



COURT OF APPEAL FOR ONTARIO

CITATION: Emery Silfurtun Inc. (Re), 2018 ONCA 485

DATE: 20180525

DOCKET: C64275

Strathy C.J.O., Roberts
    and Paciocco JJ.A.

In the
    Matter of the Proposal of Emery Silfurtun Inc.
of the Town of Markham, in the Province of Ontario

Catherine Francis, for the appellant, Emery Silfurtun
    Inc.

Peter I. Waldmann, for the respondent, Warburg-Stuart
    Management Corporation

Heard: March 29, 2018

On appeal from the order of Justice Frederick L. Myers of
    the Superior Court of Justice, dated August 28, 2017, with reasons reported at
    2017 ONSC 5768, 52 C.B.R. (6th) 144.

Roberts
    J.A.
:

A.

Overview

[1]

The appellant, Emery Silfurtun Inc., appeals from the order of the
    motion judge requiring the appellant and the trustee of the appellants
    bankruptcy proposal to disclose to the respondent, Warburg-Stuart Management
    Corporation, all documents and communications that set out any and all terms of
    the appellants settlement with its creditor, Zodax. The Zodax settlement is
    important to the respondent because the appellant contends that its settlement
    with Zodax discharged the respondents security interest, which the respondents
    rely upon in their bankruptcy claim.

[2]

A brief procedural history is useful to understand the context of this
    appeal. While many of the key facts were contested before the motion judge, how
    the motion came to be heard is not in dispute.

[3]

On May 5, 2016, the appellant filed a proposal to its unsecured creditors
    under the
Bankruptcy and Insolvency Act
, R.S.C. 1985, c. B-3 (
BIA
).
    On October 28, 2016, the appellant and its creditor, Zodax, entered into a
    settlement of Zodaxs claims. The appellants proposal was approved by a
    majority of its creditors on October 31, 2016. The trustee made its motion for
    approval on notice to all creditors who filed proofs of claim in the proposal
    for court approval. The respondent had registered a general security agreement
    against the appellants assets to secure its claim for professional services
    allegedly rendered by the appellant, and was given notice. None of the
    creditors opposed court approval of the proposal. On November 22, 2016, Master
    Mills approved the proposal. The appellant fully performed the proposal as of December
    6, 2016, and its trustee issued a Certificate of Full Performance of Proposal.

[4]

The appellant subsequently attempted to resolve the respondents
    asserted secured claim. Negotiations failed.

[5]

On February 10, 2017, the appellant commenced an application to set
    aside the respondents security on the basis of the settlement concluded with
    Zodax.

[6]

On March 20, 2017, the respondent commenced an action against the
    appellant to enforce its security by appointing a receiver and manager over the
    assets and undertaking of the appellant.

[7]

On June 27, 2017, the respondent brought a motion to annul the appellants
    proposal in the bankruptcy proceedings pursuant to s. 63 (1) of the
BIA
.
    The respondent alleges that the appellant entered into a secret settlement
    agreement with Zodax, the particulars of which were not disclosed to the
    appellants creditors. This was allegedly an attempt to circumvent the
    bankruptcy process and fraudulently obtain court approval of the proposal. In
    particular, the respondent alleges that by the settlement, Zodax released its
    unsecured claim and should not have been permitted to vote on the proposal,
    for, without Zodax, the proposal would have been defeated. The respondent also
    alleges negligence against the trustee in its treatment of Zodaxs unsecured
    claim.

[8]

On July 13, 2017, Conway J. ordered, pursuant to the parties agreement,
    that the respondents motion to annul the bankruptcy proposal would proceed
    before the applications. She also directed that the respondents production
    motion be heard before the other proceedings. No appeal was taken from Conway
    J.s order.

[9]

The motion judge determined that he could not resolve the contested
    facts on the record before him, which included whether the appellant had
    disclosed the Zodax settlement at the October 31, 2016 meeting of the
    creditors. He concluded that the respondents allegations gave rise to serious
    questions about the propriety of the proposal process. He determined that production
    of the settlement documentation and communications was necessary because the
    interests of justice in the integrity of the
BIA
proposal process
    overwhelm any need to encourage settlement by recognizing privilege in this
    case. He also found that the appellant had waived any privilege by relying on
    its settlement with Zodax in support of its application to set aside the
    respondents security and in response to the respondents annulment motion and
    action.

[10]

While
    not necessary for the disposition of the motion before him, the motion judge
    stated the following as a general proposition that should apply to all
    restructuring and bankruptcy proposal processes:

In my view, settlement privilege cannot apply to the contents
    of claims settlements between creditors and a debtor in a
CCAA
or
BIA
proposal process. Secrecy of deal terms is inconsistent with the necessity of
    scrutiny of such agreements by other creditors and the court.



