Citation:
Caterpillar Financial Services v. 360networks corporation et al,
2007 BCCA 14
Date: （略）
Docket: CA32259
Between:
Caterpillar Financial Services Limited
Appellant
(Plaintiff)
And
360networks corporation, 360fiber ltd., 360finance ltd.,
Carrier Centers (Canada) Ltd.,
360Urbanlink Ltd., 360networks (cdn fiber) Ltd.,
360networks services ltd., 360cayer ltée
Respondents
(Defendants)
And
JPMorgan Chase Bank
Respondent
(Intervenor)
- and -
Docket: CA32286
In the Matter of the Companies’ Creditors Arrangement Act,
R.S.C. 1985, c. C-36
In the Matter of the Nova Scotia Companies Act, S.C., c. 81
In the Matter of the Companies Act, R.S.B.C. 1996, c. 62
In the Matter of the Canada Business Corporations Act,
R.S.C. 1985, c. C-44
Between:
Caterpillar Financial Services Limited
Appellant
And
360networks inc., 360networks (holdings) ltd., 360fiber ltd.,
360finance ltd., Carrier Centers (Canada) Ltd.,
360 Urbanlink Ltd., 360Networks (Cdn Fiber) Ltd.,
360networks services ltd., 360cayer ltée
360engineering ltd., 360pacific (canada) inc.,
360networks sub inc., Threesixty Atlantic (Barbados) Inc.,
360atlantic (canada) inc., 360atlantic (usa) inc.,
360atlantic sales (usa) inc.
Petitioners
(Respondents)
Before:
The Honourable Madam Justice Prowse
The Honourable Madam Justice Saunders
The Honourable Madam Justice Kirkpatrick
D.A. Garner and J.A. Rost
Counsel for the Appellants
R.A. Millar and K. Robertson
Counsel for the Respondents
Place and Date of Hearing:
Vancouver, British Columbia
November 17, 2006
Place and Date of Judgment:
Vancouver, British Columbia
January 09, 2007
Written Reasons by:
The Honourable Madam Justice Kirkpatrick
Concurred in by:
The Honourable Madam Justice Prowse
The Honourable Madam Justice Saunders
Reasons for Judgment of the Honourable Madam Justice Kirkpatrick:
[1] The appellant, Caterpillar Financial Services Limited (“Caterpillar”) appeals from the 11 August 2004 order of the Supreme Court that, with one relatively modest exception, denied Caterpillar’s claim to recover the amounts owed to it under its equipment leases to the respondents, the 360 group of companies (“360”). Caterpillar’s claims were determined in the context of proceedings under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (“CCAA”), in which 360 sought to reorganize its affairs.
BACKGROUND
[2] The background facts to this appeal are deceptively straightforward because, as it will become evident, application of the law to these facts is complex. The essential facts are as follows.
[3] At all material times in question, 360 was involved in the development and construction of a worldwide fibre optic communications network. The work was initially undertaken by Ledcor Industries Limited. Ledcor Industries Limited subsequently transferred the fibre optic portion of its business to Ledcor Communications Ltd. in 1999. The trial judge found that Ledcor Communications Ltd. changed its name to 360fiber ltd. no later than on 28 June 2000.
[4] Caterpillar is in the business of leasing heavy duty construction equipment. On 14 February 1997, 360fiber’s pre-predecessor company, Ledcor Industries Limited, entered into a Master Finance Lease with Caterpillar. The lease contemplated that each piece of equipment (referred to as a “unit”) leased by Caterpillar would be documented by a subsequently issued schedule. Essentially, each schedule constituted a separate lease agreement, but the provisions of the Master Finance Lease applied to each lease agreement.
[5] On 30 March 1999, 360fiber’s predecessor company, Ledcor Communications Ltd., entered into a new Master Finance Lease. Under the terms of that lease, 360fiber had the option at the end of the term of each lease agreement to purchase the equipment, return the equipment, or agree with Caterpillar to extend the term of the lease.
[6] The governing Master Finance Lease provided:
4.1 Lessee shall not … (f) sell, assign or transfer, or directly or indirectly create, incur or suffer to exist any lien, claim, security interest or encumbrance on any of its rights hereunder or in any Unit.
…
4.6 The Units are and shall remain the personal property of Lessor irrespective of their use or manner of attachment to realty, unless such units are purchased by the Lessee at the end of the lease term or at such time as Lessee has paid to Lessor the “Balance Due” (as hereinafter defined).
…
11. Unless assigned by Lessor or applicable law provides otherwise, title to and ownership of the Units shall remain in Lessor as security for the obligations of Lessee hereunder until Lessee has fulfilled all of such obligations. Lessee hereby grants to Lessor a continuing security interest in the Units … and all proceeds of all of the foregoing, to secure the payment of all sums due hereunder.
“Balance Due” was defined under each Master Finance Lease as the sum of:
(i) all amounts then due or accrued under this Lease with respect to such Unit, (ii) the present value of the entire unpaid balance of all rental for such Unit, and (iii) the present value of the … “Purchase Option Price” … of such Unit set forth on the applicable Schedule, (iv) less any insurance proceeds …
Each of the schedules issued pursuant to the Master Finance Leases contained the following option:
At the end of the Lease term with respect to the Units, provided this Lease has not been earlier terminated with respect to such Units, Lessee may by written notice to Lessor no more than 60 days prior to the end of the Lease Term with respect to any Unit, elect to purchase at the end of such term such Unit for the Purchase Price of $ … If Lessee does not elect to purchase such Unit at the end of such term, Lessee shall return such Unit to Lessor as provided in Section 4 of the Master Finance Lease …
[7] This appeal centers on six units:
(a) Unit 1 was leased for four years commencing April 1997. Financing statements were registered for this unit under s. 43 of the Personal Property Security Act, R.S.B.C. 1996, c. 359 (“PPSA”). However, Caterpillar did not file a financing change statement under s. 51 of the PPSA when Ledcor Communications Limited changed its name to 360fiber.
(b) Unit 2 was leased for three years commencing August 1999. The trial judge found, and Caterpillar does not contest this finding on appeal, that Caterpillar failed to register a financing statement for this unit under the PPSA.
(c) Unit 3 was leased for three years commencing August 1999. No financing statement was registered for this unit.
(d) Unit 4 was leased for three years commencing December 1997. The term was extended for two years by a modification agreement. Caterpillar registered financing statements and financing change statements for this unit.
