BARRIE COURT FILE NO.: CV-13-0621

DATE: 20131206

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: BAY PORT VILLAGE INC., Applicant

AND:

THE CORPORATION OF THE TOWN OF MIDLAND and HSBC BANK CANADA, Respondents

BEFORE: McISAAC J.

COUNSEL:
S. Schwarz, Counsel, for the Applicant

A. Mae, Counsel for the Respondent Town of Midland

P. Cavanagh, Counsel for the Respondent HSBC Bank Canada

HEARD: October 18, 2013

ENDORSEMENT

[1] The Applicant, an insolvent corporation, seeks interpretation of a subdivision agreement dated June 29, 2009 involving itself as developer, the Town of Midland as municipality and HSBC as source of finance. As a term of this agreement, Bayport obtained from HSBC a standby LOC (“LOC”) securing the supply and construction of certain municipal works as defined in two schedules to the agreement. In particular, Bayport maintains that Midland is entitled under the terms of this agreement to use monies accessed from the LOC to pay off unsecured trade auditors who supplied goods and services to the development prior to its insolvency. HSBC insists that they have no obligation in law or contract to these creditors and they are entitled to any surplus under the LOC pursuant to their GSA from Bayport.

[2] HSBC firstly objects to Bayport’s standing to bring this application suggesting that, as an insolvent corporation, it has no interest in these matters that really involve Midland and HSBC. Although initially attracted to this submission, upon reflection, I am satisfied that Bayport has standing as a party to the subdivision agreement in issue. Of course, the situation would have been otherwise if Bayport was a bankrupt. I turn now to the merits of the application.

[3] Under the terms of s.3.4 of the subdivision agreement, Bayport undertook to install all of the “works”, that is, municipal services, described in Schedule “C” to the agreement according to the timetable described in Schedule “E”. Those obligations were secured by the LOC described in s. 4.8. In my view, Midland could only look to the LOC for prospective costs associated with the completion and rectification of these “works”; the agreement herein did not entitle Midland to “see paid” unsecured trade creditors who had supplied goods and services to this project prior to the insolvency of Bayport. If such retroactive munificence had been contemplated, an appropriate clause could have been incorporated into this agreement: see A.N. Bail Co. v. Gingras 1982 199 (SCC), [1982] 2 SCR 475. Any wider interpretation of s.4.8 as proposed by the applicant is tempered by an appreciation of its limits when the agreement is viewed in its entirety, particularly s.3.4.

[4] Accordingly, I see nothing in this agreement supporting the proposal that unsecured trade creditors of Bayport involved in this project prior to its insolvency are entitled to any of the proceeds of the LOC herein.

[5] Bayport has made a desperate attempt to leverage some of the proceeds of this LOC for its unsecured trade creditors on the basis of the doctrine of autonomy: see Bank of Nova Scotia v. Angelica Whitewear Ltd. 1989 109 (SCC), [1989] 1 SCR 59. However, this case also makes clear that fraud will defeat this doctrine. In the present case, it would be fraudulent to permit retroactive payment to unsecured trade creditors of Bayport, an obligation which HSBC clearly did not secure under the terms of the LOC.

[6] For all of these reasons, the application in favour of the interpretation sought by Bayport is dismissed. The parties are invited to seek an appointment to address the issue of costs, if necessary.

McISAAC J.

Date: December 6, 2013