Canadian Western Bank v. MCMM Inc., 2011 ABQB 150

Court of Queen ’ s Bench of Alberta Citation: Canadian Western Bank v. MCMM Inc., 2011 ABQB 150 Date: 20110308 Docket: 0603 12324 Registry: Edmonton Between: Canadian Western Bank Plaintiff - and - MCMM Inc. and Marlene Murray Defendants _______________________________________________________ Memorandum of Decision of the Honourable Madam Justice J.H.

Goss _______________________________________________________ [ 1 ] This case is about a creditor, Canadian Western Bank, seeking to recover certain assets, and rental income from those assets, from a company, MCMM Inc., who claimed that these assets had been purchased by them for value from a debtor and later bankrupt company, Tomcat Machinery Sales & Rentals Ltd. The bank further alleges that an excavator was transferred as a non-arms length transaction from the bankrupt company to MCMM Inc. in satisfaction of an alleged debt while the bankrupt was insolvent and therefore constitutes a fraudulent preference.

There is also a question regarding priority over another excavator leased to the bankrupt company. The Background [ 2 ] On June 11, 2004 a monitor was appointed on behalf of Canadian Western Bank, hereinafter referred to as “CWB”, for Tomcat Machinery Sales & Rentals Inc. and Tomcat Machinery (Edm) Inc. On July 9, 2004, upon it appearing that CWB had a security

interest in the property and had sent the prescribed notices under the Bankruptcy and Insolvency Act , a receiver was appointed. On August 13, 2004, upon the Petition of CWB, Tomcat Machinery Sales & Rentals Ltd., hereinafter referred to as “Tomcat”, was adjudged bankrupt and a Receiving Order was made against it appointing a Trustee of the estate of the bankrupt. As of the date of bankruptcy the Trustee was in possession of numerous assets, including a Kubota K008 mini excavator, a Thomas T15 mini excavator and eight light towers leased to Jacobs Catalytic Ltd. [ 3 ]

Section 38 of the Bankruptcy and Insolvency Act, R.S. 1985, c. B-3 allows a creditor to obtain a court order authorizing it to take proceedings in its own name where the trustee has not, and to retain the benefit of those proceedings to the extent of its claim. On May 25, 2006 CWB, obtained such an order allowing it to pursue an action in its own name as against MCMM Inc., hereinafter referred to as “MCMM”, for recovery of assets transferred from the bankrupt, Tomcat, to MCMM without any or inadequate consideration being paid by MCMM.

CWB was also thereby authorized to bring an action against MCMM for the recovery of assets owned by MCMM but leased to Tomcat at the time of bankruptcy when such leases were in excess of one year and were not registered at Personal Property Registry. [ 4 ] Marlene Murray is the sole shareholder of MCMM. Her husband Jim Murray was the sole shareholder and manager of Tomcat. Pursuant to the May 25, 2006 court order, the current litigation was commenced. At present the light towers have been frozen by court order and the two mini excavators have been sold and the proceeds are being held.

Were Assets Acquired for Valuable Consideration? Eight Light Towers [ 5 ] Mr. Fryzuk, the senior manager of Browning Crocker, who were appointed as monitor, receiver and manager and finally as Trustee of the estate of the bankrupt Tomcat, gave evidence that all the documents he reviewed at the time in 2004 showed Tomcat to be in control of the eight light towers. There was nothing in the documents he was provided at the time that showed MCMM as the owners and he gave evidence that no one from MCMM had called to say that they were the owners of the light towers or that they were taking possession of them.

The light towers were being rented to Jacob Catalytic who had physical possession of them. When trustee went to retrieve the light towers from Jacob Catalytic they were told that they had been returned to MCMM. [ 6 ] Marlene Murray gave evidence that MCMM had purchased the light towers from Tomcat on December 6, 2003 for value and produced an invoice from Tomcat for $127,342.19 for the purchase of the light towers. MCMM customer journals, generated by MCMM showing amounts owing from Tomcat, were produced to establish the value paid by MCMM for the light towers.

