COURT FILE NO.: BK-21-02734090-0031
DATE: 20221101
SUPERIOR COURT OF JUSTICE – ONTARIO IN BANKRUPTCY AND INSOLVENCY (COMMERCIAL LIST)
RE: IN THE MATTER OF THE BANKRUPTCY AND INSOLVENCY
ACT, R.S.C. 1985, c. B-3, AS AMENDED
IN THE MATTER OF THE NOTICES OF INTENTION TO
MAKE A PROPOSAL OF YG LIMITED PARTNERSHIP AND
YSL RESIDENCES INC.
BEFORE: Kimmel J.
COUNSEL: Robin Schwill and Chenyang Li, for the Proposal Trustee, KSV Restructuring Inc.
Jason Berall, for the Proposal Sponsor, Concord Properties Developments Corp.
Alexander Soutter, for Yonge SL LPs
Shaun Laubman, for Chi Long LPs
Mark Dunn and Sarah Stothart, for Maria Athanasoulis
HEARD: October 17, 2022
ENDORSEMENT (funding motion)
Overview
[1] YG Limited Partnership and YSL Residences Inc. (together, “YSL” or the “Debtor”) filed Notices of Intention to Make a Proposal under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”), which were procedurally consolidated pursuant to an Order dated May 14, 2021. The Debtor companies are special purpose entities established to hold the assets for a large real estate development in downtown Toronto known as the “YSL Project”.
[2] This court approved an Amended Third Proposal dated July 15, 2021 (the “Proposal”) on July 16, 2021. Under the Proposal, the moving party, KSV Restructuring Inc. (the “Proposal Trustee”), was authorized to deal with various claims against the Debtor, some of which were disputed.
[3] In the Proposal, Concord Properties Developments Corp. (the “Sponsor”) covenanted in sections 10.2 and 11.1 to indemnify the Proposal Trustee for “all Administrative Fees and Expenses (defined below) reasonably incurred [and not covered by the reserve established on the Proposal Implementation Date by the Sponsor in respect of the reasonably estimated additional Administrative Fees and Expenses anticipated to be incurred in connection with the administration of Distributions, resolution of any unresolved Claims … and the Proposal Trustee’s discharge]”. [emphasis added]
[4] “Administrative Fees and Expenses” are defined in the Proposal as “the fees, expenses and disbursements incurred by or on behalf of the Proposal Trustee, the solicitors for the Proposal Trustee, the solicitors of the Company both before and after the Filing Date.”
[5] The Proposal Trustee brings this motion to compel the Sponsor to provide funding for the Proposal Trustee’s continuing work towards the determination and/or resolution of the outstanding proofs of claim against the Debtor.[^1] Jurisdictional questions have been raised within the motion.
[6] For reasons given orally at the hearing, I declined to grant the contested adjournment of this motion that the Sponsor asked for at the outset.
[7] For the reasons that follow, I have concluded that the Sponsor is not obligated to fund phase 2 of the Arbitration that was intended to determine the Athanasoulis Claim (as those terms are later defined herein). The Sponsor is obligated to indemnify the Proposal Trustee for its Administrative Fees and Expenses reasonably incurred to determine that claim itself, with the benefit of the Award from phase 1 of the Arbitration. The specific orders and directions arising from this ruling are detailed in this endorsement.
Background to the Motion
[8] As of October 2022, most of the claims filed against the Debtor had been settled or accepted by the Proposal Trustee. The largest claim, by far, filed against the Debtor is made by Maria Athanasoulis. This claim is comprised of $1 million for wrongful dismissal damages and $18 million in damages for alleged breaches of an oral profit-sharing agreement by which she alleges YSL must pay her 20% of the profits earned on the YSL Project (the “Athanasoulis Claim”).
[9] The Athanasoulis Claim is one of three disputed claims by various stakeholders that the Proposal Trustee says have increased the professional costs associated with the Proposal and prevented the Proposal Trustee from completing the administration of these proceedings.
[10] As of the end of July 2022, the Proposal Trustee’s Administrative Fees and Expenses totalled just under $1.2 million, excluding Harmonized Sales Tax. Included in that total were the costs of phase 1 of an arbitration held from February 22-25, 2022 (the “Arbitration”) before William G. Horton (“the Arbitrator”). The Proposal Trustee and Ms. Athanasoulis both participated in the Arbitration. It resulted in a partial award dated March 28, 2022 (the “Arbitration Award”) that included findings that:
a. The Debtor had entered into an oral profit sharing agreement with Ms. Athanasoulis;
b. Ms. Athanasoulis was an employee of YSL; and
c. Ms. Athanasoulis was constructively dismissed by YSL in December 2019.
[11] The Proposal Trustee says that it agreed to arbitrate the Athanasoulis Claim because the existence of the oral profit sharing agreement upon which it was based, as well as Ms. Athanasoulis’ status with the Debtors (and other entities within the same corporate group referred to as the Cresford Group), were disputed by the Debtor’s representative(s) and the determination of those questions would turn on credibility assessments. In these circumstances, the Proposal Trustee believed that the determination of whether Ms. Athanasoulis had a profit sharing agreement, what its terms were and whether she was an employee who was constructively dismissed, could be best determined through a hearing with viva voce evidence.
[12] The Sponsor was told on December 1, 2021 “that arrangements are being made with [Mr.] Horton to arbitrate the claim in late February, which is the earliest available date.”