(e) Unit 7 was leased for three years commencing April 2000. Financing statements and financing change statements were registered for this unit.
(f) Unit 8 was leased for one year commencing June 2000. The term was extended for three years by a modification agreement. Financing statements and financing change statements were registered for this unit.
[8] The total amount claimed by Caterpillar in respect of these units was $785,392.27.
Disposition of the Units and Use of Sale Proceeds
[9] By February 2001, 360 was experiencing financial difficulties. Consequently, 360 sought to dispose of its leased equipment. The trial judge accepted that, in late January or early February 2001, Caterpillar consented to 360fiber’s sale of about 60 of Caterpillar’s leased units during the currency of the applicable leases and subsequent retention of the “equity.”
[10] On 16 February 2001, 360fiber provided Caterpillar with a list of 66 units that were to be auctioned. The list did not include the six units that are the subject of this appeal.
[11] In April 2001, 360fiber sold units 7 and 8 directly to a U.S. railroad company. The sale proceeds of $231,902.79 (U.S.) were deposited into 360’s U.S. bank account on 9 May 2001. At the time of the deposit, the account had a credit balance. However, it went into an overdraft position by the close of business on 29 June 2001.
[12] 360 concedes that the sale of units 7 and 8, and the deposit of the proceeds therefrom into its U.S. account, was in breach of its covenant to pay Caterpillar under the Master Lease Agreement. However, Caterpillar recognizes its inability to trace the sale proceeds because 360 deposited the proceeds into an account that became overdrawn at the material time.
[13] On 12 June 2001, Ritchie Bros. Auctioneers (“Ritchie”) wrote two letters to Caterpillar. One letter was from Ritchie in Richmond, B.C., advising Caterpillar that on or about 26 June 2001, it was selling in Canada, the equipment described in two schedules attached to the letter. The letter requested Caterpillar to confirm if it had an interest in any of the pieces of equipment and, if so, to confirm that it would release its interest upon receipt of either a buyout amount indicated by Caterpillar as of 18 July 2001 or the net sale proceeds.
[14] The second letter was from Ritchie in Portland, Oregon, advising Caterpillar that on or about 22 June 2001, Ritchie was selling in the U.S., the equipment described in the schedule attached to the letter. It similarly requested Caterpillar to confirm if it had an interest in any of the pieces of equipment and, if so, to confirm that it would release its interest upon receipt of either a buyout amount indicated by Caterpillar as of 16 July 2001 or the net sale proceeds.
[15] In faxed responses to Ritchie, Caterpillar indicated a buyout figure beside each description of equipment in which it claimed an interest. Caterpillar indicated that it would release its interest in the equipment upon receipt of the buyout amounts.
[16] Units 1, 3 and 4 were included in the schedule attached to the Canadian letter. Caterpillar failed to quote a figure or otherwise indicate an interest in those units.
[17] Unit 2 was included in the schedule attached to the U.S. letter. Again, Caterpillar failed to quote a figure or otherwise indicate an interest in this unit.
[18] The U.S. auction was held on or about 22 June 2001. The net proceeds, including those from the sale of unit 2, were $863,563.34 (U.S.). On or about 11 July 2001, Ritchie distributed the net sale proceeds by forwarding $760,470 (U.S.) to Caterpillar and $103,093.34 (U.S.) to 360. 360 deposited the cheque into its U.S. current account in Vancouver on 15 August 2001, at which time the account was in an overdraft position.
[19] The Canadian auction was held on or about 26 June 2001. The net proceeds, including those from the sale of units 1, 3 and 4, were $827,365.94. On or about 13 July 2001, Ritchie distributed the net sale proceeds by forwarding $178,556.89 to another equipment lessor and $648,809.05 to 360. 360 deposited the cheque into its current account in Vancouver on 15 August 2001, at which time the account was in an overdraft position.
360’s CCAA Proceedings
[20] During the period 360 was disposing of the leased equipment, it was also planning to restructure its affairs under the CCAA. On 28 June 2001 (the “Filing Date”), 360 commenced proceedings under the CCAA. The initial stay order was obtained on the Filing Date. The confirmation order granted on 20 July 2001 contained, inter alia, a stay of all proceedings against 360. Most significantly, the initial stay order and the confirmation order restricted 360 to payment of obligations incurred only after the Filing Date to persons who advance or supply goods after the Filing Date. 360 could make no payments on account of amounts owed by it to its creditors as of the Filing Date.
[21] Approximately one year later, on 24 July 2002 (the strongest candidate for the “Plan Filing Date”), the trial judge (who managed the case from the commencement of the CCAA proceedings) granted the procedural order that authorized 360 to file a plan of arrangement (the “Plan”) substantially in the form of a plan dated 18 July 2002 and that set out the mechanisms for the filing of proofs of claim by creditors, the disallowance of claims by 360, and appeals from disallowances.
[22] Caterpillar submitted its proof of claim on or about 19 September 2002 and when 360 disallowed the claim, Caterpillar appealed the disallowance.
[23] On 27 August 2002, the requisite majorities of 360’s creditors approved the Plan. The Supreme Court sanctioned the Plan on 4 September 2002.
[24] The Plan contained numerous conditions precedent, including the resolution of Caterpillar’s claims. It established two classes of creditors: the Senior Lenders and the General Creditors. The Senior Lenders, of which JPMorgan Chase Bank was the agent, were to receive $135 million in cash, new secured notes in the amount of $215 million, and 80.5% of the equity of 360networks corporation. The Senior Lenders underwrote the CCAA proceedings by providing funding to 360 during the restructuring process. The amount owed to the Senior Lenders as of the Filing Date was $1.176 billion (U.S.). The Plan specified that it did not affect or compromise the claims of certain specified creditors, including:
3.3 Unaffected Creditors
This Plan does not affect or compromise the Claims of the following Creditors and other Persons:
(a) Post-Filing Claims of any Person;
…
(g) Claims of Secured Creditors (including Lien Creditors but excluding the Senior Lenders) to the extent that the Charge of such Secured Creditors against any affected assets, property and undertaking of any one of the Canadian Companies was properly registered or perfected on the Filing Date, up to the realizable value of such assets as determined pursuant to the Procedural Order, except to the extent provided for in section 3.4 hereof.
[Emphasis added.]
