Crate Marine, 2015 ONSC 3338

COURT FILE NO.: CV-14-00010798-00CL

DATE: 20150527

SUPERIOR COURT OF JUSTICE – ONTARIO

(COMMERCIAL LIST)

IN THE MATTER OF THE RECEIVERSHIP OF Crate Marine Sales Limited, F. S. Crate & Sons Limited, 1330732 Ontario Limited, 1328559 Ontario Limited, 128648 Ontario Limited, 1382415 Ontario Ltd., and 1382416 Ontario Ltd.

RE: Crate Marine Sales Limited et al.

BEFORE: L. A. Pattillo J.

COUNSEL: R. B. Bissell, for the Receiver and Trustee

H. Chaiton and M. Poliak, for Crawmet Corp.

Tony Reyes and Alex Schmitt, for 1889863 Ontario Inc.

HEARD: May 20, 2015

ENDORSEMENT

Introduction

[1] A. Farber & Partners Inc., in its capacity as Receiver (“Receiver”) of Crate Marine Sales Limited (“Crate Marine”), F.S. Crate & Sons Limited, 1330732 Ontario Limited, 1328559 Ontario Limited, 1282648 Ontario Limited, 1382415 Ontario Ltd., and 1382416 Ontario Ltd. (collectively the “Crate Companies”), brings this motion for advice and directions concerning competing claims to a travel lift described as a “New Lift 50 BFM II S/N 3495-0713 (the “Lift”).

[2] The dispute is between 1889863 Ontario Inc. (“188”) and Crawmet Corp. (“Crawmet”). 188 owns the Lift and leased it to Crate Marine in July 2013 (the “Lease”). Crawmet has a general security interest over all of Crate Marine’s assets, properties and undertakings.

[3] Crawmet submits that its security, which is registered under the Personal Property Security Act, R.S.O 1990, c. P. 10, as amended (the “PPSA”), attaches to the Lift and is sufficient to defeat 188’s interest in the Lift.

[4] 188 submits that the Lease was terminated between it and Crate Marine in August or September 2014, well before the appointment of the Receiver and accordingly, Crawmet has no interest in the Lift.

[5] For the reasons that follow, I have concluded that in accordance with the provisions of the PPSA, Crawmet has priority over 188 in the Lift and is entitled to take possession of the Lift and dispose of it in accordance with the provisions of the PPSA.

Background

[6] Crate Marine operated a large marina in Keswick as well as at other locations in Ontario and one in Quebec. It was a family business operated by members of the Crate family. Three siblings, Stephen Crate, Greg Crate and Lynn Marko were the sole directors and officers of Crate Marine.

[7] The Receiver was appointed by Order of Court dated December 8, 2014 and at the same time was also appointed as trustee in bankruptcy of the Crate Companies.

[8] Crawmet was the operating lender for Crate Marine. The Receiver has obtained a security opinion which confirms that Crawmet has generally first priority over the assets, properties and undertakings of Crate Marine in the province of Ontario. 188 takes no issue with that opinion.

[9] 188 carries on the business as a distributor of marine travel lifts. Its principal, Omar Abdelati (“Abdelati”), has carried on the business through 188 and predecessor companies for 14 years. 188 is not in the business of leasing equipment. The Lease was the first and only lease 188 or its predecessors entered into.

[10] In or around July, 2013, Crate Marine, who had previously purchased marine travel lifts through Abdelati’s companies, advised 188 of its intention to purchase a lift for its use of Crate Belleville Inc. (“Crate Belleville”) as Crate Belleville did not have any ability to fund its operations.

[11] Crate Belleville was established in June 2013. Ryan Crate, Greg Crate’s son, is the sole director and officer of Crate Belleville. Crate Belleville operated on rented property in Belleville, Ontario on Lake Ontario.

[12] Subsequently, Crate Marine selected the Lift and 188 purchased it for the purpose of leasing it to Crate Marine. The total cost paid by 188 for the Lift was $341,177 (exclusive of HST) which amount includes the price of the lift, the cost of certain options, delivery and installation.

