2003 BCSC 497, 2003 BCSC 497

Citation: Bankruptcy of Woodland Windows Ltd. Date: 20030331 2003 BCSC 497 Docket: 11-206300 Registry: Prince George IN THE SUPREME COURT OF BRITISH COLUMBIA IN BANKRUPTCY IN THE MATTER OF THE BANKRUPTCY OF WOODLAND WINDOWS LTD. DECISION OF MASTER BAKER AS REGISTRAR IN BANKRUPTCY Counsel for KPMG Inc., Trustee: J. Christiansen Counsel for Her Majesty the Queen in Right of the Province of British Columbia: D.

Hatter Date and Place of Hearing: March 17 and 18, 2003 Prince George, BC ISSUE [ 1 ] KPMG Inc. (“the Trustee”) is Trustee in these bankruptcy proceedings concerning Woodland Windows Ltd. (“the bankrupt”) and applies for an order approving the sale of specific assets to Woodland Forest Products Ltd. (“WFP”). The motion includes a term that the assets pass to WFP free and clear of all encumbrances by Her Majesty the Queen in right of the Province of British Columbia (“the Province”).

Excepted from this latter relief are the claims for security by the Province’s Industrial Development Assistance loan program (“IDA”). The application further particularizes the Province’s encumbrances that, should the sale be approved, would be released and discharged. These charges arise from Forest Renewal BC obligations and stumpage charges owed by the bankrupt to the Province. The issue is contested so that the parties have consented pursuant to s. 192(1 ) (

j) of the Bankruptcy and Insolvency Act [1] , (“ BIA ”), to my hearing and deciding the matter as Registrar. BACKGROUND

[ 2 ] The bankrupt is a non-reporting, family-held company in Prince George, B.C., sawmilling and re-manufacturing wood products - primarily windows, doors, glued pine panels, and the like. On August 29,2000, it filed notice of an intention to make a proposal in bankruptcy; that proposal was filed February 16, 2001.

It later became clear that the proposal would not succeed, so that on September 13, 2002, the company made an assignment into bankruptcy. [ 3 ] At the time of the proposal, the bankrupt held a variety of assets, including - - rights under timber sale licenses A55448 and A68612 - logs and lumber inventory - leasehold properties on BC Rail land (“BCR assets”) - fee simple lands and premises - chattels, equipment, and machinery on site These assets were variously encumbered by numerous secured creditors including, in addition to the Province for FRBC and stumpage: - the Receiver General in respect of source deductions and remittances for taxes, - the Business Development Bank of Canada (BDC), - BC Rail (“BCR”) for lease payments, - City of Prince George (“the City”) for arrears of property taxes, - Algoma Holdings Ltd. (“Algoma”), a family company formed by the principals of the bankrupt, holding security under the Personal Property Security Act [2] , (“ PPSA ”) and, - the Province in respect of its IDA loan.

It is the opinion of the Trustee that the secured creditors and their priorities stand in the above order and take priority over the Province’s security for FRBC and stumpage. The FRBC obligation is $2,400,000.00 and the stumpage owing is in excess of $12,000,000.00 (by the Trustee’s valuation) to $14,800,000.00 (by the Province’s proof of claim). Adding, therefore, all of the secured debts together, by May 1, 2002, they totalled $17,285,000.00 to $20,085,931.00.

By any view this total secured indebtedness vastly exceeds the total security. [ 4 ] Between the notice of intention to file a proposal and the actual assignment slightly more than two years passed, and it became obvious that operations could not continue with the bankrupt. Its principals, through their family company (Algoma) invested further operating funds, then elected to transfer operations to WFP, another family-held non-reporting company. It did this July 19, 2002, executing an agreement dated and effective as at May 1, 2002.

WFP and the bankrupt are clearly related within the terms of the BIA and the transaction is non-arm’s length. [ 5 ] This agreement included the sale of its assets to WFP for $2,280,475.00. No cash was to be paid on the agreement; the price would be met by the assumption of debt. The price was derived from appraisals of the lands, leasehold interests, and equipment. The Trustee actually obtained two appraisals of the leasehold interests; one by Jorgensen & Nelson Appraisals Ltd. (“Jorgensen”) and one by Prince George Appraisals Ltd. (“ Beairsto ”).

