ENDORSEMENT OF CIVIL MOTION, APPLICATION OR CASE CONFERENCE
Short Title of Proceedings: In The Matter of The Bankruptcy of The Aggressive Good Inc.
Court File No.: 33-3134118
Before: Associate Justice Perron
Heard On: February 3, 2025
Counsel:
David R. Elliott and Maggie Sullivan for the moving party creditors, Jennifer Look-Hong and Geoffrey MacKay
Joël Turgeon for the Trustee
☒ ORDER SIGNED ☐ ON CONSENT
☐ UNOPPOSED ☐ NO ONE APPEARED
☐ ADJOURNED TO Click here to enter a date.
Endorsement
Procedural Background
This was a motion by the creditors, Jennifer Look-Hong and Geoffrey MacKay (the “moving parties”), seeking various relief.
The matter was originally returnable on December 2, 2024 but was adjourned to today on consent.
Part of the motion has now been resolved. The parties have agreed that the Trustee will call and hold another meeting of creditors, the creditors will be entitled to submit proofs of claim for determination and the meeting will also address the appointment of inspectors. The consent relief also provides that the appointment of Christopher Falconi (“Mr. Falconi”) and Timothy Falconi as inspectors is suspended until the conclusion of the new meeting and pending the outcome of the new meeting.
I have reviewed the draft order seeking the consent relief set out above and am satisfied that it is appropriate and have signed the draft order as requested.
The balance of the relief sought seeks an order that Mr. Falconi is ineligible to act as an inspector and that his appointment as an inspector be revoked. The moving parties also seek an order that Mr. Falconi’s votes cast on the appointment of inspectors at the first meeting of creditors held on October 17, 2024 and completed on October 21, 2024 (the “First Meeting”) are revoked. They also seek an order precluding Mr. Falconi from voting on the appointment of inspectors at the upcoming meeting.
The Trustee indicated that it does not take a position on the balance of the relief sought. However, the Trustee filed a report and a factum and its counsel made submissions at the hearing. Based on my review of the materials and the submissions made, the Trustee is for all intents and purposes opposing the motion and defending the decisions it made during the First Meeting.
The materials indicate that Mr. Falconi does not take a position on the motion.
Standard of Review
- An issue arose at the outset of the hearing in respect of the standard of review, if any, applicable to the Trustee’s decisions and whether or not this hearing was an appeal or a de novo hearing. The moving parties conceded in reply that they agreed with the Trustee’s submissions that this is an appeal and that the standard of review is reasonableness as the issues relate to questions of mixed fact and law (see Housen v. Nikolaisen, 2002 SCC 33, and Proposition de Bouclin, 2024 QCCS 4729). Pursuant to the applicable standard, the Court may only intervene today if the trustee made a palpable and overriding error of fact or in applying the law to the facts.
The Facts
Mr. Falconi and Mr. MacKay co-founded the now insolvent company, The Aggressive Good Inc. (“TAG”). They were TAG’s sole directors and officers until September 1, 2019 at which time Ms. Look-Hong joined them as a director and officer. The three were equal shareholders.
TAG began experiencing financial difficulties in early 2023 and on July 8, 2023, Mr. Falconi was placed on temporary layoff. Mr. Falconi was not recalled to work prior to the expiry of the maximum temporary layoff permitted under the Employment Standards Act, therefore, his employment was deemed terminated effective July 8, 2023.
The moving parties’ evidence on this motion is that they did not discover the inadvertence, in failing to recall Mr. Falconi to his employment, until on or around January 1, 2024. Upon the discovery, a board meeting was held on January 3, 2024 where, among other things, the moving parties and Mr. Falconi agreed to provide Mr. Falconi with written notice of termination and confirming that his termination of employment was effective as of July 8, 2023. The written notice was provided to Mr. Falconi on January 5, 2024.
At the First Meeting, the Trustee was advised that Mr. Falconi’s employment with TAG terminated on July 8, 2023. The date of termination of Mr. Falconi’s employment is not contested on this motion.
