Schendel Mechanical Contracting Ltd (Re), 2021 ABQB 893

Court of Queen’s Bench of Alberta Citation: Schendel Mechanical Contracting Ltd (Re), 2021 ABQB 893 Date: 20211109 Docket: B203 489860, BK03 155990, BK03 155991 Registry: Edmonton In the Matter of the Bankruptcy of Schendel Mechanical Contracting Ltd. Between: PricewaterhouseCoopers, Court Appointed Receiver of Schendel Mechanical Contracting Ltd., Schendel Management Ltd. and 687772 Alberta Ltd. Applicant - and - C & G Hatch Associates (Hatch Company) Respondent _______________________________________________________ Reasons for Decision of the Honourable Mr. Justice Douglas R. Mah

_______________________________________________________ A. Background [ 1 ] The dispute here concerns the legality of a $40,000 payment made by an insolvent company to one of its suppliers. The Applicant Receiver, PricewaterhouseCoopers, says the payment is prohibited on a number of grounds, and seeks its return for the benefit of the estate.

The recipient Hatch says the payment was both innocently and validly received, and that Hatch is entitled to retain it. [ 2 ] The insolvent company, Schendel Mechanical Contracting, was one of a trio of associated companies that at one time collectively constituted a major construction concern in Alberta operating under the Schendel name. The events leading to Schendel’s financial demise are described in Justice Lema’s receivership decision of July 19, 2019 reported at 2019 ABQB 545 . [ 3 ] The payment in question was made by way of cheque on July 8, 2019. Schendel had filed a Notice of Intention under

section 50.4(1) of the Bankruptcy and Insolvency Act on March 22, 2019 and had obtained a series of extensions from the Court to file a proposal. However, it was not until July 19, 2019 at 11:48 AM that Hatch’s bank certified the cheque. There is no evidence before me as to the exact moment in time on that same day that Justice Lema’s decision was pronounced. [ 4 ] Between April 2018 and May 2019, Hatch had supplied Schendel with HVAC equipment on various Schendel projects. The affidavit of Mr.

Manning dated September 2, 2021 itemizes at para 8 the various invoices rendered by Hatch to Schendel during that period. As of May 24, 2019, Schendel was indebted to Hatch to the extent of $175,860.35, of which the sum of $34,476.75 was incurred post-NOI. [ 5 ] Mr. Manning, who is Hatch’s sales manager, deposes that Schendel’s cheque for $40,000 was received by Hatch out of the blue. Hatch is arm’s-length from Schendel. Mr. Manning deposes that Hatch had taken no steps to collect the indebtedness aside from normal periodic inquiries to the customer regarding payment.

He states that no one at Hatch, as far as he knows, had any conversation with anyone at Schendel regarding special treatment for Hatch. Mr. Manning says on behalf of Hatch that he does not know why Schendel chose to forward the payment at that time or why Hatch may have received a payment when other creditors did not. The payment was assumed to be and treated by Hatch as a payment on account. [ 6 ] The Receiver is not able to shed much light on the matter. Mr.

Fleming, the Receiver’s deponent, in his December 1, 2020 affidavit simply states that PwC in the course of its administration duties reviewed Schendel’s bank records and noted that the $40,000 cheque cleared Schendel’s bank on the same day that the Receivership Order was granted.

PwC as Schendel’s Receiver demanded that Hatch refund the amount, which Hatch has refused to do and which leads us to the present application. [ 7 ] No evidence was tendered by either side concerning the impugned transaction from Schendel itself, the proposal trustee under the NOI (Grant Thornton LLP), the current Trustee in Bankruptcy (also Grant Thornton LLP), nor ATB which was the secured creditor and the prime mover behind the receivership. Hatch applied the $40,000 payment to certain specific invoices and provided that information to PwC but it was not put before the Court. A.

