Unofficial English Translation
Stonehaven Country Club Centre de villégiature & spa, l.p. (Syndic
de)
2011 QCCA 718
COURT OF APPEAL
CANADA
PROVINCE OF QUEBEC
REGISTRY OF MONTREAL
No.:
DATE:
500-09-019650-092
(700-11-009752-082)
April 4, 2011
CORAM: THE HONOURABLE J.J. MICHEL ROBERT, C.J.Q.
BENOÎT MORIN, J.A.
JACQUES A. LÉGER, J.A.
IN THE MATTER OF THE BANKRUPTCY OF:
STONEHAVEN COUNTRY CLUB CENTRE DE VILLÉGIATURE & SPA L.P.
Bankrupt
and
EUGENE J. HOWARD
JUERGEN EISERMANN
STONEHAVEN COUNTRY CLUB INC.
APPELLANTS/Creditors-respondents
and
INVESTISSEMENT QUÉBEC
RESPONDENT/Creditor-petitioner
and
SAMSON BÉLAIR/DELOITTE & TOUCHE INC., in its capacity as trustee in bankruptcy
of Stonehaven Country Club Centre de Villégiature & SPA L.P.
IMPLEADED PARTY/Trustee
JUDGMENT
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PAGE: 2
[1]
The Court; - On the appeal from a judgment rendered on April 22, 2009, by the
Superior Court, District of Terrebonne (the Honourable Mr. Justice Jean-Yves Lalonde),
which set aside the notice of disallowance of the proof of claim of respondent
Investissement Québec in the matter of the bankruptcy of Stonehaven Country Club
Centre de villégiature & Spa L.P.;
[2]
Having examined the file, heard the parties, and deliberated;
[3]
For the reasons of Morin J.A., with which Robert C.J.Q. and Léger J.A. agree;
[4]
DISMISSES the appeal, with costs.
J.J. MICHEL ROBERT, C.J.Q.
BENOÎT MORIN, J.A.
JACQUES A. LÉGER, J.A.
Mtre Guy P. Martel
Mtre Joseph Reynaud
Stikeman, Elliott
For the appellants
Mtre Jean Lozeau
Mtre Brigitte Gobeil
Joli-Coeur, Lacasse
For the respondent
Date of hearing:
December 8, 2010
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PAGE: 1
REASONS OF MORIN J.A.
[5]
The appellants appeal from a judgment rendered on April 22, 2009, by the
Superior Court, District of Terrebonne (the Honourable Mr. Justice Jean-Yves Lalonde),
which set aside the notice of disallowance of the proof of claim of the respondent
Investissement Québec (IQ) in the matter of the bankruptcy of Stonehaven Country
Club Centre de villégiature & Spa L.P. (Stonehaven).
THE FACTS
[6]
On January 20, 2005, Stonehaven accepted a hypothecary loan offer of
$2,500,000 made by IQ (exhibit R-1).
[7]
The contract in respect of this loan, namely the loan offer accepted by
Stonehaven, includes the following clauses:
[TRANSLATION]
7.
INTEREST RATE
7.1
The Loan will bear interest, from each disbursement, at a rate
calculated monthly and equal to the weekly variable rate in effect
at IQ increased by two point twenty-five per cent (2.25%). If the
Business decides to change the variable rate to a fixed rate in
accordance with the provisions of subsections 7.4 et seq. of this
section 7, the fixed rate in effect at IQ at that time will also be
increased by two point twenty-five per cent (2.25%).
7.2
IQ’s weekly variable rate, before the increase provided in
subsection 7.1, is currently, for reference purposes only, [five point
seventy-five] per cent (5.75%) per annum. For the purposes
hereof, the weekly variable rate in effect at IQ is equal to the
average prime rate of six (6) Canadian chartered banks chosen by
IQ, expressed on an annual basis and increased by one and onehalf per cent (1.5%). This rate is revised once a week and is
therefore likely to change on a weekly basis.
7.3
The Business accepts at this time any variation in the weekly
variable rate that IQ may determine from time to time and which
IQ will take into account in calculating interest on the Loan. Any
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statement of account sent to the Business by IQ will constitute
incontrovertible proof of the accuracy of such calculation, unless
the Business notifes IQ to the contrary within a period of ten (10)
days from the receipt of any such statement of account.
