Court File and Parties
Court File No.: BK-13-01758002-0032 Date: 2023-11-14 Ontario - Superior Court of Justice – In Bankruptcy and Insolvency
In the Matter of the Bankruptcy of: Verinder Malhotra, of the City of Brampton, in the Regional Municipality of Peel
Re: Gurdeep Nagra, Appellant / Creditor And: Verinder Malhotra, Respondent / Bankrupt
Before: Peter J. Osborne J.
Counsel: Matthew Harris, Counsel for the Appellant / Creditor, Gurdeep Nagra Colby Linthwaite, Counsel for the Respondent / Bankrupt, Verinder Malhotra
Heard: July 7, 2023
Endorsement
1The Creditor, Gurdeep Nagra, (the “Appellant” or “Nagra”) appeals from the Order of Associate Justice Ilchenko, sitting as the Registrar in Bankruptcy, dated January 31, 2023 (the “Order”), which expunged or reduced (in part), the Proof of Claim (the “Nagra Claim”) as accepted by the Trustee in Bankruptcy.
2The Appellant seeks an order setting aside the Order, with costs of this appeal, and costs of the court below which were ordered payable by the Appellant to Malhotra in the amount of $99,266.21 inclusive of fees, disbursements and HST.
3The Bankrupt, Verinder Malhotra (the “Bankrupt” or “Malhotra”) opposes the relief sought.
4The Nagra Claim was filed with the Trustee in Bankruptcy by Nagra in the amount of $5,994,500 and was accepted by the Trustee in the reduced amount of $2,580,000. Malhotra brought an application pursuant to s. 135(5) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”) for an order expunging or reducing the Nagra Claim and was successful on the application.
5The Order reduced the Nagra Claim to $85,000, being the amount of an award of costs that Nagra had obtained against Malhotra in this Court, and expunged the balance of the Nagra Claim.
Facts
6The Facts underlying the Order were complicated and unusual. They are set out in the Endorsement of the court below. The Endorsement is lengthy, and the materials filed both in the court below and on this appeal were voluminous.
7Malhotra practised medicine full-time in Brampton, Ontario. He owned 50% of the shares in companies which in turn owned hotels in Vermont and New Hampshire, United States. The other 50% of the shares were owned by Nagra. Malhotra was an investor and was not involved in the management or financing of the hotels, all of which was the responsibility of Nagra.
8Unbeknownst to Malhotra, Nagra falsified documents on a loan application to the Chittenden Bank that was submitted to induce the Bank to extend loan facilities, the proceeds of which were used to finance the construction of one of the hotels.
9Following an FBI raid at the hotel properties, Nagra was charged with several felony offences, including bank fraud, conspiracy and employing illegal aliens.
[10] As a result of those charges against Nagra, several events occurred: a. the Chittenden Bank called the loans and placed two of the hotels into receivership; b. another lender to the hotels, CIT Lending Service Corporation (“CIT”), called its loans and demanded the repayment of two loans in the amounts of $6,054,548 and $1,947,500 respectively; and c. the Bank of Las Vegas, New Mexico, to which the hotels had applied for refinancing in the amount of $7,195,000, refused to further consider that refinancing application unless Nagra was removed as a principal of the hotels.
11The immediate prejudice to Malhotra arose from the fact that he had guaranteed the liabilities of the hotels to both Chittenden Bank and CIT with the result that he had personal exposure of approximately $11 million.
12Discussions ensued with the Bank of Las Vegas about a possible refinancing. On November 5, 2007, the Bank of Las Vegas provided a letter of commitment which included, among other things, covenants requiring that the hotels satisfy their outstanding liabilities to creditors, which would permit the discharge of the Receiver that had been appointed by CIT. The letter of commitment also required that Malhotra, and his wife Kiran Malhotra personally, guarantee the debts of the hotels to the Bank of Las Vegas.
13To satisfy the requirement that Nagra be removed from the corporate structure of the hotels, Nagra and his lawyer, George Nostrand (“Nostrand”), prepared an agreement of purchase and sale pursuant to which Malhotra would purchase Nagra’s shares in the hotel companies (the “Purchase Agreement”).
14Schedule “A” to the Purchase Agreement set out the value of assets and liabilities related to the hotels. It was prepared by Nagra and his lawyer. Malhotra had no independent knowledge of the value of the hotels, nor did he have any time to conduct due diligence given the necessity of immediate refinancing.
