Meridian Construction Inc. (Re)

Meridian Construction Inc. (Re) Court Supreme Court Date 2006-01-16 Citation 2006 NSSC 17 Docket SN251566 Judge/Registrar/Adjudicator Edwards, Frank C. (Honourable Justice) Document Type Decision Relations Library Sheet - Meridian Construction Inc. (Re) - 2006 NSSC 17 - 2006-01-16 - Library Sheet Decision Content IN THE SUPREME COURT OF NOVA SCOTIA Citation: Meridian Construction Inc. (Re), 2006 NSSC 17 Date: 20060116 Docket: SN 251566 Registry: Sydney Between: IN THE MATTER OF THE BANKRUPTCY OF MERIDIAN CONSTRUCTION Inc., a Body Corporate - and - IN THE MATTER OF THE APPLICATION OF Shannex Inc. pursuant to Section 69.4 of the Bankruptcy and Insolvency Act and for a determination as to the disposition of funds held in trust by an Arbitrator Judge: The Honourable Justice Frank Edwards Heard: January 11, 2006, in Sydney, Nova Scotia Counsel: George MacDonald, Q.C., for the applicant Shannex Inc. James W. MacLellan, Esq., for the respondent, St. Paul Guarantee Insurance Company (“St. Paul”) By the Court: [1] This is an application by Shannex Inc. (“Shannex”) pursuant to Section 69.4 of the Bankruptcy and Insolvency Act (“BIA”) to lift the stay of proceedings in relation to the bankrupt corporation, Meridian Contracting Inc., (“Meridian”) with respect to an ongoing Arbitration between Shannex and Meridian. [2] In addition, Shannex seeks a determination as to the disposition of funds being held by the Arbitrator in trust pursuant to a Judgment of the Arbitrator on the issue of security for costs. [3] Background: Shannex is the owner of the Truro Home for Special Care (“Cedarstone”). Cedarstone was constructed by Meridian pursuant to the provisions of two separate contracts (“Contract”). Meridian was required to provide a Performance Bond (“Bond”) securing performance of the Contract. The Bond was issued by St. Paul Guarantee Insurance Company (“St. Paul”), (formerly London Guarantee Insurance Company). The Bond is dated June 26, 2001 and lists Shannex as Obligee, Meridian as Principal and St. Paul as Surety. St. Paul opposes this application. [4] Disputes arose between Meridian and Shannex concerning completion of the construction. In April 2004 Shannex terminated the Contract alleging a material breach and default by Meridian. Meridian disputed the termination and sought to recover the balance of Contract funds from Shannex. The Contract contained a binding arbitration provision. Meridian advanced a claim for payment of the balance of Contract funds. Shannex advanced a counter‑claim seeking damages for the cost of completing the contractual work. [5] The parties agreed to appoint John D. McIsaac, Q.C. as Arbitrator. [6] In May 2005, there were a large number of court proceedings involving Meridian and other parties throughout Nova Scotia. Shannex brought an Application before the Arbitrator seeking security for costs. Meridian contested the Application. The Arbitrator filed a Decision dated May 23, 2005 and ordered Meridian to post $60,000.00 as security for costs. The funds are held in Mr. MacIsaac’s firm’s trust account pursuant to the provisions of his Decision. [7] In many of the disputes involving Meridian throughout the Province, St. Paul was called upon to respond pursuant to the provisions of bonds which were issued for most projects. St. Paul was aware of the arbitration being held between Meridian and Shannex. On several occasions during the conduct of the arbitration, and in particular in August 2005, David Coles, Q.C., Solicitor for Meridian, advised that he could not make decisions on matters such as scheduling additional days for the hearings, without receiving instructions from St. Paul. Mr. Coles also advised that St. Paul was funding Meridian’s legal costs. [8] For its part, St. Paul denies that it participated in the arbitration. In particular, St. Paul states that it was not: (I) a party to the arbitration agreement between Shannex and Meridian; (ii) requested by Shannex to participate in the arbitration; (iii) involved in the selection of the arbitrator; (iv) provided with the submissions or documentation used in the arbitration; (v) invited to attend any of the days of arbitration; or (vi) consulted regarding the scheduling of the arbitration. [9] On or about August 11, 2005 the parties, together with the Arbitrator, set tentative dates to resume and complete the arbitration in October and November 2005. The dates were tentative because Counsel for Shannex faced the possibility of having surgery in November 2005. [10] In July and August 2005 Shannex became aware that efforts were being taken to petition Meridian into bankruptcy. St. Paul participated in that process