[25] Section 3.4 of the Plan reads:
3.4 Affected Claims of Secured Creditors
Secured Creditors other than Senior Lenders shall have no Voting Claim or Distribution Claim, except to the extent of any Deficiency Claim to which they may be entitled, in respect of the realizable value of the collateral for which a Charge has been properly registered or perfected by them, which value shall be determined by agreement between the Canadian Companies and such Secured Creditors, or by Order of the Court. The Canadian Companies shall satisfy their obligations to the Secured Creditors (other than in respect of that portion of the obligation which constitutes a Deficiency Claim) in accordance with the terms of the relevant security agreement …
[26] Certain definitions from the Plan are relevant to this appeal:
“Charge” means a valid and enforceable security interest, lien, charge, pledge, encumbrance, … on any assets, property or proceeds of sale of any of the Canadian Companies or a right of ownership on any equipment which was leased by any of the Canadian Companies.
“Claim” means any right or claim of any Person against any one or more of the Canadian Companies whatsoever, … in connection with any indebtedness, liability or obligation of any kind of the Canadian Companies, which indebtedness, liability or obligation is in existence at the Filing Date and which is not a Post-Filing Claim, and any interest that may accrue thereon up to and including the Filing Date where there is an obligation to pay such interest, pursuant to the terms of any contract with such Person by operation of law or in equity, whether or not reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, unsecured, perfected, unperfected, present, future, …based in whole or in part on facts which exist on or before the Filing Date, together with any other claims that would have been claims provable in bankruptcy had the Canadian companies become bankrupt on the Filing Date including, without restriction, a claim arising after the Filing Date as a result of the termination of an executory contract or lease by any of the Canadian Companies as part of the restructuring of the business of the Canadian Companies.
“Creditor” means any Person having a Claim or a Post-Filing Claim against any one of the Canadian Companies …
“Deficiency Claim” means that portion of the Claim of a Secured Creditor for which there would be no realizable value on liquidation of the Charge held by such Secured Creditor and which constitutes a General Creditor Claim under the Plan.
“Plan Filing Date” means the date upon which this Plan is first filed with the Court in the CCAA Proceedings.
“Secured Creditors” means any Creditor asserting a Charge, including the Senior Lenders and the Lien Creditors.
[27] The Plan essentially provided that Secured Creditors’ security agreements would be honoured as long as the realizable value of the assets covered by the security agreement was equal to or greater than the amount due under the security agreement. If the realizable value was less than the amount owed under the security agreement, the Plan treated the creditor as an unsecured creditor for the amount of the shortfall or deficiency and as a secured creditor to the extent of the realizable value of the assets.
[28] A significant flaw in the procedural order of 24 July 2002 was the absence of a mechanism for determining the realizable value of assets. Further, the order was silent as to the date on which that determination was to be made: this date came to have critical importance.
[29] If the relevant date was the Filing Date (28 June 2001), the proceeds of sale of the units were traceable and exceeded the amounts owed by 360 under the lease agreements. In this scenario, Caterpillar would not have a Deficiency Claim in respect of any of the units and would be entitled to payment in full.
[30] However, if the relevant date was the Plan Filing Date (24 July 2002), the sale proceeds, having been deposited into bank accounts that were either overdrawn or became overdrawn by 24 July 2002, were no longer traceable and the realizable value of Caterpillar’s collateral in the units was zero. In this scenario, Caterpillar would have a Deficiency Claim in the full amounts owed under the lease, which would be compromised under the Plan.
[31] The Plan clarified that the treatment of claims was final and binding on all creditors.
The Trial Judgment
[32] Caterpillar appealed from 360’s disallowance of its claims in the CCAA proceeding. In addition, Caterpillar was granted leave to commence a separate action in which it claimed, inter alia, that it had a constructive trust over all the sale proceeds of the units.
[33] The trial judge heard both actions at the same time. He framed the issues as follows at para. 34 of his reasons ((2004), 4 C.B.R. (5th) 4, 35 B.C.L.R. (4th) 145 (S.C.)):
[34] The issues raised in the CCAA appeal and Action No. LO32238, as framed by counsel for Caterpillar but in my words, are as follows:
(a) is Caterpillar a Secured Creditor under the Plan entitled to payment under its lease agreements covering the Units (the “Lease Agreements”) pursuant to section 3.4 of the Plan?
(b) does Caterpillar have Post-Filing Claims under the Plan as a result of breaches of constructive trusts after the Filing Date?
(c) what is the amount owed to Caterpillar in respect of the Units which was not compromised by the Plan?
[34] As the trial judge noted, Caterpillar abandoned its claim that it was entitled to a trust over all of 360’s assets or that it could trace the proceeds from the sales of the units.
[35] The trial judge concluded as follows:
(a) Caterpillar fell within the definition of “Secured Creditor” as defined by the Plan. However, the full amounts owing under the lease agreements were compromised by the Plan as Deficiency Claims. This conclusion was premised on the trial judge’s determination that the date for ascertaining the realizable value of Caterpillar’s collateral was the Plan Filing Date (24 July 2002).
(b) Caterpillar was not entitled to a declaration of constructive trust over the sale proceeds from units 1, 2 and 3, but was entitled to such a declaration to the extent of the buyout amounts under the relevant lease agreements in respect of units 4, 7 and 8. The trial judge noted that 360 improperly sold the units themselves, as opposed to its rights in any units. Further, the trial judge concluded that there were two independent juristic reasons for 360’s enrichment in respect of units 1, 2 and 3. The first concerned Caterpillar’s general agreement that 360 could sell equipment and retain the “equity”. The second concerned the Senior Lenders’ priority in respect of units 1, 2 and 3 by reason of Caterpillar’s failure to perfect its security in units 2 and 3, and its failure to register a financing change statement in respect of unit 1. Consequently, Caterpillar’s claim for unjust enrichment applied only to units 4, 7 and 8.
(c) The breach of trust relating to the sale proceeds from unit 4 constituted a Post-Filing Claim that was not compromised by the Plan. This conclusion rested on the trial judge’s determination as to when the breach of trust occurred. The trial judge decided that in respect of units 7 and 8, it was at one of two dates: either when 360 received the proceeds and deposited them into its bank account without remitting the buyout amounts to Caterpillar (9 May 2001) or when the funds were no longer available to 360 to reduce its indebtedness to others. Although the trial judge favoured the first date, he found it unnecessary to decide the issue because in either case, the breach occurred before the Filing Date (28 June 2001). He therefore concluded that the claims in respect of units 7 and 8 were pre-filing claims that were compromised by the Plan. In contrast, because the proceeds from the sale of unit 4 were deposited into 360’s overdrawn bank account on 15 August 2001, it constituted a Post-Filing Claim.