Also produced were two invoices from MCMM to Tomcat for “rental split” on the light towers and other equipment dated June and August 2004. With respect to the customer journals, Mrs. Murray stated that they were complied at a later date by her husband Jim Murray from documents, but she did not know how much later or what documents he relied on. There is no independent verification of these customer journals.

Jim Murray, was not called as a witness for the defendants to help clarify what occurred. [ 7 ] It remains unclear from the document produced by MCMM what amounts were credited towards the purchase of the light towers or that these amounts were indeed owing by Tomcat. There was no other documentation or evidence produced to establish the value or consideration, if any, paid for the light towers. Based on the evidence before me I am not at all satisfied that any consideration was paid by MCMM for the light towers and I so find. CWB is entitled to recovery of those assets.

Rentals for the Light Towers [ 8 ] The Plaintiff seeks an accounting for and judgement against MCMM & Marlene Murray for all rental payments received for the light towers. There is in evidence a letter dated July 1, 2004 on MCMM letterhead signed by Jim Murray that all rentals for light towers will no longer come from Tomcat but will be invoiced from MCMM. There is evidence that MCMM was directly invoicing for rental fees after this date. I am satisfied that such an order flows from my finding that consideration was not paid by MCMM for the light towers and CWB is entitled to recovery of the assets.

That would also include recovery of all rental income generated by MCMM from those light towers after July 1, 2004. Kubota K008 Mini Excavator

[ 9 ] The K008 mini-excavator was on Tomcat’s property in the wash bay when Browning Crocker was appointed as Receiver and attended at the property. Mr. Fryzuk gave evidence that the equipment and a series of invoices for the rental of the mini-excavator (Exhibit 1, Tab 14) were on Tomcat property while the Receiver was in place. There were no documents provided to them at that time to show that the excavator was owned by MCMM. [ 10 ] A former employee of Tomcat, Mr.

McMullan, was at the time responsible for managing the equipment rental contracts and doing deliveries of the rental equipment for Tomcat and also for MCMM. He gave evidence that any equipment belonging to or rented out by MCMM was delivered to and from the MCMM yard only and would always be marked as MCMM on the rental invoice.

None of the rental invoices noted above refer to MCMM anywhere which would appear to confirm that the rental invoices for the K008 were not with MCMM. [ 11 ] After Tomcat was petitioned into bankruptcy, MCMM made a claim for the return of the K008 mini-excavator by Proof of Claim dated August 17, 2004. The claim was based on an invoice dated June 19, 2004 from Tomcat to MCMM for the K008 in the amount of $11,240.38 ($12,027.21 with GST).

The amount was stated in the Proof of Claim to have been paid in full by MCMM by off setting debts that Tomcat owed MCMM as shown on the customer journal print out generated by MCMM and also attached to the Proof of Claim. Mr. Fryzuk gave evidence that the claim was disallowed on the basis of insufficient proof of ownership. [ 12 ] Mrs. Murray gave evidence that the customer journals were created by MCMM to ensure that invoices were paid by Tomcat. They were complied by her husband Jim after the fact from unknown documents.

She added that there was also no paperwork completed on the purchase of the K008 by MCMM until later. Again, Jim Murray, was not called as a witness for the defendants to help clarify what occurred. Nothing further was entered in evidence. [ 13 ] Mrs. Murray also gave evidence that she thought a visa slip in the amount of $12,840.00 (Exhibit 3, Tab 6) was for the purchase of the K008. The date of the VISA transaction is unknown as the VISA slip is ripped. Mrs. Murray thought the purchase was made by her husband Jim Murray in April 2004.

The date of the invoice to MCMM is dated much later than this and the amount of the invoice is different. There is no other evidence that the VISA slip relates to the purchase of the K008 and again, Jim Murray was not called to give evidence. [ 14 ] Mrs. Murray had a breakdown on March 18, 2004 and was under doctor’s orders not to work. Her husband, Jim, and her daughter gave her assistance with MCMM. She stated that she knew little of what was going on at Tomcat or at MCMM at that time due to her illness. Neither her husband nor her daughter told her anything about the companies from March to early June 2004.

