CONSUMER AND MID-MARKET TECHNICAL UPDATE

1. CONSUMER AND MID-MARKET TECHNICAL UPDATE Commercial/Mid-Market materials prepared by:Karen Fellowes, DLA Piper (Canada LLP) Consumer Materials prepared by: Nicole Taylor-Smith,Miller Thomson LLP

2. Dealing with the AER • ATB v Redwater Energy Corp. – decision pending • Two day hearing before Chief Justice in December 2015 • Receiver/Trustee and BIA priorities vs. AER power to transfer well licenses • Constitutional Issues • Re: Verity Energy Ltd. –unreported • November 2015 order of Justice Jeffrey • AER estopped from refusing to transfer well licenses • AER had made representations at earlier Court hearing

3. Dealing with the AER (continued) • National Bank of Canada v. Spyglass Resources Corp. – unreported • Consent Order - January 2016 • Receiver and AER agree to process for marketing and sale of assets, including license transfers

4. Provincial government cannot use penalties to circumvent BIA • Alberta (Attorney General) v. Moloney, 2015 SCC 51 • Province suspended license to compel Moloney to pay debt after Moloney had been discharged from bankruptcy • Doctrine of Paramouncy – operation of provincial law in conflict of federal law – federal law prevails • Court held first purpose of BIA is equal distribution of assets and second purpose is “fresh start” for debtor • TSA is colorable attempt to enforce debt that was discharged per BIA • Held - Province cannot suspend license in these circumstances

5. Approval of Monitor’s Reports and Activities • Re: Target Canada Co. (2015) ONSC 7574 • Monitor sought general approval of reports 3-18 and activities • Court limited approval so as not to bind third parties

6. Impartiality of the Monitor • ReNelson Education Ltd (2015) ONSC 3580 • Re Guestlogix Inc. (2016) ONSC 1047 • Two recent CCAA proceedings where Monitor was replaced • Monitor had been involved with debtor prior to filing • Monitor must be seen to be completely independent

7. Assessments under Appeal do not form part of unpaid tax debt per s. 172.1 • Schnier v Canada (Attorney General), 2016 ONCA 5 • Bankrupt reassessed by CRA who claimed bankrupt owed $4.0 million of personal tax debt, majority of which was under appeal to Tax Court • Issue was whether amounts claimed by CRA which are under appeal are part of bankrupt’s “personal income tax debt” per s.172.1 of the BIA • Relevant fact that CRA took 2 decades to respond to bankrupt’s original objections to reassessments • Held - tax claims under objection or appeal are contingent and not “personal income tax debt”; s.172.1 did not apply • CRA’s concern regarding abuse can be dealt with by adjournment of discharge hearing

8. Security Deposits and Security Interests • York Realty v. Alignwest Private Debt Ltd. (2015) ABQB 148, affirmed (2015) ABCA 355 • Landlord held $3.1 million security deposit from bankrupt tenant • Pre-paid rent vs security interest (unperfected)

9. Interest Stops Rule • Re: Nortel Networks Corp (2015) ONCA 681 • “Interest stops” rule in bankruptcies also applies to CCAA proceedings • all unsecured claims frozen as at date of insolvency • preserves pari passu principal of fairness

10. Trustee may take an assignment of action from creditor to pursue collective claim • BDO Canada Limited v Dorais, 2015 ABCA 137 • Deceased bankrupt controlled group of companies Receiver appointed • Legal actions had been commenced by creditors claiming, in part that certain transactions were fraudulent preferences/conveyances - stayed by Receivership Order • 2 actions assigned to Trustee who applied to lift stay to pursue assigned actions (limitation expired) – application denied at QB • Law – trustee cannot pursue personal claims of creditors but can pursue preference action and unjust enrichment (considered to be “collective claims” ) • CA held that stay could be partially lifted to pursue collective claims only

11. Claims against Receiver • Holmes v. SchonfeldInc. (2016) ONCA (Ont.CA) • Shareholders sought to sue Receiver post-discharge • Receiver protected by terms of discharge order • Accountants cannot third-party Receiver -- cannot do indirectly what shareholders could not do directly

