Golfside Ventures Ltd (Re), 2023 ABKB 86

Court of King’s Bench of Alberta Citation: Golfside Ventures Ltd (Re), 2023 ABKB 86 Date: 20230215 Docket: B203 473663 Registry: Edmonton In the Matter of the Bankruptcy of Golfside Ventures Ltd. Between: BDO Canada Limited in its capacity as Licensed Insolvency Trustee of Golfside Ventures Ltd. Applicant - and - Donald Oborowsky and Obcorp Holdings Inc. Respondents _______________________________________________________ Memorandum of Decision of Associate Chief Justice K.G. Nielsen _______________________________________________________ I. Facts

[ 1 ] Golfside Ventures Ltd. (Golfside) and Hustle Holdings Ltd. entered into a joint venture agreement (Joint Venture Agreement) in relation to the development of forty-four parcels of bare land located in Redwater, Alberta (the Lands). The Joint Venture Agreement was effective July 7 th , 2007 and entered into on August 20 th , 2008. Obcorp Holdings Inc. (Obcorp) subsequently acquired the interest of Hustle Holdings Ltd. in the Joint Venture Agreement. [ 2 ] Robert Shalhoub (Mr. Shalhoub) is the principal of Golfside.

Mr Shalhoub is also the principal of Metrocan Ventures Inc. (Metrocan). [ 3 ] Donald Oborowsky (Mr. Oborowsky) is the principal of Obcorp. On or about December 14, 2011, the Town of Redwater assigned a mortgage, which was previously registered against the Lands, to Mr. Oborowsky (Oborowsky Mortgage). [ 4 ] On February 11, 2019, Golfside made on assignment into bankruptcy. BDO Canada Limited was appointed Licensed Insolvency Trustee (the Trustee) of Golfside. Golfside’s sole asset is the Lands.

The cumulative list price for the Lands was most recently, $1,634,377. [ 5 ] At the time of bankruptcy, the Trustee was aware of three secured creditor claims: • Oborowsky Mortgage – Donald Oborowsky held the Oborowsky Mortgage with a principal sum of $430,447.90; • Metrocan Claim – Metrocan held a claim secured by a General Security Agreement against all present and after acquired personal property of Golfside with a principal sum of $1,079, 434.88; and • Redwater Claim – the Town of Redwater had a claim for unpaid municipal property taxes which with interest at the time of the Second Report to the Court by the Trustee, was $121,423. [ 6 ] The Trustee was of the view that there was sufficient equity in Golfside’s assets to cover the fees and expenses involved in administering the estate.

However, in addition, as part of its due diligence, the Trustee took steps to secure payment of its administration fees by reaching an agreement with Metrocan.

Effective February 11, 2019, Metrocan agreed to postpone and subordinate any and all claims it held against Golfside to the Trustee’s fees and expenses. [ 7 ] On March 4, 2019, after the assignment into bankruptcy of Golfside and after the Trustee was appointed, Obcorp registered a Builders’ Lien pursuant to the Builders’ Lien Act , RSA 2000, c B-7 (the Builders’ Lien Act ) in the approximate sum of $5,500,000 against the Lands in relation to the joint venture (Obcorp Lien). [ 8 ] The Trustee disallowed the Obcorp Lien. Obcorp appealed and the Trustee sought advice and direction from the Court.

Graesser J held that the Obcorp Lien was valid and enforceable against the Lands.

Graesser J did not make any findings as to the quantum of the Obcorp Lien ( Golfside Ventures Ltd (Re) , 2021 ABQB 427 ). [ 9 ] The Obcorp Lien is a secured claim under the Bankruptcy and Insolvency Act , RSC 1985, c B-3 (the BIA ). [ 10 ] Relying on the Court’s inherent jurisdiction and the principles of fairness, the Trustee seeks an Order granting and creating a first charge on Golfside’s assets as security for payment of the Trustee’s reasonable professional fees and disbursements. [ 11 ] The Respondents, Donald Oborowsky and Obcorp, argue that the rights provided to secured creditors pursuant to the BIA clearly govern this situation and the Trustee’s Application should be denied.

Additionally, the Respondents assert that the Trustee should have known of the existence of a lien before its appointment due to the ongoing lawsuit, Hustle Holding Ltd, Obcorp Holdings Inc v Golfside Ventures Ltd ( Hustle/Obcorp v Golfside Lawsuit) between Obcorp/Hustle and Golfside, which began in April 2012. II. Issue Can, and if so, should, the Court exercise its inherent jurisdiction to grant a charge in favour of the Trustee against the Lands and the proceeds from the sale of the Lands to secure the Trustee’s costs? III.