The Receiver’s Arguments [ 8 ] The Receiver stakes its position that the funds should be returned on these grounds: • upon the filing of the NOI, and throughout the extensions of the proposal period, the automatic stay under section 69(1) of the BIA was in effect and consequently Hatch had no remedy against Schendel; • the court-ordered stay contained at paras 8 and 9 of Justice Lema’s Receivership Order of July 19, 2019 and the simultaneous stay imposed by a deemed bankruptcy under

section 69.3(1) of the BIA deprived Hatch of any remedy as of that date; • alternatively, the payment is a preference prohibited by sections 1, 2 or 3 of the Fraudulent Preferences Act ; or • in the further alternative, the payment is contrary to the Statute of Elizabeth .

In response, Hatch asserts that: • the latter two of the extension orders for the NOI expressly prescribe a process by which Schendel could make payments, and the Receiver has failed to prove that the process was not followed in the case of the subject payment; • Hatch, in the circumstances, is in any event the equivalent of a bona fide purchaser for value, having provided both pre and post- NOI consideration; • no assets of Schendel vested in anyone prior to the Receivership Order and deemed bankruptcy, and the Receiver has failed to prove that the Receivership Order and deemed bankruptcy were granted before the cheque cleared Schendel’s bank; • the required intent cannot be shown to invoke either of sections 1 and 2 of the Fraudulent Preferences Act or the Statute of the Elizabeth ; moreover, the one-year limitation period for challenging a transaction under

section 3 elapsed before this application was brought. [ 9 ] It was acknowledged by both sides that sections 95 and 96 of the BIA do not apply as it is the Receiver, not the Trustee in Bankruptcy, bringing the application. [ 10 ] With all these arguments, the Receiver bears the onus of proof.

B. The Notice of Application [ 11 ] The Receiver’s Notice of Application filed in this matter invoked only the Fraudulent Preferences Act and the Statute of Elizabeth . It did not mention the BIA at all, nor either the statutory stays or the stay in the Receivership Order. The grounds for the application speak only of unlawful preferences or conveyances. [ 12 ] Mr. Quinlan, counsel for Hatch, at the hearing before me on September 22, 2021, expressed surprise that counsel for the Receiver, Mr.

Lekas, was purporting to rely on the stay provisions in the BIA , other provisions in the BIA , and the Receivership Order stay as grounds of argument. Mr. Lekas, who spent the bulk of oral argument discussing the various stays and the BIA , acknowledged that the Notice of Application did not refer to these arguments. [ 13 ] In order to remedy the situation, I adjourned the application for written argument so that Mr. Quinlan could address the effect of the stays and the BIA in a more fulsome way. Additional written argument was provided by counsel on October 6, 2021 (Mr. Quinlan) and on October 13, 2021 (Mr.

Lekas). [ 14 ] Mr. Quinlan submitted at the end of his written submissions that I could dismiss all of the Receiver’s arguments concerning the statutory stays, the BIA itself and the court-ordered stay in the Receivership Order, on the basis of non-compliance with Rule 6.3(2), which requires an applicant to specify the grounds relied upon in the Notice of Application, relying on DGS v HAS , ABQB 887 at paras 58-61. I am not going to do that. The Court retains discretion to relieve against non-compliance in a case like this and I do so.

To me, any prejudice to Hatch has been addressed by adjourning the matter for written argument. [ 15 ] Given the amount at stake, I was somewhat reluctant even to ask counsel to submit written argument but ultimately concluded that was the only way to achieve fairness in this application. C. Stay under Section 69(1) of the BIA [ 16 ] The Receiver’s first branch of argument relates to the automatic stay created by section 69(1) of the BIA .

This provision provides that no creditor has any remedy against the insolvent person or that person’s property, on the filing of the NOI, or is permitted to commence or continue any action, execution or other proceeding, for the recovery of a claim provable in bankruptcy. [ 17 ] The Receiver argues that the stay was continuously in effect from March 22, 2019 and throughout the various extensions until the date of Schendel’s receivership and deemed bankruptcy on July 28, 2019.

All through that period, says the Receiver, Hatch was legally prevented by the statutory stay from dealing in any manner whatsoever with the $40,000 cheque. [ 18 ] Hatch says that it took no positive steps to collect on any indebtedness from Schendel.

