Gagnon (Re), 2021 ABQB 583

Court of Queen’s Bench of Alberta Citation: Gagnon (Re), 2021 ABQB 583 Date: 20210723 Docket: B203 700347 and B203 700348 Registry: Edmonton Docket No. B203 700347 In the Matter of the Division 1 Proposal of 1810234 Alberta Ltd. o/a AGL Industries Between: Capital Now Inc. Applicant - and - 1810234 Alberta Ltd. o/a AGL Industries Respondent Docket No. B203 700348 In the Matter of the Division 1 Proposal of Antoine Paul Jacob Gagnon Between: Capital Now Inc. Applicant - and - Antoine Paul Jacob Gagnon Respondent

___________________________________________________ Reasons for Judgment of the Honourable Mr. Justice M. J. Lema ____________________________________________________ A. Introduction [ 1 ] A factoring company owed money by a proposal-filing client wants the Bankruptcy and Insolvency Act stay of proceedings lifted. It contends that the debt, or much of it, arose through fraudulent conduct and seeks to vindicate that view in freed-to-continue litigation.

Its mission is to shelter under ss. 62(2.1) BIA , which makes fraud-based (among other) claims immune from the claim- compromising effects of a successful proposal. [ 2 ] The debtor and its principal, who guaranteed the debt and who also filed a proposal, resist. They deny fraudulent behaviour and see the dispute as merely one of quantification of the factor’s claims, which should be done within the proposal proceedings. [ 3 ] The proposal trustee supports the debtor’s position. [ 4 ] I find that the stay of proceedings should be lifted in both proposal proceedings. B.

Background Factoring company’s involvement [ 5 ] 1810234 Alberta Ltd (operating as AGL Industries) obtained receivables financing (with recourse) from Capital Now Inc., starting in summer 2019. AGL would send over invoices from its customers – mostly from one large customer – and receive from CNI a portion of the face amount of the invoice.

If and when CNI collected the receivable from the customer, it would pay over the balance of the invoice amount, less its factoring fee. [ 6 ] In December 2020, both AGL and its principal filed Division I proposals under the Bankruptcy and Insolvency Act . [ 7 ] By its own calculations, CNI was owed approximately $865,000 by AGL when the proposals were filed, and it held security for approximately half of that amount. Accordingly, it filed secured and unsecured proofs of claim in AGL’s proposal of approximately $432,000 each. [ 8 ] Gagnon guaranteed AGL’s debts. CNI does not hold any security from him.

Accordingly, CNI filed an unsecured claim in his proposal of approximately $865,000. [ 9 ] Via investigations after the proposals were filed, CNI came to the view that AGL had submitted both fabricated and inflated invoices to it, presenting an untrue picture of how much its customers (again, largely one core customer) actually owed to AGL. [ 10 ] CNI tallied fabricated invoices (i.e. no actual services provided by AGL to its core customer and thus no receivable created) of roughly $153,000.

It tallied a further roughly $680,000 of inflated invoices (services provided to the customer but generating a receivable less than that presented to CNI for factoring. [ 11 ] According to CNI, it verified both aspects with the customer in question and then asked AGL for an explanation of the discrepancies.

AGL’s explanations [ 12 ] AGL provided some explanations, including: • the customer in question routinely demanding markdowns of AGL’s invoices; and • AGL getting stuck between its customer’s demand for batched invoices (aggregating multiple trips on a single invoice) and CNI’s demand for per-trip invoicing. [ 13 ] AGL elaborated (in part): [Certain] invoices were reduced because of a duplicate ticket, improper information on the tickets or, in some cases, documentation was lost by [AGL] drivers, resulting in [the customer] refusing to pay for certain expenses. … In addition, [the customer] removed payments

for repairs [by it] to trailers. As a recent example, [the customer] removed an amount over $16,000.00. Ten[s] of thousands have been deducted from our invoices with [that customer]. In addition, fuel surcharge can also result in changes to the invoice. [ 14 ] As CNI sees it, AGL provided no satisfactory explanation or reconciliation of any of the apparently fabricated or inflated invoices. Per CNI, whatever adjustments the customer and AGL made between themselves were not relayed by AGL, leaving CNI to rely (i.e. pay out on) the original (and larger) invoices.

As well, the supposed invoice-batching problems did not actually explain any of CNI’s losses. Finally, AGL’s attempts to reconcile other apparent discrepancies between presented-to-CNI and presented-to-customer invoices simply did not add up.

CNI’s position on the proposals [ 15 ] CNI advised AGL’s and Gagnon’s proposal trustee (same in both) that it did not support either proposal, that it would not vote at all, that it believed it had been defrauded by AGL, and that it intended to enforce its security and also apply to lift the stay of proceedings on its unsecured claim i.e. as a pursuable (fraud-based) claim despite the proposal. [ 16 ] AGL’s proposal is double-barreled, proposing a particular resolution of CNI’s secured claim (and “as agreed” resolutions with other secured creditors) and a separate resolution of AGL’s unsecured creditors generally. [ 17 ] On the unsecured front, AGL’s proposal contemplates total payments of $166,000, to be paid, via three-stage payments increasing over time, by November 30, 2024. [ 18 ] CNI advised the proposal trustee that, in its view, with CNI not participating, the secured-creditor dimension of AGL’s proposal would not lift off.

As for the unsecured-creditor dimension, CNI acknowledged that it might pass (i.e. if sufficient unsecured creditors voted in favour), but (as noted) CNI sees its entire claim as fraud-caused and thus as surviving any successful proposal. [ 19 ] CNI and AGL’s proposal trustee have had some (not particularly fruitful) discussions about the scale of CNI’s claims. Those discussions are apparently continuing, and the trustee has not yet formally admitted or denied CNI’s claims i.e. not yet sparking any s. 135 time clock for CNI to challenge (as necessary) the trustee’s gauging of its claims.

