Bulut v. Corporation of the City of Brampton et al. 1238157 Ontario Inc. v. Corporation of the City of Brampton [Indexed as: Bulut v. Brampton (City)]

48 O.R. (3d) 108

[2000] O.J. No. 1062

Nos. C29850 and C30139

Court of Appeal for Ontario

Charron, Rosenberg and MacPherson JJ.A.

April 3, 2000

*Application for leave to appeal to the Supreme Court of Canada was dismissed with costs November 16, 2000 (L'Heureux-Dubé, Bastarache and LeBel JJ.). S.C.C. File No. 27933. S.C.C. Bulletin, 2000, 2080.

Personal property security -- Priorities -- Charging order for payment of occupancy costs granted to mortgagee in possession by court order -- Mortgagee not having security interest in personal property under its land mortgage -- Mortgagee having security interest under its charging order -- Holders of security interests registered before court order claiming priority -- Priorities determined outside of statutory regime -- Mortgagee's charging order for occupancy costs having priority over prior registered security interests -- First in time rule qualified by equitable doctrine -- Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 -- Property Security Act, R.S.O. 1990, c. P.10

The appellant B and his family controlled Everingham, a manufacturer of stainless steel cookware, and Royal Spas, a manufacturer of hot tubs. Everingham owned premises in Brampton where it and Royal Spas carried on business.

The respondent Sun Life was the first mortgagee of the Brampton property, under a $2.25 million mortgage registered in January 1992. B was a secured creditor of Everingham under a security interest registered under the Personal Property Security Act ("PPSA") in November 1991 and purchased by B in 1996 and under a second security interest registered in April 1997. By April 1997, B was a secured creditor of Everingham in the amount of approximately $650,000. The appellant 123 Inc., which was controlled by B's family, was a secured creditor of Royal Spas under a security interest that had been first registered under the PPSA in June 1995 and under a security interest that had been first registered in May 1997. By May 1997, 123 Inc. was a secured creditor of Royal Spas for approximately $1.5 million.

In the spring of 1997, after Everingham had defaulted in its mortgage, Sun Life took possession of the Brampton property and changed the locks. At about the same time, the respondent City of Brampton levied distress upon Everingham's personal property for arrears in payment of business taxes. Everingham and Royal Spas then commenced proceedings for recovery of their personal property and several court orders, which did not resolve the contending claims, followed. On June 4, 1997, MacKenzie J. ordered that Everingham and Royal Spas could recover their property subject to terms that included the payment of certain occupancy costs. He further ordered that any arrears in payment of occupancy costs "shall be a charge on the said equipment, inventory and trade chattels in the same manner and to the same extent as a landlord's distress". Everingham and Royal Spas paid some but not all of the occupancy costs and did not recover their personal property. In September 1997, Everingham filed a notice of intention to file a proposal pursuant to the Bankruptcy and Insolvency Act ("BIA") and subsequently became bankrupt. On October 3, 1997, MacKenzie J. ordered that Sun Life could sell Everingham's assets if the occupancy costs were not paid and that Sun Life had a charge on the assets in its possession. On October 23, 1997 B and 123 Inc. served notice on Sun Life that they intended to enforce their security interests in accordance with the PPSA. Sun Life disputed these notices and, ultimately, the assets were sold with the proceeds paid into court.

In March 1998, Royal Spas made a voluntary assignment into bankruptcy. By orders made in May 1998 with respect to Everingham and on June 3, 1998 with respect to Royal Spas, MacKenzie J. ruled that Sun Life was a secured creditor and lien holder outside the priority regimes of the PPSA and the BIA and its lien rights had priority to the security interests of B and 123 Inc. They appealed.

Held, the appeals should be dismissed with costs.

Per MacPherson J.A. (Charron J.A. concurring): Under its mortgage, Sun Life had no interest in the personal property of Everingham, and Royal Spas', B's and 123 Inc.'s security interests under the PPSA arose before the security interest granted to Sun Life, created by MacKenzie J.'s order of June 4, 1997. MacKenzie J. had to resolve the question of the priority of the competing security interests, and this question had to be determined outside the framework of the BIA and the PPSA using common law and equitable principles. MacKenzie J. recognized that prima facie the common law rule was a "first in time" rule, but that this rule is not absolute and can be overridden by statute or in equity where the prima facie rule is qualified by the notion of "the better equity." Under the equitable approach, the person with the prima facie entitlement may be postponed owing to fraud, estoppel or gross negligence. Reasoning by analogy to the Court of Appeal's decision in Leavere v. Port Colborne (City), which allows municipalities to distrain for tax arrears upon chattels subject to prior security interests, MacKenzie J. applied equitable principles to give Sun Life priority. He reasoned that B and 123 Inc., through continuing and concerted misconduct, had delayed the payment of occupancy costs and their misconduct disentitled them from priority over Sun Life. It was true, as noted by Rosenberg J.A., that the result resembled the doctrine of equitable subordination, the introduction of which into Canadian law has been left unresolved by the Supreme Court of Canada and the Court of Appeal because there is a serious issue of whether statutory regimes may be modified by equitable principles. The situation, however, in the present appeal was different because the resolution of the competing claims was outside any statutory regime and the approach of MacKenzie J. was not wrong. Accordingly, the appeals should be dismissed.

Per Rosenberg J.A. (dissenting): The trial judge relied by analogy on the Court of Appeal's decision in Leavere v. Port Colborne (City); however, that judgment rather supported the position of the appellants. The difficulty with the analogy is that in Leavere the express language of the legislation indicated that the municipality was to have the right to distrain upon chattels subject to security agreements. In the immediate case, the order of June 4, 1997 creating a charge did not expressly give the order priority over the security interests of the appellants. However, the order of October 3, 1997 did give Sun Life priority over B and this order was still standing; accordingly, B's appeal should be dismissed.

The appeal of 123 Inc. was on a different footing because it was not affected by the October 3, 1977 order, which related only to the assets of Everingham. The issue then was whether the order of June 3, 1978 can be supported on the basis of an equitable jurisdiction. The problem with MacKenzie J.'s equitable remedy was that it was based on nothing more than his assessment that it would be just, in the sense of a fair or equitable result. It should be noted that 123 Inc. did not engage in any kind of inequitable conduct nor did its conduct result in injury to Sun Life. MacKenzie J. made no finding of fraud against 123 Inc., nor was there any evidence of estoppel or gross negligence that would disentitle it from asserting its prior secured interest.

APPEAL from an order determining the priority of security interests in personal property.

