2023 QCCA 368, 2023 QCCA 368

Syndic de Société de vélo en libre-service 2023 QCCA 368 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No.: 500-09-030055-222 (500-11-045951-148) DATE: March 20, 2023 CORAM: THE HONOURABLE MARK SCHRAGER, J.A. GUY COURNOYER, J.A. SOPHIE LAVALLÉE, J.A. IN THE MATTER OF THE BANKRUPTCY OF: SOCIÉTÉ DE VÉLO EN LIBRE SERVICE/PUBLIC BIKE SYSTEM COMPANY BANKRUPT – Debtor and ARTHUR BLUMER & ASSOCIÉS INC., in continuance of suit for Litwin Boyadjian Inc. APPELLANT – Trustee v.

VILLE DE MONTRÉAL RESPONDENT – Creditor/Petitioner JUDGMENT [ 1 ] On appeal from a judgment rendered on May 5, 2022 by the Superior Court, Commercial Division, District of Montreal (the Honourable Justice Martin Castonguay), dismissing in part the Appellant’s disallowance of the Respondent’s proof of claim in the bankruptcy of Société de vélo en libre-service/Public Bike System Company. [ 2 ] For the reasons of Schrager, J.A., with which Cournoyer and Lavallée, JJ.A. agree, THE COURT: [ 3 ] DECLARES that the Appellant has an appeal as of right, such that leave is not required, and DISMISSES the Appellant’s De Bene Esse Application for Leave to Appeal a Judgment Rendered in the Course of Bankruptcy Proceedings, without costs; [ 4 ] ALLOWS the appeal; [ 5 ] SETS ASIDE the judgment of the Superior Court, Commercial Division, District of Montreal (the Honourable Justice Martin Castonguay) rendered on May 5, 2022; [ 6 ] DISMISSES the Respondent’s appeal from the Trustee’s Notice of Disallowance of proof of claim dated December 15, 2020; [ 7 ] TAKES COGNIZANCE of the withdrawal of the Notice of Disallowance dated December 15, 2020, issued by the Appellant to the Respondent, solely with respect to the disallowance of the portion of the re-amended Proof of Claim related to the suretyship agreement dated June 1, 2011, entered into between National Bank of Canada (the “Bank”) and the Respondent, the payment by the Respondent to the Bank made on April 30, 2014, in an amount of $6,489,081.12, the Modalités relatives au paiement des sommes dues par Société de vélo en libre-service à Banque Nationale du Canada , being

Schedule “A” to the re-amended Proof of Claim, and the payment by the Respondent to the Bank made on June 10, 2014, in an amount of $1,702,600.00; [ 8 ] THE WHOLE with costs against the Respondent in first instance and in appeal. MARK SCHRAGER, J.A. GUY COURNOYER, J.A. SOPHIE LAVALLÉE, J.A.

Mtre Alain Tardif Mtre Gabriel Faure Mtre Marc-Étienne Boucher MCCARTHY TÉTRAULT For the Appellant Mtre Se-Line Duong Mtre Eleni Yiannakis Mtre François Goyer IMK For the Respondent Date of hearing: February 9, 2023 REASONS OF SCHRAGER, J.A. [ 9 ] This is an appeal from the judgment rendered on May 5, 2022 by the Superior Court, Commercial Division, District of Montreal (the Honourable Martin Castonguay). [1] [ 10 ] The judgment sets aside, in part, the disallowance by the Appellant-Trustee [2] of the Respondent’s proof of claim in the bankruptcy of Public Bike System Company (“ Bixi ”) and declares that the Respondent [3] is an unsecured creditor for an amount of $31,746,757 ranking pari passu with the other unsecured creditors. [ 11 ] For the reasons which follow, I propose that the Court allow the appeal, overturn the judgment under appeal and dismiss the Respondent’s appeal from the Trustee’s notice of disallowance of its proof of claim.

I. FACTS [ 12 ] The partial disallowance of the Respondent’s claim pertains to the following sums of money: - $8,191,681.12 due by Bixi to the Respondent and arising from payments by the Respondent to Bixi’s banker pursuant to a guarantee signed by the Respondent; - $31,746,575 due by Bixi to the Respondent for a direct loan that was declared null by the Court in a previous judgment . [4] [ 13 ] The text of the disallowance reads in part as follows: 2.

