Concrete Equities Inc. (Re), 2012 ABQB 19

Court of Queen ’ s Bench of Alberta Citation: Concrete Equities Inc. (Re), 2012 ABQB 19 Date: 20120110 Docket: 0901 11048 Registry: Calgary In the matter of the Companies ’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 as amended, Section 13(2) of the Judicature Act, R.S.A. 2000, c. J-2 , as amended and

Section 99(

a) of the Business Corporations Act, R.S.A. 2000, c. B-9 , as amended And in the matter of Concrete Equities Inc., Wealthcrete Investment Corporation, Concrete Associates Investment Corporation, Concrete Associates II Investment Corporation, Concrete Associates III Investment Corporation, Concrete Associates IV Investment Corporation, Concrete Associates V Investment Corporation, El Golfo Investment Corporation, Costa Koraal Investment Corporation, Luna Morada Investment Corporation, Concrete Equities Executive Club Inc., 1456775 Alberta Ltd., Concrete Place Properties Ltd., and Concrete Associates VIII Corp.

Docket: 1101 03927 Registry: Calgary And between: Darcy Sandhu, 934608 Alberta Ltd. and 587901 Alberta Ltd. Plaintiffs - and - MEG Place LP Investment Corporation, Safeguard Real Estate Investment Fund V Limited Partnership and Concrete Associates IV Investment Corporation Defendants _______________________________________________________ Memorandum of Decision of the

Honourable Madam Justice B.E. Romaine _______________________________________________________ INTRODUCTION [ 1 ] This application arises from complicated and unusual insolvency proceedings involving a number of real estate limited partnerships. While the facts are complex, the main issue is whether a trustee in bankruptcy serving a notice of disallowance of claim may rely on an address for service set out in a proof of claim in circumstances where he has received information that indicates the possibility of a change in the identity of the agent of the claimant.

FACTS [ 2 ] On July 29, 2009, this Court granted an Initial Order placing the five general partners of the Safeguard Real Estate Investment Fund I - V Limited Partnerships and other related entities (the “Concrete Equities Group”) into protection under the provisions of the Companies ’ Creditors Arrangement Act , R.S.C. 1985, c. C-36. One of the debtor general partners was Concrete Associates IV Investment Corporation (“Concrete IV”), the predecessor to the applicant MEG Place Limited Partnership Investment Corp. (“MEG”) as general partner to LP V.

On the same day, certain interim receivership orders that had been previously granted over the limited partnerships were amended, restated and consolidated into a Receivership Order that operated concurrently with the CCAA proceedings. Ernst & Young Inc. (“E & Y”) was appointed as Monitor and Receiver under the Initial Order and the Receivership Order.

The Initial Order included the usual stay provisions. [ 3 ] In accordance with a December 14, 2009 Claims Process Order, the Trustee in Bankruptcy of Varun Aurora and David Humeniuk, two key individuals in the management of the Concrete Equities Group, filed claims in the CCAA proceedings against LP V.

So did 587901 Alberta Ltd., Darcy Sandhu and 934608 Alberta Ltd. 934608 filed a claim on its own behalf and as assignee of the claims of Vincent De Palma, another principal of the Concrete Equities Group. [ 4 ] The Monitor disallowed the Humeniuk claim and the Aurora claim in February, 2010, reserving all rights of set-off and counterclaims of Concrete IV and LP V against Mr. Aurora and Mr. Humeniuk. The Trustee in Bankruptcy filed appeals of these disallowances, which have not yet been heard. A Registrar in Bankruptcy granted an order in March, 2010 that permitted Mr.

Sandhu and 934608 to pursue the Humeniuk claim and the Aurora claim. [ 5 ] The Humeniuk claim, the Aurora claim, the 587901 claim, the Sandhu claims, the 934608 claim and the De Palma claim are referred to as the “Disputed Claims” in this application. [ 6 ] During the course of the CCAA proceedings involving the Concrete Equities Group, the Monitor and Receiver concluded that a plan was not required for LP V because there were few affected creditors, and it advocated the granting of a final order for this limited partnership without a plan. [ 7 ] In June, 2010, this Court granted final orders in the CCAA proceedings.

