In the Matter of a Plan of Compromise or Arrangement of Grant Forest Products Inc. et al. [Indexed as: Grant Forest Products Inc. (Re)]
101 O.R. (3d) 383
2010 ONCA 355
Court of Appeal for Ontario,
O'Connor A.C.J.O., Doherty and Goudge JJ.A.
May 14, 2010
Equity -- Remedies -- Declaration -- Respondent entering into agreement with company pursuant to which he advanced funds to purchase income tax refunds due to company in 2008 and 2009 -- Agreement providing that respondent acquired no right, title or interest in 2009 refund until company delivered transfer to him on January 2, 2009 -- Company not doing so and subsequently receiving protection under Companies' Creditors Arrangement Act -- Respondent moving successfully for declaration that, in equity, transfer had taken place as of January 2, 2009 and that he acquired full right, title and interest in refund -- Motion judge not erring in applying maxim that equity considers done what ought to be done.
The respondent was the chief executive officer and controlling shareholder of GFPI. He and GFPI entered into a Tax Refund Agreement pursuant to which the respondent advanced funds to GFPI to purchase income tax refunds due to GFPI in 2008 and 2009. Under the agreement, the respondent acquired no right, title or interest in the 2009 tax refund until GFPI delivered a transfer to him on January 2, 2009. GFPI failed to deliver the transfer. It subsequently sought and received protection under the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36. The respondent moved successfully for a declaration that, in equity, the transfer had taken place as of January 2, 2009 and that he acquired full right, title and interest in the 2009 tax refund as of that date. The appellant appealed.
Held, the appeal should be dismissed.
The motion judge did not err in applying the principle that equity considers done what ought to be done. That maxim may be applied if (i) the contract, properly interpreted, imposes an obligation on a contracting party to do something that it had not done; (ii) the contract is one that can be specifically enforced; and (iii) the maxim is invoked not by a stranger, but by a party who would be entitled to specifically enforce the contract. All of those criteria were met in this case. The application of the equitable maxim did not remake the parties' contract for them. Rather, it served to cure GFPI's breach of its obligation to deliver the transfer; it [page384] was the contract itself that accorded the respondent the interest in the refund. The application of the maxim did not give the respondent full recovery of an unsecured claim against GFPI at the expense of the company's secured creditors. The respondent's claim was not for money damages; it was for a beneficial interest in the 2009 tax refund -- on e that the Tax Refund Agreement provided to him and that GFPI's breach denied.
APPEAL from the order of Newbould J., 2009 55379 (ON SC), [2009] O.J. No. 4223, 58 C.B.R. (5th) 127 (S.C.J.) granting a declaration with respect to interest in the tax refund.
Cases referred to De Beers Consolidated Mines Ltd. v. British South Africa Co., [1912] A.C. 52 (H.L.) Statutes referred to Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 95 [as am.] Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 [as am.] Authorities referred to Martin, Jill E., Hanbury and Martin: Modern Equity, 16th ed. (London: Sweet & Maxwell, 2001) McGhee, John, Snell's Equity, 31st ed. (London: Sweet & Maxwell, 2005)
Geoff R. Hall, for appellant Toronto-Dominion Bank. Sean Dunphy and Kathy Mah, for monitor Ernst and Young. Richard B. Swan, for respondent Peter J. Grant Sr. D. Dowdall, for respondents Grant Forest Products Inc., Grant Alberta Inc., Grant Forest Products Sales Inc. and Grant U.S. Holdings GP.
The judgment of the court was delivered by
[1] GOUDGE J.A.: -- The respondent, Peter J. Grant Sr., is the chief executive officer and controlling shareholder of Grant Forest Products Inc. ("GFPI"). Pursuant to an agreement between the respondent and GFPI (the "Tax Refund Agreement"), the company was required to deliver a "transfer" document to Mr. Grant on January 2, 2009, which entitled him to the tax refund due to the company in 2009.
[2] In breach of the Tax Refund Agreement, GFPI failed to deliver this transfer. On June 25, 2009, the company sought and received protection under the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 ("CCAA"), as amended.
[3] Mr. Grant moved successfully for a declaration that, in equity, the transfer has taken place as of January 2, 2009 and, as a consequence, he acquired full right, title and interest in the 2009 tax refund as of that date. The motion judge reached this [page385] conclusion by applying the principle that equity considers done what ought to be done.
[4] The question in this appeal is whether the motion judge was correct to apply the maxim or whether by doing so he effectively rewrote the contract between the parties. For the reasons that follow, which closely parallel those of the motion judge, I conclude that he was correct and that the appeal must be dismissed. The Facts
[5] GFPI is in the lumber business. The respondent started the business in 1980, but by the mid-point of the present decade GFPI's financial health had declined to the point that the respondent began to advance the company funds in several different ways.
