FINANCIAL ASSET MANAGEMENT SERVICES LTD. PLAINTIFF AND: JAMES B. PANTHER DEFENDANT AND: WILLIAM PARK, in his capacity as trustee of the trust known as FINANCIAL ASSET MANAGEMENT FOUNDATION DEFENDANT BY COUNTERCLAIM Counsel for Plaintiff J.R. Sandrelli Counsel for Defendant R.A. Millar Counsel for Defendant by Counterclaim D.W. Roberts, Q.C. A. Kanji Place v. Date of Hearing:, 2003 BCSC 531

Citation: Financial Asset Management Services v. Panther Date: 20030321 2003 BCSC 531 Docket: 11-213464 VA 01 Registry: Vancouver IN THE SUPREME COURT OF BRITISH COLUMBIA Oral Reasons for Judgment The Honourable Chief Justice Brenner March 21, 2003 IN BANKRUPTCY IN THE MATTER OF THE PROPOSAL OF FINANCIAL ASSET MANAGEMENT FOUNDATION BETWEEN: FINANCIAL ASSET MANAGEMENT SERVICES LTD. PLAINTIFF AND: JAMES B. PANTHER DEFENDANT AND: WILLIAM PARK, in his capacity as trustee of the trust known as FINANCIAL ASSET MANAGEMENT FOUNDATION DEFENDANT BY COUNTERCLAIM Counsel for Plaintiff J.R.

Sandrelli Counsel for Defendant R.A. Millar Counsel for Defendant by Counterclaim D.W. Roberts, Q.C. A. Kanji Place and Date of Hearing: Vancouver, B.C. March 21, 2003 [ 1 ] THE COURT: This application has been brought to determine the choice of law to be applied with respect to certain issues scheduled to proceed before the court by way of

summary trial. [ 2 ] The specific issues have to do with whether or not Financial Asset Management Services Ltd. (“FAM Services”) has a valid and enforceable security interest in all of the property, assets and undertaking of Financial Asset Management Foundation (“Foundation” or “FAMF”), and, secondly, the priority of the claims as between FAM Services and James Panther over the assets of Foundation. [ 3 ] Services and Foundation say that British Columbia and Canadian law should be applied; Mr. Panther argues that California law should be applied, or, alternatively, the court should defer its choice of law decision until hearing all of the evidence on the

summary trial. [ 4 ] FAM Services is a company incorporated in British Columbia. Foundation is an inter vivos business trust resident in British Columbia. These entities were established in 1995 by two individuals in British Columbia, Paul Groat and Robert Pain. [ 5 ] In 1997, Mr. William Park and Mr. Ken Tremblett became involved with Services and Foundation with a view to realizing on their assets for distribution to creditors.

[ 6 ] Foundation was established to enable the Services’ bondholders to participate in investments to be made principally in the United States while at the same time remaining in compliance with the Canadian RRSP Foreign Content Rules. [ 7 ] In 1995, an offering memorandum was issued pursuant to which Services issued bond certificates to investors in British Columbia and Alberta. This raised approximately $18 million from some 637 individuals; these have been referred to as the “bondholders” in this proceeding.

Their investments ranged from $25,000 to $300,000 in amount. [ 8 ] Services then advanced some $14 million to Foundation pursuant to a loan agreement dated June 16, 1995. That agreement anticipated that the funds would be invested in consumer and commercial loan portfolios, both performing and non-performing. However, Foundation ended up making loans initially to a California partnership and later to a California limited liability company in respect of a property development located in Carlsbad, California.

James Panther was one of the principals involved in this development. [ 9 ] After a time Foundation decided to foreclose Mr. Panther’s 25% equity interest in the development. [ 10 ] Mr. Panther subsequently sued Foundation in the California Superior Court for wrongful foreclosure. In a judgment dated February 23, 2001, he obtained a jury verdict of some $2.4 million for damages. [ 11 ] Foundation filed this proceeding on April 5, 2001, under the proposal provisions of the Canadian Bankruptcy and Insolvency Act , R.S.C. 1985, c. B-3 . [ 12 ] Foundation and its Canadian trustee then moved, in the U.S.

Bankruptcy Court in San Diego, for ancillary relief under s. 304 of the U.S. Bankruptcy Code (11 USC s. 304). Included in that relief was a stay of Mr. Panther’s execution efforts on his judgment. [ 13 ] Mr. Panther unsuccessfully applied to set aside this proceeding. Then the parties negotiated and agreed on a number of issues that would require determination. They entered into a cross-border insolvency stipulation, which was approved both by this court and the U.S. Bankruptcy Court. [ 14 ] At issue on this application is the

interpretation of that agreement. Under the agreement, the parties agreed that certain issues would be decided by the U.S. Bankruptcy Court and certain issues would be decided by the Canadian Bankruptcy Court. [ 15 ] Paragraph 15 of the stipulation sets out the issues for the U.S. court. It states: The Parties agree that there shall be a determination of certain issues by the U.S. Court, subject to the directions of the U.S. Court as to the procedure by which such issues shall be determined, including the issuance of pleadings and the manner of the trial of issues. The U.S. Court shall determine, in such manner as it shall order, the following issues: (

