Brampton (City) v. Sun Life Assurance Company

Brampton (City) v. Sun Life Assurance Company Collection Decisions of the Court of Appeal Date 1999-03-16 Docket numbers C28120, C28620 Judges Labrosse, Jean-Marc; Charron, Louise Vivianne; Métivier, Monique Subject Civil Decision Content DATE: 19990316 DOCKET: C28620 C28120 COURT OF APPEAL FOR ONTARIO LABROSSE and CHARRON JJ.A. and MÉTIVIER J. ad hoc C28620 IN THE MATTER OF THE PROPOSAL OF EVERINGHAM BROTHERS LIMITED IN THE CITY OF BRAMPTON, IN THE PROVINCE OF ONTARIO BETWEEN: ) ) THE CORPORATION OF THE CITY OF ) BRAMPTON and P. D. MERRELL BAILIFF INC.) Jack B. Elie, ) for the appellants Appellants ) ) Peter L. Biro and - and - ) Jonathan Eades, ) for the respondent SUN LIFE ASSURANCE COMPANY OF CANADA ) ) Respondent ) Heard: December 10, 1998 ) ) C28120 IN THE MATTER OF THE BANKRUPTCY OF PINESTONE RESORT AND CONFERENCE CENTRE INC. OF THE TOWN OF HALIBURTON, IN THE TOWNSHIP OF DYSART, PROVINCE OF ONTARIO BETWEEN: ) ) DOANE RAYMOND LIMITED, in its ) capacity as Trustee in Bankruptcy of ) Pinestone Resort and ) Ian V. B. Nordheimer, Conference Centre ) for the appellant ) Applicant ) (Appellant) ) Jack B. Elie, ) for the respondent - and - ) ) THE TOWNSHIP OF DYSART ) Heard: December 10, 1998 ) Respondent ) (Respondent) ) MÉTIVIER J.: [1] These two appeals were heard together. Both appeals involve a municipality that exercises a right of distress on a corporation’s chattels for arrears of business taxes, thereby creating a lien on the chattels by operation of law. In each case, before the municipality sells the distrained goods, the corporation acts to engage the provisions of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”). The common issue to be decided in these appeals is as follows: Is a municipality, who exercises a right of distress on the goods of a taxpayer in arrears for business taxes, and who thus acquires a lien on such goods, a “secured creditor” for purposes of the BIA? Facts [2] In the Matter of the Proposal of Everingham Brothers Limited, the City of Brampton (“Brampton”) seized a corporation’s chattels for arrears of business taxes, as it was entitled to do under s. 400(2) of the Municipal Act, R.S.O. 1990, c. M.45.1 As a result of Brampton’s exercise of this right of distress, it acquired a lien on the seized goods. Before the goods were sold, the corporation filed a Notice of Intent to File a Proposal under the BIA and a trustee was named. [3] When Brampton later took steps to proceed with the sale of the corporation’s goods, a motion was brought by the trustee before MacKenzie J. for an order declaring that Brampton was bound by the stay of proceedings under the BIA. 2 On September 24, 1997, MacKenzie J. found that Brampton was not a secured creditor for the purposes of the BIA. He held that “the time the lien comes into force is not determinative of the issue: it is the nature of the claim that must be examined having regard to the operation of Section 136 and the [BIA] as a whole.” Brampton appeals against this finding. The respondent in this appeal is Sun Life Assurance Company of Canada (Sun Life). Sun Life is a secured creditor of the bankrupt corporation that stands to benefit if Brampton is denied secured creditor status. [4] In the Matter of the Bankruptcy of Pinestone Resort and Conference Centre, the Township of Dysart (“Dysart”) levied a constructive distress against the goods of a corporation for arrears of business taxes. Before any action was taken with respect to the goods, a receiving order was made adjudging the corporation bankrupt and appointing a trustee in bankuptcy (the “Trustee”). Dysart filed a proof of claim as a secured creditor which was disallowed by the Trustee. Dysart appealed the Trustee’s disallowance and was successful before the Registrar. The Trustee then appealed the Registrar’s order before Rosenberg J. In a brief endorsement dated September 9, 1997, Rosenberg J. held that a municipality that acquires a lien by exercising a right of distress over certain chattels because of unpaid taxes is a secured creditor for all purposes, including the BIA. The trustee appeals against this finding. The BIA [5] Parliament has exclusive power over bankruptcy and insolvency by virtue of s. 91(21) of the Constitution Act, 1867, being Schedule B to the Canada Act 1867 (U.K.), 1867, c. 11. One of the main goals of the BIA is to provide for the orderly distribution of the property of a bankrupt among his or her creditors on a pari pasu basis. The general rule is that all creditors rank equally. However, the BIA grants priorities to certain unsecured creditors. Specifically, section 136(1) of the BIA mandates a distribution scheme that provides the order in which certain unsecured creditors will be paid. Fifth in that list of priorities, is the following item: (e) Municipal