2016 NLCA 60, 2016 NLCA 60

Project Management and Development Limited (appellant) v. Josefina Prats Paredes, Jose Antonio Paredes, Martha O’Connor, Anne Harrison, and Canadian Western Trust Company, In Trust for RRSP Plan Nos. 10085602, 10084347 and 10084588 (respondents) (16/50) Indexed As: Project Management and Development Limited (Re) 2016 NLCA 60 1 C.A.N.L.R. 211 Court of Appeal of Newfoundland and Labrador Welsh, White and Harrington JJ.A. November 4, 2016

Summary: Project Management and Development Limited (PMDL) appealed an order declaring it bankrupt pursuant to section 43(1) of the Bankruptcy and Insolvency Act , RSC 1985, c. B-3 (“ BIA ”). PMDL also filed an application to admit fresh evidence. Held: Application to file fresh evidence dismissed, appeal dismissed. White J.A. (Welsh and Harrington JJ.A. concurring): PMDL argued that the applications judge erred by:

a) Not staying the proceedings pending the resolution of a dispute between the parties concerning the amount of the debt. This decision is entitled to deference unless the judge exceeded his jurisdiction, failed to apply or misapplied an applicable principle, made a palpable and overriding error in his appreciation of the facts, or failure to interfere would otherwise cause a manifest injustice;

b) Finding the interest, and interest on interest was due and payable. This issue consists of a challenge to some of the judge’s findings of fact which are reviewable on a standard of palpable and overriding error, as well as a challenge to the

interpretation of the mortgage and amending agreement. As neither of the contracts is a standard form agreement (subject to a correctness review), their

interpretation is a question of mixed fact and law and reviewable on a standard of palpable and overriding error;

c) Failing to find that the respondents failed to prove the amount claimed, which is reviewable on a standard of palpable and overriding error;

d) Failing to exclude evidence tendered by the respondents about the value of the secured property. This issue concerns the applications judge’s findings of fact with respect to the value of the security and is reviewable on a standard of palpable and overriding error; and

e) Failing to find that the Respondents’ representation of the value of the secured property was absurdly small or a sham. This issue concerns the applications judge’s findings of fact with respect to the value of the security and is reviewable on a standard of palpable and overriding error. Issue (

a) In bankruptcy petitions, the judge must decide whether the debt or debts owing to the petitioning creditor amount to $1,000 and the debtor has committed

an act of bankruptcy within six months preceding the filing of the petition ( BIA, section 43(1) ). When the debtor denies the facts, the court may, instead of dismissing the petition, stay all proceedings on the petition for such time as may be required for trial of the issue relating to the disputed facts (section 43(10)). When there is a bona fide dispute between the petitioner and debtor with respect to the debt, the matter must be decided in proceedings in the ordinary courts, rather than in the bankruptcy court.

However, a judge is not required to dismiss or stay the proceedings under section 43(10) in every case where the defendant disputessome aspect of a bankruptcy petition. Where the court is satisfied that there is an undisputed indebtedness of at least $1000.00 and actsof bankruptcy have been established, it may grant the petition. Moreover, a stay under section 43(11) is discretionary and sufficient cause for granting it must be shown by the debtor. Here, there was an indebtedness of at least $1000.00 and

an act of bankruptcy. There was no issue that needed resolution prior to thegranting of the declaration of bankruptcy and no other sufficient cause. The judge did not err in not staying the proceedings in this case. Issues (

b) and (

c) PMDL argues the applications judge misinterpreted the mortgage and the amending agreement when he found that interest on the loanwas due and owing to the Respondents at the date of the application. There is no palpable and overriding error in the applications judge’s

interpretation of the mortgage and its amending agreement. Theissue of the

interpretation of the amending agreement with respect to the interest was not central to the case. A $1000.00 indebtednesswas established regardless. Moreover, the applications judge concluded that the act of bankruptcy was primarily the failure to pay theprincipal amount of the loan. Thus, even if he had erred with respect to the issue of interest, this had no effect on his judgment. Issues (

d) and (

e) PMDL argues that the estimate of the value of the land advanced by the respondents was absurdly small or a sham. Instead, PMDLargued the judge should have accepted the opinion of value prepared in 2013. PMDL attempted to file an alternative, new estimate byway of fresh evidence. The fresh evidence did not meet the test for admission. There was doubt as to why the evidence could not have been presented to theapplications judge. More fundamentally, the evidence did not have the indicia of credibility and reliability. The applications judge did not otherwise err is assessing the value of the security.

