Wolfe et al v Taylor et al, 2020 MBCA 44

Citation: Wolfe et al v Taylor et al, 2020 MBCA 44 Date: 20200427 Dockets: AI18-30-09165; AI18-30-09166; AI18-30-09171 IN THE COURT OF APPEAL OF MANITOBA Coram: Chief Justice Richard J. Chartier Mr. Justice Marc M. Monnin Madam Justice Karen I. Simonsen BETWEEN : ) F. J. Trippier and ) I. Vakurova ) for the Appellants ) lincoln wolfe and 5606269 ) R. A. McFadyen manitoba ltd. ) for the Respondents ) Lincoln Wolfe and (Applicants) Respondents ) 5606269 Manitoba Ltd . ) - and - ) J. R. N. Boudreau ) for the Interveners duanne taylor and 5608067 ) Manitoba ltd. ) J. M. Lee, Q.C. and ) J. J.

Burnell (Respondents) Appellants ) for Deloitte Restructuring ) Inc., the Court-Appointed - and - ) Liquidator for Taylor ) Bros. Farm Ltd. and Edwin TAYLOR BROS. FARM LTD. and EDWIN ) Potato Growers Ltd. POTATO GROWERS LTD. ) ) T. W. Turner (Respondents) ) for Pitblado LLP,

a) judgment creditor of - and - ) Taylor Bros. Farm Ltd. ) and Edwin Potato GERALD WIEBE and MARTHA WIEBE ) Growers Ltd. ) Interveners ) Appeals heard: ) August 27, 2019 ) ) Judgment delivered: ) April 27, 2020 MONNIN and SIMONSEN JJA [ 1 ] These three appeals arise from liquidation proceedings under the provisions of The Corporations Act , CCSM c C225 (the Act ) , with respect to the assets of two corporations, namely, Taylor Bros. Farm Ltd. (TBF) and Edwin Potato Growers Ltd. (EPG).

By a liquidation order dated April 28, 2017, the liquidation judge appointed Deloitte Restructuring Inc. (the liquidator) the liquidator of the assets and property of TBF and EPG. Those proceedings followed their course and culminated in the granting of the three orders under appeal in these proceedings:

a) an order pronounced August 31, 2018, whereby the liquidation judge ordered that certain funds in the hands of the liquidator be reallocated between TBF and EPG, allowing for the claim of a secured creditor, R. L. Wolfe Ltd. (RLW), to be paid in full, and the claims of a judgment creditor, the Pitblado LLP law firm (Pitblado), to be paid to a greater extent (the Marshalling Order);

b) another order pronounced August 31, 2018, whereby the liquidation judge approved a distribution

schedule proposed by the liquidator (the Distribution Order); and

c) an order pronounced September 25, 2018, whereby the liquidation judge granted priority to the claims of Pitblado, to the extent not otherwise satisfied by the Distribution Order, over any other unsecured creditor of TBF and EPG notwithstanding a bankruptcy of either (the Supplemental Order). Background History and Corporate Structure [ 2 ] In early 2008, Lincoln Wolfe (Wolfe) and Duanne Taylor (Taylor) began farming together using two corporate ent ities, TBF and EPG.

The shares of those two companies were held equally by Wolfe and Taylor through their own personal holding companies, 5606269 Manitoba Ltd. (269) for Wolfe and 5608067 Manitoba Ltd. (067) for Taylor. Those two individuals entered into a unanimous shareholders agreement (USA) to define their relationships with each other and with TBF. [ 3 ] TBF and EPG essentially carried on as one business operation. While EPG owned much of the land, all of the active farming operations were carried on through TBF.

All of the obligations of TBF and EPG to the Bank of Montreal (BMO) were secured by a first charge over all of the assets of TBF and EPG. [ 4 ] Disputes with respect to the farming operation arose between Taylor and Wolfe. Wolfe moved for the appointment of a liquidator and dissolution of the companies under the Act . The application was stayed by a motion judge to allow the dispute to proceed to arbitration. The arbitration proceedings resulted in an award on April 20, 2016, ordering the liquidation of all of the assets of TBF and EPG in accordance with

section 207 of the Act . However, prior to the award being implemented, the parties agreed to a postponement of the liquidation until a series of interim steps were completed, including the determination of issues with respect to the amounts owing to TBF and EPG by either of the shareholders or companies controlled by them. [ 5 ] In a subsequent award made on August 24, 2016, the arbitrator dealt with the amounts owing between the respective corporations and individuals.

Those amounts included debts owing by TBF to Farm Credit Canada (FCC) and the Bank of Nova Scotia (BNS) on account of input costs for previous farming years which Wolfe, through RLW (a corporation that he owned and controlled), had paid and received assignments of the securities held by those creditors. The allegation before the arbitrator was that Wolfe should not be entitled to the benefit of the securities he held on those loans and the benefits of the transfer since he had obtained them at a discounted amount, nor should TBF be liable for the increased interest rates charged as a result of the default.

Wolfe’s position was that he had advanced those funds to the creditors in order to ensure the continued operation of the farming operation. [ 6 ] The arbitrator accepted Wolfe’s version of events and confirmed that TBF owed RLW $1,823,842 for the loans it acquired from secured creditors, including the FCC and BNS loans. [ 7 ] Between May and December 2016, Wolfe and Taylor agreed to liquidate the majority of the equipment owned by TBF and EPG through a third-party auctioneer.

By December 2016, the primary assets of TBF and EPG that remained were approximately 2,900 acres of land and physical building structures located upon those lands. [ 8 ] Wolfe and Taylor were unable to reach an agreement on how to deal with those remaining assets and Wolfe proceeded before the Court of Queen’s Bench to enforce the April 20, 2016 arbitration decision to have a liquidator appointed. The liquidation judge granted that request on April 28, 2017 with the liquidation order being filed on June 5, 2017.