Cases referred to Birch (in trust) v. Lacasse Enterprises Inc. (1991), 1991 7152 (ON SC), 2 O.R. (3d) 465, 4 C.B.R. (3d) 256 (Gen. Div.); Budinsky v. The Breakers East Inc. (1993), 1993 5442 (ON SC), 15 O.R. (3d) 198, 106 D.L.R. (4th) 370, 18 C.P.C. (3d) 166 (Gen. Div.) (sub nom. Rowntree v. The Breakers East Inc.); Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 49 (SCC), [1992] 3 S.C.R. 558, 5 Alta. L.R. (3d) 193, 97 D.L.R. (4th) 385, 143 N.R. 321, 7 B.L.R. (2d) 113, 16 C.B.R. (3d) 154; Commercial Credit Corp. v. Harry D. Shields Ltd. (1981), 1981 1840 (ON CA), 32 O.R. (2d) 703, 122 D.L.R. (3d) 736, 14 B.L.R. 121 (C.A.), affg (1980), 1980 1617 (ON SC), 29 O.R. (2d) 106, 112 D.L.R. (3d) 153, 1 P.P.S.A.C. 99, 15 R.P.R. 136 (H.C.J.); J.J. H. McLean Co. v. Newton (1926), 1926 444 (MB CA), 8 C.B.R. 61 (Man. C.A.); Leavere v. Port Colborne (City) (1995), 1995 715 (ON CA), 22 O.R. (3d) 44, 122 D.L.R. (4th) 200, 25 M.P.L.R. (2d) 122 (C.A.); MacMillan Bloedel Ltd. v. Simpson, 1995 57 (SCC), [1995] 4 S.C.R. 725, 14 B.C.L.R. (3d) 122, 130 D.L.R. (4th) 385, 191 N.R. 260, [1996] 2 W.W.R. 1, 33 C.R.R. (2d) 123, 103 C.C.C. (3d) 225, 44 C.R. (4th) 277 (sub nom. P. (J.) v. MacMillan Bloedel Ltd.); Olympia & York Developments Ltd. v. Royal Trust Co. (1993), 1993 8578 (ON CA), 14 O.R. (3d) 1, 103 D.L.R. (4th) 129, 9 B.L.R. (2d) 221, 19 C.B.R. (3d) 1 (C.A.); R. v. Barrie (City), 1969 353 (ON CA), [1970] 1 O.R. 200, 8 D.L.R. (3d) 52 (C.A.); Sara (Re) (1985), 56 C.B.R. (N.S.) 282 (Ont. H.C.J.); Scholey v. Peck, [1893] 1 Ch. 709, 62 L.J. Ch. 658, 68 L.T. 118, 41 W.R. 508, 3 R. 245; Soulos v. Korkontzilas, 1997 346 (SCC), [1997] 2 S.C.R. 217, 32 O.R. (3d) 716, 146 D.L.R. (4th) 214, 212 N.R. 1, 46 C.B.R. (3d) 1, 17 E.T.R. (2d) 89, 9 R.P.R. (3d) 1 Statutes referred to Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 Commercial Tenancies Act, R.S.O. 1990, c. L.7, ss. 31(2), 53 Personal Property Security Act, R.S.O. 1990, c. P.10 Municipal Act, R.S.O. 1990, c. M.45, s. 400(2)(c) Authorities referred to Baker and Langan, Snell's Equity, 29th ed. (London: Sweet & Maxwell, 1990), p. 57 Jacob, "The Inherent Jurisdiction of the Court" (1970), 23 Curr. Legal Probs. 23, p. 51 McLaren, Secured Transactions in Personal Property in Canada, 2nd ed., looseleaf (Toronto: Carswell, 1989), p. 5-202 Spence on Equitable Jurisdiction of the Court of Chancery (1850), vol. 2, pp. 727, 737

Harvin D. Pitch, for appellants. Peter L. Biro and Jonathan N. Eades, for respondent, Sun Life Assurance Company of Canada.

[1] ROSENBERG J.A. (dissenting): -- This is an appeal from the order of MacKenzie J. in which he determined the priorities among certain secured creditors of two bankrupt companies. MacKenzie J. declared that the respondent, the mortgagee in possession of certain premises, had priority over two creditors with perfected security interests on the assets of the companies. For the reasons that follow, I would dismiss the appeal of the appellant Nicholas Bulut and allow the appeal of the appellant 1238157 Ontario Inc.

The Facts

The parties

[2] This appeal arises out of the bankruptcy of two companies, Everingham Brothers Limited and 764388 Ontario Limited. 764388 Ontario Limited operated as Royal Spas and I will refer to it as Royal Spas in these reasons. Everingham owned commercial premises at 5 Tilbury Court in Brampton. Everingham was a manufacturer of stainless steel cookware and therefore it had various presses and dies as well as inventory on the premises. Royal Spas leased space in the Tilbury property where it carried on the manufacture and distribution of hot tubs and whirlpool spas. It too had equipment and inventory on the premises. Everingham and Royal Spas were controlled by Nicholas Bulut and his family. Nicholas Bulut was the president of both companies.

[3] The respondent Sun Life Assurance Company of Canada holds the first mortgage granted by Everingham on the Tilbury property. The original loan secured by the mortgage was $2,250,000 and the mortgage was registered against the Tilbury property in January 1992.

[4] Nicholas Bulut became a secured creditor of Everingham under the following circumstances. In 1991, Everingham granted a security interest to the Royal Bank to secure a loan for $568,000. The financing statement was registered in accordance with the Personal Property Security Act, R.S.O. 1990, c. P.10 ("PPSA") in November 1991. Bulut purchased the Royal Bank interest in the security on November 25, 1996 and the Bank assigned the security to Bulut. On November 26, 1996, a financing change statement was registered under the PPSA. On June 30, 1995, Everingham granted a security interest to Bulut to secure a revolving line of credit to be advanced by Bulut. This security was registered on April 2, 1997. At that time the line of credit stood at approximately $100,000. There is no suggestion that Bulut did not advance the funds for which the security interests were granted in either case. Thus, by April 1997 Bulut was a secured creditor of Everingham in the amount of approximately $650,000.

[5] The other appellant in this case is 1238157 Ontario Inc. ("123 Inc."). It became a secured creditor of Royal Spas under the following circumstances. In April 1995, Royal Spas granted a security interest to Nicholas Bulut to secure a $2 million revolving line of credit. In April 1997, that line of credit stood at just under $1.3 million. On May 14, 1997, Bulut registered his security interest in accordance with the PPSA. On May 23, 1997, Bulut assigned his security interest to 123 Inc. and a financing change statement was registered a year later on March 24, 1998. 123 Inc. is controlled by the Bulut family and Nicholas Bulut's son is a director of that company. On June 26, 1995, Royal Spas granted a general security agreement to National Bank of Canada to secure a $250,000 loan. A financing statement was registered in accordance with the PPSA. On May 16, 1997, 123 Inc. purchased the National Bank's interest and the general security agreement was assigned to it. A financing change stat ement was registered on May 20, 1997. Thus, by May 1997, 123 Inc. was a secured creditor of Royal Spas for approximately $1.5 million.

The court proceedings

[6] In January 1996, Everingham went into default under the mortgage to Sun Life. On April 2, 1997, Dyson J. granted possession of the Tilbury property and leave to issue a writ of possession to Sun Life. Sun Life took possession on April 25, 1997 and changed the locks. At this point, Sun Life did not have any security interest in the personal property of the bankrupts. The core of the dispute in this appeal centres on the attempts by Everingham and Royal Spas to recover possession of their chattels in the Tilbury property. To further complicate matters, on May 2, 1997, a bailiff acting on behalf of the City of Brampton levied distraint upon Everingham's personal property for arrears in the payment of business taxes of approximately $80,000.