7.4
Starting from the last disbursement of the Loan, the Business may
make a written request to IQ that the variable rate applicable to
the Loan be changed to the fixed rate in effect at IQ at that time.
7.5
In the event of a request to change from the variable rate to the
fixed rate, such new rate will take effect for a term of five (5) years,
from the date of the effective conversion, and will correspond
automatically thereafter to the new fixed rate in effect at IQ on
expiry of such period of five (5) years, and so on and so forth, from
one period of five (5) years to the next, until the end of the
repayment period. The Business may, nevertheless, at least one
(1) month before the expiry of each period of five (5) years, make
a written request to IQ that the Loan bear interest at the variable
rate in effect at IQ at that time. If the Business had previously
chosen the variable rate, it may at any time revert to the fixed rate
in effect at IQ at the time of its request and such rate will be in
effect for a period of five (5) years.
7.6
If the Business requests IQ to change the variable rate applicable
to the Loan to the fixed rate, it agrees at this time that the fixed
rate will be that in effect at IQ at the time of the effective
conversion from the variable rate to the fixed rate, provided that
the fixed rate has not increased since the date of the conversion
request. If it has decreased, the Business will have a period of five
(5) days from the date on which it is informed by IQ of the new
fixed rate in effect to accept or refuse the new rate in writing.
7.7
IQ sets aside a maximum period of one (1) month to effect the
conversion from the variable rate to the fixed rate, insofar as the
fixed-rate funds are available at IQ on conditions acceptable to it.
…
11.
PREMIUM
11.1
In consideration of the Loan, the Business will pay an annual
premium, hereafter referred to as the Premium, equal to four point
seven six one nine per cent (4.7619%) of its profits before income
tax and yearly amortization, as established in its audited annual
financial statements.
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11.2
The Premium will be payable annually on the last day of the sixth
(6th) month following the end of each fiscal year of the Business.
The first fiscal year used to calculate payment of the Premium will
be that of the fiscal year ending December 31, 2005.
11.3
The last fiscal year to which the Premium will apply will be that
during which the last capital repayment on the Loan is made.
Regardless of the amount of the balance of capital repaid during
the last fiscal year, the Premium will be based on the earnings as
a whole for the said fiscal year.
11.4
In the event of prepayment of the Loan, the Business shall
reimburse the Premium for the two (2) fiscal years subsequent to
the year during which the prepayment is made.
…
13.
SECURITY
13.1
As specific and continuous security for the performance by the
Business of all its obligations to IQ under this offer, the Business
shall:
13.1.1 grant IQ a first-ranking principal hypothec in the amount of
two million five hundred thousand dollars ($2,500,000) and
an additional hypothec in the amount of five hundred
thousand dollars ($500,000) on the universality of its
property, present and future, movable, corporeal or
incorporeal, it being agreed that such hypothec will be
drafted in such a way as to enable the Business to dispose
of its property in inventory in the ordinary course of its
business and to give its banker a prior hypothec on its
property in inventory, the proceeds of insurance thereon
and its accounts receivable, as security for operating
credits;
13.1.2 grant IQ a first-ranking principal hypothec in the amount of
two million five hundred thousand dollars ($2,500,000) and
an additional hypothec in the amount of five hundred
thousand dollars ($500,000) on the universality of its
immovable property, present and future, and without
limiting the generality of the foregoing, in particular on the
parcels of land covering an area of 427 acres included in
the land acquired from the Missionary Oblates by the
Business;
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13.1.3 obtain, to IQ’s satisfaction, the requisite assignments of
rank so that IQ obtains the rank specified at paragraphs
13.1.1 and 13.1.2 on the property of the Business;
13.1.4 subscribe, to IQ’s satisfaction, for an all-risk insurance
policy with a hypothecary clause covering its assets for the
full amount of the Loan and designating IQ as beneficiary;
[8]
On February 11, 2005, Stonehaven granted in favour of IQ a hypothec (exhibit
R–2) containing, among others, the following clauses:
[TRANSLATION]
1.