PMDL failed to establish that the applications judge erred in granting the declaration of bankruptcy. The appeal was dismissed. Cases cited: Langor v. Spurrell (1997), (NL CA), 157 Nfld. & P.E.I.R. 301 (Nfld. C.A.) Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37 Re Bearcat Exploration Ltd. (Bankrupt), 2003 ABCA 365, 339 A.R. 376 JICO Holdings Inc. v. Lynco Construction Ltd., 2016 SKCA 126 Palmer v. The Queen, (SCC), [1980] 1 S.C.R. 759 Counsel: Daniel W. Bennett, for the appellant; William T. Cahill, for the respondents.

This appeal was heard on September 22, 2016 before Welsh, White and Harrington JJ.A. The following judgment was delivered on November 4, 2016 by White J.A. for the Court. ______________________________________________________________ White J.A.: [1] The Appellant, Project Management and Development Limited (PMDL) appeals an order of the Supreme Court Trial Division(General), allowing an application by the Respondents, who are some of the creditors of PMDL, and declaring PMDL bankrupt. BACKGROUND [2] PMDL is the owner of a small (1234.6 square-meter) parcel of land on Temperance Street, St.

John’s, Newfoundland andLabrador. The Respondents loaned PMDL $1,550,000 under certain terms and conditions to finance the development of a 60-unitcondominium complex on the land. The Respondents secured the loan by taking pari passu mortgages (the mortgage) over the land. [3] The condominium complex was not built. The land remains a vacant lot.

After the loan maturity date had come and gone (fromthe perspective of the Respondents) and no payment was received, the Respondents applied to the Supreme Court Trial Division(General) for a declaration that PMDL was bankrupt pursuant to section 43(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3(“BIA”). [4] PMDL opposed the application, raising a number of objections.

PMDL argued that an amending agreement entered into by theparties changed the terms on which interest was payable under the mortgage, such that interest was not owing on the date of theapplication and only the principal amount of the loan was due; that the loan maturity date had not actually occurred at the time of theapplication; that the value of the security estimated by the Respondents was too low; and, that the Respondents had not complied withsection 244(1) which requires a secured creditor to give the debtor ten days notice prior to enforcing its security.

The applications judgegranted the Respondents’ application. [5] PMDL has appealed raising a number of issues, listed below. An automatic stay imposed by

section 195 of the BIA wascancelled by Rowe J.A. on June 22, 2016 upon application by the Respondents (Project Management and Development Limited (Re),2016 NLCA 31). PMDL also filed an application to admit fresh evidence, which was heard and dismissed by the panel at the hearing ofthe appeal (see paragraph 18 below for the reasons). ISSUES [6] PMDL raises the following grounds for the appeal:

a) Did the trial judge err in fact and/or law in failing to dismiss or stay the proceedings until an

interpretation of Indenture ofMortgages in favour of the Respondents herein and an Amending Agreement was carried out by a Justice of the Supreme Court anddetermined on its merits, pursuant to section 43(10) and section 43(11) of the Act, as to the payment date of interest, calculation ofinterest, date of advancement of the mortgage funds, maturity date of the mortgage, and the amount payable on the maturity date?

b) Did the trial judge err in fact and/or law in finding the interest, and interest on interest, of the said Indenture of Mortgages was dueand payable, and that it was due and payable as at March 8, 2016?

