Registering a caution under s. 74(3) of the BIA

Re Kolenc (BK-20-02642914-0031)
What is the test for registering a caution under s. 74(3) of the BIA?

The Bankrupt was a real estate agent, and one of four partners of a real estate joint venture partnership in connection with the development and subdivision of four contiguous properties, being 7803 Kipling, 15 Burwick, 40 Lansdowne and 36 Lansdowne (the “Properties”). The joint venture agreement (“JVA”) executed by the parties provided that, notwithstanding legal title to the Properties, the Properties were held in trust for the beneficial interest of the Partnership and the Partners. The JVA was silent on the rights and obligation of the Partners: (i) on the insolvency of any Partner, and (ii) governing dissolution.

After receiving a copy of the JVA, the Court-appointed Trustee of the Bankrupt’s estate registered cautions on title to the Properties pursuant to s. 74(3) of the BIA. The Trustee believed that the Bankrupt had an interest, estate or right in the Properties pursuant to the JVA and the Partnership, which had vested in the Trustee upon bankruptcy. The Trustee sought an order for, inter alia, a declaration that the Bankrupt held a 25.07 percent vested interest in the Partnership and its assets, and the Partnership had been dissolved by operation of law under s. 33(1) of the Partnership Act as a result of the bankruptcy of the Bankrupt. Accordingly, the Trustee sought the appointment of an independent receiver to wind-up the Partnership and distribute its assets (including the Properties), as well as a declaration that the cautions registered by the Trustee were properly registered pursuant to s. 74(3) of the BIA. The stakeholders—consisting of the Partners who participated in the Partnership and held legal title to the Properties—opposed the registration of the cautions.
 
The BIA’s fundamental purpose is to provide a regime whereby the creditors of the bankrupt pursue their claims by collective action through the trustee, so that the assets of the bankrupt can be collected, protected, realized and distributed on an equitable basis. To enable this objective, the BIA facilitates investigation into the bankrupt’s financial affairs and provides trustees with an arsenal of enhanced investigatory machinery, which extends beyond the usual purview of creditors. Among them, bankruptcy trustees have the right to register cautions pursuant to s. 74(3) of the BIA.

The plain wording of s. 74(3) of the BIA explicitly captures a belief in an interest, estate or right: “[i]f a bankrupt owns any real property ... or is believed to have any interest, estate or right in any of them ... a caveat or caution may be filed”. In light of the aforementioned objectives, and having regard to its plain language and giving all of the words of s. 74(3) meaning, a trustee’s ability to quickly and inexpensively register a caution, without the need for a court order, to preserve the status quo in respect of real property exists not only in circumstances where the bankrupt has a clear legal ownership interest in a property but also where the trustee believes the bankrupt may have a lesser or indirect “interest, estate or right” therein.
 
The opposing Partners argued that because the Trustee had not provided a case in which a caution has been found to be valid when filed against property that the bankrupt does not legally own or hold a charge over, the Trustee should not be permitted to register a caution under s. 74(3) of the BIA. The Court noted that, just because the precise question had not been adjudicated in any reported case and a leading text on bankruptcy and insolvency did not discuss cautions filed based on the Trustee’s belief of an interest, estate or right, did not mean that the Court should ignore the language of the statute.

Remedial statutes, particularly in the insolvency context, are to be interpreted liberally and their words are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament. In the case of the BIA, that requires a liberal reading of s. 74(3) as part of the Trustee’s arsenal to collect, protect, realize and distribute the Bankrupt’s estate on an equitable basis.
 
The Trustee had a reasonable basis for a belief that the Bankrupt had an interest in the Properties. As such, the caution was properly registered under s. 74(3) of the BIA. However, a caution is merely a temporary protection while a trustee arranges its affairs. While the BIA is remedial, it does not give the Trustee greater rights than the Bankrupt would have once the parties have moved into ordinary litigation. As such, a caution is appropriately maintained only until the formal litigation proceeding in which the trustee’s claims will be advanced has been regularized. Once there is formal litigation, a CPL is a more appropriate mechanism for notifying third parties of the interest in the Properties that the Trustee is claiming, unless the parties can reach an agreement upon terms for maintaining the caution.

The Court held that the caution was properly registered and could be maintained for the time being, pending the regularization of the procedure for adjudicating the Trustee’s claims in the Properties.

 

Judge: Justice Kimmel

Counsel: Ian Klaiman of Lipman Zener Waxman for Baigel Corp. as Trustee in Bankruptcy; Catherine Francis of Minden Gross for Michael Kolenc, Gabriela Pierantoni, Marcello Di Francesco and Gordana Mihailovic; Gregory Gryguc of Zeppieri & Associates for Ugo Crescenzi, Ugo Crescenzi Consultants Limited and Norcrest Investments