Law and Analysis Priority [ 12 ] Generally, secured claims rank in priority over a trustee’s fees and expenses. [ 13 ]

Section 39 of the BIA sets out trustee remuneration. Trustee remuneration shall be the amount voted to the trustee by ordinary resolution at a meeting of creditors (s 39(1)).

However, if the remuneration is not fixed under section 39(1), the trustee may “retain as his remuneration, subject to increase or reduction as hereinafter provided, a sum not exceeding seven and one-half per cent of the amount remaining out of the realization of the property of the debtor after the claims of the secured creditors have been paid or satisfied” (s 39(2)). [ 14 ] The BIA provides the priority scheme for distributing proceeds of a bankrupt’s estate.

The trustee’s fees, expenses, and legal costs have priority, subject to the rights of secured creditors ( BIA , s 136(1)(b)): 136(1) Subject to the rights of secured creditors, the proceeds realized from the property of a bankrupt shall be applied in priority of payment as follows:

(

b) the costs of administration, in the following order, (

i) the expenses and fees of any person acting under a direction made under paragraph 14.03(1) (a), (ii) the expenses and fees of the trustee, and (iii) legal costs; [ 15 ] As a lienholder, Obcorp falls within the definition of secured creditor in

section 2 of the BIA : secured creditor means a person holding a mortgage, hypothec, pledge, charge or lien on or against the property of the debtor or any part of that property as security for a debt due or accruing due to the person from the debtor... [ emphasis added ] [ 16 ] Based on the definition above, Obcorp became a secured creditor the moment it acquired the lien, not when Obcorp registered the lien. Sections 6(1) of the Builders’ Lien Act provides as follows: 6

(1) Subject to subsection (2), a person who (

a) does or causes to be done any work on or in respect of an improvement, or

b) furnishes any material to be used in or in respect of an improvement, for an owner, contractor or subcontractor has, for so much of the price of the work or material as remains due to the person, a lien on the estate or interest of the owner in the land in respect of which the improvement is being made . [ 17 ] In other words, Obcorp was a secured creditor even before the date of bankruptcy. [ 18 ] The stay of proceedings in BIA

section 69.3(1) and (2) does not interfere with Obcorp’s ability as a secured party, to realize its security interest: 69.3

(1) Subject to subsections (1.1) and (2) and sections 69.4 and 69.5 , on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor’s property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy. ...

(2) Subject to sections 79 and 127 to 135 and subsection 248(1) , the bankruptcy of a debtor does not prevent a secured creditor from realizing or otherwise dealing with his or her security in the same manner as he or she would have been entitled to realize or deal with it if this

section had not been passed, unless the court otherwise orders... [ emphasis added ]. [ 19 ] Generally, a trustee has no priority for fees and expenses against secured assets; meaning in this case the Obcorp Lien would have priority over the Trustee’s fees and expenses claim. A trustee should arrange to protect itself before incurring fees, expenses, and legal costs to administer the estate (Houlden, Morawetz & Sarra, Bankruptcy and Insolvency Law of Canada , 4 th ed (Toronto: Thomson Reuters, 2019) at para 6.259).

However, there are exceptions established at common law, discussed in the next section. [ 20 ] Unless the Court’s inherent jurisdiction can be applied in this situation, the Obcorp Lien, as a secured claim, would have priority over the Trustee’s fees and expenses. Exercise of Inherent Jurisdiction [ 21 ] The Trustee submits that the Court may exercise its inherent jurisdiction to grant the requested charge.

The Trustee relies on principles of bankruptcy law, as well as the analysis and result in Re Residential Warranty Company of Canada , 2006 ABQB 236 , aff’d 2006 ABCA 293 ( Residential Warranty ). [ 22 ] In Residential Warranty , a trust claimant (whose claim was disputed by the trustee) asked the Court to grant an Order declaring that the trustee was not entitled to use the realizations of any of the bankrupt’s assets and property to pay the trustee’s fees and expenses, pending the claimant’s appeal and related court action.

In response, the trustee sought a retrospective and prospective charge on the estate assets under its administration to pay its fees and expenses. [ 23 ] Topolniski J held that, while generally a trustee cannot access trust funds to cover the costs incurred in administering an estate, she recognized two exceptions: • If a trustee can show that the work was necessary to preserve or otherwise benefit the trust asset; or • If the trustee can show that its work was required for resolution of the trust claim or to determine beneficiaries (at para 41). [ 24 ] Topolniski J noted, at para 42, “the first exception developed as a result of court’s exercise of inherent jurisdiction in ordinary trust cases... [and] has been exercised sparingly and generally in circumstances where the beneficiary would have had to hire someone else to do the work performed by the trustee.” With respect to the second exception, Topolniski J noted at para 42: “The second exception flows from the trustee in bankruptcy’s duty under the BIA to approve or disallow of claims.” [ 25 ] Neither exception identified by Topolniski J applies neatly to this situation, and indeed, the Trustee argues that the exceptions should apply analogously.

