In the Matter of the Bankruptcy of Norame Inc. of the City of Vaughan, in the Regional Municipality of York, in the Province of Ontario

[Indexed as: Norame Inc. (Re)]

90 O.R. (3d) 303

Court of Appeal for Ontario,

Lang, MacFarland and LaForme JJ.A.

April 28, 2008

Bankruptcy and insolvency -- Priorities -- Property of the bankrupt -- Statutory trust -- Trust obligations of Load Brokers Regulation applying to trustee in bankruptcy -- Bankruptcy and Insolvency Act not entitling load broker's creditors to moneys paid to its trustee in bankruptcy in respect of carrier's shipping services and held in separate trust by trustee -- Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 -- Load Brokers Regulation, O. Reg. 556/92.

N Inc. carried on business as a load broker. Before its voluntary assignment in bankruptcy, N Inc. had commingled the moneys it received from its shipper-customers and consignees with its own funds, instead of segregating those funds in a trust account for the carriers as required under the Load Brokers Regulation made under the Truck Transportation Act, R.S.O. 1990, c. T.22. After the bankruptcy, on an application by the trustee for directions, the court ordered that all moneys owed by shippers were to be paid to the trustee to be held in a separate account. A carrier commenced an action against N Inc. and the trustee for payment of its outstanding accounts. The carrier brought a motion seeking a determination of priority and entitlement to the funds which the trustee was holding in a separate trust account. The motion judge held that the funds satisfied the conditions for a trust and had to be paid to the carrier, and that they were therefore not available for distribution to N Inc.'s creditors under the Bankruptcy and Insolvency Act ("BIA"). The trustee appealed.

Held, the appeal should be dismissed.

APPEAL by a trustee in bankruptcy from an order made by H.J.W. Siegel J., of the Superior Court of Justice, dated April 5, 2007, on a motion for the determination of priorities.

Cases referred to The trust obligations of the Load Brokers Regulation apply to a trustee in bankruptcy. The BIA does not entitle a load broker's creditors to moneys paid to its trustee in bankruptcy in respect of a carrier's shipping services where those funds can be segregated in trust. GMAC Commercial Credit Corp.-Canada v. TCT Logistics Inc., [2006] 2 S.C.R. 123, [2006] S.C.J. No. 36, 2006 SCC 35, 271 D.L.R. (4th) 193, 351 N.R. 326, J.E. 2006-1500, 215 O.A.C. 313, 22 C.B.R. (5th) 163, 51 C.C.E.L. (3d) 1, 53 C.C.P.B. 167, [2006] CLLC 220-045, 149 A.C.W.S. (3d) 542, revg (2005), 2005 CanLII 3584 (ON CA), 74 O.R. (3d) 382, [2005] O.J. No. 589, 194 O.A.C. 360, 7 C.B.R. (5th) 202, 137 A.C.W.S. (3d) 247 (C.A.), apld Statutes referred to Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, ss. 18, 30(1), 67(1) Truck Transportation Act, R.S.O. 1990, c. T.22 Rules and regulations referred to Load Brokers Regulation, O. Reg. 556/92, s. 15 [page304]

H. Richard Bennett, for appellant Paddon + Yorke Inc., Trustee in Bankruptcy. Michael A. Handler, for respondent Vitran Corporation Inc.

The judgment of the court was delivered by

LAFORME J.A.: -- Overview

Overview

1This case raises an issue about whether moneys paid to a load broker's trustee in bankruptcy for the shipping services of an independent carrier are held by the trustee in trust pursuant to the provisions of the Load Brokers Regulation, O. Reg. 556/92, made under the Truck Transportation Act, R.S.O. 1990, c. T.22, as amended (the "Regulation"). The motion judge held that the funds, which the trustee had segregated, satisfied the conditions for a trust and, accordingly, must be paid to the carrier. As a result, they were not available for distribution to the load broker's creditors on the basis of their priorities under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the "BIA").

2The only guiding authority, was considered by the motion judge: GMAC Commercial Credit Corp.-Canada v. TCT Logistics Inc. (2005), 2005 CanLII 3584 (ON CA), 74 O.R. (3d) 382, [2005] O.J. No. 589 (C.A.). In my opinion, the motion judge correctly concluded that GMAC -- which dealt with an interim receiver who collected carrier fees as required by the Regulation -- also applies to the similarly situated trustee in bankruptcy. As a result, and for the reasons that follow, I would dismiss the appeal. Background

Background

3Norame Inc. ("Norame") carried on business as a load broker, arranging transportation of goods for its clients, including Dimplex North America Limited ("Dimplex"), by way of truck transportation. Norame engaged Vitran Corporation ("Vitran") as the carrier to ship the goods of Dimplex.

