DATE: 20021018
DOCKET: C36849
COURT OF APPEAL FOR ONTARIO
CARTHY, LASKIN AND BORINS JJ.A.
B E T W E E N:
CANADIAN IMPERIAL BANK OF COMMERCE
Neil S. Abbott for the appellant
Applicant (Appellant)
- and -
PAUL CONWAY and 1327266 ONTARIO INC.
Paul Conway (in person)
Respondents (Respondents in Appeal)
Heard: August 13, 2002
On appeal from the order of Justice Anne M. Molloy of the Superior Court of Justice dated July 26, 2001.
CARTHY J.A.:
[1] CIBC made application under rule 14.05(3) for the interpretation of documents where there were no material facts in dispute. The issue for resolution was the right of a shopping centre owner to divert rental receipts for its personal use after default to the lender and before the lender had taken steps to enforce its security. Molloy J., in reasons reported at, [2001] O.J. No. 3027 (Sup. Ct.) found that the bank had no claim to the funds and the bank appeals.
FACTS
[2] The respondent, Paul Conway, is a non-practising lawyer who, with a partner, operated two shopping centres in Newfoundland through two corporations. The circumstances related to each are identical and I will treat them as one. The appellant financed the company with a package of security instruments including a debenture and an assignment of leases and rents. On June 26, 1998, Conway obtained a letter agreement providing for the payment to Conway of a management fee, the due date for the loan to be set for October 31, 1998, and in the meantime that the rents be paid into the shopping centre’s account at the CIBC.
[3] On October 31, 1998 the full debt of $12 million became due and payable and it was not until over two months later that the bank took steps to enforce its security. The letter agreement lapsed on October 31 and Conway then deposited the rents into a shopping centre account at the Bank of Montreal. Then the respondent corporation was created and the funds transferred to its account at Canada Trust. The appellant was, at the time, unaware of these new banking arrangements. The rents received by the respondent corporation total $394,100.00.
[4] Molloy J. held that until the bank took steps to enforce its security the borrower was free to use all rental receipts as it saw fit. I have arrived at the opposite interpretation of the rights of the parties under these agreements.
ANALYSIS
[5] Molloy J. reasoned that on a proper reading of the security instruments the assignment of rents applied only until the rents were paid and thereafter they became general assets of the business subject only to the debenture. Since no steps had been taken in the three month period to enforce the debenture the respondents were free to use the rents as they saw fit. In her view, the debenture was one of a package of security instruments and, where possible, each should be read as consistent with the others.
[6] As to the debenture, paragraph 11 reads:
- Subject to any other relevant agreement between the parties hereto and/or their affiliates, until the security hereby constituted shall have become enforceable and the Bank shall have determined to enforce the same, the Company shall be permitted, in the same manner and to the same extent as if this debenture had not been executed but subject to the express terms hereof and the terms of any other agreements between the parties hereto or on their behalf, to possess, operate, manage, use and enjoy the Charged Premises, freely to control the construction, development, leasing and operation of the Charged Premises, to deal with lessees (including to amend any leases or agreements to lease or to accept the surrender of any leases), and to take and use the rents, incomes, profits and issues thereof, including the collection of rents and other moneys payable under leases or agreements to lease of any portion of the Charged Premises, as and when the same shall become due and payable according to the terms thereof, and all lessees of any portion of the Charged Premises shall be entitled to pay such rents and other moneys to the Company until they shall have received a written direction to the contrary from the Bank which direction the Bank may give only if the security hereby constituted shall have become enforceable and the Bank shall have determined to enforce the same.
[7] Note the stipulation in paragraph 11 “subject to the express terms hereof and any other agreements between the parties …” which clearly contemplates other more restrictive agreements that may limit the freedoms of operation normally associated with a floating debenture. The latter is a cloud suspended over an ongoing business but asserting no day-to-day control until it is enforced. Thus, any agreement imposing controls prior to default proceedings would necessarily be inconsistent with a floating debenture. I, therefore, find no need to read the documents consistently in the sense of assuring that more restrictive rights are not granted in one over another.