12. Costs Awards – As against the Receiver • Re 144 Park Ltd. (2015) ONSC 6864 • Receiver/Trustee brought motion for advice and direction • Court would have awarded costs against Receiver • Court awarded costs against non-party (secured creditor)

13. Allocation of personal injury settlement and surplus income • Conforti (Re), 2015 ONCA 268 • Bankrupt permanently disabled due to MVA 2½ yrs prior to bankruptcy • Sought accident benefits from Ontario government and commenced personal injury action - failed to disclosed either to trustee in bankruptcy • During bankruptcy received benefit payments and settlement from personal injury action • Issue as to whether amounts received were income or property per s.67 and s.68 of BIA • Minutes of settlement allocated personal injury settlement under several heads of damage – accepted by trustee

14. Allocation of personal injury settlement and surplus income (continued) • Conforti (Re), 2015 ONCA 268 • Per CA decision • Future loss of competitive advantage is income to be pro-rated over estimated working life, estate to get proportion from date of settlement to date of discharge • Financial assistance payment received from government – due to be paid back – in nature of a loan - not income • Pain and suffering and items like housekeeping and lost of future care not paid to estate under s.67 and s.68

15. Privilege/Confidentiality • Stretch v. Solid Gold Resources (2015) ONSC 82 • Admission of insolvency made in pleadings • Unable to use as basis for bankruptcy application • Absolute privilege • Asian Concepts Franchising Corp. (2015) BCSC 192 • Creditor asked for copies of other proofs of claim • Trustee ordered to provide photocopies • Recipient bound by implied undertaking of confidentiality

16. Receiver’s fees • B. Love Holdings Inc. v. Deloitte Restructuring Inc. (2015) ONSC 5272 • Private Receiver -- fees reduced by 50%, legal fees also reduced • Servus v. Trimore (2015) ABQB 745 • Receiver and counsel fees approved in full • Legal fees governed by contractual term in loan agreement whereby debtor agreed to pay the Lender their full indemnity solicitor and client fees for enforcing its security

17. Conflicts • Trillium Motor World Ltd. v. General Motors of Canada Ltd. and Cassels Brock and Blackwell LLP (2015) ONSC 3824 • Court awards damages of $45 million, plus interest, plus costs • Damages against law firm for conflict of interest • Award based on lost opportunity to negotiate with GM

18. Removing funds from joint account can be misappropriation while in fiduciary capacity • Lehman (Re), 2016 BCSC 126 • Application for discharge order and determination of whether ex-spouse’s claim survives bankruptcy • Common law relationship ended – bankrupt withdrew $157,000 from joint line of credit and used to set up her new life • Family law dispute had proceeded to trial in Ontario and ex-spouse obtained judgment against bankrupt - did not plead misappropriation or fiduciary relationship

19. Removing funds from joint account can be misappropriation while in fiduciary capacity (cont’d) • Lehman (Re), 2016 BCSC 126 • Ex-spouse opposed discharge but did not prove assets not of value equal to 50¢ on dollar and did not show bankruptcy result of extravagance or culpable neglect • Creditor active in bankruptcy and had delayed discharge hearing for 2 years with information requests • Court therefore granted absolute discharge order

20. Removing funds from joint account can be misappropriation while in fiduciary capacity (cont’d) • Lehman (Re), 2016 BCSC 126 • On issue of s. 178 Court held: • Joint line of credit was for them to use for their life together – unilateral withdrawal for bankrupt’s sole use was misappropriation • Bankrupt was fiduciary due to spousal relationship and agreement regarding use of line of credit

21. Builders Liens • Iona Contractors Ltd. (Receiver of) v. Guarantee Co. of North America (2015) ABCA 240– leave to appeal to SCC denied • Builder’s Lien Act -- statutory trust • Not property of bankrupt estate

22. CCAA Stay of Proceedings and Set-off • North American Tungsten Corp. v. Global Tungsten and Powders Corp. (2015) BCSC 1382, leave to appeal denied (2015) BBCA 390 • Tungsten mine with only two customers -- in CCAA • One customers sought to set-off pre-filing debt against post-filing supply of materials • CCAA stay prevented set-off in these circumstances