Manitoba

1. The Puratone Corporation et al[1]

It took a while but ultimately the CCAA proceedings for The Puratone Corporation generated some jurisprudence. Puratone involved one of this country’s top five hog producers which filed for protection on September 12, 2012 – just two days after Big Sky Farms, the nation’s second largest hog producer, went into receivership in Saskatchewan. Puratone’s initial claim to fame was that it was the Manitoba Courts first experiment with “paperless” filing. All Court documentation was filed and stored electronically. Several distinct matters of interest have come out of this proceeding over this past year:

1. a) Secured Lenders Potentially Liable for Unpaid Feed Suppliers in CCAA

Re Puratone et al, 2013 MBQB 171

Prior to filing for the Initial Order, Puratone had been engaged in a more than 5 year struggle for survival against cyclical and worldwide forces wreaking havoc upon the Canadian hog industry. In the beginning of 2007, the decline of the U.S. dollar (the basis upon which prices are paid in the hog industry) significantly reduced the actual price realized by Canadian hog producers. At about the same time, the price of feed began to escalate, primarily in response to the dramatic increase in corn demand arising from the growth of U.S. ethanol industry. By late 2007 and continuing through to last Fall there continued to be a world surplus of hogs primarily due to significant advances in genetics and animal health. To complicate matters, in or about March, 2009 the Government of United States announced and then implemented a country of origin labeling (“COOL”) requirement which significantly impacted the marketability of Canadian hogs in the U.S. In addition, the H1N1 pandemic in 2009 (misdescribed as “swine flu”) combined with the global economic recession prompted governments of countries which typically import North American pork to impose trade barriers on Canadian and U.S. animals.

Throughout this time Puratone engaged in an ongoing informal restructuring process to respond to the industry crisis. It reduced staffing, increased efficiencies, divested non-core assets and took advantage of several federal government programs, including AgriStability and HILLRP,[2] to try to survive the calamitous economic situation it found itself in.

Notwithstanding these efforts the financial predicament of the Canadian hog industry was exacerbated in 2012 when the U.S. drought resulted in a drastic increase in feed prices. In June and July alone, corn prices went up 58 percent – wheat 37 percent over the same period. By this stage Puratone was also well into a Sales and Investment Solicitation Process (“SISP”). While there was some optimism that a buyer could be found, which would allow the business to continue on a going concern basis, a satisfactory purchase offer or letter of intent had not been obtained by the time a filing became necessary.

The Initial CCAA Order contemplated Puratone completing the SISP, albeit under very tight time lines. Within approximately 6 weeks of the filing an Asset Purchase Agreement had been entered into with Maple Leaf which contemplated a December closing and was ultimately approved by the Court in a multi-stage[3] approval process. The net realizable sale proceeds were less than half of what was owed to Puratone’s primary secured creditors, BMO and FCC.

When the Monitor subsequently brought its motion for authorization to pay out the net proceeds to the secured creditors a small group of grain farmers brought a motion requesting that approximately $900,000.00 be withheld from distribution to secured creditors. These claimants supplied grain to Puratone on an individual contract basis during the two weeks prior to filing the CCAA proceedings. The claimants also brought a motion to lift the stay in order to commence an action against Puratone and its officers and directors – this claim would also include BMO and FCC as Defendants. The claimants’ position was this: although this was a CCAA proceeding, Puratone’s plan was always to liquidate the assets in a controlled way to maximize secured creditor return. Had the secured creditors taken the receivership route, the grain suppliers would likely have received the benefit of the unpaid farmer’s lien under BIA s. 81.2. The submission was that Puratone, its officers, directors and secured creditors “must have known” at the time the grain was being purchased from the claimants that not only was Puratone insolvent, but that the contemplated CCAA filing could not result in payment of unsecured creditors’ claims. Claimants’ counsel pointed out that CCAA Initial Orders are “not prepared overnight”, and that at the time of the grain purchases, Puratone would have been preparing its CCAA materials and should have known that completing the SISP under the CCAA proceedings would not be sufficient to satisfy secured creditor obligations. According to the claimants, by ordering grain under these circumstances, Puratone was perpetrating a fraud. Given the usual level of cooperation and disclosure between an insolvent debtor and its major lenders prior to the CCAA filing, there was effective collusion in the fraud upon the grain suppliers. This was the foundation to the unjust enrichment claim upon which the claimants endeavoured to attach a share of the sale proceeds.

However, the claimants had not actually adduced any evidence in support of the lenders alleged collusion.

Notwithstanding the protests of BMO and FCC that there was no evidence filed by the claimants from which the Court could infer knowledge of fraudulent intent on the part of either Puratone or the lenders and that the established case law[4] did not support unjust enrichment claimants jumping the queue of priorities, the Manitoba Court directed the Monitor not to release the disputed portion of the sale proceeds.

At para. 25 Dewar, J. set out his reasoning:

The problem which I see with this submission is that the evidence of the knowledge of the Banks at the material times is a factual matter that is not readily apparent. Evidence such as that would normally only surface during the discovery process in civil litigation. The Banks have chosen to file no Affidavit material in this motion. It seems too high a threshold to require the…Claimants to demonstrate the knowledge of the Banks at the material times on this motion. For current purposes, it is sufficient to conclude that given the size of the troubled loans, a reasonable inference is that the two Banks who appear to oppose the…Claimants’ motion would have been aware of the pending CCAA proceeding before they were filed, and at the time that the grain was being supplied, Bank representatives would have had more than a cursory understanding of the business of Puratone and its financial difficulties. Whether the Banks were aware that Puratone was purchasing grain on other than a COD basis after the decision had been made to apply for a CCAA Order, and if so whether the Banks were in any position to do anything about it, is currently unknown. I do not say that the…Claimants will prevail and demonstrate the necessary knowledge in the fullest of time, but they have a claim which raises interesting issues, and they should be given the opportunity to pursue it sooner rather than later, especially when the existence of the claim will not jeopardize any restructuring.

