Dorais (Re), 2014 ABQB 331

Court of Queen ’ s Bench of Alberta Citation: Dorais (Re), 2014 ABQB 331 Date: 20141024 Docket: BK03 115588 Registry: Edmonton In the Matter of the Bankruptcy of the Estate of the Late Michel Joseph Dorais Between: BDO Canada Limited Applicant - and - Shauna Lee Dorais and Grant Dewar Respondents _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice D.R.G. Thomas _______________________________________________________

Table of Contents I. Introduction . 3 II. Background Facts . 3 III. Application by the Trustee . 4 IV. Response . 6 V. Issues . 6 VI. Applicable Law .. 6 VII. Analysis . 7 VIII. Conclusion . 11 I. Introduction [ 1 ] The Applicant seeks an order lifting a stay of proceedings and authorizing it to pursue two legal actions commenced by creditors of the bankrupts. II. Background Facts [ 2 ] The deceased, Michel Dorais (“Dorais”), and a group of companies which he controlled (the “Dorais Companies”), were adjudged bankrupt in January 2012 and the Applicant, BDO Canada Limited (the “Trustee”), was appointed as trustee.

The Respondent, Shauna Dorais (“Shauna Dorais”) is the widow of Dorais and the Respondent Grant Dewar (“Dewar”) had loaned money to Dorais and/or the Dorais Companies. [ 3 ] Dorais had died in June 2009. [ 4 ] In August 2009, Anthony Gerrow (“Gerrow”) was appointed as a receiver of many of the Dorais Companies in Action Number 0903 13412 (the “Receivership Action”). [ 5 ] In December 2009, Jon and Neris Havelock and Francesco Valle commenced Action Number 0903 20225 against a number of the Dorais Companies, Shauna Dorais, Dewar and others (the “Havelock Action”). The Havelock Action alleges that: (

a) three of the Dorais Companies were flow-through entities which raised money to loan to other Dorais Companies, which were operating entities and the Dorais Companies were organized in this fashion to deceive investors; (

b) relying on Dorais’ fraudulent misrepresentations, the plaintiffs in the Havelock Action made substantial investments in, and loans to, two of the Dorais Companies; (

c) the fraudulent misrepresentations of Dorais were that the plaintiffs’ funds would be invested in real property and secured by mortgages on real property;

(

d) Dorais fraudulently misrepresented that the Dorais Companies already owned, and held mortgages on, real property in which there was significant equity; (

e) Dorais used some of the plaintiffs’ funds to buy real property for himself and his wife and $4.5 million worth of life insurance; (

f) after Dorais died Shauna Dorais received payments pursuant to the life insurance policies; and (

g) around the time of its insolvency, one of the Dorais Companies assigned one of the life insurance policies to Dewar, this was a fraudulent preference and the defendants in the Havelock Action breached provisions of Alberta’s Securities Act . In the Havelock Action the Plaintiffs seek the return of their funds, or equivalent damages.

They also seek declarations that they are entitled to a constructive trust over the life insurance proceeds paid to Shauna Dorais and the assignment of the life insurance policy to Dewar is null and void. [ 6 ] In May 2011 Gerrow, as a receiver, commenced Action Number 1103 08567 against Shauna Dorais and Dewar (the “Gerrow Action”). The Gerrow Action alleges that: (

a) the Dorais Companies are all interrelated; (

b) the Dorais Companies purchased nearly $4.5 million worth of insurance on the life of Dorais; (

c) the proceeds from those insurance policies are the property of the Dorais Companies and not Shauna Dorais; and (

d) one of the Dorais Companies assigned one of the life insurance policies to Dewar and that assignment is a fraudulent preference. [ 7 ] In the Gerrow Action the receiver seeks damages and declarations that he is entitled to all life insurance proceeds paid to Shauna Dorais and that the assignment of the life insurance policy to Dewar is null and void. [ 8 ] In June 2011, Terry and Patricia Metz commenced Action No. 1103 09631 against the Estate of Dorais, most of the Dorais Companies, Dewar, Shauna Dorais and others (the “Metz Action”).

