DATE: 20001106

DOCKET: C33119

COURT OF APPEAL FOR ONTARIO

RE: HONEY GROVE ESTATES INC. (APPLICANT/APPELLANT) and DIVERSEY LEVER CANADA, a division of UL Canada Inc.,

AT&T CAPITAL CANADA INC., ACCEL CAPITAL CORP.,

BRAMA MANUFACTURING INC., ROYAL BANK OF CANADA, THE TRUSTEE OF THE ESTATE OF MARIA GRAZIA PALERMO, a Bankrupt and SUPERIOR ACCEPTANCE CORPORATION (Respondents)

BEFORE: FINLAYSON, CARTHY JJ.A and SIMMONS J. AD HOC

COUNSEL: John LoFaso and Elliott S. Feintuch

For the appellant

Darryl Singer and Peter Lewarne

For the respondent Superior Acceptance Corporation

HEARD: September 14, 2000

On appeal from the order of Justice Ian Nordheimer dated October 6, 1999

E N D O R S E M E N T

[1] This appeal involves competing claims of a landlord, an equipment vendor and a financing company to goods of a tenant.

[2] The tenant, 1224396 Ontario Inc. (“Palette”), operated a sports bar and social club called Palette Bar & Grill in premises leased from Honey Grove Estates Inc. (“Honey Grove”). Palette abandoned the leased premises on September 12, 1998. Honey Grove distrained on the goods remaining on the leased premises for arrears of rent on September 13, 1998. The goods distrained included restaurant equipment purchased from Brama Manufacturing Inc. (“Brama”).

[3] The applications judge found that a broker, Trump Acceptance Corporation (“Trump”), “put the deal together with Palette” for the purchase from Brama of the goods distrained on the following basis. Trump leased the equipment to Palette in September 1997. Trump then assigned its interest in the lease to the financing company, Superior Acceptance Corporation (“Superior”). Superior paid one-half of the purchase price to Brama. Palette was to pay the other half but failed to do so.

[4] Brama registered an interest in the equipment under the Personal Property Security Act, R.S.O. 1990, c. P-10 (the “PPSA”) on December 15, 1997 against the tenant numbered company.

[5] Superior registered an interest in the equipment under the PPSA on September 15, 1998 against the style name Palette.

[6] The applications judge found the security interests of Superior and Brama had attached in accordance with s. 11 of the PPSA, thus making them enforceable against a third party. He then determined the priority issues in accordance with section 31(2) of the Commercial Tenancies Act, R.S.O. 1990, c. L 7 (the “CTA”) which contains two potentially relevant exceptions to the prohibition against distraining on the goods of a third party:

31(2) A landlord shall not distrain for rent on the goods and chattels of any person except the tenant or person who is liable for the rent, although the same are found on the premises; but this restriction does not apply ...

[i] in favour of a person whose title is derived by purchase, gift, transfer, or assignment from the tenant, whether absolute or in trust, or by way of mortgage or otherwise,

[ii] nor to the interest of the tenant in any goods or chattels on the premises in the possession of the tenant under a contract for purchase, or by which the tenant may or is to become the owner thereof upon performance of any condition, ...[numbering of subparagraphs added]

The applications judge found that Palette “never had title to the equipment” but that “[t]itle remained with Superior and Brama, pending completion of the lease agreement....” He therefore determined the first noted exception does not apply. He distinguished this case from Leavere v. City of Port Colborne (1995), 1995 715 (ON CA), 22 O.R. (3d) 44 (C.A.) on the basis that in Leavere “the taxpayer always had title to the chattels and gave a security interest in those chattels to the secured parties”.

[7] The applications judge found the second noted exception to be applicable. He concluded this exception permitted Honey Grove to distrain but only to the extent Palette may have acquired any equity in the goods pursuant to the terms of its agreement with Superior. Given the relatively short period of the lease, he found the amount of any equity would likely be small. The applications judge accordingly dismissed Honey Grove’s request for a declaration that it has priority to the goods distrained. He ordered that Honey Grove deliver up Palette’s equipment to Superior and Brama for disposition and directed that the proceeds of disposition be held until entitlement is determined as between Honey Grove, Superior and Brama.