Further at para. 33:

There is no doubt that the secured creditors are prima face entitled to the proceeds of these proceedings. They have valid security agreements which have been properly registered. The …Claimants seek to challenge their priority not on the basis that the Banks are not secured creditors, but on the basis of factual circumstances that would make it equitable to provide the …Claimants with a priority over the secured creditors. There are factual impediments to their claim for unjust enrichment and potentially legal impediments to their claim for equitable subordination and tracing. If I give them the right to make those claims, and those claims are not successful the delays which those claims might cause to the timely receipt of monies by the secured creditors should not go unaddressed. This can be done by requiring the …Claimants to each file an undertaking whereby they would be liable to pay either both of the Bank’s damages arising from the delay in the payment of the holdback monies attributable to their claim. I am therefore ordering that out of the general holdback monies the amounts of $903,250.50 be dedicated to the …claim and not be paid out without further order of the Court…”

The secured lenders have sought leave to appeal the decision.

1. b) Court Approval of Monitor’s Reports No Claims Bar

The Puratone Corporation et al, Unreported Court of Queen’s Bench, November 8, 2012, Queen’s Bench File No. CI 12-01-79231, Dewar, J.

It has become common practice in most CCAA proceedings to seek the presiding CCAA Judges’ approval of Monitor’s reports and activities described therein on an on-going basis. Typically such approval is pro forma and is included as part of every Extension Order. This has certainly become accepted Ontario practice and had been adopted in previous Manitoba CCAA proceedings without incident.[5]

When counsel appeared before Dewar, J. on the First Extension Motion for Puratone last Fall, His Lordship was reluctant to grant the approval order, particularly given that the first report had only just been circulated to the service list. The matter was adjourned sine die to be brought back before the Court on appropriate notice. Subsequently, the matter was brought on by separate motion of the Monitor. After deliberating on the matter His Lordship was prepared to grant the approval but provided a caution as to exactly what the Court officer and the stakeholders could make of it:

“That does not mean that the Monitor can necessarily bank on this approval for any challenge that might arise in the future….I simply caution that the Monitor should not necessarily feel that no subsequent challenge can be successfully made simply because I grant the Order in the form which it is being sought. It is not like a bar Order which stops any further challenge. It is, however, an acknowledgement that the report has been read and there does not appear anything untoward about the activities of the Monitor or on its face.” (Emphasis added)

The Court also set out some guidance with respect to what the best practice might be on seeking such Court approval. Firstly, it was recommended that it be the Monitor who filed a specific Notice of Motion seeking the approval, rather than piggy-backing it on extension motions brought by Applicants. Furthermore:

…if a Court Officer wishes a clear mandate, it is to specifically set out in the report, those particular activities for which protection is being sought and if ratification is requested to set out the reasons why the judgments were made or the activities carried out. The Monitor should also clearly delineate in the motion the specific activities for which it seeks approval. In that way, both the Court and any third party who is reading the report might more readily understand why and what specifically is being approved and the Order which ultimately issues would be more clear and specific, and therefore, less likely for future equivocation.”

It is unclear whether Dewar, J.’s suggested approach has gained traction with any other Judges.

1. c) “Vesting Out” the Interests of Shareholders in Partially Owned Subsidiaries

Order (Transfer of Partially Owned Subsidiaries), November 16, 2012 – Queen’s Bench File No. CI 12-01-79231

In order to complete the sale of the going-concern Puratone assets to Maple Leaf it was necessary to assign the contractual and other rights of numerous counter-parties to the agreements that constitute part of the companies’ assets and undertaking without written consent.

Assignment of such contracts without the consent or waiver of the counterparties has become fairly common in CCAA proceedings even before it was codified in CCAA s. 11.3.[6] The Court’s vesting and authorizing assignment without consent have become common place with respect to licenses, customers, supply contracts, rights of first refusal and landlords where the proposed purchaser will assume and carry on the original obligations without default. Certainly, BIA s. 84.1 (the Bankruptcy equivalent to CCAA s. 11.3) has been used to authorize assignments of franchise agreements without the counterparties consent and, indeed, notwithstanding the counterparty’s objection.[7]

In addition to the usual assortment of leases, licenses, suppliers contracts and so many other agreements which had to be assigned to and assumed by Maple Leaf within an expedited closing process, the Puratone assets included shares or units in partially owned subsidiaries (both corporate and limited partnership based). Puratone was obliged to assign and transfer its shares and units in the partially owned subsidiaries to the purchaser. These subsidiaries were not publicly traded and were subject to a multiplicity of restrictions on transfer arising from their incorporating documents as well as shareholder and limited partnership agreements including, inter alia, rights of first refusal, prohibitions and restrictions on transfer, requirement for special majority and in some cases unanimous shareholder approval to transfers including length, notice and voting procedures. Given the number of other shareholders and unit holders, compliance with these restrictions would have made it impossible to close the deal to Maple Leaf or otherwise dispose of the business on a going concern basis.

