Bankruptcy — Trustees — Duties — Duty to act fairly — Creditors — Priorities — Judgment creditors.
Appeal by a judgment creditor from the disallowance of its claim in the bankruptcy of Canada Asian Centre. TDPHoldings performed work on the Centre's lands pursuant to written terms which were unsigned and referred to only a portion of the lands. TDPHoldings registered liens against all of the lands for its work and applied for judgment. It alleged in the proceedings that the contract was oral, had been reduced to written terms, and applied to all of the lands. Its application was opposed by other builders with subsequent liens, and by persons claiming beneficial interests in the lands. The Court found that TDPHoldings' claims were against all of the lands, and granted judgments to TDPHoldings. The judgments were not appealed. A trustee in bankruptcy was appointed for the Centre. TDPHoldings filed proofs of claim based on its judgments. The trustee disallowed the proofs of claim on the ground that TDPHoldings failed to provide signed agreements or evidence that all of the lands were included in its contract. The trustee reviewed the judgments and raised no grounds of fraud, collusion, or miscarriage of justice. TDPHoldings argued that the trustee was bound by the judgments of the court in the absence of proof of fraud, collusion, or miscarriage of justice.
HELD: Appeal allowed. Since there were no grounds raised to suggest that the judgments resulted from fraud, collusion, or miscarriage of justice, the trustee's duty to act fairly and equitably required it to accept the judgments, as it was not in a position to substitute its judgment for that of the Court which issued the judgment or to act as a Court of Appeal.
Counsel:
| D.A. Hobbs and U. Ghani, for the
Trustee. G.M. Elliott, for TDP Holdings Ltd. |
BURNYEAT J.:—
1 TDP Holdings Ltd. ("TDP") appeals the September 13, 2002 disallowance of its Proof of Claim and Proof of Security by the Trustee in Bankruptcy of Canada Asian Centre Developments Inc. ("Canada Asian") and seeks an order declaring its claim to be valid and subsisting.
BACKGROUND
2 [1] Canada Asian was formed to develop a large shopping centre in Surrey on three separate parcels of land owned by Canada Asian: the main development lot ("Centre"), a vacant lot located down the street ("Vacant Lot"), and a third lot located a few hundred yards away from the Centre ("Parking Lands").
3 [2] During the construction of the shopping centre, Canada Asian ran into financial difficulties and failed to pay the general contractor, Stuart Olson Constructors Inc. ("Olson"). Olson filed builders liens against the 3 parcels.
4 [3] In the liens, the general description of the work done or materials supplied was: "Work and materials supplied as general contractor for a strata commercial project known as Canada Asia Centre...."
5 [4] Canada Asian initiated proceedings pursuant to the Companies Creditors Arrangement Act ("C.C.A.A."). In support of those proceedings, Thomas Leung, the President of Canada Asian swore a November 29, 2000 Affidavit referring to builders liens totalling $8,132,000.00 filed by Olson. An ex parte application was made in the C.C.A.A. proceedings and, in a December 1, 2000 order, Tysoe, J. made an order staying all proceedings except that Olson was:
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...at liberty to take judgment against the Petitioner in the builder's lien action commenced against the Petitioner in Action No. S005465, Vancouver Registry, Supreme Court of British Columbia, but will take no action to enforce such judgment or claim of lien. |
6 [6] At the same time, others claiming builder's liens were at liberty to commence actions to preserve their claims of lien but no further steps were to be taken after the writs were issued and served.
7 [7] In Supreme Court of British Columbia Action No. S005465 (Vancouver Registry) ("Lien Action"), Olson then applied for judgment on its liens. All parties including Canada Asian received notice of the applications for judgment. The applications for judgment were opposed. Three counsel appeared on behalf of 29 of the Defendants at the applications for judgment. Four of the Defendants including Canada Asian were not represented by counsel at the hearings. However, the applications were opposed by those who claimed to be the beneficial owners of the properties owned by Canada Asian and by those having builders liens filed subsequent to the liens of Olson. Judgments were granted and there were no appeals taken from the Judgments. The Judgments were based on the assertion that Olson had entered into an agreement partially oral and partially in writing pursuant to which work and materials were supplied for the construction of the improvement on the 3 parcels, including the Parking Lands.
8 [8] In support of the application for judgment in the Lien Action, the Project Manager for Olson stated that the contract between Canada Asian and Olson was "reduced to writing". Attached as Exhibit "A" to the November 22, 2000 Affidavit of Alan Lier was stated to be: "...a copy of the written agreement." In that Affidavit, Mr. Lier states that Olson carried out construction "...under the Contract in accordance with its obligations under the Contract commencing on or about March 3, 2000."
