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Law 584 Bankruptcy Wood

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Bankruptcy & Insolvency Part I – Bankruptcy .......................................................................................................... 6

1) Introduction............................................................................................................... 6 a) Historical Evolution of Bankruptcy Law........................................................................ 6 b) Objectives of Bankruptcy Law........................................................................................ 6 c) Fundamental Principles ................................................................................................... 6 d) 6 Stages of Bcy Process.................................................................................................... 6

2) Commencement of Bcy............................................................................................ 6 a) Appln for a Bcy Order..................................................................................................... 7

i) Eligibility............................................................................................................................... 7 ii) Procedure for Involuntary Bcy .............................................................................................. 7

Re Kaussen Estate (1988 QbCA) – universalism; Gr. C/R applies against Gr. D w/ assets in Cda. 7 Re Abalone (1979 OntSC) – bcy court won’t resolve civil disputes; debt must be strictly proven ... 8 Moody v. Ashton (1997 SaskCA) – can’t force bcy if D can pay..................................................... 8 Re Holmes (1975 Engl) – can’t infer single unpaid C/R = all C/Rs unpaid w/ 3 exceptions ........... 8 BMO v. Scott Road (1989 NS) – attempt to change priorities w/ bcy is insufficient for rejecting

appln.................................................................................................................................... 9 b) Interim Receiver (interim preservation order) .............................................................. 9

Grounds for s.46 Order.............................................................................................................. 9 c) Assignment in Bcy............................................................................................................ 9

i) Who Can Make Assignment?................................................................................................. 9 ii) Procedure.............................................................................................................................10 iii) Annulment..........................................................................................................................10

Re Dahl (1986 ABQB) – no annulmt just b/c D made assignmt to gain benefit if he met BIA reqmts............................................................................................................................................10

Re Wale (1996 OntGD)................................................................................................................10 3) Property of the Bankrupt ....................................................................................... 11

a) Fundamental Principles................................................................................................. 11 Gano (1997 ABQB) – action for damages relating to the person doesn’t vest (incl. punitive) .......12

Analysis ...................................................................................................................................12 Re Bell (1996 BCSC) – damages for earning capacity relates to ppty→vests in T/B .....................12 Tinant v. Tinant (2003 ABCA) – MPA actions vest iff triggering event (separation) occurs ..........12 Blackman v. Davison (1987 BCCA) – T/B can’t assert claim arising from trust w/out separation.12

b) Exemptions (note: DOB = date of bcy) ......................................................................... 12 5 Scenarios Relating to Exempt Property..................................................................................13

Hirani (1993 AB) – look at applicable law: some provinces preserve exempt status (Alta: 60 days)............................................................................................................................................13

Re Gruber (1993 AB) – proceeds of exempt assets realized post-date/bcy exempt iff identifiable..13 Re Monteith (SaskCA) – exempt ppty acquired post-DOB is exempt .............................................13 Gazelle (2001 ABQB) – exemption determined at DOB; D keeps value increase if w/in exemptn..14 MacKay (2002 ABQB) – if asset was exempt at DOB→apply exemption at date of sale ...............14

c) Trust Property................................................................................................................ 15 1) Express Trust .......................................................................................................................15

Grant (2005 ABQB) – Equitable tracing rules..............................................................................15 2) Resulting Trust.....................................................................................................................16 3) Constructive Trust................................................................................................................16

Re Baltman (1996 OntGenDiv) – CT law is uncertain: court rejects CT arg in unprincipled decision...............................................................................................................................16

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4) Deemed Statutory Trust .......................................................................................................17 BC v. Henfrey (1989 SCC) – deemed stat trust claimable in bcy only if meets ordinary trust

principles ............................................................................................................................17 d) Surplus Income (s.68) .................................................................................................... 17

Re Landry (2000 OntCA) – incl awards for loss of pre-bcy wages in surplus income calc ............18 Re Coates (2006 ABQB) – s.68 covers income for basic expenses (wages), NOT windfall ............18 Anderson (2004 ABQB) – s.68 applies to award for lost damages even if it covers period pre-bcy

............................................................................................................................................18 e) Principle in Ex Parte James........................................................................................... 19

Re McDonald (1972 OntSC) – T/B can be prevented from asserting legal right if unfair ..............19 IV) Effect of Bankruptcy on Third Parties................................................................. 19

a) Stay of Proceedings (s.69.3) ........................................................................................... 19 i) Characteristic of Stay............................................................................................................19 ii) Lifting Stay..........................................................................................................................19

b) Effect of Stay on Unsecured Creditors ......................................................................... 20 West Coast Savings v. McElroy, (1981 BC SC) – Bankruptcy changing priority of Unsecured

Creditors .............................................................................................................................20 c) Effect of Bankruptcy on Matrimonial Property Litigation.......................................... 20

Millar v. Millar (1991 ABCA) – effect of bcy depends on nature of MP order...............................21 d) Effect of Bankruptcy on Landlords (& their remedies)............................................... 21

i) Effect on Termination ...........................................................................................................21 ii) Distress for rent ...................................................................................................................21

Profoot (1981 ABQB) – distressed landlord loses priority in bcy..................................................21 iii) Assignment of Lease...........................................................................................................21

e) Set-Off............................................................................................................................. 22 f) Effect on Secured Parties ............................................................................................... 22

General Rules...........................................................................................................................22 i) Procedure: SP Rights in Bcy .................................................................................................22

Farmstart (1988 SaskCA) – SP retains SI even after discharge; surrender of SI requires intention............................................................................................................................................23

Holy Rosary (1967 SCC) – Effect of Discharge of Bankrupt on SP – SI not retained after Discharge............................................................................................................................23

g) Executory Contracts ...................................................................................................... 24 Thompson (1924 OntSC) – Bcy doesn’t terminate K.....................................................................24

h) 30 Day Goods (S.81.1).................................................................................................... 24 i) Criticisms of s.81.1 ...............................................................................................................24

Thompson (1996 Ont KB) – identifiable reqmt is very strict .........................................................25 RBC v. Stereo People (1996 ACA) – Mere notice sufficient – details not required ........................25

i) Crown Claims (ss.86-87)................................................................................................. 25 j) Post Bankruptcy Dealings (ss.74-75, 97, 99) .................................................................. 25

Re: Sanderson (1978 Ont CA) – distribution of after acquired property is limited to original creditors..............................................................................................................................26

i) How to Determine if Person is Bt..........................................................................................26 ii) Dealings w/ Bt person (Post-bcy & pre-discharge) ...............................................................26

Van Pelt (1984 OntSC) – bad faith requires more than mere knowledge of bcy ............................26 Cliche v. Michaud (1984 Que. CA) – narrow exception to Sanderson if T/B is unconscionable ....26

5) Review of Pre-Bcy Transactions........................................................................... 26 a) Intro to Fraudulent Conveyances & Preferences ......................................................... 26

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i) 2 Sources of T/B’s power to impeach these transaction: ........................................................27 b) Fraudulent Preferences ................................................................................................. 27

ii) In favour of C/Rs .................................................................................................................27 Burlingham v. Evjens (1983 SaskQB) – Request for Security not a Binding Promise ....................28 Green Gables Manor (1998 Ont TD) – s.96 requires “related” as defined by s.4; non-AL not

enough ................................................................................................................................29 Future Changes ........................................................................................................................29

c) Settlements ..................................................................................................................... 29 Godford (1996 SCC) – RRSPexempt annuities transfer: void in vesting stage but not in admin

stage....................................................................................................................................29 d) Reviewable Transactions............................................................................................... 30

Standard Trustco(1995 OntCA) – crt finds reviewable transn but doesn’t award judgment (uncertainty)........................................................................................................................30

People’s Dept Store (2004 SCC) – Privy to transaction includes those with knowledge and have indirect benefit ....................................................................................................................31

e) Proposed Transfer at Undervalue Provisions............................................................... 31 f) Effect of New Changes ................................................................................................... 31

6) Eligible Claims and Distribution of Proceeds...................................................... 32 a) Provable Claims............................................................................................................. 32

i) Procedure For Proving Claim................................................................................................32 Ontario New Home Warranty (1990 OntGD)-contingent claim triggered pre-discharge is provable

............................................................................................................................................32 ii) Valuation of Claims.............................................................................................................32

Claude Resources (1993 SaskQB) – court won’t allow claim if probability is too low/speculative 33 Central Capital Corp (1996 OntCA) – S/H <C/R even if corp owed $ to S/Hs pre-bcy .................33

b) Scheme of Distribution .................................................................................................. 33 i) Preferred C/Rs ......................................................................................................................33

Lamford (1991 BCSC) – enviro charges outrank other C/Rs but not T/B......................................33 Re Whalley (1990 SaskQB) ..........................................................................................................34

Wage Earners Protection Program Act: will give e/ees superpriority ............................ 34 Pension Contribution Charge............................................................................................ 34

ii) Ordinary C/Rs......................................................................................................................34 iii) Postponed C/Rs ..................................................................................................................35

7) Discharge of Bt ....................................................................................................... 35 a) Eligibility ........................................................................................................................ 35 b) Procedure ....................................................................................................................... 35

i) 1st time bt..............................................................................................................................35 ii) Repeat bt..............................................................................................................................35

McAfee (1988 BCCA) – factors court considers for discharge appln ............................................35 Re: Cole (2001 NS SC) — Factors for discharge of Income Tax debt ...........................................36 Seaboard (1986 BCCA) - reaffirmation agrmts continue post-bcy ................................................36

iii) Non-dischargeable Claims ..................................................................................................37 Reforms .............................................................................................................................. 37

Part II – Corporate Reorganizations ............................................................................. 37 Fundamental Principles of Restructuring Law ..........................................................................38

Lehndorff (1993 Ont TD) – restates objectives of CCAA...............................................................38 1) Companies Creditors Arrangement Act (CCAA) ................................................. 38

a) The Application.............................................................................................................. 38

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i) Eligibility..............................................................................................................................38 i) Commencement ....................................................................................................................39 ii) Court’s Role ........................................................................................................................39

Royal Oaks (1999 Ont TD)– initial order should be minimalist ....................................................39 b) The Order ...................................................................................................................... 39

i) Contents of the Initial Order..................................................................................................40 ii) Powers of the Court .............................................................................................................40

Bargain Harold’s (1992 Ont TD) –factors for whether order should be granted ..........................41 Lehndorff (1993 Ont TD)– crt uses inherent JD to incl order stay of proceedings against p/ship..41 Eaton (1997 Ont. T.D.) – Stay of proceedings extended to non-C/R 3Ps ......................................41 Stelco (2005 OntCA) – High water mark of Inherent Jurisdiction – no Jurisdiction to affect

corporate governance..........................................................................................................41 d) Classification of Claims ................................................................................................. 42

i) Developing Plan of Arrangement ..........................................................................................42 ii) Classification of Claims.......................................................................................................42

Re: Woodwards (1993 BC SC)– C/Rs in same class must have common purpose/interest .............42 iii) Voting Rules.......................................................................................................................43

e) Court Sanction (aka fairness proceedings) ................................................................... 43 Olympia v. York (1993 Ont G.D.)– Factors considered for Court Sanction ..................................43

Factors For Court Sanction.......................................................................................................43 2) Commercial Proposals under BIA ........................................................................ 44

Part III – Receiverships.................................................................................................. 45 1) Sources of Right to Rr/ship: Court vs. Private (document) Apptmt ........................... 45

Limits on Powers of Rr ............................................................................................................45 2) Interim Rr ...................................................................................................................... 46

Big Sky Living (2007 ABQB) – court limits powers of interim Rrs ................................................46

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Part I – Bankruptcy

1) Introduction a) Historical Evolution of Bankruptcy Law • Bcy is oldest regime: largely punitive; D viewed as quasi-criminal

o System didn’t distinguish between reasons for bcy o C/Rs could seize D’s assets o Appln: only traders; not all individuals

• Early 1700s: shift from govt-controlled system to C/R-run system o Problem: C/Rs fraudulent o Soln (19th C): intermediary-run system

• BIA, 1919: based mostly on English model • Bcy law is marked by trend of big reforms→another amendment coming w/in next year

b) Objectives of Bankruptcy Law 1) Liquidation of D’s assets & distribution of assets 2) Economic rehabilitation of individual D’s (cf. corporate): debts are extinguished w/ some exceptions 3) Enhance commercial morality + prevent abuse of the system

o Bcy has public interest component: promote reputation of the bcy & credit-lending system c) Fundamental Principles 1) Bcy proceedings are collective: for the benefit of all C/Rs 2) Upon bcy, assets vest in T/B: legal (automatic) transfer 3) Bcy law only deals w/ D’s ppty; not ppty rights of 3P 4) Personal rights of C/R are converted to rights to prove in bcy

o C/R may have ppty right or personal right o Ppty: assert ppty right & get the asset back o Personal (right to sue, damages, obligation owed): share in the bcy by getting dividend

Can’t enforce right through judgment enforcement system 5) Once assets are sold, a statutory system of distribution governs

o General: share pro rata w/ exceptions (ex. preferred) 6) Bcy in respect of individual D: discharge in bcy distinguishes all pre-B claims d) 6 Stages of Bcy Process 1) Commencement – invoking the bcy system (ch.2) 2) Assembling the ppty – T/B gathers D’s assets (ch.3) 3) Sorting out 3P claims – D’s assets subject to diff types of ppty rights→must sort out (ch.4) 4) Enhancing the bt estate – try to improve/swell the assets by voiding certain pre-B transns (ch.5)

o Ex. fraudulent conveyance: T/B can impugn certain transns 5) Determination of eligible claimants + Rules for distribution – ch.6 6) Discharge – individual D (cf. corp: ceases to exist) (ch.7)

2) Commencement of Bcy 4 Key Issues 1) Scope: who is eligible to become bt? 2) How/when can C/R force involuntary bcy? 3) When can D voluntarily go bt? What’s the process? 4) Under what circumstances can a court limit access to bcy?