By this, I understand the Trustee to mean that the Court may use its inherent jurisdiction to grant the remedy sought.

[ 26 ] In Residential Warranty , Justice Topolniski ultimately granted a charge on the assets to the trustee. She found that a considerable part of the trustee’s work would have benefitted the alleged beneficiaries of the trust assets (presuming their ultimate success), since the beneficiaries claimed all assets under administration. [ 27 ] In affirming Topolniski J’s decision, Paperny JA held: There is inherent jurisdiction to permit trustee’s fees to be paid from property that is subject to undetermined trust claims in appropriate circumstances.

The case management judge recognized the power must be used sparingly and did not err in exercising jurisdiction in this case ( 2006 ABCA 293 at para 41 ). [ 28 ] The Trustee also relies on several tenets of Canadian bankruptcy law expressed in Residential Warranty . For example, at para 25, Topolniski J noted the: “fundamental tenet of BIA proceedings is that fairness should govern”. Further, at para 26: The BIA expressly preserves the Bankruptcy Court’s equitable and ancillary powers. Accordingly, inherent jurisdiction is maintained and available as an important but sparingly used tool.

There are two preconditions to the Court exercising its inherent jurisdiction: (1) the BIA must be silent on a point or not have dealt with a matter exhaustively; and (2) after balancing competing interests, the benefit of granting the relief must outweigh the relative prejudice to those affected by it.

Inherent jurisdiction is available to ensure fairness in the bankruptcy process and fulfillment of the substantive objectives of the BIA , including the proper administration and protection of the bankrupt’s estate. [ 29 ] Topolniski J further noted the importance and necessity of trustees in the bankruptcy process (at paras 36, 59), and stated, at para 67: Common sense dictates that trustees in bankruptcy should receive reasonable compensation when they are called on to exercise their judgment and to be real problem solvers in a situation such as the present one.

If it were otherwise, trustees would be inclined to shy away from problems and the list of persons willing to take on the role of trustee would dwindle, particularly in situations where there was no personal connection between the potential trustee and the beneficiary or the assets under administration. [ 30 ] Further the Trustee relies on Re Michie , 2020 BCSC 1611 , which followed Residential Warranty . In Michie , the British Columbia Supreme Court accepted the following propositions, at para 41:

a) The general rule is that the trustee does not have access to trust assets to fund its own work.

b) As an exception to the general rule, the court has jurisdiction to grant a trustee in bankruptcy a charge over assets administered by the trustee, even where they do not form part of the estate divisible among creditors, to secure payment of the trustee’s fees and reasonable disbursements.

c) Whether a charge should be granted and, if so, its extent is discretionary.

d) In exercising its discretion, the court may consider: i. Whether the trustee was required to address the ownership of the assets in the course of the administration of the estate; ii. Whether the trustee took the initiative or otherwise positively contributed to the resolution of an uncertain situation; iii. The work done by the trustee and the public interest in the orderly administration of bankrupt estates; iv.

The interests of the persons entitled to the assets in question and their actions; and v. the interests of justice. [ 31 ] In Michie , the Court ultimately granted the trustee a charge over funds in its possession to the extent necessary to permit recovery of 50% of its reasonable fees and disbursements. [ 32 ] In contrast to the Trustee, the Respondents take the position that the BIA is very clear and that the Trustee who incurred fees and expenses did so at its own peril. They say that the Trustee’s request is plainly contrary to the priority rights afforded secured creditors under the BIA .

The Respondents argue that since there is no ambiguity in the relevant sections of the BIA , there is no room for the Court to exercise its inherent jurisdiction. [ 33 ] The Respondents rely on two cases. In Re ASI Acoustical Supplies Inc , 2000 BCSC 1838 ( Re ASI ), the Court denied a trustee’s requested payment from amounts recovered from a fraudulent preference.

The Court found the amounts recovered were subject to a security interest and were, therefore, not available to the trustee to satisfy his expenses. [ 34 ] In Avery’s Trucking Inc (Receiver of) v Avery’s Trucking Inc (Trustee of) , 2013 NSSC 302 ( Avery’s Trucking ), the Court held that the trustee was not permitted to have the expenses it incurred in relation to secured assets reimbursed in priority to secured creditors. [ 35 ] The two cases cited by the Respondents fail to assist this Court with the determination of priority.