15Accordingly, Malhotra and Nagra agreed that Malhotra would purchase Nagra’s interest in the hotels for USD $3,500,000 (the “Purchase Price”), to be paid by way of a promissory note from Nagra to Malhotra in the corresponding principal amount of USD $3.5 million (the “Note”). It is this Note that is at the centre of the dispute about the Nagra Claim.
16The Bank of Las Vegas financing was scheduled to close on December 14, 2007. Funds were to be used for the payout of the Chittenden Bank, the discharge of its receiver and the payment of the CIT financing.
17Three days before the closing, Malhotra’s lawyer advised him that Schedule “A” to the Purchase Agreement had understated the liabilities of the hotels by a material amount exceeding USD $1.5 million. The Regional Manager of the hotels advised Malhotra and his wife that the financial position of the hotels was significantly worse than Nagra had represented, and specifically that the hotels had substantial undisclosed liabilities (the “Undisclosed Liabilities”).
18Malhotra realized that the financing itself would not be sufficient to satisfy the Undisclosed Liabilities and that the payment of those debts would require a further advance. At a meeting on December 11, 2007 among Nagra, Malhotra and his wife, their lawyer, Nostrand, and the Regional Manager, Malhotra advised that he was not prepared to complete the purchase of Nagra’s shares or advance further funds unless the Purchase Agreement and the Promissory Note were amended to factor into the Purchase Price the Undisclosed Liabilities.
19The evidence of Malhotra, and a finding of fact in the court below, was to the effect that the Parties came to an agreement that the Purchase Agreement and the Note would be superseded by what became known as a Governing Agreement. (As further discussed below, Nagra denies that any such Governing Agreement was reached. His position in the court below was that the Governing Agreement was a recent fabrication of Malhotra.)
[20] That Governing Agreement provided, in relevant part, that: a. after the Bank of Las Vegas financing was completed, Nagra would assist Malhotra in selling the hotels; b. the proceeds of sale would be used to pay the debts of the hotels; c. after those debts had been paid, Malhotra would receive the sum of $1,975,000, an amount that Nagra described as the amount that Malhotra had invested in the hotel properties in excess of Nagra’s own investment; and d. if, but only if, there was any surplus remaining, Nagra would be entitled to recover on the Note.
21In reliance on the Governing Agreement, Malhotra’s wife advanced a further $450,000 to the hotels, for a total contribution of $1.7 million, and she signed a personal guarantee of the debts of the hotels to the Bank of Las Vegas.
22Nagra was convicted of conspiracy and employing illegal aliens in the Vermont hotels.
23It is the position of Malhotra that Nagra was motivated to induce Malhotra and his wife to accept the Governing Agreement, since it provided for repayment to the Chittenden Bank and CIT, and if those entities were not repaid in full for his fraud, then his prison sentence in respect of the felony charges would be significantly longer than it would otherwise be.
24Indeed, the Sentencing Memorandum filed by the prosecutor in his criminal case addressed that very point. The value of the Note was an issue at Nagra’s sentencing hearing. Under United States sentencing guidelines, Nagra’s period of incarceration would have been harsher if he could lawfully collect on the Note, as such would amount to him profiting by his crime.
25For that reason, the prosecutor made reference to the Note in support of its submissions requesting a longer sentence, which submissions stated, in part, that: “the hotels for which he committed fraud and for which he employed illegal aliens for so long have been bought by his ex-partner, Dr. Malhotra, and [Nagra] is to receive $3.5 million”.
26Nagra, seeking to minimize the length of his incarceration, disagreed and submitted in his own Sentencing Memorandum that it was “unknown whether he would ever be repaid on this Note, or if so, in what amount or when”.
27Nagra also called evidence from Nostrand who testified to the effect that [Malhotra] would not pay Nagra on the Note until there was a complete liquidation of the hotel properties, and if there was anything left over, “we would pay on the Note”. The result, he testified, was that it may be several years and it may ultimately be that [Nagra] never gets anything. He stated in his testimony: “the deal we made with him is, we get our money back; then we pay on your note”.
28The issue between the parties as to whether the Governing Agreement had in fact been reached arose, in large part, because it was never reduced to writing by Nagra’s lawyer. The Record in the court below includes affidavits from three of the individuals who attended the December meeting referred to above, all of which are to the effect that the Governing Agreement was reached, and that it included the terms summarized above.
29One of those affidavits was sworn by Malhotra’s Vermont lawyer, Nostrand, and it refers to the evidence that he gave at Nagra’s sentencing hearing as described above.
