Slim (But Useful) Pickin’s From The Prairies

By David R.M. Jackson on 2012/10/18

[Prepared for the 8th Annual Pan-Canadian Insolvency and Restructuring Conference, Halfax, NS, October 12, 2012.]

Introduction

It seems that every year or so the restructuring community will fixate on a particular new case. The initial shock of this “precedent” is promptly followed by dire predictions of it undermining the efficiency of the restructuring business in this country. The actual consequences tend to be much less severe. Remember TCT? The SCC refused to use the paramouncy doctrine to enable the federal insolvency regime to trump provincial jurisdiction over labour relations. From the reaction of the pundits, you would have thought receiverships would no longer be an effective remedy. What was it in 2008? Cliffs over Maple Bay 2008 BCCA 327 led many of us to conclude that there would no longer be liquidating or, at least, no more CCAA Initial Orders unless there was a clear intent to file a Plan of Arrangement. Last year? Indalex. The Ontario Court of Appeals’ decision in Re Indalex 2011 ONCA 265 found that beneficiaries of under-funded pension plans had priority to Indalex’s DIP Lender, again raising the spector of a provincial deemed trust gaining priority notwithstanding bankruptcy. In fact, the uncertainty created by Indalex continues to hover like a spector over the profession while we await the ultimate decision of the Supreme Court of Canada – or the legislative reaction that may follow.

The problem with our professions’ neurotic obsession with cases such as TCT, Cliffs Over Maple Bay, Indalex and so many others over the years is that we tend to overlook the less dramatic jurisprudence from across the country which may be helpful or of use in our day to day practice. It is with this theme in mind that you may want to consider the case law coming out of Manitoba and Saskatchewan.

Manitoba

While there has been little in the way of new case law from Manitoba, it is not for lack of activity on the restructuring front. Aside from the usual host of receiverships and bankruptcies, there are two large CCAA proceedings underway in the industries you might expect to find in Manitoba: ice and pigs. Neither of which has yet produced any reported decisions:

a) Arctic Glacier Income Fund et al is interesting to the extent that the Court approved sales process for this cross-border packaged ice business was so successful that the secured creditors have been paid out, the claims process is in place which should ultimately witness pay out of the unsecured creditors and there is a possibility that even the equity holders might see some funds at the end of the day;

b) The Puratone Corporation et al involves one of this country’s top 5 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 current claim to fame is that it is the Manitoba Courts first experiment with a “paperless” filing. All Court documentation was filed and stored electronically. If you ever need to figure out how to “seal” an electronic document with the Court you may want to take a look at paragraph 17 of this Initial Order.

Chances are that one or both of these proceedings may generate jurisprudence over the next year or so.

BDO Dunwoody as Trustee of Karen May Andrews v. Canada 2011 MBCA 93 (“Andrews”)

The Manitoba Court of Appeal continues to uphold the BIA as a tool for inverting Crown priorities, in this case the “Crown Prerogative” and on a retroactive basis when challenged as a preference. In Andrews the debtor made several income tax instalment payments in the three months immediately preceding bankruptcy. The Trustee moved against Canada Revenue Agency (“CRA”) to set aside these payments as a preference under BIA s. 95. While there were several issues on appeal, at the hearing, CRA argued that the Crown’s Prerogative applied to the pre-bankruptcy payments. Given that the Prerogative gave CRA priority over creditors of equal rank prior to bankruptcy, any pre-filing payments should not be considered preferential under BIA s. 95 .

Notwithstanding the logic of CRA’s submission, the Manitoba Court of Appeal concluded that BIA 4.1 extinguished Crown Prerogatives from application in BIA s. 95 preference challenges. BIA s. 4.1 simply states:

“This Act is binding on Her Majesty in right of Canada or a province.”

Chartier, J.A. set out the Court’s reasoning:

“I believe that the reference to the well-accepted modern approach to statutory interpretation answers the question. It is well settled that one of the purposes of the BIA is to put all unsecured creditors on the same footing (see s. 141 of the BIA) and that s. 95 is a means of carrying into effect that principle….when the above-mentioned provisions are read contextually and in their grammatical and ordinary sense, harmoniously with the scheme and objects of the BIA and the intention of Parliament, it is my view that s. 4.1 abrogates the Crown prerogative in s. 95 matters.”

While this decision was limited to the Crown Prerogative, my query is can the same reasoning apply to payments made towards other government priority claims, including statutory liens or trusts, within the three month review period? Aside from BIA s. 4.1 and BIA s. 141 which confirms “all claims proved in bankruptcy shall be paid ratably”, do not forget BIA s. 86(1) which, subject to the exceptions laid out in BIA s. 86(2) and 86(3) – the most important of which are unremitted source deductions – provides that:

“In relation to a bankruptcy or proposal, all provable claims, including secured claims, of Her Majesty in Right of Canada or a province or of anybody under an Act respecting workers’ compensation…rank as unsecured claims.”

