A Licensed Insolvency Trustee’s obligation to examine a proof of claim and using the civil standard of proof and the creditor’s onus of proof to value unliquidated claims

One of the functions of a Licensed Insolvency Trustee in bankruptcy or proposal proceedings is to assess and allow or disallow the claims of creditors. 

In some cases it takes no effort to make that assessment.  If the creditor has a judgment then for the most part the trustee can rely on the judgment in allowing the claim.  If the creditor is relying on a promissory note or a contract with a clause providing for liquidated damages, the trustee will have some documents to review but ultimately there should not be too much difficulty in assessing the claim. 

But what about unliquidated claims?  How does a trustee deal with a claim where the damages are uncertain or there is competing evidence showing vastly different valuations of the claim?  The trustee may be tempted to throw up its hands, deny the claim, let the creditor appeal, and let the courts figure it out. 

As tempting as this solution may be, the recent British Columbia Supreme Court decision in Sellathamby (Re)[1] makes it clear that this is not an option at all.

What happened in Sellathamby (Re)?

Sellathamby (Re) was an application by a creditor, David Lofthaug (“Lofthaug”), for an order annulling the trustee’s disallowance of Lofthaug’s proof of claim and other related relief.

Lofthaug’s claim arose from an Alberta judgment.  In 2008 the Alberta Court of Queen’s Bench issued a consent judgment that Sellathamby was liable for certain debts owed to Lofthaug but quantum was not determined.  In 2014 the court ordered that a trial should be held to determine damages but no trial was scheduled.

In December 2015 Sellathamby filed a Notice of Intention to Make a Proposal. 

Lofthaug filed a proof of claim with Sellathamby’s trustee.  The proof of claim included an expert report valuing Lofthaug’s losses at between $1,144,000 and $1,249,000.  Sellathamby filed his own expert report responding to Lofthaug’s expert which concluded that the losses were substantially less. 

Sellathamby’s trustee disallowed the claim.  The reason for disallowing the claim set out in the disallowance was “[y]ou have not provided the documentation quantifying the amount of your claim as per the Consent Judgment dated September 8, 2008.”

On the application brought by Lofthaug, the trustee filed an affidavit explaining why the claim was disallowed.  The trustee noted that the claim related to a court action in Alberta which had been underway since 2008.  The trustee also noted that even though significant time had passed since 2008, the Alberta court had not made a determination as to the quantum that was owed to Lofthaug.  The trustee decided that he was not in any better a position than the Court to make a determination as to the value of the claim.  In circumstances where the trustee is unable to place a value on a claim, the trustee said that it is his practice to disallow the claim. 

Among other arguments, Lofthaug argued that the trustee was required to value his claim but failed to do so.

In analyzing this issue the court first considered section 135 of the Bankruptcy and Insolvency Act which deals with the admission and disallowance of proofs of claim.  Section 135(1) to (2) states:

Admission and Disallowance of Proofs of Claim and Proofs of Security

Trustee shall examine proof

135 (1) The trustee shall examine every proof of claim or proof of security and the grounds therefor and may require further evidence in support of the claim or security.

Determination of provable claims

(1.1) The trustee shall determine whether any contingent claim or unliquidated claim is a provable claim, and, if a provable claim, the trustee shall value it, and the claim is thereafter, subject to this section, deemed a proved claim to the amount of its valuation.

Disallowance by trustee

(2) The trustee may disallow, in whole or in part,

(a) any claim;

(b) any right to a priority under the applicable order of priority set out in this Act; or

(c) any security.

The court held that, under s. 135(1), the trustee has a responsibility to value a claim.  The trustee cannot defer to the court in Alberta.  There was no evidence that the Alberta court declined to make a determination on quantum.  The fact that the court made no determination does not mean that the trustee is unable to place a value on the claim.

Section 135(1.1) of the BIA requires the trustee to do two things:

  1. the trustee shall determine whether any contingent claim or unliquidated claim is a provable claim; and
  2. if it is a provable claim, the trustee shall value it.

The section is not permissive.  The trustee is required to determine if the claim is a provable claim, and, if a provable claim, the trustee is required to value it.

