Court File and Parties
COURT FILE NO.: 35-2026632T DATE: 20170116 SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Royal Bank of Canada, Plaintiff AND: Delta Logistics Transportation Inc., Defendant
BEFORE: Justice H. A. Rady
COUNSEL: J. Ross Macfarlane, for the plaintiff Dante Gatti, for the defendants 2337764 Ontario Inc. No one appearing for Delta Logistics Transportation Inc.
HEARD: November 29, 2016
Endorsement
Introduction
[1] BDO Canada Limited, the court appointed receiver of Delta Logistics moves for an order requiring 23377764 Ontario Inc. to deliver to it possession of seven trucks over which 233 asserts a possessory lien pursuant to the Repair & Storage Liens Act, R.S.O. 1990, c. R.25 (RSLA).
Background
[2] The plaintiff, Royal Bank of Canada, is a creditor of the defendant Delta Logistics Transportation Inc. Delta made an assignment in bankruptcy on September 26, 2013. Pursuant to s. 243(1) of the Bankruptcy & Insolvency Act, R.S.C. 1985, c.B3 (BIA), BDO was appointed as receiver of the assets, undertakings and property of Delta pursuant to the order of Justice Leach dated September 27, 2016. It is also Delta’s trustee in bankruptcy.
The Issue
[3] BDO seeks possession of seven of nine trucks being held by 233 and over which 233 claims an RSLA lien. BDO believes the seven trucks have net equity and wishes to sell them. It has concerns about the validity of the lien claim, but the adjudication of that issue would await another day.
[4] BDO submits that it is authorized pursuant to court order to carry out various tasks, including to take possession of the debtor’s property and sell it for the benefit of the creditors.
[5] The responding party submits that the receiver’s rights flow through the debtor. The respondent asserts a possessory right to certain of the debtor’s property, which it says also affects the receiver. It argues that the court has no jurisdiction to make the order sought and that resort must be taken through the dispute resolution provisions of the RSLA.
[6] The responding party relies on an affidavit sworn by Eduardo Conte, the vice-president of 233. He deposes to the history of dealings with Delta and calculates that 233 is owed $80,000 (in round terms) for its inspection, repairs and storage of the trucks. Much of his affidavit speaks to 233’s concern about BDO’s First Report of the Receiver (which was not addressed in argument) as well as the loss of its possessory lien rights.
The Law
[7] Section 69.3 of the BIA provides as follows:
69.3 (1) Subject to subsections (1.1) and (2) and sections 69.4 and 69.5, on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor’s property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy.
(1.1) Subsection (1) ceases to apply in respect of a creditor on the day on which the trustee is discharged.
(2) Subject to sections 79 and 127 to 135 and subsection 248(1), the bankruptcy of a debtor does not prevent a secured creditor from realizing or otherwise dealing with his or her security in the same manner as he or she would have been entitled to realize or deal with it if this section had not been passed, unless the court otherwise orders, but in so ordering the court shall not postpone the right of the secured creditor to realize or otherwise deal with his or her security, except as follows:
(a) in the case of a security for a debt that is due at the date the bankrupt became bankrupt or that becomes due not later than six months thereafter, that right shall not be postponed for more than six months from that date; and
(b) in the case of a security for a debt that does not become due until more than six months after the date the bankrupt became bankrupt, that right shall not be postponed for more than six months from that date, unless all instalments of interest that are more than six months in arrears are paid and all other defaults of more than six months standing are cured, and then only so long as no instalment of interest remains in arrears or defaults remain uncured for more than six months, but, in any event, not beyond the date at which the debt secured by the security becomes payable under the instrument or law creating the security.
(2.1) No order may be made under subsection (2) if the order would have the effect of preventing a secured creditor from realizing or otherwise dealing with financial collateral.
[8] Section 70 states:
70 (1) Every bankruptcy order and every assignment made under this Act takes precedence over all judicial or other attachments, garnishments, certificates having the effect of judgments, judgments, certificates of judgment, legal hypothecs of judgment creditors, executions or other process against the property of a bankrupt, except those that have been completely executed by payment to the creditor or the creditor’s representative, and except the rights of a secured creditor.