In Avery’s Trucking, the Bankrupt made an assignment in bankruptcy on May 1, 2013 (at para 1). Two secured creditors submitted proof of claims to the trustee (at para 2). Because the amounts of these claims exceeded the value of the assets, the trustee applied to have a priority over these two secured creditors (at para 4). The decision does not clearly indicate whether the trustee had knowledge of the claims before or after the bankruptcy. Further, this decision does not cite the leading and binding case in Alberta - Residential Warranty , although Residential Warranty preceded it by several years.

Therefore, I conclude that Avery’s Trucking does not assist this Court in these circumstances. [ 36 ] Similarly, in Re ASI , the bankrupt made an assignment in bankruptcy on December 28, 1994. The trustee incurred expenses

in administrating the assets; however, the trustee did not make any agreements with secured creditors regarding its fees. Unlike in the current case, the trustee in Re ASI was aware of secured creditors before its appointment.

This is the situation that is contemplated by the BIA ; therefore, it simply requires a straight application of the BIA . [ 37 ] The Respondents further argue that even if inherent jurisdiction may be used here, the relevant factors applied to these facts weigh against a priority charge for the Trustee, namely: • The Trustee was aware of Golfside’s litigation with Obcorp (which has been ongoing since 2012) in relation to the joint venture, before taking the assignment; • The Trustee knew, as of March 4, 2019, that Obcorp was claiming a large secured interest in the Lands; • In March 2021 Donald Oborowsky commenced foreclosure proceedings in this Court to realize his security against the Lands; • In June 2021, Graesser J found the Obcorp Lien to be a valid secured interest in the Lands; • Only after June 2021 did the Trustee seek a priority charge over the Lands (and sale proceeds), and for the first time suggested that it may disallow the Oborowsky Mortgage. [ 38 ] The Respondents argue that the Trustee should have known of the existence of a lien, due to the ongoing Hustle/Obcorp v Golfside Lawsuit, which began in April 2012.

The Respondents state that the Trustee ought to have made arrangements to protect itself before it incurred expenses, fees, and legal costs. [ 39 ] In the Third Report to the Court by the Trustee, at para 15(b), the Trustee notes the following: The Trustee was unaware at the time of its appointment that the quantum of the potential claims by Obcorp against the Lands, or that the lien subsequently registered by Obcorp... after the Trustee's appointment, would exceed the value of the Lands. [ 40 ] In the Hustle/Obcorp v Golfside Lawsuit, the Amended Amended Amended Amended Statement of Claim, filed on November 9, 2015, states, at para 16: In reliance upon the Joint Venture Agreement, Hustle and/or Obcorp expended in excess of $5,000,000.00 towards the development of the Lands , and has complied with all of Hustle and/or Obcorp’s obligations pursuant to the Joint Venture Agreement. [emphasis added] [ 41 ] This statement and other documents in the Hustle/Obcorp v Golfside Lawsuit do not clearly mention the existence of the Obcorp Lien.

More importantly, in Golfside Ventures Ltd (Re) , 2021 ABQB 427 , the very issue in the decision was whether “work performed by a joint venturer for the joint venture entitle the contractor/subcontractor/materialman/worker to claim a builders’ lien for that work if the work is the worker’s or contractor’s contribution to the joint venture” (at para 38). [ 42 ] All this to say, even the most prudent trustee would not have been alerted to the existence of the Obcorp Lien, based on the Amended Amended Amended Amended Statement of Claim.

The existence of the Obcorp Lien was an equivocal and contested issue that was decided in Golfside Ventures Ltd (Re) . Therefore, it would be unfair to find the Trustee “should have known” of the Obcorp Lien. [ 43 ] Moreover, the Trustee exercised necessary due diligence and protected its interests in relation to the secured creditors of which the Trustee had knowledge at the time of bankruptcy. The Trustee obtained a postponement from Metrocan to secure its fees and expenses against Golfside’s assets. [ 44 ] Once the Trustee learned about the Obcorp Lien, there was nothing the Trustee could do to protect itself.

Further, section 135(1) of the BIA obliges the Trustee to examine every proof of claim. The Trustee could not have avoided the accumulation of fees and expenses. [ 45 ] The Trustee notes the large amount of work that has already gone into administering the estate, as well as the additional steps the Trustee is still obligated to take in administering the estate.

