Integris Credit Union Plaintiff And: All-Wood Fibre Ltd., Caterpillar Financial Services Limited, Business Development Bank of Canada, Transportaction Lease Systems Inc., LWL Holdings Ltd., Pioneer Biomass Inc., Valiant Financial Services Inc., Navigate Capital Corp., Excel Transportation Inc., Jewel Winifred Bates, Gerald Lawrence Bates, Royal Bank of Canada, Blue Chip Leasing Corporation, National Leasing Group Inc., Daimler Truck Financial, Alliance Leasing Ltd., Jim Pattison Industries Ltd.,, 2015 BCSC 1146

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Integris Credit Union v.

All-Wood Fibre Ltd., 2015 BCSC 1146 Date: 20150703 Docket: S152310 Registry: Vancouver Between: Integris Credit Union Plaintiff And: All-Wood Fibre Ltd., Caterpillar Financial Services Limited, Business Development Bank of Canada, Transportaction Lease Systems Inc., LWL Holdings Ltd., Pioneer Biomass Inc., Valiant Financial Services Inc., Navigate Capital Corp., Excel Transportation Inc., Jewel Winifred Bates, Gerald Lawrence Bates, Royal Bank of Canada, Blue Chip Leasing Corporation, National Leasing Group Inc., Daimler Truck Financial, Alliance Leasing Ltd., Jim Pattison Industries Ltd., Arundel Capital Corporation, Varion Capital Corp., doing business as Accord Financial, Accord Financial Ltd., Bodkin Capital Corporation, Woodland Equipment Inc., BHL Capital, a division of Berner Holdings Ltd., Roynat Inc., Fibre-Crown Manufacturing Inc., Liebherr-Canada Ltd., NK Automotive Truck & Diesel Repair Ltd., Equirex Leasing Corp., Mercedes-Benz Financial Services Canada Corporation Defendants Corrected Judgment: The text of the judgment was corrected on the front page on August 14, 2015.

Before: The Honourable Mr. Justice D.M. Masuhara Reasons for Judgment Counsel for Integris Credit Union: C.D. Brousson Counsel for the Receiver: S.A. Dubo Counsel for Mercedes-Benz Financial Services Canada Corporation: G.G. Plottel Counsel for BHL Capital, A division of Berner Holdings Ltd.: R.A. Finlay Place and Date of Hearing: Vancouver, B.C. May 27, 2015 Written Submissions: June 1, 2015 June 3, 2015 Place and Date of Judgment: Vancouver, B.C.

July 3, 2015 Introduction [ 1 ] This is a case involving the insolvency of All-Wood Fibre Ltd. (“All-Wood”). [ 2 ] The court appointed Receiver, KPMG Inc., applies for an order approving the sale of certain property of All-Wood pursuant to an auction agreement. [ 3 ] Two secured creditors, Mercedes-Benz Financial Services Canada Corporation (“MBFS”) and BHL Capital (“BHL”), who supplied trucks to All-Wood, apply for a declaration that the trucks are not subject to the receivership order and an order requiring the Receiver to deliver up the subject trucks to the respective supplier. [ 4 ] All-Wood’s principal line of business was fibre supply planning, procurement, logistics and processing (including portable debarking, grinding, chipping and screening) for the forestry industry.

The company ceased operations on March 9, 2015, severing 51 employees and leaving equipment abandoned at various work sites in British Columbia. The indebtedness of All-Wood to all its creditors is estimated to exceed $8 million. [ 5 ] At the “come back” hearing on March 25, 2015, KPMG Inc. was appointed Receiver in respect of all the assets, undertakings and properties of All-Wood (the “Receivership Order”). The order is based on the court’s Model Receivership Order (the “Model

Order”). [ 6 ] A bankruptcy order was made against All-Wood on March 31, 2015 pursuant to which KPMG Inc. was appointed trustee in bankruptcy of All-Wood. [ 7 ] The Receiver was challenged in carrying out its responsibilities in locating and collecting the equipment of All-Wood as there were no employees or computer systems remaining when the Receiver was appointed. [ 8 ] MBFS states that it finances the acquisition of equipment. [ 9 ] MBFS provided financing to All-Wood for the acquisition of interests in three trucks; a 2014 Freightliner 122SD new; a 2010 Freightliner CA125DC used; and a 2010 Freightliner CA125DC used. [ 10 ] One of the 2010 Freightliner CA125DC was provided to All-Wood under a Conditional Sale Contract and Security Agreement on December 4, 2012.

