Court File and Parties

COURT FILE NO.: 31-2084381 DATE: 20160928 SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL LIST

IN THE MATTER OF THE BANKRUPTCY OF DANIER LEATHER INC.

BEFORE: Newbould J.

COUNSEL: David Bish, for The Cadillac Fairview Corporation Limited Derek J. Bell and Sean Zweig, for the Trustee in Bankruptcy, KSV Kofman Inc.

HEARD: September 23, 2016

Endorsement

[1] The Cadillac Fairview Corporation Limited and certain of its affiliates appeal from the partial disallowance by the trustee in bankruptcy of Danier Leather Inc. of Cadillac Fairview’s claim against Danier. It arises from the amount that can be claimed by Cadillac Fairview for loss of rent due to the disclaimer of a number of leases of premises that Danier leased from Cadillac Fairview prior to its bankruptcy.

[2] On February 4, 2016, Danier filed a Notice of Intention to make a proposal under the BIA in order to permit Danier to implement a Court-approved sale and investor solicitation process with the goal of identifying one or more potential purchasers of, or investors in, Danier. KSV Kofman Inc. ("KSV") was appointed as the proposal trustee.

[3] The Court-approved sale and investor solicitation process resulted in Danier entering into an agency agreement dated March 1, 2016 with a contractual joint venture comprised of Merchant Retail Solutions, ULC and Gordon Brothers Canada ULC for the liquidation of Danier's inventory, furniture, fixtures and equipment located at certain of its retail locations. The agency agreement and the liquidation sale were approved by the Court on March 7, 2016.

[4] Through the sale and investor solicitation process, Danier exhausted the market for parties that may have been interested in restructuring Danier or its business and ultimately determined that it was unable to make a proposal to its creditors. On March 21, 2016, Danier made an assignment into bankruptcy and KSV was appointed as the trustee in bankruptcy.

[5] Also on March 21, 2016, prior to making an assignment into bankruptcy, Danier sought a receivership order pursuant to section 101 of the Courts of Justice Act, R.S.O. 1990, c. C.43, appointing KSV as Receiver over the property, assets and undertakings of Danier. The receivership order was obtained on that day on notice to stakeholders, including Cadillac Fairview, and was unopposed.

[6] Due to certain restrictions under the BIA which have the effect of limiting the ability of a trustee to deal with an operating company (such as Danier at the relevant time) in the most efficient and cost-effective manner, the receivership order was sought to facilitate the carrying out of the liquidation sale by the Receiver in fulfillment of Danier's obligations under the agency agreement and the wind-down of Danier in an orderly manner. Some of the restrictions included:

(a) The agency agreement contemplated that the proceeds of the liquidation sale would be deposited in certain designated bank accounts held by Danier. Under the BIA, there are banking restrictions imposed on a trustee in bankruptcy that would have made it difficult to comply with such obligations under the Court-approved agency agreement.

(b) Pursuant to the agency agreement, Danier was required to make store-level employees available for use in the liquidation sale. Upon a bankruptcy filing, those approximately 796 employees would be deemed terminated and the Trustee would have been required to enter into separate employment letters with each employee to fulfill Danier's obligations under the agency agreement.

(c) The liquidation sale gave rise to a number of operational issues that would have required inspector approval in a bankruptcy, including operating Danier's business, retaining employees, selling assets outside the ordinary course of business and terminating contracts.

(d) Danier had obtained goods and services on credit since it filed its notice of intention; a trustee in bankruptcy would not have been permitted to pay these parties.

[7] The receivership order provided authority to the Receiver to enter into an occupation agreement of leased premises with the Trustee:

4. THIS COURT ORDERS that the Receiver is hereby empowered and authorized.... (q) to enter into agreements with any trustee in bankruptcy (the "Bankruptcy Trustee") appointed in respect of the Debtor, including...the ability to enter into occupation agreements for any property owned or leased by the Debtor;

[8] In accordance with paragraph 4(q) of the receivership order, the Trustee brought a motion on March 24, 2016, seeking authorization to enter into an Occupancy Agreement dated March 21, 2016 (the "Occupancy Agreement") with the Receiver. The motion was brought on notice to all significant landlords, including Cadillac Fairview, and was unopposed. The Occupancy Agreement provided that the Receiver would occupy the premises as agent of the Trustee and pay the rent directly, and provide evidence of such to the Trustee, rather than have the Trustee pay the rent and then be reimbursed by the Receiver.

