Thompson Bros. (Constr.) Ltd. v Jay Vee Sandblasting Ltd., 2013 ABQB 670

Court of Queen ’ s Bench of Alberta Citation: Thompson Bros. (Constr.) Ltd. v Jay Vee Sandblasting Ltd., 2013 ABQB 670 Date: 20131115 Docket: 1303 03149 Registry: Edmonton Between: Thompson Bros. (Constr.) Ltd. Plaintiff/Respondent - and - Jay Vee Sandblasting Ltd. Defendant - and - BDO Canada Limited Receiver - and - MMD Leasing Ltd., Sandra Kirkup and 67017 Manitoba Ltd. Applicants _ ________________________________________ ______________ Reasons for Judgment of the

Honourable Mr. Justice B.R. Burrows _________________________________________ ______________ [ 1 ] MMD Leasing Ltd., Sandra Kirkup and 67017 Manitoba Ltd., who I will refer to collectively as the Kirkup Group, seek an order lifting the stay of proceedings imposed in a Receivership Order in respect of Jay Vee Sandblasting Ltd. granted by Thomas J. on March 7, 2013.

They seek the lifting of the stay so they can bring a bankruptcy application under BIA s. 43 with respect to Jay Vee of which each of them is an unsecured creditor. [ 2 ] Thompson Bros. is a secured creditor of Jay Vee and was the applicant for the Receivership Order. The order appointed BDO Canada Ltd. as Receiver. [ 3 ] The secured debt claimed by Thompson Bros. is $11.75 million. Of this, $8.15 million was originally owed to the Canadian Western Bank whose security held first priority.

Thompson Bros.’ secured debt (the amount of which is in issue but which Thompson Bros. claims to be $3.6 million) held second priority. The Bank assigned its debt to Thompson Bros. [ 4 ] The First Report of the Receiver dated May 10, 2013 indicates debt to the Canada Revenue Agency and other priority creditors exceeding $600,000. [ 5 ] The Kirkup Group has unsecured claims against Jay Vee exceeding $1.6 million. Actions had been commenced in respect of these debts against Jay Vee prior to the receivership.

There are other unsecured creditors whose claims total $1.9 million. [ 6 ] Since the receivership was ordered there have been two main streams of activity. First, the Receiver has proceeded with the sale of Jay Vee’s assets. Second, the Kirkup Group has made a number of applications inspired by its principals’ concerns that there was significant pre-receivership dissipation and unremunerated use of the assets of Jay Vee, and that the proper credit has not been made for payments made by Jay Vee in respect of the Thompson Bros.’ debt.

I will describe these concerns more specifically below. [ 7 ] The first stream of activity reached the point on October 25, 2013 of the Court approving the sale of the assets of Jay Vee to Thompson Bros. subject to terms which, among other things, attempted to preserve the rights of the Kirkup Group to pursue the concerns they have raised in the second stream of activity. [ 8 ] The second stream of activity consists of the following applications brought by the Kirkup Group: a.

June 21, 2013 - Application for an order determining: 1. the amount of the debt owed by Jay Vee to Thompson Bros., 2. the validity of the security taken by Thompson Bros. against Jay Vee, 3. the validity of the security taken by Canadian Western Bank against Jay Vee which was subsequently assigned to Thompson Bros. In this application the Kirkup Group alleged that Thompson Bros. might not have been a legitimate arms-length creditor of Jay Vee and may have been a mortgagee in possession. b.

July 25, 2013 - Application for an order setting aside the Receivership Order of March 7, 2013, or alternatively, replacing BDO Canada Limited as Receiver with a new Court appointed receiver and other relief. c. July 29, 2013 - Application for an order directing Paul Sturt, deponent of an affidavit filed by Thompson Bros. in response to the previously filed applications, to provide answers to undertakings, and to questions refused to be answered at Questioning on the affidavit. d.

August 12, 2013 - Application for an order directing Earl Northcott to answer undertakings and questions he refused to answer at Questioning on an affidavit. e. August 12, 2013 - Application that the first two applications be determined at a trial involving viva voce evidence. [ 9 ] On September 4, 2013 I granted an order declaring that all security granted by Jay Vee to the Canadian Western Bank was valid and that the amount of the debt it secured was $8,105,776.64.

