First Capital Management (Re), 2012 ABQB 33

Court of Queen ’ s Bench of Alberta Citation: First Capital Management (Re), 2012 ABQB 33 Date: 20100112 Docket: BE01 406754 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 First Capital Management Ltd. _______________________________________________________ Memorandum of Judgment of the Honourable Mr. Justice G.C. Hawco _______________________________________________________ Background [ 1 ] The Applicant is a lawyer, a former partner of Burnett, Duckworth & Palmer ( “ BDP ” ).

He was admitted to the Bar in 1996 and practised corporate and commercial law with BDP from 1996 to 2007, when he became executive vice-president, Corporate Finance, of the Respondent, First Capital Management Ltd. ( “ FCM ” ). He held that post from June 1, 2007 to May 31, 2010. [ 2 ] There was no written contract of employment between Mr. Herman and FCM; however, Mr. Herman claims that there was an agreement made between himself and Mr. Bob Wilfur, President of FCM, whereby he would earn a salary of “ approximately ” $1 million per year.

This would include his base salary of $200,000, bonuses to be paid at the discretion of FCM and what has been referred to as an equity interest in various investments in which FCM became involved. In addition, Mr. Herman was to receive beneficial ownership of 100,000 shares of Oil Sands Underground Mining Corporation ( “ OSUM ” ). [ 3 ] FCM filed a Notice of Intention ( “ NOI ” ) under the Bankruptcy and Insolvency Act, R.S.C. 1985, C. B-3 ( “ BIA ” ) on September 15, 2010. [ 4 ] On October 29, 2010, Mr.

Herman filed a Proof of Claim claiming 75,000 shares of OSUM, which he valued at $975,000 plus $1,437,500 in unpaid salary. After deducting money which he owed FCM in connection with the purchase of certain shares, Mr. Herman ’ s actual claim was $818,501.47, plus the OSUM shares.

[ 5 ] Attached to his Proof of Claim was a document entitled “ Confirmation of Terms of Agreement ” , dated October 19, 2010. This document purported to confirm the agreement between FCM and Mr. Herman referred to above. Mr. Wilfur signed the document on behalf of FCM and signed an acknowledgement that the document accurately reflected the agreement between Mr. Herman and FCM. [ 6 ] On December 10, 2010, the Trustee replied to Mr. Herman ’ s claim by way of Notice of Disallowance, stating that it had reviewed Mr.

Herman ’ s Proof of Claim in the amount of $818,501.47 and was allowing the Proof of Claim as an unsecured claim in the amount of $1,577,501.47. The claim for the OSUM shares had been converted into a monetary value of $13 per share, which was included within the $1.5 million referred to above. [ 7 ] As usual, the Trustee advised Mr. Herman that if he was dissatisfied with his decision in disallowing his claim, he could appeal to this Court within 30 days.

If he failed to appeal, the Notice of Disallowance would be binding upon him. [ 8 ] On February 24, 2011, the Trustee filed an addendum to his proposal. [ 9 ] Shortly before March 10, 2011, the creditors, including the unsecured creditors, of which Mr. Herman was one, approved the proposal. [ 10 ] On March 10, 2011, this Court granted an Order stating that the proposal was fair and reasonable and was approved pursuant to the provisions of the BIA. [ 11 ] On March 21, 2011, Mr. David Lewis of the Trustee ’ s Office advised Mr.

Herman that the inspectors had been reviewing various claims, including his, and would update him if any change in status occurred. [ 12 ] On September 6, 2011, the Trustee advised Mr. Herman by way of a formal Notice of Disallowance, that his entire claim had been disallowed because there had been no agreement with FCM. It went on to say that the Confirmation Agreement was not enforceable and that the compensation which he had received while with FCM was fair and reasonable. [ 13 ] On October 4, 2011, Mr.

Herman filed this Application to, in effect, set aside the second Notice of Disallowance on the grounds that he had relied upon the first Notice and, not having appealed it, was prohibited from maintaining a claim for 75,000 shares of OSUM. As such, he had been prejudiced. [ 14 ] Mr. Herman submits that the Trustee had a duty to exercise due diligence in reviewing his original claim.