30The court in the United States imposed a more lenient sentence on Nagra, amounting to imprisonment for a term of four months in a minimum security facility, followed by a three year term of supervised release and a fine of $10,000.
31Nagra and Malhotra than implemented the first element of the Governing Agreement by selling the Vermont hotels and generating net proceeds of $438,484.34 which, although materially less than had been anticipated, was applied toward the payment of debts or the operation of the hotels. In any event, neither Malhotra nor his wife recovered any of the advances they had made to the Vermont hotels.
32As a further result, and pursuant to the terms of the Governing Agreement referred to above, since they did not recover their advances, their position was that nothing was due or in fact ever paid on the Note and accordingly, it became valueless.
33The story did not, however, end there. Nagra then immediately tried to enforce the Note. In 2010, he brought an action here in Ontario against Malhotra alleging default on repayment pursuant to the Note. Malhotra sought to have the action dismissed and brought a motion challenging jurisdiction. That motion was unsuccessful and costs were awarded against Malhotra in the amount of $85,000. That amount is also part of the Nagra Claim.
34Malhotra then filed a proposal under the Bankruptcy and Insolvency Act, (“BIA”) (Division 1), commencing this proceeding. Nagra filed a Proof of Claim in the bankruptcy in the amount of $5,994,500 (the “Nagra Claim”) that is now the subject of this appeal. That quantum was comprised of the costs awarded of $85,000, the full USD $3.5 million face value of the Note, interest, and $250,000 claimed in respect of legal fees and collection costs.
35Malhotra made a proposal to creditors. It was rejected, and he made a deemed assignment into bankruptcy. On September 24, 2014, the then Trustee (i.e., the first Trustee) distributed to Nagra an interim dividend of $70,762.01.
36Malhotra disputed the Nagra Claim, maintaining the position throughout that he owed nothing to Nagra. Ultimately, the Trustee classified the Nagra Claim as “contingent” subject to the completion of legal proceedings that had been brought in Vermont by the Trustee against Nostrand and his estate.
37Nostrand had died in 2016. Malhotra commenced, and the Trustee continued, an action against Nostrand’s estate alleging negligence in Nostrand’s failure to document the Governing Agreement. That action was subsequently settled by the Trustee for USD $350,000, which funds went into Malhotra’s bankruptcy estate for the benefit of his creditors.
38The Trustee then “compromised and accepted” the Nagra Claim in the amount of $2,580,000, advising Malhotra (via correspondence to his counsel) that the Trustee had investigated the matter and come to the conclusion that “it was in the best interest of the estate to attempt to compromise the [Nagra Claim] rather than litigate a disallowance.”
39Malhotra then brought a motion (i.e., the motion below) for an order reducing the Nagra Claim to $85,000, being the amount of the costs award resulting from the unsuccessful jurisdiction challenge motion in the Ontario action.
40Malhotra filed a comprehensive motion record, containing among other things affidavits from Malhotra, his wife and the former General Manager of the Vermont hotels and the other individuals whose affidavits are referred to above. Malhotra’s position was that almost all of the quantum comprising the Nagra Claim was predicated on the Note which was worthless. Both Nagra and the Trustee had relied upon the worthlessness of the Note before the US courts and had received concrete benefits based on that reliance with the result that they were estopped from taking the opposite position in the bankruptcy proceeding or before this Court.
41Nagra filed his own voluminous record on the motion. However, by Order of Associate Justice Jean dated February 4, 2020, that record was struck as a result of findings made of abuse of process in various preliminary motions and Nagra’s failure to comply with a Case Timetable that the Associate Justice had imposed.
[42] In Reasons released on March 4, 2020, reproduced in the Endorsement of Associate Justice Ilchenko, Associate Justice Jean concluded that Nagra had sought an adjournment simply to delay the adjudication of the motion, that he had failed to comply with the motion timetable set out in her previous order made on his consent, that by attempting to file the motion record, Nagra was indirectly doing what he was not entitled to do and: Fifth, and most importantly, by circumventing the hearing of the motion to extend, Nagra usurped the role and function of the court to control its own process. I agree with [Malhotra’s lawyer’s] submission that the steps taken by Nagra is an abuse of the court process. For all of these reasons, I granted the bankrupt’s motion to strike Nagra’s responding motion record.
43Associate Justice Jean granted costs on a substantial indemnity basis given that the motion to strike was entirely unnecessary and given what she viewed as sharp practice on the part of Nagra.
