CITATION: GE Capital Aviation Services, Inc. v. Winnipeg Airports Authority Inc., 2007 ONCA 514
DATE: 20070706
DOCKET: C46549
COURT OF APPEAL FOR ONTARIO
IN BANKRUPTCY
IN THE MATTER OF THE BANKRUPTCY OF CANADA 3000 INC., of the City of Toronto, in the Province of Ontario
AND IN THE MATTER OF THE BANKRUPTCY OF CANADA 3000 AIRLINES LIMITED/LIGNES AÉRIENNES CANADA 3000 LIMITÉE, of the City of Toronto, in the Province of Ontario
AND IN THE MATTER OF THE BANKRUPTCY OF ROYAL AVIATION INC., of the City of Toronto, in the Province of Ontario
DOHERTY, MacPHERSON and CRONK JJ.A.
BETWEEN:
GE CAPITAL AVIATION SERVICES, INC., as agent and manager for POLARIS HOLDING COMPANY AND AFT TRUST-SUB I, PEGASUS AVIATION, INC. AND PALS I, INC.
Appellants
and
WINNIPEG AIRPORTS AUTHORITY INC., HALIFAX INTERNATIONAL AIRPORT AUTHORITY, EDMONTON REGIONAL AIRPORTS AUTHORITY, THE CALGARY AIRPORT AUTHORITY, AÉROPORTS de MONTRÉAL, OTTAWA MACDONALD-CARTIER INTERNATIONAL AIRPORT AUTHORITY, VANCOUVER INTERNATIONAL AIRPORT AUTHORITY and ST. JOHN’S INTERNATIONAL AIRPORT AUTHORITY
Respondents
GREATER TORONTO AIRPORTS AUTHORITY
Respondent
NAV CANADA
Respondent
Christopher W. Besant and Joseph J. Bellissimo, for the appellants
Alan B. Merskey, for the respondents Winnipeg Airports Authority Inc., et al
Lyndon A. J. Barnes, for the respondent Greater Toronto Airports Authority
Clifton P. Prophet, for the respondent NAV Canada
Heard: June 12, 2007
On appeal from the orders of Justice John D. Ground of the Superior Court of Justice dated November 21, 2006, November 29, 2006, January 12, 2007 and March 9, 2007.
CRONK J.A.:
I. Background
[1] This is another appeal arising out of the collapse of Canada 3000 Airlines Limited/ Lignes Aériennes Canada 3000 Limitée and Royal Aviation Inc. (collectively, Canada 3000).
[2] In early November 2001, Canada 3000 applied for creditor protection under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36. Within days, its officers and directors resigned, its fleet of thirty-eight aircraft was grounded throughout Canada by court order, and bankruptcy proceedings were commenced.
[3] Most of Canada 3000’s aircraft were leased. The respondents in this appeal (collectively, the Authorities) applied under various statutes for court orders authorizing the seizure and detention of the aircraft on account of unpaid airport or air navigation charges. These applications were vigorously opposed by the aircraft lessors, including the appellants, who claimed the right to repossess the leased aircraft based on legal title or perfected security interests in the aircraft.
[4] The parties then entered into negotiations concerning the terms on which the aircraft might be released to the lessors pending the determination of the Authorities’ seizure and detention applications. By order dated December 3, 2001, Ground J. of the Superior Court of Justice approved three protocols settled by the parties (the Release Order), which provided for the interim release of the aircraft to the lessors on condition that they post security for 110 per cent of the charges owing to the Authorities (the Release Fund). When the Release Fund was in place, the aircraft were returned to the lessors.
[5] The protocols also specified the conditions under which the Authorities might “call” or realize on the Release Fund.[^1] They stated:
- The Security posted by a Lessor in respect of an Aircraft shall stand as security only for the amount, if any, of the Airport Authorities’ claims against the Aircraft in which such Lessor has an interest as determined in a final order made in accordance with this paragraph. The Airport Authorities shall only be entitled to call or realize on the Security posted by a Lessor in respect of an Aircraft in the event that:
(i) a final order has been made, from which all rights of appeal have expired, or in the event appeals have been instituted, all such appeals have been finally disposed of, lifting any applicable stay of pro-ceedings, granting the Airport Authorities seizure orders against the Aircraft claimed by such Lessor and declaring that the Airport Authorities’ right of seizure pursuant to such order has priority over and is enforceable against the right, title, interest and claims of such Lessor in and to such Aircraft in such amount as determined by the Court (the “Priority Seizure Rights”)[.]
