COURT FILE NO.: 31-2484304
DATE: 2024 01 03
ONTARIO
SUPERIOR COURT OF JUSTICE
IN BANKRUPTCY AND INSOLVENCY
IN THE MATTER OF THE BANKRUPTCY OF GALTY B.V. HAVING ITS HEAD OFFICE IN THE CITY OF AMSTERDAM IN THE NETHERLANDS
BEFORE: Associate Justice Ilchenko, Registrar in Bankruptcy
COUNSEL: S. Title, LIT (“Title”) for Responding Party Trustee MNP Limited (the “Trustee”), Trustee in Bankruptcy of the corporate Bankrupt GALTY B.V. (the “Bankrupt”)
R.B. Bissell, (“Bissell”) for Trustee
C. Linthwaite (“Linthwaite”) for Moving Party, Appellant Creditor The Avenue Road Trust (“ART”), counsel in insolvency litigation for ART, but not Civil Litigation
M. Ward for Bennett Jones LLP, creditor and Inspector of Estate (“Ward”), former counsel for Galty B.V. in ART Civil litigation with claim in bankruptcy estate for unpaid fees
A.M. Heinrichs, Inspector of Estate (“Heinrichs”) and creditor, defendant in ART Civil litigation
Ron Chapman, civil litigation counsel for ART and Inspector of Estate not attending (“Chapman”) – present for prior case conferences for main disallowance appeal scheduling
HEARD: Fresh Evidence Motion by ART on Appeal from Trustee’s Disallowance of ART Claim heard on August 16, 2023 and adjourned to September 7, 2023 to determine whether parties could agree on terms – when no agreement was reached by the parties preparation of reasons for ART Fresh Evidence Motion was necessitated.
ENDORSEMENT
I) Nature of Relief Sought by ART
[1] The specific relief sought by ART on this Motion was:
“1. An order admitting as evidence on the hearing of the ART's appeal from the disallowance of its claim in the within bankruptcy the documents attached as Exhibit "G" to the affidavit of Timothy Seabrook sworn May 5, 2023 (the "New Documents");”
(For the purposes of this endorsement I will refer to these new documents as the “Exhibit G Documents”)
[2] This Motion was part of a larger Special Appointment request for ¾ to a full day on the Appeal dated September 3, 2021 (the “Appeal”) from the Disallowance by the Trustee dated August 6, 2021 (the “Disallowance) of the Proof of Claim of ART dated March 11, 2021 (the “ART Claim”) that I was exclusively Case-Managing from September 20, 2022 forward after the retirement of AJ Jean, who was conflicted from dealing with this Appeal. I issued a series of Endorsements (collectively the “Scheduling Endorsements”) to deal with the preliminary issues that arose with respect to the appeal of the Trustee’s disallowance by ART.
[3] The Endorsement dated September 20, 2022 read, inter alia:
Counsel for the Trustee and the Creditor appealing the Trustee's disallowance will caucus and advise whether there will be any preliminary evidentiary or other issues before the disallowance appeal is heard and set the schedule for exchange of Materials, if needed, at a further 9:30 Appointment before me on my October 25th In writing Motion day.
[4] At a Case Conference dated October 25, 2022 it appeared that a Fresh Evidence Motion was not necessary:
“Counsel have agreed to forgo preliminary evidentiary motions and will both be filing fresh evidence.
Hearing date to be on February 16, 2023 for a full day.
Counsel have been working cooperatively and do not require a timetable.
If issues arise between now and the hearing date they may schedule a case conference before me through the Bankruptcy Court Office.”
[5] Unfortunately, due to, inter alia, the death of Victor Seabrook, the original Affiant for ART, the parties appeared before me on February 6, 2023 where I provided the following endorsement:
“As a result of possible evidentiary issues raised by the Trustee regarding the recently discovered further evidence in the dwelling of the late Mr. Seabrook, and the Trustee and the Inspectors of the Estate needing time to determine whether the Appellant will be required to bring a Motion to introduce that Evidence at the hearing, the Special Appointment of the Appeal from the Trustee's Disallowance of the Appellant's Claim scheduled to be heard on Thursday, February 16th, 2023 for a full day is adjourned sine die, pending this determination and, if necessary, the scheduling of an evidentiary motion.
The Parties have agreed to attend at a 9:30 Case Conference before me on February 28th, 2023 on my In- Writing Bankruptcy Discharge day, to advise as to what fork, down what road, this matter will proceed. I would ask the Bankruptcy Court Office to set that Zoom Case Conference up.”
[6] I adjourned the Case Conference on February 27, 2023 to March 28, 2023 to give the Trustee more time to consider the newly located documentation. At that Case Conference I made the following endorsement:
“Having considered the new documentation, the Trustee has taken the position that the Appealing Creditor requires an Order to introduce the documentation as fresh evidence on the Appeal from Disallowance.
Counsel to exchange materials and bring the motion on my Zoom Motions list for under 1hr that I will schedule for my Zoom Motions day that will occur at the end of May, as I not anticipate that this motion will require more than an hour. The hearing date will be confirmed when the May schedule is released.”
[7] This motion was initially returnable on May 30, 2023 and was adjourned by me to be heard on August 16, 2023 with the following endorsement:
“Fresh Evidence Motion adjourned to my Zoom Motions list for August 16, 2023 for 1 hour.
If parties resolve issues of whether the "Exhibit G" Documents in the Moving Parties Affidavit on this Motion have been previously disclosed in the Civil Litigation, to which Mr. Linthwaite is not counsel for the Moving Party, and the Fresh Evidence Motion is not necessary, they may advise me through the Bankruptcy Court Office.”
[8] Bissell and Linthwaite, and Title as Trustee, are all experienced insolvency Counsel and Trustee, and up until a hearing date on August 16th, 2023 the Case Management of the Appeal and this Motion was what would be expected of the parties and their counsel.
[9] Fresh Evidence Motions on Trustee’s Disallowance Appeals are not unusual occurrences in Bankruptcy where these appeals at first instance are generally True Appeals, subject to the Court’s discretion to admit new evidence and/or to treat the appeal as a ”trial de novo”, two different issues that are often conflated.
[10] As will be set out in detail in the jurisprudence section, this discretion recognizes the general policy considerations of the Bankruptcy and Insolvency Act, R.S.C. 1985, c.B-3, as am (the “BIA”) BIA being a “businessperson’s statute” and the possible malign economic and practical effects of requiring parties to involve lawyers at every level of proceeding, but also recognizing that procedural fairness and the practicality of being able to supplement evidence, particularly with more complex claims, may require exercise of that discretion to be fair to the parties and to assist the Court in adjudicating the appeal properly.
[11] As will be detailed, the Appeal already had some inherent complexity due to a combination of age, complexity of administration of the underlying bankruptcy estate and determination of the claims made in it, the death of ART’s principal witness, and, especially, the existence of parallel complex civil litigation involving the Bankrupt, as well as non-bankrupt parties.
[12] The events that occurred at the August 16th hearing added additional complexity, beyond that ordinarily considered at a Fresh Evidence Motion.
[13] All underlined text in these reasons is emphasis added by me for these reasons.
[14] The Court has considered all materials and arguments raised by the parties. The Court has also read all of the materials filed by all of the parties on this Fresh Evidence Motion. Any failure by the Court to refer in these reasons to specific arguments and materials raised does not reflect that the Court has not considered those arguments.
The Galty B.V. Bankruptcy
[15] The issues arising on the Fresh Evidence Motion, and the underlying Appeal for which the fresh evidence is being sought to be introduced, must be placed in the broader factual circumstances of the administration of the Bankruptcy Estate of the Bankrupt.
[16] The history of the administration of the Bankruptcy Estate is well summarized in the following paragraphs of the Third Report of the Trustee filed on this Motion (the “Third Report”):
“1. On March 11, 2019, Galty B.V. (“Galty” or the “Company”) made an assignment in bankruptcy, which was accepted by the Office of the Superintendent of Bankruptcy the same day. MNP Ltd. (the “Trustee”) was appointed to act as Licensed Insolvency Trustee of Galty’s bankruptcy estate, subject to affirmation by the creditors at the First Meeting of Creditors.
On March 13, 2019, the Notice of Bankruptcy and First Meeting of Creditors (the “Notice”), a list of the creditors and a proof of claim form, along with a proxy were sent to all known creditors of Galty. Pursuant to subsection 102(4) of the Bankruptcy and Insolvency Act (“BIA”), a Notice of Bankruptcy was published in the Friday, March 15, 2019, edition of the Toronto Sun newspaper. A copy of the Notice and Statement of Affairs (“SOA”) is attached as Appendix “A”.
The First Meeting of Creditors (the “Meeting”) was held on April 1, 2019 and was presided over by Sheldon Title. At the Meeting, the creditors resolved to affirm the Trustee’s appointment and to appoint five Inspectors.
On February 27, 2020, the Trustee issued its first report (the “First Report”) in support of its motion to have the Court Order, inter alia, that Aird & Berlis LLP release to the Trustee an amount of $591,503 (“Net Sale Proceeds”), representing the balance of funds in its trust account from the sale of real property formerly owned by Galty, less an amount of $45,805.93(“Retained Funds”) in satisfaction of that firm’s claim against the Company for fees owing. A copy of the First Report, without appendices, is enclosed as Appendix “B”.
On May 27, 2020, the Court ordered that Aird & Berlis LLP pay the Net Sale Proceeds less the Retained Funds to the Trustee.
Galty’s creditors have filed claims totaling $25,079,500; the largest claim is Galty N.V. (“NV”), which filed a claim for $20,679,439. The second largest claim made in the bankruptcy is a contingent claim filed by Avenue Road Trust (“ART”) for an amount equivalent to CAD $3,197,000. As detailed more fully below, the Trustee has disallowed ART’s unsecured proof of claim. ART’s appeal (the “ART Appeal”) from the Trustee’s disallowance of the unsecured claim is pending, which appeal is the subject matter of this Report.
During the administration of the estate, the Trustee identified a potential preferential payment in the amount of $1.1 million (the “Brazilian Trust Transfer”) made in favour of NV. Galty is owned by NV. NV is owned by a Brazilian Trust. At a meeting of Galty’s directors, held on July 13, 2017, the Directors authorized Galty transferring the sum of $1,100,000 from its bank account to the Brazilian Trust. The Brazilian Trust Transfer was to be set off against the loan owing to NV. The monies used to fund payment of this transfer were derived from a corporate tax refund (associated with the taxes withheld by a non- resident on the sale of the Property) paid by Canada Revenue Agency on May 26, 2017 and deposited to Galty’s bank account on July 6, 2017. The payment to the Brazilian Trust occurred on July 14, 2017.
The Trustee negotiated the terms of a settlement with NV (the “Proposed NV Settlement”), concerning the Brazilian Trust Transfer, which settlement requires NV to return to the estate the portions of the Brazilian Trust Transfer that would not have gone to NV in any event under a distribution to creditors.
The Proposed NV Settlement was considered by the Inspectors at a meeting held on August 30, 2021 (the “August 30th Meeting”). As detailed in the Second Report (defined below), after the August 30th Meeting, the Trustee was uncertain whether the vote taken at the meeting was valid as one Inspector was potentially conflicted, and if so, should have been recused from the vote on the Proposed NV Settlement.
If that Inspector should not have voted, then the vote of the remaining Inspectors attending the August 30th Meeting would have been a 1:1 tie.
Subsection 117(2) of the BIA requires that in the event of a tie that the opinion of the absent Inspector(s) be sought to break the tie. The Trustee sought the opinion of the absent Inspector, who opposed the Proposed NV Settlement. The Trustee also considered that Inspector to be potentially conflicted in voting on the issue.
Given the foregoing, the Trustee issued its second report, dated October 6, 2021 and its Supplementary Report to the Second Report, dated October 22, 2021 (collectively, the “Second Report”) in support of its motion (returnable on October 26, 2021) for, inter alia, advice and directions whether the decision of the Inspectors at the August 30th Meeting to authorize the Trustee to enter into the Proposed NV Settlement was valid; and if not, authorization and direction for the Trustee to enter into the Proposed NV Settlement. A copy of the Second Report, without appendices, is enclosed as Appendix “C”.
On November 3, 2021, the Court issued an endorsement wherein it noted the “Trustee is entitled to disregard the vote of Ron Chapman (“Chapman”) as having been disqualified” by virtue of a conflict of interest and authorizing the Trustee to “exercise his prerogative under s.117(2), therefore, to cast the deciding vote.” A copy of the Endorsement is enclosed as Appendix “D”.
On November 3, 2021, the Trustee exercised its prerogative under s.117(2) of the BIA and voted to accept the Proposed NS Settlement and concurrently implement the Proposed NV Settlement.
Galty was incorporated on July 31, 1979 as a limited liability company under the laws of the Netherlands and previously operated as a property investment, property rental and holding company. At the date of bankruptcy, the Company was involved in litigation (the “Litigation”) with ART and with La Hogue Financial Management Services Corp. and Pantrust International (collectively “LaHogue”). The Litigation concerned respective claims by ART and LaHogue against the Company, NV and individuals and entities affiliated with them for multimillion dollar amounts claimed to be owing to each of ART and LaHogue. ART also relies in its claims on a partial assignment by LaHogue to ART of claims against the Company.
The Trustee has been advised by Galty’s designated officer, Harold Pothoven, that the Company’s bankruptcy was as a result of the ongoing legal costs associated with defending the Litigation.”
[17] From the updated Claims Register dated September 7, 2023 (the “Claims Register”) provided to me by the Trustee at my request as a supplement to the Third Report, the total creditors currently having filed claims in the Bankrupt Estate of the Bankrupt (the “Bankruptcy Estate”) are $25,079,500. The admitted claims are $21,882,294.77.
[18] The notable current creditors include:
Galty N.V. $20,679,439 (settlement of claim approved by Penny, J. as set out below);
ART: $3,197,000 (disallowed claim under appeal in these proceedings)
Bennett Jones LLP $557,934.22 (counsel to Bankrupt in Civil Action prior to Bankruptcy)
Heinrichs $256,755 (Inspector and personal defendant in Civil Action)
AMI Business Solutions $204,095.00 (same contact address in Claims Register as Heinrichs)
Local Corporation Management c/o Bennett Jones $97,188.32
[19] Of the 10 creditors listed in the Claims Register, only AMI Business Solutions seems not to have been directly involved in the Civil Action (as defined below) as Plaintiffs, Defendants or as counsel, although Heinrichs appears to be the contact for that Creditor as well, given the identical addresses on the Claims Register.
[20] At the date of the Third Report the assets of the estate are as listed on the interim Statement of Receipts and Disbursements at April 30, 2023 at Appendix E to the Third Report:
Cash Receipts
Cash in Bank 1,464.27
Transfer of Funds from Aird & Berlis LLP 545,697.47
Funds advanced by MNP Ltd. to estate 710.00
Interest 4,852.54
Total Cash Receipts $552,724.28
Less:
Cash Disbursements
Trustee's fees 79,281.00
OSB Filing Fee 150.00
Advance to be repaid to MNP Ltd. 710.00
HST Paid 10,370.08
Notice of bankruptcy - Newspaper 488.79
Total Disbursements $90,999.87
Excess of receipts over disbursements $461,724.41
[21] This does not include the fees of the counsel for the Trustee, Bissell, subject to Taxation, but there are distributable assets in this estate that make the determination of the issues on the appeal of the Trustee’s Disallowance of the ART claim more than academic.
[22] The “Endorsement” referred to in paragraph 13 of the Third Report is referring to the Endorsement of Penny, J. dated October 26, 2021 (the “Penny, J. Endorsement”) that makes a number of findings of fact that are relevant to this Fresh Evidence Motion, relating to the reason why Penny, J. determined that Chapman was in conflict of interest as an Inspector of the Bankruptcy Estate in voting against a settlement by the Trustee of the Galty N.V. claim:
“[29] The question here, therefore, is whether Chapman, in voting against the proposed settlement, was participating in making any arrangement that would advance the litigation interests of the creditor, ART, that he represents in litigation against the Bankrupt, Galty N.V. and the Brazilian Trust, to the possible detriment of the creditors as a whole. In my view, he was. The conflict was of a nature as to constitute a "true conflict" or one that would undermine confidence in the administration of the scheme of the BIA.