[44] Nagra appealed the order of Associate Justice Jean. For Reasons released on May 26, 2021, Conway, J. of the Commercial List dismissed that appeal, stating in relevant part that: I find no error in principle by the Master [now Associate Justice] in striking the Responding Materials. … What [the Master] found particularly egregious was that he had scheduled the Motion to Extend, filed the Responding Materials in the face of that motion, and then withdrew the motion. As she found, Mr. Nagra had circumvented the Motion to Extend and thereby usurp the role and function of the court to control its own process. … The Master in this case struck the Responding Materials because Mr. Nagra was not permitted to file them in the first place, absent a court order. … Mr. Nagra was taking matters into his own hands and seeking to do indirectly what he was not allowed to do directly. The Master refused to allow Mr. Nagra to do so. That was a proper exercise of her discretion in controlling the court’s process and there is no basis for appellate interference.
45Conway, J. ordered costs against Nagra on a partial indemnity basis fixed at $8000.
46The costs awards against Nagra in favour of Malhotra arising from the motion and the unsuccessful appeal totalled in the aggregate $38,086.23.
47As stated in the Endorsement of Associate Justice Ilchenko, Nagra was permitted, by his order (March 17, 2022 endorsement), to file on the motion below a factum and brief of authorities.
48However, and as the Associate Justice put it: “despite my order, counsel for Nagra also filed a compendium and an exhibit brief from the cross-examination of the Bankrupt”.
[49] As stated in the Endorsement, Nagra never obtained leave of the court to conduct that cross-examination under Rule 14 of the BIA, and: [T]he exhibit brief again, despite the Orders of Associate Justice Jean, and Conway, J., attempted to introduce as “exhibits” the statement of defence of the bankrupt in the collection action, affidavits sworn by the bankrupt, email communications and other materials. In other words, Nagra sought to put into the Record, yet again, the same material that this Court had, twice, struck from the record.
50Associate Justice Ilchenko therefore concluded that because of the Reasons of Associate Justice Jean and the Reasons of Conway, J., the only admissible evidence on the motion was the evidence filed by the Bankrupt, and the cross-examination transcripts of the examinations of the Bankrupt and his spouse on their affidavits.
51I pause to observe that Nagra has filed the Exhibit Brief yet again, this time as part of his Appeal Book on this appeal.
52Finally, as stated in the Endorsement, the Trustee took no position on the motion below, and filed no materials. Associate Justice Ilchenko observed that it would have been of assistance to the court for the Trustee to have provided a report summarizing the procedural and administrative steps taken in the bankruptcy estate … and to report firsthand on the rationale for the settlement of the Nagra Claim.
53I agree with the Associate Justice that a report from the Trustee would have been of assistance to the Court. The Trustee, in its capacity as such, is an officer of the Court. In the particular circumstances of this case, the fact that the Trustee took no position on the motion below, nor on this appeal, is remarkable in an unhelpful way.
54With respect to the role of the Trustee, I observe that the Endorsement states that the original Trustee was replaced at the First Meeting of Creditors and the present Trustee (who was also the Trustee at the time of the motion below) was substituted on the motion of Nagra. Nagra’s original counsel in the bankruptcy resigned and was subsequently appointed as counsel to the second Trustee.
The Grounds for Appeal
[55] Nagra submits on this appeal that in making the Order, the Associate Justice made two errors in that he: a. ignored relevant jurisprudence in determining what evidence should be before the Court on this motion; and, in the alternative, b. failed to consider the lack of independent evidence that, on a balance of probabilities, the Note was invalid.
56The basis for the first ground of appeal is set out at paragraphs 13 – 20 of Nagra’s factum. Nagra submits that the decision of the Trustee (here, allowing the Nagra Claim in the full amount) should have been given the highest level of deference and the motion before the Associate Justice ought to have proceeded as an appeal, and not a hearing de novo.
57Nagra submits that: “even though the Trustee took no active role in the proceeding, there was still a finding by the Trustee that the claim was valid in the context of the bankruptcy. By allowing further and more materials, as a de novo matter, the Associate Justice gave no deference to the decision of the Trustee (contrary to the jurisprudence)”.
58The basis for the second ground of appeal is described by Nagra in his factum this way: “on a prima facie basis, there does not appear to be anything wrong with the Proof of Claim as provided.” Nagra refers to the finding by the Associate Justice that he (Nagra) was a convicted felon in the United States, and that this fact, while ordinarily irrelevant to the determination of the validity of a proof of claim in a Canadian bankruptcy court, was highly relevant given the circumstances surrounding the Governing Agreement. Nagra submits: “the question before the Court is why this is relevant to the matter at instance”.