The Metz Action makes substantially similar allegations to, and seeks the same type of relief as that sought in the Havelock Action. [ 9 ] In December 2011, the Havelock, Gerrow and Metz Actions, and other claims, were put into case management, and stayed, by an order made in the Receivership Action (the “Stay Order”). [ 10 ] A second order was made in December 2011 directing Gerrow, as receiver, to assign into bankruptcy all of the Defendants in the Receivership Action (Dorais and many of the Dorais Companies). [ 11 ] In January 2012 an order was made adjudging Dorais and the Dorais Companies bankrupt and appointing the Trustee. [ 12 ] The statement of claim in the Gerrow Action was not served in time, or at all. [ 13 ] In January and February 2014, the Plaintiffs in the Havelock and Metz Actions assigned and transferred their actions to the Trustee.

The terms of the assignment set out the payments the Trustee has made and agrees to make for the assignments. III. Application by the Trustee [ 14 ] On this motion, the Trustee applies to lift the Stay Order in the Havelock and Metz Actions and to authorize the Trustee to

pursue those Actions to recover real property and insurance proceeds for the benefit of the Estates of Dorais and the Dorais Companies. [15] The Vice President of the Trustee, Robert Sword, made an affidavit, dated February 7, 2014, (the “Sword Affidavit”) insupport of this application. In that deposition Sword swears that the “insurance policies in issue appear to have been ‘key man’ policiesto protect investors in the Dorais Companies, but proceeds of these policies appear to have been paid to Shauna Dorais and to GrantDewar”. [16] Exhibits to Sword’s Affidavit indicate that: (

a) the Dorais Companies paid some of the life insurance policy premiums; (

b) one of the Dorais Companies was the original beneficiary of one of the policies; (

c) the owner of some of the policies changed; (

d) changes were also made to the named beneficiary of some of the policies; and (

e) Shauna Dorais became the named beneficiary of all the policies; one of the policies was assigned to Dewar and death benefits werepaid to Shauna Dorais and Dewar under the policies. [17] Other exhibits to Sword’s affidavit show that Dorais assured some creditors (but not the plaintiffs in the Havelock and MetzActions) that their investments and loans were covered by insurance policies. [18] Sword deposes further that the evidence obtained during the questioning of Ronnie Chen (“Chen”), who is a Defendant in theHavelock and Metz Actions, indicates that: (

a) Chen understood that the life insurance policies in issue were “key man” insurance policies intended to protect investors, not toprovide for Shauna Dorais; (

b) there are no circumstances legitimizing the designation of Shauna Dorais as the beneficiary of the policies, which the DoraisCompanies paid for, nor the changes made to the named beneficiary of some of the policies; (

c) Shauna Dorais received the assignment of one of the life insurance policies for past indebtedness, rather than as security for newadvances; (

d) two properties put into the name of Shauna Dorais were improperly purchased with funds from Dorais, or funds flowing from theDorais Companies; and the proceeds from the sale of those properties were kept by Shauna Dorais. [19] Sword states, “[g]iven that the claims in the Havelock [and Metz Actions] are against the bankrupt companies as well as non-bankrupt individuals, I believe that the most efficient means of recovering the insurance and property proceeds for the benefit of theBankrupts’ Estates would be through these actions”: [20] In support of its application, the Trustee relies on ss 30(1)(

d) and 72 of the Bankruptcy and Insolvency Act, RSC 1985, c B-3(“BIA”) and two case authorities: Hess (Re) (1977), 23 CBR (NS) 215, [1977] OJ No 1642 (QL) (SC) and Kozan Furniture (Yorkton)Ltd (Trustee of) v Countrywide Factors Ltd, (SCC), [1978] 1 SCR 753, [1977] SCJ No 76 (QL). The Trustee says thestatutory provisions give it the power to bring legal proceedings relating to the property of the bankrupts and avail itself of all rights andremedies provided by provincial law, including those in statutes dealing with preferential transactions.

It is the Trustee’s position that, asit is obliged to gather the bankrupts’ assets and distribute them to the bankrupts’ creditors, and there is evidence that some of thebankrupts’ assets improperly went to Shauna Dorais and Dewar instead of other creditors, it ought to be allowed to pursue those assetsthrough the Havelock and Metz Actions.