[30] It is manifestly true that, if Galty N.V.'s claim was finally disallowed or if a preference claim against Galty N.V. and the Brazilian Trust was successfully pursued, the other creditors would be better off. If those choices were the real basis for Chapman's vote, it might not involve a disqualifying conflict for him to have voted as he did. On the evidence, however, those are not the binary choices available and that is not the basis upon which ART and Chapman now argue the disputed vote was taken.
[31] In this case, Mr. Wiffen argues that Chapman's (and ART's) opposition to the settlement was on the basis that the settlement assumes the validity of Galty N.V.'s $20 million claim in the bankruptcy. Chapman, and more importantly ART, does not accept the validity of the Galty N.V. claim. Mr. Wiffen submits that a finding by the Trustee that the Bankrupt's debt owed to Galty N.V. is bona fide could be prejudicial to ART in its outstanding litigation with Galty N.V. and the Brazilian Trust.
[32] The nature of Chapman's conflict is made plain, it seems to me, by this submission and, more generally, by the manner in which Mr. Wiffen has, on Chapman's behalf, responded to this motion. On one hand, Chapman has filed affidavit evidence that he was not "acting on [his] client's instructions" when he voted against the settlement. On the other, Mr. Seabrook has also filed affidavits, supported by evidence from Chapman as his counsel in the litigation, vociferously attacking the Trustee's allowance of the Galty N.V. claim in the bankruptcy. Among other things, Mr. Seabrook says, the quantum of Galty N.V.'s claim has not been explained or justified, enforcement of Galty N.V.'s claim would be barred by the Limitations Act, 2002, and no demand for payment was ever delivered by Galty N.V. to the Bankrupt.
[33] The Trustee's reasons for accepting Galty N.V.'s claim are, on their face, entirely reasonable. Each of Mr. Seabrook's concerns was considered and rejected by the Trustee. The Trustee concluded that the expanded quantum of the claim is fully explained by the provision for compound interest in the loan documents; the debt became due in December 2017, so the two year limitation had not yet run when Galty B.V.'s assignment into bankruptcy took place; and, the loan is a term loan, not a demand loan such that whether there was ever a demand for payment is irrelevant.
[34] More importantly, it was open to ART to apply to the court to expunge or reduce Galty N.V.'s claim under s. 135(5) of the BIA. ART appealed the disallowance of its own claim under s. 135(4) but has not taken any similar action with respect to the Trustee's allowance of the Galty N.V. claim.
[35] It was also open to ART, in the face of the Trustee's proposed settlement of the preference claim with Galty N.V., to apply under s. 38 of the BIA for an order authorizing ART to take that proceeding in its own name and at its own expense and risk. ART has not done that either. Indeed, it seems clear that ART wants the Trustee to take carriage of that claim, and the associated risks of the litigation, utilizing the funds available to the estate for that purpose. This, the evidence is clear, the Trustee is not prepared, and cannot be compelled, to do. That is precisely why s. 38 exists; it is the creditor's fall back if the trustee will not pursue a potential claim. Here, the Trustee has weighed the merit of the preference claim, together with the risks, costs and delay in the administration of the estate associated with pursuing that claim, and come to the conclusion that to pursue the claim is not consistent with the interests of the creditors as a whole. That assessment was the very foundation for the settlement reached with Galty N.V.
[36] All of this leads me to the following conclusion: it was reasonable for the trustee to conclude, from the circumstances of this case, that Chapman, in voting against the proposed settlement, was "participating in making an arrangement that would advance the litigation interests of his client, ART (which he represents in ongoing litigation against the Bankrupt, Galty N.V. and the Brazilian Trust), to the detriment of the other creditors. It was therefore reasonable for the Trustee to conclude that Chapman was, therefore, either acting in his client's interests (as he was, frankly, obliged to do), and not in the interests of creditors as a whole, or was at least engaging in conduct which would undermine confidence in the administration of the scheme of the BIA, when he voted to refuse the settlement. The Trustee is entitled to disregard Chapman's vote as having been disqualified by that conflict: Intercoast Lumber; Re Preston.”
[23] To provide context to the statements made by Penny, J. the Inspectors of the estate of the Bankrupt at the time of the Penny, J. Endorsement were identified by Penny, J. as follows:
“[12] There are five inspectors:
Ron Chapman- counsel to ART in the litigation
Anne Marie Heinrich [sic]- a discretionary beneficiary of the Brazilian Trust (the Brazilian Trust being a potential defendant in the preference claim)
Masiel Matus - counsel to La Houge
Oliver Egerton-Vernon- Galty N.V. (creditor with accepted claim but potential defendant in preference claim by the estate)
Maureen Ward- Bennett Jones (creditor with accepted claim)”
[24] It is of note that the Trustee, in its Second Report to the Court dated October 6, 2021 submitted to Penny, J. (and attached as Appendix C to the Third Report filed on this Fresh Evidence Motion) (the “Second Report”) stated the following as the reasons why the Trustee needed the Court’s assistance regarding the dispute between the Inspectors on the approval of the settlement of the Galty N.V. Claim:
“51. Given the uncertainty of Heinrich's standing to vote on the Proposed NV Settlement, the Trustee is uncertain whether formally seeking the vote of Chapman as the absent Inspector is appropriate given the foregoing. Part of the Trustee's reasoning in that regard is that as an inspector, Chapman has consistently acted on the basis of what is desirable for ART his client, rather than what is in the interest of all creditors of the Company. At times, Chapman's position has been expressly noted to be on the basis of "instructions." The Trustee is accordingly concerned that the dynamics of the Litigation are merely being repeated in meetings of inspectors, all of whom were involved in the Litigation before the Company was bankrupt and remain involved in the portions that are still proceeding, such that the views of the Court as an independent adjudicator may be more appropriate in any event. If Heinrichs is disqualified from voting, then the Trustee seeks advice and direction from the Court on entering into the Proposed NV Settlement irrespective of the inspectors' votes. In so doing, the Trustee relies on subsection 119(2) of the BIA, which states "The decisions and actions of the inspectors are subject to review by the court at the instance of the trustee or any interested person and the court may revoke or vary any act or decision of the inspectors and it may give such directions, permission or authority as it deems proper in substitution thereof or may refer any matter back to the inspectors for reconsideration."
[25] Also of relevance on this Fresh Evidence Motion are the factual findings of AJ Abrams (the “AJ Abrams Endorsement”) in Seabrook v. Galty, 2018 ONSC 7306, on a costs hearing arising from a motion brought by La Hougue Financial Management Services Corp. (“La Hougue”) and Pantrust International, S.A. (“Pantrust”) arising from their requests to inspect documents in the possession of the (now) Bankrupt in respect of documents referenced in Affidavits filed by the Heinrichs Defendants in support of a Summary Judgment Motion brought by the Bankrupt prior to Bankruptcy and which motion counsel on this Motion advised has not been heard yet.
[26] The Inspector of the Bankruptcy estate Ward argued this Motion before AJ Abrams on behalf of the (not yet) Bankrupt Galty B.V., and the Inspector Heinrichs was the Affiant on behalf of the Heinrichs Defendants in Action CV-15-530070, the “Litigation” described in the Third Report and the “outstanding Litigation” referenced in the Penny, J. Endorsement (for the purposes of this Endorsement, the “Civil Action”).
[27] In the Third Report the Trustee states in regards to the Civil Action:
“19. The Trustee has been advised by Galty’s designated officer, Harold Pothoven, that the Company’s bankruptcy was as a result of the ongoing legal costs associated with defending the Litigation.”
The “legal costs” referred to are presumably the same as the claim of Bennett Jones LLP in the Bankruptcy of $557,934.22, as well as any possible costs awards made against the Bankrupt in the Civil Action, including the $12,573.08 awarded to La Hougue and Pantrust in the AJ Abrams Endorsement.
[28] The Style of Cause in the Civil Action at the time of the AJ Abrams Endorsement read:
Court File No. 15-CV-530070-0000
BETWEEN:
SUPERIOR COURT OF JUSTICE
VICTOR M. SEABROOK AND TIMOTHY SEABROOK,
TRUSTEES OF THE AVENUE ROAD TRUST,
ISOBEL R. SEABROOK,
by her Litigation Guardian, TIMOTHY SEABROOK
Plaintiffs
-and-
GALTY B.V., LA HOUGUE FINANCIAL MANAGEMENT SERVICES LIMITED, PANTRUST INTERNATIONAL, S.A., WERNER CORNELIUS HEINRICHS, WAYNE WEAVER,
AIRD & BERLIS LLP, ANNE MARIE HEINRICHS, ELFRIEDA ELIZABETH HEINRICHS, RICHARD WIGLEY and JAMES WIGLEY
Defendants
[29] In her endorsement, AJ Abrams finds:
“[1] On behalf of Galty B.V. (“Galty”), Ms. Ward sought an adjournment of the November 23/18 costs hearing. She advised the court that Galty has filed for bankruptcy in the Netherlands. That said, Galty has not yet been declared bankrupt; no Trustee has been appointed; and, Galty continues to provide instructions to Ms. Ward and her firm. The bankruptcy process in the Netherlands is only in the nascent stages and no Order, in Canada, has been made for the recognition of the Netherlander proceeding (pursuant to the provisions of the Bankruptcy and Insolvency Act). That being so, I declined the adjournment.1
[2] La Hougue Financial Management Services Corp. (“La Hougue”) and Pantrust International, S.A. (“Pantrust”) ask of the court that they be awarded $18,573.08 in costs for a motion originally scheduled for May 24/18 that did not proceed. The motion arose from two requests to inspect documents, served on Galty, in respect of documents referenced by the Heinrichs defendants in affidavits filed in support of Galty’s summary judgment motion herein (a motion that has yet to be heard). In January/18, Galty responded to the requests to inspect, with some requests being granted and a large number of requests being refused. La Hougue and Pantrust brought a motion for production of the documents (for which production had been refused) on the basis that the documents were in the power, possession and control of Galty and/or the Heinrichs and are relevant to a proper determination of the issues raised on the summary judgment motion.
[3] After much discussion and after attendances in CPC Court to address the timing of the summary judgment motion and the need to address documentary production issues before the motion can be heard, and in the context of a case conference with me (scheduled to timetable the production motion), counsel advised that Anne Marie Heinrichs would be serving an affidavit of documents by May 7/18.
[4] La Hougue and Pantrust served their motion materials, and a responding record was served by Galty. In that record, Anne Marie Heinrichs confirmed that she would be serving an affidavit of documents which would render the production motion moot.
[5] The May 7th self-imposed deadline (confirmed by the Court on April 17/18) passed, with no affidavit of documents having been served. On May 15/18, counsel for the Heinrichs sent approximately 40,000 pages of documents to the moving parties. No affidavit of documents was served by Ann Marie Heinrichs but the documents sent were said to be relevant documents in Mrs. Heinrichs’ power, possession and control. Ms. Matus says, and I am inclined to agree, that the timing of their production was directly responsive to the fact that a production motion had been brought.
[6] The May 24/18 motion was adjourned to permit La Hougue and Pantrust time to review the documents. Thereafter, La Hougue and Pantrust determined that, with this documentary production having been made, they no longer needed to have their motion heard and decided. They seek costs thrown away, including as they relate to the adjournment request that I declined to grant.
[7] Ms. Ward points out that, while the motion may have been rendered moot by virtue of the May 15/18 production of documents, the documents sought were available to La Hougue and Pantrust in Jersey on terms—terms that La Hougue and Pantrust declined to accept. They were available to them by way of supervised access for which they would have had to pay some costs. They declined to take the time, incur the costs and travel to Jersey. Instead, Anne Marie Heinrich did so. The documents produced by Anne Marie Heinrichs, Ms. Ward says, were not in Mrs. Heinrichs’ possession. They were in her control and power (as much and in the same way as they were in the power and control of La Hougue and Pantrust).
[8] In the circumstances, ought the moving parties to be entitled to costs of their abandoned motion? Yes, but in a lesser amount than has been sought (even though I recognize that the amount sought reflects a discount having been applied).
[9] While it has been suggested that La Hougue and Pantrust had access to the documents at issue, I do not know this to be so. And, the responses to the requests to inspect documents do not say that this is the reason that the requests, at first instance, were declined. Instead, they say that the requests to inspect were/are not proper, simpliciter. The documents were referenced in the affidavits filed in support of Galty’s summary judgment motion and it was reasonable for La Hougue and Pantrust to seek their production.
[10] It was not until after the motion materials were delivered by La Hougue and Pantrust and after responding materials were delivered by Galty that La Hougue and Pantrust knew why the requests to inspect were denied. And, it was only after production of the documents by Anne Marie Heinrichs, with the timing of that production also being responsive to the motion of La Hougue and Pantrust, that La Hougue and Pantrust knew that their motion had indeed been rendered moot.
[13] The issues were important to La Hougue and Pantrust—with it being necessary for them to review and consider documents referenced in the summary judgment motion materials. Whether they could have accessed the documents themselves is not the issue, here. The issue is that these are documents relied upon by Galty. It follows that Galty had access to them in order to reference them. La Hougue and Pantrust, reasonably, sought their own access to these documents through Galty.”
Legal Context of the ART Appeal and Fresh Evidence Motion
[30] Section 135 of the BIA creates the legal context for the Fresh Evidence Motion and reads:
135(1) Trustee shall examine proof 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.
135(1.1) Determination of provable claims 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.
135(2) Disallowance by trustee The trustee may disallow, in whole or in part,
(a) any claim;
(b) any right to a priority under the applicable order of priority set out in this Act; or
(c) any security.
135(3) Notice of determination or disallowance Where the trustee makes a determination under subsection (1.1) or, pursuant to subsection (2), disallows, in whole or in part, any claim, any right to a priority or any security, the trustee shall forthwith provide, in the prescribed manner, to the person whose claim was subject to a determination under subsection (1.1) or whose claim, right to a priority or security was disallowed under subsection (2), a notice in the prescribed form setting out the reasons for the determination or disallowance.
135(4) Determination or disallowance final and conclusive A determination under subsection (1.1) or a disallowance referred to in subsection (2) is final and conclusive unless, within a thirty day period after the service of the notice referred to in subsection (3) or such further time as the court may on application made within that period allow, the person to whom the notice was provided appeals from the trustee's decision to the court in accordance with the General Rules.
135(5) Expunge or reduce a proof The court may expunge or reduce a proof of claim or a proof of security on the application of a creditor or of the debtor, if the trustee declines to interfere in the matter.
[31] On the issue of Fresh Evidence and the nature of the appeal from the Trustee’s disallowance The Honourable Mr. Justice Lloyd W. Houlden, Mr. Justice Geoffrey B. Morawetz, and Dr. Janis P. Sarra Bankruptcy and Insolvency Law of Canada, 4th Edition (“Houlden & Morawetz”) states at § 6:273:
An appeal from a notice of disallowance is a trial de novo. The judge or registrar hearing the appeal is not required to proceed solely upon the information before the trustee, the court is entitled to accept and consider all evidence relevant to the claim: Re Eskasoni Fisheries Ltd. (2000), 2000 10880 (NS SC), 16 C.B.R. (4th) 173, 2000 CarswellNS 116, 187 N.S.R. (2d) 363, 585 A.P.R. 363 (N.S.S.C.); Re Hickman Equipment (1985) Ltd. (2003), 2003 68648 (NL SC), 41 C.B.R. (4th) 77, 2003 CarswellNfld 85, 2003 NLSCTD 47, 224 Nfld. & P.E.I.R. 73, 669 A.P.R. 73 (N.L. T.D.); Re Port Chevrolet Oldsmobile Ltd. (2002), 2002 CarswellBC 3602, [2002] B.C.J. No. 3206, 2002 BCSC 1874, [2003] G.S.T.C. 168, 49 C.B.R. (4th) 127 (B.C. S.C. [In Chambers]), affirmed (2004), 2004 CarswellBC 354, 2004 BCCA 37, [2004] G.S.T.C. 8, 193 B.C.A.C. 114, 316 W.A.C. 114, 49 C.B.R. (4th) 146, 23 B.C.L.R. (4th) 335 (B.C. C.A.).
