Royal Bank of Canada v. Cow Harbour Construction Ltd., 2011 ABQB 223

Court of Queen ’ s Bench of Alberta Citation: Royal Bank of Canada v. Cow Harbour Construction Ltd., 2011 ABQB 223 Date: 20110405 Docket: 1003 11241, 1003 05560 Registry: Edmonton Between: Royal Bank of Canada Plaintiff - and - Cow Harbour Construction Ltd. and 1134252 Alberta Ltd. Defendant’s And Between: Docket: 1003 05560 BKCY Action No: 24-115359 In the Matter of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 , as amended In the Matter of Companies ’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended And in the Matter of a Plan of Compromise or Arrangement of Cow Harbour Construction Ltd. _______________________________________________________

Memorandum of Decision of the Honourable Mr. Justice K.D. Yamauchi _______________________________________________________ I. Introduction [ 1 ] Cow Harbour Construction Ltd. (“Cow Harbour”) sought relief under the Companies' Creditors Arrangement Act , R.S.C. 1985, c. C-36 (" CCAA "). By an order dated April 7, 2010, as amended by further order dated July 6, 2010 (collectively, the "Initial Order"), this Court granted Cow Harbour the relief it was seeking.

The Initial Order appointed Deloitte & Touche Inc. as monitor with respect to those proceedings (the "Monitor"). [ 2 ] Matthews Equipment Limited, operating as Hertz Equipment Rental ("Hertz") is one of Cow Harbour’s creditors. Hertz has applied to this Court seeking an order granting it leave to file a proof of claim in a critical suppliers’ claims process that this Court established by way of court order.

Hertz missed the court-ordered deadline for filing its proof of claim. [ 3 ] PricewaterhouseCoopers Inc., in its capacity as Cow Harbour’s court-appointed receiver, along with other creditors, oppose Hertz’s application. II. Facts [ 4 ] The Initial Order imposed a stay of proceedings on all of Cow Harbour’s creditors. Specifically, the Initial Order prohibited creditors, defined by the Initial Order to be "Critical Suppliers," from filing builders' liens against lands on which Cow Harbour did work or furnished materials in respect of improvements.

Were it not for the Initial Order, these Critical Suppliers would have been entitled to file valid and enforceable builders' liens. To protect the Critical Suppliers’ claims, the Initial Order granted them a charge over Cow Harbour’s property, not to exceed $8,000,000 (the "CS Charge"). [ 5 ] Hertz rented to Cow Harbour various equipment including heaters, loaders, light towers and generators. Hertz issued invoices to Cow Harbour for those rentals between December 23, 2009 and April 1, 2010. As at April 1, 2010, Cow Harbour owed Hertz $178,598.47, representing rental arrears for that period (the “Debt”).

The Debt was unsecured. [ 6 ] On May 19, 2010, the Monitor circulated its Fifth Report to the Court (the "Monitor's Fifth Report") among Cow Harbour’s creditors. The Monitor’s Fifth Report contained, among other things, a list of those creditors that the Monitor classified to be the holders of true leases with Cow Harbour, as opposed to capital, or financing, leases.

Hertz was among those creditors that the Monitor classified as holding a true lease. [ 7 ] The Monitor's Fifth Report also recommended that this Court establish a formal claims process pursuant to which those creditors claiming to be Critical Suppliers could assert their claims. By an order dated May 21, 2010 (the "May 21 Order"), this Court established a process by which the Monitor’s counsel would circulate a proof of claim form to those claimants who wanted to establish themselves as a Critical Supplier (a "Proof of Claim").

The Monitor’s counsel would send the Proof of Claim form to Cow Harbour’s equipment lessors and persons to whom Cow Harbour owed money as at April 1, 2010. All recipients had to complete and deliver the Proof of Claim to the Monitor by June 16, 2010 (“Claims Bar Date”). The May 21 Order paras. 11(

c) and 11(

d) said: (

c) any lessor or claimant of a payable failing to deliver to the Monitor by [the Claims Bar Date], a completed Proof of Claim, shall be disqualified as a Critical Supplier and not entitled to the benefit of the [CS Charge], unless otherwise ordered by the Court; and

(

d) so soon as practical following [the Claims Bar Date], the Monitor shall report to this Honourable Court, with respect to the Proofs of Claim received and other matters relating to claimants under the [CS Charge]. [ 8 ] Hertz retained Parlee McLaws LLP ("Parlee McLaws") in or about April, 2010, to act as its legal counsel in Cow Harbour’s CCAA proceedings. Marilyn Ann White, Credit Manager for Hertz ("Ms. White"), was the "sole point of contact" between Hertz and Parlee McLaws. All of Hertz's communications with Parlee McLaws ultimately went through Ms. White. Ms.