Jorgensen valued the leases and buildings at $1,091,000.00, and Beairsto at $948,000.00. The freehold lands were valued at $272,000.00. [ 6 ] The Jorgensen lease appraisal, however, proposed a further or alternative value of the lease property and estimates that the value of the property as “operational” would be $2,378,000.00. This valuation included the value rents, taxes, and a 10% capitalization rate on “estimated land cost of $78,160.00”.

At the close of argument counsel for the Trustee introduced a supplementary letter from Beairsto contradicting any “operational” aspect or perspective in the valuation procedure, and emphasizing that, in his view, there was no land value in lease property (see paras . 18 to 20 below). TRUSTEE’S POSITION [ 7 ] The Trustee submits that there is authority for the court to approve the sale, that the sale would proceed at fair market value and would benefit the estate by

avoiding receivership and commission costs, and by avoiding future claims against the estate. He further argues that the inspectors of the estate (including a representative of the Province) have approved the sale at a meeting November 21 2002. Moreover, the Trustee’s position is that, given the priorities stated above, the rights of preceding secured creditors mean that there is no equity whatever in the assets to secure the debts to the Province, and that their position is therefore moot.

Further, the Trustee submits that the Province has remained inactive and is thereby inhibiting any restructuring or reconfiguration of the bankrupt that may permit it to continue as a going concern. He also submits that approving the sale will save 100 jobs and that delay in a falling market will result in later sales at lower prices. Finally, he suggests that, in refusing agreement to the sale and by possibly benefiting from debt reduction that has occurred during WFP’s involvement, the Province would be acting in bad faith.

The Province’s Position [ 8 ] The Province argues that there is no legal authority for the relief sought. It further denies that priorities amongst the secured creditors are established or, indeed, may necessarily be as the Trustee has concluded and proposed.

The Province does not accept that the assets have been reliably valued and, finally, submits that the question of whether or not the transactions between the bankrupt and WFP to date are reviewable transactions under the BIA , fraudulent transactions under the Fraudulent Conveyance Act [3] , or fraudulent preferences under the Fraudulent Preference Act [4] is by no means resolved. ANALYSIS [ 9 ] Legal Authority . The primary considerations underlying this application, both general and particular, arise from the provisions of the BIA .

As a generality, a Trustee in bankruptcy may only deal with the property of the bankrupt. As another generality, all proceedings taken and rights asserted by a Trustee or by any creditor are subject to the rights of secured creditors ( ss . 69.3(2), 70, 71). These two principles come together in this application to preclude any of the relief requested. Given that the Trustee has not suggested that any of the security of the various creditors described above ( para . 3) is invalid, one has to assume that the total security of creditors exceeds the value of the total assets.

That being the case, it is difficult to see what remains as “property” of the bankrupt for the Trustee to sell or transfer. [ 10 ] More specifically, the Trustee presents ss . 34 , 128 , and 129 of the BIA , s. 63 of the PPSA , and Rule 43 of the Rules of Court as various bases in law for the relief sought. I will discuss these separately below, followed by considerations of the merits of the application and other arguments. [ 11 ] Sections 128 and 129 BIA .

Section 128 provides for the Trustee “…by serving notice in the prescribed form and manner…” to require a creditor to prove its security. In default of that proof, the Trustee may seek the court’s approval to sell or dispose of the asset, “…free of that security”. Similarly, s. 129 provides that, if the Trustee is dissatisfied with “…the value at which a security is assessed…” the Trustee offer the security for sale. The Trustee seems not to have served notice in the prescribed form and manner (at least has not alleged that step in Mr. Gilchrist’s affidavit), but argues that in its proof of claim the Province did not value its security as required, but rather, in

Part 3 of the proof (dated September 24, 2002), valued the assets “against which it holds security… at $5,000,000.00” and then stated that the amount that the Province might realize on its security “…is dependent upon the value of claims secured against the assets in priority to the Crown Secured Claims…and this amount is not known at this time.” This endorsement follows upon exhaustive and detailed itemization and description of the elements of the FRBC and stumpage debts, including dates, amounts, account numbers, and filing dates and reference numbers.

It is singular, in my mind, that the Trustee does not appear, prior to this application, to have challenged, questioned, or disallowed the proof. The only mention in evidence on this point is para . 28 of the Trustee’s affidavit, almost indirectly rejecting the Province’s proof.

