Court File and Parties
COURT FILE NO.: CV-13-10046-00CL DATE: 20160809 SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL LIST
RE: FREEPORT FINANCIAL LLC AND: PRACS INSTITUTE CANADA B.C. LTD.
BEFORE: Hainey J.
COUNSEL: Daniel S. Murdoch and Vlad A. Calina, for the Moving Parties, Bioassay Research Co., Contract Research Solutions, Inc., and the Cetero Group of Companies Linc A. Rogers and Kelly D. Peters, for the Responding Party, PricewaterhouseCoopers Inc., in its capacity as Court-Appointed Receiver
HEARD: July 14, 2016
Endorsement
Overview
[1] On January 6, 2016, PricewaterhouseCoopers Inc. (“PWC”), in its capacity as receiver of PRACS Institute Canada B.C. Ltd. (“PRACS”), received a payment from the Canada Revenue Agency (“CRA”) payable to BA Research Co. (“BA”) in respect of certain tax refunds owing to BA. BA was part of the Cetero Group of Companies (“Cetero Group”) who have brought this motion.
[2] The Cetero Group and PWC have reached a settlement in respect of a portion of the tax refund, however, the entitlement to $298,243 of the tax refund relating to BA’s carry-back losses for the 2008 tax year remains in dispute (“carry-back refund”). This motion has been brought by the Cetero Group to determine who is entitled to the carry-back refund currently held by PWC.
[3] PWC claims that the carry-back refund belongs to PRACS pursuant to an asset purchase agreement (“APA”) through which PRACS acquired all of BA’s assets including any tax refunds to which it was entitled in June 2012.
[4] The Cetero Group disagrees and submits that the carry-back refund should have been paid by the CRA to BA, not to PWC, because of the Financial Administration Act, R.S.C. 1985, c. F-11. The Cetero Group claims to be entitled to the carry-back refund because of PRACS’ failure to pay US $273,301 owing to the Cetero Group under an operation support agreement that was entered into as part of PRACS’ acquisition of BA’s assets under the APA. The Cetero Group submits that it is entitled to the carry-back refund under the principles of set-off and that PRACS would be unjustly enriched if it is permitted to retain it.
Issues
[5] I must decide the following issues:
a) Whether the carry-back refund is subject to a valid and binding assignment and transfer of ownership to PRACS under the APA; b) Whether PWC would be unjustly enriched by its retention of the carry-back refund; and c) Whether the carry-back refund is held by PWC on a constructive trust for the benefit of the Cetero Group because of the principles of set-off.
Was the carry-back refund validly assigned to PRACS?
[6] I am satisfied on the record before me that the carry-back refund was validly assigned to PRACS pursuant to the terms of the APA for the following reasons.
[7] The APA makes it clear that the Canadian assets purchased by PRACS from BA included the carry-back refund. Section 2.1 (p) of the APA includes the following description of certain of the assets acquired by PRACS from BA:
any claim, right or interest of any Sellers in or to any refund, rebate, abatement, or other recovery for Taxes, together with any interest due thereon or penalty rebate arising therefrom, for any Tax Period (or portion thereof) ending on or before the Adjustment Date …
[8] In my view, this language clearly includes the carry-back refund. Further, s. 220 (6) of the Income Tax Act, R.S.C. 1985, c. 1, provides that any restrictions on the assignment of Crown debts do not apply to tax refunds such as the carry-back refund.
[9] I agree with PWC’s submission at para. 10 of its factum that:
a) The carry-back refund was validly assigned to PRACS when it acquired all of BA’s assets pursuant to the APA in June 2012. The transaction was approved by orders of the U.S. Court and this Court; b) All legal formalities were complied with in connection with the assignment of the carry-back refund and the Cetero Group has been fully compensated for the sale of this asset; and c) The Cetero Group has no right or entitlement to the carry-back refund. It is the sole and exclusive property of PRACS pursuant to the APA.
[10] In fact, Mr. Murdoch, counsel to the Cetero Group, conceded during argument that if the set-off claim did not exist, PWC would be entitled to retain the carry-back refund.
