Cox (Re)

2007 BCSC 1665 Cox (Re) IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Cox (Re), 2007 BCSC 1665 Date: 20071119 Docket: 062789 Registry: Victoria In Bankruptcy In the Matter of the Proposal of James Henry Cox Before: The Honourable Mr. Justice Cole Reasons for Judgment Counsel for the Debtor Daniel D. Nugent Counsel for The Department of Justice Neva R. Beckie Counsel for the Trustee, Campbell Saunders Ltd. Heather Ferris Counsel for Forest & Marine Financial Limited Partnership Alan H. Brown Date and Place of Trial/Hearing: November 6, 2007 Vancouver, B.C. [1] James Henry Cox [the Debtor] applies for an order and declaration that: 1. Canada Revenue Agency [CRA] is bound by the terms of a proposal made by the Debtor to his creditors dated June 23, 2006 [the Proposal]; 2. as a result of CRA being bound by the terms of the Proposal, CRA be directed to forthwith and immediately discharge a judgment in its favour against the Debtor registered in the Land Title Office on December 13, 2005 under charge number EX158690 from title to certain property more particularly known and described as: (i) Parcel Identifier 025-655-281 Lot A, Section 28, Township 6, Rupert District, Plan VIP75262 (the "Property"); 3. the Registrar of Land Titles be directed to amend the Register of Land Titles accordingly, on production of a certified copy of the order or certified copies of the order sought herein; 4. directions with respect to any notice or publication that may be required by the court in accordance with the Property Law Act, R.S.B.C. 1996, c. 377; 5. CRA be directed to forthwith release and discharge any security filings made against the debtor at the British Columbia Personal Property Registry; and 6. costs and increased costs. [2] The CRA applies for the following orders: 1. the Proposal of the Debtor be annulled; or in the alternative, 2. leave be granted to CRA to file the amended proof of claim dated May 24, 2007; and 3. the CRA, as a secured creditor, is not bound by paragraph 14 of the Proposal of the Debtor. [3] Campbell, Saunders Ltd. [the Trustee] in the Proposal of the Debtor and Forest & Marine Financial Limited Partnership, a creditor in the bankruptcy proceedings, support the application of the Debtor. Background [4] On June 23, 2006, the Debtor made a proposal to his creditors and at that time, CRA was a creditor in relation to unpaid personal taxes of the Debtor. Pursuant to the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp) the CRA obtained a certificate in the Federal Court in the amount of $92,277.04 with respect to a portion of the Debtor's unpaid income tax liability. [5] On December 13, 2005, the CRA registered the judgment against the 50% interest in land owned by the Debtor. [6] The terms of the Proposal make it clear that it was made solely to the unsecured creditors of the Debtor. [7] Paragraph 14 of the Proposal stated: THAT it is a condition of this Proposal that during the term of this Proposal Her Majesty the Queen in Right of Canada shall take no action to enforce any security interest arising from the Crown charge filed at the British Columbia Personal Property Registry pursuant to the Income Tax Act of Canada or at any Land Title Office and shall discharge such charge upon Issuance of the Certificate of Full Performance of this Proposal. [8] The Proposal required that the Debtor make the following payments to the Trustee, for the Trustee's fee and for the benefit of the unsecured creditors: i) the sum of $1,000 for the Trustee's fee, ii) $49,500 in 20 consecutive monthly instalments, and iii) payment of the funds available after taxes from his R.R.S.P. which amounted to approximately $98,000 [9] CRA filed a proof of claim in the Proposal as an unsecured creditor and used its claim as an unsecured creditor to vote against the Proposal. [10] At the meeting of creditors the Trustee reported that the Debtor had no equity in the property, that the property was appraised by an independent appraiser who estimated that its fair market value was approximately $475,000, and that there was, outstanding, a first mortgage in the amount of $502,672.46. There was also a second mortgage held by Forest & Marine Financial Limited Partnership but that was to be discharged because it had been paid out by the proceeds when the property was financed through the outstanding mortgage. In addition, CRA had a registered judgment against the Debtor's one-half interest in the property. [11] The Proposal was approved by the creditors and subsequently received court approval. On August 4, 2006, the Debtor completed his requirements under the Proposal. He secured arm's length third party