There is no evidence of a refusal by the Trustee under s. 135 to accept the proof. [ 12 ] The argument is that the Trustee now “…is dissatisfied with the value at which a security is assessed…” ( s. 129 BIA ) in the Province’s case, and that, having invited the Province’s consent to a sale, is seeking the court’s direction approving the sale pursuant to s. 129(1). This, with respect, seems a misapplication of that section.

Counsel for the Trustee argues that s. 129 applies in this case because rather than valuing its security per se , the Province has valued the assets that secure its debt (which, by any measure, vastly exceeds the value the assets). Notwithstanding the submissions of the Trustee, the only real issue in this matter is by how much the secured obligation of the bankrupt to the Province exceeds the value of the assets.

It should be pointed out, as well, that the Province denies that the Trustee has ever requested of it that the assets be sold (Plunkett affidavit #1, para . 6; Bittner affidavit #1, para . 11), a step that s. 129 would seem to require as a precursor to the court engaging in the matter. Finally, if all

precedent steps under ss . 128 and 129 had been taken by the Trustee, the avenue prescribed then is to offer the security for sale, and I infer that such an offer would be to the open market (see para . 16, below), not to a related party. [ 13 ] If the Trustee takes issue with the perspective of the Province as endorsed in

Part 3 of the Province’s proof, the obvious and proper step for the Trustee would have been to question the proof under s. 135, not to advance that ostensible disagreement as a basis for recourse to the court under s. 129 . [ 14 ]

Section 34 BIA .

Section 34 of the BIA is the omnibus provision in the Act permitting a Trustee to seek direction from the court in any matter. The dispute in this matter seems primarily to be between the Trustee and the Province. Certainly, the bankrupt agrees with the Trustee’s position (so much so that the bankrupt’s counsel appears in this application on behalf of the Trustee). The other secured creditors seem unconcerned with the application (due, of course, to the Trustee’s conclusion that their rights take priority to the Province’

s) but this does not mean that they are adverse to the Province’s position. I regard the matter, therefore, as basically one between the Trustee and the Province. To use the generality of s. 34 to resolve this specific dispute, therefore, seems to me, to run afoul of Re Ward ( (1987) 1987 CanLII 7512 (NB KB) , 66 C.B.R. (N.S.) 164 at 171) .

If, however, the court’s direction is required in this matter pursuant to s. 34 , my direction would be that, there being no unsecured value or equity in the assets whose sale is sought, there is no reason, on these facts, for the Trustee to pursue the sale, and there is certainly no basis to transfer the property free and clear of the Province’s otherwise valid claim to security. [ 15 ]

Section 63 Personal Property Security Act .

Section 63 of the PPSA states: 63

(1) In this section, "secured party" includes a receiver.

(2) Subject to subsection (3), on application of a debtor, a creditor of a debtor, a secured party, a sheriff or a person with an interest in the collateral, a court may make one or more of the following orders: (

a) an order, including a binding declaration of right and injunctive relief, that is necessary to ensure compliance with this Part or

section 17, 36, 37 or 38; (

b) an order giving directions to a person with respect to the exercise of the person's rights or the discharge of the person's obligations under this Part or

section 17, 36, 37 or 38; (

c) an order relieving a person from compliance with the requirements of this Part or

section 17, 36, 37 or 38, but only on terms that are just and reasonable to all parties affected; (

d) an order staying enforcement of rights provided in this Part or

section 17, 36, 37 or 38; (

e) an order necessary to ensure protection of the interest of any person in the collateral.

(3) Nothing in subsection (2) (

c) and (

d) affects the application of sections 58 (3) to (5) and 67. The PPSA could only have effect in this matter, of course, in respect of the bankrupt’s movables, chattels, or equipment and machinery. I cannot see how this

section gives authority for the relief sought by the Trustee. I agree that s. 63 relates to the efficacy of security itself and to the rights, possibly, of secured creditors against the owner of property, or against other secured creditors, but do not accept it as authority for the relief sought in this application. [ 16 ] Rule 43, Rules of Court . Rule 43 of the Rules of Court similarly has no application in this matter. Firstly, the Supreme Court Rules are meant (Rule 3, Bankruptcy and Insolvency General Rules) to apply only where the BIA or its rules have no provision.