[11] The carry-back refund is, therefore, the property of PRACS.
Would PWC be unjustly enriched by its retention of the carry-back refund?
[12] In order to establish a claim of unjust enrichment on the part of PWC, the Cetero Group must establish the following:
a) An enrichment of PWC; b) A corresponding deprivation to the Cetero Group; and c) The absence of any juristic reason for the enrichment of PWC.
[13] Although PWC has been enriched by the receipt of the carry-back refund, the terms of the APA provide a juristic reason for PWC’s enrichment in its capacity as PRACS’ receiver. I have already concluded that the carry-back refund is the property of PRACS because of the sale of all of BA’s assets to PRACS. The principle of unjust enrichment, therefore, does not apply to PWC’s retention of the carry-back refund on behalf of PRACS because the carry-back refund belongs to PRACS as a result of the APA. This is the juristic reason for PWC’s retention of the carry-back refund.
Legal Set-Off
[14] Section 111 of the Courts of Justice Act, R.S.O. 1990 c. C-34 (“CJA”) sets out the following two prerequisites for legal set-off to apply:
- The obligations to be set off must each be debts; and
- The debts must be mutual cross obligations.
[15] I agree that the Cetero Group’s claim related to the unpaid invoices is a debt owing by PRACS to the Cetero Group. However, I am not persuaded that the carry-back refund is a debt owing by BA to PRACS. As I have already concluded, the carry-back refund was validly assigned to PRACS and belongs to it. It cannot be characterized as a debt owing by BA. The requirements of s. 111 of the CJA have, therefore, not been met.
[16] Legal set-off does not apply to the carry-back refund for this reason.
Equitable Set-Off
[17] In order for equitable set-off to apply, the party relying upon the set-off must establish the following:
a) Some equitable grounds for being protected against his adversary’s demands; b) The equitable ground must go to the very root of the plaintiff’s claim before a set-off will be allowed; c) A cross-claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross-claim; d) The plaintiff’s claim and the cross-claim need not arise out of the same contract; and e) Unliquidated claims are on the same footing as liquidated claims.
[18] At para. 69 of their factum, the moving parties submit that equitable set-off should apply for the following reason:
In short, PRACS seeks to claim an outstanding benefit under the APA (the Carry-Back Refund) without ever having fully satisfied the concomitant burden that it has assumed as part of the various instruments and collateral agreements executed as contemplated by the APA during pendency of the cross-border insolvency [of the] Cetero Group.
[19] I am not persuaded that equitable set-off applies for these reasons. The outstanding invoices relied upon by the Cetero Group relate to professional expenses incurred after the closing of the APA. PRACS is only one of a number of companies that was responsible for paying for these services. I agree with PWC’s submissions at paras. 56 and 57 of its factum as follows:
- Moreover, the ultimate result of granting the remedy of equitable set-off cannot be ignored. If the Cetero Group succeeds, this Court will be elevating the Cetero Group’s pre-appointment unsecured claim to a super priority claim ranking ahead of PRACS Canada’s sole secured creditor.
- The Cetero Group entered into the APA, brought the motions to have the APA approved, executed the Bill of Sale to effect transfer of the Canadian Acquired Assets and accepted payment of the purchase price on closing. The Cetero Group agreed to turn over Canadian Acquired Assets that came into its possession (without further compensation). The Cetero Group provided post-closing services on an unsecured basis. The Cetero Group should not be able to obtain enhanced rights superior to those for which it bargained.
[20] I am satisfied that equitable set-off does not apply to the carry-back refund for these reasons.
Conclusion
[21] The Cetero Group’s motion is, therefore, dismissed.
Costs
[22] PWC is entitled to its costs of the motion. The parties have agreed that $30,000 should be awarded to the successful party on account of costs. PWC is awarded all-inclusive costs of $30,000 payable by the Cetero Group within 30 days.
[23] I wish to commend counsel for the professional manner in which they conducted this proceeding.