A request was made to stay that liquidation order pending resolution of various matters which remained subject to the arbitration proceedings. The stay request was dismissed and appealed to this Court. By decision dated August 11, 2017, the application to stay the liquidation order was dismissed by a chambers judge in our Court ( see 2017 MBCA 74 ).

The Liquidation Proceedings [ 9 ] In its first report of October 31, 2017, the liquidator outlined the steps it had taken to secure the assets of the corporations and deal with their indebtedness. [ 10 ] The liquidator confirmed that BMO was the principal lender to the companies and held various first-ranking security positions against both companies and their assets. It was owed approximately $5,200,000.

As well, the liquidator confirmed that, during 2015, RLW purchased indebtedness owed by TBF to BNS, FCC and the Royal Bank of Canada (RBC). [ 11 ] Given a lack of cooperation between the parties on how to proceed, the liquidator proposed and received approval from the Court of a liquidation plan which included a sale process with respect to the assets of the companies.

As well, it proposed and received approval for a claims process. [ 12 ] By the time of the second report dated March 26, 2018, the liquidator had updated the security claims and they were as follows: • BMO.................................................................. $5,182,300 • RLW.................................................................. $2,407,367 • Gerald and Martha Wiebe (the Wiebes)................ $788,711 • a small amount to another party Unsecured debt included amounts owed pursuant to the arbitration award to Taylor and charges to the shareholders’ accounts of both corporations reflecting the amounts in the award.

However, by that time, the liquidator had formed the view that the proceeds from the sale process could well be insufficient to pay out all the companies’ secured and unsecured creditors’ claims in full.

[ 13 ] In a supplement to the second report, the liquidator confirmed the validity and enforceability of the security held by BMO against the assets of both TBF and EPG, the security held by the Wiebes against the assets of EPG and the security held by RLW against the assets of TBF. It is common ground that the BNS and RBC portions of TBF’s debt to RLW were guaranteed by EPG but the FCC portion was not. The liquidator also confirmed the amounts owing to BMO and to RLW but was not able to do so with respect to the Wiebes.

Given that the Wiebes’ claim ranked in priority to the RLW claim in respect of the lands owned by EPG, the liquidator was not in a position to recommend a distribution to either RLW or the Wiebes. The liquidator recommended a distribution to BMO in the amount of $5,518,039 in satisfaction of both companies’ obligations. This distribution was premised on the successful sale of the lands and equipment. [ 14 ] On April 13, 2018, the liquidation judge approved the sale and a vesting order. The sale and distribution of proceeds were made subject to certain conditions, namely:

a) With respect to priorities, the net proceeds from the sale would stand in the place and stead of the assets and any claims and encumbrances would attach to the net proceeds with the same priority as they had immediately prior to the sale.

b) The distribution could be made to BMO without prejudice to the rights of the parties as to how the distribution amounts would be allocated as between the assets of TBF and EPG and the costs of the liquidation proceedings would be allocated as between the assets of TBF and EPG; the allocations would be deferred to be made by the Court at a later date. [ 15 ] The sale of the assets of TBF and EPG realised the amount of $9,357,455.

The receipts were allocated by the liquidator as follows: • TBF................................................................... $4,238,475 • EPG ................................................................... $5,118,980 [ 16 ] On completion of the sale of the lands, the BMO debt was paid in full. BMO’s own internal allocation of the debt between TBF and EPG, based on a payment statement

summary provided by BMO, was as follows: • TBF................................................................... $3,838,986 • EPG................................................................... $1,679,053 This was reflected in the liquidator’s proposed distribution

schedule as at May 30, 2018. The result was that considerable funds were left remaining in EPG but limited funds remained in TBF. Marshalling Application [ 17 ] RLW filed a motion in June 2018, seeking the application of “the equitable doctrine of marshalling” as between the secured creditors of TBF and EPG to have the debt owing to BMO by those two companies paid, or deemed to have been paid, from the proceeds realised from the sale of EPG assets to a greater extent than shown in the proposed distribution

schedule of the liquidator. [ 18 ] On the hearing of the marshalling application, RLW had agreed that the Wiebes would have a holdback from EPG funds pending a final determination of the quantum of their claim. The reallocation that RLW proposed would therefore not prejudice them.

As well, Pitblado, a judgment creditor by virtue of the registration of two judgments for legal services, was also present seeking to have its priority against the TBF and EPG lands maintained. [ 19 ] In a brief endorsement, the liquidation judge, acknowledging that he was unable to determine exactly the extent of RLW’s secured interest—in particular, as assigned from FCC—was of the opinion that RLW had access to both funds (presumably the proceeds from the sale of the TBF and EPG lands). [ 20 ] As such, the liquidation judge was incorrectly of the view that RLW was a secured creditor in respect of both corporate debtors and it was irrelevant whether the doctrine of marshalling was applicable.

In his conclusion, he held that RLW was entitled to the reallocation sought to the extent that its secured interest in both funds permitted. [ 21 ] The initial order prepared by the successful party, RLW, and provided to the judge for signing, made a reference to the doctrine of marshalling. In a second endorsement dated July 27, 2018, the liquidation judge stipulated that the order should not refer to that doctrine. In the same supplemental endorsement, the liquidation judge recognised that he had not dealt with the claim advanced by Pitblado that it had a priority over other unsecured creditors.