[7] Shortly after Sun Life took possession, Everingham and Royal Spas brought a motion for an order for recovery of their personal property. On May 9, 1997, Thomas J. made an order that on or before May 15, 1997, Everingham and Royal Spas pay $35,000 into court on account of occupation costs, costs of security guards and utilities. In the meantime, they were to have access to the premises from 6:00 a.m. to 9:00 p.m. Monday to Friday of each week. They were also entitled to use the packaging machines. Everingham and Royal Spas were to be responsible for the cost of security guards, utilities and occupation costs in an amount to be determined by Thomas J. The $35,000 was paid in accordance with this order.

[8] From this time on, there was a continuing dispute between Sun Life and Everingham and Royal Spas about access to the property. One difficulty was that the City of Brampton claimed to have a secured interest in the personal property of Everingham and it and another creditor, Aristech Chemical International Limited, obtained court orders enjoining Everingham and Royal Spas from in any way dealing with Everingham's personal property. Further, it appears relatively clear that Everingham and Royal Spas were not particularly interested in vacating the premises. Rather, Everingham hoped to reach a settlement with Sun Life. Several agreements were reached but never carried out by Everingham.

[9] A critical order in the appeal is the order made by MacKenzie J. on June 4, 1997, in response to a further motion by Everingham and Royal Spas for an order to permit recovery of their personal property. Nicholas Bulut swore an affidavit in support of this motion. In effect, Everingham and Royal Spas sought an extension of time to realize on their inventory and remove their personal property. The order of June 4, 1997 included the following provisions:

1. The occupancy costs (consisting of rent and security services) was fixed at $1,305 per day from and including April 25, 1997.

2. The $35,000 paid into court was to be paid out to Sun Life on account of the occupancy costs.

3. The shortfall of $17,200 as of June 4, 1997 was to be paid by June 16, 1997. Thereafter, the occupancy costs were to be paid on a weekly basis.

4. Everingham and Royal Spas were to have to August 1, 1997 to remove their equipment, inventory and trade chattels subject to the following:

(a) any sale that may take place by Aristech pursuant to MacKenzie J.'s order of the same date;

(b) provided that Everingham and Royal Spas make the payments referred to in para. (3.).

[10] The fifth paragraph of the order is the most important. It purported to create a charging order and was in the following terms:

5. THIS COURT ORDERS that if the Plaintiffs [Everingham and Royal Spas] fail to make the payment referred to in paragraph 3 of the Order the Defendant [Sun Life] shall be at liberty to exercise its right under the writ of possession herein and that any arrears in payment of occupancy costs shall be a charge on the said equipment, inventory and trade chattels in the same manner and to the same extent as a landlord's distress subject to any rulings as to the entitlement and priorities of the parties on the motion contemplated under paragraph 9 of my Order of even date in Court File No. 87-CV- 428-CM, with liability for the occupancy costs on the proceeds of sale by Aristech only from June 4, 1997 to the date of vacant possession.

(Emphasis added)

[11] While Everingham and Royal Spas paid the shortfall of $17,200 they did not pay any of the occupancy costs thereafter. They were also not able to remove their equipment and inventory from the premises.

[12] On September 17, 1997, Everingham filed a Notice of Intention to file a proposal with the official receiver pursuant to the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA"). On October 3, 1997, on motion by Sun Life, MacKenzie J. lifted the stay of proceedings under the BIA to allow Sun Life to sell Everingham's assets if the occupancy costs were not paid by Everingham by October 17, 1997. MacKenzie J.'s order contains the following:

THIS COURT ORDERS AND DECLARES that Sun Life has a charge on the assets of Everingham in the possession of Sun Life on the Premises (the "Assets") and that Sun Life shall be entitled to distrain against the Assets in accordance with the terms of the Occupation Order for the amounts payable to it as occupancy costs accruing at the rate of $1,305.00 per day from June 4, 1997 to the date when Sun Life receives vacant possession of the Property and to, subject to the provisions of this Order, proceed to sell such portion of the Assets as described hereinafter.

(Emphasis added)

[13] Everingham failed to file a proposal and therefore became bankrupt on October 17, 1997 (effective September 17, 1997).

[14] On October 23, 1997, Bulut, as security holder of Everingham, and 123 Inc., as security holder of Royal Spas, served notice on Sun Life that they intended to exercise their security interest over the collateral and chattels of Everingham and Royal Spas in accordance with the PPSA. Sun Life served its own notice refusing to recognize these security interests and objected to Bulut and 123 Inc. (the appellants) realizing on their security. Ultimately, the assets of Everingham and Royal Spas were sold by an interim receiver and the proceeds now stand in court to the credit of these proceedings.

[15] Royal Spas made a voluntary assignment in bankruptcy on March 31, 1998.

[16] On April 8, 1998, Bulut and 123 Inc. brought a motion for a declaration that their security interests had priority over the occupancy costs payable to Sun Life in accordance with the charging order of June 4, 1997. MacKenzie J. heard the motion and issued orders on May 14, 1998 in respect of Everingham and June 3, 1998 in respect of Royal Spas. It is these orders that are subject to this appeal.

The orders under appeal

[17] The orders made by MacKenzie J. may be summarized as follows:

i. Sun Life is a "secured creditor" within the meaning of the BIA.

ii. The charge on the assets of Everingham and Royal Spas respecting the occupancy costs created by the order of June 4, 1997 constitutes a "lien" within the meaning of the PPSA, which lien is enforceable "in the same manner and to the same extent as a landlord's distress".

iii. Sun Life, as a secured creditor and lien holder, is outside the priorities regimes stipulated under the BIA and the PPSA.

iv. Sun Life has the right to enforce its lien rights for its occupancy costs in priority to the security interests of Bulut and 123 Co. in the assets of Everingham and Royal Spas respectively.

v. The sale of the assets of Everingham and Royal Spas was to proceed forthwith.

[18] MacKenzie J. gave the following reasons for these orders. In his reasons in relation to Everingham he held that the charge created by the June 4, 1997 order made Sun Life a secured creditor, applying Re Sara (1985), 56 C.B.R. (N.S.) 282 (Ont. H.C.J.). He held that the charging order also gave Sun Life a lien "by operation of law". (Since the parties are agreed that the Personal Property Security Act does not apply to determine the priorities, I need not decide whether this is a correct characterization of the charging order.) Further, by reason of the order of October 3, 1997, Sun Life "in enforcing its rights has the status of a landlord distraining, either actually or constructively". As to the question of priorities among the secured creditors, MacKenzie J. held as follows:

Since Sun Life is outside the ambit of both the BIA and the PPSA regimes in terms of priorities, Sun Life has priority over Bulut in satisfying the charge or lien in its favour with respect to occupancy costs.

[19] MacKenzie J. held, however, that there were no grounds for piercing the corporate veil "to impose personal liability on Bulut".

