Court File and Parties
COURT FILE NO.: CV-15-11129-00CL
DATE: 2022-10-31
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: IN THE MATTER OF SECTION 243(1) OF THE BANKRUPTCY AND INSOLVENCY ACT, R.S.C. 1985, C. B-3 AS AMENDED, AND SECTION 101 OF THE COURTS OF JUSTICE ACT, R.S.O. 1990 C. C.43, AS AMENDED
ROMSPEN INVESTMENT CORPORATION, Applicant
AND:
COURTICE AUTO WRECKERS LIMITED, NORTHWOOD RECYCLING & ENERGY INC., 800619 ONTARIO LIMITED, POWER GROW SYSTEMS INC., COURTICE ENERGY CORP., LES REBUTS DE PATES ET PAPIERS DE L’OUTAOUAIS LTEE., LES AMENAGEMENTS GUIRARD INC., COURTICE AUTO INDUSTRIES INC., 2254066 ONTARIO INC., LAKES TERMINALS & WAREHOUSING LTD., KAWARTHA DOWNS LIMITED, HARVEY AMBROSE and SPLASH CANYON WATERPARK & CAMPING RESORT INC., and PARK TERRACE DEVELOPMENT CORP., Respondents
BEFORE: Justice Cavanagh
COUNSEL: Emily Durst, for the BNG Financial
Steven Weisz and Shahrouz Hafez, for Rosen Goldberg Inc. as Court-appointed receiver of Northwood Recycling & Energy Inc.
Lisa Corne for Romspen Investments Corporation
HEARD: October 12, 2022
ENDORSEMENT
Introduction
[1] Rosen Goldberg Inc. is the Court-appointed receiver (the “Receiver”) of Northwood Recycling & Energy Inc. (“Northwood”) and the other respondents pursuant to an Order dated October 19, 2015 (the “Appointment Order”).
[2] BNG Financial (“BNG”) is a creditor of Northwood. In 2008, BNG sold certain equipment to Northwood for a purchase price of $865,000. Northwood issued a promissory note to BNG for the unpaid balance of the purchase price payable over five years. As security for payment of the amounts due pursuant to the promissory note, BNG received a purchase money security interest (“PMSI”) in the equipment.
[3] Northwood defaulted on its obligations. Before the Receiver was appointed, BNG obtained several court orders including a judgment entitling it to possession of the equipment.
[4] Upon its appointment, the Receiver took possession of certain of the equipment sold by BNG to Northwood: (i) three digestors (large cylindrical tubes used to process organic waste), (ii) a Jaylor mixer, and (iii) a weigh scale.
[5] The Receiver continued to operate the business of Northwood and used the equipment as part of the operations of Northwood’s business. The operations of Northwood included a contract with the City of Toronto. The Receiver sold the Jaylor mixer in early 2016 for $5,000.
[6] The Receiver sought a legal opinion concerning the validity of BNG’s PMSI security. This was not completed until May 2018. In July 2018, the Receiver notified BNG that it had valid PMSI security.
[7] The Receiver completed its sale of the Northwood assets in May 2019. The sale did not include the remaining equipment in the Receiver’s possession that was subject to BNG’s PMSI security (the “Equipment”).
[8] By Notice of Motion dated October 7, 2019, the Receiver moved for an Order: (i) authorizing and directing the Receiver to relinquish to BNG all assets on hand that are subject to BNG’s purchase money security interest and to pay BNG the proceeds from the sale of the Jaylor Mixer in the amount of $5,000, and (ii) approving the Receiver’s activities as described in the Seventeenth Report of the Receiver.
[9] By Notice of Cross-Motion dated November 1, 2019, BNG brought a cross-motion for: (i) an Order requiring the Receiver to compensate BNG for the use of the Equipment during the receivership and the diminished value of the Equipment arising from its use, failure to use, failure to repair and maintain and failure to properly operate the Equipment, and (ii) an Order requiring the Receiver to disgorge to BNG all proceeds from the sale of any of the Equipment.
[10] BNG’s claim for compensation is (i) for all equipment listed in Schedule “A” to the Asset Purchase Agreement, from October 2015 to December 2018 (when the City of Toronto contract was complete), $41,186.94 per quarter or $370,682.46; (ii) for the digesters, $10,000 per month from October 2015 to December 2018, a total of $380,000, and (iii) for the weigh scale, $2,920 per month from October 2015 to October 2020 (date of retrieval) based on market rent for a comparable weigh scale of $2,920 per month for a total of $175,200.
[11] For the following reasons, I grant the Receiver’s motion and I dismiss BNG’s cross-motion.
Additional Background Facts
[12] Upon the Receiver’s appointment, the General Manager appointed by the Receiver to manage Northwood’s business operations, Orazio Valente, inspected the Equipment and found it to be generally in a poor state of repair and/or redundant to Northwood’s continued business operations.