White filed an affidavit and a supplementary affidavit in support of Hertz’s application and subjected herself to questioning on her affidavit. Ms. White’s supplemental affidavit specifically responded to the matters arising out of her questioning [ 9 ] Ms.

White stated that as a "routine matter," Parlee McLaws forwarded to her emails and court documents that were filed and which Parlee McLaws received from the Monitor with respect to the Cow Harbour's CCAA proceedings. [ 10 ] On May 28, 2010, the Monitor's counsel sent, via email (the "May 28 Email"), a copy of the May 21 Order, to the service list, which included Bryan Maruyama, Dean Hitesman, and Jerry Hockin, all of Parlee McLaws. [ 11 ] On June 1, 2010, the Monitor's counsel sent to Bryan Maruyama, Dean Hitesman, and Jerry Hockin, all of Parlee McLaws, via email (the "June 1 Email"), a copy of the Proof of Claim "package" that claimants would use if they wanted to make a claim as a Critical Supplier, and setting out the Claims Bar Date. [ 12 ] Ms.

White does not recall whether she received the May 28 Email or the June 1 Email. She has reviewed her email archives and has found no record of the May 28 Email or the June 1 Email. As well, Hertz's systems department informed Ms. White that once an email received by anyone at Hertz has been deleted, it cannot be retrieved. [ 13 ] There was nothing that prevented Ms. White from asking Parlee McLaws to check their “sent items” to see whether (contrary to their “routine” practice) they failed to forward either the May 28 Email or the June 1 Email to Hertz or to Ms. White.

She did not make that inquiry. [ 14 ] Hertz did not file a Proof of Claim with the Monitor by the Claims Bar Date. [ 15 ] On August 25, 2010, this Court granted an order in which it appointed PricewaterhouseCoopers Inc. as receiver (the "Receiver") of all of Cow Harbour’s and 1134252 Alberta Ltd.’s current and future assets, undertakings and properties (the "Receivership Order"). This Court granted the Receivership Order pursuant to the Judicature Act , RSA 2002, c. J-2, s. 13(2) and the Bankruptcy and Insolvency Act , RSC 1985, c.

B-3, s. 243(1) (" BIA "). [ 16 ] Parlee McLaws provided Hertz’s Proof of Claim to the Receiver on January 12, 2011, together with the supporting invoices. [ 17 ] On January 12, 2011, this Court granted a further order (the "January 12 Order"), in which it ordered, among other things, that in accordance with the May 21 Order, any creditor who did not file a Proof of Claim by June 16, 2010, shall, unless otherwise ordered, be conclusively deemed not to be a Critical Supplier. [ 18 ] Hertz now requests this Court to grant it leave to file its Proof of Claim, even though it failed to file it on or before the Claims Bar Date.

III. Issue

[ 19 ] Whether this Court should grant Hertz leave to file its Proof of Claim subsequent to the Claims Bar Date. IV. Discussion [ 20 ] Blue Range Resource Corp. (Re) , 2000 ABCA 285 at para. 26 , held that courts, in a CCAA proceeding, respond to the following questions when they are determining whether they will permit a claimant to file its claim after the expiry of a deadline for filing claims: (

a) Was the delay caused by inadvertence and if so, did the claimant act in good faith? (

b) What is the effect of permitting the claim in terms of the existence and impact of any relevant prejudice caused by the delay? (

c) If relevant prejudice is found, can it be alleviated by attaching appropriate conditions to an order permitting late filing? (

d) If relevant prejudice is found which cannot be alleviated, are there any other considerations which may nonetheless warrant an order permitting late filing? 1. Inadvertence and Good Faith [ 21 ] Blue Range held that "inadvertent" includes carelessness, negligence, accident, and is unintentional (para. 27). [ 22 ] Hertz argues that the inadvertence in this case is attributable to Parlee McLaws failing to advise Hertz to file its Proof of Claim in advance of the Claims Bar Date.