[20] In supplementary reasons on May 28, 1998, MacKenzie J. held that:

The charge and lien created under the June 4th, 1997 order for occupancy costs refers to a landlord's distress right only for purposes of describing the means of enforcement; it does not state nor could it reasonably imply that the charge or lien created could only apply to the costs of the means of enforcement . . .

[21] In his reasons on June 3, 1998 in relation to Royal Spas, MacKenzie J. dealt with other arguments from the appellants concerning the question of priorities. He rejected the argument that the first-in-time rule should apply to the secured creditors, relying upon the decision of this court in Leavere v. Port Colborne (City) (1995), 1995 715 (ON CA), 22 O.R. (3d) 44, 122 D.L.R. (4th) 200. He reasoned that Sun Life was "in possession" of the chattels of Royal Spas and the order of June 4, 1997 authorized Sun Life to "enforce its lien by means analogous to a landlord's right of distress upon chattels".

[22] MacKenzie J. also held in the June 3, 1998 reasons that, even if Sun Life did not have priority, he would have granted it an order that the appellants could only realize on their security interests upon paying all of the occupancy costs outstanding under the June 4, 1997 order. He reasoned as follows:

The basis for such alternative relief is that it would be just and equitable for 123 Co. and N. Bulut to pay such costs since the evidence establishes a continuing and concerted course of action between and among Mr. N. Bulut, Mr. S. Bulut and their respective corporations, including 123 Co. herein, in delaying the payment of occupancy costs relating to personal property of Royal Spas and Everingham in respect of which Messrs. Bulut and their respective corporations now claim an interest as secured parties, and which personal property Sun Life has effectively warehoused for one year at a cost of $1,305.00 per day. In my view, it would be a just, in the sense of fair or equitable, term that the said Messrs. Bulut and their respective corporations in their capacities as secured parties of Everingham and Royal Spas should pay to Sun Life the occupancy costs for this collateral prior to their having any rights in and to the same vis-à-vis any security interest holders or claimants other than Sun Life.

The Positions of the Parties

[23] For the purposes of this appeal, the appellants concede that Sun Life is a secured creditor and that accordingly the priorities are to be determined outside the scheme of the BIA. [See Note 1 at end of document] Similarly, as indicated, the parties conceded that the PPSA does not apply. They also concede that it is possible for a judge to make a charging order giving the person a priority over other secured creditors. [See Note 2 at end of document] However, they submit that the charging order of June 4, 1997 did not give Sun Life such a priority and that accordingly the normal rule of priorities of secured creditors applies. That rule is simply that priorities are based on the "first in time" and the security interests of Bulut and 123 Inc. were prior in time to the June 4, 1997 charging order. Finally, in the absence of a finding of fraud or some other reason to pierce the corporate veil, the appellants submit that there were no grounds in equity for giving the respondent priority over the appellants.

[24] The respondent supports the motion judge's order principally on the basis of equity. It submits that the motions judge had an inherent equitable jurisdiction to do justice between the parties. Sun Life had been thrust into the position of unwilling creditor, required to warehouse and protect the goods of the bankrupts for the benefit of the creditors. It suggests that there is an analogy to a solicitor's lien, which can take priority in some circumstances over the claims of secured creditors. In support of its position, counsel for the respondent carefully reviewed the facts to demonstrate that Mr. Bulut, as the directing mind of the bankrupts, had no real intention of causing the bankrupts to remove their property from the premises. Rather, he was attempting to force Sun Life into an improvident settlement of its claim on the mortgage.

Analysis

[25] The reasons of the motions judge raise two issues. First, did the charging order of June 4, 1997 give Sun Life a priority at law over secured creditors? Second, if not, did the motions judge have an equitable jurisdiction to, in effect, give Sun Life a priority over the claims of the secured creditors that were related to the bankrupts? The phrase "related to" is mine, but as I understand his reasons the motions judge would have denied a priority to the appellants because of the conduct of Mr. Bulut and his son in causing the bankrupts not to pay the occupancy costs.

Issue One: The position at law

[26] In his reasons of May 14, 1998, the motions judge held that:

Since Sun Life is outside the ambit of both the BIA and the PPSA regimes in terms of priorities, Sun Life has priority over Bulut in satisfying the charge or lien in its favour with respect to occupancy costs.

[27] The motions judge did not otherwise explain why the respondent's charge should take priority over the claims of other secured creditors. In his reasons of June 3, 1998, the motions judge expanded on his initial reasons. He rejected the applicability of the first-in-time rule and relied upon this court's reasons in Leavere v. Port Colborne (City). In my view, Leavere does not support the motions judge's holding. The issue in that case was whether a municipality distraining on a taxpayer's chattels for arrears of business taxes is entitled to those chattels as against a creditor of the taxpayer with a registered perfected security interest in those chattels. Galligan J.A., writing for the court, held that the PPSA did not apply because of s. 4 of that Act, which provides that the Act does not apply to a lien given by statute or rule of law. He then noted at pp. 48-49 that at common law priorities are determined in accordance with the chronological order of the encumbrances . The creditors in Leavere relied upon this rule since their security interests were registered before the exercise of the right of distress by the municipality created the lien upon the taxpayer's chattels. Galligan J.A. adopted the following statement of the common-law rule from Spence on Equitable Jurisdiction of the Court of Chancery (1850), vol. 2, at p. 727:

It has already been stated that the general rule, though not without exceptions as will presently appear, is, that statutes, judgments and recognizances, at law and in equity, and equitable charges of every kind, in equity, all rank according to their dates: therefore, in the absence of particular circumstances, the successive periods of their execution or attainment constitute the order in which they will be directed to be satisfied.

[28] However, Galligan J.A. held at p. 52 that it has always been recognized that this common-law rule could be displaced by the provisions of a statute and this was the effect of s. 400(2)(c)(ii) of the Municipal Act, R.S.O. 1990, c. M.45. That provision gave the municipality the right to levy unpaid taxes by distress upon any goods and chattels in the possession of the taxpayer where title to the goods and chattels is claimed, "by way of mortgage or otherwise". The security interests claimed by the creditors in that case were so similar to mortgages that they could be included in the word "otherwise". Galligan J.A. found that the legislature had clearly intended that the municipalities were entitled to levy by distress upon chattels in the possession of a person taxed although the chattels were subject to security agreements. At p. 53, he held that it would "amount to an absurdity if the statute authorized distress upon chattels covered by security agreements but did not intend as we ll that the lien created by the exercise of the right of distress was to have priority over the security agreement".

[29] In my view, the decision in Leavere supports the position of the appellants in this case with respect to the effect only of the June 4 order. There is no statutory exception to prevent the ordinary rule from applying -- that secured interests of all kinds rank according to their dates. In this case, the appellants' perfected security interests all preceded the charging order of June 4, 1997.