MBFS registered its interest in the truck on December 10, 2012 in the personal property registry. [ 11 ] The other 2010 Freightliner CA125DC was provided to All-Wood under a Conditional Sale Contract and Security Agreement on January 14, 2013. MBFS registered its interest in the truck on January 16, 2013 in the personal property registry. [ 12 ] The 2014 Freightliner 122SD was provided to All-Wood under a Lease Agreement on December 14, 2014.

MBFS registered its interest in the truck on December 29, 2014. [ 13 ] BHL describes itself as being a leasing company providing lease financing for class 6, 7 and 8 trucks, trailers and a variety of other equipment. It states that it does not, and never has, loaned money or financed the purchase of trucks, trailers or other equipment. [ 14 ] BHL provided under a lease to All-Wood a 2015 Freightliner 122SD 48. The lease agreement is dated May 23, 2014. The Lessees are listed as All-Wood, Lucien Legault, Wendy Lynn Legault and three other corporate lessees.

BHL’s security interest in the truck was registered in the personal property registry on May 23, 2014. [ 15 ] For the purpose of specifically leasing the truck to All-Wood, BHL purchased the truck for $176,500.

The agreement had a purchase option for the truck at the end of the 48-month term for $17,692.60, based on 10% of the vehicle’s purchase price. [ 16 ] The Receiver as part of its assessment of All-Wood’s assets engaged two independent equipment appraisers, Maynards Appraisals and Sterling Equipment Appraisals. [ 17 ] MBFS says that it has extensive experience in remarketing trucks and that the trucks will be remarketed through its remarketing center or public auction and any expenses associated with the trucks and sales commissions will be deducted from the net sales proceeds. [ 18 ] As noted earlier, BHL is in the business of leasing. [ 19 ] On June 8, 2015, I approved the auction sale as put forth by the Receiver.

However, I excluded the subject trucks from the sale of the bases that there was no evidence that the inclusion of the trucks would enhance the package of assets to be auctioned, that MBFS and BHL had the ability and resources to market the trucks on their own, and that MBFS and BHL had raised issue with respect to whether the trucks were subject to the Receivership Order.

I specified terms for the two companies to keep the Receiver notified as to the status of the trucks and to hold monies received for the trucks in trust in the event such were received. [ 20 ] I advised that my determination on whether the trucks fell within the scope of the Receivership Order would follow. [ 21 ] I turn now to that issue; more specifically whether the trucks fall within the definition of Property under the order. Receivership Order [ 22 ] The relevant portions of the Receivership Order which has the same wording as in the Model Receivership Order, except where noted: 1.

Pursuant to Section 243(1) of the BIA and

Section 39 of the LEA KPMG Inc. is hereby appointed Receiver, without security, of all of the assets, undertakings and properties of the Debtor, including all proceeds thereof (the “Property”). Receiver’s Powers 2.

The Receiver is hereby empowered and authorized, but not obligated, to act at once in respect of the Property and, without in any way limiting the generality of the foregoing, the Receiver is hereby expressly empowered and authorized to do any of the following where the Receiver considers it necessary or desirable: … j. to market any or all of the Property, including advertising and soliciting offers in respect of the Property or any part or parts thereof and negotiating such terms and conditions of sale as the Receiver in its discretion may deem appropriate … RECEIVER’S ACCOUNTS 16.