The order was expressed to be without prejudice to the Kirkup Group’s right to seek a setoff against the total debt owed to Thompson Bros. by Jay Vee of any amount the Kirkup Group might prove Thompson Bros. is responsible to pay Jay Vee. [ 10 ] In the same order I dismissed Kirkup Group’s applications to set aside the Receivership Order or alternatively to replace BDO as Receiver.

The other Kirkup Group motions listed above were adjourned. [ 11 ] Also in the September 4, 2013 order I ordered that if Thompson Bros. was the successful purchaser of Jay Vee’s assets (which, as noted, it was) the question of whether and to what extent Thompson Bros. should be required to leave the assets purchased unencumbered, or alternatively the amount of security which Thompson Bros. should be required to post so that the claims advanced by Kirkup Group would not be prejudiced, would be determined at the application for approval of the sale.

In fact, at that application, on October 25, 2013, that issue was further adjourned. In the meantime the Receiver was directed to make no distribution of the net proceeds of the sale until further order. [ 12 ] The concerns that the Kirkup Group raises in the second stream of activity are more specifically described by Kirkup’s counsel in the materials filed on this application as follows:

a. Payments (or at least an August 2012 payment of $300,000) made by Jay Vee to Thompson Bros. has not been credited in the accounting for Jay Vee’s debt to Thompson Bros. b. Payments were made in June, July and August 2012 by Jay Vee to “Thompson individuals” for no apparent reason. Undertakings to advise why these payments were made have not been satisfied. c. Jay Vee records indicate that two payments totalling $88,000 were made by certified cheque to unknown payees on October 9, 2012. Information explaining these payments has not been provided. d.

The mortgage granted by Jay Vee to Thompson Bros. does not provide for compound interest. Thompson Bros. has improperly calculated the debt using interest compounded monthly. e. The mortgage granted by Jay Vee to Thompson Bros. secured a debt of $1.5 million that was outstanding on April 24, 2009. It did not secure advances which were made by Thompson Bros. to Jay Vee after that date. Payments by Jay Vee should be credited against the oldest debt – the mortgage debt.

If payments were properly credited, no payment should have been credited against advances made by Thompson Bros. to Jay Vee after the mortgage, on August 27, 2009 and August 26, 2010, totalling $650,000, until the mortgage debt was entirely repaid. The accounting records disclosed to date do not confirm that this accounting procedure was followed.

If it was, the post April 24, 2009 advances would be wholly outstanding and would now be statute barred. [I note that the Kirkup Group materials do not discuss how the General Security Agreement granted by Jay Vee in favour of Thompson Bros. on April 24, 2009 which appears to grant security in respect of existing and “future obligations, liabilities and indebtedness” fits into this allegation.] f. There was no documentation providing that interest was payable on advances made by Thompson Bros. to Jay Vee after April 24, 2009.

None should be included in the debt claimed in respect of advances made after that date. g. The debt claimed by Thompson Bros. includes legal fees incurred by Thompson Bros. in relation to the collection of the debts owed to it. The only legal fees that Thompson Bros. can properly claim against Jay Vee are those relating to the mortgage and the enforcement of the mortgage. The legal fees paid, which exceed $140,000, were for services both inside and outside that scope. The portion for services outside that scope are not properly included in the secured debt. h.

Some of the information obtained by the Kirkup Group suggests that for several months prior to the Receivership Order, Thompson Bros. may have been a mortgagee in possession as it was playing a significant role in the day to day operation of Jay Vee. This would open the question of whether Thompson Bros. mismanaged the affairs of Jay Vee during that period in such a way that the amount of the debt owed by Jay Vee to Thompson Bros. should be reduced. An example of such mismanagement could be permitting Norpoint Sandblasting & Painting Ltd. to use Jay Vee’s facility without payment of rent.

