged that Emery had transferred intellectual property to Emery EHF or that Emery EHF had usurped a corporate opportunity belonging to Emery. Emery denied these allegations, taking the position that the opportunity was not available to Emery given its financial position. This discussion gave rise to certain follow-up questions posed by the Proposal Trustee. A letter answering the Proposal Trustee’s questions was delivered by Emery’s counsel on September 8, 2016. This letter was shared with the creditors.
12Mr. Valko, president of Warburg, admitted he was at the August 2016 creditors’ meeting and received a copy of the letter. He also admitted that Mr. Jonsson, who attended on behalf of Emery, “told everybody what he was doing” regarding Emery EHF and the Mexican contract.
13Emery also engaged in negotiations with Zodax to settle the secured portion of its claim. The Proposal Trustee was aware of these negotiations. On October 28, 2016, Zodax advised the Proposal Trustee that Zodax had settled its secured claim and would be voting its interest as an unsecured creditor in support of the proposal.
14The meeting of creditors to consider the proposal was convened on October 31, 2016. The Proposal Trustee explained to Mr. Valko and the other creditors that each of the Zodax, LEI and Pulp Moulding unsecured claims (as described above) were being admitted only for voting purposes. No creditor or purported creditor, including Warburg/Mr. Valko, objected to any of the proofs of claim filed with the Proposal Trustee being admitted for voting purposes, including the contingent and unsecured claims filed by Zodax, LEI and Pulp Moulding.
15In addition, the settlement of the Zodax claim was openly discussed at the meeting, although Emery and Zodax declined to disclose the details on the basis of confidentiality.
16The proposal involved, in part, the payment of $300,000 for distribution to creditors, funded by Emery EHF. These funds had been advanced by Emery EHF to Emery’s counsel in trust. The proposal was supported by the requisite majority of creditors.
17The Proposal Trustee brought a motion for court approval of the proposal, supported by the Proposal Trustee’s report. No creditors attended the approval motion or opposed approval of the proposal.
18The approval motion was heard by Registrar Mills on November 22, 2016. She approved the proposal. No one appealed the court approval order. After the appeal period expired, Emery’s counsel transferred the $300,000 to the Proposal Trustee. The Proposal Trustee issued his certificate of completion on December 6, 2016.
19Commencing in January 2016, Warburg began to assert its status as a secured creditor of Emery under a general security agreement and demanded payment of certain indebtedness under a promissory note. These demands were reiterated through counsel in October 2016. As a result, on February 10, 2017, Emery issued a notice of application seeking an order discharging the general security agreement and declaring that Emery was not indebted to Warburg. On February 15, 2017 Warburg issued a statement of claim against Emery and others on the alleged debt and, on March 20, 2017, issued a motion seeking the appointment of a receiver over Emery’s business. Although affidavits were exchanged in both proceedings, neither Emery’s application nor Warburg’s receivership motion have ever been heard.
20Instead, on June 27, 2017, Warburg brought the present motion to annul the proposal.
Issues
21Warburg relies on the “injustice” and “fraud” provisos of section 63(1) of the BIA. It argues that these provisos are satisfied for two reasons:
(1) Zodax and LEI should not have been permitted to vote on the proposal in the amounts claimed. The true value of their claims was either not disclosed by Emery or not examined by the Proposal Trustee. This resulted in an injustice or fraud on the proposal; and
(2) Emery fraudulently transferred its assets (intellectual property) and business opportunities (the Mexican contract) to its affiliate Emery EHF, essentially “parking” these assets in a shell company so they could be returned to Emery after the proposal had been approved. This too resulted in an injustice or fraud on the proposal.
22The issue on this motion, therefore, is whether either or both of these arguments are sufficient to exercise the discretion of the court under s. 63(1) of the BIA to annul the proposal.
23The respondents, Emery and the Proposal Trustee, argue that, on their merits, these two arguments have not been established on the evidence and that there is, therefore, no basis upon which the proposal could or ought to be annulled.
24However, the respondents also argue, as a preliminary matter, that the entire Warburg motion is an abuse of process and a collateral attack on the decisions of the Proposal Trustee and Registrar Mills. This is because, they say, all of the material facts now relied on in support of the motion to annul were known to Mr. Valko and Warburg at the time. Mr. Valko did not object to the voting of the Zodax and LEI claims, did not appeal the Proposal Trustee’s acceptance of their claims for voting purposes, did not attend the court approval hearing or oppose court approval of the proposal and did not appeal Registrar Mills’ approval order.