[30] The motions judge, however, relied upon Leavere by analogy. He referred to the following excerpt from the reasons at p. 53 and held that by substituting "rule of law" [being the June 4 charging order] for "statute" or "statutory", the same result could be achieved. The passage referred to by the motions judge is as follows:

The municipalities' liens arose when the municipalities took possession of the chattels in exercise of their statutory power to distrain. Because the statute authorizes distress upon chattels subject to security agreements I am constrained to conclude that the lien which arises upon the exercise of that right must take priority over the security agreements. It would, in my view, amount to an absurdity if the statute authorized distress upon chattels covered by security agreements but did not intend as well that the lien created by the exercise of the right of distress was to have priority over the security agreement. The power to distrain upon chattels subject to security agreements would be rendered nugatory if the security agreements were not required to rank behind the liens which had arisen by rule of law.

[31] The difficulty with the analogy is that, while the legislature by express language clearly intended that the municipality have the right to distrain upon chattels subject to security agreements, the wording of the June 4 order does not expressly give that right. For convenience, I repeat the relevant part of the charging order:

. . . any arrears in payment of occupancy costs shall be a charge on the said equipment, inventory and trade chattels in the same manner and to the same extent as a landlord's distress . . .

[32] While the order makes the arrears a charge on the assets of the (now) bankrupts and provides as means for realizing on the charge, "in the same manner and to the same extent as a landlord's distress", it did not expressly give the order priority over the secured interests of the appellants who, it should be pointed out, were not parties to the June 4, 1997 proceedings. My interpretation of the order is bolstered by the supplementary reasons of the motions judge on May 28, 1998 where he held:

The charge and lien created under the June 4, 1997 order for occupancy costs refers to a landlord's distress right only for purposes of describing the means of enforcement; it does not state nor could it reasonably imply that the charge or lien created could only apply to the costs of the means of enforcement . . .

[33] Even if the use of the phrase, "in the same manner and to the same extent as a landlord's distress" was intended to describe the priority of the charging order, it cannot give the respondent a priority over the perfected security interests of the appellants. In Commercial Credit Corp. v. Harry D. Shields Ltd. (1981), 1981 1840 (ON CA), 32 O.R. (2d) 703, 122 D.L.R. (3d) 736 (C.A.), affirming (1980), 1980 1617 (ON SC), 29 O.R. (2d) 106, 112 D.L.R. (3d) 153 (H.C.J.), this court held that through the combined operation of the common law and s. 31(2) of the Landlord and Tenant Act, R.S.O. 1970, c. 236 (now Commercial Tenancies Act, R.S.O. 1990, c. L.7, s. 31(2)) a landlord could levy distress on goods found on the demised premises including goods subject to a chattel mortgage. However, this priority arises not simply because the landlord has a right of distress, but depends upon the landlord taking possession of the chattels pursuant to its right of distress.

[34] However, on October 3, 1997, after Everingham filed its notice of intention to file a proposal with the official receiver pursuant to the Bankruptcy and Insolvency Act, MacKenzie J. made a further order lifting the automatic stay of proceedings in favour of Sun Life. This order included the paragraph set out above which I repeat for convenience:

THIS COURT ORDERS AND DECLARES that Sun Life has a charge on the assets of Everingham in the possession of Sun Life on the Premises (the "Assets") and that Sun Life shall be entitled to distrain against the Assets in accordance with the terms of the Occupation Order for the amounts payable to it as occupancy costs accruing at the rate of $1,305.00 per day from June 4, 1997 to the date when Sun Life receives vacant possession of the Property and to, subject to the provisions of this Order, proceed to sell such portion of the Assets as described hereinafter.

(Emphasis added)

[35] In my view, the only reasonable interpretation of this order is that Sun Life was deemed to have taken possession of the assets of Everingham pursuant to its right of distress. Everingham appealed this order but the appeal was dismissed by the Registrar of this court for failure to perfect. [See Note 3 at end of document] The order of October 3 therefore stands and whether or not it was based on a correct interpretation of the June 4 order, it gave Sun Life priority over Bulut. I would therefore dismiss Bulut's appeal.

[36] The appeal of 123 Inc. stands in a different position. It was not affected by the order of October 3, which related only to the assets of Everingham. 123 Inc.'s security was on the assets of Royal Spas.

Issue Two: The position in equity

[37] In view of my conclusion on the first issue, this part of the analysis only directly concerns the dispute between 123 Inc. as secured creditor of Royal Spas and Sun Life's claim to a charge on the assets of Royal Spas. In his reasons of May 14, 1998, dealing only with Everingham, the motions judge held that there were not sufficient grounds to pierce the corporate veil to impose personal liability on Bulut. In his reasons of June 3, 1998, dealing with Royal Spas, the motions judge did not make any such comment in respect of Mr. Bulut or his son as regards 123 Inc. On the other hand, there is nothing to distinguish the two cases. I did not understand the respondent to argue that the order of June 3, 1998 could be upheld on the basis that the motions judge had pierced the corporate veil to, in effect, make 123 Inc. or its principals responsible for the debts incurred by Royal Spas under the charging order.

[38] The issue then is whether the order of June 3 can be supported on the basis of an equitable jurisdiction. MacKenzie J. held that Bulut and 123 Inc. could not realize on their security interests until they had paid the occupancy costs under the June 4, 1997 charging order. For convenience, I repeat his reasons for that disposition:

The basis for such alternative relief is that it would be just and equitable for 123 Co. and N. Bulut to pay such costs since the evidence establishes a continuing and concerted course of action between and among Mr. N. Bulut, Mr. S. Bulut and their respective corporations, including 123 Co. herein, in delaying the payment of occupancy costs relating to personal property of Royal Spas and Everingham in respect of which Messrs. Bulut and their respective corporations now claim an interest as secured parties, and which personal property Sun Life has effectively warehoused for one year at a cost of $1,305.00 per day. In my view, it would be a just, in the sense of fair or equitable, term that the said Messrs. Bulut and their respective corporations in their capacities as secured parties of Everingham and Royal Spas should pay to Sun Life the occupancy costs for this collateral prior to their having any rights in and to the same vis-à-vis any security interest holders or claimants other than Sun Life.

(Emphasis added)

[39] The financial affairs of Everingham and Royal Spas were complex. In addition to the security interests of the appellants, various other creditors sought to establish that they had secured interests. In particular, the City of Brampton claimed that it was a secured creditor after it exercised its right of distress on the goods of Everingham for business taxes. That dispute did not involve Royal Spas, so far as I can tell. However, it seems to have been a factor that prevented Sun Life from exercising its rights under the charging order. On September 24, 1997, MacKenzie J. held that Brampton was not a secured creditor. Brampton appealed that decision to this court and the appeal was dismissed in reasons reported at (1999), 1999 1705 (ON CA), 43 O.R. (3d) 594, 171 D.L.R. (4th) 426.

[40] With respect to Royal Spas, on July 2, 1997, Manton J. made an order prohibiting Bulut and related persons from entering the premises for any purpose or from obstructing any liquidation or sale of the machinery and equipment of Royal Spas.