[9] Section 243(1) provides:
243(1) Subject to subsection (1.1), on application by a secured creditor, a court may appoint a receiver to do any or all of the following if it considers it to be just or convenient to do so:
(a) take possession of all or substantially all of the inventory, accounts receivable or other property of an insolvent person or bankrupt that as acquired for or used in relation to a business carried on by the insolvent person or bankrupt;
(b) exercise any control that the court considers advisable over that property and over the insolvent person’s or bankrupt’s business; or
(c) take any other action that the court considers advisable.
[10] Subsection 1.1 deals with restriction on the appointment of a receiver, which does not apply here.
[11] Section 247 imposes on a receiver the duty to act honestly and in good faith and to deal with the property of the insolvent in a commercially reasonable manner. A receiver acts in a fiduciary capacity with respect to all interested persons: Ostrander v. Niagara Helicopters Ltd. (1973), 19 C.B.R. (NS) 5 (Ont. S.C.). A court appointed receiver’s powers come entirely from court order: Royal Trust Co. v. Montex Apparel Industries Ltd. (1972), 17 C.B.R. (N.S.) 45 (Ont. C.A.).
[12] The relevant sections of the RSLA are reproduced below:
(1) In the absence of a written agreement to the contrary, a repairer has a lien against an article that the repairer has repaired for an amount equal to one of the following, and the repairer may retain possession of the article until the amount is paid:
The amount that the person who requested the repair agreed to pay.
Where no such amount has been agreed upon, the fair value of the repair, determined in accordance with any applicable regulations.
Where only part of a repair is completed, the fair value of the part completed, determined in accordance with any applicable regulations.
(1) Subject to subsection (2), a storer has a lien against an article that the storer has stored or stored and repaired for an amount equal to one of the following, and the storer may retain possession of the article until the amount is paid:
The amount agreed upon for the storage or storage and repair of the article.
Where no such amount has been agreed upon, the fair value of the storage or storage and repair, determined in accordance with any applicable regulations.
Where only part of a repair is completed, the fair value of the storage and the part of the repair completed, determined in accordance with any applicable regulations.
A lien under this Part is discharged and cannot be revived as an interest in the article if possession of the article that is subject to the lien is surrendered to, or lawfully comes into the possession of, the owner or any other person who is entitled to receive a notice under subsection 15 (2)
A lien under this Part has priority over the interests of all other persons in the article.
[13] Part IV of the Act contains provisions respecting dispute resolution, which for the purposes of the decision need not be recited.
[14] In this case, the court order appointing the receiver provides in part:
This court orders that pursuant to section 243(1) of the BIA, BDO is hereby appointed Receiver, without security, of all the assets, undertakings and properties of the Debtor acquired for, or used in relation to a business carried on by the Debtor, including all proceeds thereof (the “Property”).
This court orders that the Receiver is hereby empowered and authorized, but not obligated, to act at once in respect of the Property and, without in any way limiting the generality of the foregoing, the Receiver is hereby expressly empowered and authorized to do any of the following where the Receiver considers it necessary or desirable:
(a) to take possession of and exercise control over the Property and any and all proceeds, receipts and disbursements arising out of or from the Property…
This court orders that (i) the Debtor, (ii) all of its current and former directors, officers, employees, agents, accountants, legal counsel and shareholders, and all other persons acting on its instructions or behalf, and (iii) all other individuals, firms, corporations, governmental bodies or agencies, or other entities having notice of this Order (all of the foregoing, collectively, being “Persons” and each being a “Person”) shall forthwith advise the Receiver of the existence of any Property in such Person’s possession or control, shall grant immediate and continued access to the Property to the Receiver, and shall deliver all such Property to the Receiver upon the Receiver’s request.
