SUPERIOR COURT OF JUSTICE – ONTARIO

COURT FILE NO.: 32-1477576
DATE: 2013-08-15

IN THE MATTER OF THE BANKRUPTCY OF DI-MOND TRAILERS INC.

RE: Scott and Pichelli Limited, Moving Party

- v. -

Eveley International Corp., Respondent

BEFORE: Mr. Justice H.J. Wilton-Siegel

COUNSEL: Cameron D. Neil, for the Moving Party
James D. Higginson, for the Respondent

HEARD: June 13, 2013

ENDORSEMENT

[1] This is a motion for a determination of priority to the sum of $124,618.33, plus any accrued interest thereon, that has been paid into court to the credit of the estate of Di-Mond Trailers Inc. (the “Bankrupt”) by VT Hackney, Inc. (“VT”) pursuant to the order of Perell J. dated July 18, 2011 (the “Perell Order”). The parties claiming an interest in these monies are the applicant Scott and Pichelli Limited, the trustee in bankruptcy of the Bankrupt (the “Trustee”), and the respondent Eveley International Corp. (“Eveley”). The Trustee also seeks reimbursement to the estate of the Bankrupt of its costs of the interpleader proceeding before Perell J. in the amount of $15,000.

Factual Background

[2] VT is a producer of side-loader, overhead door truck bodies and trailers.

[3] VT contracted with the Bankrupt for the production and installation on 19 of its trailers of a component referred to herein as a “b-train”, which is added to a trailer to allow it to tow a second trailer. VT issued purchase orders for 19 b-train parts (the “Purchase Orders”) and delivered 19 trailers to the Bankrupt for installation of such parts. It is acknowledged that at all relevant times the trailers were the property of VT.

[4] The Bankrupt sub-contracted the work to Eveley without VT’s prior knowledge or consent. VT learned of the sub-contract arrangement in December 2010, several months after it had issued the Purchase Orders.

[5] The sub-contract arrangement between Eveley and the Bankrupt was governed by a written sales agreement dated August 16, 2010 (the “Sales Agreement”), which governed all 19 b-train parts to be installed on the 19 trailers.

[6] The b-train parts were installed on all of VT’s trailers, which were in turn delivered to VT, with the exception of one trailer which was delivered to the Bankrupt and subsequently repossessed by Eveley (the “Trailer”). The parties dispute whether the repossession occurred before or after the date of bankruptcy, which occurred on March 24, 2011. This issue is addressed below.

[7] The total cost of Eveley’s work under the Sales Agreement, which was $151,227.69, remains outstanding and owing by the Bankrupt. The cost of the production and installation of the b-train installed on the Trailer (the “B-Train”) was $11,564.70.

Nature of the Proceeding

[8] This trial proceeded by way of cross-examination on affidavits previously submitted by Peter Pichelli, on behalf of the Trustee (“Pichelli”), Christopher Dilillo, the former president of the Bankrupt (“Dilillo”), and Dawn Eveley, the Secretary-Treasurer of Eveley (“Dawn Eveley”). In addition, Eveley produced an affidavit of Scott Paddock, the operations manager of Earl Paddock Transportation Inc. (“Paddock”), but Paddock did not attend the hearing and therefore was not cross-examined.

[9] In a troubling development, Dilillo changed his testimony in a significant manner at trial without any prior indication to Eveley or its counsel. In his affidavit, Dilillo stated that an agreement was reached that $100,000 would be paid to Eveley, the Trailer would be released to VT, and the balance owing by VT to the Bankrupt would be paid to the Trustee. At the hearing, Dilillo stated that his evidence was now that no such agreement had been reached. He offered no explanation for changing his testimony. It is clear that, in the circumstances of the bankruptcy at least, Dilillo’s personal interests override whatever sense of honesty he might otherwise have. In these circumstances, I have treated all of his evidence with skepticism, there being no corroborating documentation to support his evidence on either of the two factual issues to be determined by the Court.

Factual Issues in Dispute on this Motion

[10] There are two principal factual issues in dispute between the parties: (1) whether the parties entered into a settlement agreement in June 2011; and (2) if not, whether Eveley repossessed the Trailer before or after the date of bankruptcy of the Bankrupt. I will address each issue in turn.

Alleged Settlement Agreement

[11] Eveley alleges that the parties reached an agreement at a meeting held on June 7, 2011 for the payment to Eveley of $100,000 in full satisfaction of its claim against the Bankrupt. The Trustee denies that the parties reached a settlement at the meeting as alleged by Eveley.