ISSUES
[36] Caterpillar alleges that the trial judge erred:
(a) in law, in relation to Caterpillar’s claim for payment in full as a Secured Creditor under the Plan, in finding that the date for determination of the realizable value of the sale proceeds of the Units was to be a date after the proceeds had been wrongfully used by 360 to reduce its own indebtedness.
(b) in law, in relation to Caterpillar’s claim for a constructive trust over the sale proceeds of Units 1, 2 and 3, in finding that the priority of the general security held by 360’s bankers was (a) relevant to a Post Filing Claim and (b) properly a factor to be considered in determining whether to declare the constructive trust.
(c) in law, in relation to Caterpillar’s claim for damages for breach of the constructive trust declared by the court over the proceeds of sale of Units 7 and 8, in finding that the only acts relevant to the claim of breach of trust occurred before the Filing Date.
(d) in law, further in relation to Caterpillar’s claim for damages for breach of the constructive trust declared by the court over the proceeds of sale of Units 7 and 8, in finding that it was the act of writing the cheques on the trust funds’ bank account which constituted the breach of trust, rather than the actual withdrawal of funds.
[37] Caterpillar’s grounds of appeal are conveniently divided into two categories: those that relate to its claims as a Secured Creditor (ground (a)) and those that relate to its claims under constructive trust principles (grounds (b), (c) and (d)).
DISCUSSION
Secured Creditor Claim
[38] As I have noted, the trial judge found that Caterpillar was a Secured Creditor as defined by the Plan. Caterpillar agrees with this finding. Conversely, while 360 agrees with the final outcome, it takes issue with this finding.
[39] In any event, Caterpillar submits that the Plan could have simply specified that the court determine the priorities of competing security interests prior to paying the Secured Creditors. Caterpillar contends that the Senior Lenders, by approving the Plan, agreed to forego priority battles and essentially allowed each Secured Creditor to be paid according to the Plan.
[40] Caterpillar thus argues that priority issues have no place in CCAA proceedings. 360, on the other hand, argues that priority issues are central to this case.
[41] At this point, it is instructive to consider the purpose of the CCAA regime. This Court in Chef Ready Foods Ltd. v. HongKong Bank of Canada (1990), 51 B.C.L.R. (2d) 84, [1991] 2 W.W.R. 136 (C.A.) at paras. 10 and 22 stated:
[10] The purpose of the C.C.A.A. is to facilitate the making of a compromise or arrangement between an insolvent debtor company and its creditors to the end that the company is able to continue in business.
…
[22] The C.C.A.A. was enacted by Parliament in 1933 when the nation and the world were in the grip of an economic depression. When a company became insolvent liquidation followed because that was the consequence of the only insolvency legislation which then existed - the Bankruptcy Act and the Winding-up Act. Almost inevitably liquidation destroyed the shareholders' investment, yielded little by way of recovery to the creditors, and exacerbated the social evil of devastating levels of unemployment. The government of the day sought, through the C.C.A.A., to create a regime whereby the principals of the company and the creditors could be brought together under the supervision of the court to attempt a reorganization or compromise or arrangement under which the company could continue in business.
[42] While it might be suggested that CCAA proceedings may require those with a financial stake in the company, including shareholders and creditors, to compromise some of their rights in order to sustain the business, it cannot be said that the priorities between those with a financial stake are meaningless. The right of creditors to realize on any security may be suspended pending the final approval of the court, but this does not render their potential priority nugatory. Priorities are always in the background and influence the decisions of those who vote on the plan.
[43] In “Reorganizations under the Companies’ Creditors Arrangement Act” (1947) 25 Canadian Bar Rev. 587 at 595-97, the learned author Stanley E. Edwards explains the necessity of considering priorities in CCAA proceedings:
In order to make an equitable redistribution of the securities of a company and the other claims against it, it is important to classify the creditors and shareholders according to their contract rights. Most important will be their respective rights of participation in the distribution of the company’s income while it is operating, and its assets on liquidation. Included also will be the power which secured creditors would have but for the C.C.A.A. to realize upon the property by foreclosure in priority to other claimants. I would suggest that the aspect of these rights to be first considered should be not their face or nominal value, but rather what they would in reality be worth if the company had been liquidated rather than reorganized. This would entail a valuation and estimate of what the assets would bring at a public sale, or be worth to the secured creditors upon foreclosure. There can hardly be a dispute as to the right of each of the parties to receive under the proposal at least as much as he would have received if there had been no reorganization…
…The United States Supreme Court by adopting the absolute priority doctrine as a “fixed principle”, has in effect compelled the full recognition in a plan of all of the former nominal participation rights of senior claimants in priority to any rights of junior creditors or stockholders. It has held that although the requirements of feasibility may preclude giving senior claimants the same type of participation as they had before, they may be compensated for giving up seniority or a high interest rate by giving them a larger face value of inferior securities or some other concession. This rule…may well necessitate the exclusion of some of the junior classes from any participation in the reorganized company…
In England, on the other hand, the courts will sanction any scheme if the formal statutory requirements have been satisfied and if the senior classes obtain at least what they would be entitled to on liquidation, regardless of how the increase in value resulting from the reorganization is distributed…
…it would seem to me that considerations of policy point to the desirability of adopting the American rule… [Emphasis added.]
[44] According to Edwards (at 603), priorities are also relevant in the classification of creditors under the CCAA:
[T]he court should examine the nature of the claims of the creditors in order to classify them properly. For example, no two secured creditors should be grouped together unless their security is on the same or substantially the same property and in equal priority. Further divisions may be made on the basis of other legal preferences or according to whether the claim is liquidated or unliquidated, absolute or contingent. [Emphasis added.]