This court orders that all funds, monies, cheques, instruments, and other forms of payments received or collected by the Receiver from and after the making of this Order from any source whatsoever, including without limitation the sale of all or any of the Property and the collection of any accounts receivable in whole or in part, whether in existence on the date of this Order or hereafter coming into existence, shall be deposited into one or more new accounts to be opened by the Receiver (the “Post Receivership Accounts”) and the monies standing to the credit of such Post Receivership Accounts from time to time, net of any disbursements provided for herein, shall be held by the Receiver to be paid in accordance with the terms of this Order or any further Order of this Court.
[15] On the return of the motion, BDO filed no statement of law or book of authorities, probably considering the basis for the relief sought was self-evident. The responding party filed a book of authorities, which reproduces decisions that discuss mechanics’ liens and the status of a lienholder as a secured creditor. None are appellate authorities, none deal with the RSLA and I was told none could be located. However, it is settled that mechanics’ and construction lienholders are secured creditors. The RSLA replaced the Mechanics’ Lien Act and consequently, the principles remain the same.
[16] Turning then to the cases cited by 233, in Pisiak v. Dyck, [1986] S.J. No. 770 (Q.B.), the plaintiff sought to enforce a mechanics’ lien against a discharged bankrupt. The defendant argued that the plaintiff was not a secured creditor and in any event could not enforce a lien after he had been discharged from bankruptcy. The court ruled that the lien was enforceable. The lienholder became a secured creditor upon perfection. The debt was extinguished on discharge but not the security itself.
[17] In Panver Construction Ltd. (1987), 57 O.R. (2d) 758 (S.C. in Bankruptcy), the owner of land mortgaged it. Liens were acquired arising from work performed. Following default on the mortgage, the land was sold under power of sale. The owner made an assignment in bankruptcy. The trustee sought the surplus on the mortgage sale and brought a motion to determine priorities. The court ruled:
On the basis of the decisions in Re Polsak and Re Radovini, it appears to me that the trustee does not have priority over the lienholders to the surplus funds unless he can achieve such priority through the operation of s. 50(1). The interest of the lienholder in the lands was conferred by statute when the work was done and the materials supplied. The judgment in the action did no more than determine and quantify the existence of the liens and authorize the lienholders to sell the lands if payment was not made. The secured interest was derived from the statute and not from the judgment. If there had been no judgment, the lienholder would nonetheless have had an interest in the lands. After the sale, that interest became a claim to the surplus trust fund. Again, if there had been no judgment, the claim of the lienholders to the surplus would have been no different. Section 50(1) gives the trustee priority over various forms of process. In my opinion, the claim to the surplus by the lienholders does not fall within the ambit of “judicial or other attachments, garnishments, certificates having the effect of judgments, judgments, certificates of judgments, judgments operating as hypothecs, executions, or other process against the property”.
[18] In Re Victoria Bed and Mattress Co. Ltd., [1960] B.C.J. 104 (S.C.) the court held that mechanics’ lienholders have the status of secured creditors. The court in Rockland Cocoa and Chocolate Co., [1921] O.J. No. 259 (H.C.) came to the same conclusion.
[19] The only decision dealing with the RSLA and bankruptcy that I could locate is Totalline Transport Inc. v. Caron Belanger Ernst & Young Inc., 8 C.B.R. (4th) 307 (Gen.Div.). The defendant was appointed the trustee in bankruptcy and receiver. In 1998, an order was issued by in the Superior Court of Quebec, allowing the receiver to take control of the goods held by the plaintiff. The plaintiff submitted that it had a valid possessory lien pursuant to the RSLA; that it could exercise its lien without regard to the bankruptcy proceedings; and that no leave was required from the court in order to do so. The trustee argued that given the order from the Superior Court of Quebec, possession of the goods was to be turned over to the receiver.
[20] The Ontario court agreed with the plaintiff, finding that it had the right to possess the security and realize its security on the goods under its lien. In support of its decision, the Court examined s. 69.3(2) of the BIA and interpreted it to provide that “a secured creditor can realize and otherwise deal with its security in the same manner as it would have been entitled to realize or deal with it if the section, i.e. staying any action to recover a claim provable in bankruptcy pursuant to s. 69.3(1), had not been passed, unless the court orders otherwise” (at para. 11).