[13] The terms of appointment of the arbitrator were signed by the Proposal Trustee and Ms. Athanasoulis on December 9, 2021 (the “Agreement to Arbitrate”). By its terms, the parties agreed to:
a. appoint Mr. Horton to serve as sole arbitrator of their dispute relating to the Athanasoulis Claim; and
b. bifurcate the Athanasoulis Claim such that the Arbitration shall initially resolve only the liability of YSL (in phase 1). In the event the Arbitrator finds that YSL is liable to Ms. Athanasoulis, the parties agreed to schedule an additional hearing before the Arbitrator to determine the quantum of YSL’s liability (in phase 2).
[14] The Sponsor did not receive a copy of the Agreement to Arbitrate at that time and was not privy to its specific terms.
[15] The Proposal Trustee was advised on March 31, 2022 that “[w]e received the decision in the fact finding phase just the other day or so. Arbitrator Horton found an enforceable 20% profit sharing agreement to exist.”
[16] A few weeks later, the Proposal Trustee provided the Sponsor an updated budget. With only approximately $210,000 remaining from the original reserve established under s. 10.1 of the Proposal, the Proposal Trustee requested additional net funds of approximately $1.485 million in respect of Administrative Fees and Expenses anticipated to be incurred in connection with the resolution of the remaining three claims and to administer the distributions.
[17] Some limited partners of YSL (the Yonge SL LPs and Chi Long LPs, collectively the “LPs”) questioned the Proposal Trustee’s handling of certain disputed claims, including the Athanasoulis Claim. The LPs are entitled to any remaining cash in the $30.9 million “Affected Creditors Cash Pool” established by the Sponsor, after proven claims are paid out. That cash pool is only to be used by the Proposal Trustee to satisfy proven claims. Therefore, the determination of the Athanasoulis Claim could impact the LPs’ recovery from the Affected Creditors Cash Pool.
[18] At a case conference on May 24, 2022, the LPs asked the court to schedule motions they proposed to bring. Their motions were described at that time to be directed to the Proposal Trustee’s authority to arbitrate the Athanasoulis Claim and to determine whether the Athanasoulis’ Claim is subordinate to the LPs’ entitlements. They also requested that the court order a stay of phase 2 of the Arbitration of the Athanasoulis Claim. At that time, the authority of the Proposal Trustee to enter into the Agreement to Arbitrate was being challenged by at least one of the LPs.
[19] Instead of scheduling that motion, the court urged the parties to work out an arrangement that would allow the LPs’ priority claims to be added to, and determined in, the existing Arbitration under an expanded comprehensive arbitration process (the “consolidated arbitration process”).[^2]
[20] At a further case conference on June 8, 2022, the parties updated the court about their ongoing discussions since the last case conference. The LPs indicated that they would be prepared to have their priority issues determined in a consolidated arbitration process. The Sponsor expressed concerns about the added cost of adding the LPs priority issues into the existing Arbitration process. The Sponsor asked for two conditions: i) that there be an attempt to settle through mediation before embarking upon stage 2 of the Arbitration and/or any consolidated arbitration process, and ii) that the LPs undertake to pay the Proposal Trustee’s expenses associated with the next phase of the consolidated arbitration process. The LPs did not agree to either of these conditions.
[21] The court once again urged the parties to continue collaborating and refining the issues for a potential consolidated arbitration process and to try to reach an agreement about the additional cost of this expanded arbitration of all issues, in the face of the alternative of parallel proceedings and the added cost and delay that would ensue if the LPs’ proposed motion was scheduled. The court summarized the outstanding issues to be addressed (or not to be addressed) in the context of a potential consolidated arbitration process and some of the terms that were under consideration, as had been identified by the parties at that time, in an endorsement dated June 8, 2022 as follows:
a. The enforceability of the contract as found by Mr. Horton regarding Ms. Athanasoulis’ claim and the quantum of any damages she may have suffered.
b. Whether any claim for damages by Ms. Athanasoulis is in the nature of debt or equity.
c. Any claim for damages that the LPs may assert against Ms. Athanasoulis.
d. The Arbitration will not consider any claims between Ms. Athanasoulis and Cresford Capital/Dan Casey.
e. The LPs will reserve their rights with respect to whether Mr. Horton's decision at phase 1 of the Arbitration regarding enforceability is rendered res judicata.
f. At the conclusion of the Arbitration the Proposal Trustee will make a determination as to whether Ms. Athanasoulis’ claim is provable, will value it and determine its priority.
g. The parties’ rights to appeal are preserved under the BIA.
The court directed counsel to return for a further case conference on July 29, 2022.
[22] On July 4, 2022 the Sponsor advised that it would be withdrawing funding from the Proposal Trustee. It objected to funding the estimated $1.485 million in additional funding that the Proposal Trustee and indicated would be needed by it and its external counsel to complete the administration of these proceedings.[^3]
[23] By the July 29, 2022 case conference, the Sponsor had been provided with a copy of the Arbitration Award and the Agreement to Arbitrate. The parties continued to have differing views on whether the Proposal Sponsor was obligated to fund the Proposal Trustee’s fees and expenses for phase 2 of the Arbitration. Accordingly, the Proposal Trustee’s funding motion was scheduled.
