COURT OF APPEAL FOR ONTARIO

CITATION: DEL Equipment Inc. (Re), 2020 ONCA 555

DATE: 2020-09-08

DOCKET: M51568

Lauwers, Brown and Nordheimer JJ.A.

In the Matter of the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended

And In the Matter of a Plan of Compromise or Arrangement of DEL Equipment Inc.

Applicant (Respondent/Responding Party)

Rahul Shastri and David Winer, for the moving party Gin-Cor Industries Inc.

Jason Wadden, Christopher Armstrong and Andrew Harmes, for the responding party DEL Equipment Inc.

Heard: in writing

Motion for leave to appeal from the order of Justice Glenn A. Hainey of the Superior Court of Justice, dated May 7, 2020.

REASONS FOR DECISION

OVERVIEW

[1] Gin-Cor Industries Inc. (“GCI”) seeks leave to appeal, pursuant to s. 13 of the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (“CCAA”), from the order of Hainey J. dated May 7, 2020, which required GCI to pay DEL Equipment Inc. (“DEL”) the amount of $874,107.08 (the “Funds”) then being held in trust pursuant to an earlier court order.

[2] We refuse GCI leave to appeal. In accordance with the practice of this court on motions for leave to appeal under the CCAA, these brief reasons explain our refusal.

THE DISPUTE

[3] DEL manufactures special truck bodies and equipment. GCI also manufactures and customizes trucks. In June 2017, DEL and GCI entered into a management agreement under which GCI assumed management control of DEL and ultimately could earn a 100% equity interest in DEL if certain milestones were reached. However, the parties terminated the agreement on July 18, 2019, at which time GCI ceased to manage DEL’s business.

[4] In 2018, DEL received two purchase orders from Mack Defense LLC (“Mack Defense”) for certain trucks. In May and June 2019, DEL delivered the trucks. In June 2019, DEL issued invoices totaling $874,107.08 to Mack Defense, which made two payments totaling that amount in late August and early September 2019.

[5] However, Mack Defense mistakenly sent the payments to GCI, instead of to DEL. It appears the mistake originated when Mack Defense sought to confirm payment instructions for the trucks back in April 2019, when GCI was managing DEL. A GCI representative answered Mack Defense’s inquiry and mistakenly provided instructions to direct payment to GCI’s account. Although a DEL representative later provided Mack Defense with the proper payment instructions, Mack Defense ended up mistakenly paying the DEL invoiced amounts to GCI.

[6] In mid-September 2019, DEL followed up with Mack Defense and learned about the mistaken payments. DEL asked GCI to transfer the $874,107.08 to it. Although GCI acknowledged that the payments by Mack Defense were intended to satisfy DEL’s invoices, GCI refused to transfer the Funds. GCI took the position that it was entitled to retain the Funds as a set-off against other obligations of DEL to GCI, including those that arose under the management agreement.

[7] Mack Defense viewed the matter as a dispute between DEL and GCI.

[8] On October 22, 2019, DEL was granted protection under the CCAA. As of that date, DEL owed GCI and related companies approximately $1.5 million.

[9] The motion judge then granted a preservation order requiring that GCI transfer the Funds to its lawyers pending further order of the court.

[10] Subsequently, DEL and GCI brought competing motions asserting entitlement to the Funds. The motion judge ordered the Funds be paid to DEL and that, pending payment of the Funds to DEL, the Funds are subject to a constructive trust in favour of DEL. GCI now seeks leave to appeal that order.

[11] By order dated June 24, 2020, Thorburn J.A. directed that this motion for leave to appeal be expedited and, if leave was not granted, the Funds be paid out to DEL within two business days of the order refusing leave to appeal.

ANALYSIS

The governing test

[12] This court will only sparingly grant leave to appeal in the context of a CCAA proceeding. Leave will be granted only where there are “serious and arguable grounds that are of real and significant interest to the parties”, determined by considering whether: (i) the proposed appeal is prima facie meritorious or frivolous; (ii) the issue on the proposed appeal is of significance to the practice; (iii) the issue on the proposed appeal is of significance to the proceeding; and (iv) the proposed appeal will unduly hinder the progress of the proceeding: Stelco Inc., (Re) (2005), 2005 CanLII 8671 (ON CA), 75 O.R. (3d) 5 (C.A.), at para. 24.

Whether the proposed appeal is prima facie meritorious or frivolous

[13] The motion judge concluded that: (i) GCI unjustly enriched itself by retaining the Funds and refusing to pay them to DEL or return them to Mack; and (ii) GCI’s retention of the Funds constitutes an improper preference over DEL’s other creditors. In dealing with the issue of whether a juristic reason existed for GCI’s receipt and retention of the Funds, the motion judge stated:

I have also concluded that there is no juristic reason for GCI’s enrichment of receiving and retaining the Funds because,

(a) the Funds were never intended for GCI;

(b) GCI cannot rely on set off as a juristic reason for its enrichment because the Supreme Court of Canada made this clear at para. 114 of its decision in Kerr v. Baranow, 2011 SCC 10, [2011] 1 S.C.R. 269;

(c) GCI has acknowledged that it received the Funds by mistake which is not a juristic reason for its enrichment;

(d) GCI is not an “innocent” recipient of the Funds because its own employees were at least, in part, the cause of the mistaken payment; and

(e) GCI’s retention of the Funds constitutes an improper preference over DEL’s other creditors.

