Alberta Treasury Branches v Chocolaterie Bernard Callebaut Partnership, 2012 ABQB 245

Court of Queen ’ s Bench of Alberta Citation: Alberta Treasury Branches v Chocolaterie Bernard Callebaut Partnership, 2012 ABQB 245 Date: 20120413 Docket: 25 1395703 and 1001 11456 Registry: Calgary In The Matter of the Bankruptcy and Insolvency Act, R.S.C. 1985, C. B-3 , as amended And in the Matter of Chocolaterie Bernard Callebaut Partnership AND Between: Alberta Treasury Branches Plaintiff - and - Chocolaterie Bernard Callebaut Partnership, by Its Managing Partner, Chocolaterie Bernard Callebaut Ltd., 1013988 Alberta Ltd., Chocolaterie Bernard Callebaut Ltd., 1054796 Alberta Ltd., Bernard Callebaut and Francesca Callebaut Defendants

Corrected judgment: A corrigendum was issued on April 18, 2012; the corrections have been made to the text and the corrigendum is appended to this judgment. _______________________________________________________ Reasons for Decision of the Honourable Madam Justice B.E. Romaine _______________________________________________________ Introduction [ 1 ] The Trustee in bankruptcy of the Callebaut Partnership applies for advice and direction relating to the payment of fines levied against Benard Callebaut arising from a contempt hearing. In addition, a creditor of the Partnership applies pursuant to

Section 38 of the Bankruptcy and Insolvency Act to be allowed to take proceedings in the place of the Trustee to disallow Mr. Callebaut’s claim as an unsecured creditor in the bankruptcy. Facts [ 2 ] Deloitte & Touche Inc. was appointed the receiver and manager of Chocolaterie Bernard Callebaut Partnership (the “Callebaut Partnership”), 1013988 Alberta Ltd., Chocolaterie Bernard Callebaut Ltd. and 1054796 Alberta Ltd. (“105") (collectively “Callebaut”) on August 9, 2010. [ 3 ] Under the receivership, land owned by Callebaut was sold.

In addition, the assets of the Callebaut chocolate business were sold to 1563181 Alberta Ltd., now known as Cococo Chocolatiers Inc. As a result of events that arose during the sale of the chocolate business, the Court granted an order dated March 24, 2011 declaring Bernard and Francesca Callebaut in contempt of the receivership order and ordering them to pay financial penalties and costs of $99,150 plus an additional $50,000 (the “Damages”) for the benefit of unsecured creditors within six months of the order having been granted.

The Callebauts have not paid these fines. [ 4 ] Pursuant to an order dated March 23, 2011, funds totalling $1,628,575 were transferred to the bankrupt estate of the Callebaut Partnership, representing the net proceeds of the sales of land and of the chocolate business after payments to Callebaut’s secured creditors, Alberta Treasury Branch and Invesco Mortgage Inc. [ 5 ] Deloitte as Trustee in bankruptcy of the Callebaut Partnership now applies for the Court’s approval:

a) to set off the amount of the fines owing under the contempt order from any dividend payable to Mr. Callebaut from the bankrupt estate;

b) to distribute funds remaining in the estate on account of the Damages portion of the contempt fines for the benefit of the unsecured creditors of the estate excluding Mr. Callebaut; and

c) to pay final dividends to the unsecured creditors, including the Callebaut dividend, within 30 days. [ 6 ] Mr. Callebaut has filed a proof of claim in the bankruptcy in the amount of $4,068,101. Invesco submits that it has priority with respect to any payment due to Mr. Callebaut pursuant to his unsecured claim by virtue of a general security agreement granted to it by Mr. Callebaut. Mr. Callebaut appeared at this application and confirmed that Invesco has the right to receive any dividend payable to him in the bankruptcy. I granted an order directing that any dividend that would otherwise be payable to Mr.

