Galaxy Sports Inc. (Re),

• Jurisdiction: British Columbia
• Judge: Rowles, Newbury and Hall, JJ.A.
• Neutral Citation: 2004 BCCA 406,2004 BCCA 284
• Date: 27 January 2004
• Court: Court of Appeal (British Columbia)

Galaxy Sports (Bankrupt), Re (2004), 200 B.C.A.C. 184 (CA);

    327 W.A.C. 184

MLB headnote and full text

Temp. Cite: [2004] B.C.A.C. TBEd. MY.057

Galaxy Sports Inc. (appellant/debtor) v. Abakhan & Associates Inc., Trustee in the Proposal of Galaxy Sports Inc., Umbro Worldwide Limited, and Umbro International Limited (respondents)

(CA030731; 2004 BCCA 284; 2004 BCCA 406)

Indexed As: Galaxy Sports Inc. (Bankrupt), Re

British Columbia Court of Appeal

Rowles, Newbury and Hall, JJ.A.

May 20, 2004 and July 22, 2004.

Summary:

Galaxy Sports Inc. was the exclusive distributor in Canada of "Umbro" sports clothing and products. Galaxy filed a propo­sal under the Bankruptcy and Insolvency Act (BIA). Two of Galaxy's landlords filed claims for arrears of rent plus the aggregate amount that Galaxy would have paid in rent and other costs over the unexpired term of the leases. The landlords' claims were al­lowed at the full amount. Claims were also made by three of Galaxy's directors. Various creditors objected that the directors were prohibited from voting by s. 109(6) of the BIA. The chair of the meeting of creditors ruled that the directors' votes would be counted at the full amount of their claims. Umbro Worldwide Inc. also filed a claim. Galaxy's representative argued that the claim was invalid because it was signed by Umbro Worldwide Inc. while all of the support for the claim, including invoices, were to the account of Umbro International Inc. The chair ruled that Umbro's claim was valid for voting purposes. The creditors accepted Galaxy's proposal. The trustee applied for court approval of the proposal. Umbro Worldwide moved for orders that the land­lords' claims be reduced and that the votes of the three directors not be counted. Galaxy brought a motion for declarations that Umbro Worldwide and Umbro International were disentitled by s. 109(6) of the BIA from voting at any creditors' meetings as they did not deal with Galaxy at arm's length during the year preceding the bank­ruptcy. Alternatively, Galaxy sought a dec­laration that Umbro Worldwide was not entitled to vote as a result of its failure to prove its claim by annexing a statement of account that evidenced a debt owing to it.

The British Columbia Supreme Court, in a decision reported at [2003] B.C.T.C. Uned. 158, ruled that the votes of the three Galaxy directors could not be counted and that their proofs of claim should be expunged. The court also ruled that the landlords' claims had to be discounted to consider the likely recovery on re-letting. The court held that the evidence did not allow it to determine an appropriate reduction and the matter was adjourned to allow the parties to adduce further evidence on that point. With respect to the claim filed by Umbro Worldwide, the court concluded that Umbro International had assigned its licence agreement with Gal­axy to Umbro Worldwide in 1999 and had given notice of the assignment to Galaxy and it was therefore appropriate that Umbro Worldwide file the proof of claim. As to the objection based on s. 109(6) of the BIA, the court stated that it could not conclude that Umbro was not acting at arm's length with Galaxy. In light of the court's rulings on the voting entitlements of the Galaxy directors and the adjournment of the motion concern­ing the landlords' claims, the court did not deal with the trustee's application for court approval of Galaxy's proposal. Galaxy ap­pealed from the court's determinations.

The British Columbia Court of Appeal allowed the appeal to the extent that it allowed the claim of one of the Galaxy directors to be voted at the meeting and it set aside the Chambers judge's order which directed that new evidence be adduced con­cerning the valuation of the landlords' claims. The court remitted the landlords' claims to the trustee for determination of the amounts of rent that had become due since the purported terminations of the leases, in respect of which s. 65.1 of the BIA did not bar the claims. However, damages for loss of future rent were to be disallowed. Following the re-taking of the creditors' vote on the proposal, the court remitted the motion for approval of the proposal back to the Supreme Court.

Bankruptcy - Topic 2282

Proposals - Voting - Who may vote - Galaxy Sports Inc. was the exclusive dis­tributor in Canada of "Umbro" sports clothing and products - Galaxy filed a proposal under the Bankruptcy and Insol­vency Act (BIA) - Umbro Worldwide Inc. filed a claim - The claim was signed by Umbro Worldwide Inc. while all of the support for the claim, including invoices, were to the account of Umbro International Inc. - The chair of the creditors' meeting ruled that Umbro's claim was valid for voting purposes - Galaxy moved for a dec­laration that Umbro Worldwide and Umbro International were disentitled by s. 109(6) of the BIA from voting at any creditors' meetings as they did not deal with Galaxy at arm's length during the year preceding the bankruptcy - The Cham­bers judge stated that she could not con­clude that Umbro was not acting at arm's length - Galaxy appealed - The British Columbia Court of Appeal dismissed the appeal on that point - See paragraph 60.