c) Did the trial judge err in fact and/or law in failing to find that the Respondents herein failed to prove the amount claimed by themin the Application?

d) Did the trial judge err in fact and/or law by failing to exclude evidence tendered by the Respondents herein with regards to thevalue of the secured property pursuant to the Indenture of Mortgages?

e) Did the trial judge err in fact and/or law by failing to find that the Respondents’ representation of the value of the secured propertywas absurdly small or a sham? STANDARD OF REVIEW [7] Issue (

a) concerns the applications judge’s refusal to exercise his discretion pursuant to sections 43(10) or 43(11) of the BIA todismiss the application or order a stay pending the resolution of a dispute between the parties. This decision is entitled to deferenceunless the judge exceeded his jurisdiction, failed to apply or misapplied an applicable principle, made a palpable and overriding error inhis appreciation of the facts, or failure to interfere would otherwise cause a manifest injustice (Langor v. Spurrell, (1997), 1997

14712 (NL CA), 157 Nfld. & P.E.I.R. 301 (Nfld. C.A.) at para. 33). [8] Issue (

c) concerns the applications judge’s findings of fact and is reviewable on the standard of palpable and overriding error(Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 at para. 10). [9] Issues (

d) and (

e) are really one issue and concern the applications judge’s findings of fact with respect to the value of thesecurity. They are reviewable on a standard of palpable and overriding error (Housen). [10] Issue (

b) consists of a challenge to some of the applications judge’s findings of fact with respect to the dates certain eventsoccurred, which are reviewable on a standard of palpable and overriding error (Housen), as well as a challenge to the

interpretation of themortgage and amending agreement. As neither of the contracts is a standard form agreement (subject to a correctness review), theirinterpretation is a question of mixed fact and law and reviewable on a standard of palpable and overriding error (Ledcor ConstructionLtd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37 at paras. 21 and 24). ANALYSIS Failure to stay proceeding pending resolution of a contract

interpretation issue (issue (a)) [11] PMDL argues that there were bona fide issues concerning the

interpretation of the mortgage and amending agreement and thattherefore, the applications judge should not have proceeded to determine the bankruptcy issue but dismissed or stayed the proceedingpending the resolution of the issue in the civil courts, pursuant to sections 43(7), 43(10) or 43(11) of the BIA. In Re Bearcat ExplorationLtd. (Bankrupt), 2003 ABCA 365, 339 A.R. 376, the Alberta Court of Appeal commented on the operation of those sections: [14] In any event, the jurisdiction of a bankruptcy judge is limited. In bankruptcy petitions, the judge must decide whether the debt ordebts owing to the petitioning creditor amount to $1,000 and the debtor has committed

an act of bankruptcy within six months precedingthe filing of the petition (BIA, s. 43(1)). If the court is satisfied with the creditor’s proof, it may make a receiving order (s. 43(6)). If thecourt is not satisfied with the proof, or is satisfied by the debtor that he is able to pay his debts, the court must dismiss the petition (s.43(7)).

When the debtor denies the facts, the court may, instead of dismissing the petition, stay all proceedings on the petition for suchtime as may be required for trial of the issue relating to the disputed facts (s. 43(10)). [15] Therefore, when there is a bona fide dispute between the petitioner and debtor with respect to the debt, the matter must be decidedin proceedings in the ordinary courts, rather than in the bankruptcy court: Concept Marketing Ltd., Re (1975), 20 C.B.R. (N.S.) 27 (Ont.S.C.); Central Coast Carriers Ltd., Re (2002), 2002 BCSC 312 32 C.B.R. (4th) 200 (B.C.S.C.) (Chambers).

A bankruptcy C.B.R. 127 at 131 (Ont. C.A.). It is not the judge’s function in bankruptcy proceedings to determine whether the respondent has a gooddefense to the petitioner’s claim: Tawe International Fairs Inc. (Re), [1992] B.C.J. No. 2064 (B.C.S.C.) (Chambers) (QL).