[24] Although no formal stay was ordered, phase 2 of the Arbitration has not been rescheduled, pending the outcome of this motion, since the Proposal Trustee requires funds to participate in it. The Proposal Trustee and Ms. Athanasoulis anticipate that the phase 2 proceeding contemplated by the Agreement to Arbitrate will require additional fact and expert evidence. The original schedule had set aside two weeks in September, 2022 for phase 2 of the Arbitration, before any consideration of including the LPs’ claims.
[25] In the intervening timeframe, the Proposal Trustee and Ms. Athanasoulis did attend a mediation to try to come to a resolution of the Athanasoulis Claim, but that mediation was not successful.
[26] On October 13, 2022, shortly before the return of this funding motion, the LPs provided a draft notice of motion indicating their intention to bring a motion for declarations that: (a) any claim by Ms. Athanasoulis to the proceeds of the YSL Project under any profit-sharing arrangement is subordinate to their entitlement to such proceeds; and (b) Ms. Athanasoulis’ profit-sharing claim is unenforceable against the Debtors. The LPs’ assertions are based primarily on alleged representations and promises made to them by Ms. Athanasoulis.
[27] The Proposal Trustee’s Notice of Motion on this motion seeks an order declaring that:
a. The Proposal Trustee’s Administrative Fees and Expenses have been reasonably incurred.
b. The Sponsor remains bound by the Proposal.
c. The Sponsor is required to fund the Administrative Fees and Expenses of the Proposal Trustee pursuant to the Proposal.
d. The commencement and continuation of Arbitration to determine the Athanasoulis Claim was a valid exercise of the Proposal Trustee's power under the Proposal or the BIA.
[28] The Sponsor does not dispute that it remains bound by the Proposal to fund Administrative Fees and Expenses reasonably incurred. It disagrees on whether the Proposal requires it to fund the Proposal Trustee’s fees and expenses that will be incurred in respect of phase 2 of the Arbitration.
[29] The court does not technically need to deal with the Proposal Trustee’s request for a declaration that its Administrative Fees and Expenses have been reasonably incurred up until now. The Sponsor is no longer seeking to claw-back prior expenses that the Proposal Trustee has already been paid from the initial funding reserve. This includes fees and expenses associated with phase 1 of the Arbitration.
[30] During the hearing, and considering the most up to date positions, the Proposal Trustee re-stated the issues to be decided on this motion:
a. Whether the commencement and continuation of Arbitration to determine the Athanasoulis Claim was a valid exercise of the authority granted to the Proposal Trustee under the Proposal or the BIA (the “Jurisdiction Question” below), and therefore are any Administrative Fees and Expenses associated with it reasonably incurred?
b. If not, and in the alternative, is the question of whether the Sponsor is obligated to fund the Administrative Fees and Expenses of the Proposal Trustee and its counsel associated with phase 2 of the Arbitration res judicata and has this court already ruled that phase 2 of the Arbitration should proceed in some fashion, either with or without the added issues raised by the LPs?
c. Should there be any other order made at this time regarding the approval of the fees of the Proposal Trustee and its counsel?
d. Should the Sponsor pay the Proposal Trustee’s costs of this motion, which are rolled up in its defence of the reasonableness and appropriateness of the Arbitration process?
Analysis
The Positions of the Parties
[31] The focus of the analysis is on the question of whether any Administrative Fees and Expenses associated with completing phase 2 of the Arbitration would be “reasonably incurred,” such that the Sponsor is obligated to indemnify the Proposal Trustee for them under s. 11.01 of the Proposal.
[32] The Sponsor argues that the Proposal Trustee should have either allowed or disallowed the Athanasoulis Claim without resorting to arbitration. The Sponsor says the Proposal Trustee should determine and value that claim on its own, with such input from Ms. Athanasoulis and others as it deems appropriate. This process, the Sponsor postulates, could be completed more efficiently and at a significantly lesser cost than through the Arbitration.
[33] The Proposal Trustee argues that, even with the benefit of hindsight, a process outside of the Arbitration resulting in an allowance or disallowance of the Athanasoulis Claim would not necessarily have been more cost effective or timely. It postulates that both parties would have inevitably challenged the Proposal Trustee’s decision regarding the determination of the Athanasoulis Claim under s. 37 of the BIA. Either Ms. Athanasoulis would appeal a decision against her to the court, or the LPs would further challenge a ruling that favoured Ms. Athanasoulis. The Proposal Trustee believes that these appeals or challenges to the court under s. 37 of the BIA would have the potential to involve the same evidentiary input, time and expense as the Arbitration.
[34] The Proposal Trustee likens the Arbitration to the appointment of a claims officer to adjudicate the Athanasoulis Claim and urges the court to permit that process to now run its course through phase 2 of the Arbitration.
[35] The Proposal Trustee also maintains that it was reasonable to have entered into the Agreement to Arbitrate and that it cannot now renege and disallow the Athanasoulis Claim simply because the Sponsor does not like the outcome of phase 1. The Sponsor counters that if the Agreement to Arbitrate, the terms of which it only had full disclosure of in July 2022, improperly delegates to the Arbitrator the Proposal Trustee’s responsibility for determining and valuing the Athanasoulis Claim and was entered into without authorization or jurisdiction, then it is invalid ab initio and unenforceable.
