Gaum v. Grant Thornton Limited, 2023 NSCA 5

Nova Scotia Court of Appeal Citation: Gaum v. Grant Thornton Limited , 2023 NSCA 5 Date: 20230131 Docket: CA 511776 Registry: Halifax Between: Errol Franklyn Gaum Appellant v. Grant Thornton Limited Respondent and Issam Kadray Intervenor Judge: The Honourable Justice David P. S. Farrar Appeal Heard: November 8, 2022, in Halifax, Nova Scotia Subject: bankruptcy and insolvency, proposal in bankruptcy, ability of trustee or creditors to make application after the meeting of creditors to deem the Proposal to have been refused, ss. 34(1) , 50(12) , 52(2) (

d) of the BIA

Summary: The appellant, Dr. Gaum, made a Proposal in bankruptcy to his creditors. In order to be successful, the Proposal required a majority in number representing two-thirds in dollar value of the creditors to vote in favour. The Trustee approved the intervenor Issam Kadray as a creditor and assigned a nominal amount of $1.00 to the value of his claim. This allowed Mr. Kadray to vote on the Proposal. At the meeting of creditors, the Proposal was defeated because two creditors voted for and two voted against the Proposal.

The parties voting for the Proposal represented two-thirds of the value of the creditors’ claims. Dr. Gaum appealed the Trustees’ decision to acknowledge Mr. Kadray as a creditor, asking that his vote be disallowed. The end result would be that Dr. Gaum would have received a majority of the creditors representing two-thirds of the value of their claims. After the meeting of creditors and before Dr. Gaum’s Appeal could be heard, one of the creditors informed the court that it no longer supported the Proposal.

As a result of the change in decision of the creditor, the Trustee, pursuant to s. 34 of the BIA , made a motion for directions before the Supreme Court. It asked the court whether a creditor could make an application pursuant to s. 50(12) of the BIA to have the court declare a Proposal to have been refused after the meeting of creditors. The plain reading of s. 50(12) requires the application to take place before the meeting of creditors. If so, should the court declare the Proposal to have been refused by the creditors?

The motion judge found that there was a gap in s. 50(12) of the BIA and that legislative gap should be filled to allow for an application by a trustee or a creditor to request the court to deem the Proposal to have been refused by the creditors failing to meet the two requirements as set out in s. 54(2)(

d) after the meeting of creditors. The motion judge then went on to dismiss Dr. Gaum’s Appeal of the Trustee’s decision finding that whether the Appeal was successful ceased to be of any significance as the Proposal would never pass as a result of the change in position of one of the creditors. Dr. Gaum appealed the motion judge’s decision. Issues: Did the motion judge err in finding there was a legislative gap in s. 50(12) of the BIA ? Result: Held. The motion judge erred in finding that there was a legislative gap in the BIA . Dr.

Gaum’s Appeal should have been heard to determine what impact it would have on the outcome of the meeting of creditors. A creditor who changes its mind either for or against the Proposal after the meeting of creditors can voice its opinion at the time of court approval, which is required under the BIA after the Proposal is approved at the meeting of creditors. There is no ambiguity in the BIA . Any application by a creditor or the Trustee to have or deem the Proposal to be refused must take place before the meeting of creditors. The appeal was allowed without costs to any party.

This information sheet does not form part of the court’s judgment. Quotes must be from the judgment, not this cover sheet. The full court judgment consists of 48 paragraphs.

Nova Scotia Court of Appeal Citation: Gaum v. Grant Thornton Limited , 2023 NSCA 5 Date: 20230131 Docket: CA 511776 Registry: Halifax Between: Errol Franklyn Gaum Appellant v. Grant Thornton Limited Respondent and Issam Kadray Intervenor Judges: Farrar, Bryson and Bourgeois JJ.A.

