DATE: 20050621
DOCKET: C42138
COURT OF APPEAL FOR ONTARIO
BORINS, BLAIR AND LAFORME JJ.A.
B E T W E E N :
IVORYLANE CORPORATION
Arnold Zweig, for the appellant
Plaintiff (Respondent)
- and -
COUNTRY STYLE REALTY LIMITED
Alistair Riswick, for the respondent
Defendant (Appellant)
Heard: May 4, 2005
On appeal from the Order of Justice Peter Cumming, dated June 22, 2004.
R.A. BLAIR J.A.:
Outline
[1] The primary issue on this appeal is whether, on the facts of this case, a pre-CCAA claim for arrears of rent under a lease may be asserted in full against the re-organized CCAA company after the CCAA proceedings have been completed, where the lease in question was not repudiated as part of those proceedings.
[2] On December 13, 2001, Country Style Realty Limited sought and obtained court protection pursuant to the Companies’ Creditors Arrangement Act R.S.C. 1985, Chapter 36, as amended (the “CCAA”). As a result, all pending and potential proceedings against it were stayed pending negotiation and approval of a plan of compromise or arrangement between the company and its creditors. At the time, Country Style was in arrears in the payment of the portion of its rent pertaining to adjusted taxes, maintenance and insurance (“TMI”) respecting a fast-food retail outlet leased from Ivorylane Corporation and located near Shanty Bay, Ontario. The arrears amount to $146,892.12.
[3] Country Style elected not to repudiate the Ivorylane lease, as it was entitled to do under the Initial CCAA Order. All amounts owing for rent since the effective date of the CCAA proceedings, including the TMI portion of the rent, have been paid.
[4] Although there had been intermittent negotiations about the arrears of TMI in 1999, Ivorylane had taken no steps to enforce its claim before the CCAA proceedings were commenced. There is currently no dispute about the amount of the claim, however.
[5] For reasons that are unclear on the record, Ivorylane’s claim for rental arrears was not documented in Country Style’s books. As a result, no direct notice was given to it of the CCAA proceeding and it did not see the notice that was published in the Globe and Mail on January 9 and 10, 2002, in accordance with a Claims Procedure Order (the “CPO”) granted by Lax J. on January 7. In fact, Ivorylane did not become aware of the CCAA proceedings until March 6, 2002, when it received from Country Style a faxed response to a February 26 summary of TMI arrears that Ivorylane’s counsel had forwarded. The March 6 letter advised Ivorylane that Country Style, and related companies, had commenced proceedings under the CCAA.
[6] On March 7, 2002, Spence J. sanctioned and approved the Plan of Compromise that Country Style had negotiated with its creditors (the “Sanction Order”), and Country Style emerged from CCAA protection.
[7] On October 4, 2002, Ivorylane commenced this action, seeking to recover $146,892.12, being the full amount of the TMI arrears up to December 31, 2001. Country Style defended on the grounds that the claim was barred by the terms of the Plan of Compromise and the Sanction Order in the CCAA proceedings. On a Rule 21 motion for the determination of a question of law, Cumming J. declared that the claim was not barred.[^1] Country Style appeals that decision.
[8] For the reasons that follow, I would dismiss the appeal.
The CCAA Proceedings
[9] Under the Initial Order granted by Colin Campbell J. on December 13, 2001 (paragraph 8(f)), Country Style was entitled, but not required, to,
. . . repudiate any lease . . . relating to any leased premises . . . on such terms as may be agreed upon between the Applicant and such Landlord, or failing such agreement, to deal with the consequences thereof in the Plan.
[10] The effect of the CCAA stay of proceedings was to require a landlord to continue to honour the terms of a lease that was not repudiated, provided Country Style complied with its obligations under the lease on a going-forward basis. After consultation with the Monitor appointed under the Initial Order, Country Style decided not to repudiate the lease.