AGL’s core response to CNI’s concerns [ 20 ] As AGL sees it, it and the proposal trustee have provided CNI with both sufficient (and benign) explanations of the apparent discrepancies between presented-to-CNI and presented-to-customer invoices and offered it ample opportunity (not yet taken up) to provide further information to substantiate its concerns. [ 21 ] In particular, AGL points to an accounting report, commissioned by the proposal trustee, which apparently shrinks CNI’s claim to “less than $400,000” and (apparently) supports AGL’s “benign explanations” position.

Per AGL, CNI declined to participate in the examinations and analyses underlying that report.

Views of the proposal trustee [ 22 ] Per the proposal trustee: • it appeared initially that CNI was owed roughly $325,000; • CNI declined to provide certain information requested by the trustee to vet its claims; • at a creditors’ meeting on February 22, 2021, sufficient unsecured creditors approved AGL’s proposal (with CNI not voting); • with CNI not participating, the secured-creditor dimension of that proposal was not approved, causing the evaporation of the (or any) secured-creditor stay but leaving the unsecured-creditor stay in place, including as against CNI, which (unless it obtains a proposal- survival declaration) binds CNI despite its not voting; • the noted accounting report concluded that CNI is owed approximately $371,00; • on March 22, 2021, sufficient unsecured creditors (with CNI not voting) approved Gagnon’s proposal; • in that proposal, the trustee valued CNI’s claim at roughly $370,000; • in the trustee’s view, CNI is bound by Gagnon’s proposal, absent a declaration of “proposal survival” declaration; • CNI’s complaints of discrepancies cannot be explored adequately without more information from CNI; • the trustee needs more time to reconcile certain additional (but still overall insufficient) information provided by CNI via its deponent’s supplementary affidavit; and • as of June 14, 2021, when the trustee’s second report was prepared, the trustee has not issued a disallowance of CNI’s claim or claims in either proposal, as it continues to try to reconcile CNI’s and AGL’s numbers (again, ideally with more information from CNI).

CNI’s proposed statement of claim

[ 23 ] If the 69.1 stays of proceedings are lifted, CNI intends to file an action against both AGL and Gagnon seeking recovery of $865,000 (plus interest) jointly, anchored on false representations about amounts owing to AGL by its customers which induced CNI to make unwarranted advances. [ 24 ] The proposed action asserts that Gagnon participated in the false representations either personally or as a corporate representative of AGL.

If the latter, it asks that the “corporate veil” be pierced i.e. to tag Gagnon with personal liability for corporate- officer misrepresentations. [ 25 ] It also seeks (among other relief) declarations that CNI’s claims against both AGL and Gagnon are not compromised by the, or any eventual, proposals, on the combined strength of ss 62(2.1) and 178(1) BIA . C. Issues [ 26 ] The issue is whether the s. 69.1 stays of proceedings currently blocking CNI, in both proposal proceedings, from filing and proceeding with its proposed action should be lifted. That turns on whether: 1.

CNI would be “materially prejudiced” by the continued operation of those stays; or 2. in any case, it is “equitable on other grounds” to lift them. D. Stay and lift-stay provisions [ 27 ] Here is the stay provision: 69.1

(1) Subject to … [section] 69.4 …, on the filing of a proposal under subsection 62(1) in respect of an insolvent person, (

a) no creditor has any remedy against the insolvent person or the insolvent person’s property, or shall commence or continue any action , execution or other proceedings, for the recovery of a claim provable in bankruptcy, until the trustee has been discharged or the insolvent person becomes bankrupt ; … [ 28 ] It is common ground that the proposals in question were filed under ss. 62(1) BIA , that CNI’s claims in both proceedings are “claim[s] provable in bankruptcy” (per ss 121(1) BIA ), and that, absent a lift-stay order under s. 69.4, CNI’s proposed proceeding would be blocked in each proposal proceeding until proposal-trustee discharge or AGL or Gagnon (as applicable) becomes bankrupt . [ 29 ] Because the focus is whether the s. 69.1 stay of proceedings should be lifted earlier than when it would otherwise expire, I next examine the two possible “natural expiry” events: the proposal trustee’s discharge and the proposal maker’s bankruptcy.

Discharge of proposal trustee [ 30 ] When is a proposal trustee typically discharged? Interestingly, while the BIA expressly provides for the discharge of a bankruptcy trustee (s. 41), an interim receiver (Rule 82(2)), and an administrator of a consumer proposal (Rules 101(1)(

a) and (2) and 103(3), (4) and (5)), it does not expressly address the discharge of a proposal trustee. [ 31 ] While I have found no case on point, it seems that, via ss. 66(1), which makes the BIA ’s provisions (generally aimed at bankruptcies) applicable (modified as necessary) to proposals, s. 41 will govern the discharge of a proposal trustee.

Here is s. 41’s core provision ((1)): When a trustee has completed the duties required of him with respect to the administration of the property of a bankrupt, he shall apply to the court for a discharge. [ 32 ] In the case of a successful proposal, the “completed duties” point will presumably coincide with the filing of a certificate under s. 65.3: Where a proposal is fully performed, the trustee shall give a certificate to that effect, in the prescribed form [46], to the debtor and to the official receiver. [ 33 ] At that stage, s. 41 would oblige the proposal trustee to apply for its discharge. [ 34 ] Once the proposal trustee is discharged, the s. 69.1 stay will no longer operate. [ 35 ] But whether that actually opens the door to an action depends on the effect of the proposal on a given creditor’s claim. [ 36 ] For most creditors, a successful proposal will mean the end of the line for any existing or proposed action against the proposal maker, per ss 62(2).

It makes an approved-by-creditors-and-court proposal binding on all unsecured creditors. This means a binding swap of the creditors’ pre-existing rights, including the right to bring and continue lawsuits, for whatever payments are provided by the proposal. In other words, beyond the payments contemplated by the proposal, the creditors’ claims are released. [ 37 ] Subsection 62(2.1) makes an exception for a defined set of creditors: A proposal accepted by the creditors and approved by the court does not release the insolvent person from any particular debt or liability

referred to in subsection 178(1) unless the proposal explicitly provides for the compromise of that debt or liability and the creditor in relation to that debt or liability voted for the acceptance of the proposal. [ 38 ] Subsection 178(1)’s select catalogue of surviving debts includes two categories into which CNI hopes to fall: (

d) any debt or liability arising out of fraud …; [and] (

e) any debt or liability resulting from obtaining property … by … fraudulent misrepresentation … [ 39 ] All to say: if a proposal achieves lift-off and is fully performed, the trustee will be discharged and the s. 69.1 stay will be lifted.