and consented to the Order which was granted on August 17, 2005. Pursuant to the terms of the Order Meridian was placed into bankruptcy but it was expressly provided that the Order did not affect the ability of St. Paul to pursue various proceedings under its bonds, including the arbitration of Meridian against Shannex. The Order made no mention of the counterclaim between Shannex and Meridian. [11] When Counsel's surgery was scheduled for early November, the parties spoke with Mr. MacIsaac to select new dates. Mr. MacLellan, on behalf of St. Paul, participated in those discussions. Dates were set for January and February 2006. Shannex cannot proceed with its counterclaim unless the stay of proceedings which results from the issuance of the Bankruptcy Order is lifted. [12] The arbitration is scheduled to resume on January 16, 2006 and 13 days have been set aside to enable the proceedings to be completed. However, the Trustee for Meridian's Estate has no interest in proceeding with the arbitration. The parties agree that it is unlikely that there will be any assets available for distribution to the unsecured creditors of Meridian. [13] On November 15, 2005 the Receiver‑Manager for Meridian wrote to Mr. MacIsaac requesting that he forward to the Receiver‑Manager the funds held in his Firm's trust account provided to him by Meridian. Mr. MacIsaac has confirmed to the Receiver‑Manager that the funds are being held in a trust account, and that any entitlement Shannex would have to the funds could only be determined once the arbitration had been completed and a decision filed. [14] On July 13, 2005, Shannex commenced an action against St. Paul (the “Performance Bond Action”). St. Paul filed a defence on December 14, 2005. [15] Issues: (1) Should an Order be issued lifting the stay of proceedings pursuant to Section 69.4 of the Bankruptcy and Insolvency Act ("BIA") so as to allow Shannex to advance its counter‑claim against Meridian at Arbitration? (2) Should the funds being held in Mr. McIsaac's Firm trust account be held until a decision from Mr. MacIsaac is reached and he determines the disposition of such funds? [16] Issue No. 1. ‑ Is Shannex entitled to a remedy pursuant to s. 69.4 of the BIA? Law and Analysis: [17] Legislation: One of the objects of the BIA is to provide for the orderly and fair distribution of the property of a bankrupt among its creditors. Section 69 is designed in part to prevent proceedings by a creditor which might give that creditor an advantage over other creditors. [18] The relevant provisions of the Bankruptcy and Insolvency Act are: “69.3(1) Subject to subsection (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, until the trustee has been discharged. 69.4 A creditor who is affected by the operation of s. 69 to 69.31 or any other person affected by the operation of Section 69.31 may apply to the court for a declaration that those sections no longer operate in respect of that creditor or person, and the court may make such a declaration, subject to any qualifications that the court considers proper, if it is satisfied (a) that the creditor or person is likely to be materially prejudiced by the continued operation of those sections; or (b) that it is equitable on other grounds to make such a declaration.” (Emphasis added) [19] Authorities: The leading case with respect to lifting a stay of proceedings is Re Advocate Mines Ltd., [1984] O.J. No. 2330 (Ont. Supreme Court ‑ In Bankruptcy) (QL) where the Court stated: “The court may, however, remove the stay of proceedings prescribed by that section in appropriate cases and has done so in the following circumstances (only #3 and #5 are at issue here): 3. Actions in which the bankrupt is a necessary party for the complete adjudication of the matters at issue involving other parties. (Emphasis mine) 5. Actions in Ontario which, at the date of bankruptcy, have progressed to a point where logic dictates that the action be permitted to continue to judgment.” [20] In Re Ma, [2001] O.J. No. 1189 (Ont. Court of Appeal) (QL), the Court reviewed the law with respect to granting an Order lifting a stay of proceedings and commented that on an application to lift a stay, the onus is on the Applicant to establish if there are sound reasons consistent with the scheme of the BIA prior to granting leave to lift a stay of proceedings. While there is no requirement to establish a prima facie case, the Court may consider the merits of the proposed action where relevant to the issue of whether there are sound reasons for lifting the stay. [21] In Re Maple Homes Canada, [2000] B.C.J. No. 1958 (B.C.S.C.)