[11] On February 7, 2002, Lax J. granted the Claims Procedure Order which required, amongst other things, that notice of the CPO be given by facsimile transmission, personal delivery, courier or pre-paid mail to each known existing creditor, and that the creditor be provided with a Proof of Claim and Instruction Letter. In addition, a Notice to Creditors was to be placed in the national edition of the Globe and Mail newspaper for two days, commencing January 9, 2002. As I have indicated, no such notice was sent to Ivorylane, and Ivorylane did not see the notice in the Globe and Mail.
[12] The CPO established a claims bar date (ultimately set as February 11, 2002). Any creditor not submitting a Proof of Claim by that date was to be forever barred from asserting the claim and the claim would be extinguished. Unaware of the CCAA proceedings, Ivorylane submitted no such Proof of Claim.
[13] After the usual series of negotiations and meetings of creditors, the Plan of Compromise proposed by Country Style was approved by the requisite vote of creditors. Spence J. granted the Sanction Order on March 7, 2002.
Analysis
[14] The motion judge concluded that Ivorylane’s pre-CCAA claim for arrears of rent was an Unaffected Obligation and not an Affected Unsecured Claim under the Plan of Compromise. Therefore, it was not compromised, released, extinguished or barred by the Plan or the Sanction Order and Ivorylane was entitled to bring this action. The motion judge also held that the Claims Bar Date in the Claims Procedure Order was not effective to preclude Ivorylane’s claim because Ivorylane had not been give the requisite notice. In any event, even if the Claims Bar Date were operative against Ivorylane, the motion judge would have granted relief against the bar “in the exceptional circumstances, as [he found] to be present in the instant situation” (reasons, para. 47), based on the principles enunciated by the Alberta Court of Appeal in Enron Canada Corp. v. National Oil-Well Canada Ltd. (2000) ABCA 285 at para. 41.
[15] As the motion judge noted, there are some seeming anomalies in this result. First, Ivorylane appears to be better off as a result of his Order than it would have been had it received notice and filed its Proof of Claim (as it says it would have done). This is because, in the claims process, Ivorylane would have received only the eight or nine cents on the dollar that all Affected Unsecured Creditors received from the Plan. Secondly – and perhaps more notably – the effect of the Order is to place a landlord, with an ordinary unsecured claim for pre-CCAA arrears of rent, but whose lease has not been repudiated, in a superior position to other landlords with exactly the same kind of claim but whose lease was repudiated, and, as well, to place the landlord in a superior position to all other creditors with similar unsecured claims. This contravenes the basic insolvency principle that creditors are to be treated equally and rateably in accordance with their class.
[16] It would take compelling and clear language in the Plan and Sanction Order to mandate such a result. However, the fate of a creditor’s claim in a CCAA proceeding is governed by the provisions of the Plan negotiated and approved by the creditors, and by the Court Order sanctioning the arrangement and permitting the insolvent company to re-emerge as a viable economic entity. Therein lies the explanation for the apparent anomalies, in the circumstances of this case. The motion judge was correct in holding that the provisions of this Plan and this Sanction Order did not compromise or bar Ivorylane’s claim for pre-CCAA arrears of rent.
[17] A review of the pertinent provisions of the Sanction Order and the Plan bear out this conclusion.
The Sanction Order
[18] Paragraph 6 of the Sanction Order sanctions and approves the Plan pursuant to the CCAA. In other provisions the Order stipulates that,
a) the Plan becomes effective and binds the Applicants and the Affected Creditors upon the Effective Date (para. 8); and,
b) subject to the provisions of the Plan, “all obligations or agreements to which the Applicants are party as of the Effective Date shall be and remain in full force and effect, unamended” and the parties are obliged to perform, and prohibited from repudiating, their obligations thereunder by reasons (amongst other things) of the fact that the Applicants sought and obtained relief under the CCAA or that a reorganization has been implemented (para. 15) [emphasis added].