Once the Court was satisfied that the service requirements of CCAA s. 11.3 had been met, that there were no defaults aside from the insolvency, that Maple Leaf was fit, proper and otherwise prepared to assume the obligations and that there was no opposition, the Court was prepared to order that all of Puratone’s right, title and interest in the partially owned subsidiaries be assigned to the purchaser. There are no written reasons for decision.

2. Court Approval of Receiver’s Sales – Don’t Wait to Object

Business Development Bank of Canada v. Paletta & Co. Hotels Ltd. 2012 MBCA 115

This case involves the Hecla Island Resort Complex in Manitoba. While the reported decision cited above results from the Chambers motion before the Court of Appeal to lift the automatic stay arising from the appeal to enable a Receiver sale to close, the more interesting aspects of the decision stem from the unreported Reasons for Decision of Dewar, J. of November 20, 2012.

Most Manitobans are familiar with the Hecla Island Resort. Although it boasts one of our province’s best golf courses it has had a notorious history of mismanagement, poor customer service and financial loss that may be systematic to government sponsored recreational projects. There was some guarded optimism a few years ago when the Paletta family negotiated an agreement with the Province to lease this facility and run it privately. Unfortunately, the Palettas had less success than the government and on November 18, 2010 a BIA Receiver was appointed by Court Order. Without repeating the litany of problems with the receivership, it should be sufficient to note that it was almost two years before the Receiver was able to come back to Court for approval of an Asset Purchase Agreement. Initially when the property was listed for sale with the realtor the asking price was $6.5 million. At the time of Court approval BDC had already advanced $1.2 million to the Receiver for not only its costs but to maintain the vacant and deteriorating property. Estimated costs to get through the approaching 2012-2013 winter, including Receiver’s fees would be an additional $450,000.00.

In the unreported Reasons for Decision of Dewar, J. the purchase price received from Lakeview was subject to a Sealing Order and therefore the full extent of the losses was not apparent. By the time the matter was heard by Scott, C.J.M. in the Court of Appeal Chambers motion there seemed to be no qualms about disclosing that the price for the assets being purchased consisting of chattels and equipment, was only $350,000.00 – the leased property, including the resort premises, was to be dealt with separately by the Province and the Purchaser.

After the hearing before Dewar, J., and prior to the Court of Appeal Chambers motion, a company related to Paletta tendered a letter of intent proposing a purchase price of $500,000.00 for the same asset, conditional upon a 60 day inspection. Paletta’s counsel confirmed that Paletta was not willing to fund the upkeep and maintenance for the resort during the due diligence period.

Before Dewar, J., the Palettas opposed the sale for various reasons including the price not being fair market value. There were various procedural fairness issues raised and a suggestion that the assets should be subject to a further bidding process before the drastically low Lakeview offer could be accepted.

After deliberation, Dewar, J. approved the sale and identified three “realities” which impacted the marketability of the resort:

1. The resort was situated on land leased from the Province of Manitoba and any purchaser would need to make separate arrangements on a lease;
2. The resort continued to be empty and that the costs of servicing the property over another winter was significant – indeed as later disclosed, such cost exceeded the ultimate purchase price; and
3. The property had been listed for sale with a reputable realtor for at least a year and a half without producing a better offer.

The only practical thing for the Court to do was to approve the Lakeview deal.

The salient parts of the decision of Dewar, J. were repeated in the reported decision of Scott, CJM of the Court of Appeal including at para. 12:

“What is particularly important to me and my assessment of this matter is that the Paletta group have been served with materials for every application which the Receiver has made during the course of this receivership and have been present at many, if not most of them….[If] the Receiver is doing something that is inappropriate or not commercially reasonable, there was ready access to the Courts to complain and to convince the Court to put the Receiver back on track….I do not accept that a party who claims to be a stakeholder can sit quietly back and then come in at the last minute and say that the publicized process is all wrong. At best, the Paletta group has simply stuck their heads in the sand. At worst, they wanted to see what someone else would offer and then try to arrange for someone else or themselves to do better. Neither extreme nor anything in between is reasonable for me to interfere with the process which has been undertaken by the Receiver with the knowledge of all concerned….it is not the Court’s function to make its Receiver, nor the major creditors, take unnecessary risks and there being no one prepared to fund, it is time to move on or at least give Lakeview and the government the opportunity to work out their plans”. (Emphasis added)

As the Receiver in this instance had been appointed pursuant to the provisions of the BIA, the mere filing of a Notice of Appeal of the decision of Dewar, J. resulted in an automatic stay under BIA s. 195. To close the Lakeview deal it was necessary for the Receiver to have the Court of Appeal lift the stay. Based upon the Reasons for Decision of Dewar, J., Scott, C.J.M. concluded that Paletta did not have either “an arguable case or a reasonable prospect of success” on appeal and lifted the stay.

3. “It’s Not Personal…” – Homestead Veto Rights Vest in Trustee

Chartier v. Chartier Estate 2013 MBCA 41

The bankrupt made her assignment in May of 2007 and remained undischarged. Some two years later she married Mr. Chartier and moved into his upscale Wellington Crescent home whereupon that property became their homestead property within the meaning of The Homestead Act CCSM c.H80. In 2013 Mr. Chartier listed the property for sale and ultimately accepted an offer to purchase. Before the transaction could be closed, however, Mrs. Chartier’s Trustee became aware of the situation and registered a Homestead notice against the title maintaining that because Mrs. Chartier was an undischarged bankrupt she acquired the homestead interest, the veto right constituted after acquired property that vested in the Trustee. [Coincidentally, the prospective purchaser was prepared to offer $20,000.00 to the Trustee for a consent and discharge of the homestead notice].