(QL) the following summary of the principles emerging from the jurisprudence were set out: (1) The general scheme of bankruptcy proceedings is that civil actions are stayed against the insolvent person; exemptions are to be made only where there are "compelling reasons". This flows from one of the major purposes of the Bankruptcy and Insolvency Act, which is to permit the rehabilitation of the bankrupt unfettered by past debts. (2) An applicant for exemption from the stay must show that there will be material prejudice to the applicant if the stay is continued or that it is equitable on other grounds to allow the exemption. (3) The existence of one or more of the factors listed in Re Advocate Mines will be an important consideration, but is not determinative. (4) The court is not to attempt to determine the proposed claim on its merits. (5) Rather, it must assess whether it is a claim of the nature that would survive discharge, whether it is a claim that could not succeed, and whether if it did succeed it could not result in recovery against the defendants. [22] Another factor to be considered is whether the Trustee consents to an Order granting leave to proceed. The Courts have indicated that the existence of the Trustee's consent is an important factor in determining whether leave should be granted on the basis that the Trustee's consent with respect to an Application of this nature would indicate that the granting of an Order would not adversely affect the bankrupt estate: Canada (Attorney General) v. Moss, [2001] M.J. 332 (Man. Q.B.)(QL). The Trustee of Meridian's estate has not provided his consent but has merely indicated that Shannex's application “... is of no interest or benefit to the Estate ...”. [23] Analysis: I am satisfied that there are no compelling reasons to exercise my discretion to lift the stay of proceedings against Meridian. The reality is that Shannex is still free to pursue its claim against St. Paul in the Performance Bond Action. It is unfortunate that Shannex spent ten days in arbitration defending the claim by Meridian and commencing the presentation of its counterclaim. That that effort and expense has to a great extent been wasted is one of the unavoidable consequences of dealing with a company which is subsequently forced into bankruptcy. Beyond the time and expense of re-litigating the same issues, Shannex has suffered no prejudice to its claim under the performance bond. [24] On the other hand, to lift the stay would not be of assistance to Shannex. As Shannex acknowledges on page 12 of its brief, it is at best an unsecured creditor of Meridian. It also states: “Shannex views the arbitration as a platform to seek recovery against St. Paul.” [25] If I lifted the stay, Shannex would continue presenting its counterclaim in an undefended arbitration. Presumably Shannex would then obtain a paper award to present to the Trustee as an unsecured creditor. There are no funds for distribution. [26] The arbitration award therefore would be useless unless Shannex could convince a Court that St. Paul ought to be bound by it. In my view, that is at best uncertain and probably unlikely. St. Paul was not a party to the arbitration. If Shannex had wanted the arbitration to be binding on St. Paul, one would have expected that Shannex would have involved St. Paul in the arbitration. Shannex elected to pursue its counterclaim against Meridian and not pursue its claim under the Performance Bond. Shannex is now asking this Court to clear the path for Shannex to impose the Arbitration on St. Paul. [27] An arbitral award is not binding on a surety. In Drafting Arbitration and ADR Clauses for Commercial Contracts (Scarborough, Ont.: Carswell, 2001), the author generally comments on the binding effect of an arbitral award and states at p. 4-17: “By its nature an arbitration award only binds the parties to the arbitration agreement pursuant to which it is made.” [28] This basic principle does not change when a surety is involved. In The Law of Guarantee, (Scarborough, Ontario: Carswell, 1996) at p. 322, the author states as follows: “6.13 Although a surety’s liability is contingent upon the principal being liable for the debt, default or miscarriage to which the guarantee relates, a judgment or arbitral award against the principal in favour of the creditor in respect of that debt, default or miscarriage is not evidence that may be used to establish the liability of the surety. Unless the surety was a party to the proceeding in which that judgment or award was given, it is merely res inter alios, acta and, should any proceeding be brought against the surety for recovery, he is free (in the absence of an agreement to the contrary) to contest the liability of the