The Plan
[19] What the Motions Judge referred to as “the chain of definitions in s. 1.1 of the Plan”, and certain other provisions of the Plan, are also important for the disposition of the appeal. The following definitions are pertinent:
“Affected Claim” means an Affected Unsecured Claim or an Affected Secured Claim . . .
“Affected Creditor” means a holder of an Affected Claim.
“Affected Unsecured Claim” means a Claim for which a Proof of Claim has been delivered, including the Claims of those Persons listed on Schedule “A”[^2]
“Affected Unsecured Creditor” means a holder of an Affected Unsecured Claim including, without limitation, a holder of a Landlord Claim
“Claim” includes any right of a Person against one or more of the Applicants in connection with any indebtedness, liability or obligation of any kind whatsoever of one or more of the Applicants . . . whether liquidated, unliquidated, reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, unsecured, present, future, known or unknown . . . including without limitation, any claim arising from or caused by the repudiation by an Applicant of any contract, Lease or other agreement . . . For greater certainty, a “Claim” includes a Landlord Claim but does not include any right to payments of any creditor for the provision of goods and/or services to an Applicant on or after the Date of Filing.[^3]
“Landlord Claim” means an Affected Unsecured Claim arising in respect of (i) a Landlord Repudiation Claim or (ii) a Lease or written agreement relating to a Lease in respect of which the Applicants have agreed that a Claim may be made in consideration of an amendment or variation of the terms of such Lease or agreement.
“Landlord Creditors” means Affected Unsecured Creditors holding Landlord Claims.
“Landlord Repudiation Claim” means the actual or prospective repudiation of a Lease where notice of repudiation of such Lease was given by an Applicant in accordance with the Initial Order and the Claim Procedure Order which shall be calculated, in the case of a repudiation, as the Rent payable by an Applicant to such Landlord for the 12 months following the delivery of the notice of repudiation (but not beyond the termination date under the relevant Lease), less any amounts paid or payable by any other Person to such Landlord under any lease entered into by such Landlord for such premises after receipt by the Landlord of such notice of repudiation.
“Unaffected Obligations” means those Claims listed on Schedule “B”.
[20] Schedule “B” to the Plan, entitled “Unaffected Obligations” includes, in subparagraph (f) the following:
Equipment, personal property and real property leases and other contracts which have not been repudiated or terminated as at the Subsequent Claims Bar Date and in respect of which there has been no written agreement to allow a Claim [emphasis added]
[21] Other provisions in the Plan that are relevant include:
Section 2.2 Persons Affected
This Plan provides for a coordinated restructuring and compromising of Affected Claims. This Plan will become effective on the Effective Date and shall be binding on and enure to the benefit of the Applicants and the Affected Creditors . . .
Section 2.3 Persons Not Affected
This Plan does not affect holders of Unaffected Obligations. . . [emphasis added]
Section 7.1 Contracts and Leases
Except as otherwise provided in the Plan, or in any contract, instrument, release, indenture or other agreement or document entered into in connection with the Plan, as of the Effective Date each Applicant shall be deemed to have ratified each executory contract and unexpired lease to which it is a party, unless such contract or lease (a) was previously repudiated or terminated by such Applicant, or (b) previously expired or terminated pursuant to its own terms. [emphasis added]
Lack of Notice and the Effect of the Claims Procedure Order
[22] The motion judge found that Ivorylane should have been given formal notice of the claims procedure process because it was, or should have been, a “known existing creditor”. This finding is well supported by the record, and I agree with it. However, on the wording of this Plan and Sanction Order, it does not follow that Ivorylane’s claim should be treated as if it were an Affected Claim compromised by the Plan. This conclusion flows from the following analysis.