Rather, it says the cheque simply appeared on July 8, 2019 and that Hatch was a totally passive party. [ 19 ] In Startek Computer Inc (Trustee of) v Samtech Computer Inc , 2000 BCSC 1316 , 20 CBR (4 th ) 166, Harvey J found that the cashing of a cheque by a creditor after the NOI date (although the cheque was received prior to that date) was a “remedy” within the meaning of section 69(1) and therefore prohibited by the statutory stay.

However, as I read the case, the judge does not explain why this is the case and his view seems to be influenced by the fact that the cheque-casher was attempting to get paid twice for the same services. [ 20 ] A case cited by Hatch, 1732427 Ontario Inc v 1787930 Ontario Inc , 2019 ONCA 947 , makes the point that not every post- NOI payment by an insolvent company to a creditor is necessarily prohibited by the stay. There are circumstances where such payments are necessary to enable the company to pursue the restructuring process, and thus are valid.

The case involved a preauthorized debit arrangement that had been entered into between the parties prior to the NOI and there was evidence that honouring the arrangement was essential to continue delivery of required fuel post-NOI. The Ontario Court of Appeal in 1732427 Ontario Inc overturned the commercial court judge, who had cited and made a similar finding as Harvey J in Startek Computer , and stated: [13] We do not agree with the respondent’s submissions that the parties could not enter into an agreement for the payment of past debts in order to secure future fuel supplies.

This would undermine the first stage of the BIA process that serves to encourage a debtor’s successful reorganization as a going concern. Creditors and debtors alike benefit from the latter’s continued operation. The goal of the stay and preference provisions under ss. 69 , 95, 96 and 97of the BIA is to give the debtor some breathing room to reorganize. Legitimate agreements with key suppliers also form a vital part of that process. [14] Apposite is the commentary of E.

Patrick Shea, “Dealing with Suppliers in a Reorganization” (2008) 37 C.B.R. (5th) 161 who writes: There is, however, no specific prohibition in the BIA on the debtor effecting payment of claims provable in the proposal proceedings. Instead, the BIA provides the trustee in the proposal (or the bankruptcy trustee in the event the proposal fails) with remedies against any creditor who receives such a payment on the basis that the payment is a preference. Payments to critical suppliers in the context of proposal proceedings are best analyzed on the basis that they are a preference. … In the context of proposals

section 97of the BIA arguably clarifies that payments to suppliers made in good faith after the date the proposal proceedings are commenced (even payments of pre-filing claims) are intended to be valid . [Emphasis in original.] [ 21 ] The Ontario Court of Appeal concluded in this case that it was a critical question whether the payment of past indebtedness was a bona fide condition of post-NOI fuel supply, needed for the restructuring to proceed.

The question was remitted to the commercial court to determine. [ 22 ] Here, what is known from the evidence is that Schendel was trying to make a proposal to its creditors and had continued to do business with Hatch after filing its NOI, as evidenced by the various invoices issued by Hatch to Schendel in the post-NOI period. There is no evidence of what Schendel was trying to achieve by making the $40,000 payment. Mr. Manning, Hatch’s representative, reports that there were no discussions between Hatch and Schendel with regard to treating Hatch differently from other creditors.

He has no further information about any other conversations that might have occurred.

[23] Further, the proposal process was subject to court supervision at the relevant time. In the last of the extension orders, grantedby Justice Yamauchi on June 11, 2019, the following conditions were imposed by the Court: (

a) For the period of the Further Extension, Schendel shall report prior to the end of each business day on actual payments proposed to bemade regarding disbursements for the next day (the "Projected Disbursements"). The report on the Projected Disbursements is to bemade concurrently to the Proposal Trustee and to ATB. The Proposal Trustee shall review the Projected Disbursements and provide itsapproval to pay the Projected Disbursements or comment on any concerns with payment before noon on the next business day. TheProposal Trustee's comments shall be provided concurrently to Schendel and ATB.