There is, in the correct circumstances, provision for the sale of assets under the terms of the BIA . Secondly, the Court of Appeal in Fright v. Fright [5] has directed the application of Rule 43: “…except in the most exceptional of circumstances…” the court is not to approve sales without recourse to the open market that most orders for conduct of sale ensure. No such order for conduct has been sought in this case, nor has the property been offered to the market at large. MERITS

[ 17 ] If I am wrong in respect of the court’s authority to decide this application, I will now move to the merits of the application. [ 18 ] Asset Value . The Trustee submits that the fair market value of the assets is established by their appraised values ( paras . 5 and 6, above). Further, without real evidence on the point, he argues that the Jorgensen reference to “operational” complex in valuation is a remote contingency that does not apply.

Briefly stated, this concept is not defined by Jorgensen, but seems to mean the value to a purchaser intending to use the facilities for its own use, which would be substantially the same as the bankrupt’s. This is opposed to his expressed definition of “non-operational”, as scavenged value. [ 19 ] The Province does not accept this perspective.

Firstly, it argues that the range of values (particularly including the references to “operational complex” or “operational value”) demonstrates that the values have not been sufficiently established, and that the only true fair market value would be that established by offering the assets to arm’s-length purchasers in the open market ( Fright v. Fright , supra , at para.13). The Province also takes exception to the valuation of all equipment at “forced liquidation” or “fire sale” prices. [ 20 ] The Jorgensen and Beairsto valuations of the leasehold properties are within $143,000.00 of each other.

That, of course, is not a trivial sum, but represents a 13% difference or, in other words, a swing of 6.5% from the average. Such a swing in estimates is probably not surprising or alarming. On the other hand, the possibility of greater value as an operational complex cannot be summarily dismissed. [ 21 ] In an effort to contradict the Jorgensen reference to operational value, counsel for the Trustee introduced a supplemental letter of opinion by Beairsto , emphatically and clearly contradicting certain of the bases for the Jorgensen appraisal.

Beairsto says there is no land value per se in leases, and that the operational complex approach simply does not apply. He discusses the “going concern” perspective, but says it has no application for industrial assets such as these. Mr. Hatter, for the Province, argues that this letter has little, if any, probative value. I see the matter slightly differently: the Beairsto letter seeks to impeach aspects of the Jorgensen appraisal. A party cannot tender evidence in that way, impeaching one witness with another.

At the very least, however, and of more import to my considerations, the contradictory letters seem to point out the risk in relying solely on appraisals and opinion evidence and that the alternative valuation of free and open market offers is preferable. [ 22 ] I conclude, therefore, that the valuation evidence to date is not reliable enough to found a sale, particularly when, as is clearly acknowledged by all parties, the offer is non-arm’s length, to a related party. [ 23 ] The Trustee criticizes the Province for not having presented its own evidence of value.

With respect, the Province, at this stage and for these purposes, has no positive duty to gather and present such evidence. Such an obligation would contradict its rights as a secured creditor. The rights of the Province, once again, flow from the efficacy of its security, not the value of the asset per se , and the Trustee has not, in appropriate form, challenged that security. [ 24 ] Priorities . The Trustee has decided the priorities as above ( para . 3).

Other than the Trustee’s conclusions, there has been no formalization of the order of priorities, and the Province specifically challenges the Trustee’s view. To be clear, however, it is not the position of the Province that the proper order need be established for this application; once it is established that the various creditors are secured, their rights vis-à-vis any purchaser are clear, and any dispute is for the secured creditors to work out amongst themselves, or seek adjudication on the point.

The Province raises the point simply to counter any suggestion that, given the total value of the secured debts versus the total value of the assets, its claims are moot. Its claims are not moot if other creditors do not take priority. With regard to the City, for example, Mr. Hatter submits that s. 396(1) of the Local Government Act [6] clearly exempts the claims of the crown from the priority statutorily granted local governments for taxes. He is clear that the Province has not elected to avail itself of this exemption, but the choice remains with the Province to do so. I agree with that submission.

I will not review the other arguments presented by the Province questioning the Trustee’s opinion of priorities, save to say that I accept that by no means are the priorities settled amongst the secured creditors sufficiently to conclude that the Province’s security for FRBC and stumpage is moot. It also seems to me that, except in unusual cases, priority amongst secured creditors is an issue for the secured creditors and rarely could be posited, as here, as an issue between a Trustee and a particular secured creditor. [ 25 ] Marshalling .

The Province has introduced the issue of marshalling into this application. Marshalling, of course, requires that a senior creditor with more than one form of security enforce that security which does the least harm to junior creditors. Mr.