The Lease

[13] The Lease is in writing and dated July 23, 2013. The salient terms of the Lease with their location in brackets are as follows:

a) Lease Term: 48 months (Lease Details);

b) Assumed Price: $385,530.01 ($341,177.00 plus HST of $44,353.01) (Lease Details);

c) Payment Terms: lump sum payment of $50,000.00 secured by the transfer of a boat to be paid no later than September 30, 2013 or earlier if the boat is sold; $8,000.00 per month ($7,079.65 plus HST of $920.35); first and last month’s rent due on signing (Lease Details);

d) Purchase Options: (i) on the first anniversary of the Lease for the option price of $273,400.00 and (ii) at the end of the 48 month term for $57,580.00 (Lease Details);

e) Termination by Lessee: the Lease cannot be cancelled or prepaid by Crate Marine (Lease Terms, s. 1);

f) Risk of Ownership: Crate Marine shall bear the entire risk of loss, damage or destruction of the Lift and all costs relating to the equipment’s ownership, use, maintenance, possession or disposal of the Lift, including taxes and insurance (Lease Terms, ss. 6.1 and 6.2);

g) Default: Section 9 sets out nine events of default including failure to pay any rental or other amount due within 10 days of the due date (S. 9 (a)). Section 9.2 sets out some of 188’s rights upon default including that Crate Marine shall pay to 188 as liquidated damages, among other things, all amounts due and to become due under the Lease, cost of enforcement of the Lease and any deficiency suffered after the sale or disposition of the Lift by 188 (s. 9.2 (a)); upon 188’s demand, return the Lift at Crate Marine’s expense (s. 9.2(b)); the rights of Crate Marine in the Lift shall cease and terminate absolutely (s. 9.2(d); and 188 may terminate the Lease by notice in writing (s. 9.2(e));

h) Security: as a general and continuing collateral security for the payment and performance of all obligations under the Lease, Crate Marine granted to 188 a continuing security interest in all present and future equipment and assets with respect to which 188 “has provided any value”… together with any proceeds thereof (Lease Terms, s. 20).

[14] As additional security for its obligations under the Lease, Crate Marine executed a written Security Agreement in favour of 188, granting it a security interest in the Lift. 188 did not register a financing statement to perfect its security in the Lift within 15 days of Crate Marine taking possession of the Lift as required by the PPSA.

[15] The Lift was (and remains) located at the marina operated by Crate Belleville in Belleville, Ontario. The Lift was used by Crate Marine to move watercraft owned by Crate Marine and its customers into and out of Lake Ontario.

The Lease Termination

[16] Abdelati, Greg Crate and Ryan Crate have all filed affidavits on this motion deposing that in August 2013, Crate Marine (Greg Crate) advised 188 (Abdelati) that Crate Marine was done with the Lease. At first Abdelati did not agree. In due course, however, 188 agreed to terminate the Lease and entered into a lease with Crate Belleville (Ryan Crate) for the Lift. The agreement to terminate the Lease was oral. Similarly, the new lease with Crate Belleville was also oral. Abdelati and Ryan Crate depose that the new lease was on a month to month basis, on the same terms and conditions as the Lease including a monthly rent of $8,000.00. Crate Belleville commenced paying the monthly rent for the Lift on September 1, 2014 and continued until January 2015 when Ryan Crate advised Abdelati that Crate Belleville would no longer pay under the Lease.

[17] In January 2015, 188 received an offer to purchase the Lift from a company related to Crate Belleville’s landlord. Due to Crate Marine’s receivership, however, the purchaser would not complete the purchase without documentation evidencing the termination of the Lease that had occurred in September 2014. 188 then prepared a notice of termination of the Lease dated September 14, 2014 and executed by Abdelati on behalf of 188. It also prepared a receipt of notice of termination dated September 14, 2014 which was signed by Greg Crate on behalf of Crate Marine.

The Issues

[18] As framed by the parties, the issues for determination on this motion are as follows:

1. Whether the PPSA applies to the Lease;

2. Whether the Lease was terminated prior to the bankruptcy and receivership of Crate Marine on December 8, 2014;

3. If the Lease was terminated, what effect, if any, did termination have on Crawmet’s prior perfected security interest; and

4. If the Lease was not terminated before December 8, 2014, did Crate Marine’s rights in the Lift cease and terminate in any event.