However, in Re Galaxy Sports Inc. (2004), [2004] B.C.J. No. 2008, 2004 CarswellBC 1112, 1 C.B.R. (5th) 20, 29 B.C.L.R. (4th) 362, 20 R.P.R. (4th) 1, 240 D.L.R. (4th) 301, 200 B.C.A.C. 184, 2004 BCCA 284, the British Columbia Court of Appeal declined to follow Re Eskasoni Fisheries Ltd. (2000), 2000 10880 (NS SC), 16 C.B.R. (4th) 173, 2000 CarswellNS 116, 187 N.S.R. (2d) 363, 585 A.P.R. 363 (N.S.S.C.). The Court of Appeal held that the hearing of an appeal of a trustee's valuation of a claim was not intended, under s. 135(4), to be a trial de novo, but a true appeal. The court noted 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; creditors who neglected to file proofs of claim in compliance with s. 124 would suffer no practical consequences, and the business conducted at creditors' meetings would be co-opted by the courts, with attendant expense, delay and formality. The standard of review for a trustee's legal determinations, such as the decision to allow or disallow a proof of claim, is one of correctness. A standard of reasonableness applies to a trustee's decisions of a factual nature, such as the valuation of a contingent or unliquidated claim.
The Saskatchewan Court of Queen's Bench, relying on Re Galaxy Sports Inc. (2004), [2004] B.C.J. No. 1008, 2004 CarswellBC 1112, 1 C.B.R. (5th) 20, 29 B.C.L.R. (4th) 362, 20 R.P.R. (4th) 1, 240 D.L.R. (4th) 301, 200 B.C.A.C. 184, 2004 BCCA 284 (B.C. C.A.), additional reasons at (2004), 2004 CarswellBC 1708, 2004 BCCA 406 (B.C. C.A.), held that an appeal of a trustee in bankruptcy's decision regarding the value of an unliquidated claim should proceed as a true appeal and not a trial de novo, and that the standard of review that should be applied to the trustee's decision is a standard of reasonableness: Johnson v. Erdman (2005), 2005 CarswellSask 857, 2005 SKQB 515, 18 C.B.R. (5th) 97 (Sask. Q.B.).
[32] Very recently, P. J. Osborne, J. of the Ontario Superior Court (Commercial List) in Re Malhotra, 2023 ONSC 6570, upholding Re Malhotra, 2023 ONSC 2291 (“Malhotra”) reviewed the various tests for fresh evidence on motions under s.135, in the context of an expungement motion under s.135(5), which explains the differences between “fresh evidence” issues and the “trial de novo” issue. (Linthwaite coincidentally was the successful counsel on Malhotra, at both levels). P.J. Osborne, J. states:
“89. I 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 (“Credifinance”) at para. 24, citing Charlestown Residential School, Re, 2010 ONSC 4099 at paras. 1, 18, and Re: Poreba, 2014 ONSC 277 at para. 32.
To 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.
In 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].
However, 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), 2009 CarswellNat 213, 2009CarswellNat 542 (F.C.); Business Development Bank of Canada v. Pinder Bueckert & Associates Inc., (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 CarswellOnt 5343, 70 C.B.R. (5th) 13(Ont. S.C.J.).
Accordingly, 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.
On 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.).
However, 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.
Perhaps 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.
In 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.
The 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.”
The Dispute regarding the admission of the Exhibit G Documents
[33] As was set out in the Scheduling Endorsements, initially there was cooperation with respect to the issues of further evidence and both parties agreed to permit the introduction of further evidence, by both the Trustee and the Appellant, ART.
[34] However, as also noted, at some point the issue became “How much fresh evidence?” was admissible by both parties, when after the death of the original affiant on behalf of the creditor ART Victor Seabrook (“Victor”), documentation was apparently found by his son Timothy Seabrook (“Timothy”) (also a Trustee of ART and a party to the Civil Action) in Victor’s condominium unit in the course of administering his father’s estate, that forms the Exhibit G Documents, and which ART seeks to admit on the appeal of the Trustee’s disallowance of the ART Claim on this Fresh Evidence Motion.
[35] As stated in the Affidavit of Timothy Seabrook sworn on May 5 2023 (the “Timothy Affidavit”) filed by ART on this Fresh Evidence Motion:
“7. After appealing the disallowance, the ART provided further evidence in support of the claim to the Trustee, in the form of a third affidavit from my father, sworn October 5, 2021. I have been advised by Linthwaite that this affidavit has been filed separately.
My father died in May 2022. After his death, I became more involved in this matter.
In September 2022, the Trustee, through its lawyer R. Brendan Bissell, (“Bissell”) informed the ART, through Linthwaite, that it (the Trustee) also wished to use further evidence on the hearing of the Appeal, being certain financial statements of the bankrupt. The relevant email exchange between Bissell and Linthwaite is attached hereto as Exhibit “D”.
I subsequently instructed the ART’s civil lawyer, Ron Chapman, who has possession of my father’s files respecting the relevant transactions, to review those files to determine if there was anything further the ART should produce for use on the Appeal. Chapman advised me that there was nothing that ART needed to add to the record.
The Trustee and the ART then agreed that each side would file fresh evidence for use on the hearing. This agreement was recorded in an endorsement of this Honourable Court dated October 25, 2022, made in respect of a case conference on the scheduling and conduct of the appeal. A true copy of this endorsement is attached hereto as Exhibit E.
The specific evidence to be used on the appeal was identified in a email exchange between Linthwaite and Bissell later that month. A true copy of the relevant email chain is attached hereto as Exhibit “F”.
I am the co-executor of my father’s estate.
In January 2023, I was emptying the contents of my father’s storage locker in preparation for the sale of his former residence when I unexpectedly came upon documents I believed would be relevant to the Appeal (the “New Documents”). These consist of documents contemporaneous with, and referring to, the transactions which form the basis of the ART’s claim in the bankruptcy. True copies of these documents, put into chronological order by Linthwaite, are attached hereto as Exhibit “G”.
The New Documents were sent to the Trustee in January 2023. After reviewing the documents, the Trustee took the position that the Trust required an order of this Court declaring the New Documents admissible as evidence on the Appeal. A true copy of Bissell’s email to Linthwaite in these terms is attached hereto as Exhibit “H”
[36] No cross-examination was conducted of Timothy on the Timothy Affidavit filed for this Motion, or of the Trustee on its Report.
The Proof of Claim of ART
[37] Attached as Exhibit A to the Timothy Affidavit is the Proof of Claim of ART as originally filed. The ART Claim is dated March 11, 2021 and makes an unsecured claim in the amount of “UK Pounds 685,687.95 and $1,992,312.99 CDN” and is signed by Victor.
[38] At Schedule A to the ART Claim is a Statement of Account itemizing the ART claims and further attaches the Affidavit of Victor Seabrook sworn March 25, 2019 containing as exhibits pleadings and Orders issued in Action CV-15-530070 in Toronto, being the same Civil Action in which the AJ Abrams Endorsement was issued, and the same “outstanding litigation” referred to in the Penny, J. Endorsement.
[39] From the Amended, Amended, Amended Statement of Claim attached to the ART Claim, Timothy, the affiant on this Motion appears to be a Plaintiff in the Civil Action, along with Victor, ART and Isobel Seabrook, by her Litigation Guardian, Timothy.
[40] Heinrichs, the Inspector, appears to be a party in the Civil Action, along with the Bankrupt, La Hougue, Pantrust, Werner Heinrichs, Elfrieda Heinrichs, Richard Wigley and James Wigley. Aird & Berlis LLP appears to have been a defendant at some point.
[41] The Civil Action was commenced on June 10, 2015, by Chapman on behalf of certain of the Plaintiffs prior to repeated amendments adding both Plaintiffs and Defendants and amending the pleadings. It is unclear from the materials before me on this motion whether there are also cross and counterclaims in the Civil Action, or whether the pleadings that are filed on this Fresh Evidence Motion as part of the ART Claim or otherwise are the most current versions.
[42] Essentially the nature of the ART Claim is that the Plaintiffs advanced monies to the Defendants that the Defendants were alleged to have agreed to invest on the behalf of the Plaintiffs, and in alleged breach of Trust by the Defendants, the amounts advanced were not repaid, with interest. The Plaintiffs make allegations of fraudulent conduct against some of the Defendants.
[43] The ART Claim also attaches an affidavit of Bruce Buckley sworn December 17, 2018 in the Civil Action setting out the calculation of the ART Claim, including the compound interest owing at that time.
[44] The Disallowance of the ART Claim by the Trustee is dated August 6, 2021 (the “Disallowance”) on the following grounds:
Take notice that:
As trustee acting in the matter of the bankruptcy of Gally B.V., we have disallowed your claim (or your right to a priority or your security on the property) In whole, pursuant to subsection 135(2) of the Act, for the following reasons:
a) There has been no contemporaneous documentation provided to show a loan from Victor M. Seabrook & Timothy Seabrook, Trustees of The Avenue Road Trust and Isobel R, Seabrook by her Litigation Guardian, Timothy Seabrook ('ART') to the Bankrupt or a loan agreement whereby ART would loan funds to La Hogue and then La Hogue would in turn loan those same funds to the Bankrupt The documentation provided, in which Victor Seabrook appears to have been acting as an instructing principal of ART, solicitor and managing director of the Bankrupt and solicitor for La Hogue in connection with transactions in 1993 and 2001 do not have a documented relationship between ART and the Bankrupt. The central role that Mr. Seabrook appears to have played in the materials times makes the absence of such documentation more significant than if a true third party had been making the Claim.
b) Insofar as ART relies on assignments to it of claims by La Hogue against the Bankrupt (in Exhibits J and L to Mr. Seabrook's affidavit sworn August 14, 2020), it is not adequately established that La Hogue had any claims against the Bankrupt to assign, or that if it did that such claims were not limitation barred. The documentation provided, including in the affidavit of Richard Wigley that is attached to Mr. Seabrook's affidavit sworn August 14, 2020, does not have any paperwork with Werner Heinrichs or anyone else on behalf of the Bankrupt after November 14, 2013, and even that is equivocal as to what loans were being discussed.
c) Additionally even if the assignments from La Hogue to ART did assign debts, those assignments only extend to the amounts in the Claim of £ 472,790, CAD $150,000 and CAD $250,000, respectively. They do not include the CAD$750,000 amount in the Claim. If Claim were to be allowed, it could only be allowed in part and to the exclusion of the CAD $750,000.
d) The documentation of the Bankrupt available to the Trustee, such as accounting and tax return records, includes no records of amounts owing to either La Hogue or ART as of the date of the bankruptcy.
e) Insofar as the Claim includes amounts for legal fees and international process server fees, the lack of proven liability of the Bankrupt to ART would be a basis not to allow those further claims as well. In addition, legal fees are not normally claimable on a 100% basis in Ontario Litigation, so even if the Claim were allowed in full, full recovery of those amounts would not be proven.
[45] Accordingly, the basis of the majority of grounds of disallowance set out in the Notice of Disallowance are a lack of documentation being provided in the ART Claim, although some are substantial issues raised with the probity and enforceability of the claim itself.
[46] After the service of the Notice of Disallowance, ART served an Notice of Appeal of the Notice of Disallowance dated September 3, 2021 (the “ART Notice of Appeal”). ART appealed the Disallowance on the following substantive grounds:
“8.The evidence submitted by Seabrook in support of the Seabrook Proof of Claim provides material evidence to support the loan by Seabrook to the Bankrupt.
9.The evidence submitted by Seabrook documents that there is a commercial relationship between Seabrook and Ga1ty:B.V. (the "Bankrupt") in the material period of 1993-2001.
10.The evidence submitted by Seabrook that Seabrook supports the allegation that Seabrook had limited access to the books and records of Bankrupt to access documents to support the amounts claimed in the Seabrook Proof of Claim.
The evidence submitted by Seabrook supports the amounts claimed in the Seabrook Proof of Claim that Seabrook loaned the Bankrupt $750,000 contrary to the position set forth in the Disallowance.
The Trustee is an officer of the court.
It has come to light that the Trustee and/or the Trustee's solicitor had communications with another interested party to these proceedings. No advise was given to the Creditor's counsel of these communications prior to the Trustee's decision.
Therefore, it is respectfully Submitted that the Trustee's decision should be vacated and there should be a new Trustee appointed to consider this matter.”
[47] In the ART Notice of Appeal, ART also requests as relief:
“2. If necessary, an order granting leave to Seabrook to introduce fresh evidence into the appeal record.”
Discussions between parties regarding admission of Fresh Evidence on Appeal
[48] Unlike most of the “fresh evidence”/trial de novo cases, as was reflected in my Scheduling Endorsements, after the Appeal of the disallowance was filed by Jaffe & Peritz which was retained initially on a limited retainer to file the ART Notice of Appeal. Fred Tayer & Associates became insolvency counsel for ART in 2022 and entered into discussions with the Trustee and its counsel Bissell regarding the conduct of the Appeal and the Fresh Evidence issues.
[49] The Exhibit G Documents appended to the Timothy Affidavit that are the actual subject matter of this Fresh Evidence Motion consist of 196 pages of documents apparently from the period 1980 to 2002.
[50] The evidence of Timothy in the Timothy Affidavit indicates the back and forth between Bissell and Linthwaite on the admissibility of the Exhibit G Documents.
[51] The crux of the dispute over these documents is summarized in the emails from Linthwaite to Bissell on January 24, 2023 stating:
found as matters of fact by AJ Jean with respect to the Bannikov Estate, a year prior to Filatova And the response from Bissell on January 30, 2023:
“Hi Colby: I've discussed this with the trustee and where we've landed is that if The Avenue Road Trust ("ART") wants to add/rely upon these further documents then ART should bring a motion in that regard.
Among other things, the trustee and I will need further instructions from the estate inspectors on such matters if ART is going to pursue this, and it also seems unfortunately unlikely that the Feb. 16 special appointment can be kept if so. Given the passage of time on the proof of claim (to say nothing of the underlying litigation) it is within the realm of possibility that further interlocutory steps will be required to deal with these documents if they are going to be part of what ultimately goes before the Court on the appeal from the disallowance.
Please let me know if ART is going to pursue this. If not, we should get ourselves ready for hearing on Feb. 16 without these further documents. If so, then you and I should probably get a chambers appointment before llchenko, AJ to speak to this and (likely) get an adjournment of the special appointment.
Happy to discuss if you wish of course.”
[52] In the Third Report, the dispute on this issue with the admissibility of the Exhibit G Documents, in the context of the entirety of the disallowance process, was fulsomely characterized as follows, and adds many details not present in the Timothy Affidavit, making for a much more complicated factual situation:
“27.As detailed in the Second Report, the following summarizes the Trustee’s efforts to request from ART’s counsel further documents that may provide evidence in support of ART’s claim:
(i) on July 23, 2020, the Trustee’s counsel advised ART’s counsel that the Trustee had reviewed the documents in ART’s proof of claim and requested further documents that may provide evidence in support of ART’s claim;
(ii) ART submitted additional documentation by way of an affidavit of Mr. Victor Seabrook on August 14, 2020;
(iii) on August 30, 2020, ART’s counsel notified the Trustee’s counsel of the scheduling of examinations for discovery in November 2020 and advised that the examinations would be helpful in respect of its asserting ART’s claim against Galty. ART asked for the Trustee to defer deciding on ART’s claim pending the completion of the examination;
(iv) in February, 2021, the Trustee’s counsel followed up with ART and asked that any further documentation be delivered by the end of February, 2021. ART’s counsel responded on February 22, 2021 to advise that the examinations were still pending and that the examinations would provide further evidence of the monies owed to ART by Galty. The Trustee’s counsel responded by advising that it was not prepared to wait for the further documents requested in connection with ART’s claim due to the fact that, inter alia, considerable time had elapsed in respect of both the Litigation and the bankruptcy administration; and
(v) ART requested and received a two-week extension to submit further documentation to March 15, 2021. On March 23, 2021, ART submitted supplementary information to the Trustee.
The Trustee considered the supplementary information before issuing its Notice of Disallowance to ART.
Notwithstanding the foregoing accommodations, on April 14, 2022, ART’s counsel sent a letter to the Trustee’s counsel enclosing an affidavit of Victor Seabrook, dated October 5, 2021 (the “October 5th Affidavit”). ART’s counsel indicated it had previously sent the October 5th Affidavit to the Trustee’s counsel, although the Trustee’s counsel had no record of receiving it. ART’s counsel advised that its delay in scheduling the appeal hearing was attributable to his waiting for the Trustee’s position on the supplementary information ART delivered to the Trustee, including the October 5th Affidavit.