Issue

[9] The issue in this case is the effect of the Occupancy Agreement on the operation of section 136(1)(f) of the BIA, which permits a trustee in bankruptcy to deduct from amounts to be paid for occupancy rent any payment made on account of accelerated rent payable by the trustee under the lease of the bankrupt. The section provides:

136. (1) Subject to the rights of secured creditors, the proceeds realized from the property of a bankrupt shall be applied in priority of payment as follows: (f) the lessor for arrears of rent for a period of three months immediately preceding the bankruptcy and accelerated rent for a period not exceeding three month following the bankruptcy if entitled to accelerated rent under the lease, but the total amount so payable shall not exceed the realization from the property on the premises under lease, and any payment made on account of accelerated rent shall be credited against the amount payable by the trustee for occupation rent;

[10] Therefore, a landlord is entitled to receive as a priority claim, inter alia, three months of accelerated rent unless a trustee is in occupation of the premises under lease, in which case, the BIA permits the trustee to deduct the occupation rent paid from the accelerated rent that would otherwise be payable to the landlord.

[11] Following the bankruptcy of Danier and until the leases of Cadillac Fairview were disclaimed, $736,400 in occupation rent became payable in respect of Cadillac Fairview’s various properties and was paid to Cadillac Fairview by the Receiver.

[12] Under the Danier leases, Cadillac Fairview was entitled to accelerated rent. On May 16, 2016, Cadillac Fairview filed proofs of claim in Danier’s bankruptcy case in the amount of $1,392,943, primarily in respect of its priority claim for accelerated rent in respect of the leased premises. On July 7, 2016, pursuant to Notices of Partial Disallowance of Claim, the Trustee allowed $656,543 of the CFCL Claim and disallowed $736,400.

[13] The Trustee takes the position that the Receiver was its agent under the Occupancy Agreement in occupying the premises and paying the occupation rent and, as a result, was entitled to deduct the $736,390 in occupation rent under section 136(1)(f) of the BIA from the claim of Cadillac Fairview. Cadillac Fairview takes the position that the Receiver was not the agent of the Trustee and that it was the Receiver and not the Trustee that occupied the premises and became liable to pay the accelerated rent.

Analysis

[14] Counsel for Cadillac Fairview says that the sole issue is whether there was an agency relationship between the Trustee and the Receiver. If there was, the Trustee is correct in its position. If there was not, Cadillac Fairview is correct. Cadillac Fairview has a number of reasons why it says the Receiver was not an agent of the Trustee, none of which in itself may be sufficient to come to that conclusion but taken together are sufficient. I have come to the conclusion that the Trustee is correct.

[15] The Occupancy Agreement states clearly that the Receiver is acting as agent for the Trustee. It provides in part:

1. The Trustee hereby authorizes the Receiver and the Receiver hereby agrees to occupy the Leased Premises through its servants, agents, licensees and employees, as agent for the Trustee, for such period of time as permitted by the laws of the jurisdiction in which the Leased Premises is situated, subject to such earlier termination of occupancy as the Receiver may cause by notice in writing as provided herein, but in no event shall such occupation exceed three months from the date of Danier’s bankruptcy.

2. During its period of occupancy of the Leased Premises, the Receiver hereby undertakes to pay all costs and expenses for which the Trustee has liability in connection with the leases including, without limiting the generality of the foregoing, all costs related to base rent, additional or percentage rents, real estate taxes, common area maintenance costs, operating costs, insurance and utilities (collectively, the “Occupancy Expenses”).

3. The Receiver hereby undertakes to pay the Occupancy Expenses as and when due in accordance with the terms of the leases or when payable by the Trustee and hereby undertakes to pay such amounts directly to those entitled to receive payment and to provide the Trustee with evidence of such payment, if required. (Underlining added)

[16] Thus under the Occupancy Agreement the Receiver was to occupy the leased premises as agent for the Trustee and to pay the occupancy expenses for which the Trustee was liable.

[17] Cadillac Fairview argues that the language in clause 1 of the Occupancy Agreement that the Receiver was the agent of the Trustee is the only reference to agency and was put into the agreement unintentionally. There is really no support for the argument. Apart from the express language used by sophisticated parties with sophisticated lawyers, the fact that the Occupancy Agreement provided that the occupancy expenses were those for which the Trustee had liability is an indication that the agency was intended. The Trustee would not be liable for those occupancy expenses if it did not occupy the premises.