Having failed to do so, it ought not now be permitted to do a further review and disallow his remaining claim in the amount of $602,501.47, which is the amount which he claimed to be owed based upon an annual salary of $1 million, after deducting the amount of salary and bonuses actually received, and deducting the amount he owed FCM. Issues 1. Was there any breach of duties by the Trustee towards Mr. Herman? 2. Does the Trustee have the right to disallow all of Mr. Herman ’ s claim, having previously disallowed only a portion of it? 3. Should Mr. Herman ’ s appeal of his second Notice of Disallowance be allowed?

Answers

1. There was no breach of duty by the Trustee. 2. The Trustee had the right to re-visit Mr. Herman ’ s claim and disallow all of it. 3. Mr. Herman ’ s appeal of the second Notice is dismissed. Reasoning Breach of Duty by the Trustee [ 15 ] Certainly a Trustee has a duty to act fairly with respect to all creditors.

To suggest that a Trustee is not acting fairly because it initially accepts a Proof of Claim without going into a thorough examination of all of the facts which a creditor alleges occurred does not appear to be based upon current jurisprudence. [ 16 ] To initially concede that there may be an agreement in place and then to do a more critical analysis to determine whether there was indeed an agreement which was unenforceable is another matter entirely. [ 17 ] There is a certain frenetic activity which takes place once an NOI is filed.

Among other things is the appointment of inspectors who are entitled to look at all claims submitted and request a further examination take place. Whether an agreement was or was not actually in place is a legitimate concern. Once the Trustee had an opportunity of taking a closer look at that issue, it determined that there was no agreement in place. There is nothing to suggest bad faith or a sloppy investigation. A Trustee must have sufficient time in which to decide whether a claim previously allowed be disallowed. Section 135(4) of the BIA gives the right of the Trustee to the disallow a claim.

That is – subject to the right of appeal – final. There is no language which says the Trustee may not do so. More will be said of this later. [ 18 ] I do not accept that there has been any evidence whatsoever to suggest that because the Trustee initially allowed the claim and later disallowed it, there should be assumed a breach of good faith or breach of any duty of care from the Trustee to a creditor. Right to Disallow Claim [ 19 ] Mr. Herman also argued that the Trustee had accepted the bulk of his claim. As such, he elected not to appeal the Notice of Disallowance.

Because of this, he argues that the Trustee ought not now be permitted to reconsider its original decision, because he has been prejudiced. [ 20 ] Mr. Herman relies upon section 135(4) of the BIA. That

section provides: Determination or disallowance final and conclusive

(4) A determination under subsection (1.1) or a disallowance referred to in subsection (2) is final and conclusive unless, within a thirty day period after the service of the notice referred to in subsection (3) or such further time as the court may on application made within that period allow, the person to whom the notice was provided appeals from the trustee ’ s decision to the court in accordance with the General Rules. [ 21 ] It is argued that by disallowing only a part of his claim, and allowing another part, the whole of the disallowance becomes final and conclusive. [ 22 ] Mr.

Herman concedes that had there been new evidence which had not been available when the first Notice of Disallowance was issued, his argument would not have much merit. He argues, instead, that there was nothing new of any significance which was discovered prior to issuing the second Notice. [ 23 ] The Trustee ’ s response is that there was new evidence in the form of new financial documents. In addition, there were emails

which had not previously been seen. [24] In any event, the Trustee argues that the inspectors who were appointed had the right, indeed the obligation, to examine all ofthe materials which had been in existence prior to the Trustee’s first Notice having been sent out. As well, they were entitled to look atanything else which had arisen. That was information which was all new to them. [25] I agree with the Trustee’s position. I do not read section 135(4) as prohibiting the Trustee from reviewing any part of a claimwhich earlier had been allowed – which is what happened here. In Mamczasz Electrical Ltd. v.

South Beach Homes Ltd. (2010) 69 CBR(5th) 1, Registrar Schwann of the Saskatchewan Court of Queen’s Bench allowed a Trustee to fully disallow a claim after havingpartially allowed that claim earlier, basing his decision upon Re Drummie (2004) 2004 NBQB 35 , 49 CBR (4th) 90, a decisionof Registrar Bray of the New Brunswick Court of Queen's Bench. In that decision, Registrar Bray said this: [16] Having initially decided that the security claim had appeared to be in order, he later disallowed it based on further information. TheAct refers only to the Trustee's disallowance as being final and conclusive.