[6] Ultimately, the Authorities’ seizure and detention applications were dismissed by Ground J. on the basis that the statutory detention remedy sought by them did not take precedence over the rights of the lessors to terminate the leases and repossess the aircraft: Re Canada 3000 Inc., 2002 49584 (ON SC), [2002] O.J. No. 1775 (S.C.J.). This decision was subsequently upheld by a majority of this court, Juriansz J. (as he then was), sitting ad hoc, dissenting in part: (2004), 2004 32169 (ON CA), 69 O.R. (3d) 1.
[7] On further appeal to the Supreme Court of Canada, these decisions were reversed in part: 2006 SCC 24, [2006] 1 S.C.R. 865 (the Supreme Court Decision). The Supreme Court agreed with the applications judge and this court that the lessors were not liable for the unpaid charges owed to the Authorities. However, the Supreme Court also held that the Authorities were entitled to obtain judicially-authorized seize and detain orders “to be exercised against the security posted in substitution for the aircraft”. This statutory detention remedy, if granted by the courts, was limited to possession. It did not confer any interest in the beneficial ownership of the aircraft, nor was it tantamount to the “airborne equivalent of a maritime lien”. Moreover, it did not encompass any power to sell the aircraft once detained.
[8] Following the Supreme Court Decision, the applications judge granted seizure and detention orders in favour of the Authorities. These orders, dated November 21 and 29, 2006 as confirmed on January 12, 2007, authorized the Authorities to draw on the Release Fund in satisfaction of the debts owed to them.
[9] The appellants, however, moved before Ground J. for various relief, including declarations: (i) that the Authorities had not satisfied the preconditions under the protocols in order to call or realize on the Release Fund; (ii) that the Authorities were not entitled to call or realize on the Release Fund in payment of any charges owed or owing to them; and (iii) that, except for “the right of detention until further order of the court”, the Authorities had no right or interest in the Release Fund.
[10] The appellants’ motion was not supported by the other aircraft lessors.
[11] By order dated January 12, 2007, the motion judge dismissed the appellants’ motion for declaratory relief, holding that the Authorities were entitled to collect the unpaid charges owed to them from the Release Fund. Subsequently, by order dated March 9, 2007, he awarded the costs of the motion to the Authorities. The appellants now appeal these orders. They also appeal the November 2006 seizure and detention orders.
II. Issues
[12] The appellants contend that the motion judge erred in his interpretation of both the judicially-approved protocols and the Supreme Court Decision. In particular, contrary to the motion judge’s decision, the appellants maintain that the Authorities have not satisfied the call provisions under the protocols, with the result that resort by them to the Release Fund for payment of the debts owed to them is precluded. The appellants further assert that because the Supreme Court Decision confines the nature and scope of the Authorities’ seizure and detention rights to the limited right to detain the aircraft, if so ordered by the courts, the Authorities’ detention remedy does not extend to a right to call on the money comprising the Release Fund to satisfy the unpaid charges owed to the Authorities.
III. Discussion
[13] In my opinion, this appeal turns on the proper interpretation of the purpose of the Release Order and associated protocols and the meaning of the call provisions contained in the protocols, construed in the context of the Supreme Court’s determination of the rights of the parties. My consideration of these factors compels the conclusion that this appeal must be dismissed. I say this for the following reasons.
[14] First, by negotiating and settling the terms of the protocols, and thereafter obtaining the Release Order that incorporated the protocols, the parties effected a voluntary compromise of their rights and interests in respect of the aircraft, in exchange for mutual commercial benefits.
[15] The purpose of the protocols and the Release Order was to facilitate the interim return of the aircraft to the lessors – including the appellants – pending the adjudication of the Authorities’ seizure and detention applications, on terms designed to permit the continued use of the aircraft by the lessors while also protecting the rights of the Authorities in respect of the aircraft if they were eventually found to be entitled to exercise their statutory detention remedy. This is confirmed by the following provisions of the protocols:
- In advance of the hearing, the Lessors wish to obtain the release of the Aircraft by posting bonds or other security with the … Authorities in substitution for the Aircraft subject to the seizure claims, if any, which the … Authorities have against the Aircraft.
B. Purpose and Goals
- The purpose of this Release Protocol is to provide for the release of the Aircraft to the Lessors prior to the final determination of the Seizure Motions and to provide alternative security for the charges claimed by the … Authorities to be owing to them.
