Sapient Grid Corp. (Re), 2012 ABQB 357

Court of Queen ’ s Bench of Alberta Citation: Sapient Grid Corp. (Re), 2012 ABQB 357 Date: 20120528 Docket: BE03 1502756 Registry: Edmonton In the Matter of the Bankruptcy of Sapient Grid Corp. Between: Oil Lift Technology Inc. Appellant - and - Deloitte & Touche Inc. Respondent _______________________________________________________ Memorandum of Decision of W. S. Schlosser, Registrar in Bankruptcy _______________________________________________________ [ 1 ] These are three appeals of the Trustee ’ s disallowance of property claims. [ 2 ] The situation appears complex but, on examination, the basic facts are relatively straightforward and, for the most part, not

in dispute. However, there is conflicting evidence on some key issues. [ 3 ] Oil Lift Technology Inc. hired the Bankrupt, Sapient Grid Corp. to produce an oilwell site device that would allow remote monitoring and control of well sites (the “ AMOS System ” ). Sapient undertook the project with the assistance of Harold Kobler and Terry Renneberg. Oil Lift advanced funds to Sapient and a prototype was built. [ 4 ] The prototype went to Australia for testing in the field. It was installed with less than ideal timing or ideal circumstances.

The system required input and contribution from a variety of sources, (including Oil Lift) for it to work. Both Kobler and Renneberg wrote some of the computer code for different portions of the application. [ 5 ] There is conflicting evidence about the status of the system at the end of the test. But it is clear that the system was not complete. It required work. [ 6 ] Oil Lift sued Sapient and Terry Renneberg, March 22, 2011. In general terms, the lawsuit is to recover the amounts Oil Lift paid to Sapient. It also seeks unliquidated damages for, inter alia, breach of warranty.

The action against Renneberg is based in misrepresentation, breach of duty and the tort of interference with contractual relations. [ 7 ] Sapient filed a voluntary assignment in bankruptcy in late May 2011. The AMOS project was never completed. [ 8 ] Oil Lift sought to prove its claim in the bankruptcy. This claim was disallowed by the Trustee. This is the first appeal. [ 9 ] The second appeal has primarily to do with the ownership of the intellectual property comprising the AMOS System. Mr. Renneberg has asserted a claim for this together with a claim for some other physical property.

This claim was also disallowed by the Trustee. Mr. Renneberg has appealed. [ 10 ] The Trustee ’ s first disallowance and the appeal of that disallowance resulted in an explosion of evidence. There were six very detailed Affidavits prepared; variously in support of the disallowance, or the appeal, and two cross-examinations on the Affidavits. The cross-examinations themselves exceed one hundred pages. [ 11 ] The Trustee ’ s disallowance of Mr. Renneberg ’ s

section 81 property claim prompted two further Affidavits. [ 12 ] Mr. Kobler asserted a property claim in January of this year which was also disallowed by the Trustee. The disallowance prompted a further detailed Affidavit on appeal. [ 13 ] In the interim, Mr. Kobler sought access to documents in the bankruptcy and the Trustee applied to sell the Bankrupt ’ s hard assets, which was opposed and a qualified Order was granted. [ 14 ] The lawsuit underlying the first disallowance has now grown to include a Counterclaim and Third Party proceedings.

Given this additional evidence, the three appeals now before me are quite different from the claims initially presented to the Trustee. [ 15 ] There are three legal questions arising from the Trustee ’ s disallowances and these late developments:

(1) The standard of review to be applied to a Trustee ’ s disallowance;

(2) Whether an appeal from a Trustee’s disallowance is de novo, and whether new materials can be considered;

(3) If the appeals are allowed, the options open to a Registrar to bring these matters to a conclusion. Standard of Review [16] Subsections 135(1) and (1.1), which deal with proof of claims and provable contingent or unliquidated claims, are mandatoryin terms of the Trustee’s duties and obligations. The decided cases tell us that the standard of review of a Trustee’s rejection of a claim is“correctness”. The standard of review of a Trustee’s valuation of a contingent or unliquidated claim is “reasonableness”.

Re TransglobalCommunication Group Inc., 2009 ABQB 194 at para. 74, per Yamauchi, J. [17] Here, all of the claims were rejected, so the starting point for the review of the Trustee’s disallowance is correctness. [18] The threshold for establishing the existence of a contingent or unliquidated claim is low. In general terms, there must be an‘air of reality’ to the claim. The claim must not be too remote or speculative. The existence of the claim need not be established on abalance of probabilities to the ordinary civil standard. Re Confederation Treasury Services Ltd. (1997) 43 CBR (3d) 4 (Ont.

CA); Re Experienced Equipment Sales and Rentals

(2011) ABQB 641, per Belzil, J. National Bank of Canada v. Merit Energy Ltd.