Appeal Heard: November 8, 2022, in Halifax, Nova Scotia Held: Appeal allowed without costs to any party, per reasons for judgment of Farrar J.A.; Bryson and Bourgeois JJ.A. concurring Counsel: John O’Neill, for the appellant Tim Hill, K.C., for the respondent Robert MacKeigan, K.C. and Sara Scott, for the intervenor Reasons for judgment: [ 1 ] On May 2, 2018, the appellant (“Dr. Gaum”) filed a Notice of Intention to Make a Proposal under the Bankruptcy and Insolvency Act , R.S.C. 1985, c. B-3 (“the BIA ”). [ 2 ] On July 16, 2018, Dr. Gaum filed a Proposal pursuant to

Part III, Division I of the BIA . The respondent Grant Thornton Limited was the Trustee in bankruptcy (“Trustee”). It recommended the unsecured creditors vote in favour of the Proposal. [ 3 ] For a Proposal to pass it must be accepted by a majority in number representing two-thirds (⅔) in dollar value of the unsecured creditors who vote pursuant to s. 54(2) (

d) of the BIA . [ 4 ] The Trustee approved claims from the Canada Revenue Agency (“CRA”), Canadian Imperial Bank of Commerce (“CIBC”), and Zion II Inc (“Zion”) in the respective amounts of $708,491.97, $23,886.33, and $2,091,801.18 respectively. [ 5 ] The intervenor Issam Kadray claimed he was owed $406,971.37. Dr. Gaum opposed the admission of Mr. Kadray’s claim for the purposes of the Proposal. [ 6 ] The Trustee allowed Mr. Kadray’s claim in the amount of $1.00 which allowed him to vote on the Proposal. [ 7 ] On May 7, 2019, a meeting of creditors was held.

The result of the vote was as follows: CRA Opposed Issam Kadray Opposed CIBC In Favour Zion In Favour [ 8 ] The Proposal was deemed to be rejected because it had not been approved by a majority of creditors in number. It had received approval of two-thirds of the value of the creditors’ claims.

[ 9 ] On June 4, 2019, Dr. Gaum appealed the Trustee’s decision to allow Mr. Kadray’s claim in the amount of $1.00 to the Nova Scotia Supreme Court (“Appeal”). He requested an Order declaring that the claim was not a duly proved claim in bankruptcy and should not have been admitted for voting purposes. Dr. Gaum did not challenge the Trustee’s allowance of the proofs of claim put forward by Zion, CRA, or CIBC. [ 10 ] There is no dispute between the parties to this appeal that Dr. Gaum had a right to appeal the Trustee’s decision and the Appeal had been filed in time. [ 11 ] Dr.

Gaum requested his Appeal be allowed and his deemed assignment into bankruptcy under s. 57 of the BIA be set aside upon recalculation of the creditors’ votes. The result would be the Proposal would be accepted. [ 12 ] On August 28, 2020, McDougall J. heard the issue of whether the Appeal should be heard as a true appeal, hearing de novo , or in a hybrid form. The court determined that the Appeal would be heard in a hybrid form ( Gaum v.

Grant Thornton Limited , 2020 NSSC 317 , at ¶24-27). [ 13 ] On April 21, 2021, Zion’s representative Jonica Stingl advised the court, in a conference call, that Zion no longer supported the Proposal. On June 2, 2021, she filed an affidavit confirming Zion no longer supported the Proposal. [ 14 ]

Section 34 of the BIA allows a trustee to apply to the courts for directions relating to the administration of the estate of a bankrupt: Trustee may apply to court for directions 34

(1) A trustee may apply to the court for directions in relation to any matter affecting the administration of the estate of a bankrupt and the court shall give in writing such directions, if any, as to it appear proper in the circumstances. […] [ 15 ] In light of Zion’s change of position, the Trustee moved for an order for directions pursuant to s. 34 asking the following: (

a) On the facts of this proceeding, can a creditor make application pursuant to section 50(12) of the Bankruptcy and Insolvency Act to have the Court declare the Proposal of Errol Gaum to be deemed to have been refused by the creditors; and, if so (

b) Should the Court declare the Proposal of Errol Gaum to be deemed to have been refused by the creditors; [ 16 ] Section 50(12) provides that prior to the meeting of creditors, a trustee, receiver, or creditor may make an application to declare a Proposal to have been refused: Court may declare proposal as deemed refused by creditors

(12) The court may, on application by the trustee, the interim receiver, if any, appointed under

section 47.1 or a creditor, at any time before the meeting of creditors, declare that the proposal is deemed to have been refused by the creditors if the court is satisfied that (

a) the debtor has not acted, or is not acting, in good faith and with due diligence; (

b) the proposal will not likely be accepted by the creditors; or (

c) the creditors as a whole would be materially prejudiced if the application under this subsection is rejected. [ 17 ] Section 50(12) does not allow for an application by a trustee, receiver or creditor after the meeting of creditors. [ 18 ] The motion for directions was heard by McDougall J. on July 7, 2021.