[6] One of these ways was the Tax Refund Agreement. It took effect on March 31, 2008, and provided that the respondent would pay US$20 million to GFPI in March 2008 to purchase US$10 million worth of income tax refunds due to GFPI in each of 2008 and 2009. The contract was carefully structured to comply with GFPI's credit agreements, which set out that the total amount of assets sold in a given year could not exceed US$10 million. Thus, while the company immediately acquired the US$20 million paid by the respondent, he acquired no right, title or interest in the 2009 tax refund until GFPI delivered the transfer to him at the 2009 closing -- defined in the Agreement as "the closing of the purchase and sale of the Sold 2009 Refund on January 2, 2009". The relevant provisions of the Agreement are as follows:
Section 5.02 No Interest of Purchaser in Sold 2009 Refund Until 2009 Closing
The parties agree, notwithstanding any other provision of this Agreement or any other right or purported right of the Purchaser, that the Purchaser does not acquire any right, title or interest in the Sold 2009 Refund, and the Vendor does not sell, assign or transfer any right, title or interest in the Sold 2009 Refund until the Vendor delivers to the Purchaser at the 2009 Closing, the transfer referred to in Section 7.04(a)
Section 7.04 Deliveries or Payments on 2009 Closing by the Vendor
The Vendor shall deliver or pay to the Purchase at the 2009 Closing, in form and substance satisfactory to the Purchaser, acting reasonably:
(a) a transfer by the Vendor to the Purchaser of the Sold 2009 Refund.
[7] The Agreement also required GFPI to hold in trust for the respondent the 2009 tax refund that he purchased, once the company received it, after the 2009 closing: [page386]
Section 5.06 Sold 2009 Refund Held in Trust by Vendor
The Vendor shall hold in trust for Purchaser, keep segregated from any other funds, accounts or assets of the Vendor and pay to the Purchaser any amount of the Sold 2009 Refund received by the Vendor after the completion of the 2009 Closing.
[8] On January 2, 2009, GFPI failed to deliver the transfer to the respondent as required by s. 7.04(a) of the Agreement. It acknowledges that it is in breach of the Agreement for failing to do so. It had still not done so by June 19, 2009, when the respondent, anticipating the company's filing under the CCAA, demanded that GFPI deliver the required transfer document no later than June 22, 2009. Once again, the company did not do so, and on June 25, 2009 it sought and obtained protection under the CCAA. The respondent's motion ensued. The Decision Appealed From
[9] The respondent sought an order that he had purchased and was entitled to receive from GFPI the transfer, as defined in the Tax Refund Agreement. GFPI took no position on the motion. The appellant opposed the motion, arguing (as it does in this court) that the Tax Refund Agreement provides the respondent no interest in the 2009 tax refund before GFPI delivers the transfer at the closing on January 2, 2009. Since that transfer was not delivered, the appellant's position was that the court would be rewriting the clear agreement of the parties by providing for it now.
[10] The appellant is the agent for a syndicate of banks who constitute the senior secured lenders to GFPI. The motion judge found that these lenders and their solicitors were quite involved in the drafting of the Tax Refund Agreement. He also found that it was the position of these lenders in 2009 that influenced GFPI to decline to deliver to the appellant on January 2, 2009 the transfer that the Agreement required. In order for GFPI to have the support of these lenders in the restructuring that was required, they sought to have the US$10 million refund in 2009 retained in the company and not paid to the respondent. In this court, the appellant does not challenge these findings of fact.
[11] In these circumstances, the motion judge found that it would be inequitable and contrary to the intent of the Tax Refund Agreement for GFPI to contend that, because of its own breach in failing to deliver the transfer to the respondent -- that is, in causing the 2009 closing not to take place -- its requirement to hold the 2009 tax refund in trust for him does not arise. The motion judge held that the principle that equity considers done what ought to be done is applicable, and the transfer that [page387] was to occur on January 2, 2009 must be treated as if it took place. He concluded as follows [at paras. 44-45]:
In my view, and I so find, as the transfer from GFPI to Mr. Grant is deemed at equity to have been delivered on January 2, 2009, the trust provisions of s. 5.06 mean that if the tax refund due to Mr. Grant is received by GFPI, it is to be held in trust for him and the first and second lien lenders do not have any security over it.
I do not agree with the assertion by TD that to now order GFPI to deliver a transfer of the 2009 tax refund would amount to a preference in favour of Mr. Grant. It would not be providing Mr. Grant as an unsecured creditor with a payment from the company's assets ahead of other creditors. Rather it would be effecting delivery to him of an asset belong [sic] to him. It is not the company's asset. Analysis
[12] In this court, the appellant argues that the equitable maxim relied on by the motion judge cannot be invoked to make for the parties a contract different from the one they made for themselves. It also argues that it would be inequitable to apply the maxim following the CCAA order because that would give the respondent recovery of 100 cents on the dollar on his unsecured claim, thereby creating a clear preference over the secured lenders whose recovery will be substantially less than that. The monitor appointed for GFPI in the CCAA proceedings supports the appellant and adds that the motion judge should not have applied the equitable maxim without considering whether this could potentially be found to grant a preference over other creditors pursuant to s. 95 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA").
[13] The first question is whether it was open to the motion judge in the exercise of his equitable jurisdiction to apply to the equitable maxim that equity looks on that as done which ought to be done. Like the other so-called maxims of equity, this is not a rule that must be rigorously applied in every case, but a principle illustrating the way in which the equitable jurisdiction of the court is exercised: see, Hanbury and Martin: Modern Equity, 16th ed. (London: Sweet & Maxwell, 2001) at p. 27.