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a) Appln for a Bcy Order • 3 ways to initiate bcy proceedings

1) Automatic (Div1): common proposal: attempt to restructure o If fails→Div1 triggers automatic bcy

Cf. CCAA restructuring: no automatic bcy is triggered upon failure 2) Involuntary (s.42-43): C/Rs force bcy 3) Voluntary (s.49): D makes assignment in bcy (most typical)

i) Eligibility Rule: natural & unnatural {corp, p/ship} persons can go bt→s.42 & s.49 & s.2 defn of “person”

o s.42 refers to “debtor” (defn = “person”); s.49 refers to “insolvent person” o Defn: “person” includes {p/ship, corp}→s.2

Defn: “corp” = {Canco, Forco}; ≠ {bank, trust co., insurance co, railway co.}→s.2 Except: bank, trust co., insurance co, railway co.→s.2 defn of “corporation”

o This is clumsy drafting: C/R is defined as “person” Arg: bank can’t claim in bcy b/c it’s not a “person”→rejected by courts

Except2: individual + principle occupation = {fishing, farming, soil tilleage} + income ≤ $2500 can’t be forced into involuntary bcy→s.48

o Can still voluntarily go bt o If individual incorporates, it can be forced into bcy

2005/2007 amend: defn of corp will include income trusts→trustco’s can now declare bcy

ii) Procedure for Involuntary Bcy • Terminology issues: cases may refer to old section # & old terminology

o Old: 1) File petition 2) If granted, get receiving order o New: 1) Apply for bcy order 2) Bcy order granted

• Involuntary bcy is more complicated b/c it involves court decision Rule(s.43(1)): Bcy order is granted if:

(a): (i) Debt + (ii) ≥$1000→s.43(1)(a) Debt = sum owing; not just any obligation Total of all debts must ≥1000

(b): “act of bcy” + occurs w/in 6 months of bcy appln→s.43(1)(b) “Act of bcy” falls into 2 categories→s.42(1)(a)-(j)

1) Bad acts (harmful to C/R): harder to invoke b/c must prove intent (b): fraudulent gift, (c): fraudulent preference, (d): D escapes Cda w/ intent to hide from C/Rs

2) Insolvency act: act showing D can’t pay (a): assignmt of ppty for benefit of C/R (e): ppty seized + debt still unsatisfied 5 days after time set for seizure OR debt unsatisfied 15 days post-seizure OR JE officer reports no assets (f): written record of insolvency (ie. D gives notice) (j): D ceases to pay C/Rs (most common)

Rule: Bcy appln is dismissed if: 1) Facts aren’t proven OR 2) court not satisfied of proper service to D OR 3) Court satisfied D able to pay OR 4) other sufficient ground→s.43(7)

Re Kaussen Estate (1988 QbCA) – universalism; Gr. C/R applies against Gr. D w/ assets in Cda • Gr. millionaire keeps maj+ assets in Gr, some in Qb • Gr. C/Rs not paid; Cdn C/Rs fully paid→Gr proceedings under way→Gr C/Rs bring appln in Cda

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• Failure to pay Gr. C/Rs happened more than 6 months before bcy appln Issues: 1) Can foreign C/R apply in Cda in respect of foreign debts? Yes 2) Can bcy appln be brought against Gr. estate? Yes 3) Has an act of bcy occurred? Yes 4) Are C/Rs barred from appln b/c the act of bcy occurred outside 6 month period? No Analysis • 1) Gr. C/R has standing b/c debt owing >$1000: s.43()(a) is satisfied • 2) Bcy appln can be brought against Gr. estate:

o D = {insolvent…resided or carried on bus in Cda} o D carried on bus in Cda: test is met even if carried on some, not main bus in Cda

• 3) Has an act of bcy occurred? o C/Rs alleged that D had made an assignment in bcy even though widow contested

Court: ground a) (assignment of ppty for C/Rs) only applies to voluntary bcy o Ground j) (cessation of payments to C/Rs) is met

D ceased to pay Gr. C/Rs; doesn’t matter if he paid all Cdn C/Rs Cdn bcy law applies to all of D’s assets→∴should apply to all C/Rs Court adopts universalist approach

• 4) Failure to pay Gr. bank occurred more than 6 months prior to appln o Court: even if 1st failure was outside 6 mth period, D still failed to pay leading up to the appln

Note – Universalist vs. territorial approaches • Universalist approach: bcy applies to D, assets, C/Rs, wherever located

o Problem: some countries won’t recognize our C/Rs: can’t enforce o Soln: UNCITRAL model law sets out process for foreign bcy recognition

Look at main proceeding (ex. Gr.): Cdn proceedings merely help the main proceedings Re Abalone (1979 OntSC) – bcy court won’t resolve civil disputes; debt must be strictly proven • 4 C/Rs assert debt >1000→allege cessation to pay C/Rs • D contests debt: claims obligation not owed

o Debt seemed to be part of larger web of debts owed by both parties o Some problems with proof of debt owing

Issue: should court grant bcy order? Held: No • Act of debt owing must be strictly proven • Even if proven, court would dismiss under other sufficient grounds:

o Bcy court isn’t the place for resolving disputes Moody v. Ashton (1997 SaskCA) – can’t force bcy if D can pay • C/R applied for bcy against D • TJ: D had means to pay Issue: should court grant bcy order? Held: no: Court must dismiss appln if D can pay • Purpose of bcy law isn’t to give C/R an addl remedy to enforce debts→that’s what JE is for • Bcy law applies only if D can’t pay • BOP on D to show he has sufficient assets Re Holmes (1975 Engl) – can’t infer single unpaid C/R = all C/Rs unpaid w/ 3 exceptions Issue: can single unpaid C/R assert bcy based on j) (cessation to pay C/Rs)? Held: No • 1 unpaid C/R ≠ infer that all C/Rs aren’t being paid • Single applicant must prove all others aren’t being paid also

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o Except (applicable only to j)): 1) C/R proves he’s the only C/R 2) Special circumstances resulting in pressing need for bcy even if P isn’t single C/R 3) D admits he can’t pay C/Rs

Note: Who can apply for bcy order? • Applicant for bcy order can be someone other than person bringing seizure

o Ex. P has COA against D→D has valuable asset→C/Rs about to seize→P can apply for bcy • If C/R has right to seizure: doesn’t make sense to bring bcy: forces you to share w/ other C/Rs

o Applicable if seizing C/R can’t find assets BMO v. Scott Road (1989 NS) – attempt to change priorities w/ bcy is insufficient for rejecting appln • SP w/ GSA seizes: appoints receiver to take over business + applies for bcy

o Rationale: in bcy, SP > e/ee (cf. outside bcy regime, e/ees > SP b/c prov legislation) Bcy: SP > e/ee > unsecured C/Rs E/ees can’t use provincial law to get higher priority

Issue: Is an attempt to change priorities using bcy law grounds for rejecting bcy order? Obiter: No • S.43(7): court can dismiss appln under “other sufficient cause” if C/R is being malicious

o Attempt to change priorities by invoking bcy isn’t sufficient cause Exercise • W enters K to sell O equipment for $75K→O refuses delivery on Jan28/07→Feb/07: C/R seized

against D→Sept18/07: W applies for bcy order alleging s.42(1)(e) & s.42(1)(j) • Q: any objections? • 1) Appln under s.43(1)(a): there may not be a debt: must check if title to the ppty has passed

o If not, W has action for breach of K (damages) • 2) Appln under s.43(1)(b) for s.42(1)(e) (seizure of truck):

o s.42(1)(e): seizure of truck was act of bcy but not w/in 6 months→∴stale act of bcy • 3) Appln under s.43(1)(b) for s.42(1)(j) (ceased paying C/Rs):

o Unsatisfactory EV that D ceased to meet all liabilities b) Interim Receiver (interim preservation order) • Civil process: action commenced---------------<time delay>---------------------------judgment

o During the time delay, court imposes pre-judgment remedy (freeze assets so D can’t dissipate) • Bcy situation: C/R applies for bcy order-------------<time delay>----------------bcy order granted

o Problem: time delay during which D may deplete assets o Soln: appoint interim receiver→s.46

• Role of Interim Receiver is very limited: Preserve & protect D’s ppty o D’s ppty doesn’t vest in receiver

• S.46 appln usually ex parte to avoid giving notice to D to hide assets Grounds for s.46 Order 1) Strength of P’s appln for bcy: is court likely to grant P’s bcy order? 2) Necessity of order: is there detriment to P if not granted

o Need real apprehension/imminent risk of harm based on smthg about D’s conduct o Mere concern isn’t enough

c) Assignment in Bcy i) Who Can Make Assignment? Rule: assignment in bcy can be made by deceased person w/ leave of court OR insolvent person→s.49(1) • D only needs to show that “insolvent person” applies

o “person” = {individual, corp (excl. bank, trustco, etc.)}

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Defn (s.2): “insolvent person” (4 reqmts): 1) Can’t already be bt, AND 2) Resides OR carries on bus (need not be main bus) OR owns ppty in Cda, AND 3) Liabilities to C/R provable as claims ≥ $1000, AND

“Claims” is wider than debts: includes claims for damages 4) Insolvent:

a. Can’t meet obligations as they become due (cash flow), OR b. Ceased paying current obligations in ordinary course of bus (cash flow), OR c. Total assets < total liabilities due & accruing (balance sheet test)

ii) Procedure 1) Financially distressed D gets licensed T/B

o T/B is an agent for C/Rs (acts for their benefit), not the bt 2) T/B outlines options: {restructure, consumer proposal, bcy} 3) Assists w/ 2 documents:

a. Assignment b. Stmt of affairs: outline of D’s assets + name/addr of claimants

4) T/B usually gets letter from maj+ C/Rs to ensure they’re ok w/ assignment of T/B 5) T/B files documents (note: no need for court appln)

o Time/date of bcy = granting of bcy order OR filing of assignmt OR event causing assignmt to be deemed→s.2.1

iii) Annulment • C/Rs may challenge bcy after it’s granted under s.181 • 2 grounds for annulment: 1) Prove D wasn’t insolvent OR 2) was insolvent but bcy still inappropriate

(ie. abuse of process) Re Dahl (1986 ABQB) – no annulmt just b/c D made assignmt to gain benefit if he met BIA reqmts • Dahl & Klau had S/H agrmt: when 1 dies, other can buy shares of deceased using money from their

life insurance policies • S/H agrmt terminated if either S/H goes bt • Parties have falling out • Dahl gets terminal cancer→makes assignmt in bcy to trigger termination of S/H agrmt + life insurance

goes to his own estate Issue: Is Dahl’s ulterior motive sufficient ground for bcy to be annulled? Held: No • Insufficient grounds to annul unless OS can prove Dahl didn’t meet reqmts of BIA (ie. not insolvent) • Court won’t annul bcy just b/c D made assignment to gain benefit for himself Re Wale (1996 OntGD) • H & W getting divorced→right before matrimonial ppty proceedings, H closes bus, stops paying C/Rs • H makes assignmt in bcy Issue: Was Wale an insolvent person? What does “liabilities” under the defn of “insolvent person” include? If so, was there abuse of process? Held: Insolvent but annulled Analysis • Court considers 3rd test for “insolvent person”: total assets < total liabilities

o Dominant approach: liabilities = all future/current liabilities (incl. long term; due in 5 yrs) Rejects alternative approach: liabilities = those due in next quarter

o Contingent liabilities: Approach1: assess probability: all or nothing

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Approach2: probability * liability (problematic if liability is 5B w/ only 1% probability) • D was legally bankrupt

o Not insolvent under a) (can’t meet obligations) or c) (balance sheet): D could pay o Insolvent under b): D ceased to pay (regardless of whether he could pay)

• Bcy should be annulled: there’s EV of bad faith/abuse of process: D trying to hide assets from wife

3) Property of the Bankrupt • The concept of ppty is important once bcy is triggered

o D’s ppty vests in bcy o C/R’s claim in bcy depends on whether they have ppty claim or personal right against D

a) Fundamental Principles 1) Only D’s assets are available

o Ppty of a bt divisible amongst his C/Rs does NOT comprise: a) Ppty held by bt in trust for 3P→s.67(1)(a) b) Exempt ppty→s.67(1)(b)

2) Real rights created before bcy are NOT affected (ex. 3P’s ppty right) 3) Personal rights held by 3P against D are converted into right to prove in bcy

o Must distinguish between personal right/obligations (owed) vs. ppty right (owned) 4) T/B takes assets of bt subject to any limitations:

o T/B steps into bt’s shoes: faces same limitations as the bt 5) Ppty of bt = {ppty at time of bcy + ppty acquired after bcy but before discharge of bt}→s.67(1)(c)

Defn: “ppty” = any type of ppty, situated in Cda or elsewhere, incl {actions, land, obligations, goods}→s.2 o All of bt’s ppty right vests in T/B (incl. personal rights: right to sue) o Don’t need to distinguish between real vs. ppty right (distinction only applies to 3P against bt) o Income earned between bcy & discharge: Superintendent sets amt required to maintain

reasonable standard of living→s.68 6) SP has a kind of ppty right in a certain class; unSP is owed an obligation (has no ppty right) Examples • Ex1) A & B own land in joint tenancy→B goes bt→ppty vests in T/B

o Q: what entitlement does T/B have? o A: Upon bcy, A’s interest isn’t affect: joint tenancy becomes co-tenancy

If A dies post-bcy: A’s estate gets the ppty T/B has right to apply to court for partition + sale OR sell B’s part to A

• Ex2) D buys winning lottery ticket post-bcy & pre-discharge→winnings announced post-discharge o Q: Who gets the ticket o A: Actual ticket was acquired pre-discharge: goes into bcy→D gets surplus

• Ex3) Watch is broken→owner takes it to repairman o Q1: Repairman goes bt: does watch vest in T/B?

A: No. Owner has proprietary interest • Repairer has claim for cost for repairs (obligation) • Repairer has possessory lien (proprietary right to retain possn)

o Q2: Owner goes bt: what demand can T/B make of repairman? A: Ask for watch back subject to lien (so long as repairman has possn)

• Repairman is owed an obligation (right to prove in bcy)

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Gano (1997 ABQB) – action for damages relating to the person doesn’t vest (incl. punitive) • Bt has claim against 3P for punitive damages→sues • 3P arg: action vests in T/B→∴bt can’t sue, action must be struck out Issue: does the action vest in T/B? Held: No Analysis • Ppty doesn’t include all rights of action

o Ex. COA for divorce: it would be absurd to allow this to vest in T/B • Heads of damage relating to the person (ex. personal injury, defamation)→doesn’t vest in T/B

o Rationale: bcy not designed to take recovery for bodily pain from the bt • Some events giving rise to personal + ppty damages: ppty claim vests in T/B Application • Claim for punitive damage is a judicial fine: not associated w/ bt’s ppty→∴doesn’t vest in T/B

Re Bell (1996 BCSC) – damages for earning capacity relates to ppty→vests in T/B • Bt has claim for personal injury→part of it is for loss of earning capacity Issue: Does claim for damages relating to loss of earning capacity relate to the person or ppty? Held: Ppty • An award for diminished earning capacity relates to ppty: should vest

o The capital asset is capacity to earn Note • Decision is problematic:

o Hypo: Bt has 40 years of expected earning capacity→gets injured→monetary award Applying Bell, C/Rs can go after all 40 years of income

• Re Anderson (2004 ABQB): Bt gets damages for 40 yrs of expected earning capacity o T/B can’t go after all of it: only earnings pre-discharge vests in T/B o Bcy laws aren’t meant to require payments by the bt after bt’s discharge

Tinant v. Tinant (2003 ABCA) – MPA actions vest iff triggering event (separation) occurs • Bt (non-owning spouse) had right to apply under matrimonial ppty law against other spouse • Graham (old law): doesn’t vest: it’s a right of action that only gives the right to ask court for discretion Issue: Does this right vest in T/B? Held: Yes, but only upon triggering event (spouses separate) • Court changes the law: purpose of MPA is to govern ppty→∴actions under MPA vest • Limit: Parties must actually separate: T/B can’t pursue division w/out triggering event

o Recall: T/B steps into the shoes of bt: if bt hasn’t separated, T/B can’t apply for division Blackman v. Davison (1987 BCCA) – T/B can’t assert claim arising from trust w/out separation • Bt has right arising from family law: Equitable principles gave entitlement

o Couple had condo→wife held title→H was bt • T/B wanted to assert bt’s right arising from resulting/constructive trust • Nature of the right arising from the trust: doesn’t require triggering event

o Spouse need only prove contribution to get declaration w/out separation Issue: Can T/B assert the claim? Held: No→QUESTIONABLE • Only the H is entitled to bring claim/declaration of trust (questionable!!)