In a written decision dated December 7, 2021 the motion judge found there was a legislative gap in s. 50(12) of the BIA and the gap should be filled to allow a trustee, receiver, or creditor, after the meeting of creditors, to apply to the court for an order deeming the proposal to have been refused by the creditors ( 2021 NSSC 339 , at ¶30 (“motion decision”)). [ 19 ] He went further and decided as a result of his determination that such an application could be made, Dr. Gaum’s Appeal of the Trustee’s decision to allow Mr. Kadray’s claim should be dismissed.

I will discuss his reasoning in more detail later. [ 20 ] For the reasons that follow, I would allow the appeal without costs to any party. Issues [ 21 ] The issues as set out in Dr. Gaum’s factum are as follows: (

a) The learned judge erred in law by finding that a gap exists in s. 50(12) of the Bankruptcy and Insolvency Act that permits an application by the Trustee or a creditor to request the court to deem a proposal to have been refused by the creditors for failing to meet the requirements set out in s. 54(2)(

d) of the Act . (

b) The learned judge erred in law by finding that a court may on application by the Trustee or a creditor, at any time after the meeting of creditors, refuse to approve a proposal without complying with the requirements set out in ss. 58 and 59 of the Act . (

c) The learned judge erred in law by finding that a creditor can change their vote after the meeting of creditors. (

d) The learned judge erred in law by predetermining it would be virtually impossible that a court would approve the proposal after a majority creditor has indicated that it no longer accepts the proposal. [1]

[ 22 ] I would reduce the grounds of appeal to one as follows: Did the motion judge err in finding there was a legislative gap in s. 50(12) of the BIA ? [ 23 ] The remaining issues cease to be of any significance or relevance once that issue is determined. Standard of Review [ 24 ] The motion judge’s decision involves the

interpretation of the BIA . It is a question of law subject to review on a standard of correctness. Analysis Did the motion judge err in finding there was a legislative gap in s. 50(12) of the BIA ? [ 25 ] This matter came before the motion judge in an unusual way. As noted in the background, Dr. Gaum’s Proposal to creditors was rejected because he failed to achieve the required majority of creditors representing two-thirds in value of the debt required by s. 54(2) (

d) of the BIA . However, the Trustee had approved Mr. Kadray as a nominal creditor with a nominal sum of $1.00 which allowed him to vote. [ 26 ] If the Trustee had not approved Mr. Kadray’s claim, the Proposal would have passed. [ 27 ] Dr. Gaum appealed the Trustee’s decision approving Mr.

Kadray as a voting creditor pursuant to s. 37 of the BIA which provides: Appeal to court against trustee 37 Where the bankrupt or any of the creditors or any other person is aggrieved by any act or decision of the trustee, he may apply to the court and the court may confirm, reverse or modify the act or decision complained of and make such order in the premises as it thinks just. [ 28 ] An issue arose about how Dr.

Gaum’s Appeal of the Trustee’s decision should proceed – whether as an appeal de novo or a hybrid appeal. [ 29 ] In a decision dated November 10, 2020 ( 2020 NSSC 317 ), Justice McDougall held that it would proceed as a hybrid appeal and that Dr. Gaum and Mr. Kadray, and if needed the Trustee, would be permitted to file additional affidavit evidence. [ 30 ] Dr. Gaum’s Appeal did not proceed as directed by Justice McDougall because before it could be heard Zion indicated it no longer supported the Proposal (motion decision, at ¶3).

This led to the Trustee’s application for directions and the motion judge’s decision from which Dr. Gaum appeals. [ 31 ] The motion judge’s reasoning is found at paras. 21-30 of the motion decision and may be summarized as follows: • Dr.