[ 21 ] In oral argument, the Trustee conceded that it is seeking to pursue the Havelock and Metz Actions because it would be faced with a limitations problem if it commenced similar proceedings in its own name. IV. Response [ 22 ] The Respondents say that there are many reasons why the application of the Trustee should be dismissed. Their main arguments are summarized as follows: (

i) The Trustee has not complied with s. 69.4 of the BIA ; i.e., it has not met the test to lift the Stay Order. (ii) The Trustee lacks the power to purchase and assume control of the Havelock and Metz Actions. (iii) It is improper for the Trustee to pursue claims against the bankrupts (Dorais and the Dorais Companies) because of the potential for a conflict of interest. (iv) The Havelock and Metz Actions are unlikely to be successful. V. Issues [ 23 ] Does the Trustee have the power to pursue the Havelock and Metz Actions and should the Stay Order be lifted? VI. Applicable Law [ 24 ] The BIA provides: Powers exercisable by trustee with permission of inspectors 30.

(1) The trustee may, with the permission of the inspectors, do all or any of the following things: ... (

d) bring, institute or defend any action or other legal proceeding relating to the property of the bankrupt; ... Court may declare that stays, etc., cease 69.4 A creditor who is affected by the operation of sections 69 to 69.31 [that is, a stay of proceedings] or any other person affected by the operation of

section 69.31 [stay of proceedings - directors] may apply to the court for a declaration that those sections no longer operate in respect of that creditor or person, and the court may make such a declaration, subject to any qualifications that the court considers proper, if it is satisfied (

a) that the creditor or person is likely to be materially prejudiced by the continued operation of those sections; or (

b) that it is equitable on other grounds to make such a declaration. ... Application of other substantive law

(1) The provisions of this Act shall not be deemed to abrogate or supersede the substantive provisions of any other law or statuterelating to property and civil rights that are not in conflict with this Act, and the trustee is entitled to avail himself of all rights andremedies provided by that law or statute as supplementary to and in addition to the rights and remedies provided by this Act. ... VII. Analysis [25] In arguing that the Trustee lacks the power to purchase, and assume control of, the Havelock and Metz Actions, theRespondents rely on s 30(1)(

d) of the BIA, Hess, supra, and Toyota Canada Inc v Imperial Richmond Holdings Ltd (1997), (AB KB), 202 AR 274, [1997] AJ No 412 (QL) (QB). [26] In Hess at para 3, Henry J. said, “it must be borne in mind that the trustee is a licensed and appointed official who derives hisappointment and status from the Bankruptcy Act.

His powers and duties are prescribed by the statute, and he must exercise and fulfilthem as the statute requires.” In Toyota at para 20, Clarke J. put it this way: “The trustee is a creature of statute so the trustee has onlythose rights or powers that are given to it by statute.” Therefore, the issue of whether the Trustee has the power to purchase, and assumecontrol of, the Havelock and Metz Actions must be resolved by examining the powers which the BIA confers on the Trustee. [27] Section 30(1)(

d) of the BIA empowers the Trustee, “with the permission of the inspectors, ... [to] bring, institute or defendany action or other legal proceeding relating to the property of the bankrupt[s]”. There is no suggestion that the Trustee did not obtain therequisite permission of the inspectors.

Therefore, the question is whether the Trustee’s power to bring, institute or defend any action orother proceedings relating to the bankrupts’ property includes the power to receive assignments of, and continue, actions of thebankrupts’ creditors. [28] The legal authorities which the parties have provided do not answer this specific question. Hess was an appeal from a decisionreducing the remuneration of a bankruptcy trustee.

In his decision allowing the appeal, and the trustee’s fee as rendered, Henry J.acknowledged in para 5 that “it is clearly in the interests of the integrity of the overall administration of the [Bankruptcy] Act thatproperty wrongfully in the hands of other persons, or claims by the trustee wrongly resisted, should be recovered, even if the return to theestate turns out to be minimal”: Later in his judgment at para 11 he said: [T]he due administration of the Bankruptcy Act ... requires that the assets of the debtor be gathered in and realized by the trustee, even atthe expense of investigation and litigation.

Not only is this the entitlement of the creditors, but the public interest in the integrity of thelegislative scheme requires that abuses be penalized and made unprofitable. There is therefore a wider obligation on the trustee to seekout and recover assets that have been concealed or put beyond the reach of the creditors by improper preferences, conveyances orsettlements or by invalid security, not only for the benefit of the general creditors but, equally important, as a deterrent to abuse andfrustration of the legislative scheme.