Read together, the sections require a trustee to determine whether a contingent or unliquidated claim is provable and, if provable, to value it.  It is only after the trustee takes these steps (including valuing the claim) that the trustee is permitted to disallow the claim.

Lofthaug was the holder of a consent judgment for liability in connection with a commercial contract.  The parties agreed that the holder of such a judgment has a claim provable in bankruptcy. 

The trustee did not value Lofthaug’s claim as it was required to do.  Instead the trustee wrongly concluded that the claim was not supported by any documentation.  The trustee also deferred to the Alberta court regarding the valuation of Lofthaug’s claim.  This was not correct.  It was clear that the trustee had a complete record, including expert reports, from Lofthaug and Sellathamby.

Since the trustee did not value the claim under section 135(1.1), the trustee was not permitted to disallow it pursuant to section 135(2).

How can a trustee value an unliquidated claim?

Sellathamby makes it clear that a trustee is required to examine a claim.  The trustee cannot disallow it “as a matter of practice”. 

This is relatively simple for liquidated claims.  A trustee can look behind a judgment in some circumstances[2] but a judgment of a court of competent jurisdiction should almost invariably satisfy a trustee regarding the legitimacy of a debt if, in awarding the judgment, the court has considered the merits of the claim[3].  Claims based on promissory notes or contracts with liquidated damages clauses will require more investigation but ultimately should not cause a trustee too much difficulty.

What about unliquidated claims?  What should a trustee have done to comply with its obligation? 

The trustee is required to value the claim based on the evidence provided to the trustee by the creditor.  The trustee had expert reports from Lofthaug and Sellathamby.  The trustee should have reviewed all the evidence presented to it, including the expert reports, in order to value the claim. 

The two expert reports presented very different amounts for valuing the claim.  The trustee is required to review the two reports and to decide which of the reports is more persuasive.  How does the trustee arrive at a valuation based on different reports? 

The court in Re HDYC Holdings Ltd.[4]offers some guidance on how a trustee should approach an unliquidated claim.  At paragraph 70 the court says that “certainty” is not the test for deciding the validity of a claim or calculating its value.  The court goes on to say that if the method for calculating the claim is reasonable and the evidence is relevant and probative, that is sufficient to quantify the claim. 

The trustee does not have to be “certain” that one report is correct and the other is wrong.  The trustee only has to conclude that one of the reports is more reasonable and probative than the other.

How can a trustee value a claim where equally persuasive evidence suggests different valuations?

How does the trustee decide how to value a claim when faced with two diametrically opposite, but equally persuasive, reports?

While Re HDYC Holdings Ltd. offers some guidance it still does not help the trustee resolve a situation where there are different calculations of the value both of which are reasonable and supported by relevant and probative evidence.  What can a trustee do in such circumstances? 

There are two legal principles – the standard of proof and the onus of proof – that can assist a trustee in resolving this issue.

What is the “standard of proof”?

“Standard of proof” is the standard that has to be met in order to prove a fact.  In criminal proceedings the standard is proof beyond a reasonable doubt[5].  In some cases, such as proving that a bankrupt has committed an offence under the BIA, this standard is applied.  However for the most part in bankruptcy proceedings the civil standard is applied[6].

The civil standard of proof is proof on a balance of probabilities.  Balance of probabilities means “more probable than not” or that the chance of a fact being true is more than 50%[7].  This means in a civil proceeding, the party trying to prove something has to prove that, on balance, it is more likely than not to be true.

What is the onus of proof?

The next question is who has to prove a fact.  This is called the onus of proof or burden of proof.  The party with the onus of proof or burden of proof is responsible for proving that a fact is true. 

Section 124(1) of the BIA provides that “[e]very creditor shall prove his claim, and a creditor who does not prove his claim is not entitled to share in any distribution that may be made.”  The creditor bears the onus of establishing its claim[8].  This means it is the creditor’s responsibility to prove that it has a claim.  No one is responsible for disproving that a creditor has a claim.

Taken together how do these two principles help in a situation where a trustee cannot decide between competing evidence led by, for example, a creditor and the bankrupt? 

If the trustee can decide that, on a balance of probabilities, the creditor’s evidence is more compelling than not, then the creditor has discharged its onus of proof and the claim should be allowed.  On the other hand if the trustee can decide that, on a balance of probabilities, the creditor’s evidence is less compelling than not, then the creditor has not discharged its onus of proof and the claim should disallowed. 