[23] Ivorylane’s claim for pre-CCAA arrears of rent is clearly a “Claim” as that term is defined in the Plan. The Claims Procedure Order requires that any person with an existing claim must file a Proof of Claim and provides that the claims of those who fail to do so are barred forever. An Accepted Unsecured Claim is a claim with respect to which a Proof of Claim is filed, and such Claims are compromised by the Plan and the Sanction Order. On a non-contextual application of the CPO alone, then, it would appear that if Ivorylane had filed a Proof of Claim – as it says it would have done, had it received notice – the claim for pre-CCAA arrears would have become an Accepted Claim. The CPO cannot override the terms of the Plan and the Sanction Order, however, and in my opinion, the effect of the provisions of the Plan respecting Unaffected Obligations is to divest Ivorylane’s claim of its apparent quality as an Accepted Claim because of the provisions of the Plan respecting Unaffected Obligations.
[24] I note, parenthetically, that at best, if Ivorylane’s Claim were an Affected Claim, Ivorylane would be entitled to recover no more than the same compromised amount of eight or nine cents on the dollar as were other unsecured creditors of its class. However, for the reasons explained below, the wording of this particular Plan of Compromise takes Ivorylane’s claim for such arrears out of the Affected Claim category for the simple reason that Country Style’s obligation to pay those arrears is an obligation under a non-repudiated lease and is, accordingly, an Unaffected Obligation not affected by or compromised by the Plan.
The Plan and Sanction Order
[25] The fact that the negotiators and authors of the Plan felt compelled to specify that a “landlord claim” was included in an “affected unsecured claim” and that “landlord creditors” means “affected unsecured creditors holding Landlord Claims”, lends support to the notion that other claims by landlords – such as claims for pre-CCAA arrears of rent – are not included as affected unsecured claims. This conclusion is bolstered, in my opinion, by other provisions in the Plan. First, the definition section and Schedule “B”, to the Plan make it plain that a real property lease that has not been repudiated or terminated, and in respect of which there has been no written agreement to allow a claim, is an “Unaffected Obligation”. The Plan by its express terms only compromises Affected Claims and only binds Affected Creditors (s. 2.2). The Plan does not affect holders of Unaffected Obligations (s. 2.3).
[26] Moreover, except as otherwise provided in the Plan – and I cannot find anywhere in the Plan where it is “otherwise provided” – Country Style is “deemed to have ratified each . . . unexpired lease to which it is a party, unless such . . . lease (a) was previously repudiated or terminated . . . or, (b) previously expired or terminated pursuant to its own terms (s. 7.1). The Ivorylane lease does not fall within either of these exceptions. There is nothing in the Plan or the Sanction Order to suggest that Country Style is only deemed to have ratified that part of the lease that relates to Country Style’s post-CCAA obligations.
[27] Finally, as noted earlier in these reasons, the Sanction Order makes it clear that the Plan only binds Affected Creditors and that any agreement to which Country Style is a party as at the Effective Date – which would include the unrepudiated Ivorylane lease – “shall be and remain in full force and effect unamended” and that Country Style, as a party to that agreement, is obliged to perform it and prohibited from repudiating its obligations under the lease by reason of the fact that Country Style sought and obtained CCAA relief or that a reorganization has been implemented (Sanction Order, para. 15).
Disposition
[28] Accordingly, I agree with the motion judge, on the particular facts of this case, that Ivorylane’s pre-CCAA claim for arrears of rent is not compromised or barred by the Plan and Sanction Order. Ivorylane is entitled to bring the within action.
[29] The appeal is therefore dismissed.
[30] In accordance with the agreement of counsel, costs of the appeal are fixed in the amount of $6,500 all inclusive, payable to the respondent as the successful party.
“R.A. Blair J.A.”
“I agree S. Borins J.A.”
“I agree H.S. LaForme J.A.”
RELEASED: June 21, 2005
[^1]: A Rule 20 motion for summary judgment, that was brought at the same time, was dismissed.
[^2]: Schedule “A” is a list of all the existing known affected unsecured creditors. Ivorylane is not on that list.
[^3]: “Claim” is even more compendiously defined than quoted here. I have excerpted only the portions of the definition that appear to relate to the issues on the appeal.