[16] To accomplish these goals, the protocols provided at para. 14 that the security posted in respect of an aircraft “shall stand in lieu of and in place of that Aircraft”. Thus, the Release Fund was substituted for the security potentially afforded to the Authorities by the aircraft themselves – assets valued at approximately U.S. $1.1 billion.
[17] Under the compromise reflected in the protocols, the lessors gained the return of their aircraft – prior to any determination of their claimed right to terminate the leases in question and to regain possession of the aircraft – and the right to operate those aircraft, with attendant revenue generation, for their own account.
[18] The economic value to the lessors of these benefits should not be minimized. The motion judge put it this way when, at para. 14 of his reasons, he adopted the following submission made by the Authorities:
The [appellants] obtained a significant commercial benefit under the Release Protocols; they received the right, but not the obligation, to get their aircraft back in service and generating revenue. In return, they were required to post a fraction of the value of their aircraft as surety and bond. In fact, the Release Protocol Order as a whole enabled the release of Aircraft worth approximately U.S. $1.1 billion in exchange for sureties of approximately 3% of that amount.
I agree with this description of the effect of the protocols and the Release Order on the position of the lessors.
[19] Conversely, the Authorities surrendered a powerful commercial advantage under the protocols. So long as the Authorities retained their seizure and detention rights regarding the aircraft, they were positioned to ‘tie-up’ the aircraft, thus preventing their use by the lessors indefinitely, until arrangements satisfactory to the Authorities were made for payment of the charges owed to them. The relinquishment of these rights by the Authorities was a significant compromise of their bargaining position.
[20] However, the Authorities also obtained an important advantage under the ‘deal’ made by the parties. The benefit to the Authorities of the surrender of the negotiation leverage that arose from their ability to detain the aircraft indefinitely was security of future payment of the amounts owed to them from the funds posted as security in lieu of the aircraft. In effect, the Authorities “traded” the leverage arising from their seizure and detention rights in favour of security of future payment, on the contingency that they would ultimately prevail on the determination of their seizure and detention applications.
[21] The commercial implications of the protocols for the Authorities were not lost on the motion judge. In his reasons in support of the Release Order, he said:
The subject aircraft obviously have an aggregate value far in excess of the total fees in respect of which the [A]uthorities claim detention rights and the release of the aircraft will result in the [A]uthorities losing their only potential security for the fees owing. [Emphasis added.]
[22] The negotiated compromise achieved under the protocols also advanced the public interest. As the motion judge stated in his reasons in support of the Release Order:
It is accordingly essential that pending such final disposition [of the seizure and detention applications], some procedure be put in place quickly whereby the aircraft can be released to the lessors and put back into service for the benefit not only of the lessors but also for the benefit of the airline and travel industries and the traveling public.
[23] Relying on para. 16(i) of the protocols, however, the appellants contend that the negotiated bargain between the parties does not permit resort to the Release Fund by the Authorities absent a prior judicial determination that the Authorities’ seizure and detention rights afforded them a “priority” interest over the aircraft ahead of that of the lessors. To hold otherwise, the appellants submit, would allow the Authorities to “expropriate” the lessors’ money – the Release Fund – to retire the debts owed to the Authorities by Canada 3000 when, as confirmed by the Supreme Court Decision, the lessors have no responsibility in law for those debts. I would reject this argument.
[24] Paragraph 16(i) of the protocols establishes two preconditions to the Authorities’ right to call on the Release Fund to satisfy the outstanding charges owed to them. First, the Authorities are obliged to obtain a final court order, from which all appeal rights have been spent, lifting any applicable stay of proceedings and granting the Authorities seizure orders against the aircraft claimed by the lessors. As I have indicated, these orders were made by the motion judge in November 2006 and confirmed on January 12, 2007. Accordingly, once all appeal rights from these orders have been exhausted – including this appeal – this precondition will have been satisfied.
[25] Second, para. 16(i) of the protocols requires that a final court order be in place, declaring that the Authorities’ right of seizure “has priority over and is enforceable against the right, title, interest and claims of [the lessor in question] in and to such Aircraft”. In their factum filed on this appeal, the appellants argued that this requirement obliges the Authorities to establish that a detention order in their favour “creates a secured lien so that [the Authorities] had superior title to the [Release Fund] to the extent of their unpaid debt than would the [lessor] as [the] mere owner [of the aircraft in question]”.
[26] I disagree. In my view, this argument ignores the heart of the bargain struck by the parties under the protocols. As I have said, from the perspective of the Authorities, the essence of the protocols was a trade of the negotiating leverage arising from their seizure and detention rights in exchange for security of future payment of the debts owed to them. This did not depend on a holding that the Authorities’ detention remedy was the equivalent in law of a secured lien. Rather, it arose from the negotiations between the parties and from the resulting agreement embodied in the protocols and the Release Order.