With respect to Ville de Montreal's entire claim in the amount of $39,938,256.12: • Ville de Montreal was not dealing at arm's length with the debtor when it entered into the various transactions at the basis of its claim, as held by the Court of Appeal at paragraphs 67 and following of its judgement in Ville de Montreal c. Litwin Boyadjian inc . ( Syndic de Société de vélo en libre-service ), 2019 QCCA 794 .

In the Trustee's opinion, these transactions cannot be deemed "proper" within the meaning of section 137(1) of the Act, as they were entered into in violation of the Municipal Aid Act, a legislation of public order intended to protect taxpayers against municipal mismanagement of public funds. The City's claim must thus be postponed pursuant to section 137(1) of the Act. • Alternatively, Ville de Montréal's claim must be characterized as an equity claim and postponed accordingly pursuant to

section 140.1 of the Act. Pursuant to the recharacterization doctrine, the Trustee must consider the manner in which the underlying transactions were implemented and the economic reality of the surrounding circumstances. The record shows inter alia that Ville de Montréal intervened to regularize the Bankrupt's financial situation at a time when the latter could not find other sources of financing in order to uphold the Debtor's bike-sharing services for the benefit of its citizens.

Moreover, the Convention de prêt dated May 27, 2011 was mostly used to reimburse the Bankrupt's starting capital (initially itself lent by Société en commandite Stationnement de Montréal). In short, the transactions at the basis of Ville de Montréal's claim must be recharacterized as capital contributions. [ 14 ] It is common ground that the Respondent’s claim, if not postponed, would seriously dilute the distribution to the unsecured creditors of Bixi from the approximate amount of $21,000,000 held by the Trustee for such purpose.

If the claim is postponed, the Respondent will not receive any dividend. [ 15 ] The Court’s 2019 Judgment referred to above [5] declared that the loan advanced by the Respondent to Bixi and the hypothec granted to secure it were null as they offended a provision of public order prohibiting municipalities from offering financial assistance to commercial establishments. [6] However, the judgment went on to declare that the Respondent was nevertheless a creditor of Bixi (in an amount of $31,746,575) since the nullity of the loan agreement gave rise to the obligation of restitution between the parties, such that Bixi should return the loan proceeds received from the Respondent.

However, since the bankruptcy of Bixi made it impossible for Bixi to pay the monies to the Respondent, the Court modified the manner of making restitution and recognized that the Respondent could file a proof of claim in the bankruptcy.

[ 16 ] As set forth above, the Trustee disallowed the Respondent’s proof of claim and the claims were postponed. The Respondent’s appeal from the Trustee’s disallowance was allowed in part by the Superior Court. The judge overruled the Trustee’s postponement regarding the portion of $31,746,575 only. He accepted the Respondent’s argument that the 2019 Judgment created a new “legal reality” between the parties such that the source of the Respondent’s claim was not the loan contract that had been declared null but rather the obligation to make restitution.

Accordingly, s. 137 of the Bankruptcy and Insolvency Act [7] (“ BIA ”) invoked by the Trustee to justify the postponement did not apply. Such provision allows for the postponement of claims arising from contracts that are entered into between a bankrupt and non-arm’s-length parties and are not proper. The judge added that the Respondent did deal at arm’s length with Bixi since they were not related according to the

definitions found in ss. 4(2) and 4(3) BIA . The judge also made short shrift of the Trustee’s reliance on s. 140.1 BIA to contend that the claim represented equity and not debt. The judge stated that the proof in the record indicates the Respondent’s intention to be reimbursed the advances made to Bixi, so that the money advanced was a loan and not a contribution to capital. [ 17 ] As stated above, I believe the appeal should be allowed as the judgment is tainted by both errors of law and errors of mixed fact and law. II.