DEBT
The Creditor has granted the Debtor a loan in the amount of TWO
MILLION FIVE HUNDRED THOUSAND DOLLARS ($2,500,000.00)
under a loan offer addressed by the Creditor on January seventeenth, two
thousand and five (2005) and accepted by the Debtor on January
twentieth, two thousand and five (2005), which loan offer is appended
hereto as Schedule C as an integral part hereof after having been
recognized as genuine and executed for identification by the parties in the
presence of the undersigned notary (the “Loan Offer”). All the amounts
due or accruing due from the Debtor as a result of the Loan Offer, in
capital, interest, costs and accessory amounts, are hereafter collectively
referred to as the “debt”. If the Creditor were to agree to the renewal or
replacement of the document evidencing the Debt or to evidencing the
amount lent through another document, such renewals, replacements, or
other documents would not effect novation and this deed will retain all its
effect.
2.
HYPOTHEC
2.1
To secure payment of the debt and the performance of its
obligations under this deed, the Debtor hypothecates the
universality of its property, movable and immovable, present and
future, corporeal and incorporeal, of any nature whatsoever and
wherever it may be situated (hereafter referred to as the
“Hypothecated Property”).
2.2.
This hypothec is granted for the amount of TWO MILLION FIVE
HUNDRED THOUSAND DOLLARS ($2,500,000.00) with interest
at the rate of twenty-five (25%) per annum from the date hereof.
500-09-019650-092
2.3
PAGE: 5
Without limiting the generality of the foregoing, this hypothec
affects in particular the immovable property described hereafter,
the present and future rent from such immovable property and
other immovable property of the Debtor, as well as the indemnity
payable under insurance contracts covering such rent;
…
9.
ADDITIONAL HYPOTHEC
To secure the payment of interest not already secured by the hypothec
constituted in section 2, as well as to secure further the performance of its
obligations under this deed, the Debtor hypothecates the Hypothecated
Property for an additional amount equal to twenty per cent (20%) of the
amount in capital of the hypothec constituted in section 2.
[9]
On July 11, 2006, being in default of its contractual obligations to IQ, Stonehaven
filed a notice of intention to make a proposal in bankruptcy to its creditors under
subsection 50.4(1) of the Bankruptcy and Insolvency Act, R.S.C. (1985), c. B-3 (the
Act).
[10] Samson Bélair/Deloitte & Touche Inc. was named trustee in the notice of
intention.
[11] On December 4, 2006, Stonehaven filed a proposal to its creditors that was
accepted by the requisite majority at a meeting held on December 21, 2006.
[12] On January 26, 2007, the Superior Court approved the proposal, but it would
never be carried out.
[13] In addition, on January 17, 2007, IQ served on Stonehaven a prior notice of its
intention to exercise the hypothecary remedy of sale by judicial authority under articles
2757 et seq. of the Civil Code of Québec (exhibit R–3).
[14] On May 15, 2007, IQ served on Stonehaven a motion to institute proceedings for
forced surrender and sale by judicial authority under articles 2791 et seq. of the Civil
Code of Québec (exhibit R–3).
[15] On October 4, 2007, Gaudreau J. allowed the motion in accordance with its
conclusions (exhibit R–4).
500-09-019650-092
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[16] On February 1, 2008, Stonehaven made an assignment of its property to the
trustee Samson Bélair/Deloitte & Touche Inc. and, the same day, the trustee sent IQ a
notice of stay of proceedings under section 69.3 of the Act (exhibit R–5).
[17] On March 18, 2008, the trustee served on IQ a notice under subsection 128(1) of
the Act requiring that the respondent file with it with proof of the security that it
apparently held on Stonehaven’s property (exhibit R–6).
[18] On or about April 16, 2008, IQ filed with the trustee a proof of claim as a secured
creditor for the amount of $3,249,009.73, emphasizing that it held Stonehaven assets
estimated at $4,800,000 (exhibit R–8).
[19] On May 1, 2008, the appellants, Stonehaven’s most important ordinary creditors,
requested that the trustee disallow IQ’s claim as a secured creditor and instead treat its
claim as a postponed claim within the meaning of section 139 of the Act (exhibit I–3).