Following approval by the Proposal Trustee,Schendel may proceed to pay the Projected Disbursements; (

b) For the period of the Further Extension, Schendel will not enter into any further specific direct payment arrangements that wouldmodify existing contracts without approval from the Proposal Trustee and ATB, or pending further Order of this Court … [24] There is no evidence before me as to whether the $40,000 payment in question either was an approved payment within themeaning of condition (

a) above, in which event it would be valid, or a prohibited payment arrangement under condition (

b) above. In thelatter regard, I do not know whether there was an existing supply contract between Hatch and Schendel or whether the payment inquestion modified it or not, or if so, whether there was approval from the Proposal Trustee and ATB. [25] Finally, it is known that Hatch supplied goods to various Schendel projects during the post-NOI period to the tune of$34,476.75. Hatch advised the Receiver of which specific invoices to which the $40,000 was applied. That information was not providedto the Court.

It is known that apart from those specific invoices, there was a balance that was applied to indebtedness on the Paul BandSchool project, where one invoice related to the post-NOI period. [26] The stay would not apply in respect of indebtedness arising from goods and services supplied to Schendel after the date offiling the NOI as such indebtedness would not be “a claim provable in bankruptcy” per section 69(1): Wosk’s Ltd Re, (BC SC), 1985 Carswell BC 807 (SC), 58 CBR 312; 728835 Ontario Ltd., Re, (ON CA), 1998 CarswellOnt 2576, 3C.B.R. (4th) 214.; and Jones, Re, (ON CA), 2003 CarswellOnt 3184, 2003 CarswellOnt 3184, [2003] O.J.

No. 3258. [27] In

summary, there is no evidence before the Court, one way or the other, as to: • whether the payment was, or was not, authorized by Yamauchi J’s Order of June 11, 2019. (Certainly, Hatch would be in noposition to know one way or the other.) • whether the payment was intended by Schendel to secure future supply of critical product, as part of the process of trying to putforward a viable proposal. [28] The onus of proof is upon the Receiver to prove that the payment was in violation of the stay. The evidence does indicate thatSchendel and Hatch continued to do business together after the NOI was filed.

I should not simply assume facts that are in the Receiver’sfavour. As shown in the above two bullet points, there may well be circumstances in which the payment is valid.

In the absence ofevidence, the probability of either “yes” or “no” to either of the questions posed in the two bullet points above is evenly balanced, nottipped in favour of the Receiver. [29] Further, the evidence before me indicates that some portion of the $40,000 payment was applied to post-NOI supply of goods.The evidence shows that some $34,476.75 worth of product was supplied by Hatch to Schendel in the post-NOI period. [30] I also agree that the question of whether Hatch should be allowed to retain the payment is better analysed as a question ofwhether the payment is a preference, as stated by the Court of Appeal of Ontario in 1732427 Ontario Inc. [31] For these reasons, I am not prepared to say that the funds should be remitted by Hatch to the Receiver because the paymentviolated the stay imposed by section 69(1).

D. Dual Stays on July 19, 2019 [32] In Justice Lema’s receivership decision, as a precursor to making the Receivership Order, he also found that Schendel’sproposal was likely to be refused, resulting in a deemed bankruptcy: BIA, sections 50(12) and (12.1) and

section 57. As a result of abankruptcy and receivership occurring simultaneously, two further stays came into effect: • the court-ordered stay at paras 8 and 9 of Justice Lema’s Receivership Order; and • the further statutory stay found at

section 69.3(1), which occurs on the bankruptcy and relates to the recovery of a claim provablein bankruptcy. [33] Both have the effect of providing that the creditor has no further remedy or action against the debtor or the debtor’s propertyupon the occurrence of the bankruptcy or receivership. What is in controversy is exactly when on July 19, 2019, the two stays tookeffect, since the time of pronouncement is unknown but the moment the cheque cleared is known, being 11:48 AM on that day. [34] The Receiver argues that the time of day of the pronouncement is irrelevant so long as it happened on July 19, 2019.

In sosaying, the Receiver relies on section 121(1) of the BIA: 121(1) All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt orto which the bankrupt may become subject before the bankrupt’s discharge by reason of any obligation incurred before the day on whichthe bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act. [35] The phrase “on the day on which the bankrupt becomes bankrupt” can have no meaning, the Receiver says, other than all

debts existing at 12:01 AM on the day of bankruptcy become a claim provable in bankruptcy. In other words, section 121(1) operates as a “relation back” provision such that all of the debtor’s debts and liabilities crystallize as, or convert to, a claim provable in bankruptcy as of 12:01 AM on the date of bankruptcy. As such, by necessary implication, the Receiver says that Hatch’s only recourse as of 12:01 AM on that day was to file a proof of claim and could not in any way deal with the cheque. [ 36 ] To evaluate this argument, one must have regard to the purpose of section 121(1).

