Royal Bank of Canada v. Cow Harbour Construction Ltd. et al., (2012) 529 A.R. 147 (QB)

• Judge: Yamauchi, J.
• Court: Court of Queen's Bench of Alberta (Canada)
• Case Date: January 23, 2012
• Citations: (2012), 529 A.R. 147 (QB);2012 ABQB 59

Royal Bk. v. Cow Harbour Constr. Ltd. (2012), 529 A.R. 147 (QB)

MLB headnote and full text

Temp. Cite: [2012] A.R. TBEd. FE.089

Royal Bank of Canada (plaintiff) v. Cow Harbour Construction Ltd. and 1134252 Alberta Ltd. (defendants)

(1003 11241)

In The Matter Of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended

In The Matter Of the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended

And In The Matter Of a Plan of Arrangement of Cow Harbour Construction Ltd. (1003 05560)

(2012 ABQB 59)

Indexed As: Royal Bank of Canada v. Cow Harbour Construction Ltd. et al.

Alberta Court of Queen's Bench

Judicial District of Edmonton

Yamauchi, J.

January 23, 2012.

Summary:

Various equipment lessors applied for a proportionate share of the funds held by court appointed receiver and manager of the assets, property and undertaking of Cow Harbour Construction Ltd. At issue was whether the leases fell within s. 11.01(A) of the Companies' Creditors Arrangement Act so as to be exempt from a stay of proceedings imposed pursuant to s. 11.02 of the Act with respect to Cow Harbour.

The Alberta Court of Queen's Bench determined which of the leases were true leases and which were financing leases. The true leases fell within s. 11.01(A).

Editor's Note: there are several related cases involving Cow Harbour Construction Ltd.

Creditors and Debtors - Topic 8588.3

Debtors' relief legislation - Companies' creditors arrangement legislation - Leases - Section 11.01(A) of the Companies' Creditors Arrangement Act provided that "No order made under section 11 or 11.02 has the effect of (A) prohibiting a person from requiring immediate payment for ... use of leased ... property or other valuable consideration provided after the order is made." - Section 11.02 provided for a stay of proceedings - The Alberta Court of Queen's Bench reviewed the law respecting s. 11.01(A) - Only true leases fell within s. 11.01(A) - A true lease, in essence, was a bailment contract such that ownership of the leased good remained with the bailor/lessor and the bailee/lessee paid for the "use" of those goods - A true lease's central character was "payment for use" - An instrument was either a financing lease or a true lease - There was no room for finding the instrument to be a hybrid of the two - The determination of whether an arrangement was a true lease involved a functional analysis of the parties' relationship based on substance as opposed to form - The court referred to Smith Brothers Contracting Ltd. et al., Re, (B.C.S.C.) which referred to a non-exhaustive list of considerations for determining whether a document was a true lease or a security agreement (the Smith Brothers factors) - A court could use some or all of the factors when assessing the nature of a lease - While the presence or absence of one or more factors might loom larger than others, in all instances the inquiry remained focussed on determining the parties' intention and was based on an interpretation of the entire agreement - One factor could not trump others in terms of the legal test - Courts had to review the entire agreement and they had to consider all factors - Certain factors could have greater probative value than others in terms of the particular agreement - In such cases, the court might give those factors greater weight - In all cases, the court had to examine the various Smith Brothers factors and any other factor that it considered material and relevant, balance those factors in the context of the entire agreement and make a determination - This was not a scientific exercise - The court had to interpret the agreement as of the date it was made as the exercise was intended to discern the parties' intention at that time - See paragraphs 15 to 72.

Creditors and Debtors - Topic 8588.3

Debtors' relief legislation - Companies' creditors arrangement legislation - Leases - A lessor of heavy equipment and vehicles applied for a proportionate share of the funds held by the court appointed receiver and manager of a lessee's assets, property and undertaking - At issue was whether the five leases were true leases that came within s. 11.01(A) of the Companies' Creditors Arrangement Act (CCAA) so as to be exempt from a stay of proceedings imposed pursuant to s. 11.02 of the CCAA - The leases were entered into six months prior to the lessee's CCAA filing - The lessee sourced the equipment, negotiated the sale price and approached a broker to seek assistance with acquisition of the assets - The broker then contacted the lessor and the equipment went straight from the third party vendor to the lessee - The lessor generally structured its leases as true leases - The lessor's due diligence suggested that the lessee might be in a precarious financial position and it did not intend on providing financing leases - The Alberta Court of Queen's Bench applied the criteria set out in Smith Brothers Contracting Ltd. et al., Re (B.C.S.C.) for determining whether the leases were true leases or financing leases - There were indicia of a financing arrangement - There were hypothetical situations under which the lessee could have built up equipment and paid only the residual amount of the equipment's capital cost plus a financing charge - Those hypothetical situations did not occur and based on the wording of the leases, the lessee was paying for the equipment's use - Although the security deposits were relatively substantial, there was no obligation on the lessee's part to forfeit the security deposit at the end of the lease terms - It could simply return the equipment and demand the security deposits - It had been suggested that a substantial security deposit was indicative of a financing lease - However, considering the whole of the lease agreements, that factor was not determinative and, in fact, it assisted the lessor in its position - The leases were true leases - See paragraphs 73 to 119.