[12] Eveley’s position is based entirely on Dawn Eveley’s testimony that the parties reached an agreement. There is no written evidence of any kind of the alleged agreement.

[13] The onus of establishing the agreement rests with Eveley. While I have no doubt that Dawn Eveley proposed such a settlement, Eveley has not demonstrated that the parties reached such an agreement. The Trustee’s position on this issue is more credible. Pichelli says the Trustee was only prepared to pay an amount that represented estimated legal costs if a settlement were not reached. Pichelli says that, accordingly, he offered only $20,000 and that, in any event, the Trustee could not enter into a binding agreement without the consent of the inspectors of the estate. The former is consistent with the weakness of Eveley’s legal position. The latter is legally correct, rendering any understanding reached at the meeting unenforceable in any event until inspector consent was obtained.

[14] In addition, and in any event, on Dawn Eveley’s own testimony, the agreement reached was conditional on VT’s participation, which was not forthcoming without court approval according to Eveley’s own affidavit. Therefore, the alleged agreement would also be unenforceable on this additional ground.

[15] Based on the foregoing, I therefore conclude that the parties did not enter into a binding agreement of the nature alleged by Eveley at or following the meeting of June 7, 2011.

Date of Repossession of the Trailer

[16] The parties also dispute the date of repossession of the Trailer by Eveley. Eveley says it repossessed the Trailer on March 18, 2011. The Trustee says that the Bankrupt had possession of the Trailer as of the date of bankruptcy and that Eveley repossessed the Trailer some time later.

[17] Dawn Eveley says that the Trailer was delivered to Di-Mond on or before March 18, 2011 on the understanding from Dilillo that a cheque would be delivered by Di-Mond at the same time. When no cheque was delivered, she says she arranged with Earl Paddock Transportation Inc. (“Paddock Transportation”) to have it picked up on March 18, 2011 and that it was picked up at 8:05 p.m. that day.

[18] The Trustee relies principally on Pichelli’s testimony that he saw the Trailer on the Di-Mond property on the morning of March 24, although in his affidavit Pichelli says the date was March 23. Pichelli says the Trailer was surrounded by three other trailers and had a lock-pin in it. He says Dilillo pointed out the Trailer to him. The Trustee also relies on an email of Dilillo to VT dated March 21, 2011 in which Dilillo referred to one trailer belonging to VT being ready to go but locked inside the Di-Mond compound.

[19] On balance, I think it is more probable that the Trailer was picked up on March 18, 2011 for the following reasons.

[20] First, Eveley’s evidence is supported by an invoice of Paddock Transportation as well as the affidavit of Paddock referred to above. I have not relied on the Paddock affidavit as the Trustee was unable to cross-examine Paddock on it. However, there is no obvious reason why Paddock Transportation would have fabricated an invoice for $285 plus tax in this matter.

[21] Second, insofar as the Trustee relies on evidence of Dilillo for its position – in this case his email of March 21, 2011 – I am skeptical of such evidence. As mentioned, I think Dilillo’s concern for his personal interests in the bankruptcy make his statements to third parties suspect. There is no independent support for the accuracy of his email to VT even if it was sent at the time. It is also possible that he did not know the Trailer had been removed.

[22] Third, removal after March 21, 2011 required access to the Di-Mond property as well as movement of the three trailers placed around it. The Trustee says the Di-Mond property was locked so that access must have been through an adjoining property. It seems improbable that a third party transportation company would be prepared to access the Di-Mond property in this manner and move three other trailers, as well as unlock the linchpin, without having any contact with, and without obtaining permission from, both the adjoining landowner and Di-Mond, which did not occur.

Legal Issues on this Motion

[23] Eveley asserts that it has a lien or other security interest against the Trailer under two statutes which will be addressed in turn. It should be noted, however, that in either case, the lien is limited to the value of the B-Train attached to the Trailer, being $11,564.70.

Did Eveley Have a Valid Lien Under the Repair and Storage Liens Act, R.S.O. 1990, c. R.25?

[24] Eveley initially claimed in this proceeding that it had a lien under the Repair and Storage Liens Act, R.S.O. 1990, c. R.25 (the “RSLA”). It did not, however, argue strenuously for such lien at the hearing. In any event, I conclude that Eveley does not have a lien under the RSLA for the following reasons.