taxes assessed or levied against the bankrupt within the two years immediately preceding his bankruptcy, and that do not constitute a preferential lien or charge against the real property of the bankrupt, but not exceeding the value of the interest of the bankrupt in the property in respect of which the taxes were imposed as declared by the Trustee. [6] The entire list is prefaced by the following important qualification: 136. (1) Subject to the rights of secured creditors, the proceeds realized from the property of a bankrupt shall be applied in priority of payment as follows: Positions of Parties [7] It is common ground between the parties that provincial legislation cannot affect the priorities set out in the federal BIA. The position of Brampton and Dysart (the “municipalities”) is that their right to be treated as secured creditors for the purposes of the BIA arises, not by way of a provincial statutory lien, but by the operation of law arising from the statutory right of distress. As stated above, the provincial Municipal Act, authorizes the right of distress over goods. It is well established that once that right is exercised a lien on those goods is created: Leavure v. Port Colborne (City) (1995), 22 O.R. (3d) 44 at 47-48 (C.A.). The municipalities rely on that lien for their inclusion in the definition of a “secured creditor” in s. 2 of the BIA, which includes “lien holders”. They submit that because the lien arises by operation of law, and not by statute, the Municipal Act neither alters the priorities established by the BIA nor offends the paramountcy of the federal legislation. [8] The parties who resist the municipalities’ position assert that the Municipal Act effectively alters the established priorities under the BIA to the extent that it allows municipalities to be treated as secured creditors in a bankruptcy situation. They base this submission on the fact that the BIA has expressly provided that municipalities are to receive payment for unpaid business taxes in accordance with the scheme of distribution outlined in s. 136(1). Moreover, where property of a bankrupt is under seizure for taxes, the BIA provides that the property must be turned over to the trustee in bankruptcy (s.73(4)). They submit that because the true effect of the Municipal Act, direct or indirect, is to subvert the scheme of priorities set out by Parliament, the provincial legislation is inoperative to the extent that it conflicts with the BIA. Analysis [9] Since a bankrupt may own property in any province in the country, it is important that the federal BIA be interpreted with consistency in all of the provinces. Provincial statutes, which impinge on the operation of the scheme envisaged by the BIA, have repeatedly been held to be inapplicable. [10] For instance, in 1985, the Supreme Court of Canada, in Deloitte Haskins and Sells Limited v. The Workers’ Compensation Board, [1985] 1 S.C.R. 785 (“Deloitte”), considered whether a section of The Workers' Compensation Act, 1973, (Alta.), c. 87, conflicted with the Bankruptcy Act, R.S.C. 1970, c. B-3. Specifically, the provincial legislation created a charge on an employer's property for money owed to the Workers’ Compensation Board. In a bankruptcy situation the Workers’ Compensation Board sought to rely on this charge to render it a secured creditor, despite the fact that the Board was accorded a specific priority under s. 107(1) of the Bankruptcy Act [now s. 136(1) of the BIA]. [11] Wilson J., writing for the majority in Deloitte, held that a claimant in bankruptcy could not claim under a provincial statute to be a secured creditor for the purposes of the Bankruptcy Act and thereby avoid the priority accorded under s. 107(1). She stated at p. 806: It was not open to the claimant in bankruptcy to say: By virtue of the applicable provincial legislation I am a secured creditor within the meaning of the opening words of s.107(1) of the Bankruptcy Act and therefore the priority accorded my claim under the relevant paragraph of s.107(1) does not apply to me. . . . [This Position] cannot be supported as a matter of statutory interpretation of s.107(1) since, if the section were to be read in this way, it would have the effect of permitting the provinces to determine priorities on a bankruptcy, a matter within exclusive federal jurisdiction. [12] It is thus clear that a claimant in a bankruptcy cannot, by virtue of a provincial statute, claim to be a secured creditor and thus avoid the priorities set out in the BIA. The question remains whether this result is any different where a creditor in bankruptcy claims to be a secured creditor by acquiring a lien which arises from the exercise of a right in a provincial statute. [13] The Supreme Court of Canada recently considered the relationship between the scheme of distribution