Imperfections - Case Comments

  • March 06, 2018
  • Jennifer Babe

IMPERFECTIONS

Cases of Note

1.   did section 89 of the Indian Act prevent the owner of the goods from recovering them pursuant to provisions of the RSLA?

Taylor’s Towing v. Intact Insurance Company, 2017 ONCA 992

Intact Insurance had, after accidents and thefts of certain vehicles, paid the insured’s claim and ownership of the vehicles was transferred to Intact. 

These vehicles had been towed by entities owned by members of an Indian Reserve and the towed vehicles were located on the reserve.    There was a dispute between the towers and Intact as to the price of the towing and storage fees.

Intact applied to Court pursuant to sections 23 and 24 of the Repair and Storage Liens Act (“RSLA”), to pay the disputed amount into Court and get back possession of the vehicles.  The towers claimed that their rights under the RSLA were a chose in action and personal property of Indians located on reserve.   As such, the towers claimed s. 89(1) of the Indian Act (Canada) made the vehicles exempt from execution or seizure of any kind.

The application judge ordered that the vehicles be returned to Intact. On appeal the Court of Appeal held also that the vehicles be returned.   The Court of Appeal followed decisions of the Supreme Court of Canada and held that the purpose of section 89 was to preserve assets of an Indian or a Band from seizure by  a non-Indian creditor or taxing authority.   In this situation Intact was a debtor and not a creditor of an Indian enterprise and section 89 did not apply.

2. Different RSLA remedies claimed by opposing parties allowed to be heard together

Intact Insurance v. 2229152 Ontario Limited, 2017 ONSC 3282

In February 2016 an insured vehicle was in an accident.   Intact was alerted by its insured that the vehicle was in the possession of 2229152 Ontario Limited o/a Royal Windsor Collision Centre (“Royal”).   Shortly thereafter Intact inspected the vehicle at Royal’s premises and determined it to be a total loss.  Intact paid its customer and had subrogated rights to the wreck to sell to recover some of its costs.

In February 2017 Intact tried to get the wreck from Royal and was presented with an invoice for about $687 for towing and $25,289 for 373 days of storage at $60 per day.     Intact tried to settle with Royal on the amount owed without success.

On May 11, 2017 Royal applied to the Burlington Small Claims Court under s.23 of the RSLA seeking a determination that it was owed some $24,642, having abandoned any amounts over the Court’s monetary jurisdiction.   This application was served on Intact on May 12, 2017.

On May 12, 2017 Intact made an application to the Ontario Superior Court of Justice under s. 24 of the RSLA and paid $32,000 into Court, which amount included the full sum Royal claimed plus  $4,395.70 as Intact’s offer to settle the dispute.   Shortly thereafter Intact sought recovery of the wreck from Royal pursuant to section 24 of the RSLA.  Royal refused to release the wreck to Intact.

Royal asked the Superior Court of Justice that Intact’s section 24 application be terminated on the basis that sections 23 and 24 were mutually exclusive and its application was first in time. The Court noted that Intact wanted to recover the wreck and fight over the amount owed later, while Royal wanted to continue its leverage by retaining possession of wreck, and have a determination of  the amount it was owed in the Small Claims Court under section 23. 

The Court held that it saw no reason in this fact situation for sections 23(1)(d) and section 24, both dealing with the a determination for the proper  amount of the lien claim,  to be mutually exclusive.   Both of these mechanisms allowed for the Court with proper monetary jurisdiction to resolve their dispute on the amount properly owed for the towing and storage.    The Court ordered the section 24 application of Intact be transferred to the Burlington Small Claims Court to be heard together with Royal’s section 23 application, and that the amount already paid into Court by Intact equal to the gross sum claimed by Royal be transferred to the Small Claims Court and the balance over that sum be released to Intact.

3.  solicitor’s charging order vs. PPSA secured creditor

Dalcor Inc. v. Unimac Group Ltd., 2017 ONSC 945

Certain funds were paid into Court by the land owners of the real property to resolve the construction lien claims brought by Unimac.   Trisura Guarantee Insurance Co. had provided certain construction bonds to Unimac and held Unimac’s indemnity for its bonding and Trisura held a PPSA registered security interest over the personal property of Unimac.

