2010 ONSC 2369, 2010 ONSC 2369

CITATION : I. Waxman & Sons Limited, 2010 ONSC 2369 COURT FILE NO.: 32-157239 DATE: 20100504 ONTARIO SUPERIOR COURT OF JUSTICE (IN BANKRUPTCY AND INSOLVENCY) IN THE MATTER OF THE BANKRUPTCY OF I. WAXMAN & SONS LIMITED, a corporation incorporated under the laws of the Province of Ontario, carrying on business in the City of Hamilton, in the Province of Ontario. COUNSEL: Alan Merskey and Christine Kilby , for Deloitte & Touche Inc., in its capacity as Trustee in Bankruptcy of the Estate of I. Waxman & Sons Limited Samuel M. Robinson , for Sheldon Kumer Pepall J.

REASONS FOR DECISION Introduction [ 1 ] The Trustee in Bankruptcy of I. Waxman & Sons Limited (“IWS”), Deloitte & Touche Inc., seek advice and directions as to whether it should withhold and cease distributions to IWS’s former General Manager, Sheldon Kumer, and whether Mr. Kumer must repay any dividend previously distributed. Mr. Kumer is the brother-in-law of the brothers Chester (now deceased) and Morris Waxman who for many years had been engaged in acrimonious litigation. Facts [ 2 ] Mr. Kumer was employed by IWS for 50 years from January 1, 1957 until March 26, 2007.

His employment was terminated when Deloitte & Touche Inc. was appointed Receiver of IWS. From March 27, 2007 until April 11, 2007, Mr. Kumer provided services as an independent contractor to the Receiver for which he was paid $11,634.62 plus a bonus of $3,000. [ 3 ] On March 30, 2007, Dynamic Metal Trading Inc. (“Dynamic”) was incorporated. Mr. Kumer is its President and Secretary and is identified as the company’s sole director. His wife is the sole shareholder. She provides bookkeeping services to the company. There are no other employees. [ 4 ] Mr.

Kumer stated that he had income from a couple of sources including a small pension plan that was in effect at IWS for many years, the Canada Pension Plan and a RIF. He testified that when he was terminated, he had to provide for himself in some way. He is in his 70s. Dynamic was formed for the purpose of having a business so as to earn income. No distributions have been made to his wife in her capacity as shareholder or at all. [ 5 ] Since April, 2007, Mr. Kumer has provided consulting and brokerage work for Dynamic for clients in the scrap metal industry including Waxman Industrial Services (“WIS”).

WIS was a competitor of IWS and was created and operated by relatives of Chester Waxman. The services provided by Dynamic were similar in nature to Mr. Kumer’s employment obligations at IWS. [ 6 ] Mr. Kumer has not been paid anything by Dynamic. Mr. Kumer states that he has not drawn a salary from Dynamic. A shareholder loan of $105,000 was provided to the company in March or April of 2007 in order to have liquidity for the scrap metal brokerage part of the business. He testified that $200,000 to $300,000 in working capital was needed for that purpose.

It is estimated that Dynamic’s gross revenues are $45,000 per month. The consulting activities at Dynamic are similar to Mr. Kumer’s employment responsibilities at IWS and that part of the business has few expenses. There are some expenses associated with the brokerage part of the business. Mr. Kumer and his wife’s business expenses are paid by the company. On his cross-examination, counsel for Mr. Kumer took under advisement the request to produce Dynamic’s income tax returns and financial statements but ultimately they were not produced. [ 7 ] On April 23, 2007, Mr.

Kumer wrote to Deloitte stating that as a former employee, he was now a creditor and submitted a claim “for severance pay based on common law notice” in the amount of $656,250. This was stated to represent 30 months’ wages. His annual compensation at IWS had been $262,500. [ 8 ] On September 4, 2007, IWS was declared bankrupt. Deloitte & Touche Inc. became the Trustee in Bankruptcy. Mr. Kumer’s claim was listed in IWS’s Statement of Affairs. On November 2, 2007, Deloitte disallowed Mr. Kumer’s claim except to the extent of his Employment Standards Act entitlement. This limited Mr.

Kumer’s claim to $173,250.11 and reflected a disallowance of $482,999.89. Mr. Kumer appealed the partial disallowance to court. Prior to the appeal being heard, the Trustee and Mr. Kumer settled. Counsel for the Trustee wrote confirming its agreement with Mr. Kumer’s counsel stating that “subject to whatever other issues there may be in respect of claims that are or can be made against the estate, the appropriate notice period for Mr. Sheldon Kumer is 24 months.” The parties had agreed on a quantum that reflected 24 months’ notice. [ 9 ] The Trustee paid a dividend of $162,555.23 to Mr.

Kumer but the second and third dividends have not been paid. The Trustee states that it has refused to make those payments as a result of Mr. Kumer’s non-disclosure of his new employment with

Dynamic which obviated his claim for lost wages (except for the statutory severance and termination amount of $173,250.11). Mr. Kumer states that after he provided Deloitte with his proof of claim, he occasionally spoke to two Deloitte representatives and he told them that he was doing some consulting and brokerage work for Dynamic. Mr. Kumer was not cross-examined on this evidence nor was it contradicted in the report filed by the Receiver. [ 10 ] Morris Waxman and Solid Waste Reclamation Inc. (“SWR”) are parties to litigation with Mr. Kumer.