[20] On May 6, 2008, the trustee refused the application, while indicating that it would
not oppose a motion by the appellants under subsection 38(1) of the Act:
38 (1) Where a creditor requests the trustee to take any proceeding that in his
opinion would be for the benefit of the estate of a bankrupt and the trustee
refuses or neglects to take the proceeding, the creditor may obtain from the
court an order authorizing him to take the proceeding in his own name and at
his own expense and risk, on notice being given the other creditors of the
contemplated proceeding, and on such other terms and conditions as the
court may direct.
[21] On May 22, 2008, the registrar of bankruptcy allowed such an application
brought by the appellants (exhibit I–5) and, on May 26, 2008, as a result of that
judgment, the trustee assigned to the appellants all its rights and interests in respect of
IQ’s proof of claim (exhibit R–9).
[22] On May 28, 2008, the appellants disallowed IQ’s proof of claim as a secured
creditor, relying on section 139 of the Act, which had the effect of postponing IQ’s claim
to the last rank of the ordinary claims in the bankruptcy of Stonehaven.
[23] On April 14, 2008, IQ brought a motion to appeal the disallowance of its proof of
claim under subsection 135(4) of the Act.
500-09-019650-092
[24]
PAGE: 7
This motion gave rise to the judgment a quo.
JUDGMENT OF THE SUPERIOR COURT
[25] The trial judge considered the origins of section 139 of the Act and the Supreme
Court of Canada judgment in Sukloff v. A.H. Rushforth & Co.1 He concluded that its
objective was [TRANSLATION] “to prevent a silent or sleeping partner from participating in
the distribution of dividends by a trustee in bankruptcy, as a result of advances given in
consideration of a percentage of the profits”.2
[26] The loan contract between the parties provided that a premium of 4.7619% of the
debtor’s profits before income tax and amortization would be paid to the respondent.
The Court noted that the amounts advanced were recorded in the bankrupt’s financial
statements as loans payable rather than contributions to the funds of the general
partner or of the partners and that the security was duly published. It concluded that the
true, principal, and overriding substance of this agreement was to establish a debtorcreditor relationship, and that the premium based on a percentage of the earnings was
only ancillary.3
[27] The Court then considered the appellant’s argument that the provincial
legislature did not have the requisite constitutional jurisdiction to create prior claims
interfering with the distribution scheme provided by Parliament at sections 136 to 147 of
the Act. The appellants submitted a [TRANSLATION] “quintet” of judgments, namely the
following judgments of the Supreme Court of Canada: Deputy Minister of Rev. (Que.) v.
Rainville,4 Deloitte Haskins & Sells v. Workers’ Compensation Board,5 Federal Business
Development Bank v. Québec (CSST),6 British Columbia v. Henfrey Samson Belair
Ltd.7 and Husky Oil Operations Ltd. v. Minister of National Revenue.8 The trial judge
was of the opinion that this dispute did not place in opposition contradictory federal and
provincial laws, but that it raised the question of interpretation of section 139 of the Act,
and that these judgments were therefore not applicable in this case.9
1
2
3
4
5
6
7
8
9
Sukloff v. A.H. Rushforth & Co., [1964] S.C.R. 459. (hereafter “Sukloff”).
Judgment a quo, at para 36.
Judgment a quo, at paras 39-44.
Deputy Minister of Rev. (Que.) v. Rainville, [1980] 1 S.C.R. 35.
Deloitte Haskins & Sells v. Workers’ Compensation Board, [1985] 1 S.C.R. 785.
Federal Business Development Bank v. Québec (CSST), [1988] 1 S.C.R. 1061.
British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24.
Husky Oil Operations Ltd. v. Minister of National Revenue, [1995] 3 S.C.R. 453. (hereafter “Husky
Oil”)
Judgment a quo, at paras 51-52.
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[28] Finally, the Court stated that the respondent’s claim could be divided between
the amount attributable to the premium under the loan agreement and the remainder,
and suggested that the first portion would be subject to section 139 of the Act. Given the
lack of profit, however, no order was made in this respect.10
[29] The judge therefore set aside the notice of disallowance of the respondent’s
claim and confirmed its status as a secured creditor of the bankrupt.
ISSUES IN DISPUTE
[30]
The appellants raise the two following issues:
1. Did the trial judge err in concluding that section 139 BIA does not cover a
contract secured by a hypothec charging the borrower’s property?