Authors Houlden, Morawetz and Sarra, in their 2019 Annotated Bankruptcy and Insolvency Act, comment as follows regarding: The purpose of this subsection is, so far as possible, to include every kind of claim in the definition of “provable claim” so that when the bankrupt receives a discharge, he or she will be free of the claims of creditors and will be able to make a fresh start. (at p 686) The expression “the day on which the bankrupt becomes bankrupt” presumably means the date on which the assignment is filed or the bankruptcy order is made.

A debt or liability incurred by the bankrupt after the filing of the application but prior to the making of the bankruptcy order is a provable claim… (at p 688) [ 37 ] The purpose of the

section therefore is to define which claims are provable in bankruptcy so that they may be dealt with in the bankruptcy. If the payment has already been made, it would not be a claim provable in the bankruptcy (again, subject to the law of preferences). The

section does not go so far as to create and apply a “relation back” effect to completed transactions occurring after 12:01 AM on the day of but before the actual occurrence of the bankruptcy. Such an

interpretation could capture otherwise valid payments that are made in the normal course earlier in the day. In my view, if the

section is to have such an effect, more specific language would be required. [ 38 ] Hatch points out, and I agree, that Justice Lema’s Order (which had the effect of placing Schendel in receivership and deeming it bankrupt) could only take effect upon pronouncement, and not before.

In this regard, Hatch relies on section 71(1) of the BIA : 71(1) On a bankruptcy order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with their property, which shall, subject to this act and to the rights of secured creditors, immediately past to invest in the trustee named in the bankruptcy order assignment, in any case of change of trustee the property shall pass from trustee to trustee without any assignment or transfer. [ 39 ] The notion of an order taking effect at the moment of pronouncement is further supported by Court of Appeal statements in this regard: Under Rule 9.6, “an order that is pronounced is effective from the moment of pronouncement”: Gingrich v Gingrich , 20212 ABCA 371 at para 9, and “for one thing, orders and judgments in Alberta are effective on pronouncement …”: Phoenix Land Ventures Ltd v FIC Real Estate Fund Ltd, 2015 ABCA 245 .

Further, in Phoenix Land Ventures at para 25, the Court equated pronouncement with the written Reasons for Decision. [ 40 ] Thus, Schendel did not cease to have dominion over its own property and that property did not vest in the Trustee in Bankruptcy (Grant Thornton LLP) until the moment of pronouncement of Justice Lema’s Order, i.e. when the written decision was released. There is no evidence before the Court as to when that exact moment was. Again, I cannot simply assume facts that are in the Receiver’s favour. As stated, the Receiver bears the onus of proof in this application.

It is not proven on a balance of probabilities that the Receivership and deemed bankruptcy occurred before the payment was complete. [ 41 ] I accept the Receiver’s argument that actual payment did not occur on July 8, 2019, when the cheque was received by Hatch but rather on July 19, 2019, when Hatch’s bank cleared the cheque, but that makes no difference to the outcome. [ 42 ] As a consequence of the foregoing, I cannot rule in favour of the Receiver on this branch of argument.

Further, I feel that in order to promote commercial certainty sections 71(1) and 121(1) of the BIA should be read together such that the moment the bankruptcy occurs should be the same for both purposes, not occurring at different times of the same day. E. Fraudulent Preferences Act [ 43 ]

Section 1 of the Fraudulent Preferences Act provides that a payment made by a person in insolvent circumstances with intent to defeat, hinder, delay or prejudice the person’s creditors or any of them is void against any such creditors.