Pursuit of this objective may be costly and at times productive of little tangible gain. [29] Although these statements help explain why the Trustee wishes to pursue the Havelock and Metz Actions, they do not shedany light on the question before me, nor do any other statements in Hess. [30] Likewise for Kozan (supra) which is the other authority the Trustee relies on. That decision supports the Trustee’s argumentthat s 72 of the BIA entitles it to avail itself of all rights and remedies provided by provincial law, including those in statutes dealing withpreferential transactions.

However, it does not shed any light on the question of whether s. 30(1)(

d) empowers the Trustee to receiveassignments of, and continue, actions of the bankrupts’ creditors. [31] Toyota is more helpful. The plaintiffs in that case issued a statement of claim pursuant to an order made under s 38 of whatwas then the Bankruptcy Act. (Section 38 provides the mechanism for creditors to proceed with an action of the bankrupt where thetrustee refuses or fails to act).

At para. 19, Clarke J. said that, although the named plaintiffs were the bankrupt’s two main creditors, itwas common ground that the cause of action was that of the bankrupt and that it was only by virtue of s 38 of the BIA that the namedplaintiffs had the right to sue. The parties agreed that the named plaintiffs stood in the shoes of the bankruptcy trustee and had no greater(or lesser) rights than the trustee would have in bringing the action.

Among other things, the defendants in that action applied to strikeportions of the statement of claim (that is, all references to the allegations of the bankrupt’s creditors) on the basis that the bankrupt’screditors had no independent right to make any claims against them. [32] After describing a bankruptcy trustee as “a creature of statute” Clarke J. stated in para. 20:

The trustee has certain rights to attack transactions given to it under the Bankruptcy Act and it also has the right to attack certaintransactions as a result of the power and status given to it by provincial legislation such as for example the Personal Properties SecuritiesAct in Alberta. The Bank [one of the Defendants] submitted that it was clear that an individual claim of a particular creditor could not bepursued by the trustee on behalf of that creditor. This principle is well settled in Alberta law and in that regard I was directed to the caseof Principal Group Ltd. (Bankrupt) and Valan v.

Alberta (1993), (AB KB), 139 A.R. 26; 8 Alta. L.R. (3d) 73 (Q.B.)where Mr. Justice Virtue at p. 75 states the issue to be determined as follows: “The issue to be determined is whether Ernst, in its capacity as trustee in bankruptcy of Principal has the status to conduct on behalf ofcertain creditors of Principal, an action against the Government of Alberta, for damages alleged to have been sustained by each of thosecreditors personally by reason of wrongful actions of the government. ...” In reaching the conclusion that the trustee does not have such status Mr. Justice Virtue adopts the reasoning of Mr.

Justice Berger (as hethen was) in another Principal Group case where Mr. Justice Berger was sustained by the Court of Appeal and the Supreme Court ofCanada [Principal Group Ltd (Bankrupt) v Principal Savings and Trust Co (1990), (AB KB), 111 AR 81, [1990] AJNo 907 (QL) (QB)] and goes on to p. 76 to conclude as follows: “I agree with and adopt Berger, J.'s, conclusions as a correct statement of the law.

It is clear that the Bankruptcy Act has not authorizedthe Trustee to commence actions to recover damages sustained by individual creditors of the bankrupt who may be victims of the samefailure to properly regulate as is alleged in the action brought by the trustee on behalf of Principal.

Failure on the part of the trustee torecognize the fundamental difference between an action brought on behalf of Principal for damages sustained by it and an action broughton behalf of individual creditors of Principal for damages sustained by them, is, I believe, at the root of the problems that continue to[beset the noteholders] in pursuing their claims against the Government of Alberta.” [33] Berger J.’s conclusions in Principal Group Ltd (Bankrupt) v Principal Savings and Trust Co (1990), (AB KB), 111 AR 81 at para 14, [1990] AJ No 907 (QL) (QB) [Principal, 1990], adopted by Virtue J. in Principal Group Ltd(Bankrupt) and Valan v Alberta (1993), (AB KB), 139 AR 26 at para 10, [1993] AJ No 116 (QL) (QB) [Principal,1993], were: The Bankruptcy Act authorizes the Trustee to institute “proceedings relating to the property of the bankrupt” (s. 30) and imposes a dutyand power on the Trustee to obtain possession of the property of the bankrupt (ss. 16 and 17).