The reasonable fees and disbursements of the Receiver and its legal counsel, in each case at their standard rates and charges, shall

be entitled to and are hereby granted a charge (the “Receiver’s Charge”) on the Property, as security for such fees and disbursements, both before and after the making of this Order in respect of these proceedings, and that the Receiver’s Charge shall form a first charge on the Property in priority to all security interests, trusts, liens, charges and encumbrances, statutory or otherwise, in favour of any Person, but subject to Sections 14.06(7) , 81.4(4) , and 81.6(2) of the BIA . … FUNDING OF THE RECEIVERSHIP 19.

The Receiver be at liberty and it is hereby empowered to borrow by way of a revolving credit or otherwise, such monies from time to time as it may consider necessary or desirable, provided that the outstanding principal amount does not exceed $100,000 (or such greater amount as this Court may by further Order authorize) at any time, at such rate or rates of interest as the Receiver deems advisable for such period or periods of time as it may arrange, for the purpose of funding the exercise of the powers and duties conferred upon the Receiver by this Order, including interim expenditures.

The whole of the Property shall be and is hereby charged by way of a fixed and specific charge (the “Receiver’s Borrowings Charge”) as security for the payment of the monies borrowed, together with interest and charges thereon, in priority to all security interests, trusts, liens, charges and encumbrances, statutory or otherwise, in favour of any Person, but subordinate in priority to the Receiver’s Charge and the charges as set out in Sections 14.06(7) , 81.4(4) , and 81.6(2) of the BIA . … 29.

Any interested party may apply to this Court to vary or amend this Order on not less than seven (7) clear business days’ notice to the Receiver and to any other party likely to be affected by the order sought or upon such other notice, if any, as this Court may order, specifically including an application by any Defendant to authorize the Receiver to release to any Defendant any Property in its possession or control, and to exclude such Property from the priorities set out in the paragraphs 16 and 19 herein. [Italics denoting the hand written addition to the order] Discussion [ 23 ] It is acknowledged by the parties to this hearing that the Receivership Order does not provide an express definition of Property and I am advised there are no cases which have interpreted the term.

The order states that a Receiver is appointed in respect of “all of the assets, undertakings and properties of the Debtor”. The order also states that the Receiver is appointed pursuant to s. 243(1) of the Bankruptcy and Insolvency Act , R.S.C. 1985, c. B-3 (“ BIA ”) which provides a definition of Property under the BIA . [ 24 ] MBFS argues that the definition of the “property” from the BIA cannot be imported. MBFS says that was to be the case then such a reference would have been done expressly.

MBFS and BHL both submit that any determination on what constitutes Property of the debtor should be done according to the contractual rights held by the debtor not by any external statutes. [ 25 ] The Receiver and the plaintiff argue that the term Property should be construed broadly. Particularly, as the order refers to having been made under s. 243(1) of the BIA . The language of the BIA is broad in its reference to property and this breadth should inform the

interpretation of Property. [ 26 ] Section 243(1) of the BIA reads as follows: 243.

(1) Subject to subsection (1.1), on application by a secured creditor, a court may appoint a receiver to do any or all of the following if it considers it to be just or convenient to do so: (

a) take possession of all or substantially all of the inventory, accounts receivable or other property of an insolvent person or bankrupt that was acquired for or used in relation to a business carried on by the insolvent person or bankrupt; (

b) exercise any control that the court considers advisable over that property and over the insolvent person’s or bankrupt’s business; or (

c) take any other action that the court considers advisable.

Section 2 of the BIA defines “property” as: …any type of property, whether situated in Canada or elsewhere, and includes money, goods, things in action, land and every description of property, whether real or personal, legal or equitable, as well as obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property … [ 27 ] In my view, the term Property in the order should be construed broadly.

