Shaw Estate v. Nicol Island Development Inc. et al., 2009 ONCA 276

• Judge: Doherty, Cronk and Juriansz, JJ.A.
• Court: Court of Appeal (Ontario)
• Case Date: November 06, 2008
• Jurisdiction: Ontario
• Citations: 2009 ONCA 276;(2009), 248 O.A.C. 35 (CA)

Shaw Estate v. Nicol Island Dev. Inc. (2009), 248 O.A.C. 35 (CA)

MLB headnote and full text

Temp. Cite: [2009] O.A.C. TBEd. AP.018

Ernst & Young (Thunder Bay) Inc., Trustee of the Estate of Herbert Graham Shaw (respondent) v. Nicol Island Development Incorporated and Andre Nicol (appellants)

Northern Lights Credit Union Limited (respondent) v. Nicol Island Development Incorporated and Andre Nicol (appellants)

(C48494; 2009 ONCA 276)

Indexed As: Shaw Estate v. Nicol Island Development Inc. et al.

Ontario Court of Appeal

Doherty, Cronk and Juriansz, JJ.A.

April 3, 2009.

Summary:

Shaw operated two companies, Shaw Transportation and Shaw Baking. In 1993 and 1998, when Shaw Transportation experienced financial difficulties, Shaw decided to access funds in his RRSPs. Shaw persuaded Nicol to arrange for Nicol Island to borrow funds from the RRSPs, to be secured by mortgages granted by Nicol Island on lands owned by it in favour of the trustee of the RRSPs. In June 1993, Nicol Island borrowed $37,000 from the RRSPs and in July 1998, Nicol Island borrowed an additional $55,000 from the RRSPs. Both loans were secured by mortgages by Nicol Island in favour of the trustee of the RRSPs, in the same amount as the loans. The proceeds of both loans were funneled, directly or indirectly, to Shaw Transportation. In June 2003, Northern Lights Credit Union Ltd. commenced an action against Shaw and his wife on their personal guarantee of Shaw Baking's indebtedness to the Credit Union (the guarantee action). Five days later, Shaw arranged for the discharge of the mortgages although the full amount and interest remained outstanding. The Credit Union obtained a default judgment. Shaw filed an assignment into bankruptcy. Shaw acknowledged the Credit Union as an unsecured creditor but did not disclose the mortgages or the discharges. He indicated that his RRSPs had no value. Shaw received an automatic discharge from bankruptcy in July 2004. Shaw's trustee subsequently learned of the mortgages and discharges and concluded that the discharges constituted a wrongful settlement, fraudulent conveyance and/or preference without which the mortgages would have formed part of the assets. The trustee commenced proceedings against Nicol and Nicol Island (the appellants) for payment of the mortgages (the trustee's motion). In 2006, the Credit Union requested that the Trustee move forward with the litigation. The trustee refused to do so as Shaw's estate lacked the sufficient funds to finance the litigation. The Credit Union obtained an order under s. 38 of the Bankruptcy and Insolvency Act authorizing it to continue the proceedings against the appellants (s. 38 order). The Credit Union instituted a fresh action against the appellants (s. 38 action). The appellants moved for orders dismissing the trustee's motion, the s. 38 order and the s. 38 action. The Credit Union brought a cross-motion for an order under Civil Procedure Rules 25.11 and 38.10 striking certain paragraphs of the appellants' pleadings that raised issues unrelated to the issues ordered for trial.

The Ontario Superior Court, in a decision reported at [2007] O.T.C. Uned. Q79, dismissed the appellants' motion and granted the relief sought by the Credit Union. The court held that (i) the impugned paragraphs of the appellants' pleading raised a new issue that was outside the scope of the issues to be tried under the Platana Order; (ii) no binding settlement was entered into by the Credit Union with Shaw, rather, the settlement discussions relied on by the appellants "could only have been with Carol Shaw"; (iii) the Credit Union was a creditor of Shaw at the time of his assignment in bankruptcy and, therefore, was eligible to seek an order under s. 38(1) of the Act; and (iv) the appellants' challenge to the Credit Union's creditor status constituted an impermissible collateral attack on the s. 38 Order. The appellants appealed.

The Ontario Court of Appeal allowed the appeal in part by setting aside paragraph 9 of the s. 38 order, the costs provision, and staying the trustee's motion. The appeal was otherwise dismissed.

