Superior Court of Justice – Ontario

Commercial List

Re: Royal Bank of Canada, Applicant

And:

Komtech Enterprises Limited and 2277247 Ontario Limited, Respondents

Before: D. M. Brown J.

Counsel: J. Whincup, for the Receiver, The Fuller Landau Group S. Babe, for the Royal Bank of Canada M. Eng, for Surgenor National Leasing Limited

Heard: April 1, 2014

REASONS FOR DECISION

I. Receiver’s motion for the declaration of an interest in the proceeds of sale of a truck

[1] By order made September 18, 2013, the Fuller Landau Group Inc. was appointed receiver of all of the assets, undertakings and properties of Komtech Enterprises Limited (“New Komtech”) and 2277247 Ontario Limited. A dispute has arisen between the Receiver and Surgenor National Leasing Limited (“Surgenor”) regarding entitlement to the proceeds of sale of a 2006 GMC truck (the “Truck”), along with payments made by New Komtech to Surgenor from May, 2011 until July, 2013.

II. Background Facts

[2] Komtech Inc., or “Old Komtech” as the parties called it, leased the Truck from Surgenor on August 1, 2008. The Lease was for a period of 60 months ending on July 31, 2013.

[3] In May, 2011, Old Komtech filed a notice of intention to make a proposal under the Bankruptcy and Insolvency Act. Old Komtech then moved for an order approving a stalking horse asset purchase agreement between it and 2279591 Ontario Inc. and the vesting of the purchased assets in 2279591 Ontario Inc. Shortly after the closing that company changed its name to Komtech Enterprises Limited, or “New Komtech”.

[4] On May 12, 2011, Old Komtech obtained an approval and vesting order (the “2011 Order”) which vested in New Komtech all of the Old Komtech assets which were purchased under the APA and extended the time for Old Komtech to file a proposal. Old Komtech failed to do so, and on May 19, 2011, it was deemed to have filed an assignment in bankruptcy.

[5] Over two years later, on August 1, 2013, Surgenor purported to enter into an agreement to extend the Truck Lease with Old Komtech, even though Old Komtech was bankrupt.

[6] Since May, 2011 New Komtech had kept possession of the Truck with Surgenor’s knowledge and consent, and New Komtech had made monthly lease/rent payments to Surgenor of $746.36 from June 1, 2011 to July 31, 2013.

[7] On August 15, 2013, Surgenor filed a financing statement regarding the Truck naming Old Komtech as the debtor. A PPSA search conducted just prior to the hearing of this motion revealed that Surgenor had not registered or filed any financing change statement against New Komtech.

[8] The receivership Appointment Order against New Komtech was made on September 18, 2013. The Receiver engaged Infinity Asset Solutions Inc. to sell the Truck at auction. On the evening of November 18 or the morning of November 19, 2013, Surgenor trespassed onto the property of New Komtech and removed the Truck from the Receiver’s possession without notice and without court approval. Surgenor then sold the Truck to an unknown party for $12,500.00, plus H.S.T.

III. First Issue: The effect of the 2011 Approval and Vesting Order

[9] Old Komtech served a notice of motion dated May 10, 2011, seeking the 2011 Order. The motion sought to vest in the purchaser, New Komtech, the “Purchased Assets” as defined and described in the stalking horse asset purchase agreement with New Komtech. Surgenor was named as an interested person on the service list on whom service of the notice of motion was made. The Receiver, in its Second Report dated March 21, 2014, stated that the May, 2011 notice of motion had been served on Surgenor.

[10] The language of the draft approval and vesting order attached to the notice of motion was the same as that in the 2011 Order ultimately granted. Paragraph 4 provided that upon delivery of the proposal trustee’s certificate to the purchaser, “all of the Debtor’s right, title and interest in and to the Purchased Assets as defined and described in the Purchase Agreement and listed on Schedule ‘B’ hereto shall vest good and marketable title, without further instrument of transfer or assignment, fully and absolutely in the Purchaser, free and clear of and from any and all security interests (whether contractual, statutory, or otherwise)…”

[11] Schedule “B” to the 2011 Order stated that the “Purchased Assets” were:

All of the properties and assets of the Debtor (other than the Excluded Assets), personal or mixed, tangible or intangible, owned, or leased or licensed under an Assigned Contract, in or relating to the Purchased Business, including all right, title and interest of the Debtor in, to and under:…(d) the Equipment; (e) the Assigned Contracts… (emphasis added)

Schedule “B” stipulated that the capitalized terms used in it bore the meanings ascribed to them under the Purchaser Agreement. Those terms included “Equipment” and “Assigned Contracts”.

[12] The April 18, 2011 Asset Purchase Agreement between Old Komtech and New Komtech defined “Equipment” as “all those items of tangible personal or movable property owned by Komtech that are held or used in connection with the Purchased Business, excluding any Inventory, and including all express or implied warranties with respect thereto.” The 2008 Lease between Surgenor and Old Komtech stated, in paragraph 6, that: “all right, title and ownership will always remain with the Lessor”.