[36] Ms. Athanasoulis supports the Proposal Trustee’s position and adds that she is an innocent third party. Having contracted with the Proposal Trustee for an arbitration in two phases and having herself invested significant time and expense on phase 1, it would be unfair to her to now return to square one for the determination and valuation of her claim.
[37] Ms. Athanasoulis further argues that there is no principled distinction between the jurisdiction to arbitrate phase 1 vs. phase 2 of the Arbitration. She contends that the Sponsor’s withdrawal of its objection to paying the fees and expenses for phase 1 is a concession that arbitrating in phase 1 was authorized and within the jurisdiction of the Proposal Trustee, and thus phase 2 must be as well.
[38] The LPs still intend to argue that they are not bound by any findings in the Arbitration or its outcome, and that the Athanasoulis Claim is subordinate to theirs. Neither of those arguments are before the court now. However, should the court find that the Proposal Trustee lacked the authority or jurisdiction to arbitrate the Athanasoulis Claim, that would make their intended motion less complicated and possibly moot, depending on the Proposal Trustee’s timing and ultimate determination of the Athanasoulis Claim.
The Issues
A) The Jurisdiction Question
i) Contractual and Statutory Framework
[39] Section 3.02 of the Proposal provides that the Proposal Trustee will assess claims in accordance with s. 135 of the BIA.
[40] Section 135 of the BIA provides that:
(1) The trustee shall examine every proof of claim or proof of security and the grounds therefor and may require further evidence in support of the claim or security.
(1.1) The trustee shall determine whether any contingent claim or unliquidated claim is a provable claim, and, if a provable claim, the trustee shall value it, and the claim is thereafter, subject to this section, deemed a proved claim to the amount of its valuation.
ii) Relevant Jurisprudence Relied Upon by the Parties
[41] The Sponsor objects to providing additional funding for phase 2 of the Arbitration on the grounds that the Arbitration falls outside the Proposal Trustee’s mandate under the Proposal, which is to determine and resolve disputed claims in accordance with s.135 of the BIA. The Sponsor maintains that because the Proposal Trustee improperly delegated that decision-making function to the Arbitrator and assumed the role of adversary, rather than the decision-maker, any Administrative Fees and Expenses associated with phase 2 of the Arbitration will not be reasonably incurred.
[42] The Sponsor relies upon the recent decision of this court In the Matter of the Proposal to Creditors of Conforti Holdings Limited, 2022 ONSC 3264, leave to appeal refused, 2022 ONCA 651. In Conforti, the court declined to relieve a trustee of its responsibility under s. 135 of the BIA to determine a particular claim through a single claims process under the supervision of the Bankruptcy Court and declined to approve the trustee’s suggestion that it be determined, instead, by a foreign court.
[43] This court held in Conforti that s. 135(1.1) of the BIA contains mandatory language that “unambiguously” requires the Proposal Trustee itself to determine and value claims. Conforti confirms, at para. 42, that:
The regime under the BIA provides for a summary procedure for (i) determination by the trustee of whether a contingent or unliquidated claim is a provable claim, and, if so, (ii) for the trustee to value it. [ ... ] Insolvency proceedings under the BIA are subject to court supervision, and the court is able to give directions for the timely and efficient determination of claims.
[44] This is not the first time a trustee’s “mandatory statutory duty to review claims and value unliquidated or contingent claims” has been recognized: see Asian Concepts Franchising Corporation (Re), 2018 BCSC 1022, 62 C.B.R. (6th) 123, at para. 99.
[45] Unlike in Conforti, the Proposal Trustee says it is not seeking to dispense with any obligation to determine the Athanasoulis Claim. It says it still intends to go through the motions of that determination but wishes to do so with the benefit of the Arbitrator’s decision in phases 1 and 2.
[46] The Proposal Trustee also seeks to distinguish Conforti on the grounds that it has a very broad discretion under s. 135 of the BIA to obtain or require further evidence in support of a claim and has the power under s. 30 to bring, institute or defend any action or legal proceeding relating to the property of the bankrupt and to compromise any claim made by or against the estate. The Proposal Trustee argues that this permits a trustee to arbitrate a claim; or, at the very least, that this permits the Proposal Trustee to use an arbitration process to assist in the development of the evidence and facts that will be needed to determine and value a claim.
[47] The Proposal Trustee defends the Arbitration process as fair, reasonable and transparent. It emphasizes the importance of its role in ensuring all stakeholder interests are protected (as was envisioned in Asian Concepts, at paras. 55-56, 98, for example). The Proposal Trustee’s contends that its decision to gather facts in respect of the Athanasoulis Claim by way of Arbitration was a reasonable decision and that it was an appropriate process to achieve a fair determination of the merits of the Athanasoulis Claim because it tested the potentially relevant evidence. It maintains that there is no single correct way to value a claim and that a trustee’s decision should be afforded deference: see Galaxy Sports Inc. (Re), 2004 BCCA 284, 29 B.C.L.R. (4th) 362, at paras. 39-43.
iii) The Agreement to Arbitrate – is it Beyond the Scope of s. 135 of the BIA?
[48] In theory, the Proposal Trustee does have a broad discretion under s. 135 of the BIA that might justify its participation in adversarial proceedings that could inform the eventual determination of claims. The Proposal Trustee seeks to characterize what the Arbitrator was asked to do as a fact finding exercise: to determine whether Ms. Athanasoulis was an employee who was constructively dismissed and whether she had an oral profit sharing agreement. The issue here is whether the Agreement to Arbitrate in this case—which was not before the court and had not been disclosed to the Sponsor or the LPs until sometime in July, 2022—went beyond a fact finding exercise.
