COURT OF APPEAL FOR ONTARIO

DATE: 20060322 DOCKET: C43933

WEILER, LASKIN and ROSENBERG JJ.A.

B E T W E E N :

THE PROVIDENT BANK Applicant (Respondent)

• and -

WELLS FARGO BANK NORTHWEST, NATIONAL ASSOCIATION, CHELL.COM/AIR, INC. and MAXWELL AERO MAINTENANCE LTD. Respondent (Appellant)

Counsel: Ronald G. Chapman for the appellant Sarah Chesworth for the respondent

Heard: January 11, 2006

On appeal from the order of Justice Susan E. Greer of the Superior Court of Justice dated July 18, 2005.

WEILER J.A.:

Overview

[1] Maxwell Aero Maintenance Ltd. ("Maxwell") appeals the motion judge's dismissal of its claim for a lien for storage and repair of a 1983 Dassault Falcon 200 Aircraft (the "aircraft"). Although Maxwell's negligence resulted in damage to the aircraft that exceeded the repair and storage charges giving rise to its lien, Maxwell asserts that it has the right to be paid because Provident Bank (the "Bank"), the lender who took possession of the aircraft, was insured for the damage Maxwell caused. Maxwell asserts that the motion judge erred in setting off its charges against the cost to repair the aircraft due to its negligence without regard to the insurance proceeds the Bank received.

[2] Maxwell alleges that it had an oral agreement with the bailor of the aircraft, Chell.com/Air, Inc. ("Chell") that Chell would obtain insurance covering any loss or damage to the aircraft while it was in Maxwell's possession. Maxwell asserts that set-off does not apply because the alleged oral agreement precludes any claim for loss or damage to the aircraft while in its possession. Rather, the Bank must look to the insurance proceeds. Maxwell further contends that its rights are not affected by the fact that it is claiming against the Bank as opposed to Chell because the Bank's claim can be no higher than Chell's. Irrespective of whether an agreement exists, Maxwell also argues that it is entitled to be paid because otherwise the Bank will receive double recovery. Consequently, Maxwell submits that the motion judge erred in dismissing its lien claim.

Facts

[3] The facts are as follows. As of January 26, 2000, the aircraft was owned by Chell. Pursuant to a trust agreement dated January 26, 2000, Chell transferred title to the aircraft to First Security Bank, National Association ("First Security").[^1] The same day, Chell entered into an Aircraft Operating Agreement ("AOA") with First Security whereby it obtained a licence to possess, use and operate the aircraft. One of the terms of the AOA was that Chell was required to maintain at all times comprehensive aircraft and general liability insurance "in such amount and type usually carried by corporations similarly situated with [Chell] and owning and operating similar aircraft, and covering such other risks as are customarily insured against by such corporations." The AOA also directed that all insurance policies name both First Security and Chell as insureds or loss payees.

[4] First Security then borrowed $7,000,000 USD from the Bank. In addition to executing a promissory note for the amount of the loan plus interest thereon, Chell and First Security provided the Bank with a first priority security interest in the aircraft by entering into an Aircraft Mortgage and Security Agreement ("AMSA") with the Bank dated February 4, 2000. The AMSA stated that in the event of loss Chell and First Security would pay the Bank the outstanding principal balance of the loan together with accrued but unpaid interest thereon. The AMSA also required Chell and First Security to insure the aircraft against loss or damage. All policies were to be made payable to the Bank as the loss payee so long as the loan was outstanding and any payments made were to reduce the amount to be paid by First Security on the loan. The Bank perfected its security interest by making the required filings both in the United States and Ontario.

[5] It appears from the evidence that Mark Valentine, an investment banker and representative of Chell, and his wife also gave their personal guarantees of the loan.