Callebaut be paid to Invesco. [ 7 ] In the Receiver’s third report, it advised that a potential claim may exist against the Callebauts as sole directors of 105 for breach of fiduciary duty under

section 122 of the Alberta Business Corporations Act (“ABCA”) or an oppression action under

section 242 of the ABCA, since it appeared that the mortgage on the lands since sold was entered into in breach of 105's by-laws. The inspectors in bankruptcy approved a motion in February, 2011 to the effect that the Trustee would not pursue these potential claims, but would notify creditors of their ability to prosecute them pursuant to

section 38 of the BIA . No creditor came forward to do so at that time. [ 8 ] Cococo, which had acquired the books and records of the chocolate business when it purchased the assets, expressed concern to the Trustee about the validity of Mr. Callebaut’s unsecured claim in the bankruptcy. After reviewing information provided by Cococo, the Trustee issued a Notice on January 27, 2012 that disallowed $173,688 of the claim, but has admitted the balance of $3,894,441. Cococo has raised additional concerns with respect to the validity of the claim as follows: a.

Dividends may have been declared at a time when Callebaut was insolvent; b. Dividends may have been declared at a time when the preferred shares of Callebaut were not fully redeemed; c. Appropriate resolutions may not have been prepared for selected dividend transactions; d. Transactions involving Francesca Callebaut may not have been differentiated from those involving Bernard Callebaut (collectively, the “Legal Issues”); and e.

Lapses in the overall accounting practices of Callebaut may call into question the validity of the entire shareholder loan (the “Accounting Issue”). [ 9 ] The Trustee reviewed the Legal Issues and concluded that it had insufficient evidence to support any further disallowance of Mr. Callebaut’s claim.

The Trustee also reviewed the Accounting Issue and concluded that the cost of the Trustee undertaking further review of the books and records of Callebaut would be prohibitive, given the evidence provided. [ 10 ] The inspectors agreed with the Trustee that it should not take further action, and the Trustee advised Cococo that, should it wish to challenge the admitted portion of Mr. Callebaut’s claim, it had the ability to undertake proceedings pursuant to

section 38 of the BIA . [ 11 ] Cococo has now applied to be substituted for the Trustee in an action to disallow, wholly or partially, Mr. Callebaut’s unsecured claim. Cococo also applies for an order directing the Trustee to postpone the payment of any further dividend to either Mr. Callebaut or Invesco pending the outcome of the creditor disallowance process. Invesco opposes Cococo’s application. [ 12 ] Cococo opposes the Trustee’s application to have the Damages portion of the contempt fines set-off from any dividend payable to Mr. Callebaut.

However, it does not oppose the set-off of the costs portion of the contempt fines, and the distribution of that set-off amount to the appropriate parties as directed by the contempt order. Invesco supports the Trustee’s application to set-off in its entirety.

Issues A. Is Cococo entitled to an order pursuant to s. 38 of the BIA that would allow it to take proceedings to disallow Mr. Callebaut’s claim? B. Should the Trustee be allowed to set-off the Damages portion of the contempt order made against Mr. Callebaut against any dividends that would be payable to him? Analysis A. Cococo’s application pursuant to

section 38 of the BIA [ 13 ] Section 38(1) of the BIA allows a creditor to apply for an order authorizing it to take proceedings in its own name and at its own expense and risk where it has requested the trustee to take such proceedings that in its opinion would be for the benefit of the estate and the trustee has refused to do so. [ 14 ] The two pre-conditions to the application, being that the creditor has asked the trustee to act and the trustee has neglected or refused to do so, have been met. [ 15 ] In addition, an applicant must establish a threshold case sufficient on its merits to warrant the Court’s approval to proceed.

While what this means has varied from case to case, the courts in Alberta have adopted the test endorsed in Re Jolub Construction Ltd. (1993), 21 C.B.R. (3d) 313 , being that the applicant must establish that the claim is not “obviously spurious”: para. 19; see also Re Tirecraft Group Inc. , 2009 ABQB 281 at paras 2 and 14 ; Re NESI Energy Marketing Inc. , 1998 ABQB 912 at 22.