9 [9] What was attached to the Affidavit of Mr. Lier was an unsigned "Stipulated Price Contract", being a "Standard Construction Document" prepared by the Canadian Construction Documents Committee. While the work in that document was described as being "Canada Asian Centre", only the Centre parcel was included as the address for the Centre. It was that address which was defined as the "Place of the Work" as defined under the Contract. The "Working Budget" which was attached to the Contract did not include a specific amount for work relating to the Parking Lot. However, there was an amount of $662,000.00 as an "Owner Contingency for Construction".
10 [10] The January 9, 2001 and March 26, 2001 Judgments were registered in the Land Title Office against all 3 parcels. The Judgments were later assigned by Olson. First from Olson to 622013 B.C. Ltd. ("622013") in 2001 and then from 622013 to TDP in 2002.
11 [11] Foreclosure proceedings were commenced against the Centre parcel. 622013 obtained an assignment of the mortgage registered against the Centre and then applied for and obtained an order absolute of foreclosure relating to that mortgage on June 28, 2002.
THE BANKRUPTCY PROCEEDINGS
12 [12] In July, 2001, a proposal made by Canada Asian pursuant to the C.C.A.A. was rejected by the creditors of Canada Asian. As a result, C. Topley and Company was appointed Trustee in Bankruptcy of Canada Asian ("Trustee").
13 [13] On November 20, 2001, the Trustee requested a Proof of Claim and Proof of Security from 622013 and, pursuant to that request, a Proof of Claim was provided to the Trustee on December 3, 2001. 622013 claimed as an unsecured creditor for $520,321.50 and as a secured creditor for $7,384,005.19. The Proof of Claim outlined the builders liens filed, the assignments of builders lien obtained, the judgments obtained in the Lien Action and the registration of those judgments against the 3 parcels.
14 [14] On February 6, 2002, counsel for the Trustee wrote to counsel for Olson requesting copies of the contracts that Olson had with Canada Asian. In that letter, counsel for the Trustee advised that they were: "...investigating the issue as to whether the "parking lands" were included in the "development" for the purposes of your client's contract."
15 [15] On February 20, 2002, counsel for Olson responded indicating that they were "pulling extracts from the contract to assist you and we will have it to you shortly" but also advising: "I am not sure if that alone will answer your questions. It is more a matter of what was done". There is no evidence that any further materials were forwarded by counsel for Olson.
16 [16] On August 6, 2002, counsel for the Trustee wrote to counsel for 622013 requesting a copy of any contracts that Olson had with Canada Asian "...in order to determine the validity of the liens and judgments on the property..." Counsel responded on August 20, 2002 indicating that a search of their records did not disclose a copy of the building contract requested.
17 [17] On September 13, 2002, a Notice of Disallowance of Claim was issued by the Trustee. The Notice of Disallowance stated in part:
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The Proof of Claim filed is deficient in that it does not contain evidence of the full particulars of the security obtained in particular does not set forth what work, if any, was done on, or what material was supplied to the Parking Lands and the Vacant Lot. Furthermore the Proof of Claim does not include the contract under which the work was performed, accounts rendered or materials supplied, by Stuart Olson on the Parking Lands and the Vacant Lot. The Trustee, despite requests for the contract, has not been provided with same. |
18 [18] In his August 28, 2002 Affidavit, Colin Topley on behalf of the Trustee states:
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I have taken appropriate legal advice and I am advised by my legal counsel that I am not bound by the registration of liens or the Judgments on the Parking Lands and as Trustee I must assess whether the Judgment holders are entitled to liens and the amounts claimed. |
19 [19] On September 30, 2002, a Notice of Appeal was filed by TDP and delivered to the Trustee.
20 [20] In his October 15, 2002 Affidavit, Mr.Topley states that the secured claims in the Estate of Canada Asian total $8,272,556.25 and that the unsecured claims total $15,354,685.27. The estimated realizable value of the assets remaining is $1,085,620.00 of which the Parking Lot was estimated to be $215,000.00. The September 30, 2002 List of Creditors provided by Mr. Topley on behalf of the Trustee lists 622013 as a secured creditor generally and against the Parking Lands in particular.
21 [21] The issue which is raised by the appeal of TDP is whether and to what extent the Trustee is in a position to look behind a Judgment of this Court and to then require a secured creditor to again show to the satisfaction of the Court that it is entitled to a further declaration that its security is valid.