2. Did the trial judge err in concluding that he could divide the respondent’s proof of
claim by splitting it to remove the amount attributable to the Premium exacted by
the respondent and provided in the Loan?
[31] In my opinion, the answers to these two questions result from the Sukloff
judgment rendered by the Supreme Court of Canada on April 28, 1964. In this
judgment, the Court ruled on the interpretation of section 98 of the Bankruptcy Act,
R.S.C. 1952, c. 14, which was the equivalent of section 139 of the current Bankruptcy
and Insolvency Act.
[32]
Here is how the latter article reads, in both English and French:
Postponement of claims of silent partners
Renvoi des réclamations d’un bailleur de fond
139. Where a lender advances money to a
borrower engaged or about to engage in trade or
business under a contract with the borrower that
the lender shall receive a rate of interest varying
with the profits or shall receive a share of the
profits arising from carrying on the trade or
business, and the borrower subsequently
becomes bankrupt, the lender of the money is
not entitled to recover anything in respect of the
139. Lorsqu’un prêteur avance de l’argent à
un emprunteur, engagé ou sur le point de
s’engager dans un commerce ou une entreprise,
aux termes d’un contrat, passé avec
l’emprunteur, en vertu duquel le prêteur doit
recevoir un taux d’intérêt variant selon les profits
ou recevoir une partie des profits provenant de la
conduite du commerce ou de l’entreprise, et que
subséquemment l’emprunteur devient failli, le
10
Judgment a quo, at paras 53-55.
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loan until the claims of all other creditors of the
borrower have been satisfied.
prêteur n’a droit à aucun recouvrement du chef
d’un pareil prêt jusqu’à ce que les réclamations
de tous les autres créanciers de l’emprunteur
aient été acquittées.
ANALYSIS
[33] I believe it is advisable, at the outset, to cite the appellants’ comments on Sukloff
in paragraphs 57 to 62 of their memorandum:
[TRANSLATION]
57.
58.
The Supreme Court ruled only once on the scope of section 139 BIA, in
Sukloff, and it was long before the aforementioned quintet of judgments.
In Sukloff, the Supreme Court determined that Mr. Sukloff’s total claim of
$50,000, arising from three separate loans, had to be treated as follows in
the bankruptcy of the debtors:

an amount of $35,000 being the subject of an assignment and to be
paid from the funds held by the trust company;

an amount of $5,000 to be considered an ordinary claim and to be
collocated pari passu because the agreement between the bankrupts
and Mr. Sukloff did not provide that he would receive a portion of the
profits of the bankrupts in respect of this loan; and

the balance of $10,000 was covered by section 139 BIA because the
agreement provided that Mr. Sukloff could receive a portion of the
profits of the bankrupts in respect of this loan.
The Supreme Court stated that section 98 BA (now section 139 BIA)
originated from section 5 of Bovill’s Act of England, which read as follows:
In the event of any such Trader as aforesaid being adjudged a
Bankrupt, or taking the Benefit of any Act for the Relief of
Insolvent Debtors, or entering into an Arrangement to pay his
Creditors less than Twenty Shillings in the Pound … the Lender of
any such Loan as aforesaid shall not be entitled to recover any
Portion of his Principal, or of the Profits or Interest payable in
respect of such Loan…until the Claims of the other Creditors of
the said Trader for valuable Consideration in Money or Money’s
Worth, have been satisfied. [p. 466]
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59.
We respectfully submit that section 139 BIA must be interpreted
differently from section 5 of Bovill’s Act because the terms used in the two
provisions are different. Indeed, section 5 of Bovill’s Act provides that the
lender may not recover any portion of the principal, profits, or interest
payable under the loan whereas section 139 BIA provides that the lender
is not entitled to recover anything in respect of the loan. The far broader
terms of section 139 BIA make it possible to argue that the lender
intended by it may not execute the security that it could have obtained
under provincial law to guarantee performance of the obligations arising
from the loan, with the words “is not entitled to recover anything in respect
of the loan” covering the exercise of a security.
60.