ISSUES [ 18 ] The parties’ respective positions give rise to four issues for resolution on appeal: 1.- Does the Appellant have an appeal as of right or does it require leave and, if so, should leave be granted pursuant to the De Bene Esse application for such leave referred to this panel? 2.- Did the judge err in concluding that the Court already decided in the 2019 Judgment that the Respondent’s claim as an unsecured creditor should be allowed by the Trustee? 3.- Did the judge err in the

interpretation and application of s. 137 BIA ? 4.- Did the judge err in concluding that the Trustee’s determination that the Respondent’s claim was an “equity claim” was unreasonable? III. ANALYSIS 1.- Does the Appellant have an appeal as of right or does it require leave and, if so, should leave be granted pursuant to the De Bene Esse application for such leave referred to this panel? [ 19 ] The Appellant’s notice of appeal relies upon paragraph (a) – the point at issue involves future rights – and paragraph (c) – the property involved in the appeal exceeds in value $10,000 – of s. 193 BIA . [ 20 ] The Appellant has also applied for leave to appeal under s. 193 (

e) BIA in the event the Court rules that it has no appeal as of right. That application was referred to the Court by one of our colleagues. [8] [ 21 ] Given that the question of the postponement of the Respondent’s proof of claim would mean that the Respondent would not share in any dividend in the Bixi bankruptcy, the Appellant contends that the value of the property involved in the appeal exceeds $10,000. [9] I believe this to be the case. Moreover, there is abundant case law confirming that where the amount at issue in a proof of claim exceeds $10,000, a right of appeal under s. 193 (

c) BIA exists. Ultimately, if the issue is the loss or gain resulting from the disallowance or acceptance of a proof of claim for more than $10,000, s. 193 (

c) BIA permits an appeal. [10] [ 22 ] However, the Respondent argues, based primarily on the decision of Brown, J.A., sitting as chamber’s judge, in 2403177 Ontario Inc. v. Bending Lake Iron Group Limited , [11] that s. 193 (

c) BIA should be read restrictively and not apply to “(

i) orders that are procedural in nature; (ii) orders that do not bring into play the value of the debtor’s property; or (iii) orders that do not result in a loss”. [12] [ 23 ] To put the decision in context, Bending Lake involved an appeal from a judgment approving a sale agreement and ordering the vesting of the debtor’s property. The value of the property was not in issue.

Rather, the grounds of appeal were “process-related”, regarding such things as disclosure of information about the sale agreement to the debtor by the receiver, the negotiation process for the sale and the adequacy of notice given to Aboriginal communities. [13] [ 24 ] In Hillmount Capital inc. v. Pizale , [14] Brown, J.A. revisited s. 193 (

c) BIA and agreed with the Saskatchewan Court of Appeal in MNP Ltd. v Wilkes [15] that merely because the question raised in appeal is procedural, this does not mean there is not property involved that exceeds $10,000. Thus, the Court should scrutinize the grounds of appeal to examine the effect of the order sought. [16] [ 25 ] In the present case, the value of the Respondent’s claim is inextricably the issue as it is common ground that if it is postponed, it will be worthless in a distribution and will result in a loss for the Respondent exceeding $30,000,000.

Moreover, if not postponed, the claim will cause considerable dilution, exceeding in the aggregate $10,000, of the payment to all other creditors. This appeal clearly involves a potential loss either to the Respondent or to the mass of creditors exceeding the threshold amount; it is not restricted to procedural issues. [ 26 ] Accordingly, I would conclude that the Appellant has a right of appeal under s. 193 (

c) BIA . [ 27 ] If I doubted the existence of an appeal as of right, I would not hesitate to grant leave as requested by the Appellant because the

criteria for the granting of such leave are easily satisfied. [17] [ 28 ] The appeal is, at the very least, prima facie meritorious, its resolution is important for this bankruptcy estate, and the issues raised bear on the law in the area. No undue delay in the administration of the bankrupt estate is caused at this point in time by the appeal. [ 29 ] However, I propose to dismiss the application for leave, without costs, as being unnecessary given my opinion that there is a right of appeal under s. 193 (

c) BIA . 2.- Did the judge err in concluding that the Court already decided in the 2019 Judgment that the Respondent’s claim as an unsecured creditor should be allowed by the Trustee? [ 30 ] The conclusions of the 2019 Judgment state simply: [76] ACCUEILLE partiellement l’appel, avec les frais de justice, à seule fin d’ajouter une conclusion déclaratoire : DÉCLARE que la Ville est créancière pour le solde dû à la date de la prise en paiement, soit 31 746 575 $, et peut présenter une réclamation au syndic de faillite; Though the doctrine of res judicata can extend beyond the conclusions (in French “ dispositif ”) of a judgment to the reasons, the latter must be intrinsically tied to such conclusions. [18] In principle, it is the conclusions which are operative. [19] [ 31 ] As stated above, the Court examined the validity of the loan made by the Respondent to Bixi and the security, in light of the legal prohibition against such financial assistance. [20] The Court found that the nullity gives rise to the obligation of restitution pursuant to art. 1422 C.C.Q. and then added the following: [62] La faillite subséquente de Bixi l’empêche de remettre le prêt obtenu.