[27] Moreover, the interpretation of para. 16(i) urged by the appellants is inconsistent with the language and context of the protocols. The motion judge was of the view that the appellants’ interpretation of para. 16(i) would require a court order declaring that the Authorities’ detention rights have priority over the title of the aircraft lessors “in the sense of priority of one creditor’s claim over that of another creditor to an asset of the debtor”. The motion judge, who drafted the protocols and oversaw the proceedings that led to the Release Order, rejected this interpretation, holding at para. 11 of his reasons:
I do not agree that the word “priority” was used in that sense in the Release Protocols. The whole purpose of the Release Protocols was to provide a mechanism whereby the aircraft could be released into service and the Authorities granted some security for the unpaid Charges pending a determination of the conflicting rights of the Authorities to detain the aircraft and the Lessors to possess the aircraft. It was not a question of competing security interests of two creditors in the same asset of the debtor. [Emphasis added.]
[28] I agree. At the time of the Release Order, the Authorities had sought, but had not yet obtained, seizure and detention orders. Their entitlement to such orders remained to be determined by the courts. Consequently, the accord struck under the protocols was not in the nature of a “bond-off” of a seizure order. Rather, from the Authorities’ perspective, the core of the protocols was the creation of a right to call on the Release Fund in the future, contingent upon the Authorities’ success on their detention app-lications.
[29] This was not a typical priorities contest between competing creditors. It was a deal struck between the titleholders to the aircraft and the unpaid creditors of Canada 3000 for reasons particular to their respective interests. Were it otherwise, it is difficult to conceive that the Authorities voluntarily would have surrendered the bargaining power arising from their prospective indefinite detention of aircraft valued at about U.S. $1.1 billion for the uncertain benefit of possession – but not the use – of money posted in substitution for the aircraft.
[30] In the Supreme Court Decision, the court held that the Authorities were entitled to seize and detain the aircraft notwithstanding the lessors’ property rights in the aircraft. In effect, therefore, the Supreme Court Decision provides the legal basis for a declaration concerning priority and enforceability, in satisfaction of the second precondition contem-plated by para. 16(i) of the protocols. As observed by the Supreme Court at para. 76 of the Supreme Court Decision: “In the Ontario case, there was considerable debate about whether the detention remedy created a lien. … Whether or not a lien could be said to arise by operation of law is perhaps of theoretical interest but it has no practical bearing on the result in these appeals.”
[31] Finally, I do not accept the appellants’ submission that the seizure and detention order issued by the motion judge in respect of the appellants “directly contradicts the instructions given by the Supreme Court as to the permissible scope of that order”, by permitting the Authorities recourse against the Release Fund. To the contrary, in my opinion, the decision of the motion judge is entirely consistent with the Supreme Court Decision.
[32] Justice Binnie, writing for the Supreme Court, stated at paras. 8-10 of the Supreme Court Decision:
I agree with the courts below that the respondent legal titleholders are not subject to personal or corporate liability to pay the unpaid charges under s. 55 CANSCA. But that is not to say that the aircraft are similarly unburdened.
In my view, the appellants are entitled to obtain judicially-authorized seize and detain orders (hereinafter sometimes collectively referred to as the detention remedy) to be exercised against the security posted in substitution for the aircraft. The matters should be remitted to the motions judges to work out the details of the orders. Considered in the context in which the detention remedy was intended by Parliament to operate, the detention remedy cannot be circumvented as suggested by the respondents by the expedient of leasing arrangements made between the airlines and the aircraft lessors. The detention remedy is purely statutory and Parliament’s intention to create an effective collection mechanism against the aircraft itself owned or operated by the person liable to pay the amount or charge must be given full effect. [Emphasis in original.]
On the other hand, the appellants’ remedy, if an order is granted, is limited to possession. Simple possession under the statutes does not confer any interest in the beneficial ownership of the aircraft. I do not think the appellants’ further claim to the airborne equivalent of a maritime lien is well founded, nor do they have any “implied” power to sell the aircraft once detained. They get what the statute says they get – a right to apply for a judicial order to seize and detain the aircraft until payment – no more, and no less.
