J.P. Morgan Canada v. Maxlink Canada Inc. et al.

[Indexed as: J.P. Morgan Canada v. Maxlink Canada Inc.]

58 O.R. (3d) 205

[2002] O.J. No. 390

Docket No. C36952

Court of Appeal for Ontario

Carthy, Sharpe and Cronk JJ.A.

February 7, 2002

Bankruptcy and insolvency -- Landlord and tenant -- Termination of lease -- Landlord consenting to assignment of lease from tenant to assignee -- Assignment agreement providing that tenant to remain jointly and severally liable for all of tenant's obligations -- Interim receiver appointed for assignee -- Interim receiver authorized to terminate agreements -- Interim receiver having authority to terminate assignment agreement -- Interim receiver not having authority to terminate lease -- Tenant remaining liable under lease -- Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 47(1).

In July 1999, by an assignment agreement, the landlord of an office building consented to the tenant assigning the lease to 3617181 Canada Limited ("the assignee"). The agreement was signed by the landlord, the tenant and the assignee, and it provided that the tenant remained jointly and severally liable with the assignee for all the tenant's obligations.

Pursuant to s. 47(1) of the Bankruptcy and Insolvency Act, in November 2000, by ex parte order dated November 17, 2000, Jarvis J. appointed an interim receiver for the assignee. The order of Jarvis J. provided that the receiver was empowered to terminate existing agreements. In June 2001, the receiver advised the landlord that pursuant to the appointment order, it was terminating the lease. The landlord applied for a further order or a variation of the order, and by order dated August 31, 2001, Nordheimer J. held that the receiver did not have the authority to terminate the lease. The tenant appealed.

Held, subject to a variation in the language of the order under appeal, the appeal should be dismissed.

The issue for the appeal was that of determining the meaning of the order of Jarvis J. That order had to be interpreted in the context and in furtherance of the receiver's intended purpose, which was to protect creditors by carrying on the insolvent's business, protecting its assets and limiting its liabilities. The order did not empower the receiver to terminate agreements by whim and outside the context of the insolvency proceedings. The assignment agreement was a burden on the assignee and would fall within the receiver's power of termination, but the obligations of the original tenant were outside the matters of the assignee's insolvency. The landlord obtained an additional covenant, not a replacement covenant, when it signed the assignment agreement, and the receiver had the authority to terminate the assignment agreement but not the original lease.

APPEAL from an order made in bankruptcy proceedings.

Cases referred to Crystalline Investments Ltd. v. Domgroup Ltd. (2001), 39 R.P.R. (3d) 49 (Ont. S.C.J.); Lava Systems Inc. (Receiver and Manager of) v. Clarica Life Insurance Co., [2001] O.J. No. 3365 (S.C.J.) Statutes referred to Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 47(1)

M.P. Gottlieb, for appellant Shaw Communications Inc. Sharon M. Addison, for respondents Clarica Life Insurance Company and Oxford Properties Group Inc. Michele Altaras, for Ernst & Young Inc., Interim Receiver.

The judgment of the court was delivered by

[1] CARTHY J.A.: -- The issue on this appeal is whether the interim receiver of an insolvent assignee of a tenancy effectively terminated the lease pursuant to a court order and thus freed the assignor tenant from liability under the terms of the lease. Upon a motion by the landlord for advice and direction, the motions judge issued a declaration that the action taken by the receiver did not have the effect of terminating the lease. The tenant appeals from that finding.

[2] Clarica Life Insurance Company and Oxford Properties Group Inc. (collectively, "the landlord") are the owners of an office building at 3300 Bloor Street West, Toronto. A portion of the premises was leased to a predecessor of Shaw Communications Inc. ("the tenant"). That lease was assigned to 3617181 Canada Limited ("the assignee") by an agreement of assignment and consent dated July 30, 1999 executed by the landlord, the tenant's predecessor and the assignee. The agreement provides that the tenant remains jointly and severally liable with the assignee for all the tenant's covenants and obligations.

[3] By ex parte order, made at the instance of J.P. Morgan Canada and dated November 17, 2000, Jarvis J. appointed Ernst & Young Inc. as interim receiver of, among others, the assignee, pursuant to s. 47(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3. Paragraph 2(f) of that order provides:

2. THIS COURT ORDERS that Ernst & Young Inc. (the "Interim Receiver") be and is hereby appointed, pursuant to s. 47(1) of the Bankruptcy and Insolvency Act (i) interim receiver, without security, of MaxLink Canada Inc., MaxLink Holdings Inc., 3617181 Canada Limited, Regional Vision Inc., and MaxLink Communications Inc., and all of their present and future undertaking, property and assets and (ii) interim receiver, without security, of Net only in respect of the shares of MaxLink Canada owned by Net, and any notes or other documents evidencing indebtedness owed to Net by MaxLink Canada or its subsidiaries (hereinafter referred to as the "Assets") and, subject to the provisions hereof, the Interim Receiver is hereby empowered, authorized and directed, but not obligated, to take possession of and control the Assets and any and all proceeds, receipts and disbursements arising out of or from the Assets, until further order of this Honourable Court, and to act at once in respect of the Assets and carry on the business of MaxLink and, without in any way limiting the generality of the foregoing and in furtherance thereof, the Interim Receiver is hereby expressly empowered and authorized, but not obligated:

(f) to negotiate and enter into agreements in respect of the Assets, including without limitation, managements agreements, or to amend or terminate existing agreements;

(Emphasis added)

[4] The landlord became aware of this order and, for a time, received rent from the receiver. Then on June 1, 2001, the receiver wrote the landlord and stated:

By letter dated May 30, 2001, we advised you that [the tenant] vacated the premises occupied by it at 3300 Bloor Street West (the "Premises") effective May 28, 2001. Pursuant to paragraph 2(f) of the Appointment Order, the Interim Receiver is authorized to terminate existing agreements to which [the tenant] is a party. This letter will serve as notice that the lease dated April 21, 1997 relating to the Premises is hereby terminated effective immediately.

[5] Thereafter, the landlord brought this motion pursuant to the order of Jarvis J., which permitted any interested party to apply to the court for a further order or a variation of that order. The motions judge endorsed the record in these terms:

I am of the view that the letter of June 1, 2001 from the Interim Receiver insofar as it purported to terminate the lease dated April 21, 1997 did not have that effect nor could it have that effect because the debtor was not a party to that Lease and the Receiver would therefore have no authority to do that which the letter purports to do. This conclusion is not intended to restrict in any way the right of the parties to make any and all arguments with respect to what the Receiver did or did not have the authority to do or what the Receiver did or did not in fact do under the letter of June 1/01.

[6] I agree with the general result achieved by this endorsement but my reasoning is somewhat different.

[7] The emphasis of the appellant's submissions was upon the clear words of empowerment in the order of Jarvis J. "to amend or terminate existing agreements" and the jurisprudence supporting such broad authority to affect third party rights under s. 47(1) of the Bankruptcy and Insolvency Act. As the argument was put, the judge had the authority and explicitly handed the power to the receiver to terminate all agreements.

[8] I don't see the issue as being the breadth of authority in Jarvis J. Rather, the issue is one of determining what his order means. It most certainly did not empower the receiver to terminate agreements by whim and outside the context of the insolvency proceedings. Some limitation of scope must be implied by the context that gave rise to the order. I place emphasis on the words of para. 2 of the order of Jarvis J.: "and in furtherance thereof, the Interim Receiver is hereby expressly empowered and authorized . . ." (emphasis added). The powers granted by the order should be read as limited to those in furtherance of the receiver's intended purpose: to protect creditors by carrying on the insolvent's business, protecting its assets and limiting its liabilities.

[9] The assignment agreement was a burden to the assignee and would fall within the receiver's power of termination, as so defined, but the obligations of the original tenant to the landlord have absolutely no relationship to the insolvency. The landlord presumably negotiated the original lease in reliance on the tenant's apparent credit strength and business prospects. When the assignment was executed, the landlord obtained an additional covenant, not a replacement. It defies common sense to consider that the order of Jarvis J. was intended to be used to extinguish obligations between the two original parties to the lease with no pretence of benefit to the insolvent.

[10] The motions judge based his order on the fact that the insolvent was not a party to the lease. That is a narrower approach than mine and is vulnerable to the argument that the assignee was indeed a party by virtue of the assignment. The assignment contains a covenant that the assignee will observe the covenants in the lease as though it were named as tenant. That covenant disappears with the termination of the assignment agreement, a measure that is therefore sufficient to fulfil the receiver's intended function to limit ongoing liabilities of the insolvent. To go beyond the assignment agreement and terminate the lease serves no purpose related to the insolvency. I therefore conclude that the interim receiver had the power to terminate the assignment agreement but not the original lease. In my view, defining the receiver's power of termination by purpose is a more natural interpretation than restricting the power to agreements to which the insolvent is a party.

[11] The appellant referred to two authorities said to support its position. They are Crystalline Investments Ltd. v. Domgroup Ltd. (2001), 39 R.P.R. (3d) 49 (Ont. S.C.J.) and Lava Systems Inc. (Receiver and Manager of) v. Clarica Life Insurance Co., [2001] O.J. No. 3365 (S.C.J.). Each of these cases is currently under appeal to this court and although I see them as distinguishable on their facts, it is not appropriate in these circumstances to comment further.

[12] I would therefore allow the appeal, to the extent of varying the declaration in the order of Nordheimer J. by deleting in para. 1 of the order the words "nor could it have that effect because the debtor was not a party to that lease and the Receiver would therefore have no authority to do that which the letter purports to do".

[13] The appeal is otherwise dismissed. The respondent should have its costs of the appeal.

Order accordingly.