[59] Nagra continues by submitting that: The Reasons reflect consideration by the Associate Justice of facts ranging from the criminal record of Nagra, to the context in which the proceedings took place, and many other facts which are listed. … He does so without any benefit of responding materials (due to the admitted fault of Nagra in having it stricken). However, he also does so without any report or responding materials from the Trustee. He makes de novo findings of fact regarding the credibility of Nagra, of other (American) counsels, and evaluates the “plea agreement” in the United States federal criminal charges. His Honour uses these reasons as consideration for the reasoning that the proof of claim of Nagra should be expunged. It is submitted that there is no independent reasoning that the proof of claim is invalid. The promissory note is valid. There are no legal technicalities or problems with it, and it meets the requirements from the Bills of Exchange Act. There was never any dispute as to the conduct that led to the criminal charges (and plea arrangements) in the United States. However, this evidence does not support a finding that ipso facto the promissory note was not demandable or a proven claim in the bankruptcy. It is an error in principle that the Court should rely on the findings.
60Nagra goes on to submit that the language of a promissory note itself determines whether it is conditional or unconditional, and the Note on its face does not contain any words suggesting contingency.
61As is clear from the above, the two grounds advanced on this appeal are closely related and indeed overlapping.
62As the Respondent on this appeal, Malhotra submits that the Associate Justice properly found that the Note, considered in the factual matrix in which it was given, was contingent and that the contingency did not occur.
[63] That factual matrix included: a. the fraud; b. Nagra’s conviction; c. the buyout by Malhotra of Nagra’s interest in the enterprise; and d. the fact that the creditor received a reduced sentence on the basis of evidence from the lawyer for the Bankrupt to the effect that the buyout was contingent and the contingency would probably never occur. It in fact did not occur, and the creditor is owed nothing on the Note.
64Moreover, Nagra submits, the Trustee knew the note was valueless since it had brought (or continued) the negligence action against the lawyer for the Bankrupt (alleging the failure to document Governing Agreement) on that very basis.
The Law
65An appeal from an order or decision of the Registrar in Bankruptcy must be made by motion to a judge sitting in bankruptcy: Rule 30(2) of the Bankruptcy and Insolvency General Rules and s. 192(4) of the BIA.
66Findings of fact by the Registrar are also afforded deference absent a palpable and overriding error. Questions of law and matters of principle are reviewed on a standard of correctness. The standard on mixed questions of fact and law lies along the spectrum. At one end, the palpable and overriding error standard applies to questions that primarily involve fact-finding or the making of factual inferences. At the other, where there is an error in characterizing or considering the proper legal standard to be applied, the standard is correctness: Murphy v. Sally Creek Environs Corporation, 2010 ONCA 312 (“Murphy”) at para. 68.
67Great deference must be accorded to the exercise of discretion. In order to interfere with the discretionary determination, the reviewing court must first find 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. Where there has been such an error in the making of a discretionary decision, the reviewing court may exercise the discretion afresh: Murphy, at para. 70 and Re Kanovsky Estate (Bankrupt), 2012 MBQB 265 at para. 3.
68The onus of proof on a motion to expunge is on the party seeking to have the claim expunged: Badger, Re, (1929), [1930] 2 D.L.R. 88 (Sask. C.A.).
69It is unnecessary for the Bankrupt to show that the trustee acted unreasonably or improperly in allowing the claim. The Bankrupt must prove on the merits that the claim should not be allowed: Re Marsuba Holding Ltd., (1998), 8 C.B.R. (4th) 268 (“Marsuba”).
70The standard of proof on a motion to expunge is that of the balance of probabilities: Re Karataglidis, (2003), 47 C.B.R. (4th) 241, and Marsuba at para. 19.
Analysis
71Neither ground of appeal can succeed, and the appeal is dismissed.
72First, Nagra does not appeal the findings of fact in the Endorsement from which this appeal is taken. In argument, counsel for Nagra was clear in his candour that the findings in the court below included the findings of fact that the buyout of Nagra’s interest in the hotels by Malhotra was contingent, and further that this contingency did not occur.