[13] The Receiver obtained an appraisal of the Equipment approximately in December 2015. The appraiser estimated the value of the equipment to be $34,000 in total. The appraised value of the three digestors was $30,000 and the appraised value of the mixer was $4,000.
[14] BNG disputes the Receiver’s position concerning the condition of the digestors when the Receiver was appointed and the appraised values. BNG disputes that the digestors were in poor condition, nearing the end of their useful life, and of little value. BNG’s position is that the Jaylor mixer had a value of $10,000 to $12,000 when the Receiver was appointed. BNG asserts that the equipment included a Case tractor with an estimated value of $12,000 to $15,000 when the Receiver was appointed.
[15] The Receiver reports that no Case tractor was stored at the Northwood premises at the appointment date or when the appraisal was conducted. The Receiver requested from BNG the serial number for the Case tractor. On August 11, 2020, counsel for BNG provided the serial number for the Case tractor. By email dated August 12, 2020, counsel for the Receiver advised that the Receiver did not sell the Case tractor and that it may have been sold prior to the Receiver’s appointment. BNG has failed to show that the Receiver took possession of the Case tractor. When I refer to the Equipment, I do not include the Case tractor.
[16] Soon after the Receiver was appointed, BNG notified the Receiver that it had a PMSI in the Equipment that ranked ahead of security held by the appointing creditor, Romspen Investment Corporation (“Romspen”).
[17] In March 2016, counsel for the Receiver advised BNG’s counsel that if BNG had a valid PMSI, it could make arrangements to take possession of the Equipment or, alternatively, the Receiver could sell the equipment and any priority issue could be dealt with on the distribution motion.
[18] The Receiver sought a legal opinion on the validity of BNG’s security. There was a lengthy delay in obtaining the legal opinion. BNG’s counsel followed up regularly and diligently about the status of the security opinion.
[19] The legal opinion was provided to the Receiver in May 2018. On July 16, 2018, the Receiver’s counsel advised that BNG had a valid PMSI in the Equipment. The Receiver’s counsel also advised that they anticipated that Romspen would be making a partial credit bid for the Northwood assets and the sale could include the Equipment.
[20] At the time the Receiver was appointed, Romspen was owed approximately $102 million. The indebtedness owed to Romspen is secured by a first-ranking security interest, subject to any purchase money security interests. Romspen is still owed $45 million as at the date of the Receiver’s seventeenth report.
[21] On July 19, 2019, BNG’s counsel asserted on behalf of BNG a claim of $1,334,781 regarding the Equipment.
[22] BNG recovered possession of the weigh scale and related equipment in October 2020. BNG recovered possession of the three digestors in 2020.
Analysis
[23] BNG submits that the Receiver has breached its duty to act honestly and in good faith and to deal with the property of Northwood in a commercially reasonable manner. BNG submits that the Receiver had a duty to use reasonable care in the custody and preservation of the equipment pending completion of the security opinion and thereafter. BNG submits that the Receiver had a further duty to act in good faith and take all steps necessary to obtain the best price possible for the equipment in the circumstances.
[24] BNG submits that the receivership estate should pay for the use or benefit derived from the Receiver’s use of the Equipment over the course of three years. BNG submits that it is entitled to compensation for the Receiver’s use of the equipment before a distribution is made to Romspen, otherwise, Romspen will be effectively enriched to the detriment of BNG. BNG submits that a payment to it for the Receiver’s use of the Equipment is supported by equitable principles.
[25] At the hearing, BNG’s counsel confirmed that BNG does not seek any finding of personal liability for payment of damages against the Receiver or against Romspen.
[26] The Receivership Order provides that no proceeding against or in respect of the Respondents or the Property shall be commenced or continued except with the written consent of the Receiver or with leave of the Court. The Equipment is part of the Northwood’s Property
[27] The Receiver submits that BNG’s motion is brought without its consent and without leave of the Court having been granted. Accordingly, the Receiver submits that BNG’s motion should be dismissed on this ground alone.
[28] BNG submits that the Receiver consented to its claim for compensation being brought against Northwood’s estate in the receivership proceeding. In support of this submission, BNG relies on the Order of Justice Conway dated May 7, 2019. In this Order, Justice Conway approved a sale transaction for the sale of Northwood’s interest in the Thornton Road property and certain personal property of Northwood. The sale excluded the Equipment. Justice Conway’s Order includes the following handwritten additions at paras. 9 and 10:
THIS COURT ORDERS that the within Order is without prejudice to the Claims (hereinafter defined) of the PMSI Creditor (hereinafter defined) in assets subject to their security against the Receiver and/or any cash security paid to the Receiver.
THIS COURT ORDERS that in light of the absence of cash on closing, BNG Financial et al. (collectively, the “PMSI Creditor”) may be at liberty to move for cash security to be paid by the Applicant to the Receiver for the PMSI Creditor’s pre-and post-filing claims (the “Claim”). In the event the parties are unable to agree on the amount of cash security, any party may move for an Order of this Court to determine such security, if any, in respect of the Claim of the PMSI Creditor. Alternatively, any party shall be at liberty to move for a determination of the financial value of the PMSI Creditor’s Claim.