That issue was deferred to a later hearing. [ 22 ] Subsequently, in a court appearance on August 31, 2018, scheduled to deal with the liquidator’s request for approval of a distribution schedule, the liquidation judge confirmed that it was his intention to allow the reallocation of funds on an equitable basis similar to a marshalling principle. [ 23 ] In the same proceeding, the liquidation judge was asked to grant Pitblado a priority over unsecured creditors as a result of it being a judgment creditor and reallocate funds from EPG to TBF to satisfy its judgment against TBF.

Again, this was opposed by Taylor on the grounds that marshalling was not available. The liquidation judge disagreed and allowed Pitblado to rank in priority above the unsecured creditors with respect to the proceeds from the sale of the lands behind only RLW and the Wiebes and also allowed reallocation in favour of Pitblado. [ 24 ] At that appearance of August 31, 2018, the liquidation judge was also asked to approve the distribution to the Wiebes of their claim on EPG assets. This was opposed by Taylor, arguing that it had not been properly quantified before being accepted by the liquidator.

The liquidation judge, finding that the liquidator had followed the claims process in dealing with the matter, confirmed the priority and the amount.

[ 25 ] The liquidator accepted, as part of the EPG claims process, a claim by TBF in the amount of $916,336 as against EPG. The basis for that claim were general ledger details from the books and records of TBF and the December 31, 2015 financial statement for EPG which indicated that EPG was indebted to TBF in that amount. [ 26 ] In the proceedings of August 31, 2018, dealing with the liquidator’s further report before the liquidation judge, Taylor sought to contest both the amount and the underlying indebtedness of EPG to TBF.

It is unclear from the transcript of the proceedings whether the liquidation judge ever turned his attention to that issue. However, with the liquidation judge having accepted that a reallocation should occur, counsel for the liquidator made it clear that there were no longer funds available to satisfy that indebtedness. The matter was therefore moot. Issues [ 27 ] These appeals raise the following issues:

a) as to the Marshalling Order, whether the liquidation judge erred in ordering the reallocation of the BMO debt between TBF and EPG such as to allow RLW to recover fully on its securities acquired from BNS, FCC and RBC and to allow Pitblado to make a more substantial recovery, ahead of unsecured creditors;

b) as to the Distribution Order, whether the liquidation judge erred in dismissing the challenge to the claims of the Wiebes and TBF in the EPG claims process and, if the Marshalling Order is set aside, whether the intercompany debt claim between TBF and EPG should be reviewed; and

c) as to the Supplemental Order, whether Pitblado, as a judgment creditor, was entitled to rank in priority to unsecured creditors and benefit from the reallocation notwithstanding the potential bankruptcy of TBF or EPG. Standard of Review [ 28 ] The liquidation proceedings were conducted pursuant to the provisions of the Act (see

section 207 and following). [ 29 ] Pursuant to those provisions, a court has the power to make a number of different orders it thinks fit, including:

a) orders determining the validity of any claims made against a corporation (see

section 210(e));

b) orders approving payment, satisfaction or compromise of claims (see

section 210(h)); and

c) orders giving directions on any matter arising in the liquidation (see

section 210(j)). [ 30 ] These orders were made in the course of the Court’s supervision of the liquidation. They are, for the most part, discretionary orders for which a liquidation judge is entitled to significant deference. Unless the liquidation judge has misdirected himself or the order is so wrong as to amount to an injustice, appellate interference is not justified (see Perth Services Ltd v Quinton et al , 2009 MBCA 81 ).

Issue #1—The Marshalling Order The Doctrine of Marshalling [ 31 ] Marshalling is an equitable remedy, intended to protect the recovery of a junior creditor against the arbitrary action of a senior creditor, and to thereby treat all secured creditors equitably. [ 32 ] While its origin may be as early as Roman civil law, it found its way into English law in the mid-17th century (see Bruce MacDougall, “Marshalling and the Personal Property Security Acts: Doing Unto Others. . .” (1994) 28:1 UBC L Rev 91 at 91, online (pdf): Allard Research Commons < commons.allard.ubc.ca/fac_pubs/220 >.

One of the most recognised statements of the doctrine was set out by Lord Eldon in Aldrich v Cooper (1803), 8 Ves Jun 382, 32 ER 402 (Ch (Eng)) (at p 407): . . . a person having two funds shall not by his election disappoint the party having only one fund; and equity, to satisfy both, will throw him, who has two funds, upon that, which can be affected by him only; to the intent that the only fund, to which the other has access may remain clear to him. [ 33 ] To obtain marshalling, certain specific criteria must be met.

These criteria include the requirements that: two or more creditors share a single common debtor ; and the senior creditor has a claim against two of the debtor’s funds, while the junior creditor, ranking behind the doubly secured senior creditor, has recourse to only one (see Green v Bank of Montreal , 1999 CarswellOnt 3954 (CA) ) . [ 34 ] The Supreme Court of Canada has not discussed marshalling in any detail. The most recent decisions of this Court addressing the doctrine are more than 100 years old (see In Re Hamilton Trusts , 1895 CanLII 155 ; and Dominion Lumber & Fuel Co v Gelfand , 1916 CarswellMan 110 ).

In both Hamilton and Dominion Lumber , this Court declined to grant marshalling because there was no single common debtor. [ 35 ] An exception to the single common debtor rule has developed in situations where a surety and principal relationship exists between the two debtors (see Brown v Canadian Imperial Bank of Commerce , 1985 CarswellOnt 729 (SC (H Ct J))). [ 36 ] Furthermore, as stated in his text, Walter M Traub, Falconbridge on Mortgages , 5th ed (Toronto: Thomson Reuters, 2003) (loose-leaf updated 2019, release 29) at 14-23, the single common debtor requirement and a general exception can be described as follows based upon the decisions of Ex parte Kendall (1811), 17 Ves Jun 514 , 34 ER 199 ; and Ernst Bros Co v Canada Permanent Mortgage Corp , [1920] OJ No 147 ( Ont SC (HC Div) ) :

It is often stated that marshalling does not apply unless the creditors, in the language of Lord Eldon, “both are creditors of the sameperson” [quoting from Kendall at p 201]. . . . While, however, the ordinary case for the application of the doctrine is that of twocreditors and a common debtor, it is sufficient that as between the persons interested [in] the two debts ought to be paid by the sameperson even though that person may not be directly liable to the creditor for the two debts. [37] In Ernst, Orde J formulated the doctrine as follows (at para 24): . . .