It does so in terms so clear and with such distinct proceduresfor giving notice of the disallowance and for appeal thereof, that one must imply an exclusion for other decisions by the Trustee. ... [20] The Act does not make the determination of a provable claim by the Trustee final and conclusive as it does for a disallowance. Hadthe legislators wished to limit the competence of the Trustee to review a decision under subsection (1.1) of

section 135 of the Act, whenfurther evidence is received, they surely would have done so in terms as clearly as those enacted in subsection (4). [26] This reasoning was also approved by Justice Veit of this Court in Re Dyrland, 2008 ABQB 356 , [2008] AJ No856, at para 53, where she said: Re Drummie, which in my view correctly states that the BIA does not prevent a Trustee from re-assessing claims as the administration ofa bankruptcy goes forward, points the way to a correct purposive

interpretation of the BIA. [27] It should be noted that in Mamczasz Electrical, the Registrar reached that conclusion in the absence of evidence of prejudiceon the part of the creditor (see para 54). [28] Mr. Herman, says that he was prejudiced by not appealing that part of the initial disallowance whereby the Trustee convertedhis claim for OSUM shares into a claim for the value of the shares and then set off an additional $216,000, thereby reducing his claim of$818,000 to $602,000. What the Trustee did in its second Notice of Disallowance was to review the original total claim of Mr. Herman,which was $2,412,000.

This included his valuation of OSUM shares at $975,000. That total claim was what the Trustee disallowed onSeptember 6, 2011. Mr. Herman has the right to appeal that disallowance of his claim and has done so. I see no prejudice. [29] The Trustee has the right to review its prior allowance. It did so, based upon a reconsideration of material before it togetherwith some new material. Appeal of Notice of Disallowance [30] The primary issue before the Court is whether the Trustee was justified in disallowing Mr.

Herman’s claim for unpaid salaryunder an agreement which he alleged was in place between himself and FCM. [31] Mr. Herman argues that while the amount of any bonus was to be at the discretion of FCM, on an annual basis, and while itwas entirely within the discretion of FCM as to what and if and in what amount he would be entitled to earn equity interests ininvestments of FCM, it was agreed that he would receive “approximately” $1 million per year taking into consideration all of the above.

[ 32 ] Mr. Herman did receive a bonus in the amount of $100,000 in December 2009. He also received certain equity interests in investments in FCM. But his claim is that he was still short some $818,000 over the three-year period of employment plus what he lost by not having the OSUM shares delivered to him. [ 33 ] I have no doubt but that Mr. Herman believed he did have an agreement with FCM. The Confirmation of Terms of an Agreement was not in any manner an attempt to mislead the Trustee. It appears to have been the belief of both Mr. Herman and Mr.

Wilfur that an agreement had been reached. [ 34 ] Unfortunately, the correspondence which went back and forth between these two individuals and the questioning of Mr. Herman confirms to me that there was no agreement reached other than and agreement to agree on a method of compensation in the future. Mr. Herman ’ s email to Mr. Wilfur on March 17, 2007 said: On the go forward front, I think we just handle it deal by deal. I don ’ t need or want a set percentage.

I think we address it based on the circumstances at the time, similar to what we discussed based on where the deal came from, how it is put together, what is involved to get the deal done and how everyone is involved in the process. I think we can work out what is fair. [ 35 ] An email from Mr. Herman to Mr. Wilfur on September 30, 2009 stated: ... but I do need to move some things forward on my compensation front. ... we need to move forward with our discussions on salary, bonus and share allocations. Any thoughts that you are ready to discuss ... ? [ 36 ] Mr.

Wilfur ’ s response, on October 5, 2009 stated: I am working on the idea we originally talked about of how you can make $1 M per year as a combination of salary, bonus and share positions ... [ 37 ] In Mr. Herman ’ s questioning on October 25, 2011, he was referred to the passage above in the email of March 17, 2007 and then was asked the following questions and gave the following responses, beginning at line 15 on page 20: Q: You wrote that paragraph; right? A: Yes, yup. Q: I think you will agree with me that this is in response to Mr.

Wilfur ’ s paragraph that we talked about a moment ago about the percentage of seed shares. A; Correct. Q: I take from this that what you are saying is, we don ’ t need to come to an agreement on that now, we can just agree on that from time to time as the need arises; is that fair?

A: Yes, correct, the percentage on each deal; that ’ s correct. Q: I ’ m sorry? A: The percentage on each deal; that ’ s correct. Q: Right. What that percentage is and whether you ’ re entitled to participate and what your participation may be on each deal, you and Mr. Wilfur will simply agree to decide that from time to time as the need arises? A: Correct. [ 38 ] On November 10, 2011, Mr. Herman was again questioned with respect to the emails above referring to the need to move forward with discussions on salary, bonus and share allocations.

