Québec – bankruptcy proceedings stayed pending arbitration on merits of creditor’s claim – #110

Mr. Justice Pierre C. Bellavance in Syndic de Station touristique Massif du Sud (1993) Inc., 2018 QCCS 3605 suspended the court’s determination of a creditor’s application for a bankruptcy order under the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (“BIA”) pending the result of an imminent arbitration on the merits between the creditor and debtor. Though the debtor applied for the immediate dismissal of the creditor’s court application, arguing that the highly publicized litigation harmed its operations, Bellavance J. exercised his discretion under the BIA to suspend the court process. Bellavance J. did so because the court was not the appropriate forum for doing so and the parties were soon to proceed on the merits before the arbitration tribunal having jurisdiction. The forthcoming arbitration award would soon resolve the court litigation.

The dispute involved a landowner, 9367-3085 Québec Inc. (“9367”), and a lessee, Station touristique Massif du Sud (1993) Inc. (“STMS”), bound by a ninety-nine year lease which allowed STMS to operate a ski hill operation on 9367’s land. (See at the bottom of this note, more details on an “emphyteutic lease”). Though the lease terminated seventy (70) years from now, 9367 initiated eviction proceedings in Québec Superior Court on January 8, 2018 alleging extra-judicial resiliation of the lease. On April 27, 2018, 9367 filed for a bankruptcy order under section 43 of the BIA.

Section 43 (1) Subject to this section, one or more creditors may file in court an application for a bankruptcy order against a debtor if it is alleged in the application that
(a) the debt or debts owing to the applicant creditor or creditors amount to one thousand dollars; and
(b) the debtor has committed an act of bankruptcy within the six months preceding the filing of the application.

9367’s grounds in support of the resiliation and eviction appear in more detail in the reasons for judgment as excerpted at paragraphs 5. In its allegations, 9367 mentioned that arbitration had been initiated to determine the question of resiliation.

STMS’ response to 9367’s allegations is reproduced at paragraph 6. STMS contested the merits of 9367’s claims and asserted that the proper forum to determine the merits of the parties’ dispute was arbitration and not the bankruptcy court. STMS pointed out that 9367’s court proceedings reproduced almost entirely numerous passages of the notice of arbitration. STMS argued that the bankruptcy proceedings were based on only one (1) creditor’s claims, those of 9367, and that 9367 was bound by an arbitration clause which all parties admitted had already been acted triggered.

Prior to appearing before Bellavance J., the parties had participated in an earlier case management hearing before Mr. Justice Jean-François Émond. Having examined the pleadings and heard from the parties, Émond J. suggested that he stay the bankruptcy proceedings given his ‘preoccupations of an administrative nature’.

Section 43 of the BIA provides for a stay of the application for a bankruptcy order if the debtor denies the truth of the facts alleged in its creditor’s application. The court also has discretion to order a stay for “other sufficient reason”.

Section 43(10) If the debtor appears at the hearing of the application and denies the truth of the facts alleged in the application, the court may, instead of dismissing the application, stay all proceedings on the application on any terms that it may see fit to impose on the applicant as to costs or on the debtor to prevent alienation of the debtor’s property and for any period of time that may be required for trial of the issue relating to the disputed facts.

Section 43(11) The court may for other sufficient reason make an order staying the proceedings under an application, either altogether or for a limited time, on any terms and subject to any conditions that the court may think just.

9367 agreed with Émond J. to order a stay of the bankruptcy proceedings but STMS resisted. STMS claimed that the bankruptcy proceedings hung like ‘a sword of Damocles’ over its operations and advised that STMS would present a declinatory motion in the near term to have 9367’s application dismissed. In STMS’ contestation in the BIA proceedings, at paragraph 46 excerpted at paragraph 6 of Bellavance J.’s reasons, STMS alleged that the parties’ dispute had received wide media coverage, harming STMS’ operations, and needed to be resolved quickly. 9367 accepted to proceed as suggested by STMS and STMS’ declinatory exception was presented to Bellavance J.

The parties prepared to have their arbitration heard by the arbitrator on August 20, 21 and 22, 2018. Parallel to or, as Bellavance J. noted, ‘despite’ the arbitration proceedings, STMS presented its declinatory motion June 11, 2018.