Moreover, in Sukloff, Mr. Sukloff had obtained not a mortgage or another
security of the same kind on the estate of the bankrupts, but an
assignment of the amount of $35,000 before the bankruptcy. The valid
assignment fully made before the occurrence of the bankruptcy had to be
recognized by the Court, because the amounts assigned were no longer
part of the bankrupts’ estate. In the present case, the respondent did not
want to obtain recognition of an assignment validly made before the
bankruptcy but to obtain recognition of a mortgage on the estate that
clearly illegally modified the scheme of distribution of the estate of a
bankrupt provided in the BIA.
61.
Also, in Sukloff, the Court divided Mr. Sukloff’s claim because it arose
from three separate loans. In this case, the trial judge could not divide the
respondent’s Proof of Claim by removing the premium because there was
only one Loan and the respondent’s entire Proof of Claim had to suffer
the same fate.
62.
Moreover, in Sukloff, the Court did no analysis of the exclusive federal
jurisdiction over bankruptcy and insolvency, and the provincial laws that
amend the rules established under this jurisdiction, and relied on the
English decision Badeley to interpret section 139 BIA, whereas the
question of exclusive federal jurisdiction over bankruptcy and insolvency
did not arise in this English decision. With respect, the trial judge clearly
erred in law by determining that the rule of stare decisis required that the
principles of Sukloff be applied. The question of exclusive federal
jurisdiction over bankruptcy and insolvency was thoroughly analyzed in
the quintet of judgments, whereas there is not a single line about this
matter in Sukloff. We submit that it is the principles established in the
quintet of decisions as well as those that arise from Ocean Drive that
must instead be applied in the present case.
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[34] Furthermore, before turning to the Sukloff judgment, I believe it is appropriate to
point out that the Superior Court of Quebec had already had the opportunity, in 1953, to
rule on section 98 of the Bankruptcy Act in Duranceau and Perras v. Chatel.11
[35]
Batshaw J. had briefly summarized the matter as follows:
In the present case the trustee invokes the application of s. 98 of The Bankruptcy
Act which provides for the postponement of claims of silent partners and asks the
Court to set aside a mortgage granted by the debtor under the hereinafter related
circumstances.12
[36]
He then added:
Under the circumstances, the Court has come to the conclusion that the
respondent’s loan was made under the conditions stipulated by s. 98 and that his
claim must be deferred until all the other creditors have been paid. The Court
has considered whether the fact that the respondent received security by way of
hypothec on his debt should make any difference in the matter, but has decided
that, since the hypothec is merely an accessory of the debt, the respondent
should not be permitted to realize thereon, for to allow him to do so would defeat
the principle of deferment created by s. 98.13
[37] He had ultimately allowed the trustee’s motion, declaring that the hypothec
securing the respondent’s loan could not be set up against the trustee.
[38] This judgment was harshly criticized by Lloyd W. Houlden, the well-known author
on bankruptcy, who wrote as follows:
If this were a case where money had been loaned to the bankrupt in the
circumstances set out herein, the learned judge’s reasons would appear to be
undoubtedly correct. The English Partnership Act (1890), c. 39, contains a similar
provision to s. 98 of The Bankruptcy Act. The English Courts have given a very
strict interpretation to their Act, for example in the recent decision of Re Meade,
[1951] Ch. 774, [1951] 2 All E.R. 168, it was held that a common law wife who
advanced money to a man with whom she was living, but there was no
agreement to repay or for payment of interest or for a share of the profits, but
received a home and a living, was not entitled to prove in competition with other
creditors.
11
12
13
1955, 34, Canadian Bankruptcy Reports, at 106.
Idem.
Idem, at 109-110.
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However, where a loan is made and security has been given for the loan, it would
seem that there should be a different result. In Ex parte Sheil; In re Lonergan
(1877), 4 Ch. D. 789, a loan was made to a trader at a rate of interest varying
with the profits of the business, the amount of the loan and interest being
secured by a mortgage to the lender of the lease on the house where the
business was carried on and of the goodwill of the business. It was held that the
rights of the mortgagee under his mortgage was in no way affected by the
provisions of s. 5 of The Partnership Law Amendment Act, 1865. The Court of
Appeal was of the opinion that the word “recover” in the section was not
equivalent to “retain” and a mortgagee could keep his security. Similarly in
Badeley v. Consolidated Bank (1888), 38 Ch. D. 238, the Court of Appeal held
that realizing upon security was not recovering in respect of a loan within the
meaning of the section. Cotton L.J. said at p. 254: “In my opinion, the section
only means that the lender shall not come in and rank with other creditors in the
bankruptcy independently of any security he has in respect of the principal,
interest or profits. He is not in any way prevented from insisting upon his
security.”