73In submissions to this Court, counsel was equally clear that he did not attack those findings of fact, but rather, submitted that they ought to be irrelevant to the analysis of the issue. His position is that the court below ought to have had regard only to the terms of the promissory note on its face, as submitted by Nagra to the Trustee with his proof of claim, and the court ought not to have placed any weight whatsoever on the evidence respecting the history and enforceability of that note informed by the factual matrix in which it came about and the chronology described above.
74Nagra submits that by considering that evidence, “the Associate Justice gave no deference to the decision of the Trustee (contrary to the jurisprudence)”. Nagra further submits that it was improper for the Associate Justice to have relied upon the material he did “without any benefit of responding material (due to the admitted fault of Nagra and having it stricken). However, he also does so without any report or responding materials from the Trustee.
75Neither of those two submissions can succeed either. It was entirely appropriate for the Associate Justice to consider the matter without responding material for the very reason that Nagra states in his factum: his admitted fault (para. 25). The factum goes even further and states that the decision of Associate Justice Jean, confirmed on appeal by Justice Conway “was an appropriate result” (para. 18). Those materials were properly struck.
76Moreover, it cannot be improper for the Associate Justice to determine the matter in the absence of a report or responding materials from the Trustee, where the Trustee, who had been nominated by Nagra, elected not to file a report or any responding material. Section 135(5) of the BIA specifically contemplates the application to expunge or reduce a claim if the trustee declines to interfere in the matter [emphasis added].
77Second, neither ground of appeal advanced before this Court was argued before the Associate Justice below. Not only were the grounds not advanced, but the position of Nagra in the court below was entirely the opposite of the position advanced now as he submits that the hearing ought to have been limited to the record before the Trustee and it was an error for the Associate Justice to have considered the matter de novo with reference to the material submitted by Malhotra.
78In the court below, not only did Nagra not challenge the admissibility or use of new or contextual evidence that had not been filed with the Trustee, but he also attempted to rely upon affidavit material that he himself had not submitted with the proof of claim. Reliance by the Associate Justice on material that was not before the Trustee is precisely the error that he now alleges was committed by the Associate Justice in the hearing below.
79That in itself completely undermines the position of Nagra advanced on this appeal. It is also inconsistent with the general rule that appellate courts will not entertain entirely new issues on appeal. The rationale for the rule is that it is unfair to spring a new argument upon a party at the hearing of an appeal in circumstances in which evidence might have been led at trial if it had been known that the matter would be an issue on appeal: Kaiman v. Graham, 2009 ONCA 77 at para. 18.
80However, the arguments advanced by Niagara on this appeal are further compromised still.
81As described above, the material that Nagra attempted to file in the court below (including his Exhibit Book) was struck as an abuse of process. He appealed the order striking his materials. The appeal was dismissed. He then tried to circumvent the order striking his record, already upheld on appeal, by attempting to put the documents to Malhotra on examination and then filing them in his Exhibit Book. The Associate Justice quite properly refused to consider that evidence.
82Nagra now seeks to file that same material on this appeal and includes it in his Appeal Book. Attempting to have that material form part of the record is inconsistent both with the order striking it and the order on appeal confirming that it should be struck, and is also inconsistent with his position that it was an error in law for the Associate Justice to have heard the motion below de novo rather than restricting himself to materials that were originally before the Trustee when the claim was allowed.
83That submission and the attempt to file again the material already struck is an abuse of process, is improper, illogically inconsistent, and cannot succeed.
84In my view, this alone is also sufficient to dismiss the appeal.
85However, in the event I am in error in that regard, in my view the Associate Justice made no error in considering, in the particular circumstances of this case being an application brought pursuant to s. 135(5), evidence beyond that which was filed with the Trustee in support of the proof of claim.
86The Appellant here accepts the law as summarized above to the effect that on this appeal, significant deference is owed to the Registrar in Bankruptcy (i.e., the Associate Justice sitting as the Registrar in Bankruptcy). He argues, however, that the Registrar committed an error in law in considering evidence that was not before the Trustee, and further that the Registrar did not show adequate deference to the decision of the Trustee.
87His argument on this point also, however, is internally inconsistent. Nagra relies on Marsuba, cited by the Associate Justice below, but he relies upon it for the proposition that as a general rule, an application to expunge a proof of claim should follow the same procedure as the appeal of the trustee’s disallowance of a proof of claim and should proceed as a true appeal rather than a trial de novo.
88In my view, it was appropriate for the Associate Justice to consider the matter de novo, and therefore to consider evidence that had not been before the Trustee when the claim was allowed, in the particular circumstances of this case.