1. Does the PPSA Apply to the Lease?

[19] Crawmet has a perfected security interest under the PPSA in Crate Marine’s property, which includes the Lift. Whether it has priority over 188’s interest in the Lift depends on whether the Lease is subject to the PPSA or not.

[20] The application section of the PPSA is Section 2 which provides in part:

2. Subject to subsection 4(1), this Act applies to,

(a) every transaction without regard to its form and without regard to the person who has title to the collateral that in substance creates a security interest including, without limiting the foregoing:

(ii) an assignment, lease or consignment that secures payment or performance of an obligation.

(c) the interest of a lessor of goods under a lease for a term of more than one year even though the lease may not secure payment or performance of an obligation.

[21] Security interest is defined in s. 1(1) of the PPSA as “an interest in personal property that secures payment or performance of an obligation”.

[22] The test therefore in determining whether a lease is subject to the provisions of the PPSA, as set out in s. 2, is whether the transaction as a whole “in substance creates a security interest”. That is, whether it secures payment or performance of an obligation. See: Adelaide Capital Corp. v. Integrated Transportation Finance Inc. (1993), 1994 7214 (ON SC), 16 O.R. (3d) 414 (Ont. Ct. G.D.); Paccar of Canada Ltd. v. Peterbuilt of Ontario Inc. (2005), 2005 43684 (ON SC), 18 C.B.R (5th) 125 (Ont. S.C. J., Comm. List).

[23] In determining whether a lease “secures payment or performance of an obligation”, the cases have tended to distinguish between a “security lease” and a “true lease”. But as R. A. Blair J. (as he then was) pointed out in Adelaide Capital, the PPSA makes no such distinction. As the learned judge stated at para. 21 of the decision:

21. Thus, a lease agreement between parties may have all the appearances of being a ‘true’ lease, and may, indeed, be such an arrangement, but still be caught by the registration requirements of the PPSA if it also serves, in the overall transaction, to secure payment or performance of an obligation.

[24] In determining whether the lease in question is one which “secures payment or performance of an obligation”, the court looks to the details of the transaction including the terms of the lease and the surrounding circumstances to the transaction: Re Speedrack Ltd. (1980), 1 P.P.S.A.C. 109 (Ont. S.C.) at para. 10; Adelaide Capital, and Paccar.

[25] Looking first at the Lease as a whole, in my view it is clear from its terms that in substance it secures payment or performance of an obligation.

[26] Specifically, the terms of the Lease, as supplemented by Abdelati’s evidence in respect of how the rent and the two option prices were determined, have the indicia of a financing arrangement as opposed to a “true” lease of property. For example:

a) Section 20 of the Lease expressly provides for the creation of a security interest in the Lift;

b) The monthly rent provided for in the Lease of $8,000 is not based on the actual use of the Lift but rather was determined by the purchase cost to 188 of the Lift plus an interest rate of 12.9% per annum amortized over the term of the Lease after taking into account the $50,000.00 initial payment;

c) The two option purchase prices are merely the amounts of the principal then owing by Crate Marine under the Lease at the time and are not based on the fair market value of the Lift at the time;

d) While title to the Lift remains in 188 during the term of the Lease, the benefits and risk of ownership have been shifted to Crate Marine;

e) In the event of default, 188 rights as lessor include the right to collect from Crate Marine any deficiency on the sale of the Lift;

[27] The evidence of the surrounding circumstances also supports the conclusion that the Lease is in essence a financing agreement. Crate Marine started by seeking to purchase the Lift. It picked out the Lift and 188 then purchased it and entered into the Lease to, in effect, sell the Lift to Crate Marine. 188 is not in the business of leasing travel lifts in the traditional sense. Its business is ordinarily that of a brokerage selling travel lifts. The Lease was the first and only time in 14 years of doing business either through 188 or predecessor corporations that it had entered into such a leasing arrangement. The clear purpose of the Lease, in my view, was to facilitate the sale of the Lift to Crate Marine.

[28] Further, at the same time as the Lease, 188 and Crate Marine entered into the separate Security Agreement whereby Crate Marine granted 188 a security interest in the Lift.