[33] As I read these key passages, the Supreme Court held that the Authorities’ statutory detention remedy, if granted by the courts, as occurred here, takes priority over the rights of the lessors to repossess the aircraft, but the Authorities could not look to the aircraft itself to obtain payment of the outstanding charges owed to them. As Binnie J. put it, “[T]he appellants’ remedy, if an order is granted, is limited to possession. Simple possession under the statutes does not confer any interest in the beneficial ownership of the aircraft.”
[34] At the same time, however, as set out above, the Supreme Court accepted that the detention remedy – if granted – can be “exercised against the security posted in sub-stitution for the aircraft”, in accordance with Parliament’s intention “to create an effective collection mechanism against the aircraft itself”.
[35] That the detention remedy afforded the Authorities under the applicable federal statutes contemplates the ultimate payment of the debts owed to the Authorities was recognized throughout the Supreme Court Decision. Justice Binnie observed:
The only claim that the [A]uthorities have under federal aeronautics law is the claim to possession of the aircraft until their user charges are paid.
[T]he statute says that an aircraft operated by the person liable to pay the amount can be seized and, absent further court order, need not be released until the entire amount owed by that operator has been paid. … The [A]uthorities must only release the aircraft if “the amount in respect of which the seizure was made is paid”.
Parliament has left the door open for the motions judge to work out an arrangement that is fair and reasonable to all concerned, provided that the object and purpose of the remedy (to ensure the unpaid user fees are paid) is fulfilled. … The judge need not make each aircraft hostage for the full amount of the unpaid charges, provided the result is that the authority is paid in full. [Italicized emphasis in original; underlined emphasis added.]
[36] In practical terms, the Authorities’ detention remedy is a statutory device intended to drive all interested parties to the bargaining table to negotiate the payment of the debts owed to the Authorities, against the prospect of the release of the detained aircraft. Justice Binnie described this “collection mechanism” in these terms at para. 37:
It is more likely that Parliament fully appreciated that in dealing with aircraft flown in and out of jurisdictions under complex leasing arrangements, the only effective collection scheme is to render the aircraft themselves available for seizure, and thereafter to let those interested in them, including legal titleholders, registered owners, sublessors and operators, to resolve their dispute about where the money is to come from to pay the debts due to the service providers.
[37] Thus, while the scope of the detention remedy, once engaged, is limited to the right to detain the aircraft, the purpose of the remedy is to promote payment of the debts owed to the Authorities through negotiated dispute resolution.
[38] In this case, the parties did “resolve their dispute about where the money is to come from to pay the debts due” to the Authorities. Although not legally required to do so, they negotiated the creation of a Release Fund – in substitution for the aircraft and in consideration of the release of the aircraft to the lessors. Having so elected, the Authorities’ entitlement to detain the aircraft was in issue thereafter only to the extent that the judicial grant of their detention remedy was the trigger for the invocation of the call provisions under the protocols and the Release Order. This occurred here when, in accordance with the Supreme Court Decision, the motion judge determined to grant the requested detention remedy. Nothing more was required to satisfy the call provisions under the protocols.
[39] Accordingly, in the end, the protocols facilitated Parliament’s intention in creating the detention remedy, by generating a negotiation process that produced a fund from which the Authorities might be paid in full. In my opinion, this conforms with the Supreme Court’s conclusion that Parliament’s objective in respect of the remedy was to create an effective collection mechanism, enforceable against the aircraft, for the eventual payment in full of the unpaid charges owed to the Authorities.
IV. Conclusion
[40] I conclude, therefore, that the protocols and the Release Order reflect a voluntary commercial arrangement entered into by highly sophisticated parties for their mutual benefit. Under this arrangement, the appellants, like the other lessors, accepted that if the Authorities succeeded on their seizure and detention applications, recourse by the Authorities to the Release Fund would follow. This was the risk knowingly undertaken by the lessors to achieve a pressing commercial objective at the time of Canada 3000’s demise – the immediate return of their aircraft. I agree with the following submission by the Authorities, adopted by the motion judge at para. 14 of his reasons:
The Lessors posted this security [the Release Fund] without prejudice to their abilities to make legal and factual argu-ments on the issues that were litigated to the [Supreme Court of Canada]. The Lessors did not retain the right to argue that they could have full use of their Aircraft for five years, with no attendant payment obligation if they lost the legal arguments.
[41] I would dismiss the appeal. As agreed among the parties, I would award no costs of this appeal.
RELEASED:
“JUL -6 2007” “E.A. Cronk J.A.”
“DD” “I agree Doherty J.A.”
“I agree J.C. MacPherson J.A.”
[^1]: The language of the call provisions in each of the protocols was virtually identical.