(2001) ABQB 583, per LoVecchio, J. [19] The Oil Lift Statement of Claim discloses a cause of action. It is not too remote or speculative. It is not necessary to resort tofurther materials or evidence to see that the claim passes the low initial threshold. Accordingly, the appeal of the disallowance of the OilLift’s claim is allowed. Valuation, however, is another matter and will be discussed below.

Section 81 Claims [20] Both Kobler and Renneberg have advanced

section 81 claims.

Section 81 provides that the person claiming property inpossession of the Bankrupt should provide a sufficiently particularized Proof of Claim (subsection 81(1), (2)). Section 81(3) puts the onus on the claimant to establish their property claim. (Re Melnitzer, (1991) (ON SC), 9 CBR (3d) 30, 87 DLR (4th)696). [21] The starting point for intellectual property claims is the federal Copyright Act, R.S.C. 1985, C-42. The author (of a computerprogram) is the owner of the program in issue (section 13(1)), unless ownership is displaced by employment, or agreement. Massie andRenwick Limited v.

Underwriters Survey Bureau Limited et al, (SCC), [1940] SCR 218. (There is a similar provisionwith respect to author’s manuscripts in

section 83 of the Bankruptcy and Insolvency Act). [22] In this case, the evidence does not disclose any clear agreement displacing ownership. [23] That leaves employment. Among many decided cases on the topic, 671122 Ontario Ltd. v. Sagas Industries Canada Inc.,2001 SCC 59 and, more recently (for example), Alberta Permit Pro v. Booth, 2007 ABQB 562, per Reid, J. at paras. 129-147, set out theconsiderations for determining whether a person is an employee. The tests in those cases are not satisfied on the evidence before me.

Thegist of the evidence in the present case is that Renneberg and Kobler were more like joint venturers with the Bankrupt, than employees. [24] It is also not for the claimant to disprove potential exceptions to ownership. On balance, the evidence does not demonstrate

that one of the exceptions should apply. Applying the standard of correctness to the

section 81 claims, the appeals of the Trustee’sdisallowances of the property claims are also allowed. Fresh Evidence on Appeal [25] The uncontroverted evidence is that there was a contract between Oil Lift and the Bankrupt, although the contract was notformalized, and some of the terms are in dispute.

There is no doubt that the contract was partly performed. [26] We do not know the value of the existing equipment, or the value of the technology in its present state of development.However, it appears that the primary value, if any, is in the intellectual property rather than the hardware itself. [27] In the simplest terms, the evidence discloses that there was a contract and a breach. If the contract was to provide a workable,saleable product, the Bankrupt’s efforts plainly fell short of the mark.

However, the technology was to be developed with theparticipation of the claimant, Oil Lift, and overall responsibility for the deficiencies in the prototype is not entirely clear cut. The divisionof responsibility remains to be determined. [28] Sapient received a substantial amount of money from Oil Lift for the development of the AMOS system. Exactly how muchis in issue and is not clearly demonstrated. There are further issues about whether these contributions were refundable or whether theywere investment-type expenses intended to be used for the development of the final product.

There are also issues about the extent towhich a working final product was warranted by the Bankrupt. [29] The role of a Trustee with respect to the determination of an unliquidated or contingent claim under

section 135 of theBankruptcy and Insolvency Act is, two fold. First of all the Trustee has to decide whether the claim is not too remote or speculative. Oncethe claim passes this test, the next step is to value it. [30] The authorities determining what evidence should be considered on appeal are mixed. Some cases say that appeals are denovo and fresh evidence can be considered on appeal as a matter of course. Re Eskasoni Fisheries Ltd., (2000) (NS SC), 16 CBR (4th) 173 (NSSC); Re Alberta Permit Pro,

(2011) ABQB 141; Re Experience Equipment Sales and Rentals, 2001 ABQB 641. [31] Other cases hold that appeals from a Trustee are ‘true appeals’. They are essentially appeals on the record that was before theTrustee.

Re Galaxy Sports Inc., 2004 BCCA 284. [32] A hybrid line exists as well: Re San Juan Resources Inc., 2009 ABQB 55 (Prowse, R.); Re Transglobal Communications Group Inc., 2009 ABQB 195 (at para. 49-50, per Yamauchi, J.; Re South Beach Homes Ltd., 2010 SKQB 182, per Schwann, R; [33] The hybrid approach is that an appeal is on the record but it can be de novo, involving fresh evidence, where the interests ofjustice require it. (This was also the fall back position in the Alberta Permit Pro case).

[34] The Bankruptcy and Insolvency Act is sometimes said to be a “businessman’s statute’. All that means is that the Act shouldbe administered in a practical and accessible way. Rigid formalism should be rejected and a pragmatic approach should be preferred.However, a claimant should be encouraged to put their best foot forward with their proof of claim. Automatically accepting freshevidence on appeal would encourage a careless approach to initial proofs. It would also have the effect of transferring the obligationsimposed upon the Trustee under

section 135 of the Act, to the Court. Accordingly, some explanation ought to be given about why thematerial now before a Registrar was not initially before the Trustee. [35] This case is striking in that only a faction of the materials now before the court were before the Trustee when the claims wereinitially considered. However, despite the ever expanding evidence, there was enough before the Trustee to demonstrate that Oil Lift’scontingent, unliquidated claim was not too remote or speculative.