[29] 188 submitted that the Lease was not caught by s. 2 of the PPSA because it was a “lease for a term of more than one year” as defined in s. 1(1) of the PPSA. Although it is clear from the definition that the Lease is not a “lease for a term of more than one year” (because leases by a lessor who is not regularly engaged in the business of leasing goods as 188 is, are specifically excluded), it is of no consequence that the Lease is not a “lease for more than one year”. The Lease is caught by s. 2(a) of the PPSA. Section 2(c), which incorporates “leases for more than one year” does not come into play.

[30] Based on the above therefore, I am satisfied, when viewed as a whole, that the transaction between 188 and Crate Marine concerning the Lift creates a security interest and the Lease in particular secures the performance of an obligation that is payment for the Lift. Accordingly, pursuant to s. 2(a) of the PPSA, the PPSA applies to the Lease and the Lease should have been registered.

2. and 3. Was the Lease Terminated and if so, What Effect did Termination Have on Crawmet’s Perfected Security Interest?

[31] 188 submits that the evidence establishes that the Lease was terminated in August, effective September 14, 2014 and that a new month to month lease with Crate Belleville was entered into.

[32] Crawmet submits that 188 has failed to establish on a balance of probabilities and on a common sense view of the evidence that the Lease was terminated before Crate Marine’s bankruptcy and receivership.

[33] While I have serious doubts about the credibility of 188’s evidence concerning the termination of the Lease, in my view, given that I have concluded that the Lease was subject to the provisions of the PPSA, it is not necessary to decide that issue.

[34] Simply put, by failing to register its security interest under the PPSA, 188 has an unperfected security interest in the Lift. Crawmet has a perfected security interest in the Lift. Section 20(1)(a)(i) of the PPSA provides that an unperfected security interest in collateral is subordinate to the interest of a person who has a perfected security interest in the same collateral. 188’s security interest in the Lift is therefore subordinate to Crawmet’s perfected security interest.

[35] Part V of the PPSA sets out the rights and remedies where a debtor is in default under a security agreement. In 188’s notice of termination prepared in January 2015 which purported to document the termination of the Lease, 188 relied on specific events of default as contained in s. 9 .1 of the Lease. The provisions of Part V of the PPSA and specifically s. 63(9) dealing with disposition of collateral and s. 65(7) dealing with foreclosure are clear that any dealings with the collateral by the secured party do not effect the rights of a prior ranking secured creditor.

[36] It follows, in my view that even if the Lease was terminated as alleged by 188, Crawmet’s prior ranking security interest is not affected.

4. Did Crate Marine’s Rights in the Lift Cease in any Event?

[37] 188 submits that even if the Lease wasn’t terminated, Crate Marine’s rights in the Lift ceased and terminated in any event. It submits that because Crate Marine failed to pay the rent due under the Lease on September 1, 2014, it was in default under the Lease, s. 9.1(a). Further, upon default, s. 9.2 (d) provides that the rights of the lessee in respect of the equipment “shall cease and terminate absolutely.”

[38] In my view, for the reasons already discussed, 188’s submission has no merit. 188’s evidence as to whether the Lease was in default as at September 10, 2014 for failure to pay rent (10 days after the September rent was due) or had been mutually terminated by then is contradictory. Crate Belleville had already paid the September rent. Assuming, however, that the Lease was in default for failure to pay rent, even if s. 9.2(d) of the Lease was operable as between 188 and Crate Marine, it would not affect Crawmet’s prior perfected security interest in the Lift. Crawmet still has priority over 188.

Conclusion

[39] For the above reasons, therefore, I conclude that Crawmet has priority over 188 in respect of the Lift.

[40] An order will issue declaring that Crawmet has priority over 188 and is entitled to take possession of the Lift and dispose of it in accordance with the provisions of the PPSA.

[41] Crawmet, having been successful on the motion, is entitled to its costs on a partial indemnity basis. The parties have agreed to an amount of $20,000 inclusive. Having regard to the issues on the motion, I consider that amount to be reasonable. Costs fixed at $20,000 inclusive of disbursements and taxes.

L. A. Pattillo J.

Released: May 27, 2015