British Columbia Supreme Court Rejects Parts of Franchisee Claim Against Franchisor Estate

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Author: Robert Jones, Law Works P.C.
Editor: Ben Hanuka, Law Works P.C.

In re Asian Concepts Franchising Corporation, a June 21, 2018 decision of the British Columbia Supreme Court applied Ontario’s Arthur Wishart Act (Franchise Disclosure) 2000 (“the Act”) to assess the merits of franchise rescission and misrepresentation claims by a franchisee creditor against the estate of a bankrupt franchisor, and disallowed significant portions of the claim.

Key facts

The bankrupt franchisor, Asian Concepts Franchising Corporation (“ACFC”), owned the Wok Box Fresh Asian Kitchen Franchise System.

The franchisee, Adrenaline Drive Inc. (“Adrenaline”), entered into a master development agreement with ACFC for the development of Wok Box franchise locations in Manitoba, Saskatchewan and Alberta.

Another franchisee, WB Heartland Inc. (“Heartland”), entered into a unit franchise agreement with ACFC for the operation of a Wok Box franchise in Mississauga, Ontario.

ACFC purported to terminate the master development agreement with Adrenaline. Adrenaline filed an action against ACFC in the Alberta Court of Queen’s Bench claiming over $8 million in damages for breach of the master development agreement.

ACFC made an assignment into bankruptcy under the Bankruptcy and Insolvency Act (BIA) and filed a proposal to creditors.

Heartland filed a claim with ACFC’s trustee in bankruptcy seeking $2.38 million in damages for rescission and misrepresentation under sections 6 and 7 of the Act, and indicated its intention to vote against the proposal. Heartland then amended its claim to $1.6 million. ACFC’s trustee allowed Heartland’s claim at $1.6 million. The vote on ACFC’s proposal to creditors took place and received the requisite support, including from Heartland.

Adrenaline opposed ACFC’s proposal because it contained a release in favor of ACFC which would impede its damages claim. Adrenaline applied under s.135(5) of the BIA to challenge the trustee’s acceptance of Heartland’s claim in the amount of $1.6 million.

Supreme Court holds the trustee did not discharge its obligations

The court held the trustee did not conduct the necessary independent diligence in assessing Heartland’s claim against ACFC’s bankrupt estate, and thereby prejudiced the rights and interests of Adrenaline.

The court expressed concerns about the unexplained reduction in the amount of Heartland’s claim and sudden shift in its voting position. The court found that the settlement between ACFC and Heartland was directly linked to Heartland voting in favour of the proposal.

Instead of independently assessing the validity, and quantifying the value of, Heartland’s claim, the court held that the trustee “largely abandoned [her] role” in the proposal process by deferring to the settlement reached between ACFC and Heartland. The court characterized the trustee’s investigation as “superficial” and declined to accord any deference to her determinations.

Supreme Court holds certain aspects of Heartland’s claim were not provable

The court assess the merits of Heartland’s claim against ACFC’s bankrupt estate. It concluded that $480,595 claimed under s.6(6)(d) of the Act as “lease indemnity costs”, and $310,020 claimed under s.7 of the Act as “lost profit and opportunity”, were not provable.

After reviewing the dates on which Heartland entered into the lease agreement for its Wok Box franchise and subsequently abandoned the premises, the court found that Heartland would have had a valid Limitations Act defence to any lease indemnity action by its landlord.  In addition, there was no reasonable prospect of the landlord ever commencing such an action against Heartland.

The court considered, but did not decide, whether a franchisee can simultaneously bring an action for rescission under s.6 of the Act and seek damages for future loss of profits and opportunity under s.7 of the Act.  Rescission attempts to unwind an agreement and place the parties back in the pre-contractual position, while damages for future loss of profits seek to place the party in the position they would have occupied had the contract been performed.

The court accepted, for the sake of argument, that the amounts claimed by Heartland for loss of profit and opportunity were recoverable. Nonetheless, any damages alleged to be suffered must be proven. The court found that Heartland provided no evidence in support of its claim under s.7 of the Act for loss of profit and opportunity to the trustee. The court was not even satisfied that the trustee had evaluated this aspect of Heartland’s claim.

In the result, Adrenaline was entirely successful in its application to have the lease indemnity costs and future loss of opportunity and profits expunged from the provable value of Heartland’s claim.

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