The presiding Motions Court Judge found that the undischarged bankrupt’s veto right did not vest in the Trustee and had no value. The Motions Court Judge noted the “personal” nature of the veto and the case law which held that a non-owner spouse had no interest in the homestead during the owner’s lifetime.[8] The Trustee appealed.

The Court of Appeal looked at the more recent bankruptcy decisions coming out of the Supreme Court of Canada, in particular Saulnier v. Saulnier 2008 SCC 58, and the notion that a so-called “personal right” of the bankrupt does not necessarily prevent the right from vesting the Trustee. Certainly there are personal rights, particularly claims of mental distress, loss of reputation and punitive damages that are so personal in nature that they do not vest in the Trustee. However, as noted by Cameron, J.A. as para. 44:

“…while the veto right is a personal right, it is unlike other personal rights (such as the right to sue for defamation) in that it is directly related to, or interconnected with, the preservation of another right, that being the Homestead right. As noted earlier, consent to a disposition can result in the loss of an opportunity to obtain a life estate. More importantly, the characterization of the veto right as personal does not answer the question of whether the veto right constitutes property and vests in the Trustee pursuant to the BIA.”

And at para. 58:

“In consideration of [Saulnier], Mrs. Chartier’s veto rights fit within the wide definition of property under the BIA. That is, she has certain rights (part of a bundle) as against others, arising out of or incidental to property, and these rights are both enforceable against others, and exclusive to her.”

4. SCC Schreyer Decision Rectified by Bankruptcy Registrar

Re Bankruptcy of Anthony Leonard Schreyer 2013 MBQB 179

Back in 2011 the SCC released its controversial decision in Schreyer v. Schreyer 2011 SCC 35. This led to a public outcry for insolvency law reform to prevent further strategic bankruptcies from defeating spousal rights to equalization payments.[9] Apparently, this issue is to be addressed by Industry Canada when it reports on the upcoming round of insolvency reform. The Family Law Section of The Canadian Bar Association also set up a committee to address the issue. That said, Mrs. Schreyer’s predicament may now have been overcome by a recent procedural motion brought before the Registrar in Bankruptcy.

There is little doubt that the facts in Schreyer resulted in a gross injustice. In 1990 Mr. and Mrs. Schreyer were married. The following year they moved into a farm which was purchased in the name of Mr. Schreyer. By 1999 the Schreyers separated and in 2000 Mrs. Schreyer filed her petition for divorce seeking, inter alia, an equal division of marital property under Manitoba’s The Family Property Act CCSM c.F25 (“FPA”). In December, 2001 Mr. Schreyer assigned into bankruptcy but apparently made no disclosure of that fact before the marital property accounting – certainly Mrs. Schreyer was not listed as a “creditor” in the bankruptcy but, as the SCC acknowledged, there was no allegation that the husband’s failure to disclose was fraudulent. In 2002 Mr. Schreyer was granted an absolute discharge. Mr. Schreyer’s interest in the farm land was exempt from his creditors as homestead. In October, 2005 the hearing and valuation of assets occurred. In 2007 the Master’s valuation report was filed. Deducting Mr. Schreyer’s debts from his assets as of the date of separation, the report concludes that Mrs. Schreyer was entitled to an equalization payment of roughly $40,000.00. The Master’s report was confirmed by a Judge on April 30, 2008 following which Mr. Schreyer asserted that the equalization payment was extinguished by his discharge from bankruptcy. The Manitoba Court of Appeal agreed.

In its unanimous decision, the SCC confirmed that the equalization payment owed to Mrs. Schreyer was a provable claim as defined in the BIA and therefore Mr. Schreyer was released from it by his discharge from bankruptcy.

The net result is that the husband was allowed to keep the farm with no unsecured debt. The wife received only a judgment for the amount of the equalization payment, which was extinguished by the bankruptcy.

The fundamental reason that this injustice arose was not because of the BIA nor the manner in which our Courts administer it. The fact is that Manitoba, like Ontario and a number of other provinces, is an “equalization” province in the context of marital property division. It is not a “division of property province” like Quebec and British Columbia, where each spouse has a proprietary interest in the marital assets.

As the SCC recognized, the equalization regime leave the recipient spouse with no greater rights that an unsecured creditor, at least insofar as the marital property division is concerned. LeBel, J. pointed out that: “Parliament could amend the BIA in respect of the effect of a bankrupt’s discharge on equalization claims and exempt assets”.

When this conference was held two years ago in Toronto, the SCC decision in Schreyer was reported and amongst the debate as to whether or not the insolvency legislation actually needed to be amended or not, the question was posed:

“Why wasn’t there a motion to set aside the discharge as soon as counsel were aware of bankruptcy and then make a proprietary claim on the farm which although exempt from ordinary creditors would not have been exempt between spouses.”[10]

Subsequently, and coincidentally, some 11 years after bankruptcy, Mrs. Schreyer’s counsel brought a motion to set aside the husband’s discharge. The motion came before Senior Registrar Lee who concluded that Mr. Schreyer had deliberately kept the existence of the matrimonial proceedings from the Trustee while also failing to disclose the existence of the bankruptcy proceedings from his wife. The Registrar took the position that the 11 year delay was not at bar and in particular that it was not unreasonable to expect Mrs. Schreyer to delay her motion until after the SCC decision. Accordingly, Mr. Schreyer’s Absolute Discharge Order was set aside (as was the Trustee’s discharge) and leave granted to Mr. Schreyer to continue her equalization claim in respect of the exempt asset, that being the family farm.