[13] The 2011 Asset Purchase Agreement defined “Assigned Contracts” as meaning:

(i) all Contracts of Komtech listed in Schedule 1.1(a), other than any of those Contracts in respect of which any Consent is necessary to effect the assignment thereof to the Purchaser which shall not have been given on or prior to the Closing Date and (ii) Accepted Purchase Orders.

“Contract” was defined to include any “equipment lease”. Schedule 1.1(a) did not list any Assigned Contracts. Section 19 of the 2008 Lease stipulated that “this agreement or any interest herein may not be assigned or sublet by the Lessee(s) without the prior written consent of the Lessor. The Lessor alone will decide the credit worthiness and suitability of any proposed Sub-Lessee.”

[14] The Proposal Trustee for Old Komtech, in its Second Report dated April 19, 2011 in support of its request for an order approving a sales and marketing process, stated that under the stalking horse APA “the purchaser will acquire, as a going concern on an ‘as is, where is’ basis, substantially all of the Company’s business and assets…” That report made no specific mention of the Truck.

[15] When one employs the definitions used in the April 18, 2011 Asset Purchase Agreement which were incorporated by reference into the 2011 Order, the Truck did not constitute “Equipment” of the debtor because it was not owned by Old Komtech, as was stated in paragraph 6 of the Lease. Nor was the Truck an asset of Old Komtech “leased or licensed under an Assigned Contract” because no Assigned Contract had been listed in Schedule 1.1(a) of the Asset Purchase Agreement. Therefore, the Lease was not an Assigned Contract. Pursuant to Section 1.1 of the Asset Purchase Agreement, that made the Lease an “Excluded Contract” – i.e. any “Contract” that was not an “Assigned Contract” – which, pursuant to Section 2.2(b), made it an “Excluded Asset”. Section 2.1 of the APA made it clear that “Excluded Assets” were not “Purchased Assets”.

[16] From that, it follows that the interest held by Old Komtech in the Truck as lessee under the 2008 Lease did not pass to New Komtech under the Asset Purchase Agreement pursuant to the 2011 Order. From that it follows that paragraph 4 of the 2011 Order did not extinguish the ownership or security interest of Surgenor in the Truck.

[17] Accordingly, notwithstanding the 2011 Vesting Order, Surgenor remained the owner of the Truck. I therefore reject the argument of the Receiver that as of May 12, 2011, the Truck vested in New Komtech free and clear of any security interest.

IV. The Lease Payments: June 1, 2011 until July 31, 2013

[18] The Receiver argued that following the making of the 2011 Order, Surgenor had no further right to collect payments in respect of the Truck. I disagree. Surgenor remained the owner of the Truck. Although it did not enter into a new written lease agreement with New Komtech, the evidence disclosed that it permitted New Komtech to use the Truck upon payment of the same rent as set out in the former Lease with Old Komtech. I find that Surgenor was entitled to charge and receive the $22,190.74 rent for the Truck from June 1, 2011 until July 31, 2013.

[19] That said, following the bankruptcy of Old Komtech, New Komtech sent Surgenor new void cheques to cover the lease payments. The June 20, 2011 email to Surgenor from Abbas Naqvi, the Controller of New Komtech, clearly identified the new contracting party as Komtech Enterprises Limited, the corporate name for New Komtech. I therefore find that no later than June 20, 2011, Surgenor knew that the “lessee-in-fact” of its Truck was a new corporate entity, New Komtech. Surgenor thereby had consented to the effective transfer of Old Komtech’s interest in the Truck to New Komtech for the purposes of PPSA s. 48(1).

V. Priorities in the receivership of New Komtech

[20] Surgenor had filed an initial financing statement under the PPSA in respect of the Truck on August 5, 2008 which named the debtor as Komtech Inc. and recorded the Truck’s VIN. There was no dispute that the VIN was accurate.

[21] That financing statement was set to expire on August 5, 2013. Prior to that date, and following the bankruptcy of Old Komtech in May, 2011, Surgenor did not file a new or amended financing statement which showed New Komtech as the new lessee of the Truck notwithstanding that Surgenor knew that it had a new debtor in respect of the Truck.

[22] In June, 2013, Surgenor contacted the President of New Komtech, Raj Mathur, to discuss lease extension options for the Truck. By July 24 the parties had agreed upon a three-year lease extension. The emails clearly identified Mr. Mathur as the President of Komtech Enterprises Limited, the New Komtech.

[23] The original financing statement in respect of Old Komtech expired on August 5, 2013.

[24] On August 12, 2013, Surgenor entered into a Lease Extension which named Old Komtech as the lessee. It, of course, had gone into bankruptcy over two years before.