[49] Although no determination need be made on this point, the Proposal Trustee’s participation in phase 1 of the Arbitration may have been sound in the sense that the necessary parties and information were before the Arbitrator to enable him to make determinations about the existence of the oral profit sharing agreement and a finding of constructive dismissal. The Proposal Trustee can consider and take into account these inputs from the Arbitration in its determination and valuation of the Athanasoulis Claim.
[50] Since the Sponsor is no longer challenging the right of the Proposal Trustee to be indemnified for the Administrative Fees and Expenses incurred in respect of phase 1 of the Arbitration, the issue now before the court is whether the Proposal Trustee is acting within the scope of s. 135 of the BIA by engaging in phase 2 of the Arbitration to determine whether to allow the Athanasoulis Claim, and if so in what amount.
[51] The Proposal Trustee concedes that the Arbitrator’s determination of the damages question in phase 2 of the Arbitration would be both informative and probative, and that the Proposal Trustee’s determination of the Athanasoulis Claim would be heavily influenced by the Arbitrator’s decision. The suggestion that the Proposal Trustee could, after the Arbitration, still determine and value the Athanasoulis Claim in a manner inconsistent with the decision of the Arbitrator on liability and damages is difficult to reconcile with the words of the Agreement to Arbitrate and the intended binding nature of arbitrations under s. 37 of the Arbitration Act 1991, S.O. 1991, c. 17.
[52] I find that phase 2 of the Agreement to Arbitrate goes beyond a fact finding exercise. By its very terms, the Agreement to Arbitrate contemplates an eventual ruling from the Arbitrator on “damages” (the quantum of the Debtors’ liability) at the end of phase 2. On their face, the terms of the Agreement to Arbitrate contemplate a final adjudication by the Arbitrator. That amounts to an improper delegation to the Arbitrator by the Proposal Trustee of its ultimate responsibility to determine and value the Athanasoulis Claim.
[53] It was suggested that the court would be effectively ordering, or approving, the Proposal Trustee to breach the Agreement to Arbitrate if the Sponsor’s position with respect to the funding of phase 2 of the Arbitration is accepted. I do not see it that way. If the Proposal Trustee did not have the authority to agree to phase 2 of the Arbitration as was provided for in the Agreement to Arbitrate because it amounted to an improper delegation of its responsibility to the Arbitrator, then that aspect of the Agreement to Arbitrate is unenforceable as against the Proposal Trustee. Further, as a practical matter, if the Sponsor is not required to fund the Administrative Fees and Expenses associated with phase 2 of the Arbitration, it cannot proceed.
[54] I also do not accept the assertion that just because the Sponsor is no longer challenging its obligation to fund the Proposal Trustee’s Administrative Fees and Expenses incurred in connection with phase 1 of the Arbitration, that the court is bound to accept that entering into the Agreement to Arbitrate was a valid exercise of the Proposal Trustee’s discretion and a valid delegation of its responsibility to the Arbitrator in all respects, or that the Sponsor is estopped from asserting that any aspect of the Agreement to Arbitrate exceeded the Proposal Trustee’s authority under s. 135 of the BIA.
iv) Would the Cost of this Arbitration be a Reasonably Incurred Expense?
[55] One of the other grounds upon which the Sponsor argued that the anticipated Administrative Fees and Expenses for phase 2 of the Arbitration would not be reasonably incurred was because they would be the product of a complex, lengthy and expensive process that is not in keeping with the summary and efficient adjudication of claims envisioned by the BIA, especially one that might not have resulted in a final resolution of the Athanasoulis Claim without the willing participation of the LPs,[^4] leaving the LPs’ priorities and other enforceability issues to be determined through some other process.
[56] Section 135 of the BIA is intended to be a summary procedure for the determination of claims, animated by the objectives of speed, economy and informality: see Conforti, at para. 43 and Asian Concepts, at para. 53.
[57] The decision on the Jurisdiction Question renders it unnecessary to decide whether the anticipated budgeted cost of phase 2 of the Arbitration represents anticipated reasonably incurred Administrative Fees and Expenses that the Sponsor should be required to fund. The court will not order the Sponsor to fund this aspect of the Arbitration that involves the ultimate determination of this claim by someone other than the Proposal Trustee as that would not be a determination of the Athanasoulis Claim in accordance with s. 135 of the BIA.
v) Section 135 BIA Determination of the Athanasoulis Claim
[58] The Proposal Trustee has identified various aspects of what had been expected to be resolved through the anticipated phase 2 Arbitration that will still require factual inputs and findings for the Proposal Trustee to make its determination of the Athanasoulis Claim. For example, to determine the meaning of “profits” under the oral profit sharing agreement, and when and how they should be calculated, expert valuation evidence may be required. This was part of the justification for the Arbitration process envisioned, and has not been resolved by the court’s finding that the process agreed to went too far by improperly delegating the ultimate issue to be decided by the Proposal Trustee to the Arbitrator.
[59] Further, whether the Athanasoulis Claim is a provable claim under s. 135 of the BIA depends on whether the claim is in debt or equity, which in turn may require further evidence and inputs from other stakeholders, like the LPs. Not only would the LPs potentially have relevant information, but they also have a direct interest in these determinations.