o Court also questioned existence of trust: couldn’t establish intent to create resulting T + no UE Note – subsequent decision takes different position • Kopr v. Kopr (2006) – right of action for ppty vests whether or not the parties separate b) Exemptions (note: DOB = date of bcy) Rule: the divisible ppty of the bt shall NOT comprise exempt ppty→s.67(1)(b)

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• Exemption = statutory limit on C/R’s ability to use JE means to go after an asset • Procedure: exempt ppty vests in T/B→T/B determines not divisible→reconveys back to bt

o Problem: D sells exempt ppty→goes bt→vests in T/B→in the interim, bt can’t transfer to 3P B • Exemptions may come from any law applicable in province {prov, federal}

o Diff provinces have diff exemptions: ex. Alta: pensions are exempt but bank RRSPs are not Cf. Qb: all RRSPs are exempt

o CEA, 88: some assets are completely exempt & others have monetary limit (ex. up to $50K) 5 Scenarios Relating to Exempt Property i) Exempt ppty converted into non-exempt ppty before date of bcy • Situation: Exempt ppty--------------------converted to non-exempt--------------------------owner goes bt Hirani (1993 AB) – look at applicable law: some provinces preserve exempt status (Alta: 60 days) • D has pension (exempt)→July 27: transfer pension to bank RRSP (non-exempt)→July 30: Bcy Issue: what effect does the conversion have on bt’s ability to claim exemption? Rule: Exemption status determined at date of bcy unless statute says otherwise • Need to look at provincial statute:

o Some provinces: proceeds of exempt asset are exempt o BC/Sask CL: voluntary sale by D destroys exemption (cf. involuntary (SP forces sale) doesn’t) o AB CEA, S.37(2) reg: proceeds from sale of exempt asset + proceeds NOT intermingled with

other funds→exempt for 60 days regardless of whether the sale was voluntary or involuntary

ii) Exempt ppty converted into non-exempt ppty after date of bcy • Situation: Exempt ppty---------------------bcy-----------------------------convert to non-exempt (ex. sale) Re Gruber (1993 AB) – proceeds of exempt assets realized post-date/bcy exempt iff identifiable • Post-DOB, D sells exempt asset to make money to support his family during the bcy Issue: does this affect exempt status? Rule: exemption status determined at date of bcy→∴doesn’t matter if status changes post-date of bcy

o If exempt pre-bcy→proceeds remain exempt post-date of bcy o Limit: proceeds must be identifiable

• Rationale: bcy law designed to promote fresh start: ∴allow slae of exempt assets to rehabilitate iii) Exempt ppty acquired after bcy • Situation: bcy---------------------------------------bt acquires exempt ppty • Statutory interpretation issue: 2 conflicting sections: which is pre-eminent?

o S.67(1)(b): exempt ppty isn’t divisible vs. s.67(1)(c): post-bcy, pre-discharge ppty is divisible Re Monteith (SaskCA) – exempt ppty acquired post-DOB is exempt • Post-DOB, D is awarded ppty (formerly belonging to her H)→wants to claim exemption Issue: Is ppty exempt despite s.67(1)(c)? Held: Yes; s.67(1)(b) > s.67(1)(c) • Ppty is exempt notwithstanding s.67(1)(c) iv) Non-exempt ppty converted to exempt ppty Pre-DOB • 2 possible responses:

o 1) T/B may attack the transfer as fraudulent conveyance o 2) Court may use discharge powers:

Typically, 1st time bt gets absolute discharge if there’s no objection

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Here, C/R may object: “D should make available the amt that was converted to exempt” Court may impose conditional discharge (cf. absolute): contingent upon D making

available the amt he converted into exempt assets v) Exempt ppty increases in value post-DOB • Exempt----------------------bcy-----------------------------value of exempt ppty increases Gazelle (2001 ABQB) – exemption determined at DOB; D keeps value increase if w/in exemptn • 4 months pre-bcy, man transfers ½ interest in exempt ppty to wife→joint owners • DOB: FMV of house = $225K→post-bcy: $260K • C/R arg: increase in value is divisible amongst C/Rs • BT arg: at DOB, it was determined that his asset was exempt→∴increase in value remains exempt Issue: Does increase in asset’s value post-bcy, pre-discharge go to bt’s exempt portion or to the C/Rs? • If asset is owned by 2+ owners→prorate the value: increase in value doesn’t just accrue to the bt • CEA set the exemption at $40K

o Policy: permit D sufficient assets to maintain himself/family at reasonable standard of living o D may not preserve more than $40K: to do so violates the intention of Parliament

• If transfer to wife is legitimate: H gets $20K exemption; if not: H gets $40K exemption Note • C/Rs applied for s.38 order to pursue action setting aside the ppty transfer to bt’s wife:

o Sometimes T/B isn’t willing to pursue litigation for certain issues o C/Rs can apply to court under s.38 to pursue remedy at their own risk o All C/Rs interested in litigating must be present at the s.38 appln to share in the litigation

winnings DOB Post-bcy Post-bcy: 2 owners FMV of asset 225K 260K 260 Mortgage 160K 160K 160 Equity 65K 100K 100 Exemption (CEA) <40K> <40K> <40> Divisible amongst C/Rs 25K 60K 60K/2 owners = 30K

MacKay (2002 ABQB) – if asset was exempt at DOB→apply exemption at date of sale • Rule: Determine if exempt at DOB→if increase in value, apply exemption at date of sale • Value of the asset is determined only when the asset is realized

o Not crystallized at DOB but Bt doesn’t realize benefit until asset is sold • T/B can’t wait forever for value to ↑: must decide by the time of discharge if he’s going after the asset

o 1) Realize for the surplus equity: sell before discharge + share remainder w/ C/Rs o 2) Conclude no asset: don’t see if C/Rs likely get nothing o 3) Conclude there’s some value but not enough to justify sale→court can grant discharge

conditional upon bt paying the increase in value Ex. $250K (FMV) - $200K (mortgage) = $50K - $40K (exemption) = $10K for C/Rs Conditional discharge: bt must pay $10K value to C/Rs

Summary Scenario Result 1) Exempt→convert to non-exempt→bcy Determine status at date bcy unless statute says diff

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Alta CEA: continues exempt 60 days 2) Exempt→bcy→convert to non-exempt Ppty remains exempt iff remains identifiable 3) Bcy→bt acquires exempt ppty Ppty is exempt 4) Non-exempt→converted to exempt→bcy 2 responses:

1) T/B attacks as fraudulent conveyance 2) Court may order bt to make available the amt transferred to exempt as part of condl discharge

5) Exempt→bcy→exempt asset increases in value 1) Determine if asset is exempt at DOB 2) Apply exemption at time of sale/value realized T/B must decide by appln for discharge if he’s going to realize on the asset (for C/R’s benefit)

Proposed Amendments • 2005/2007 amdmts contains new section s.67(1)(b.3): bank RRSPs will now be exempt

o Affects Alta b/c it wasn’t exempt before • Limit: amdmt doesn’t affect provinces where all RRSPs are already fully exempt

o Bt needn’t rely on s.67(1)(b.3) c) Trust Property Rule: divisible ppty of the bt shall NOT comprise ppty held by bt in trust for 3P→s.67(1)(a) • 4 types of trust:

o Express – intention o Resulting – operation of law o Constructive – operation of law o Statutory – usually applies to debts owed to govt (ex. ITA)

• Beneficiary of trust has proprietary interest in the assets→∴respected in bcy • 2 issues:

o 1) Did the bt hold ppty on trust? Or was it some other r/ship? o 2) What happens if the trust ppty has been disposed of?

Beneficiary must be able to point to trust ppty OR proceeds of the trust ppty Once the trust ppty is gone, beneficiary only has personal right Ex. T/B breaches trust, dissipates trust ppty→beneficiary must share in bcy

1) Express Trust • Express trusts need 3 certainties: 1) intention 2) subject matter 3) beneficiary • Issue: what happens if trust ppty is disposed of? Grant (2005 ABQB) – Equitable tracing rules • Trustee defrauds man→uses trust assets to pay personal debts • T’s assets vest in T/B: some of it is $ held in trust, others is T’s own money Issue: Can man/beneficiary trace trust assets into hands of T/B? • If so, beneficiary can assert claim (scoop out asset) in bcy Analysis – Lionel Smith & Tracing • 2 types of substitutions

o Clean substitution: $ in cash→cash traded for car→car traded for bike→easily traced o Mixed substitution: $ put into acct→mixed with other funds→harder to trace

• 3 Equitable Tracing Rules 1) Mixture→Presume bt T’s $ is spend 1st

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Bt’s money: 100 Trust assets: 100 W/draw: <100>→Presume the $100 w/drawl was Bt’s $

2) Mixture of $ belonging to multiple beneficiaries→share pro rata A’s money: 100 B’s money: 100 W/draw: <100>→A & B share pro rata ($50 each)

3) Intermediate Balance Rule: mixture + w/drawl < bt’s $→beneficiary’s ppty right must be adjusted downwards (new deposits into the acct don’t accrue to beneficiary)

T’s $: 100 Trust assets: 100 W/draw: <150> ------------------------------------ Balance: 50→1st $100 was T’s $; $50 of the trust assets have been eroded T deposits own $: 50→subsequent deposit doesn’t trigger rejuvenation of trust assets ------------------------------------ Balance: 100→$50 belongs to trust; $50 is T’s own

• Grant: some $ was traceable→beneficiary could claim against T/B

2) Resulting Trust • RT arises in 2 situations: 1) when intentional trust fails & 2) presume gift to stranger is unintended • Situation: intentional trust has defect→T has legal title→T goes bt→settlor can get ppty back w/ RT

3) Constructive Trust • Law relating to CT is unpredictable

o Inherent conflict: imposing CT gives a right to assert ppty right (scoop asset from bcy) • Recall: 2 types of rights: 1) Ppty & 2) obligation {K, UE, wrongs}

o CT crosses the 2 categories: a finding of CT imposes proprietary remedy for UE/wrong o Effect: person claiming CT can assert their claim over other C/Rs

• CT arises in 2 circumstances (law is clear as mud: not sure when courts will find CT) o 1) Restitution for Wrongdoing: breach of fiduciary duty, breach of confidence

SCC: limited circumstances under which court will find CT in bcy • CT typically isn’t a fair remedy b/c 1 C/R is preferred over others

o 2) Restitution for UE (pure UE): some courts have awarded this instead of $ award (unsecured) • Limit: alleged CT ppty must still exist OR be traceable Re Baltman (1996 OntGenDiv) – CT law is uncertain: court rejects CT arg in unprincipled decision • Scam artist uses forged share certificates to get RBC loan→loan used to buy paintings→goes bt • RBC claims UE, asks court to impose CT on paintings

o RBC also had claims in breach of K (obligation) but didn’t pursue this (not sure) Issue: Should court impose CT? Held: No • Elements of UE weren’t made out:

o No “absence of juristic reason” b/c loans were made under K Lawyers likely screwed up: should’ve rescinded the K based on fraud

• Even if UE was proven, CT was inappropriate (QUESTIONABLE!) o Parties were in purely commercial r/ship o Bank could’ve taken security on paintings but didn’t: wasn’t duly diligent o Unfair to give bank preference over other C/Rs (this is likely the real reason)

Note

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• Courts have found CT in similar cases 4) Deemed Statutory Trust • Bt parties often owe $ to the Crown • Statutes try to remedy this by imposing deemed trust (ITA, WCB, etc.)

o Ex. ITA imposes deemed trust for unremitted tax & e/ee source deductions • Deemed trusts vary between provinces (depends on fedl & prov statute) • A trust is imposed even if ppty isn’t traceable BC v. Henfrey (1989 SCC) – deemed stat trust claimable in bcy only if meets ordinary trust principles Issue: Is deemed statutory trust claimable in bcy? Held: Yes, but only if it satisfies ordinary trust principles • Problem: deemed trusts likely never satisfy ordinary principles→that’s why they’re deemed!

o Difficult to identify/trace assets Note • Henfrey defeats the purpose of statutory deemed trusts • BIA has codified this decision Rule: ppty of bt is NOT regarded as held in trust for R→s.67(2) Except: some deemed trusts {unremitted source deductions by e/ers (IT, CPP, EI)}→s.67(3)

o Policy: e/er deductions is too important a source of revenue to lose to bcy Recall: e/er takes deduction→e/ee can claim against CRA even if e/er doesn’t remit

o Note: GST isn’t excepted • Effect: Statutory trusts don’t’ work unless excepted under s.67(3) (e/mt source deductions) d) Surplus Income (s.68) • Situation: bcy→bt continues to earn income→income counts as after-acquired ppty→vests in T/B • If C/Rs take all earnings, then B won’t have any way to survive

o ∴Federal exemptions exist to allow bt some money to survive post-bcy & pre-discharge • s.68(1): the superintendent (overseer of bcy system) sets up rules to det how much after-acquired

earnings must be paid to T/B o Previously T/B had to apply to court→problem: v. discretionary, some T/Bs didn’t apply o Now: Federal Guidelines (Directive #11-R)

Calculating Surplus Income • “total income” = {all revenues of whatever source/nature}→s.68(2)

o T/B makes determination of income→go to mediation process if someone objects 1) Calculate available family income for the family unit (11R, para4-6)

o Family unit = anyone residing…that incurs or contributes to expenses→para5 Doesn’t depend on r/ship or conjugality

a) Family’s total income = All members’ monthly income – (Stat remittances for salaried e/ees & required deductions) - (bus expenses/deductions under ITA for self-e/ed people)→para6(2)

b) Available family income = net income – non-discretionary expenses→para6(3) Non-discretionary = {child/spousal support, child care, expenses permitted under ITA}

2) Calculate surplus income→para7 • SI = avail family income – superintendent standard

o Superintendent standard: see chart (looks at how many people & income for family) 3) Determine how much surplus income to be paid to T/B→para.7

o If SI <100→pay 0 o If 100 ≤SI ≤1000→pay 50% to T/B

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o If SI ≥ 1000→pay between 50-75% to T/B Multiple Income Earners • If multiple income earners, then SI must be adjusted (pro rata) so that only B’s portion of the family

income is paid to T/B • Ex. Bt’s available monthly income: 1800

W’s available monthly income: 1000 Available family income: 2800 Superintendent standard <2286> --------------------------------------------------------------- Surplus Income 514

• Only B’s portion of the income is debt o B contributed 64.3% of the income (1800/2800 = .643) o 64.3% of the SI should be paid to T/B = $165