The Amended Final Order dated June 29, 2010 provided as follows: (

a) The Disputed Claims and certain claims filed by David Aurora were excepted from the order and were directed to be resolved in accordance with the procedure previously set out in the Claims Process Order, with MEG as the new general partner of LP V replacing the word “Monitor” therein; (

b) All other creditor claims against LP V were compromised; (

c) The Receiver and Monitor was expressly authorized to participate in the Humeniuk and Aurora bankruptcies by lodging claims

with the Trustee in such amounts and on account of such claims as the Receiver deemed advisable; (

d) MEG became entitled to hold various assets of LP V subject to certain limitations on the use and encumbering of those assets pending the determination of the Disputed Claims and the David Aurora claims; (

e) The Receiver and Monitor was to deliver the books and records of LP V to MEG; (

f) E&Y was discharged as Monitor and Receiver “as of the Order Implementation Date and upon satisfying its obligations pursuant to this Order”. The Order Implementation Date was defined as the date the Monitor filed the Monitor’s Certificate; and (

g) The stay of proceedings provided in the Initial Order with respect to LP V was extended until after the determination of the Disputed Claims and the David Aurora claims. [ 8 ] Members of the service list in the CCAA proceedings, including counsel for the Trustee in Bankruptcy of Humeniuk and Aurora, were served with a copy of the Amended Final Order on June 29, 2010. [ 9 ] On July 13, 2010, in accordance with the Amended Final Order, E&Y submitted proofs of claim in the Humeniuk and Aurora bankruptcies on behalf of Concrete IV and LP V.

These proofs of claim provided that notices or correspondence with respect to the claims were to be forwarded to counsel for E&Y. [ 10 ] The process that led to the appointment of MEG as general partner of LP V, replacing Concrete IV, is relevant to what next occurred. Originally, certain investors in the Concrete Equities Group opposed the receivership application with respect to these limited partnership and companies, and submitted instead that a corporation controlled by Steven Butt be allowed to assume the role of general partner of the members of the Concrete Equities Group.

Despite this opposition, an interim receivership order was granted. Mr. Butt became involved in the receivership as a member of the Concrete Investors’ Steering Committee, a group of interested investors formed to consult with the Receiver and provide information on the receivership to other investors. The Steering Committee was represented by Bennett Jones LLP. [ 11 ] The Steering Committee continued to participate in the CCAA proceedings when they were commenced, and Mr. Butt continued as a member of the Steering Committee. In that capacity, it is clear that Mr.

Butt was aware of the Disputed Claims, the Humeniuk and Aurora bankruptcies, the Amended Final Order and the proofs of claim filed by E & Y on behalf of Concrete IV and and LP V in the Humeniuk and Aurora bankruptcies. [ 12 ] Mr. Butt incorporated MEG on June 4, 2010 so that it could become the new general partner of LP V when the receivership and the CCAA proceedings were wound down. Mr. Butt is the sole officer, director and shareholder of MEG, which lists the offices of Bennett Jones LLP as its registered office. Mr.

Butt acknowledges that he was aware that any claims that Concrete IV or LP V might have against Mr. Aurora, Mr. Humeniuk or Mr. De Palma would be transferred to MEG upon the discharge of the Monitor and Receiver. [ 13 ] On December 13, 2010, the Trustee in Bankruptcy of Humeniuk and Aurora delivered by courier and mailed two Notices of Disallowance of the proofs of claim filed by E&Y in the bankruptcies to counsel for E&Y.