In fact, Hertz argues that it did not receive the Proof of Claim at all and did not recognize the need to file its Proof of Claim until Parlee McLaws advised it to do so on January 12, 2011. Hertz completed its Proof of Claim and had Parlee McLaws submit it to the Receiver on the day that Parlee McLaws brought this requirement to its attention.

Finally, Hertz argues that its failure to file its Proof of Claim was not the result of any deliberate act attributable to Hertz. [ 23 ] The Receiver argues that while "inadvertence" sets a seemingly low standard, it is not sufficient for a party to claim inadvertence if there is no explanation for its failure to file its claim on time.

In the absence of conduct evidencing "inadvertence," a period of inadvertence will have "ceased to run" when a claimant's solicitor is given specific notice of a claims bar date. [ 24 ] The Receiver further argues that Hertz has not provided sufficient or any evidence of conduct amounting to inadvertence, whether on Hertz’s behalf, or on behalf of Parlee McLaws. In fact, it argues, there is no evidence to indicate why Hertz did not file its Proof of Claim in a timely manner.

While Hertz argues that this was a result of Parlee McLaw's inadvertent failure to provide the documents to Hertz, there is no evidence to support this assertion. This is so, despite the fact that Ms. White was specifically asked this question during questioning and subsequently filed a supplemental affidavit. [ 25 ] The Receiver argues that this Court may provide the relief Hertz seeks only if Hertz proves “exceptional circumstances.” This term comes from Ivorylane Corp. v. Country Style Realty Ltd. , 2004 CarswellOnt 2567 at para. 47 . The court, in that case, cites Blue Range for this proposition.

This Court does not agree that Blue Range made this a part of the test. Instead, it requires this Court to examine the facts before it in the light of the 4 questions it posed. Whether the result of that analysis is exceptional or unexceptional matters not.

[26] The description of “inadvertent” in Blue Range, says that the action is “unintentional.” It is difficult to imagine a situationwhere carelessness, negligence or accident could be “intentional” and still be inadvertent, unless the court in that case was envisaging asituation where a claimant is wilfully blind or procrastinating. Nonetheless, to determine inadvertence, one must look at thecircumstances in which the claimant found itself. For example, was there an advantage to Hertz “lying in the weeds” until the Claims BarDate passed?

Although we must examine this question, as well, when deciding whether any prejudice flows, it is important to answerthat question at this stage. [27] Hertz’s statement that it was not lying in the weeds is not sufficient. Further, the Receiver argues that there is no evidencebefore this Court to indicate why Hertz did not file its Proof of Claim in a timely manner.

While this Court agrees with the Receiver that it is Hertz’s onus to show why it requires an extension, Romaine J. in BA Energy Inc. (Re), 2010 ABQB 507, 70 C.B.R. (5th) 24, tells usthat “the question of whether a late claim should be accepted is an equitable consideration, taking into account the specificcircumstances of each case” (para. 34). [28] In Lindsay v. Transtec Canada Ltd. (1994), (BC SC), 28 C.B.R. (3d) 110 (B.C.S.C.), the court would notgrant the claimant leave to pursue his claim after the creditors had approved a plan of arrangement and the court sanctioned it.

Hebecame aware of the CCAA proceedings at some point during the proceedings and at various stages throughout the proceedings, hissolicitors contacted the debtor’s solicitors to inquire about the process. He, however, did not pursue his claim until a point where hecould recover potentially more than the debtor’s other creditors. The court in Blue Range said of the Lindsay case: 18 ... [T]he case does highlight the issues of the conduct of the late claimants and the potential prejudice to other creditors and thedebtor.

Lindsay was the classic creditor "lying in the weeds", waiting for the appropriate moment to pounce. He did not act in good faithand his conduct was potentially prejudicial to other creditors and the debtor company. By avoiding the CCAA proceedings, Lindsay wasattempting to gain an advantage not available to other creditors. [29] The Receiver forcefully argued that, on the evidence, we still do not know whether Parlee McLaws ever forwarded the May28 Email or the June 1 Email to Hertz. Ms. White's supplemental affidavit says nothing more than that Hertz is unable to retrieve emailsonce they are deleted.

That may be so, but this lack of evidence does not completely answer the question. We must look at “the specificcircumstances of the case” to answer it. In this case, there would be no advantage for any creditor to simply lie in the weeds. They couldlose their claim completely or they could be subject to a costs claim. The only advantage could be that they would not have to incur thecost of having to file a Proof of Claim. As well, there could be a practical advantage, such as the one outlined in Lindsay v. TranstecCanada Ltd. (1994), (BC SC), 28 C.B.R. (3d) 110 (B.C.S.C.).