[45] In Re Stelco Inc. (2005), 204 O.A.C. 205, 78 O.R. (3d) 241 (C.A.), the court articulated relevant principles in determining “commonality of interest” for CCAA classification purposes. The court stated as follows at para. 23:
In Canadian Airlines Corp., Re (2000), 19 C.B.R. (4th) 12 (Alta. Q.B.), Paperny J. nonetheless extracted a number of principles to be considered by the courts in dealing with the commonality of interest test. At para. 31 she said:
In summary, the cases establish the following principles applicable to assessing commonality of interest:
…
2. The interests to be considered are the legal interests that a creditor holds qua creditor in relationship to the debtor company prior to and under the plan as well as on liquidation.
…
[46] The Ontario Court of Appeal’s decision in Re 1078385 Ontario Ltd. (2004), 206 O.A.C. 17, 16 C.B.R. (5th) 152 [Bob-Lo Island] suggests that secured creditors may assume a leadership role in a restructuring process that has traditionally been directed by debtor companies to the company’s general benefit. Further, the decision appears to create an opportunity for secured creditors to use the CCAA as an efficacious shortcut to enforce their security. Ultimately, Bob-Lo Island represents the evolution of the role of secured creditors under the CCAA, and the use of the statute as a flexible and advantageous restructuring tool for secured creditors. The Ontario Court of Appeal, in dismissing a motion for leave to appeal a decision of the Ontario Superior Court of Justice, held that the fact that a plan of arrangement under the CCAA is put forth by a secured creditor, which plan vests all of the debtor company's assets into a non-arm's length purchaser and operates exclusively for the benefit of secured creditors, does not, in and of itself, negate the fairness and reasonableness of such a plan where it can be shown that, even outside of the plan, the assets of the debtor company will not generate any recovery for unsecured creditors. In response to the argument that the plan was a shortcut in the realization of assets without regard to traditional means of enforcing security, the Superior Court noted at para. 125: “To a certain extent, that is true, but I think that is the nature of the CCAA” ((2004), 16 C.B.R. (5th) 144).
[47] As I have said, Caterpillar agrees with the trial judge’s finding that it was a Secured Creditor as defined by the Plan. However, Caterpillar contends that the trial judge erred in finding that the date for determining realizable value was the Plan Filing Date (24 July 2002).
[48] The dispute arises because, contrary to s. 3.3(g) of the Plan, the procedural order did not contain a mechanism for determining the realizable value of assets. The trial judge resolved the issue as follows at paras. 43-47:
[43] The Plan does not provide any clear assistance by specifying the date on which the realizable value of secured assets should be determined. Clause (g) of section 3.3 refers to the realizable value of the assets “as determined pursuant to the Procedural Order”, which, as mentioned above, does not contain a mechanism other than the proof of claim process. Section 3.4 provides that the value is to be “determined by agreement between the Canadian Companies and such Secured Creditors, or by Order of the Court”.
[44] It is my view that, in the absence of a specific date being identified, the effective date of the valuation of the assets should be the date on which the Plan was formerly [sic] issued (namely, the Plan Filing Date). As was stated at section 4.13 of The Interpretation of Contracts 2nd ed. (London: Sweet & Maxwell, 1997):
Since a contract must be interpreted as at the date when it was made, words must be given the meaning which they bore at that date …
In referring to the realizable value of the assets, the Plan must be taken to mean the current realizable value. It would not make sense for 360 to pay more for the asset than it was worth at the time 360 issued the Plan. Put in the context of the present circumstances, it would not make sense for 360 to agree to make payments under leases when it did not intend to use the leased equipment in its future operations.
[45] If it had been the intention that the realizable value of assets was to be determined as of a date other than the current date, it would have been very easy to specify an earlier date. For example, the requirement in clause (g) of section 3.3 for the proper registration or perfection of the Charge was that it be “registered or perfected on the Filing Date”. The very next phrase in clause (g) makes reference to the realizable value of the assets but does not contain the same words “on the Filing Date”. The drafter’s mind had been directed to the “Filing Date” when drafting clause (g) and the absence of those words to modify the phrase “the realizable value of such assets” suggests that it was not the intention to have the assets valued as at the Filing Date.
[46] Support for this interpretation is found in the definition of “Equipment Lessor”, which was defined to mean a Creditor holding a title interest in relation to equipment in the possession of the Canadian Companies at the Filing Date “which remains in the possession of the Canadian Companies on the Plan Filing Date”. Caterpillar does not actually fall within this definition because the units were not in the possession of 360fiber at the Filing Date, but it is instructive of the Plan’s treatment of equipment lessors generally.
[47] The term “Equipment Lessor” was used in the definition of “General Creditor” (“… in the case of an Equipment Lessor, any arrears outstanding as at the Filing Date”). General Creditors were the creditors whose claims were compromised under the Plan. The Plan demonstrates that it was the intention to require 360 to make payments on leases only if it would be using the leased equipment in its future operations (but excluding arrears owing on the Filing Date, which would be treated as an unsecured or general claim). The manner in which the definition of “Equipment Lessor” was drafted suggests that the full amounts owing under leases of equipment no longer in the possession of 360 on the Plan Filing Date would be compromised under the Plan.
[49] Caterpillar submits that since the drafters of the Plan omitted to articulate a mechanism for determining realizable value, the Plan itself should be of no use in making such determination. Ultimately, Caterpillar proposes that the proper date for valuation is the date on which the assets were “used” by 360 to reduce its indebtedness to others.
[50] In my opinion, Caterpillar’s arguments cannot succeed. In the absence of a specified date for calculating realizable value, the trial judge considered all other reasonable sources for determining that critical date. To suggest that the Plan should not be considered in making this determination is unreasonable. It is true that the Plan contemplated that the procedural order would specify a mechanism for determining realizable value. However, the fact that the expectation was never realized does not render the Plan barren of meaning in this regard.
[51] Caterpillar’s proposition – that the proper date for valuation of the assets is the date on which they were “used” by 360 contrary to the lease agreements or, if they were not “used” and hence still in existence, the date of the Plan (by which I assume Caterpillar to mean the Filing Date) – ignores the necessity of orderliness in CCAA proceedings, which the trial judge was obviously at pains to impose in the case at bar. It would make little practical sense to determine realizable value before the Plan had been authorized to be put to creditors unless, of course, the Plan or procedural order so specified. Further, the alternative date proposed by Caterpillar (i.e. when the assets were used by the debtor to reduce its indebtedness to others) would yield unnecessary complexity and uncertainty. When could it be said that assets were “used”? Even if one could define when an asset was so “used”, this formula would result in different valuation dates depending on when each asset was used.