It is apparent that the drafters intended an expansive notion of what constitutes Property of the debtor when one considers the reference in the order to s. 243(1) of the BIA , s. 39 of the Law and Equity Act , R.S.B.C. 1996, c. 253, the BIA definition of the term “property” and that Property under the order states that it includes all of the “assets, undertakings and properties of the Debtor”. I do not accept the argument that the definition of “property” from the BIA should be ignored. [ 28 ] A broad

interpretation can also be seen in the sole explanatory note in relation to “assets, undertakings and properties”. That note says: “If the Order is made only under section 243(1) of the BIA , the wording “acquired for, or used in relation to a business carried on by the Debtor” should be added at this point in the paragraph to reflect the specific wording of

section 243 of the BIA .” As the order made in the instant matter is made under both the BIA and the Law and Equity Act , the phrase must be taken to be even broader.

[ 29 ] A further argument is that the trucks are not Property under the contracts that BHL and MBFS had with All-Wood. BHL and MBFS point to the language in those agreements that specifically state that All-Wood does not obtain an interest in the title to the trucks. In this regard, they refer to the contracts as “pure leases” as opposed to “financing leases”. [ 30 ] The position of the Receiver in relation to this aspect of the argument is that the agreements relating to the subject trucks are “financing leases” as opposed to “true leases”.

As such, the trucks constitute Property and are subject to the Receivership Order. The Receiver submits that if the agreements are “true leases” then the trucks do not form part of the assets of All-Wood and would not be subject to the Receivership Order. [ 31 ] BHL and MBFS rely upon DaimlerChrysler Services Canada Inc. v. Cameron, 2007 BCCA 144 , at paras. 8-9 : [8] Paragraph 55(2)(

a) of the PPSA states that

Part 5, which sets out the rights and remedies on default, "does not apply to a transaction referred to in

section 3"; namely, a true lease. In the event of default, the contractual rights and remedies as set out the lease, in addition to any common law rights and remedies, apply. As between the lessor and the lessee, a true lease never actually assumes the characteristics of a security interest. [9] In contrast, a security lease is subject to

Part 5. Accordingly, the relief available under

Part 5 applies, and a lessor under a security lease is limited to the statutory remedies. With certain exceptions, a secured party, whose collateral constitutes "consumer goods", must make an election as to remedies. The secured party - in this context, the lessor - may sue under the security agreement. Alternatively, the lessor may choose to enforce its security by seizure or repossession or accept a surrender of goods by the debtor lessee. [ 32 ] In determining whether an agreement is a security lease (a financial lease) or not, the court of appeal in DaimlerChrysler at paras. 21-24 stated: [21] Paragraph 2(1)(

a) of the PPSA reflects the centrality of the substance test in characterizing a lease as either a security lease or a true lease. The court must scrutinize the relationship between the lessor and lessee to ascertain whether in that relationship, the indicia of a security agreement are evident. If, in substance, the impugned transaction creates a security interest, it is a security agreement, irrespective of its form and the parties' subjective intention when they entered into it (Ronald C.C. Cuming, "True Leases and Security Leases under Canadian Personal Property Acts" (1983), 7 Can. Bus. L.J. 251 at 264). [22] The process of characterization is guided by numerous factors. In his

article at 285, Professor Cuming refers to a helpful list of factors derived from American jurisprudence.

The factors that support a finding that the lease is a security lease include: 1. whether there was an option to purchase for a nominal sum; 2. whether there was a provision in the lease granting the lessee an equity or property interest in the equipment; 3. whether the nature of the lessor's business was to act as a financing agency; 4. whether the lessee paid a sales tax incident to acquisition of the equipment; 5. whether the lessee paid all other taxes incident to ownership of the equipment; 6. whether the lessee was responsible for comprehensive insurance on the equipment; 7. whether the lessee was required to pay any and all licence fees for operation of the equipment and to maintain the equipment at his expense; 8. whether the agreement placed the entire risk of loss upon the lessee; 9. whether the agreement included a clause permitting the lessor to accelerate the payment of rent upon default of the lessee and granted remedies similar to those of a mortgagee; 10. whether the equipment subject to the agreement was selected by the lessee and purchased by the lessor for this specific lease; 11. whether the lessee was required to pay a substantial security deposit in order to obtain the equipment; 12. whether there was a default provision in the lease inordinately favourable to the lessor; 13. whether there was a provision in the lease for liquidated damages; 14. whether there was a provision disclaiming warranties of fitness and/or merchantability on the part of the lessor; and 15. whether the aggregate rentals approximate the value or purchase price of the equipment. [23] Various Canadian courts have been influenced by similar considerations.