On page 101 the following exchange took place, beginning at line 16: Q: I gather the reason that you wrote that is because as of this date (September 3, 2009), apart from the agreement on the $200,000 base salary, there was no agreement with respect to bonus or share allocation; correct? A: Specifically allocation; that ’ s correct. Q; Or bonus? A: Or bonus; that ’ s correct. Q: So this was an issue that had been kind of hanging out there for some time, and you were beginning to grow concerned and wanted to pin Mr. Wilfur down on these issues?

A: Yes, we were two years after the fact and it was time to discuss the allocations. [ 39 ] Further on in the questioning, Mr. Herman was being examined about notes made by himself prior to or during a meeting with Mr. Wilfur in New York, entered as Exhibit 3 to Mr. Herman ’ s affidavit of October 25, 2011. At page 109, the following exchange took place, beginning at line 10: Q: Right, sure. That ’ s – this is a negotiation; right? A: Correct. Q: Mr. Wilfur is making certain suggestions to you, and you are looking at them and thinking, this doesn ’ t make sense to me?

A: Yeah, we ’ re trying to figure out the allocations, correct. Q: I take a sense from reading some of these notes, Sir, that there ’ s a certain amount of frustrations setting in with you as at this date, October of 2009, in your dealings with Mr. Wilfur around this issue.

A: I don’t know of “frustration” is the right word, because I’m actually happy we’re talking about the allocations now and actuallygetting to the matter. Q: Right, because – A; Because to this point we hadn’t specifically talked about the allocations. Q: Right, because you had been employed by First Capital for two years, three months or so – A; Yeah. Q: – and hadn’t had any real discussion around the allocation to this point? A: Correct. Q: You wanted to get this issue on the table and have these negotiations and come to an agreement on it; right? A: Correct. [40] Mr.

Herman has urged the Court to follow the reasoning of Backhouse, J. of the Ontario Superior Court of Justice inSambrook v. Altamira Management Ltd., [2001] OJ No. 2769, at para 73: In approaching these issues, I take heed of what Mr. Justice Morden wrote in Canada Square v. V.S.

Services Ltd. (1981), (ON CA), 34 O.R. (2d) 250 (C.A.) at 262: “Nonetheless, accepting that the parties intended to create a binding relationship and were represented by experienced businessmen whohad full authority to represent their respective companies, a court should not be too astute to hold that there is not that degree of certaintyin any of its essential terms which is the requirement of a binding contract.” There was an enforceable agreement. No essential matter was left unresolved. [41] I accept that Mr. Herman and Mr.

Wilfur intended to create a “binding relationship” but I do not accept that there was “thatdegree of certainty” with respect to a number of its essential terms. There was, in my respectful view, nothing more than “a pious hope”that the essentials of some agreement would be reached. [42] I agree with the Trustee’s argument that Mr. Herman did not have a binding contract pursuant to which he was entitled to earn$1 million per year.

His entitlement to remuneration in excess of a base salary of $200,000 was uncertain and was subject to on-goingnegotiation and further agreement from time to time on what might be a fair amount. [43] As stated by our Court of Appeal in Angus Leitch & Associates Ltd. v. Legrand Industries Ltd. (1983), 1983 ABCA 231, 31 Alta. L.R. (2d) 158, at para 11:

Some uncertainty may be so bad as to amount to no agreement whatever. An agreement to agree later on some term is a device which seems to spring very naturally to the minds of businessmen, but unfortunately it is void and will most probably render void the entire contract in which it is contained. ... An agreement to agree is void because it is not really an agreement on anything at all, but merely a pious hope that an agreement may later be reached. [ 44 ] The Confirmation of Terms of Agreement was prepared after the fact. Indeed, it was prepared after the Notice of Intention.

I am satisfied that there never was anything more than an agreement to agree, pending on-going negotiation. The actions of the Trustee were warranted. Mr. Herman ’ s claim is dismissed. Heard on the 1 st day of December, 2011. Dated at the City of Calgary, Alberta this 12 th day of January, 2011. G.C. Hawco J.C.Q.B.A. Appearances: Josef G.A. Kruger, Q.C. Borden Ladner Gervais LLP for Mr. Herman Randal S. Van de Mosselaer D. Aaron Stephenson Macleod Dixon LLP for the Trustee