[6] The insurance policy in place at the time of the loss identified Thompson Kernaghan, the now-bankrupt investment firm for whom Mark Valentine worked, as the named insured and Chell, the Bank and Wells Fargo as loss payees. Although the policy covered persons in possession of the aircraft with the permission of the insured, and the aircraft itself was insured at all times, paragraph 20(b) of the policy stated:

However, we will not cover any person in the business of manufacturing aircraft, repairing or maintaining aircraft or aircraft components, selling or renting aircraft, chartering aircraft, operating a commercial air service, or operating a flying school.

[7] Subsequently, in September 2001, Chell left the aircraft with Maxwell for repair and maintenance and Maxwell negligently lost parts for the aircraft valued at $325,000.

[8] In early 2003, First Security and Chell failed to make their interest payments on the loan and committed various events of default under the security agreement. As a result, in April 2003, the Bank sent First Security and Chell demand letters and notices that it intended to enforce its security. The Bank also demanded payment of the loan from the Valentines as guarantors. When the indebtedness was not repaid, the Bank brought an application seeking, among other relief, an order permitting it to take possession of the aircraft. The Bank also ascertained that valuable airplane parts had gone missing from the airplane while it was in Maxwell's possession and filed a proof of loss under the insurance policy. Insurance proceeds in the amount of $333,937.64, plus $6,062.36 in prejudgment interest, were eventually paid out to pursuant to court order in 2004. Of that total, the sum of $15,000 was paid to the trustee in bankruptcy for Thompson Kernaghan (the named insured) in full settlement of any claims by the firm for amounts owing under the insurance policy.

[9] As of July 30, 2003, Maxwell's outstanding account for repair and storage was $253,336.98 and it proceeded to file a lien under the Repair and Storage Liens Act, R.S.O. 1990, c. R.25. The lien had priority over the aircraft mortgage in favour of the Bank.

[10] By order dated June 26, 2003, Ground J. granted possession of the aircraft to the Bank on condition that the Bank post a letter of credit in the amount of $250,000 to secure Maxwell's lien. Following this order, in November 2003, the Bank sold a loan portfolio to LINC Acquisition One LLC ("LINC"). It included the Bank's security interest in the aircraft, as well as all rights to the proceeds of the letter of credit. LINC therefore stands in the shoes of the Bank.

[11] LINC and its predecessor, the Bank, incurred in excess of $258,369 USD to replace the tail cones that were lost by Maxwell. In addition, LINC spent more than $60,000 USD to maintain and store the aircraft and to make it airworthy. The aircraft was eventually sold at auction for about $3,450,000 USD, leaving LINC with a significant loss.

[12] After the sale of the aircraft, LINC moved before Greer J. for an order that Maxwell was not entitled to any lien against the aircraft because the amount of the debt owing to Maxwell was less than the amount of the loss due to its negligence and equitable set-off applied.

[13] Maxwell argued that due to its oral agreement with Chell, the current rights holder, LINC, would have to look to the insurance proceeds. Since LINC received the insurance proceeds and Maxwell had not been paid for its work, Maxwell further argued that it was entitled to judgment against LINC for the amount of its lien.

The Motion Judge's Decision

[14] The motion judge dealt with the issues of double recovery and equitable set-off. She noted that the Supreme Court of Canada set out the principles of equitable set-off in Telford v. Holt (1990), 69 D.L.R. (4th) 25 at 46 (S.C.C.). These principles are as follows:

1. The party relying on a set-off must show some equitable ground for being protected against his adversary's demands...
2. The equitable ground must go to the very root of the plaintiff's claim before a set-off will be allowed...
3. A cross-claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross-claim...
4. The plaintiff's claim and the cross-claim need not arise out of the same contract...
5. Unliquidated claims are on the same footing as liquidated claims...