Bankruptcy - Topic 2282

Proposals - Voting - Who may vote - Galaxy Sports Inc. filed a proposal under the Bankruptcy and Insolvency Act (BIA) -Claims were filed by three of Galaxy's directors (Dewar, Watson and Gill) - Dewar and Watson's claims were with respect to severance pay and Gill's claim was for reimbursement of expenses in­curred on company business - Various creditors objected that the directors were prohibited from voting by s. 109(6) of the BIA because they did not deal with Galaxy at arm's length in the year preceding the bankruptcy - The chair of the creditors' meeting ruled that the directors' votes would be counted at the full amount of their claims - Upon a motion by a creditor, a Chambers judge ruled that the directors' votes could not be counted and that their proofs of claim should be expunged - The Chambers judge found that the directors were not passive directors and that each could influence the direction of Galaxy - Galaxy appealed - The British Columbia Court of Appeal held that the directors were not prohibited from filing proofs of claim and voting the dollar amount thereof by reason of the fact that they were direc­tors, or even "active" directors, and in that regard the Chambers judge erred - How­ever, the court held that the Chambers judge was correct in concluding that the claims of Dewar and Watson assumed that their employment contracts had been ter­minated when there was no evidence of that fact - Since there was no evidence of termination, the Chambers judge was cor­rect in expunging those claims - Gill would be allowed to vote his claim at the meeting - See paragraphs 56 to 58.

Bankruptcy - Topic 2285

Proposals - Voting - Value of creditors' claims - Galaxy Sports Inc. filed a pro­posal under the Bankruptcy and Insolvency Act (BIA) - Two of Galaxy's landlords filed claims for arrears of rent plus the aggregate amount that Galaxy would have paid in rent and other costs over the unex­pired term of the leases - The landlords' claims were allowed at the full amount - Another creditor moved for an order that the landlords' claims be reduced - The Chambers judge ruled that the landlords' claims had to be discounted to consider the likely recovery on re-letting - Galaxy appealed - The British Columbia Court of Appeal held that the landlords' claims to the losses over the unexpired terms of their leases were prohibited by s. 65.1(1) of the BIA and that the trustee was bound to reject their claims except insofar as they related to past arrears and rent as it became due monthly post-proposal - It followed that the landlords' claims for purposes of the creditors' meeting and other purposes had to be so limited - See paragraphs 43 to 55.

Bankruptcy - Topic 3627

Creditors - General - Claims - General - Proper applicant - Galaxy Sports Inc. was the exclusive distributor in Canada of "Umbro" sports clothing and products - Galaxy filed a proposal under the Bank­ruptcy and Insolvency Act (BIA) - Umbro Worldwide Inc. filed a claim - Galaxy's representative argued that the claim was invalid because it was signed by Umbro Worldwide Inc. while all of the support for the claim, including invoices, were to the account of Umbro International Inc. - The chair of the creditors' meeting ruled that Umbro's claim was valid for voting pur­poses - Galaxy moved for a declaration that Umbro Worldwide was not entitled to vote as a result of its failure to prove its claim by annexing a statement of account that evidenced a debt owing to it - The Chambers judge concluded that Umbro International had assigned its licence agree­ment with Galaxy to Umbro Worldwide in 1999 and had given notice of the assign­ment to Galaxy and it was therefore appro­priate that Umbro Worldwide filed the proof of claim - Galaxy appealed - The British Columbia Court of Appeal dis­missed the appeal on this point - See para­graph 59.

Bankruptcy - Topic 3640

Creditors - General - Claims - General - Valuation - [See Bankruptcy - Topic 2285 ].

Bankruptcy - Topic 6885.1

Practice - Appeals - From trustee's deci­sion - Galaxy Sports Inc. filed a proposal under the Bankruptcy and Insolvency Act (BIA) - Claims filed by two of Galaxy's landlords were allowed at the full amount - Another creditor (Umbro) moved for an order that the landlords' claims be reduced - In support of its motion, Umbro filed affidavit material referring to or having appended to it documents that had not been before the chair of the meeting of creditors - The Chambers judge ruled that the landlords' claims had to be discounted to consider the likely recovery on re-letting - Galaxy appealed - The British Columbia Court of Appeal stated that the Chambers judge erred to the extent that she pro­ceeded on the basis that the appeal was a trial de novo in which fresh evidence was considered as a matter of course - The Chambers judge should have considered whether the trustee had made a reviewable error in its treatment of the landlords' claims on the evidence before it - If coun­sel applied to adduce fresh evidence, the Chambers judge would then have been obliged to decide whether its admissibility was justified in the interests of justice or on some other principled basis - See para­graph 42.