Counsel for E&Y emailed copies of these disallowances to Bennett Jones on the same date, advising that E&Y had been discharged as Receiver of all Concrete Equities Group entities but one and would not be taking steps in relation to the disallowances. [ 14 ] Mr. Butt deposes that, at this point in time, he had not retained counsel for MEG with respect to the Disputed Claims. Specifically, Mr. Butt says that, while Bennett Jones was counsel to the Steering Committee at the time the Notices of Disallowance were forwarded to it by counsel for E&Y and Mr.

Butt was a Steering Committee contact and advisor, he had not instructed Bennett Jones on behalf of MEG as the general partner of LP V. Mr. Yorke-Slater of Bennett Jones, who was acting as counsel to the Steering Committee at this time, advises that he recalls forwarding the emailed disallowances to Mr. Butt, but Mr. Butt deposes that he does not recall receiving them.

[ 15 ] At any rate, no one appealed the Notices of Disallowance. In fact, no-one has formally appealed them to the date of this application, nor has there been an application to extend the time to appeal. Mr. Aurora and Mr. Humeniuk were discharged from bankruptcy in December, 2010. [ 16 ] Mr.

Sandhu, 934608 and 587091 (the “Plaintiffs” in this capacity) filed a Statement of Claim (the “Action”) in March, 2011 naming MEG, LP V and Concrete IV as defendants (the “Defendants”), alleging claims arising from advances made to Concrete Equities or its principals, including the claims filed by the estates of Aurora, Humeniuk and De Palma against LP V now controlled by the Sandhu group. A courtesy copy was provided to Bennet Jones on March 24, 2011. Mr.

Butt deposes that it then became apparent to him that the Disputed Claims were still being pursued against LP V, and he retained Bennett Jones on behalf of the Defendants with respect to the Disputed Claims in April, 2011. By order of May 18, 2011, the Plaintiffs were granted leave to serve the Statement of Claim. [ 17 ] On May 3, 2011, Bennett Jones asked the Trustee in Bankruptcy of Humeniuk and Aurora to provide copies of the proofs of claim and advise of their disposal.

The Trustee sent copies of the claims filed by E&Y to Bennett Jones via courier on June 2, 2011, and advised that the Trustee had issued Notices of Disallowance on the claims and that E&Y had not appealed them. The Defendants filed their Statement of Defence on June 15, 2011, claiming, among other things, the right to set-off against the claims of Mr. Aurora and Mr. Humeniuk. In a Reply to Defence dated June 30, 2011, the Plaintiffs claimed that the set-off claims were barred because the Notices of Disallowance had not been appealed.

On July 11, 2001, Bennett Jones requested copies of the Disallowances from counsel to the Plaintiffs and received emailed copies on the same day. This application was filed on August 17, 2011. [ 18 ] MEG and LP V apply for the following relief: (

a) a declaration that the actions taken by the Trustee in bankruptcy of Humeniuk and Aurora in sending the disallowances of certain claims made on behalf of MEG and LP V against the estates of Aurora and Humeniuk constituted a breach of the stay of proceedings imposed by the Initial Order in the CCAA proceedings, and a declaration that the disallowances shall have no force or effect so far as they purport to affect the CCAA proceedings or the Action, which purports to be an extension of the CCAA proceedings; or alternatively (

b) an order declaring service of the Notices of Disallowance by the Trustee invalid and providing that service of the Disallowances is effective as of the date of the order. ISSUES [ 19 ] The issues in this application are thus as follows: (

a) whether the Notices of Disallowance constitute a breach of the stay of proceedings provided for in the Initial Order, and therefore, whether they are of any force or effect for the purposes of the CCAA proceedings and the Action; (

b) whether the Notices of Disallowance were properly served on MEG pursuant to section 135(3) of the BIA and Rule 113 of the Bankruptcy and Insolvency General Rules , CRC 1978, c 368 as amended, and therefore, whether they are valid; and (

c) if the Notices of Disallowance were not properly served, whether the Court should exercise its discretion to deem that notice was adequately provided. ANALYSIS (

a) Breach of Stay of Proceedings

[20] This part of the application can be dispensed with summarily. [21] LP V through its Receiver, acting under the authorization of the Court in the Amended Final Order, filed proofs of claim inthe bankruptcies of Mr. Aurora and Mr. Humeniuk, and thus engaged the mandatory process set out under the BIA.