For most creditors, that lifting will have no significance, since the unpaid portion of their claims will have been released. [ 40 ] But for creditors sheltered by ss. 178(1), their proceedings against the debtor can then be launched or continued. [ 41 ] That is how things work on the natural expiry of the stay following a successful proposal. [ 42 ] What if the proposal proceedings fail, perhaps even before a proposal is filed?

Bankruptcy of proposal maker [ 43 ] As noted, the other “natural expiry” of the s. 69.1 stay is the bankruptcy of the proposal maker (if that occurs). [ 44 ] A proposal maker may tumble into bankruptcy at various points along the proposal high wire: • if a notice of intention is filed, for failure to make certain filings or file a proposal within certain deadlines (ss 50.4(8)) or where the court eclipses the proposal-filing period for one of various reasons (ss 50.4(11)); • a deemed refusal of the proposal before the creditors’ meeting (ss 50(12) and (12.1)); • creditor refusal of the proposal (s. 57); • non-approval by the court (ss 61(2)); and • annulment of the proposal (s 63). [ 45 ] The termination of the s. 69.1 stay because of the proposal proponent’s bankruptcy will not actually open the door to a creditor starting or continuing an action, because the debtor’s bankruptcy triggers a separate stay of proceedings, under s. 69.3. [ 46 ] That stay too can be lifted, if appropriate, under s. 69.4 [ 47 ] To summarize: following a successful proposal, a “surviving” creditor can carry on with its proceedings.

After a failed proposal (ending in bankruptcy), such a creditor will have to bring (and succeed in) a lift-stay application before it can press on. [ 48 ] That brings us to the test for lifting the stay i.e. accelerating the lifting from its “natural expiry” end-points.

Lifting the stay [ 49 ] The test for lifting the stay comes from s. 69.4: A creditor who is affected by the operation of [section 69.1] … 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. [ 50 ] The focus turns to the “material prejudice” and, as necessary, “equitable on other grounds” factors. Lift-stay case law [ 51 ] A number of cases have gathered and summarized the lift-stay case law, extracting the key principles. One well-known catalogue of “stay should be lifted” circumstances comes from Registrar Ferron’s decision in Re Advocate Mines Limited , (1984) 52 CBR (NS) 277 (ONSC) : 1. Actions against the bankrupt for a debt to which a discharge would not be a defence . [per ss 178(1) BIA , discussed below]. 2.

Actions in respect of a contingent or unliquidated debt , the proof of which and valuation has that degree of complexity which makes the

summary procedure prescribed by s. 95(2) [now s. 135(2)] of the Bankruptcy Act inappropriate . 3. Actions in which the bankrupt is a necessary party for the complete adjudication of the matters at issue involving other parties . 4. Actions brought to establish judgment against the bankrupt to enable the plaintiff to recover under a contract of insurance or indemnity or under compensatory legislation .

5. Actions … which, at the date of bankruptcy, have progressed to a point where logic dictates that the action be permitted tocontinue to judgment. [para 2] [emphasis added] [52] In Ma (Re), , the Ontario Court of Appeal elaborated on the first category: In our view there is no requirement to establish a prima facie case [for ss 178(1) survival] and no inconsistency in the case law. … Theapproach to be taken on s. 69.4 application was considered by Adams J. in Re Francisco (1995), (ON SC), 32 C.B.R.(3d) 29 at 29-30 (Ont. Gen.

Div.), a decision affirmed by this court (1996), (ON CA), 40 C.B.R. (3d) 77 ( Ont.C.A.): In considering an application for leave, the. function of a bankruptcy court is not to inquire into the merits of the action sought tobe commenced or continued. Instead, the role is one of ensuring that sound reasons, consistent with the scheme of the Bankruptcyand Insolvency Act, R.S.C. 1985, c.B-3, exist for relieving against the otherwise automatic stay of proceedings. As this passage makes clear, lifting the automatic stay is far from a routine matter.

There is an onus on the applicant to establish abasis for the order within the meaning of s. 69.4. As stated in Re Francisco, the role of the court is to ensure that there are "soundreasons, consistent with the scheme of the Bankruptcy and Insolvency Act" to relieve against the automatic stay. While the test is notwhether there is a prima facie case, that does not, in our view, preclude any consideration of the merits of the proposed actionwhere relevant to the issue of whether there are "sound reasons" for lifting the stay.

For example, if it were apparent that theproposed action had little prospect of success, it would be difficult to find that there were sound reasons for lifting thestay. [paras 2 and 3] [emphasis added] [53] In Global Royalties Limited v Brook, 2016 ONCA 50 (in chambers), Strathy CJO reaffirmed the Ma (Re) approach to meritsreview, declining to give leave to appeal to reconsider or clarify that decision (paras 34-36). [54] In Great North Data Ltd (Re), 2020 NLSC 105 (para 11), Handrigan J. gave additional guidance, building on both AdvocateMines and Ma (Re): From my review of

section 69.4 of the BIA, these are some of the principles that are relevant to its application: • A creditor applying under

section 69.4 of the BIA must meet at least one of the two criteria stated in the section, not both; • A creditor applying under

section 69.4 of the BIA does not have to show it has a prima facie case in its action against thebankrupt: Re Ma [ (ONCA)]; • The bankruptcy court need only consider the merits of the proposed action to see whether there are ‘sound reasons’ forlifting the stay: Re Ma; • A bankruptcy court on a leave application must ensure that sound reasons exist for relieving against the automatic stay ofproceedings: Re Francisco [ (ONSC) (Adams J.)]; • It is an error of law to accept the five circumstances enumerated in Re Advocate Mines Limited [cited above] as “a limiting orexhaustive instrument”: Re Francisco; • If the creditor satisfies the court that one or more of the grounds referred to in Re Advocate Mines Limited is present and that thecreditor is likely to be materially prejudiced or that it is equitable on other grounds to make such a declaration then a court will liftthe stay of proceedings: Re Panorama Parkview Homes Ltd., 2017 BCSC 2071 (BCSC); and, • Fraud alleged by a creditor to have been committed by the bankrupt is a complex matter which should not ordinarily bedealt with on a