25As I said at the outset, I agree with the respondents that this motion to annul is an abuse of process and a collateral attack on the order of Registrar Mills. This is sufficient to dispose of the motion. Had I felt it necessary to deal with the s. 63(1) arguments on the merits, I would nevertheless have found that Warburg has not discharged its onus to prove injustice or fraud and declined to exercise my discretion to grant the requested order to annul. Among other things, for example, it is by no means clear that the result would have been any different had a more rigorous evaluation of all the contingent, unliquidated claims (which would have including the Pulp Moulding and Warburg claims as well) been done.
Analysis
Voting of Zodax and LEI Claims
26The centrepiece of Warburg’s argument under this head is the alleged non-disclosure of the terms of the Zodax settlement reached just prior to the creditors meeting to vote on the proposal. However, it is well-established on the evidence that the settlement was disclosed to the Proposal Trustee and to the creditors and that it was openly discussed at the creditors’ meeting.
27While it is true that the specific terms of the settlement were not disclosed, I fail to see how that is relevant to the matter in issue. This is because the material terms of the settlement relate to Zodax’s secured claim for $352,000, not its unsecured claim of $2.5 million. The proposal was only to the unsecured creditors. Emery EHF acquired Zodax’s secured claim for $200,000. Zodax agreed to vote its remaining unliquidated claim in favour of the proposal. I can find no fraud or injustice in this.
28Warburg argues that this agreement made Zodax a non-arm’s-length party and that, as such, it should have been disqualified from voting. I do not agree.
29The concept of a non-arm’s-length relationship is one in which there is no incentive for the transferor to maximize the consideration for the property being transferred in negotiations with the transferee. It is intended to address situations in which the economic self-interest for the transferor is, or is likely to be, displaced by other non-economic factors that result in the consideration for the transfer failing to reflect the value of the transferred property.
30There is no evidence to support the suggestion that Zodax was not acting in its own economic self-interest or that the settlement agreement in any way had the effect of limiting its ability to do so.
31Warburg’s other complaint is that Zodax’s unsecured proof of claim was improper because it was barred by minutes of settlement and a default judgment entered into between Zodax and Emery in February 2015, in which Zodax compromised its claim. Warburg argues that both Jonsson and the Proposal Trustee were aware of this and ought to have heavily discounted the value, for voting purposes, of the Zodax claim. If they had done so, Warburg argues, the vote on the proposal would have gone the other way.1
32In support of this argument Mr. Valko swore in his June 27, 2017 affidavit that he only learned about the 2015 minutes of settlement after obtaining the documents from the Proposal Trustee’s file in 2017. This is simply not true. On his cross-examination, Mr. Valko admitted that Emery provided the minutes of settlement and default judgment to him in the fall of 2015 and that he actually attempted to negotiate a resolution with Zodax at the time. Thus, at the time of the creditors’ meetings, Mr. Valko and Warburg were well aware of the problem they are now raising with the value of the Zodax claim. Yet they did nothing about it. Warburg could have objected to Zodax’s proof of claim at the October 31, 2016 creditors’ meeting. It could have appealed the Proposal Trustee’s allowance of Zodax’s vote on that claim. It could have opposed court approval of the proposal on this basis. And, it could have appealed the court’s approval order on the same grounds. It did none of these things.
33Warburg argues that LEI’s contingent claim was based on a quotation agreement which contained a limitation of liability provision in favour of Emery. This stated that Emery’s liability would not exceed the repair or replacement cost of the equipment which was calculated in the agreement to be USD $1.136 million. Warburg relies on an expert report from a former trustee in bankruptcy to argue that the Proposal Trustee failed to exercise due diligence in his assessment of this claim and that it was misconduct for the trustee to have allowed LEI to vote on a $5 million claim value.
34It is well recognized in bankruptcy law and practice that there is a significant difference between allowing a proof of claim for voting purposes and allowing a proof of claim for distribution purposes. This is because, among other things, there is often very little notice provided of a claim in advance of the creditors’ meeting. Bankruptcy proceeding are meant to proceed expeditiously.
35Further, in determining the amount of creditor claims, a claim will be given no value only where it is “plain and obvious that it has no foundation or is frivolous,” Worldwide Pork Co. v. Agricultural Credit Corp. of Saskatchewan, 2006 SKQB 8. Trustees are obliged to review pleadings in contingent unliquidated claims and make some assessment. In this case, the Proposal Trustee reduced the LEI claim from the claimed $12 million to $5 million.