The Disallowancesthat followed in the ordinary course cannot reasonably be considered to be caught by the stay imposed by the Initial Order and extendedby the Amended Final Order. [22] The Disallowances were issued long after the Amended Final Order was granted in the proceedings, at which time the onlyremaining issues to be resolved were the claims controlled by Mr. Sandhu and Mr.

David Aurora, which were expressly contemplated inthe Amended Final Order. [23] This situation is not analogous to the issue with respect to the meaning of “proceedings” in a stay order discussed in Re NortelNetworks Corp., 2010 CarswellOnt 15907, or Re AbitibiBowater, 2010 QCCS 1261 , 2010 CarswellQue 2812. To the extent theNotices of Disallowance are “proceedings” that might otherwise be subject to the stay, they are steps in proceedings that werespecifically contemplated by the Amended Final order during the CCAA proceedings.

They were steps that could be anticipated and thatfollowed logically from the Monitor and Receiver filing the claims in the bankruptcies. [24] I also note that there was no plan of arrangement involving LP V, and that the purpose of the stay provisions of the InitialOrder, to allow a breathing space for LP V to develop such a plan, had become moot by the time the Notices of Disallowance wereissued and the Amended Final Order was granted. [25] The Amended Final Order extended the stay with respect to LP V specifically in order to allow the Disputed Claims to beresolved while LP V was under the protection of the CCAA.

It could not be reasonably contemplated that the extension of the stay wouldapply to the Trustee’s consideration of the proofs of claim. (

b) Service of the Notices of Disallowance [26] Section 135(3) of the BIA provides that if a trustee disallows a claim, he “shall forthwith provide in the prescribed manner tothe person whose claim . . . was disallowed” a notice of disallowance (emphasis added).

The prescribed manner of service of notices ofdisallowance set out in Rule 113 is by service or by registered mail or courier. [27] “Person” includes a partnership and in this case, the person whose claim was being disallowed by the Notices ofDisallowance was LP V. [28] MEG submits that at the time the Trustee in Bankruptcy of Humeniuk and Aurora sent the disallowances by courier and emailto counsel for E&Y in December, 2010, the Trustee knew or ought to have known from receipt of the Final Amended Order in June,2010 that MEG had become the general partner of LP V, and that MEG and not E&Y should have been served with the disallowances.Therefore, MEG submits, the disallowances were not properly served. [29] The Plaintiffs who now control the Humeniuk and Aurora claims against LP V submit that the Trustee was entitled to providethe Notices of Disallowance to the address listed in the proofs of claim, that it did so in this case, and that therefore electronic service byemail on counsel to E&Y (which is allowed under the Alberta Rules of Court in force in December, 2010) was properly effected. [30] The Plaintiffs rely on case law that they submit confirms that a trustee is entitled to provide a notice of disallowance to anaddress listed in the proof of claim: Gully (Trustee of) v.

TD Canada Trust, 2002 CarswellBC 1873 at para. 18; Dixon’s BoatbuildersLtd., Re, 2000 CarswellNS 330 (NSSC) at para. 20. [31] In Gully, the trustee served a notice of disallowance on an address set out in a proof of claim by a bank creditor by fax andordinary mail, thus failing to comply with Rule 113. Despite this, the court found service to be sufficient, curing the deficiency by relying

on s. 187(1) of the BIA and finding that the failure to comply with Rule 113 in the circumstances was an irregularity, not a nullity. [ 32 ] The bank creditor had admitted receiving the notice of disallowance, and had ignored a letter from the trustee advising of the strict limitations on time to appeal and recommending that the creditor seek legal advice. The decision is distinguishable in that notice was provided to the proper creditor representative but by an irregular method of service. [ 33 ] Dixon ’s Boatbuilders is a case about apparent authority of an agent.

Service in that case had been properly made on a private mail box address given in the proof of claim, but the mail box company did not deliver the notice to the creditor before the period for filing an appeal had expired.

Neither Section 135(3) nor Rule 113 were in issue, since the disallowance was sent to the proper person, but had gone astray. [ 34 ] The issue in this application is different, being whether the Trustee can rely on an address for service set out in a proof of claim despite having subsequently received information that alerted him or should have alerted him to the possibility of a change in the identity of the claimant’s agent. I find that he cannot do so. Once the Trustee is aware of the appointment of a new agent, service on that new agent must be effected in accordance with Section 135(3) and Rule 113.

Service of the Notices of Disallowance on the Monitor and Receiver as the former agent of LP V is not sufficient for the purposes of the Act and the Rule. [ 35 ] The Plaintiffs submit that failing to allow a trustee the ability to rely on the claimant’s address set out in a proof of claim will add uncertainty and unnecessary expense to the bankruptcy process, and that it should not be the case that trustees must make enquiries to ensure that an address provided in the proof of claim is still the appropriate address. This decision does not require a trustee to make enquiries in the normal course.

However, in this case, the Trustee was advised through receipt of the Amended Final Order in June, 2010 that the general partner of LP V was now MEG, and that the duties of the Monitor and Receiver were shortly coming to an end.

It was not an onerous duty to impose on the Trustee in this case the obligation of checking to see whether MEG had assumed its duties pursuant to the Amended Final Order at the time he sent out the Notices of Disallowance in December, 2010. [ 36 ] The Plaintiffs also submit that Bennett Jones had as ostensible authority to accept service of the Notices of Disallowance as agent of MEG and LP V, even if it had not been formally retained. The scope of Bennett Jones’ authority may well have been confusing in the circumstances.

However, even if Bennett Jones had such apparent authority, the Trustee did not directly serve Bennett Jones as agent for MEG, as required by the Act or Rule, or not at least until July 11, 2011. [ 37 ] There is a troubling inconsistency in the evidence with respect to the authority of Bennett Jones in December, 2010. Mr. Butt testified on cross-examination on affidavit that the investigation and advancement of the claims by Concrete IV and LP V against the bankruptcy estates of Aurora and Humeniuk were part of Bennett Jones’ retainer in acting for the Steering Committee.

MEG attempted to resile from that testimony at the hearing of the application, suggesting it was inconsistent with the Steering Committee’s status and overall mandate.

However, the submission that Bennett Jones as counsel to the Steering Committee was actually the agent for LP V, and that LP V had thus been properly served, ultimately fails for the same reason as the ostensible authority submission: Bennett Jones was not directly served with the Notices of Disallowance by the Trustee. [ 38 ] The Plaintiffs submit that, in any event, service of the Notices of Disallowance was effected on July 11, 2011 when counsel for the Plaintiffs emailed copies of the Notices of Disallowance to Bennett Jones.

The Plaintiffs submit that this constituted service as required by Rule 113, section 135(3) of the BIA and the Rules of Court . [ 39 ] These copies were provided by counsel to the Plaintiffs, not by the Trustee in Bankruptcy of Humeniuk and Aurora, and in the context of pre-hearing proceedings directly related to the issue of valid service. The copies were not accompanied by any warning that this would now constitute proper service, and it must be inferred that there was an implied understanding between counsel that the issue of service was to be resolved through this application. [ 40 ] In

summary on this issue, the Notices of Disallowance were not properly served on MEG, and have not been properly served to the date of this decision. The time to appeal such Notices of Disallowance as set out in Section 135(4) of the BIA has not yet commenced.