[18] Cadillac Fairview argues that if the agency was intentional, it means the Trustee misled the Court when it sought approval to enter into the Occupancy Agreement with the Receiver. It argues this on the basis that in the notice of motion seeking approval of the Occupancy Agreement drafted by Bennett Jones acting for the Trustee, there was a sentence “The Occupancy Agreement is appropriate and no stakeholder is prejudiced by its terms”. There was a similar statement in the report to the Court by the Trustee.

[19] I have considerable difficulty with that contention. The motion was on notice to all parties, including Cadillac Fairview, and was not opposed by Cadillac Fairview. The Occupancy Agreement was in the motion record and available to Cadillac Fairview and its counsel to read. They must have read the agreement and seen that it provided in clause 1 for the Receiver to be the agent of the Trustee. They must also have seen the provisions in clauses 2 and 3 regarding the occupancy expenses being the liability of the Trustee, the implication of which any sophisticated lawyer would understand. It was also spelled out in the Receiver’s report which stated: “during the occupancy period, the Receiver will pay and indemnify the Trustee for all occupancy costs and expenses for which the Trustee has liability in connection with the Company’s leased premises”.

[20] Counsel for the Trustee points out that in fact no stakeholder such as Cadillac Fairview was prejudiced by the Occupancy Agreement. The Trustee could have occupied the premises qua Trustee and this would have resulted in the deduction of occupation rent. For administrative convenience and to reduce the costs of the liquidation, the Receiver was retained to undertake the liquidation. By maintaining the Trustee’s payment obligations and having the Receiver act as the agent for the Trustee, the priorities were not altered.

[21] I cannot accept that Cadillac Fairview or any other party was fooled or misled by the statement in the notice of motion and the Receiver’s report that no stakeholder was prejudiced. The language of the Occupancy Agreement was there for all to be seen.

[22] Cadillac Fairview argues that the language of the order appointing the Trustee precludes any agency. At the end of the list of powers given to the Receiver numbering from (a) to (u) is the following:

…and in each case where the Receiver takes any such actions or steps, it shall be exclusively authorized and empowered to do so, to the exclusion of all other Persons (as defined below), including the Debtor and the Bankruptcy Trustee, and without any interference from any other Person.

[23] It is argued that as the Receiver was authorized in subparagraph (q) to enter into the Occupancy Agreement, the quoted language means that it did so to the exclusion of the Trustee and therefore the Trustee could have no interest in the leased premises under the Occupancy Agreement. I do not agree. The quoted provision just means that the Trustee is bound by what the Trustee authorized the Receiver to do. Moreover, even if the quoted language meant what Cadillac Fairview contends, the later order authorizing the Receiver to enter into the Occupancy Agreement would override the earlier receivership order.

[24] In subparagraph (b) of the receivership order, the Receiver is given the power to receive, preserve and to protect the property, including the power to change the locks on the property. Cadillac Fairview argues that although it is legally questionable whether the Receiver could in fact deny the Trustee entry or access, the order purports to grant the Receiver this power and it is contrary to a relationship of agency. This is a far-fetched argument. Subparagraph (b) is a standard provision and power in all receivership orders in the Commercial List which a receiver is authorized to exercise if it sees fit and is intended to provide a receiver with the power to protect the property to the exclusion of the debtor who may and often does try to prevent a receiver from entering or maintaining the property. The subparagraph (b) in its entirety states:

to receive, preserve and to protect the Property, or any part or party thereof, including, but not limited to, the changing of locks and security codes, the relocating of Property to safeguard it, the taking of physical inventories and the placement of such insurance coverage as may be necessary or desirable;

[25] This standard provision enabling a receiver to exercise powers if it sees fit cannot affect the interpretation of the later Occupancy Agreement. It does not provide that the Receiver must exercise that power, and in any event, in this case there is no evidence that the power was exercised at all.

[26] Cadillac Fairview cites provisions of G.H.L. Fridman, Canadian Agency Law, 2nd Ed. (Markham: LexisNexis Canada, 2012) to argue that the relationship between the Trustee and the Receiver is not one of principal and agent.