[25] On August 15, 2013, Surgenor filed a PPSA Financing Change Statement for the Truck which identified the debtor as Old Komtech, although the VIN for the Truck was the same as that used on the 2008 financing statement.

[26] On November 11, 2013, Surgenor filed a proof of claim in the receivership of New Komtech asserting a secured claim of $12,196.83 based upon the security described in its August 15, 2013 financing change statement, the 2008 Lease with Old Komtech and the 2013 Lease Extension signed with Old Komtech. The Receiver disallowed the claim, contending that Surgenor’s failure to file a financing change statement under PPSA s. 48 following the acquisition of the Truck by New Komtech under the 2011 Vesting Order meant that its security interest was unperfected and subordinate to the security interests of Komtech’s secured creditors.

[27] Surgenor submitted that although the August, 2013 Financing Change Statement did not identify the proper debtor, its use of the correct Truck VIN was sufficient to effect proper registration. In support of its position Surgenor relied on the decisions of Re Lambert[^1] and Magna International Inc. v. Formulated Coatings Ltd.[^2] dealing with the registration curative provision in PPSA s. 46(4).

[28] I do not see this as a case which turns upon the application of PPSA s. 46(4) and the principles set out in Re Lambert. I take a different perspective on the problem. To perfect a security interest, PPSA s. 19(a) first requires that the security interest has attached. Section 11(2) of the PPSA sets out the requirements for attachment applicable in the present case:

11(2) Subject to section 11.1, a security interest, including a security interest in the nature of a floating charge, attaches to collateral only when value is given, the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party and,

(a) the debtor has signed a security agreement that contains,

(i) a description of the collateral sufficient to enable it to be identified, or

(ii) a description of collateral that is a security entitlement, securities account or futures account, if it describes the collateral by any of those terms or as investment property or if it describes the underlying financial asset or futures contract…

[29] Following the bankruptcy of Old Komtech, Surgenor did not enter into a new written security agreement with New Komtech notwithstanding, as I have found, that by June, 2011 it knew that its Truck was now in the possession of a new corporate entity, Komtech Enterprises Ltd. Surgenor permitted New Komtech to continue using and paying for the Truck, but it did not reduce that agreement to writing. Accordingly, its new debtor, New Komtech, did not, in May, 2011, “sign a security agreement” as required by PPSA s. 11(2)(a) for the security interest of Surgenor to attach to the Truck. Any security interest enjoyed by Surgenor in the Truck following the bankruptcy of Old Komtech was an unattached and therefore an unperfected one. A similar result follows when the facts are looked at from the perspective of PPSA s. 48(1): Surgenor failed to file a financing change statement within 15 days after the effective transfer of the Truck from Old Komtech to New Komtech in May, 2011.

[30] The August, 2013 Lease Extension did not alter that state of affairs because Surgenor purported to contract with an entity which was bankrupt – Old Komtech. It was not a security agreement signed by the debtor – i.e. by New Komtech.

[31] Consequently, the unperfected security interest of Surgenor in the Truck which arose out of its course of dealings with New Komtech was not effective against the Receiver: PPSA, s. 20(1)(b). As well, the Receiver, in its Second Report, stated that the Royal Bank of Canada and 2277247 Ontario Limited held, pursuant to their general security agreements with New Komtech, security which was valid and enforceable against the Receiver. Therefore, the unperfected security interest of Surgenor would be subordinate to that security: PPSA, s. 20(1)(a)(i).

VI. Conclusion and costs

[32] As a result, I order that Surgenor must pay to the Receiver, within 15 days of the date of this order, the proceeds of its sale of the Truck in the amount of $12,500.00, plus H.S.T.

[33] After reaching that conclusion I reviewed the Bills of Costs filed by the parties at or just after the hearing. There was no formal offer to settle. Surgenor had offered to pay the Receiver $3,000.00 in settlement of the motion, but that amount was quite low when compared to the amount in dispute.

[34] I award the Receiver its full indemnity costs of $12,529.46 set out on its Costs Outline, payable by Surgenor to the Receiver within 30 days of the date of this order. Elevated costs are justified on this motion because of the “reprehensible” conduct[^3] of Surgenor in removing the Truck from the possession of the court-appointed Receiver without the Receiver’s consent or the approval of this Court. Parties which disregard the standard stay of proceedings contained in receivership orders must expect that their resort to illegal self-help most likely will expose them to an award of elevated costs.

D. M. Brown J.

Date: June 17, 2014

[^1]: (1994), 1994 10576 (ON CA), 20 O.R. (3d) 108 (C.A.). [^2]: (2009), 15 P.P.S.A.C. (3d) 32 (Ont. S.C.J.). [^3]: Davies v. Clarington (Municipality) (2009), 2009 ONCA 722, 100 O.R. (3d) 66 (C.A.).