principal debtor in that proceeding.” (Emphasis added) [29] The support for the principle that a surety is not bound by a judgment or arbitral award in a matter in which it was not involved was explained by James L.J. in Exp. Young, In re Kitchin [1881] 17 Ch. 668 at 672 (C.A.) at p 672: “The principal debtor might entirely neglect to defend the surety properly in the arbitration; he might make admissions of various things which would be binding as against him, but which would not, in the absence of agreement, be binding as against the surety. It would be monstrous that a man who is not bound by any admission of the principal debtor, should be bound by an agreement between the creditor and the principal debtor as to the mode in which the liability should be ascertained. That is enough to dispose of this case.” [30] In The Law of Guarantee, the author confirms that admissions of a principal may not be used against a surety at p. 322 as follows: “Similarly, it is a general principle of the law of evidence that admissions are binding only against the party making them. Consequently, much as a judgment or award against the principal may not be sued as evidence against the surety, neither may admissions made by the principal be used as evidence against the surety in a subsequent proceeding.” [31] Courts typically do not deviate from the principle that a surety is not bound by a proceeding between the principal and the obligee in which is was not involved. The reason is that the obligee has independent rights to pursue the surety, without the necessity of first obtaining judgment against the principal. [32] Shannex’s position is that St. Paul participated in the arbitration in a “covert manner by funding and directing the conduct of the arbitration on behalf of Meridian”. It cites two cases to make the point that St. Paul may therefore be estopped from denying the findings of the arbitrator. (See Kvaerner Enviropower Inc. v. Tanar Industries Ltd., [1994] A.B. No. 556 (Alb.Q.B.)(Q.L) affmd. [1994] AJ. No. 778 (Alta.C.A.); Fuller Austin Insulation Inc. v. Wellington Insurance Co., [1995] S.J. No. 489 (Sask.Q.B.)(Q.L.) [33] There is no evidence before me that, beyond funding legal counsel, St. Paul directed the conduct of the arbitration on behalf of Meridian. Such evidence might possibly at some future date be elicited through cross-examination or discovery of officials of St. Paul. The point is that using the arbitration as a “platform” for the claim against St. Paul is a precarious strategy. It is based upon the hope that a Court will in the future bind St. Paul to the arbitration result. If the Court ultimately refused to do so, then Shannex would be in a worse position than it is now. At that point, Shannex would have invested an additional 13 days in the arbitration. It would therefore have to re-litigate 23 days instead of 10. [34] The consequences from the Court’s viewpoint are even worse. Allowing the arbitration to proceed would raise the potential for inconsistent findings in the arbitration and the Performance Bond Action. Obviously, that potential is highly undesirable and ought to be avoided. [35] Finally, I will deal briefly with the two factors listed in Re Advocate Mines. “3. Actions in which the bankrupt is a necessary party for the complete adjudication of the matters at issue involving other parties.” (Emphasis added) [36] Here the only two parties to the arbitration are Meridian and Shannex. There are no “other parties”. St. Paul is not a party to the arbitration. Shannex is free to pursue its claim against St. Paul in the Performance Bond Action. Factor number 3 is therefore not relevant to the circumstances of this case. [37] “5. Actions in Ontario which, at the date of bankruptcy, have progressed to a point where logic dictates that the action be permitted to continue to judgment.” I have already explained that the result of the arbitration would (at best for Shannex) be a worthless award to an unsecured creditor. Whether such an award would be useful to Shannex against St. Paul is uncertain and unlikely. Logic therefore dictates that the arbitration be terminated. [38] In conclusion, for the reasons cited, I will not be issuing an Order lifting the stay of proceedings pursuant to Section 69.4 of the B.I.A. [39] Issue No. 2: Should the funds being held in Mr. McIsaac’s Firm trust account be held until a decision from Mr. MacIsaac is reached and he determines the disposition of such funds? [40] Shannex is seeking an Order for the payment of the $60,000.00 fund held by the arbitrator. Essentially, Shannex is requesting that the Court grant Shannex priority for its costs in the arbitration over St. Paul, a