There must be evidence beyond mere allegations to support the claim: Jolub at para. 20, Tirecraft at para. 14. [ 16 ] Although Cococo has not filed an affidavit to support the threshold test, it relies upon the description of its case contained in the Trustee’s first report put in evidence, particularly the particulars of its concerns as previously described. The report provides sufficient background and context to lift the issues raised by Cococo from the status of mere allegations.

It is not necessary that an applicant provide a strong prima facie case, or that the Court embark on a searching review of the strength of the case at this stage of the proceedings. As noted in NESI at para. 24,

section 38 is not the forum to try the merits of the proposed litigation beyond the establishment of a threshold case. [ 17 ] Invesco submits that the fact that the Trustee has decided not to act is sufficient to establish that the claim has not passed the threshold test. However, the Trustee’s report makes it clear that the Trustee is merely of the view that it had insufficient evidence to support a further disallowance with respect to the Legal Issues and that pursuing the Accounting Issue would be too expensive. It is precisely for these types of circumstances that

section 38 exists: to provide a mechanism for creditors to proceed with an action when the trustee is not prepared to do so. Any abuse of the opportunity offered by

section 38 to creditors can be addressed through use of the Court’s discretion to refuse the application even if the threshold test has been met. The language of

section 38 is permissive: the Court “may” grant the order, and may impose conditions on the proceedings”: Jolub at para. 24. [ 18 ] Invesco notes that Cococo purchased its unsecured claim to pursue this application and that it is driven by competitive reasons to make this application. While these may be factors to be taken into account in the Court’s exercise of discretion under

section 38, they are not sufficient in this case to cause me to refuse the application. As in Jolub (at para. 27), there is nothing contrary to any principles of bankruptcy law or contrary to the integrity of the bankruptcy proceedings in allowing the proposed action to proceed. While Cococo is a competitor of Mr. Callebaut’s new business, its purchase of the chocolate business was an integral part of the bankruptcy proceedings, and it is not a stranger to the process who has stepped in for purely competitive reasons.

[19] Invesco submits that

section 38 requires that the proceedings have the potential to result in a monetary gain or increase in theassets of the bankrupt’s estate, and that, since the proposed action if successful in whole or in part would only result in a greater recoveryfor the unsecured creditors other than Mr. Callebaut, the application does not fall within the strict confines of

section 38: ICI Canada Inc.V. Bishop Holdings Ltd., 2007 BCSC 635, citing Re Benard Motors Ltd., (1958), (NB CA), 18 D.L.R. (2d) 528(N.B.C.A.). [20] Interpreting

section 38 in this manner restricts the use that creditors can make of it if they disagree with a decision of theTrustee. While a creditor may have statutory avenues to appeal the decision of the Trustee and/or the inspectors, an appeal, if successful,would force the Trustee to take action that it has concluded would be too expensive for the estate.

Section 38 provides a method fordirect action by a creditor or creditors at no risk of additional cost to the estate, and this is different in effect and scope from an appeal.There appears to be no good policy reason to restrict the scope of

Section 38 in the way suggested. [21] While the right provided by

section 38 is a statutory right, and thus a creditor must bring itself strictly within its provisions,the Alberta Court of Appeal in Toyota Canada Inc. v. Toronto-Dominion Bank, 1994 ABCA 261 , [1994] A.J. No. 520 at para.13 has endorsed the following comments of the Ontario Superior Court on the

interpretation of the predecessor to the present

section 38: Any

interpretation to be given to the meaning and scope of sec. 35 should be a liberal one, and not a construction that would debar acreditor, if he is prepared to undertake the risk, of the right to proceed for his own benefit. Re Andrew Motherwell of Canada Ltd. (1924), 550 L.R. 294 at 298. [22] The Court in Toyota Canada took a purposive approach to the notice provisions of

section 38 and found that the

section didnot require that notice of the application be given before an action was commenced. At para. 12, Conrad, J.A. referenced the SupremeCourt’s general rule of

interpretation of the BIA in Mercure v. Marquette & Fils Inc., (SCC), [1977] 1 S.C.R. 547, tothe effect that using an “overly narrow legalistic approach” to

