ONTARIO

SUPERIOR COURT OF JUSTICE ( Commercial List)

Court File No. CV-11-9144-00CL
Date: 20120322

B E T W E E N:

CENTRAL 1 CREDIT UNION (Applicant)

Roger Jaiparagas, Douglas O. Smith for the Applicant

• and -

UM FINANCIAL INC. and UM CAPITAL INC.

Jane O. Dietrich for the Receiver of UM Financial Inc. and UM Capital Inc.

(Respondents)

C.P. Stevenson, J. Daniel McConville for Multicultural Consultancy Canada, Inc.

HEARD: March 14, 2012

REASONS FOR DECISION

[ 1 ] Central 1 Credit Union ("Central 1") seeks a declaration with respect to the validity of security interests granted by UM Financial Inc. and UM Capital Inc. (collectively "UM") and the priority of those interests over (a) certain precious metals with a value exceeding $2 million; and (b) to the collateral over the claims of Multicultural Consulting Canada Inc. ("MCC") in a civil action of which MCC is the assignee from the Plaintiff UM with a claim of $50 million that exceeds the debt owed by UM to the Defendant in the action, Central 1.

[ 2 ] MCC does not dispute the validity of the General Security Agreement or the priority granted to Central 1 over the precious metals which were converted by UM from cash shortly before the receivership motion in this matter was brought by Central 1 in October 2011 and a subsequent assignment in bankruptcy of UM.

[ 3 ] What MCC does object to is the claim by Central 1 for priority over an action commenced by UM against Central 1 for among other things negligence, interference with economic relations and a denial of default in the debt to Central 1.

[ 4 ] MCC received an assignment of a cause of action commenced by UM one day prior to the hearing of Central 1’s receivership application apparently with knowledge that UM was to withdraw its opposition to the receivership Order.

[ 5 ] The basis of the opposition of MCC to the declaratory relief sought by Central 1 is that since the action of which MCC is the assignee is against Central 1, the applicant should not have control of the action since it is the defendant.

[ 6 ] The first position of MCC is that in the circumstances, the action is not within the definition of “collateral” in the General Security Agreement. I am of the view that the definition of “collateral” is sufficient to include an action in the abstract sense.

[ 7 ] I accept the argument on behalf of MCC that the general proposition must take into account the particular circumstances that could give control to a creditor over an action as against it by the debtor.

[ 8 ] Counsel for MCC relies on the decision of Ground J. in 1239745 Ontario LTD v. Bank of America Canada, 1999 CarswellOnt. 2665 (S.C.J.) for the proposition that it would be “absurd and manifestly unfair” if a security agreement gives the lender the right, upon default, to pursue causes of action belonging to the debtor against the lender itself. To avoid the absurdity, the security agreement in question was held to apply only to causes of action against third parties and not the debtor.

[ 9 ] I agree with the reasoning and decision in the above case. Each situation must be considered in a factual context. The distinction to be made between the factual situation in the Bank of America case and in this situation is the presence of a Receiver who is a court officer.

[ 10 ] If I am correct that the General Security Agreement can include control over an action, then one looks to the next step to ask the question whether control in the particular circumstances would be unfair, unreasonable or absurd.

[ 11 ] In this case, given the Receivership Order, it is the Receiver and not the lender who will advise and determine whether or not it is appropriate that the action continue or not continue. As a result, it will be the Receiver's advice and the Court’s determination as to whether or not the action should continue. In my view there is nothing unfair or unreasonable in that process.

[ 12 ] There is another reason why leaving the matter in the first instance with the Receiver is not unfair. If the action is not pursued by the Receiver, then MCC can seek the opportunity in the bankruptcy to either have the Trustee pursue the action or seek assignment from the Trustee to pursue it under section 38 of the BIA.

[ 13 ] Since I have concluded that in these circumstances Central 1 will not control the action, it is not necessary to deal with the final argument of MCC that the security would only apply to the proceeds and not the action itself.

[ 14 ] For the above reasons an Order will issue that in the particular circumstances in this matter, given the Receivership Order of this Court, included in the collateral under the General Security Agreement is the cause of action of which MCC is the assignee.

[ 15 ] If it is necessary to deal with the issue of costs counsel may make written submissions.

C. CAMPBELL J.

RELEASED:

Court File No. CV-11-9144-00CL
Date: 20120322

ONTARIO SUPERIOR COURT OF JUSTICE B E T W E E N: CENTRAL 1 CREDIT UNION (Applicant) - and – UM FINANCIAL INC. and UM CAPITAL INC. (Respondents) REASONS FOR DECISION C. CAMPBELL J.

Released: March 22, 2012