That situation does not apply in this case. This Courtfinds that there would be no advantage to Hertz by its lying in the weeds and the only explanation for it not filing its Proof of Claim wasinadvertence on its part or on the part of Parlee McLaws. [30] The Receiver rightly points out that service on a solicitor of record is service on the claimant. In fact the Alberta Rules ofCourt, Alta. Reg. 124/2010, rr. 11.16, 11.17 and 11.20 permit this. Does the Blue Range test of unintentional negligence, carelessnessand accident apply equally to the claimant’s solicitors, as well as the claimant itself?

Or is the Blue Range test limited only to claimants?If it is the latter, then the claimant’s remedy would be as against the Alberta Lawyers Insurance Association. With respect to the former,the court in Air Canada (Re) (2004), (ON SC), 49 C.B.R. (4th) 175 (Ont.

S.C.J. [Commercial]), allowed theclaimant to file its late notice when counsel had acknowledged that it was through its inadvertence that the notice had not been filed ontime, and that corrective action was taken promptly and that the extension of time would not cause a hardship to any interested party orprejudice the debtor company's reorganization. [31] This Court does not countenance solicitors’ negligence, but in the unique circumstances of this case where there are 3solicitors from the same firm dealing with numerous clients involved in a CCAA matter, one can see how the solicitors might beinadvertent.

In fact, throughout this Court’s involvement in this matter, Parlee McLaws has made submissions which, at the same time,support and contest a particular approach to a matter. One would have thought that solicitors with the experience of those involved in thismatter would never allow something like this to happen. [32] This Court must also assess whether Hertz was acting in good faith in these circumstances. A simple assertion that it wasacting in good faith is not enough. This analysis can be done by answering what appears to be two sides of the same coin.

Was Hertzacting in bad faith and was it acting in good faith? With respect to the former, the “lying in the weeds” analysis will answer that question.With respect to the latter, a court will find that a claimant is acting in good faith if it submits its claim as soon as it becomes aware of thesituation. See e.g. Blue Range at paras. 28 and 30. In the case at bar, Hertz, through Parlee McLaws, provided its Proof of Claim to theReceiver immediately on being advised of the need so to do.

[33] This Court finds that Hertz’s failure to file its Proof of Claim was the result of Parlee McLaws’ “inadvertence.” To this end,this Court chooses to follow the approach that the court took in Air Canada. In the alternative, if Hertz did receive the Proof of Claim, itfailed to file the Proof of Claim through its own inadvertence. As well, Hertz, by providing the Receiver with its Proof of Claimimmediately on being advised, or reminded, as the case may be, of its need to provide it, shows that it acted in good faith. 2.

Prejudice [34] Hertz argues that having this Court granting it leave to file its Proof of Claim after the Claims Bar Date, and the claim itself,would have a negligible impact on the Critical Supplier claims process. The Receiver has not yet (1) completed its review of thepreviously submitted Proofs of Claim; (2) completed the appeals process in respect of the Receiver's review of the previously submittedProofs of Claim; or (3) made any distribution in respect of the CS Charge. Hertz has not been “lying in the weeds.” [35] It further argues that its claim was known to the Monitor and the other creditors.

The Monitor categorized Hertz as a truelessor. The Monitor communicated that categorization to all creditors in the Monitor's Fifth Report. Hertz was also known to theReceiver and is listed as having an unsecured claim in the amount of $196,966.29, in the Notice and Statement of Receiver dated August31, 2010, that the Receiver circulated to all of Cow Harbour’s creditors, pursuant to the BIA. [36] Furthermore, Cow Harbour’s creditors were aware that there were other creditors who had filed late Proofs of Claim.

ThisCourt has not yet adjudicated on the validity of the other late-filed proofs of claim. [37] Finally, Hertz argues that none of Cow Harbour’s creditors will have lost a realistic opportunity to do anything that theyotherwise might have done.

Conversely, had Hertz submitted its Proof of Claim on time, each of the other creditors would haveproceeded in exactly the same fashion as they did. [38] The Receiver argues that in any consideration of prejudice, this Court should weigh the prejudice to the Receiver or a monitorin a CCAA proceeding on its ability carry out its duties and effect a level of predictability and finality in CCAA or receivershipproceedings. [39] Blue Range (para. 36) tells us that timing is a key element when determining whether Hertz or the other Critical Supplierswill suffer any prejudice if this Court were to grant Hertz leave to file its claim.