The judgment in the instant case appears to be directly contrary to the decisions
of the English Courts.14
[39]
Returning to Sukloff, we see that Ritchie J. wrote:
In the course of the argument before this Court, counsel for the appellant made
reference to the case of Badeley v. Consolidated Bank, which, as I understand it,
was not drawn to the attention of either of the Courts below. That was a case in
which the plaintiff advanced money to a contractor to enable him to carry out a
contract with a railway company for the construction of a railroad and the parties
executed a deed by which the contractor assigned to the plaintiff all his
machinery, plant, etc., and all shares and debentures he might receive from the
company to secure the repayment of the loan. The deed also provided that the
plaintiff should receive 10 per cent interest on his money and 10 per cent of the
net profits. Having held that the plaintiff and the railway company were not
partners in the undertaking, Cotton L.J., commenting on the provisions of s. 5 of
Bovill’s Act, had this to say:
Mr. Wallis says the Plaintiff is here seeking to recover within the meaning of the
section. In my opinion he is not seeking to recover any principal or interest.
These words must mean, recover as against the property of the debtor not
comprised in the security. If there is a security then insisting upon that security is
not recovering principal and interest from the debtor. It may enable him ultimately
to get it; but insisting upon the security and realizing the security, or, in my
14
Idem, 111-112.
500-09-019650-092
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opinion, taking any proceedings which are necessary in order to recover that
which is comprised in the security, cannot be said to be recovering principal or
interest within the meaning of that section. In my opinion, that section only means
that the lender shall not come in and rank with other creditors in the bankruptcy
independently of any security he has in respect of the principal, interest or profits.
He is not in any way prevented from insisting upon his security…
It appears to me that Badeley’s case provides a very close analogy to the
present circumstances and that the reasoning advanced by the Court of Appeal
in England in that case in relation to Bovill’s Act applies with equal force to the
provisions of s. 98 of the Bankruptcy Act and s. 4 of The Partnerships Act. It is,
however, argued on behalf of the respondent that the principle of Badeley’s case
does not apply where the security is taken, as were the equitable assignments in
this case, after the original loan. I can see nothing in either Badeley’s case or in
Ex parte Sheil to limit their application to cases in which the taking of security is
contemporaneous with the making of an advance, and in any event, the present
case is marked by the fact that a further advance of $5,000 was made at the time
of the taking of the security on October 31, 1958.
The two agreements of July 31 and October 31, 1958, taken together with the
direction addressed to the Guaranty Trust Company on October 31, in my
opinion constitute a valid equitable assignment of a future chose in action which
was so assigned for the express purpose of providing the plaintiff with security for
the advance by way of loan which he made to the Rushforth and Rest Plan
Companies, nor do I think that there is any validity in the plea that the
assignment was void as constituting a fraudulent preference.15
[40] When one reads these words of Ritchie J., it is difficult not to make a connection
with those of Lloyd W. Houlden, which I have already cited, in particular the reference to
Badeley v. Consolidated Bank and the argument that section 98 of the Bankruptcy Act
did not apply to a secured creditor.
[41] Furthermore, in the wake of Sukloff, the following comments were made by the
editorial team of the Canadian Bankruptcy Reports:
The result of this decision is to bring Canadian law into line with the decisions of
the English courts. If security has been given for a loan, s. 98 has no application
even though the agreement provides for a sharing of profits. The case of
Duranceau and Perras v. Chatel, 34 C.B.R. 106, 1 Abr. Con. (2nd) 530, is now
overruled as a result of this case.16
15
16
[1964] S.C.R. 459, 468-469.
1964, 6 Canadian Bankruptcy Reports (N.S.) 186.
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[42] Similar comments are found concerning section 139 of the Act in The 2011
Annotated Bankruptcy and Insolvency Act:
If a creditor holds security for its claim, the creditor is entitled to enforce it
notwithstanding the fact that its agreement calls for it to receive a share of profits.