The October 5ᵗʰ Affidavit provided further documentary that ART wished to rely upon in support of its claim. The Trustee considered the contents of the October 5ᵗʰ Affidavit, and concluded that it did not alter the Trustee’s position vis-à-vis ART’s claim.
On April 21, 2022, the Trustee’s counsel sent an email to ART’s counsel advising him that the Trustee’s position on ART’s claim had not changed after a review of the October 5ᵗʰ Affidavit and also that such review was without prejudice to the issues of (a) whether further material should have been submitted given the several prior requests for evidence in support of the Proof of Claim, and (b) whether having already issued the Notice of Disallowance the Trustee is itself able to alter that.
On May 18, 2022, Victor Seabrook passed away.
On or around May 18, 2022, Fred Tayar & Associates Professional Corporation (“Tayar”) was retained as ART’s counsel to deal with the ART Appeal.
After Tayar’s retention, the Court scheduled a hearing for September 20, 2022 with respect to the ART Appeal.
After Victor Seabrook’s passing, ART took its instructions from Timothy Seabrook, Victor Seabrook’s son and a trustee of ART.
Tayar took the position that the October 5ᵗʰ Affidavit must before the Court as part of ART’s appeal notwithstanding the affidavit was not before the Trustee on the consideration of ART’s proof of claim.
The Trustee and ART’s counsel entered into discussions and exchange of information with the view of reaching an agreement on the documentary evidence that would be admitted on the appeal. An agreement was not reached prior to the September 20, 2022 court hearing, resulting in the Court issuing an endorsement that read, in part,
“Counsel for the Trustee and the Creditor appealing the Trustee’s disallowance will caucus and advise whether there will be any preliminary evidentiary or other issues before the disallowance is heard and set the schedule for exchange of Materials, if needed, at a further 9:30 Appointment before me on my October 25ᵗʰ In writing Motion day”.
- The Trustee had through its counsel proposed a resolution (the “Appeal Record Agreement”) to ART on August 3, 2022, whereby evidence on the appeal would include
• all materials that ART provided to the Trustee prior to the disallowance of the claim,
• Galty’s financial statements for all years relevant to the periods at issue in the proof of claim, and (iii) the October 5th Affidavit. In exchange for this agreement, ART would agree not to seek to admit any other materials and the argument will proceed before the Associate Justice sitting as Registrar in bankruptcy on this record. A copy of that email is attached as Appendix “F”.
The Trustee’s proposal to address the contents of the appeal record was made after a specific meeting of Inspectors to consider the progress of the ART claim and its appeal from disallowance. The Inspectors and the Trustee were concerned that the outstanding appeal by ART was preventing the administration of the Bankrupt’s estate and also that ART had been afforded multiple opportunities over a long period of time to provide evidence to substantiate its claims. The Inspectors and Trustee agreed on making the offer that was ultimately communicated to ART as a way to attempt to ensure that ART’s appeal would progress promptly thereafter.
On September 19, 2022, Tayar and the Trustee’s counsel discussed the record that should be before the Court on ART’s appeal from the disallowance. Tayar indicated concern that the terms proposed by the Trustee would prevent further materials from being admitted. The Trustee’s counsel responded to advise by email that in the circumstances that was precisely what was intended. A copy of the aforementioned email from the Trustee’s counsel to Tayar is attached as Appendix “G”. Tayar then requested that the Trustee provide until September 30, 2022 for Tayar to determine whether ART wished to rely on any further documentation. If there were no further documents, the Appeal Record Agreement would be implemented.
On September 30, 2022, Tayar advised the Trustee’s counsel that ART may have additional evidence to add to the appeal record but was waiting on particulars.
The Trustee’s counsel followed up with Tayar on October 15, 2022 to determine if there was any further evidence on which rely and noted that repeated attempts by the Trustee to obtain evidence from ART in support of its proof of claim.
On October 17, 2022, Tayar advised the Trustee that “I understand that there is nothing new (i.e., that you are not already aware of) to be added.” Accordingly, the Appeal Record Agreement was implemented. The correspondence between Tayar and counsel for the Trustee in that regard between September 30 and October 27, 2022 is attached as Exhibit “F” to the Timothy Seabrook sworn May 5, 2023.
Since the parties had entered into the Appeal Record Agreement, counsel for the Trustee and ART agreed to forgo preliminary evidentiary motions, with the Court scheduling the hearing on the appeal for February 16, 2023, noting that “if issues arise between now and the hearing date they may schedule a case conference before me through the Bankruptcy Court Office.”
On January 24, 2023, Tayar advised the Trustee’s counsel that Mr. Timothy Seabrook was recently going through some of his late father’s personal effects, in his former residence, and came upon the Supplementary Documents. Tayar’s office shared the Supplementary Documents with the Trustee’s counsel and proposed to introduce them as evidence on the appeal, noting “I’m aware that the agreed-upon deadline for the submission of additional documents has passed, but as I understand it the documents were in an unexpected location (and had apparently been forgotten by the senior Seabrook himself.)”
Given the possible evidentiary issues arising from the Supplementary Documents, the February 16ᵗʰ appointment to hear the appeal was adjourned sine die to permit the Trustee and the Inspectors time to determine whether ART will be required to bring a Motion to introduce the Supplementary Documents at the appeal hearing.
After considering the Supplementary Documents, consulting the Inspectors, and having regard to the Appeal Record Agreement, the Trustee advised ART’s counsel that the Trustee requires a Court order to introduce the Supplementary Documents as part of the appeal record. Similarly, on March 28, 2023, the Court was advised of the Trustee’s position, resulting in ART filing the ART Motion. The Court’s endorsement relating to the ART Appeal is attached as Appendix “H.”
In the Trustee’s view, the Supplementary Documents should not be admitted as part of the appeal record for the following reasons:
(i) the Trustee’s determination of ART’s claim and its Notice of Disallowance did not consider the Supplementary Documents;
(ii) the Trustee has been advised by Anne Marie Heinrichs, one of the inspectors of the estate of the Bankrupt and a party to the Litigation, that most of the Supplementary Documents have previously been disclosed as part of the Litigation and were available to ART from productions in the Litigation such that ART could have submitted them to the Trustee (a) when ART filed its proof of claim, (b) when ART provided further documents in response to requests by the Trustee, (c) prior to the Trustee issuing its Notice of Disallowance and (d) prior to the parties entering into the Appeal Record Agreement. A list prepared by Ms. Heinrichs of where the Supplementary Documents had been previously produced in the civil litigation is attached as Appendix “I”.
(iii) the admission of the Supplementary Documents may result in additional delay and expense to the estate; and
(iv) the terms of the Appeal Record Agreement were that ART agreed not to seek to admit any other materials.”
[53] In reviewing the correspondence at Exhibit “F” to the Timothy Affidavit (the “Exhibit F Emails”), the “Appeal Record Agreement” as described in the Third Report above, as at October 24, 2022, was set out as follows in the email from Linthwaite to Bissell on that date describing the documents that the Appeal would proceed on (the “Appeal Record Agreement Documents”) stating:
“The Proof of Claim of Victor M. Seabrook and Timothy Seabrook as Trustees of the Avenue Road Trust and the attachments thereto
The Affidavit of Richard Wigley sworn February 27, 2018 The Affidavit of Bruce Buckley sworn December 17, 2018 The Affidavit of Victor M. Seabrook sworn March 25, 2019
The Affidavit of Victor M. Seabrook sworn August 14, 2020
The Notice of Disallowance of the Trustee in Bankruptcy dated August 6, 2021
The Affidavit of Victor M. Seabrook sworn October 5, 2021
The financial statements of the Bankrupt recently produced by the trustee.
Please confirm that this is correct.”
Bissell confirmed Linthwaite’ s understanding on October 27, 2022 stating:
“Hi Colby: Thanks for that. I am going to have to go back through my file to confirm the specifics, but what you set out below isn't raising any red flags on first impression. I'll have to get back to you on that, which will have to be after today's 9:30 appointment.”
[54] Prior to these emails in October, 2022, on September 19, 2022 Bissell wrote to Linthwaite stating the following, as set out in its Factum and Appendix “G” to the Third Report:
“Colby: Our emails below discussed a possible further affidavit from Mr. Seabrook that you would also want to be part of the record on the appeal from the disallowance in addition to what we set out below. I don’t yet have instructions to agree to any such further affidavit, and that is in part because I confess I’m not following why/how the affidavit noted (Oct. 21,2021) has anything to do with the ART proof of claim and its disallowance.
In addition to that, though, you and I also discussed in our call that you were not comfortable with the precise terms on which I indicated that the Trustee was prepared to resolve the issue of further evidence in the appeal record beyond what was submitted to the Trustee prior to the disallowance. Those terms were set out in my email of Aug.8 and were:
The Trustee is prepared to agree that the evidence on the appeal will include (i) all materials that The Avenue Road Trust (“ART”) provided to the Trustee prior to the disallowance of the claim, (ii) the bankrupt’s financial statements for all years relevant to the periods at issue in the proof of claim, and (iii) the further affidavit of Mr. Seabrook sworn October 5, 2021 and delivered after the disallowance. In exchange for this agreement, ART will agree not to seek to admit any other materials and the argument will proceed before the Associate Justice sitting as Registrar in bankruptcy on this record.
The problem you outlined with that is that it would foreclose further materials and you instead preferred that further materials could go in by either agreement or by further order.
I have reviewed that suggestion and discussed it with the Trustee and it is unfortunately not acceptable. The directions from the estate inspectors were rather clear, and moreover the entire point of the terms suggested was to “nail down” the appeal record with finality. The history of this matter is replete with many requests from ART for supporting documentation and several deadlines to do so (along with several extensions of those deadlines). There is a real issue with the suggestions that for a matter that has been in litigation since 2015 that there is any evidence left to find or that a failure to find that evidence would not be due to a lack of diligence.
I understand the normal desire of counsel to leave “wiggle room” on something like this, but in this case I suggest it is unwarranted and in any event it is unacceptable to the Trustee.
If what I set out is agreeable then we can advise Ilchencko AJ.[sic] that there is no need to argue a fresh evidence motion. If what I set out is not agreeable then I think we need to tell His Honour the contrary and then we should schedule that motion in tomorrow’s case conference.”
[55] As noted in the Trustee’s Third Report:
“37. The Trustee and ART’s counsel entered into discussions and exchange of information with the view of reaching an agreement on the documentary evidence that would be admitted on the appeal. An agreement was not reached prior to the September 20, 2022 court hearing, resulting in the Court issuing an endorsement that read, in part, “Counsel for the Trustee and the Creditor appealing the Trustee’s disallowance will caucus and advise whether there will be any preliminary evidentiary or other issues before the disallowance is heard and set the schedule for exchange of Materials, if needed, at a further 9:30 Appointment before me on my October 25th In writing Motion day”.”
[56] So from this, it is apparent that in preparation for the September 20 and October 25, 2022 Case Conferences before me that Tayar and Linthwaite were corresponding with Bissell and the Trustee, and at some point had received instructions from their client, presumably Timothy (given Victor’s passing in May 2022 and the retainer of Tayar as insolvency counsel after Victor’s death), that all of the documents that were required for the hearing of the appeal were in the agreed documents listed in Linthwaite’ s confirming email of October 24, 2022.
[57] It is also clear that no agreement had been reached prior to September 20, 2022, so if there was an agreement it can only be found in the post September 20, 2022 correspondence.
[58] Chapman’s role in this negotiation is less clear, but he too was likely involved, given his carriage of the Civil Action for 7 years at that point. He is not copied on the emails at Appendix G to the Third Report. Chapman is actually copied on the Exhibit F Emails in the Timothy Affidavit.
[59] The Exhibit G Documents were sent to the Trustee by Linthwaite on January 24, 2023 by email, prior to the looming February 16, 2023 hearing date scheduled for the Hearing of the Appeal, which is attached at Exhibit “H” to the Timothy Affidavit,. Linthwaite wrote:
“Dear Brendan,
Tim Seabrook was recently going through some of his late father's personal effects, in his former residence, and came upon documents relevant to the dispute between our respective clients. I put them in chronological order and inserted sheets identifying them by year. They are attached. I think you will agree that they are relevant. For this reason, I propose to introduce them as evidence on the appeal, perhaps attached to an affidavit from Mr. Seabrook I'm aware that the agreed-upon deadline for the submission of additional documents has passed, but as I understand it the documents were in an unexpected location (and had apparently been forgotten by the senior Seabrook himself.)
Please review the attached and let me know if the trustee will consent to their admission. If you'd like to discuss this, give me a call.”
[60] The response from Bissell on January 30, 2023 was:
“Hi Colby: I've discussed this with the trustee and where we've landed is that if The Avenue Road Trust ("ART") wants to add/rely upon these further documents then ART should bring a motion in that regard.
Among other things, the trustee and I will need further instructions from the estate inspectors on such matters if ART is going to pursue this, and it also seems unfortunately unlikely that the Feb. 16 special appointment can be kept if so. Given the passage of time on the proof of claim (to say nothing of the underlying litigation) it is within the realm of possibility that further interlocutory steps will be required to deal with these documents if they are going to be part of what ultimately goes before the Court on the appeal from the disallowance.
Please let me know if ART is going to pursue this. If not, we should get ourselves ready for hearing on Feb. 16 without these further documents. If so, then you and I should probably get a chambers appointment before llchenko, AJ to speak to this and (likely) get an adjournment of the special appointment.
Happy to discuss if you wish of course.”
[61] The February 16th, 2023 appeal hearing date was cancelled and the hearing date for the Fresh Evidence Motion was set by me.
[62] The role of the Inspectors Heinrichs and Ward in this decision by the Trustee is unclear, but given that both Title and Bissell are careful and experienced insolvency professionals, it is unlikely that they were proceeding without the involvement of the Inspectors of the Bankruptcy Estate. They are not explicitly copied on the Exhibit F Emails, or the emails at Exhibit H to the Timothy Affidavit.
[63] All of this is proper and laudatory conduct by the Trustee, Bissell, Linthwaite and Tayar, with the encouragement of the Court, to solve an evidentiary problem so the Court does not have to. They were properly communicating in the spirit of the “Three C’s” of the Commercial List. Counsel, with knowledge of the actual scope of the documentation available, are the best situated parties to determine what each side needs. The Court should intervene when a decision cannot be consensually arrived at.
[64] In this case it is clear that both sides benefited by the filing of additional documentation for the Appeal, until a point of disagreement arose with respect to the further request to admit the additional Exhibit G Documents, apparently found by Timothy in Victor’s condominium at some point in January 2023, but after Tayar and Linthwaite had advised Bissell and Title on October 24th that the Appeal Record Agreement Documents were “It”.
[65] Timothy in the Timothy Affidavit stated that after September 2022:
“10. I subsequently instructed the ART’s civil lawyer, Ron Chapman, who has possession of my father’s files respecting the relevant transactions, to review those files to determine if there was anything further the ART should produce for use on the Appeal. Chapman advised me that there was nothing that ART needed to add to the record.”
[66] It appears that there is no disagreement therefore that, at least the Appeal Record Agreement Documents, including additional documentation not originally provided with the ART Claim, were to be admissible on the Appeal of the Disallowance of the ART Claim, making the issue “How much Fresh Evidence”.
[67] Based on the submissions of all counsel at various case conferences, in my October 25, 2022 Endorsement I found:
“Counsel have agreed to forego preliminary evidentiary motions and will both be filing fresh evidence.”
[68] The issue is therefore whether the additional Exhibit G Documents should be, in all of the circumstances, and particularly after the alleged agreement amongst counsel in the Exhibit F Emails that the Appeal Record Agreement Documents were “It”, and were to be allowed by the Court to be admitted on the Appeal.
[69] That is the case that was ably argued by Bissell and Linthwaite, prior to the intercession of Ward in making submissions to the Court after Bissell and Linthwaite concluded their submissions on August 16, 2023 (the “Ward Intercession”), resulting in an adjournment of the hearing and further argument on September 7, 2023.
[70] The Submissions by ART were that this was not a True Appeal, but was also not a trial de novo situation. As stated in the ART Factum:
19.This is not another in the line of cases about the proper procedure to be followed on an appeal from a disallowance. The ART and the Trustee have agreed that the Appeal will not proceed as a true appeal, (i.e. solely on the material that was before the Trustee when it issued its Disallowance), as both sides will rely upon fresh evidence. Similarly, the parties have agreed that the Appeal will not proceed de novo (i.e. with both sides entitled to call whatever admissible evidence they wish), as they have, subject to the resolution of the within motion, settled on the content of the Appeal Record.