[60] The Proposal Trustee has the power under s. 135 of the BIA to seek additional information and documents from the claimant: see Urbancorp Cumberland 2 GP Inc., 2022 ONSC 2430, at paras. 23, 26. It remains open to the Proposal Trustee under s. 135 of the BIA to receive and consider expert input from Ms. Athanasoulis and other stakeholders.
[61] The broad discretion afforded to the Proposal Trustee also allows it to seek out its own expert input, as well as information and input from the LPs and other stakeholders in respect of the issues it must decide.
[62] In these circumstances, the Proposal Trustee will need to carry out its responsibilities under s. 135 of the BIA, get the factual and other inputs it requires from witnesses, other stakeholders, experts and the like and determine whether the Athanasoulis Claim has been proven and, if so, at what amount it should be valued.
[63] The Proposal Trustee complains that the Sponsor has not spelled out an alternative process to the Arbitration for doing this.
[64] In the absence of any proposed alternative, the Proposal Trustee is entirely unencumbered and may determine its own process for how it wishes to do this, which will be afforded significant deference. According to the Court of Appeal in Galaxy, at paras. 39 and 44,
a. the Proposal Trustee is entitled to evaluate the Athanasoulis Claim in accordance with s. 135(1.1) with significant discretion, taking into account factors that may appear in the BIA;
b. there is no one “correct” answer to the valuation of the Athanasoulis Claim;
c. the Proposal Trustee’s valuation of the Athanasoulis Claim will be scrutinized on a “reasonableness” standard; and
d. the Proposal Trustee can use its knowledge and expertise to consider whether, as a factual matter, the valuation as to the full amount of the Athanasoulis Claim is appropriate.
[65] The Proposal Trustee is concerned that this may lead to de novo appeals or challenges (by either Ms. Athanasoulis or the LPs) and could end up being as much or more expensive than the anticipated cost of phase 2 of the Arbitration. There is no crystal ball that can foretell this.
[66] The Sponsor says that it will not micromanage this aspect of the Proposal Trustee’s determination of the Athanasoulis Claim. While the Sponsor does not expect that this alternative process will end up costing as much as the current estimate for phase 2 of the Arbitration, it is prepared to accept the possibility that it does. The Sponsor has said it will pay for the Proposal Trustee to develop and follow a process to determine and value the Athanasoulis Claim in accordance with s. 135 of the BIA.
[67] The Proposal Trustee must determine how to reasonably determine and value the Athanasoulis Claim in a timely and principled manner. It will be afforded significant deference. All parties agree that it can use the Arbitration Award from phase 1 of the Arbitration and build on it so that time and effort is not wasted. The goal is not the gold standard of coming up with a process that cannot be challenged.
[68] The Proposal Trustee may choose to invite expert evidence and inputs from Ms. Athanasoulis and then determine if it needs its own expert to review and comment upon what is provided. It may choose to share that plan with the other stakeholders participating in this motion and seek their input. If it chooses to share its plan with the Sponsor and/or other stakeholders, and if the parties require some further direction and assistance from the court, they may arrange a case conference before me.
[69] In any event, the parties will eventually need to come back on a scheduling appointment to determine the sequencing and timing of the LPs’ priorities and enforceability motion, but only after that motion (with supporting evidence) has been served and the parties have met and conferred amongst themselves to consider the appropriate timing and sequencing of all that needs to occur.
[70] Whatever process the Proposal Trustee may adopt, the Sponsor remains obligated under the Proposal to indemnify the Proposal Trustee for the Administrative Fees and Expenses reasonably incurred going forward to the final determination of the Athanasoulis Claim.
B) The Res Judicata and Estoppel Argument(s)
i) Res Judicata
[71] There can be no finding of res judicata with respect to the issues raised on this funding motion regarding the Sponsor’s obligation to fund phase 2 of the Arbitration.
[72] The Proposal Trustee and Ms. Athanasoulis argue that Gilmore J. held, at two separate case conferences in May and June 2022, that arbitration was an appropriate way to proceed, and that issue estoppel prevents the court from revisiting this in the context of this funding motion. I disagree.
[73] There are three requirements for invoking issue estoppel: (i) the same question has or could have been decided in a prior proceeding; (ii) the decision giving rise to estoppel is final; and (iii) the parties to the decision giving rise to estoppel are the same as the parties to the subsequent proceeding in which estoppel is claimed: see The Catalyst Capital Group Inc. v. VimpelCom Ltd., 2019 ONCA 354, 145 O.R. (3d) 759, at para. 25. It is the first requirement upon which the res judicata argument fails in this case.
[74] The Proposal Trustee argues that the endorsement of Gilmore J. arising out of the June 8, 2022 case conference requires an arbitration of the Athanasoulis Claim because it was stated in the endorsement that the “arbitration must prevail” and the Sponsor never sought to appeal that declaration.
[75] I do not read the June 8, 2022 endorsement as ordering an arbitration. Rather, it was the court’s strong preference that the parties agree to expand the Arbitration to address the issues raised by the LPs and avoid a parallel, costly and time consuming motion process to determine the priority and enforceability issues. I am not aware of any authority upon which the court can order unwilling parties to arbitrate a dispute; that is a matter of private agreement. The court was simply strongly encouraging the parties to make such an agreement, building upon the arbitration process already in place.