What does this mean? Had the Receiver completed itsanalysis of the Critical Suppliers’ issue and distributed funds then this Court might be less inclined to allow Hertz to file its Proof ofClaim. As well, Cow Harbour’s other creditors were aware of Hertz’s potential claim through many of the Monitor’s reports: BlueRange at para. 39. This Court has not adjudicated on the admissibility of any of the other late Proofs of Claim, as yet. [40] Blue Range at para 37, also tells us that materiality is relevant to the issue of prejudice.

Assuming that Hertz’s claim is theagreed-upon amount of $178,598.47, its claim, as against the total amount of the Proofs of Claim of $49,962,687.68 is .357%. In BlueRange, the court found a .435% claim to be immaterial.

Surely, .357% is even less material. [41] Even if materiality is not sine qua non of this Court’s analysis, the fact that the Critical Suppliers will receive less money,should this Court grant Hertz leave to file its Proof of Claim, is not something this Court need consider: 37 In a CCAA context ... the fact that Enron and the other Creditors will receive less money if late and late amended claims areallowed is not prejudice relevant to this criterion. Re-organization under the CCAA involves compromise. Allowing all legitimatecreditors to share in the available proceeds is an integral part of the process.

A reduction in that share can not be characterized asprejudice: Cohen, Re (1956), (AB CA), 36 C.B.R. 21 (Alta. C.A.) at 30-31. [42] Because of the immateriality of Hertz’s claim relative to the Proofs of Claim as a whole, Cow Harbour’s other creditors’

awareness of Hertz’s potential claim, and the fact that nothing has been done concerning these claims to this point, this Court finds that neither the Critical Suppliers nor the Receiver will suffer any prejudice if this Court were to grant leave to Hertz to file its claim. [ 43 ] Because this Court finds that there would be no “relevant prejudice” that flows as a result of its approving Hertz’s late filing, this Court does not intend to deal with the third and fourth Blue Range questions. V.

Conclusion [ 44 ] Proceedings under the CCAA are meant to deal with compromises and arrangements among a debtor company and its creditors. If a creditor fails to file its claim in those proceedings because of its solicitors’ negligence or its own inadvertence, as defined in Blue Range , it should be permitted to argue that, nonetheless, a court should permit it to file its claim.

That is the reason why Blue Range outlined the four questions and why this Court inserted the “unless otherwise ordered by the court” provision in the May 21 Order and the January 12 Order. [ 45 ] The objective of a claims procedure order was set out by Romaine J. in BA Energy as follows: 41 The objective of a claims procedure order is to attempt to ensure that all legitimate creditors come forward on a timely basis.

A claims procedure order provides the debtor and the Monitor with the information necessary to fashion a plan that may prove acceptable to the requisite majority of creditors given the financial circumstances of the debtor and that may be sanctioned by the court. The fact that accurate information relating to the amount and nature of claims is essential for the formulation of a successful plan requires that the specifics of a claims procedure order should generally be observed and enforced, and that the acceptance of a late claim should not be an automatic outcome.

The applicant for such an order must provide some explanation for the late filing and the reviewing court must consider any prejudice caused by the delay. 42 The claims procedure process was developed to give creditors a level playing field with respect to their claims and to discourage tactics that would give some creditors an unjustified advantage. Situations that give rise to concerns of improper manipulation of the process by a creditor must be carefully considered. [ 46 ] It is important to note that each case depends on its unique facts.

This Court finds that Hertz was not attempting to seek an unjustified advantage by not filing its claim or that it was improperly manipulating the process. Its failure to file its claim was inadvertent. Accordingly, this Court grants Hertz leave to file its Proof of Claim subsequent to the June 16, 2010 deadline. Heard on the 25 th day of March, 2011. Dated at the City of Edmonton, Alberta this 65th day of April, 2011. K.D. Yamauchi J.C.Q.B.A. Appearances:

Bryan Maruyama Parlee McLaws for the Applicant Matthews Equipment Limited, operating as Hertz Equipment Rental Randall S. Van de Mosselaar Macleod Dixon for the Respondent PricewaterhouseCoopers Inc., receiver of Cow Harbour Construction Ltd.