[29] BNG did not move for cash security to be paid by Romspen to the Receiver for BNG’s claim.
[30] I do not agree that BNG is foreclosed by the Appointment Order from bringing this cross-motion The Order of Justice Conway authorizes BNG to move for a determination of the financial value of its claim. BNG seeks such a determination on its cross-motion.
[31] The question before me is whether BNG has proven that it has a claim against the estate of Northwood in receivership for compensation for the Receiver’s use of the Equipment during the receivership to operate Northwood’s business or for the diminished value of the equipment after the Receiver took possession of it because of the Receiver’s alleged failure to repair and maintain the Equipment or to properly operate it.
[32] In its Notice of Motion, BNG states that it is a secured creditor of Northwood holding a valid purchase money security interest (“PMSI”). At the hearing of these motions, counsel for BNG submitted that BNG was making its claim for compensation as owner of the Equipment, and not as a secured creditor. BNG did not foreclose on the equipment pursuant to the Personal Property Security Act. There is no evidence that BNG became the owner of the Equipment.
[33] I treat BNG’s claim as being made, as stated in its Notice of Motion, in its capacity as a secured creditor of Northwood holding a first ranking PMSI security interest against the Equipment.
[34] BNG submits that it should be compensated for the Receiver’s use of the Equipment during the receivership to operate Northwood’s business over the course of three years, before a distribution was made to Romspen. BNG submits that such an order is justified on equitable principles. I disagree.
[35] It is true that there was considerable delay in obtaining the legal opinion provided to the Receiver that BNG’s PMSI security is valid. Nevertheless, it was open to BNG to take steps to enforce its PMSI security against the Equipment at any time, even while the legal opinion was being sought. It did not do so. After the Appointment Order, the Receiver was entitled to use Northwood’s property, including the Equipment, to operate Northwood’s business. It did not require permission from BNG to do so.
[36] BNG has not shown that the Receiver breached its duties by taking possession of the Equipment and using it as it did. It is important to recognize that BNG does not make a claim against the Receiver in its personal capacity or against Romspen. BNG’s claim is against the estate in receivership. The assets of Northwood which were subject to Romspen’s security were sold, and the proceeds were applied to reduce Romspen’s secured indebtedness. BNG has recovered possession of the Equipment subject to its PMSI security.
[37] BNG relies on the doctrine of unjust enrichment to support its claim. To succeed on such a claim, a claimant must show (i) an enrichment of the defendant, (ii) a corresponding deprivation of the claimant, and (iii) an absence of a juristic reason for the enrichment.
[38] The Receiver operated the business of Northwood for a time during the Receivership and, in so doing, properly used assets of Northwood, including the Equipment. The estate received revenues from these operations, but it was not enriched through these operations. The revenue received from the operations of Northwood’s business was used to fund the Receiver’s expenses.
[39] BNG has also failed to show that it suffered a corresponding deprivation from the Receiver’s use of the Equipment to operate the business of Northwood. As I have said, it was always open to BNG to take steps to realize on its PMSI security if it considered this course to be advantageous to it. BNG decided not to take steps to realize on its security while the Receiver was obtaining a security opinion. BNG has not shown that through the Receiver’s use of the equipment to operate Northwood’s business, it suffered a deprivation that corresponds to an enrichment of the Receiver.
[40] I conclude that BNG, as a secured creditor of Northwood with a first ranking PMSI against the Equipment, has failed to show that it has a claim against the estate in receivership for compensation for use of the Equipment founded on principles of unjust enrichment or on alleged breaches of duty by the Receiver.
[41] To allow BNG to be compensated by an award of damages from the estate before a distribution is made to Romspen would, in substance, treat BNG’s claim for compensation as a secured claim that ranks ahead of Romspen’s secured claim. BNG has not shown that such an extraordinary order is justified on equitable principles.
[42] If BNG had proven a claim for unjust enrichment against the estate, or a claim against the estate based on the Receiver’s alleged breaches of duties, the claim would be an unsecured claim. Romspen has security over the assets of Northwood, and Romspen’s secured indebtedness has not been repaid in full. The estate in receivership has no assets with which to satisfy an unsecured claim by BNG.
Disposition
[43] For these reasons, I grant the Receiver’s motion and make an order:
a. Authorizing and directing the Receiver to pay BNG proceeds from the sale of the Jaylor mixer in the amount of $5,000;
b. Approving the Receiver’s activities as described in the Seventeenth Report of the Receiver, as supplemented.
[44] I dismiss BNG’s cross-motion.
[45] The Receiver does not seek costs. Romspen also appeared on this motion. If Romspen intends to seek costs, I may be spoken to.
Cavanagh J.
Date: October 31, 2022