4Before its voluntary assignment in bankruptcy, Norame had co-mingled the moneys it received form its shipper-customers and consignees with its own funds, rather than segregating those funds in a trust account for the carriers as [page305] required under the Regulation. After the bankruptcy, Paddon + Yorke Inc. ("Paddon" or the "Trustee"), brought an application for advice and directions. Pitt J. ordered that all moneys owed by shippers in respect of carriage services were to be paid to the Trustee to be held in a separate account, pending further order of the court. This order specified that nothing in the order would have the effect of giving rights that did not exist before the order was made.

5Vitran later commenced an action against Norame and Dimplex seeking payment of its outstanding carrier accounts. Subsequently, Mesbur J. issued a consent order, which provided that, pursuant to the order of Pitt J., Dimplex pay the sum of CDN$30,194.60 and US$10,596.23 to Paddon for Vitran's shipping services and that Paddon deposit these moneys into a separate trust account. Dimplex complied.

6Paddon brought a motion seeking a determination of the priority and entitlement to the funds. On the return of the motion, Vitran argued that it was entitled to the funds pursuant to s. 67(1) (a) of the BIA, the Regulation and the order of Mesbur J. Paddon argued that it held the funds for distribution to Norame's creditors pursuant to the BIA. Statutory Provisions

7Section 67(1) (a) of the BIA provides that a bankrupt's property available for distribution to creditors does not include "property held by the bankrupt in trust for any other person . . .". Section 15 of the Load Brokers Regulation provides that every load broker "shall hold in trust, for the benefit of the carriers to whom the load broker is liable" all money that the load broker receives in respect to the carriage of goods. For this purpose, a load broker must hold the moneys in a segregated trust account. Issues

Issues

8On this appeal, the Trustee challenges the decision of the motion judge that Vitran was entitled to the moneys. In doing so, it raises two issues:

(1) Whether the trust obligations imposed by s. 15 of the Regulation apply to carrier fees paid to and held by a trustee in bankruptcy; and

(2) Whether the carrier fees segregated by the Trustee were held in trust pursuant to s. 67(1) (a) of the BIA. [page306] Analysis

Analysis

9In GMAC, Feldman J.A. concluded that any statutory deemed trust created by the provincial Regulation would not be a trust within the meaning of s. 67(1)(a) of the federal BIA, and thereby excluded from distribution to creditors, unless it otherwise conformed with the three common law trust principles of the certainties of intention, object and subject matter. However, Feldman J.A. also determined at para. 29 that a creditor's security interest "is subject to the trust mandated by s. 15, so long as the debtor carries out the trust obligation". In other words, a creditor's security interest does not take priority over carriers' fees provided that the moneys received for those fees have been segregated in a trust account.

10Feldman J.A. also concluded at para. 36 that an interim receiver, who is carrying on the business of a load broker, is bound by the Regulation's trust obligation with regard to carrier fees that it collects after the receivership's commencement and that it is required to segregate those fees in trust. This she reasoned, is because, irrespective of subsequent court orders, the interim receiver "stands in the shoes of the [load broker], and is furthermore acting as an officer of the court". Although a secured creditor's rights in a bankrupt load broker's accounts receivable are frozen upon bankruptcy, this does not apply to the carrier's fee. In other words, GMAC held that security interests do not attach to those fees, provided that the fees collected are properly segregated. With these observations concerning GMAC, I turn to my discussion of the issues in this case. i. Applicability of the trust obligations of the Load Brokers Regulation to a trustee in bankruptcy

Applicability of the trust obligations of the Load Brokers Regulation to a trustee in bankruptcy

11The Trustee challenges the applicability of GMAC primarily on the basis that, unlike an interim receiver, a trustee in bankruptcy does not "step into the shoes of the debtor or of the bankrupt". Rather, it argues, a trustee in bankruptcy is merely "an assignee of the assets of the debtor", and is "neither an agent, nor a substitute of the debtor". Accordingly, "none of the provisions of the Truck Transportation Act (Ontario) apply and the provisions of the BIA govern".