[15] The motion judge held that even though the Bank/LINC had been paid insurance proceeds for the loss of the aircraft's tail cones, it was nonetheless entitled to an equitable set-off of the cost to replace the missing parts from the amount owing under Maxwell's lien. In concluding that equitable set-off was appropriate, the motion judge applied the common law principle in Ratych v. Bloomer (1990), 69 D.L.R. (4th) 25 at 46 (S.C.C.). This principle is to the effect that people are entitled to insure themselves against a loss and the wrongdoer may not take the benefit of the innocent party's prudence in so doing. Whether, as here, the insurer has a right of subrogation, and whether the insurer's right of subrogation has been exercised or not, she held was immaterial: see Cunningham v. Wheeler (1994), 113 D.L.R. (4th) 1 at 21 (S.C.C.). In addition, the motion judge commented:

It should also be noted that in the Aircraft Mortgage and Security Agreement between First Security and Chell and the Bank, Article 20.2 sets out what happens under the heading "Insurance Against Loss or Damage to the Aircraft" and in Article 20.3"Application of Proceeds in any Event of Loss". The payments go to reduce the Borrower's debt. Thus the Bank/LINC receive them in addition to their damages award.[^2]

I am of the view that the cases put forward by Maxwell on double recovery do not apply to the case at bar, based on the principles as set out in these Reasons.

[16] Thus, she held the amount paid out under the insurance policy to the Bank/LINC was not to be deducted from the amount of damages arising from the loss of the aircraft parts.

Analysis

[17] Before us, the appellant vigorously argued that the alleged agreement between Chell and Maxwell as to insurance affected the Bank/LINC's right to set off the cost of replacing the lost aircraft parts against Maxwell's lien claim and that the motion judge erred by disregarding the effect of the agreement. Maxwell argues that the legal effect of this agreement is that Chell is precluded from making a claim against Maxwell for the missing parts and that the Bank can have no higher rights than Chell in this regard. I accept that the Bank can have no higher rights than Chell.

[18] There is some evidence of an oral agreement between Chell's pilot and Maxwell that it would carry insurance to cover any loss or damage to the aircraft while it was in Maxwell's possession. The authority of the pilot to enter into such an agreement on behalf of Chell is not apparent from the record. Quite apart from the absence of evidence as to the pilot's authority to bind Chell, there is no evidence that Chell agreed to waive any claim against Maxwell for any loss or damage to the aircraft while it was in Maxwell's possession.

[19] The authorities on which the appellant relies are all cases in which a party agrees to insure itself against the negligence of another that could affect it and in which the court holds that the party who obtains the insurance, as well as any subrogated insurer, actually or impliedly grants a waiver against making a claim in negligence against the wrongdoer. The purpose of obtaining the insurance in those cases is to protect the wrongdoer by providing payment to the person placing the insurance. Otherwise, there would be no reason to obtain the insurance and the insurance would lack "substance." Where the only purpose of obtaining insurance is to protect the wrongdoer, the court will imply a waiver of any claim in negligence on the basis that the insurance otherwise lacks "substance."

[20] Here, the purpose of obtaining the insurance was not to protect Maxwell. The reasons for my conclusion are as follows. First, the insurance on the aircraft existed prior to the bailment of the aircraft to Maxwell. Further, the AMSA directed that any insurance payments go to reduce the borrower's debt. Second, based on the agreements with its lenders, Chell had a reason to insure the aircraft apart from the possibility of Maxwell's negligence. Thus, the insurance had "subject matter" apart from Maxwell's negligence. Waiver of any right to sue cannot be implied and, as I have indicated, there is no evidence Chell expressly waived its right to sue Maxwell.

[21] I will explain further. In support of its position that Chell agreed with Maxwell to obtain insurance, Maxwell relies on the supplementary affidavit of Glen Maxwell, representative of the appellant Maxwell. This affidavit states in paragraph 5:

Now shown to me and marked as Exhibit G to this my Affidavit is a true copy of a letter dated October 29, 2003 from the solicitor for Maxwell to the solicitor for the Applicant confirming that the agreement between Maxwell and the owner of the aircraft was that the owner of the aircraft would place all necessary insurance on the aircraft, and therefore no claim can be made as against Maxwell for any loss of parts belonging to the aircraft [emphasis added].