Gaum, to avoid bankruptcy, would have to win his Appeal and meet the two conditions in s. 54(2) (d), i.e. majority in number and two-thirds of the value of the creditors (motion decision, at ¶21); • Zion had indicated its intention to vote against the Proposal (motion decision, at ¶23); • The Trustee in its brief provided a path for the court to interpret s. 50(12) to “fill” the gap in the BIA (motion decision, at ¶24); • The BIA did not address the issue that was before him, i.e. a creditor changing its mind after the meeting of creditors to vote against a Proposal (motion decision, at ¶28); • In light of Zion’s change of heart, it would be virtually impossible for Dr.

Gaum to show a court why the Proposal should be approved. It would be a waste of time to allow the Appeal to continue given the inevitable outcome (motion decision, at ¶28-29); • There is a legislative gap in the BIA which should be filled to allow for an application by a trustee or a creditor to request the court to deem the Proposal to have been refused by the creditors for failing to meet the two requirements set out in s. 54(2) (

d) after the meeting of creditors (motion decision, at ¶30). [ 32 ] The motion judge then dismissed Dr. Gaum’s Appeal (¶31). This despite the fact there was no application by the Trustee or a creditor to deem the Proposal to have been refused by the creditors. [ 33 ] In dismissing Dr. Gaum’s Appeal, the motion judge made a number of assumptions: • Zion would continue to be opposed to the Proposal; • Zion at some point in time would make an application to deem the Proposal to be defeated; • The Proposal would be defeated. The end result of this would be that Dr.

Gaum would be forced into bankruptcy and his Appeal of the Trustee’s decision would be moot. [ 34 ] With respect, there is no gap in the legislation and the authorities which the motion judge cites do not support the conclusion he reached.

[35] For ease of reference, I will repeat s. 50(12) of the BIA: Court may declare proposal as deemed refused by creditors

(12) The court may, on application by the trustee, the interim receiver, if any, appointed under

section 47.1 or a creditor, at any timebefore the meeting of creditors, declare that the proposal is deemed to have been refused by the creditors if the court is satisfied that (

a) the debtor has not acted, or is not acting, in good faith and with due diligence; (

b) the proposal will not likely be accepted by the creditors; or (

c) the creditors as a whole would be materially prejudiced if the application under this subsection is rejected. [36] Section 50(12) is limited in time to “any time before the meeting of creditors”. The Application for deemed refusal must be putbefore the court before the meeting of creditors occurs. [37] The wording permits no

interpretation other than the requirement that the application to the court must be made prior to themeeting of creditors. [38] The Trustee did not move to have the court declare Dr. Gaum’s Proposal to have been refused prior to the May 7, 2019,meeting of creditors. Similarly, neither Zion, nor any other creditor, moved to have the court declare Dr. Gaum’s Proposal to be refusedprior to the meeting. Not surprisingly, since both the Trustee and Zion supported the Proposal. [39] Had Dr. Gaum’s Proposal been accepted, the Trustee would have then filed a Report and applied to the court within five daysfor approval of the Proposal.

Section 58 provides: On acceptance of a proposal by the creditors, the trustee shall (

a) within five days after the acceptance, apply to the court for an appointment for a hearing of the application for the court’sapproval of the proposal; (

b) send a notice of the hearing of the application, in the prescribed manner and at least fifteen days before the date of the hearing, tothe debtor, to every creditor who has proved a claim, whether secured or unsecured, to the person making the proposal and to the officialreceiver; (

c) forward a copy of the report referred to in paragraph (

d) to the official receiver at least ten days before the date of the hearing;and (

d) at least two days before the date of the hearing, file with the court, in the prescribed form, a report on the proposal. [40]

Section 59 provides what factors the court will take into consideration before approving a Proposal: 59

(1) The court shall, before approving the proposal, hear a report of the trustee in the prescribed form respecting the terms thereof andthe conduct of the debtor, and, in addition, shall hear the trustee, the debtor, the person making the proposal, any opposing, objecting,or dissenting creditor and such further evidence as the court may require.

