2015 QCCA 1107, 2015 QCCA 1107

Industries Cover inc. (Syndic des) 2015 QCCA 1107 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No: 500-09-025007-154 (500-11-047250-143) DATE: June 19, 2015 CORAM: THE HONOURABLE JACQUES DUFRESNE, J.A. MANON SAVARD, J.A. MARK SCHRAGER, J.A. IN THE MATTER OF THE BANKRUPTCY OF: INDUSTRIES COVER INC. Debtor and GUARDIAN INDUSTRIES CANADA CORP. GUARDIAN INDUSTRIES CORP. APPELLANTS – Respondents and GESTION J&N BOUDREAULT INC. RESPONDENT – INCIDENTAL RESPONDENT – Petitioner and PRICEWATERHOUSECOOPERS INC.

IMPLEADED PARTY – Trustee and JELD-WEN DU CANADA LTÉE IMPLEADED PARTY – INCIDENTAL APPELLANT – Intervenor JUDGMENT [ 1 ] Appellants have appealed the judgment of the Superior Court, District of Montreal (the Honourable Michel A. Pinsonnault), of January 13, 2015, sitting in bankruptcy matters. We are tasked with the adjudication of Appellants’ motion for leave to adduce new evidence. They also seek leave to exceed the 30 page limit and to extend the delay to file their factum. [ 2 ] Some factual background is required. Cover Industries inc. (“Cover”) filed a voluntary assignment in bankruptcy on August 25, 2014.

The assignment was authorized by a 2-1 vote of the board of directors. The directors who voted in favour are nominees of the 75% shareholder, the Appellant, Guardian Industries Canada Corp., which is a wholly owned subsidiary of the other Appellant, Guardian Industries Corp. The dissenting vote was cast by the founder of Cover, Mr. James Boudreault, the nominee of the other 25% shareholder, the Respondent, Gestion J&N Boudreault inc. [ 3 ] The extensive judgment of Justice Pinsonnault, with regard to the motion to annul Cover’s assignment in bankruptcy, held that Cover was not an insolvent person as defined in

Section 2 of the Bankruptcy and Insolvency Act (“ B.I.A. ”) [1] at the time the assignment in bankruptcy was filed and that the majority shareholder sought to place Cover into bankruptcy, abusively, that is with the ulterior motive of avoiding certain multimillion dollar obligations towards the minority shareholder under the shareholders’ agreement. [ 4 ] The two nominees of Appellant Guardian Canada on the board of directors justified their decision to cause Cover to file an assignment in bankruptcy with what they characterized as a “catastrophic” discovery by the Appellants in July 2014 of an “unusual and alarming” rate of returned, allegedly defective product, manufactured by Cover during 2011.

It appears that a new product technique or material employed during that year to produce the insulated glass product was defective.

Appellants commissioned an expert report which postulated that all products sold by Cover in 2011 would be returned at the same time so that considering the corresponding 42 million dollar liability, Cover’s liabilities exceeded it assets in July 2014 and thus, it was insolvent within the definition of insolvency found in the Bankruptcy and Insolvency Act [2] (“ B.I.A. ”). [ 5 ] At the time, though product returns were higher than historically experienced by Cover and profitability was reduced (due to factors other than defective products such as increased competition), Cover was operating in the normal course and meeting its liabilities generally as they became due.

[ 6 ] The decision to bankrupt Cover also came, 10 days before Respondent would have had the option to put its remaining 25% of the shareholdings to Appellant Guardian Canada for a purchase price of 18 million dollars. [ 7 ] After a 6 day hearing in October and November 2014, which included considering voluminous documentation and the testimony of expert witnesses, the judge concluded that Cover was not insolvent at the time the assignment in bankruptcy was filed: [427] In the present instance, the inclusion of some $42M of contingent claims conveniently acknowledged by Guardian and Guardian Canada, was absolutely necessary in Guardian’s attempt to establish the alleged insolvency of Cover in August 2014.

While these claims could potentially constitute provable claims in bankruptcy, pursuant to

Section 121 and following BIA , they are nevertheless eventual and unliquidated, if not completely hypothetical and conjectural claims that cannot and should not be utilised to establish or justify the insolvency of Cover. [ 8 ] The judge added that there was nothing “sufficiently certain” about the eventual claims so that they be considered in August 2014 as claims provable under the B.I.A. and thus, relevant to a reckoning of Cover’s insolvency on a balance sheet basis at that time.