[76] Nor do I agree with the implicit suggestion that the same question about the authority of the Proposal Trustee to enter into the Agreement to Arbitrate and to delegate its responsibility for determining and valuing the Athanasoulis Claim to the Arbitrator has been or could have been previously decided by Gilmore J. at the earlier case conferences. Leaving aside the nature of those case conferences and the typical procedural scope of directions from the court, it is clear that is not what Gilmore J. understood to be happening. To the contrary, her June 8, 2022 endorsement records that:
At the conclusion of the arbitration the Proposal Trustee will make a determination as to whether Ms. Anathasoulis’ [sic] claim is provable and will value it and determine its priority.
[77] At that time, the court did not have the Agreement to Arbitrate with the full description of the issues being submitted to arbitration and cannot be taken to have made any meaningful assessment as to whether the statement that there was still something left for the Proposal Trustee to determine at the end of the Arbitration was a fair characterization of what had been agreed to. The court did not previously order the parties to arbitrate, nor did it make any finding that phase 2 of the Arbitration could be conducted in a manner consistent with s. 135 of the BIA. There is no res judicata.
ii) Other Estoppel Considerations
[78] That said, it was prudent of the Sponsor to drop its opposition to the Proposal Trustee’s request for approval of the expenses associated with phase 1 of the Arbitration, already incurred and paid. Regardless of the court’s determination of the threshold Jurisdiction Question in relation specifically and only to phase 2 of the Arbitration, the Sponsor would have faced other obstacles in attempting to claw back from the Proposal Trustee Administrative Fees and Expenses incurred and paid for out of the initial reserve, including for phase 1 of the Arbitration.
[79] These obstacles would include the Sponsor’s inaction and failure to ask any questions or raise any complaint about, or object to phase 1 of the Arbitration proceeding while it was ongoing. However, the Sponsor’s concession obviates the need for any ruling on this.
iii) The Timing of Objections and Related Considerations
[80] Ms. Athanasoulis is understandably concerned about having engaged in phase 1 of a two phase arbitration process in good faith and now facing objections to the jurisdiction or authority of the Proposal Trustee to have entered into the Agreement to Arbitrate.
[81] Unfortunately, the Sponsor and the LPs did not have a copy of the Agreement to Arbitrate until July, 2022. Their concerns were raised in a timely manner upon learning more about the scope of the Arbitration and its anticipated cost. The fact that this discovery also coincided with their learning that the phase 1 outcome favoured Ms. Athanasoulis does not automatically lead to the inference that their objections are disingenuous.
[82] In any event, no one is suggesting that the work done in phase 1 of the Arbitration is lost. It will be one of the inputs that the Proposal Trustee will use to determine and value the Athanasoulis Claim. All parties agree on this.
[83] While I do not go so far as to accept the suggestion by the Sponsor and LPs that Ms. Athanasoulis knowingly took on the risk of this challenge and outcome, the Sponsor and LPs were left out of the process and cannot be precluded from raising the legal objections that have ultimately dictated the outcome of this motion on the Jurisdiction Question, as it relates to phase 2 of the Arbitration.
C) Fee Approvals
[84] Gilmore J.’s endorsement scheduled this funding motion to determine the Proposal Trustee’s entitlement to be indemnified for the costs of the Arbitration. The indemnity reimbursements taken up until now from the reserve fund are no longer at issue. The relief sought by the Proposal Trustee for the approval of its past activities and fees might have been warranted if the challenge to entitlement to indemnification for expenses incurred in phase 1 of the Arbitration was still at issue.
[85] However, this is no longer at issue. There is no immediate reason or need to attempt to deal with the broader requests for general approval of the activities and fees of the Proposal Trustee and its counsel.
[86] The Sponsor is right that, in general, such requests should be supported by fee affidavits: see Jethwani v. Damji, 2017 ONSC 1702, 46 C.B.R. (6th) 96, at paras. 8-11.
[87] For the same reason, it is also inappropriate to grant the requested charge over all past and future distributions to the Sponsor. This issue was not fully argued and I was not taken to the evidence or authority that I would need to consider to make such an order.
[88] Instead, the Proposal Trustee may now wish to prepare a new budget and request additional reserve funding for the indemnity obligations of the Sponsor. If the Sponsor does not agree to supplement the reserve, the parties can arrange to come back for a case conference for further consideration of the questions of up front funding and/or security for future funding to be provided by the Sponsor.
D) Costs
[89] Despite having found that the contemplated phase 2 of the Arbitration goes beyond the scope of what the Proposal Trustee was authorized to agree to, given the original position of the Sponsor that it was also challenging its obligation to fund expenses for phase 1 and given the added complications introduced by the LPs, I consider it to have been reasonable for the Proposal Trustee to have brought this motion for directions.
[90] The Proposal Trustee’s and its counsel’s costs of this motion were reasonably incurred as part of the administration of distributions and the resolution of unresolved claims such that those costs should be indemnified by the Sponsor under the s. 11.1 of the Proposal on the basis that they were reasonably incurred Administrative Fees and Expenses.
[91] Ms. Athanasoulis has asked to be awarded some reasonable costs thrown away in the event the Arbitration is not proceeding to phase 2. She spent $300,000 on phase 1 (in line with the Proposal Trustee’s disclosed legal costs for phase 1) and had started working with her expert on phase 2. I understand that there was an agreement that each side would bear their own costs of the Arbitration.