It is not necessary that the taking of security be contemporaneous with the
making of the advance: Sukloff v. A.H. Rushforth & Co., 6 C.B.R. (N.S.) 175,
[1964] S.C.R. 459, 45 D.L.R. (2d) 510.17
[43] In the present case, it is clear that the respondent acted as a hypothecary lender
and that it is therefore a secured creditor within the meaning of this term under section 2
of the Act.
[44] It should be noted here that a claim may be secured in various ways according to
this definition, and it seems clear to me that, in Sukloff, Ritchie J. considered a portion
of the funds advanced by Mr. Sukloff to be a secured claim. The argument raised by the
appellants at paragraph 60 of their memorandum is therefore not relevant.
[45] In addition, the respondent’s claim does not fall into the categories covered by
subsection 136(1) of the Act and therefore does not lose its status of secured claim
pursuant to the case law cited by the appellants. This case law, need one emphasize,
never stated that Sukloff had to be set aside under the principles stated therein.
Moreover, in Canada Deposit Insurance Corporation v. Canadian Commercial Bank,18
the Supreme Court of Canada reviewed Sukloff without calling its conclusions into
question.
[46] I am therefore of the opinion that, in accordance with that judgment, the secured
claim status of the loan made by IQ to Stonehaven does not allow the appellants to cite
section 139 of the Act in support of their argument.
[47] As to the second question, it should be answered in the affirmative, taking into
account the conclusion of Ritchie J. in Sukloff:
In view of all the above, I have formed the opinion that the appellant is entitled to
be paid $35,000 from the fund now held by the Guaranty Trust Company, and
that as to the $5,000 advanced on October 31, 1958, he is entitled to rank pari
passu with the general creditors because at the time of that advance no
stipulation was made for him to share in the profits of the company. As to the
balance of his claim, I think that he is postponed to the general creditors having
17
18
Houlden, Morawetz & Sarra, The 2011 Annotated Bankruptcy and Insolvency Act (Toronto: Carswell,
2010), G 159, 690.
[1992] 3 S.C.R. 558.
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PAGE: 15
regard to the terms of the agreement and to the provisions of s. 98 of the
Bankruptcy Act.19
[48] I believe that because of these remarks, Lalonde J. misguidedly stated the
following at paragraphs 53 and 54 of his judgment:
[TRANSLATION]
[53]
Applying the principles established by Sukloff, the Court cites it as
authority to divide IQ’s provable claim and split it to remove only the
amount attributable to the premium required by IQ. Only this portion of the
provable claim representing the premium based on a percentage of the
profits would be subject to section 139 BIA.
[54]
But the question remains theoretical because the evidence shows that
IQ’s provable claim involves no numerical value as a premium payable. In
point of fact, during its corporate existence Stonehaven never had any
profits before income tax and amortization within the meaning of clause
11.1 of the loan agreement (R-1).
[49] In fact, as the appellants suggest at paragraphs 57 and 61 of their memorandum,
Ritchie J. considered Mr. Sukloff’s claims to be divided into three:
1.
a claim of $45,000 for advances of funds to give rise to profit sharing,
including $35,000 constituting a secured claim and $10,000, an unsecured
claim; and
2.
a claim of $5,000 for an advance of funds not giving rise to profit sharing
and constituting an unsecured claim.
[50] Concerning the claim of $35,000, Ritchie J. decided that section 98 of the
Bankruptcy Act did not apply, because it was a secured claim.
[51] He drew the same conclusion regarding the $5,000 claim, given that this claim
did not give rise to profit sharing.
[52] He did, however, subject the $10,000 claim to the application of section 98, given
that this claim fulfilled the conditions provided in that section and was not a secured
claim.
19
[1964] S.C.R. 459, 469-470.
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[53] In the present case, the trial judge could not cite Sukloff as authority to make the
statements found at paragraphs 53 and 54 of his judgment, given that the
circumstances were different.
[54] That being said, the answer to the second question has a purely theoretical
scope in this case, given that the answer to the first question is enough to seal the fate
of the appeal.
[55]
For these reasons, I would dismiss the appeal with costs.
BENOÎT MORIN, J.A.