Par ailleurs, ordonner à la Ville seule de restituer les prestations créerait un déséquilibre et avantage injustifié pour Bixi. La solution adéquate est de modifier les modalités de la restitution en reconnaissant que la Ville est créancière de Bixi pour le solde du prêt et qu’elle peut présenter une réclamation dans la faillite [27] , en application du deuxième alinéa de l’

article 1699 C.c.Q. Cette créance est sujette aux règles de droit régissant la faillite ( art. 69.3 LFI ). Sa créance sera traitée pari passu avec les autres créanciers de la faillite . Le prêt et l’hypothèque sont nuls, mais l’obligation pour Bixi de restituer l’argent reçu existe en application du principe de restitution des prestations. [63] À la lecture du jugement, il est impossible de savoir si le juge estime que Bixi n’a pas à rembourser le prêt ou s’il a tenu pour acquis que la Ville possède une créance et va déposer une réclamation dans la faillite .

Il convient d’ajouter une conclusion à cet effet. (Emphasis added) [ 32 ] The Court’s language is permissive – i.e. the City “peut présenter une réclamation dans la faillite” and any such proof of claim will be subject to the legal rules governing the bankruptcy. [ 33 ] No such proof of claim had been filed at the time of the 2019 Judgment . As such, the Court cannot be taken to have ruled on the validity or propriety of such claim. Nevertheless, the Respondent submits that the use of the term “ pari passu ” in paragraph 62 refers to how such claim should be treated or collocated in the bankruptcy.

The judge evidently agreed: [35] De fait, le Syndic, en ajournant la preuve de réclamation de la créance de la Ville telle qu’établi par la Cour d’appel, fait comme si cet arrêt n’existait tout simplement pas ou encore que la décision de la Cour supérieure maintenue par la Cour d’appel, n’avait aucun impact sur le pouvoir par le Syndic, d’analyser le bien-fondé d’une preuve de réclamation sous le prisme de l’article 137(1) L.F.I. [36] C’est l’existence même de l’arrêt et en particulier son paragraphe 62 lequel doit être lu en conjonction avec tous ceux de la

section « La restitution par Bixi » qui fait en sorte que la position du Syndic est non seulement déraisonnable, mais frôle la témérité. [ 34 ] The Respondent and the judge read into the 2019 Judgment what is not there. As stated, the Court was not examining a proof of claim but merely the City’s right to file a proof of claim and thereby become a creditor in the bankruptcy. [21] In the brief the Respondent had filed in that case, it had indeed sought to have its claim (as opposed to its right to file a proof of claim) recognized, but that is not what the Court did. [ 35 ] Counsel for the Respondent points to the second paragraph of

Article 1699 C.C.Q. : 1699. (…) The court may, exceptionally, refuse restitution where it would have the effect of according an undue advantage to one party, whether the debtor or the creditor, unless it considers it sufficient, in that case, to modify the scope or modalities of the restitution instead. 1699. […] Le tribunal peut, exceptionnellement, refuser la restitution lorsqu’elle aurait pour effet d’accorder à l’une des parties, débiteur ou créancier, un avantage indu, à moins qu’il ne juge suffisant, dans ce cas, de modifier plutôt l’étendue ou les modalités de la restitution.

Thus, the Respondent argues that it was open to the Court in the 2019 Judgment to subordinate the City’s claim if it obtained an undue advantage. Given that the Court did not do this, counsel reasons that the Court did not believe the City obtained an undue advantage, such that the Trustee is bound to consider the 2011 transaction a proper one and not invoke s. 137 to subordinate the Respondent’s claim. Again, counsel reads into the 2019 Judgment what is not there. There is no indication that this was considered. It is not for this panel to

add to what the Court wrote in paragraph 62 of the 2019 Judgment quoted above. [ 36 ] Nowhere did the Court put aside or even refer to the Trustee’s duty “to examine every proof of claim (…) and the grounds therefor” and to make a determination, as required by s. 135 (1) BIA . This duty is a fundamental obligation of a bankruptcy trustee. [22] [ 37 ] The expression “ pari passu ” in paragraph 62 of the 2019 Judgment refers to the right of the Respondent, like other creditors, to file a proof of claim, not to its eventual treatment or collocation by the Trustee.

