COURT OF APPEAL FOR ONTARIO

DATE: 20000404

DOCKET: C32279

RE:

DELOITTE & TOUCHE INC., in its capacity as Trustee
of the Estate of Sunys Petroleum Inc.,/Les
Petroles Sunys Inc., a bankrupt (Applicant/Appellant)

and

653129 Ontario Limited, 919 Upper Paradise Road
Inc., Lehndorff Property Management Limited, RioCan
Acquisitions Inc., Morsyd Investments Limited, The
Galleria Development Limited and S. Anglin Co. Ltd.
(Respondents/Respondents in appeal)

BEFORE: LABROSSE, WEILER AND SHARPE JJ. A.

COUNSEL: Catherine Francis
For the appellant

Allan S. Halpert
For the respondent, The Galleria Development Limited

J.M. Hickey
For the respondent, S. Anglin Co. Ltd.

Barbara Frederikes
For the respondent, 919 Upper Paradise Road Inc.

HEARD: March 29, 2000

On appeal from the decision of Epstein J. dated May 18, 1999.

E N D O R S E M E N T

[1] The appellant trustee appeals the decision of Epstein J. (the “motions judge”) dismissing the trustee’s application for an order approving three proposed assignees as fit and proper persons to be put in possession of leased premises pursuant to the Commercial Tenancies Act, s. 38(2).

[2] The facts in this matter are not in dispute. The appellant trustee sold the bankrupt’s assets, which included the leases in question, to Suny’s Energy Inc. (“New Suny”). New Suny is controlled and operated by Cango Inc. (“Cango”). New Suny was incorporated specifically to acquire the assets of the bankrupt entity which had also been known as Suny’s. While the financial status of Cango is to some extent disputed by the respondents on the ground that they claim to have received insufficient information, there is no doubt but that Cango is an established business in the retail gas industry. The proposed assignees are recently incorporated numbered companies specifically incorporated to assume the leases at issue. In an affidavit filed by the president of Cango and president of each of the numbered companies, the reason for structuring the transaction in this manner is explained. Cango knew little about the lease arrangements for the sites, the individual profitability of the sites, and nothing about the environmental status of the sites. Accordingly, Cango determined “that each lease should be assigned to a separate company. As a result we incorporated forty separate numbered companies to individually take title to the owned and leased sites”.

[3] In reaching her decision that the proposed assignees should not be approved, the motions judge considered the proper test applicable to this issue, namely, would the proposed tenants be motivated and able to honour the covenants in the lease, and would they make proper use of the premises. See Darrigo Consolidated Holdings Inc. (Trustee of) v. Norfinch Construction Toronto) Ltd. (1987), 63 C.B.R. (N.S.) 216 (Ont. H.C.); Micro Cooking Centres (Canada) Inc. (Trustee of) v. Cambridge Leaseholds Ltd. (1988), 68 C.B.R. (N.S.) 60.

[4] The respondent landlords object to the approval of the numbered companies as fit and proper persons on the grounds that they are mere shell corporations, specifically created by Cango to insulate Cango from liability. In a response to that objection, Cango and New Suny have offered to provide guarantees of the obligations to be undertaken by the proposed assignees.

[5] At the time the matter came before the motions judge, the proposed assignees had, in fact, been in possession of the leased premises. There is no issue but that rent has been paid in a timely fashion and that the premises have been operated in accordance with the terms of the lease. However, the assignees themselves have not been paying the rent. Rent has been paid by the parent corporations.

[6] In her reasons for judgment, the motions judge stated that she could not take into consideration the security offered by New Suny and Cango to assess the fitness of the assignees. In our view, that cannot be accepted as a generally applicable statement of the law. Where an assignee is a corporate entity, it will almost always be necessary to consider those behind the corporation in determining the fitness of the entity. Moreover, it is not the law that a newly incorporated entity cannot be approved as a fit and proper person assuming that it has appropriate backing: See Darrigo Consolidated Holdings Inc., supra.

[7] However, we are not persuaded that the determination of the motions judge dismissing the trustee’s application should be interfered with by this court. As the motions judge indicated, the fatal flaw in the trustee’s application is that it seeks to treat New Suny and/or Cango as if they were, in fact, the assignees. We agree with the conclusion of the motions judge that the landlords are entitled to look to their tenants as the primary party responsible for the terms of the lease. On this record, it was clearly open to the motions judge to conclude that the assignees simply did not have the wherewithall to meet those obligations as they were specifically designed as shell corporations to insulate the real tenants, New Suny and Cango from liability. It was noted by the motions judge that the operation of these premises is a potentially hazardous undertaking and the issue of immediate liability is a significant one. In our view, it was open to her to conclude that a shell corporation is not a fit and proper person within the meaning of s. 38(2).

[8] Accordingly this appeal is dismissed with costs.

“J.M. Labrosse J.A.”

“K.M. Weiler J.A.”

“Robert J. Sharpe J.A.”