He did however determine that even if 75% of the 2011 production was to be returned, Cover’s cash flow would remain positive. [ 9 ] The judge further concluded after an exhaustive review of the evidence that: [246] In light of the preponderant evidence, the Court is of the opinion that under the circumstances prevailing in August 2014, Guardian would have had no interest in provoking the voluntary assignment of Cover in the absence of the … [put option] … in the … Shareholders’ Agreement. (…) [ 10 ] Consequently, the trial judge annulled the bankruptcy pursuant to his powers under

Section 181 B.I.A. and granted provisional execution of such judgment notwithstanding appeal. On February 13, 2015 a judge of this Court, sitting in chambers, refused to suspend that provisional execution. [3] [ 11 ] The motion before us seeks to adduce new evidence, all of which Appellants contend is “necessary and susceptible of influencing the outcome of the appeal because it confirms the projections in respect of Cover’s insolvency on August 25, 2014”. [ 12 ]

Article 509 C.C.P. , second paragraph provides as follows: 509. (…) In exceptional circumstances, the Court may, if the interests of justice so require, allow a party to adduce, in such manner as the Court directs, indispensable new evidence. (…) 509. […] La Cour peut, si l'intérêt de la justice le requiert, permettre à une partie, en des circonstances exceptionnelles, de présenter, selon le mode qu'elle indique, une preuve nouvelle indispensable. […] [ 13 ] Our Court has established the following criteria for the exercise of its discretion to permit the filing of new evidence: La Cour d’appel n’emploiera sa discrétion pour permettre une preuve non administrée en première instance que si cette dernière répond aux conditions suivantes : 1.- elle doit être nouvelle; 2.- elle doit être indispensable; 3.- on doit être en présence de circonstances exceptionnelles; et 4.- les fins de la justice doivent requérir l’introduction de cette preuve.

En principe, la Cour d’appel doit évaluer les faits ainsi qu’ils ont été soumis à la cour de première instance. Il arrivera des cas où certaines circonstances survenues pendant l’instance en appel jetteront sur les faits mis en preuve un éclairage tellement différent de celui envisagé par le juge du procès qu’une nouvelle preuve pourra être permise. [4] [ 14 ] Appellants argue that the passage of time has confirmed their expert’s advice about the insolvency of Cover.

Thus, Appellant seeks to produce the following: - The Trustee’s report dated January 13, 2015 containing financial results of Cover as of November 30, 2014; - A

schedule which is stated to outline the cumulative warranty claims and returns of Cover’s product for the first three months of 2015 on an annualized basis; - A judgment to be rendered on quantum against Cover in favour of Groupe Bocenor inc.; - A demand letter from Scotia Bank dated January 15, 2015 as well as letters referred to dated October 28, 2014 and November 25,

2014; - An amended Notice of Arbitration dated January 26, 2015 issued pursuant to the terms of the shareholders’ agreement between Appellants and Respondent; - Notices of collective dismissal by Cover of its employees dated April 20, 2015; - Statement by Cover to its customers dated April 17, 2015; and - Affidavit of Richard Zoulek (Appellants’ representative and a director of Cover) concerning Cover’s financial situation dated May 18, 2015. [ 15 ] Appellants have cited well established case law in support of the proposition that proof of a future event (e.g. the extent of damages) may be updated from the date of occurrence of the litigious event or the date of inscription on the merits up to the time of the hearing in first instance. [5] However, Appellants’ extrapolation from this case law is unfounded.

The appeal is not a second trial but rather an enquiry as to whether the trial judge committed a reversible error. [6] [ 16 ] The facts arising after the hearing pertaining to the returns of defective product and the deteriorating financial situation of Cover may well be relevant to the business outcome of the affair or even subsequent legal proceedings.

