Cross-Border Leasing

The debtor, All-Wood Fibre Ltd. (the Debtor), was a company principally involved in the business of fiber supply for the forestry industry. The Debtor financed certain trucks (the Equipment) from Mercedes-Benz Financial Services Canada Corporation (MBFS) and BHL Capital, a division of Berner Holdings Ltd. (BHL). Both MBFS and BHL (together, the Equipment Financiers) held purchase money security interests (PMSIs), which established them as the highest-ranking secured creditors in respect to the Equipment.

The Debtor ceased operations in March 2015, following which Integris Credit Union (Integris), a lender with a general security agreement with the Debtor, sought and obtained a receivership order. The goal of the receivership was to liquidate the assets over which Integris held priority for its security, and KPMG Inc. was appointed receiver (the Receiver). Notably, the receivership order included language, at the request of the Equipment Financiers, that specifically permitted them to later apply to the court for an order excluding the Equipment from the receivership.

Shortly after the Debtor was placed into receivership, the Equipment Financiers made it known to the Receiver that they desired to take back the Equipment in order to market and sell it through their own processes. The Receiver instead took steps to liquidate all of the Debtor's assets by auction, and applied to court for approval. The Equipment Financiers contemporaneously applied to court for an order requiring the Receiver to deliver the Equipment to them.

The lower court approved the proposed sale, but excluded the Equipment from the package of assets to be auctioned by the Receiver. The lower court did so in order to permit the Equipment Financiers to market and sell the Equipment on their own on the condition that the proceeds would be held in trust pending disposition of the matter. Notably, the lower court did not find, nor did the Receiver or Integris establish, that the Receiver expended money necessary for the preservation of the Equipment. Accordingly, the issue of whether the Equipment was subject to the costs of the receivership was left for another day.

The lower court ultimately determined that the Equipment was subject to the costs of the receivership. In making that determination, the lower court reviewed the leases and determined them to be “financing leases” as opposed to “true leases,” with the result that the Equipment fell within the scope of the receivership order and the Equipment Financiers were responsible for a portion of the receivership costs.

The Decision

The Court of Appeal reversed the lower court's decision. In reaching its determination, the court rejected the distinction between “financing leases” and “true leases” as irrelevant, and largely relied on the leading decision of the Ontario Court of Appeal in Robert F. Kowal Investments Ltd. V Deeder Electric Ltd., 59 DLR (3d) 492 (ONCA) and subsequent cases that stand for the proposition that a receiver generally has no priority for his expenses over a prior secured creditor unless:

• The receiver has been appointed at the request, or with the consent or approval, of the security holders;
• The receiver has been appointed to preserve and realize assets for the benefit of all interested parties, including secured creditors; or
• The receiver has expended money for the necessary preservation or improvement of the property.

In the court's view, none of the exceptions were engaged in the circumstances. In particular, the Equipment Financiers had, since the outset of the court application, taken the position that they wanted no part in the receivership. In addition, prior to the court application, BHL had engaged in correspondence with the Receiver in an attempt to have the Receiver give up the Equipment without a court application.

The court noted that the “most telling circumstance” weighing in favor of excluding the Equipment from the receivership was the fact that the Equipment Financiers had priority over Integris with respect to the Equipment pursuant to their PMSIs. Accordingly, allowing the Equipment to remain with the receivership would grant the Receiver, and indirectly Integris (who had to indemnify the Receiver's losses), priority over the Equipment Financiers. In particular, the court noted that “[t]he priority rules of the PPSA are designed to achieve commercial certainty and predictability'” and that “t[o] keep the Equipment within the Receivership, and thus subject to the charges of the Receiver, would circumvent the priority rules of the PPSA.”

The court also noted that, by virtue of the lease or conditional sale agreements, the Debtor had only possessory interests in the Equipment. The Equipment Financiers retained the proprietary rights. Accordingly, the Debtor only had the right to possess and use the Equipment, on certain terms and conditions as set out in the agreements, and the Receiver could not acquire a greater interest than the Debtor held.

Implications

Based on Integris, it appears that an equipment financier may be able to avoid the costs of a receivership provided that the receivership is a liquidation style receivership rather than a receivership where the assets are being sold as a going concern; the equipment financier has a PMSI in the subject equipment; and the equipment financier makes it known early in the receivership that it wishes to seize its equipment, and sell it outside the scope of the receivership.

The court's reasoning also appears to have been driven by the fact that the receivership order specifically authorized the Equipment Financiers to later apply for an order excluding the Equipment from the receivership. Accordingly, equipment financiers seeking a similar result may be advised to attend the application for the receivership order to state their objections, and, as in Integris, request that a carve-out be made to the receivership order which provides them with the ability to later apply to have their equipment excluded from the receivership.

While the court did not expressly define the circumstances in which a secured creditor will be permitted to avoid being subjected to the costs of a receivership, its reasoning suggests that a secured creditor's status as a PMSI holder will often be a central consideration. What remains uncertain is whether a secured creditor must also retain an ownership interest in the equipment.

The reasoning in Integris may be extended to other circumstances in future cases. Although it was PMSIs that gave the Equipment Financiers priority interest over the receiver's interest in Integris , the rationales and principles upon which the court relied may be extended by analogy to other priority-ranking security interests.

Conclusion

In summary, in order to assess the likelihood of a similar result in future cases, consideration should be given to the following key factors, among others:

• Whether the receivership order permits the relief sought;
• Whether the receivership is a liquidation-style receivership;
• The nature of the relationship between the secured creditor and the debtor, and, in particular, whether the secured creditor holds a PMSI in connection with a conditional sales contract or leasing relationship;
• Whether the secured creditor has made it known to the receiver forthwith that it wishes to retain the asset and administer the realization of the assets itself;
• Whether the secured creditor has consented to the appointment of the receiver; and
• Whether the receiver has expended funds for the necessary preservation or improvement of the asset.

If the right circumstances exist, this precedent can help equipment financers reduce their costs in the event of an insolvency.

Matthew Nied is an attorney in the Vancouver office of Cassels Brock & Blackwell LLP practicing in insolvency and commercial litigation.