20.The parties’ agreement means that, subject to direction from this Honourable Court, the Appeal will proceed as a “hybrid”: on the record that was before the Trustee, plus specific fresh evidence. The issue on this motion is whether the New Evidence [the Exhibit G is to be included among that specific evidence.
[71] Not surprisingly, the Trustee takes the position that a binding agreement was reached by counsel in the Exhibit F Emails that the Appeal Records Agreement Documents were all of the documents that would be admissible on the Appeal of the Disallowance, and that the subsequent request to admit the Exhibit G Documents violates that alleged agreement between counsel:
“34. The issue is instead whether an agreement made between counsel for the parties about the conduct of the appeal should be adhered to or not. The same matters that the Trustee and estate inspectors were concerned about when offering the terms of what ultimately became the Appeal Record Agreement are still applicable, and probably even more so. Namely, there has been delay in getting ART’s appeal heard and there were already multiple prior attempts over a long period of time to get ART to advise what it wanted to rely upon for its claim.”
[72] The allegation that a binding agreement bound the parties necessitates the review in detail of the communications between the parties that I have included in these reasons.
“The Test” for Fresh Evidence on a s.135(4) Appeal from Disallowance
[73] ART’s main submission in favour of the admission of the further Exhibit G Documents is “The Test” in Credifinance Securities Limited v. DSLC Capital Corp., 2011 ONCA 160 (“Credifinance”), citing specifically paragraph 24, but it must be read in the complete context of LaForme, J.A.’s reasoning:
“[23] It seems that in Ontario the usual course for appeals under the BIA may be to proceed by way of viva voce evidence. This includes appeals under s. 81 of the BIA of a Notice of Dispute of property claims. Occasionally the court permits these appeals to proceed by way of affidavit evidence or partly by way of affidavit evidence and partly by way of viva voce evidence: Katz (Bankruptcy) (Re) (2005), 2005 30874 (ON SC), 14 C.B.R. (5th) 193 (Ont. S.C.) at paras. 4 and 5.
[24] At the very least, the practice seems to be that an appeal court, when considering a Notice of Disallowance, will first decide the issue of whether the matter proceeds as a true appeal or as a hearing de novo. The test that has evolved seems to be that a hearing de novo will occur if the court decides that to proceed otherwise would result in an injustice to the creditor: Charlestown Residential School (Re) (2010), 70 C.B.R. (5th) 13 (Ont. S.C.) at paras. 1 and 18.
[25] I note that this practice is not used uniformly across the country. For example, in British Columbia an appeal under s. 81 of the BIA is not intended to be a trial de novo but rather a true appeal: Galaxy Sports Inc. (Re) (2004), 2004 BCCA 284, 1 C.B.R. (5th) 20 (B.C.C.A.) at para. 40. The policy rationale is that trustees in bankruptcy should be regarded as having experience and expertise in the area of business financing, restructurings and insolvency.
[26] This BC approach makes sense because, if evidence that was not before a Trustee were to be presented on an appeal as a matter of course, much of the efficiency in the operation of the bankruptcy scheme would be lost. Creditors who neglected to file a proof of claim in compliance with the requirements of the scheme would be at an advantage because they could expect to enhance their proof on appeal. This, it seems to me, would impact on the objective implicit in the BIA, which is to enable parties to have their rights and claims determined in an expeditious fashion, and add unwanted expense, delay and formality: Galaxy Sports at para. 41.
[27] However, since counsel before us did not raise the issue of the correctness of this practice, I do not intend to comment on it further. This is not the case that requires this court to consider the merits of the Ontario practice. I would add that the practice appears to have been developed mainly through decisions of Ontario’s Bankruptcy Court.
[28] The procedure adopted for the hearing of the appeal in this case was agreed to by the parties and was, in their view, the appropriate means to determine the issues. On that there is no dispute. There is, however, a dispute that the Trustee describes as this: the Trustee did not seek a trial of DSLC's fraud allegations against Benarroch, nor was it the Trustee's understanding that such allegations were supposed to have been tried before the appeal judge.
[29] There is no doubt that DSLC’s appeal of the Trustee’s Notice of Dispute was focused entirely on its allegation of fraud. That was the very issue it sought to have decided by the appeal judge. At para. 2 of his reasons, the appeal judge describes DSLC’s position on the appeal this way:
[T]hat it is the victim of a fraud at the hands of Georges Benarroch and that, as a result of that fraud, it loaned $400,000 to Credifinance Securities Limited. According to DSLC Capital Corp., the $310,500 is directly traceable to that $400,000 loan and, therefore, should be impressed with a constructive trust in favour of DSLC Capital Corp.
[30] It was DSLC’s appeal. It framed the issue to be heard by the appeal judge, and all parties agreed to the process to be followed. While the Trustee may have disagreed with what issue was to be decided, the appeal judge was required to address the issue put forward by DSLC. I fail to see where he committed any error in doing so. There is no merit to this submission”
[74] ART makes the submission that “The Test” from Credifinance is that “the New Evidence should therefore be admitted “if to proceed otherwise would result in an injustice to the creditor”.
[75] But from the complete quotation above it appears that the Court of Appeal was describing what “seems to be” the “Ontario Test”, and LaForme, J.A. does not exclude from use the “British Columbia test” from Galaxy Sports Inc. (Re) (2004), 2004 BCCA 284, 1 C.B.R. (5th) 20 (B.C.C.A.) (“Galaxy Sports”), which LaForme, J.A. also finds “makes sense” and also posits that there are other aspects to the test that involves the Court also considering whether allowing new evidence:
was agreed to by the parties;
would violate the “…objective implicit in the BIA, which is to enable parties to have their rights and claims determined in an expeditious fashion, and add unwanted expense, delay and formality”, as stated in Galaxy Sports;
would violate the principle that “if evidence that was not before a Trustee were to be presented on an appeal as a matter of course, much of the efficiency in the operation of the bankruptcy scheme would be lost.”.
[76] P.J. Osborne, J, in Malhotra in dealing with these issues in the s.135(5) expungement context focuses on this “matter of course” issue, the implementation of the policy objectives of the BIA, and the exercise of discretion by the Court, finding 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. 91)
“…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” (para. 92)
“…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; (para.93);
The 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 (para. 98).
[77] In the Charlestown Residential School, Re 2010 CarswellOnt 5343, 2010 ONSC 4099, [2010] O.J. No. 3140, 191 A.C.W.S. (3d) 19, 70 C.B.R. (5th) 13 (“Charlestown”) case cited by LaForme, J.A. as setting out the “Ontario Test”, (now) Justice J. E. Mills stated:
“13 The Alberta Court of Queen’s Bench appears to have attempted to align the Eskasoni and Galaxy decisions in San Juan Resources Inc., Re, 2009 ABQB 55, 2009 CarswellAlta 98 (Alta. Q.B.), finding that a hearing de novo ought not be as of right, but rather restricted only to those cases where an injustice might result if the creditor is not permitted to adduce new or fresh evidence.
14 This approach is compelling in so far as it recognizes the experience and expertise of the Trustee who, by the provisions of s. 135 of the BIA, is required to carefully examine every proof of claim and act equitably in determining whether to allow or disallow a claim. Where additional information is needed, the Trustee is entitled to request further documentary support for the Proof of Claim to assist in making a final determination and, in accordance with s. 135(4), the decision of the Trustee is to be final and conclusive unless appealed within thirty days of the notice of disallowance having been served.
15 It is also reasonable to place a positive onus upon a creditor to properly prove his or her claim in bankruptcy at the first instance.
16 By granting a degree of deference to the decision of the Trustee, this appeal process promotes an efficient and cost effective means by which to administer a bankruptcy or insolvency estate while ensuring that an aggrieved creditor is afforded proper justice. An appeal may proceed as a de novo hearing in circumstances where an injustice would be the result if restricted to just the record.”
[78] Also relevant to this case, (now) Justice J.E. Mills states:
“19 In the case before me, the Trustee appears to have reached out to the creditor’s counsel by telephone for additional information but the request was not reduced to writing so it is unclear as to the nature or extent of the information sought. Further, the Trustee reviewed materials not otherwise available to the creditor to assist in formulating her decision to disallow the claim. This alone amounts to an injustice if the appeal was to proceed based solely on the record of the documents submitted by the creditor.
20 In addition, the Trustee relies upon an Amended Notice of Disallowance delivered without leave of the court nor with the consent of the creditor as is required for the amendment of pleadings (Eskasoni Fisheries Ltd., Re, supra.) subsequent to the launching of the appeal from the original Notice of Disallowance. One must conclude that the additional grounds for disallowance were only considered by the Trustee after the appeal was commenced and the Amended Notice of Disallowance was an effort by the Trustee to “cooper up” the original notice. It would be an injustice to allow the Amended Notice of Disallowance to stand and to deny the creditor the opportunity in a hearing de novo to fully respond with all relevant evidence to the grounds for disallowance raised by the Trustee.
[79] The decision of Registrar Hill in Eskasoni Fisheries Ltd., Re 2000 10880 (NS SC), 2000 CarswellNS 116, [2000] N.S.J. No. 122, 16 C.B.R. (4th) 173, 187 N.S.R. (2d) 363, 585 A.P.R. 363 (“Eskasoni”) is cited by Mills, J. in Charlestown as the “other pole” dealt with by the British Columbia Court of Appeal in Galaxy Sports, that I will deal with subsequently. Registrar Hill in Eskasoni states:
“16 Where a creditor appeals to the court from the decision of a trustee to disallow a claim that appeal will proceed by way of trial de novo. While I have found no specific case or commentary that makes this point clear, it is clear from a review of the cases generally that a Judge or Registrar hearing an appeal from a trustee's decision is not required simply to proceed upon the information before the trustee. In other words, on such appeals the court is entitled to accept and consider all evidence relevant to the claim.
17 In contrast, an appeal from a Registrar or Judge who has heard and determined an appeal from a decision of a trustee to disallow a claim in first instance is a true appeal, and does not, absent exceptional circumstances, proceed by way of trial de novo: Re MacCulloch Estate(1992), 1992 2799 (NS SC), 113 N.S.R. (2d) 367, 309 A.P.R. 367, 13 C.B.R. (3d) 201 (N.S. T.D.); Re Achilles(1993), 83 B.C.L.R. (2d) 116, 23 C.B.R. (3d) 20 (B.C. S.C.); Re Gervais(1993), 21 C.B.R. (3d) 95 (Ont. Bktcy.). Although on appeal from the decision of a Registrar the court will have a broad discretion to authorize the presentation of evidence, it does appear that the decision of a Registrar will not be disturbed unless the Registrar committed errors of a nature likely to justify the interference of a court on appeal.
18 This deference exhibited by appeal courts to decisions of those courts trying a matter at first instance is in large part founded upon the principle that the court of first instance is in a unique position having heard all the evidence and arguments in support of the positions taken by the various parties to the controversy. If a Registrar was restricted simply to dealing with the record of evidence as presented to a trustee when determining an appeal of this nature, there would be no reason for a court on appeal to exhibit such deference. That court would be at least equally capable of reaching it's own conclusion based upon the record, if the record of evidence was restricted to that before the trustee.
19 I note that a trustee in either accepting or rejecting a proof of claim is acting in his or her capacity as administrator of the bankrupt estate. The trustee conducts no hearing when determining whether or not to accept or reject the proof of claim. Thus no record is generated and in order to do justice to the parties it is necessary for a Registrar, or indeed a Judge, to hear the matter de novo in order to render an appropriate decision.”
[80] Counsel for ART also cites P. J. Osborne, J. in YG Limited Partnership and YSL Residences Inc., 2022 ONSC 6548 (“YG”), which also cites both Charlestown and Credifinance, stating:
“[34] I am satisfied that this Court may direct that an appeal from a disallowance of a claim by a trustee proceed by way of hearing de novo where it determines that to proceed otherwise would result in an injustice to the creditor. (see Credifinance Securities Limited v DSLC Capital Corp, 2011 ONCA 160 at para. 24, citing Charlestown Residential School, Re, 2010 ONSC 4099 at paras. 1, 18, and Re: Poreba, 2014 ONSC 277 at para. 32).
[35] I recognize, as did the Court of Appeal in Credifinance, that this practice is not uniform across the country. I also recognize that a major legislative objective of the bankruptcy regime is to maximize efficiency and the expeditious determination of claims between and among the stakeholders, and that this, in turn, could support the exercise of deference in the review of a decision of a trustee. In my view, that is why appeals of this nature should generally proceed as true appeals, based on a record consisting of the materials relied upon by the trustee in its decision to disallow the claim.
[36] However, it seems to me that the present case is an example of precisely the type of case where to proceed otherwise than de novo, and limit the record to that material originally filed in support of the claim, would result in an injustice to the creditor. That is exactly what section 135(5) is designed to correct or avoid, and in circumstances such as this, the appeal can and should proceed de novo in the sense that materials not originally before the trustee can and should be considered by the court.
[37] The Poreba case is such an example, where the Master [now Associate Judge] concluded that a hearing de novo was appropriate because there were significant issues of credibility such that fairness required that the claimant be given an opportunity to provide viva voce evidence and to explain certain issues.
[38] The evidence that, in my view, is relevant both to a determination of the claim and to my conclusion that to exclude it would work an injustice on the creditor, is described below. The creditor and the Proposal Trustee acted openly and transparently and entering into the settlement agreement, in the context of the appeal by the creditor. They did not act in an underhanded or unfair manner.”
[81] ART also cites the decision Eamon, J. of the Court of Kings Bench of Alberta in Aronson v Whozagood Inc, 2019 ABQB 656 (“Aronson”):
[29] There is conflicting authority in Alberta over which approach should be taken. Following the decision in Re Galaxy Sports, 2004 BCCA 284, the Alberta Courts have mainly adopted the hybrid approach (Re San Juan Resources Inc, 2009 ABQB 55; Transglobal Communications Group Inc (Re), 2009 ABQB 195. This approach requires claimants to put their best foot forward with their proof of claim to ensure efficient and expeditious claims determinations, while ensuring that the process is fair to all concerned. The Court has discretion to admit fresh evidence where the interests of justice require it. The test for admitting fresh evidence is not limited to the stringent test which applies to appeals from trials conducted in a Court as set out in Palmer v The Queen, [1980] 1 SCR 759 at p 775, 1979 8.
[30] In contrast, other Alberta judges have adopted the de novo approach (Alberta Permit Pro Inc (Re), 2011 ABQB 141; Experienced Equipment Sales & Rentals Inc, 2011 ABQB 641). In Alberta Permit Pro, Veit J preferred the de novo procedure, citing the “tight time lines imposed by Parliament in respect of the proceedings, the limited resources of the Trustee, the cost of providing “records”, and, most importantly, the considerable delay and additional expense caused by returning matters to the Trustee for reconsideration in every case where either the Trustee did not give sufficient reasons to allow an appeal court to adequately assess the Chair or the Trustee’s reasons, or where the Trustee made an error of law on which correctness would be the standard of review ...” (at para 39).
[31] The Alberta Court of Appeal does not appear to have ruled on the question. Some guidance might be taken from its decision in Pacer Construction, where the Court dealt with the procedures and standards of review in respect of a decision under a claims procedure order in a receivership.
[32] The claims officer in that case conducted a hearing between opposing parties, a situation which is not parallel to the manner in which a bankruptcy trustee typically proceeds in determining a claim under section 135 of the BIA. Nevertheless, some of the considerations mentioned by the Court suggest that the hybrid approach would best balance the competing considerations in a bankruptcy proceeding.
[33] The Court held that the judicial review of the claims officer’s determination contemplated gatekeeping scrutiny of additional evidence tendered on an appeal, to avoid encouraging a careless approach to the claims process and the effect of transferring the obligations imposed on claims officers to the court (ibid at para 104). Further, the standard of review was correctness on questions of law, and palpable and overriding error on questions of fact or mixed fact and law (ibid at para 104). This approach provided the adjudicative pragmatism required in commercial matters, ensured the process operated expediently, and respected the presumptions of fitness of the participants in the process (ibid at para 105). It also reminded that the correctness standard of review is critically different than the de novo standard because the former proceeds with no regard to the original decision while the latter raises a presumption of fitness (ibid at para 66).