However, this information is not relevant to determine whether the trial judge erred in concluding that Cover was not insolvent in August 2014 based on the evidence presented to him and existing at the time. [ 17 ] The evidence of the ongoing returns of product and pending litigation of warranty claims are not indispensable as they are not susceptible of altering the findings of fact in the judgment described above. Appellants in essence seek to reinforce what they pleaded at the trial with the new evidence which is neither useful nor indispensable within the meaning of

Article 509 C.C.P. [7] [ 18 ] Many of the facts Appellants seek to prove (such as the bank cancelling the line of credit and demanding payment, employee lay-offs, deteriorating financial performance and cessation of normal operations) occurred after the hearing and even the judgment and may well be the result of a self-fulfilling prophecy created by the bankruptcy filing and the legal dispute which followed rather than the problem with the 2011 product line. The filing of the new evidence would undoubtedly provoke Respondent to seek similar leave to file rebuttal evidence and perhaps cross-examine Mr.

Zoulek on his affidavit. [8] The ends of justice do not require an ongoing trial before this Court. [ 19 ] Two of the documents emanating from Scotia Bank regarding the cancellation or non-renewal of the line of credit existed at the time of the trial and in any event pertain to a situation considered by the judge i.e. that the expiration of Cover’s credit facilities was imminent. There is nothing new in these documents.

In any event, the matter could have been raised during the hearing in November or December. [ 20 ] The facts relevant to insolvency files often evolve quickly and often require resolution in “real time”. [9] The Superior Court is responsive to this in the manner that insolvency cases are managed. However, the mission of the Court of Appeal to intervene to correct errors [10] and not hold new trials or continue and update the hearing in first instance is unaltered.

Particularly in this case, the issue is not merely whether the 2011 production defects would result in the insolvency of Cover but whether based on the facts as they were known as of August, 2014, Cover was insolvent at that time . Moreover, the decision to voluntarily bankrupt Cover was made on the basis of the facts presented at trial.

As the trial judge stated, the issue there is whether the voluntary assignment in bankruptcy was made in order for Appellants to avoid their obligation to purchase the Respondent’s shareholdings: [474] The remedies of the BIA are not designed to be used to enable a shareholder to dodge its financial obligations toward another shareholder to the detriment of the employees, creditors and customers of the bankrupt debtor, who all become collateral victims as a result thereof.

In such context, the evidence which Appellants seek to adduce is not indispensable to the foregoing determinations. [ 21 ] For all the foregoing reasons, the motion to adduce new evidence will be dismissed. [ 22 ] Regarding the request that two of the documents sought to be adduced (schedule of warranty claims and affidavit of Mr.

Zoulek) be subject to a confidentiality and sealing order, given the consent of all parties that the matter be dealt with by the Court on the merits of the appeal, a safeguard order will be issued so that the documents be kept confidential and sealed until such hearing. [ 23 ] Lastly, regarding the length of the factum, we see no reason why the factums need exceed the usual length. [ 24 ] Concerning the delay to file Appellant’s factum, given that the extension is not contested, the delay to serve and file Appellants’ factum will be extended to July 27, 2015. [ 25 ] FOR THE FOREGOING REASONS, THE COURT : [ 26 ] GRANTS the motion in part for the sole purpose of the following conclusions: [ 27 ] ORDERS that the following documents be kept under seal in the record of the Court until the matter of their confidentiality be dealt with by the Court on the merits of the appeal or by any other order of the Court: - Annex 8 : the cumulative warranty claims and returns of Cover’s IGUs for the first three months of 2015; - Annex 17 : Richard Zoulek’s affidavit concerning Cover’s financial situation dated May 18, 2015. [ 28 ] EXTENDS the time limit to serve and file Appellants’ factum until July 27, 2015;

[ 29 ] DISMISSES the conclusion seeking leave to file a factum of more than 30 pages; [ 30 ] DISMISSES the conclusions seeking leave to adduce new evidence. [ 31 ] THE WHOLE with costs against Appellants. JACQUES DUFRESNE, J.A. MANON SAVARD, J.A. MARK SCHRAGER, J.A. Mtre Stephan H. Trihey MILLER THOMSON SENCRL / LLP For Appellants Mtre Suzanne Gagné Mtre Mihnea Bantoiu LÉTOURNEAU & GAGNÉ Mtre William Noonan GESTION HICKSON NOONAN INC. For Respondent – Incidental Respondent Mtre Jean-Bertrand Giroux (absent) BCF s.e.n.c.r.l. For Impleaded party PRICEWATERHOUSECOOPERS INC.

Mtre Suzie Lanthier GOWLING LAFLEUR HENDERSON s.e.n.c.r.l. For Impleaded party – Incidental Appellant JELD-WEN DU CANADA LTÉE Date of hearing: June 15, 2015