Ally Credit Canada Limited v. All-Ontario Towing & Storage Inc., (McKinnon, J., October 24, 2012, Court File No )

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1 Volume 32, No. 1 March 2012 Business Law Section OTHER CASES Compiled by Jennifer Babe* 1. Party not a Storer for the RSLA Ally Credit Canada Limited v. All-Ontario Towing & Storage Inc., (McKinnon, J., October 24, 2012, Court File No ) The business debtor had financed three vehicles with Ally. It defaulted under all three contacts. On April 4, 2011 the debtor signed a vehicle pick up authorization agreement with All- Ontario, an affiliate of NewStart Financial Services Inc., a business the court described as, to profit from individual and corporate insolvencies. Ally s bailiff found the three vehicles on May 30, 2011, and only after that did All-Ontario give notices of its invoices to Ally s bailiff and on June 6, 2011 delivered its RSLA notice of intent to sell claiming a storage lien back to April 13, The debtor was petitioned into bankruptcy on July 18, MacKinnon, J. awarded the three vehicles to Ally, together with its cost of the proceedings, and denied All-Ontario any RSLA remedies. He held that: (d) (e) All-Ontario was not in the usual and ordinary course of business of a storer. It did not own or control any storage facilities. Its business was to support NewStart; it did not expect the debtor to pay it. It knew the debtor was insolvent; it did not establish to the Court its fair market value of its $ a day storage charges; it did not comply with the section 4(7) notice of sale requirement that notice be given more than 60 days after the storage amounts became due; and it had not tried to sell the vehicles in a commercially reasonable manner. It had not advertised or conducted an auction, and was proposing to sell the vehicles at less than Black Book value

2 2. Section 95 BIA Preference Tucker v. Aero Inventory (U.K.) Ltd., [2011] O.J. No. 3816, 338 D.L.R. (4 th ) 577, 80 C.B.R. (5 th ) 1 (Ont. S.C.J., Commercial List; Morawetz, J.) Aero supplied parts to Air Canada under certain agreements. Air Canada had issues with Aero s performance and a settlement was effected by which Aero had returned certain bills of exchange valued at about $75 million U.S. dollars to Air Canada. On November 11, 2009 Aero s U.K. affiliate obtained protection from its creditors for itself and the Canadian Aero entity, and KPMG was appointed administrator for the Canadian Aero under Part IV of the CCAA. On January 22, 2010 the court appointed KPMG as trustee in bankruptcy of the Canadian Aero entity. The trustee in bankruptcy sought a declaration that the return of the bills of exchange to Air Canada be found to be a preference under section 95 of the BIA and a void transaction as against the trustee, and that Air Canada be ordered to return the value to the bankrupt s estate. Air Canada argued that the trustee could not take an action for the benefit of only the secured creditors and that the funds should flow to the unsecured creditors only. Justice Morawetz granted the declaration to the trustee. He held that: the bankruptcy trustee is the only party entitled to bring a preference action under the BIA; the recovered funds returned to the estate remain subject to the BIA distribution rules; and if the assets were subject to the secured creditor s security at the time of the preferential transaction, the secured party was entitled to enforce its remedies when the proceeds were returned into the estate. 3. Forbearance Is Not Enough Consideration Harry Snoek Limited Partnership (Re), 2011 ONSC 6667 HSLP borrowed funds for land development from various lenders. It turned out to be a Ponzi scheme and HSLP was defaulting on interest payments. Certain lenders demanded payment. HSLP offered them security in exchange for forbearance from enforcement, decreased interest rates and a one year term renewal before repayment was required. The bankruptcy trustee moved to set aside the grant of security under the Assignments and Preferences Act (Ontario)

3 The court agreed and held that: the grant of mortgages to these lenders was a preference done by HSLP at a time it knew it was insolvent and other creditors were also demanding payment; section 5(1) of this Act excepts a conveyance or transfer from being a preference, that is made in good faith in consideration of a present actual payment of money, or by way of security for a present actual advance of money. ; and the Act requires an actual advance of money and does not provide for any other types of consideration such as forbearance or different payment terms. 4. Home Transfer to Joint Tenant Not Subject to BIA Section 96 Re Cameron and Re: Shaul, 2011 ONSC 6471, 108 O.R. (3 rd ) 117 (Ont. S.C.J.) In these two cases the Bank obtained a section 38 BIA order to pursue a declaration under section 96 of the BIA that the matrimonial homes of the deceased bankrupts were a transfer at undervalue. In both cases the Bank had lent funds to the respective husband, now dead, for business operating lines, secured by their business assets. On death, the respective matrimonial homes which were held in joint ownership with the wives became the sole property of the surviving spouse. The business assets were insufficient to repay the Bank. The court rejected the Bank s application and held that the right of survivorship in the surviving joint tenant was not a transfer for purposes of section 96 of the BIA. Rather, the deceased s property rights were extinguished on death. On the death of a joint tenant, the deceased does not dispose or part with an asset. Its interest is extinguished, leaving nothing to transfer or part with. [para. 28]. Editorial Note: See the OBA s Insolvency News issue of February 2012 for an analysis of these cases by Sean Zeitz, including the court s use of the Family Law Act (Ontario) to refute that this was a transfer to a spouse at undervalue. 5. Chicken Quota Farm Credit Canada v. K & R Poultry Ltd., 2011 SKQB 316, [2011] S.J. No. 531 (Sask. Q.B.) The court upheld FCC s general security agreement as a valid and enforceable security interest in the debtor s after-acquired broiler chicken quota, and FCC was awarded the proceeds of sale of this quota when it was sold by the debtor. 6. Assignee of GSA Could Not Use It For All Debts CPC Networks Corp. v. Eagle Eye Investments Inc., 2011 SKQB 436 (Sask. Q.B.) - 3 -