In June she was updated but did not resume control of MCMM. In fact, Jim Murray has run MCMM since June 2004. For this reason, I find that Mrs. Murray is not able to say exactly what occurred with MCMM since March 18, 2004 including what occurred regarding transfer of the K008 to MCMM, either by setoff or by way of a VISA purchase. [ 15 ] On the evidence before me, I find the customer journals unreliable as a basis for establishing anything as they were compiled after the fact by Jim Murray on the basis of unknown documents. Again, there is no independent verification of those journals.

I find that a transfer of the K008 for value in the form of setoff was intended by Marlene and Jim Murray but is not established by the evidence at all. Nor do I find that the evidence establishes that the K008 was purchased by way of the VISA transaction.

I find that there is no evidence that any consideration was paid by MCMM for the K008 and CWB is entitled to recovery of that asset or the proceeds of sale of that asset. [ 16 ] In the alternative, if the K008 was somehow transferred to MCMM I find the transfer of the K008 pursuant to the invoice dated June 19, 2004 constitutes a fraudulent preference and void against the trustee, or CWB pursuant to the May 6, 2004 Order. I will address this further on in my decision.

Other Kubota Assets [ 17 ] The unaudited Tomcat financial statement generated by Tomcat for the period ending March 31, 2004 attached to the July 8, 2004 Report of the Monitor refers to “Kubota Rental Inventory” of a value of $325,663.00. Then, four days later, on April 3, 2004, an invoice from Tomcat to MCMM reflects the sale of $339,765.98 worth of Kubota and other equipment to MCMM. Later that year, in

June 2004, a third party, Mr. Gronberg, registered a security interest in that very equipment against MCMM. The plaintiffs argue thatthis series of documents establish that this Kubota equipment was transferred to MCMM. [18] Mrs. Murray gave evidence that the April 3, 2004 invoice was reversed as MCMM could not get financing to purchase theequipment and that the equipment was not ever acquired by MCMM. There is no evidence of a payment or transfer of value for thisequipment. There is one document produced showing a reversal of the sale of one piece of equipment to MCMM. Again, it is at thistime that Mrs.

Murray was under doctor’s orders not to work and her husband Jim and their daughter were running MCMM. None of theequipment identified in the invoice was located by Browning Crocker later that year. On the evidence before me I am not satisfied thatthis property was transferred to MCMM or that the plaintiffs claim in this amount is made out. Parts [19] The Plaintiff also argues that various parts, to a total value of $1,741.00,invoiced by Tomcat to MCMM from August 3 - 12,2004 were simply being credited with no payment made for those items. Mrs.

Murray stated in her evidence that MCMM did not receiveany parts they were not invoiced for. She was not asked about payment of these invoices. On the evidence before me, I am not satisfiedthat the plaintiff has proven that these parts were transferred to MCMM by Tomcat for no or inadequate consideration. Payments Made by Tomcat to MCMM [20] The plaintiff alleges that payments were made to MCMM by Tomcat in June of 2004 when the monitor was in place andthereafter. This claim has not been proven by the plaintiff on the evidence before me.

Thomas T15 Mini-Excavator [21] The T15 mini-excavator was also on Tomcat’s property in the wash bay when Browning Crocker was appointed as Receiverand attended at the property. The T15 mini excavator was also claimed by MCMM in their August 17, 2004 Proof of Claim. The claimprovided that MCMM had paid in full for the T15 by way of cheques dated August 2003. Some cheques were produced by MCMM. Theinvoice for the T15 is dated June 19, 2003 in the amount of $16,291.49. Mr. Fryzuk gave evidence that the claim was disallowed on thebasis of insufficient proof of ownership.

The Plaintiff is prepared to accept that this piece of equipment was purchased by MCMM inJune of 2003 and ultimately paid for. Which Interest Prevails on the t15 Mini Excavator? [22] The Personal Property Security Act , R.S.A. 2000,c. P-7, s.1(1)(tt)(ii) defines “security interest” as the interest of a “lessorunder a lease for a term of more than one year”.