BPR Litigation Lawyers (“BPR”) were claiming a solicitor’s charging order over the funds paid into Court, in priority to Trisura as Unimac’s secured creditor.   Trisura sought an order for its PPSA priority over a possible charging order, arguing that:

a)  the language of section 4 of the PPSA excludes liens from the Act, but does not specifically exclude charging orders;  and

b)  the common law “first in time” rule give Trisura’s prior registered PPSA claim priority.

The Court disagreed with Trisura’s arguments and held that should a charging order be granted to BPR, such charging order  would have priority ahead of the PPSA security interests of Trisura for the following reasons:

a)  while the language in section 4 does not refer to charging orders being specifically excluded from application of the PPSA, there are two kinds of solicitor’s charging order:  

i)  statutory order under section 34 of the Solicitors Act by which a Court may declare,  “… the solicitor to be entitled to a charge on the property recovered or preserved through the instrumentality of the solicitor for the solicitor’s fees, costs, charges and disbursements in the proceeding” [ie:  the funds paid into Court in this situation]; and

 ii)  a charging lien that arises from the jurisdiction of the common law courts and courts of equity, and which creates the proprietary interest of a secured creditor. [at paras 14, 15 and 16]

It is inconsistent that section 4 excludes the lien component of the solicitor’s rights but not its statutory charging order.  It would be unjust and inconsistent to have portions of the solicitor’s rights be excluded as a lien but the other be subject to the PPSA [at paras 33 and 34]

b)   solicitor’s charging orders arise only after the solicitor has expended the work to preserve or recover the subject property.  It is an access to justice matter that the solicitor be paid for the work to recover the asset in situations where the client is unable to make payment for services during the course of the proceedings. The solicitor is unable to protect him or herself until the conclusion of the matter.  The charging order is a unique right created at statute, common law and equity to protect solicitors.  As such the common law “first in time rule” does not practicably apply.  [at paras 44 and 45]

4.   bankruptcy does not extinguish the GST/HST deemed trust as against creditors who received  payments from the tax debtor prior to its bankruptcy

Canada v. Callidus Capital Corporation, 2017 FCA 162; leave to appeal to SCC is being sought

In December of 2011, Callidus Capital Corporation (“Callidus”) bought under an assignment of debt agreement some $3.5 million of debt and related security agreements issued by Cheese Factory Road Holdings Inc. (“Debtor”), which held certain real property as investments.   Pursuant to a forbearance agreement, Debtor sold one property and paid the net proceeds of some $590,000 to reduce its debts to Callidus.   Debtor also paid all of the rents collected from another property into a blocked account held by Callidus, which account held some $780,000.

In April 2012, CRA claimed about $90,000 to be paid by Callidus from the deemed trust in favour of the Crown for unremitted GST and HST owed by the Debtor  pursuant to section 222 of the Excise Tax Act. Subsections 222(1) and (3)  create a deemed trust for unremitted GST and HST over all of the property of the tax debtor, and property of the tax debtor held by any secured creditor.

At the instance of Callidus, the Debtor assigned itself into bankruptcy in November 2013.   The Crown started an action against Callidus to collect from it an amount equal to the GST and HST that the Debtor collected but did not remit, being some $177,000 plus interest.  Callidus argued that the deemed trust disappeared by reason of section 67 of the Bankruptcy and Insolvency Act.

The majority for the Federal Court of Appeal held that the personal liability of the secured creditor under the Excise Tax Act deemed trust was not eliminated by a  bankruptcy for proceeds from assets subject to the deemed trust that the secured creditor received from the tax debtor prior to the tax debtor’s  bankruptcy. [at para 26]

5.   DIP charges vs source deductions in CCAA proceedings

Canada North Group Inc., 2017 ABQB 550

The Canada North Group of companies sought protection from their creditors under the CCAA.  Pursuant to the Initial Order granting that protection, the Court included an order granting priority charges (the “Priority Charges”) ahead of all of the debtors’ other secured creditors to:

            a)  an interim financier for $1 million [later increased to $2.5 million];

            b) administration charges for the Monitor of $500,000; and

            c)  directors’ indemnity charge for $50 million.