What about a situation where there is equally compelling evidence for two different valuations or where there is equally compelling evidence in favour of and against a proof of claim? 

This is where the creditor’s onus of proof comes into play.

The creditor has the onus of proof.  This means the creditor is responsible for proving its claim.  The standard of proof that the creditor must meet is a balance of probabilities.  In other words the creditor must show that it is more likely than not that it has a valid claim. 

If the evidence in support of and against the creditor’s claim is equal then the creditor has not shown, on a balance of probabilities, that it has a claim.  This means the creditor has not discharged its onus and, as a matter of law, must lose.  The trustee is justified in disallowing the claim because the creditor has not proven it. 

It may at first appear that by disallowing the claim in these circumstances the trustee is throwing up its hands and doing exactly what the court in Sellathamby (Re) said that it could not do.  However this is not the case.  In Sellathamby (Re) the trustee had evidence in support of two different valuations.  Instead of analyzing this evidence the trustee disallowed the claim both because it felt that the Alberta courts would do a better job and because this was the trustee’s “practice”.

If a trustee reviews the evidence both in favour of and against a proof of claim, decides that the evidence is equally compelling, and then applies the standard of proof and onus of proof to disallow the claim, the trustee has met its obligation pursuant to section 135(1) to “examine” the proof of claim. 

Properly examining a proof of claim is necessary to allow a court to deal with an appeal from a disallowance.

There is another way in which following this process will help with the administration of bankruptcy estates. 

Section 135(4) of the BIA provides that the trustee’s disallowance of a claim is final and conclusive unless the creditor appeals from the disallowance.  An appeal from a disallowance is a true appeal, not a hearing de novo[9].  This means that, on an appeal of a disallowance, the court will not consider the matter anew, with the parties leading fresh evidence.  Instead the court will review the documents that were filed with the trustee and will consider whether the trustee arrived at the correct decision.

In order for the court on an appeal from a disallowance to be able to consider the trustee’s decision and to treat the appeal as a true appeal, the trustee must have properly examined the proof of claim and all the evidence that was available to the trustee and must render a decision that an appeal court can consider.

The decision in Sellathamby (Re), the trustee’s obligation to examine a proof of claim under section 135(1) of the BIA, and the nature of an appeal from a trustee’s disallowance make it clear that a trustee cannot merely disallow a claim because arriving at a decision is difficult or because it is the trustee’s “practice”.  The trustee has to properly consider the evidence and prepare a reasoned decision in order for the claims process, including appeals, to function properly. 

[1] 2020 BCSC 1567 (CanLII)

[2] Re Van Laun; Ex parte Chatterton, [1907] 2 K.B. 23, 76 L.J.K.B. 644, 97 L.T. 69 (C.A.)

[3] Re Canadian Asican Centre Development Inc. (2003), 39 C.B.R. (4th) 35, 2003 CarswellBC 270

[4] Re HDYC Holdings Ltd. (1995), 35 C.B.R. (3d) 294 (B.C. S.C.)

[5] R. v. Lifchus, 1997 CanLII 319 (SCC), [1997] 3 S.C.R. 320

[6] see for example Hefler (Bankruptcy), Re, 1997 CanLII 1953 (NS SC), Sran (Re), 2010 BCSC 937 (CanLII), Asian Concepts Franchising Corporation (Re), 2018 BCSC 1022 (CanLII), Roberts v. E. Sands & Associates Inc., 2014 BCCA 122 (CanLII) and Toro Aluminum v. Sampogna, 2008 ONCA 125 (CanLII)

[7] Continental Insurance Co. v. Dalton Cartage Co., 1982 CanLII 13 (SCC), [1982] 1 SCR 164

[8] Mamczasz Electrical Ltd. v. South Beach Homes Ltd., 2010 SKQB 182 (CanLII)

[9] Re Galaxy Sports Inc. (2004), 2004 CarswellBC 1112, 1 C.B.R. (5th) 20; Charlestown Residential School (Re) (2010), 70 C.B.R. (5th) 13 (Ont. S.C.)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: