DATE: 20010228

DOCKET: C29472

COURT OF APPEAL FOR ONTARIO

AUSTIN, LASKIN and SIMMONS JJ.A.

BETWEEN:

THE TORONTO-DOMINION BANK

John A. Campion,

Michael J. MacNaughton and

Moving Party/Respondent

Carole J. Hunter

(Appellant)

for the appellant

Toronto Dominion Bank

• and -

USARCO LIMITED AND

FRANK LEVY

Neil C. Saxe

for the respondent

Defendants

Coopers & Lybrand Limited

- and -

THE CORPORATION OF THE CITY

F. Paul Morrison and

OF HAMILTON

David E. Leonard

for the respondent

Moving Party/Respondent

Corporation of the City of Hamilton

(Respondent in Appeal)

- and -

COOPERS & LYBRAND LIMITED

Moving Party/Respondent

(Respondent in appeal)

- and -

THE MINISTRY OF LABOUR

Respondent

Heard: October 11 and 12, 2000

(Respondent in appeal)

On appeal from the judgment of Justice Alvin Rosenberg dated June 2, 1997.

AUSTIN J.A.:

[1] The Toronto-Dominion Bank (“the Bank”) appeals from the decision of Rosenberg J. made June 2, 1997, that Coopers & Lybrand Limited (the “Receiver”) should have paid to the Corporation of the City of Hamilton (the “City”) the municipal taxes on the property of Usarco Limited (“Usarco”) and Frank Levy (“Levy”) in receivership as they accrued due.

[2] From the Bank’s perspective, the issue is whether the claim of a fully secured creditor ranks ahead of a municipality’s claim for realty taxes on a receivership. The City’s position is that it had priority and that the Receiver was wrong in not paying the taxes as they accrued due. Rosenberg J. agreed with the City’s position and ordered the Bank to refund the money received during the receivership to the Receiver. The Receiver was also ordered to pay to the City all the money it had realized with the exception of its fees and disbursements, including all the money refunded to it by the Bank. Rosenberg J.’s reasons are reported at (1997), 1997 CanLII 12417 (ON SC), 50 C.BR. (3d) 127 and at 40 M.P.L.R. (2d) 293 (Ont. Gen. Div). I agree with his reasons and his conclusion. My reasons follow.

[3] The matters in issue involve the duty of a court-appointed receiver and the interpretation of certain sections of the Municipal Act R.S.O. 1990 c. M.45 (the “Act”), insofar as they bear on the issue of priority. The facts are set out fully in the reasons of Rosenberg J. A summary will suffice for the purposes of the appeal.

[4] Levy was a principal of Usarco. Usarco was a scrap metal dealer and processor for over 40 years. It operated on five properties in Hamilton, Ontario, some registered in its name and others in the name of Levy. All or some of these lands were believed to be highly contaminated because of the operations carried out on them.

[5] Levy and Usarco had been dealing with the Bank for about 40 years. In 1989, Usarco’s business was failing and Usarco owed the Bank about $18,000,000. As security for Usarco’s obligations the Bank held, among other security, a registered general security agreement dated December 22, 1987, charging all of Usarco’s property, a registered $3,000,000 demand debenture charging all of Usarco’s property, a registered general assignment of book debts, mortgages on 371 Wellington Street North and 735 Strathearne Avenue and guarantees of Usarco’s debts to the Bank provided by Levy, secured by mortgages upon 363 Wellington Street, 675 Strathearne Avenue and 725 Strathearne Avenue, all in Hamilton.

[6] The Receiver was appointed by the order of Borins J. on October 11, 1990. The Receiver was not to go into possession or to manage or continue the business because of the contamination. The Receiver’s function was “to sell, lease, transfer or otherwise dispose of” the assets. Those assets consisted of the five properties and the buildings, contents and equipment on them. The Receiver was granted the power and authority but not the obligation to make payments to persons having prior mortgages, charges or encumbrances upon the assets and to pay any debts, charges or expenses of Usarco and Levy considered “necessary and desirable for the purposes of carrying out this Order.” Usarco and Levy remained the owners of the assets. Any tenants were to pay rents and arrears to the Receiver, but the Receiver was not obligated to fulfil any of the obligations of Usarco or Levy as landlords. No proceedings were to be taken or continued against the Receiver without leave of the court.

[7] The Receiver actively carried on the receivership from the date of the order until 1996. By that time some of the property had been sold to Archibald Leach (“Leach”) and the receivership had been discontinued with respect to the balance of the assets in light of the fact that they were unsaleable. The Receiver and the Bank were in the process of winding up the receivership when the City brought a motion seeking to recover municipal realty taxes.

[8] During the receivership the Receiver dealt with the Ministry of Labour respecting claims of former employees, the Ministry of the Environment respecting contamination of the premises and the City with respect to the removal of chemicals from the lands in question into the city at large. The Receiver also dealt with Dofasco with respect to a part of the premises leased to Dofasco.

[9] During the receivership, the Receiver recorded receipts of $3,606,611.48 and disbursements of $2,561,238.30. Among the receipts was a payment by Dofasco of $115,245.23 in February 1993, for the years 1990, 1991 and 1992 in accordance with a lease requirement that the tenant’s share of the municipal realty taxes be paid to the landlord.

[10] Included in the disbursements made by the Receiver were the following:

Security

$267,638.39

Utilities

$120,687.06

Legal Fees

$110,756.34

Telephone

$ 4,408.66

Receiver’s Fees

$467,374.52

Ministry of Labour

$509,557.14

The $115,245.23 paid by Dofasco to the Receiver on account of taxes was not paid over to the City.

[11] As is the custom, the Receiver’s activities were periodically reported to the court. These reports, some lengthy and detailed, were dated March 13 and July 14, 1992, November 15 and December 3, 1993, February 11 and August 10, 1994, September 28, 1995, and March 15 and October 30, 1996. They were presented to the court on or about their respective dates, each accompanied by a notice of motion requesting a particular order or orders, as for instance for the approval of a sale.

[12] Although Dofasco’s payment to the Receiver on account of taxes was made in February 1993, it does not appear in the lists of disbursements in the reports until October 1996. Presumably it was included under “Rental of Premises” in the earlier reports. No explanation for this accounting was provided. There is no reference to the payment of municipal realty taxes in any of the lists of disbursements in the reports.

[13] As of October 11, 1990, $186,002.93 was owing on account of such taxes. Nothing was paid on that account by the Receiver. As a consequence, by January 15, 1997, $2,588,159 was owing for taxes, penalties and interest. No issue was raised with respect to the amounts of these debts.

[14] The evidence before the court does not indicate when it was decided not to pay these taxes nor by whom or why. Borden & Elliot were the Receiver’s solicitors. In June, 1992 they provided the Receiver with an opinion letter as to the Bank’s priority over all other claims. “Unregistered Rights and Liens” were expressly excluded from that opinion. The letter dealt with municipal realty taxes at length. They were described as constituting a “special lien against the land in priority to all other claims except claims by the Crown”. It was pointed out that notice of the lien did not require registration. As to s. 384 of the Act, which deals with leases, the letter stated that “[t]his provision takes effect upon the tenant receiving written notice from the “collector” or the treasurer of the municipality” and would not apply otherwise.

[15] The only reflection of this opinion letter in the reports to the court is in the Report dated July 14, 1992, paragraph 8 of which states that:

The Receiver has obtained an opinion from Messrs. Borden & Elliot that, subject to certain qualifications, the Security held by the Bank charges the Proceeds in priority to the claims of third parties.

[16] That Report proposed that from its excess receipts, the Receiver should pay to the Bank $900,000 subject to agreement by the Bank to refund to the Receiver as much as might later be revealed to be required to satisfy the costs of the Receivership or a claim ranking in priority to the security held by the Bank. There was no indication in that Report that substantial municipal taxes were owing and were not being paid. Nor is there any indication that any consideration was given to the propriety or otherwise of non-payment of municipal taxes or to the question whether the court should be advised of such non-payment and direction sought.

[17] In the first Report dated March 13, 1992, it was noted that a cash offer of $525,000 which had been made for the land and equipment “was withdrawn upon the offeror learning of the property taxes payable in respect of the Wellington Street property”.

[18] In the same Report, there is a reference to the Receiver being required to pay the Minister of Labour a sum in excess of $500,000 on account of wages, vacation pay, termination pay and severance pay of former employees. An order to this effect was made by Farley J. on August 2, 1991.

[19] The Receiver’s statement of receipts and disbursements to September 30, 1993, includes the following disbursements:

Pension Plan

$509,557.14

Receiver's Fees

$387,965.95

Security Charges

$253,201.10

Utilities

$120,687.06

There is no mention of municipal taxes.

[20] The Report of November 15, 1993, indicated that under the agreement with Leach the purchaser would be responsible for the settlement of all property taxes and that, based on information supplied by the City, the property tax arrears were approximately $260,000. The same report indicated a net excess of receipts over disbursements of $1,322,988.64, $900,000 of which had already been remitted to the Bank.

[21] In dealing with the sale to Leach, the Report of December 3, 1993, states that the agreement is “conditional upon Leach making an arrangement with the City of Hamilton with respect to outstanding tax arrears”.

[22] The motion which accompanied the Report of December 3, 1993, was made on notice to the City. This was the first notice the City had of the receivership or of any of the proceedings before the court. The City was not given notice because of tax arrears owing to the City, but because the City claimed the Receiver was responsible for certain costs incurred when chemicals from the property were spread within the City and a “state of emergency” was declared. The Receiver’s response was to send the City a copy of the original receiving order referring:

in particular to paragraphs 1 and 2 of that Order which directs the Receiver not to and deems the Receiver not to have possession, management or control of Usarco’s property . . . .

[23] The Receiver’s next Report was dated February 11, 1994. It noted that the Receiver’s motion in respect of the partial termination of the receivership had been adjourned in December 1993, as a consequence of concerns raised by the Ministry of the Environment. These concerns were resolved through the sale by the Receiver of certain of Usarco’s equipment for $25,000 and the application of that sum to environmental assessment of the Wellington Street property. In paragraphs 8 and 13 of this Report the Receiver refers to the Bank as “the only secured creditor of Usarco”. The result of the Receiver’s motion for approval of the Report of February 11, 1994, was an order of Farley J. dated February 18, 1994, reducing the receivership by deleting the unsold properties from it. The receivership was continued with respect to the lands still in the process of being sold to Leach.

[24] The Report of March 15, 1996, advised that the sale to Leach had been completed. The Receiver’s statement of receipts and disbursements showed that it expected a net receipt of $375,000 from the sale to Leach after commissions and expenses. Leach was responsible for and had assumed the tax arrears on the property purchased. He had not paid the taxes as of the date of the hearing before Rosenberg J. Leach provided a limited indemnity to the Receiver and the Bank in respect of any claims that might be brought against them in regard to realty taxes.

[25] The Bank’s position is that there was a contest as to entitlement from the outset and that the Receiver’s duty in the circumstances was to recognize this, to refrain from paying the municipal taxes and to wait until the court determined priorities, if necessary. The Bank argues that this approach is supported by the original order of October 11, 1990, which authorizes and empowers the Receiver to pay bills, including encumbrances, but does not order the Receiver to do so. The City’s position is that the Receiver should have paid the municipal taxes as they became due. Had the Receiver done so, the total amount paid to the City would have been approximately $1,260,000, leaving about $600,000 available for distribution to the Bank.

[26] In his decision, after setting out the facts, Rosenberg J. dealt with the issues as follows:

Without criticizing the Receiver or Mr. MacNaughton as counsel for the Bank and sometimes counsel for the Receiver, the receivership has been conducted as if it were a private receivership by the Receiver for the Bank rather than a court appointed receiver. Even the indemnity from Leach with regard to the realty taxes is given both to the Receiver and the Bank. Mr. MacNaughton on behalf of the Bank argued that the position is analogous to a second mortgagee serving notice on tenants to attorn the rents to the second mortgagee. The funds that the second mortgagee thus realizes can be applied on account of the second mortgage until such time as the first mortgagee takes steps to protect its position. This analogy does not apply to the present situation. The City is prevented from taking any steps because of the order of this court. Even more significant is the duty owed by the Receiver to represent all of the creditors (at para 31).

[27] After reference to the law, Rosenberg J., at paras 33, 36-40, continued as follows:

At the time of the appointment of the Receiver the total tax arrears were approximately $186,000. Those tax arrears have increased and the latest statement shows the total tax arrears to be $2,588,000. In my view the Receiver would not be acting in a meticulously correct manner if during the term of receivership the Receiver realized some $1,900,000 while paying nothing on account of taxes and allowing tax arrears to accumulate and increase in the amount of some $2,500,000. The Receiver has not even paid on account of realty taxes the amount paid to the Receiver under the leases as contribution to realty taxes.

One other factor that makes this application unusual but reflects on the equities between the parties is the concern about the environment. The Bank and the Receiver were careful to make certain that the order of Borins J. did not make either the Bank or the Receiver subject to the strict requirements that might be ordered by the Ministry of the Environment with regard to cleaning up any pollution of the property. These requirements can be most onerous. It was prudent of the Bank and the Receiver to have the appointment in the nature of a liquidator and not as an occupier or owner. However if the City attempted to sell and if a purchaser were unable to be found the city would become the owner and subject to those onerous requirements. This is particularly relevant in the present case since it is already known from the Receiver’s reports that there are no purchasers that have been located and likely none that can be located for the properties in question. It is also known that there maybe serious environmental problems with the properties.

The Municipal Act R.S.O. 1990, c.M.45, section 400 gives the City recourse to chattels owned by the taxpayer and similarly other sections of the Act allow the City to collect rentals.

It is not necessary for the Receiver to proceed under these sections of the Municipal Act on behalf of the City because the Court has already given the Receiver all rights to dispose of the chattels and to collect the rents. Accordingly it is not appropriate to deprive the City of the rights to proceeds of the sale of the chattels or the collection of rents on the ground that it could have taken steps to collect them and has not.

For all of the foregoing reasons and in the peculiar circumstances of this case, it is appropriate that the net proceeds realized by the Receiver (especially in this case since they are less than the taxes that accrued during the receivership) should be paid to the City. Accordingly the Bank will pay back to the Receiver the sum of $900,000 paid to it together with interest at the prime bank rate from the time of receipt to the time of repayment to the Receiver and all of the net funds realized by the Receiver shall be paid to the City on account of taxes. The City shall also be entitled to its costs of these proceedings against the Bank after assessment thereof on a party and party basis.

I wish to make it abundantly clear that in so deciding I am not criticising the actions of the Receiver or Mr. MacNaughton. The situation is an unusual one and neither the Receiver nor Mr. MacNaughton could be expected to predict that the City was entitled to priority for all monies realized.

[28] I turn now to consider the law. As I do so, it is useful to repeat what was said at the outset of these reasons, namely that from the perspective of the appellant Bank, the issue in this appeal is whether the claim of a secured creditor on a receivership ranks ahead of a claim for municipal realty taxes. From the perspective of the respondent City, on the other hand, the issue is whether, during a receivership, the receiver is bound to pay such taxes as they become due.

[29] A useful place to start (as Rosenberg J. did) is with the statement of Laycraft C.J.A. in Panamericana de Bienes y Servicios, S.A. v. Northern Badger Oil & Gas Ltd. (1991), 1991 ABCA 181, 81 D.L.R. (4th) 280 at 292, 293 and 294; Supplementary Reasons at 1991 ABCA 336, 86 D.L.R. (4th) 567 leave to appeal refused 86 D.L.R. (4th) viii. (Alta. C.A.):

A receiver appointed by the court must act fairly and honestly as a fiduciary on behalf of all parties with an interest in the debtor's property and undertaking. The receiver is not the agent of the debtor or the creditor or of any other party, but has the duty of care, supervision and control which a reasonable person would exercise in the circumstances. The receiver may be liable for failure to exercise an appropriate standard of care.

A further factor affecting the obligation of a court-appointed receiver is the receiver's status as an officer of the court; the standard required because of that status is one of meticulous correctness. In Alta. Treasury Branches v. Invictus Fin. Corp. (1986), 1986 CanLII 1601 (AB KB), 42 Alta. L.R. (2d) 181, 68 A.R. 207 (Q.B.) Stratton J. (as he then was) said that the Receiver's obligations “reach further than merely acting honestly”. He quoted with approval the statement of Wilson J. in Fotti v. 777 Management Inc. (1981), 1981 CanLII 3423 (MB KB), 2 P.P.S.A.C. 32 at p. 37, [1981] 5 W.W.R. 48, 9 Man. R. (2d) 142 (Q.B.):

… the receiver is an officer of the Court and in his discharge of that office he may not, in the name of the Court, lend his power to defeat the proper claims of those on whose behalf those powers are exercised. Clothed as he is with the mantle of this Court, his duties are to be approached not as the mere agent of the debenture holder, but as trustee for all parties interested in the fund of which he stands possessed. [Emphasis added.]

The same concern for proper conduct by the court's appointed officer may be seen in the judgment of the Saskatchewan Court of Appeal in Canadian Commercial Bank v. Simmons Drilling Ltd. (1989), 1989 CanLII 4785 (SK CA), 62 D.L.R. (4th) 243, 76 C.B.R. (N.S.) 241, 35 C.L.R. 126 … per Sherstobitoff J.A. at pp. 250-51:

The receiver, and through it the bank, must bear responsibility for the consequences of the failure to act with sufficient diligence to discover the claims within a reasonable time, thereby permitting lapse of the limitation period.

The bank now seeks to benefit from that default and the receiver supports its position. That position is untenable. While it may not be improper for a private debtor to withhold payment of a debt due and owing, whether deliberately or by neglect or oversight, and thereby benefit from an intervening limitation period, the same is not true of a receiver, for he is an officer of the court. The receiver's action is the action of the court and the court will not permit or approve any action on the part of its officer which has the effect of changing the rights of competing creditors, whether deliberately or by default. [Italics in the original; underlining added.]

[30] Reference may usefully be made to Bennett on Receiverships, 2nd ed. (Toronto: Carswell, 1999), at 180-181 (footnotes omitted):

A court-appointed receiver represents neither the security holder nor the debtor. As an officer of the court, the receiver is not an agent but a principal entrusted to discharge the powers granted to the receiver bona fide. Accordingly, the receiver has a fiduciary duty to comply with such powers provided in the order and to act honestly and in the best interests of all interested parties including the debtor. The receiver's primary duty is to account for the assets under the receiver's control and in the receiver's possession. This duty is owed to the court and to all persons having an interest in the debtor's assets, including the debtor and shareholders where the debtor is a corporation. As a court officer, the receiver is put in to discharge the duties prescribed in the order or in any subsequent order and is afforded protection on any motion for advice and directions. The receiver has a duty to make candid and full disclosure to the court including disclosing not only facts favourable to pending applications, but also facts that are unfavourable.

In setting the standard of care, the court-appointed receiver must act with meticulous correctness, but not to a standard of perfection. As a fiduciary, the receiver owes a duty to make full disclosure of information to all interested persons. … The court-appointed receiver owes no duty to any individual creditor who may attempt to interfere in the receivership. [Emphasis added.]

[31] Perhaps of limited significance here is the duty of a court-appointed receiver to the debtor and its shareholders. It would normally be a matter of some concern to a debtor and shareholders if the conduct of a receiver included the non-payment of taxes and the incurring of penalties and interest, thereby reducing the recovery or the chance of recovery of the owner. Barring extraordinary circumstances, such events should be fully disclosed to the court and the advice and instruction of the court sought.

[32] The priority of a municipality with respect to municipal taxes is set out in the Act., Section 382 deals with realty, s. 384 deals with tenants and s. 400 with personalty. The relevant parts of those sections read as follows:

382. The taxes due upon any land with costs may be recovered with interest as a debt due to the municipality from the owner or tenant originally assessed therefor and from any subsequent owner of the whole or any part thereof, saving that person’s recourse against any other person, and are a special lien on the land in priority to every claim, privilege, lien or encumbrance of every person except the Crown, and the lien and its priority are not lost or impaired by any neglect, omission or error of the municipality or of any agent, or officer, or by want of registration. [Emphasis added.]

383. (1) Where taxes are due upon any land occupied by a tenant, the collector or, after the roll has been returned, the treasurer, may give the tenant notice in writing requiring the tenant to pay such collector or treasurer the rent of the premises as it becomes due from time to time to the amount of the taxes due and unpaid and costs, and the collector or treasurer has the same authority as the landlord of the premises would have to collect the rent by distress or otherwise to the amount of the unpaid taxes and costs.

(2) Nothing in this section prevents or impairs any other remedy for the recovery of the taxes or any portion thereof from the tenant or from any other person liable therefor.

400. (1) Subject to section 399, if taxes that are a lien on land remain unpaid for twenty-one days after demand or notice made or given under section 392, 395 or 399 or, where a longer period has been authorized under subsection 399(6) such taxes remain unpaid at the expiry of that period, the collector or, where there is no collector, the treasurer may alone or by an agent, subject to the exemptions and provisos mentioned in this section, levy them with costs by distress,

(a) upon the goods and chattels, wherever found within the county in which the municipality lies, belonging to or in the possession of the owner or tenant of the land whose name appears upon the collector’s roll (the owner or the tenant in this section is called “the person taxed”);

(b) upon the interest of the person taxed in any goods on the land, including an interest in any goods to the possession of which the person is entitled under a contract for purchase or a contract by which the person may or is to become the owner thereof upon performance of any condition;

(c) upon the goods and chattels of the owner of the land found thereon, though the owner’s name does not appear upon the roll;

(d) upon any goods and chattels on the land, where title to such goods and chattel is claimed,

(i) by virtue of an execution against the person taxed or against the owner, though the person’s name does not appear on the roll,

(ii) by purchase, gift, transfer or assignment from the person taxed, or from such owner, whether absolute or in trust, or by way of mortgage, or otherwise,

(iii) by the spouse, daughter, son, daughter-in-law or son-in-law of the person taxed, or of such owner, or by any of his or her relatives, in case such relative lives on the land as a member of the family, or

(iv) by virtue of any assignment or transfer made for the purpose of defeating distress,

provided that, where the person taxed or such owner is not in possession, goods and chattels on the land not belonging to the person taxed or to such owner are not subject to seizure, and the possession by the tenant of such goods and chattels on the premises is sufficient proof, in the absence of evidence to the contrary, that they belong to the tenant; provided also that no distress shall be made upon the goods and chattels of a tenant for any taxes not originally assessed against him, her or it as tenant; provided also that in cities and towns no distress for taxes in respect of vacant land shall be made upon goods and chattels of the owner except upon the land.

(11) Where personal property liable to seizure for taxes as hereinbefore provided is under seizure or attachment or has been seized by the sheriff or by a bailiff of any court or is claimed by or in possession of any assignee for the benefit of creditors or any liquidator, trustee or authorized trustee in bankruptcy or where such property has been converted into cash and is undistributed, it is sufficient for the tax collector to give to the sheriff, bailiff, assignee or liquidator or trustee or authorized trustee in bankruptcy notice of the amount due for taxes, and in such case the sheriff, bailiff, assignee or liquidator or trustee or authorized trustee in bankruptcy shall pay the amount to the collector in preference and priority to any other and all other fees, charges, liens or claims.

[33] Courts have long recognized the importance of taxation to society. In Re Decker’s Delicatessen (1924), 1924 CanLII 413 (ON SC), 56 O.L.R. 140 (S.C.), Fisher J., in the course of interpreting the predecessor to s. 382 of the Act, made the following observation at 142:

Governments and municipalities must secure revenue, otherwise they could not function; money must be secured, and taxation is the method adopted to secure it; and transactions between individuals must, therefore, unless excepted by statute, be subordinated to that of the Government or municipality.

[34] Also on the subject of priority, he said at the same page:

It also seems to me that banks, loan companies, and persons engaged in the lending of money must have in mind, when valuing the security upon which they make a loan, to provide for taxes due to Dominion and Provincial Governments, or to a municipality, as being a prior charge or encumbrance in the event of insolvency.

[35] More recently, MacPherson J. in Royal Bank of Canada v. Lawton Development Inc. (1994), 19 M.P.L.R. (2d) 170 (Ont. Gen. Div.) noted at 176 that s. 382 of the Act and its related provisions deserved of broad construction. As he explained:

In recent years, Canadian courts have recognized that taxes serve important social purposes and are, therefore, entitled to judicial respect provided they are imposed in a clear fashion by a proper legislative body.

MacPherson J. also commented on the importance of property taxes at p. 175:

It seems obvious that if a taxpayer owes a $1,000 municipal tax on January 1, 1994, and does not pay it, then the municipality is deprived of the use of that money. It will not have the money, to which it is legally entitled and on which it has counted, available to support the education, recreation, housing, social support and other programmes which it is required to provide. . . .

[36] Inherent in the Bank’s appeal is the proposition that the Receiver had no duty to keep current and to pay the arrears of property taxes owed by Usarco and Levy out of the proceeds of the receivership. In my view, this proposition is wrong. It fails to recognize the principles enunciated in Re Decker’s Delicatessen, supra. Further, it has been specifically rejected in numerous cases.

[37] In Royal Bank v. Lawton Development Inc., supra, a court-appointed receiver sought the court’s advice regarding the payment of certain moneys owed to the municipality. While the receiver did not question that it had an obligation to pay the accrued property taxes, it did question its obligation to pay, inter alia, the penalties, interest and costs assessed by the municipality. MacPherson J. specifically endorsed the receiver’s recognition of its obligation to pay the accrued property taxes at p. 173 as follows:

The Royal Bank does not challenge the priority of the municipal tax over its security, almost certainly because of the clear language of s. 382 of the Municipal Act. . .

MacPherson J. continued at pp. 174-175:

… the status and recovery of [a municipal] tax are governed by s. 382 ... [The provisions of s. 382] make it clear that a tax due upon land ... has priority over all other forms of security, except security held by the Crown. This conclusion has been reached by several judges of the Ontario courts in cases raising the relationship between a variety of municipal taxes and many different encumbrances held by private parties … It follows that the security held by the Royal Bank in the instant case does not take priority over the money owed to the City of Toronto . . .

In the end, MacPherson J. had little difficulty deciding that the priority granted to the City of Toronto under s. 382 of the Act extended to interest, penalties and certain costs.

[38] In Hamilton Wentworth Credit Union Ltd. v. Courtcliffe Parks Ltd. (1995), 1995 CanLII 7059 (ON SC), 28 M.P.L.R. (2d) 59 (Ont. Gen. Div.) Blair J. observed that the receiver had not made tax payments to the municipality on an ongoing basis, nor had it made any arrangements specifically providing for such payment. In contrast, however, the receiver had made other payments, including legal fees, receivership fees and utilities. When the municipality proposed selling the property pursuant to its powers under the Municipal Tax Sales Act, R.S.O. 1990, c. M.60, it appeared there would be insufficient proceeds to pay both the property tax arrears and the receiver’s own fees and disbursements. In denying the receiver priority over the municipality, Blair J. noted at p. 63:

It is the failure [by the receiver] to keep taxes current that has led to the present predicament.

Blair J. also stated at pp. 72-73:

Accordingly, I am of the opinion that the statutory scheme enacted through the Municipal Act and the Municipal Tax Sales Act for the imposition and collection of municipal property taxes precludes an order granting a receiver and manager priority over the Municipality for the receiver and manager’s fees and disbursements, regardless of whether those fees and disbursements were incurred for the necessary preservation or improvement and realization of the property on behalf of all creditors.

While this approach denies a receiver and manager a “super priority” with respect to municipal property taxes, it does not, in my view, alter what has traditionally been the case – and the understanding in the industry – concerning the payment of such taxes. Such taxes have traditionally been considered to be part of the “necessary costs of preservation” to be paid by a receiver and manager.

[39] The City’s claim with respect to realty is quite straightforward. Section 382 puts the City’s claim ahead of all others except the Crown. As stated by Sherstobitoff J.A. in Canadian Commercial Bank, supra at p. 251, “the Court will not permit or approve any action on the part of its officer [the receiver] which has the effect of changing the rights of competing creditors . . . ” This is precisely what the City says has happened. I agree with Sherstobitoff J.A. that the court will not permit such conduct. The same result is dictated by consideration for other interested parties. Levy and Ursaco should not be prejudiced by the City’s claim increasing because of the accretion of penalties and interest.

[40] Usarco leased part of the lands in question to Dofasco. This arrangement was continued following the Receiver’s appointment. Under the lease Dofasco was responsible for taxes on that land. Dofasco paid $115,245.23 in taxes for the years 1990, 1991 and 1992 to the Receiver on or about February 15, 1993. Counsel for the Bank conceded during oral argument that this amount should have been paid over to the City on account of taxes. No similar concession was made by counsel for the Receiver.

[41] In my respectful view, that amount should have been paid to the City on account of taxes in February 1993. It is my understanding that Dofasco remained liable for the taxes on the "leased lands" which were subsequently sold to Leach. To the extent that Dofasco has paid further amounts to the Receiver on account of taxes, such amounts should have been and must now be paid over to the City.

[42] Personalty is dealt with under s. 400 of the Act. The Bank advances many reasons why the City has no entitlement to personalty or its proceeds. First, the Bank argues in its factum that the "goods and chattels" the City was entitled to pursuant to s. 400(1) did not include such items as Usarco's receivables, rent and like matters. I understood this argument respecting receivables was withdrawn during oral argument.

[43] The Bank then argued that the City was further limited to applying the proceeds of the sale of personalty on a particular lot to the realty taxes on that lot. It was then argued that the City's lien respecting chattels did not arise until after distraint, and since the City never distrained any personalty, it had no lien in that regard and therefore no priority. Finally, in dealing with s. 400(11), which applies where personal property liable to seizure for taxes is in the hands of certain named persons, it was argued that as the Receiver was not one of such named persons, no relief was available to the City under s. 400(11).

[44] The City's position is that s. 400(1)(a) accords the City the right to distrain against the goods and chattels of Usarco and Levy situated anywhere in the county and that s. 400(1)(d) gives the City the right to distrain against any goods and chattels situated on the subject property, i.e. on the property on which municipal taxes remain unpaid.

[45] The City also argues that “chattels” is one of the widest words known in law in its relation to personal property (Re Goverde, 1972 CanLII 486 (ON SC), [1972] 2 O.R. 506 (H.C.J.)), therefore it encompasses all personal property including:

. . . choses in action such as money in a bank account, stocks, bonds, the right to receive money under a contract (e.g. rents under release) and debts (e.g. accounts receivable).

[46] As a result, the City submits that in the instant case the meaning of “chattels” in s. 400(1) includes all of the assets realized upon by the Receiver and the proceeds thereof. Having regard to the concession by counsel for the Bank in the course of oral argument and his choosing not to argue further as to the meaning of "chattels", no specific ruling is required in this regard.

[47] In view of the fact that s. 400(1)(a) refers to goods and chattels situated anywhere in the county and s. 400(1)(d) refers to any goods and chattels on the particular land on which taxes are unpaid, it does not seem to me that the City is limited by any geographic argument.

[48] The real argument with respect to personalty is whether s. 400(11) applies to the Receiver in this case. The relevant language of that section is set out earlier in these reasons. The Bank argues that the section has no application because a court-appointed receiver or a receiver of any kind is not included in the list of persons to whom the subsection applies. Only asheriff, bailiff of any court, assignee, liquidator, trustee or authorized trustee in bankruptcy are listed in s. 400(11). The City’s position is that the Receiver is a “trustee” within the meaning of s. 400(11).

[49] In my view, the purpose of s. 400(11) is to provide a municipality clear and simple means to assert its priority in circumstances where personalty otherwise available to be seized for taxes, has come under the control of some other person and has been or is in the process of being realized for the purpose of paying a debt or debts owed to that other person or his or her principal. In my opinion a receiver in these circumstances has no personal interest in the fund, apart from its fees and is therefore a trustee as well as a receiver. As such the Receiver comes within the ambit of the s. 400(11).

[50] The jurisprudence on this point is mixed. In Royal Bank of Canada v. 238842 Alberta Ltd. (1985), 1985 CanLII 2369 (SK CA), 57 C.B.R. (N.S.) 242 (Sask. C.A.) the contest was between a debenture holder and a municipality claiming for business taxes and water and electric charges. The receiver, whose appointment by the debenture holder had been affirmed by the court, was directed to pay into court the proceeds of his sales of the debtor’s assets. Section 384 of the Saskatchewan Urban Municipality Act, R.S.S. 978, c. U-10 was identical to our s. 400(11) for the purposes of these proceedings. At 247 and 248 Wakeling J.A. speaking for the majority said:

The section [s. 384] certainly seems to be applicable in this instance as personal property was under seizure or attachment, the property was liable to seizure for taxes (s. 379), it had been converted into cash, was held by a trustee and was undistributed when the required notice was given by the city. In such circumstances, the priority provisions underlined above are to be applied and were so applied by Noble J. in the judgment from which this appeal is taken.

The result is supported by the Ontario decision of Re Decker's Delicatessen … in which an almost identical section was interpreted to give priority to Ontario Hydro for electric rates which were acknowledged to be the equivalent of a municipal tax, rate or assessment.

[51] The reasons of the court do not reveal any discussion apart from the foregoing as to whether the receiver in that case was a "trustee" within the meaning of s. 384.

[52] In Alberta Treasury Branches v. Invictus Financial Corporation Ltd. (1986), 1986 CanLII 1601 (AB KB), 42 Alta. L.R. (2d) 181, aff'd (1986), 1986 ABCA 178, 47 Alta. L.R. (2d) 94 (C.A.) a court appointed receiver-manager sought direction as to the priority of claims as amongst a Workers’ Compensation Board claim for employer contributions, claims of two municipalities for business taxes incurred both before and after the appointment of the receiver and the claim of a debenture holder under its debenture. Stratton J. of the Court of Queen’s Bench decided that the Workers’ Compensation Board ranked first because of the language of its legislation. One of the claiming municipalities was Lloydminster, which is partly in Alberta and partly in Saskatchewan, and as a consequence is governed by a charter. Section 330 of the charter is for our purposes identical to Ontario s. 400(11). At 189 and 190 Stratton J. said:

Upon deciding that the Decker's Delicatessen and Mowbrey Stout [Royal Bank v. 238842 Alberta Ltd.] cases apply to the case at bar, it must then be determined whether, in the present case, the receiver-manager falls within any of the categories listed in s. 330 of the charter. "Receiver" is not expressly mentioned in that section.

I am of the view that a court-appointed receiver-manager would fit within the term of "trustee." A court-appointed receiver-manager is a fiduciary. His obligations reach further than merely acting honestly and in good faith. Wilson J. of the Manitoba Court of Queen's bench indicated in Fotti v. 777 Mgmt. Inc. ... that a receiver-manager appointed under a court order is:

… an officer of the court and in his discharge of that office he may not, in the name of the court, lend his power to defeat the proper claims of those on whose behalf those powers are exercised. Clothed as he is with the mantle of this court, his duties are to be approached not as the mere agent of the debenture holder, but as trustee for all parties interested in the fund of which he stands possessed.

The scope of the priority created by s. 330 of the charter is clearly limited to personal property and to the proceeds of personal property. [Emphasis added.]

[53] Thus Royal Bank v. 238842 Alberta Ltd., supra, Alberta Treasury Branches v. Invictus Financial, supra, and Fotti v. 777 Mgmt. Inc., supra, all equate a receiver with a trustee for the purposes of s. 400 (11). Bennett on Receiverships, supra, cites the Alberta Treasury Branches v. Invictus Financial, supra, as authority for the statement that “[a] court-appointed receiver is a trustee and fiduciary” (at p. 180, footnote 93).

[54] Royal Bank of Canada v. Sherkston Beaches Ltd. (1988), 70 C.B.R. (N.S.) 197 (Ont. Sup. Ct.) stands for the contrary position. This case involved a claim by a municipality for business taxes assessed against Sherkston Beaches Limited. Sherkston Beaches Limited owned and operated a recreational park and camping facility within the limits of the municipality. Royal Bank was its major creditor and on its application a receiver was appointed by the court. The operation was sold to another company but the proceeds were not sufficient to pay both the business taxes assessed and the amount owing to the bank. With respect to the application or otherwise of s. 400(11) O'Driscoll J. at 202 and 205-207, said the following:

V. ISSUES

A. Is the court-appointed receiver a "trustee or authorized trustee in bankruptcy" under the provisions of s. 387(11) [now s. 400 (11)] of the Municipal Act?

Re P.W. Ellis Co. (1929), 36 O.W.N. 202,10 C.B.R. 491 at 493-94 (S.C.; Official Referee):

Secondly, Mr. Herapath contends that if the proceeds are to be regarded as I think they must be, as being in the possession of Mr. Clarkson qua receiver on behalf of the bondholders, then the words in the subsection "or of any trustee" include a receiver such as Mr. Clarkson is and the section applies.

I disagree with this contention also. The whole phrase must be read together, "or of any trustee or authorized trustee in bankruptcy," both referring, I think to a case of bankruptcy; and I cannot bring myself to believe, what Mr. Herapath's argument implies, that a trustee for a mortgagee claiming or being in possession of chattel property, is in a worse position than the mortgagee himself would have been had he taken possession of the mortgaged property.

Conclusion

My answer to the question posed in "A" is: "No".

VI. SUBMISSION OF COUNSEL FOR THE CITY OF PORT COLBORNE

1. The receiver is a “trustee” under the provisions of s. 387(11) of the Municipal Act.

2. In the case at bar, “property has been converted into cash and is undistributed.” (s. 387(11) of the Municipal Act).

3. Notice of the amount due was given to the “trustee”.

4. The “trustee” is obliged to pay the city the arrears of business tax under s. 387(11) of the Municipal Act.

5. The following decisions support the city’s position:

(a) Royal Bank v. 238842 Alta. Ltd.; Saskatchewan v. Mowbrey Stout Ltd., 1985 CanLII 2369 (SK CA), 57 C.B.R. (N.S.) 2422, [1985] 5 W.W.R. 373 , 20 D.L.R.(4th) 450, 40 Sask.R. 177 (C.A.)

(b) Re Decker’s Delicatessen, O.L.R. 140, 1924 CanLII 413 (ON SC), 5 C.B.R. 208, [1925] 1 D.L.R. 652 (S.C.)

My conclusions

1. The following quotations are found in the majority judgment in the Saskatchewan Court of Appeal in Royal Bank v. 238842 Alta., Ltd., supra:

Page 246:

The section then goes on to indicate that the only interest which is protected from the city’s remedy by distress is that of a vendor with a subsisting lien for the purchase price (s. 379(2)).

Pages 247-48:

In the result, the provisions of s. 379 set up a different but very extensive system of priorities which are sweeping in nature, covering by specific mention the right to distrain against property other than that of the taxpayer and exempting only the claim of an unpaid vendor…

The section certainly seems to be applicable in this instance as personal property was under seizure or attachment, the property was liable to seizure for taxes (s. 379), it had been converted into cash, was held by a trustee and was undistributed when the required notice was given by the city. In such circumstances, the priority provisions underlined above are to be applied and were so applied by Noble J. in the judgment from which this appeal is taken.

The result is supported by the Ontario decision of Re Decker’s Delicatessen [supra] in which an almost identical section was interpreted to give priority to Ontario Hydro for electric rates which were acknowledged to be the equivalent of a municipal tax, rate or assessment.

2. It will be observed that:

(a) The Saskatchewan Court of Appeal in Royal Bank v. 238842, supra, did not consider the question: Was the personal property “liable to seizure for taxes”?

(b) The Saskatchewan Court of Appeal did not deal with the question whether a court-appointed receiver falls within the phrase “trustee” in the legislation comparable to s. 387(11) of the Municipal Act.

(c) In Re Decker’s Delicatessen, supra, Fisher J. was sitting as a bankruptcy judge and had to decide whether the priorities set out in s. 387(11) of the Municipal Act of Ontario should take precedence or whether a priority in the Landlord and Tenant Act of Ontario should take precedence.

Fisher J. held (headnote [O.L.R.]):

… [that] the trustee of the bankrupt estate is bound to pay, out of the proceeds of the personal property of the debtor liable to seizure for taxes and rent, rates payable by the debtor to Hydro-Electric Power Commission, in priority to the claim of the landlord for rent.

(d) The case before me does not involve a bankrupt estate nor does it involve two competing statutes each setting out a priority.

(e) In my view, Re Decker’s is not analogous to the case before me.

(f) The Saskatchewan Court of Appeal in Royal Bank v. 238842 Alta. Ltd., supra, dealt with a statute which gave wide powers to municipalities regarding distress for arrears of business taxes – powers much wider that the Ontario statute.

If and insofar as the decision of the Saskatchewan Court of Appeal is in conflict with the Ontario decisions, I decline to follow it.

[55] I am not certain what weight should be given to Royal Bank of Canada v. Sherkston Beaches Limited et al. First, it deals with business taxes rather than realty taxes and the powers of a municipality with respect to collecting realty taxes and business taxes are not co-extensive. In addition, the motions judge found that the goods in question were not "liable to seizure" because the bank's secured claim exceeded the value of the goods and accordingly Sherkston Beaches Ltd.had no interest or equity in the goods. As well, the decision of the Alberta Court of Appeal in Alberta Treasury Branches v. Invictus Financial, supra, does not appear to have been drawn to the attention of the motions judge.

[56] If the motions judge’s conclusion was based upon the Official Referee’s opinion, then with respect, I would draw a distinction between the example referred to by the Official Referee, namely a person not appointed by the court, and the situation in the instant case. That same distinction was drawn by Sherstobitoff J.A. in Canadian Commercial Bank, supra, when he pointed out the difference between a “private debtor” and an “officer of the court”. It may well be that, in the instant case, had the Bank itself taken and sold the personalty, it would have been in a stronger position than the Receiver. The Receiver was bound, by its appointment, to act on behalf of all interested parties, including Usarco, Levy and the City. Had the Bank taken possession, by itself or by a private receiver it could have looked to its own interests alone. I disagree with what appears to have been the opinion of the Official Referee in this regard.

[57] In Royal Bank of Canada v. Niagara Falls (City) (1992), 1992 CanLII 7510 (ON SC), 7 O.R. (3d) 147 (Gen. Div.) Steele J. dealt with the lawfulness of a seizure for business taxes. After deciding the case in favour of the municipality, Steele J. said at 151:

I do not think that s. 400(11) has any application. The private receiver appointed by the bank is not one of those persons referred to therein. In this regard, I agree with the conclusion in Royal Bank of Canada v. Sherkston Beaches Ltd. (1988), 1988 CanLII 4599 (ON SC), 64 O.R. (2d) 126, 49 D.L.R. (4th) 460 (H.C.J.), at p. 130 O.R., p. 464 D.L.R. I would distinguish the decision in the Sherkston Beaches case from the present one in that, in that case, no seizure had taken place. [Emphasis added.]

[58] I agree with Steele J. that s. 400(11) had no application to the circumstances of that case. His remarks with respect to the decision in Royal Bank of Canada v. Sherkston Beaches Ltd. et al, supra, were accordingly obiter. It does not appear from the reasons of Steele J. that the decision in Alberta Treasury Branches v. Invictus Financial, supra, was drawn to his attention.

[59] Having regard to the purpose of s. 400(11) as set out earlier and to the circumstances under which the court-appointed Receiver dealt with the properties in question, including both realty and personalty, I conclude that the Receiver in the instant case was a "trustee" within the meaning of s. 400(11). It is conceded that the requirement for notice in s. 400(11) was met. Accordingly the Bank's arguments with respect to priority with respect to the proceeds from the sale of personalty must be rejected.

[60] I should note that in reaching this conclusion, in addition to the authorities discussed above, I have considered the following:

The Assessment Amendment Act, S.O. 1917 c.45, s.10 (the original of what is now s. 400(11) of the Municipal Act R.S.O. 1990, c.M-45).

In re West and Company (1921), 1921 CanLII 488 (ON SC), 2 C.B.R. 3.

In re Cecilian Company Limited (1922), 2 C.B.R. 330.

The Suburban Area Development Act, S.O. 1922, c.77, s.24 (which amended the Assessment Act by adding the words “or trustee or authorized trustee in bankruptcy”).

In re P.W. Ellis Company Limited (1929), 10 C.B.R. 491.

In re General Fireproofing Company of Canada Limited (1937), 1937 CanLII 2 (SCC), 18 C.B.R. 159 (S.C.C.).

In re Blind River Pine Company Limited (1937), 19 C.B.R. 41.

Merrell v. A. Sung Holdings Ltd. (1992), 11 M.P.L.R. (2d) 62 (Ont. Gen. Div.) aff’d. (1995), 1995 CanLII 715 (ON CA), 22 O.R. (3d) 44 (C.A.).

808757 Ontario Inc. (Receiver of) (Re.) (1994), 1994 CanLII 7466 (ON SC), 26 C.B.R. (3d) 75 (Ont. Gen. Div.).

Canadian Imperial Bank of Commerce v. Barley Mow Inn Inc. (1996), 1996 CanLII 1437 (BC CA), 41 C.B.R. (3d) 251 (B.C. C.A.)

[61] The Bank has an alternative or additional argument. It submits that the Bank is entitled to any and all of the money recovered by virtue of its security, while the City is more limited in that it can only apply the money recovered by the disposition of realty and personalty owned by Usarco to the taxes owing by Usarco. Simply put, the money recovered from the sale of Levy’s property cannot be applied to tax arrears on Usarco’s property.

[62] This submission was not made by the Bank at the hearing below nor does it appear in its factum. Counsel for the Bank first advised counsel for the City of the argument at 8:30 a.m. on October 11, 2000, the day the appeal was to be argued. The court was advised of this submission when the case was called for argument, at which time counsel for the Bank sought to introduce a chart to illustrate this point. The City's position was that the court should not hear the argument because it was not raised before and notice was not given until that day. As the court anticipated that the hearing might run over into the following day, it decided to accept the chart and hear the argument without any commitment on the court’s part to deal with the argument. Counsel for the City would be at liberty, if so advised, to file written submissions on the matter. He did so the following day.

[63] The first two paragraphs of those submissions are as follows:

1. The Bank now raises, for the first time in these proceedings, the distinction between assets and property owned by the two Defendants, Usarco Limited (“Usarco”) and Usarco’s President, Director and majority shareholder Frank Levy (“Levy”). The Bank says that the assets of Usarco cannot be used to pay the realty tax arrears of Levy, and vice versa, and as a result, at most the City is entitled to recover $645,823.01 in respect of Usarco realty tax arrears and $276,980.32 in respect of Levy realty tax arrears.

2. This is wrong, it is submitted, in three ways:

(a) it ignores the treatment of the Usarco and Levy properties and assets as one by the Receiver during the course of the receivership, as set out in more detail below and as evidenced in the attached documents from the Appeal Books;

(b) it ignores the strong evidence that Usarco was a tenant on the Levy properties; and

(c) even if the Appellant is correct in its submission, it fails to allocate to the Levy realty tax arrears the $541,800.00 the Receiver realized in respect of Usarco’s inventory which was situated on Levy property (363 Wellington St. N.) and the $729,802.43 the Receiver realized in respect of Usarco’s Accounts Receivable which were situated at Usarco’s head office on Levy property (363 Wellington St. N.), as it should pursuant to s. 400(1)(d)(ii) of the Municipal Act.

[64] I agree with those submissions. Arguments (a) and (b) run together. All the properties were used by Usarco or for Usarco’s purposes. There was no indication that Levy's involvement in or ownership of the properties was personal. The Receiver treated the properties as a single pool of Usarco assets and the only reference to Levy was to identify which parcels were being talked about. Usarco assets were used for the benefit of "Levy" lands. When lands were sold, there was no apportionment of the price between the part in Levy's name and the part in Usarco's name.

[65] Whether in retrospect the Receiver acted properly in treating this as a single receivership rather than as two, the fact remains that it did. To achieve the allocation now asserted by the Bank would require, at the least, consideration of a reaccounting to reflect separate ownerships. In my view it is neither timely nor appropriate to consider such a suggestion. The allocation argument must therefore be rejected.

[66] In paragraph 25, I set out the position taken by counsel for the Bank on the appeal. This position was that the issue between the Bank and the City was a question of priorities and that the Receiver was correct in not paying any taxes during the receivership. Instead, the proper position was to protect, preserve and realize the assets and leave priorities to be worked out at the end. The Bank claimed that nothing had been lost and no one had been injured by the Receiver following such a course.

[67] In my respectful view, that position is quite wrong and totally untenable. It overlooks the Receiver’s normal duty to pay the taxes as part of preserving the property. The deliberate accretion of penalties and interest discriminated amongst interested parties, favouring the Bank at the expense of all others, including the City and the owners. There may well be receiverships where an uneven hand is appropriate. Such a position, however, should not be adopted unilaterally or at the suggestion or request of the petitioning creditors, but only upon direction from the court upon complete disclosure and on notice to parties who may be affected.

[68] The appeal of the Bank must therefore be dismissed with costs. The Receiver submitted its rights to the court and took no significant part in the argument. Its costs may be addressed by letter if so advised.

RELEASED: February 28, 2001

“Austin J.A.”

“I agree J. I. Laskin J.A.”

“I agree J. Simmons J.A.”