summary basis and without a full hearing: Re Taylor Ventures Ltd., 2002 BCSC 82 (BCSC). Lift-stay circumstance(

s) here [55] In the present case, we are not dealing with contingent or unliquidated claims, instead CNI’s claim for recovery of moniesadvanced to AGL i.e. a liquidated claim. [56] We are also not concerned with claims over against insurance, indemnity or other compensation schemes. [57] CNI’s action is only proposed i.e. we are not dealing with a ripe or almost-ripe action. [58] Finally, I do not see the “necessary party” exception as applying, with CNI’s scrutiny focused on the actions of effectively asingle party i.e.

AGL acting through its principal Gagnon or Gagnon personally. [59] Accordingly, per the Advocate Mines framework, the focus narrows to the first lift-stay circumstance: claims that survive, ormay survive, bankruptcy (or here, a proposal). [60] As discussed below, the operation of the stay to bar the pursuit of such claims has been found to create “material prejudice” tothe claimant. E. Rationale for finding material prejudice in the context ofsurviving claims

[61] What is the rationale for finding “material prejudice” arising from being stayed by s. 69.1 in the case of surviving or may-survive claims? [62] I first note that we are not examining prejudice arising from the actions or inactions of another party to litigation. Instead, s.69.4 focuses on prejudice arising from the operation of the BIA itself i.e. the s. 69.1 stay. [63] That stay applies to all unsecured claims in a proposal.

What is it about a surviving, or potentially surviving, claim that couldshow prejudice i.e. some kind of differential disadvantage arising from being bound by the same statutory stay as all other unsecuredcreditors? [64] The answer is illuminated by the Supreme Court of Canada’s decision in Alberta (Attorney General) v Moloney, 2015 SCC51. In the course of exploring various BIA fundamentals, Gascon J. described the rationale for the bankruptcy stay (69.3): The first purpose of bankruptcy, the equitable distribution of assets, is achieved through a single proceeding model.

Under thismodel, creditors of the bankrupt wishing to enforce a claim provable in bankruptcy must participate in one collective proceeding.This ensures that the assets of the bankrupt are distributed fairly amongst the creditors. As a general rule, all creditors rank equally andshare rateably in the bankrupt’s assets: s. 141 of the BIA; Husky Oil, at para. 9. In Century Services Inc. v.

Canada (AttorneyGeneral), 2010 SCC 60, [2010] 3 S.C.R. 379, at para. 22, the majority of the Court, per Deschamps J., explained the underlying rationalefor this model: The single proceeding model avoids the inefficiency and chaos that would attend insolvency if each creditor initiated proceedingsto recover its debt.

Grouping all possible actions against the debtor into a single proceeding controlled in a single forumfacilitates negotiation with creditors because it places them all on an equal footing, rather than exposing them to the risk that amore aggressive creditor will realize its claims against the debtor’s limited assets while the other creditors attempt a compromise. Avoiding inefficiencies and chaos, and favouring an orderly collective process, maximizes global recovery for all creditors: Husky Oil, atpara. 7; R. J. Wood, Bankruptcy and Insolvency Law (2009), at p. 3.

For this model to be viable, creditors must not be allowed to enforce their provable claims individually, that is, outside thecollective proceeding.

Section 69.3 of the BIA thus provides for an automatic stay of proceedings, which is effective as of the firstday of bankruptcy [s. 69.3 reproduced – effectively a twin to s. 69.1] (See R. v. Fitzgibbon, (SCC), [1990] 1 S.C.R.1005, at pp. 1015-16.) Yet there are exceptions to the principle of equitable distribution. … A court may … grant leave permitting a creditor to beginseparate proceedings and enforce a claim: s. 69.4 of the BIA.

These exceptions reflect the policy choices made by Parliament infurthering this purpose of bankruptcy. [paras 33-35] [emphasis added] [65] For creditors with dischargeable (non-surviving) claims (and assuming no other Advocate Mines exceptions apply), noindependent or incremental benefit could arise from continuation of their claims. The BIA provides a process for proving their claims (s.121) and for determining any disputes over their quantum (s. 135). [66] After that, such creditors “wait in the corral” for any dividends.

And once the bankrupt (if an individual) is discharged, theunpaid balances of their claims are released (ss. 178(2)). [67] But things are different for surviving creditors. [68] Their claims are not released, meaning they are free, after the bankrupt’s discharge, to commence or continue their claims andseek recovery of the unpaid balance i.e. after giving credit for any dividends received during the bankruptcy. [69] Such creditors have the best of both worlds: they can prove their claims in the bankruptcy (and receive any dividendsgenerated by it) and pursue the unpaid balance after bankruptcy. [70] Thus, we see the critical difference between dischargeable and surviving claims and also the rationale for finding prejudice inthe latter being subjected to the bankruptcy stay.

For dischargeable claims (and again assuming no other Advocate Mines exceptionsapply), there is no “life after bankruptcy” and thus no reason for actions to continue. [71] For surviving claims, by definition, there is “life after bankruptcy.” [72] The core prejudice to a surviving or may-survive claimant is being forced, if the stay operates, to wait until the bankruptcy(or, here, the proposal) is completed before being able to commence or continue with its claim. [73] With the stay in place, such a creditor is effectively told: “Your claim will not go away; you will be able to pursue it in time.But in the meantime, you must put it on hold.” [74] In the present case, the AGL proposal contemplates payments to unsecured creditors, including CNI, being made over thenext almost 3.5 years, through to November 30, 2024. [75] If the s. 69.1 stay remains until place until “natural expiry” following successful performance of the proposal, CNI will beforced to park its proposed proceeding for that entire period. [76] At that stage, it would then have to start its action and, as part of it, seek the necessary “survival” declarations i.e. that itsclaim is in fact sheltered under ss. 178(1)(

d) or (e) (or both). [77] CNI does not want to wait another 3.5 years to take those steps. (In Gagnon’s own proposal, the pay-out period is even longer:59 months starting January 31, 2021 i.e. December 31, 2025.)

[ 78 ] Being forced to wait by the s. 69.1 stay is what CNI sees as “material prejudice.” [ 79 ] I recognize that, if the proposals were to fall off-track in one of various ways (as catalogued above), the s. 69.1 stay would end earlier than the “full performance natural expiry” i.e. with the bankruptcy of the proposal maker(s). [ 80 ] However, CNI has no control over those triggering events, which are largely in AGL’s and Gagnon’s own hands, assuming the court approves the proposals.

If such approval is given, the only remaining off-ramp to bankruptcy, and thus the end of the s. 69.1 stay, is probably default in the performance of the proposal (per ss 63(1)), which depends on AGL’s and Gagnon’s actions i.e. nothing that CNI has any control over. [ 81 ] Accordingly, the focus remains on the other “natural expiry” of the stay i.e. the successful performance of the proposal and the accompanying discharge of the proposal trustee. [ 82 ] Have the cases recognized this “forced wait” as material prejudice under s. 69.4? F.

Case law on material-prejudice delay in the context of surviving claims [ 83 ] The answer is yes. [ 84 ] Many cases have explored this concept in a bankruptcy context. I am focusing here largely on cases considering the point in a proposal context. [ 85 ] Registrar Cregan found such delay to be material prejudice in Jenkins (Re) , 2005 NSSC 234 : I am satisfied that the Plaintiff will be materially prejudiced by the continuation of the stay. The pleadings satisfactorily make out that the claim relates to matters described in subsection 178(1). If proven they survive bankruptcy.

No significant evidence was presented which suggested there was little prospect of success. Not being able to proceed against Mr. Jenkins will cause serious problems with discovery, considerable delay in eventually bringing the action forward against him , and all the problems with having a second trial on the same set of facts. As well, the Bankruptcy Court

summary procedures are inadequate to properly deal with the complications of this action. [para 39] [emphasis added] [ 86 ] He echoed that finding in Coyle (Re) , 2011 NSSC 469 : The prejudice for the Commission is that it would be denied the right of remedy against the Applicant when it had reasonable bases for asserting a claim framed in fraudulent misrepresentation, which, if proved, would survive bankruptcy. This is how it “was likely to be materially prejudiced” . The purpose of the stay is to facilitate the administration of the bankrupt’s estate. Assets are collected by the trustee.

Creditors must assert their claims to the trustee. It is the trustee who then makes the lawful distribution of assets and debts are thereby discharged. But debts arising from fraud and the like are not discharged. Such creditors are normally allowed to pursue their debts outside the bankruptcy procedures. But to assure that procedures against the bankrupt are orderly, the permission of the Court is necessary. As mentioned above where fraud is involved such permission is normally granted.

Delay can result in prejudice to the creditor and unwarranted advantage to the debtor. [possibly end quote here and save next para for “impact on proposal” discussion] No submissions were made that the administration of the estate would have been prejudiced, if the stay were lifted. I do not see that any rights of the Applicant would have been prejudiced by lifting the stay. The debts, if proved, would survive bankruptcy.

I am satisfied that the stay would have been lifted, if it had been sought before the commencement of proceedings before the Board. [paras 30-32] [emphasis added] [ 87 ] In Marasse (Re) , 2014 SKQB 18 , Registrar Thompson found material prejudice arising from stay-imposed delay: According to s. 69.4 of the BIA , the court has the discretion to lift the bankruptcy stay in cases where the applicant establishes that either (

a) the applicant is likely to be materially prejudiced by the continued operation of the stay; or (

b) it is equitable to declare the stay inoperable.

The Ontario Superior Court in Mawji SC [upheld in 2012 ONCA 152 ] held that claims that would survive bankruptcy if proved, are of a category falling under s. 69.4(a), and that the “prospect of a delay in the prosecution of an action to which a discharge in bankruptcy would not be a defence constitutes sound reasons for lifting the stay of proceedings , unless it is apparent that the action has little prospect of success.” (at para. 15). [para 22] [emphasis added] [ 88 ] Same in Global Royalties Ltd v Brook , 2015 ONSC 6277 (a bankruptcy case), where Penny J. held: Having to wait until [the bankruptcy] discharge, when a release may well not be available to the defendant anyway, represents material prejudice to the plaintiffs. [para 27] [leave to appeal denied: 2016 ONCA 50 ]. [ 89 ] Romaine J. signaled a similar approach in Transamerica Life Canada v Oakwood Associates Advisory Group Ltd , 2020 ABQB 279 : Mr.

Goulet [proposal debtor] submits that Transamerica [proposal creditor] has not been materially prejudiced by the stay. This is an interesting argument, as the defendants [including Mr. Goulet] argued with considerable vigour in their application to strike for delay that they had suffered prejudice. The various levels of Court in the delay application were clear that, while the degree of prejudice could not support striking the claim, “... that obviously should not be interpreted as any sort of approval of the pace at which this litigation has been conducted.

The parties to any litigation, and their counsel, have obligations under the Rules of Court to advance

litigation in a timely way”: Court of Appeal decision at para 52. It is noteworthy that the defendants now take the position that a delay for over 16 years until Mr. Goulet is discharged from bankruptcy is not prejudicial .

However, even if Transamerica has not shown material prejudice , the Court can lift the stay if it is equitable on other grounds to do so. [paras 25-27] [emphasis added] [ 90 ] In the context of a different kind of surviving claim (sexual-assault damages, per para 178(1)(a.1)), Myers J. found material prejudice in the delay imposed by s. 69 (consumer proposal): see Lundahl v Poilievre , 2013 BCSC 1628 at paras 6-8 . [ 91 ] In the bankruptcy realm, Rooke ACJ confirmed that stay-caused delay in pursuing a surviving claim can warrant lifting of the stay ( Anstead (Re) , 2017 ABQB 700 at para 19 ): It is well established that the prospect of delay in the prosecution of an action, to which a discharge in bankruptcy would not be a defence, constitutes reason for lifting the stay of proceedings: Echino v Munro , 2014 ABQB 636 , aff’d: 2014 ABCA 422 ; Gaastra v Tri-Link Consultants Inc. , 2012 ABQB 271 ; aff’d: 2012 ABCA 262 .

Conclusion on delayed start to proposed action as material prejudice [ 92 ] I conclude that the delays otherwise imposed by s. 69.1 here -- approximately 3.5 years on the AGL front and 4.5 years on the Gagnon front -- until the “natural expiry” of the stay (i.e. on the trustee’s discharge) constitute material prejudice as interpreted by these cases. [ 93 ] Here I also invoke the general concerns about litigation delay outlined by the Alberta Court of Appeal in Humphreys v Trebilcock , 2017 ABCA 116 : There is no doubt that the passage of time may impair a moving party’s ability to defend its interests at the trial of an action. “ Delay may compromise the fairness of a trial”.

The unavailability of crucial witnesses – death, impairment or disappearance – may diminish the strength of the moving party’s case. The passage of time may also have impaired a prospective witness’ ability to access stored data. A potential witness’ mental health may have declined and place the person in a position where he or she no longer can retrieve material in a memory bank. Or a party may have lost exhibits. This may be attributable to disastrous fires or floods or mistakes made by movers or document managers.

Many Alberta courts have recognized this form of prejudice – litigation prejudice – as a legitimate interest meriting protection. This is not controversial . [paras 130 and 131] [footnotes omitted] [emphasis added] [ 94 ] While the cause of the delay here is not a party’s laxity in pressing forward but a statutory stay, these same delay considerations arise i.e. if CNI were obliged to wait over three years before commencing its proposed proceeding. [ 95 ] As well, CNI’s proposed action is not purely a “documents” case, where a delayed start to the action may be less prejudicial.

AGL argues that the dispute is essentially over the quantum of CNI’s claims, that the quantum can be determined by reviewing AGL’s and CNI’s records, that the proposal trustee has invested considerable time and energy into determining that quantum, that CNI has been less-than-optimally cooperative in that exercise, that more time should be allowed to complete that review (ideally, with more cooperation from CNI), and that greenlighting a fraud action would lead to unnecessary and expensive duplication of the quantum work. [ 96 ] It is one thing to sort out the numbers i.e. to determine precisely how much CNI is owed; it is another to determine how the various elements of its claim arose. [ 97 ] CNI’s fraud allegations will probably turn on credibility – in part, Mr.

Gagnon’s -- as the following questions (potentially among others) are explored: • did some or all of CNI’s claim stem from defaults “receivable defaults” by AGL’s major customer (or other customers), for which AGL is liable in this “with recourse” setting, but with no fraud or other wrongdoing by AGL? • is some or all of CNI’s claim due to different invoices being presented to CNI, on the one hand, and AGL’s’ customers, on the other, where AGL in fact provided services?

If so, are there benign explanations for those differences, or was this part of a plan by AGL to misrepresent the state of its receivables to CNI and extract more advances than warranted? and • can AGL provide benign explanations for the “unrecognized invoices”, or did AGL conjure up invoices having no connection to work actually provided to its customers and thus extract unwarranted advances? [ 98 ] CNI’s evidence will apparently include testimony from a former AGL employee with inside understanding of the motivations for some of AGL’s factoring-related actions.

AGL minimizes the significance of that person’s viewpoint, but his testimony will set up a credibility contest between himself and Mr. Gagnon. BIA claims-scrutiny process not created or equipped to explore debt-genesis issues [ 99 ] These “underlying causes” questions will not be answered by the quantification work the proposal trustee has done and wishes to complete. The BIA , in ss 121 and 135, focuses only on whether a claim exists, its nature (secured, preferred or unsecured), and its quantum. [ 100 ] The uncertainty here, as far as the BIA is concerned, is quantum.

In theory, quantification could be distilled to simply how much CNI advanced overall, compared to how much it collected from AGL’s customers (“cash out, cash in”).

[ 101 ] The BIA claims-scrutiny process will not, and cannot, answer how CNI’s debt came to exist and whether it arose, in whole or in part, out of fraud. [ 102 ] I conclude that being obliged to wait up to 3.5 years before commencing its proposed proceeding, including sorting out how its debt arose, constitutes material prejudice to CNI within the meaning of that phrase in the case law. [ 103 ] What else does CNI have to show? G.

Threshold level of allegations or evidence to raise surviving- claims grounds [ 104 ] A creditor asserting a “will survive” claim, who has not already obtained a judgment, is obliged to show that it has at least some prospect of success in proving fraud, false pretenses, or other “survival” grounds. [ 105 ] In Gaastra v Tri-Link Consultants Inc , 2012 ABQB 271 , Hall J. put it this way: I have read the excerpts referred to by Mr. Watts. I have also read the affidavits of Mr. Gaastra and the remainder of the transcripts. I do not agree with Mr.

Watts [that there is no case to be met and that the Plaintiffs have no evidence of fraud]. There are many indicia that the defendants controlled by Mr. Watts and Mr. Watts himself have failed to properly explain how the Plaintiffs’ investments of in excess of $1.8 million have dissipated. Absent a full and transparent explanation by those defendants, some case for a finding of fraud against Watts is put forward by the Plaintiffs. Fraud can be difficult to prove without full examination or cross examination of the defendants and their documentation.

For the purposes of this application, the Plaintiffs need not prove a prima facie case, only that there is a case to be met. A review of the merits of the case leads me to find that the Plaintiffs have done so. [para 9] [emphasis added] [ 106 ] The Alberta Court of Appeal agreed ( Gaastra v Watts , 2012 ABCA 262 ): The chambers judge recognized that in order to justify lifting the stay, some evidence must be produced to demonstrate that there is some substance to the allegations of fraud. The threshold of evidence required to prove fraud at this stage of the proceedings is low.

While there is arguably no overt evidence of fraud on the record, the chambers judge concluded that there were sufficient suspicious circumstances to warrant an inference of fraud.

At this stage, it is not necessary that fraud be the only way of interpreting the available evidence, nor is the possibility of a defence decisive . [para 2] [emphasis added] [ 107 ] In Transamerica (cited above), Romaine J. noted: It is not necessary or appropriate that I decide definitively that the claim would survive discharge from bankruptcy: that depends in the end on the judgment after trial, and not just allegations in the pleadings. However, it is clear that it is arguable that a judgment against Mr.

Goulet arising from a trial may survive discharge from bankruptcy . [para 20] [emphasis added] [ 108 ] In Da Silva v River Run Vistas Corp , 2016 ABQB 433 , Strekaf J. (as she then was) expressed the threshold this way: … Having regard to the low threshold of evidence and the absence of any contradictory evidence from the Defendants, the evidence before me raises sufficient suspicious circumstances to warrant an inference of fraud that merits permitting the action to proceed against Messrs.

Becker and Bradley at this stage. [para 18] [ 109 ] In Dalmac Oilfield Services Inc (Re) , 2020 ABQB 752 , Mah J. endorsed that approach: The more recent case law suggests that a Court tasked with determining whether a stay should be lifted may make some inquiry into the merits of the proposed action. This position was endorsed by Strekaf J, also then of this Court, in Da Silva v River Run Vistas Corporation [cited above] at para 10 where she quoted with approval from the previously referred to Ma v Toronto Dominion Bank at para 3 : ...

While the test is not whether there is a prima facie case, that does not, in our view, preclude any consideration of the merits of the proposed action where relevant to the issue of whether there are "sound reasons" for lifting the stay. For example, if it were apparent that the proposed action had little prospect of success, it would be difficult to find that there were sound reasons for lifting the stay . Overall, this makes public-policy sense.

The Court should not be promoting the propagation of futile litigation . [paras 13 and 14] [emphasis added] [ 110 ] Master Summers expressed the same view in Musat (Re) , 2020 ABQB 215 : The threshold to have the stay of proceedings lifted under

section 69.4 of the BIA is low. But there must still be some evidence - Re Munro. In this case, I find that there is a complete lack of evidence to support a lifting of the stay of proceedings. … [para 21] [emphasis added] Application of those principles here [ 111 ] I find that CNI has show at least “some prospect”, on the basis of some evidence, which AGL has not undercut in any material way, that at least some of CNI’s claim arises out of fraudulent conduct by AGL.

[ 112 ] Here I point to paragraphs 12-27 and 6-12 of the affidavits sworn by Bianca Cortese on behalf of CNI on March 15 and June 7, 2021, respectively.

They detail CNI’s concerns and, in brief, paint a picture, at least at first glance, of AGL both presenting invoices for factoring not corresponding to invoices actually issued to any AGL customer, as well as invoices (to CNI) reflecting receivables larger than the actual receivables owing by AGL customers. [ 113 ] CNI also provided evidence, via those affidavits, of AGL providing shifting explanations for collection problems with its major customer (initially pointing to delayed payments by that customer before pointing to post-billing adjustments and the need to prepare two series of invoices). [ 114 ] For its part, and as reflected in its affidavit (sworn by Mr.

Gagnon on March 24, 2021), AGL explained various ways in which amounts originally billed to its major customer came to be reduced, but it did not offer any evidence that such reductions were reflected in the invoices turned over to CNI for factoring, whether in the material initially forward to CNI or any corrected follow-ups. [ 115 ] As well, while it provided an explanation for the existence of both “batched” and “per-trip” invoices (reflecting different preferences of its major customer, on one hand, and CNI’s requirements, on the other), as far as I can tell AGL did not provide an adequate reconciliation i.e. explain why, properly matched (i.e. a given batched invoice with its component per-trip invoices), the receivable amounts occasionally differed. [ 116 ] I do not make any finding, at this preliminary stage and on potentially incomplete evidence, about fraud or any other wrongdoing having occurred. [ 117 ] But, as noted, I do find that CNI has shown at least some prospect (i.e. going beyond mere allegations and mere speculation) that it will be able to prove fraud and, by extension, that s. 178(1) “survival declarations” are warranted.

H. Additional considerations No weed-lying [ 118 ] CNI did not “lie in the weeds” (as in Re Barry-Kays , (2010) 67 CBR (5 th ) 253 (ONSC – Registrar Nettie) at para 18 affirmed 2010 ONSC 3535 (Hoy J. as she then was)) , instead making it plain to AGL, Gagnon and the proposal trustee, before the creditor vote, that it claimed fraud by AGL at the root of its claim and intended to seek s. 69.4 leave to pursue a fraud-based action. CNI not bound to proposal on account of voting [ 119 ] CNI did not vote in either proposal.

Accordingly, if CNI is ultimately shown to have surviving claims in either or both proposals, it will not be treated (via ss 62(2.1)) as effectively having waived the survival feature of its claims.

Impact on proposal [ 120 ] Some cases hold that, in gauging whether the s. 69.1 stay should be lifted, the court must take a holistic approach i.e. assess whether potential damage or prejudice to the proposal proceeding itself (i.e. if the stay is lifted) outweighs the prejudice that the moving creditor faces via continued operation of the stay. [ 121 ] As I see it, if the focus were on the second prong of s. 69.4 (“equitable on other grounds”), it may be appropriate to consider “all of the equities” i.e. to measure and consider relative “prejudice” in the way described. [ 122 ] But, under the first prong, the BIA ’s focus is whether “ the creditor … is likely to be materially prejudiced by the continued operation of [s. 69.1].” The sole focus is the creditor (here, CNI) and whether it is materially prejudiced by the stay.

The statutory test does not factor in any impact on the proposal from granting leave. [ 123 ] In any case, Gagnon’s evidence of predicted adverse impacts of leave being granted is too imprecise (“grave concerns ... [of] a significant effect” and “will seriously put [the AGL proposal and my personal proposal] in jeopardy [by] effectively putting AGL into bankruptcy and potentially prejudicing [proposal-approving] creditors”) to tip any scales here. These effects are forecast, but no particular causes are described or suggested.