[27] At para. §1.2 of Fridman, it is said that it is irrelevant that the parties have used the term “agent” or some other term in describing their relationship. I think it is an overstatement to say that using the word “agent” is irrelevant. The agency language in the Occupancy Agreement cannot be ignored. The principles of contractual interpretation of a commercial contract are well settled. Meaning must be given to all of the words in a contract and courts should strive to reject an interpretation that would render one of its terms ineffective. See Geoff R. Hall, Canadian Contractual Interpretation Law, 2nd ed. (Markham Ont.: LexisNexis 2012) at p. 15, §2.2.1.

[28] The cases cited in support of the proposition that the use of the word “agent” is irrelevant do not go that far. One case cited, Jostens Canada Ltd. v. Gibsons Studio Ltd., 42 B.C.L.R. (3d) 149 (B.C.C.A.) had no discussion about what constituted an agent. The other case cited, Thorne Riddell Inc. v. Rolfe, [1982] A.J. No. 945 contained some discussion as follows:

The following words of Robertson, C.J.O., in B & M Readers' Service Limited v. Anglo Canadian Publishers Limited, [1950] O.R. 159, are applicable:

"...where the question is whether or not the relationship of principal and agent was intended to be established, that question is to be determined, not by giving a strict legal interpretation to an expression used by a layman in forming the contract, but rather by a board consideration of the intention of the parties as evidenced by what the parties did, as well as by what they said."

Aylesworth, J.A., in the B & M case at p. 177 quotes the following principle from Halsbury.

"In order to ascertain whether the relationship of agency exists, the true nature or the exact circumstances of the relationship between the alleged agent will be regarded, and if it be found that such agreement in substance contemplates the alleged agent acting on his own behalf, and not on behalf of a principal, then, though the alleged agent may be described as an agent in the agreement the relation of agency will not have arisen."

[29] What was said in B & M makes sense, particularly if one is dealing with “an expression used by a layman in forming the contract”. Here that was not the case. The Occupancy Agreement was drafted by sophisticated parties and sophisticated lawyers. The Occupancy Agreement did not provide that the Receiver was acting on its own behalf. It was obliged to the Trustee for a number of things under the agreement.

[30] At para. §1.18 of Fridman it is said that the two features that delineate an agency relationship are representation of another person by the agent and the power of the agent to affect the legal position of that other person. It is said that a relationship that does not exemplify all these features will not be considered to be an agency. The authority given for that proposition, Canadian Pacific Airlines Ltd. v. CIBC, [1987] O.J. No. 856, involved ticket agents who sold tickets for the airlines and the issue was whether their relationship was one of trust so that money collected by the agents was held by them in trust for the airline and whether the bank was put on notice of the trust. There was no discussion as to what constituted an agency relationship.

[31] The issues of agency are more nuanced. The first chapter of Bowstead and Reynolds On Agency (20th ed. Sweet & Maxwell), make that clear. A person can be considered to be an agent if that person has authority to act on behalf of a principal but has no authority to affect the principal’s relations with third parties. See §1-001 and 1-019. This makes sense. It is not every agency relationship in which an agent is selling something on behalf of his principal. In any event under the Occupancy Agreement the Receiver had the ability to affect the legal position of the Trustee and did so by occupying the leased premises on behalf of the Trustee. The Trustee became liable for occupation rent by virtue of the fact of possession by the Receiver on behalf of the Trustee. The Occupancy Agreement made that clear and required the Receiver to pay the occupancy expenses on behalf of the Trustee.

[32] Subparagraph (b) of the receivership order, the Receiver is given the power to receive, preserve and to protect the property, including the changing of the locks on the property. Cadillac Fairview argues that although it is legally questionable whether the Receiver could in fact deny the Trustee entry or access, the order purports to grant the Receiver this power and it is contrary to a relationship of agency. This is a far-fetched argument. Subparagraph (b) is a standard provision and power in all receivership orders in the Commercial List which a receiver is authorized to exercise if it sees fit and is intended to provide a receiver with the power to protect the property to the exclusion of the debtor who may and often does try to prevent a receiver from entering or maintaining the property. The subparagraph (b) in its entirety states:

to receive, preserve and to protect the Property, or any part or party thereof, including, but not limited to, the changing of locks and security codes, the relocating of Property to safeguard it, the taking of physical inventories and the placement of such insurance coverage as may be necessary or desirable;

[33] Cadillac Fairview relies on the case of Dancole Investments Ltd. v. House of Tools Co., 2011 ABCA 145 which involved the right of the trustee in bankruptcy to have credited under section 136(1) of the BIA the amount paid by a receiver for occupation rent to the landlord. It was held that the trustee could not deduct the amount paid by the receiver because under section 136(1) what can be deducted is the amount payable by the trustee and not the receiver. In that case, the Court stated:

21 The primary question we must answer is whether the phrase "payable by the trustee" includes payments made by the Receiver. We are of the view that it does not.