[92] I agree that if Ms. Athanasoulis had actually incurred costs thrown away of the Arbitration, that are now wasted, she might be entitled to an award for her trouble: see Caldwell v. Caldwell, 2015 ONSC 7715, 70 R.F.L. (7th) 397, at paras. 10-12.
[93] However, given that the phase 1 Arbitration findings will be the factual predicate upon which the determination of her claim will proceed and that it is reasonable to expect that Ms. Athanasoulis will require expert input, regardless of the procedure, to have her claim determined by the Proposal Trustee, I am not convinced that she has suffered any costs thrown away.
[94] The parties are just now pivoting to a different process for the final determination of the Athanasoulis Claim, but the onus is still on her to prove it. It is difficult to see how she has wasted the cost of whatever work she did in furtherance of her quest to persuade the Arbitrator to decide in her favour the same issue that the Proposal Trustee will now take into consideration when determining her claim. All the work should be usable to support the proof of her claim to the Proposal Trustee.
[95] As such, no costs thrown away are awarded to Ms. Athanasoulis.
Final Disposition
[96] The court’s decision on each of the issues on this funding motion, as re-stated by the Proposal Trustee, is as follows:
a. The continuation of phase 2 of the Arbitration provided for in the Agreement to Arbitrate the Athanasoulis Claim is not a valid exercise of the authority granted to the Proposal Trustee under the Proposal or s. 135 of the BIA. Therefore, the court makes no order requiring the Sponsor to fund (and/or indemnify the Proposal Trustee for) the budgeted Administrative Fees and Expenses associated with phase 2 of the Arbitration (of approximately $700,000).
b. The questions of whether phase 2 of the Arbitration was a procedure that the Proposal Trustee had the jurisdiction to engage in, and the Sponsor’s obligation to fund the Administrative Fees and Expenses of the Proposal Trustee associated therewith, are not barred by res judicata or any other estoppel or laches.
c. The Sponsor is required to indemnify the Proposal Trustee for all of the reasonably incurred Administrative Fees and Expenses in relation to the determination and valuation of the Athanasoulis Claim, including for phase 1 of the Arbitration and for whatever procedure the Proposal Trustee, in its discretion, determines appropriate to receive the further evidence and positions of Ms. Athanasoulis and other interested stakeholders and any expert inputs deemed necessary.
d. The Proposal Trustee should first determine how it intends to proceed in light of the court’s decision on this motion, and may prepare a budget for the anticipated Administrative Fees and Expenses associated with this exercise, or seek indemnification after the fact, as it deems appropriate.
e. If asked to do so and the Sponsor is not prepared to top up the reserve for the funding of the Proposal Trustee’s anticipated Administrative Fees and Expenses to complete the determination and valuation of the Athanasoulis Claim, the parties may request a case conference before me so that the court can provide further directions in this regard and any related issues. The parties are directed to confer about these issues before scheduling a case conference so that the appropriate amount of court time is reserved.
f. If the LPs are proceeding with their proposed motion, they shall serve their motion record(s) with supporting evidence and, after that, the parties shall confer about the timetabling and sequencing of those motions and then seek a scheduling appointment (if all agree) or a longer case conference (if all do not agree) for directions, timetabling and a motion hearing date if determined appropriate.
g. There have been no costs demonstrated to have been thrown away as a result of the court’s ruling on this motion, and none are awarded.
h. The costs of the Proposal Trustee and its counsel for this motion were reasonably incurred and may be paid out of the remaining reserve fund and/or a claim for reimbursement by the Sponsor for those costs may be made under the Proposal.
[97] This endorsement and the orders and directions contained in it shall have the immediate effect of a court order without the necessity of the formal issuance and entry of an order.
KIMMEL J.
Date: November 1, 2022
[^1]: The motion originally sought the determination of the Sponsor’s obligation to fund certain past expenses incurred by the Proposal Trustee; however, these expenses have been funded through previous advances from the Sponsor and the Sponsor advised that it is not seeking to “claw-back” monies previously advanced nor challenge the use of funds by the Proposal Trustee to date. Thus, the practical implication of this motion is only to deal with future funding obligations of the Sponsor.
[^2]: This reference to a “potential consolidated arbitration process” is not intended to resolve the dispute between Ms. Athanasoulis (and the Proposal Trustee), on the one hand, and the LPs on the other, about whether they did in fact reach an agreement to consolidate all issues into an arbitration. That issue was not squarely put before the court on this motion.
[^3]: This estimate assumed that the three remaining disputed claims would be adjudicated in the manner indicated by the Proposal Trustee, with no further procedural motions. Also included in this budget were estimated Administrative Fees and Expenses associated with the phase 2 of the Arbitration. The amount for this portion of the future fees was initially estimated to be approximately $500,000, but that estimate is now approximately $700,000. However, other disputed claims have been resolved such that the overall estimate for future funding that the Proposal Trustee anticipates remains at an estimated $1.485 million.
[^4]: As previously indicated, there is a dispute about whether the LPs agreed to arbitrate their priority and enforceability challenges to the Athanasoulis Claim. The court was not asked to determine whether the LPs had in fact agreed to arbitrate their issues in the expanded phase 2 of the Arbitration. I do not need to decide this question to decide the funding motion.