Bankruptcy - Topic 6885.1

Practice - Appeals - From trustee's deci­sion - Section 135(4) of the Bankruptcy and Insolvency Act provided that the trus­tee's decision as to the value of a contin­gent or unliquidated claim or the dis­allowance of any claim under s. 135(2) was "final and conclusive" unless it was appealed within 30 days of service of the notice of determination or notice of dis­allowance - The British Columbia Court of Appeal stated that "the Supreme Court's hearing of an appeal under s. 135(4) of the Bankruptcy and Insolvency Act is not intended to be a trial de novo but a true ap­peal ... 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 ... the appeal will be an ordinary appeal" - See paragraph 40.

Bankruptcy - Topic 6885.1

Practice - Appeals - From trustee's deci­sion - Section 135(4) of the Bankruptcy and Insolvency Act provided that the trus­tee's decision as to the value of a contin­gent or unliquidated claim or the disal­lowance of any claim under s. 135(2) was "final and conclusive" unless it was ap­pealed within 30 days of service of the notice of determination or notice of dis­allowance - The British Columbia Court of Appeal discussed the standard of review to be applied on such an appeal - The court applied the pragmatic and functional ap­proach and concluded that a correctness standard was required where compliance with a "mandatory" provision was in­volved, and a "reasonableness" standard applied where the determination of a fac­tual matter or an exercise of true discretion was called for - See paragraph 39.

Cases Noticed:

Skalbania (Trustee of) v. Wedgewood Village Estate Ltd. (1989), 74 C.B.R.(N.S.) 97 (B.C.C.A.), refd to. [para. 21].

Canadian Triton International Ltd. (Bank­rupt), Re (1997), 46 O.T.C. 83; 49 C.B.R.(3d) 192 (Gen. Div. Bktcy.), consd. [para. 27].

Northstone Power Corp. v. R.J.K. Power Systems Ltd. et al. (2002), 314 A.R. 169; 33 C.B.R.(4th) 261 (Q.B.), consd. [para. 32].

Director of Investigation and Research, Competition Act v. Southam Inc. et al., [1997] 1 S.C.R. 748; 209 N.R. 20; 144 D.L.R.(4th) 1, refd to. [para. 33].

United Brotherhood of Carpenters and Joiners of America, Local 579 v. Bradco Construction Ltd., [1993] 2 S.C.R. 316; 153 N.R. 81; 106 Nfld. & P.E.I.R. 140; 334 A.P.R. 140; 102 D.L.R.(4th) 402, refd to. [para. 33].

Pezim v. British Columbia Securities Com­mission et al., [1994] 2 S.C.R. 557; 168 N.R. 321; 46 B.C.A.C. 1; 75 W.A.C. 1, refd to. [para. 33].

Pushpanathan v. Canada (Minister of Citi­zenship and Immigration), [1998] 1 S.C.R. 982, addendum [1998] 1 S.C.R. 1222; 226 N.R. 201, refd to. [para. 33].

Baker v. Canada (Minister of Citizenship and Immigration), [1999] 2 S.C.R. 817; 243 N.R. 22; 174 D.L.R.(4th) 193, refd to. [para. 33].

Dr. Q., Re, [2003] 1 S.C.R. 226; 302 N.R. 34; 179 B.C.A.C. 170; 295 W.A.C. 170; 2003 SCC 19, refd to. [para. 33].

Ryan v. Law Society of New Brunswick, [2003] 1 S.C.R. 247; 302 N.R. 1; 257 N.B.R.(2d) 207; 674 A.P.R. 207; 2003 SCC 20, refd to. [para. 33].

Aquasource Ltd. v. Freedom of Informa­tion and Protection of Privacy Commis­sioner (B.C.) et al. (1998), 111 B.C.A.C. 95; 181 W.A.C. 95; 58 B.C.L.R.(3d) 61 (C.A.), refd to. [para. 33].

McCoubrey, Re (1924), 5 C.B.R. 248 (Alta. S.C.), refd to. [para. 33].

Eskasoni Fisheries Ltd. (Bankrupt), Re (2000), 187 N.S.R.(2d) 363; 585 A.P.R. 363; 16 C.B.R.(4th) 173 (S.C.), not folld. [para. 36].

MacDonald (Bankrupt), Re, [2002] O.T.C. Uned. 543 (Sup. Ct.), refd to. [para. 36].