a) the secured or unsecured status of Panther’s claim arising from his Judgment against FAMF in California Superior Court Action No. 728248 (the “Judgment”) applying California state law (excluding any principles arising under the Bankruptcy Code); (

b) the relative priority of Panther’s claim based on his Judgment versus the claim of FAM Services under the U.S. legal principles of substantive consolidation and equitable subordination; and (

c) whether or not FAMF or any person acting in concert therewith, violated any order of the California Superior Court in Action No. 728248. [ 16 ] The issues for the Canadian court are set out in paragraph 17 of the agreement: The Parties agree that there shall be a determination of certain issues by the Canadian Court, subject to the directions of the Canadian Court as to the procedure by which such issues shall be determined, including the issuance of pleadings and the manner of trial of the issues. The Canadian court shall determine in such manner as it shall order the following issues: (

a) the secured or unsecured status of the claim of FAM Services under Canadian law; (

b) with respect to the issues set out in paragraph 15(c), in the event that the U.S. Court decides that FAMF or any person acting in concert therewith violated an Order of the California State Court in Action No. 728248, then the effect of that violation, if any, on the secured status of the claim of FAM Services; and (

c) the relative priority of the claims of Panther (including the Judgment) and other U.S. Creditors versus the claim of FAM Services and other Canadian Creditors under Canadian law, taking into account and giving full effect to the U.S. Court’s determination referenced

in paragraph 15. [ 17 ] The U.S. Bankruptcy Court heard the U.S. issues and entered an amended judgment on March 19, 2002. That court applied California State law and concluded that Panther’s judgment was secured against FAMF’s membership interest in CanAm Properties, LLC, as at February 28, 2001, and against all of FAMF’s personal property as of March 7, 2001. [ 18 ] Now pending before this court is a determination of the paragraph 17 issues. [ 19 ] The parties agree that the issue in 17(a), the secured or unsecured status of the claim of FAM Services under Canadian law, should be determined by applying Canadian law. [ 20 ] The issue in 17(

b) will be decided in large measure by the answer to 17(

a) and whether Services is a secured creditor or not. [ 21 ] The real issue is the one in 17(c); that is, the relative priority as between the U.S. judgment creditor, Mr. Panther, who enjoys secured status by reason of the operation pf California law and FAM Services and any other Canadian creditors. [ 22 ] The question is whether the phrase “Canadian law” in 17 (

c) includes Canadian conflict of law rules, which would permit this court, after an appropriate conflict of law analysis, to apply California law to the priority issue, or whether the parties by this agreement have already agreed on the choice of the law to be applied. [ 23 ] The U.S. issues were argued before Judge Adler of the U.S. Bankruptcy Court in November and December of 2001. The question as to whether the stipulation foreclosed the application of foreign law was raised before Judge Adler in that hearing. Somewhat ironically, the Canadian parties argued for an

interpretation of the stipulation that would have allowed her to apply Canadian law to the paragraph 15 issues. [ 24 ] In opposing those submissions Mr. Panther’s counsel argued that the parties in the stipulation had made an agreement as to choice of law and that the issues in paragraph 15 were to be determined by the law of California. He said that the parties, by their choice, had foreclosed any application of foreign law. Judge Adler accepted that submission. She applied California law in reaching her conclusions on the “U.S. issues” in paragraph 15. [ 25 ] Before me the parties reversed their positions. Mr.

Panther’s counsel now says paragraph 17 leaves it open to this court to apply California law, if considered appropriate in this case. [ 26 ] A factor that this court must consider is that the parties have entered into a cross-border insolvency stipulation. In such a circumstance, the court must take great care to try to uphold the parties’ choices so that their intentions can be realized. [ 27 ] It is telling that when this issue came up in the U.S. Bankruptcy Court in California, counsel for Mr. Panther took the position that he did with respect to what he believed the parties had agreed to.

I think he was right. I also think Judge Adler was correct in her conclusion that the parties had made an agreement that the issues in paragraph 15 were to be decided according to California law only. [ 28 ] In my view the parties made such a choice when they divided the issues in paragraph 15 and paragraph 17. They decided to ask the courts in each country to make the appropriate determinations requested by applying the domestic laws of each country.

They chose to have a U.S. bankruptcy judge make determinations under the laws of the State of California and a Canadian bankruptcy judge make determinations or findings under the laws of Canada. [ 29 ] However that does not end the matter. I must go on to consider whether such a choice is sufficiently inconsistent with Canadian law that it should be overridden by the court. [ 30 ] Services argues that a Canadian choice of law for the priority issue in 17(

c) is consistent with both the Personal Property Security Act R.S.B.C. 1996, c. 359 (“ PPSA ”); and Canadian common law. [ 31 ] Mr. Panther says that the PPSA has no application in this case since his secured interest arose solely in California and by operation of California law in a manner that is unknown to the Canadian law. Mr.