However, the minutes of the First Meeting held on October 21, 2024 appear to contain an error as they indicate: “C. Falconi ceased to be en [sic] employee in January 2024, is no longer an employee ceased to be an officer more than one year prior to DOB on July 8th as per the shareholder’s agreement therefore can vote and be appointed inspector”. As will appear, there are various inconsistencies in the Trustee’s report and the relevant documents in this matter.
The facts are a bit murkier regarding the date that Mr. Falconi ceased to be an officer and director of TAG.
On January 17, 2024, TAG exercised its option to repurchase Mr. Falconi’s shares in TAG’s capital. Following the repurchase, the moving parties (as TAG’s sole remaining shareholders) voted to remove Mr. Falconi as a director effective as of the date of the repurchase being January 17, 2024. The moving parties submit that the resolution confirming Mr. Falconi’s removal as director erroneously indicated July 8, 2023 as the date on which Mr. Falconi ceased to be a director rather than January 17, 2024.
The Change of Directors form that was subsequently filed with the ministry by Ms. Look-Hong on September 16, 2024 denotes the date of removal as January 17, 2024.
At the First Meeting, the Trustee was presented was the signed resolution indicating Mr. Falconi’s removal as director as of July 8, 2023. It does not appear that the Trustee was provided with a copy of the Change of Directors form. It is unclear whether the Trustee was provided with a copy of the Board Meeting Minutes from January 3, 2024. Based on the minutes of that meeting, it is abundantly clear that Mr. Falconi was still a director in early January 2024 and actively participated in the meeting.
In discussing Mr. Falconi’s ability to vote at the First Meeting, Mr. Falconi’s counsel told the Trustee that he had sent a letter to TAG in September 2024 requesting that Mr. Falconi be removed as a director. Counsel for TAG explained that Mr. Falconi had been removed as a director when his share repurchase was effected in January 2024 but that the corporate documents required to effect the removal had inadvertently not been filed.
The September 2024 “letter” was included in the moving parties’ record. The “letter” is actually a “Resignation as Director and Officer”. It is dated September 4, 2024 and is signed by Mr. Falconi. In this document, Mr. Falconi tenders his resignation as a director and as an officer “to the extent previously disputed and not formally confirmed”. The resignations are indicated as coming into effect “immediately”. He also goes on to indicate that he is not aware of any directors or officers’ meetings after January 3, 2024 and that he had no involvement in any decisions taken by the directors or officers since January 5, 2024. Again, while it is unclear if the Trustee was provided with a copy of this letter, it was clearly referred to at the First Meeting.
The moving parties’ evidence is that during the ensuing discussion, they discovered the clerical error in the resolution in respect of the date of Mr. Falconi’s removal as director. The meeting was adjourned to review the situation. In her report, the Trustee explains that in the face of the signed resolution, she decided that the verbal rectification did not “trump an executed legal document”. That position was communicated to the parties at the return of the First Meeting. Unsurprisingly, the Trustee’s position on this issue was also shared by Mr. Falconi’s counsel.
As the Trustee determined that Mr. Falconi’s employment and status as a director terminated on July 8, 2023, the Trustee took the position that Mr. Falconi had, in the one-year period before the date of bankruptcy, dealt with the debtor at arm’s length. The Trustee therefore found that Mr. Falconi was eligible to vote on the appointment of inspectors.
TAG filed for bankruptcy on September 27, 2024, therefore, the 1-year period preceding the bankruptcy is material in respect of Mr. Falconi’s status as an employee and director pursuant to the applicable provisions of the Bankruptcy and Insolvency Act (the “BIA”).
In addition to the question relating to the termination of Mr. Falconi’s status as a director, further issues arose at the First Meeting in respect of Mr. Falconi’s claims against TAG.
On April 14, 2024, uDesign (a corporation controlled by Mr. Falconi) commenced a civil action against TAG seeking over $60,000 in damages for alleged unpaid rent. TAG delivered a defence on May 17, 2024 and uDesign delivered a reply on May 27, 2024. uDesign has filed a proof of claim in TAG’s bankruptcy for $1. According to the Trustee’s report, the Trustee has not yet made a determination on this proof of claim.