The recognition of a blanket privilege for claims settlements
    under the
CCAA
and
BIA
is inconsistent with the transparent
    statutory processes that require scrutiny of such agreements. In my view
    settlement privilege does not apply to claim settlements in a
CCAA
or
BIA
proposal process.

[11]

The
    appellant makes two principal submissions on appeal:

1. The motion judge erred in
    failing to determine whether the respondents annulment motion was an abuse of
    process before he heard and disposed of the production motion.

2. The motion judge erred in
    concluding that settlement privilege did not apply generally or specifically,
    or that it had been waived by the appellant.

Before considering these submissions, I will examine
    whether leave to appeal is required and if it should be granted.

B.

Analysis

(1)

Leave to appeal

[12]

The
    appellant submits that leave to appeal is not required under s. 193 of the
BIA
.
    If leave is required, the appellant submits that it should be granted because
    the application of settlement privilege to
CCAA
and
BIA
proposal processes raises a significant issue of public importance.

[13]

In
    my view, leave is required because the motion judges production order does not
    involve future rights nor is it likely to affect other cases of a similar
    nature in the bankruptcy proceedings: see s. 193 (a) and (b) of the
BIA
;
    and
Ravelston Corp., Re
(2005), 24 C.B.R. (5
th
) 256 (Ont.
    C.A.), at para. 18.

[14]

I
    would grant the appellant leave to appeal under s. 193 (e) of the
BIA
.
    The appeal raises the important issue of the applicability of settlement
    privilege to
CCAA
and
BIA
proposal processes. This issue is
    of general importance to bankruptcy and insolvency matters, and to the
    administration of justice as a whole. The appeal on this issue is also
prima
    facie
meritorious in that it raises an arguable ground of appeal, and it
    would not unduly hinder the progress of the bankruptcy proceedings:
Business
    Development Bank of Canada v. Pine Tree Resorts Inc.
, 2013 ONCA 282, 115 O.R.
    (3d) 617, at para. 29.

(2)

Did the motion judge err in determining the production motion before the
    annulment motion?

[15]

The
    appellant argues that the motion judge should have determined whether the
    annulment motion was an abuse of process before hearing the production motion.
    According to the appellant, the respondent should have appealed from the
    approval order of Master Mills. Moreover, the trustee and the respondent, along
    with the other creditors who attended the October 31, 2016 proposal approval
    meeting, were apprised of the appellants settlement with Zodax.

[16]

I
    do not accept these submissions.

[17]

First,
    there was a clear direction order from Conway J. requiring the motion judge to
    hear the production motion before the other applications. As the motion judge
    noted in his reasons, the production motion was the only matter before him. No
    appeal was taken from the order of Conway J. nor was there any attempt to have it
    set aside or modified.

[18]

Further,
    the motion judge correctly determined that he could not resolve the issue as to
    whether the respondents annulment motion was an abuse of process because of
    the conflicting evidentiary record before him. I agree that the record presents
    differing accounts as to whether the trustee, the respondent, and the other
    creditors were aware of the material particulars of the settlement. This cannot
    be reconciled on a paper record.

[19]

Finally,
    I do not agree that the respondent should have appealed from Master Mills
    approval order. The respondents annulment motion was authorized under s. 63 (1)
    of the
BIA
, which provides as follows:

Where default is made in the performance of any provision in a
    proposal, or where it appears to the court that the proposal cannot continue
    without injustice or undue delay or that the approval of the court was obtained
    by fraud, the court may, on application thereto, with such notice as the court
    may direct to the debtor, and, if applicable to the trustee and to the
    creditors, annul the proposal.

[20]

The respondent alleges that the appellant and Zodax entered into a
    secret deal to fraudulently conceal their agreement from the trustee and the
    creditors in order to obtain approval of the proposal. As such, the allegations
    in the respondents annulment motion meet the highlighted criteria under s. 63 (1)
    of the
BIA
. See for example:
Amertek Inc., Re
(1998), 4
    C.B.R. (4th) 23 (Ont. C.J.) and
Proposition de 3245951 Canada inc.
, 2017
    QCCS 2659, 281 A.C.W.S. (3d) 247. Whether or not the annulment motion will
    ultimately succeed was not the issue before the motion judge or on this appeal.

(3)

Did the motion judge err in ordering production of the settlement
    documentation and correspondence?