Panther also says that the common law supports a California choice of law analysis. [ 32 ] In view of my conclusion as to the state of the common law, it is not necessary for me to deal with the submissions regarding the PPSA . [ 33 ] The leading decision in Canada on property of this nature, is Canada Deposit Insurance Corp. v. Canadian Commercial Bank (1992), 1992 CanLII 6240 (AB KB) , 16 C.B.R. (3d) 147 (“ CCB ”).

That case was an aftermath of the difficulties which befell the CCB in the late 1970s and early 1980s. [ 34 ] CCB had executed an agreement granting a security interest to the Bank of Canada over its loan portfolio denominated in non- Canadian currency. This loan portfolio included all loans made by a CCB agency in the State of California, as well as the loans, security records and proceeds of those loans. [ 35 ] In the course of winding up the CCB and liquidating its assets, the issue of the Bank of Canada’s claim arose.

In that case, it was assumed for purposes of the application that the collateral supporting the California loans was located in the State of California. In CCB , while the Bank of Canada had taken steps to perfect its interest in accordance with Canadian law, it had not perfected its security interest pursuant to the requirements of California law.

[ 36 ] In that case, the Court drew a distinction between the validity and nature of a claim to security and the priority of such security. The court held that the question of priority was to be decided according to Alberta law. [ 37 ] Mr. Panther’s counsel submits that the CCB decision may no longer be sound law, or, alternatively, that it might have been founded on an erroneous application of a number of maritime decisions. He says this is highlighted by the decision of the English Court of Appeal in Macmillan Inc. v. Bishopsgate Investment Trust plc (No 3) , [1996] 1 All E.R. 585 .

That case involved a priority dispute over certain shares that had been wrongfully pledged as security. [ 38 ] The shares were owned by Macmillan Inc. one of the companies controlled by Robert Maxwell. At his instructions the shares were transferred out of Macmillan’s name into an investment trust controlled by Maxwell to be held as nominee for the benefit of Macmillan Inc. under an agreement governed by New York law. [ 39 ] As noted in the judgment, almost before the ink was dry, that trust agreement was violated. The shares were transported to England.

They were then used as collateral to support a number of loans from financial institutions in London to other Maxwell interests. To complete these transactions the share security was perfected in New York by deposit with the Depository Co., an electronic share transfer system. After Maxwell disappeared over the side of his yacht, the financial institutions not surprisingly took steps to realize on their security.

As the lenders in London became aware that the shares that had been used by Maxwell as collateral for the loans were in fact beneficially owned by Macmillan Inc., the priority dispute got underway in the English court. A critical issue was whether the priority dispute was to be decided by English or New York law. [ 40 ] At the trial level Lord Millett applied a lex causae analysis and he decided that the proper law to be applied was the law of the State of New York as the place where the cause of action arose.

On appeal, while the English Court of Appeal also agreed that New York law was the appropriate law to be applied in the English litigation, it did so for different reasons. The Court of Appeal concluded that the issue as to who has title to shares in a company should be decided by the law of the place where the shares are situated or the lex situ . [ 41 ] Mr. Panther’s counsel, in his submissions, emphasized the exhaustive nature of the English Court of Appeal’s analysis of the conflicts issue.

He also refers to p. 599 where Lord Justice Staughton specifically disapproved of the CCB decision saying that the consequences of applying forum law would be “an invitation to forum shopping if ever there was one”. [ 42 ] Counsel for Mr. Panther argues that in deciding to apply forum law in CCB , the court fell into error by relying on maritime decisions. In such cases, actions against the vessels or ships are in rem and not in personam proceedings.

Since the vessels are invariably arrested in the forum where the proceedings are filed, the law of the forum and the law where the property in issue is located coincide. [ 43 ] In the case at bar the parties have decided to have the issues in paragraph 17 decided according to Canadian domestic law. As set out earlier, the question I must decide is whether this decision offends Canadian statutory or common law such that I must override the parties choice. [ 44 ] I do find the analysis of the English Court of Appeal in the Bishopsgate case compelling.

It clearly has the advantage of reducing the risk of forum shopping. As levels of trans national trade increase this is not an insignificant factor. It may well be that the analysis in this case will at some point be considered by a court in Canada. [ 45 ] However, until it is, it is my view that the decision in CCB represents the state of the common law in Canada, particularly as the court relied on a number of decisions from the Supreme Court of Canada. [ 46 ] Accordingly in my view, the Canadian common law is consistent with the choice of law made by the parties in the cross-border insolvency stipulation.

This case will proceed on the basis that the issues referred to in paragraph 17 will be determined in accordance with the law of Canada without reference to the choice of law rules. [ 47 ] I thank counsel for their very full argument. (DISCUSSION BETWEEN THE COURT AND COUNSEL) [ 48 ] THE COURT: I have concluded the stipulation was an election of Canadian law. So the issues in 17 will be decided under Canadian law and not foreign law. [ 49 ] MR.

SANDRELLI: My Lord, just in your hands, but whether it’s appropriate to deal with costs in respect of this motion or Your Lordship is inclined to deal with that at the end of the day? [ 50 ] THE COURT: The latter. [ 51 ] MR. SANDRELLI: Thank you. [ 52 ] THE COURT: Thank you. “D.I. Brenner, C.J.S.C.” The Honourable Chief Justice D.I. Brenner