[8] The second issue is the effect of the assignment of rents after default and before proceedings are taken by the Bank under its security.
[9] The granting clause in the Assignment of Leases and Rents reads:
- 3.01 Grant. Subject only to the prior assignment of leases and rents in favour of Canada Trustco Mortgage Company, the Borrower hereby assigns, transfers and sets over to the Lender, all the right, title and interest of the Borrower in and to, and to the full benefit of, the Leases and all Rents payable thereunder and each and every one of them, all of which are sometimes hereinafter collectively referred to as the “Assigned Rights”.
- [10] Rents, in the Assignment of Leases and Rents, are defined as:
- 1.06 “Rents” includes all rent, additional rent, deposits as security or otherwise, revenues, other monies, issues, monetary benefits, rights and profits, present and future, absolute or contingent derived or to be derived by the Borrower from the Property.
[11] Molloy J. concluded that this assignment applied only to rents while they were payable and that once paid they became part of the general assets of the corporation without any obligation to account. She emphasized how the whole structure of the assignment is designed to permit the borrower to collect the rents until the Bank exercises its option to be the collector after a default. Pending that election, and it was not exercised here, on her reasoning, the borrower may use the funds as it sees fit.
[12] I take a different view. Rents are defined to include “all rent … derived or to be derived by the borrower from the property” and the grant is of “all rents payable thereunder”. These clauses speak from the date of the document and seek to define in composite form what is being assigned. They are not speaking in ongoing terms such as the expression “as and when payable” would suggest. Rather, once and for the duration of the agreement rents derived or to be derived and payable under leases to the premises are assigned to the Bank. They came into the hands of the borrower impressed with that assignment. They are then rents “derived” within the meaning of paragraph 1.06.
[13] Paragraph 5.02 of the assignment reads:
- 5.02 If No Default. Until Default, the Borrower shall be entitled to receive all Rents and to deal with the Leases and to exercise its rights with respect thereto and shall not be liable to account therefor to the Lender, but subject to the provisions hereof.
- [14] This should be read together with paragraph 5.04 reading:
- 5.04 Rents. In the event of Default then in addition to the rights hereby assigned to the Lender, the Lender may but shall not be obliged to collect the Rents and/or manage the Property and otherwise exercise all rights of the lessor under the Leases or any of them without regard to the adequacy of the security and without waiving such Default.
[15] On my reading the absolute assignment is relaxed by paragraph 5.02 to permit collection and use with no accountability until default.
[16] Then, upon default, under paragraph 5.04 the right to collect and manage is, by inference, left with the borrower if the bank does not exercise its right of entry. However, the freedom from accountability granted by paragraph 5.02 extends only until default and is not, by inference or otherwise, extended by paragraph 5.04. It is one thing to infer a right to continue to manage pending action by the lender, but beyond the reach of inference to conclude a freedom to divert rents to personal use from a business in default on its debt.
[17] Paragraph 5.02 is the only provision which makes this assignment of rents less than absolute and it is not applicable after default. The real issue is not who has the right to collect the rents after default. The issue is whether the rents are impressed with the assignment when collected. Even if “payable” is construed as a temporal term these rents were such when collected and, although they could be used for management purposes under paragraph 5.04, they could not be freed of the assignment by appropriating them to personal use.
[18] An accounting was required and should be granted. The agreed statement of facts states that the total amount diverted was $394,100.00 and judgment should issue in favour of the appellant against the respondents in that amount together with pre-judgment interest from the date of demand, March 10, 1999, at the rate provided in the Courts of Justice Act, R.S.O. 1990, c. C-43, and post-judgment interest also pursuant to the said Act.
[19] The appellants are entitled to costs throughout on a partial indemnity basis. A bill of costs has been filed but we have not heard submissions concerning it from the respondents. Nor do we know if an offer to settle was made prior to the hearing of the application which affects the entitlement to costs. The parties may make written submissions concerning costs, the appellant within 10 days, the respondent 7 days thereafter and the reply, if any, 5 days thereafter.
Released: October 18, 2002 “JJC”
“J.J. Carthy J.A.”
“I agree John Laskin J.A.”
“I agree S. Borins J.A.”