secured creditor of Meridian, and the claims of other unsecured creditors. As already noted, Shannex acknowledges at p. 12 of its brief that “at best Shannex can be an unsecured creditor of Meridian”. [41] St. Paul states that the fund held by the Arbitrator is the property of the estate of Meridian, and therefore, payable to St. Paul as the only secured creditor. [42] Law and Analysis: On May 23, 2005, the arbitrator released his decision requiring Meridian to post $60,000.00 as security for Shannex’s costs in the arbitration. On June 10, 2005, the fund was forwarded to the Arbitrator. The $60,000.00 fund paid by Meridian to the Arbitrator in the arbitration is analogous to Meridian being required to pay security for costs into Court. Meridian’s payment to the arbitrator is no different than the money paid into Court for security for costs in the Trademor Investments Ltd. v. Valdi Foods (1987) Inc. [1995] O.J. No. 1952 (O.C.J.) (QL) affirmed Trademor Investments Ltd. V. Valdi Foods (1987) Inc. [1997] O.J. No. 24 (CA (QL). In Trademor, the lower Court concludes at paras. 19 and 20 as follows: “In circumstances such as the present, it would be an anomaly if the plaintiff, prior to judgment, was given a greater right to the money in court than it would have following judgment. To my mind, that appears to be the result attained in Ford and the cases referred to therein. For this reason, I cannot follow them. In my opinion, when paid into court pursuant to Matlow J.’s Order, the money was the property of the bankrupt and has remained to be such. At the time of the claim of the Trustee in Bankruptcy to that money, it cannot be said that the plaintiff was a secured creditor within the meaning of the Bankruptcy Act.” [43] In addition, there is authority for the proposition that a bankrupt’s possessions in the hands of its solicitor remain the property of the bankrupt for distribution as directed by the provisions of the BIA. This is so despite the fact that the possessions are held “in trust” by the solicitor (Canadian Imperial Bank of Commerce v. Smith Estate, [1976] 1 S.C.R. 341). The policy reason for such a decision is to prevent bankrupts from shielding their assets from creditors simply by depositing them into a solicitor’s trust account. [44] In its brief at page 14, Shannex notes that the decision in Acepharm Inc. (Re), [1999] O.J. No. 2353 (C.A.) is an exception to the Trademor case. In Acepharm, the Court decided that settlement funds (not an amount for security for costs), which were paid to a solicitor pending the outcome of an action, were not property of the bankrupt’s estate based on trust principles. In para 10 of the Acepharm decision, the Court lists the indicia of a trust as “certainty of intention, subject matter and objects” and then goes on to conclude that a trust exists. The distinction between the principles decided in Trademor and Acepharm was summarized in Canadian Freight Assembly Ltd. v. Garden Grove Distribution (1998) Ltd. [2005] M.J. No 416 (M.Q.B.) (Q.L.). At paras. 21‑ 23, the Court states: “Under this rule, any money paid into court is intended to provide security for the value of goods taken and, as such, is intended to replace any interest in the particular goods held by the party against whom the order is granted. An order for security for costs is a different thing. Generally, it is intended to act as security against the legal costs associated with future legal proceedings in the event that the party ordered to pay costs loses. I am satisfied that was not the intent of the master that he made in this instance. The distinction is an important one. As will be seen, case law has held that money paid into court as security for costs continues to belong to the party paying it until the court determines otherwise. Where money is paid into court as security for an order to seize property from another, there is case law that holds that the security in intended to protect the interest that the party against whom the order is granted may have in the property. In the event that the property is eventually determined to have been improperly ordered seized from a party, his interest in the property is replaced by the money paid into court.” [45] The $60,000.00 fund which was ordered to be paid to the Arbitrator, a disinterested third party, was only to secure costs in the Arbitration and therefore the money remains the property of Meridian or its Estate. Accordingly I direct the Arbitrator to pay the $60,000.00 fund to Ernst and Young, the Receiver and Manager of Meridian. [46] Costs: The Respondent St. Paul shall have its costs in any event in the amount of $2,000.00 payable forthwith. J.