[34] I prefer the hybrid approach in San Juan and the cases that followed it.
(a) Parliament assigned the roles of investigating and disallowing claims to the bankruptcy trustee (BIA, s 135). Creditors must “specify the vouchers or other evidence, if any, by which [the claim] can be substantiated” and the trustee may require further evidence (BIA, ss 124(4), 135(1)).
(b) The de novo approach would seriously undercut a bankruptcy trustee’s authorities and functions.
(c) The Court can ensure fairness and encourage diligence by creditors in submitting claims to the bankruptcy trustee by allowing fresh evidence in appropriate cases.”
[82] It should be noted that the “British Columbia Test” as set out in Galaxy Sports is more nuanced than “no trial de novo”. Newbury, J.A. states the following in dealing with the formulation of the “British Columbia Test”:
[40] I am also of the view that the Supreme Court's hearing of an appeal under s. 135(4) of the BIA is not intended to be a trial de novo but a true appeal. With all due respect to Re Eskasoni, supra, the law in British Columbia is clear that unless the statute that provides an appeal also states that it is to take the form of a trial de novo (as do, for example, s. 119(4.1) of the Social Service Tax Act, R.S.B.C. 1996, c. 431 and s. 822(4) of the Criminal Code, R.S.C. 1985, c. C-46), the appeal will be an ordinary appeal. Thus in McKenzie v. Mason (1992) 1992 2291 (BC CA), 72 B.C.L.R. (2d) 53, this court held that a statutory appeal to the Chief Gold Commissioner provided by s. 35 of the Mineral Tenure Act did not envisage a trial de novo. In the course of his reasons for the Court, Toy J.A. cited a passage from R. v. Dennis 1960 34 (SCC), [1960] S.C.R. 286, where Ritchie J. wrote:
. . . the distinction between "an appeal by holding a trial de novo" and an appeal to the provincial Court of Appeal is that although the object of both is to determine whether the decision appealed from was right or wrong, in the latter case the question is whether it was right or wrong having regard to the evidence upon which it was based, whereas in the former the issue is to be determined without any reference, except for purposes of cross-examination, to the evidence called in the Court appealed from and upon a fresh determination based upon evidence called anew and perhaps accompanied by entirely new evidence. [at 290-91]
McKenzie v. Mason was confirmed by a five-judge panel of this court in Dupras v. Mason (1994) 1994 2772 (BC CA), 120 D.L.R. (4th) 127. There, Mr. Justice Lambert, speaking for the Court, reviewed the complaint procedure provided in the Mineral Tenure Act and said:
“Running through the consideration of s. 35 must be an understanding of the function and expertise of the chief gold commissioner. He or she may be expected to have had many years of experience with respect to the mining industry in general and the locating and recording of mineral claims in particular. That expertise will imbue the carrying out of his or her functions under s. 35. It will also make his or her decision under s. 34 about good faith non-compliance a decision which is well informed by practical experience of what constitutes a good faith attempt to comply with the Act and Regulations, and about whether a failure to comply was calculated to mislead other free miners.
If an appeal were to be taken by trial de novo the chief gold commissioner's expertise would no longer be available in the process of decision-making under ss. 35 and 34. For that reason and for the other reasons set out by Mr. Justice Toy for this court in McKenzie v. Mason, including particularly the fact that the appeal is not specified in the statute to be by trial de novo, I conclude that s. 35(10) of the Mineral Tenure Act does not contemplate or permit an appeal to a Supreme Court judge by trial de novo.
Having reached that conclusion, it follows that the appeal to the Supreme Court must be a true appeal confined to whether the chief gold commissioner made a reviewable error of fact, of law, or of procedure. [at 134-35; emphasis added.]”
[41] In my opinion, similar considerations apply in this case with respect to the expertise of trustees in bankruptcy. As I have already mentioned, they can be expected to have considerable experience and expertise in the area of business financing, restructurings and insolvency. If "fresh evidence" — i.e., evidence not before the trustee or chair at the time of his or her decision — were to be adduced in Supreme Court on appeal as a matter of course, it seems to me that much would be lost in the way of efficiency in the operation of the bankruptcy scheme generally. Creditors who neglected to file proofs of claim in compliance with the requirements of s. 124 would suffer no practical consequences if, in Farley J.'s phrase, they could expect to "cooper up" their proofs at a later date in court; and the business now conducted at creditors' meetings by trustees (who are generally supervised by inspectors under the BIA) would be largely co-opted to courts of law, with all the attendant expense, delay and formality.
[83] Therefore, to sum up all of this jurisprudence it appears that “The Test” for admission of Fresh Evidence for an appeal from a disallowance under s.135(4) of the BIA is:
a) that an appeal Court, when considering a Notice of Disallowance, will first decide the issue of whether the matter proceeds as a true appeal or as a hearing de novo. (Credifinance)
b) the Court has the discretion to hear the appeal de novo and/or admit fresh evidence if the court decides that to proceed otherwise would result in an injustice to the creditor and that there can be a hybrid proceeding where further evidence not included with the Proof of Claim can be admitted; (Credifinance, Charlestown, Malhotra, YG, Aronson, Eskasoni)
c) In exercising this discretion the Court must take into consideration:
i) The fundamental policy objective of balancing 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 (Malhotra, YG, Eskasoni);
ii) Whether there is agreement between the parties to allow further evidence on the Appeal (Credifinance);
iii) Whether allowing further evidence would add unwanted expense, delay and formality and would impair the efficiency and cost effectiveness of the operation of the Bankruptcy Scheme (Credifinance, Galaxy Sports, Malhotra, Charlestown);
iv) Whether allowing fresh evidence would fail to recognize the experience and expertise of the Trustee “…in the area of business financing, restructurings and insolvency” and would impair “…the business now conducted at creditors' meetings by trustees (who are generally supervised by inspectors under the BIA) would be largely co-opted to courts of law” (Galaxy Sports);
v) Whether the Trustee reviewed materials not otherwise available to the creditor to assist in formulating the decision to disallow the claim which alone would amount to an injustice if the appeal was to proceed based solely on the record of the documents submitted by the creditor. (Charlestown):
vi) Whether the refusal to permit further evidence denies the creditor the opportunity to fully respond with all relevant evidence to the grounds for disallowance raised by the Trustee (Charlestown, Eskasoni).
Was there an agreement between the parties that the Exhibit G Documents would not be admitted as Fresh Evidence on the Appeal?:
[84] From “The Test” one of the factors that the Court must consider in exercising its discretion to admit Fresh Evidence is whether the parties had agreed that Fresh Evidence would be admitted and on what terms.
[85] This is the issue that the Trustee dealt with chiefly in argument. The Trustee argues that the decision of Harkema v. Hutchison, 2004 53534 (ON SC) (“Harkema”) is instructive. In that case Di Tomaso, J. stated:
“[27] In Gagro v. Morrison, [1995] O.J. No. 1611, Wilkins J. considered an application brought by the plaintiffs just before the commencement of trial seeking to increase the prayer for relief to $1,000,000.00. Such application was brought in the face of an alleged agreement between the parties whereby the plaintiffs' claims would be confined to the policy limits of $500,000.00 in return for the defendants admitting liability. the plaintiffs' application was dismissed. Mr. Justice Wilkins found that the parties were bound by the agreement that their counsel had entered into long before trial. We reviewed the correspondence between counsel and the conduct of the parties which he found to constitute an agreement. At the time of the exchange of correspondence both parties were represented by counsel, each of whom represented to the other that they were binding their respective clients. There was no question raised on the material before Mr. Justice Wilkins that both solicitors were cloaked with the authority to enter into the agreement. No affidavit material was filed on behalf of the moving party to suggest that their solicitor acted without instructions or authority. He also considered the argument advanced by the moving party that there was no consideration flowing to the plaintiffs, and as such, any agreement should be struck down. In Gagro at paragraph 30, Mr. Justice Wilkins states: "It is significant to point out that this was not an agreement between contracting parties, but rather was an agreement between counsel, properly forged in the crucible of the litigation they were retained to conduct."
[28] He found there was a mutuality of interest among the parties and that it was to everyone's benefit that the litigation be conducted in a cost efficient and time saving manner. By admitting liability, the defendants acknowledged and accepted all of the fault which might be attributable to the plaintiffs and they placed the plaintiffs in a circumstance where their action need only proceed as an assessment of damages. The issues considered by Mr. Justice Wilkins in Gagro are similarly striking to the issues raised in the motion before me. I have examined the correspondence between the parties and their conduct throughout. A strict examination of only the correspondence is not determinative of the issue before me as argued by the plaintiffs. Rather, I find that in the crucible of litigation the parties have entered into the agreement asserted by Hutchison. Both counsel were cloaked with the authority to enter into the agreement. There is no affidavit material filed on behalf of the plaintiffs' counsel that would suggest that they were acting without instructions or authority. In my view, there was a mutuality of interest between the parties. An admission of liability would be beneficial to all parties saving time and expense with only the issues of damages and causation to be tried. I agree with Wilkins J. that agreements between counsel touching on issues in litigation are not simple matter of commercial contract. I reject the commercial contract analysis out forward by counsel for the plaintiffs. There was ample consideration flowing to the parties for the agreement entered into between them.
[31] For the foregoing reasons, I am satisfied that there is an enforceable agreement between the where there was an admission of liability by Hutchison in exchange for the limitation of the plaintiffs' claims within the Hutchison motor vehicle insurance policy limits of $1,000,000.00. These kinds of agreements are made regularly in these types of cases. There would not have been an admission of liability by the defence with Hutchison still being exposed to claims in excess of her policy limits in the amount of $5,000,000.00 as pleaded in the Statement of Claim. In this case, it is clear that Hutchison benefited from the agreement by being protected within her policy limits. The plaintiffs benefited from the agreement by saving expense, time and unnecessary proceedings where causation and damages are the true issues to be resolved.”
[86] The Trustee also cites the case of RFG Private Equity Limited Partnership No 1B v Value Creation Inc., 2014 ABQB 61 at para. 59. (“RFG”) that an agreement between counsel about the timing of delivery of expert reports, which differed from the applicable rules of court, was binding and prevented the delivery by the defendant of a sur-rebuttal expert report.
[87] It should be noted that in RFG, like in Harkema where the motion was heard at the outset of trial, there were serious timing issues related to the proffering of additional experts reports, as:
“…Strekaf J will hear the “main event” in 22 days, and the trial is scheduled to be heard 55 days from the date on which the parties appeared before this Court.”
[88] To decide the issue of whether an agreement had in fact been reached between counsel, LoVecchio, J. ordered a mini-trial to be heard by Yamauchi, J. with testimony from the counsel as to what their dealings were with respect to the filing of a sur-rebuttal report.
[89] The narrow issue to be decided at that Mini-Trial was whether the parties, on the facts of their communications, had agreed to allow a sur-rebuttal report to be filed, or whether they needed to have heard a motion in advance of trial to obtain leave to do so (the Strekaf, J. “main event” mentioned above), as the Alberta Rules limited the number of experts reports that could be filed without leave.
[90] From the report it appears that Yamauchi, J. never actually disposed of the issue of whether the sur-rebuttal report was to be admissible, but rather that:
“[59] Counsel for VCI and counsel for the Respondents had an agreement with respect to the filing of expert reports. That agreement said that the expert reports would be exchanged simultaneously and that rebuttal expert reports would be exchanged simultaneously. The parties settled on the dates and the names of the experts. There would be no surrebuttal reports or no additional reports filed by either party, as they saw no need for them. That is the limit of the parties’ agreement.
[60] If VCI wants to pursue its application before Strekaf J to allow it to file the Additional Report, it must advise Strekaf J that this Court found an agreement and the nature and scope of it.
[61] In the face of this agreement, does Mr. Anderson the right to apply to the court pursuant to Rules r 8.16(1)? That issue is the one to which Strekaf J will address her mind.”
[91] None of this from RFG is similar to this situation, in either fact, law or procedure, where “the Test” is altogether different for the Court to exercise its discretion to admit further evidence on appeal under s.135(4).
[92] Unlike RFG, I have heard no trial on viva voce evidence before me regarding what Linthwaite, Seabrook, Bissell, Title and/or Chapman did or did not agree to. I have no affidavit evidence at all from the Trustee evidencing the agreement, as they are appended to a Report, which may have some evidentiary limitations. I have before me a series of emails that may or may not be indicative of an agreement, and even in the case of the Bissell emails, still appeared to be dependent on Inspector approval, and do not evidence a clear agreement at either the October 2022 or January, 2023 sets of correspondences:
“I am going to have to go back through my file to confirm the specifics, but what you set out below isn't raising any red flags on first impression. I'll have to get back to you on that,…” (October 27, 2022)
and
“Among other things, the trustee and I will need further instructions from the estate inspectors on such matters if ART is going to pursue this, and it also seems unfortunately unlikely that the Feb. 16 special appointment can be kept if so. Given the passage of time on the proof of claim (to say nothing of the underlying litigation) it is within the realm of possibility that further interlocutory steps will be required to deal with these documents if they are going to be part of what ultimately goes before the Court on the appeal from the disallowance.
Please let me know if ART is going to pursue this. If not, we should get ourselves ready for hearing on Feb. 16 without these further documents.” (January 30, 2023)
[93] I should also note that in this case, the alleged “deal” between counsel is less dramatic. There is no admission of liability in exchange for the limitation of claims at trial within policy limits like Harkema. Counsel for ART had already submitted further documentation for the Trustee to consider and reject in response to issues raised in the Disallowance. The discussions between the counsel was what “even further” documentation could be submitted by both sides.
[94] The Harkema motion was brought at the beginning of trial to resolve one of the prime issues that the trial was to determine. There is no “trial” currently occurring that this “agreement” has disposed of certain of the substantial issues of. The dispute over the Fresh Evidence has already resulted in the adjournment of the hearing of the Appeal from February 2023 to some point in the Spring/Summer of 2024.
[95] In Harkema, there was clear consideration exchanged between the parties in the settlement between counsel, namely:
“There would not have been an admission of liability by the defence with Hutchison still being exposed to claims in excess of her policy limits in the amount of $5,000,000.00 as pleaded in the Statement of Claim”
[96] The Trustee argues in its Factum that the “consideration” in this case was:
“Consideration was also ample in allowing some further materials to go into the record and avoiding an argument about how the appeal should proceed.”
[97] I do not follow that reasoning regarding the consideration for the “deal” allegedly flowing to ART, given that both sides have already added further evidence and each side was trying to “avoid an argument”, that could benefit both parties through a speedier adjudication of the Appeal. As noted from the Third Report, it is clear that the Trustee and Inspectors were desirous of a resolution of the Appeal, making the consideration of a speedier hearing flow to both sides.
[98] Given the breakdown in discussions in the admission of the Exhibit G Documents in January 2023 and the bringing of this Fresh Evidence Motion, by the Trustee’s argument, this cannot be the consideration for any agreement.
[99] Here the benefits of not including the Exhibit “G” Documents, do not include limitation of damages against the defendant within policy limits or “saving expense, time and unnecessary proceedings” to the plaintiff. It is unclear what “consideration” ART received here in exchange for “giving up” the Exhibit “G” Documents.
[100] There was no the admission on the one side giving a concession on the other side on a substantial issue like a limit on damages as there was in Harkema. What “…mutuality of interest between the parties” in the wording of Di Tomaso, J. was there in this case?
[101] At best, the Trustee argues that counsel for ART agreed to admit less documents, instead of more documents, but in return for what?
[102] It is also unclear whether Linthwaite and Tayar even knew that they were “giving up” the admission into evidence of the Exhibit G Documents (or whether those documents existed) when they made the alleged agreement with Bissell in the Exhibit F Emails, and limited ART to the Appeal Record Agreement Documents in October 22, if Timothy’s testimony is correct that the Exhibit G Documents were located by Timothy in Victor’s storage locker in January 2023. There is nothing in the Timothy Affidavit that indicates “who said what to whom and when” on the ART side.
[103] Evidence of whether Timothy, as a defendant in the Civil Action was aware of these documents prior to that date, or what role Chapman played in advising Tayar and Linthwaite that no further documentation was required, is not before the Court.
[104] Evidence of Chapman as to what his knowledge was, or what he advised is not before the Court. Submissions were made in paragraph 28 of the Factum of ART that “Chapman’s initial review of the files was imperfect” but there is no evidence before the Court anywhere that this was the case, and Chapman was not at the hearing to confirm that or defend himself, from what eventually became a pile up of “blame Chapman” from all parties. In any event, it was not Chapman that had allegedly done any “deal” with Bissell.