There was also, in my view, not enough to demonstrate that ownershipof the intellectual property had been displaced from its authors. [36] The bulk of the evidence now before this court demonstrates, unequivocally, that there are live issues in the underlyinglawsuit advanced by Oil Lift. Only one party to that lawsuit is bankrupt. The evidence clearly demonstrates that any damages claimed inthe claim (or the counterclaim) are not now capable of assessment on this evidence, or in this forum.

Most of the evidence generatedafter the initial disallowance demonstrates that the claim is in no state to be valued even with the benefit of the additional evidence. Options [37] A Registrar’s powers are determined by

section 192 of the Bankruptcy and Insolvency Act. Among the powers set out insection 192 are the powers to hear and determine appeals from the decisions of a Trustee (section 192(1)(n))and to hear and determineany matter, with the consent of the parties (section 192 (1)(j)). The Registrar may also refer a matter to a Judge for disposition (section192(6)). (There is a parallel provision in

section 13 of the Court of Queen’s Bench Act permitting a Master to refer a matter to a Judge). [38] Some of the options open to a Registrar on an appeal from a Trustee’s disallowance, in addition to agreeing with the Trusteeand upholding the Trustee’s determination, would be: (1) to allow the appeal and assess the claim, (2) to allow the appeal and refer it back to the Trustee for a determination, (3) to allow the appeal and permit a revised Proof (Sinnathurai (Trustee of) v.

Sabapathipillai, 2010 69 CBR (5th) 287 (Ont SCJ)); All of which would be consistent with the Registrar’s consideration of new evidence following a disallowance. [39] Another option would be to allow the appeal and direct a trial. The authorities appear to be divided on this point. A trial wasdirected in: Re Masson, (1992) (AB KB), 17 CBR (3d) 230, 136 AR 349 (pursuant to sections 2 and 187(8) of theBIA); Re Phillips, (1994) (AB KB), 27 CBR (3d) 126 (Funduk, Registrar); Re Page, 2006 ABQB 430 (Waller,Registrar). Registrar Prowse in the San Juan case directed a

Summary Trial. [40] Doubt appears to be cast upon the option of directing a trial by Re Stuart and Sutterby (1930) (ON SC), 11CBR 279 (Ont SC Aff’d) (1931) (ON CA), 12 CBR 267 (CA). This decision was followed by the Manitoba Court ofQueen’s Bench in Re Hunger, 2008 NBQB 193 and Kalinchuk (Trustee of) v Martinussen (2000) (MB KB), 17 CBR (4th) 238. In my view, the Ontario Court of Appeal decision may raise an issue about the power of a Registrar to hear a trial but Iagree with the decisions of the Alberta Registrars noted above. Even if a Registrar does not have a power to try an issue, directing that amatter go to trial, if not within the Registrar’s powers, under

section 2 and 187 of the BIA, would certainly be justified by section 192(6),which permits the Registrar to refer a matter to a Judge. I have some difficulty with the idea that a Registrar could only refer a matter to aJudge for a determination about whether a trial should be directed. (Note: The 2012 Annotated Bankruptcy and Insolvency Act,Houlden et al (at I§27, I§53)). An

interpretation that favours a more complex and less expedient administration of the Act is not to bepreferred

[ 41 ] Deciding whether something can be decided summarily, or whether it should go to trial is one of the most familiar and natural parts of a Masters jurisdiction. It is only logical here that the Registrar should exercise a similar power. [ 42 ] In this case, there is conflicting evidence, issues of credibility, questions of apportionment of responsibility, and there will likely be expert testimony. It appears to be tailor-made for a trial. This would not be an appropriate circumstance to send it back to the Trustee, even with the new material, to attempt to value the claim.

Accordingly, the valuation of the claim should proceed to trial. It would be appropriate to have the claims and cross claims of the non-insolvent parties determined at the same time. If necessary an Order can be made pursuant to

section 69.4, allowing Oil Lift ’ s action to proceed. This may be the most expeditious way of dealing with these issues. Heard on the 13 th day of October, 2011, 10 th day of November, 2011, and 9 th day of February, 2012. Dated at the City of Edmonton, Alberta this 28 th day of May, 2012. W. S. Schlosser Registrar in Bankruptcy Appearances: Karen Fellowes Davis LLP for the Appellant B. Beggs Deloitte & Touche Inc. Trustee in Bankruptcy R. Nickerson Nickerson Roberts Holinski & Mercer for Harry Renneberg H. Kobler Claimant

Ken Pawlyna Office of the Superintendent of Bankruptcy