In the case of Re Bronson (1995), 34 C.B.R. (3d) 255 , [1995] B.C.J. No. 1579 (S.C. Master) , aff'd [1996] B.C.J. No. 216 (S.C.) followed by the chambers judge, the master rendered his decision by considering, inter alia , Professor Cuming's list of factors. [24] Another relevant factor is the term of the lease.

A lease for a short period generally indicates a true lease, since the leased property will have a significant residual useful life upon expiration of the lease and can be leased again or sold by the lessor ( Ibid . at 269). [ 33 ] There are a number of characteristics in the agreements between All-Wood and MBFS and BHL which support a conclusion that the leases are financing leases and not true leases. In both the BHL and MBFS leases there exists an option to purchase the vehicles

after an express period of time. In the BHL lease, for example, at the end of the term of the lease the truck could be purchased for 10% of the market value of the vehicle.

BHL disputes that 10% of the price of the vehicle can be considered “nominal”; however, in DaimlerChrysler , an option to purchase goods at a price “less than their expected market value” was enough to demonstrate equity in the goods and have the lease characterized as a security agreement (para. 44). [ 34 ] Under both the BHL and the MBFS leases All-Wood was responsible for paying all applicable taxes, insurance costs, and all fees associated with maintaining the vehicles.

The BHL and MBFS leases also both contained a number of similar provisions including: a clause allocating any risk of loss entirely on All-Wood, an acceleration clause if All-Wood defaulted on any payments under the agreement, and default provisions that were significantly favourable to BHL and MBFS. [ 35 ] Further, the MBFS lease required that a security deposit be paid; no security deposit was required under the BHL lease, however, under the agreement the first month’s rental fee was four times higher than the fee paid in the remaining months.

Another significant indicia of a financing lease is that both the BHL and MBFS leases were long-term (48 months) with the aggregate of the rental payments exceeding the market value of the vehicles at the time that the lease was signed. [ 36 ] The BHL leases and the MBFS leases are not identical, additional indicia from DaimlerChrysler of a financing lease are also individually present in those leases.

For example, the truck leased by BHL to All-Wood was selected by All-Wood and specifically purchased by BHL for that purpose; there is no evidence that the vehicles leased to All-Wood by MBFS were specifically selected or purchased. Conversely, the MBFS lease specifically references liquidated damages whereas the BHL lease does not. [ 37 ] BHL and MBFS point to the fact that the lease agreements specifically say that title and ownership of the vehicles remained with the lessors under the agreements and therefore no equity or property interest was transferred.

BHL also notes that they are in the business of leasing, not financing, and that the truck was purchased for the specific purpose of leasing it to All-Wood. [ 38 ] The fact that the BHL and MBFS leases both meet nearly every indicia of a financing lease from DaimlerChrysler militates against any argument that these were intended to be true leases. Taken individually, each of these indicia may not be enough evidence of the intention to establish a financing lease; however, the confluence of these factors strongly indicates the existence of a secured lease.

The Court in DaimlerChrysler does not suggest that some of these factors should be weighted with greater import. It is notable, however, that in the instant matter these were long term leases where the lessor’s capital investment was eventually matched and exceeded by the lessee’s monthly payments with an option to purchase at the end of the lease. This was a significant factor in DaimlerChrysler that indicated a financing lease as this structure was noted to be similar to that of an instalment purchase contract. [ 39 ] I find the BHL and MBFS agreements are financing leases over the vehicles in question.

Conclusion [ 40 ] Given my

interpretation of the term Property, the trucks fall within the scope of the Receivership Order. Further, the agreements between All-Wood and BHL and MBFS are financing leases; as a result the trucks fall within the scope of the Receivership Order. “The Honourable Mr. Justice Masuhara”