interpretation of the BIA would be to misinterpret it. [23] It is noteworthy that

section 38 does not on its face require that proceedings be for the benefit of the estate in the sense of anincrease in assets, but merely that, in the opinion of the creditor making the application, the proposed proceeding “would be for thebenefit of the estate”. Cococo submits that the disallowance of Mr. Callebaut’s claim would yield “an obvious benefit to the remainder ofthe general body of creditors, that is the estate”: Re Newman, [1990] O.J. NO. 2753. While Cococo and other creditors who join withCococo would be the primary beneficiaries of a successful

section 38 proceedings, any surplus would enure to the estate generally. Giventhat Mr. Callebaut’s unsecured claim is by far the largest in the estate, representing approximately 76% of total unsecured claims (andthe estate will suffer a deficiency), a successful disallowance would have a major impact on the remainder of the unsecured creditors. [24] For these reasons and in the circumstances of this case, I accept Cococo’s opinion of the benefits of the action to the estate. [25] I therefore direct as follows: (

a) Cococo and any participating creditor at their own risk and expense are authorized to be substituted for the Trustee, with all ofthe rights, powers and entitlements of the Trustee, to disallow, wholly or partially, the unsecured claim of Mr. Callebaut in thebankruptcy proceedings or to apply for an order expunging or reducing Mr. Callebaut’s Proof of Claim; (

b) Any other creditors with proven claims in the bankruptcy are granted leave to join the creditor disallowance process as co-applicants on the condition that each such co-applicant bear a proportionate share of the costs of prosecuting the process; and (

c) Any benefit derived from the creditor disallowance process (including any benefit arising from any further reduction in the claimof Mr. Callebaut) shall belong exclusively to Cococo and any other creditors who choose to join the creditor disallowance process as co-applicants to the extent of their claims and costs, with any surplus belonging to the bankruptcy estate.

[ 26 ] As suggested by the Trustee, other creditors will have 30 days from the date of this order to participate in the creditor disallowance process with Cococo. [ 27 ] In addition, I direct the Trustee to postpone the payment of any dividends or further dividends, as the case may be, to Mr. Callebaut or Invesco in its capacity as the holder of a general security agreement over the assets of Mr.

Callebaut, pending the outcome of the creditor disallowance process or further order of this Court. [ 28 ] I direct the Trustee to provide Cococo and its counsel with copies of all materials submitted in support of or in the Trustee’s possession related to Mr. Callebaut’s unsecured claim in the bankruptcy, and grant Cococo the investigative power of the Trustee under the BIA , including the powers to examine witnesses under oath and compel production of documents. An order substantially in the form submitted by Cococo at the application shall be issued. B.

Set-off of the Damages Portion of the Contempt Fines [ 29 ] The Trustee submits that it would make sense to set-off the fines levied under the contempt order from any distribution that may be made to Mr. Callebaut as an unsecured creditor in the bankruptcy, given that Mr.

Callebaut has not paid the fines as he was ordered to do within six months, and that this is a practical way of collecting the fines so that they can be distributed to cover costs and so that the Damages portion can be distributed to other unsecured creditors. [ 30 ] Cococo submits that it would be mathematically and morally inappropriate to allow payment of Mr. Callebaut’s fines under the contempt order by allowing them to be set-off against any dividends that are payable to him. [ 31 ] In Kushner v. Rocky Mountain Sportswear Ltd. (Trustee of) , [2001] A.J.

No. 1135 , Registrar Waller applied the rule in Cherry v. Boultbee in a bankruptcy case where the Trustee’s right to set-off was at issue. The rule provides that where a person entitled to participate in a fund is also bound to make a contribution to that fund, that person will not be allowed to participate in the distribution of the fund until he has made good what is owing to the fund: Houlden, Morawitz and Sarra, 2011 Annotated Bankruptcy and Insolvency Act, citing Cherry v. Boultbee (1939), 4 My.& Cr. 422.