[41] Thus, because of various legal proceedings and court orders, Sun Life, which was simply seeking vacant possession of the premises, became the custodian of the appellants' property. The motions judge considered it fair and equitable that 123 Inc. and Bulut, rather than any of the other parties, bear the burden of Sun Life's costs for preserving the appellants' property. If the motions judge had the jurisdiction to make that determination, he is entitled to deference from this court: R. v. Barrie (City), 1969 353 (ON CA), [1970] 1 O.R. 200 at p. 206, 8 D.L.R. (3d) 52 (C.A.).

[42] In I. H. Jacob, "The Inherent Jurisdiction of the Court" (1970), 23 Curr. Legal Probs. 23 at p. 51, the author described the inherent jurisdiction of the court as that reserve or fund of powers, "which the court may draw upon as necessary whenever it is just or equitable to do so, and in particular to ensure the observance of the due process of law, to prevent improper vexation or oppression, to do justice between the parties and to secure a fair trial between them". [See Note 4 at end of document] Aside from such general statements about a court of equity's right to do justice between the parties, we were referred to no case that would justify the order made by the judge in this case.

[43] Counsel for Sun Life sought to analogize its position to that of a solicitor who is entitled to an order charging funds that have been recovered or preserved by the action of the solicitors. In Budinsky v. The Breakers East Inc. (1993), 1993 5442 (ON SC), 15 O.R. (3d) 198 at pp. 206-09, 106 D.L.R. (4th) 370 (Gen. Div.), Ground J. held that the charging order should rank ahead of the other secured creditor, although the latter's security preceded the charging order of the solicitors. Ground J. fully reviewed the authorities, including the decision of Romer J. in Scholey v. Peck, [1893] 1 Ch. 709, 62 L.J. Ch. 658 where at p. 711 he explained the rationale for giving the solicitor priority over the secured creditor:

Here undoubtedly the property was preserved by the action brought by these solicitors on behalf of the Plaintiff, and but for the proceedings taken by them the mortgagee would have lost her security. In my judgment the case is governed by the principle of Greer v. Young [(1883), 24 Ch. D. 545]. I hold, therefore, that the solicitors are entitled to the charge for which they ask, not only against the Plaintiff, but also against the mortgagee, who is taking the benefit of the action, over whose mortgage they must have priority.

(Emphasis added)

[44] In my view, this is not an apt analogy. This is not a case where, but for the actions of Sun Life, 123 Inc. would have lost its security. As mortgagee in possession of the realty, Sun Life had certain rights. On April 2, 1997, Dyson J. granted Sun Life possession of the Tilbury property and leave to issue a writ of possession. The writ was issued and Sun Life took possession and changed the locks.

[45] In any event, on May 9, 1997 the first of two orders was made requiring Everingham and Royal Spas to pay occupancy costs. In the second order, of June 4, 1997, MacKenzie J. ordered Everingham and Royal Spas to pay $1,305 per day in occupancy costs "to and including the date of vacant possession". These costs were to be paid on a weekly basis. They were also required to pay the arrears to that date. Those arrears were paid on June 19, 1997.

[46] The order also provided that Everingham and Royal Spas had until August 1, 1997 to remove their equipment, inventory and trade chattels from the premises. However, pursuant to the order if Everingham and Royal Spas failed to make the arrears payment or the weekly payments, Sun Life was "at liberty to exercise its right under the writ of possession". Finally, the order provided that the occupancy costs were a charge on the equipment, inventory and trade chattels in the same manner and to the same extent "as a landlord's distress". None of the weekly payments were made and Sun Life could therefore have taken steps to obtain vacant possession or, at the very least, exercise its right of distress and sell the goods, presumably in accordance with s. 53 of the Commercial Tenancies Act. It did not do so. Instead, it entered into negotiations with the mortgagor in an attempt to reach some solution. This was its choice. It seems to me that the problem with Sun Life's position is captured in an excerpt from its counsel's affidavit where he says:

Sun Life never wished the occupancy costs claim to keep escalating; however, it could not, without giving up possession of the assets, and therefore, giving up its security without payment, cap the amount owing pursuant to the June 4 and October 3 Orders.

[47] At least under the June 4 order, Sun Life had the right to attempt to collect the occupancy charges by exercising its rights under the writ of possession. That would have capped the occupancy charges and it could have done so a week after June 19, 1997, when Everingham and Royal Spas failed to pay that week's costs. Alternatively, it could stand by and let the occupancy costs accrue knowing that the occupancy costs were a charge on the assets. The risk it ran in pursuing that course of action was that, if there was not sufficient value in the assets to cover both the secured claims and the occupancy charges, under the first-in-time rule, it would not recover the occupancy charges. This was a matter within Sun Life's control. The matter is different from the case where a solicitor is given a charging order over property that would not have otherwise been available. The solicitors are given priority because, without their action, the property would not be available to the creditors. Sun Life has not preserved assets that would not have been available. The assets were available.

[48] My concern with the motions judge's equitable remedy is that it is based on nothing more than his assessment that "it would be a just, in the sense of fair or equitable" result. No doubt, in cases where parties are in a relationship of, or akin to, trust, a certain degree of generality or uncertainty is necessary and is tolerable: see Soulos v. Korkontzilas, 1997 346 (SCC), [1997] 2 S.C.R. 217 at pp. 236-37, 146 D.L.R. (4th) 214. Sun Life, Everingham and Royal Spas were not in such a relationship, nor was Sun Life in a vulnerable position. In my view, this degree of uncertainty is not to be encouraged in matters associated with bankruptcy and insolvency.

[49] The result reached by the motions judge resembles the doctrine of equitable subordination. In Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 49 (SCC), [1992] 3 S.C.R. 558 at p. 609, 97 D.L.R. (4th) 385 Iacobucci J. left open the question of whether such a doctrine should be recognized in Canada. This court has similarly left the matter open in Olympia & York Developments Ltd. v. Royal Trust Co. (1993), 1993 8578 (ON CA), 14 O.R. (3d) 1, 103 D.L.R. (4th) 129.

[50] In Canada Deposit Insurance Corp., Iacobucci J. held that assuming Canadian courts have the power in insolvency matters to subordinate otherwise valid claims to those of other creditors on equitable grounds relating to the conduct of these creditors inter se, there were insufficient grounds to justify the exercise of the power in that case. He referred to the requirements for a successful claim of equitable subordination as developed in the United States as follows at p. 609:

(1) the claimant must have engaged in some type of inequitable conduct; (2) the misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant; and (3) equitable subordination of the claim must not be inconsistent with the provisions of the bankruptcy statute.

[51] It should be borne in mind that the motions judge did not "pierce the corporate veil", nor did he find that the security interest held by 123 Inc. was not bona fide. Thus, the "claimant" for the purposes of the doctrine is 123 Inc. It did not engage in any kind of inequitable conduct, nor did its conduct result in injury to Sun Life.

[52] In P.V. Baker and P. St. J. Langan, Snell's Equity, 29th ed. (1990), at p. 57 the authors describe the circumstances in which persons may lose a prima facie claim to which they would otherwise be entitled under the first-in-time rule:

A person with a prima facie claim to priority for his interest may lose it through his own misconduct. The owner of a legal interest may be postponed to a subsequent equitable interest owing to his fraud, or by estoppel, or through his gross negligence; and the owner of a prior equitable interest may be postponed if his conduct is inequitable.

(Emphasis added)

[53] The motions judge made no finding of fraud against 123 Inc., nor was there any evidence of estoppel or gross negligence that would disentitle 123 Inc. from asserting its prior secured interest.

Disposition

[54] Accordingly, I would dismiss Mr. Bulut's appeal. I would allow the appeal by 1238157 Ontario Inc., set aside para. 4 of the order of MacKenzie J. dated June 3, 1998 and in its place provide that the rights of Sun Life are subject to the security interest of 1238157 Ontario Inc. The appellants were represented by the same counsel in this court. Accordingly, I would make no order for costs in this court. 1238157 Ontario Inc. is entitled to its costs before MacKenzie J.

[55] MACPHERSON J.A. (CHARRON J.A. concurring): -- I have had the benefit of reading the reasons prepared by Rosenberg J.A. I agree with his summary of the facts and the positions of the parties and with his statement of the issues.

[56] Rosenberg J.A. would dismiss Nicholas Bulut's appeal, essentially on grounds of res judicata. I agree with his proposed disposition but would dismiss Mr. Bulut's appeal on the merits.

[57] Rosenberg J.A. would allow 1238157 Ontario Inc.'s appeal. With respect, I disagree.

[58] I will attempt to set out, in brief fashion, my reasons for the above conclusions. Essentially, I agree with the reasons and conclusions of MacKenzie J. in the two decisions which are the subject of these appeals.

Analysis

[59] There is a good deal in the legal analysis in my colleague Rosenberg J.A.'s judgment with which I agree. In order to move quickly to the crucial point of difference, I will record in summary form the points on which I agree with Rosenberg J.A.'s analysis.

[60] First, the appellant Nicholas Bulut ("Bulut") is a secured creditor of Everingham Brothers Ltd. ("Everingham"). Bulut registered his security under the Personal Property Security Act, R.S.O. 1990, c. P.10 ("PPSA") on April 2, 1997.

[61] Second, the appellant 1238157 Ontario Inc. ("123 Co.") is a secured creditor of 764388 Ontario Ltd. carrying on business as Royal Spas ("Royal Spas"). Through a variety of transactions with Bulut and the National Bank of Canada, 123 Co. held a registered security interest in Royal Spas by May 23, 1997.

[62] Third, there is nothing to suggest that Bulut's and 123 Co.'s security interests in Everingham and Royal Spas are not legitimate.

[63] Fourth, Bulut and his family controlled Everingham, Royal Spas and 123 Co. at all times relevant to this appeal. Royal Spas leased space at Everingham's premises in Brampton.

[64] Fifth, the respondent Sun Life Assurance Company of Canada ("Sun Life") held a first mortgage on Everingham's property at 5 Tilbury Court in Brampton. The mortgage was registered in January 1992 and secured an original loan of $2,250,000. Everingham defaulted on the mortgage in January 1996. Sun Life took possession on April 25, 1997 and changed the locks. At this juncture, Sun Life had no security interest in the personal property at Everingham's premises.

[65] Sixth, as expressed by Rosenberg J.A., "a critical order in the appeal is the order made by MacKenzie J. on June 4, 1997." Moreover, "the fifth paragraph of the Order is the most important" because it purported to create a charging order over personal property in favour of Sun Life and against both Everingham and Royal Spas. The relevant portion of para. 5 of the order is:

5. THIS COURT ORDERS . . . that any arrears in payment of occupancy costs shall be a charge on the said equipment, inventory and trade chattels in the same manner and to the same extent as a landlord's distress . . .

[66] Seventh, as can be seen from the relevant dates set out above, Bulut's and 123 Co.'s security interests under the PPSA arose before Sun Life's security interest created by court order (April 20 and May 23 versus June 4, 1997).

[67] Eighth, for reasons explained by Rosenberg J.A. and MacKenzie J., neither the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA") nor the PPSA resolves the question of whose security interests have priority.

[68] I turn now to where my analysis diverges from that of Rosenberg J.A.

[69] After MacKenzie J. made his order on June 4, 1997, the financial situations at Everingham and Royal Spas became increasingly gloomy. Everingham became bankrupt on October 17, 1997. Royal Spas followed suit on March 31, 1998.

[70] The question then arose: which security interest had priority, Sun Life's or Bulut's and 123 Co.'s? On April 1, 1998, Bulut and 123 Co. brought a motion for a declaration that their security interests had priority over Sun Life's. On April 2, 1998, Sun Life brought a "mirror" motion seeking a declaration in its favour.

[71] MacKenzie J. heard the motions and decided in favour of Sun Life. His reasons on the Sun Life-Bulut priority question (May 14, 1998) were sparse: "Since Sun Life is outside the ambit of both the BIA and the PPSA regimes in terms of priorities, Sun Life has priority over Bulut in satisfying the charge or lien in its favour with respect to occupancy costs."

[72] However, the motions judge provided more elaborate reasons when he analyzed the Sun Life-123 Co. priority question (June 3, 1998). In these reasons, he found in favour of Sun Life on two bases -- first, reasoning by analogy from this court's decision in Leavere v. Port Colborne (City) (1995), 1995 715 (ON CA), 22 O.R. (3d) 44, 122 D.L.R. (4th) 200; second, applying equitable principles to require 123 Co. (and, by parity of reasoning, Bulut) to pay occupancy costs before collecting under its (their) security interest(s). In broad terms, and acknowledging that there is an overlap between the two reasons, I would describe the motions judge's first reason as dealing with how Sun Life could be given priority, and his second reason as explaining why Sun Life should be given priority.

[73] On the question of "how", the starting point, as the motions judge recognized, was that the priorities regimes in the BIA and PPSA did not apply. Accordingly, the priorities issue had to be resolved by the application of common law principles.

[74] Prima facie, the common law principle that applies to priorities between secured interests is the "first in time" rule: see McLaren, Secured Transactions in Personal Property in Canada, 2nd ed., looseleaf (Toronto: Carswell, 1989) at p. 5-202.

[75] However, the "first in time" rule is not an absolute rule. It can be overridden by statute: see McLaren, Secured Transactions in Personal Property in Canada, at p. 5-202. An example is s. 400(2)(c)(ii) of the Municipal Act, R.S.O. 1990, c. M.45, which allows municipalities to distrain upon the chattels of persons who have not paid municipal taxes even though the chattels are subject to security interests which arose before the tax liability: see Leavere v. Port Colborne (City), supra.

[76] A second line of exception to the "first in time" rule is provided by equity. In Spence on the Equitable Jurisdiction of the Court of Chancery, the author identified the "first in time" rule as "the general rule" (vol. 2, at p. 727). However, he stated that the rule was qualified by the notion of "the better equity" and that "the circumstance of priority of time alone does not give a better equity" (vol. 2, at p. 737).