[52] There can be no doubt that Caterpillar’s security position was eroded between the Filing Date and the Plan Filing Date. However, Caterpillar had knowledge that 360 intended to sell Caterpillar’s collateral. Conceivably, Caterpillar could have acted promptly to protect its position. It had sufficient opportunity to demand payment prior to the Filing Date. After the Filing Date, 360 was prohibited by the terms of the initial order to make any payments to creditors holding a pre-filing claim. Ultimately, Caterpillar’s inaction contributed to the risk that materialized.
[53] In these circumstances, I am not persuaded that the trial judge erred in finding that the proper date for determining the realizable value of the assets was the Plan Filing Date (24 July 2002). Accordingly, it is unnecessary to decide whether, as 360 contends, the trial judge was in error in concluding that Caterpillar was a Secured Creditor as defined by the Plan.
Constructive Trust Issues
Units 1, 2 and 3
[54] First, Caterpillar contends that the trial judge erred in relation to its claim for a constructive trust over the sale proceeds of units 1, 2 and 3 in finding that the priority of the general security held by 360’s bankers was relevant to a Post-Filing Claim and properly a factor to be considered in determining whether to declare a constructive trust.
[55] The trial judge applied the well-known test for unjust enrichment articulated in Pettkus v. Becker, [1980] 2 S.C.R. 834, 34 N.R. 384 at para. 38. The test features three elements: first, an enrichment; second, a corresponding deprivation; and third, an absence of any juristic reason for the enrichment. 360 conceded that Caterpillar, in not receiving the sale proceeds from the units, suffered a deprivation. The trial judge found an enrichment by 360 in the form of a reduction in its indebtedness. However, as I have noted, the trial judge found two independent juristic reasons for the deprivation. First, Caterpillar agreed to 360’s sale of the leased equipment and subsequent retention of the “equity”. Second, the Senior Lenders enjoyed priority over Caterpillar in respect of units 1, 2 and 3 because of the failure of the latter to perfect its security over these units.
[56] Caterpillar’s argument rests on its assertion that constructive trust claims must be analyzed as Post-Filing Claims as defined by the Plan:
… any right or claim of any person against the Canadian Companies … arising from or caused by, directly or indirectly, any action taken by the Canadian Companies from and after the Filing Date [28 June 2001].
[57] However, this analysis ignores the essential question of when the claim to any constructive trust arose. There is no Post-Filing Claim if the right to assert the claim arose prior to the Filing Date. In my opinion, Caterpillar’s argument is unsustainable because it rests on a logical fallacy. Caterpillar prematurely assumes the existence of a constructive trust. The proper approach is to determine whether a constructive trust arises before characterizing it as a Post-Filing Claim.
[58] 360 opposes the imposition of a common law constructive trust as being inconsistent with the priority provisions of the PPSA. In support of its contention, 360 relies on s. 68(1) of the PPSA:
The principles of the common law, equity and the law merchant, except insofar as they are inconsistent with the provisions of this Act, supplement this Act and continue to apply. [Emphasis added.]
360 thus argues that Caterpillar is prevented from correcting its own defective registration and perfection in units 1, 2 and 3 by asserting a constructive trust.
[59] I recognize that Caterpillar’s loss did not, strictly speaking, arise from its failure to register or perfect its security. Rather, Caterpillar’s loss was the product of its failure to protect its security upon receiving notice that 360 intended to sell the units. The leases merely permitted 360 to sell its rights to the units. Thus, the sales intended, and in fact carried out, by 360 constituted a blatant breach of the leases.
[60] The trial judge addressed this issue at paras. 53 and 54:
[53] The second reason proffered by counsel for 360 (as well as counsel for the Senior Lenders) relates to the criterion of an absence of juristic reason as well as the criterion of an enrichment. Counsel for 360 and the Senior Lenders relies upon the following passage from Luscar Ltd. v. Pembina Resources Ltd. (1994), 162 A.R. 35 (C.A.):
Where there exists a contract under which parties are governed, and one party gains by a breach of the same, that party is not truly enriched, because the breaching party takes that gain subject to its liability for breach of contract. If the other party does not sue within the time set out in the Limitations Act, then, without more, there is a juristic reason for the gain because the breaching party is entitled to rely on the intended limitation. (? 117)
In my opinion, this passage does not apply to the present circumstances. 360fiber already had the contractual obligation to pay the amounts owing under the Lease Agreements prior to the sale of the Units. Its sale of the Units, and retention of the sale proceeds, was not subject to any consequential liability under the Lease Agreements. It was enriched without any new offsetting liability.
[54] In addition, I do not believe that the sale of the Units by 360fiber was merely a breach of the Lease Agreements. It was prohibited by the terms of the Lease Agreements from selling its rights in any Unit, but it did more than simply sell its rights. It sold the Units themselves, including Caterpillar’s ownership interests, as a result of an auctioneer’s ability to convey title to purchasers. The sale of the Units constituted a wrong which cannot be properly characterized solely as a breach of contract. 360fiber did not have the right to sell the Units because Caterpillar owned them, not because the Lease Agreements prohibited the sale of the Units (what the Lease Agreements prohibited was the sale by 360fiber of its rights in the Units). It is true that I have found that Caterpillar gave a general consent to sales of its equipment by 360fiber. However, the consent was subject to the condition that Caterpillar would be paid the buyout amounts under each lease agreement, and this condition was never satisfied in relation to the Units.
[61] The availability of a remedial constructive trust in the commercial context has been the subject of considerable academic and judicial debate: see e.g. Re Ellingsen (2000), 142 B.C.A.C. 26, 190 D.L.R. (4th) 47; Atlas Cabinets & Furniture Ltd. v. National Trust Co. (1990), 45 B.C.L.R. (2d) 99, 68 D.L.R. (4th) 161 (C.A.); British Columbia v. National Bank of Canada (1994), 52 B.C.A.C. 180, [1995] 2 W.W.R. 305. In particular, the existence of a contractual relationship between the plaintiff and defendant may preclude the imposition of a constructive trust. The general principle is stated by David M. Paciocco in “The Remedial Constructive Trust: A Principled Basis for Priorities and over Creditors”, (1989) 68 Canadian Bar Rev. 315 at 341-42:
There is widespread agreement that a party who has accepted the role of a general creditor should be denied proprietary relief. The decision in Sinclair v. Brougham is often used to make the point. There the depositors of the bank entered into their transactions with the expectations that they would be unsecured creditors of the bank. Allowing them to trace therefore gave them proprietary protection which was never expected. Only an out of court settlement with the other general creditors of the bank and the condition imposed by the court that the depositors recognize the claims of the shareholders prevented this from producing an unwarranted priority. It has therefore been suggested that:
As a general principle, … people who willingly choose to become unsecured creditors of an eventual bankrupt ought not to be given priority over other unsecured creditors through the extended use of the constructive trust remedy.