DISCUSSION AND CASE AUTHORITIES
22 [22] In Re Van Laun Ex Parte Chatterton, [1907] 2 K.B. 23 (C.A.), the question which was raised was whether a Trustee in Bankruptcy had the right to go behind a mortgage. A debtor had engaged Mr. Chatterton as his solicitor, had received accounts from Mr. Chatterton, had agreed to those accounts and had granted a mortgage for the amount of those accounts. Cozens-Hardy, M.R. stated:
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...if a judgment had been obtained upon the covenant, it is competent and it is the duty of the Court of Bankruptcy to go behind the judgment, to open the judgment and to say, "That is the judgment, but the creditor can only prove for the amount which is justly and truly due upon it." (at p. 29). |
23 [23] Mr. Chatterton obtained a judgment on the covenant under the mortgage but that judgment was later set aside on an application by Mr. Van Laun. Cozens-Hardy, M.R. stated that the case of the appellants would be "quite hopeless" if the judgment had not been set aside. As it had not, he observed that the trustee was entitled to say:
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I will not admit your proof until you have given me reasonable means of satisfying myself whether the debt in respect of which you are proving is to any and what extent justifiable and reasonable. |
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24 [24] Cozens-Hardy, M.R. then adopts the language of the trial judge who had stated at [1907] 1 K.B. 155 at p. 162:
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The trustee's right and duty when examining a proof for the purpose of admitting or rejecting it is to require some satisfactory evidence that the debt on which the proof is founded is a real debt. No judgment recovered against the bankrupt, no covenant given by or account stated with him, can deprive the trustee of this right. He is entitled to go behind such forms and to get at the truth, and the estoppel to which the bankrupt may have subjected himself will not prevail against him. In the present case the trustee desires to satisfy himself of the claims for costs represent a real indebtedness. He can only do this by seeing and examining the bills. When he sees them it may be that he will think them fair and reasonable and, if so, he will probably admit the proof. But until Mr. Chatterton furnishes him with the means of forming an opinion I think the trustee cannot do otherwise than reject the proof. |
25 [25] In Van Laun, Buckley, L.J. stated:
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Whether the creditor alleges that there has resulted, and that he relies upon an account stated, or a covenant entered into by the debtor, or a judgment which he has obtained, the principle, I apprehend, is exactly the same, and is this - that the trustee is not the person who has stated the account, is not the covenantor, is not the judgment debtor, but is entitled to say, "it is my business to see that those who seek to rank against this estate are persons who are really creditors of that estate." If there be a judgment it is not necessary to show fraud or collusion. It is sufficient, in the language of Lord Esher, to shew miscarriage of justice - that is to say, that for some good reason there ought not to have been a judgment. Exactly the same, I think, is true of an account stated or of a covenant. (at p. 31). |
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I think the trustee is entitled in every case, whether there be account stated, covenant or judgment, to say to the creditor who comes into the bankruptcy to prove, "very well, you say you are a creditor; make out your case as if there was no account stated or no covenant or no judgment. Satisfy me that the amount for which you say you are a creditor is right." That, of course, must be done reasonably. (at p. 32). |
26 [26] In Van Laun, it must be noted that there was no judgment so that the comments made by Cozens-Hardy, M.R. and Buckley, L.J. were obiter. That being said, Van Laun stands for the propositions that it is incumbent upon the trustee to require "some satisfactory evidence" that the debt, the security, or the judgment is "real" debt, security, or judgment. In acting reasonably in this regard, it is not necessary for the trustee to allege fraud or collusion but the trustee must be of the belief that there has been a "miscarriage of justice" so that it can be said that for some "good reason" there ought not to be the debt, security or judgment.