[14] In Snell's Equity, 31st ed. (London: Sweet & Maxwell, 2005), the maxim is described this way, at p. 107:
This maxim has its most frequent application in the case of contracts. Equity treats a contract to do a thing as if the thing were already done, though only in favour of persons entitled to enforce the contract specifically and not in favour of volunteers. Agreements for value are thus often treated as if they had been performed at the time when they ought to have been performed, with the same consequences as if they had then been completely performed. For example, a person who enters into possession of land under a specifically enforceable agreement for a lease is regarded in any court [page388] which has jurisdiction to enforce the agreement as being in the same position as between himself and the other party to the agreement as if the lease had actually been granted to him.
[15] In addition, in De Beers Consolidated Mines Ltd. v. British South Africa Co., [1912] A.C. 52 (H.L.), this is said about the maxim, at pp. 65-66:
Much reliance was placed by counsel for the company in argument on the application to the agreement of December 7, 1892, and especially to its first paragraph, of the well- known doctrine of Courts of Equity, that in equity everything should be taken to be done which ought to be done. That doctrine cannot, in its application to contracts, however, be permitted to turn the conditional into the absolute, the optional into the obligatory, or to make for the parties contracts different from those they have made for themselves. What a party to a contract ought to do, within the true meaning of this doctrine, is what he has contracted to do, and nothing more and nothing less is to be taken, in equity, to be done. So that the very first point to be considered in this case, necessarily, is the true construction of the contract of December 7, 1892 -- the determination of what the parties to it had respectively bound themselves to do.
[16] Thus, the maxim can clearly be applied if (i) the contract, properly interpreted, imposes an obligation on a contracting party to do something that it has not done; (ii) the contract is one that can be specifically enforced; and (iii) the maxim is invoked not by a stranger, but by a party who would be entitled to specifically enforce the contract.
[17] Where the time for performance required by the contract has passed, the application of the maxim allows the court to give recognition to the obligation from the time it ought to have been performed. This can be compared to the remedy of specific performance which typically carries only prospective effect.
[18] The circumstances of this case make the application of this equitable maxim entirely appropriate. The Tax Refund Agreement imposed a clear obligation on GFPI to deliver the transfer to the respondent on January 2, 2009. GFPI failed to perform this obligation.
[19] Under the Tax Refund Agreement, delivery of the transfer created a beneficial interest in the 2009 tax refund in favour of the respondent, and a corresponding trust obligation on GFPI. The obligation to deliver the transfer is thus the kind of obligation that the respondent is entitled to specifically enforce, and it is the respondent who seeks to invoke the maxim.
[20] Contrary to the appellant's submission, the application of the equitable maxim does not remake the parties' contract for them by giving the respondent an interest in the 2009 tax refund even though the transfer was never delivered. Rather, the maxim serves to cure GFPI's breach of its obligation to [page389] deliver the transfer and it is the contract itself that then accords the respondent the interest in the 2009 tax refund.
[21] I would therefore dismiss the appellant's argument that it is not open to the motion judge to invoke the equitable maxim in the circumstances of this case.
[22] Nor do I think it was inequitable for him to do so. Quite the reverse. As between the respondent and GFPI, it would be inequitable for GFPI to take advantage of its own breach of the Tax Refund Agreement by successfully contending that its failure to deliver the transfer (which precluded the 2009 closing from taking place) excused it from its contractual obligation to hold the 2009 tax refund in trust for the respondent.
[23] Moreover, I do not agree that the application of the maxim gives the respondent full recovery of an unsecured claim against GFPI at the expense of the Company's secured creditors. The respondent's claim against GFPI for its breach of the Tax Refund Agreement is not for money damages. Rather, his claim is for a beneficial interest in the 2009 tax refund -- one that the Tax Refund Agreement provides to him and that GFPI's breach denied. The application of the maxim simply remedies that breach.
[24] Even if one went beyond the interests of the contracting parties and considered the interests of the secured creditors in determining whether it is equitable to apply the maxim to cure GFPI's breach of the Tax Refund Agreement, in my view the answer would be the same. As the trial judge found, the secured creditors were quite involved in the beginning in drafting the Tax Refund Agreement, and it was their position with GFPI that influenced the company to breach its contractual obligation to the respondent. It is hardly inequitable for the court to apply the equitable maxim to require the secured creditors to live with an agreement that they helped make, and that they influenced GFPI to breach.
[25] The final issue to be considered is the monitor's argument that the motion judge should have considered s. 95 of the BIA in determining whether to apply the equitable maxim. The simple answer is that GFPI is not engaged in bankruptcy proceedings under the BIA, nor has it been found that the company was insolvent on January 2, 2009. Speculation about whether that could possibly happen in the future does not warrant the consideration of s. 95 of the BIA in the present proceeding.
[26] For these reasons, the appeal must be dismissed. Costs payable by the appellant to the respondent are fixed at $24,000, inclusive of disbursements and GST.
Appeal dismissed.