500-09-019650-092PAGE: 1
Unofficial English TranslationStonehaven Country Club Centre de villégiature & spa, l.p. (Syndic de) / 2011 QCCA 718
COURT OF APPEAL
CANADA
PROVINCE OF QUEBEC
REGISTRY / OF MONTREAL
No.: / 500-09-019650-092
(700-11-009752-082)
DATE: / 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
[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 asidethe notice of disallowanceof the proof of claim ofrespondent 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 theappellants
Mtre Jean Lozeau
Mtre Brigitte Gobeil
Joli-Coeur, Lacasse
For the respondent
Date of hearing: / December 8, 2010
500-09-019650-092PAGE: 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 asidethe notice of disallowanceof 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 ahypothecary loan offerof$2,500,000made by IQ (exhibit R1).
[7]The contract in respect of this loan, namely the loan offer acceptedby Stonehaven, includes the following clauses:
[translation]
7. INTEREST RATE
7.1The Loanwill 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-fiveper cent (2.25%). Ifthe Businessdecides 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%).
7.2IQ’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 one-half per cent (1.5%). This rate is revised once a week and is therefore likely to change on a weekly basis.
7.3TheBusiness acceptsat 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 statement of account sent to the Business by IQ will constitute incontrovertible proof of the accuracy of such calculation, unlessthe Businessnotifes IQ to the contrary within a period of ten (10) days from the receipt of any such statement of account.
7.4Starting from the last disbursement of the Loan, the Business maymake 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.
7.5In 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 effectiveconversion, 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 hadpreviously 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.
7.6If theBusinessrequestsIQ to change the variable rate applicable to the Loanto 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 Businesswill 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.
7.7IQ 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
11.1In 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.
11.2The 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.
11.3The last fiscal year to which the Premium will apply will be that during which the last capitalrepayment 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.
11.4In the event of prepayment of the Loan, the Businessshall reimburse the Premium for the two (2) fiscal years subsequent to the year during which the prepayment is made.
…
13.SECURITY
13.1As specific and continuous security forthe performanceby the Business of all its obligations to IQ under this offer, the Business shall:
13.1.1grant IQ a first-ranking principalhypothec 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 andfuture, movable, corporeal or incorporeal, it being agreed that suchhypothec 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 apriorhypothec on its property in inventory, the proceeds ofinsurance thereon and its accounts receivable, as security for operating credits;
13.1.2grant IQ a first-ranking principalhypothec in the amount oftwo 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 itsimmovable 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;
13.1.3obtain, 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;
13.1.4subscribe, to IQ’s satisfaction, for an all-risk insurance policy with ahypothecary 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 ahypothec (exhibit R–2) containing, among others, the following clauses:
[translation]
1.DEBT
The Creditorhas granted the Debtor a loan in the amount ofTWO 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 dueor 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 tothe renewal or replacement of the document evidencing the Debt or to evidencing the amount lent throughanother document, such renewals, replacements, or other documents would not effectnovation and this deedwill retain all its effect.
2.HYPOTHEC
2.1To secure payment of the debt and the performance of its obligations under this deed, the Debtor hypothecatesthe 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.
2.3Without 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 section2, as well as to securefurther 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 incapital 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 intentionto make a proposal in bankruptcyto its creditors undersubsection 50.4(1) of the Bankruptcy and Insolvency Act, R.S.C. (1985), c. B-3 (theAct).
[10]Samson Bélair/Deloitte & Touche Inc. wasnamed trustee in the notice of intention.
[11]On December 4, 2006, Stonehaven filed a proposalto its creditorsthat 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 intentionto exercise the hypothecary remedyof sale by judicial authorityunder articles 2757 et seq.of the Civil Code of Québec (exhibit R–3).
[14]On May 15, 2007, IQ served on Stonehaven amotion to institute proceedingsfor forced surrenderandsale by judicial authorityunder 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 withitsconclusions (exhibit R–4).
[16]On February 1, 2008, Stonehaven made anassignmentof its property to the trustee Samson Bélair/Deloitte & Touche Inc. and, the same day, the trustee sent IQ anotice of stay of proceedingsunder section 69.3 of the Act (exhibit R–5).
[17]On March 18, 2008, the trustee served on IQ a notice undersubsection 128(1) of the Actrequiring that the respondentfile with it withproof 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 aproof of claimasa secured creditorfor theamount 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, requestedthat the trustee disallow IQ’s claimas asecured creditorand instead treat its claim as a postponed claim within the meaning ofsection 139 of the Act (exhibit I–3).
[20]On May 6, 2008, the trustee refused the application, while indicating that itwould not oppose a motion by the appellants undersubsection 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 disallowedIQ’sproof of claimas a secured creditor, relying onsection 139 of the Act, which had the effect of postponing IQ’s claim to the last rank of the ordinary claimsin thebankruptcy of Stonehaven.
[23]On April 14, 2008, IQ brought a motion to appeal the disallowance of its proof of claimundersubsection135(4) of the Act.
[24]This motion gave rise to the judgment a quo.
judgment of the superior court
[25]The trial judgeconsideredthe origins ofsection 139 of the Actand the Supreme Courtof Canadajudgmentin Sukloff v. A.H. Rushforth & Co.[1]He concluded that its objectivewas [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 debtor-creditor 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 claimsinterfering withthe distribution scheme provided by Parliament at sections 136 to 147 of the Act. The appellants submitteda[translation]“quintet” of judgments, namely the following judgments of the Supreme Courtof 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 NationalRevenue.[8]Thetrial judgewas of the opinion that this dispute did not place in opposition contradictory federal and provincial laws, but that it raised the question of interpretation ofsection 139 of the Act, and that these judgments were therefore not applicable in this case.[9]
[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 disallowanceof the respondent’s claim and confirmed its status as a secured creditorof the bankrupt.
issues in dispute
[30]The appellants raise the two following issues:
1.Did the trial judge err in concluding that section 139 BIAdoes not cover a contract secured by a hypothec chargingthe borrower’s property?
2.Did the trial judgeerr in concluding that he could divide the respondent’s proof of claim by splitting it to removethe amount attributable to the Premium exacted by the respondent and provided in the Loan?
[31]In my opinion, the answers to these two questions resultfrom the Sukloff judgment rendered by the Supreme Courtof Canada on April 28, 1964. In this judgment, the Court ruled on the interpretation ofsection 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 partners139.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 loan until the claims of all other creditors of the borrower have been satisfied. / Renvoi des réclamations d’un bailleur de fond
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 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 onSukloff in paragraphs 57 to 62 of theirmemorandum:
[translation]
57.The Supreme Courtruled 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 Courtdetermined 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 passubecause 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 BIAbecause the agreement provided that Mr. Sukloff could receive a portion of the profits of the bankrupts in respect of this loan.
58.The Supreme Courtstated that section 98 BA (now section 139 BIA) originated from section 5 of Bovill’s Actof 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 ProfitsorInterest 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]