It should be pointed out, however, that Mr. Schreyer’s has filed a Notice of Appeal to a Judge and that appeal is pending.

Saskatchewan

5. “A Stalking Pig?” Utilization of Stalking Horse Bid Procedure in Saskatchewan

Big Sky Farms Inc. et al, Queen’s Bench Judicial Centre of Saskatoon, Q.B. No. 1305 of 2012 in particular sale approval, bidding process and ERP Order, October 19, 2012

As noted previously, Big Sky Farms was Canada’s second largest hog producer before it went into receivership two days before Puratone’s CCAA filing in September, 2012. Big Sky had struggled much the same as Puratone against the cyclical and worldwide forces wreaking havoc upon the Canadian hog industry. In fact, Big Sky experienced such serious financial difficulties earlier on in the crisis that it had previously filed for and obtained protection under CCAA. It emerged from CCAA on March 19, 2010 after restructuring its facilities with its creditors and with the help of the HILLRP.

Notwithstanding these efforts, when further troubles to the industry exacerbated in 2012 Big Sky also initiated a SISP. Before a purchaser could be found Big Sky exhausted its credit facilities and on September 10, 2012 Ernst & Young Inc. was appointed Receiver.

While Puratone utilized CCAA for the breathing space necessary to complete its SISP and negotiate a sale of the ongoing business, Big Sky’s Receiver initiated contact with the company’s major customers to solicit interest in submitting an offer within the context of a “stalking-horse” sale process. Within a month of its appointment, the Receiver negotiated the stalking-horse purchase agreement with Olymel with a break fee of 3.6 percent of the base purchase price.[11] It returned to Court on October 19, 2012 for authorization to accept the stalking-horse bid nunc pro tunc and set up an expedited six step sales process over the next three months to ascertain whether a more favourable price could be obtained from another buyer.

Prior to the deadline for qualified bids, the Receiver was advised that none of the qualified bidders were prepared to submit a bid following which the Receiver completed the sale to Olymel.

To date, no reported reasons for decision have come out of the Big Sky proceedings.

6. “Who Owns an Unbranded Cow?” – Careful How you Frame the Claims Process

Bank of Montreal v. Scott 2013 SKQB 64

Livestock ownership has long been the bain to Banks and the boon of rogues. Historically, it was the old fashion “brand” which cattlemen and their owners used to identify property. In more recent years, tags and tattoos have also been used to signify ownership. That said, such indicia has never prevented the creative rogue from misrepresenting his cattle inventory to lenders.

Pity then, PricewaterhouseCoopers when it took possession of the Scotts’ cattle herd where numerous animals were unbranded and some bore the brands which did not match up with the debtors. At the Receiver’s direction, a Court administered claims process was established by Order of December 6, 2012. This authorized the Receiver to determine the validity of Proofs of Claim with an appropriate claims bar mechanism. The process further provided that in the event the claimant chose to challenge the Receiver’s determination, the claimant could file a Notice of Motion to appeal the determination before the presiding Motions Court Judge.

One claimant was not satisfied with the Receiver’s determination. Relying upon a written Ranching Joint Venture Agreement the Claimant took the position that it owned 217 cows and their respective calves that remained in the debtor’s possession at the time of the Receiver’s appointment. The Receiver had determined that this claimant was only entitled to the 18 cows and three yearlings which actually bore the claimant’s brand.

The threshold issue before the Court was whether the claimants motion was an appeal on the record of the Receiver’s decision (where the standard of review was that of an appellant Court and deference would be given to the Receiver’s determination) or whether the claimant was entitled to introduce additional evidence to prove ownership.

While Rothery, J. readily conceded that an appeal of a Trustee’s disallowance under BIA s. 81 is an appeal on the record,[12] as is the appeal of a decision of a claims officer in CCAA,[13] the result may be different for a Receiver, depending upon the nature of the claims process set out in the Order.

Rothery, J. conceded in para. 11 that:

“When that Court ordered claims process includes a determination to be made by a Claims Officer after receiving evidence, an appeal to the Court of the Claims Officer’s decision is an appeal on the record.”

However, as the claims process which had been set up by the Court in this receivership was different and did not set out an adjudication process before the Receiver as a claims officer, the Court was entitled to consider further evidence on the so-called appeal. As Rother, J. stated:

[15] “…the use of the word “appeal” does not restrict the evidence that may be tendered before the Court in an application for a determination of the validity of the Claimant’s interest in the property….” [17]….there is no adversarial proceeding before a Claims Officer where evidence may be tendered and where the parties are subject to cross-examination. Obviously, there is no decision of a trier of fact.”

In this instance not only was the Claimant entitled to adduce additional evidence but, because the Affidavit evidence filed was “so contradictory” that the Judge could not fairly decide the question of ownership, it was necessary for the Court to direct a trial of the issue. Not exactly a summary claims process.