If the property of the bankrupt wasmisappropriated, misused or misapplied, or if the bankrupt itself was deprived of property by a fraudulent scheme, it is clearly the dutyand responsibility of the Trustee to pursue recovery. If successful, the recovered property accrues to the benefit of the creditors of thebankrupt. The Bankruptcy Act, however, does not authorize the [Trustee] to commence actions to recover the property of individualcreditors of the bankrupt who may have fallen victim to the same fraudulent scheme or misrepresentations.

The Trustee is not and cannotbe the agent of the individual investors in [the bankrupt] for this purpose: Clarkson Company Limited v.

Muir et al. (1982) (NS CA), 53 N.S.R. (2d) 609; 109 A.P.R. 609 (C.A.) at p. 617: “A trustee under the Bankruptcy Act does not function as an agent of the creditors in the ordinary sense but as an administrative officialrequired by law to gather in and realize on the assets of the bankrupt and then divide the proceeds in accordance with the scheme of theBankruptcy Act among those entitled thereto.” (my emphasis) [34] At para 15 in Principal, 1990, Berger J. went on to say: The [Trustee’s] alternative prayers for rescission, restitution, constructive or resulting trust, tracing, consolidation and pooling and for anoppression remedy must all be grounded in allegations of fact.

Where the factual underpinnings of such prayers for relief are said to bethat the creditors of [the bankrupt] qua investors were victims of wrongful, dishonest or negligent schemes as to their investments, suchclaims cannot be brought by the Trustee of the estate of [the bankrupt].

The Court of Appeal dismissed the bankruptcy trustee’s appeal from Berger J.’s decision and the Supreme Court dismissed thebankruptcy trustee’s application for leave to appeal the Court of Appeal’s decision: [1991] SCCA No 69 (QL). [35] In oral argument, the Trustee argued that Toyota, and the case authorities which it follows, are distinguishable because thegoal of the Trustee in this case is to recover insurance and property proceeds for the benefit of the Estates of the bankrupts (that is, for

the benefit of all the creditors), not for the benefit of the plaintiffs in the Havelock and Metz Actions. Counsel for the Trustee stated to the Court, “This is not a case where we’re acting for individual creditors. We’re here for the entire class of creditors acting for the benefit of everyone who has an interest in the bankrupt estate.” [ 36 ] The Trustee’s argument is flawed. The fact that the Trustee seeks to pursue the Havelock and Metz Actions (that is, actions of the creditors of the bankrupts) for the benefit of the Estates of the bankrupts does not change the fact that, in pursuing those Actions, the Trustee would be (

a) pursuing the bankrupts’ creditors’ claims that they were victims of a fraudulent scheme as to their investments, and (

b) looking to recover the bankrupts’ creditors’ investments. In other words, the Trustee would merely be stepping into the shoes of the individual plaintiffs in the Havelock and Metz Actions to pursue their causes of action. [ 37 ] As it appears to be the law in Alberta that s. 30(1) (

d) of the BIA does not give a bankruptcy trustee the power to pursue an individual claim of a particular creditor, the Trustee does not have the power to pursue the Havelock and Metz Actions. Had Parliament intended to give a bankruptcy trustee the power to pursue claims of the creditors of the bankrupt for the benefit of the bankrupt’s estate, it could have done so in a provision similar to s. 38. Receiving assignments of, and continuing, legal actions commenced by the creditors of Dorais and the Dorais Companies are not avenues available to the Trustee to avoid a limitation problem. VIII.

Conclusion [ 38 ] As I have determined that the Trustee lacks the power to pursue the Havelock and Metz Actions, it is unnecessary for me to consider the other arguments of the Respondents. The Trustee’s application to lift the Stay Order is dismissed. The parties may speak to costs within 60 days of the issuance of these Reasons for Judgment. Heard on the 04 th day of April, 2014. Dated at the City of Edmonton, Alberta this 24 th day of October, 2014. D.R.G. Thomas J.C.Q.B.A. Appearances: Mr. J. Thorlakson (Miller Thomson LLP) for the Trustee in Bankruptcy, BDO Canada Ltd. Mr. Kenneth W. Fitz, and Mr. C.P.

Russell, QC (McLennan Ross LLP) for the Respondent Shauna Lee Dorais Mr. Pierre G. Asselin

(Durocher Simpson Koehli & Erkler LLP) for the Respondent Grant Dewar