Creditors and Debtors - Topic 8588.3

Debtors' relief legislation - Companies' creditors arrangement legislation - Leases - A lessor of an off-highway truck applied for a proportionate share of the funds held by the court appointed receiver and manager of a lessee's assets, property and undertaking - At issue was whether the lease was a true lease that came within s. 11.01(A) of the Companies' Creditors Arrangement Act (CCAA) so as to be exempt from a stay of proceedings imposed pursuant to s. 11.02 of the CCAA - The lease term was 60 months - The lessee was required to pay irregular monthly payments (six months at $100,000 and 54 months at $28,397.86) - The aggregate amount of the rents was about $2,133,485 - The original costs of the truck was $2,235,456 - If the lessee exceeded the maximum hours of allotted use, it was to pay an excess hour charge - The lease contained an end of term purchase option price of $524,535 - The lessee selected the truck to be leased and the lessor acquired that truck to lease to the lessee - The Alberta Court of Queen's Bench applied the criteria set out in Smith Brothers Contracting Ltd. et al., Re (B.C.S.C.) for determining whether the leases were true leases or financing leases - The purchase option price was a reasonable pre-estimate of the truck's fair market value at the end of the lease terms - The lease did not require a security deposit or down payment - While the lessor was entitled to accelerate rental payments on default, the lessee was not responsible for the residual value of the truck, if any - The aggregate rent was about 5% less than the truck's original value - However, the rent payments and option purchase price together amounted to the truck's capital costs plus a 7% interest rate - Some of the terminology used in the floating rate addendum suggested that it was an addendum to a financing lease agreement - The lessee was not obliged to exercise the purchase option - If it did, the price was a significant amount and the lessor was not guaranteed the residual value of the truck unless the lessee exercised the option - The lessee simply agreed to pay a premium for the use of the leased property - Looking at the lease as a whole, the court concluded that it was a true lease - See paragraphs 120 to 142.

Creditors and Debtors - Topic 8588.3

Debtors' relief legislation - Companies' creditors arrangement legislation - Leases - A lessor of equipment applied for a proportionate share of the funds held by the court appointed receiver and manager of a lessee's assets, property and undertaking - At issue was whether three leases were true leases that came within s. 11.01(A) of the Companies' Creditors Arrangement Act (CCAA) so as to be exempt from a stay of proceedings imposed pursuant to s. 11.02 of the CCAA - The leases were for a maximum six month initial term, with extensions allowed thereafter - The lessee could exercise the option to purchase at any time during the initial term or within six months after that if the lessor extended the term - The lessee had to pay the specified monthly rental unless it used the equipment for more than 200 hours in a month, in which case it had to pay overtime charges - The option to purchase was for the original cost of the equipment, but if the lessee exercised it during the initial term, 85% of the rental payments was to be credited towards the purchase price - If the lessee exercised the option during the second six month term, the lessor was to credit towards the purchase price 85% of the rental payments that the lessor had made during the first six month term and 50% of the payments made during the second term - The lessee did not exercise the option during the first term and the lessor did not extend the option to purchase beyond that - At the date that the initial order was granted, the lessee no longer had an option to purchase the equipment - The Alberta Court of Queen's Bench applied the criteria set out in Smith Brothers Contracting Ltd. et al., Re (B.C.S.C.) for determining whether the leases were true leases or financing leases - The parties' intent was that the lessee would purchase the equipment if it found a third party to finance the purchases - The purchase option price or "new money" was a reasonable pre-estimate of the equipment's market value - The leases were relatively short term - In any event, the six month option expired for each lease and was not extended - While there was a default clause in each lease which allowed for acceleration of rents, it was only for 30% of the aggregate rental charges for the unexpired portion of the terms - Further, the lessee had no liability for deficiency on the sale of the leased property at the end of the term - The leases were true leases - See paragraphs 143 to 164.

