Can one creditor have the proof of claim of another creditor expunged or reduced?
In 2008, Adrenaline Drive Inc. (“Adrenaline”) and Asian Concepts Franchising Corporation (the “Debtor”) entered into a Master Developer Agreement (the “Agreement”) governing the operation and development of “Wok Box” franchises. By 2012, the Debtor ceased making royalty payments to Adrenaline and purported to terminate the Agreement. Adrenaline subsequently commenced an action against the Debtor, claiming that the Debtor had wrongfully terminated the Agreement.
In 2013, the Debtor filed a notice of intention to make a proposal to its creditors pursuant to the Bankruptcy and Insolvency Act (“BIA”), which stayed Adrenaline’s proceedings against it. Grant Thornton Limited was to act as the Trustee. The Debtor amended its proposal in 2014. If the creditors accepted the amended proposal and it was approved by the Court, Adrenaline’s ability to pursue its claims against the Debtor, the directors of the Debtor and others would be adversely affected, if not eliminated. Adrenaline’s claim was valued at $1,122,720.25 for voting purposes, which constituted only 26.7% in value of the voting creditors and meant that its negative vote was not sufficient to defeat the amended proposal. As such, Adrenaline vigorously opposed the proposal by, among other things, challenging the amount of the claim of another creditor—WB Heartland Restaurant Inc. (“Heartland”).
Heartland’s claim against the Debtor stemmed from a franchise agreement between the parties concerning franchising in Ontario. Heartland subsequently rescinded the agreement, and commenced an action in Ontario claiming damages for materially deficient disclosure on the part of the Debtor. In January 2014, after the filing of the Debtor’s initial proposal, Heartland filed its first proof of claim in these proceedings in the amount of $2,383,187. In February 2014, Heartland filed a second proof of claim in the amount of $1.6 million, but offered no clarity about which claims had been deleted or reduced to account for the overall reduction in the amount claimed.
Adrenaline requested that the Trustee expunge Heartland’s second proof of claim pursuant to s. 135(5) of the BIA, asserting that there was no discernable basis to support the amount claimed. The Trustee, for her part, was satisfied with the quantification of Heartland’s claim and indicated that it would not be taking any further position on it.
The BIA anticipates a robust process by which claims are submitted and then reviewed by the trustee for allowance or disallowance in whole or in part. First, every creditor must “prove” her claim, and provide relevant and probative evidence to substantiate the claim. Second, the trustee has a duty to examine every proof of claim and the supporting documents to determine its validity and, if provable, its value. If a trustee is unsatisfied with the supporting documents, the trustee has both the ability and the right to require further evidence from the creditor.
The Trustee indicated that Heartland’s first proof of claim and revised proof of claim were deficient in terms of supporting documents that could substantiate the claims. Nevertheless, the Trustee made only tepid requests for further documentation. The Trustee was aware of settlement discussions taking place between Heartland and the Debtor in respect of quantifying Heartland’s claim. Upon receiving notice of the parties’ agreement as to the value of Heartland’s claim, the Trustee satisfied itself with the quantification of such claim at $1.6 million and, accordingly, allowed Heartland’s vote in that amount.
The evidence showed that the “settlement” of Heartland’s claim was directly linked to Heartland voting in favour of the amended proposal. The Court concluded that the Trustee largely abandoned her role within the proposal process, in relation to the review and assessment of Heartland’s claim, in favour of the Debtor. While the Trustee stated that she investigated the claim, the Court found that the investigation was superficial. The Trustee did not obtain independent legal advice prior to accepting the “settled” claim. The Court conceded that, in some circumstances, input from a proposal debtor as to claims advanced against the estate could and should reasonably be considered and factored into the valuation of those claims. However, a trustee cannot abrogate her duty to properly evaluate the claims in a proposal process. Simply relying on the Debtor’s assessment without engaging in an independent review left open the possibility that the Debtor settled Heartland’s claims for purposes beyond ensuring that only valid claims were admitted within the proceedings. In light of the foregoing, the Court showed no deference to the Trustee’s decision.
The Court then proceeded to assess the merits of a couple of Heartland’s claim. It found that Heartland did not suffer the losses that it claimed pursuant to its indemnity obligations, and, in turn, had no valid claim that it could have advanced against the Debtor under the Arthur Wishart Act. The evidence also indicated possible duplication in respect of Heartland’s operational loss claim. The Court agreed with Adrenaline that the Trustee was in error in admitting these aspects of Heartland’s claim, and reduced the total of Heartland’s provable claim in these proceedings to $809,382.
Counsel: Kimberley Robertson and Blair McRadu of Lawson Lundell LLPfor Grant Thornton Limited, Trustee in the Proposal of Asian Concepts Franchising Corporation, Jeremy Hockin and Heather Frydenlund of Parlee McLaws LLP for Adrenaline Drive Inc. and Gordon Plottel of Miller Thomson for Asian Concepts Franchising Corporation