Accordingly, to the extent that a debtor continues in the three months before filing to pay statutory lien claims such as provincial sales tax or GST which otherwise invert to unsecured status on bankruptcy should Trustees consider initiating a preference challenge? Assuming, of course, that the other objective criteria to satisfy BIA s. 95 are present.

Saskatchewan

PricewaterhouseCoopers Inc. et al v. Poultry 2.01 Farms Ltd. et al 2011 SKQB 422

Poultry 2.0 involved a Receiver error in accepting a purchase offer and the unsuccessful purchaser’s attempt to re-open the sales process. The facts were straight-forward: following the Court appointment, the Receiver marketed the two separate poultry farming operations of two related debtor corporations. There was no dispute as to the reasonableness of Receiver’s marketing efforts and that the assets of the two debtors were dealt with separately. The Information Packages for each debtor contained, for the benefit of the potential purchasers, a standard form offer containing the usual receivership sale boiler-plate terms with the appropriate blanks on the first page to insert the purchase price for the assets.

After opening the offers the Receiver accepted what it understood to be the highest offers for each of the debtors: $6.5 million for the first debtor’s assets; $2,050,000.00 for the second.

What the Receiver did not notice was that the highest offer received on the second debtor package had typed in small print at the end of the standard sales terms an additional section which stated: “This offer is conditional on the Receiver accepting the offeror’s purchase of” the first debtor package.

Once the Receiver became aware of this unexpected amendment to the standard terms he contacted the offeror (“Friesen”) who confirmed that his offer was conditional upon being the successful offeror on the other. As that condition was not met there was no deal but Friesen then proceeded to negotiate with the Receiver, offering a reduced price on the second debtor package and alternatively offering $8.2 million if the Receiver was prepared to sell him both packages. Instead, the Receiver contacted the next highest offeror for package two, negotiated an increase in the price up to $2,050,000.00 and verbally accepted the new deal, subject of course, to Court approval. While this negotiation was underway Friesen sent an e-mail advising that he had decided to remove the condition from his original offer for $2,050,000.00. When the Receiver sought Court approval for the sale to the next highest offeror, Friesen objected and brought his own motion for alternatively:

a) A Court Order approving a sale of the second debtor’s assets to him for $2,050,000.00; or

b) Extending the deadline for submissions of offers to enable the interested parties to submit new offers. This led to a preliminary scrimmage over whether or not Friesen had any standing at the Court hearing for approval of sale.

While the Saskatchewan Court acknowledged that an unsuccessful or perspective purchaser had no legal right or interest in the proceedings, it was prepared to accept that the Receiver’s “mistake” gave Friesen standing:

“[24] Based on the reasoning in Skyepharma the Court would conclude that Friesen had no legal right to participate in the sale approval motion. However, because of the unique circumstances of this case, where the Receiver’s mistake in reading the Friesen’s offer led to an unfolding of events such that…the Receiver had two potential purchasers for the same sale price of $2,050,000.00. The decision was better addressed within the context of the sale approval application. Thus, Friesen had standing to bring his motion.”

The Saskatchewan Court then had to address whether the Receiver’s mistake in interpreting the offers and subsequent negotiations with the second highest bidder ran afoul of the 4 step Soundair test. Notwithstanding the Receiver’s mistake, the Court dismissed Friesen’s motion and approved the offer recommended by the Receiver. Rothery, J. recognized in paragraphs 33 and 34 that:

“It was Friesen, by submitting his conditional offer, who started the chain of events which caused the Receiver to mistakenly accept Friesen’s offer on the Meadow Lake assets. Had the Receiver been aware of the conditions in Friesen’s offer…the Receiver would not have accepted it. Friesen would have been an unsuccessful bidder of both the assets….no one other than Friesen is to blame for the result.”

MNP Ltd. et al v. Mustard Capital Inc. 2012 SKQB 325

This is a good example of the mischief that can arise when the contents of an offer to purchase are not placed under seal as part of a sale approval motion.

Mustard Capital Inc. (“MCI”) initially filed a Notice of Intention to Make a Proposal (“NOI”) under the BIA and initiated a sales and investor’s solicitation process. Ultimately, the NOI was allowed to expire, MCI deemed bankrupt and MNP appointed Receiver. Unfortunately, no reasonable offers were received in response to the solicitation process whereupon the Receiver contacted five auctioneers for their proposals. Three of the auctioneers provided offers which the Receiver treated as “confidential”. A motion was brought to Court for approval of the sale of the assets to Grasswood Auctions as the auctioneer with the best offer. The motion also sought a sealing order with respect to the Grasswood Auctions offer.

MCI’s landlord, Bissma, attended the approval hearing. It had previously made an offer to the Receiver for some of MCI’s equipment but the price was inadequate. Bissma opposed the sealing order and was successful in having the contents of the Grasswood Auctions offer disclosed and the main approval motion adjourned to another date. Prior to the hearing, a company affiliated with Bissma, Memphis Strand, submitted an unsolicited offer which the Receiver acknowledged to be “better” than that received from Greenwood Auctions. Both Greenwood Auctions and Memphis Strand made submissions to the Court. The Receiver did not take a position other than requesting the Court decide which offer to accept and attended Court possessing two draft Orders to accommodate either alternative.