[25] First, there is no evidence that the Bankrupt agreed to act as agent for VT in forwarding the Trailer to Eveley nor is there any evidence that Eveley was identified to VT as the proposed repairer of the Trailer. Accordingly, pursuant to section 1(2) of the RSLA, Eveley did not have a lien under that statute even if its work on the Trailer satisfied the requirements of a “repair” as defined in section 1(1) of the RSLA.

[26] Second, pursuant to section 5 of the RSLA, any lien that Eveley had was discharged upon delivery of the Trailer to the Bankrupt on or about March 18, 2011. Section 5 of the RSLA not only provides that any lien thereunder is discharged in such circumstances but also provides that any prior lien “cannot be revived as an interest in the article”. Accordingly, Eveley’s repossession of the Trailer on March 18, 2011 did not revive any lien it might otherwise have had under the RSLA.

Priority Under the PPSA

[27] It is common ground that Eveley purported to reserve title to the B-Train under the Sales Agreement and that therefore the PPSA applies to the transaction. It is also common ground that the B-Train constitutes an “accession” as defined in section 1(1) of the Personal Property Security Act R.S.O. 1990, c. P.10 (the “PPSA”), being “goods that are installed or affixed to other goods”, i.e., to the Trailer.

[28] Priorities with respect to accessions are governed by section 35 of the PPSA:

35.--(1) Subject to subsections (2) and (3) of this section and section 37, a security interest in goods that attached,

(a) before the goods became an accession, has priority as to the accession over the claim of any person in respect of the whole; and

(b) after the goods became an accession, has priority as to the accession over the claim of any person who subsequently acquired an interest in the whole, but not over the claim of any person who had an interest in the whole at the date the security interest attached to the accession and who has not consented in writing to the security interest in the accession or disclaimed an interest in the accession as part of the whole.

[29] It is my understanding that the parties accept that paragraph 35(1)(a) of the PPSA governs the attachment of Eveley’s security interest in the B-Train. On this basis, whether Eveley has a secured claim in respect of the B-Train depends upon whether Eveley had a perfected security interest in the B-Train at the date of bankruptcy.

[30] In view of the fact that Eveley registered its PPSA financing statement after the date of bankruptcy, the perfection of Eveley’s security interest therefore turns on whether Eveley’s security interest in the B-Train was perfected by possession pursuant to section 22 of the PPSA at the date of bankruptcy. If it was not, paragraph 20(1)(b) of the PPSA provides that its security interest in the B-Train is not effective against the Trustee.

[31] By virtue of the finding above that Eveley repossessed the Trailer on March 18, 2011, I conclude that Eveley had a perfected security interest as of the date of bankruptcy of Di-Mond. This claim has been valued at $11,564.70.

Additional Claim of the Trustee

[32] As mentioned, the Trustee also seeks reimbursement of its costs in the amount of $15,000 for the proceeding before Perell J. It says this proceeding would not have been necessary if, prior to the interpleader proceeding before Perell J., Eveley had clarified that its claim was limited to the B-Train and did not extend to the Trailer.

[33] I do not accept this submission for the following reasons.

[34] First, while there was some confusion on this issue, I think that Eveley did make the distinction between the B-Train and the Trailer clear in the email of its counsel dated May 3, 2011, even if correspondence of the same date may have been incorrect.

[35] Second, and more importantly, it is not clear that the interpleader proceeding would have been unnecessary if this confusion had been cleared up. Pichelli testified that, while he was prepared to recommend a settlement of $20,000, the inspectors were not prepared to pay anything to settle the Eveley claim. Given that position, Eveley needed a court order to protect its claim against the proceeds to the extent of the value of its claim in respect of the B-Train.

[36] Third, Eveley had a much larger claim for work performed for Di-Mond that was significant to it, given the size of its operations. Given the complexity of the situation, it was entitled to require a legal proceeding to see whether it could obtain payment of a larger portion of its receivable. If this was inappropriate procedurally, the Trustee should have raised the issue of its costs before Perell J. who was in a better position to appreciate, or inquire into, any such allegations.

Conclusion

[37] Based on the foregoing, Eveley is entitled to a secured claim in the amount of $11,564.70 payable out of the monies paid into court pursuant to the Perell Order, the balance of its claim of $151,227.69 being an unsecured claim against the estate of the bankrupt.

Costs

[38] If the parties are unable to agree on costs, they will have thirty days to provide costs outlines in accordance with the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.

Wilton-Siegel J.

Date: August 15, 2013