It must, of course, be almost universally the case that in the application of the doctrine there will be a single debtor and twocreditors, and that in cases where there are two debtors the doctrine is inapplicable, not because there are two debtors but because itwould be inequitable as between those debtors to marshal the securities. . . . Bars to Marshalling [38] Jurisprudence recognises bars to marshalling. The first one is that marshalling will not be permitted if it would interferewith the superior right of a secured creditor to pursue its remedy against either of the two funds.

The other bar, for our purposes, is thatthe doctrine is applicable unless it causes prejudice to a third party. Potential prejudice to unsecured creditors is irrelevant (seeWilliamson v Loonstra (1973), (BC SC), 34 DLR (3d) 275 (BC SC), cited in St Gregor Credit Union Ltd v Zimmer,2004 SKQB 75; and Ledco Ltd, Re, 2008 CarswellOnt 6137 (Sup Ct J)).

Position of Taylor and 067 [39] With respect to the appeal of the Marshalling Order, Taylor and 067 take the position that the liquidation judgecommitted reversible error by misapprehending the facts upon which he reached his conclusion and by failing to appreciate the law onmarshalling.

They recognise that the standard of review on the misapprehension is one of palpable and overriding error but argue thatthe failure to appreciate the requirements of the law on marshalling is to be reviewed on a standard of correctness. [40] As to the misapprehension, they point to the liquidation judge’s comments in his first endorsement, whereby heproceeded on the belief that RLW held security over the assets of EPG such that marshalling was not required, an obvious error. [41] As to the misapplication of the law, they argue that marshalling was and is not available given that there is no singlecommon debtor and that the exception relating to sureties and principals does not apply to the fact situation, particularly given that therewas no guarantee of the FCC debt by EPG. [42] Taylor and 067 also argue that there was no second fund available as RLW did not have access to both funds (being theproceeds of the sale of the assets of TBF and EPG) for which the senior creditor, BMO, had security.

In their submission, the guaranteegiven by EPG did not constitute a fund at the disposal of RLW. [43] For these reasons, they argue that there is no basis upon which the liquidation judge could find that RLW is entitled tothe funds remaining in EPG for the purposes of satisfying the debts RLW had purchased from the creditors of TBF. Position of Wolfe and 269 [44] In response, Wolfe argues marshalling is available simply because TBF and EPG should be treated as one entity. It wasadmitted in cross-examination by Taylor that the farming operation was conducted by both companies as one.

The mutual cross-guarantees given to BMO by both entities in like amounts confirm that they were, in essence, being operated jointly. This would satisfythe one-debtor rule for the purposes of applying the doctrine of marshalling and would also address the issue of two funds as the singledebtor would be the source of the second fund. Wolfe also argues that there has been recognition that the doctrine can be applied insituations of two or more debtors as long as the matter relates to the same debt (see Condominium Corporation No 082 6970 v 1117398Alberta Ltd, 2012 ABQB 233 (Condo Corp 6970)).

It is not limited to the precise principal/surety exception articulated in the Browndecision. Position of the Wiebes [45] The Wiebes acknowledge that the proposal advanced by Wolfe would not affect their interests as he requested that theEPG assets be subject to a holdback to satisfy their claim in priority to the reallocation of the BMO debt repayment. As such, there is noprejudice to a secured third party. The quantification of the Wiebes’ claim is another issue and will be dealt with in the discussion of theDistribution Order.

Position of Pitblado [46] Pitblado agrees with Wolfe and says that it too should benefit from the doctrine of marshalling as its judgments made itakin to a secured creditor or, at the very least, that it should rank above other unsecured creditors. As mentioned previously, at thehearing of August 31, 2018, Pitblado advanced the argument that it should rank as a junior secured creditor.

Analysis [47] The effect of the Marshalling Order was to reallocate between TBF and EPG funds in the hands of the liquidator toallow RLW to realise on its securities to a greater extent and provide funds to satisfy Pitblado’s judgments. [48] The liquidation judge reached his first decision on a factually incorrect premise, namely, that RLW had access to theassets of both TBF and EPG. That was an error and led him to the initial finding that marshalling was not required. It was a clear andpalpable error. He then proceeded to reach a similar outcome by, in essence, ordering marshalling without calling it so.

There was nobasis for him to do so in law. This was also reversible error.

[ 49 ] In our view, marshalling is not available on the facts of this case as there is not a single common debtor. RLW argues that marshalling in favour of itself and Pitblado should be allowed on the basis that the single common debtor criterion is met because TBF and EPG should be considered as one entity. In our view, EPG and TBF can only be treated as one entity if the corporate veil between them is pierced.

Piercing the Corporate Veil [ 50 ] Piercing the corporate veil in the context of marshalling has been the subject of considerable American authority (see Paul AU Ali, Marshalling of Securities: Equity and the Priority-Ranking of Secured Debt (Oxford: Clarendon Press, 1999) at 147-53 ), and has been mentioned by one Canadian court. In Montmor Investments Ltd v Montreal Trust Co , 1984 CarswellBC 130 (SC) , McKenzie J discussed the possibility of piercing the corporate veil to allow marshalling but declined to do so.

As explained by Professor MacDougall (MacDougall at pp 105-6): The question of two legal persons being considered a common debtor for the purposes of marshalling will often arise in the context of a corporate debtor. The court in [ Montmor ] . . . alluded to the possibility that a corporate veil could be lifted so as to make a shareholder and the company a common debtor for the purposes of the doctrine of marshalling. However, in that case, the court found that there was not such unity between the various corporate entities to justify lifting the corporate veil.

In the U.S., most courts have declined to lift the corporate veil so as to use the doctrine of marshalling because the proponent has not met the high standard of proof (clear and convincing evidence) required to rebut the presumption of separate entities. . . . The decision to lift the corporate veil will be made in accordance with the general rules of when it is appropriate to do so. . . . [emphasis added] [ 51 ] Canadian courts have been very reluctant to pierce the corporate veil, whether by looking behind the corporation at the shareholder or by treating two or more corporations as one entity.

Generally, the separate identity of related or integrated corporations has been disregarded only where there is evidence that one corporation is a subsidiary, which is completely dominated by its parent, such that it does not operate independently—almost invariably with an improper purpose; or there is clear evidence establishing that one corporation is an express or implied agent of the other corporation.

That said, as an exception to the general proposition that the corporate veil should be lifted only in cases of illegality or agency, some courts have recognised a “group enterprise” [1] or “single business entity” concept [2] where an injustice would otherwise result , but this has been carefully limited (see Salomon v Salomon & Co; Salomon & Co v Salomon , [1897]

(1896) AC 22 (HL (Eng)); Fairview Donut Inc v The TDL Group Corp , 2012 ONSC 1252 , affirmed 2012 ONCA 867 , leave to appeal to SCC refused, 35207 (16 May 2013) ; and Teti and ITET Corp v Mueller Water Products , 2015 ONSC 4434 at paras 17-21 ). [ 52 ] The reason for the courts’ reluctance to pierce the corporate veil is clear. As stated in CED 4th (online), Business Corporations (Ont), “Introduction: Characteristics of Corporation: Limited Liability: Piercing or Lifting Corporate Veil” (I.2.(b).(ii)) (at para 35): If investment is to be encouraged, it is necessary that stability prevail.

The constant recognition of corporate personality promotes stability, for otherwise investors and business people would be unable to predict when the corporate form would be respected and when it would not, and thus no confidence would be placed in it. The need for stability justifies the limited willingness of the courts to pierce the corporate veil. [ 53 ] In this case, the evidence does not establish the domination of either TBF or EPG by the other for improper purposes, or otherwise, nor an agency relationship between them.

Furthermore, there is not sufficiently clear and convincing evidence of the unity between the two companies to support a finding that they should be treated as one. The Operation of TBF and EPG [ 54 ] As previously stated, for many years, starting in 2008, TBF and EPG were engaged in a farming enterprise. The two companies had the same owners and ownership structure. They provided full security and cross-guarantees to their primary secured creditor, BMO.

While Taylor acknowledged on cross-examination that the companies were conducting business together, with EPG effectively operating as part of TBF, this arrangement is typical of the manner by which many enterprises structure and conduct their affairs. [ 55 ] Furthermore, there is significant evidence indicating that TBF and EPG were operated as separate entities throughout: • At the outset of Wolfe’s involvement in the business, a decision was made to conduct the farming operation through two corporations as opposed to another business structure, such as a partnership. • The USA signed by Wolfe and Taylor was in relation to TBF only. • EPG was solely a landholding company whereas TBF operated the farm (and also owned some farmland).

The lands held by the two companies were not owned jointly; each held separate parcels. Agricultural buildings were situated on land owned by EPG while a farm home, older farm buildings and a vacant residence were on land owned by TBF. • TBF employed about 40 people during the growing season and had liabilities to these employees.

There is no evidence that EPG shared these liabilities. • Although the evidence includes a Combined Financial Statement for TBF (together with EPG, 067 and 269) as of December 31, 2013, there are also Non-Combined Financial Statements for TBF only. • The arbitration award dated August 24, 2016 addressed an issue regarding Taylor’s remuneration as an employee of TBF during the years 2013 and 2016. The issue involved

interpretation of a contract between TBF and Taylor—that is, whether “profits of the

employer” meant only profits from the operation of TBF or also profits from the sale of TBF lands and profits from EPG.

Interestingly, contrary to the positions taken on these appeals, Wolfe argued before the arbitrator that profits from EPG should not be included as TBF was the only party named in the employment contract, and Taylor argued that profits from EPG should be included because the parties always treated EPG and TBF as a single entity. • Land titles registrations indicate that, over many years, the two companies gave individually secured mortgages to BMO and only the last $10,000,000 credit advance by BMO was a jointly secured debt on the land owned by each corporation. • In 2014, BMO’s term sheets for its loans set different credit limits for each corporation: $4,308,475 for TBF and $1,993,737.64 for EPG. • BMO kept track of the amounts loaned to each corporation which is how it generated its payout statements.

The parties were aware of this as counsel for Wolfe sent an email to counsel for Taylor on May 7, 2016, confirming an agreement between the parties that money received from renting EPG and TBF lands should be forwarded to BMO “with specific instructions that the amounts be applied to the credit of TBF against the outstanding debt owing by TBF to BMO on the line of credit.” • TBF borrowed money from FCC, BNS and RBC, and provided security to those entities.

EPG only provided guarantees on those debts and did not provide a guarantee to FCC. • The Wiebes are secured creditors of EPG but not of TBF. • Pitblado, lawyers for both companies, sued TBF and EPG separately and obtained default judgment against each, treating them as separate entities. • The liquidator’s instructions to creditors indicated that the creditor should set out its claims against TBF and its claims against EPG separately. • The liquidator has advanced a claim for an intercompany debt, owed by EPG to TBF, in excess of $900,000. [ 56 ] In these circumstances, RLW has not established that it is equitable for the corporate veil between TBF and EPG to be pierced such that they should be considered one entity.

The single common debtor criterion has not been satisfied. Principal/Surety Exception [ 57 ] An exception to the single common debtor rule has developed related to sureties and principals. We are of the view that the facts of this case do not bring it within that exception. The first factual problem is that a major component of the RLW debt, the FCC loan, is not the subject of any guarantee by EPG to TBF.

As conceded by RLW in argument on appeal, the principal/surety exception has no application in the facts of this case, even where guarantees were provided. [ 58 ] In Brown at para 12, the Court explained the exception, adopting the following passage from the decision of Bell J in the Supreme Court of Pennsylvania case of Neff v Miller , 8 PA 347 (1848) : Here is a surety, whose money has been applied in payment of the debt of his principal, to the exclusion of his own proper creditors.

That he would be entitled to come in, by way of substitution, upon the estate of the principal, is every-day equity; and I think it equally clear, that his creditor, who has suffered by the appropriation of a fund which otherwise would have been available for the discharge of his claim, may well ask to stand upon this equity, to the extent of the deprivation to which he has been subjected. [ 59 ] Similarly, according to Halsbury’s Laws of Canada (online), Guarantee and Indemnity , “The Rights of a Surety: As Against the Creditor: Securities in Favour of the Creditor” (V.1.(5)) at HGI-234 “Surety Entitled to Securities Received by Creditor from Principal” (Cum Supp – 1 June 2019) : . . .

It is an ancient principle, . . . founded upon the equitable doctrine of marshalling, . . . that unless otherwise agreed . . . on payment or performance by the surety of the guaranteed obligation, . . . the surety has the right to the benefit of all securities that the creditor has received from the principal debtor in respect of the debt in order to enable the surety to obtain satisfaction for what the surety has paid. . . . Similar equitable principle governs marshalling of funds and securities.

The surety’s rights with respect to securities existing in respect of the guaranteed obligation are derived from the equitable doctrine imposed upon the principal debtor to indemnify the surety. . . . In addition, it is felt to be inequitable for a creditor to fail to realize against a security which is available to the creditor in respect of the guaranteed debt, and instead to throw the whole liability upon the surety. ( underlining added) . . .

To compensate the surety for the payment that the surety has made on the principal’s behalf in respect of the guaranteed debt, the surety is given a right to look to the security held by the creditor in respect of that debt. . . .

As mentioned above, this right is based upon general principles of equity that are similar to those which govern the marshalling of funds and securities. . . . [ 60 ] These passages confirm that marshalling may be allowed based on the principal/surety exception in circumstances where the senior creditor of both the principal debtor and surety seeks payment from the surety—to the detriment of the junior creditor of the surety which has access only to the property of the surety. That junior creditor can invoke marshalling in order to have the senior creditor’s claim paid by the principal debtor.

This arises because of a principal debtor’s obligations to the surety. [ 61 ] By contrast, in the present case, it is the junior creditor (RLW) of the principal debtor (TBF) rather than the junior creditor of the surety (EPG) that seeks marshalling. It asks to have funds of the surety marshalled. However, marshalling is not fair in this situation because a surety has no obligation to indemnify a principal debtor (see MacDougall at p 108). [ 62 ] Finally, the principal/surety exception has no application with respect to Pitblado as the debts owed to it by each of TBF

and EPG are not the subject of guarantees. Other Circumstances Where Marshalling May be Just and Equitable [ 63 ] With respect to Condo Corp 6970 , which was the authority relied upon by Wolfe on this issue and in which the Court found that marshalling was available where the “funds belong[ed] to the same debtor, or to two or more debtors with respect to the same debt” (at para 43), it is not clear how the Court arrived at that language.

The decision, which seems to extend marshalling beyond the scope allowed in other cases, was not appealed, nor has it been judicially considered by any other court. [ 64 ] In this case, we are of the view that it is not just and equitable to order marshalling. RLW assumed the loans of FCC, RBC and BNS to TBF on the basis that it would have security against the assets of TBF and partial guarantees from EPG.

Had RLW insisted on more security before assuming those loans, it could have sought it from EPG but it did not do so. [ 65 ] Nonetheless, the effect of allowing marshalling is that RLW would be paid, before the unsecured creditors of EPG, from the funds of EPG that resulted from the sale of its land. RLW would effectively become a secured creditor of EPG despite it holding no security against the assets of EPG—and, with respect to the debt RLW assumed from FCC, not even having a guarantee from EPG.

Conclusion on the Issue of the Marshalling Order [ 66 ] For the reasons outlined above, we would not order marshalling in favour of RLW or Pitblado on the facts of this case. That is not to say that an order of marshalling may not be allowed in a case of related companies which do not fall strictly within the criteria that have traditionally been followed in the granting of the remedy to date.

In an appropriate case, a court retains the power to pierce the corporate veil in a situation where equity would demand such an outcome (in the context of the enforcement of a judgment, see the concurring reasons of Nordheimer JA in Yaiguaje v Chevron Corporation , 2018 ONCA 472 , leave to appeal to SCC refused, 38183 (4 April 2019)). However, on the evidentiary matrix before us, our view is that it would not be just and equitable to pierce the corporate veil to allow marshalling.

Issue #2—The Distribution Order [ 67 ] Taylor and 067 appeal from the Distr ibution Order made by the liquidation judge whereby he approved a distribution schedule. Two areas of contention by Taylor with respect to that

schedule are:

a) recognition of an “inter-company debt” owing to TBF from EPG in the amount of $ 916,336 ; and

b) payment to the Wiebes with respect to security held by them over the assets of EPG. Intercompany Debt [ 68 ] As a consequence of our conclusion regarding marshalling, the intercompany debt claim of TBF against EPG is not moot. [ 69 ] Taylor was only notified of the liquidator’s approval of the intercompany debt in the EPG claims process on August 9, 2018 when it was included on a proposed distribution

schedule for the first time. [ 70 ] In correspondence with the liquidator and in submissions before the liquidation judge, Taylor/067 sought to challenge this intercompany debt. In a letter to the liquidator dated August 24, 2018, they argued that a thorough accounting between EPG and TBF would show that TBF owed funds to EPG for a number of reasons as set out in that letter.

They also advised the liquidator that they would be taking that position at the next appearance before the liquidation judge on August 31, 2018. [ 71 ] While no further affidavit evidence was provided to the liquidation judge at that hearing providing substantive details regarding this issue, it was raised before him at that time. However, the liquidation judge did not turn his mind to the issue as it had been rendered moot once he ordered the reallocation sought by RLW.

On appeal, Taylor/067 take the position that, if marshalling is not allowed, the issue of the intercompany debt should be remitted to the liquidation judge for adjudication. [ 72 ] The liquidator argues that, even if marshalling is not allowed and no reallocation is made, there is no basis for this Court to interfere with its approval of the intercompany debt and the matter should not be returned to the liquidation judge.

The liquidator notes that it conducted a claims process in respect of EPG in accordance with the order approving a claims process for both companies (the Claims Process Order), which provided for a final and conclusive determination of a claimant’s claim by an independent court officer—the liquidator.

The liquidator further argues that the Claims Process Order gives Taylor/067 no standing to challenge the claim; the relevant records to challenge the claim were in the possession of Taylor/067 and not presented to the Court; and the doctrines of collateral attack and issue estoppel protect the Claims Process Order. [ 73 ] We are of the view that the liquidation judge has meaningful supervisory jurisdiction to review a determination made by the liquidator during the claims process. That jurisdiction has not yet been exercised in connection with the intercompany debt.

Therefore, the matter should be remitted to the liquidation judge for that purpose. [ 74 ] While it will be the liquidation judge’s decision as to how to conduct that review, given the extensive litigation which has already taken place over these issues and the need to respect the proportionality principle, a

summary proceeding in keeping with the liquidation process would appear to be the desired approach. A quick resolution also takes into consideration the fact that no further information substantiating their position has been provided by Taylor/067 either by affidavit or other form notwithstanding a promise to do so in the August 24, 2018 letter. The Wiebes’ Claim

[ 75 ] The exact nature of the Wiebes’ relationship with EPG and the nature of its security are unclear. However, as early as the liquidator’s second report in March 2018, the fact that they were secured creditors was known.

In its supplement to the second report, the liquidator advised that it had received a legal opinion to the effect that the Wiebes’ security was valid and enforceable, that the lands owned by EPG were charged with a second fixed and specific charge in favour of the Wiebes ranking behind the BMO registration, and that their security ranked in priority to the claims of the unsecured creditors of the company.

At that time, the exact amount of the indebtedness was not known given that the claims process, while approved by the Court, had not yet been instituted by the liquidator. [ 76 ] As stated previously, the sale and vesting order preserved priorities in the sold lands as if the lands had not been sold and attached that priority to the net proceeds of the sale, in essence preserving whatever security interest the Wiebes had in the EPG lands. [ 77 ] At the hearing of the marshalling argument on June 21, 2018, the liquidation judge was advised that, under the allocation proposed by RLW, the Wiebes would have a holdback from the EPG funds pending a final determination of the quantum of their claim. [ 78 ] In the meantime, the Wiebes had submitted their proof of claim to the authorised claims officer on June 10, 2018.

On August 21, 2018, the liquidator issued a notice of revision of proof of claim for the Wiebes, informing them that, after deduction of an offsetting claim by EPG, the amount was $813,928, which amount was disclosed in the liquidator’s fourth report of August 27, 2018 and to which the Wiebes agreed. [ 79 ] At the August 31, 2018 hearing before the liquidation judge, the liquidator sought the approval of its proposed distribution, including the payment of the Wiebes’ claim. [ 80 ] In an affidavit filed on August 30, 2018, Taylor disputed the Wiebes’ claim on the grounds that “the claim may be extinct or significantly less than the amount stated by the [l]iquidator”.

In Taylor’s affidavit, he suggests that the Wiebes removed equipment with an estimated value of approximately $400,000 and that the Wiebes had already received sale proceeds from the sale of the EPG lands. [ 81 ] At the hearing of August 31, 2018, the liquidation judge determined that the claims process had resolved the matter and that he was not going to revisit it. [ 82 ] On appeal, Taylor took the position that the liquidation judge failed to hear his argument on the Wiebes’ claim, thereby failing to observe the rules of natural justice and procedural fairness. [ 83 ] The liquidator’s position before us was that Taylor had no standing to challenge the liquidator’s decision approving the claim and its quantum.

As well, the liquidator’s actions were in accordance with the claims process, which had been approved by the Court, and there was no appeal available from those determinations.

Analysis [ 84 ] While we would not agree with the position taken by the liquidator’s counsel on the hearing of the appeal that a court has such a limited supervisory role in reviewing a determination by the liquidator made during the claims process, we are satisfied that, on the facts of this case, the liquidation judge properly exercised his discretion not to interfere in the determination of liability and the quantum with respect to the Wiebes’ claim.

