2018 ABQB 1048, 2018 ABQB 1048

Court of Queen’s Bench of Alberta Citation: 667402 Alberta Ltd (Re), 2018 ABQB 1048 Date: 20181220 Docket: 1703 12327 Registry: Edmonton In the Matter of the Companies' Creditors Arrangement Act , RSC 1985, c C-36, as Amended And in the Matter of a Plan of Arrangement of 667402 Alberta Ltd, 18512398 Alberta Ltd, 816956 Alberta Ltd, 1371047 Alberta Ltd, 1919209 Alberta Ltd and Canada North Group LP Holdings Ltd _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice K.G. Nielsen _______________________________________________________ I.

Introduction [ 1 ] Proceedings pursuant to the Companies’ Creditors Arrangement Act , RSC 1985, c C-36 as Amended ( CCAA Proceedings) are ongoing with respect to several companies that operated under what has come to be known as the Canada North Group. This Application relates to mortgages granted by two companies within the Canada North Group: Canada North Camps Inc., now 18512398 Alberta Ltd. (CNC) and 1371047 Alberta Ltd (137). II. Background [ 2 ] An Initial Order was granted in the CCAA Proceedings on July 5, 2017. The Initial Order applied to, inter alia , CNC and 137.

The principals of the companies in the Canada North Group were Paul McCracken and his wife Shayne McCracken. [ 3 ] While it was hoped that a Plan of Arrangement would be forthcoming in the CCAA Proceedings that has not happened and the CCAA Proceedings have changed from reorganization proceedings to liquidation proceedings. Ernst & Young Inc. was appointed as the Monitor (the Monitor) in the Initial Order.

Over the course of the CCAA Proceedings the role of the Monitor has changed and expanded to facilitate the liquidation. [ 4 ] Prior to July 2017, a company in the Canada North Group, 1919209 Alberta Ltd. (191) entered into contractual arrangements with Weslease Income Growth Fund GP Ltd. and Weslease Income Growth Fund Limited Partnership (collectively Weslease). Mrs. McCracken has deposed in the CCAA Proceedings that 191 was specifically incorporated to lease certain equipment from Weslease and, with Weslease’s knowledge, 191 in turn leased the equipment to CNC.

CNC would pay 191 rent equal to the lease payments for 191 to then pay to Weslease. Mrs. McCracken further deposed that she was the sole shareholder of 191 and that she controlled 191 as well as 137 indirectly. Mr. McCracken was a director of 191. [ 5 ] Keith Talbot, the former President and Chief Executive Officer of Weslease, has deposed that Weslease entered into lease arrangements with various companies within the Canada North Group in October 2015. In February 2016, Mr. McCracken approached Mr.

Talbot with respect to a proposed sale and lease back transaction in relation to a wastewater treatment plant which at that time was

owned by 191 (the Transaction). Mr. Talbot took the position that in order for Weslease to enter into the Transaction, Weslease would require personal guarantees from Mr. and Mrs. McCracken and mortgage security on personal property owned by Mr. and Mrs. McCracken. Mr. Talbot has deposed that Mr.

McCracken refused to provide such personal guarantees or personal mortgages but instead proposed that 137 and CNC would guarantee the obligations of 191 in relation to the proposed lease in the Transaction and would grant mortgage security on lands owned by 137 and CNC respectively. [ 6 ] Weslease determined that it would proceed with the Transaction and eventually the following documents were prepared: 1. Notification – Approval of Lease (Approval of Lease); 2. Lease Agreement No. 1602191A (Lease); 3. General Security Agreement (GSA); 4. Promissory Note (Promissory Note); 5.

Mortgage provided by 137 (137 Mortgage); and 6. Mortgage provided by CNC (CNC Mortgage). [ 7 ] Weslease claims that monies are due and owing to it by 191 and seeks to enforce the security pursuant to the 137 Mortgage and the CNC Mortgage to recover, at least in part, amounts alleged to be owing by 191. III. Documents A.

Approval of Lease [ 8 ] The following terms of the Approval of Lease are germane to this matter: Lessee: 1919209 Alberta Ltd and Paul McCracken, Acting Jointly and Severally Purchase Price Net: $1,200,000 Approval Conditions: • Collateral Mortgage on available property as follows: $1,500,000 Collateral Mortgage on property described as: 0826492; 3, 7, 8, 11, 12 Municipal District of Bonnyville, Alberta, and $700,000 Collateral Mortgage on Property described as 1251 Industrial Drive, Wabasca, AB (032037; 2, 1) • Promissory Note • General Security Agreement (GSA) must be signed B.

Lease [ 9 ] The following provisions of the Lease are germane to this matter: Weslease Income Growth Fund Limited Partnership (the “Lessor”) Legal Name of Lessee (the “Lessee”) 1919209 Alberta Ltd and Paul McCracken, Acting Jointly and Severally Description of Equipment: Waste Water Treatment Plant – Filter Boxx 3,000 Person Capacity “Portable” activated sludge waste water treatment plant constructed and delivered in 2008.

Date of Execution – March 1, 2016 Terms and conditions of Lease ENTIRE AGREEMENT: This Lease (Weslease Form 2014-01) constitutes the entire agreement between Lessor and Lessee respecting the Equipment. No one is authorized to waive, add to or alter any term or condition of this Lease except a duly authorized officer of the Lessor. Any alteration, amendment or addition to this Lease must be in writing and duly executed by the Lessor and Lessee. [ 10 ] Mr. McCracken signed the Lease on his own behalf and on behalf of 191. C.

General Security Agreement [ 11 ] The following provisions of the GSA are germane to this matter:

To: WESLEASE INCOME GROWTH LIMITED PARTNERSHIP BY ITS GENERAL PARTNER WESLEASE INCOME GROWTH FUND GP LTD. (hereinafter referred to as the “Secured Party”) From: 1919209 ALBERTA LTD. AND PAUL MCCRACKEN, ACTING JOINTLY AND SEVERALLY (hereinafter referred to as the “Debtor”) 2.

Security Interest As continuing security for the payment and performance of all debts, liabilities and obligations of the Debtor to the Secured Party howsoever arising (present and future, absolute and contingent) (the “Indebtedness”) the Debtor grants, assigns, mortgages, pledges and charges, as and by way of a specific mortgage, pledge and charge, and grants a Security Interest to and in favor of the Secured Party in the undertaking of the Debtor and in all personal property referred to in

schedule “A” and in all Proceeds and renewals thereof, accessions thereto and substitutions therefor (the “Collateral”). ...

SCHEDULE “A” Description of Collateral All of the Debtor’s present and after acquired personal property being Goods, Documents of Title, Securities, Chattel Paper, Instruments, Money and Intangibles... [ 12 ] Mr. McCracken signed the GSA as an “Authorized Signature” and as “Owner”. D.

Promissory Note [ 13 ] The following provisions of the Promissory Note are germane to this matter: Borrower: 1919209 Alberta Ltd. and Paul McCracken, Acting Jointly and Severally (“1919209 Alberta Ltd.”) Lender: Weslease Income Growth Fund LP (Weslease”) Principal Amount: CDN $1,200,000.00 FOR VALUE RECEIVED, 1919209 Alberta Ltd. promises to pay to Weslease at such address as may be provided in writing to 1919209 Alberta Ltd. the principal sum of One Million Two Hundred Thousand dollars, ($1,200,000.00) CDN as per lease agreements 1602191A [ 14 ] Mr.

McCracken signed the Promissory Note as “Borrower” and as “President”. E. 137 Mortgage [ 15 ] The following provisions of the 137 Mortgage are germane to this matter: Collateral Mortgage Pursuant to “ Land Titles Act ” Province of Alberta WHEREAS: A. 1371047 Alberta Ltd (herein called the “Mortgagor”), has promised payment to Weslease of Canada Ltd of 11464 149 th Street, Edmonton, Alberta, T5M 1W7 (herein called the “Mortgagee”) of the liabilities which the Mortgagor has incurred or may incur pursuant to Lease Agreement(

s) dated the 1 st day of March, 2016, and such further and other agreements as may be entered into between the Mortgagor and the Mortgagee (the “Lease Agreements”); B.

The Mortgagor agrees that this Mortgage will secure repayment in favor of the Mortgagee pursuant to the Lease Agreements of all present and future indebtedness and liabilities of the Mortgagor, and any one or more persons or entities, to the Mortgagee pursuant to the Lease Agreements (all such present and future indebtedness is hereafter called the “Indebtedness”), and the Mortgagor has agreed to execute and deliver this mortgage as collateral security for the liabilities of the Mortgagor to the Mortgagee under the Lease Agreements;

INTERPRETATION 26.

b) Unless expressly provided otherwise in this Mortgage, this Mortgage constitutes the entire agreement between the Mortgagor and the Mortgagee in respect of the subject matter of this Mortgage. No amendments or alterations to this Mortgage will be effective unless made in writing and executed by the Mortgagor and the Mortgagee. COLLATERAL SECURITY 29. This Mortgage is executed as continuing collateral security of the Indebtedness of the Mortgagor to the Mortgagee under the Lease Agreements, whereby the Mortgagor has promised payment to the Mortgagee, ON DEMAND, of the liabilities which the

Mortgagor has incurred or is under, or may incur or be under to the Mortgagee, whether arising from dealings from dealings [sic] between the Mortgagee and the Mortgagor or from any other dealings by which the Mortgagor may become in any manner whatever liable to the Mortgagee.

The total amount secured by the Mortgage shall not exceed the Principal Sum, interest and other monies hereby secured, and nothing herein contained shall in any way affect or prejudice any right of the Mortgagee independently of the Mortgage to recover the total due from the Mortgagor under the Lease Agreements over and above the amount hereby secured. If the total liability of the Mortgagor exceeds such amount, the Mortgagee may conclusively determine what part of such total liability not exceeding such amount shall be deemed secured by this Mortgage and what part shall be deemed not secured.

This Mortgage is in addition and without prejudice to any other security now or hereafter held by the Mortgagee. [ 16 ] The amount of the 137 Mortgage is $1,500,000 which is defined as the “Principal Sum”. The lands against which the 137 Mortgage is secured are Plan: 0826492, Block 3, Lots 7, 8, 11 and 12. The 137 Mortgage was registered on the Certificate of Title to each of these parcels of land on March 22, 2016. The 137 Mortgage is signed by Mr. McCracken and an Affidavit Verifying Corporate Signing Authority is part of the 137 Mortgage which confirms that Mr.

McCracken is an officer and director of 137 and authorized to sign for that corporation. F. CNC Mortgage [ 17 ] The CNC Mortgage contains terms identical to the terms of the 137 Mortgage as set out herein. The manner of execution of the CNC Mortgage is the same as the manner of execution of the 137 Mortgage. The Principal Sum of the CNC Mortgage is $761,000 and it is secured against those lands legally described as Plan: 0325037, Block 2, Lot 1.

The CNC Mortgage was registered on the Certificate of Title to this parcel of land on March 11, 2016. [ 18 ] The 137 Mortgage and the CNC Mortgage shall collectively be referred to herein as the Collateral Mortgages. IV. Positions of the Parties [ 19 ] Weslease argues that despite the absence of the word “guarantee” from the 137 Mortgage and the CNC Mortgage, it is obvious from the wording in the mortgages that it was intended and understood that 137 and CNC were guaranteeing the obligations of 191.

In the alternative, Weslease argues that looking at all of the documents in relation to the Transaction, a memorandum in writing evidencing a guarantee exists and binds the parties. Finally, Weslease argues that in the event there is a finding that no written guarantee or memorandum of guarantee exits, the doctrine of part performance should apply and the Court should exercise its discretion and find a valid and subsisting oral guarantee between Weslease and 137 and CNC. [ 20 ] The Monitor argues that neither 137 nor CNC were parties to the Lease and they have no indebtedness or liabilities pursuant to the Lease.

Further, neither 137 nor CNC provided any form of guarantee in relation to the liabilities of 191 to Weslease. Weslease, therefore, is not entitled to enforce its security pursuant to either the 137 Mortgage or the CNC Mortgage. V.

Issues [ 21 ] The issues which must be determined in this matter are: • Did 137 and CNC guarantee the obligations of 191 pursuant to the Lease, either through the Collateral Mortgages themselves, or through the Approval of Lease, the Lease, and Collateral Mortgages taken all together? • If the answer to the issue above is no, has there been part performance by 137 and CNC such that a guarantee in writing is not necessary? VI. Analysis A.

Did 137 and CNC guarantee the obligations of 191 pursuant to the Lease, either through the Collateral Mortgages themselves, or through the Approval of Lease, the Lease and the Collateral Mortgages taken all together? [ 22 ] A guarantee is a promise to pay a debt or perform a duty where the person liable for the debt or duty has failed to pay or perform: Re Conley (1938), 2 All ER 127 (Eng CA) at 130 . [ 23 ] In Alberta, the Statute of Frauds (1676), 29 Car II, c 3 applies when a party guarantees another party’s obligations. In modern language,

section 4 of the Statute of Frauds reads: No action shall be brought... whereby to charge the defendant upon any special promise to answer for the debt default or miscarriage of another person... unless the agreement upon which such action shall be brought or some memorandum or note thereof shall be in writing and signed by the party to be charged therewith or some other person thereunto by him lawfully authorized. [ 24 ] Thus, a binding guarantee requires that the agreement be set out in “a memorandum or note made in writing”. [ 25 ] The Monitor says that Weslease is asking the Court to accept that the documents before the Court establish guarantees on the part of 137 and CNC to pay the obligations of 191 and Paul McCracken under the Lease, which guarantees are secured by the Collateral

Mortgages. The Monitor says that to accept this proposition the Court would have to ignore or rewrite the language of the documentsrelied upon. I agree. [26] The wording of the Collateral Mortgages does not provide that 137 and CNC were guaranteeing the obligations of 191 or Mr.McCracken. Mr. McCracken signed the Collateral Mortgages on behalf of CNC and 137. A mortgage does not create a debt, but insteadacts as security for a debt that otherwise exists: Land Titles Act, RSA 2000, c L-4, s 1(o).

The Collateral Mortgages, by their terms,purported to secure any indebtedness owed by 137 and CNC to Weslease under the Lease. In fact, there was no underlying debt owingfrom 137 or CNC to Weslease either pursuant to the Lease or pursuant to any other agreement. The mortgages are not collateral to anydebt owed by 137 or CNC to Weslease. Rather, the Lease was between Mr. McCracken and 191, jointly and severally as Lessee and Weslease as Lessor. Neither 137 nor CNC are listed as co-lessees; neitherare listed as guarantors. [27] Mr. Talbot deposes that Mr.

McCracken proposed that 137 and CNC would guarantee the obligations of 191 in relation to theproposed lease and would grant mortgage security. This is the only evidence tendered relating to discussions the parties had about thesetransactions. While there is no evidence contradicting this oral agreement, an oral agreement does not result in a binding guarantee. [28] Any proposal, or guarantee, made was also not captured in the Lease. Further, the Lease includes an Entire Agreement clausewhich provides that the Lease constitutes the entire agreement between Weslease as the Lessor, and 191 and Mr.

McCracken as Lessee.There is no evidence of alterations, amendments, or additions to the Lease.

The same can be said about the Collateral Mortgages. [29] In Houle v Knelsen Sand and Gravel Ltd, 2016 ABCA 247 the Alberta Court of Appeal discussed entire agreement clausesnoting at para 23: ...The point of the whole agreement clause is that the obligations of the parties will be determined in accordance with the written termsof the contract, not extraneous negotiations and discussions that have not been reduced to writing, and thus formally acknowledged bythe contracting parties. [30] Further, relying on basic contract law, the Monitor argues, and I accept, that neither 137 nor CNC received any considerationfor granting the Collateral Mortgages.

Promises made without consideration do not create enforceable contracts, unless the contract isexecuted under seal: JE Côté, An Introduction to the Law of Contract (Edmonton: Juriliber Limited, 1974) at 43.

Neither of the CollateralMortgages was executed under seal. [31] If this Court finds no guarantee in evidence, which is my finding, Weslease urges me to consider several of the relevantdocuments together as evidence of a guarantee by 137 and CNC. [32] Weslease accepts that the Statute of Frauds requires a “memorandum or note made in writing” for a binding guarantee.Weslease argues, however, that such a memorandum of guarantee does not need to be limited to a single document titled “Guarantee”.Rather: A memorandum of a promise to pay the debt of another must show who is the promisee as well as the promisor.

Huron (County) v Kerr (1868), 15 Gr 265; White v Tomalin (1890), 19 OR 513; A MacDonald & Co v Fletcher (1915), 22 BCR 298; and Halsbury, 3rd ed, p434. However, I cannot find in the authorities any requirement that such should appear either in the body or in any other particular part ofthe writing.

The requirements of the statute are satisfied if the names of the parties appear upon the face of the memorandum,either expressed or by reasonable construction or by reference to other documents physically or referentially attached thereto.Richard v Stillwell (1885), 8 OR 511; Freeman v Freeman (1891), 7 TLR 431; and McEwan v Dynon (1877), 3 Vict LR 271 (26 English& Empire Digest, p 46): Ontario Marble Co v Creative Memorials Ltd (1963), (SK KB), 39 DLR (2d) 149 (Sask QB)at para 6 [emphasis added]. [33] Weslease argues that, taking together the Lease, the Approval of Lease, and the Collateral Mortgages, the only logicalconclusion to reach is that the Collateral Mortgages were intended to secure the Lease by way of guarantee.

Further, this conclusion issubstantiated by Mr. Talbot’s affidavit evidence. [34] Although it may be the case that, considering various documents all together may be sufficient to create a binding guaranteethat satisfies the Statute of Frauds, in this situation the documents referred to by Weslease do not create an enforceable guarantee.

Asnoted above, finding an enforceable guarantee in the Collateral Mortgages and other relevant documents would require the Court toignore or rewrite the language of the documents relied on. [35] Finally, Weslease relies on the case of Re Conley for the proposition that even where an individual has not entered into anexpress covenant to repay any part of another party’s obligation, the individual may nonetheless be found to have guaranteed the debts ofthat third party by way of collateral security. [36] Re Conley was a case involving fraudulent preferences.

Conley’s wife and mother both deposited war loans as collateralsecurity for Conley’s indebtedness to certain banks. Conley then paid large sums of money into his accounts and the wife and motherdemanded and received release of their securities.

Shortly thereafter Conley became bankrupt. [37] The trustee in bankruptcy made two arguments on appeal: first, that the wife and mother were under personal liability to thebanks in respect of the overdrafts, and alternatively, that a person who deposits collateral security in respect of the debt of a third party isa surety or guarantor of that debt to the extent of the security deposited. [38] With respect to the first argument, the Court noted that the respective contracts between the two women and the banks wereregulated by a written document.

The Court stated at 134-135: ...the respective contracts between the depositors and the banks are in each case regulated by a written document. In none of thesedocuments is there any express provision that the depositor is to be under any personal liability, and I am unable to appreciate on what

ground it can properly be said that personal liability is to be implied, and what is to be its limit. I am satisfied from an examination of thematerial documents that the intention of the parties in each case was to limit the depositor’s liability to the amount of the securitydeposited, and to exclude any personal liability on the part of the depositor. ... [39] With respect to the second argument, the Court reviewed the prima facie meaning of the words “surety” and “guarantor”.After reviewing numerous

definitions, the Court held that the various

definitions did not exclude as a surety or guarantor the case of aperson who agrees to pledge, or in fact pledges, a specific part of his property to respond to the debt of another without entering into anagreement to incur personal liability. [40] Re Conley can be distinguished from the case now before the Court. In Re Conley, the depositors’ liabilities were set out inthe written documents with the banks. While the documents limited the depositors’ liabilities to the amount of security deposited, itseems they acknowledged the liabilities that were owed.

What is missing in the case at bar is an initial agreement to pledge property torespond to the debt of another. The Collateral Mortgages clearly state that the property at issue is offered as security for the debts andliabilities of CNC and 137, rather than as security for the debts and liabilities of 191 or Mr. McCracken. B.

Has there been part performance by 137 and CNC such that a guarantee inwriting is not necessary? [41] Weslease argues that if the Court finds no guarantee in writing whereby 137 and CNC guaranteed the obligations of 191 inrelation to the Transaction, there has been part performance of a guarantee by 137 and CNC, namely the granting of the CollateralMortgages, such that a guarantee in writing is unnecessary. [42] Part performance is an equitable doctrine that grew out of concern from common law judges that the application of the Statuteof Frauds may lead to injustice in situations where contracts had been partly performed: Haan v Haan, 2015 ABCA 395 at para 10.