Section 20 of the Act provides that “A security interest (

a) in collateral is not effectiveagainst (

i) a trustee in bankruptcy if the security interest is unperfected at the date of bankruptcy...”. In David Morris Fine Cars Ltd. V.North Sky Trading (1994) (AB KB), 158 A.R. 117 the plaintiff had leased a car to North Sky Trading Inc. for a termof 46 months. No financing statement was registered. After the bankruptcy of North Sky, the trustee seized the car and sold it. Thedealership’s bank and the dealership both claimed an interest in the car which the trustee disallowed. The registrar upheld that decisionand the bank and the dealership appealed.

The court stated at para 19, 20 and 22: “...leasing is a service in which Morris regularly engages and which it offers its customers in the ordinary course of its business. Eventhough it is a small part of the business in volume terms it is clear that leasing is something in which the company is regularly engaged. “It follows then that the lease of the Mercedes Benz by Morris to North Sky created a security interest. Morris, unfortunately for it, failedto register the required Financial Statement.

It follows that the security interest was unperfected as at the date of bankruptcy.” “No Financing Statement had been filed and the security had not otherwise been perfected by the date of bankruptcy. Thus the interest ofMorris in the vehicle is ineffective against the trustee.”

[ 23 ] The Alberta Court of Appeal has also considered this issue in Gimli Auto Ltd. V. BDO Dunwoody Ltd. 1998 ABCA 154 involving a priority dispute over motor vehicles between two lessors and the lessee’s trustee in bankruptcy. Mr. Justice Cote stated at para 5: “ Alberta’s Personal Property Security Act (P.P.S.A.) in effect provides that the interest of a lessor for over a year is “not effective” against a trustee in bankruptcy if that interest is not perfected before bankruptcy... it is common ground that therefore the trustee will prevail and the lessors will lose the vehicles.

That is plainly correct.” [ 24 ] On June 20, 2003 MCMM entered into a Lease Agreement with Tomcat to lease the Thomas T15 mini excavator to Tomcat for a period of 36 months. Both Tomcat and MCMM were in the business of equipment rental and leasing. Mrs. Murray confirmed that MCMM did not register their ownership of the mini excavator leased to Tomcat at the Personal Property Registry. [ 25 ] It is argued by counsel for the defendants that the evidence reflects that the T15 was repossessed by MCMM as Mrs.

Murray gave evidence that in June of 2004 she issued instructions that all of her leased equipment be moved off of Tomcat’s property to another yard. There was no other evidence that the T15 had been repossessed. I am not satisfied on the evidence before me that the T15 was in fact repossessed by MCMM. [ 26 ] As the security interest of MCMM was not registered and therefore unperfected before bankruptcy of Tomcat, the interest of MCMM is ineffective against the trustee and CWB is entitled to recovery of that asset or the proceeds of sale of that asset by way of the court order granted May 25, 2006.

Fraudulent Preference [ 27 ] It is alleged by CWB in its amended Statement of Claim that while Tomcat was insolvent, an excavator, the K008, was transferred to MCMM in satisfaction or payment of an alleged debt owing to MCMM constituting a fraudulent preference under the Bankruptcy and Insolvency Act and is void against the trustee, or CWB by the May 2006 court order. Limitations Act [ 28 ] The defendants argue that the plaintiff’s amendment to the Statement of Claim is made out of the time under the Limitations Act as it raises a new cause of action and is beyond the scope of the May 2006 order.

The Limitations Act, RSA 2000, c. L-12 provides in s.6(2) (

b) that notwithstanding the expiration of the relevant limitation period, a claim may be added to a proceeding previously commenced, when the added claim does not add or substitute a defendant, or change the capacity in which a claimant sues or a defendant is sued, if the added claim is related to the conduct, transaction or events described in the original pleading in the proceedings. This

section was considered by our Court of Appeal in Slavik v. Edmonton (City) 2008 ABCA 106 wherein Justice Berger allowed the addition of a third party notice claim, which did not add or substitute a third party, on the basis that the added claim “relates to events described in that [original] pleading” , the Statement of Claim. Indeed, unless there is a new cause of action there is likely no impediment to the amendment as stated in Madill v.