The Court did not say that the claim would be paid rateably (in French “ au prorata ”), which is the general rule, set out in s. 141 BIA , for dealing with claims; the Court merely stated that the claim would be treated as all the other claims.

This includes the examination by the Trustee pursuant to s. 135. [ 38 ] The reference in paragraph 75 of the 2019 Judgment to such proof of claim as “ chirographaire ” or ordinary or unsecured, in the context of the 2019 Judgment , clearly refers to the fact that the loan and the accessory hypothec were null but that the legal institution of restitution would give rise to the City’s right to claim the monies advanced to Bixi, albeit not as a secured creditor. [ 39 ] Moreover, the postponement of the Respondent’s claim pursuant to the Trustee’s notice of disallowance does not per se contradict that the Respondent is an unsecured (“ chirographaire ”) creditor.

The disallowance maintains such qualification but postpones the claim, or in the wording of ss. 137 and 140.1 BIA , the Respondent is not entitled to receive a dividend in the bankruptcy until the other unsecured creditors are fully paid. [ 40 ] The Respondent points to comments from one member of the panel and exchanges with counsel to bolster its position that the Court decided in the 2019 Judgment that the proof of claim was valid.

However, comments from the panel are not binding and do not form any part of a judgment. [23] [ 41 ] I believe that the foregoing analysis indicates that the conclusions of the 2019 Judgment , taken alone or in conjunction with the reasons, disclose a decision providing for the Respondent’s right to file a claim as an unsecured creditor in the bankruptcy of Bixi in the amount stated. Neither the conclusions nor the reasons address the eventual treatment of that claim by the Trustee in the exercise of its duties under s. 137 BIA .

In deciding otherwise, the judge committed a reviewable error, which merits intervention by the Court. 3.- Did the judge err in the

interpretation and application of s. 137 BIA ? [ 42 ] The judge concluded that the Trustee was wrong to postpone the Respondent’s claim pursuant to s. 137(1) BIA . It provides as follows: 137

(1) A creditor who, at any time before the bankruptcy of a debtor, entered into a transaction with the debtor and who was not at arm’s length with the debtor at that time is not entitled to claim a dividend in respect of a claim arising out of that transaction until all claims of the other creditors have been satisfied, unless the transaction was in the opinion of the trustee or of the court a proper transaction. 137

(1) Le créancier qui, avant la faillite du débiteur, a conclu une transaction avec celui-ci alors qu’il existait un lien de dépendance entre eux n’a pas droit de réclamer un dividende relativement à une réclamation née de cette transaction jusqu’à ce que toutes les réclamations des autres créanciers aient été satisfaites, sauf si la transaction était, de l’avis du syndic ou du tribunal, une transaction régulière. [ 43 ] The judge held that s. 137 BIA did not apply because the Respondent and Bixi did deal at arm’s length. He reasoned that since they were not related within the meaning of ss. 4 (2) and 4

(3) BIA , then in virtue of s. 4 (5) they could not be deemed not to deal at arm’s length. This is an error of law as the judge failed to consider s. 4 (4) BIA which provides as follows: 4

(4) It is a question of fact whether persons not related to one another were at a particular time dealing with each other at arm’s length. 4

(4) La question de savoir si des personnes non liées entre elles n’avaient pas de lien de dépendance, à tel ou tel moment, est une question de fait. [ 44 ] Thus, even though the Respondent and Bixi might not have been related parties within the definition of s. 4 BIA (and I express no opinion on such finding), the judge should have pursued his analysis to see if the facts indicated that they were or were not arm’s length parties. The factual matrix is compelling: (

i) Bixi was executing the Respondent’s bicycle sharing project on its behalf as the Court observed in the 2019 Judgment ; [24] (ii) Bixi’s project was conceived by Mr.