7. Provincial Farm Protection Trumps BIA?

Lemare Lake Logging Ltd. v. 3L Cattle Company Ltd. 2013 SKQB 278; leave to appeal granted, 2013 SKCA 90

One of the unique enforcement issues that arises in the agricultural sector stems from the fact that there is a separate farm protection regime in place. The federal Farm Debt Mediation Act SC 1997 c.21 (“FDMA”) prescribes additional statutory Notices of Intention to Enforce Security which must be complied with before enforcement can occur. It also provides farmers with the right to seek an administrative stay of proceedings for up to 120 days as well as mediation services. The problem in Saskatchewan and in Manitoba is that in addition to the federal requirements of the FDMA, there are also separate provincial farm protection regimes which establish an additional layer of statutory notices, stays and mediation requirements that must be met before a secured creditor can proceed with enforcement. In Saskatchewan this is the Saskatchewan Farm Security Act SS 1988-89, c.S-17.1 (“SFSA”) – in Manitoba it is The Family Farm Protection Act SM 1986-87, c.6. (“FFPA”) Enforcement steps taken by creditors in contravention of farm protection legislation are typically null and void.[14] Furthermore, if the SFSA process is not properly followed the secured creditor faces the risk in certain circumstances of cancellation of the debt secured. [15] While such protection may be justified in the historic context of an ordinary Real Property Mortgage over a classic family farm, it can create unjustified difficulties when dealing with the lending requirements of large corporate farms of the magnitude of Puratone and Big Sky. It also creates tremendous uncertainty to the stakeholders in emergency situations.

Some Manitoba and Saskatchewan practitioners have utilized the doctrine of federal paramountcy for insolvency legislation as the basis upon which to bring an application for either an interim receiver or national receiver under BIA ss. 47 and 243 notwithstanding non-compliance with provincial farm protection requirements.[16] These arose on an uncontested basis. When the issue recently came up on a contested basis in Saskatchewan in 3L Cattle, Rothery, J. concluded that the SFSA was not inoperative under the Doctrine of Paramountcy and it would have to be complied with (including the 150 day stay) before a Receiver could be appointed.

Now 3L Cattle is not a classic farm insolvency situation involving a lender and a Banker. The principals behind the applicant and respondent corporations are members of the same family. When the family could not get along, the father took control of the cattle company and the sons took on the logging company. The logging company happened to be the major secured creditor of the cattle company. It was the logging company which sought the application for appointment of a receiver under BIA s. 243. 3L Cattle contested the application based upon non-compliance with the requirements of SFSA.

Without getting further into the factual merits it is important to note that the evidence before the Court was contradictory and, separate and apart from the constitutional issue, Rothery, J. concluded that it would not be just and equitable to appoint a Receiver in this case.

That said, the preliminary issue was whether or not the SFSA requirements had to be satisfied before a BIA s. 243 Receiver could be appointed by the Court. The secured creditor submitted that the time restraints and statutory presumptions under the SFSA create an operational conflict between the federal and the provincial laws and as such, to the extent there is a conflict, the argument was that the doctrine of federal paramountcy rendered the SFSA in operative. It was the secured creditors submission that upon proof that the debtor was insolvent, it was entitled to apply for a BIA Receiver over the debtor’s property and should only be required to comply with the BIA notice requirements.

Rothery, J. concluded that the secured creditor is “not in the position of having to comply with the BIA and having, at the same time, to defy the SFSA.” Focusing on the discretionary nature of the receivership remedy available to the secured creditor, Rothery, J. concluded that there was no “operational conflict” between the statutes and at para. 18 noted:

“It is possible for the Secured Creditor to comply with the prohibitive legislation of the SFSA, and once it has obtained the requisite Court Order, to apply for the appointment of a Receiver under s. 243(1) of the BIA. In other words, compliance with the SFSA is not in defiance of the BIA”.

Having satisfied herself that dual compliance was possible, she then had to determine whether the requirements of the provincial law were incompatible with the purpose of the federal legislation.[17]

At this point the Court focused on the “national” aspect of a Receiver appointed under BIA s. 243 and construed the requirement for filing in the “locality of the debtor” as mandating compliance with provincial legislation.[18] As stated at para. 24:

“If it is necessary for the secured creditor to realize on the insolvent debtor’s assets that are in more than one jurisdiction, the purpose of s. 243 of the BIA is to permit a secured creditor to apply for a Court appointed Receiver that is recognized nationally….At the application for a Receiver stage, a secured creditor need only be subjected to the legislative scheme of the province in which it makes application. That is the clear wording of s. 243(5) of the BIA. Secured creditor must apply in the Court having jurisdiction in the locality of the debtor. Once the secured creditor has complied with the legislative requirements of that province, and that Court has exercised its discretion to appoint a Receiver, the purpose of s. 243(1) of the BIA has been met. That Receiver may now act nationally.”

(emphasis added)

The Court also drew analogy to Bank of Montreal v. Hall [1990] 1 SCR 121 which found that s. 427 Bank Act security regime had paramountcy over the SFSA’s predecessor legislation as the Bank Act provided a “complete code that once defines and provides for the realization of a security interest”. The Court in 3L Cattle viewed the appointment of a BIA Receiver as “a discretionary remedy” available to the Court to assist creditors in the realization of the security where it is just or convenient to do so. But it did not create a “complete code for the realization of security as set out in the Bank Act”. The secured creditor’s application was dismissed.

Leave to appeal to the Saskatchewan Court of Appeal was argued on August 14, 2013 and granted August 29, 2013. Stay tuned.

8. “Turning Water into Wine?” Can you Convert Unsecured Debt into a    Secured Position by Taking an Assignment of Security?