[21] At para. 15, the Court determined that the plaintiff did not require leave of the court to exercise its security pursuant to its possessory lien and found that the goods held by the plaintiff did not form part of the bankrupt’s property that could be seized by the trustee.
[22] In response to my request, the parties forwarded facta, which I have had an opportunity to review.
[23] A helpful and ultimately dispositive statement of the relevant principles is found in Bank of Nova Scotia v. MacCulloch & Co. (1983), 49 C.B.R. (N.S.) 251 (N.S.T.D.) at para. 3. The court states that “[o]nce a receiver is appointed, it is the receiver’s duty to liquidate the assets, pay all costs and expenses of the receivership, and distribute the net proceeds among the creditors of the company in order of priority. A receiver owes a duty to the court that appointed it and to the creditors generally”.
[24] It quotes from Raymond Walton, ed., Kerr on Receivers, 17th Ed. (London: Sweet & Maxwell, 1978 at p. 173, noting that a receiver is obliged:
… to take possession of the estate, or the property, the subject- matter of dispute in the action, in the room or place of the owner thereof; and, under the sanction of the court, to do, as and when necessary, all such acts of ownership … for the parties to be ultimately declared to be entitled thereto, as the owner himself could do if he were in possession…
[25] The court concludes:
But it owes no duty to any individual creditor. Indeed, it may be improper for an individual creditor to insinuate itself into the liquidation process. Certainly, it is improper for a receiver to permit it.
[26] Put another way and as outlined at para. 6 of the Receiver’s factum:
… a court-appointed receiver … is authorized and empowered to liquidate all of the assets of the debtor under the supervision of the court, to the exclusion of all others including secured creditors, whereas the stay in a bankruptcy specifically preserves the rights of secured creditors to exercise their remedies. The whole point of a court-appointed receivership is that one person … is appointed to deal with all of the assets of an insolvent debtor, realize upon them, and then distribute the proceeds of that realization to the creditors’ claims should be prioritized. As is clear from the broad wording of the Appointment Order, all creditors, secured and unsecured, are stayed from exercising remedies against the insolvent person’s assets in favour of a single, court-supervised liquidation process by the Receiver. Whether a secured creditor’s rights arise under the Mortgages Act, the Personal Property Security Act, the Construction Lien Act, the Repair and Storage Liens Act, at common law, or otherwise, that creditor is bound by the provisions of the Appointment Order…
Disposition
[27] The court order prevails. Given its breadth, the receiver is and must be entitled to take possession of the liened articles, without prejudice to the claimant’s possessory lien claim to be determined at another time. Such an interpretation is consistent with the necessity for the receiver to maintain control over the debtor’s assets to ensure their advantageous and orderly disposition for the benefit of all creditors and to avoid duplicative costs that would otherwise arise from multiple sales. The receiver’s rights and obligations derive from the court order and not from the debtor as 233 asserts.
[28] A distinction must be made between the powers of a trustee and those of a court appointed receiver, not the least of which is the latter’s fiduciary obligations to all stakeholders. It is on that basis that the Totalline case is distinguishable. With respect to the other cases on which 233 relies, they stand for the proposition that RSLA claimants are akin to secured creditors, a proposition with which the receiver does not quarrel.
[29] Accordingly, an order will issue as follows:
a) Approving the First Report and the Supplementary Report, and the activities of the receiver described therein;
b) Requiring 233 to deliver the vehicles to the receiver;
c) Authorizing the receiver to enter, by force and with police assistance if required, upon 233’s premises if the vehicles are not delivered forthwith;
d) Authorizing the receiver to sell the vehicles by public auction;
e) Requiring the receiver to place the proceeds of the sale into a separate trust account;
f) Providing that 233’s claim will not be prejudiced by the delivery of possession of the vehicles to the receiver; and,
g) Providing that the proceeds of the sale shall be distributed by the receiver only upon further of the court.
[30] If the parties cannot agree, I will receive brief written submissions on costs by February 17, 2017.
“Justice H. A. Rady” Justice H. A. Rady Date: January 16, 2016