André Lavallée, an elected official of the Respondent; (iii) the Respondent’s treasurer was also a member of the board of directors of Bixi from 2001 to 2013 and was extensively involved in the financing referred to above, as the Court observed in the 2019 Judgment ; [25] and (iv) the Respondent’s consolidated financial statements included those of Bixi together with other entities under the Respondent’s control. [ 45 ] Moreover, the judge did not consider the scope of the agreement entered into between the Respondent and Bixi in 2011, whereby Bixi effectively gave the Respondent de jure control over it.

Pursuant to such agreement, inter alia : (

i) the members and the chairman of Bixi’s board of directors and its managing director were appointed on the recommendation of the Respondent; (ii) Bixi was obliged to submit to the Respondent, for approval, its budgets and three-year plans on such dates and in such form and substance as the Respondent indicated; (iii) Bixi was obliged to inform the Respondent of any major change to its approved budget; (iv) Bixi was obliged to remit to the Respondent yearly audited financial statements, quarterly interim financial statements, and quarterly detailed reports of its operations and orientations (“ reddition de compte complète […] de ses activités et de ses orientations ”); (

v) Bixi granted the Respondent unfettered access to its books, records and premises; (vi) Bixi undertook to abide by the rules governing the awarding of contracts under the Cities and Towns Act ; and (vii) Bixi undertook not to contract debt financing, modify its corporate structure, merge with any entity, modify its letters patent or seek its dissolution without the prior approval of the Respondent. These elements are not addressed in the judgment. [ 46 ] In view of the above, it is not surprising that in the 2019 Judgment , the Court, in applying s. 95 (1) (

b) BIA to the transaction

between the Respondent and Bixi, underlines the following passage of the provision: [26] (…) a creditor who is not dealing at arm’s length with the insolvent person (…) [ 47 ] Lastly, during argument before the judge, counsel for the Respondent conceded that his client was related to Bixi: “ C’est pas contesté que la Ville est une personne liée à Bixi, c’était notre conclusion à l’époque, ça été la conclusion de la Cour d’appel, c’est pas un fait qui est contesté ”. [ 48 ] Accordingly, in deciding that s. 137 (1) BIA was not applicable, the judge erred both in law and in fact. [ 49 ] However, the Respondent asserts (and the judge agreed) that the effect of the 2019 Judgment providing for restitution creates a new “legal reality” between the parties – i.e. the restitution obligation to return the funds received is the source of the obligation, such that the propriety of the transaction between the Respondent and Bixi in 2011 was not to be considered in examining the Respondent’s proof of claim. [ 50 ] I believe this argument is wrong in law for the reasons that follow. [ 51 ] That the concept of restitution allowed the Respondent to file a proof of claim regarding proceeds of a loan declared null does not mean that logically or legally the Appellant in the performance of its trustee’s duty to examine that claim “and the grounds therefor”, [27] should not look beyond the obligation of the bankrupt to make restitution and consider the circumstances giving rise to the claim.

Such consideration would include the elements giving rise to the nullity of the contract as examined by the Court in the 2019 Judgment . That judgment has the effect of setting aside the obligation generated by the contract of loan but does not somehow erase the historical fact of that loan transaction so that a trustee should close its eyes to it, pretending that it never existed.

As a majority of the Supreme Court observed recently in dealing with a municipal contract declared a nullity: (…) it will then be deemed never to have existed (arts. 1416 and 1422 C.C.Q. ; Cumyn, at No. 224; Lluelles and Moore, at No. 1087; Baudouin and Jobin, at No. 377; Gaudet, at p. 332). But this does not mean that the contract never actually existed.

Logically, a contract must exist before it can be annulled: if a contract did not become a legal reality, it cannot be deemed never to have existed, because it does not in fact exist. (…) [28] [ 52 ] In the words of s. 137 BIA , the Respondent’s claim “aris[es] out of [the] transaction” that was entered into between it and Bixi and was declared a nullity by the Court.

