Trustee's decision in its notice of disallowance was final decision

Bankruptcy and Insolvency - Practice and Procedure in Courts - Stay of Proceedings

SK Ltd. loaned SM Ltd. $2 million to enable it to purchase vessel and establish commercial black cod fishing business, but SM Ltd. only made two interest payments and one payment toward principal. After SK Ltd.'s written demand that SM Ltd. execute registrable marine mortgage went unsatisfied, SK Ltd. commenced admiralty action in British Columbia Supreme Court (BCSC) in personam against SM Ltd. and in rem against vessel seeking to enforce loan agreement. SK Ltd. caused vessel to be arrested. At time of vessel's arrest it was subject to mortgages, and first mortgagee commenced this Federal Court action to enforce its first priority statutory marine mortgage. SK Ltd. released vessel from arrest to permit its sale. Sale of vessel was approved in amount of $1,800,000, proceeds were paid into court in this action, and some of proceeds were paid to first and second mortgagees. In meantime SM Ltd. filed assignment in bankruptcy and trustee in bankruptcy was appointed. SK Ltd. filed proof of claim asserting secured claim of $2,129,853.54, but trustee issued notice of disallowance. SK Ltd. filed motion in this action seeking determination that it held equitable mortgage over vessel, and order paying proceeds of sale to it. Trustee brought motion seeking stay of claim of SK Ltd. against proceeds of sale of vessel and for order paying it remaining funds from proceeds of sale. Motion granted. SK Ltd. did not appeal trustee's disallowance of its secured claim under s. 135(2)(c) of Bankruptcy and Insolvency Act as it was entitled to do under s. 135(4), and doctrine of res judicata applied. SK Ltd. could not avoid application of doctrine of res judicata by raising in Federal Court arguments that could have been raised before trustee and in appeal to BCSC. Trustee's decision in its notice of disallowance was final decision of nature that permitted invocation of doctrine of issue estoppel, and parties to process leading to notice of disallowance were same as presently before court. Issue addressed by notice of disallowance, SK Ltd.'s entitlement to equitable mortgage, was same as issue presently before court. Principles of issue estoppel/res judicata precluded SK Ltd. from pursuing its claim through within proceeding. Permitting SK Ltd. to present its claim against proceeds of sale of vessel in this proceeding would cause prejudice and injustice to trustee because it would be required to defend claim that had already been finally and conclusively adjudicated, and it was in interests of justice to order stay. Remaining proceeds of sale were to be paid to trustee, except $2,000 was to remain in court to cover claim of harbour authority for unpaid moorage.

Royal Bank of Canada v. Seamount Marine Ltd. (2019), 2019 CarswellNat 4786, 2019 CarswellNat 4787, 2019 FC 1043, 2019 CF 1043, Richard F. Southcott J. (F.C.).

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