under the federal bankruptcy regime and a provincial statute in Husky Oil Operations Ltd. v. Minister of National Revenue, [1995] 3 S.C.R. 453 (“Husky”). Husky dealt with The Workers Compensation Act, 1979, S.S. 1979, c. W-17.1, as it interacted with the Bankruptcy Act, R.S.C. 1985, c. B-3 [now the BIA]. The provincial statute purported to create a debt to the Workers’ Compensation Board that would survive a bankruptcy. [14] Gonthier J., writing for the majority, reviewed numerous cases dealing with the constitutional relationship between the scheme of distribution under the Bankruptcy Act and various provincial statutes relating to property. In particular he reviewed the following “quartet” of Supreme Court Canada decisions: · Québec (Deputy Minister of Revenue) c. Rainville (sub nom. Re Bourgault), [1980] 1 S.C.R. 35. · Deloitte, supra. · Québec (Commission de la santé et de la sécurité du travail c. Banque fédérale de développement, [1988] 1 S.C.R. 1061 (“F.B.D.B.”). · British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24 (“Henfrey”). [15] In his review of this quartet Gonthier J. referred to excerpts from F.B.D.B., supra where Lamer J., speaking for the court, confirmed that Re Bourgault, supra and Deloitte, supra yielded the proposition that: …in a bankruptcy matter, it is the Bankruptcy Act which must be applied. If a bankruptcy occurs, the order of priority is determined by the ranking in s.107 of the Act, and any debt mentioned in that provision must therefore be given the specified priority. [Emphasis added].3 Also highlighted in Gonthier J.’s review of F.B.D.B. are the following comments by Lamer J. about the effect of provincial statutes on the scheme of distribution under the Bankruptcy Act: As soon as the bankruptcy occurs, the Bankruptcy Act will be applied: the mere fact that a creditor is mentioned in s.107 of the Act suffices for such creditor to be ranked as a preferred creditor and in the position indicated in that provision. As provincial statutes cannot affect the priorities created by the federal statute, consistency in the order of priority in bankruptcy situations is ensured from one province to another. [Emphasis added].4 [16] In Husky, Gonthier J. also quoted McLachlin J.’s judgment in Henfrey, supra, where the issue was whether a deemed statutory trust created by provincial legislation was a valid trust for the purposes of the Bankruptcy Act, R.S.C. 1985, c. B-3. Gonthier J. emphasized that McLachlin J. was “at pains to stress that the reality of the property interest created by the province ought to govern over the form” and quoted the following statement from McLachlin J. in Henfrey: The province . . . argues that it is open to it to define “trust” however it pleases, property and civil rights being matters within provincial competence. The short answer to this submission is that the definition of “trust” which is operative for purposes of exemption under the Bankruptcy Act must be that of the federal Parliament, not the provincial legislatures. The provinces may define “trust” as they choose for matters within their own legislative competence, but they cannot dictate to Parliament how it should be defined for purposes of the Bankruptcy Act: Deloitte Haskins and Sells Ltd. v. Workers’ Compensation Board. [Emphasis added].5 [17] Gonthier J. was of the view that the quartet of cases reviewed in Husky embodied “. . . a consistent and general philosophy as to the purposes of the federal system of bankruptcy and its relation to provincial property arrangements”6. He identified a number of related propositions flowing from this general philosophy. [18] In particular, he cited with approval four propositions taken from Andrew J. Roman and M. Jasmine Sweatman in their study of the quartet, “The Conflict Between Canadian Provincial Personal Property Security Acts and the Federal Bankruptcy Act: The War is Over”, (1992) 71 Can. Bar Rev. 77, at p. 78-79: (1) provinces cannot create priorities between creditors or change the scheme of distribution on bankruptcy under s.136(1) of the Bankruptcy Act [now the BIA]; (2) while provincial legislation may validly affect priorities in a non-bankruptcy situation, once bankruptcy has occurred s.136(1) of the Bankruptcy Act determines the status and priority of the claims specifically dealt with in that section; (3) if the provinces could create their own priorities or affect priorities under the Bankruptcy Act this would invite a different scheme of distribution on bankruptcy from province to province, an unacceptable situation; and (4) the definition of terms such as “secured creditor”, if defined under the Bankruptcy Act, must be interpreted in bankruptcy cases as defined by the federal Parliament, not the provincial legislatures. Provinces cannot affect how such terms are defined for purposes