Duplication of effort [ 124 ] I acknowledge that considerable effort has gone into quantifying, or getting closer to quantifying, CNI’s claims in both proposals (primarily in AGL’s). [ 125 ] But I do not necessarily foresee duplication.

It may be that, whether by agreement among the parties or the operation of the s. 135 process (pronouncement by trustee on quantum of CNI’s claims and any resolution of any CNI challenge), the quantum of CNI’s claims comes to be settled. [ 126 ] That would presumably relieve the parties from any need, in the proposed civil litigation, to determine quantum i.e. the parties would not be starting from scratch on that dimension. [ 127 ] Instead, that action would focus, as noted, on the “how and why” of CNI’s (now quantified) claims and whether they are, in fact, rooted (in whole or in part) in fraud. I.

Gagnon’s own proposal

[128] The above analysis is largely focused on AGL’s proposal. [129] Does the same analysis, and do the same conclusions, apply equally to Gagnon’s personal proposal? [130] The answer is yes. [131] In its proposed statement of claim, CNI names both AGL and Gagnon personally, and seeks a declaration that Gagnon attractspersonal liability for his allegedly fraudulent actions or inactions i.e. beyond their effects on AGL i.e. in his representative capacity. [132] CNI did not offer any evidence of independent actions by Gagnon i.e. distinct from his actions on behalf of AGL.

EverythingGagnon did was apparently done in his corporate capacity. [133] But, when it comes to fraud, or allegations of fraud, Gagnon may not be able to shield behind the corporate veil. His “corporateactions” may still expose him to personal liability. [134] Here I rely on the analysis of Kirker J. in 1234389 Alberta Ltd v 606935 Alberta Ltd, 2020 ABQB 28: Dr. Phu argues that she is not personally liable because everything she did was for the purpose of her business and done in thecourse of that business. She also argues that this is not a circumstance in which the corporate veil should be pierced.

There are two areas of law implicated in Dr. Phu’s position: (

i) the liability of directors and officers for torts committed while conductingcorporate business; and, (ii) the principle of corporate separateness, which says that a corporation is a legal person separate from itsshareholders (Salomon v Salomon & Co, [1897] AC 22). While there is some conflicting authority in relation to when directors and officers are personally liable for ordinary negligence,there is no such doubt when the facts invoke fraud, deceit or dishonesty: Slatter JA in Hogarth at para 96, citing ScotiaMcLeod Inc.v Peoples Jewellers Ltd. (1995), (ON CA), 26 OR (3d) 481 (CA) at paras 25-26.

This aligns with the requirements inthe Business Corporations Act, RSA 2000, c B-9, s 122 that every director in exercising her powers and discharging her duties shall acthonestly and in good faith with a view to the best interests of the corporation. Section 122(3) further states that no provision in a contract,the articles, bylaws or a resolution can relieve the director from liability for breach of this duty. When a director and officer of a corporation acts in a fraudulent manner, as I find Dr.

Phu has done, that individual is no longeracting in the best interests of the corporation and is personally liable for their tortious actions: Dominion of Canada GeneralInsurance Co. v MD Consult Inc., 2013 ONSC 1347 at para 25 (leave to appeal dismissed 2013 ONSC 6906), citing ADGA SystemsInternational Ltd. v Valcom Ltd. (1999), (ON CA), 43 OR (3d) 101 (CA). It does not offend the principle of corporate separateness to impose personal liability on Dr.

Phu for her fraudulentmisrepresentation because her actions as the directing mind of the Seller “exhibit a separate identity or interest from that of the[Seller] so as to make the act or conduct complained of her own”: Hogarth, per O’Brien and Rowbotham at para 13, citing Blacklawsv 470433 Alberta Ltd, 2000 ABCA 175, leave to appeal refused [2001] 1 SCR vii. ... I find that, on the facts of this case, Dr. Phu is independently liable for the Purchaser’s damages caused by her intentional tortiousconduct in her capacity as director and officer of the Seller.

It is not necessary to pierce the corporate veil to attach liabilityto Dr. Phu in that capacity. [paras 158-162 and 164] [emphasis added] [135] In light of my conclusion above about CNI having shown at least some prospect of succeeding in its proposed fraud-basedaction against AGL, and with the evidence showing that Gagnon as the “prime mover” at AGL, and based on Kirker’s J.’s analysis, Ifind that CNI has also shown at least some prospect of being able to prove a fraud-based claim against Gagnon personally. J.

Conclusion [136] CNI has shown sufficient prospect of proving fraud-based claims against both AGL and Gagnon and that the stay-imposeddelays in pursuing a fraud-based action and “survival declaration” against both of them are materially prejudicial to CNI. [137] One way or another, and sooner or later, AGL and Gagnon have to face CNI’s fraud allegations. As noted, CNI is not “vote-bound” by either proposal.

Absent leave now, if the court approves the proposals, and they are performed successfully, the day willcome (whether in 3.5 or 4.5 years, depending on the proposal) when the proposal trustee is discharged and CNI will be able to pursue itsfraud-based claim. [138] The green light I am giving to CNI to pursue that claim now simply accelerates what AGL and Gagnon must eventually face. [139] And any actual or claimed impact on the proposals is not a relevant factor in this “leave or not” exercise. (In any case, there isinsufficient evidence of likely adverse impact.) [140] Ultimately, it may serve all the parties’ interests to have the fraud allegations addressed sooner than later. [141] If AGL and Gagnon believe CNI’s fraud allegations are groundless, they can presumably seek some kind of

summarydisposition of CNI’s action. [142] In any case, for all the reasons expressed above, CNI is entitled to lift-stay orders under s. 69.4 in both proposals. [143] CNI is entitled to its taxable costs of this application.

Heard on the 18 th day of June, 2021. Dated at the City of Edmonton, Alberta this 23rd day of July, 2021. M. J. Lema J.C.Q.B.A. Appearances: Daniel Jukes Miles Davison LLP for the Applicant Capital Now Inc. Martyn Laurin Pahl Howard LLP for the Respondents 1810234 Alberta Ltd. o/a AGL Industries and Antoine Paul Jacob Gagnon Bryan P. Maruyama Parlee McLaws LLP for the proposal trustee Faber Inc.