[34] Dancole, however, was an entirely different case from this case. In Dancole, the receivership order was granted on the application of a secured creditor, and the receivership proceedings operated separately from the bankruptcy proceedings. The trustee denied responsibility for any occupation rent, told the landlord that it had no interest in the premises, and that all issues relating to occupation rent were a matter for the receiver and the landlord, Dancole. The trustee never assumed possession of the premises and instead, the receiver and Dancole entered into a direct agreement with respect to occupation rent (notwithstanding that the receivership order in that case also provided the receiver could enter into an occupancy agreement with the trustee). All of this was made clear by the Court:

32 The trustee's liability for occupation rent does not arise until the estate vests pursuant to s. 71 of the BIA and attaches only if the trustee elects to take possession of the leased premises: Houlden and Morawetz at 5 - 251. The receiver's authority to deal with the debtor's property derives entirely from the Receivership Order issued by the Court pursuant to s. 46 and 47 of the BIA. In this case, the Receivership Order granted extensive powers to the Receiver to deal with House of Tools' property, including the right to take possession of the property and the discretion to deal with it. Paragraph 3(q) of the Receivership Order specifically granted the Receiver authority to enter into agreements with the Trustee regarding the occupation for any property owned or leased by the House of Tools. This provision recognizes the vesting of the estate in the Trustee, and the Trustee's right to assume occupation of the leasehold premises and potentially incur the obligation to pay occupation rent.

33 However, the Trustee refused to take possession of the leased premises, disclaimed any interest in the premises and denied any responsibility to pay occupation rent. The Trustee advised Dancole that it took no position with regard to the payment of use and occupation rent from the date of the appointment of the Receiver, as that was a matter between the Receiver and Dancole. Further, the Trustee confirmed that the Receiver had been appointed to dispose of House of Tools' assets, impliedly denying responsibility for that phase of the proceedings. Throughout, the Receiver was obliged to pay occupation rent to Dancole, and as permitted by law, was entitled to recover the amount paid for rent as costs incurred in the receivership. The occupation rent was never payable by the Trustee or anyone other than the Receiver. Because the Receiver is entitled to recover its costs, the rent paid by it to Dancole under its agreement with Dancole did not come from the estate available for ordinary creditors, and was not an expense or amount payable by the Trustee as it was never paid out of the bankruptcy estate.

[35] Dancole cannot stand as authority that in no case can rent paid by a receiver not be rent “payable by the trustee” under section 136(1) of the BIA. It depends on the facts. A trustee who disclaimed any interest in the property and told the receiver to make its own deal with the landlord could not say that the rent paid by the receiver to the landlord was rent payable by the trustee. A trustee with the right of occupancy that exercised that right by authorizing a receiver to occupy the leased premises on its behalf is in a far different position as it would then be liable for occupation rent. That is the situation in this case under the Occupancy Agreement.

Conclusion

[36] The appeal of Cadillac Fairview from the partial notice of disallowance of its claim by the Trustee is dismissed.

[37] The Trustee is entitled to its costs. The trustee claims fees on a partial indemnity basis of $22,867.50. This claim is less than in the cost outline submitted by Cadillac Fairview claiming fees on a partial indemnity basis of $28,380.90 plus HST. The claim of the Trustee for fees is allowed.

[38] The Trustee claims disbursements of $4,255.40, inclusive of HST. It includes photocopying/printing disbursements of $1,463.55 and online research charges of $2,379.38. This compares to the photocopying/printing disbursements claimed by Cadillac Fairview of $158.20 and online research charges of $105. I do not understand the basis for the charges by the Trustee for photocopying/printing disbursements and how they relate to the LSUC rates permitted. Nor do I understand the basis for the large online research charge. Until I understand these and whether they are legitimate disbursements, I will not approve the Trustee’s claim for disbursements.

Newbould J. Date: September 28, 2016