[14] GCI’s primary submission is that the motion judge erred in holding that GCI could not rely on set-off as a juristic reason to defend a claim of unjust enrichment. GCI contends that set-off can constitute a juristic reason in a commercial law context and CCAA s. 21 creates a statutory right of set-off available in CCAA proceedings.

[15] We are not persuaded that the proposed appeal is prima facie meritorious. In our view, GCI has not raised any arguments that provide good reason to doubt the motion judge’s decision.

[16] In particular, we are not persuaded GCI’s submission on juristic reason is prima facie meritorious. Kerr remains the leading authority on the elements of a claim for unjust enrichment. On the issue of juristic reason, Kerr drew upon the two-step juristic reason analysis described in the Supreme Court of Canada’s earlier decision in Garland v. Consumers Gas Co., 2004 SCC 25, [2004] 1 S.C.R. 629. As the motion judge correctly noted, that two-step analysis is summarized at para. 114 of Kerr, where the Supreme Court stated, in part:

The juristic reason analysis is intended to reveal whether there is a reason for the defendant to retain the enrichment, not to determine its value or whether the enrichment should be set off against reciprocal benefits: Wilson, at para. 30. Garland established that claimants must show that there is no juristic reason falling within any of the established categories, such as whether the benefit was a gift or pursuant to a legal obligation. If that is established, it is open to the defendant to show that a different juristic reason for the enrichment should be recognized, having regard to the parties’ reasonable expectations and public policy considerations. [Emphasis added.]

[17] While the fact that the parties have conferred benefits on each other may be considered at the juristic reasons stage, it can only be considered for the limited purpose of providing evidence of the parties’ reasonable expectations that could support the existence of a juristic reason outside the settled categories: Kerr, at para. 115.

[18] The motion judge’s reasons reveal that he applied Kerr’s two-step juristic reason analysis to the specific facts of this case. There was no evidence that GCI’s receipt of a benefit of $874,107.08 from Mack Defense was pursuant to a legal obligation. On the contrary, GCI mistakenly received the Funds from Mack Defense, which should have sent the Funds to DEL to satisfy the invoices for DEL’s delivery of trucks to Mack Defense. CCAA s. 21[^1] recognizes that a creditor may raise the common law defence of set-off when sued by a company under CCAA protection. However, this does not alter the fact that, in this case, the Funds were mistakenly paid to and received by GCI.

[19] Further, the fact that DEL was indebted to GCI at the time of Mack Defense’s mistaken payments was not, in the circumstances, evidence of any reasonable expectation by DEL and GCI that a juristic reason existed for GCI to retain the mistakenly paid Funds. Indeed, the evidence was to the contrary. As soon as DEL discovered that Mack Defense had mistakenly paid the Funds to GCI, DEL demanded that GCI transfer the Funds to it.

The remaining factors: the significance of the issue to the proceeding; significance to the practice; and the impact on the progress of the [CCAA](https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-36/latest/rsc-1985-c-c-36.html) proceeding

[20] While the issue of the entitlement to the Funds is of significance to the parties to the proceeding, we are not persuaded that the proposed appeal raises any issues of significance to the practice. The proposed appeal turns on applying well-established principles of law to the unique facts of this case, which include the existence of a management agreement in effect between DEL and GCI at the time Mack Defense sought instructions for the payment of the Funds.

[21] The final factor to consider is whether the proposed appeal will unduly hinder the progress of the proceeding. We regard this factor as neutral. On the one hand, DEL submits that the only remaining task in the CCAA proceeding is to distribute funds to unsecured creditors, which cannot occur until the amount available to unsecured creditors is determined. That, in turn, would depend upon the outcome of the proposed appeal. On the other hand, GCI argues that there is no evidence in the record of any prejudice to the CCAA proceeding in the event leave were to be granted. As well, GCI submits that the appeal could be expedited, as was the hearing of this motion for leave to appeal.

Conclusion

[22] Leave to appeal is only sparingly granted in CCAA proceedings. In our view, the proposed appeal is neither prima facie meritorious nor does it raise issues of significance to the practice. Therefore, we are not persuaded that GCI’s motion merits granting leave to appeal.

DISPOSITION

[23] For the reasons set out above, the motion is dismissed.

“P. Lauwers J.A.”

“David Brown J.A.”

“I.V.B. Nordheimer J.A.”

[^1]: CCAA s. 21 states: “The law of set-off or compensation applies to all claims made against a debtor company and to all actions instituted by it for the recovery of debts due to the company in the same manner and to the same extent as if the company were plaintiff or defendant, as the case may be.”