financing against the property, and the mortgage was guaranteed by a woman who is his present girlfriend. This new mortgage allowed him to make a lump sum payment of $47,025 to the Trustee and to use $17,556.36 for his own purposes. [12] On February 7, 2007, CRA received a letter requesting a payout on their judgment from a law firm and, at that point, began to "wonder about the equity in the property". [13] On February 19, 2007, CRA received a Certificate of Full Performance from the Trustee, and correspondence asking CRA to discharge the judgment on the basis of paragraph 14 of the Proposal. [14] CRA took the position that paragraph 14 of the Proposal did not apply to them. [15] Subsequently, CRA learned that on December 6, 2006, the Debtor had become the full owner of the property when his former wife transferred her half-interest in the property to him, pursuant to a separation agreement. [16] It was further ascertained that, on February 15, 2007, a new mortgage was registered against the property for the amount of $80,000. [17] On May 24, 2007, CRA filed an amended proof of claim that indicated CRA held assets of the Debtor valued at $87,028.81 as security, being the judgment amount outstanding. [18] The Trustee has approximately $118,000 to distribute to the creditors under the terms of the Proposal but is unable to do so until the issue with CRA is resolved. [19] The Debtor, the Trustee, and Forest & Marine Financial Limited Partnership say there is real and substantial prejudice to the other creditors who were unsecured and voted in good faith in favour of the Proposal as they had been deprived of their dividends for over 8 months. The Debtor faces prejudice because he has already incurred further debt and has collapsed his R.R.S.P.s to make payments to his creditors. The Debtor's legal counsel, who acted in connection with the mortgage financing to pay out the amounts owed under the Proposal, is in breach of an undertaking to the lender who advanced the net mortgage proceeds to secure the removal of the CRA judgment from title. [20] The Debtor argues that if CRA is successful it would undermine the very basis upon which debtors seek to reorganize their affairs by putting forward proposals to their creditors rather than simply assigning themselves into bankruptcy. Issue 1: the CRA's Application to File an Amended Proof of Claim [21] Section 4.1 of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 [BIA] provides that: This Act is binding on Her Majesty in right of Canada or a province. Section 54(2)(d) states: (d) the proposal shall be deemed to be accepted by the creditors if, and only if, all classes of unsecured creditors vote for the acceptance of the proposal by a majority in number and two thirds in value of the unsecured creditors of each class present, personally or by proxy, at the meeting and voting on the resolution. Section 62(2) states: (2) A proposal accepted by the creditors and approved by the court is binding on creditors in respect of (a) all unsecured claims, and (b) ... [22] Section 241(1) of the Land Title Act, R.S.B.C. 1996, c. 250 states: (1) If a registered charge has been satisfied, surrendered, released or discharged in whole or in part, the registrar must, on application in the form approved by the director and on satisfactory proof, cancel the registration of the charge in whole or in part. [23] In Employer's Liability Assurance Corp. v. Ideal Petroleum (1959) Ltd., [1978] 1 S.C.R. 230, the court said at 239: The proposal is a contract between the debtor and his creditors. When it is made in accordance with certain formalities prescribed in the Act this contract, which binds all the creditors, even the dissenting minority, is not an act of bankruptcy, and the situation which results from it is not a situation of bankruptcy. [24] CRA asks for leave pursuant to section 132 of the BIA to file an amended proof of claim. [25] The CRA originally filed as an unsecured creditor, they say, based on the evaluation of the property that was relied upon and provided by the Trustee. This valuation clearly showed that there was not sufficient equity to satisfy the face value of the first mortgage. [26] Section 132(1) of the BIA states: (1) Where the trustee has not elected to acquire the security as provided in this Act, a creditor may at any time amend the valuation and proof on showing to the satisfaction of the trustee or the court that the valuation and proof were made in good faith on a mistaken estimate or that the security has diminished or increased in value since its previous valuation. [27] The CRA filed an amended proof of claim on May 24, 2007, and the Trustee