Indeed, the Court’s conclusion quoted above declares that the City may file a proof of claim in the amount of the balance due to it at the date of the taking in payment and not the balance due when the loan was declared a nullity. [ 53 ] I conclude that it is an error of law to only consider the obligation of restitution and not the underlying transaction of 2011 in analyzing the Respondent’s proof of claim. [ 54 ] Given his view of the law, the judge did not consider whether the 2011 transaction was a proper transaction within the meaning of s. 137 BIA . [ 55 ] The standard of review on appeal from a trustee’s disallowance is correctness on questions of law and reasonableness (or palpable error) on questions of fact or mixed fact and law. [29] The parties had stipulated before the Superior Court that the only issue was the reasonableness of the Trustee’s decision.

That being said, the onus was on the Respondent in the lower court to demonstrate that the Trustee’s decision was not reasonable. [30] [ 56 ] As seen above, the Trustee found that the 2011 loan transaction was not proper because it was entered into in violation of a statutory provision of public order to protect taxpayers against misuse of public funds by municipalities. The Court agreed in the 2019 Judgment and declared the loan agreement a nullity. Thus, it cannot be said that the Trustee’s determination that the transaction was not proper was an unreasonable conclusion.

I would thus propose that the Court intervene to set aside the judgment and dismiss the appeal from the disallowance of the proof of claim. 4.- Did the judge err in concluding that the Trustee’s determination that the Respondent’s claim was an “equity claim” was unreasonable? [ 57 ] Though not strictly necessary, given my opinion that the Trustee could postpone the Respondent’s claim upon the application of s. 137 BIA , I propose to briefly examine the other ground in the disallowance, based on s. 140.1 BIA , to the effect that the “loan” was really a contribution to capital. [ 58 ] The judge devoted two paragraphs to dismiss the Trustee’s position in this regard: [37] Tout aussi téméraire l’argument subsidiaire que la créance devrait être également ajournée ne vertu de l’article 140.1 L.F.I. puisque la Ville serait un « Equity Partner » dans l’aventure commerciale de Vélo, puisqu’il fait fi des motifs développés tant par la Cour supérieure que par la Cour d’appel quant à l’aspect commercial de Vélo, limité à la seule aventure internationale et non pas quant au réseau strictement montréalais. [38] Cet argument ne tient pas compte non plus de l’ensemble de la preuve administrée devant la Cour supérieure alors que celle-ci constate que les gestes posés par la Ville ne visaient qu’à se faire rembourser les avances consenties par Société en commandite Stationnement de Montréal (SCSM) à Vélo, pour qu’elles lui soient versées à

titre de redevances. En aucun temps il ne fut question d’une quelconque recherche de profits par la Ville. [ 59 ] I reiterate that the standard of review of a trustee’s disallowance is one of reasonableness. [ 60 ] Equity claim is defined in s. 2 of the BIA as follows:

equity claim means a claim that is in respect of an equity interest, including a claim for, among others, réclamation relative à des capitaux propres Réclamation portant sur un intérêt relatif à des capitaux propres et visant notamment : (

a) a dividend or similar payment,

a) un dividende ou un paiement similaire; (

b) a return of capital,

b) un remboursement de capital; (

c) a redemption or retraction obligation,

c) tout droit de rachat d’actions au gré de l’actionnaire ou de remboursement anticipé d’actions au gré de l’émetteur; (

d) a monetary loss resulting from the ownership, purchase or sale of an equity interest or from the rescission, or, in Quebec, the annulment, of a purchase or sale of an equity interest, or

d) des pertes pécuniaires associées à la propriété, à l’achat ou à la vente d’un intérêt relatif à des capitaux propres ou à l’annulation de cet achat ou de cette vente; (

e) contribution or indemnity in respect of a claim referred to in any of paragraphs (

a) to (d); (réclamation relative à des capitaux propres)

e) une contribution ou une indemnité relative à toute réclamation visée à l’un des alinéas

a) à d). (equity claim) [ 61 ] Was the 2011 loan a contribution by the Respondent to Bixi’s capital? [ 62 ] Judges sitting in bankruptcy matters have identified various indicia relevant to the examination: [41] U.S. Steel sets out a helpful two-part test in to be followed in situations involving parent-subsidiary relationships at paras 186-190: (

a) subjectively, did the alleged lender actually expect to be repaid the principle (sic) amount of the loan with interest out of the cashflows of the alleged borrower; and (

b) objectively, was the expectation reasonable under the circumstances? [42] The Court in U.S. Steel referred to various factors used by American courts to aid in determining appropriate characterization, including the following: (