Other indications of mismanagement in the same period include that there were very substantial reductions in

a) the reported value of Jay Vee’s inventory (from $1,968,980 to $20,000), and

b) the reported value of Jay Vee’s accounts receivable (from $9,673,782.85 to $323,281.68). i. Principals of Jay Vee used money of Jay Vee to pay for personal items including expensive vehicles, rent and Court ordered maintenance. j. Jay Vee funds were paid to both related and unrelated persons and entities for unknown or no reason. [ 13 ] The stay of proceedings provision in the Receivership Order states: No Proceedings Against the Debtor or the Property 8.

No Proceeding against or in respect of the Debtor or the Property shall be commenced or continued except with the written consent of the Receiver or with leave of this Court and any and all Proceedings currently under way against or in respect of the Debtor or the Property are hereby stayed and suspended pending further Order of this Court, provided, however, that nothing in this Order shall prevent any Person from commencing a proceeding regarding a claim that might otherwise become barred by statute or an existing agreement if such proceeding is not commenced before the expiration of the stay provided by this paragraph 8. [ 14 ] The Kirkup Group seek a lifting of the stay to permit them to apply for a bankruptcy order against Jay Vee.

They submit that a bankruptcy proceeding would provide a better procedure for the determination of the issues they have raised in the second stream of activity described above than the receivership proceeding provides. [ 15 ] In particular they submit that the powers of a trustee in bankruptcy are wider in relevant ways than those of a Court appointed receiver.

In that regard they cite the following passages from Bennett on Receiverships, Carswell, 3 rd ed., found under the title, “Reasons for Bankruptcy from Unsecured Creditor’s Point of View”: - Information: . . . bankruptcy affords unsecured creditors through the trustee a right to demand an accounting from the security holder as well as an opportunity of determining whether the security instrument can be attacked. (page 624) - Investigation: . . . the bankruptcy gives all creditors a measure of protection through the mechanics of the Act.

Even if the trustee in bankruptcy does not have sufficient proceeds, creditors have the right to fund the trustee or to proceed under

section 38 of the Bankruptcy and Insolvency Act for a thorough investigation of the affairs of the debtor. Moreover, once the debtor is placed into bankruptcy, the trustee in bankruptcy acquires causes of action that may not be apparent without an investigation. If the trustee is successful in pursuing the causes of action, the proceeds benefit preferred and unsecured creditors including the security holder who is partially secured. . . . in a bankruptcy situation, the trustee may proceed and recover moneys paid as a preference with the result that such moneys devolve upon all preferred and unsecured creditors. (page 626)

And these passages found under the title, “Causes of Action available only to Trustee in Bankruptcy”: - Fraudulent Preferences and Transfers at Undervalue: . . . the trustee in bankruptcy may be entitled to attack the security instrument pursuant to the Bankruptcy and Insolvency Act as being a fraudulent preference or a transfer at undervalue. (page 630) . . .

Aside from any trustee attack that might be made against the security holder, the trustee may also assert any of the causes of action against third parties who have received fraudulent preferences or who have received transfers at undervalue. (page 633) - Examinations: . . . [Pursuant to BIA s. 163(1)] [t]he trustee may without an order examine under oath any person reasonably thought to have knowledge of the affairs of the bankrupt.

The trustee may require a person to produce any books, documents, correspondence or other papers in that person’s possession or under his or her power relating all or in part to the bankrupt, his or her dealings, or property. In addition, the trustee may require anyone who has or is believed or suspected to have [it] in his or her possession to produce or deliver any property of the bankrupt, including books, documents, or papers. (page 636) - Creditors’ Remedies –

Section 38 Proceedings: . . . If the trustee does not have sufficient funds to proceed or receives a legal opinion that the trustee’s cause of action is not meritorious, then it is open for an unsecured creditor including a security holder who has a claim for a deficiency balance, to proceed with such cause of action pursuant to s. 38 of the Bankruptcy and Insolvency Act . Creditors may have claims against another creditor who, for example, received a fraudulent preference and may have claims against the security holder and receiver.

With respect to both types of claims, creditors do not have any cause of action against them directly as such claims are vested in the trustee in bankruptcy. The creditors must either obtain an assignment from the trustee or an order under

section 38 of the Act. [ 16 ] The Kirkup Group also observe that their efforts to this point to have their concerns explored in the receivership have been largely unsuccessful. On April 18, 2013, the Kirkup Group’s solicitors wrote to counsel for the Receiver requesting that the Receiver investigate what happened to Jay Vee’s inventory and accounts receivable between August 2012 and March 2013. As previously noted the recorded value of the former declined from $1,968,980 to $20,000 and the recorded value of the latter declined from $9,673,782.85 to $323,281.68 in that period.

A follow-up letter was sent to the Receiver’s counsel on May 6, 2013. There is no indication that the Receiver has responded to these requests. [ 17 ] I note that in the Bench Brief filed on August 28, 2013 for the September 4, 2013 application the Receiver’s counsel has acknowledged that the Kirkup Group has raised the issues it has and that, at some point, at least some of them must be addressed.

That brief also stated that the Receiver has been unable to determine with any degree of certainty the exact amounts owed by Jay Vee to Thompson Bros. though, “it seems apparent on the evidence presented thus far, that the amount owing to Thompson Bros. is definitely in excess of $1.5 Million dollars ( sic )”. I am not aware of any objective determination having been made as to what caused the very significant decline in the stated value of Jay Vee’s inventory and accounts receivable in the six months preceding the appointment of the Receiver.

So far as I am aware it has not been determined whether any causes of action exist in favour of Jay Vee in connection with whatever those causes were. [ 18 ] Thompson Bros. did not file any affidavit or other materials in response to this application. In oral submissions, Mr. Delblanc, counsel for Thompson Bros., submitted that bankruptcy proceedings would be “incredibly expensive”. Whether or not this is so, I note that the cost of the bankruptcy proceedings would not reduce the recovery of Thompson Bros. to the extent that, as it claims, it is a fully secured creditor. [ 19 ] Mr.

Delblanc further submitted that the Kirkup Group is, in this application, seeking equitable relief (the lifting of the stay). He submitted that the Kirkup Group’s conduct prior to the Receivership Order should disentitle it to do so. He referred to portions of the questioning of Grant Kirkup and Earl Northcott (the principal of Jay Vee) which, he submitted, showed that Mr. Kirkup caused the mischief which put the company into receivership. [ 20 ] Excerpts from the questioning of Mr. Northcott give some indication as to how the recorded value of accounts receivable may have become inflated.

He testified that Jay Vee both billed for anticipated work that never materialized and adjusted the date of billings (without cancelling the aged accounts) so as to show accounts receivable being more current than they actually were. This was done to satisfy the margin requirements of the Canadian Western Bank. Mr. Northcott testified that Mr. Kirkup, who was providing accounting services to Jay Vee, both knew of and participated in these manipulations of the records. In his questioning, Mr. Kirkup confirmed that he knew that misrepresentations were being made to the bank. [ 21 ] Mr.

Delblanc indicated that his clients will be commencing action against Grant Kirkup in connection with his actions in this regard. It seems to me that it is more likely that Jay Vee would have a cause of action arising from them, than that Thompson Bros. would. This is a matter which might properly be investigated and pursued by a bankruptcy trustee. In my view this outweighs any concern that the Kirkup Group does not have clean hands. [ 22 ] Counsel for the Canada Revenue Agency, Mr. Segal, appeared and opposed the application.

He noted that there is a GST deemed trust which though presently asserted at $10,000 may in fact be less than that or non-existent. While he acknowledged that the priority that would otherwise be accorded to the deemed trust would not be recognized in a bankruptcy, he suggested that the amount in issue is so small that this should not be a factor in determining whether or not to lift the stay. I agree. [ 23 ] He also objected that the cost of bankruptcy proceedings would not appear to be justified.

He suggested that the disputes that exist between Thompson Bros. and the Kirkup Group should more properly be determined in the applications that have been brought. The costs of determining those issues should be borne by the disputants. In a bankruptcy, they would be a charge on the residue, if any, available for distribution to unsecured creditors. [ 24 ] Mr. Rimer, counsel for the Receiver, observed that the Kirkup Group itself would be responsible to pay the costs of the bankruptcy trustee unless and until it is determined that the Thompson Bros.’ debt is not wholly secured.