27 [27] In Canadian Imperial Bank of Commerce v. 433616 Ontario Inc. (1993), 17 C.B.R. (3d) 160 (Ont. C.J.-G.D.), the court dealt with applicants who stated that they had provided the sole shareholder of a bankrupt company with money to invest in mortgages with the bankrupt company. The proofs of claim of the applicants had been disallowed on the basis that there was no evidence to support the allegations that the money was put into mortgages. The appeal from the disallowance was dismissed and McWilliam, J. stated:
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Under s. 135(1) of the Bankruptcy Act the trustee is under a duty to examined [sic] 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 inquiries. He is entitled to go behind such forms to get at the truth; it is unnecessary for him to show fraud or collusion...." (at p. 165). |
28 [28] The decision In Re Mechanical Trades Company, Ltd. (1926), 7 C.B.R. 619 (Ont. C.A.) dealt with the validity of debentures which were said to be void for failure to comply with the provisions of The Ontario Companies Act., R.S.O., 1914, C. 178, ss. 101-102. The court did not find it necessary to deal with the question of whether or not a judgment operates as an estoppel against the trustee in bankruptcy. However, Orde, J.A. stated in obiter:
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It is really not necessary to deal with question (a), as to whether or not the judgment of July 24, 1924, operates as an estoppel as against the company's trustee in bankruptcy, but, lest our affirmance of the judgment appealed from may be interpreted as a complete assent to the answer of the learned Judge to question (a), I desire to point out that there may be cases where a trustee in bankruptcy may open up the judgment upon grounds other than fraud or collusion. The powers exercised by Courts of Bankruptcy in requiring judgment creditors to prove the consideration for their judgments have been very wide; Williams on Bankruptcy, 12th ed., p. 145. See for example In re Van Laun.... (at p. 624). |
29 [29] In the case at bar, there is absolutely no suggestion, indication or allegation of fraud or collusion surrounding the judgments obtained. In those circumstances, the Trustee and the Court should be very reticent to attempt to go behind a judgment of the Court and should only do so where there was some good reason to conclude that there should not have been a judgment against all 3 parcels but, in particular, against the Parking Lands.
30 [30] While it is the duty of the Trustee to require satisfactory evidence that the debt on which the Proof of Claim is founded is real debt or that the security on which the Proof of Security is founded is valid security against the property set out in the Proof of Security, it is also clear that there is a duty on the Trustee to act fairly and equitably and to conduct a reasonable investigation: McCrie v. Gray (1940), 22 C.B.R. 390 (Ont. S.C.); Re Gavex, a Resource Corp. (1989), 77 C.B.R. (N.S.) 102 (B.C.S.C.); Re Wedlock Ltd. (1925), 5 C.B.R. 662 (P.E.I.S.C.); H.A. Walker & Associates Ltd. v. Waltson Properties Ltd. (1977), 24 C.B.R. (N.S.) 212 (Ont. Reg.), affirmed (1978), 28 C.B.R. (N.S.) 269 (Ont. S.C.) which was affirmed (1979), 25 O.R. (2d) 60 (Ont. C.A.); and 433616 Ontario Inc., supra.
31 [31] When the Trustee reviewed the Judgments which were obtained by Olson, the Trustee should have concluded that there was no good reason that there ought not to have been a judgment and there was no miscarriage of justice.
32 [32] An Order of this Court allowed Olson to apply for judgment in the Lien Action despite the Order in the C.C.A.A. proceedings that there would be a general stay of proceedings against all creditors. That Order was made with the concurrence of Canada Asian and pursuant to the specific proceedings initiated by Canada Asian under the C.C.A.A. It was apparent to Canada Asian and to the Court that Olson was claiming that its liens were valid against all 3 parcels.
33 [33] Later, a judge of this Court concluded that judgment for the full amount claimed by Olson should be granted against all 3 parcels. While that application was not opposed by Canada Asian, Canada Asian had notice of the application. More importantly, that application was opposed by those having liens registered subsequent to the liens registered by Olson and by a number of parties claiming that they were entitled to be registered as the beneficial owners of the 3 parcels.
34 [34] In those circumstances, it was not reasonable for the Trustee to disallow the Proof of Claim and the Proof of Security and then to argue on the appeal of the disallowance that this Court was in error when judgment for the full amount claimed by Olson against all 3 parcels was granted. It is unreasonable to expect that one Supreme Court Judge sitting in bankruptcy should be asked to second guess the judgment of another Supreme Court Judge when that Judge considered the question of whether there should be judgments against all 3 parcels on its merits and decided in favour of the lien holder.
35 [35] Only the Court of Appeal of this Province should be in a position to say that the Order granting judgment in the Lien Action should not have been granted. As no appeal was taken from that Order, the Court of Appeal will not be given that opportunity unless the Trustee is successful in an application to seek leave to now appeal the January 9 and March 26, 2001 Judgments. Despite the obiter comments in the cases relied upon by the Trustee, a Judgment of a Court of competent jurisdiction should almost invariably satisfy a trustee regarding a debt, the security, or a judgment if it can be said that the Court considered the merits of the entitlement to a creditor to a judgment relating to security claimed. If it were otherwise, the trustee would be substituting his or her opinion regarding the judgment thus displacing the authority given to the Court of Appeal.
36 [36] The appeal from the September 13, 2002 disallowance of the Proof of Claim and Proof of Security of TDP Holdings Ltd. is allowed. TDP Holdings Ltd. is entitled to its costs. In the circumstances, the Trustee will not be entitled to its costs against the Estate of Canada Asian Centre Developments Inc.
BURNYEAT J.
QL UPDATE: 20030115
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