Exner (Bankrupt), Re, [2003] B.C.T.C. 260; 41 C.B.R.(4th) 49 (B.C.S.C.), refd to. [para. 36].

Beetown Honey Products Inc. (Bankrupt), Re, [2003] O.T.C. 866 (Sup. Ct.), refd to. [para. 36].

Port Chevrolet Oldsmobile Ltd. (Bank­rupt), Re (2004), 193 B.C.A.C. 114; 316 W.A.C. 114; 2004 BCCA 37, refd to. [para. 36].

Chamberlain et al. v. Board of Education of School District No. 36 (Surrey), [2002] 4 S.C.R. 710; 299 N.R. 1; 175 B.C.A.C. 161; 289 W.A.C. 161, refd to. [para. 37].

McKenzie v. Mason et al. (1992), 18 B.C.A.C. 286; 31 W.A.C. 286; 72 B.C.L.R.(2d) 53 (C.A.), refd to. [para. 40].

R. v. Dennis, [1960] S.C.R. 286, refd to. [para. 40].

Dupras v. Mason et al. (1994), 52 B.C.A.C. 59; 86 W.A.C. 59; 99 B.C.L.R.(2d) 266; 120 D.L.R.(4th) 127 (C.A.), refd to. [para. 40].

Wiebe, Re (1995), 30 C.B.R.(3d) 109 (Ont. Gen. Div. Bktcy.), refd to. [para. 43].

Highway Properties Ltd. v. Kelly, Douglas & Co., [1971] S.C.R. 562, consd. [para. 43].

Keneric Tractor Sales Ltd. v. Langille, [1987] 2 S.C.R. 440; 79 N.R. 241; 82 N.S.R.(2d) 361; 207 A.P.R. 361; 43 D.L.R.(3d) 171, refd to. [para. 43].

32262 B.C. Ltd. v. See-Rite Optical Ltd. et al., [1998] 9 W.W.R. 442; 216 A.R. 33; 175 W.A.C. 33 (C.A.), refd to. [para. 43].

Eftaxias, Re (1962), 3 C.B.R.(N.S.) 152 (Que. Sup. Ct.), refd to. [para. 44].

B.C. Boat Sales Ltd., Re; Casson v. Redis­co Ltd. (1962), 4 C.B.R.(N.S.) 168 (B.C.C.A.), refd to. [para. 49].

Vanwood Forest Products, Re (1983), 45 C.B.R.(N.S.) 254 (B.C.S.C.), refd to. [para. 49].

KPMG Inc. v. Alberta Dental Association et al. (2003), 337 A.R. 275; 44 C.B.R.(4th) 236 (Q.B.), refd to. [para. 49].

Cosgrove-Moore Bindery Services Ltd. (Toronto) (Bankrupt), Re, [2000] O.T.C. Uned. 381; 48 O.R.(3d) 540 (Sup. Ct.), refd to. [para. 49].

Crystalline Investments Ltd. v. Domgroup Ltd. (2002), 58 O.R.(3d) 549; 156 O.A.C. 392 (C.A.), affd. (2004), 316 N.R. 1; 184 O.A.C. 33; 2004 SCC 3, refd to. [para. 53].

Irving Oil Ltd. v. Noseworthy, Cook, Atlantic Transportation Co. and Heap Noseworthy Ltd. (1982), 42 C.B.R.(N.S.) 302 (Nfld. S.C.), refd to. [para. 60].

Statutes Noticed:

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, sect. 65.1 [para. 45]; sect. 109(6), sect. 113(3) [para. 20].

Authors and Works Noticed:

Anger and Honsberger, The Law of Real Prop­erty (2nd Ed. 1985), §811.1 [para. 50].

Brown, D.J.M., and Evans, J.M., Judicial Review of Administrative Actions in Canada (1998) (Looseleaf), generally [para. 37].

Haber, H.M., Landlord's Rights and Rem­edies in a Commercial Lease (1996), p. 80 [para. 50].

Waddams, Stephen, Judicial Discretion (2001), 1 Commonwealth L.J. 59, gen­erally [para. 43].

Counsel:

J.P. Sullivan and D.A. Gagnon, for the appellant;

K.R. Doyle and M.B. Morgan, for the respondents, Umbro Worldwide Ltd. and Umbro International Ltd.;

J.R. Sandrelli, for the respondent, Abakhan & Associates, Trustee.

This appeal was heard on January 27, 2004, at Vancouver, British Columbia, before Rowles, Newbury and Hall, JJ.A., of the British Columbia Court of Appeal. The judgment of the Court of Appeal was delivered by Newbury, J.A., on May 20, 2004, and supplementary reasons were delivered on July 22, 2004.