89I am satisfied that a court on an application to expunge, can proceed by way of hearing de novo where it determines that to proceed otherwise would result in an injustice. In my view, the issue does not depend on whether the injustice would be to the creditor or the bankrupt: Credifinance Securities Limited v. DSLC Capital Corp, 2011 ONCA 160 (“Creditfinance”) at para. 24, citing Charlestown Residential School, Re, 2010 ONSC 4099 at paras. 1, 18, and Re: Poreba, 2014 ONSC 277 at para. 32.
90To be clear, in my view whether the matter before the court is an appeal from a disallowance pursuant to s. 135(4) or a motion to expunge pursuant to s. 135(5), there is a discretion in the court as to whether the matter should proceed de novo in the particular circumstances of the case before it.
91In Re Galaxy Sports Inc., (2004) 2004 BCCA 284, 2004 CarswellBC 1112, 1 C.B.R. (5th) 20, the British Columbia Court of Appeal held that the hearing of an appeal of the trustee’s valuation of a claim under s. 135(4) was not intended to be a trial de novo, but a true appeal, and that if fresh evidence was adduced in the appeal court as a matter of course, there would be a loss of efficiency in the bankruptcy process (para. 41) [emphasis in original].
92However, a number of Canadian courts have held, in a manner that in my view is consistent with the decision in Galaxy Sports, that appeals under s. 135(4) may be heard de novo where the circumstances are such that a hearing restricted to the record might result in an injustice: Houlden and Morawetz, 2023 Annotated Bankruptcy and Insolvency Act at § 6:273, quoting from: Re San Juan Resources Inc., (2009), 2009 ABQB 55, 2009 CarswellAlta 98, 52 C.B.R. (5th) 97 (Alta. Q.B.) (Registrar); Aguilar v. Canada (Minister of Citizenship & Immigration), 2009 FC 100, 2009 CarswellNat 213, 2009CarswellNat 542 (F.C.); Business Development Bank of Canada v. Pinder Bueckert & Associates Inc., 2009 SKQB 440, (2009), 2009 CarswellSask 776(Sask. Q.B.) (Registrar); Royal Bank v. Insley, (2010), 2010 SKQB 17, 2010 CarswellSask 47, 64 C.B.R. (5th) 105 (Sask. Q.B.) (Registrar); and Re Charlestown Residential School, (2010), 2010 ONSC 4099, 2010 CarswellOnt 5343, 70 C.B.R. (5th) 13(Ont. S.C.J.).
93Accordingly, the procedure under s. 135(4) will usually be a true appeal, and a hearing de novo is not a matter of right. Where, however, a true appeal might result in an injustice, the court has the discretion to hear the matter de novo.
94On an application to expunge or reduce a proof of claim pursuant to s. 135(5), there is older Canadian authority for the proposition that such an application is, in effect, an appeal by a creditor or the debtor against an allowance by the trustee of a proof of claim: Houlden and Morawetz, 2023 Annotated Bankruptcy and Insolvency Act at § 6:283, quoting from Re Cassidy, (1922), 2 C.B.R. 459, 22 O.W.N. 241 (S.C.); and Re Transportation & Power Corp. (1939), 21 C.B.R. 125 (Ont. S.C.).
95However, there is also authority, equally found in Houlden and Morawetz, 2023 Annotated Bankruptcy and Insolvency Act at § 6:283, to the effect that an application to expunge a claim is to be decided on the basis of evidence of relevant witnesses (viva voce evidence): see Marsuba. Other authorities endorse a procedure under s. 135(5) with evidence not restricted to that which was before the trustee, but tendered by affidavit: Re Palmer, 2007 BCSC 130, 2007 CarswellBC 160, at para. 2, although the matter was unopposed. Still, courts will occasionally permit these appeals to proceed by way of affidavit evidence: Creditfinance, at paras. 23 – 24.
96Perhaps the clearest statement about the procedure on an application pursuant to s. 135(5) is from the British Columbia Court of Appeal which held that the provision effectively provides for applications to be heard de novo and that an application to expunge or reduce a proof of claim is not an appeal: Ted Leroy Trucking Ltd. (Re), 2012 BCCA 511 at para. 16.
97In my view, that is consistent with the nature of the two provisions: whereas s. 135(4) is an appeal from a decision of the trustee and is therefore generally a true appeal (albeit with residual discretion in the court to consider the matter de novo to avoid an injustice), s.135(5) is an application by a creditor or the debtor to expunge or reduce a claim where the trustee declines to interfere in the matter. It seems reasonable, therefore, that the intention of Parliament is that such an application would generally proceed as a hearing de novo.