CL • Main issue in CL: r/ship between s.67 & s.68

o S.67: after-acquired ppty vests in T/B vs. s.68: bt can keep some income to survive • Merzetti v. Merzetti (SCC): s.68 is complete code: if it governs, then s.67(1)(c) doesn’t apply

o Effect: earnings don’t immediately vest unless/until T/B invokes s.68 to get at the ppty Re Landry (2000 OntCA) – incl awards for loss of pre-bcy wages in surplus income calc • 1993: L is fired→97: bcy→98: discharge→award for wrongful termination Issue: Is the award applicable to the bcy? Award was made to cover lost wages in 1993 • S.68 is complete code • Surplus income includes awards for lost wages even if the award covers a period of time pre-bcy Re Coates (2006 ABQB) – s.68 covers income for basic expenses (wages), NOT windfall • AB residents get $400 rebate→statute says it’s exempt from bcy: deemed return for tax overpayment Issue: Is $400 governed by s.68? • If s.68 governs, it’s treated as a s.68 federal exemption • If s.67 governs, it vests in T/B but is exempt under s.67(1)(b) (provincial exemption) Analysis • S.68 exists to ensure bt has reasonable amt to stay alive • If receipt has nothing to do w/ living expenses, then it’s not related to s.68

o S.68 applies to receipts ordinarily used for basic expenses: {wages, awards for lost wages} Doesn’t incl. {sale of assets, receipts in the nature of windfall}

Anderson (2004 ABQB) – s.68 applies to award for lost damages even if it covers period pre-bcy • MVA-------(34 mths)-----------Bcy------(19 mths)------------discharge---------------------award for MVA

o Award = $37,500 (loss of future wages) + $22,500 (loss of past wages) Issue: Does S.67 or s.68 apply to the award? Held: s.68 applies • Re Bell: some damages can relate to ppty • S.68 doesn’t apply to loss of future wages ($37,500) BUT applies to loss of past wages • Muddled reasoning for how much of $22,500 goes into bcy:

o Court seemed to divided $22,500 over entire period from Bcydischarge & applied exemptions for period between bcydischarge

o Effect: lost wages for pre-bcy period is available to the C/Rs Note – Live Issue: not sure how to calc awards for lost wages that covers pre-bcy & bcy periods

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• Re Landry: s.68 includes award for lost wages even if it covered wages pre-bcy (incl it ALL) • Anderson & other case: take award & divide it over period from MVA/terminationdischarge e) Principle in Ex Parte James • Theory: T/B is an officer of the court: shouldn’t invoke legal right (to ppty) if it’s unconscionable &

inconsistent w/ natural justice o Situation: T/B gains benefit under mistake of law

CL: no recovery if problem arose out of mistake of law (cf. mistake of fact) BUT curable under bcy principle

Re McDonald (1972 OntSC) – T/B can be prevented from asserting legal right if unfair • Bt gets condl discharge w/ condition that he pay $3300 to T/B • Bt’s last 2 payments split in 2: 1) 99 dated & 2) $1 undated • Bt asks T/B to hold off on applying the last $1 to avoid publicity of the discharge→Bt dies • Technically, he hadn’t been discharged→insurance vested in T/B under s.67(1)(c) Issue: Should insurance be payable to C/Rs? Held: No • Unfair to allow T/B to invoke legal right b/c bt had paid all but $1 • Principle in ex parte james used to prevent s.67(1)(c) from operating Note • Very hard to invoke this

IV) Effect of Bankruptcy on Third Parties a) Stay of Proceedings (s.69.3) • Affects C/Rs • Objectives: 1) Prevent multiplicity of actions & 2) Prevent rush to grab assets i) Characteristic of Stay 1) Automatic stay of proceedings occurs bcy (order OR assignment)→s.69.3(1) 2) Duration: Stay lasts from date of Bankr until discharge of trustee→s.69.3(1) 3) Coverage:

o Prevents litigation (commence or continuing actions) AND enforcement 4) Claims subject to stay: those provable in bcy under s.121

o Doesn’t apply to claims arising post-DOB (ex. debt) b/c claim didn’t exist at DOB o Problem: even if C/R sued, there’s no $ to satisfy judgment b/c all bt’s assets vested in T/B o Effect: C/R w/ debt arising post-bcy must wait until bcy ends & bcy gets assets to repay

5) Stay doesn’t operate against 3P o Ex. A loans from bank→B guarantees loan→A goes bt o Bank’s action against A is stayed, but can go after B

6) Doesn’t operate against SP b/c SI = proprietary right→s.69.3(2) o SP can foreclose, seize/sale o T/B may try to delay the secured C/R’s remedy by applying to the court

7) Vachon v. Canada (SCC): stay covers judicial + extra-judicial (self-help) remedies o Facts: C/R overpaid to D→D goes bt→C/R stops paying E.I. to set-off original overpayment o Court: C/R can’t do this – extrajudicial remedy is also stayed

8) Owners must get order to get back ppty that’s in bt’s possessn→S.81 o File a proof of claim and affidavit with T/B before retaking possession

ii) Lifting Stay • C/R can apply to court to lift stay (to allow them to go after asset)→s.69.4

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• Limit: only in some circumstances: 1) Stay materially prejudices C/R or person OR 2) Equitable to lift • Limit2: only to allow litigation (ie. commence/continue action); never for enforcement • 5 situations where stay can be lifted (Angelstad (1991 SaskQB))

1) Case involving multiple D’s + effective litigation requires Bt to take part (named as a defendant) 2) Complex litigation: better to get court to assess/quantify damages

o Cf. T/B’s summary determination using lmtd procedure of proof 3) Civil action in advanced stages (almost complete): best to let it to continue to judgment 4) Bt is the insured + action required to allow P to recover against Bt’s insurer 5) Action is for debt not subject to release upon discharge under s.178(1)

o Some debts aren’t released upon discharge: ∴no reason to stay the proceedings • Note: Court won’t ever lift stay for enforcement purpose: C/R can’t ever interfere w/ bt’s estate • Undischarged debts:

o Stay doesn’t apply to proceedings under proceedings under s.121(4)→s.69.41 S.121(4) includes s.178(1) family support claims (child/spousal support, etc.)

o P’s w/ undischarged debts can’t go after ppty vested in T/B o Ex. Child/spousal support payments can’t discharged

Recipient can go after surplus income OR exemptions (some provinces only) b) Effect of Stay on Unsecured Creditors • General: can’t enforce claims/go after assets; must prove in bcy & get dividend in bcy Rule: bankruptcy order > uncompleted legal processes (judgements, writ, remedy) of unsecured C/Rs against ppty of bt→ S.70(1) Unless: it’s fully paid/completed pre-bcy

o “fully paid” = enforcement is fully completed Ex. enforcement agency holds $, about to pay C/R→bcy→C/R must share in bcy

• Effect: C/Rs may want to force involuntary bcy to prevent fast C/Rs from getting everything West Coast Savings v. McElroy, (1981 BC SC) – Bankruptcy changing priority of Unsecured Creditors Facts • Ppty: 1st mortgage→2nd mortgage→writ against title→3rd mortgage→D goes bt

o Pre-bcy priority: M1 > M2 > Writ > M3 Issue: Does S.70 change priorities? Held: Yes, T/B > writ: • New priorities: M1>M2>M3>T/B>Writ

o Pay mortgages 1st b/c they’re SP→surplus vests in T/B→writ holder shares in bcy Note – situation creates strategic behaviour • M3 more likely to force involuntary bcy to get more • Wood proposes alternative analysis:

o S.70(1) only says T/B > writ, doesn’t say writ is extinguished o T/B is a representative of bt AND C/Rs, not just the bt:

∴T/B acquires any right available to C/Rs to enhance the estate by avoiding or subordinating competing 3P claims

o Soln: pay M1, pay M2→rest goes into bcy order o T/B acquires writ holder’s priority→distribute its share in bcy along w/ those of all C/Rs

Writ maintains priority but so does all C/Rs: removes incentive for M3 to force bcy c) Effect of Bankruptcy on Matrimonial Property Litigation • Issue: if non-owning spouse goes bt, can T/B go after the other spouse?

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Millar v. Millar (1991 ABCA) – effect of bcy depends on nature of MP order • Verukas (cited w/ approval):

o Matrimonial ppty schemes are preferred distribution schemes o Division of MP occurs upon court order (cf. communal ppty regime) o Upon bcy of owning spouse→ppty vests in T/B

Non-owning spouse can’t just go after ppty: must prove claim in bcy • Except: if they can prove resulting/constructive trust→can scoop out asset

o If court had already made order pre-bcy→effect post-bcy depends on nature of the order: 1) Vesting order: transfers ppty entitlement: spouse > T/B 2) Payment order: 1 spouse must pay the other: T/B > spouse (unsecured C/R)

Facts: • Divorce order: H gets title to house on condition that he pay $ to wife→H goes bt before paying Issue: what’s the effect of the order on bcy? Held: Wife wins: has ppty interest (cf. unsecured C/R) • Transfer of the house to H was conditional on satisfaction of payment to W • Since W hadn’t been paid→she can assert her title in the ppty

o Wife entitled to ½ of sale price of home, is an unsecured creditor for any remainder d) Effect of Bankruptcy on Landlords (& their remedies) • Remedies of landlord:

o 1a) Terminate lease upon default, OR o 1b) Distress for rent: go onto premises & seize ppty + sell to satisfy arrears owing, AND o 2) Bring action (as unsecured C/R) for arrears of rent

• Issue: what’s the effect of bcy on landlord’s remedies? i) Effect on Termination • Termination is effective if landlord terminated pre-bcy • Post-bcy: rights determined by provincial law→s.146

o AB Landlord’s Rights on Bcy Act (LRBA): T/B may continue to occupy premise + must pay occupation rent (at K rate) as it becomes due

Need not pay arrears • Effect: Landlord can’t terminate ii) Distress for rent • Pre-bcy: Alta CEA, S.104: distressed landlord > SP, unless SP has PMSI

o Outside of bcy, defn of SP usually covers distressed landlord o Distress is effective if process already completed pre-bcy

• Post-bcy: landlord (preferred C/R)→BIA s.136(1)(f): ∴landlord < SP o BIA defn trumps other defns of secured C/R for purposes of bcy

Profoot (1981 ABQB) – distressed landlord loses priority in bcy • Landlord------------SP-------------L right of distress------T/B Issue: effect of bcy on L’s right of distress? Held: L loses priority to SP • Pre-bcy: L > SP • Post-bcy: L is given preferred C/R status under s.136(1)(f): loses priority iii) Assignment of Lease • Situation: tenant leases ppty→goes bt→T/B may try to assign the lease (may have commercial value) • Problem: Some lease Ks prohibit assignment • Soln: LRBA, s.8: NWS K term, T/B can assign iff new tenant 1) observes/performs lease terms, 2)

agrees to conduct reasonable business 3) be fit person (pay all arrears) + 4) approved by court

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o Appln: only applies to merchants MicroCooking (1988 OntTD) – Variation of Assignment Clause • Tenant lease space in mall→bt→T/B assigns lease to 3P • Lease K had restrictive user provisions: developer wanted certain # of different types of tenants

o New tenant (yogurt store) wanted to replace cooking supplies store Issue: Can T/B assign the lease? Held: No • Purpose of legislation was to allow T/B to assign lease if K simply doesn’t allow assignment

o BUT, it’s not the court’s job to rewrite the K • Provincial statute (LRBA) can’t vary the other terms of the K: tenant must abide by other terms e) Set-Off • Situation: A owes B $30,000→B owes A $50,000→B goes bt

o If set-off allowed: A claims $20,000 in bcy→gets $2,000 o If set-off prohibited: A claims $50K in bcy→gets $5K→must pay full $30K→effect <-25K>

Recall: B’s claim against A vests in T/B Rule: The law of set-off applies to all claims in bcy + actions initiated by T/B→S.97(3) • 2 Types of set-off:

1) Legal Set-Off: 2 requirements: 1) both obligations = debts + 2) mutuality: both must be same type of right (ex. debt vs. debt; NOT unliquidated claim vs. debt) o Coopers v. Lybrand: at bcy, 1 debt was immediately due; other payable in the future

Held: Set-off allowed: both are debts 2) Equitable Set-Off: set-off allowed even if both aren’t debts BUT 2 claism must arise from same or

closely related K or event o Eg. S sells goods to B on credit→goods defective, B doesn’t reject goods→S goes bt

B has claim for Breach of K (warranty)→court must assess damages (unliquidated) Legal set off not available BUT equitable set-off is

f) Effect on Secured Parties • SP has proprietary right: BIA respects this General Rules • 1) Defn of secured C/R = C/R holding SI against personal OR real ppty (incl. stat. Lien)

o Unless: BIA lists SC/R as preferred C/R under s.136→C/R gets preferred status, not SP status→Profoot

o Limit: statutory SI + in favour of R (non-consensual): different treatment under s.86-87 o PPSA defn < BIA defn of SP: BIA incl: {mortgage, charge, lien holder}

• 2) Unregistered SP o BIA only deals w/ assignment of book debts; doesn’t subordinate claims (PPSA does this)

SI < T/B if unperfected→PPSA, s.20 • 3) Unregistered mortgage > T/B:

o Unregistered mortgage > T/B: no subordination provision in Land Titles Act i) Procedure: SP Rights in Bcy

1) If SP fully secured→realize on collateral + don’t prove in bcy 2) If SP partly secured→prove in bcy to extent of any deficiency→s.127(1) 3) Valuation:

a. SP can file tentative valuation while proving for balance; can amend valuation→s.131-32 b. SP only entitled to dividend in bcy to extent that assessed valuation is less than the secured

debt (ie. deficiency)→S.128(2)

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c. If T/B dissatisfied w/ valuation of collateral→T/B can require sale of collateral/security (terms to be agreed upon by T/B & SP)→S.129

4) SP can surrender SI to T/B + prove for entire debt in bcy→s.127(2) 5) T/B powers:

a. If SP doesn’t realize→T/B can make demand + SP must file proof of security, incl. valuation→s.128(1)

b. T/B may dispose of collateral free from security if SP fails to file proof of security w/in 30 days of notice from T/B→S.128(1.1)

c. T/B has right to inspect collateral in SP’s possession: if T/B requests inspection→SP can’t realize on collateral until post-inspection→S.79

6) Redeeming the collateral: a. T/B can redeem collateral by paying the assessed value→S.128(2), S.134 b. SP may require trustee to elect to redeem or not: if no election w/in 1 month (or longer, if

court allows)→right to redeem is lost→S.130 7) SP excluded from dividend if he doesn’t comply w/ s.127-132→s.133 8) SP is free to realize on security subject to ss.79,127-125, 248(1)→s.69.3(2) 9) Stay of Proceedings

a. Court may grant stay of proceedings against SP if T/B applies: limit: good for max 6 months from DOB→69.3(2)(a)

b. SP may apply to have stay lifted – stay does not operate automatically against SP→S.69.4

Farmstart (1988 SaskCA) – SP retains SI even after discharge; surrender of SI requires intention • SP1: 1st mortgage-------SP2: 2nd/3rd mtge------------SP3: 4th mtge------------bcy--------------discharge • Land heavily encumbred: SP3 owned 4th mtge

o SP3 assumed not enough to pay all SI→∴proved claim in bcy as unsecured C/R o Post-discharge, D paid off M1 & M2: there was actually $ left to pay SP3

Issue: 1) Did SP3 surrender SI by claiming as unsecured C/R? 2) What’s effect of discharge on SP? Held: SP3 wins: SP3 can pursue collateral Analysis • If SP surrenders SI→can’t claim SI anymore

o Surrender requires intention to surrender • Discharge doesn’t affect SP’s ability to enforce SI (b/c proprietary right) BUT SP can’t sue for

deficiency as unsecured C/R o Upon discharge, the underlying debt is released BUT SI isn’t (ppty right, not personal) o SP3 can’t sue for deficiency as unsecured C/R

Note • Farmstart created debate re: increase in ppty value post-discharge

o Arg1 (Buckwold): treat post-discharge increase in ppty the same as new ppty acquired post-discharge: SP can’t go after it

o Arg2: all increase in ppty value is available o Wood leans towards arg2: SI grants proprietary right in the collateral outside of bcy regime

∴Increase/decrease after discharge irrelevant Holy Rosary (1967 SCC) – Effect of Discharge of Bankrupt on SP – SI not retained after Discharge • D gives wage assignmt (pay-day loan): SI-------------Bcy---------------discharge------------future wages Issue: Can SP go after post-discharge earnings?