Master Waller noted that the ordinary effect of the rule would be to require the payment of the amount owed before the creditor was entitled to a dividend from the estate. However, he suggested that the practical effect would be to set-off the amount: Kushner at para. 27. [ 32 ] In Re Taylor Ventures Ltd. , [2011] B.C.J.

No. 355 , Burnyeat, J. applied the rule in effect and allowed a trustee in bankruptcy to retain a dividend that would otherwise be payable to a creditor and apply it to a balance owing arising from an order for costs made against a corporation related to the creditor arising from litigation in the bankruptcy. [ 33 ] While the proposed set-off is a practical solution, and I would have no hesitation applying the rule by way of set-off had the debt owed by Mr.

Callebaut been an ordinary debt, the issue is coloured by the fact that the debt arises from a contempt order, a sanction levied by the Court for conduct in breach of court orders. As I indicated at the hearing when I levied the Damages fine, contempt is not only a serious issue for the parties who are directly affected by the conduct of the party in contempt, but also for the Court and the administration of justice generally. It was important in considering and deciding upon an exemplary fine that the penalty be harsh enough to deter not only Mr.

Callebaut but others in future insolvency proceedings who may be tempted to breach a court order for their own benefit. [ 34 ] Allowing the Trustee to set-off the Damages portion of the contempt order in the circumstances of this case would relieve Mr. Callebaut of the burden of the contempt order without any effort on his part to satisfy the order. While it is true that the set-off would ensure that funds that would otherwise be distributed to Mr.

Callebaut would go into the estate, and while he thus would lose the benefit of funds that would be credited against his Invesco debt, the process would be offensive to the nature and purpose of a contempt order. [ 35 ] I must decline to allow the satisfaction of the Damages portion of the contempt order through set-off. Applying the rule in Cherry v. Boultbee in its strict sense, Mr. Callebaut is not entitled to participate in any dividends from the estate unless and until he pays the Damages portion of the contempt fines.

This is not intended to limit additional available sanctions should a party bring a further application in the face of Mr. Callebaut’s continuing contempt and failure to pay the fines in the time stipulated under the order.

[ 36 ] The remainder of the contempt fines may be paid through set-off as proposed by the Trustee. These amounts were levied to cover costs and to reimburse Cococo for the theft of product and supplies, and it would be prejudicial to the estate and the unsecured creditors for these amounts to remain unpaid. [ 37 ] I appreciate that this decision affects the ability of Invesco to collect dividends that may be found to be owing to Mr. Callebaut through its assignment. However, Invesco as assignee of Mr.

Callebaut’s interest takes that interest “subject to all the equities and infirmities of the title of the assignor”. Taylor Ventures at para. 9. As conceded by Invesco, it can be in no better position than Mr. Callebaut in terms of its entitlement to these dividends. Conclusion [ 38 ] Cococo is entitled to an order pursuant to

Section 38 of the BIA . Payment of any dividends to Mr. Callebaut or to Invesco by virtue of its assignment of Mr. Callebaut’s interest is postponed pending the outcome of creditor disallowance proceedings. At any rate, Mr. Callebaut is not entitled to participate in any dividends from the estate unless and until he pays the Damages portion of his contempt fines. The remainder of the contempt fines may be paid through set-off as proposed by the Trustee once the creditor disallowance proceedings are concluded, or with the consent of the s. 38 parties.

Dated at the City of Calgary, Alberta this 13th day of April, 2012. B.E. Romaine J.C.Q.B.A. Appearances: Kelly Bourassa/Ryan Zahara for the Plaintiff Howard H. Gorman/Aaron Stephenson for the Plaintiffs

Peter Jull, Q.C. for the Defendants Bernard Callebaut Self-represented _______________________________________________________ Corrigendum of the Reasons for Decision of The Honourable Madam Justice B.E. Romaine _______________________________________________________ The citation line has been changed to read: Alberta Treasury Branches v Chocolaterie Bernard Callebaut Partnership The Style of Cause has been changed to incorporate the Bankruptcy file in these Reasons for Decision. On page 9 the spelling of Bernard Callebaut has been corrected under Appearances.