[22] The emphasized portion of this excerpt from Glen Maxwell's affidavit is a legal argument and not a statement of fact. In fact, it appears to be drawn from the above-referenced letter written by Maxwell's solicitor, in which he states:

With respect to the issue of the loss of the cones and other items, the agreement between my client and the owner of the aircraft was that the owner of the aircraft was to place all necessary insurance on the aircraft.

I attach a copy of some of the emails that confirm this.

Therefore no claim can be made by your client as against mine in respect of this loss – specifically no set off from the monies owing for repairs etc. [see Bow Helicopters Ltd. v. Bell Helicopter Textron 1981 ABCA 146, 125 D.L.R. (3rd) 386 and similar cases].

[23] The decision of the Alberta Court of Appeal in Bow Helicopter Ltd. v. Bell Helicopter Textron et al. (1981), 1981 ABCA 146, 125 D.L.R. (3d) 386, mentioned in the letter, is inapplicable to the case at bar. In Bow Helicopters, the lessee of a helicopter agreed with the lessor to provide insurance against loss or damage to the helicopter and to obtain a waiver of subrogation in favour of the lessor. The helicopter sustained damage in an accident, which the parties agreed was caused by a cause insured against under the insuring agreement. It was agreed that the lessee should repair the helicopter. In due course, the repairs were made and the insurer paid the repair bill. To recover the money expended on that account, the insurer purported to exercise its right of subrogation by causing an action to be commenced in the lessee's name against the lessor, who was also the manufacturer of the helicopter, on the basis of negligent manufacture. The Alberta Court of Appeal determined that the covenant by the lessee to insure was for the protection and benefit of the lessor, and had the parties intended to exclude the case of liability for negligent manufacture, express words to that effect would have been required. Accordingly, the court concluded that the lessee and its insurer, who stood in its shoes, were precluded from making a claim against the lessor.

[24] A similar decision on which the appellant relies is Maryland Casualty Co. v. Blue Sparrow Industries Ltd., [1980] O.J. No. 1447 (H.C.J.). In that case, Leonard Petrie, a trucker, was hired to transport honey owned by Blue Sparrow Industries Ltd. ("Blue Sparrow"). During the trip, the tractor trailer overturned and lost its cargo. Blue Sparrow's insurer, Maryland Casualty Co. ("Maryland"), paid Blue Sparrow's insurance claim and would ordinarily have succeeded in a subrogated action against Mr. Petrie for his negligence. Mr. Petrie swore, however, that Blue Sparrow knew he did not carry cargo insurance and that he would not have agreed to carry the goods had he not been assured by a representative of Blue Sparrow that no claim would be made against him, since Blue Sparrow would carry sufficient cargo insurance to protect its own interests. Maryland sued Blue Sparrow for the return of the insurance money it had paid out. Holland J. held that Blue Sparrow, by its arrangement with Mr. Petrie before the accident, not only breached its warranty that the policy would not inure directly or indirectly to one in Mr. Petrie's position but also deprived the insurer of the right of subrogation to which it was entitled. As a result, Maryland succeeded in obtaining judgment against Blue Sparrow for the amount it had paid out to it. The appeal to this court, reported at [1982] O.J. No. 1521, was dismissed on the facts of the case and the single issue defence raised at trial.

[25] Here there is no evidence as to whether Chell had knowledge of Maxwell's insurance situation. More importantly, unlike the situation in Bow Helicopters, supra, and Blue Sparrow, supra, there is no evidence that Chell actually promised not to sue Maxwell for its negligence or to obtain a waiver of subrogation; nor is there any evidence that such a promise was required by Maxwell as a condition of its agreement to repair and store the aircraft. Again, the insurance carried on the aircraft had subject matter, or purpose, unrelated it to coverage against the risk of loss caused by Maxwell's negligence.