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Held: No, debt is released • Future wages are new assets of D; it’s not ppty Note • Reconciling Farmstart & Holy Rosary

o Farmstart: SP allowed to go after SI post-discharge vs. Holy Rosary: not allowed o HR deals w/ ppty acquired post-discharge (cf. Farmstart: ppty existed pre-bcy)

• Live issue: what if asset is acquired post-bcy & pre-discharge? o Ex. SI---------new asset1-----------Bcy-------newAsset2----------discharge----------newAsset3

NewAsset1 is covered→Farmstart; newAsset3 isn’t→Holy Rosary; not sure about #2 • HR decision led to s.68.1: wage assignment doesn’t cover post-Bcy earnings

o S.68.2: same but for accts generated after bcy g) Executory Contracts • Situation: sales K→S to sell to D→D to pay S→S delivers goods, D doesn’t pay

o If D goes bt, S can claim in bcy as unsecured C/R o If S goes bt, S’s rights vest in T/B→T/B can sue D for price of goods

• Problem: what happens if K hasn’t been completed for both parties? This is an executory K o K is both asset and liability in bankruptcy o US law: spells out law cf. Cda: no statutory provisions

Thompson (1924 OntSC) – Bcy doesn’t terminate K • Bcy ≠ K terminated (except: E/ee K) • T/B as 2 options

o 1) Affirm the K: T/B notifies OS that they’ll perform o 2) Disclaim the K: T/B not prepared to perform

Disclaimer = OS released from future obligations Disclaimer ≠ rescission (wipe out ab initio): OS has claim for damages (breach of K)

claimable in bcy & can continue to benefit from terms of K o Notice must be given w/in set time→if not, OS can assume disclaimed

h) 30 Day Goods (S.81.1) • Rule: Supplier of goods must prove in Bankruptcy as unsecured creditor • Except: 30 days goods rule: supplier can repossess under lmtd circumstances→s.81.1(1)

o Rationale: 11th hr transfers Upon bcy, SP can scoop all assets If D obtains last-minute transfer from unsecured supplier→SP can scoop this too Problem: ex. corp gives SI to SP→individual D/R gave personal guarantee→if SP

doesn’t recover against corp, can go after D/R • D/R has incentive to do get unsecured supplier to transfer ppty so SP’s claim is

satisfied (escapes personal liability) Soln: s.81.1

Rule(s.81.1): Supplier can repossess iff meet requirements: 1) sale of goods + 2) for use in purchaser’s bus +

3) written demand for repossessn given w/in 30 days of delivery of goods to purchaser + 4) purchaser is bt OR in receivership at time of written demand + 5) goods still in possessn of purchaser OR T/B OR receiver + 6) identifiable + 7) same state as when delivered + 8) not resold to BFP (AL purchaser)

Limit: If bt paid in part→supplier repossesses pro-rate OR repay T/B & repossess entire→s.81.1(2)

i) Criticisms of s.81.1

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1) “Written demand w/in 30 days of delivery”: supplier often won’t know abt bcy: easy to miss deadline 2) “identifiable”: issues when supplier makes >1 delivery & goods can’t be identified Thompson (1996 Ont KB) – identifiable reqmt is very strict Facts: • Delivery1---------------Delivery2-----------------B-----------------------Notice (w/in 30 days of delivery2)

o Supplier makes 2 deliveries→D goes bt→C/R gives notice w/in 30 days of delivery2 o Goods between delivery1 & delivery aren’t identifiable

Issue: Can supplier repossess delivery2? Held: No • Identifiable reqmt is strict: court won’t create presumptions

o C/R must prove specific goods came from a specific shipment: strict identifiability RBC v. Stereo People (1996 ACA) – Mere notice sufficient – details not required Issue: How specific must the written demand be under s.81.1(1)(a)? Rule: demand must contain enough detail to notify T/B of claim • Only need enough info to make goods identifiable to T/B: specific identification not necessary 2005/2007: amends s.81.1 • Problem w/ 30 day notice rule: time usually runs out before C/R can give notice/finds out abt bcy • New law: supplier now has until 15 days post-bcy to give notice (cf. 30 days post-delivery)

i) Crown Claims (ss.86-87) • There are various statutes giving R higher priority as against other C/Rs→BIA: too bad Rule: R claims rank as ordinary unsecured C/R→s.86(1) Except:

1) R holds SI that’s ordinarily available to other SPs→maintains SP priority→s.86(2)(a) 2) R (special) claim + registered under s.87→s.86(2)(b)

S.87 reg: R must reg before date of appln for bcy order (s.87(1)(a)) OR assignmt in bcy (s.87(1)(b))

Reg only covers amts currently owing; not future amts→s.87(2)(b) • Ex. amt owing----------R regs-------------new amt owing----------bcy • New amt owing isn’t covered

Provision upheld in Re:Gilford Furniture Mart 3) Statutory garnishment remedy under ITA,s.224(1.2)→s.86(3) (gives CRA superpriority!)

j) Post Bankruptcy Dealings (ss.74-75, 97, 99) • Rules typically apply only to individuals, not corps (corps rarely survive bcy) • 4 Principles for determining status of post-bcy C/Rs:

1) Post-bcy C/R not subject to stay of proceedings→s.69.3(1) Rationale: post-bcy C/Rs can’t prove in bcy Not very valuable b/c even if C/R sues, he still can’t enforce against the ppty

2) Post-bcy C/R can’t prove claims in bcy→s.121(1) Only C/Rs w/ claim at time of bcy can claim

3) Post-bcy C/Rs not subject to bcy discharge (claim isn’t released)→s.178(2) 4) Post bcy C/Rs are at a risk for any value they supply to by

Ex. C/R gives goods/services/$ to undischarged bt→ppty vests in T/B, avail to C/Rs This increases the risk that post-bcy C/R won’t get paid (b/c pre-bcy C/Rs can go after

it)→∴Undischarged bt persons normally made to pay in cash upfront

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Re: Sanderson (1978 Ont CA) – distribution of after acquired property is limited to original creditors • New C/Rs provide credit to bt pre-discharge→find out act bcy→wants claim in bcy Issue: can post-bcy C/Rs prove claim in bcy? Held: No Rule: after-acquired assets vest in T/B & are only available to those with claims in bcy • New C/Rs voluntarily lent $ to bt: doesn’t matter if they didn’t know of bcy • Allowing post-bcy creditors to claim would upset bcy system i) How to Determine if Person is Bt • Office of superintendent has a searchable database • Credit agencies track individuals, also some PPSA registries ii) Dealings w/ Bt person (Post-bcy & pre-discharge) • Issue: what happens if bt sells asset post-bcy & pre-discharge to 3P w/out knowledge? • Rule: If Bt sells asset post-bcy & pre-discharge→improper sale b/c T/B has o/ship

o General: bt’s after-acquired ppty vests in T/B→bt wouldn’t have title→∴can’t transfer to 3P B Except1: sale of land OR granting of mortgage in land→T/B < 3P B unless T/B registers caveat OR gives notice in land registration system→s.74/75

o Rationale: 3P should be able to rely on the land titles system Except2: certain good faith dealing (s.97(1)):

1) Paymt by bt to bt’s C/Rs, 2) Payment or delivery to the bt, 3) Transfer by bt for adequate valuable consideration, AND 4) K, dealing or transaction (incl. giving security), for valuable consideration

Except3: good faith dealing + for value + in respect of ppty acquired post-bcy + before T/B interferes→s.99(1)

Van Pelt (1984 OntSC) – bad faith requires more than mere knowledge of bcy • Mere knowledge of bcy ≠ bad faith→must show 3P B was acting dishonestly

Cliche v. Michaud (1984 Que. CA) – narrow exception to Sanderson if T/B is unconscionable • Undischarged bt loses job→gets loan from brother & friend to start bus→T/B claims it vests Issue: Does ppty vest in T/B? Held: No Analysis – court provided limited reasons • Allowing T/B to assert claim would be unconscionable

o Similar to rule in Re: Ex Parte James • T/B is O/R of court: must act in good conduct & not unconscionably • T/B must use discretion to apply the broad purpose of the Act: should allow bt to rehabilitate Note: This rule only works in exceptional circumstances (harsh consequences)

5) Review of Pre-Bcy Transactions a) Intro to Fraudulent Conveyances & Preferences • The more assets T/B can find→more assets available to C/Rs • T/B may find assets by reviewing bt’s transactions occurring pre-bcy • Fraudulent conveyance vs. fraudulent preference

o Conveyance (FC): D anticipates bcy→gifts ppty to spouse to defeat C/Rs (not available in bcy) o Preferance (FP): payment or transfer of ppty to C/R that interferes w/ scheme of distribution

Ex. pre-bcy, D pays 1 C/R over another

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i) 2 Sources of T/B’s power to impeach these transaction: 1) BIA:

a) Preferences (s.95-96): applies to transns from [3 mths pre-bcydate of Bcy event] “date of bcy event” = date of assignment (voluntary) OR date of appln for bcy order

b) Settlements (s.91) c) Reviewable transactions (s.100)

2) Provincial Law: o T/B not lmtd to BIA→can invoke provincial law in bcy→Robinson

Provincial law is available to all C/Rs, incl. T/B on bcy o T/B must commence action 1 year post-transfer of ppty a) Statute of Elizabeth (aka Fraudulent Conveyances Act)

If gift (no consideration): test = did D intend to delay, defeat or hinder C/Rs or others? If consideration given: did both D & recipient mean to delay, defeat…?

• “consideration” can be smthg less than FMV but needs to be adequate (cf. K) No need to show D insolvent at time of transfer Hard to use if there’s consideration b/c diff to prove dual intention (D & recipient)

b) Fraudulent Preferences Act Requires insolvency & stricter limits on defn of “C/R” Rules have 2 elements:

i) Effects-based test: transn is voidable if it had effect of preference • Parties using this must meet requirements (1-yr limitation)

ii) Intent-based test (if doesn’t meet 1 yr limit): show dual intent (D & recipient) • If D pays b/c of C/R pressure→no intent to defaud

• A gift can invoke more than 1 of the above rules 2005/2007: • Settlement provisions will be repealed→replaced w/ single provision for transfer under value • CL for reviewable transactions will be more relevant b/c transfer under value provisions uses similar

structure

b) Fraudulent Preferences • Situation: D transfers ppty such that C/R gets more than they would otherwise in bcy • Overview: T/B can impeach the transaction if 6 requirements are met:

1) Transfer of ppty 2) In favour of C/R 3) Preferential effect 4) Intent to Prefer 5) D insolvent 6) Transaction happened w/in prescribed time period

i) Transfer of ppty • Types of transfers = {transfer of goods/shares/etc., obligation incurred (D agrees to obligation), D

consents to excessive judgment for C/R (in judicial process)} 2005/2007 amend: now covers services (D agrees to provide services)

ii) In favour of C/Rs • Must favour C/R; doesn’t include mere transfers • C/R = {person holding debt, any claim (incl unquantified damages), tort} iii) Preferential Effect • Transactions prefers 1 C/R over another: upsets scheme of distribution

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• BOP on T/B • Preference

1) Mom owes me $→I owe brother $→I tell mom to pay brother directly: preference to brother If mom hadn’t paid direct: $ would’ve vested in T/B

1) Payment to partly secured SP to the extent of unsecured portion Ex. collateral worth $5, loan obligation for $10→D pays $10 to SP Preferential if payment > value of collateral

2) Transaction triggering set-up: D owes C/R $→D sells goods to C/R in exchange for promissory note→bcy

• Upon bcy, C/R can exercise set-off & avoid paying: T/B loses out • No preference

2) Mom gives me $ on condition that I pay brother: no preference b/c $ comes into my hands Still vests in T/B

3) Payment to fully secured SP: SP would’ve been able to scoop ppty out anyways 4) D pays $5000 for goods worth $5000 5) Security for new loans only: C/R unsecured for $10 loan→D borrows another $10→gives

security for new loan only: no benefit: C/R still unsecured for old loan iv) Intent to Prefer • Refers only to D’s intent to give preference→Bennallack (SCC)

o Cf. provincial law: needs intent of D & recipient • Rebuttable Presumption: D intended to prefer if T/B proves preferential effect→s.95(2)

o Presumption not rebutted by proof that D was pressured by C/Rs doesn’t rebut presumption Cf. prov law: if D was pressured by C/Rs: no FP, just relieving pressure

• Ways to rebut presumption of intention: o Ordinary course transaction (ex. rent, e/ees)

Cf. payment of arrears for 5 months rent→not ordinary course o Payment that’s absolutely necessary to continue the business

Ex. supplier won’t deliver if they don’t get paid; pays rent before being shut down Live issue: D gives SI for new loan AND old loan b/c SP won’t lend otherwise

• This may be ok if proven to be absolutely necessary o Transaction was fulfilling earlier K obligation

Glencar: C/R given SI→docs delayed by fire→execution happens during FP period • Rule: no intention to prefer if merely late fulfillment of earlier (pre-bcy) oblign

Burlingham v. Evjens (1983 SaskQB) – Request for Security not a Binding Promise • D insolvent------E gives unsecured loan-----requests security--------SA executed---------bcy • E’s arg: we asked for SA many times→D just making good on earlier promise Issue: Was it FP? Main issue was intent Held: Yes: parties couldn’t make out Glencar exception v) D insolvent • “insolvent person” (s.2 defn): 1) balance sheet OR 2) cash-flow test vi) Time limit • General: Applies to transactions occurring between [3 mths pre-bcy event to bcy (inclusive)]

o Extension: period = 1 yr pre-bcy if parties are “related” (defn in s.4)→s.96 Defn: “related person” (s.4(2)):

i. blood r/ships→s.4(2)(a) ii. corp AND (i) person who controls the corp→s.4(2)(b)

