Kallis v. First Capital Management Ltd., 2011 ABQB 60

Court of Queen ’ s Bench of Alberta Citation: Kallis v. First Capital Management Ltd., 2011 ABQB 60 Date: 20110207 Docket: BE01 406754 Registry: Calgary Between: Michael Kallis and Suzanne Kallis and Watson-Pastorino Revocable Trust Applicants - and - First Capital Management Ltd., and Alger & Associates Inc., in the capacity as Proposed Trustee for First Capital Management Trust, Respondents _______________________________________________________ Memorandum of Decision of the Honourable Mr. Justice G.C.

Hawco _______________________________________________________ [ 1 ] The Applicants, Michael Kallis, Suzanne Kallis (the “Kallis Creditors”) and the Watson-Pastorino Revocable Trust (“WP Trust”) seek a declaration that their security is valid and enforceable and that they are secured creditors of First Capital Management Ltd.

(“FCM”). [ 2 ] The Respondent, Alger & Associates Inc. (“Alger”) is a proposal trustee for FCM pursuant to a Notice of Intention (“NOI”) made by FCM on September 15, 2010. The Kallis Creditors entered into a number of agreements with FCM whereby they loaned approximately $6 million to FCM. Pursuant to the loan agreements made between the Kallis Creditors and FCM, FCM pledged one million shares of Catalyst Health Care Ltd. (“Catalyst”) and 220,000 shares of OSUM Oilsands Corp. (“OSUM”). FCM held share certificates representing the pledged shares at its place of business.

The shares were held in the name of FCM and were set aside by FCM and held for the Kallis Creditors pursuant to the loan agreements. [ 3 ] In the quarterly reports issued by FCM, FCM described the amount and type of securities being held by them on behalf of the Kallis Creditors. It was always the intent of FCM that the Kallis Creditors’ claims under the loan agreements would be secured by the shares in Catalyst and OSUM. Under the terms of the loan agreements, the shares were to have been delivered to a named escrow agent.

That did not take place. [ 4 ] It is argued by Alger that the amounts secured pursuant to the loan agreements is a maximum of $2.5 million because of certain limits provided for in the agreements. I am not going to determine the amount of the Kallis Creditors’ security. I am simply going to determine whether they are secured creditors. [ 5 ] WP Trust loaned money to FCM. Loan agreements were executed whereby FCM granted to WP Trust a security interest and charge over certain securities, which in this case, were shares in OSUM.

These shares were not required under the terms of the agreement to be delivered to anyone in escrow. They were, as were the Kallis shares, physically held by FCM in their offices. As with the Kallis Creditors’ shares, FCM acknowledged that these shares were being held by them as security for WP Trust. [ 6 ] FCM defaulted on its loan payments to both the Kallis Creditors and WP Trust on September 15, 2010. As stated earlier, on that same day, it filed a NOI pursuant to the Bankruptcy and Insolvency Act .

On October 5, 2010, proof of claim forms were sent to the Applicants, along with other creditors, by Alger. [ 7 ] On October 19, 2010 and November 17, 2010, respectively, the Applicants filed financing statements against FCM at the Personal Property Registry, claiming to have security over the shares which were being held for them by FCM. [ 8 ] On December 10, 2010, Alger, in its capacity as proposal trustee for FCM, purported to disallow the claims of the Applicants on the basis that the security interest was not valid and was not enforceable against third parties because the securities had not been delivered to an escrow agent, nor had there been any registration of any interest claimed in these securities prior to the NOI having been filed. [ 9 ] Alger argues that the security interest held by both Applicants are not enforceable because they had not “attached” under the Personal Properties Security Act (“PPSA”).

They have not “attached” because the securities were not “enforceable” under the Act . They are not “enforceable” because the securities had not been delivered as required under the Security Transfer Act (“STA”), nor did the Applicants have control over the shares. [ 10 ] The Kallis Creditors argue that delivery was not necessary. FCM breached its obligation to deliver the shares to the escrow agent and it cannot now turn around and use its breach of the agreement as a sword against the Kallis Creditors.

FCM’s failure to deliver the shares pursuant to its obligation to do so cannot serve to extinguish the Kallis Creditors security interest. [ 11 ] Alternatively, the Kallis Creditors argue that delivery did take place under the STA because FCM has always acknowledged that it was holding those shares for the Kallis Creditors. [ 12 ] WP Trust argues that it has a valid and enforceable claim under the PPSA. There was no obligation under its agreement to have the shares delivered. Nevertheless, delivery did take place under the terms of the STA because of the acknowledgment of FCM that

the shares were being held by it for WP Trust. [ 13 ] Both Applicants argue that the registrations under the PPSA are valid in any event as no act of bankruptcy has formally taken place. Since Alger is not a trustee in bankruptcy, and as no act of bankruptcy has occurred, the assets remain vested in FCM and the Applicants are free to register their interest, which they have now done. [ 14 ] In the alternative, the Applicants argue that if the NOI has the effect of prohibiting or nullifying the registration, a stay should be granted.

Issue [ 15 ] The issues are simply whether the shares have effectively been delivered to the Applicants or whether the Applicants’ security interest has been perfected by the registration which did take place. Decision [ 16 ] I am satisfied that the security interest of each of the Applicants has been perfected by delivery. Reasoning [ 17 ] Section 68(1) of the Securities Transfer Act , Statutes of Alberta 2006, c-4 .5 states: 68(1) Delivery of a certificated security to a purchaser occurs when ... (

b) another person, other than a securities intermediary, either (

i) acquires possession of the security certificate on behalf of the purchaser, or (ii) having previously acquired possession of the security certificate, acknowledges that the person holds the security certificate for the purchaser, [ 18 ] In this case, it is accepted that FCM has always maintained and acknowledged that it was physically holding the pledged shares on behalf of both Applicants. [ 19 ] The Respondent argues that this

section cannot be used to find the securities have been perfected by way of delivery because it would be absurd that a debtor could, by acknowledging it held shares for another, thereby effect delivery of those shares. With respect, I simply look to the wording of section 68(1)(b). The acknowledgment has been made. It is accepted that it has been made. In my respectful view, this constitutes a delivery. [ 20 ] There need be no actual delivery to an escrow agent, even though that was anticipated, and indeed, required, in one of the agreements. The escrow agent need not make the acknowledgment.

The acknowledgment may be made, as it was in this case, by the debtor who had previously acquired possession of those certificates. The security has therefore been sufficiently perfected and the Applicants are entitled to be regarded and treated as secured creditors. [ 21 ] Although this is sufficient to dispose of the application, I would simply add that Alger, as a proposal trustee, cannot stand in a higher position than the debtor itself. Although there are a number of unsecured creditors, there had been no competing claims to the pledged shares under the PPSA at the time of registration.

The registration by both Applicants takes precedent over any claims which may yet be made.

[ 22 ] As was the case in Brookside Capital Partners Inc. v. RSM Richter Inc., 2006 ABQB 572 , the Applicants here were not attempting to gain an advantage through the registration. They were simply trying to hold on to an advantage they had already negotiated. [ 23 ] If the registration which took place in September and November by the Applicants has been stayed by virtue of the NOI, I would lift the stay nunc pro tunc to enable both Applicants to file their registrations. [ 24 ] Parties may speak to me with respect to costs. Heard on the 25 th day of January, 2011.

Dated at the City of Calgary, Alberta this 4 th day of February, 2011. G.C. Hawco J.C.Q.B.A. Appearances: Michael Loberg Arif Chowdhury Fasken Martineau DuMoulin LLP for the Applicants S.B. Gavin Matthews Pat Robinson Peacock Linder & Halt LLP for the Applicant Watson-Pastorino Revocable Trust Kenneth Lenz Chris Simard Bennett Jones LLP for the Respondent First Capital Management Ltd.

Howard Gorman Macleod Dixon LLP for the Respondent Alger & Associates Inc.