Section 2 provides that a payment made to a creditor by a person in insolvent circumstances with intent to give that creditor preference over other creditors is void against such creditors. [ 44 ] In both cases, the intent of the insolvent person is a critical factor. Here, there is no evidence from any person as to Schendel’s intent in making the payment. Nor can the requisite intent be inferred to satisfy the required standard of proof. As noted above, it could just as easily be inferred that the payment was authorized by Justice Yamauchi’s extension Order or made as a necessary part of the proposal process. Consequently, the Receiver cannot succeed on either sections 1 or 2. [ 45 ]

Section 3 states that a payment by a person in insolvent circumstances to a creditor that has the effect of giving that creditor a preference over other creditors is void against those other creditors, so long as the action to set aside the transaction is commenced within a year. The payment was made by Schendel on July 8, 2019 and effectively realized by Hatch on July 19, 2021, while the Receiver’s application to impeach the transaction (i.e. the application before me) was filed on April 30, 2021. Hatch says the application was brought well beyond the prescription period of one year. [ 46 ] The Receiver argues that the relevant action to be commenced in this case for the purposes of

section 3 is the Receivership Application, which was filed before July 19, 2021. It is by this application that the Receiver says it sought the power to impugn preferential transactions, from which the application before me merely flows. Thus, according to the Receiver, the limitation period had not expired since the action was started before the payment was complete. [ 47 ] I do not agree with the Receiver here. The Receivership Order did give the Receiver the authority to investigate and seek recovery of preferential payments. However, the Receiver still had to conduct its due diligence and exercise discretion to commence the

application or not. The receiver made its demands upon Hatch in July and September of 2019, but did not bring the application until more than a year and half later. Therefore, in my view, the action to recover the payment was commenced beyond the one-year period and the Receiver cannot succeed on

section 3. [ 48 ] Receiverships can linger for years. This one has gone on for over two years already. Potentially, transactions that occurred in the distant past could be attacked under this theory. Such a situation could lead to commercial uncertainty. The Court should interpret statutes affecting commercial relations, such as the Fraudulent Preferences Act , in a manner that best promotes certainty. [ 49 ] In view of the above findings, it is unnecessary for me to consider Hatch’s argument concerning whether the transaction was bona fide within the meaning of the saving provision (section 6). F.

Statute of Elizabeth [ 50 ] In order to set aside a transaction using the Statute of Elizabeth , the Applicant must establish each of the following per Palechuk v Fahrlander , 2006 ABCA 242 at para 31 : 1. there must be a conveyance of real or personal property; 2. for no or nominal consideration; 3. with intent to defraud, delay, or hinder creditors; 4. the party challenging the conveyance must be someone who was a creditor at the time of the conveyance or someone with a legal or equitable right to claim against the transferor; and 5. the conveyance must have had the intended effect. [ 51 ] With regard to intent, Romaine J noted in Krumm v McKay , 2003 ABQB 437 at para 15 : While the Statute of Elizabeth includes an exception for bona fide transfers for consideration, it is restricted to transferees who do not have knowledge of fraud.

With respect to a transfer for value, a creditor attempting to rely on the Statute of Elizabeth must establish that the transferor had the necessary fraudulent intention and that the transferee was privy to the fraud. [ 52 ] Hatch says that this quoted passage applies because Hatch provided both pre and post-NOI consideration in the form of supply of product. Further, Hatch points out that this branch of the Receiver’s argument suffers from the same deficiency as before, that is, lack of evidence as to Schendel’s intent.

Moreover, the claim is further weakened because Hatch has expressly provided evidence of no intent on its part. Thus, the Receiver cannot succeed here. I agree. G. Outcome [ 53 ] As a result of all of the foregoing, the Receiver’s Application to recover the $40,000 from Hatch is dismissed. [ 54 ] Counsel may approach me in writing within 30 days of the date of this decision to address costs, if the parties so wish. Heard on the 22 nd day of September, 2021. Further written submissions received on October 6 and 13, 2021. Dated at the City of Edmonton, Alberta this 9 th day of November, 2021. Douglas R.

Mah J.C.Q.B.A. Appearances Sander Lekas, Reynolds Mirth Richards & Farmer LLP for the Receiver, PricewaterhouseCoopers Inc

Ryan Quinlan, Duncan Craig LLP for C & G Hatch Associates Ltd