4 In February 2008 CPC borrowed $150,000 from the Business Development Bank of Canada secured by a GSA. Eagle Eye lent CPC $465,555 on an unsecured basis. Later the Business Development Bank of Canada loan and security was assigned to Eagle Eye. CPC tried to repay Eagle Eye the amount owed under the Business Development Bank of Canada loan. Eagle Eye claimed it was owed $749,365 for collectively, the Business Development Bank of Canada loan, the Eagle Eye loan, costs and interest. CPC applied under the PPSA for a determination of the amount it owed under the Business Development Bank of Canada loan. The court held that as an assignee, Eagle Eye did not have the GSA as security for all debt, but only for the amount of the Business Development Bank of Canada loan. The terms of the Business Development Bank of Canada loan agreement permitted prepayment with a three month interest payment in addition to the principal and regular contract interest amount owed. Once that was paid, Eagle Eye was ordered to discharge its GSA. 7. Unregistered Quebec Lease v. Seizure Before Judgment Quebec Inc. v. Fischer, 2012 QCCA 29 (Que. C.A.) 9089 leased several trucks to its affiliate, and did not publish [register] the long term leases in the Quebec register of personal and moveable real rights under Article 1852 of the Civil Code. Mr. Fischer, an unsecured creditor of the lessee, endeavoured to seize the lessee s assets before judgment, including the trucks owned by 9089 as lessor. The trial court held in favour of Mr. Fischer on the basis that the lease could not be upheld against him, the lease being unregistered contrary to the Civil Code. The Court of Appeal disagreed. It held that the lessor s property rights were not created by registration. Registration makes the lease opposable [enforceable] against third parties, such as a bona fide purchaser for value without notice. The Court of Appeal held that seizure before judgment did not create rights in the property by the unsecured creditor or take away any rights of the lessor or lessee; it only placed assets with the court where enforcement of a judgment was in issue. 8. Quebec Reallocation of Payments Maisons Marcoux Inc. (Syndicde), 2012 QCCA 29 (Quebec C.A.) Caisse Desjardins du Centre de la Nouvelle Beauce ( Caisse ) financed the business debtor secured by hypothecs. Several builders had mortgages over the debtor s lands for specific project construction financing. In 2008 the debtor took protection from its creditors under the CCAA. The initial CCAA order granted the Caisse superpriority DIP loan security for $2.2 million. The debtor owed the Caisse $5.8 million and the builders $1 million. The debtor s assets were sold by Ernst & Young for $5.8 million, of which $1.2 million was from the specific construction projects where the mortgaged lands were sold under judicial authority. After repayment of the $2.2 million DIP superpriority amount the trial court adjusted the remaining sale proceeds pursuant to its powers under Article 2754 of the Civil Code for a court ordered sale to award 21 percent to the builders, as the land subject to their mortgages raised - 4 -

5 $1.2 million, 21 percent of the total $5.8 million. As such neither the Caisse nor the builders were repaid in full. The Court of Appeal agreed and held that the common law principle of marshalling does not apply in Quebec. 9. Priority Agreement Terms Prevail Toronto-Dominion Bank v. Wheatland Industries (1990) Ltd., (2012) 340 D.L.R.(4th) 671, 2011 SKCA 107, [2011] S.J. No. 588 (Sask. C.A.) In the insolvency of the equipment dealer, TD asserted priority to certain credits due to the Wheatland dealership for returned CNH parts. The CNH equipment had been financed for the debtor by CNH Capital, an affiliate of CNH Canada, the equipment supplier. The Receiver for TD applied to court to determine priority as between TD s first in time general security agreement for its operating line of credit and CHN Capital. The chambers judge awarded priority to TD. The Saskatchewan Court of Appeal disagreed. It held that the priority agreement between TD and CNH Capital prevailed. That agreement had TD agree that: CNH Capital had priority ahead of TD s security, to all present and future inventory of equipment, parts and supplies financed by CNH, and all credits from such goods including returned goods; and the agreed priorities were to be determined without regard to the dates of each other s security agreements or registrations. Therefore, the fact that TD registered first in time was not determinative of priority to the credits. A dissenting judge would have dismissed the appeal on the basis that the returned parts were already paid for by Wheatland. *Jennifer Babe, Miller Thomson - 5 -