[105] Arguably the dispute over the Exhibit G Documents, and the hearings the determination of their admissibility necessitated have ADDED a year to the determination of the actual Appeal of the Disallowance, due to the cancellation of the February 2023 Appeal hearing date to instead argue the Fresh Evidence Motion in August and September of 2023, when the parties could not resolve the issue themselves.
[106] And to apply Harkema more contextually, in what “…crucible of the litigation” that these counsel were “…retained to conduct” was this alleged agreement “properly forged”.
[107] This Appeal from the Disallowance was being conducted in the “crucible” of s.135(1) of the BIA, which reads:
135(1) Trustee shall examine proof
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.
[108] In general terms Bankruptcy is not general civil litigation involving a finite private dispute between the Plaintiffs and Defendants etc. in an action, based on the specific pleadings, and resolving issues based on those specific pleadings.
[109] It is, in colloquial terms, a “class action” proceeding where the activities of some creditors can affect the rights and recoveries of other creditors who do not have a say in those proceedings. In this case, the determination of this proof of claim affects chiefly the quantum of the dividend available to Galty N.V. with its $20,679,439 proven claim, Bennett Jones LLP represented by the Inspector Ward with a $557,934.22 claim and possible additional “Local Corporation Management” $94,047.00 claim and the Inspector Heinrichs with her $256,755 claim and possibly the additional AMI claim of $204,095.00.
[110] Put another way, there do not appear to be any remaining major creditors of the Bankruptcy Estate that have an economic interest in the outcome of the Appeal of the Disallowance of the Galty Proof of Claim, that are not also involved, in some way, in the Civil Action.
[111] As stated by the Alberta Court of Appeal in Re Cohen 1956 597 (AB CA), 1956 CarswellAlta 1, 19 W.W.R. 14, 36 C.B.R. 21, 4 D.L.R. (2d) 528 in the context of creditors arguing against the admission of a late filed claim of the Department of National Revenue that would materially affect the quantum of their recoveries:
“33 There is no doubt that if the Crown's claim is allowed, the unsecured creditors will receive considerably less from the estate. Is this a "prejudice" requiring the court to refuse the claim? Every claim filed by a creditor reduces the amount which the other creditors will ultimately receive. No claim could be received by the trustee under s. 109 if this is what is meant by the position of the parties being altered. Until a dividend is declared no creditor has a specified interest in the funds in the hands of the trustee. His only right is to receive a dividend in due course of the administration of the bankrupt's estate. As this is the only "prejudice" that is mentioned in the judgment of the learned judge in bankruptcy, it is not, in my opinion, sufficient to prevent the filing of the Crown's claim.”
[112] In re Proposal of Conforti Holdings Limited 2022 CarswellOnt 7623, 2022 ONSC 3264, 100 C.B.R. (6th) 312, 2022 A.C.W.S. 1633 (leave to appeal refused 2022 CarswellOnt 13063, 2022 ONCA 651, 2022 A.C.W.S. 3801, 2 C.B.R. (7th) 1) (“Conforti”), Cavanagh, J. stated the following regarding the determination of claims in proceedings under the BIA, in that case a contingent and unliquidated claim that was the subject of litigation in New Jersey at the time of the commencement of the Canadian BIA proceedings:
“42 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. The BIA provides for an appeal of the trustee's determination and, although the appeal may be made to the registrar in bankruptcy, a judge of this court may exercise this jurisdiction under. 192(2) of the BIA. 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.
43 Although Moroccanoil's claim was commenced in the New Jersey Court as an ordinary civil claim to enforce a settlement agreement, the claim is now being made in the context of an insolvency proceeding that was triggered by the Company's NOI filing. Before the commencement of the NOI proceedings, Moroccanoil's claim, and the cross-motion by the Company, were proceeding in accordance with the civil procedures under New Jersey law for the adjudication of ordinary civil claims. However, in an insolvency context, where an unsecured creditor is unlikely to recover its claim as proven, the full procedural opportunities of normal civil litigation are often inappropriate. For this reason, the statutory regime in Canada under the BIA for summary determination of claims differs materially from the procedural rules for adjudication of civil claims.
44 I read s. 135(1.1) of the BIA as unambiguously providing that the Proposal Trustee is required to determine whether Moroccanoil's claim is a provable claim and, if it is, that the Proposal Trustee value it. In Re Nortel Networks Corporation et al. 2015 ONSC 1354, Justice Newbould, at para. 35, held, in the context of an insolvency under the CCAA, that a court should not lightly lose control of the process whereby claims against the debtor are to be determined. The requirement for claims to be determined and valued through a single claims process under the supervision of a single Bankruptcy Court is consistent with the scheme and objects of the insolvency process under the BIA.
45 I conclude that the inherent jurisdiction of this Court under s. 183(1) of the BIA does not extend to displacing the claims process mandated by s. 135(1.1) of the BIA.
46 If I am in error in this regard, I address whether this is one of the clear cases where the court's inherent jurisdiction should be exercised to displace the process for valuation of claims provided for in the BIA.
47 The Proposal Trustee submits that adjudication of the Moroccanoil Claim through the BIA proceedings would be impractical, unreasonable and unworkable. The Proposal Trustee contends that the valuation exercise would be one of disproportionate difficulty, scale, time, and cost, which would be borne by the estate of the Company rather than the litigants to the private disputes. The Proposal Trustee cites the complexity of the issues, the voluminous evidentiary record, the existence of issues of credibility, the choice of law and jurisdiction provisions in the settlement agreement, the likelihood of an appeal, the need to determine the Company's cross-motion, and the stage of the New Jersey litigation as factors that support the requested direction.
48 Morrocanoil submits that any appeal of the Proposal Trustee's valuation of its claim should proceed to a judge of the Commercial List under s. 192(2) of the BIA to be heard as a trial of an issue by way of a streamlined process based on largely paper record and supplemented by viva voce evidence, as needed.
49 I accept that valuation of the Moroccanoil Proof of Claim may be an exercise of some complexity. It is expected that there will be an appeal of the Proposal Trustee's valuation. Nevertheless, on the materials before me, I am not satisfied that the adjudication of Moroccanoil's Proof of Claim cannot be completed in this Court through process that, with the benefit of case management, will not be materially longer, less efficient, or more costly than continuing the civil proceedings in the New Jersey Court.
50 If there is jurisdiction for this Court to give the requested direction, I am not satisfied that the Proposal Trustee has shown that this is one of the clear cases that justifies the exercise of discretion to depart from the usual process for valuation of claims under the BIA.
51 I conclude that the Proposal Trustee is required to determine and value Moroccanoil's Proof of Claim pursuant to s. 135(1.1) of the BIA. I decline to give the requested direction.
[113] In reviewing the duties of a Trustee in reviewing claims under s.135 of the BIA, McWillliam, J. in Canadian Imperial Bank of Commerce v. 433616 Ontario Inc. 1993 CarswellOnt 193, 17 C.B.R. (3d) 160, 38 A.C.W.S. (3d) 1086 (“CIBC v 433616 Ontario”):
“16 Under s. 135(1) of the Bankruptcy Act the trustee is under a duty to examine every proof of claim and the grounds for it. The trustee may require further evidence in support of the proof of claim. Such evidence must be satisfactory that the debt is a valid debt since not even a judgment recovered against the bankrupt, or covenant given or account stated by him deprives the trustee of his right to make such enquiries. He is entitled to go behind such forms to get at the truth; it is unnecessary for him to show fraud or collusion: Re Van Laun; Ex Parte Chatterton, [1907] 2 K.B. 23 (C.A.). The trustee must take into account the effect upon other creditors in exercising his discretion: Re Cohen (1956), 1956 597 (AB CA), 36 C.B.R. 21 (Alta. C.A.).
17 In Bankruptcy and Insolvency Law of Canada, Houlden and Morawetz, 3rd ed., G§69, 5-92 and 5-93, the authors say:
It would seem that the onus should be on the claimant to prove his claim, and if he fails to do so on the balance of probabilities, the court should dismiss the appeal ... In disallowing a claim, a trustee should not act inequitably: Re Waltson Properties Ltd. (No. 2) (1977), 24 C.B.R. (N.S.) 212, affirmed 28 C.B.R. (N.S.) 269 which was affirmed (1979), 30 C.B.R. (N.S.) 112 (Ont. C.A.).
[114] It appears from the Exhibit F Emails that Bissell as counsel for the Trustee was quite properly carefully attempting to fulfill the obligations required of the Trustee to, with finality, determine what evidence was going to be before the Court at the Appeal, in time to report to the Court on the progress on October 25, 2022 in accordance with the timetable.
[115] Tayar and Linthwaite appear from the Exhibit F Emails to similarly attempting to do so on behalf of their client ART, also in time to report to the Court on October 25th, 2022.
[116] Counsel on all sides have advised that the Civil Action has not proceeded since the bankruptcy of Galty B.V. in March of 2019. It appears that there was a Summary Judgment Motion that had been brought prior to the Bankruptcy that had not moved forward since that date. The AJ Abrams Endorsement was dealing with the costs issues arising from demands for particulars and requests to inspect documents referenced by the Heinrichs defendants in the Civil Action in affidavits filed in support of Galty’s summary judgment motion. At that point there appears to have been some kind of insolvency filing in the Netherlands, but no Canadian filing, as AJ Abrams sets out in her reasons for not staying the costs decision in the Civil Action.
[117] The issue of the existence or non-existence of an agreement between the parties appears to be one of the criteria of “The Test” that Court must consider to exercise its discretion in permitting additional evidence to be admitted, but does not appear to be the only consideration or dispositive in removing the Court’s discretion, in the Bankruptcy context where the Trustee has a duty as the representative of all of the Creditors in the Bankruptcy to ensure that a debt claimed is a valid debt (per CIBC v 433616 Ontario).
[118] This is particularly the case in respect of the duty of the Trustee to take into account the effect upon other creditors in exercising his discretion to require further evidence for claims (Cohen and CIBC v 433616 Ontario), and in this case it appears that the outcome of the determination of the ART Claim in the Bankruptcy Court could have effects in determining issues in the Civil Action, where the Claim of the Plaintiffs, including ART, is not only against the Bankrupt, but appears also to be against other creditors to the Bankruptcy estate that are also parties to the Civil Action, like Heinrichs, and also to defendants to the Civil Action that do not appear to be Creditors of the Bankruptcy Estate.
[119] In this regard, the Trustee argues that this duty had been fulfilled by the Trustee in reviewing further documentation provided by ART in 2020 and 2021, and in the negotiations that lead to the emails relating to the Appeal Record Agreement Documents being admitted.
[120] The Court also retains discretion to control its own process, and in the reasoning of Cavanagh, J. in Conforti, the claims process under the BIA implemented by the Trustee remains under the supervision of the Bankruptcy Court to ensure that the scheme and objects of the insolvency process under the BIA is fulfilled.
[121] For all of these reasons, on evidence before me on this Fresh Evidence Motion, I cannot conclude that within the contextual “…crucible of the litigation” under s.135 of the BIA that the alleged agreement claimed to exist by the Trustee precluding the admission of the Exhibit G Documents was “properly forged” in accordance with the reasoning in Harkema and RFG, and cannot conclude that this alleged agreement fetters my Registrar’s Discretion in dealing with the factors for the admission of the Exhibit G Documents in accordance with the other aspects of “The Test” that I have enumerated above.
Alleged Solicitor’s Error
[122] Having found the absence of the alleged agreement, with respect to the argument from ART that First Capital Realty Inc. v. Centrecorp Management Services Ltd. 2009 CarswellOnt 6914, [2009] O.J. No. 4492, 258 O.A.C. 76, 83 C.P.C. (6th) 310 and Ling v Bemac, 2017 ONSC 4113 1944949 Ontario Inc. (OMG ON THE PARK) v. 2513000 Ontario Ltd., 2019 ONCA 628 that “Courts are loath to prejudice a client due to an oversight by their lawyer, and routinely relieve clients from the consequences of such oversights.”, is applicable, as I have noted above, and as pointed out by the Trustee, there is no specific evidence from Timothy or Chapman or the Trustee that, in fact, Chapman and/or Tayar and/or Linthwaite had committed an “error” and the client was prejudiced, thus not necessitating or allowing a determination of the issue, and making the doctrine in that jurisprudence inapplicable to these facts.
[123] Even if there was an alleged “error” how would the Court deal with the Trustee taking advantage of that “error” given the existence of the doctrine in Re Condon (1874), 3 Jur. 538, (sub nom. James, Ex Parte) 9 Ch. App. 609, [1874-80] All E.R. Rep. 388 (Eng. Ch. App.) and M.C.C. Precision Products Ltd., Re, 1972 490 (ON SC), 1972 CarswellOnt 63, [1972] 2 O.R. 825, 17 C.B.R. (N.S.) 28, 27 D.L.R. (3d) 4?
Other Arguments raised by Trustee in relation to “The Test” for admission of additional evidence
[124] The Trustee raises arguments in its Factum, and in legal argument at the hearing, that this should be treated as a True Appeal as a result of following factors:
The issues in ART’s Proof of Claim are the presence or absence of a loan to the bankrupt, which is much closer to a trained accountant’s expertise or Trustee’s experience;
The Trustee’s dealing with ART’s Proof of Claim was the antithesis of rushed and Chapman was asked over months to produce further records;
ART seems is taking the determination of the ART Claim far more seriously than its potential pro rata share of the modest funds remaining in the estate would be under a distribution even if its claim were allowed in full would equate to a dividend of approximately $46,000.
The interplay between the ART Claim and the Civil Action, all of which is premised on the presence of a loan from ART to the bankrupt, may be really driving the ART position;
ART has benefitted from a very high degree of disclosure through the Civil Action, which is not present in other cases that may involve creditors with potentially insufficient access to records to establish their claims, which could raise different issues on standard of appeal matters;
If the Court permits ART to seek to introduce the “new” records on the appeal from the disallowance, then the issue of whether any further materials beyond what was before the Trustee needs to be resolved;
[125] One common issue in these issues raised by the Trustee is the Civil Action looming over the determination of the ART Claim.
[126] In support of these arguments the Trustee has attached Appendix I to the Third Report, which is a 5 page chart prepared by the Inspector Heinrichs, that indicates that most, if not all, of the Exhibit G Documents had been previously disclosed in the Civil Action in the Affidavits of Documents of the Bankrupt, ART, Pantrust/La Hogue, various Motion Records of Pantrust/La Hogue, various Affidavits of Victor, various Affidavits of Heinrichs, and the “Galty Discovery Documents”.
[127] Apart from the issue of the evidentiary admissibility of the document as an Appendix to the Third Report, in the context of Bankruptcy and Insolvency General Rule 46, and the inability of the Trustee to verify the accuracy of this document created by Heinrichs, from the Third Report and submissions by counsel for the Trustee at the hearing, it is apparent that the Trustee has not been given access to the vast majority of this documentation described in this document by Heinrichs, and that this documentation was apparently not used in the Trustee’s evaluation of the ART Claim.
[128] This document was proffered to support the argument that ART and Chapman were fully aware of this documentation prior to Timothy going to clean out his father’s condominium, and that it should have been produced as part of the ART Claim, but is of no answer to my questions as to why this documentation was not produced to the Trustee to assist in evaluating the ART Claim.
[129] The argument that “The ART Claim was so bad we didn’t need to”, as I will detail, was not the winning argument that the Trustee, and the Inspectors Ward and Heinrichs, thought it was.
[130] Who made the determination that the Trustee should not be unnecessarily worried by the production of this documentation?
[131] However, many of these able arguments by Bissell were undermined by the Ward Intercession, and I will deal with all of these arguments in that context.
The Ward Intercession
[132] After Bissell and Linthwaite completed their submissions Ward made submissions. Ward was counsel to the Bankrupt in the Civil Action, and her firm is a major creditor in the Bankruptcy Estate. She is also an Inspector of the estate, and therefore an “Interested Person” for the purposes of standing under the BIA. There were no specific objections to my allowing her to make submissions.
[133] It appeared that this was not a planned intervention in consultation with the Trustee and its counsel.