Alexander Consulting Group Limited, 1999 ABCA 231 , also cited to me. [ 29 ] The question of whether a new cause of action was raised is a question of law based on some assessment of facts. In this case the added claim is clearly related to events described in the original Statement of Claim regarding assets transferred to MCMM when Mrs. Murray was aware that Tomcat was insolvent. Therefore, I find that the amendment to the proceedings previously commenced falls with s. 6(2) (

b) of the Limitations Act . [ 30 ] I also do not find the amendment outside of the scope of the May 2006 order authorizing CWB to commence and action for recovery of assets transferred from the bankrupt to MCMM without any or inadequate consideration. It all relates to the same events or facts. Were assets transferred from Tomcat to MCMM when Mrs. Murray was aware that Tomcat was insolvent?

[ 31 ] Mrs. Murray gave evidence that since April 2003 her husband had been taking money out of their personal accounts for Tomcat and that since June 2003 she had argued with her husband over Tomcat having no money. In fact, this is why she formed her own company, MCMM in June 2003. Mrs. Murray stated that in June 2004 she was aware that all of MCMM’s equipment leases with Tomcat were in arrears and that she was not being paid by Tomcat. She stated a number of times in her evidence that “as usual, Tomcat did not pay” invoices that MCMM sent Tomcat. On June 11, 2004 a monitor was appointed for Tomcat. Mrs.

Murray gave evidence that it was at this time, June 2004, that she was updated by her husband, on what was happening with the companies. I am satisfied on this evidence that Mrs. Murray was aware that her husband’s company, Tomcat, was insolvent in June 2004. [ 32 ] It was at this time that the invoice dated June 19, 2004 from Tomcat to MCMM for the K008 was generated. As stated earlier, the intention was that debts that Tomcat owed MCMM would be off set by the transfer of this equipment. This certainly falls within what is described by s. 95(1) (

b) of the Bankruptcy and Insolvency Act , which provides that a transfer of property by an insolvent person in favor of a creditor who is not dealing at arm’s length that has the effect of giving that creditor a preference over another creditor is void against the trustee if it is made within a 12 month period before the initial bankruptcy. The actions and intent of Mrs.

Murray and MCMM to transfer the K008 to MCMM as setoff for debts allegedly owed by Tomcat to MCMM having the effect of giving MCMM a preference over other creditors when Tomcat was insolvent and a monitor was in place constitute a fraudulent preference. Decision [ 33 ] Pursuant to s.38 of the Bankruptcy and Insolvency Act and the court order of May 25, 2006 Canadian Western Bank are entitled to: 1. Possession of the eight light towers identified as follows: 0135ML02/H000112 0136ML02/H000113 0137ML02/H000114 0139ML02/H000116 0140ML02/H000117 0141ML02/H000118 0142ML02/H000119 and any proceeds of sale therefrom. 2.

A declaration that Canadian Western Bank are entitled to possession of or to retain the proceeds of sale of : Kubota mini excavator S/N K008U16858 1999 Thomas mini excavator S/N TS152075 3. An accounting for and judgement against MCMM & Marlene Murray, jointly and severally, for all rental payments received for the light towers from July 1, 2004 forward. Counsel may contact me should further submissions be required herein. Costs

[ 34 ] The Plaintiff shall have costs and reasonable disbursements. Counsel is free to contact me should further submissions be required in this area. Heard on the 31 st day of January, 2011 and the 1 st and 2 nd day of February, 2011. Dated at the City of Edmonton, Alberta this 8 th day of March, 2011. J.H. Goss J.C.Q.B.A. Appearances: Stephen J. Livingstone for the Plaintiff Richard G. Ferguson for the Defendants