of the Bankruptcy Act.7 [19] Gonthier J. highlighted the importance of maintaining a “nationally homogenous system of bankruptcy” and then added his own propositions, which he felt also emanated from the quartet of decisions: (5) in determining the relationship between provincial legislation and the Bankruptcy Act, the form of the provincial interest created must not be allowed to triumph over its substance. The provinces are not entitled to do indirectly what they are prohibited from doing directly; (6) there need not be any provincial intention to intrude into the exclusive federal sphere of bankruptcy and to conflict with the order of priorities of the Bankruptcy Act in order to render the provincial law inapplicable. It is sufficient that the effect of provincial legislation do so.8 [20] With respect to conflicts between provincial laws and the order of priorities under the Bankruptcy Act Gonthier J. stated . . . [W]hile individual provinces can define and rank categories such as “secured creditor” and “trust” as they each have their own purposes, those provincial laws which enter into conflict with the provisions of the Bankruptcy Act are simply without application in bankruptcy.9 [21] In view of this restatement of the propositions enunciated by the Supreme Court of Canada in Husky, the reasoning of the municipalities cannot be accepted. The argument that a lien created by operation of law from the exercise of a provincial statutory right, is somehow different from a lien created directly from the provincial statute must be rejected. [22] Surely the lien is created indirectly by the statute: without the statute there would be no right of distress, and without the distress there would be no lien. If the lien is not created indirectly by statute, then the effect of the statute is certainly to create a lien. The creation of such a lien engages the definition of “secured creditor” in the BIA and thus alters the priorities set out in s.136(1). This is precisely the reasoning that was expressly and repeatedly rejected by the Supreme Court of Canada, as set out above. [23] This view is further strengthened by the fact that other sections of the BIA contemplate the situation where a municipality has seized goods for arrears of business taxes. In particular, s.73(4), directs that property under seizure is to be delivered to the trustee, with a provision for payment of the costs of the distress: 73. (4) Any property of a bankrupt under seizure for rent or taxes shall on production of a copy of the receiving order or the assignment certified by the trustee as a true copy thereof be delivered forthwith to the trustee, but the costs of distress are a first charge thereon, and, if the property or any part thereof has been sold, the money realized therefrom less the costs of distress and sale shall be paid to the trustee. [24] In general terms, under s. 136(1), a municipality is given a preference that is subject to the rights of secured creditors. However, under s. 73(4) a municipality is given a first charge that ranks ahead of secured creditors for the costs of the distress. Conclusion [25] A municipality that exercises a statutory right of distress on a taxpayer in arrears for business taxes, and consequently acquires a lien is not a secured creditor for the purposes of the BIA. The BIA specifically grants municipalities a preferred claim under s. 136(1) for arrears of business taxes. The effect of s. 400(2) of the Municipal Act is to alter the priorities of distribution provided in s. 136(1) of the BIA. Given the paramountcy of the federal legislation and the need to provide consistency between the provinces in cases of bankruptcy, s. 400(2) of the Municipal Act is inoperative to the extent that it reorders the priorities of distribution under the BIA. [26] Accordingly, the appeal In the Matter of the Proposal of Everingham Brothers Limited is dismissed with costs. The appeal In the Matter of the Bankruptcy of Pinestone Resort and Conference Centre is allowed with costs. The orders of Rosenberg J. and of Registrar Ferron are set aside and the Notice of Disallowance of Claim of the Appellant Trustee is hereby confirmed. RELEASED: Marcy 16, 1999 _______________________________ 1 This section has since been repealed: S.O. 1997, c. 5 s. 59. 2 The BIA states that when a notice of intention is filed, all actions against the debtor are stayed until a proposal is filed or until the debtor goes into bankruptcy (s. 69(1)). The automatic stay provision does not apply “to prevent a secured creditor who took possession of secured assets of the insolvent person for the purpose of realization before the proposal was filed from dealing with those assets” (s.69(2)). 3 Husky, at 478. 4 Ibid. 5 Husky, at 480. 6 Husky, at 481. 7 Husky, at 481-82. 8 Husky, at 485. 9 Husky, at 485.