The debtors owed CRA about $1.14 million for unremitted payroll source deductions and GST.   CRA applied to vary an initial order on the basis that the CCAA did not permit the Court to override the Crown’s priority status under  the Income Tax Act, the Canada Pensions Plan Act, and the Employment Insurance Act (collectively the “Fiscal Statutes”) created by the Priority Charges.

The Court made an extensive review of the case law concerning the deemed trusts in favour of the Crown under the Fiscal Statutes, both before and after they were amended by Parliament, and the authority of the Court to make orders for the restructuring of debtors under the CCAA, including the creation of priority charges pursuant to sections 11.2, 11.51 and 11.52 of that Act.

The Court held that CRA was a “secured creditor” as defined in the Income Tax Act, which includes deemed trusts, and not the actual owner of the tax debtor’s assets subject to the deemed trust as argued by CRA.  [at paras 84 and 89]

 The Court concluded that the CCAA provisions had to be read together with the Fiscal Statutes and held that:

While the CCAA preserves the operation of the Fiscal Statutes deemed trusts, it also authorizes the reorganization of priorities through Court ordered priming.  [para 93]

Had Parliament wanted to limit the Court’s ability to give priority to these charges, it could have drafted s.11.52(2) (and the mirror provisions) to expressly provide:

… priority over the claim of any secured creditor, except the claim of Her Majesty over deemed trusts under s.227(4) and (4.1) of the Income Tax Act. [at para 106]

6.  unregistered lease for a term of more than one year is subordinate to prior registered GSA, again

Royal Bank of Canada v. Delta, 2017 ONSC 6208

In 2008 the bank lent funds to Delta Logistics Transportation Inc. (“Debtor”) secured by a GSA registered pursuant to the PPSA.

In May 2012 Cervus Equipment Corporation (“Lessor”) leased three trucks to Debtor on a four year lease.   Lessor did not register its lease under the PPSA.

In May 2016, Lessor and Debtor discussed Debtor buying the three trucks at lease end.   That never happened.  The Lessor repossessed two of the trucks in August 2016, and the third in October 2016, after the Debtor assigned itself into bankruptcy in September 2016. 

Lessor sold the trucks and the bank claimed the proceeds of sale.  Lessor argued that the lease had ended before the bankruptcy occurred and it was an owner of the trucks with possession of them, a higher right than that of the bank.

The Court disagreed on the basis that the lease was one subject to the PPSA, Lessor had not registered and was unsecured, and the bank’s security interest attached to the trucks and the proceeds of sale of the trucks.

7.  exact match search vs inexact match search in Manitoba

Bankruptcy of Christine Marie Rose Fauvelle, 2017 MBQB 179

The trustee in bankruptcy disallowed Toyota Credit’s claim as a secured creditor over the motor vehicle it had financed for Ms Fauvelle on the basis that Toyota Credit’s Manitoba PPSA registration used only her middle initial and  failed to use the debtor’s full middle name as required by the Manitoba regulations to the PPSA.

In this situation, a search on Ms Fauvelle’s exact name did not show Toyota Credit’s registration, but it did show that there was an inexact match on “Christine M. Fauvelle” by Toyota Credit claiming an interest in the vehicle showing its correct vehicle identification number.

Toyota Credit appealed the disallowance of its claim by the trustee on the basis that:

a)  where there is serial numbered collateral, the reasonable searcher should search both the debtor’s name and the serial number/vehicle identification number; and

b)  where the secured party’s registration showed in an inexact match it cannot be said the error in the middle name was seriously misleading.

