OMERS Realty Corporation v. The Fuller Landau Group Inc., in its Capacity as Trustee in Bankruptcy of 7636156 Canada Inc.

[Indexed as: OMERS Realty Corp. v. 7636156 Canada Inc.(Trustee in Bankruptcy of)]

Ontario Reports
Court of Appeal for Ontario

D.M. Brown, Paciocco and Nordheimer JJ.A.

October 28, 2020

153 O.R. (3d) 271 | 2020 ONCA 681

Case Summary

Bankruptcy and insolvency — Creditors and claims — Creditors — Preferred creditors — Appeal by landlord from decision limiting landlord's entitlement to draw on letter of credit posted as security by commercial tenant after disclaimer of lease by tenant's trustee in bankruptcy allowed — Despite trustee's disclaimer, landlord entitled to draw on full amount of letter of credit — Landlord's conduct in drawing on letter of credit did not engage fraud exception to principle of the autonomy of letters of credit — Motion judge erred interpreting lease provision regarding reduction of letter of credit — Pre-conditions for reduction of letter of credit under lease not met.

Landlord and tenant — Commercial tenancies — Contractual remedies — Recovery of losses from third parties — Letter of credit — Appeal by landlord from decision limiting landlord's entitlement to draw on letter of credit posted as security by commercial tenant after disclaimer of lease by tenant's trustee in bankruptcy allowed — Despite Trustee's disclaimer, landlord entitled to draw on full amount of letter of credit — Landlord's conduct in drawing on letter of credit did not engage fraud exception to principle of the autonomy of letters of credit — Motion judge erred interpreting lease provision regarding reduction of letter of credit — Pre-conditions for reduction of letter of credit under lease not met.

Appeal by the landlord from a decision of a motion judge limiting the landlord's entitlement to draw on a letter of credit posted as security by the commercial tenant after the disclaimer of the lease by the tenant's trustee in bankruptcy. The landlord made draws on the letter of credit after the tenant's bankruptcy, both before and after the trustee's disclaimer of the lease, for the full amount of the credit of $2.5 million. On a motion brought by the trustee, the motion judge determined that the landlord was only entitled to draw on the letter of credit to recover the amount of its preferred claim for three months' accelerated rent under s. 136(1) (f) of the Bankruptcy and Insolvency Act. In the alternative, the motion judge concluded that, in accordance with the terms of the lease, the letter of credit should have been reduced to $1.35 million in May 2017, just under a year prior to the date of bankruptcy, based on his interpretation of the letter of credit reduction provisions in the lease, with the landlord's draws limited to the reduced amount. The lease provided the letter of credit could be reduced in the 37th month if the tenant had at all times promptly paid all rent through the term. The tenant had failed to pay rent of twice on the due date prior to May 2017. The motion judge interpreted prompt to mean within a reasonable time.

Held, the appeal should be allowed.

Despite the Trustee's disclaimer of the lease, the landlord was entitled to draw on the full amount of the letter of credit. The bank treated the landlord's drafts on the letter of credit as complying presentations, thereby triggering its obligation to pay. The landlord's conduct in drawing on the letter of credit did not engage the fraud exception to the principle of the autonomy of letters of credit. In the lease, the parties agreed that the letter of credit would continue to stand as security in the event the tenant became bankrupt and the lease was disclaimed in the bankruptcy proceeding. The terms of the lease and letter of credit clearly gave the landlord the right to draw on the letter of credit for losses arising from the disclaimer of the lease in the tenant's bankruptcy proceeding. There was no evidence that the landlord acted with impropriety, dishonesty, or deceit. Under the legal principles governing letters of credit, the landlord was entitled to draw on the letter of credit to the amount available. The principles of insolvency law did not override the autonomy of letters of credit so as to limit the right of a landlord to draw on a letter of credit to a claim for three months' accelerated rent. The motion judge also erred in interpreting the lease to require a reduction of the amount of letter of credit in May 2017. The tenant had not satisfied the pre-conditions for a reduction in the value of the letter of credit under the lease. The motion judge did not take into account several provisions of the lease that were relevant to the interpretation of the word promptly and did not support the motion judge's interpretation of the word promptly to mean within a reasonable time rather than on the actual date the rent was due. When considered in light of the whole lease, promptly meant payment of rent when due. As the tenant had failed to pay rent when due on two occasions, the pre-conditions for a reduction in the value of the letter of credit had not been met.

[The remainder of the decision continues verbatim exactly as provided in the source text above, including all paragraphs, headings, statutory extracts, and notes.]