Creditors and Debtors - Topic 8588.3

Debtors' relief legislation - Companies' creditors arrangement legislation - Leases - A lessor of equipment applied for a proportionate share of the funds held by the court appointed receiver and manager of a lessee's assets, property and undertaking - At issue was whether four leases were true leases that came within s. 11.01(A) of the Companies' Creditors Arrangement Act (CCAA) so as to be exempt from a stay of proceedings imposed pursuant to s. 11.02 of the CCAA - The Alberta Court of Queen's Bench applied the criteria set out in Smith Brothers Contracting Ltd. et al., Re (B.C.S.C.) for determining whether the leases were true leases or financing leases - Each lease referred to a security deposit and stated that the lessee would not earn any interest on the deposit - The lessor was to return the security deposit on the lease's termination - However, the lease did not identify any security deposit unless it was meant to be the first payment, which in each case was approximately 10% of the equipment's original value or five times the other monthly rental payments - The aggregate of the rental payments, excluding the initial payment, was more than the cost of the equipment - The purchase option price available at 60 months was approximately the same as the remaining five monthly rental payments, less interest - At the end of the term of each lease, the lessee could return the equipment to the lessor or exercise the option to purchase the equipment at fair market value - That option served merely as window dressing - The economic reality was that the lessee would have exercised the 60 month option whether the first payment was considered a security deposit or actual rent - The court concluded that the leases were financing leases and did not come within s. 11.01(A) - See paragraphs 165 to 179.

Creditors and Debtors - Topic 8588.3

Debtors' relief legislation - Companies' creditors arrangement legislation - Leases - A lessor of off-highway trucks applied for a proportionate share of the funds held by the court appointed receiver and manager of a lessee's assets, property and undertaking - At issue was whether two leases were true leases that came within s. 11.01(A) of the Companies' Creditors Arrangement Act (CCAA) so as to be exempt from a stay of proceedings imposed pursuant to s. 11.02 of the CCAA - The Alberta Court of Queen's Bench applied the criteria set out in Smith Brothers Contracting Ltd. et al., Re (B.C.S.C.) for determining whether the leases were true leases or financing leases - One lease did not contain an option to purchase - At the end of the term or any renewal period, or on default, the lessee was required to pay the truck's residual value - However, the lessee was also required to return the truck to the lessor - If the lessor sold the truck and the sale yielded an amount less than the end of term minimum resale value, the lessee was responsible for the deficiency, but was not entitled to any surplus - There was no evidence that the lease's initial term was the truck's anticipated useful life - The court concluded that the lease was a true lease - However, the other lease was a financing lease - The aggregate rents was greater than the net price - A substantial down payment was required - It contained an option to purchase for $1 - The economic reality was that the lessee would have exercised that option - The lease contained other lesser indicia of a financing lease - See paragraphs 180 to 198.

Creditors and Debtors - Topic 8588.3

Debtors' relief legislation - Companies' creditors arrangement legislation - Leases - A lessor of an off-highway truck applied for a proportionate share of the funds held by the court appointed receiver and manager of a lessee's assets, property and undertaking - At issue was whether the lease was a true lease that came within s. 11.01(A) of the Companies' Creditors Arrangement Act (CCAA) so as to be exempt from a stay of proceedings imposed pursuant to s. 11.02 of the CCAA - The truck's net price was $2,737,433 - The lease term was 60 months - An addendum to the lease called for an initial payment of $273,743.30 and 59 monthly payments of $53,116.94 - At the end of the initial term or renewal period, the lessee, if not in default, had the option to purchase the lessor's interest and title in the equipment for $1 or to renew the lease for a further 12 months for the same monthly payment - The Alberta Court of Queen's Bench applied the criteria set out in Smith Brothers Contracting Ltd. et al., Re (B.C.S.C.) and concluded that the lease was a financing lease not protected by s. 11.02 - The aggregate of the lease payments was greater than the truck's net price - The lessee had been required to make a substantial down payment - The lease contained an option to purchase for $1 - The lessor's affiant deposed that the option was for the truck's estimated fair market value at the end of the lease term - If it was seen as a nominal purchase option price, the economic reality was that the lessee would have exercised that option - If it was a reflection that the truck was expected to be at the end of its useful life at the conclusion of the lease, the lessor was, in essence, giving credit to the lessee for its purchase - The lease contained other Smith Brothers indicia of a financing lease - See paragraphs 199 to 208.