Hatter is correct in pointing out that, until values and, more importantly, priorities are established fully, the issue of marshalling is speculative. [ 26 ] Inspectors’ Approval of the Sale . The Trustee submits that at a meeting of the Trustee and inspectors November 21, 2002, this sale was approved and that the inspectors included Mr. Marson , a representative of the Ministry of Provincial Revenue. Firstly, at least in form, by the time of this meeting the sale was a fait accompli , having been formalized July 19 th , and stated to be effective as at May 1. Moreover, the minutes record the following: A

summary of information regarding values associated with the sale of assets from Woodland Windows Ltd. To Woodland Forest Products Ltd. was provided to all Inspectors (copy attached). A discussion ensued amongst the inspectors and the Trustee regarding the appraisals. The Trustee investigated the spread of values surrounding the values attached to Land and Buildings and reported back to the Inspectors that the Trustee was in agreement with the appraisals.

Be it Resolved that the Trustee not pursue this matter further, that based on the appraised values and comments from the appraiser it appears that the transaction has been conducted at Fair Market Value. MOTION CARRIED A discussion ensued regarding certain transactions [sic] streams involving certain related parties, it was agreed that the transactions did not appear to fit the

definitions of being reviewable . I interpret the discussion at this meeting as centring more on the appraisal values and that the inspectors seemed, at the time, sufficiently satisfied with valuations. That is not the same as approving the sale. The Province submits that, taken in its proper context, this motion approved a valuation for the Trustee’s purposes under s. 91(1); i.e. to establish that the agreement was not void as against the Trustee.

Given the note of discussion following the motion, this seems correct. [ 27 ] More to the point, what if the inspectors had explicitly approved this sale at their November 21 meeting? Section 119(2) of the BIA provides that The decisions and actions of the inspectors are subject to review by the court at the instance of the Trustee or any interested person and the court may revoke or vary any act or decision of the inspectors and it may give such directions, permission or authority as it deems proper in substitution thereof or may refer any matter back to the inspectors for reconsideration.

At the very least, therefore, the Trustee, having brought this matter to the court for review, the court may consider the decision. If it is necessary that the court now decide on the issue presented by s. 119(2) , and if the inspectors approved the sale November 21, I would revoke the decision and remit it to the inspectors. [ 28 ] Inactivity of the Province . It is clear that the Trustee feels there is a positive duty on the Province to act in this matter, be it to seek its own value of the assets, to challenge the decision(

s) of the Trustee in some other, more direct way, or to find a purchaser. I do not accept that argument, nor do I accept that the Province is in any way estopped (my word, not the Trustee’

s) from opposing this application because it has not taken active or proactive steps earlier in the bankruptcy. At the risk of repeating myself, the answer lies in the simple fact that the Province is secured, that its security seems valid (or at least has not been rejected by the Trustee – see paras . 11 to 13 above), and that all proceedings under the BIA are subject to the rights arising from the security ( para . 9, above). Certainly, a creditor may take positive steps to either realize upon or have its security redeemed but the discretion of whether or not to do so is the creditor’s.

It is enough that it rest on its security, and know that any sale or transfer of the property must take effect subject to that security.

[ 29 ] The Trustee asks the court to infer that the Province’s alleged inactivity is caused by its conclusion that it has no value in its security. I reject that inference; it is just as likely that the Province is moving with the tectonic, contemplative speed typical of governments in some situations. [ 30 ] Bad Faith and Public Policy . The applicant argues that, by standing by while WFP paid and reduced various debts thereby possibly improving the Province’s security position, the Province is guilty of bad faith. This, in my view, is a variation on the “positive duty” argument, ( para . 28 above).

Again, a secured creditor such as the Province is entitled to assume that a purchaser such as WFP is fully informed and cognizant of the implications of its choices and acts. I cannot see that the Province was at all directly involved in WFP’s decision to proceed as it has. If WFP’s actions have the effect of benefiting the Province I cannot see that that, in itself, founds an allegation of bad faith. [ 31 ] Similarly, while the loss of 100 jobs with a failed sale is, in social terms, traumatic, it is not for this court to authorize or approve the sale for that public policy reason.

SUMMARY [ 32 ] The court is without legal authority to grant the relief sought. If I am wrong in that conclusion, it is my view that the facts and evidence do not support the application, and for these reasons the application is dismissed. “Master D. Baker”