On August 8, 2024, TAG also received notice that Mr. Falconi commenced a claim with the Ministry of Labour seeking approximately $90,000 in unpaid wages, expenses and vacation pay.
According to the Trustee’s report, Mr. Falconi has not yet filed a proof of claim with the Trustee. The Trustee’s position is that it was not presented with “pleadings” or evidence that the unpaid wage claim was contested by the bankrupt at the First Meeting.
That said, the list of liabilities provided by TAG as part of the bankruptcy lists a liability of $46,580.44 for Mr. Falconi (describing the liability as “other”).
In addition, the attendance list from the First Meeting on October 17, 2024 (included in the moving parties’ motion record) indicates that Timothy Cullen was present as Mr. Falconi and uDesign’s counsel and that those creditors had a “wage claim” and a “rent claim” and under the column “amount of proven claim” the amounts listed for each claim are $46,580.44 and $60,825.17 respectively. The same information is set out in respect of the breakdown of the vote on October 21, 2024.
This information appears to contradict the Trustee’s assertions in its report that Mr. Falconi has not yet filed a proof of claim in TAG’s bankruptcy and that the Trustee has not yet determined uDesign’s claim.
The Trustee took the position at the First Meeting that Mr. Falconi was not a party to any contested action or proceeding by or against the estate of the bankrupt and that he was eligible to be appointed as an inspector.
To further muddy the waters, Mr. Falconi’s father, Tim Falconi, is the representative of two corporate creditors in TAG’s bankruptcy. Prior to the First Meeting, the Trustee spoke with Mr. Falconi and his father and they alleged that Ms. Look-Hong misappropriated TAG’s assets and intentionally failed to declare assets on Form 78. These allegations were also alluded to at the First Meeting.
The moving parties have also produced an email from the Trustee to Ms. Look-Hong, Mr. MacKay and other persons at Ginsberg Gingras dated October 11, 2024 (prior to the First Meeting) which indicates that she had spoken to counsel for uDesign and that he would be attending the First Meeting to raise questions pertaining to the value of assets, what happened to certain assets and in respect of an allegation that Ms. Look-Hong had opened a new company carrying on the same operations as TAG and that he would question whether any property was transferred between the two corporations.
For purposes of this motion, I will end the recital of facts by noting that the end result was that Mr. Falconi and his father were deemed eligible to vote on the appointment of inspectors and they each nominated themselves to be so appointed. One other creditor (Hendrick) also nominated himself as an inspector.
Given the dollar values of their proven claims, the Falconis’ vote on the issue carried the day and they were each appointed as inspectors. The Falconis’ vote also defeated Hendrick’s appointment. I note that Hendrick’s appointment was also supported by the votes of two other creditors.
The Law and Analysis
Section 113(3) of the BIA provides that, except with permission of the Court, certain persons are not entitled to vote on the appointment of inspectors including, where the bankrupt is a corporation, any officer, director or employee and any wholly owned subsidiary corporation or any officer, director or employee thereof.
Section 109(6) of the BIA further provides that:
If the chair is of the opinion that the outcome of a vote was determined by the vote of a creditor who did not deal with the debtor at arm’s length at any time during the period that begins on the day that is one year before the date of the initial bankruptcy event and that ends on the date of the bankruptcy, the chair shall redetermine the outcome by excluding the creditor’s vote. The redetermined outcome is the outcome of the vote unless a court, on application within 10 days after the day on which the chair redetermined the outcome of the vote, considers it appropriate to include the creditor’s vote and determines another outcome.
Pursuant to section 116(2) of the BIA, no person is eligible to be appointed or to act as an inspector who is a party to any contested action or proceeding by or against the estate of the bankrupt.
I will first address the issue of Mr. Falconi’s ability to vote and/or whether or not his vote ought to have been excluded to determine the outcome of the vote.
As indicated above, when considering the alleged clerical error surrounding the date on which Mr. Falconi ceased to be a director, the Trustee chose to accept the date indicated on the resolution versus the “verbal rectification” of the error that was provided by TAG’s counsel at the First Meeting. The Trustee’s decision in this regard appears to have been made after having had an opportunity to consider the various issues during the 4-day adjournment of the First Meeting.