(2) Where the court is of the opinion that the terms of the proposal are not reasonable or are not calculated to benefit the general bodyof creditors, the court shall refuse to approve the proposal, and the court may refuse to approve the proposal whenever it is establishedthat the debtor has committed any one of the offences mentioned in sections 198 to 200.” [Emphasis added.] [41] There was no impediment to Zion changing its position between the time of the creditor’s meeting and the application for courtapproval.

It would be open to it to make its position known at the application for court approval, and it would be a factor for the court toconsider. That is exactly what occurred in Eagle Mining Ltd. (Re), (ON SC), 42 O.R. (3d) 571, a case cited by themotion judge in his reasons: [22] It is clear from the case of Eagle Mining Ltd., Re (ON SC), 1999 Carswell Ont 1291, [1999] O.J. No. 5731,42 O.R. (3d) 571, 9 C.B.R. (4th) 34 that a creditor can change its position from the one taken at a meeting of creditors prior to theapplication in court.

At para. 8 of the Eagle decision, it is stated: TD Bank is not bound by its approval given at the November 20 meeting. In my view, even if there had been no change incircumstances, there is no impediment to a creditor taking different positions. If one who favours a proposal at the creditors meeting isestopped from opposing approval by the Court, then one would have to say that one who opposes at the creditors hearing would not beallowed to favour approval by the Court.

As the Court has no obligation to form an opinion whether the terms of the proposal arereasonable and calculated to benefit the general body of creditors, the Court is bound to hear and evaluate the concerns of interestedcreditors. In doing so the Court will also consider any other positions taken by a creditor at another time. [Emphasis added.] [42] However, the court is not bound by the change in position of Zion. The court’s determination is whether the Proposal is notreasonable or is not calculated to benefit the general body of creditors. [43] There is no gap in the legislation.

The process is quite straightforward:

• Prior to the meeting of creditors, the trustee, receiver, or any creditor may make an application to declare that the Proposal is deemed to have been refused if it is not likely to be accepted by the creditors.

If successful, it is the end of the matter and there is a deemed assignment into bankruptcy; • If there is no such application or the application is unsuccessful, the Proposal goes to a meeting of creditors, there is a vote, and if the creditors, a majority in number representing two-thirds of the dollar value of the creditors, vote in favour of the Proposal, the trustee applies to the court seeking “approval” of the Proposal. • If the creditors vote against the Proposal, there is a deemed bankruptcy. • If a creditor changes their mind between the time of the vote and the time of the application for court approval, either for or against the Proposal, it may make its position known to the court at that stage. • The court then decides whether to approve the Proposal.

If it does not approve it, there is a deemed assignment into bankruptcy. If it does, then the trustee implements the Proposal. [ 44 ] The intervening circumstance in this case is that Dr. Gaum appealed the decision of the Trustee to approve Mr. Kadray as a voting creditor which delayed the deemed assignment into bankruptcy. The motion judge assumed in these circumstances, should Dr.

Gaum’s Appeal be successful, that the court would accept Zion’s representations and determine that the Proposal was not reasonable or not in the best interests of the creditors if the Proposal went to the court for approval. [ 45 ] Dr.

Gaum had a right to have his Appeal heard and decided to see what impact it would have on the creditors’ vote and any subsequent proceeding. [ 46 ] The motion judge committed the following errors: • Determining there was a legislative gap in s. 50 of the BIA ; • Even if there was a legislative gap (which there was not), no creditor or the Trustee had made an application to the court to deem the Proposal to be refused; • In finding it would be virtually impossible for a court to approve the Proposal after a majority creditor has indicated it no longer supports the Proposal.

As indicated earlier, that is an issue for a court to determine on the application of the Trustee for approval. • The motion judge did not err in finding that a creditor can change its mind after the vote at the meeting of creditors, however, he erred in the determination of the impact of that change. [ 47 ] A trustee or a creditor may not, at any time after the meeting of the creditors where a Proposal has been approved, make an application to have the Proposal to be deemed to be refused by the creditors because a creditor has changed its mind. The BIA simply does not allow that to occur.

The motion judge was in error in so finding. Conclusion [ 48 ] I would allow the appeal. However, in these circumstances I would not award costs to any party. Farrar J.A. Concurred in: Bryson J.A. Bourgeois J.A.