[77] In Snell's Principles of Equity, 29th ed. by P.V. Baker and P. St. J. Langan (London: Sweet & Maxwell, 1990) the authors explain (at p. 57) the circumstances in which the holder of a prima facie priority can lose it:

A person with a prima facie claim to priority for his interest may lose it through his own misconduct. The owner of a legal interest may be postponed to a subsequent equitable interest owing to his fraud, or by estoppel, or through gross negligence; and the owner of a prior equitable interest may be postponed if his conduct is inequitable.

[78] The motions judge recognized the "first in time" rule. However, he determined that Sun Life had a better equity. The mechanism he chose to give effect to this determination was reasoning by analogy from this court's decision in Leavere v. Port Colborne (City). He said that what the statute did in Leavere he could do by "rule of law" -- i.e., by judicial application of common law and equitable principles -- in this litigation. Since the priority issue had to be determined outside the framework of the BIA and the PPSA, I can find no fault in the motions judge's approach.

[79] Turning to the question of "why" Sun Life's interest was entitled to be given priority over Bulut's and 123's interests, the motions judge provided a clear reason:

. . . the evidence establishes a continuing and concerted course of action between and among Mr. N. Bulut, Mr. S. Bulut and their respective corporations, including 123 Co. herein, in delaying the payment of occupancy costs relating to personal property of Royal Spas and Everingham in respect of which Messrs. Bulut and their respective corporations now claim an interest as second parties, and which personal property Sun Life has effectively warehoused for one year at a cost of $1,305.00 per day.

[80] In my view, the motions judge's reasons for applying equitable principles to give Sun Life priority over Bulut and 123 Co. are sound. The record before the motions judge amply supports his analysis and conclusion. I will mention just a few of the factors that, in my view, suggest that the motions judge was correct.

[81] First, the Bulut family were the principals and directing minds of Everingham, Royal Spas and 123 Co. One does not need to pierce corporate veils to agree with the motions judge's description of "Mr. N. Bulut, Mr. S. Bulut and their respective corporations."

[82] Second, Everingham had a huge mortgage from Sun Life. It defaulted on this mortgage in January 1996. Bulut acquired the major part of his security interest in Everingham (approximately $550,000 of a total interest of $650,000) after Everingham's default on the mortgage. Similarly, 123 Co. acquired its security interest in Royal Spas (approximately $1.5 million) in May 1997. Royal Spas was a tenant of Everingham. It is obvious that Bulut and 123 Co. acquired their security interests with full knowledge that Everingham and Royal Spas were in serious financial trouble, especially vis-à- vis Sun Life.

[83] Third, Sun Life's security interest in the personal property at Everingham's premises was obtained in a court proceeding launched by Everingham and Royal Spas in which they sought to obtain their personal property (i.e., equipment and inventory) from Everingham's premises. On May 1, 1997, Nicholas Bulut, the President of both Everingham and Royal Spas, swore an affidavit in support of the motion. At the time Bulut was a secured creditor of both Everingham and Royal Spas. In his affidavit, Bulut spoke on behalf of Everingham and Royal Spas. However, importantly, he also spoke explicitly in his capacity as holder of security interests in the personal property of Everingham and Royal Spas. Bulut stated:

15. . . . The items of personal property are owned by Everingham and Royal Spas and Everingham and Royal Spas are lawfully entitled to possession of such property. The items of personal property belonging to these corporations are themselves secured under a General Security Agreement. I, Nicholas Bulut, hold the security interest in these items of personal property belonging to Everingham and Royal Spas. I am content, Royal Spas is content and Everingham [See Note 5 at end of document] is content if the items of personal property simply are released to all three of us and we can sort out our respective interests in the personal property.

[84] In other words, Bulut was openly representing not only Everingham and Royal Spas, but also himself in his capacity as holder of security interests in the personal property of Everingham and Royal Spas. He was seeking relief from the court in both of these capacities.

[85] Fourth, the motions judge provided Everingham, Royal Spas and Bulut with the relief they sought, provided Everingham and Royal Spas paid occupancy costs of $1,305 per day from April 25, 1997 to the date on which the personal property was removed. This order was not appealed. Yet, almost immediately, the companies stopped making occupancy cost payments. Further, the companies made no serious efforts to remove their personal property. In short, the companies and Bulut (explicitly) and 123 Co. (by strong and fair inference) sought relief from the court, obtained it, did not appeal the court order -- and then promptly ignored it.

[86] For these reasons, I agree with the motions judge that Bulut's and 123 Co.'s conduct disentitles them to obtain a priority over Sun Life. In the language of Snell's Principles of Equity, supra, their misconduct estops them from claiming a priority.

[87] I conclude with a final observation. It is true, as Rosenberg J.A. notes, that the motions judge's orders resemble the doctrine of equitable subordination and that the Supreme Court of Canada and this court have expressly left open the question of whether this doctrine should be introduced into Canadian law: see Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 1992 49 (SCC), [1992] 3 S.C.R. 558, 97 D.L.R. (4th) 385; and Olympia & York Developments Ltd. v. Royal Trust Co. (1993), 1993 8578 (ON CA), 14 O.R. (3d) 1, 103 D.L.R. (4th) 129 (C.A.).

[88] There is a crucial difference between those cases and this appeal. In those cases, the issue before the courts was whether the doctrine of equitable subordination should be introduced into statutory regimes for determining priorities between creditors. There is, as the courts recognized, a serious issue as to whether courts should modify explicit priorities created by statute, even if the modification arose through the application of equitable principles.

[89] The situation in the present appeal is entirely different. No statutory regime, including the BIA and the PPSA, determines the priority issue as between Sun Life and Bulut and 123 Co. That issue must be determined under common law principles. In that context, there is nothing wrong with a motions judge doing what common law judges have done for centuries, namely considering common law and equitable principles together in an attempt to reach a fair result. That is what the motions judge did on these motions.

Disposition

[90] For the above reasons, I would dismiss the appeals. I would award the respondent its costs of the appeal.

Appeal dismissed.

Notes

Note 1: In addition to Re Sara, see JJ. H. McLean Co. v. Newton (1926), 1926 444 (MB CA), 8 C.B.R. 61 (Man. C.A.).

Note 2: See Birch (in trust) v. Lacasse Enterprises Inc. (1991), 1991 7152 (ON SC), 2 O.R. (3d) 465, 4 C.B.R. (3d) 256 (Gen. Div.).

Note 3: With the consent of the trustee, Bulut brought an application for an extension of time to perfect the appeal. That application was dismissed.

Note 4: In MacMillan Bloedel Ltd. v. Simpson, 1995 57 (SCC), [1995] 4 S.C.R. 725 at para. 29, 130 D.L.R. (4th) 385 Lamer C.J.C. described this as the "seminal article on the core or inherent jurisdiction of superior courts".

Note 5: 123 Co. is not mentioned in this paragraph. That is because on May 1, 1997, when Bulut swore his affidavit, Bulut held the security interest in the personal property of both Everingham and Royal Spas. On May 23, he assigned his security interest in Royal Spas to 123 Co., another family company. In my view, it is no stretch to infer that what Bulut said qua secured creditor on May 1 could be imputed to 123 Co. three weeks later.