a) the names given to the instruments, if any, evidencing the indebtedness; (

b) the presence or absence of a fixed maturity date and

schedule of payments. The American cases suggest that the absence of a fixed maturity date and a fixed obligation to repay is an indication that the advances were capital contributions and not loans; (

c) the presence or absence of a fixed rate of interest and interest payments. Again, it is suggested that the absence of a fixed rate of interest and interest payments is a strong indication that the advances were capital contributions rather than loans; (

d) the source of repayments. If the expectation of repayment depends solely on the success of the borrower’s business, the cases suggest that the transaction has the appearance of a capital contribution; (

e) the adequacy or inadequacy of capitalization. Thin or inadequate capitalization is strong evidence that the advances are capital contributions rather than loans; (

f) the identity of interest between the creditor and the shareholder. If shareholders make advances in proportion to their respective stock ownership, an equity contribution is indicated; (

g) the security, if any, for advances; (

h) the corporation’s ability to obtain financing from outside lending institutions. When there is no evidence of other outside financing, some cases indicate that the fact no reasonable creditor would have acted in the same manner is strong evidence that the advances were capital contributions rather than loans; (

i) the extent to which the advances were subordinated to the claims of outside creditors; (

j) the extent to which the advances were used to acquire capital assets. The use of the advance to meet the daily operating needs for the corporation, rather than to purchase capital assets, is arguably indicative of bona fide indebtedness; and (

k) the presence or absence of a sinking fund to provide repayments. [31] (Emphasis added) [ 63 ] In U.S. Steel , Justice Wilton-Siegel underlined that in determining whether a transaction is a contribution to capital rather than a loan, the surrounding circumstances of the loan and the real intent of the parties rather than an adherence to the literal wording of a contract should be the focal point, particularly where the parties do not deal at arm’s length. [32]

[ 64 ] The factual elements relied on by the Trustee and in evidence before the judge indicate the reasonableness of the Trustee’s conclusion. The judge made no reference to these elements of proof in considering the application of s. 140.1 BIA . [ 65 ] In 2011, Bixi was in a dire financial situation. Indeed, it was insolvent, having an operating deficit and no reasonable outlook for making up its deficit. The Respondent had no expectation that Bixi could ever repay the $31,000,000 in direct advance nor the $8,000,000 of the guaranteed loan.

Without the Respondent’s guarantee of that loan, Bixi could not find an operating lender and would be forced to cease its activities. The Respondent wanted Bixi to be able to continue to offer its bike sharing service to Montrealers.

These are facts testified to by the CEO of Bixi as well as the Respondent’s treasurer. [ 66 ] Under the 2011 agreement entered into by Bixi and the Respondent, the latter has all the hallmarks of a sole shareholder if not an alter ego , as described above in paragraph [45]. [ 67 ] I accept that the mere fact that a sole shareholder [33] (or group of shareholders) [34] advances funds to its company does not constitute per se a contribution to capital.

However, the surrounding circumstances described above, taken together, make it such that the Trustee’s determination that the loans were, in substance, contributions to capital was a reasonable determination. The judge erred by not considering the aforementioned facts and by not applying the appropriate standard of review in considering the Trustee’s disallowance of the Respondent’s proof of claim.

This is a further ground justifying the Court’s intervention. * * * [ 68 ] Accordingly, and for all the foregoing reasons, I would dismiss the application for leave to appeal without costs as it is not necessary given the right to appeal under s. 193 (

c) BIA . I would then grant the appeal to set aside the judgment of the Superior Court and dismiss the Respondent’s appeal from the Trustee’s notice of disallowance, with legal costs before both courts. [ 69 ] The Appellant also asks the Court to take cognizance that it has withdrawn its notice of disallowance regarding the sums of $6,489,081.12 and $1,702,600 representing the sums paid by the Respondent to National Bank of Canada pursuant to the guarantee for Bixi’s liability to such bank. These amounts (totalling $8,191,681.12) are included in the total postponed amount of $39,938,256.12.

The judge makes no mention that this alternative disallowance is overturned, but the Trustee, in its written pleadings in first instance, had withdrawn the disallowance of this portion of the claim in order that National Bank of Canada not continue to be a party to the proceedings. I propose to add such a conclusion to the Court’s judgment. MARK SCHRAGER, J.A.