Bankruptcy - Topic 6421

Administration of estate - Actions by creditors - General - A bankrupt's trustee decided not to pursue an action on behalf of the bankrupt (against the appellants) - A creditor of the bankrupt obtained an order under s. 38 of the Bankruptcy and Insolvency Act (BIA) authorizing it to continue the proceedings against the appellants (s. 38 order) - The creditor instituted a fresh action against the appellants (s. 38 action) - The appellants moved for orders dismissing the s. 38 order and the s. 38 action - The appellants asserted that the creditor was not a creditor within the meaning of s. 2 of the BIA - A motion judge dismissed the motion - The appellants appealed, asserting that the motion judge erred by holding that their challenge to the creditor's status constituted "a collateral attack on the [s. 38 Order] which the [appellants] had no standing to make", such that it was not open to the appellants to challenge the s. 38 order and the s. 38 action - The Ontario Court of Appeal accepted the assertion - First, the appellants' objection to the s. 38 order rested on allegations of abuse of process, non-disclosure, procedural irregularities, fraud and misrepresentation to the court - These serious claims triggered the exceptions to the restriction on standing that generally applied to challenges of s. 38 orders - Second, there were two aspects to the appellants' motion before the motion judge - In addition to their request that the s. 38 order be set aside, the appellants also sought summary judgment and dismissal of the s. 38 action - There was no restriction on the appellants' standing to seek the latter relief - The motion judge was obliged to address both components of the appellants' motion - Finally, the costs provision of the s. 38 order exposed the appellants to potential liability for the costs of the s. 38 motion - The creditor accepted that the appellants had standing to seek to set aside this costs provision and, further, that it should be set aside - See paragraphs 42 to 52.

Bankruptcy - Topic 6421

Administration of estate - Actions by creditors - General - A bankrupt's trustee decided not to pursue an action on behalf of the bankrupt (against the appellants) - A creditor of the bankrupt obtained an order under s. 38 of the Bankruptcy and Insolvency Act (BIA) authorizing it to continue the proceedings against the appellants (s. 38 order) - The creditor instituted a fresh action against the appellants (s. 38 action) - The appellants moved for orders dismissing the s. 38 order and the s. 38 action - The appellants asserted that (i) it was an abuse of process and contrary to public policy for the creditor to settle its claims against the bankrupt and to thereafter seek to pursue such claims against his estate through an action authorized under s. 38(1) of the BIA; (ii) the creditor failed to make full disclosure of all material facts and misrepresented its creditor status, with the result that the court was misled regarding the creditor's standing to bring the s. 38 motion; and (iii) the s. 38 order merely authorized the continuation of the proceeding commenced by the trustee, rather than the initiation of a fresh action by the creditor - The Ontario Court of Appeal rejected the assertions - The creditor's proof of claim in bankruptcy had been accepted by the trustee and evidence of its status as a creditor on the day on which the bankrupt became bankrupt was adduced on the s. 38 motion - Further, the creditor's status as defined under the BIA had not been displaced by any post-bankruptcy event - The creditor was not pursuing its own claim in bankruptcy against the bankrupt - It was seeking leave of the court to proceed with the trustee's claim against the appellants - See paragraphs 70 to 78.

Bankruptcy - Topic 6422

Administration of estate - Actions by creditors - Creditor defined - A bankrupt's trustee decided not to pursue an action on behalf of the bankrupt (against the appellants) - A creditor of the bankrupt obtained an order under s. 38 of the Bankruptcy and Insolvency Act (BIA) authorizing it to continue the proceedings against the appellants (s. 38 order) - The creditor instituted a fresh action against the appellants (s. 38 action) - The appellants moved for orders dismissing the s. 38 order and the s. 38 action - The appellants asserted that the creditor was not a creditor within the meaning of s. 2 of the BIA - The appellants asserted that the creditor was not a creditor of the bankrupt at the time of the bankruptcy where the creditor had settled its claims against the bankrupt - A motion judge dismissed the motion - The appellants appealed - The Ontario Court of Appeal dismissed the appeal - When the bankrupt made his assignment into bankruptcy, the creditor had an outstanding default judgment against him - In its capacity as a judgment-creditor, the creditor filed an unchallenged proof of claim in bankruptcy - The bankrupt acknowledged the creditor's status as one of its unpaid creditors in his sworn statement of creditors and liabilities - For the purpose of s. 38, the court needed only to be satisfied on a balance of probabilities of the creditor's status - See paragraphs 53 to 62.

Bankruptcy - Topic 6422

Administration of estate - Actions by creditors - Creditor defined - A bankrupt's trustee decided not to pursue an action on behalf of the bankrupt (against the appellants) - A creditor of the bankrupt obtained an order under s. 38 of the Bankruptcy and Insolvency Act (BIA) authorizing it to continue the proceedings against the appellants (s. 38 order) - The creditor instituted a fresh action against the appellants (s. 38 action) - The appellants moved for orders dismissing the s. 38 order and the s. 38 action - The appellants asserted that the creditor was not a creditor within the meaning of s. 2 of the BIA - The appellants asserted that the creditor was not a creditor of the bankrupt at the time of the bankruptcy where the creditor had settled its claims against the bankrupt - A motion judge dismissed the motion - The appellants appealed - The Ontario Court of Appeal dismissed the appeal - When the bankrupt made his assignment into bankruptcy, the creditor had an outstanding default judgment against him - The bankrupt was discharged from bankruptcy in July 2004 many months before the March 2005 and January 2006 settlement correspondence - Pursuant to s. 178(2) of the BIA, the effect of the discharge was to release the bankrupt from his debt to the creditor - Consequently, at the time of the settlement correspondence, there was no debt owing that was susceptible to compromise - It followed that the creditor did not forfeit its creditor status by entering into a binding post-bankruptcy settlement with the bankrupt - See paragraphs 63 to 65.