The Court awarded the vehicle to Toyota Credit.  The Court noted that the Manitoba searching system was programmed to generate exact matches to the debtor name being searched, and produced inexact matches where there were similar names found to the exact name being searched.  The Court held:

If the disclosure of a  similar match result does not trigger an obligation on the part of the searcher to view and determine whether the similar match financing statement is related to the property at issue, I question the purpose of including such search results when a search is performed.  It would seem that the inclusion of s.36(3) [inclusion of similar results in searches] of the Regulations is rendered meaningless if a searcher is entitled to simply ignore the similar match results. [at para 23]

 ….I conclude that the registration of the financing statement in the name of Christine M. Fauvelle was not seriously misleading, due to the similar match search result, and the registration of the financing statement is not invalidated as a result of section 43(8) of the PPSA.  [at para25]

Editorial note:  a companion decision in Bankruptcy of Rosa Argentina Gonzalez, 2017 MBQB 178, was also released by the same judge.   In that case the lender’s Manitoba PPSA registration incorrectly named the debtor as “R. Argentina Gonzales” and gave the correct VIN.  The Court held that the name error was fatal and the lender was unsecured.   As an exact search did not reveal the lender’s registration, and there were no  inexact match results in that  search, the Court held the searcher had no obligation to do a second search on the serial number / vehicle identification number of  the subject vehicle.

Ontario’s PPSA and RSLA were both amended by Bill 154, the Cutting Unnecessary Red Tape Act, 2017 effective November 14, 2017 to specifically provide that where the correct vehicle identification number is used in the  financing statement the registration creates perfection over the properly described vehicle collateral, despite an error in the debtor’s name. The name error would still be a seriously misleading error for collateral covered by that registration, other than the properly described vehicle(s).

8. notices under the Farm Debt Mediation Act (Canada) (the “FDMA”)

In two cases the issue of notice periods under the FDMA has been raised.  These are as follows:

i)  Bank of Montreal v. Linden Leas Ltd., 2017 NSSC 223;  [2017] N.S.J. No. 329

The Nova Scotia Supreme Court dismissed a farmer’s application to strike out the bank’s application to appoint a receiver on the grounds that the bank had failed to comply with the 15 day notice period under the FDMA.   Among other reasons, the Justice held that 5 years had passed since the alleged defect in service during which a farm debt mediation had been held and a forbearance agreement signed, and as such, insufficient notice may have been waived or estoppel applied.

ii)  Adebogun v. Canada (Attorney General), 2017 FCA 242;  [2017] F.C.J. No. 1215

The Federal Court of Appeal held that section 9(2) of the Agriculture and Agri-Food Administrative Monetary Penalties Regulations provides that “a document sent by registered mail is served on the 10th day after the date indicated in the receipt issued by a post office”, means that service occurs on that 10th day and not before if the notice is actually received before the 10th day.

My Regina partner, Brian Curial, notes that similar notice wording is found in section  17(2) of the FDMA Regulation which provides that, “the giving of notice [by priority post, courier or registered mail to a farmer] is deemed to be effected on 7 business days after the date on which the notice is sent.  By analogy to the Adebogun decision, the FDMA mandated stay of execution under the FDMA, which runs from the date of service, likely does not begin to run until after this 7 business day period has expired.

9.   Alberta Possessory Liens Act vs PPSA secured creditor

Cansearch Resources Ltd. v. Regent Resources Ltd., 2017 ABQB 535

Cansearch Resources Ltd. (“Cansearch”) and Regent Resources Ltd. (“Regent”) entered into an agreement by which Cansearch would operate their jointly owned oil and gas facility (the “Facility”) for their mutual benefit.  The operating agreement gave Cansearch a first ranking lien and charge over their respective interests in the Facility to secure payment of Cansearch’s costs and expenses incurred as operator. 

Regent granted security for a loan of some $28 million from Alberta Treasury Branches (“ATB”) over all of Regent’s interest in the Facility.  ATB registered its GSA pursuant to the Alberta PPSA.  

Regent became insolvent and ATB appointed a receiver.  Regent’s interest in the Facility was sold to a third party and the receiver was holding the proceeds of sale in trust.   Cansearch claimed some of those funds to satisfy Regent’s unpaid share of the operating costs for about $92,000.

Cansearch did not do a PPSA registration for this lien and charge, and ultimately agreed with the receiver that the operating agreement was a consensual creation of a security interest and should have been PPSA registered.  

For completeness, the Court analyzed why it agreed that Cansearch was indeed an unperfected  unsecured creditor subordinate to ATB’s PPSA registered security interests.  