Creditors and Debtors - Topic 8588.3

Debtors' relief legislation - Companies' creditors arrangement legislation - Leases - A lessor of a hydraulic excavator applied for a proportionate share of the funds held by the court appointed receiver and manager of a lessee's assets, property and undertaking - At issue was whether the lease was a true lease that came within s. 11.01(A) of the Companies' Creditors Arrangement Act (CCAA) so as to be exempt from a stay of proceedings imposed pursuant to s. 11.02 of the CCAA - The excavator's value at the time of the lease agreement was $1,484,277.99 - The lease term was 60 months - The agreement called for an initial payment of $148,429.80 with 59 monthly payments of $26,777.34 - Provided that the lease had not been terminated and, if the lessee was not in default, the lessee could elect to (1) purchase the excavator on November 15, 2011 (the option date) for $148,429.80 plus taxes (the purchase option price), which was said to be the be the estimated fair market value at that date; (2) find a third party to purchase the equipment on the option date for the purchase option price; or (3) rent the equipment for a further period and periodic rent to be established by the lessor - If there was a substantial adverse change in the lessee's financial circumstances, the lessor could terminate the lease at the lessor's sole option - The Alberta Court of Queen's Bench applied the criteria set out in Smith Brothers Contracting Ltd. et al., Re (B.C.S.C.) and concluded that the lease was a financing lease not protected by s. 11.01(A) - The purchase option price was approximately 10% of the excavator's original cost, which was not a nominal amount - The parties agreed that this was a pre-estimate of the market value - Ordinarily, that would be high suggestive of a true lease - However, the lessor was guaranteed the option price - That was equivalent to a mandatory purchase option - The lessee could not return the excavator - The lease contained other indicia of a financing lease - See paragraphs 209 to 220.

Cases Noticed:

Nortel Networks Corp. et al., Re (2009), 256 O.A.C. 131; 59 C.B.R.(5th) 23; 2009 ONCA 833, refd to. [para. 15].

Chef Ready Foods Ltd. v. Hongkong Bank of Canada (1990), 51 B.C.L.R.(2d) 84 (C.A.), refd to. [para. 15].

Smith Brothers Contracting Ltd. et al., Re, [1998] B.C.T.C. Uned. 434; 53 B.C.L.R.(3d) 264 (S.C.), appld. [para. 17].

Winnipeg Motor Express Inc. et al., Re (2009), 243 Man.R.(2d) 3; 2009 MBQB 204, refd to. [para. 17].

Quintette Coal Ltd. v. Nippon Steel Corp. (1990), 51 B.C.L.R.(2d) 105 (C.A.), refd to. [para. 17].

International Wallcoverings Ltd., Re (1999), 28 C.B.R.(4th) 48 (Ont. Gen. Div.), refd to. [para. 19].

Sharp-Rite Technologies Ltd., Re, [2000] B.C.T.C. 22; 2000 BCSC 122, refd to. [para. 19].

PSINET Ltd., Re (2001), 26 C.B.R.(4th) 2888 (Ont. Sup. Ct.), refd to. [para. 19].

Clayton Construction Co., Re, [2009] Sask.R. Uned. 168; 59 C.B.R.(5th) 213; 2009 SKQB 397, refd to. [para. 34].

Confederation Life Insurance Co. v. Waselenak et al., [1998] 5 W.W.R. 712; 210 A.R. 241; 57 Alta. L.R.(3d) 3 (Q.B.), affd. (2000), 255 A.R. 357; 220 W.A.C. 357; 2000 ABCA 136, refd to. [para. 41].

166404 Canada Inc. et al. v. Coulter, [1998] O.A.C. Uned. 190; 4 C.B.R.(4th) 1 (C.A.), leave to appeal refused (1998), 223 N.R. 395 (S.C.C.) refd to. [para. 41].

Ross & Associates v. Palmer (2001), 153 Man.R.(2d) 147; 238 W.A.C. 147; 22 C.B.R.(4th) 140; 2001 MBCA 17, refd to. [para. 41].

Brant, Re (1984), 52 C.B.R.(N.S.) 317 (Ont. Sup. Ct.), refd to. [para. 41].

Punch v. Savoy's Jewellers Ltd. et al. (1986), 14 O.A.C. 4; 54 O.R.(2d) 383 (C.A.), refd to. [para. 44].

Visscher v. Triple Broek Holdings Ltd. et al. (2006), 399 A.R. 184; 2006 ABQB 259, refd to. [para. 44].

Letourneau v. Otto Mobiles Edmonton (1984) Ltd. (2002), 315 A.R. 232; 2002 ABQB 609, refd to. [para. 44].

Philip Services Corp., Re, [1999] O.T.C. 136; 15 C.B.R.(4th) 107 (Sup. Ct.), refd to. [para. 49].