In his analysis, Bellavance J. retraced the field lines for both creditors and debtors. A debtor’s dispute over a creditor’s claim is not in itself sufficient to prevent a creditor from applying for a bankruptcy order under section 43(1). That said, a court could suspend an application for a bankruptcy order if the debtor proves that it has a genuine contestation, advanced in good faith, regarding the existence of the creditor’s claim.

The court can stay the bankruptcy proceedings until the creditor has the opportunity to prove that its claim ‘before a civil tribunal having jurisdiction’ that the debt is owing or that the application is rejected because the creditor has not made an act of bankruptcy in the six (6) months preceding the application. Bellavance J. referred to Italia (Syndic d’), 2010 QCCS 645 and Laboratoires Québact inc. (Syndic de), 2010 QCCS 4452 as examples in which the court required that a creditor meet its burden. He also cited Re Jarvie (1986), 62 C.B.R. (N.S.) 75 (Sask. Q.B.), conf. par (1987), 65 C.B.R. (N.S.) 157 (Sask. C.A.). for the statement that the proof of creditor’s claim as to be before ‘a civil tribunal having jurisdiction’. (Note: no online link available for Re Jarvie).

Bellavance J. also cited the Québec Court of Appeal’s reasons in 1224-2927 Québec Inc. v. Kafko Manufacturing Ltd., 1996 CanLII 6187, paras 18 and 19 in which the Court of Appeal not only outlined the equivalent field lines retraced by Bellavance J. by reference to other cases and the BIA, but it added that the bankruptcy court is not to transform itself into a ‘collection agency’. Rather, if the debt is due, the court can either dismiss the creditor’s application for a bankruptcy order or impose a stay while the parties engage on the merits before a civil tribunal.

On the facts, Bellavance J. did not believe STMS’ contestation was frivolous or brought in bad faith. Bellavance J. also did not believe that 9367’s application was vexatious or frivolous, though he did note having doubts on whether that facts in the six (6) months leading up to 9367’s application qualified as acts of bankruptcy.

Bellavance J. dismissed STMS’ declinatory motion and, exercising his discretion, imposed a stay pending the decision of the arbitrator. With the arbitration hearing set for the August 20-22, 2018, Bellavance J. wrote that the court would soon be able to deal with 9367’s application.

If the debtor fails to demonstrate that it has a valid contestation, the court cannot consider the claim as disputed for the purposes of the BIA and the court would have no choice but to rule on the application for a bankruptcy order.

Bellavance J. recognized that the parties’ agreement to arbitrate still bound them and noted that the speed by which the arbitration could reach the merits would allow the court to deal soon with the application for a bankruptcy order. Though the stay was imposed against STMS’ wishes, the result of the arbitration would provide a prompt resolution of the debate for use in the BIA proceedings.

The presence of an arbitration was sufficient for Bellavance J. in the circumstances as the appropriate tribunal and had the added advantage of providing a prompt, final decision on the merits and address STMS’ concern to remove the BIA litigation sooner than later.

In the absence of a pre-existing arbitration clause, the parties involved in similar BIA proceedings might enter into a submission agreement and thereby access the faster decision on the merits of the creditor’s claim against the debtor.

Additional note of “emphyteutic lease”, contained at Chapter IV, articles 1195-1211 C.C.Q.

In Québec, article 1195 C.C.Q. defines “emphyteusis” as the right which, for a certain time, grants a person the full benefit and use of an immovable owned by another provided he does not endanger its existence and undertakes to make constructions, works or plantations thereon that increase its value in a lasting manner. Emphyteusis is established by contract or by will, referred to as the “constituting act”.

The term of the emphyteusis must be stipulated in the constituting act (“lease”) and cannot be less than 10 or more than 100 years. If the term is longer, article 1197 C.C.Q. reduces it to 100 years.

The lessee has all the rights in the immovable attaching to the quality of owner, subject to the restrictions contained in Chapter IV of the C.C.Q. and in the emphyteutic lease. The lease may limit the exercise of the rights of the parties, particularly by granting rights or guarantees to the owner for protecting the value of the immovable, ensuring its conservation, yield or utility or by otherwise preserving the rights of the owner or of the lessee or regulating the performance of the obligations established in the lease.

Article 1208 C.C.Q. provides that emphyteusis terminates in one (1) or more of six (6) possible situations: the expiry of the term stipulated in the lease; the total loss or expropriation of the immovable; the resiliation of the lease; the union of the qualities of owner and lessee in the same person; non-use for 10 years; abandonment.