In oral argument Cansearch next claimed a possessory lien over the equipment located at the Facility pursuant to the Possessory Liens Act (Alberta).    That Act provides in part as follows:

2   A person has a particular lien for the payment of the person’s

debt on a chattel on which the person has expended the person’s

money, labour or skill at the request of the owner of it and in so

doing enhanced its value.

The Court found that Cansearch had not established a right to such possessory lien.   The Court wrote:

To satisfy its onus, Cansearch must identify specifically what equipment the possessory lien covers and establish that money, labour or skill was expended in enhancing the value of that specific equipment.  Yet Cansearch has only provided a preliminary description of equipment, which the Operator’s Lien was intended to cover, coupled with generalized invoices from the operation of the Joffre Facility that comprise the claimed Unpaid Expenses.  [at para 61]

As such the Court dismissed Cansearch’s application to priority rights to be paid its expenses from the sale proceeds held by the receiver.

10.   emailed message was a sufficient acknowledgement to extend the limitation period on the debt

Johal v. Nordio, 2017  BCSC 1129

Sonia Kaur Johal and Jatinder Johal (the “Johals”) lent Mr. Nordio US$250,000 by transfers done November 7, 2013.  The matter was handled by Ms Johan’s husband.   The promissory note to evidence the loan was not signed by Mr. Nordio until January 2, 2014.   The note was to be repaid by April 25, 2014 with interest.

The day before the note was due, Mr. Johan emailed Mr. Nordio providing the bank account details where the repayment was to be sent.   Mr. Nordio replied he would have to delay payment.   The parties exchanged emails about the payment between May and August 2014, with Mr. Nordio repeating promises that he’d pay the note when a piece of real property was sold.  His email of August 31, 2014 stated in part, “…I will pay back capital and interest for the one time deal out of my profit from the HR transaction and close the note.”

The Johals launched an application for summary judgment on the note on July 14, 2016.  Mr. Nordio defended on the basis that the action was started after of the two year limitation period from when the note was due on April 25, 2014 had expired.

The Court granted summary judgment to the Johals on the basis that the August 31, 2014 email from Mr. Nordio had constituted an acknowledgment of the debt and hence the application was in time.  The Court held that:

a)  section 24(6) of the Limitations Act (BC) requires an acknowledgment be in writing, signed by hand or by electronic signature within the meaning of the Electronic Transactions Act (BC) (the “ETA”), made by the person making the acknowledgment,  or the person’s agent,  and given to the person with the claim or the person’s agent [here the husband for his wife];

b)  in determining whether his emails contained a sufficient electronic signature from Mr. Nordio, the Court followed a like decision about an email constituting an acknowledgement of a debt from the Saskatchewan Courts in I.D.H. Diamonds NV v. Embee Diamond Technologies Inc., 2017 SKQB 79 [since upheld on Appeal].  In that decision the Saskatchewan Court listed four requirements to create a valid “electronic signature” for purposes of Saskatchewan’s comparable electronic transactions legislation.   These four requirements are:

            i)  the presence of some type of information on the emails;

ii) such information may be in electronic form;

iii)  the information must have been “created or adopted [by the person] in order to sign a document”;  and

iv) the information must be “attached to or associated with the document”.  [at para 41]

c)  The Court found that Mr. Nordio’s emails satisfied these four requirements and gave his  “electronic signature” sufficient to satisfy the Limitations Act because each email from Mr. Nordio contained his name, his business’ name, his title as President of that business,  and his phone and email contact details;  and

d)  the Court found that a reasonable person would read Mr. Nordio’s August 31, 2014 email as providing an assurance that the debt would be repaid from a transaction to be undertaken.

Editorial note:  My Saskatoon partner, David Gerecke, notes in an article he penned that there are comparable decisions resulting to the same conclusion in the following cases, so that four provinces are aligned in this matter:

            a)  Ontario:      Lev v. Serebrennikov, 2016 ONSC 2093

            b)  Alberta:      Gryckiewicz v. Ironside, 2015 ABQB 284

          c)  Sask.:         I.D.H. Diamonds NV v. Embee Diamond Technologies Inc., 2017 SKCA 79, confirming the trial decision noted above,  2017 SKQB 79

            d)  BC:             Johal v. Nordio, 2017  BCSC 1129