Cases Noticed:

Marquette (A.) & Fils Inc. v. Mercure, [1977] 1 S.C.R. 547; 10 N.R. 239, refd to. [para. 35].

Toyota Canada Inc. v. Imperial Richmond Holdings Ltd. - see International Warranty Co. (Bankrupt), Re.

International Warranty Co. (Bankrupt), Re (1993), 155 A.R. 241; 73 W.A.C. 241; 27 C.B.R.(3d) 1 (C.A.), leave to appeal refused (1994), 185 N.R. 80; 178 A.R. 215; 110 W.A.C. 215 (S.C.C.), refd to. [para. 37].

McCarthy (Bankrupt), Re, [1997] 7 W.W.R. 243; 116 B.C.A.C. 64; 190 W.A.C. 64; 8 C.B.R.(4th) 25 (C.A.), refd to. [para. 37].

Penfold et al. v. Provenzano (1996), 11 O.T.C. 344; 30 O.R.(3d) 320 (Gen. Div.), refd to. [para. 37].

Bell ExpressVu Limited Partnership v. Rex et al., [2002] 2 S.C.R. 559; 287 N.R. 248; 166 B.C.A.C. 1; 271 W.A.C. 1, refd to. [para. 40].

Rizzo & Rizzo Shoes Ltd. (Bankrupt), Re, [1998] 1 S.C.R. 27; 221 N.R. 241; 106 O.A.C. 1, refd to. [para. 40].

Krupp MaK Maschinenbau GmbH et al. v. Black (1996), 154 N.S.R.(2d) 321; 452 A.P.R. 321 (C.A.), leave to appeal refused (1997), 223 N.R. 74 (S.C.C.), refd to. [para. 43].

Formula Atlantic Financial Corp. v. Canada (Attorney General) et al. (1994), 52 B.C.A.C. 214; 86 W.A.C. 214; 34 C.B.R.(3d) 50 (C.A.), refd to. [para. 43].

Salloum, Re (1990), 1 C.B.R.(3d) 204 (B.C.C.A.), refd to. [para. 43].

Bank of British Columbia v. McCracken (1986), 61 C.B.R.(N.S.) 287 (B.C.C.A.), refd to. [para. 43].

Swerdlow, Re (1985), 57 C.B.R.(N.S.) 180 (Ont. H.C.), refd to. [para. 43].

Caisse Populaire Vanier Ltée v. Bales (1991), 2 O.R.(3d) 456 (Gen. Div.), refd to. [para. 46].

DeGroote v. Canadian Imperial Bank of Commerce - see Montego Forest Products Ltd. (Bankrupt), Re.

Montego Forest Products Ltd. (Bankrupt), Re (1996), 20 O.T.C. 179; 45 C.B.R.(3d) 132 (Gen. Div. Bktcy.), affd. (1998), 107 O.A.C. 77; 37 O.R.(3d) 651 (C.A.), leave to appeal refused (1998), 233 N.R. 199 (S.C.C.), refd to. [para. 60].

Gladstone v. Bronson Granite & Marble Ltd. et al. (1998), 71 O.T.C. 283; 4 C.B.R.(4th) 265 (Gen. Div.), refd to. [para. 71, foonote 5].

Zammit (Bankrupt), Re (1998), 53 O.T.C. 150; 3 C.B.R.(4th) 193 (Gen. Div. Bktcy.), refd to. [para. 72].

Statutes Noticed:

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, sect. 38 [para. 2].

Authors and Works Noticed:

Driedger, Elmer A., Construction of Statutes (2nd Ed. 1983), p. 87 [para. 40].

Houlden, Lloyd W., Morawetz, Geoffrey B., and Sarra, Janis P., The 2009 Annotated Bankruptcy and Insolvency Act (2008), pp. 2 [para. 35]; 107, 109 [para. 77].

Counsel:

Allan D. McKitrick, for the appellants;

Tracey Nieckarz, for the respondent, Northern Lights Credit Union Limited.

This appeal was heard on November 6, 2008, by Doherty, Cronk and Juriansz, JJ.A., of the Ontario Court of Appeal. The following judgment of the Court of Appeal was delivered by Cronk, J.A., on April 3, 2009.