Eagle Eye Investments Inc. v. CPC Networks 2012 SKCA 118

As any bankruptcy Trustee will freely admit, the ability of otherwise unsecured creditors to conjure up a “security” position can be quite amazing. Having said that, the technical creativity of both lawyers and accountants to spin boiler plate security terms to mean what they want them to mean goes beyond fiction and common sense – which is probably why it is necessary for Bankruptcy Courts to also be Courts of Equity.

Eagle Eye had its origins in a shareholder dispute that ultimately grew into an oppression application, digressed temporarily into an interim receivership before it morphed into a very creative security enforcement lesson.

Without digressing into all of the facts, it is sufficient to say that the debtor previously had a $150,000.00 loan with Business Development Bank of Canada (“BDC”) and granted a security interest to BDC over all of its present and after acquired property and assets through execution of one of its standard form General Security Agreement. The debtor also owed $465,000.00 on an unsecured basis to Eagle Eye, a corporation controlled by one of its shareholders. Subsequently, a corporation controlled by one of the other shareholders (“Black Dove”) purchased the BDC loan and its security for the then indebtedness of $106,000.00. Black Dove purported to then privately appoint that shareholder as “Interim Receiver” of the debtor. In an earlier Court application, this interim Receiver appointment was vacated whereupon the debtor and Black Dove negotiated a repayment schedule on the former BDC loan.

The debtor later received notice that Black Dove had assigned the BDC loan and its security to Eagle Eye. In providing formal notice of assignment, Eagle Eye, demanded Bank statements, financial information, details of equipment and current customer list which it claimed to be entitled to under the terms of the BDC security. When the debtor inquired about paying out the BDC loan it was advised by Eagle Eye that the amount of the debt was now almost $750,000.00, particulars of which were:

BDC Loan                               $  57,500.00

Eagle Eye Loan                        $465,556.00

Costs                                       $140,590.59

Interest                                     $  85,709.91

Total:                                        $749,356.50

The debtor sought relief from the Court of Queen’s Bench of Saskatchewan.

The Court had to determine whether or not the BDC General Security Agreement assigned to Eagle Eye could now charge the previously unsecured debts owed to Eagle Eye. The Security Agreement contained the usual language found in most GSA’s including obligations secured:

“This Security Agreement…shall be a general and continuing security for the payment and performance of all indebtedness, liabilities and obligations of the borrower to BDC….”

and assignment:

“BDC may, without notice to the borrower, at any time assign or transfer, or grant a security interest in, all or any of the Obligations, the Security Agreement and the security interest. The borrower agrees that the assignee, transferee or secured party, as the case may be, shall have all of BDC’s rights and remedies under the Security Agreement….”

While the Motions Court Judge determined on a clear reading of the General Security Agreement, in relation to the loan agreement, that the GSA only secured the BDC loan and not loans of the third parties, there was a very thorough review of the jurisprudence on the subject of rolling-up the assignee’s unsecured claims into an assigned security position. The Motions Court Judge at paragraph 28 quoted Ronald C.C. Cuming et al Personal Property Security Law (Toronto: Irwin Law Inc., 2005) for the proposition that Personal Property Security Statutes are silent on the issue, but that as a matter of common law:

“…Courts have been unwilling to permit an assignee to claim the benefit of an all obligations clause in respect of obligations incurred by the Assignee before the assignment. It is not entirely clear whether these Courts have decided that this outcome is impossible as a matter of law, or if they have simply determined that the clause used in the agreement was not sufficient to produce this result. In England, Australia and New Zealand, the Courts have embraced the former argument and have held that only the clearest of language in the Security Agreement would permit an unsecured creditor to obtain secured creditor status by taking an assignment of a Security Agreement that contains an all obligations clause.”

After reviewing American and Commonwealth authorities the Motions Court Judge identified two previous Canadian authorities:

1. a) Canamsucco Roadhouse Food Co. v. Lngas Ltd. (1991) 2 PPSAC (2d) 203 (reversed on other grounds) (1997) 12 PPSAC (2d) 227 (Ont.C.A.) where the Court held that an assignee was not entitled to tack on other indebtedness to the assigned debt; and

1. b) Near Horbay Inc. v. Great West Golf & Industrial Inc. 2000 ABQB 861 where the Alberta Court refused to permit an assignee of security to tack on unsecured debt.

The Motions Court Judge confirmed that Eagle Eye could not roll-up its unsecured claim to the assigned BDC security and, referencing the aptly titled article of Roderick J. Wood, “Turning Lead into Gold: The Uncertain Alchemy of All Obligation Clauses” (2004) 41 Alta. L.Rev. 801 at 809 which cited three reasons why Courts should refuse to convert unsecured claims into secured claims in any security assignment:

1. a) It would be unfair to the debtors;

1. b) It would have a destructive impact on the principle of pro rata sharing in bankruptcy law;

1. c) It would have a disruptive effect on the PPSA priority regime with a subsequent loss of predictability.