While Grasswood Auctions spent considerable time challenging Memphis Strand’s standing, Smith, J. found it “not necessary” to address that issue. The Court summarized the applicable case law regarding the Court’s attitude to consideration of subsequent and higher bids including:

a) Cameron v. Bank of Nova Scotia (1982) 38 CBR (NS) 1 (NSCA) at para. 36:

“In my opinion if the decision of the Receiver to enter into an agreement of sale, subject to Court approval, with respect to certain assets is reasonable and sound under the circumstances at the time existing, it should not be set aside simply because a later and higher bid is made….on the contrary, they would know that other bids could be received and considered up until application for Court approval is heard – this would be an intolerable situation.”

b) Re Selkirk (1987) 64 CBR (NS) 140 at 142:

“The Court will not lightly withhold approval of a sale by the Receiver….only in a case where there seems to be some unfairness in the process of the sale of where there are substantially higher offers which would tend to show that the sale was improvident will the Court withhold approval.”

c) D & H Farms Ltd. v. Farm Credit Canada (2002) SKCA 88 at para. 40:

“If the law were otherwise, over the long term, persons bidding at judicial sales would play a waiting game to determine what offers had been made and make subsequent bids.”

Without reservation, Smith, J. approved the original offer:

“[31] In this instance, Bissma/Memphis Strand came into the knowledge of the precise bid submitted by Grasswood Auctions and accepted (subject to Court approval) by the Receiver. Bissma/Memphis Strand then bested that bid. If I allow the Memphis Strand bid to prevail, I am of the view that any reasonable observer would not regard the process as fair and reasonable or one characterized by integrity.

[32] It is worth reiterating that Bissma was involved at all times throughout this process and could have submitted any number of bids. It submitted one, it was rejected. Bissma/Memphis Strand then through a Court application for disclosure placed itself in a situation where it knew precisely the bid it had to better. Respectfully, to allow it to defeat Grasswood Auctions by reason of a Court Order disclosure process would not, in my opinion, yield a principal result.”

CPC Networks Corp. v. Eagle Eye Investments 2011 SKQB 436

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 why it is necessary for Bankruptcy Courts to also be Courts of Equity.

This case had its origins in a shareholder dispute that ultimately grew into an oppression application, digressed temporarily into an interim receivership before showing its true value to us as a security enforcement issue.

Without digressing into all of the facts, suffice it 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 a previous Court application, this interim receiver appointment was vacated. 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.

Ultimately, 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 Gabrielson, J. determined on a clear reading of the General Security Agreement in relation to the loan agreement that the GSA it only secured the BDC loan and not loans of the third parties, there was a very thorough review of the limited authorities on that issue. The Court 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 authorizes Gabrielson, J. identified two Canadian authorities:

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

b) In 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.

Ultimately, Gabrielson, J. confirmed that Eagle Eye could not tack on 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 cited three reasons why Courts should refuse to convert unsecured claims into secured claims in security assignment situations:

a) It would be unfair to the debtors;

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

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

Conclusion

While few pundits will be excited by the jurisprudence originating from the Prairies this past year, practitioners should find some benefit to adding these precedents to their tool boxes.

1. GMAC Commercial Credit v. TCT Logistics 2006 2 SCR 123

2. For example: Jeff Carhart “TCT Logistics and the Future of Receiverships in Canada” 2008 Canadian Institute 8th Annual Advanced Insolvency Forum, Toronto.

3. For example: Andrew, J. Hathnay “Employee Perspectives in a Liquidating CCAA” 21 Comm. Insol.R pp. 45 and 49.

4. Indalex pension decision has far reaching implications, Globe & Mail, April 7, 2011; CAIRP Chairs’ Newsletter, Issue No. 4, June, 2011; Marc S. Wasserman et al “Ontario Court of Appeal Grants Retirees Priority Over Secured Creditors” 23 COMM. Insol. R.49.

5. Has no reported decisions but you can find most of the significant documentation at the monitor’s website: www.alvarezandmarsal.com/arcticglacier.

6. Has no reported decision but you can find most of the significant documentation at the monitor’s website www.deloitte.com/ca/puratone.

7. CRA has had success in the past using a statutory trust priority to prevent other pre-filing payments from being challenged as preferences: see for example Cargill v. Compton Agro 2000 CanLII 26959 (Man.C.A.).

8. Skyepharma PLC v. Hyal Pharmaceutical Corp. (2000) 15 CBR (4th) 298 (Ont.C.A.)

9. Royal Bank v. Soundair Corp. [1991] 83 DLR (4th) 76 Ont.C.A.

 

 

 

 

 

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 Managing Partner Norm Snyder at nksnyder@tmlawyers.com, or 204.988.0302.