In my view, the Trustee made a palpable and overriding error in finding as a fact that Mr. Falconi ceased to be a director in July 2023.
While it remains unclear to me what documents and information were before the Trustee during the First Meeting and what, if any, new information the Trustee gathered during the 4-day adjournment, this was not just a matter of weighing documentary evidence as against oral advice provided during the meeting.
Even if the Trustee did not have a copy of Mr. Falconi’s resignation notice/letter during the First Meeting, the “letter” dated September 2024 was clearly referenced during the meeting. Why would Mr. Falconi have sent a letter requesting to be removed as a director in September 2024 if he ceased being a director in July 2023? At a minimum, this should have signaled to the Trustee that the date on which Mr. Falconi ceased to be a director was unclear and potentially disputed. This was clearly not just a case of Ms. Look-Hong trying to alter the termination date out of the blue during the meeting.
There is an abundance of evidence that clearly confirms that Mr. Falconi was, unquestionably, a director until early January 2024. This includes: the minutes of the Board Meeting from January 3, 2024; the Resolution of the Board of Directors dated January 17, 2024 regarding the share repurchase which identifies Mr. Falconi as a non-voting director; the Notice or “letter” of resignation by Mr. Falconi himself dated September 4, 2024 where he resigns effective September 4th and he recognizes that he continued to be an active director and officer until January 3, 2024; and, the Form 6 filed by TAG.
I am certainly cautious of Justice Farley’s remarks in the Triton International case (In The Matter of the Bankruptcy of Canadian Triton International Ltd) that the determination of who is allowed to vote at a meeting of creditors should be based on the information that was available to the chair of the meeting at the time of the vote, and that this should not be confused with other material that might then have been available. However, in my view, the Trustee made a palpable error by not considering the other information provided during the meeting or by not conducting a diligent review of the situation during the adjournment.
The purpose of the adjournment of the meeting was to consider the numerous issues that arose during the meeting. While it is evident that there was significant confusion on several issues at the First Meeting, at a minimum, the Trustee should have asked for a copy of the “letter” referenced by Mr. Falconi’s counsel. This document would have clearly shown the Trustee that there was other documentary evidence to support Ms. Look-Hong’s advice during the meeting. Basic questions surrounding this issue would surely have led the Trustee to learn that Mr. Falconi also attended and participated at a meeting of the Board of Directors on January 3, 2024 which undisputedly would have put this entire issue to rest.
In its submissions, the Trustee relied on Proposition de Bouclin, 2024 QCCS 4729 and Galaxy Sports Inc. (Re), 2004 BCCA 284 for the proposition that simply having been a director does not mean that an individual is not dealing with the bankrupt at arm’s length; there must be an “unbusiness like advantage or control”. The Trustee submits that based on the information that was before her at the First Meeting regarding the date of Mr. Falconi’s removal as director, there was no evidence that Mr. Falconi exercised dependence or control or had an unbusiness like advantage. As such, the Trustee determined that his vote could be considered in determining the outcome.
However, it is clear that Mr. Falconi did exercise control over TAG until at least January 3, 2024 in his capacity as a director. He was also one of TAG’s founding members. This case is therefore distinguishable from the facts in Bouclin and Galaxy Sports. While this situation does not trigger subsection 113(3) of the BIA, it does trigger subsection 109(6) given that within the year prior to TAG’s bankruptcy filing, Mr. Falconi was not dealing with TAG at arm’s length.
Furthermore, a creditor’s vote should not serve an improper purpose and give rise to a substantial injustice (Arrangement relatif à 9354-9186 Québec inc. (Bluberi Gaming Technologies Inc.), 2018 QCCS 1040 at para 32). By considering Mr. Falconi’s vote at the First Meeting, father and son effectively controlled the outcome of all decisions, including their appointments as inspectors to the detriment of one other creditor who sought to be appointed (and who had the support of at least two other creditors). While I do not have enough information about the rest of this puzzle to weigh in on the purpose of the vote, in considering the overall circumstances this certainly raises an eyebrow.