[8] Honey Grove withdrew its appeal against Brama prior to the date set for hearing. It raises 4 issues against Superior:

i. whether Superior properly perfected its security interest

ii. whether Honey Grove’s right to distrain is governed in any way by the PPSA

iii. whetherthe interest of Superior attached before or after the goods became fixtures?

iv. whether Honey Grove was entitled to distrain free and clear of the interests of Superior?

[9] The crux of issues i, ii and iv is the operation of, and interrelationship between, the CTA and the PPSA.

[10] Honey Grove submits section 31(2) of the CTA is a complete code of the priority rules governing the distress. It asserts the PPSA priority rules do not apply, other than to clarify that an unperfected security interest does not have priority over a landlord’s common law lien that arises upon levying distress. The applications judge was obviously aware of these principles as he quoted those portions of Leavere, which make them clear.

[11] Honey Grove submits the applications judge erred in distinguishing this case from Leavere based on who had title to the goods. It asserts that the lease arrangement found here falls squarely within the terminology “mortgage or otherwise”. It submits that title is irrelevant, that it is the nature of the transaction that is significant, and that financing by means of a lease agreement with an option to purchase for a nominal amount on expiry, is within the scope of the words “mortgage or otherwise”. Moreover, it relies on the double invoices from Brama, addressed to both Palette and Superior, to submit that Superior never had title to the goods and that the applications judge erred in finding that it did.

[12] Honey Grove’s submission that title is irrelevant ignores the words “from the tenant” which are an integral part of the particular exception in section 31(2) of the CTA it seeks to invoke. Title must flow from the tenant to the secured party for this particular exception to apply. The key finding of the applications judge was that “Palette never had title to the equipment”. He relied on the wording in the lease agreement, which included the following:

Customer shall have no right, title or interest in the Equipment other than, conditional upon Customer’s compliance with and fulfillment of the terms and conditions of this Agreement, the right to maintain possession and use of the Equipment for the full Term and any Renewal Period.

It is also noteworthy that Brama’s sales orders and invoices all provide that title shall not pass until the purchase price is paid in full. The applications judge did not make explicit findings concerning the significance of the double invoices addressed to both Palette and Superior. In the particular circumstances, he was not required to do so. Palette failed to pay its share of the purchase price to Brama. Superior could not therefore derive title to the goods “by mortgage or otherwise” ‘from the tenant’, whatever ownership rights may exist as between Brama and Superior. Honey Grove also submits the applications judge erred in finding Superior had title to the goods, however his finding was: “[t]itle remained with Superior and Brama, pending completion of the lease agreement....” Again, what is significant is that Palette did not have title to the goods. A landlord is prohibited from distraining on the goods of a third party found on leased premises except to the extent it can bring itself within one of the exceptions set out in section 31(2) of the CTA.

[13] Honey Grove submits the applications judge erred in concluding the security interest of Superior was enforceable against third parties based on compliance with s. 11 of the PPSA. It says this finding is incorrect as section 11 deals with attachment, not priorities. The finding at this point was however limited to the issue of the validity of the security interests vis-à-vis third parties, it did not purport to address priorities. There is no indication that he applied priority rules other than as set out in section 31(2) of the CTA. It is irrelevant whether Superior properly perfected its security interest given the PPSA priority rules do not govern the priority issue between Honey Grove and Superior.

[14] There is no indication that Honey Grove raised any issue about the goods having become fixtures or the timing of attachment before the applications judge. Rather, it appears that was an alternate position advanced by Brama which the applications judge found it unnecessary to determine.

[15] The appeal is accordingly dismissed with costs.

“G.D. Finlayson J.A.”

“J.J. Carthy J.A.”

“Simmons J. Ad Hoc.”