843504 Alberta Ltd., Re (2011), 523 A.R. 180; 80 C.B.R.(5th) 177; 2011 ABQB 448, refd to. [para. 56].

Cow Harbour Construction Ltd. et al., Re (2010), 499 A.R. 198; 514 W.A.C. 198; 2010 ABCA 394, refd to. [para. 59].

De Lage Landen Financial Services Canada Inc. v. Royal Bank of Canada et al. - see Cow Harbour Construction Ltd. et al., Re.

Ed Miller Sales and Rentals Ltd. v. Alberta (1982), 42 A.R. 350 (Q.B.), refd to. [para. 66].

Pioneer Machinery Co. Ltd. v. M.E.L. Industries Ltd., Ramsay and Coopers & Lybrand Ltd. (1981), 28 A.R. 429 (C.A.), refd to. [para. 66].

McDonald Crawford v. Morrow (2004), 348 A.R. 118; 321 W.A.C. 118; 2004 ABCA 150, refd to. [para. 72].

Ontario Equipment (1976) Ltd., Re (1981), 125 D.L.R.(3d) 321; 33 O.R.(2d) 648 (H.C.J.), affd. (1982), 141 D.L.R.(3d) 766; 35 O.R.(2d) 194 (C.A.), refd to. [para. 96].

DaimlerChrysler Services Canada Inc. v. Cameron (2007), 239 B.C.A.C. 3; 396 W.A.C. 3; 2007 BCCA 144, reving. [2006] B.C.T.C. Uned. C15; 32 C.B.R.(5th) 188; 2006 BCSC 1992, refd to. [para. 108].

Crop & Soil Service Inc. v. Oxford Leaseway Ltd., [2000] O.A.C. Uned. 174; 48 O.R.(3d) 291 (C.A.), refd to. [para. 195].

Statutes Noticed:

Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, sect. 11.01(A) [para. 13].

Authors and Works Noticed:

Burke, Michael E., Ontario Personal Property Security Act Reform: Significant Policy Changes (2009), 48 Can. Bus. L.J. 289, pp. 291 [para. 55]; 292 [paras. 55, 56]; 293 [paras. 55, 56, 97, 124]; 294 [paras. 55, 56, 110, 194, 219]; 295 [paras. 55, 57]; 296 [paras. 55, 57, 112, 113, 118, 196]; 297 [paras. 55, 57, 58]; 298 [para. 57].

Cahart, Jeffrey C., Should There be Special Rules in Commercial Reorganizations for Equipment Lessors? (2002), 15:2 Comm. Insol. R. 13, p. 15 [para. 36].

Chaiton, Harvey G. and Hutchins, John R., Equipment Lessors in Restructurings: Hostage Lenders (2009), 21 Comm. Insol. R. 3, generally [para. 35].

Cuming, Ronald C.C., and Wood, Roderick J., British Columbia Personal Property Security Act Handbook (4th Ed. 1998), pp. 53 [para. 50]; 54 [para. 112]; 55 [paras. 95, 100]; 56 [para. 161].

Cuming, Ronald C.C., Teaching Material for Personal Property Security Transactions Governed by Personal Property Security Acts (Sept. 1991), generally [para. 51].

Cuming, Ronald C.C., True Leases and Security Leases Under Canadian Personal Property Security Acts (1983), 7 Can. Bus. L.J. 251, generally [para. 22].

Wood, Roderick J., The Definition of Secured Coeditor in Insolvency Law (2010), 25 B.F.L.R. 341, pp. 347, 356 [para. 25].

Weisz, Steven J., Rogers, Linc A., and McLean Stacy, Striking an Imbalance: The Treatment of Equipment Lessors Under Section 11.3 of the CCAA (2003), 20:5 Nat'l Insolv. Rev. 45, pp. 48, 49 [paras. 35, 58].

Counsel:

Walker W. MacLeod (McCarthy Tétrault), for GE;

Joseph J. Bellissimo (Cassels Brock & Blackwell LLP), for Scott Capital;

Kentigern A. Rowan, Q.C., and Stephanie A. Wanke (Ogilvie LLP), for Wajax;

Ryan Zahara (Blake, Cassels & Graydon LLP), for Caterpillar Financial;

Jeremy H. Hockin (Parlee McLaws LLP), for Kempenfelt Vehicle Leasing (a Division of Equirex Vehicle Leasing 2007 Inc.), Alter Moneta Corporation, Concentra Financial, and Key Equipment.

These applications were heard on November 2 and 3, 2011, by Yamauchi, J., of the Alberta Court of Queen's Bench, Judicial District of Edmonton, who delivered the following reasons for judgment on January 23, 2012.