Even if I am wrong that the Trustee made a palpable and overriding error on this issue, there is no doubt that when the appointment of inspectors is revisited at the new meeting, Mr. Falconi’s vote should be excluded from the outcome in accordance with subsection 109(6) in view of the now unequivocal evidence that he continued to be actively involved in TAG’s affairs as a director within the year prior to the bankruptcy filing.
With respect to Mr. Falconi’s eligibility as an inspector, the Trustee’s position is that it considered subsection 116(2) of the BIA but found that neither the complaint to the Ministry of Labour nor the litigation involving uDesign constituted “contested” claims by or against “the estate of the bankrupt”. The Trustee’s position is that only persons involved in contested claims commenced after the bankruptcy filing or within the bankruptcy proceeding itself should be excluded from acting as inspectors. The Trustee does not offer any caselaw that supports this interpretation.
In my view, the Trustee’s interpretation is much too narrow. Because of the other provisions in the BIA, such as the stay provisions preventing a creditor from commencing an action against the bankrupt and that on filing for bankruptcy the bankrupt’s assets (including choses in action) vest in the trustee, there would hardly be any cases where inspectors could be disqualified if this subsection was only meant to capture contested actions or proceedings after the date of the bankruptcy filing.
The BIA defines “bankrupt” as a “person who has made an assignment or against whom a bankruptcy order has been made or the legal status of that person”. Subsection 116(2) therefore simply adopts the terminology used throughout the BIA to reflect that on filing for bankruptcy, that person/corporation is referred to as a “bankrupt”.
In my view, subsection 116(2), in its plain and ordinary meaning, precludes someone from acting as an inspector if they are a party to any contested action or proceeding by or against the estate of the bankrupt at the time the appointment of inspectors is raised, whether the contested action or proceeding existed at the time of the bankruptcy filing or materializes thereafter during the administration of the estate.
Pursuant to the caselaw that was before me, I agree with the moving parties that when considering subsection 116(2), the key part of the analysis is whether or not there exists a conflict of interest that would prevent the proposed inspector from performing their duties impartially and from setting aside their own interests in order to fulfill their fiduciary roles to the creditors as a whole, or whether there is a perceived conflict of interest that could undermine the confidence in the administration of the insolvency process (Global Plastic Packaging Ltd. (Bankruptcy), Re at paras 5-8; Wimco Steel Sales Co., Re, 1970 CarswellOnt 84 ONSC at paras 4-5). I agree with the moving parties’ submission that it is therefore not so much the timing of the action/proceeding that triggers the potential conflict but whether or not the action/proceeding is contested.
I also note that the moving parties’ caselaw does appear to include one case where litigation was pending between the parties in question at the time of bankruptcy (Maheu v. Rodrigue, 1984 CarswellQue 33). Although not before me today, I also note that the annotations in the BIA would seem to indicate that litigation that is anticipated at the time of the appointment of inspectors would also preclude a person from being appointed.
uDesign, a company controlled by Mr. Falconi, was involved in a contested action with TAG at the time of the bankruptcy filing. Pleadings were exchanged and the Trustee was aware of this at the First Meeting. In its claim, I also note that in addition to seeking damages for alleged unpaid rent, uDesign alternatively pleads that TAG was unjustly enriched by having benefited of the use of certain property therefore its claim is not simply for liquidated damages for unpaid rent.
In any event, while the Trustee may not have been aware of the status of Mr. Falconi’s complaint to the Ministry of Labour at the First Meeting, it is clear that the Trustee was aware that the action by uDesign was contested.
The restriction set out in section 116(2) applies equally to a representative of a corporate creditor as well as an individual (Wimco Steel Sales Co., Re, 1970 CarswellOnt 84 ONSC at paras 4-5; Maheu v. Rodrigue, 1984 CarswellQue 33 at para 12). Therefore, in my view, the Trustee made a palpable error in determining that Mr. Falconi was eligible to act as an inspector.
The motion is therefore granted and I have signed the draft order as requested except to extend the deadline by which the new meeting shall be held to March 7, 2025 in view of this endorsement being released one week after the hearing. There shall be no costs of this motion.
Date: February 10, 2025
Associate Justice Perron