did not recognize the validity of that claim. CRA argues that based on the fact that a new lender provided a mortgage on February 15, 2007, in the amount of $80,000, they say that is clear evidence that the property had obviously increased in value or that the initial valuation was mistaken. I disagree. There is no evidence whatsoever that the property had increased in value or that the initial valuation was mistaken. If, in fact, either of those 2 factors were the basis for the CRA's decision, they should have obtained an appraisal. [28] What they have done, in fact, is to assume that the value of the property has increased or that the original value was inaccurate based purely on the $80,000 mortgage that was placed on the property. In doing so, the CRA fails to consider that the mortgage was guaranteed by the Debtor's current girlfriend and that the mortgage has extremely high interest rates and upfront costs. [29] The CRA was well aware of what was going on in respect to the Proposal as they had a representative as an inspector for a period of time. They chose to stand idly by with full knowledge of what was going on and, after the Proposal was approved by the creditors, to do nothing. The Debtor complied with the terms and conditions of the court-approved Proposal and I am satisfied CRA cannot be allowed to amend its proof of claim. There is no credible evidence that the property has increased in value or that the initial valuation was a mistake. Issue 2: The Effect of S. 14 of the Proposal on CRA [30] The CRA takes the position that they are not bound by the Proposal. [31] The CRA argues that despite the fact that the Proposal was approved by a majority of the unsecured creditors the CRA's secured claim is not compromised by the Proposal. They refer to section 62(2) of the BIA which states: (2) A proposal accepted by the creditors and approved by the court is binding on creditors in respect of (a) all unsecured claims, and (b) the secured claims in respect of which the proposal was made and that were in classes in which the secured creditors voted for the acceptance of the proposal by a majority in number and two thirds in value of the secured creditors present, personally or by proxy, at the meeting and voting on the resolution to accept the proposal, [32] In 561861 Ontario Ltd. v. 1085043 Ontario Inc. (1999), 15 C.B.R. (4th) 146 (Ont. Gen. Div.), a proposal made by a debtor provided that professional fees and legal fees were to be paid in priority to construction lien claims who were secured. The lien claimants voted to reject the proposal which was approved by the unsecured creditors. In the circumstances it was held that the lien holders had priority over the claim for fees, notwithstanding the wording of the proposal otherwise. [33] The CRA argues, therefore, that paragraph 14 of the Proposal cannot bind CRA. [34] In my view, 561861 Ontario Ltd. quoted above is not on point, they were not dealing with creditors that had secured and unsecured claims at the same time and in any event, they did not have a clause, like paragraph 14, in the Proposal that was confirmed by the court. [35] I am of the view that the court-approved Proposal stands until it is appealed. As no appeal has been filed, paragraph 14 of the Proposal binds the CRA. Issue 3: Annuling the Proposal [36] In the alternative, CRA argues that the Proposal should be annulled, they did not really press that argument based on section 63(1) of the BIA which reads: (1) Where default is made in the performance of any provision in a proposal, or where it appears to the court that the proposal cannot continue without injustice or undue delay or that the approval of the court was obtained by fraud, the court may, on application thereto, with such notice as the court may direct to the debtor, and, if applicable to the trustee and to the creditors, annul the proposal. [37] The CRA argues that to allow the Proposal to continue would result in the injustice that the CRA, as a secured creditor, would be compelled to remove their security with no consideration. [38] I find no merit in this argument. Disposition [39] I dismiss CRA's application. In my view there is no injustice or undue delay. The only undue delay is with the CRA who sat on their hands since the Proposal was approved, did not object to the court order, failed to appeal the court order, and have now raised the issue that there is equity in the property based on nothing more than suspicion. [40] The applicants are entitled to their order as set out in their notice of motion, however I do not order special costs, but only costs on Scale B. The Honourable Mr. Justice F. W. Cole