Ifthe doctrine of part performance applies, a court can enforce a contract even if it does not meet the requirements of the Statute of Frauds. [43] Courts will apply the doctrine of part performance if three criteria are met: First, the plaintiff must show some detrimental reliance. It would be unjust for the defendant to evade obligation by relying on theStatute. Second the plaintiff must establish that the acts of detrimental reliance sufficiently manifest the contract alleged.

Third, if thelink between the acts and yet-to-be-in-evidence contract is sufficiently strong, “parol” (oral or non-written) evidence of that contract maybe permitted to be adduced (authorities omitted): Axcess Mortgage Fund Ltd v 1177620 Alberta Ltd, 2018 ABQB 626 at para 171. [44] Generally, the doctrine of part performance does not apply to guarantees: Rink v March, (SK KB), [1921] 1WWR 919 (Sask Sup Ct); Deutsche Bank v Mieszko Properties Inc, 2018 ONSC 3815 at para 35, citing from K McGuiness, The Lawof Guarantee, 3rd ed (Markham: LexisNexis Canada Inc, 2013) at 234-235. [45] Weslease says the existing case law in respect of guarantees and part performance relates solely to situations in which a lenderor creditor claims to have partly performed simply by having advanced funds to a debtor and then tries to rely on this part performance tonegate the need for the guarantee to be in writing.

However, there has not yet been a court that has considered a case of part performancein a guarantee situation where the part performance was not merely the advancement of funds. [46] Weslease argues that the rule excepting guarantees from the doctrine of part performance is based on a policy consideration –namely concern that a lender or creditor will unilaterally impose a guarantee, not in writing, on an alleged guarantor.

However, in thiscase, 137 and CNC are the ones who partly performed by granting the Collateral Mortgages and so the same policy considerations do notarise. [47] The Monitor takes the position that Weslease’s part performance argument is a red herring. There were no underlyingguarantees on the part of 137 and CNC and so there is no issue of part performance. [48] Weslease concedes that the doctrine of part performance does not apply to guarantees and, while trying to distinguish thissituation, offers no authorities in which such a distinction has been made.

Similarly, my own research failed to turn up any authority forthe proposition that part performance could apply to a guarantee. It is my determination that part performance does not apply in thissituation and the facts do not take this case out of the operation of the Statute of Frauds. [49] I do not agree that the only policy consideration behind excepting guarantees from the doctrine of part performance is the onedescribed by Weslease above.

The English Court of Appeal mentioned at least one other policy consideration in Golden Ocean GroupLimited v Salgocar Mining Industries Ltd, [2012] EWCA Civ 265 (CA) at para 21: ...Moreover the purpose of the requirement that the agreement must be both in writing and signed by the guarantor is not so much toensure that the documentation is economical but rather to ensure that a person is not held liable as guarantor on the basis of an oralutterance which is ill-conceived, ambiguous or even completely fictitious...

A combination of writing and an acknowledgement bysignature of the solemnity of the undertaking has been chosen to eliminate that mischief... [50] Further, even if the doctrine of part performance applied in this situation, Weslease has not established the three criterianecessary. In his affidavit, Mr. Talbot did not expressly depose that Weslease relied on the Collateral Mortgages in order to enter theLease, nor that Weslease would not have entered the Lease without the Collateral Mortgages. I do not find detrimental reliance on thepart of Weslease and so the first criterion of part performance is not met.

Given my finding on the first criterion I do not need to considerthe others. VII. Conclusion

[ 51 ] In conclusion I find there are no guarantees by 137 and CNC in favour of Weslease and I grant the Monitor’s application to discharge the 137 Mortgage and the CNC Mortgage. VIII. Costs [ 52 ] The parties may speak to me within 60 days of the date of these Reasons for Judgment if they are unable to agree on costs. Heard on the 23 rd day of October, 2018. Dated at the City of Edmonton, Alberta this 20 th of December, 2018. K.G. Nielsen J.C.Q.B.A. Appearances: Darren Bieganek, QC and Ryan Quinlan Duncan Craig LLP for the Ernst & Young Inc. Kent Rowan, QC and Amber Poburan Ogilvie LLP for Weslease Income Growth Fund GP Ltd and Weslease Income Growth Fund Limited Partnership