98The fundamental objective is to balance the legislative objectives of the bankruptcy regime to maximize efficiency and the expeditious determination of claim with the requirement that an injustice or unfairness to the parties not be brought about by refusing to hear the matter de novo or consider relevant evidence.
99This case clearly represents a circumstance where it would be patently unfair to the bankrupt and in a very real sense artificial, to ignore the factual matrix within which the Note came about and within which it was subsequently amended. This is all the more so where, as here, Nagra himself sought to have the court below rely upon additional material that had not been before the Trustee, all as described above.
[100] I am reinforced in this conclusion by the fact that Nagra specifically does not challenge the findings of fact below but rather submits only that they ought not to have been taken into account. Among the relevant unchallenged findings of fact, the exclusion of which would be unjust and unfair here, include these: a. Nagra was charged, and was convicted, in the U.S. proceedings relating to the falsification of the loan documents as described above; b. the Governing Agreement did in fact exist; c. Malhotra was never paid the sum of $1,975,000 due according to the terms of the Governing Agreement; d. the Governing Agreement was clear according to its terms that if, and only if, there was a surplus of funds remaining after that amount had been paid, would Nagra be paid anything under the Note. In other words, the buyout by Malhotra of Nagra’s interest in the hotels was contingent, and the contingency did not occur; and e. as a result, Nagra was not entitled to be paid anything under the Note.
101I am further reinforced in the conclusion that it would be unjust and unfair to ignore the additional evidence here since it is clear that at the time it compromised the Nagra Claim, the trustee was in fact aware of the existence of the Governing Agreement and its effect on the enforceability of the Note. In fact, the Trustee had pursued the professional negligence action against the lawyer, Nostrand, almost two years earlier on the basis of these very facts.
102The Record is clear that the Trustee elected to accept the Nagra Claim not because the Trustee had reached the conclusion that it had substantive merit, but rather because the Trustee determined it was not in the best interests of the estate to litigate a disallowance. Whether or not that was an appropriate decision, it was not a factual determination to which the Associate Justice owed any deference.
103Still, Nagra submits that even if that evidence was properly admissible, it is irrelevant to the enforceability of the Note on which the Nagra Claim is based. He submits that a promissory note, as a bill of exchange, is a standalone negotiable instrument, enforceable according to its terms on its face. He submits that: “the promissory note in this case is proper and valid in every respect and is payable now … the inferences drawn from Nagra’s criminal record, or his conduct in relation to the financial and criminal affairs of the hotels, is not relevant to the bare issue of the validity of the proof of claim”.
104This argument cannot succeed. In determining the validity of a promissory note, a court may consider not only the interpretation of the note itself, but whether it was modified by a subsequent agreement such that, despite its clear wording, it is not enforceable on demand. That in turn requires an understanding of the broader factual matrix, which includes other agreements that may or may not conflict with the promissory note, and that cannot be determined simply by reading the note in isolation from the larger transaction of which it appears to be a part, or of understanding what the various agreements together were expected to achieve: Jackson v. Solar Income Fund Inc., 2016 ONCA 908 at para. 6. See also Allen v. Succession Capital Corp., 2011 ONSC 3300 at para. 46.
105I also reject the submission of Nagra that he is a holder in due course of the Note as contemplated in s. 57(2) of the Bills of Exchange Act, R.S.C. 1985, c. B-4, as a result of which he may therefore “sue on the bill free from personal defences”. Nagra is not a holder in due course. He is the original payee on the Note. Moreover, he is clearly aware, having understated the liabilities of the hotels to Malhotra which resulted in the Governing Agreement in the first place, of circumstances that in my view are clearly such as to amount to, at a minimum, a defect in title, and for that reason also he is disentitled to the rights that might otherwise accrue to a holder in due course.
106For all of these reasons, neither ground of appeal can succeed.
Result and Disposition
107The appeal is dismissed. The Order of Associate Justice Ilchenko reducing the Nagra Claim to $85,000 is not set aside.
108The parties were not in a position at the conclusion of argument to address costs. The Respondent Malhotra has been successful on the appeal and is entitled to his costs. Malhotra may file brief submissions on costs, not to exceed three pages in length, together with a Bill of Costs, within 15 days. The Appellant Nagra may file responding submissions, also not to exceed three pages in length, within 10 days thereafter.
109Order to go to give effect to these reasons.
Osborne J.