[21]

The
    appellant submits that the motion judge erred in determining that settlement
    privilege did not apply to
CCAA
and
BIA
proposals. This error
    in principle affected the motion judges analysis such that he incorrectly
    distinguished and failed to apply the test for common law settlement privilege
    set out by the Supreme Court in
Sable Offshore Energy Inc. v. Ameron
    International Corp.
, 2013 SCC 37, [2013] 2 S.C.R. 623.
[1]

[22]

I
    agree that the motion judge erred in stating as a general proposition that
    settlement privilege should not apply to
CCAA
and
BIA
proposals. The motion judge cited no authority for this blanket statement. It
    runs contrary to long-standing and well-established common law principles relating
    to settlement privilege. Specifically, whether or not settlement privilege
    applies in any given case remains a contextual, fact-specific analysis requiring
    that certain conditions be met:
R. v. Delchev
, 2015 ONCA 381, 126 O.R.
    (3d) 267, at para. 24.

[23]

The
    Supreme Court in
Sable
confirmed the existence of and important public
    interest in preserving common law settlement privilege. It furthers the imperative
    goals of reducing the personal and public expense and time involved in
    litigation and the strain upon an already overburdened provincial court
    system, at para. 11. In particular, at para. 12, the Court reiterated the principle
    and its rationale as follows:

Settlement privilege promotes settlements. As the weight of the
    jurisprudence confirms, it is a class privilege. As with other class
    privileges, while there is a
prima facie
presumption of
    inadmissibility, exceptions will be found when the justice of the case
    requires it. [Citations omitted.]

[24]

Although
    the motion judge may have gone farther regarding the scope and applicability of
    settlement privilege than required to dispose of the production motion, he
    nevertheless reasoned in the alternative and went on to consider the outcome if
    settlement privilege did apply to
CCAA
and
BIA
proposals. It
    is clear he then referenced and applied the principles articulated in
Sable
.
    He assessed whether the present case stood as an exception to settlement
    privilege because the respondent had demonstrated that on balance a competing
    public interest outweighs the public interest in encouraging settlement. In
    particular, the motion judge determined that the countervailing interests to
    the public interest in settlement privilege included the respondents
    allegations of impropriety on the part of the appellant and their potential effect
    on the integrity of the proposal process. Absent production of the settlement
    documentation and communications, the motion judge concluded that it was
    impossible to determine whether the conduct of the parties and the terms of the
    settlement were
bona fide
or improper. I see no error in the motion
    judges determination of this issue.

[25]

The
    appellant submits that the motion judge erred by failing to consider whether
    some measure short of full production of all settlement documents and
    communications could have struck a more appropriate balance between the
    competing public interests. It contends that having determined that settlement
    privilege did not apply, the motion judge erred in failing to consider whether disclosure
    of the settlement documents and communications should be subject to
    confidentiality terms and conditions pending the determination of their
    relevance by the motion judge. I do not agree.

[26]

In
    his reasons, the motion judge refers to this issue as follows:

Perhaps the proposal trustee might have been asked to perform a
    role in reviewing and providing some assurances about the contents
were they truly sensitive, confidential material
. No one
    asked the proposal trustee to take on that task however. [Emphasis added.]

[27]

This
    reference shows that the motion judge was alert to the possibility of making an
    order requiring less than full disclosure of the settlement documents and
    communications. This determination was not mandatory but discretionary. As highlighted,
    one of the relevant factors that the motion judge considered was whether the
    contents of the settlement materials were truly sensitive and confidential.

[28]

The
    difficulty with the appellants position is that there is no evidence that the
    settlement materials contained truly sensitive and confidential provisions
    that would cause prejudice to the appellant if disclosed. Rather, the
    appellants submissions that disclosure will cause prejudice are belied by its
    initial argument that the annulment motion is an abuse of process because it
    had previously disclosed the material particulars of the settlement with Zodax
    to the trustee, the respondent, and the other creditors. Moreover, I do not
    accept the appellants argument that court-ordered mandatory disclosure could
    constitute a breach of its settlement agreement with Zodax.

C.

Disposition

[29]

Accordingly,
    while I would grant leave to appeal, I would dismiss the appeal.

[30]

I
    would allow the respondent its partial indemnity costs in the amount of $8,800,
    inclusive of disbursements and applicable taxes.

Released: May 25, 2018

L.B. Roberts
    J.A.

I agree G.R.
    Strathy C.J.O.

I agree David M.
    Paciocco J.A.





[1]

Given my proposed disposition of this issue, it is not
    necessary to determine whether the motion judge erred in finding that the
    appellant waived settlement privilege. This was not the main focus of the
    argument on appeal. As a result, I should not be taken as endorsing the motion
    judges conclusions with respect to whether privilege was waived.


