Resolving conflicting evidence in chambers

MNP Ltd (Eco-Industrial Business Park Inc) v Symmetry Asset Management Inc, 2023 ABKB 429
Can conflicting evidence on material issues be resolved in chambers?

Overview: This case is an exception to the general rule that conflicting evidence on material facts cannot be resolved in chambers. The Court stated that its obligation is to resolve bankruptcy disputes in a cost-effective and timely manner having regard for proportionality and the interests at stake, so long as procedural fairness is preserved. Applications pursuant to section 96(1) of the Bankruptcy and Insolvency Act should be resolved in chambers, absent a demonstrated need for a trial or a trial of an issue to achieve a fair and just disposition.

MNP Ltd., as the Trustee in Bankruptcy of Eco-Industrial Business Park Inc., applied to set aside the assignments of two legal claims (referred to as the “ADT Action” and the “Dentons Claim”) from Eco-Industrial to a related company, Symmetry Asset Management Inc. The Trustee asserted that the assignments were transfers at undervalue, or alternatively, fraudulent transfers or conveyances. The Trustee argued that Eco-Industrial received either no consideration for the transfers or consideration conspicuously less than the fair market value of the legal claims, resulting in the deprivation of Eco-Industrial’s creditors of the potential proceeds from the claims. Symmetry denied that the transfers were undervalued or fraudulent. The assignments allegedly compensated Symmetry for services provided to Eco-Industrial, including the payment of legal expenses associated with prosecuting or preserving the claims.

Each of the Assignment Agreements characterized Symmetry as the “asset manager” for Eco-Industrial and stated that “Symmetry provides ongoing management services to Eco-Industrial to which Eco-Industrial pays Symmetry for costs and fees.” In this application, the parties tendered some potentially conflicting affidavit evidence about Symmetry’s funding of the ADT Action and the extent of Symmetry’s disclosure in response to requests from the Trustee regarding same.

Generally, conflicting evidence on material facts cannot be resolved in chambers. The Court’s obligation, however, is to resolve bankruptcy disputes in a cost-effective and timely manner having regard for proportionality and the interests at stake, so long as procedural fairness is preserved. Protracted and costly litigation should be avoided when the issues can be determined summarily. Findings about uncontested facts and those facts not seriously challenged may be sufficient to arrive at a fair and just disposition. Contested factual issues might require a trial, but a trial is not the default process. Applications pursuant to section 96(1) of the Bankruptcy and Insolvency Act should, therefore, be resolved in chambers, absent a demonstrated need for a trial or a trial of an issue to achieve a fair and just disposition. Here, the Court held that any inconsistencies in the evidence were irrelevant, immaterial, or could be reconciled by applying the preceding principles.

Turning to its s. 96 analysis, the Court noted that s. 96 of the BIA allows a trustee in bankruptcy to challenge a debtor’s pre-bankruptcy transfers at undervalue that diminish the bankrupt’s estate and limit the ability of creditors to recover all or a part of their debts. Section 96(1)(b) of the BIA states in relevant part that a court may declare that a transfer at undervalue is void as against the trustee if:

• the party was not dealing at arm’s length with the debtor;

• the transfer occurred during the period that begins on the day that is five years before the date of the initial bankruptcy event; and

• the debtor was insolvent at the time of the transfer or was rendered insolvent by it, or the debtor intended to defraud, defeat or delay a creditor.

In making an application under s. 96, the trustee must state its opinion as to the fair market value of the property or services and the value of the actual consideration given or received by the debtor. The values on which the court makes any finding under s. 96 are, in the absence of evidence to the contrary, the values stated by the trustee.

Section 96 contains multiple elements, some of which are disjunctive, including the components of a transfer at undervalue. The parties agreed that the companies were related and not dealing at arm’s length. The parties also agreed that the transfers occurred within the five-year period in s. 96(1)(b)(ii). The parties disagreed about the consideration given for the transfers.

The Trustee asserted that the assignments were dispositions of property for which either no consideration was received, or the consideration received was conspicuously less than the fair market value of the legal claims. Specifically, the face value of the claims was $100 million and the actual consideration received was either nothing or nominal. In response to the Trustee’s assertions, Symmetry argued that the following consideration was provided to Eco-Industrial: a) management services; b) payment of legal expenses on behalf of Eco-Industrial without reimbursement; and c) assumption of legal responsibility for Eco-Industrial’s obligations relating to the legal claims.

The Court found that the transfer of the Dentons Claim offended s. 96(1)(b)(ii)(A) of the BIA because the Trustee had demonstrated that Eco-Industrial received no consideration of any kind through the Assignment Agreement. As no consideration was received, the Trustee did not have to prove the fair market value of the legal claim for comparative purposes. However, s. 96(2) still refers to the trustee providing an opinion about the property’s fair market value. Where a transfer at undervalue is established because no consideration was given, the trustee’s opinion about the fair market value of the property simply assures the Court that the property has more than notional value, thereby warranting the Court’s intervention. In these circumstances, the Court concluded that the Trustee’s opinion about the Denton’s Claim having substantial value was sufficient to meet any obligation under s. 96.

As for the ADT Action, the transfer of the ADT Action offended the same subsection because the consideration provided was conspicuously less than the fair market value of that legal claim. When the ADT Action was transferred on December 1, 2019, it had an almost 50% chance of succeeding, with the quantum being close to $100 million. Accordingly, the Court found that the fair market value of the claim was close to $50 million, and the only consideration given by Symmetry for the transfer of the ADT Action was the assumption of liability for an adverse costs award, which was valued at approximately $100,000. The consideration received by Eco-Industrial was conspicuously below the fair market value of the legal claim, offending s. 96(1)(b)(ii)(A).

Finally, the Court had to consider whether Eco-Industrial was insolvent at the time of the transfers or whether it intended to defraud, defeat or delay a creditor. If insolvency were established, the Trustee would not need to prove that Eco-Industrial intended to defraud, defeat or delay a creditor. The Court found that by the end of October 2019, Eco-Industrial was unable to meet its obligations generally as they became due and had ceased paying current obligations in the ordinary course of business as they generally became due. That state of affairs remained unchanged by December 1, 2019. Consequently, Eco-Industrial was insolvent at the time of the transfers.

The Court concluded that the transfers of the ADT Action and the Dentons Claim from Eco-Industrial to Symmetry were rendered void as against the Trustee by operation of s. 96 of the BIA.

Judge: Justice Feth

Counsel: Emily Paplawski of Osler, Hoskin & Harcourt LLP for MNP Ltd. as Trustee in Bankruptcy

Timothy Froese for Symmetry Asset Management Inc.