36The enforcement of limitation of liability clauses is a fraught area of the law. Warburg’s “expert” admitted, in follow-up questions, that the Proposal Trustee’s duty is not to decide legal issues relating to the validity of proofs of claim, including the interpretation of contracts.
37The uncontested evidence is that the creditors were advised of the Proposal Trustee’s decision to admit the LEI claim for voting and that none of the creditors, including Warburg, objected. As with the Zodax claim, it was open to Warburg to object to the LEI vote, appeal the trustee’s allowance of the LEI claim for voting purposes, oppose approval of the proposal and/or appeal Master Mills order approving the proposal. And, as with the Zodax claim, Warburg did none of these things.
38Warburg has made serious allegations of misconduct against the Proposal Trustee in failing to properly evaluate the Zodax and LEI claims. Whatever the merits of those allegations, however, the time to raise them was when they occurred or in the subsequent application for approval by the court.
39Matters under the BIA are designed to and must, if the BIA procedures are to be effective, proceed expeditiously for the benefit of the debtor and those with whom he or she conducts business. As Steele J. said in Re Dimant, 1980 CanLii 1733 (ONSC):
… it is a matter of extreme importance, not only to the individual but to the public generally, to know whether or not a person is a bankrupt and a decision in that regard should not be delayed if it all possible…
The rights of a bankrupt and others in the general public with whom he may deal are severely altered by the fact as to whether the bankrupt has or has not been discharged from bankruptcy… It is quite obvious that it affects the status of the parties in a most drastic way…
40Emery was entitled to rely on the approval of its proposal by the creditors and by the court, and on the Proposal Trustee’s certificate of completion. Having deliberately chosen not to raise these issues and pursue its legal remedies at the time, Warburg (particularly as a party whose status as a creditor is under serious challenge) cannot now allege that the Zodax and LEI proofs of claim were “unjust” or “fraudulent” for the purpose of, long after the fact, seeking to annul the proposal.
41I find that Warburg’s attempt to do so constitutes an abuse of process and a collateral attack on the approval order of Registrar Mills.
Emery EHF and the Mexican Contract
42Much the same thing can be said about Emery EHF entering into the Mexican contract. At a meeting of creditors held on August 30, 2016, Emery disclosed the Mexican contract. Mr. Valko himself at that meeting alleged that Emery had transferred intellectual property to Emery EHF or that Emery EHF had usurped a corporate opportunity belonging to Emery. Emery’s counsel delivered a follow-up letter to the Proposal Trustee answering a number of further questions about the Mexican contract. This letter was provided to the creditors, including Warburg. There is no evidence that anything said to the creditors about this transaction was incomplete or untrue. As noted earlier, Mr. Valko admitted on cross-examination that Jonsson “told everybody what he was doing” in regard to Emery EHF and the Mexican contract.
43Further, the evidence, provided to the creditors at the time and confirmed on this motion, supports the conclusion that there was nothing fraudulent or improper about this transaction. Emery was shut down and barred from its premises in Canada and therefore had no means of performing any contract to manufacture a new machine. Emery had no means of providing the performance guarantee required for the Mexican contract. Emery EHF financed the arrears going to Emery’s landlord. Emery EHF advanced $300,000 to Emery to fund the proposal. It acquired the Zodax secured claim. It was the benefit of the Mexican contract that enabled Emery EHF to fund the proposal. The creditors were aware of all of this and, weighing the risks and benefits of what was on offer, voted to accept the proposal.
44As with the Zodax/LEI issue, I find it is an abuse of process and a collateral attack on Registrar Mills’ order for Warburg to have sat on its rights, allowed these matters to proceed unchallenged through a creditor vote, Court approval and certificate of completion and only now, long after the fact, to claim that the proposal should be annulled on the basis that this issue, well known at the time, renders the proposal somehow “unjust” or “fraudulent.”
Conclusion
45For the foregoing reasons, the motion to annul the proposal is dismissed.
Costs
46The parties have all submitted bills of costs. I indicated at the hearing that, following the release of my reasons, I would invite further submissions on costs. To this end, any party seeking costs may do so by submitting a brief written submission, not to exceed two typed, double-spaced pages, within two weeks of receipt of these reasons. Any party wishing to respond to such a request may do so by submitting a brief written response, subject to the same page limit, within a further two weeks.
Penny J.
Date: July 29, 2019