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Ex. Holdco controls Opco: related iii. Deemed control: corp AND corp that has right under K to acquire control→s.4(3)

o Related persons are deemed non-AL Green Gables Manor (1998 Ont TD) – s.96 requires “related” as defined by s.4; non-AL not enough • Harquail & Thadaney each own 50% of Holdco→Holdco owns LandCo→Landco owns GG • GG goes bt→grants SI to Harquail for unpaid mgmt fees Issue: Does extended 1-yr period apply? Are parties related? Held: Yes Rule: S.96 requires that parties be related under s.4: being non-AL isn’t enough (non-AL is broader) • Control = DJ control = 50 + 1% • Harquail owned 50% shares (not enough for control) but also option to buy shares

o Deemed control rule is triggered→parties were related Provincial Law vs. BIA • Provincial law is advantageous for T/B in 2 situations:

o 1) Transn falls outside BIA time limit: Prov allows 1 yr pre-bcy o 2) If transn w/in 1 yr period→don’t need to prove intent

Future Changes • s.96 more favourable: extended period now based on whether transaction was non-AL dealing: T/B

• No longer based on related persons • If transaction is non-AL: T/B need only show preferential effect→don’t need to prove intention

• s.4(5): related persons only triggers rebuttable presumption of non-AL: not automatically deemed • Rationale: fear that current rule would catch child/spousal support

• Exam: don’t need to know provincial law; know major reform measures c) Settlements • Intro: T/B can void certain types of “special gifts” called settlements

o This is very confusing law: all statutes must be read w/ CL o Will be repealed w/ reforms

• “Settlement” = {K, covenant, transfer, gift, designation of beneficiary in an insurance K…} made for nominal consideration

o Settlement does NOT include a true gift→Whalley Purpose of defn was to extend CL, not to replace it

o Test: did donor intend ppty to be kept in same form or traceable form? If yes→settlement Ex. grad→gift of $1000 cash from: not settlement Cf. grad→gift of family heirloom: settlement (intended to be kept in original form)

• 2 Time periods: T/B may void transactions occurring in last 1 year or 5 years Rule: Settlement of ppty w/in 1 year pre-bcy event can be voided by T/B→s.91(1) Extended period: settlement of ppty w/in 5 years of pre-bcy event can be voided iff: →s.91(2)

1) Settlor/D was insolvent at date of settlement, AND 2) Ppty didn’t pass on execution of transn

Godford (1996 SCC) – RRSPexempt annuities transfer: void in vesting stage but not in admin stage • Dr opens unprofitable clinic→transfers funds from (non-exempt) RRSPs to (exempt) registered

annuities→relatives named beneficiary→goes bt→T/B wants to attack the transfer Issue: Does the shift constitute an impeachable settlement under s.91(2) (5-yr period)? Held: Yes, but assets remain exempt Rule: Exempt status trumps settlement (even if settlement & voided, it’s still exempt)

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Analysis – did ppty pass? • Nature of registered annuities meant ppty didn’t pass→∴it’s a settlement

o Beneficiaries could be changed→they only had contingent future interest→∴ppty didn’t pass • T/B can void the transn BUT it’s still exempt

o Bcy has 2 stages: 1) Vesting: T/B looks for ppty & 2) Admin: enforcement on ppty o Voiding the transaction sets aside exempt status for in vesting stage; but NOT in enforcement o Exempt assets vest in T/B BUT T/B must reconvey to D

WRONG: exempt ppty shouldn’t vest in T/B Note • Confusing & poorly reasoned decision: creates uncertainty

o Anytime D buys insurance annuity, the transn could be attacked w/in 5 years: for commerce • Courts were essentially trying to limit appln of s.91(2): troublesome statute • T/B should’ve attacked it based on fraudulent conveyance 2005/2007: Settlement provisions will be repealed

d) Reviewable Transactions • T/B can apply for judgment against C/Rs or other 3Ps who deal w/ bt at less than FMV • No intent to defraud is necessary Rule: where bt {sold, purchased, leased, hired…} + in reviewable transn + occurring between [1 yr pre-bcy event to bcy (inclusive)]→court can inquire/review whether bt dealing at FMV→s.100(1)

o “Reviewable transaction” (s.3) = non-AL transaction (OR related party)→s.3(1) Related parties are deemed non-AL→s.3(3) Whether dealing at AL is a Q of fact→s.3(2)

o Not FMV requires conspicuous disparity: ~4-5% isn’t enough→Peoples but depends on asset D sells ppty, receives < FMV D buys ppty, gives > FMV D rents out ppty for rent < FMV Provides services & undercharges

o BOP on recipient to show FMV: Court accepts T/B’s estimate of FMV unless recipient can show diff value

o Not required: fraudulent intent, insolvency Rule: Court may order judgment against recipient OR parties privy to the transaction→s.100(2)

o Can’t void the transn; Judgment is risk b/c bt might be insolvent Standard Trustco(1995 OntCA) – crt finds reviewable transn but doesn’t award judgment (uncertainty) • Trustco owns 99.9% of STC→gives STC $25million subordinated debt to keep it operating

o Both become insolvent→C/Rs attack transn (Trustco got worthless consideration) Issue: Is the transaction reviewable? Held: Yes • Transaction met the statutory requirements for s.100

o 1) Bt transferred $25M 2) Reviewable b/c related corps 3) w/in 1 yr o 4) Conspicuous discrepancy in value: subordinated debt is worthless

• BUT court wants to protect bailout industry→won’t award judgment o Court has discretion to order STC to pay the difference under s.100(2) o Other factors considered: {fair value exchanged, good faith, intention of parties}

Note: • Creates uncertainty: lawyers don’t know what must be proven & when court will award judgment

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People’s Dept Store (2004 SCC) – Privy to transaction includes those with knowledge and have indirect benefit • People’s sold to Wise→overlapping operations & join inventory→Peoples ends up extending

$18million in unsecured credit to Wise Issue: 1) is there “conspicuous disparity”? 2) Who has privity? Analysis 1) No conspicuous disparity • 6% discrepancy in value ≠ conspicuous discrepancy 2) Privity is BROAD Rule: Party with knowledge AND indirectly benefiting from transfer • Court can grant judgment to T/B against recipient (of benefit) OR personal privy to the transn

o Arg1: privy = party receiving direct transfer/benefit (narrow) o Arg2: privy = party receiving direct OR indirect benefit (broad)→SCC accepts this o Ex. A owns both X & Y→X transfer to Y (reviewable transn)→Y paid A

A indirectly benefited→∴can award judgment against him

e) Proposed Transfer at Undervalue Provisions • New s.96 will replace settlements (s.91) & reviewable transactions (s.100) Rule (s.96(1)): Court may (discretionary) void OR order judgment (against recipient OR persons privy to transn) a transfer + undervalue iff:

1) AL transn AND transfer + occurring between [1 yr pre-bcy event to bcy (inclusive)] + D insolvent at time of transfer OR made insolvent by transfer + intention to defraud, delay or defeat C/R

2) Non-AL transn + transfer AND: a. Occurring between [1 yr pre-bcy event to bcy (inclusive)] OR b. Occurring between [5 yr pre-bcy event to bcy (inclusive}] + D insolvent at time or made

insolvent by transfer OR D intended to defraud Comments • s.96(1)(a) isn’t very helpful if AL transn at undervalue: has many requirements→easier to use prov law • s.96(1)(b)(i): easy to prove BUT uncertain if courts will apply Standard Trustco discretionary factors • s.96(1)(b)(ii): overlaps w/ provincial law f) Effect of New Changes • T/B remedies: 1) BIA: preferences (s.95-96), transfer at undervalue (s.100)

2) Provincial: a. Fraudulent Conveyance Act: intent of D b. Fraudulent Preferences Act: preferential effect BUT doesn’t cover money

Application to Godford decision • D transfers non-exempt RRSP to exempt annuities + no intention to defraud + not insolvent + outside 1 yr

o S.96 doesn’t help the T/B: must still prove D insolvent o Even if s.96 did apply, voiding the transn WON’T VOID EXEMPT STATUS→must use prov law

• Live issue: what if Dr takes out non-exempt RRSP + buys house o There’s no transfer to 3P: he got house in consideration for payment o Likely no remedy under BIA or prov law o Court may order discharge conditional upon Bt paying the house value

Essay Question: What effect does the new s.96(1) have on the decisions in Standard Trusto and People’s? Live issue: not sure if Courts will still exercise discretion in voiding reviewable transns?

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• Standard Trustco: court has discretion as to whether to void reviewable transn o This was adopted & expanded by SCC in People’s: privity includes both people who directly &

indirectly benefited from transfer undervalue o People’s decision has been codified in new s.96(3)

• Basically: will the courts interpret “either void OR order judgment” as: 1) void or order judgment, OR interpret as 2) void or order judgment or exercise discretion & do neither

o Likely option 2: court has more flexibility () vs. legal uncertainty ()

6) Eligible Claims and Distribution of Proceeds • Who gets what in bcy? a) Provable Claims • Issues: 1) who can prove in bcy? 2) How are claims valued? • Intro:

o To share in bcy, C/Rs must prove claim→s.124(1) o Stay of proceedings under s.69.3 only applies to C/Rs w/ provable claim o Discharge releases all provable claims

C/R may prefer non-provable claim if bcy has little assets unless bt is corp (dies) i) Procedure For Proving Claim

1) T/B mails C/R a proof of claim form 2) T/B reviews proofs→accepts or disallows (reject or reduce)

a. Unliquidated claims (ex. claim for K damges): T/B values at 1st instance→s.131.1 • C/R can appeal w/in 30 days→appeal is trial de novo

3) Every C/R is entitled to all proofs of claim (all other C/R’s claims)→s.126(1): ensure no falsity 4) C/R can claim all debts/liabilities present and future so long as (s.121(1)):

a. Claim existed (payable) at date of bcy: bt was subject to it, OR b. B may become subject post-bcy & pre-discharge by reason of an obligation incurred at

date of bcy 5) Family support claims are provable→s.121(4) (didn’t use to be)

Ontario New Home Warranty (1990 OntGD)-contingent claim triggered pre-discharge is provable • D signed guarantee→payable if Ont New Home incurred an obligation→D goes bt • Event occurred post-discharge Issue: Is guarantee a provable claim? Held: No Rule: • Contingent claim + event triggered pre-discharge→provable claim b/c bt became subject • Contingent claim + event trigger occurs post-discharge→no provable claim • Bcy doesn’t terminate the guarantee:

o Bt owes obligation if claim is triggered post-discharge Note • Essentially, bt still liable for a liability he entered pre-bcy • Some commentators say the case shouldn’t be followed b/c it undermines the fresh-start principle

o Claim should be provable • Wood: but that’s not what the BIA intended: otherwise it wouldn’t’ve created 2nd arm • Subsequent decisions in Alta: 1 followed Ontario, other didn’t ii) Valuation of Claims • T/B values claims: Use assessor (similar to class action damages assessment)

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• Contingent claim = probability of contingency * amt of liability→Re Wiebe Limit: court won’t apply it if contingency is low & liability high (ex. 1% chance of $5B debt) o Wiebe: e/er gives forgivable loan to dentist→forgivable if he stays until 98→bt in 94

Claude Resources (1993 SaskQB) – court won’t allow claim if probability is too low/speculative • C/R has no provable claim if probability of contingency is too low (too speculative) Note – C/R in this case got nothing b/c Bt was a corp (ceased to exist post-bcy)

Central Capital Corp (1996 OntCA) – S/H <C/R even if corp owed $ to S/Hs pre-bcy • S/H rank lower than C/R: they get residual claim Issue: What if S/Hs were promised a dividend→corp goes bt→dividend not yet paid? Held: too bad Rule: even if corp owed $ to S/Hs→nature of r/ship is still S/H→∴rank lower than C/Rs • Effect: no provable claim unless there’s $ in the bcy (?) Note • S/H can convert their claim to C/R claim: 1) claim fraudulent misrep re: corp value, 2) tort damages,

OR 3) rescind the K + claim UE for purchase price o This is limited by new amendments

2005/2007 • s.2 has new defn: “equity claimant”

o Defn includes S/H w/ claim for unpaid dividends, tort claim, or K rescind claim Rule: equity claimant is NOT entitled to dividend until other non-equity claims are paid→s.141.1

o Effect: S/Hs always rank lower than C/R & can’t convert claim to C/R claim o Cf. US: S/H can share in bcy if they were misled abt value of shares: they didn’t assume risk

b) Scheme of Distribution • 3 Classes of C/Rs

1) Preferred C/Rs→s.136 2) Ordinary C/Rs→s.141 3) Postponed C/Rs→s.137, 139

i) Preferred C/Rs • Preferred claims are paid fully in the order they appear: (11 categories; some are dead letters)

a. Deceased bt’s reasonable burial b. Cost of T/B c. Levy under s.135 for federal servants administering the estate d. Spousal & child support claims (limit: arrears for 1 year) e. Lessor (limit: arrears for 3 months + 3 months future rent iff entitled upon breach)

• Limit2: max claimable = value of goods located on premises Lamford (1991 BCSC) – enviro charges outrank other C/Rs but not T/B • Ppty is contaminated→owner goes bt→ppty vests in T/B • BC issues abatement order (environmental damage charges)

o Enviro statute: liability for fine is based on o/ship or possn; not liability for causing damage o ∴T/B is liable

Issue: 1) Is T/B personally liable for enviro damage charges? 2) How does enviro damage rank? • T/B is liable for enviro damage charges only to the extent of the assets of the estate • If T/B is liable, court compels him to pay

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o Enviro charges outrank other C/Rs BUT if estate doesn’t have enough to pay Enviro & T/B→T/B gets paid 1st (otherwise no T/Bs would do the job)

Note • s.14.06 was passed in response to Lamford Rule (s.14.06(2)): T/B not personally liable for damages incurred:

o Pre-bcy→codifies Lamford o Post-bcy unless proven that damage occurred b/c T/B’s gross negligence or willful misconduct

Rule (s.14.06(4)): T/B has 4 options wrt order for payment of enviro charges: o Comply w/ order if charges < underlying value of the ppty o Contest order o Ask for stay to allow T/B to investigate o Abandon the ppty

Rule: (s.14.06(7)): R claim for enviro damage charges is secured by SI on the ppty: R SI > prior SP Appln: covers the real ppty + adjoining (contiguous) ppty

o Effect: R outranks prior SP (mortgage holder) Rule: (s.14.06(8)): if SI on ppty is undersecured (ie. damages > value of ppty)→R can prove in bcy

o Ranks as unsecured C/R Re Whalley (1990 SaskQB) • Bank takes security of cattle to secure loan→D breaches SA, sells cattle in ordinary course bus (bank

has no claim against 3P B)→uses $ to pay ITA (secured C/R)→goes bt • Court orders conditional discharge on condition that D pays $5K

o Upon conditional discharge, D must pay to T/B who distributes according to scheme/distributn • Bank arg: we should get the $5K b/c D did unauthorized sale

o Cf. use scheme of distribution: ITA is preferred over the bank even though they already benefited from the unauthorized sale

Issue: Can Court order $5K be paid to the bank? Held: No • Court doesn’t have this power: Bt must pay T/B + pay according to scheme of distribution 2005 Amendment was repealed by 2007 amendment (net effect: no change) • 2005 amendmt gave courts discretion to make this type of order • BUT 2007 repealed this (rationale: too much unfettered discretion; too difficult to decide) Wage Earners Protection Program Act: will give e/ees superpriority • History: provincial law gives e/ee priority over C/Rs BUT this is trumped by BIA (s.136(1)(d))

o Ex. corp goes bt→200 unpaid e/ees→bank has GSA: bank > e/ees • This is a controversial issue: If e/ees get priority: C/Rs less likely to lend • Soln: WEPPA:

Appln: e/ees + unpaid wages occurring [6 mths pre-bcy event to date of bcy] o Govt funds insurance scheme o E/ees get a charge for unpaid wages→charge gives them superpriority (limit: max $2000)

Wage earner’s charge > SP for $2000 o E/ees can make claim against insurance scheme (limit: max $3000)

If they make claim→R will be subrogated to the charge→R can claim against SP • Effect: govt pays $1000 & SP loses priority to e/ee for $2000 (C/Rs & R share burden) Pension Contribution Charge • E/ees get superpriority over SP: no cap & no time restriction • Charge applies as against ALL assets & ALL SPs→ for SP

ii) Ordinary C/Rs

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• Ordinary C/Rs share pro rata→s.141

iii) Postponed C/Rs • Postponed until all other C/Rs are paid fully • These C/Rs normally get nothing Amendment: Postponed C/Rs will include:

a. “equity claimants” (ie. S/Hs) b. C/Rs who are owed an obligation resulting from reviewable transn

o Ex. C/R sells goods worth $50 to D for $500K→D goes bt before paying→C/R has claim Rule: Claim (resulting from reviewable transn) is postponed untilcourt or T/B considers it a proper transn→s.137(1)

c. Silent partners (C/R who gives profit-sharing loan) o Ex. C/R gives loan to D→variable interest rate depending on profitability o Effect: C/R shares in the profits Rule: Claim (based on profit-sharing loan) is postponed→s.139 Rule: C/R who gives profit-sharing loan + certain rights for control→court will treat C/R as a partner: may be liable for debts→s.139

7) Discharge of Bt • Intro: BIA is motivated by 3 interests:

o Economic rehabilitation of the bt o Maintain credibility of the credit-lending system: promote image that bt pays debts o Interests of C/Rs

• Significance of discharge: o Post-discharge assets don’t vest in T/B→s.67(1)(c) o Provable claims in bcy are released upon discharge→s.178(2)

Except: non-dischargeable claims→s.178(1)

a) Eligibility • Persons eligible for discharge: individuals

o Corp not released unless all debts paid in full→∴most corp die

b) Procedure • There are 2 streams: 1) 1st time bt (fast-track) 2) repeat bt (court appln) i) 1st time bt Rule: 1st time bt is discharged after 9 mths post-bcy unless someone objects (C/R or T/B)→s.168.1

ii) Repeat bt Rule: Repeat bt must apply to the court→s.169 Rule (s.172(1)): Powers of the court on hearing appln:

o Absolute discharge o Conditional discharge (ex. “discharged if bt pays $X over Y years”) o Suspend order for period of time

for bt: New ppty acquired during the suspension still vests o Refuse discharge

McAfee (1988 BCCA) – factors court considers for discharge appln • Lawyer does business→goes bt→applies for discharge→C/Rs oppose: Bt still has good house/car Analysis

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• Court motivated by 2 balancing principles: o Rehabilitating the debtor o Maintain integrity of bankruptcy system – so can’t be too lenient

• Factors considered o Causes of the bcy – external or internal to B’s conduct

Internal (Bt’s reckless conduct) or external? • Alcohol and gambling now viewed as a disease – not B’s fault • Business went bad→not B’s fault

Trend: Courts more lenient re: finding fault ( for bt) o Concerns of the C/R

Excludes: C/R’s unhappiness that bt was gifted car/$ from family/friends o Nature of B’s wealth – investment v. human capital v. wage earning

If investment – needs more money to start again Human capital: easier to rehabilitate: crt more ready to order condl discharge (cf. abslt)

• Factors not considered o Bt’s social status: doesn’t matter if professional has certain social expectations (ex.St.Georges)

Professional will need to sacrifice status The formula for surplus income also displaces this concept

Held: lawyer has higher earning potential→conditional discharge with sum of $80,000

Re: Cole (2001 NS SC) — Factors for discharge of Income Tax debt • MD has medical problems, can’t work, family breakdown, owes $250,000 to CRA from 1994-1999 • MD may get damages related to MVA which will be exempt ppty Issue: Should damages from pain and suffering be considered by the Court in appln for discharge? Held: No. Absolute discharge granted • Factors considered:

o Nature of the debt: treat ITA more seriously: debt shifts burden on all society o Bt’s clear inability to pay/future financial prospects

If bt was willfully wrong or dishonest→court still imposes obligation Else→court has more sympathy

• Bt had made efforts to pay CRA Reaffirmation Agreements • Situation: D leases car, makes payments to C/R→D goes bt→wants continued use of car

o Soln: reaffirmation agrmt = agrmt between C/R & D to waive a discharge of a debt that would otherwise be discharged in pending bcy proceeding

o Bt agrees to continue paying post-discharge Seaboard (1986 BCCA) - reaffirmation agrmts continue post-bcy • Bt enters reaffirmation agrmt→discharge→ceases to pay post-discharge Issue: can SP seize collateral or sue for deficiency? Held: Yes b/c K was never extinguished by Bt. during bcy proceedings • In this case, K continued post-bcy→∴claim is not released under s.178(2) Note • Wood (better explanation): novation of K (Otherwise, the claim should’ve been released)

o Terms changed when bt agreed to pay post-discharge o ∴SP sues on new obligation created post-bcy

• US has laws dealing w/ reaffirmation agrmts o Parties must sign new K (rationale: give notice to D that he’s entering new K)

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iii) Non-dischargeable Claims Rule (s.178(1)): an order of discharge doesn’t release the bt from:

o Criminal fine/restitution o Damages for SA, bodily harm, wrongful death o (b), (c) support o d claims resulting from embezzlement or fraud committed as a fiduciary

Court: anytime e/ee uses e/er’s money o e) claims resulting from obtaining ppty w/ fraudulent misrepresentation o f) claims of C/Rs w/ no knowledge of bcy

Limit: amt they would’ve received from bcy (get same value dividend) o g) student loans (limit: bt can apply to be released from debt if acted in good faith + debt

outstanding for 10 years post-cessation of studies→s.178(1.1)) Reforms 1) New procedure→s.168.1

a. 1st time bt: i) surplus income→automatic discharge in 21 months ii) no surplus income→9 mths

b. Repeat bt: i) surplus income→automatic discharge in 36 months ii) no surplus income→24 months

Unless: objection o Notice and grounds need to be given if automatic discharge opposed s.168.2(1) o If superintendent opposes→must give notice to T/B & bt before the date of discharge o If C/R opposes→must give notice to Superintendent, T/B & Bt. before date of discharge o If T/B opposes→notice to Superintendent & Bt. before date of automatic discharge o Opposition hearing must be held w/in 30 days of notice unless T/B or bt requests later date→

s.168.2(2) 2) ITA debts→s.172.1

1) No automatic discharge if bt owes ≥$200K debt to ITA + debt represents ≥75% of total debt o Section sets out time after which discharge hearing can occur

4) Factors considered by court in appln for discharge (codifies Re Cole) o Bt’s circumstance at time debt incurred o Bt’s efforts to pay ITA debt o Bt’s payments in respect of other debts o Bt’s financial prospects for future

6) BT can apply for absolute discharge after one year if bt obviously can’t pay→s.172.1(6) 3) Student Loans

o Current: if bt can’t pay after 10 years post-cessation of studies→court can extinguish debt o New: 7 years post-cessartion, student loan is treated like any other debt o 5 years post-cessation, bt can apply to do hardship hearings dispensing w/ 7-yr reqmt

Part II – Corporate Reorganizations • Restructuring is an alternative to bcy • 2 sources of restructuring law:

o CCAA o BIA, Div 1 (s.50-65)

• Problem w/ 2 systems: high legal costs b/c D must consider both • General comments:

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o CCAA - more difficult to access (more requirements), preferred by big companies (court has more discretion)

o BIA – less court involvement, good for small businesses • Objectives of restructuring

o 1) Rescue (cf. liquidation): trend towards rescue culture o 2) Maximize C/R recovery: C/R may recover more if bus allowed to carry on as going concern o 3) Public interest: some towns depend on large corp, we don’t want corps to just shut down

• Restructuring vs. private K o K requires 100% consent – high negotiation costs, strategic behaviour (hard bargaining) o Lack of good info w/ private K – C/Rs can’t be sure they’re getting good financial info

No mechanisms in place to promote transparency, limit secret deals o Meanwhile, C/Rs can rush to seize on the ppty

Fundamental Principles of Restructuring Law 1) D maintains possn & control of assets 2) Motivated by need to maintain bus operations:

o Corp continues to operate – enter K, obligations, loans o Distinction created between post-filing & pre-filing C/Rs

Pre-filing go in on the plan of arrangement; post-filing don’t (often paid cash in full) 3) C/R’s have a right to info: necessary to make informed decision 4) Plan needs C/R approval: 100% not needed

o Dual majority (maj+ C/Rs w/ 2/3 value of claims) o All classes (diff C/Rs have diff rights) must approve

5) Court supervises the restructuring: need court approval o Rationale: protect dissenting C/Rs & ensure process is fair

Lehndorff (1993 Ont TD) – restates objectives of CCAA • Allow D to carry on bus & allow mutually beneficial plan • Court has great discretion

o Court’s role is to maintain status quo while negotiations are taking place o Prevent manoeuvres by some C/Rs

• CCAA is remedial statute→courts must give liberal interpretation

1) Companies Creditors Arrangement Act (CCAA) • CCAA = Companies • 4 mains issues – Eligibility, process, powers of court, classification/voting a) The Application i) Eligibility Rule (s.2-3): D qualifies under CCAA:

a) D is a corporation doing business in Canada Excl {banks, railway or telegraphy co, insurance co, trust co} REFORM: under new provisions, income trusts are now included Group of corporations may include a lmtd partnership→Re: Lehndorff

b) D is insolvent (or about to become insolvent) c) Has committed an act of bankruptcy under the BIA d) Total provable claims against D≥ exceeding $5million→s.3(1)

Claims = {debts, damages, mass torts, etc}→s.12 Includes provable claims in bcy

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• ∴Can be claim for damanges: restruct process can assign value Rule: Parties can’t K out of CCAA→s.8 i) Commencement • Pre-Court appln:

o Informal negotiations w/ C/Rs to see if they’re interested o Look for interim (DIP) financing (to keep business going) o In some cases, extensive negotiations have already taken place: “pre-packaged plans”

• Apply for initial order→s.11 outlines procedure • Order lasts maximum 30 days→s.11(3)

o Rationale: orders usually granted on emergency basis, not all C/Rs notified Order allows to D to preserve assets w/ exectation that D will notify all C/Rs in 30 days

• Subsequent applns made after D has given notice to all known C/Rs→s.11(4) • Both applns require court to determine if appln is appropriate→s.11(6)(a)

ii) Court’s Role • CCAA is real-time litigation • CCAA judge plays case-management role

o Dynamic process: Requires single judge to hear case from start to end o Requires specialized judges: Ont has commercial list, Alta: no formal process but judges availa

• Appeals o CA typically won’t 2nd guess trial judge o Issue may already be moot by time of appeal

• Comeback clause o Many orders are made on emergency basis w/ incomplete info o ∴need some mechanism to allow parties not notified to come back to the court & rehear issue o BOP still on D corp

Royal Oaks (1999 Ont TD)– initial order should be minimalist History • Initial orders were increasingly complex & provided on short notice

o Judges didn’t have a lot of time to review all the material • D were often asking at an early stage for all the powers needed in restructuring Court – adopts minimalist approach • Purpose of initial appln = ask for features needed to keep bus running

o If court approves everything early on + C/R objects later→it may be too late o Should only keep company operating for “brief but realistic period of time”

Note • Contentions/objections usually come at later applns; courts usually grant initial order • Lawyer’s response: create template initial order in Ontario (short, not complex)

o Parties to use template & if different→highlight it o Ensures judges are not rubber-stamping an unnecessary power

• Subsequent orders puts in place the bells & whistles b) The Order • Court must decide: is this case appropriate for restructuring?

o If bus has no chance→don’t use restructuring • 3 elements for court order→s.11(6)

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o 1) D acting in good faith (ie. honest) o 2) D acting w/ due diligence

If court thinks corp hasn’t done enough/insufficient progress→won’t grant order o 3) Case is appropriate for restructuring – courts have interpreted this as 2 elements

Prospect of viable plan Material prejudice to an interested party if court grants order

i) Contents of the Initial Order 1) Declaration of eligibility under CCAA 2) Powers for D company:

a. Carry on business & maintain power & control b. Power to terminate Ks c. Power to obtain interim/DIP financing

Note: Post-filing C/Rs aren’t in the plan: they expect to be paid 3) DIP/admin charge

o Contents: charge for DIP financing (incentive for C/Rs to lend) & admin charges (court/monitor costs)

o Charge is given priority rights→∴courts won’t grant it lightly (~50% success) o Payments to existing C/Rs are suspended so it frees up cash o Factors court considers: prejudice on pre-filing C/Rs (maybe unnecessary to give superpriority)

Courts more likely to grant if SP is oversecured 4) Stay of proceedings – operates against both secured C/R & unsecured C/R

o Stay is not automatic, must be granted by either Initial or subsequent order o Stay is effective against SC/R and unsecured C/R

5) Appointment of a Monitor – insolvency professional akin to T/B o Investigates if C/R approve o Fiduciary to shareholders/creditors→s.11.7

6) Comeback Clause: allow previously decided issue to receive full hearing o Ex. party applies to lift stay for specific purpose (ex. limitations running out)

• Initial order only maintains status quo for up to 30 days • Everything else is included in subsequent order – including application for additional powers ii) Powers of the Court • General:

o Court can call mtg to vote on plan of arrangement o Court must sanction the plan: review & make binding (even against dissenting C/Rs)

• Court has power to grant initial application→s.11(3) • Court has power to grant subsequent orders→s.11(4)

o On every subsequent appln to extend stay, Court must see if anything has changed If no progress→go to liquidation

• Power to stay/restrain/prohibit proceedings→s.11(4)(a)-(c) o C/R can’t start/continue/enforce proceedings (incl. self-remedies)

• Power to terminate restructuring (court has gatekeeping function) • CL Issue:

o 1) Where does Court get its power to terminate plans? Answer: likely s.11(6): court has power to grant if it’s certain things are shown→else

no order→plan basically terminates w/out stay o 2) Are there other sources of court’s power?