In connection with that litigation, Morris and SWR received documentation that reflected revenues being paid to Dynamic by WIS starting in June, 2007. The documentation reflected payments from July, 2007 to November, 2008 to Dynamic in the amount of $8000 to $15,000 per month. Issue [ 11 ] The issue to be considered is whether Mr. Kumer is entitled to be paid by the IWS Estate. Positions of the Parties [ 12 ] The Trustee states that Mr. Kumer’s proof of claim omitted important information about the income being generated through Dynamic.

The Trustee submits that when a dismissed employee secures alternate employment following dismissal, the net amount of what the employee has earned in the other employment is deductible from his or her damages. Given the Dynamic revenues, the Trustee states that the losses claimed in Mr. Kumer’s claim were inaccurate and the information given to the Trustee by Mr. Kumer was of an insufficient quality. Typically, a Trustee in Bankruptcy may reconsider a claim that has been allowed and in the circumstances in this case, the Trustee states that Mr. Kumer’s claim should be revisited.

The Trustee submits that as a matter of principle, the Court should emphasize the need for accuracy and truthfulness in proofs of claim and indeed the Bankruptcy and Insolvency Act demonstrates an overriding interest in disallowing claims that are proven inaccurate. Mr. Kumer gave up nothing in the settlement with the Trustee as his damages were illusory [ 13 ] In contrast, Mr. Kumer submits that the parties agreed to a settlement through their respective counsel. The settlement did not provide for any reduction in Mr. Kumer’s entitlement if he earned subsequent employment.

The Trustee cannot now unilaterally import such a term into the settlement. Furthermore, the Trustee knew that Mr. Kumer was working and working for Dynamic. In addition, the proof of claim was true when it was filed as Mr. Kumer has not received any money from Dynamic. Mr. Kumer questions the motivation behind Morris Waxman’s insistence that Mr. Kumer’s settlement be reviewed. Morris Waxman is IWS’ largest creditor and is suing Mr. Kumer in an unrelated action. Mr.

Kumer observes that to his knowledge, there has been no review of settlements with other former IWS employees who obtained employment after the receivership order. Discussion [ 14 ] The BIA outlines a statutory regime for the filing of proofs of claim.

Section 124 states that every creditor shall prove his claim and a creditor who does not is not entitled to share in any distribution that may be made. A claim is to be proved by delivering to the Trustee a proof of claim in the prescribed form. It is to contain or refer to a statement of account showing the particulars of the claim and any counterclaim that the bankrupt may have to the knowledge of the creditor and shall specify the vouchers or other evidence, if any, by which it can be substantiated. [ 15 ]

Section 125 provides that where a creditor files a proof of claim containing any willfully false statements or willful misrepresentation, the court may disallow the claim, in whole or in part, as the court in its discretion may see fit. There is no allegation that any willfully false statement or willful misrepresentation was made in this case. [ 16 ]

Section 135 states that the Trustee shall examine every proof of claim and may require further evidence in support of the claim.

Section 121 states that a creditor who willfully and with intent to defraud makes any false claim or any proof, declaration or statement of account that is untrue in any material particular is guilty of an offence punishable on

summary conviction and is liable to a fine not exceeding $5,000 or to imprisonment for a term not exceeding one year or to both. Again, there is no reliance on this provision. [ 17 ] A Trustee in Bankruptcy may reconsider a claim that has already been allowed. As stated in Royal Bank of Canada (c.o.b. Royal Bank Financial Group) v. Drummie (Trustee of) [1] : The Act does not make the determination of a provable claim by the Trustee final and conclusive as it does for a disallowance. Had the legislators wished to limit the competence of the Trustee to review a decision under subsection (1.1) of

section 135 of the Act, when further evidence is received, they surely would have done so on terms as clearly as those enacted in subsection (4). [ 18 ] A creditor’s proof of claim should be truthful and accurate and as a matter of principle, full disclosure should be made by the claimant. [ 19 ] In this case, Mr. Kumer had not and has not received any money from Dynamic. The evidence was that the brokerage side of Dynamic’s business required working capital. Furthermore, the Trustee knew that Mr. Kumer was working for Dynamic and knew that he was providing consulting services.

In these circumstances, it seems to me that once the Trustee and Mr. Kumer’s counsel entered into a settlement, the Trustee should not be permitted to resile from that settlement. In addition, the inclusion of a term in a settlement providing for a reduction or claw back in the event of receipt of other employment compensation is not novel but this settlement contained no such provision. [ 20 ] In my view, the motion of the Trustee should be dismissed insofar as it seeks reimbursement of the dividend paid to Mr. Kumer.

The Trustee should pay him any outstanding and future dividends which may be payable in accordance with the terms of the settlement.

Pepall J. Released: May 4, 2010 CITATION : I. Waxman & Sons Limited, 2010 ONSC 2369 COURT FILE NO.: 32-157239 DATE: 20100504 ONTARIO SUPERIOR COURT OF JUSTICE (IN BANKRUPTCY AND INSOLVENCY) IN THE MATTER OF THE BANKRUPTCY OF I. WAXMAN & SONS LIMITED, a corporation incorporated under the laws of the Province of Ontario, carrying on business in the City of Hamilton, in the Province of Ontario. REASONS FOR DECISION Pepall J. Released: May 4, 2010