[134] Starting on page 87 of the Transcript of the Fresh Evidence Motion, Ward’s submissions were:
“MS. WARD: Well, just a couple of points. Just first, on the onus of being on the creditor to submit their claim in an orderly fashion. The points below that are that there are multiple ways, I think, for the trustee to get to the answer that, no, the claim of the ART ought not to be submitted, that it's a denial of that claim.
The cost to the estate will be significant if more documents are allowed because then we'll have the following further documents that would be pulled from, and that's a 2018 Affidavit of Documents that consist of 2,800 documents that were delivered to Mr. Chapman.
And then the second is at the pleasure of preparing a motion record on the very topic of this debt in 2017, that motion record is 731 pages long, and the number one point in the record is, first of all, that money wasn’t owed, but second of all, Galty paid the money and has a bank record to that effect. So, if we're going to fight - continue to fight, the money that's in the estate is going to be completely gone.
And then lastly, just, Your Honour, on the Wigley issue, it's not just perjury. Wigley and Pantrust were penalized in the Colorado District Court in 2016 for completely fabricating loan documents. And in that court, they were found that they're no longer to be able to present documents or evidence to the court.
THE COURT: Okay, well, none of this is in evidence or anything else. So, I mean, you saying it doesn't make it true. But here's the thing, all right? All of that says to me that, why isn't that stuff before the court now? Like, there's no reference to it in the disallowance, there's no nothing.
MS. WARD: Well, forgive me, Brendan - Mr. Bissell, but I think it's because the claim on its face didn't meet the test. Like, it was dismissed because it was easy to dismiss at that time. It will be easy to dismiss if we spend another year and a half going through all these other documents with it, and I think that's where it's important to understand the balancing act of the administration of justice in terms of admission of new documents past the deadline.
THE COURT: Yeah, but again, this isn't a civil litigation aspect. Like, I'm sitting there looking at Mr. Title, the court officer, right? Has all of this been provided to the court officer?
MR. BISSELL: The materials that Ms. Ward was referring to were not provided to the court officer. The....
THE COURT: Well, why not? Like, for the love of God here, you're sitting there sitting on this stuff and you haven't provided it to the court officer who's trying to make determinations that are binding on the court? What are you doing?
MS. WARD: The court officer has the motion record and Mr. Chapman has the motion record.
THE COURT: Again, look, here's the point here. The trustee is usually stuck with these to deal with these things on a summary process, and this is my real concern here, is that there's some peekaboo act that's being done in terms of what's being done in the disallowance of this claim that deals with all kinds of aspects everywhere else, and you're telling me there's thousands of documents out there that are not before the court that fundamentally deal with the actual aspects of this thing, and I don't know about them, and they're not on this, and I'm supposed to ignore that now?
MS. WARD: Well, it's in the litigation that's ongoing.
And at page 93 of the Transcript:
“THE COURT: You're directing the trustee to do this, and I find out just by accident. Just by accident because you decide to make some gratuitous statements that aren't in evidence anywhere that there's a ton of stuff out there that's not decided in the estate, and that is how somehow irrelevant for the purposes of deciding whether Mr. Linthwaite gets to put in his materials?
MS. WARD: My friend already referred to the Affidavit of Documents of the other matter. We were already talking about the affidavit.
THE COURT: You're utterly missing my point here. The point here is you're making a submission here that on the basis of the fact that if he goes in, well, we've got all this other stuff and it's going to go in and all the claims and this and that and all the rest. Yeah, guess what? How is that not relevant to the fact that he's got evidence and you've got more evidence? The fact that there's a ton of stuff sitting out there that deals with the actual determination of the stuff in the estate and I don't know about it?
MS. WARD: No. The 2,800 document Affidavit of Documents would be pulled from because that claim deals with multiple parties and all kinds of evidence. It's one large affidavit.
THE COURT: You're digging a deeper hole, Ms. Ward.
MS. WARD: But we’ve talked about the documents that my friend wanted to put in being in that Affidavit of Documents, and our whole point is, well, there's also a ton of documents in there, but none of it is - if we're going to go down a path of revisiting the Proof of Claim and a new Proof of Claim that has a broader base of documents, I'm just trying to say, well, this is what the broader base of documents is. It's not just a box of documents in someone's office. It's everything. But my understanding from the trustee is....
THE COURT: Mr. Bissell, do you want to....
MS. WARD: ...we didn’t need to go down that path.”
[135] Given the opportunity by me to make submissions to repair the damage inflicted on the Trustee’s case by Ward, Bissell gamely made the submissions that:
the trustee does not have any of the further documents mentioned by Ward, other than the motion record she mentioned, apparently the Galty Summary Judgment Motion materials, but it was not reviewed or considered in determining the ART Claim;
The ART Claim was assessed on its merits after looking at the financial records of the debtor but not the litigation documents Ward described;
There is a massive amount of documents available to the parties in the Civil Action;
If the further Exhibit G Documents go in, the Trustee will consult with the inspectors about whether there's counter documents from the Civil Action that the Trustee had not been given access to date, that the Trustee would put in in response.
[136] This seems to be what the Trustee was alluding to in the Third Report, in a more subtle way:
“63. If the Court permits ART to seek to introduce the “new” records on the appeal from the disallowance, then the issue of whether any further materials beyond what was before the Trustee needs to be resolved. The Appeal Record Agreement sought to side-step that debate, but if ART is not to be held to that agreement, then neither should it bind the Trustee any longer.”
[137] Ward’s submissions are not evidence per se, but they confirm glimpses of evidence located in both the Trustee’s Reports, and the Timothy Affidavit and exhibits. Ward is an Inspector of the Bankruptcy Estate with fiduciary obligations to the Bankruptcy Estate and creditors arising from that position. As does Heinrichs. Both Ward and Heinrichs also have duties under s.4.1 of the BIA as representatives of creditors, and as Inspectors.
[138] Ward in the Ward Intercession appears to confirm that:
- The Galty Summary Judgment Motion materials filed in the Civil Action, prepared by Ward on behalf of the Bankrupt, to which the AJ Abrams Endorsement indicates that over 40,000 pages of documents were disclosed in response to requests to inspect, show that, as stated by Ward:
“…the number one point in the record is, first of all, that money wasn’t owed, but second of all, Galty paid the money and has a bank record to that effect”
which appears to be the entire point of the Disallowance of the ART Claim;
If the Court grants the request by ART to allow the admission of the Exhibit “G” Documents, then the Trustee will consider putting in these further documents proving that the ART Claim is not valid, but that those documents have not been introduced to date.
That the Disallowance was based on the inadequacy of the documentation of the ART Claim filed to date, not on these substantive issues;
If the Exhibit G Documents are admitted, the necessity of the admission of the further documentation from the Civil Action will result in the dividend payable to creditors to be consumed.
The Civil Action litigation is ongoing.
[139] These submissions also confirmed to me the concerns that the Trustee expressed in the Second Report in relation to Chapman’s voting against the settlement of the Galty, N.V. settlement:
“The Trustee is accordingly concerned that the dynamics of the Litigation are merely being repeated in meetings of inspectors, all of whom were involved in the Litigation before the Company was bankrupt and remain involved in the portions that are still proceeding, such that the views of the Court as an independent adjudicator may be more appropriate in any event.”
As well as the concerns of Penny, J. in the Penny, J. Endorsement in relation to Chapman voting as inspector against the Galty N.V. settlement, that it:
“…would advance the litigation interests of the creditor, ART, that he represents in litigation against the Bankrupt, Galty N.V. and the Brazilian Trust, to the possible detriment of the creditors as a whole.”
[140] Essentially, it appears that the submissions of the Trustee and Ward boil down to the following:
“Court:
Disallow the ART Claim because it is so deficient on evidentiary grounds now, that the Trustee didn’t have to be advised of further evidence that would prove that the claim is invalid on substantive grounds contained in documentation in the Civil Action known to the Inspectors, but not the Trustee;
Don’t admit the Exhibit G Documents, because it would be futile, as the Defendants in the Civil Litigation have a lot of documents that disprove the claims made in the ART Claim on substantive grounds, and if the Trustee would have to be provided with those documents and guidance by the Inspectors, that would “open a can of worms” and consume the benefit to creditors from dividends in legal costs.
[141] The point I made to the parties, loudly, repeatedly and at some length, at both the August 16th and reconvened September 7 hearings, was “So What?” if the “can of worms” is opened, if it aids in the proper adjudication of the ART Claim.
[142] At bare minimum, by advising that the Defendants to the Civil Action are in possession of documentation that proves that:
“…the number one point in the record is, first of all, that money wasn’t owed, but second of all, Galty paid the money and has a bank record to that effect;”
And that as a result the Court allowing the admission of the Exhibit G Documents:
“It will be easy to dismiss if we spend another year and a half going through all these other documents with it”
this effectively destroys the able arguments made by Bissell exploring the weaknesses of the ART case on the relevance of the Exhibit G Documents, because if these documents in the possession of the Defendants to the Civil Action are relevant to disposing of any arguments in the ART Claim in response to the inclusion of the Exhibit G Documents, then how can the Exhibit G Documents not be relevant to the issues raised in the ART Claim, on any formulation of the test of relevance?
[143] From all of these submissions, I am very concerned that the Summary claim adjudication process in the Bankruptcy Estate is being used to adjudicate, on a more “Cost effective” basis issues that may be determinative of the claims of the Plaintiffs against the Defendants in the Civil Action, on a deliberately restricted record being placed before this Court, and that this “…would advance the litigation interests” of the Defendants in the Civil Action “…to the possible detriment of the creditors as a whole”, and frankly to the detriment of the Trustee effectively being forced to make arguments on their behalf, while using the resources of the Bankruptcy Estate that would otherwise be distributable to all proven creditors to do so.
[144] In terms of the sudden concern for “creditors” and their dividend payable in the Bankruptcy Estate, who are they, and where was this concern previously in the period since the filing of the ART Claim in March of 2021 and the settlement of the Galty N.V. claim at $20,679,439 or 83% of the filed claims, including the currently unproven ART Claim in October 2021 after approval by Penny, J.?
[145] If we are truly only dealing with the determination of a maximum dividend to ART of $46,000 as stated by the Trustee in its Factum, and in legal argument, then settle the ART Claim and move on to distribution of the remaining 83% of the funds in the estate, net of professional costs to Galty, N.V., if this litigation is not being driven by extraneous concerns involving the Civil Action, which was one of the issues raised by the Trustee against ART’s conduct in the Second Report, but would appear to be equally applicable to the other creditors with proven claims that are also involved in the Civil Action.
[146] With respect to the Trustee’s submission that the Trustee’s review of the ART Claim should be entitled to deference, because the presence or absence of a loan to the bankrupt, is much closer to a trained accountant’s expertise or Trustee’s experience, I disagree, given that the review is only as good as the evidence the parties to the Civil Action have permitted the Trustee to see.
[147] Ward says the Trustee is in possession of what appears to be the Summary Judgment Motion Materials in the Civil Action that:
“…is 731 pages long, and the number one point in the record is, first of all, that money wasn’t owed, but second of all, Galty paid the money and has a bank record to that effect.”
but Bissell advises that this motion record was not used by the Trustee in issuing the Disallowance of the ART Claim.
[148] Given Ward’s submissions, what changed from the Trustee’s concerns about Chapman’s conduct in the Second Report that were not apparently a concern in the Third Report, namely that:
“…the dynamics of the Litigation are merely being repeated in meetings of inspectors, all of whom were involved in the Litigation before the Company was bankrupt and remain involved in the portions that are still proceeding”?
[149] To put my decision in the context of “The Test” for admission of Fresh Evidence for an appeal from a disallowance under s.135(4) of the BIA:
a) For all of the reasons I have set out above, and which I will detail below, I will exercise my Registrar’s Discretion to admit the Exhibit G Documents, as to do otherwise would result in an injustice to ART, however the Trustee may also admit further evidence in accordance with the schedule that I set, if it so chooses, and after being given access to the documentation in the Civil Action, which both the Trustee and the Inspectors have acknowledged may be relevant to the determination of the ART Claim, and in particular the documentation filed in the Summary Judgment Motion that is apparent evidence “…that that money wasn’t owed, but second of all, Galty paid the money and has a bank record to that effect”; (Credifinance, Charlestown, Malhotra, YG, Aronson, Eskasoni)
b) By allowing both ART to admit the Exhibit G Documents, and permitting the Trustee to admit responding documentation, the Court will meet the fundamental policy objective of balancing 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 consider relevant evidence, and to allow the Court to properly determine the substantive claim of ART based on all of the relevant evidence available, taking into account the interests of all of the Creditors (Malhotra, YG, Eskasoni, Cohen, Conforti);
c) I have found that on the tests argued by the Parties that the alleged agreement claimed to exist by the Trustee precluding the admission of the Exhibit G Documents was not “properly forged” in the crucible of this litigation (Harkema, RFG);
d) that if the parties are desirous of using the claims process of the BIA, to deal with issues that may have impacts on both creditors of the Bankruptcy Estate, and parties to the Civil Action that are not before this Court, but may be affected by its decision, the Bankruptcy Court must ensure that to fulfil the objectives of the BIA of coming to the right conclusion in an appeal, that all proper evidence required to prove the substantive aspects of a claim are before it (Credifinance, Eskasoni, Cohen, Conforti);
e) As the determination of the ART Claim has already taken almost 3 years, allowing further evidence at this point, by both ART and the Trustee will allow the proper adjudication of the ART Claim by the Court, and would therefore not further impair the efficiency and cost effectiveness of the operation of the Bankruptcy Scheme by allowing that substantive determination of the ART to accelerate distributions to the other creditors (Credifinance, Galaxy Sports, Malhotra, Charlestown);
f) Given the evidentiary dance set out in the emails between counsel regarding admission of additional evidence and the 3 years that have passed since the creditors meeting, as well as the Order of Penny, J. to approve the settlement of the Galty N.V. claim, with the looming influence of the Civil Action over all of the decisions being made in the Bankruptcy Estate, this is not an estate where admitting further evidence for both ART and the Trustee would fail to recognize the experience and expertise of the Trustee “…in the area of business financing, restructurings and insolvency” and would impair “…the business now conducted at creditors' meetings by trustees (who are generally supervised by inspectors under the BIA) would be largely co-opted to courts of law”, as that “business” has already been co-opted by the Lawyers and the Courts (Galaxy Sports);
g) It is not clear to me what materials the Trustee allegedly had in its possession and reviewed prior to formulating the decision to disallow the ART Claim, and whether those materials were not otherwise available to ART, but admitting the Exhibit G Documents and any responding documentation the Trustee wishes to file will deal with any possible injustice to either if the appeal was to proceed based solely on the record of the documents submitted to date by ART or the Trustee (Charlestown);
h) Given the Ward Intercession, I do find that the refusal to permit further evidence would deny ART the opportunity to fully respond with all relevant evidence to the grounds for disallowance raised by the Trustee (Charlestown, Eskasoni).
III) Summary of Order Granted
[150] Considering the factors in s.135 of the BIA, s.4.2 of the BIA, my factual findings and analysis that I have set out in these reasons, and the application of the binding and persuasive jurisprudence I have cited, and employing my Registrar’s discretion, I will make the following Orders:
a) An Order admitting as evidence on the hearing of the ART's appeal from the disallowance of its claim in the within bankruptcy the documents attached as Exhibit "G" to the Affidavit of Timothy Seabrook sworn May 5, 2023 is granted;
b) The Trustee shall serve upon ART a further Report, attaching any further documentation that is responsive to the Exhibit G Documents by March 29, 2024;
c) Counsel shall determine whether any cross-examinations will be required prior to the hearing of the disallowance, and if no agreement is reached for the conduct of cross-examinations or other scheduling issues, I can be consulted to set a Case-Timetable for cross-examinations and exchange of facta and any other hearing materials;
d) Counsel are to discuss what their availability is in May and June to argue the Disallowance Appeal, and advise the Bankruptcy Court Office, and I will endeavor to schedule this Appeal as a priority hearing.
[151] Given the submissions made on all sides regarding the delays to date regarding the adjudication of the Appeal, and who caused those delays, and given that the determination of what probative impact the Exhibit G Documents have on the actual Appeal can only occur by the hearing of the actual Appeal, I will deal with the Costs of this Fresh Evidence Motion in concert with the determination of the costs of the actual Appeal.
Associate Justice Ilchenko
Registrar in Bankruptcy
Date: January 3, 2024