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Bargain Harold’s (1992 Ont TD) –factors for whether order should be granted • D applies for initial order→C/Rs object to stay of proceedings Held: Stay denied – plan doomed to failure from get go – liquidation only option • BOP on C/Rs to show that restructuring isn’t reasonable or viable • Factors:

o Look at cause of failure of business (eg. mismanagement v. dieing business) Corp created malfunctioning info system & couldn’t find problem

• very bad if corp trying to save business & can’t find soln Loss of confidence in mgmt: this isn’t fatal b/c mgmt can be replaced

o Reasonable prospect of success, not probability No specific plan or idea

o Risk/prejudice to creditors – Continued operation would erode value of collateral o Has interim financing been found? o Are majority of creditors opposed to restructuring (indicates likely failure)

Will C/Rs inevitably vote against it? • Only option was liquidation Sources of Other Powers • Trend: courts increasingly extended their “inherent JD” in making orders Lehndorff (1993 Ont TD)– crt uses inherent JD to incl order stay of proceedings against p/ship • Group of companies tried to reorganize under CCAA, but one is a limited partnership • Not feasible to leave LLP out; can’t bring it in under CCAA→s.11(3) Issue: Is order granted? Rule: Court has inherent JD to include p/ship in a restructuring • S.11 is 1 source of power but not the only • Court has inherent JD to stay proceedings & contempt power

o Used this to stay proceedings against p/ship Note: First case where inherent jurisdiction used in CCAA – increasingly used after

o Also used to establish jurisdiction for DIP financing superpriority Eaton (1997 Ont. T.D.) – Stay of proceedings extended to non-C/R 3Ps • Eatons goes insolvent→is an anchor store in malls→wants to prevent 3P from exercising co-tenancy

clause w/ landlord (ie. if anchor goes, we go) Issue: Can court extend stay to prevent store owners from breaking lease? Held: Yes

o Allowing retailers to break lease would make restructuring impossible o Inherent jurisdiction used to justify the stay of proceedings

Stelco (2005 OntCA) – High water mark of Inherent Jurisdiction – no Jurisdiction to affect corporate governance • Steel mine owed $ to e/ees→huge claims for pensions→2 individuals buy 20% shares, elected to BOD • C/Rs worried that new D/Rs will focus on raising value for S/Hs instead of corp→apply to remove • TD allowed removal using inherent JD Issue: Can court use inherent JD to remove D/Rs? Held (OntCA): No, TD went too far • Court doesn’t have inherent JD to change corp governance→BCA deals with this • Purpose of s.11 discretion: allow court to act as referee (allow stay & maintain level playing field) • BUT s.20 CCAA: CCAA can be used in conjunction with other statutes

o Court can apply oppression remedy but must satisfy requirements of that statute o Mere apprehension isn’t enough under the BCA to remove D/Rs

Note: both inherent and statutory jurisdiction have problems

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• Statutory discretion theory: CCAA has no express language allowing changes to ppty rights 2005/2007 Amend • Creates stat powers allowing DIP financing, disclaim Ks, order removal of D/Rs • D/Rs can be removed if “unreasonably impair” the restructuring • Live issue: there 2 possible interpretations:

o 1) “unreasonably impair” = wrong/unreasonable conduct, OR o 2) “UI” = merely creates suspicion that D/R’s conduct may affect success of plan

• Wood: courts should use this power sparingly; else C/Rs can use it to bring down any D/R who may act against them

d) Classification of Claims i) Developing Plan of Arrangement • D corp typically develops the plan unless D ceases to operate (SP makes plan: very rare) • D’s objectives in drafting plan

o 1) Rescue the corp: solve the problem o 2) Approval by C/Rs: consider which groups will likely dissent

• D communicates w/ various C/Rs to feel out what they’ll accept • Many plans are pre-packaged: C/Rs already on board by the time of the initial appln ii) Classification of Claims • Plan need not cover all pre-filing claims

o “Unaffected C/Rs” maintain full legal rights & can assert them • Everyone else is included in the plan • Diff C/Rs are classified differently & each class has the power to sink the plan • Classification dictates how C/R will be treated under the plan • CCAA has voting rules: Each class must approve by dual majority

o Maj+ in # (50% + 1) + holding 2/3 value of claims o Non-votes don’t count

• Issue: when can C/Rs be classified in same class? (highly litigious) o D will try to classify them so as to get approval: swamp likely dissenters amongst supporters o C/Rs want to be in same class as others like them: increases their bargaining posn

• Ex. C/Rs = {1 fully secured C/R owed $1M, 100 general C/Rs owed $4M} & assets = $2M o In bcy, SP > general C/Rs→get full $1M o Restructuring: all C/Rs share pro rata: SP gets <1M o If D puts SP in same class→SP can get swamped & be forced to accept plan o Courts won’t allow this (unfair!)

Re: Woodwards (1993 BC SC)– C/Rs in same class must have common purpose/interest Issue: when can diff C/Rs be put in same class? • 2 views:

o 1) Identity of interest (strict): all C/Rs have identical legal rights Rejected in Cda: too hard to ever get approval if there are many classes

o 2) Non-fragmentation approach: Rights need not be the same (Court accepts this) C/Rs in same class must be able to vote for common purpose/common interest

• 2-part test to determine commonality of interest: 1) Are the creditor’s legal rights the same?

If yes, then classification cannot be challenged 2) If no, is the difference so great that class members can’t negotiate w/ common purpose?

Same interests = legal rights in and of itself; not characteristics of the holder

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Ex. E/ees (unsecured C/R) & other unsecured C/R can be in same class • Doesn’t matter if e/ee wants to continue e/mt at D corp→both unsecured C/Rs

Diff SPs can be in same class if they have common interest • Application to Woodwards: A & B had diff legal rights→put in same class

o A had claims against Opco & Holdco→B only had claims against Holdco o Court: no common interest

No common interest just b/c C/Rs both receive more than in bcy proceedings o Diff decision if Opco had no assets (A would’ve had valueless right)

Note • C/Rs shouldn’t wait until the vote to complain about unfair classification • Court may choose not to reclassify: keep in same class but recognize addl legal right iii) Voting Rules • C/Rs w/ 2/3+ majority can make plan go ahead • C/Rs w/ 1/3+ can veto • Claims trading are allowed (vulture capitalism):

o C/R acquire bigger block of claims by paying out financially distressed C/R • A plan normally needs approval by each class

o Unless a class of C/Rs vote against plan by dual maj+ & drop out→Olympia v. York o Dropout = become unaffected C/Rs o Limit: can’t represent fair # of C/Rs: ex. 1/30 is ok; 1/5 isn’t

• Dropout isn’t a fix-all: there are some C/Rs that D can’t afford to not include in the plan o Ex. SP w/ SI in delivery vans

e) Court Sanction (aka fairness proceedings) • Occurs only after creditors have approved the plan (if not approved→go through other process) • Court sanction makes the plan binding (even dissenters)

o Court acts as safeguard: ensures plan is fair to dissenting C/Rs o Emphasis on procedural fairness, not substantive fairness

Olympia v. York (1993 Ont G.D.)– Factors considered for Court Sanction Factors For Court Sanction

1) Strict compliance w/ statutory requirements o ensures that eligibility still met, etc.

2) No unauthorised conduct: Did © do anything it had not been given power to do? 3) Plan is fair and reasonable – focus on procedural fairness

o Role of court isn’t to 2nd guess the C/Rs & their business decisions o Don’t look at substantive fairness (equal sharing), just procedural

If not fair→no real consent Ensure transparent process: timely info provided to C/Rs No secret side deals Poor classification (though this should be challenged earlier) Amt of recovery: C/Rs should get more in restructuring than in liquidation Change in priority ranking – court suspicious of this unless parties consented

o Composition of vote (ex. 99% approval vs. vote only passed b/c of vote of S/H or related party) Reform: related parties can’t vote in favour of plan (can only abstain or vote against)

• NOTE: if court sanctions→plan fails→court will sometimes allow second restructuring (rare)

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2) Commercial Proposals under BIA • BIA used less often than CCAA for large restructurings

o BIA used mostly by smaller corp: cheaper, less court involvement/applns o Ex. automatic stay of proceedings upon filing documents in BIA

a) Time to Make Proposals • Proposal may be made by: s.50(1)

o Insolvent person, receiver, liquidator, a bankrupt, trustee of estate of bankrupt o Individuals and partnerships qualify, unlike CCAA

• 2 methods of initiation: file proposal (s.50(2)) OR notice of intention (NOI) (s.50.4(11)) 1) Filing of Proposal (rare; normally used in simple cases)

o Used when proposal already made o Insolvent person files proposal w/ Trustee, establishing the restructuring plan o Filing triggers stay→just need to call mtg + vote

Unless (s.50(12)): court, on appln, rejects plan b/c {unfair, D acting fraudulently, C/R unlikely to accept (rare b/c C/Rs normally already aware), C/Rs would be materially prejudiced}

2) Notice of Intention – normal route o Insolvent person may file a notice of intention→s.50.4(1)

NOI is notice to file proposal later o Filing triggers stay of proceedings→s.69(1) o Debtor given 30days to file proposal→s.50.4(3)

Court has discretion to extend by 45 days multiple times→s.50.4(9) Limit: total amt of time for stay can’t >6 mths from date of initial filing

• BOP on D to prove: 1) D acting in good faith + w/ due diligence + 2) likely to make viable

proposal + 3) no material prejudice to C/Rs • C/Rs can make submissions at every extension hearing

Extension must be filed before extension has lapsed→s.50.4(8) Court may terminate extension at any time→s.50.4(11)

• BOP applicant to establish elements in this section o SP must give notice of intention to appoint receiver OR enforce against collateral→ s.244

Appln: only applies to SP w/ GSA covering all or substantially all assets Must give 10 days notice, but is affected by stay of proceedings SP’s notice often gives D notice to file s.50.4 NOI to prevent seizure

• D’s NOI must be given before SP’s 10-day notice period expires→Cumberland Stay of proceedings will not affect seizure if 10 day period lapses

• D doesn’t go to court to start the restructuring unless he needs extension • C/Rs can also bring immediate appln to terminate restruct at any time→s.50.4(1)

o Court considers inverse factors of s.50.4(9): bad faith, not due diligent, unlikely viable proposal, material prejudice

Cumberland (1994 OntGD) – factors for lifting stay and terminating proposal • SP brings application to lift stay of proceedings s.69.4 and to terminate proposal under s.50.4(11) • Stay of proceedings will only be lifted if applicant materially prejudiced

o File to sue for an insurance claim, to make it inside the limitation period, etc. o Material prejudice look at whether the rights of the creditor are being prejudiced by the stay

Eg. rapidly decreasing value of collateral Must show diminishing value, not just that creditor is undersecured

• To terminate the application, court looks at lack of due diligence

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o Lack of progress in developing the plan o “not even a germ of a plan” o creditor with veto saying they would not vote for the plan (only a factor) o together, show unlikelihood of plan being accepted

• b) Court Approval c) Annulment of the Proposal

Part III – Receiverships • Receiverships system is the least developed • Terminology: distinguish from receiver in bcy, JE or p/ship (preserve ppty) • Receiver = person who acts in liquidating assets of D

o Appointed by SP (usually SP w/ SI in all assets) • Objectives for Appointing Receiver

1) Replace inefficient management Rr replaces mgmt & takes control of all assets

2) Enforce SI 3) Preserve going concern value: may be better to sell the bus instead of seize + sell individual

parts • Fundamental Principles

1) Assets do NOT vest in Rr 2) Managerial control shifts to Rr 3) Rr disposes of the assets: usually as going concern→if this fails, then separate assets

• Terminology: Rr vs. Rr mgr (BIA, ss.94-95) o Rr can receive income + pay off debts; CANNOT carry on mgmt & carry on bus o Rr mgr has both powers o Issue: when does K confer power to appoint Rr mgr? o Standard Trustco: GSA: “on default, SP can appt agents to manage mortgage premises”

Court: not sufficient for Rr mgr • Doesn’t grant mgmt powers for business; only power to mange 1 asset

o Note: When lawyers talk about “Rr”, they generally refer to Rr mgr 1) Sources of Right to Rr/ship: Court vs. Private (document) Apptmt 1) Court apptmt

o Court appointed Rr is O/R of the court o Acts in fiduciary capacity o Authority to act must be provided for in crt order

2) Document apptmt: ex. K has provision allowing apptmt o Not O/R of the court o Privately apptd Rr is an agent w/ dual capacity

SA deems Rr to be agent of D company • Rr takes role of D/R of the co: has authority to enter K, etc. • CBCA, s.96: D/R’s powers suspended until Rr discharged

Rr acts as agent of SP when he sells assets outside ordinary course of bus • Ex. starts selling equipment

Limits on Powers of Rr • History: big difference in quality of obligations owed by court & private-apptd Rrs

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o Court-appointed: fair, impartial, act in interests of all C/Rs Impartial = consider interests of all C/Rs Don’t need to treat all C/Rs equally (ex. SP still keeps priority)

o Cf. private-apptd: 1ry duty to SP & obligation to D corp Authority to act came from K SP was allowed to appoint Rr + sell assets w/out providing info/acct to other C/Rs

• SP didn’t need to realize for good value Obligation to other C/Rs only to act in good faith + fair sale (ex. put up ad) Court had no power to supervise apptmt Quick liquidation was allowed (SP favours this if can realize his debt quickly)

• Problem: legislature worried about doc-appointed Rr • Soln: Post-1990s: various statutes enacted to create diff requirements on Rr

o {CBCA, ABCA, PPSL, BIA} enable other C/Rs to get more info Rule: Rr must act in honest + commercially reasonable manner→PPSL, s.66, BIA, s.247

o Courts haven’t openly said this strengthen obligation on Rr but scholars all believe it Buckwold: same obligations now exist for court & doc-apptd Rr

Rule: court can order replacement of Rr OR give directions→s.100 CBCA o Court has supervisory power wrt doc-apptd/private Rr’s

2) Interim Rr • Situation: SP files notice of intention to enforce SI (gives 10 day notice)---------(10 days)-------Rr • Problem: there’s 10 day delay: D continues to control assets→may try to deplete assets

o Soln: if SP has legitimate worry that assets will be dissipated→court can appt interim Rr to preserve assets until 10 day period is over→BIA, S.47

• Purpose of interim Rr: preserve assets • Response: courts start allowing interim Rrs to start disposing assets→really just a crt-apptd Rr

o for SP b/c Rr is fedl, not provincial→∴can enforce throughout Cda o Problem: all obligations on Rr don’t apply to interim Rr

30 day goods rule (giving supplier priority) didn’t apply Big Sky Living (2007 ABQB) – court limits powers of interim Rrs • ABQB takes away problems of interim Rr • 3 problems:

o 1) Order for apptmt of interim Rr is given on ex parte basis + no notice to interested 3Ps Yet, powers allowed interim Rr to change rights of 3P w/out notice

o 2) Courts were making orders exempting interim Rrs from certain stat reqmts o 3) Interim Rr was shielded from liability→s.14.06

Held • Courts don’t have JD to exempt interim Rr from liability this way • Statutory reqmts are there for a reason: must be followed • Court must adopt principle of minimal disruption (cf. broad powers) when granting powers to intRrs Note • Alta court was interpreting fedl law→OntCA obiter has accepted this view • Template Rr/ship orders

o Big Sky created uncertainty o Practice committees created template Rr/ship orders o Courts now expect parties to use the template + highlight changes o Template Rr/ship order now adopted in BC/AB/ONT

• Dual appointments for interim Rr & Rr order

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o Rr rules apply to the interim Rr as well 2005/2007 • s.47: Int Rrs won’t be able to carry on bus OR enforce on assets

o We’re moving back to true interim Rrs: only to be used for preserving assets • BIA will allow appointment of national Rr (currently only provincial: PPSA) • Effect: powers of interim Rrs will continue to be limited (same as post-Big Sky)