12There are several reasons for rejecting this argument. First, the premise that a trustee in bankruptcy cannot step into the shoes of a bankrupt is erroneous. While the role of a trustee in bankruptcy is often limited to effecting an orderly liquidation [page307] of the bankrupt's assets for the benefit of creditors, s. 18 (a) of the BIA explicitly empowers a trustee in bankruptcy to continue running the business of a bankrupt. The trustee can do so on its own initiative as a conservatory measure prior to the first meeting of creditors, and with the permission of the inspectors thereafter (s. 30(1)(c)).

13It makes no sense that a trustee's obligations to comply with the Regulation differ depending upon whether or not it continues operating the load broker's business. If that were the case, a trustee continuing to operate the business could broker a shipper and then effectively deny that shipper its fee simply by ceasing operations. That cannot be right.

14Second, the difference between an interim receiver and a trustee in bankruptcy advanced by the Trustee to distinguish GMAC is not a principled distinction with respect to the issue at hand. While the Trustee relies on the difference between the formal status of a trustee in bankruptcy versus an interim receiver, it offers no plausible reason, and cites no authority, to explain why this difference should determine the applicability of the Regulation's trust obligations. Indeed, to the contrary, GMAC Commercial Credit Corp.-Canada v. TCT Logistics Inc., 2006 SCC 35, [2006] 2 S.C.R. 123, [2006] S.C.J. No. 36 confirmed that, like an interim receiver, a trustee in bankruptcy is also an officer of the court.

15Lastly, in my view there is nothing in GMAC that supports the Trustee's argument that the trust obligation only arises after bankruptcy provided that the bankrupt actually segregated carriers' fees prior to bankruptcy.

16GMAC only holds that property held by a bankrupt that is subject to a deemed trust under provincial law, but not held in accordance with general trust principles, does not qualify under s. 67(1) (a) BIA for exclusion from distribution to creditors. This is a different issue from whether a trustee in bankruptcy is required to comply with the Regulation by segregating the carrier fees received after the bankruptcy. Accordingly, the Trustee has not provided a purposive argument in favour of its interpretation of the BIA.

17I agree with the motion judge's observation at para. 7 of his reasons that a load broker's "contractual entitlement to moneys received from shippers is limited to its fees for such services rendered" and that the purpose of the Regulation is to "provide a means by which the contractual entitlement of a carrier can be preserved in the context of payment arrangements designed to ensure payment to a load broker of its fee and preservation of its client relationships". I also agree with the [page308] motion judge's conclusion that the BIA does not entitle a load broker's creditors to moneys paid to its trustee in bankruptcy in respect of a carrier's shipping services where those funds can be segregated in trust.

18To hold otherwise would provide an unexpected and unfair windfall for the other creditors of a load broker. It would also force carriers who selected the bankrupt load broker only as a middleman, to compete as unsecured creditors for the carriage fees that shippers intended they be paid. This would produce a result entirely at odds with both the perception of the parties engaged in the transaction, as well as the load brokerage regime enacted by Ontario's legislature. Accordingly, I would dismiss this ground of appeal. ii. Trust character of the funds collected by the appellant

Trust character of the funds collected by the appellant

19Given my conclusion that GMAC applies generally to trustees in bankruptcy as it does to interim receivers, it is clear that the Trustee cannot succeed in its argument that the carrier fees it received and placed in a separate trust account lacked the character of trust property in accordance with general trust principles. If the carrier fees the interim receiver in GMAC collected and held in trust bore the character of trust property, then so do the identically situated fees segregated by the trustee in bankruptcy in this case.

20GMAC concludes at para. 35 that, even though court orders subsequent to the appointment of an interim receiver "have no substantive effect on the legal rights of any of the parties", neither are those rights frozen upon bankruptcy. Similarly, the subsequent orders in this case have no substantive effect. However, other actions and events may affect the parties' legal rights. One such event is the receipt by an interim receiver -- or, in this case, a trustee in bankruptcy -- of carrier fees that are subject to the trust obligations of the Regulation. Accordingly, I would also reject this ground of appeal. Disposition

Disposition

21For the foregoing reasons, I would dismiss the appeal. In doing so, I would award costs of the appeal to the respondent in the amount of $8,000 inclusive of disbursements and GST.