Eagle Eye appealed to the Saskatchewan Court of Appeal. Although the appeal was dismissed, writing for the Court Jackson, J.A. was careful to point out that thorough review of the legal issues carried out by the Motions Court Judge was “for the most part” correct, but it was important for the Saskatchewan Court of Appeal to “caveat” the decision and in particular stated at paragraph 29:

“…it is not necessary to answer the question whether a security agreement can ever secure the previously unsecured debts owing by the debtor to the assignee. Assuming that the priority system in bankruptcy and under PPSA is not affected and the assignee behaves in a commercially reasonable manner, what rule of law prevents a debtor from agreeing to an assignable, all obligations clause? The ratio of this decision should not be that, as a matter of contract law or secured transactions law, a debtor and a secured creditor can never agree to an assignment of an agreement containing an all obligations clause permitting secured party to assign the security to a third party, who holds a prior unsecured debt, and thereby secure that past unsecured indebtedness.” (emphasis added)

And at para. 31:

“A court must be concerned about the fairness and the effect on bankruptcy and other priorities, but if the contract will have no effect on priorities, there may well be nothing preventing an assignee from converting unsecured debt into secured debt, if that is the intention of the contracting parties.” (Emphasis added)

While the Saskatchewan Court of Appeal insists that there is no absolute doctrine prohibiting parties from agreeing to extend secured status to previously unsecured claims, the qualification that the BIA and PPSA priority regime not be affected would seem to undermine the primary reason or engaging in this exercise.

[1] Queen’s Bench, Winnipeg Centre, File No. CI 12-01-79231. Most of the significant documentation is available at the Monitor’s website: www.deloitte.com/ca/puratone.

[2] HILLRP: Hog Industry Loan Loss Reserve Program.

[3] While the Asset Purchase Agreement was approved at the November 8, 2012 hearing, it was necessary to return for two additional hearing dates to obtain the Court’s approval to assign material contracts and to transfer the shares of partially owned subsidiaries where consents were unavailable.

[4] For example, see Canada Confederation Life (1995) 24 O.R. (3d) 717; Caterpillar Financial Services v. 360 Networks 2007 BCCA 14 CanLII; Citizen Bank of Rhode Island v. Paramount 2008 ONCA 891.

[5] See for example, Arctic Glacier Income Fund et al, Queen’s Bench, Winnipeg Centre, File No. CI 12-01-76323. Most significant pleadings are located at the Monitor’s website: www.alvarezandmarsal.com/arcticglacier; and see the Monitors’ websites for Winnipeg Motor Express and DeFehr Furniture.

[6] See Fiber Connections Inc. v. SVCM Capital 2005 CanLII 63760 at paras. 35-42; Re Pelaydium Entertainment Corp. 2001 CanLII 28281; Re Hayes Four Services Limited 2009 BCSC 1169 at paras. 31 and 51; Re Nexient Learning Inc. et al 2009 CanLII 72037 at paras. 53-59 and 101.

[7] Ford Credit Canada v. Welcome Ford Sales 2011 ABCA 158.

[8] Including Crichton v. Zelenitsky (1946) 54 Man.R. 79 (Man.C.A.); Mennig v. St. Andrews (1952) 60 Man.R. 24 (Man.Q.B.); Daly v. Daly (1980) 4 Man.R. (2d) 63 (Man.C.A.) and Coates Estate 2007 MBQB 10.

[9] See for example “Canada’s Divorce – Bankruptcy Loophole”, Wise Law Blog, July 19, 2011; Alysia Lau, “Letter of the Law”, The Court Blog, Osgoode Law School and in particular Robert A. Klotz, “Case Comment: Schreyer v. Schreyer”, Annual Review of Insolvency Law 2011 269.

[10] David R.M. Jackson, “There is More than Indalex: Interesting and Controversial Cases from the Prairies”, 7th Annual Pan-Canadian Insolvency & Restructuring Conference, p. 22

[11] Appendix O to the Receiver’s First Report provides a useful schedule of break free comparable transactions in Canada and the U.S. See: www.ey.com/ca/bsf

[12] Vern Hertz v. 1593658 Ontario et al SKQB 379 at paras. 34-36.

[13] Big Sky Farms Inc. 2010 SKQB 255 at paras. 8-10.

[14] See for example M & D Farms Ltd. v. MACC 1999 CanLII 648 (SCC); also see FDMA s. 22; FFPA s. 8(4); SFSA s. 11(3).

[15] see Jeffrey M. Lee “Agricultural Insolvency: Challenges and Opportunities Unique to Restructuring Canadian Agricultural Enterprises” 2011 Law Society of Manitoba, Isaac Pitblado Lectures, p. VII-24.

[16] see for example Farm Credit Canada v. Mesa Swine et al unreported Manitoba Queen’s Bench, August 24, 2004 (McKelvey, J.). Jeff Lee has advised the undersigned that there are a half of dozen examples without reasons for decision in Saskatchewan. This was restated in the leave application, 2013 SKCA 90 at para 16.

[17] Reference was made to Quebec v. Canadian Owners and Pilots Association 2010 SCC 39 at paras. 62-64

[18] BIA s. 243(5) simply states: “Place of Filing – The application is to be filed in a Court having jurisdiction in the judicial district of the debtor.”

DISCLAIMER: This article is presented for informational purposes only. The views expressed are solely the author(s)’ and should not be attributed to any other party, including Taylor McCaffrey LLP. While care is taken to ensure accuracy, before relying upon the information in this article you should seek and be guided by legal advice based on your specific circumstances. The information in this article does not constitute legal advice or solicitation and does not create a solicitor-client relationship. Any unsolicited information sent to the author(s) cannot be considered to be solicitor-client privileged.

If you would like legal advice, kindly contact the author(s) directly or the firm's Chief Operating Officer at pknapp@tmlawyers.com, or 204.988.0356.

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