There are two kinds of case where a claimant can be considered, every bit as much as the general creditors can, to have accepted the risk of the defendant’s insolvency: where there are contractual dealings between the plaintiff and defendant which anticipate that the plaintiff will assume the status of a general creditor; and where the plaintiff’s claim rests on a quantum meruit or quantum valebat basis in situations where there has been no reasonable expectation by the plaintiff of acquiring a proprietary interest.
[62] The application of this principle to the circumstances at bar is far from straightforward. Nonetheless, it is clear that when Caterpillar entered into the leases, it intended to secure the obligations owed by 360 by retaining title to the units. Pursuant to the PPSA, Caterpillar could perfect its security by registration. The failure to register or perfect its security meant that, as between Caterpillar and any third parties, Caterpillar was a general creditor in respect of units 2 and 3. Although Caterpillar had negotiated with 360 to be a secured creditor, it ultimately failed to protect its status as a secured creditor under the PPSA. As such, Caterpillar must be taken to have accepted the risk posed by 360’s eventual insolvency. In my view, Caterpillar should not be able to invoke constructive trust principles to alter its reduced creditor status.
[63] The trial judge instead adopted the analysis of the Supreme Court of Canada in Garland v. Consumers’ Gas Co., [2004] 1 S.C.R. 629, 237 D.L.R. (4th) 385 at paras. 44-46:
[44] The parties and commentators have pointed out that there is no specific authority that settles this question. But recalling that this is an equitable remedy that will necessarily involve discretion and questions of fairness, I believe that some redefinition and reformulation is required. Consequently, in my view, the proper approach to the juristic reasons analysis is in two parts. First, the plaintiff must show that no juristic reason from an established category exists to deny recovery. By closing the list of categories that the plaintiff must canvas in order to show an absence of juristic reason, Smith’s objection to the Canadian formulation of the test that it required proof of a negative is answered. The established categories that can constitute juristic reasons include a contract (Pettkus, supra), a disposition of law (Pettkus, supra), … and other valid common law, equitable or statutory obligations (Peter, supra). If there is no juristic reason from an established category, then the plaintiff has made out a prima facie case under the juristic reason component of the analysis.
[45] The prima facie case is rebuttable, however, where the defendant can show that there is another reason to deny recovery. As a result, there is a de facto burden of proof placed on the defendant to show the reason why the enrichment should be retained. This stage of the analysis thus provides for a category of residual defence in which courts can look to all of the circumstances of the transaction in order to determine whether there is another reason to deny recovery.
[46] As part of the defendant’s attempt to rebut, courts should have regard to two factors: the reasonable expectations of the parties and public policy considerations. It may be that when these factors are considered, the court will find that a new category of juristic reason is established. In other cases, a consideration of these factors will suggest that there was a juristic reason in the particular circumstance of a case but which does not give rise to a new category of juristic reason that should be applied in other factual circumstances. In a third group of cases, a consideration of these factors will yield a determination that there was no juristic reason for the enrichment. In the latter cases, recovery should be allowed. The point here is that this area is an evolving one and that further cases will add additional refinements and developments.
[64] Under either analysis, Caterpillar appears to be employing the remedy of a constructive trust to vault its security position in respect of units 1, 2 and 3, contrary to the provisions of the PPSA and the general framework of the CCAA.
[65] In any event, I am unable to say that the trial judge erred in his analysis. Caterpillar satisfied the initial burden of showing there was no established category of juristic reason to defeat its claim. However, the trial judge proceeded to find two other juristic reasons, one of which was Caterpillar’s failure to perfect its interest and the Senior Lenders’ ensuing priority over Caterpillar with respect to units 1, 2 and 3.
[66] Further, I respectfully agree with the trial judge’s alternative reason for refusing to declare a constructive trust in respect of units 1, 2 and 3 (at para.68):
[68] If I am mistaken and the priority of the Senior Lenders over the security interest of Caterpillar in Units 1, 2 and 3 is not a juristic reason to prevent the declaration of a constructive trust, the rights of the Senior Lenders must still be taken into account before a constructive trust is declared. Lambert J.A. said the following in the Ellingsen decision:
A remedial constructive trust will be imposed only if it is required in order to do justice between the parties in circumstances where good commercial conscience determines that the enrichment has been unjust. But a remedial constructive trust is a discretionary remedy. It will not be imposed where an alternative, simpler remedy is available and effective. And it will not be imposed without taking into account the interests of others who may be affected by the granting of the remedy. In this case that would include other creditors of the bankrupt, (both secured creditors and general creditors, since the trust may defeat both), and any relevant third parties. (? 71)
If the priority of the Senior Lenders over Caterpillar is not a juristic reason and Caterpillar would have met the criteria of unjust enrichment in respect of Units 1, 2 and 3, I would exercise my discretion to decline to order a constructive trust over the proceeds from the sales of Unit 1, 2 and 3 as a result of the priority of the Senior Lenders over Caterpillar with respect to these proceeds.
[67] Before leaving this ground of appeal, I note that while Caterpillar concedes its failure to file a name change under s. 51 of the PPSA for unit 1, it cites Re Hewstan (1996), 42 C.B.R. (3d) 186, 12 P.P.S.A.C. (2d) 36 (B.C.S.C. Chambers) at para. 31 to support its assertion that perfection is undisturbed.
[68] Subsection 51(2) addresses the scenario in which a security interest is perfected by registration, but there is a subsequent change in the debtor’s name and the secured party knows of the change of name. The subsection places an obligation on the secured party to either amend the registration by registering a financing change statement disclosing the new name of the debtor or perfect its security by taking possession of the collateral. One of these measures must be taken within the time specified.