Unless that determination is made, the proceeds of the sale of Jay Vee’s assets in the receivership will not extend to the satisfaction of the secured creditor. There will be nothing for unsecured creditors. It may be difficult for the Kirkup Group to find a bankruptcy trustee willing to accept the

appointment. [ 25 ] It can reasonably be argued that applications in the receivership proceedings have not proved to be an efficient method of having the issues raised by the Kirkup Group determined. The Receiver, probably quite properly, appears to have been focused on the first stream of activity in the receivership – the sale of Jay Vee’s assets. The main adversaries in the disputes arising in the second stream of activity, the Kirkup Group and Thompson Bros., appear to have taken entrenched litigation positions which produce more heat than light.

It is reasonable to expect that the inquisitorial process employed by a bankruptcy trustee would more likely achieve resolution of the issues than the adversarial setting in which these disputes currently reside. [ 26 ] The authorities indicate that in determining whether or not to lift the stay, “. . . the court must consider the totality of the circumstances and the relative prejudice to both the creditor and the debtor. The Court should consider a balancing of the interests of all affected parties.” Haunert-Faga v.

Faga 2013 ONSC 5161 at para. 15 . [ 27 ] I would summarize the significant features of the circumstances here as follows: - The Kirkup Group has raised serious concerns regarding the amount owing under the security claimed by Thompson Bros., the dissipation of Jay Vee assets prior to the receivership, and the involvement of Thompson Bros. in the management of Jay Vee prior to the receivership. - Thompson Bros. has raised serious concerns regarding the involvement of the Kirkup Group in the management of Jay Vee prior to the receivership. - The proceeds of the sale of the assets of Jay Vee exceed the undisputed amount of the secured debt by a significant amount. - After eight months neither the receivership nor Court applications have advanced very far toward resolution of the disputes.

A bankruptcy trustee would have rights and powers which would potentially bring the disputes to determination more quickly and probably more efficiently than the current proceedings appear likely to do. - The cost to Thompson Bros. if the disputes were resolved through the bankruptcy process would not be greater than the current proceedings, if, as it asserts, its security extends to the total amount of the sale of the assets of Jay Vee. - There will be no cost to unsecured creditors unless the bankruptcy trustee determines that there are claims to pursue and they are successfully pursued.

Otherwise the applicant for the bankruptcy order, the Kirkup Group, will be responsible for the cost of the bankruptcy proceedings. - No unsecured creditor other than the CRA has opposed the application. The CRA has not participated in the second stream applications. Mr. Segal’s submissions suggest that the CRA is resigned to the conclusion that there will be nothing for unsecured creditors. If in bankruptcy proceedings any funds become available for distribution to preferred and unsecured creditors, the CRA will have been prejudiced by receiving less of a windfall than it might otherwise have received.

That is not a real prejudice. - Beyond the possibly more effective “inquisitional” approach available to a bankruptcy trustee, both the Kirkup Group and Thompson Bros. (to the extent there is a deficiency in its recovery) would, if a bankruptcy order is obtained, acquire the right to apply under BIA s. 38 for leave to pursue any Jay Vee cause of action the bankruptcy trustee is not willing to pursue. - The continuation of the existing receivership to the point that the “first stream” activities are concluded need not be affected by a bankruptcy order.

There would seem to be little basis for concern that the bankruptcy trustee would be required to duplicate work already done by the Receiver. [ 28 ] Having given due consideration to these circumstances and the positions of affected parties I conclude that the lifting of the stay applied for should be granted. I therefore grant leave to MMD Leasing Ltd., Sandra Kirkup and 67017 Manitoba Ltd. to bring a bankruptcy application under BIA s. 43 with respect to Jay Vee Sandblasting Ltd., notwithstanding the stay of proceedings contained in paragraph 8 of the Receivership Order granted herein on March 6, 2013.

Heard on the 25 th day of October 2013. Dated at the City of Edmonton, Alberta this 15 th day of November 2013. B.R. Burrows J.C.Q.B.A.

Appearances: Greg Heinrichs, Q.C. and Deborah Szatylo for the Applicants Sigurd Delblanc for the Plaintiff/Respondent Russell A. Rimer for the Receiver Jay Vee Sandblasting Ltd. did not participate in the application