Accordingly,final decisions or declarations about illegality, severance, principal amounts owing, interest rates and validity of security are beyond thejurisdiction of a bankruptcy court hearing a bankruptcy petition. [12] That is not to say, however, that in every case where the defendant disputes some aspect of a bankruptcy petition, the judgeshould dismiss or stay the proceedings under s. 43(10).

Where the court is satisfied that there is an undisputed indebtedness of at least$1000.00 and acts of bankruptcy have been established, it may grant the petition: See for example, the discussion in JICO Holdings Inc.v. Lynco Construction Ltd., 2016 SKCA 126 at paragraph 16 and the cases referred to there. [13] Moreover, a stay under section 43(11) is discretionary and sufficient cause for granting it must be shown by the debtor. [14] I am not satisfied that the applications judge erred in not staying the proceedings in this case.

First, while a request for a stay wasmade in the defendant’s written response to the petition, it was not raised with the applications judge during the hearing and it appearedthat the matter was not being pursued. Second, whether or not there was a bona fide dispute about the

interpretation of the mortgage andamending agreement, based on all of the

interpretations advanced by the parties it was clear that there was an indebtedness of at least$1000.00. The applications judge accepted also, as he was entitled to do, that there had been

an act of bankruptcy. No other grounds for astay were advanced. There was therefore no issue that needed resolution prior to the granting of the declaration of bankruptcy and noother sufficient cause. Thus there was no need to order a stay. Fact findings about the interest due (issues (

b) and (c)) [15] PMDL argues the applications judge misinterpreted the mortgage and the amending agreement when he found that interest on theloan was due and owing to the Respondents at the date of the application. PMDL submits that it is possible that the amending agreementaltered the original mortgage contract such that interest was not due until individual condo units were sold. Since the condos were neverbuilt, no interest was due. Therefore, the most that could have been owed to the creditors on the date of the application was the principalamount of the loan, $1,550,000. [16] The applications judge rejected this

interpretation of the mortgage and amending agreement. I can see no palpable and overridingerror in his conclusion. As noted above, the issue of the

interpretation of the amending agreement with respect to the interest was notcentral to the case. A $1000.00 indebtedness was established regardless. Moreover, while the total amount of the debt is generally arelevant consideration in concluding that

an act of bankruptcy has been committed, the applications judge in this case concluded that theact of bankruptcy was primarily the failure to pay the principal amount of the loan. Thus, even if he had erred with respect to the issue ofinterest, this had no effect on his judgment. Fact findings about the valuation of the security (issues (

d) and (e)) [17] PMDL argues that the estimate of the value of the land advanced by the Respondents was absurdly small or a sham and that theapplications judge should not have relied on it. Instead, PMDL argues, the judge should have accepted the opinion of value prepared in

2013 or that the Court should now accept a new estimate which PMDL attempted to file by way of fresh evidence. [18] As noted above, the panel rejected the application for fresh evidence at the hearing. The evidence did not meet the test foradmission set out in Palmer v. The Queen, (SCC), [1980] 1 S.C.R. 759. First, there is doubt as to why the evidence couldnot have been presented to the applications judge. More fundamentally however, the evidence does not have the indicia of credibility andreliability which would warrant considering it.

Apart from other weaknesses, it is based on the extraordinary assumption that the marketvalue proposed is subject to approval by the City of St. John’s for construction of 80 condo units. PMDL does not have such an approval. [19] The applications judge considered the evidence before him and reached a reasoned conclusion. He also considered that thevaluation of the security was not determinative of the issue in the application before him, as there was an undisputed indebtedness of atleast $1000.00 and

an act of bankruptcy had been committed. PMDL has not advanced any basis to question those conclusions, apartfrom disagreement with them. I am unable to conclude that the applications judge made any error is assessing the value of the security. CONCLUSION [20] PMDL has failed to establish that the applications judge erred in granting the declaration of bankruptcy. I would dismiss theappeal with costs to the Respondents on Column 3 of the Scale of Costs. Appeal dismissed.