[69] The failure to comply with the requirement has different priority consequences depending on the type of interest in competition with the security interest. First, the security interest is subordinate to any interest, other than a competing security interest, arising after the expiry of 15 days from the date the secured party acquired knowledge as to the debtor’s new name. Second, the security interest is subordinate to a security interest that is registered or perfected after the expiry of 15 days from the date the secured party acquired knowledge as to the new name of the debtor. Finally, the security interest is subordinate to a security interest that is registered or perfected after the secured party acquired knowledge of the new name of the debtor and before the section has been complied with. However, if the secured party complies with the section or takes possession of the collateral before the expiry of the aforementioned 15-day period, but after the competing security interest is registered or perfected, the perfected status of its security interest remains unaffected.
[70] The underlying purpose of s. 51 is to preserve the integrity and utility of the registry when the debtor’s name has changed. This change impacts the ability of a searching party to discover the existence of a security interest. Unless the secured party is obliged to amend its registration to reflect the debtor’s name change, a search result obtained on the basis of the name of the person in possession or legal control of the property will fail to disclose the registration.
[71] Re Hewstan concerns the narrow issue of whether a trustee in bankruptcy qualifies as a person who has an “interest” in collateral. In contrast, the instant case does not deal with the issue of a trustee in bankruptcy’s interest pursuant to s. 51(2)(c). It centers on s. 51(2)(d): the priority of Caterpillar in relation to that of a competing security interest. In Re Hewstan, the chambers judge properly noted that s. 51(2) does not render a security interest “unperfected”. Failure to file a notice of name change does not undermine the validity of registration of a security interest. It solely impacts priority. Application of s. 51(2) of the PPSA results in Caterpillar’s perfected security interest with respect to Unit 1 being subordinate to the Senior Lenders’ perfected security interest.
[72] For the foregoing reasons, I am not persuaded that there is any merit in Caterpillar’s second ground of appeal.
Units 7 and 8
[73] As I have already noted, the trial judge declared constructive trusts in favour of Caterpillar over the proceeds of sale of units 4, 7 and 8, to the extent of the buyout amounts under the lease. The trial judge found that the breach of trust claim over the sale proceeds from unit 4 constituted a Post-Filing Claim that was not released by the Plan. The trial judge awarded Caterpillar damages in a sum equal to the buyout amount for unit 4. Counsel for 360 advised us that he did not have instructions to appeal that order, which appears to have a monetary value approximating $32,000.
[74] However, the trial judge found that the breach of trust relating to the sale of units 7 and 8 was not a Post-Filing Claim. As such, it was compromised and released by the Plan. This finding hinged on the timing of the breach.
[75] The trial judge found that the breach of trust occurred at one of two times: first, when 360 received the sale proceeds and deposited them into its account without remitting the buyout amounts to Caterpillar (9 May 2001); or second, when 360 could no longer use the sale proceeds to pay Caterpillar because 360 had used the funds for other purposes. The trial judge found that, under the second scenario, the breach occurred no later than 27 June 2001. The trial judge concluded that the breach did not occur when the bank account balance fell below the sale proceeds from units 7 and 8 (28 June 2001). Rather, it occurred when 360 made withdrawals or issued cheques on the account which resulted in the account entering an overdraft position. The cheques that were posted to the account on 28 June 2001 dated from 6 June 2001 to 25 June 2001. They were date-stamped by the drawee bank on 27 June 2001. The trial judge rejected Caterpillar’s submission that 360’s omission to place stop payments on the cheques constituted an independent breach of trust.
[76] Caterpillar argues that the trial judge erred in finding that the only acts relevant to the breach occurred before the Filing Date (28 June 2001) and that the mere writing of a cheque would necessarily result in the payment of funds contrary to the trust. In furtherance of the latter assertion, Caterpillar maintains that it was open to 360 to issue a stop payment on the cheques or otherwise prevent the funds from being used prior to the Filing Date.
[77] Both Caterpillar and 360 agree that the holding of funds without Caterpillar’s authorization – specifically, 360’s failure to remit the buyout amounts to Caterpillar – constitutes a breach of trust. 360 improperly treated the money as its own rather than that of Caterpillar’s.
[78] The crux of Caterpillar’s argument is as follows. If the date of breach is 9 May 2001, Caterpillar’s damages would be limited to the cost of wrongful holding; namely, interest or opportunity cost. Caterpillar acknowledges that a claim for those damages is compromised by the Plan.
[79] However, Caterpillar emphasizes that its claim is for the entirety of the sale proceeds. It contends that only after the Filing Date (28 June 2001) did 360 render the sale proceeds unavailable to Caterpillar. Caterpillar identifies this later breach of trust as a Post-Filing Claim.
[80] In my opinion, Caterpillar’s arguments cannot succeed. Essentially, Caterpillar seeks to impose the date most favourable to its position in the CCAA reorganization. This is exemplified by the fact that Caterpillar concedes that 360’s initial holding of the sale proceeds without remittance to Caterpillar constituted a breach of trust and yet it seeks to impose a subsequent (and in my opinion, completely uncertain) date for what it describes as a later breach of trust. In my view, this line of argument ignores the true nature of the breach. 360 was in breach from the moment it retained the sale proceeds without either remitting them to Caterpillar or Caterpillar’s authorization. This breach continued until Caterpillar’s claim was either satisfied or compromised by the Plan.
[81] I agree with 360’s submission that the CCAA does not accord a creditor wide discretion to characterize its claim as a means of elevating its status. Caterpillar, after acknowledging that there was a breach of trust prior to the Filing Date, cannot identify a post-Filing Date event – the actual withdrawal of trust funds – to convert its entire claim to a Post-Filing Claim.
[82] In my view, it was the act of writing cheques and delivering them to the payee that constituted the breach of trust. That act is identifiable and unambiguous: it is the active commission of a wrongful act. In contrast, the date on which funds are withdrawn is uncertain: is it when the account is actually reduced by the amount of the trust funds or when the drawee bank irrevocably loses its right to return the cheque through the clearing process?
[83] Wherever possible, the law should favour certainty. In my opinion, the trial judge did not err in fixing the date of the breach to be when the breach was being actively committed, as opposed to when it was allegedly being committed by omission.
CONCLUSION
[84] For all of the above reasons, I would dismiss Caterpillar’s appeal.
“The Honourable Madam Justice Kirkpatrick”
I agree:
“The Honourable Madam Justice Prowse’
I agree:
“The Honourable Madam Justice Saunders”
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