As an example, the Trustee notes the necessary assessment of the quantum of the Obcorp Lien and amounts payable thereunder, which the Trustee anticipates will involve a review of the Joint Venture Agreement, questioning on affidavits, and Applications to the Court for advice and direction. [ 46 ] To determine whether the Court may use its inherent jurisdiction, the Court must determine, first, whether the BIA is silent on a point in relation to, or has not exhaustively dealt with, the matter of priorities between secured creditors and trustees.

If the Court finds that this matter is not exhaustively dealt with or there is some portion of the matter not dealt with, then it must balance the competing interests, and only grant the Application if the benefit of granting the relief will outweigh the relative prejudice to those affected by it. [ 47 ] I find that the BIA does not exhaustively deal with the matter of priorities between secured creditors and trustees. We know this because other cases, for example, Residential Warranty , have found exceptions to the usual rule.

Further, while it is true that generally trustees receive appointments and accrue fees and expenses at their peril, the BIA does not address the type of situation that arose here, namely a trustee who made inquiries about the state of the bankrupt’s finances before their appointment and then, after appointment, was alerted to an additional secured claim. This is a gap in the legislation; in other words, the BIA has not exhaustively dealt with the matter of priorities between secured creditors and trustees.

The interaction between the BIA and the Builders’ Lien Act creates a silent security interest – a lien – which may unfairly disadvantage the most prudent trustee, as this case demonstrates. This situation was not foreseen by the BIA , and thus, it is appropriate for this Court to exercise its inherent jurisdiction. [ 48 ] Since I have found the BIA does not exhaustively deal with the priorities, I must next balance the competing interests and, if the relief outweighs the relative prejudice to those affected, I may grant the Order.

[49] The following factors weigh in favour of granting the Order: • Trustees are fundamental parts of the bankruptcy system. Trustees assist the Court and the parties in determining the validity andpriority of trust claims. • Trustees ensure that only valid claimants obtain a share of a bankrupt’s property.

The purpose of trustees’ administrative powersgranted by the BIA is to administer the estate to satisfy creditor claims in an equitable way (Royal Bank of Canada v North AmericanLife Assurance Co, (SCC), [1996] 1 SCR 325 at para 45). • It is in the public interest for trustees to perform their duties and obligations in relation to the administration of bankruptcies. • Trustees are officers of the court. Trustees must examine each proof of claim and supporting materials to determine whether theclaims are valid.

Trustees are also required to respond to the challenges to validations and disallowances. • “The Act is silent about the trustee’s responsibilities on an appeal from its rejection of a claim.

However, s. 41(4) of the BIAprovides that an estate is deemed to have been fully administered only when ‘a trustee’s accounts have been approved by the inspectorsand taxed by the court and all objections, applications, oppositions, motions and appeals have been settled or disposed of and alldividends have been paid’.” (Residential Warranty at para 35) • “[The] Trustee is a necessary party to the Appeal, which it is to participate in as an officer of the court, presenting the relevantfacts in a dispassionate, non-adversarial manner, leaving the court to decide the matter.

The Trustee’s responsibility is to ensure that onlyvalid claims to the assets under administration are recognized.” (Residential Warranty at para 36) • Determining the validity and priority of claims has a real cost. Trustees are entitled to receive reasonable compensation for theirproblem solving and exercise of judgment. • There may be a chilling effect on trustees if this Order were not granted.

Trustees would not be able to trust that they would bereasonably compensated in a situation where a secured creditor’s claim arrived post-appointment. [50] Essentially, in this situation, it is difficult to say what else the Trustee could or ought to have done to protect its interests.While I accept that the Trustee could have brought this particular Application earlier, this only appears obvious with the benefit ofhindsight and Graesser J’s determination that the Obcorp Lien was valid and enforceable. IV.

Conclusion [51] In the circumstances of this particular case, I find that the Court can, and should exercise its inherent jurisdiction to grant theOrder. The relevant factors weigh in favour of the Trustee’s position. [52] The Trustee shall have a charge on Golfside’s assets as security for payment of the reasonable professional fees anddisbursements of the Trustee and its legal counsel in priority to the Obcorp Lien. Heard on the 31st day of August, 2022. Dated at the City of Edmonton, Alberta this 15th day of February, 2023. K.G. Nielsen J.C.Q.B.A. Appearances: Tom Gusa Dentons Canada LLP and Kentigern A.

Rowan, KC

Ogilvie LLP for the Applicant, BDO Canada Limited Justine Bell McLennan Ross LLP for the Respondents, Donald Oborowsky and Obcorp Holdings Inc.