(

c) Deeming Service to be Adequately Provided [ 41 ] The Plaintiffs submit that, even if the Trustee did not comply with the strict requirements of service, the Court has the jurisdiction under s. 187(9) of the BIA to deem that notice has been properly provided. [ 42 ] Rule 187(9) of the BIA provides that no bankruptcy proceeding shall be invalidated by any irregularity unless the Court is of the opinion that substantial injustice has been caused by the irregularity that cannot be remedied by order. [ 43 ] The parties agree that the question of the Court’s authority to cure an irregularity pursuant to s. 187(9) depends on whether the irregularity is a matter of form or of substance: Haywood Securities ltd. v.

Witwicki , 1995 CarswellBC 389 (C.A.) at para. 6 . It is also clear that determining whether “substantial injustice” has been caused by an irregularity involves a weighing of the equities between the parties. [ 44 ] In Haywood , a decision to cure an irregularity through s. 187(9) would have resulted in a bankrupt changing status from discharged to undischarged, which the Court found was clearly a matter of substance and not of form. The bankrupt had not received a notice of objection to discharge made by one of his creditors. [ 45 ] In this case, Mr.

Butt, the principal of MEG, had actual knowledge of the Notices of Disallowance through membership on the Steering Committee and through receipt of copies of the disallowances from Bennett Jones as counsel to the Steering Committee. It may be that Mr. Butt did not recognize the implications of the Notices of Disallowance, but he cannot be said to have lacked knowledge. The irregularity in services is thus an irregularity of form and not of substance, and s. 187(9) is available to the Plaintiffs. [ 46 ] However, I must weigh the equities in deciding whether to cure the irregularity in service.

The effect of doing so would be to deprive MEG as new general partner of LP V of its right to pursue set-off against the Plaintiffs in this action, a right that was expressly reserved in the CCAA proceedings. I also note that the Defendants do not seek to reopen the bankruptcies of Mr. Humeniuk and Mr. Aurora, or to share in any dividend to other creditors.

On the other hand, the Plaintiffs would merely lose the right to rely on the Disallowances during the trial of the Action and would continue to have available to them the same submissions and arguments that the Trustee would have had if an appeal of the Disallowances had been heard in the bankruptcies.

While this may lengthen the trial of the Action, the equities thus appear to favour refusing to cure the irregularity in service on the basis that a substantial injustice has been caused by such irregularity that cannot be remedied by an order that service was sufficient. [ 47 ] I am aware that a decision not to cure the irregularity in service affects the integrity of the process in respect to these two bankruptcies, and should not be taken lightly. I make such a decision reluctantly, given the unusual circumstances of this case. [ 48 ] I have taken into account that MEG as represented by Mr.

Butt is responsible for the interests of many investors in LP V, and that Mr. Butt’s failure of diligence has implications, not for MEG as primary creditor, but for LP V. I also take into account that the CCAA and receivership proceedings were complex and unusual, and that the implications of the Notices of Disallowance on later litigation were not readily apparent. Remedying service in this case would not be in accordance with the fundamental purpose of CCAA proceedings in preventing undue manoeuvering for position among creditors.

CONCLUSION [ 49 ] I find that the Notices of Disallowance have no force or effect in so far as they purport to affect the CCAA proceedings; in particular, the reservation of the Disputed Claims in accordance with the Claims Procedure, with MEG in the role of the Monitor. As the Notices of Disallowance were not properly served during the course of the bankruptcies of Mr. Humeniuk and Mr. Aurora, and those bankruptcies have now been terminated, the Notices of Disallowance have no further effect.

There is thus nothing to prevent the Defendants from pursuing the set off of these claims during the course of litigating the Action.

Dated at the City of Calgary, Alberta this 10th day of January, 2012. B.E. Romaine J.C.Q.B.A. Appearances: Michael Marion and Matti Lemmens of Borden Ladner Gervais LLP for the Plaintiffs Alexis Teasdale of Bennett Jones LLP for the Defendants