[26] Another decision in the series of cases on which the appellant relies is St. Lawrence Cement Inc. v. Wakeham & Sons Ltd. (1995), 26 O.R. (3d) 321 (C.A.). In that case, a barge owned by St. Lawrence Cement Inc. ("St. Lawrence") was damaged while being towed by a tugboat owned by Wakeham & Sons Ltd. ("Wakeham"). The contract between the parties provided that St. Lawrence was to be responsible for insurance on the barge and its cargo and Wakeham's standard towing conditions provided that all towing was done at the sole risk of the vessel's owner. Chief Justice Dubin held that St. Lawrence's agreement to obtain insurance could have no purpose other than to relieve Wakeham from liability for losses caused by its negligence. While there was no express waiver, he held that the agreement to be responsible for insurance would lack subject matter and there would be no purpose to it otherwise. Thus, the insurance was obtained for the benefit of both the tugboat operator and the barge owner.

[27] Similarly, in T. Eaton Co. Ltd. v. Smith et al. (1977), 92 D.L.R. (3d) 425 (S.C.C.), the owners of two contiguous properties covenanted with the tenant to insure the buildings on their properties against risk of fire. The two buildings were subsequently destroyed by fire, which was the result of the negligence of an employee of the tenant. The respective amounts of loss to the two buildings were agreed upon at $110,400 and $35,000, and the insurers paid these amounts to the two landlords. An issue then arose as to whether the insurers could sue the tenant to recover the amounts of the loss based on their rights of subrogation. Chief Justice Laskin, for the majority of the Supreme Court of Canada, held that the landlords' covenant to insure was for the benefit of the tenant; therefore, it had to cover the risk of loss from a fire caused by the tenant's negligence, for if did not, the covenant would have lacked subject matter. Accordingly, since the landlords had essentially agreed in the leases to look to their insurers rather than to the tenant to recover losses due to fires caused by the tenant's negligence, the insurers were precluded from succeeding in their claim. See also Amexon Realty Inc. v. Comcheq Services Ltd. (1998), 37 O.R. (3d) 573 (C.A.).

[28] Here, the purpose for which the insurance was obtained was unrelated to the bailment of the aircraft to Maxwell. Chell took out an all-risk policy on the aircraft for the purpose of protecting the investment of First Security and the Bank, not for the purpose of relieving Maxwell from liability for loss or damage caused by its negligence. The insurance had purpose or substance prior to, and quite apart from, any alleged agreement with Maxwell. No agreement to waive a claim in negligence against Maxwell can be implied.

[29] The decisions on which Maxwell relies do not apply to the situation before us and do not assist Maxwell. Because Chell would not be precluded from making a claim against Maxwell for its negligence in losing the aircraft's tail cones, the Bank/LINC is not precluded from making a claim.

[30] This brings me to Maxwell's alternative argument that, irrespective of any agreement as to insurance between Chell and Maxwell, since the Bank has been paid in full by its insurer for any loss caused by Maxwell, Maxwell is entitled to be paid the monies owed to it for repair and storage charges. In rejecting Maxwell's argument, the motion judge relied on the common law principle in Ratych v. Bloomer, supra, that people are entitled to insure themselves against a loss and the wrongdoer may not take the benefit of the innocent party's prudence in doing so. I agree with the motion judge. Accordingly, I would hold that the motion judge did not err in her conclusion that the Bank/LINC was entitled to an equitable set-off of the cost to replace the missing aircraft parts from the amount owing under Maxwell's lien notwithstanding the fact that the Bank/LINC had been paid insurance proceeds for the loss and in dismissing Maxwell's claim for a lien.

[31] I would dismiss the appeal. I would award the respondent the costs of the appeal fixed in the agreed amount of $7,000 all inclusive.

RELEASED: March 22, 2006 ("KMW")

"Karen M. Weiler J.A."

"I agree John Laskin J.A."

"I agree M. Rosenberg J.A."

[^1]: Wells Fargo Bank Northwest, National Association ("Wells Fargo") is successor-in-interest to First Security Bank. [^2]: Presumably the reference to a damages award is to the amount owing to the Bank/LINC by Maxwell for the damage that occurred to the aircraft while in its possession.