Taylor knew as early as the supplement to the second report that the liquidator had viewed the Wiebes’ security as valid and enforceable and that only quantum was left to be determined. While, admittedly, the determination of the correct quantum came late in the day, the evidence which could have changed that determination could have been placed before the liquidator by Taylor much sooner than August 30, 2018 and in a more complete fashion.

That the liquidation judge chose not to become involved in reviewing the correctness of the liquidator’s decision based upon the limited information in Taylor’s affidavit is understandable. While it would have been preferable for the liquidation judge to provide Taylor’s counsel with a greater opportunity to explain the reasons for his challenge to the Wiebes’ claim, a failure to do so does not amount to a breach of natural justice in the circumstances of this case. Conclusion [ 85 ] For these reasons, we would allow the appeal from the Distribution Order only to enable a review of the intercompany debt claim.

Issue #3—The Pitblado Claims [ 86 ] Pitblado provided legal services to TBF and EPG. In 2016, it commenced proceedings against TBF and EPG and obtained default judgments in the sums of $51,889.33 and $23,296.14 respectively. It registered its judgments against the lands of both corporations. When those lands were sold pursuant to the sale and vesting order, their judgment registrations were erased.

Noteworthy, however, as discussed previously, is that the sale and vesting order provided that all claims and encumbrances against the lands existing prior to the sale would attach in the same priority to the net proceeds of the sale as if the lands had not been sold. [ 87 ] In his first endorsement, the liquidation judge failed to address Pitblado’s argument but, upon being requested to do so, he held in a second endorsement that he was not convinced of the availability of the remedy to Pitblado but would consider further argument. [ 88 ] At a further hearing on September 25, 2018, the liquidation judge granted relief to Pitblado, directing that they stood behind RLW but ahead of all other general unsecured creditors with respect to the net proceeds of the sale of the lands such that marshalling was available to it.

He also directed that such a priority would exist notwithstanding a bankruptcy proceeding; the liquidation judge ’s order to that effect was made in the Supplemental Order.

[ 89 ] Taylor appeals the liquidation judge’s decision to recognise Pitblado’s judgment claims ahead of unsecured creditors on the basis that Pitblado is simply a judgment creditor and not a secured one. As well, the issue of whether the order should survive a bankruptcy was sprung at the last minute and not properly dealt with. [ 90 ] Pitblado argues that the registration of its certificates of judgment as against the TBF and EPG lands makes it a “junior secured creditor”.

Thus, the liquidation judge rightly found (in the context of considering the availability of marshalling) that it should hold a position as something less than a fully secured creditor but greater than an unsecured or general creditor. [ 91 ] For the reasons we have given discussing the issue of marshalling, we are of the view that Pitblado’s arguments fail on whether marshalling applies to its claims. However, we have come to the conclusion that Pitblado should be entitled to receive the funds owing to it under its judgments from each of TBF and EPG in advance of the other unsecured creditors in the liquidation.

We reach this conclusion not on the basis of marshalling but because, in our view, the sale and vesting order granted in this case, which is not the subject of appeal, recognised the priority of the judgments of Pitblado as a registered judgment creditor, preserving its priority with respect to the proceeds of the sale of the lands as if the lands were still held by the respective owners.

For that reason, we would grant the relief requested and authorise payment by the liquidator to satisfy the judgments. [ 92 ] However, as to the provision in the Supplemental Order that such a priority would survive a bankruptcy, we hold a different view. The granting of that order in its current form raises concerns. In the first place, we agree with Taylor/067 that they were not provided with sufficient opportunity to challenge the appropriateness of granting that order.

It was raised at the last minute on the hearing to determine the form of the order. [ 93 ] Of greater concern is that it was presented to the liquidation judge as a standard form of order in order to ensure that determinations made by the liquidation judge are not reviewed in a bankruptcy proceeding as a fraudulent preference. However, the Supplemental Order goes further. By its terms, it validates Pitblado’s claims, to the extent they are not otherwise satisfied, over any other “unsecured creditor or creditors of TBF or EPG”.

This presumptively seeks to grant Pitblado a priority in not only the liquidation proceedings, but also on any further bankruptcy proceedings. No law or jurisprudence has been provided to warrant such a conclusion. It may well be that, in a bankruptcy proceeding, notwithstanding the terms of the sale and vesting order, Pitblado would rank solely as an unsecured creditor on the basis of its judgments. Unless there was some reason, equitable or otherwise, to justify a priority in a yet-to- occur bankruptcy, a presumptive order made in anticipation is not warranted in the circumstances.

If a bankruptcy does occur, the matter of a priority should be determined by a bankruptcy court according to the appropriate legal principles governing that eventuality. [ 94 ] Therefore, while Pitblado’s claims should be recognised in advance of other unsecured creditors in accordance with the priorities set out in the sale and vesting order, the Supplemental Order should be limited to claims of fraudulent preferences or advances under the Bankruptcy and Insolvency Act , RSC 1985, c B-3 .

Disposition [ 95 ] For the foregoing reasons, we would: (1) allow the appeal from the Marshalling Order and from the Distribution Order to the extent that they provide for reallocation based on marshalling; (2) refer the intercompany debt claim to the liquidation judge; (3) subject to the results of the review of the intercompany debt claim by the liquidation judge, order distribution as set out in Scenario 1 (no residual fund reallocation) of the liquidator’s fourth report; (4) allow the Pitblado claims to rank in priority to other unsecured creditors in the liquidation proceedings but leave any priority to be claimed in a bankruptcy proceeding to the bankruptcy court if it arises; and (5) allow distribution to the Wiebes according to their claim.

Costs [ 96 ] We would allow costs as follows: (1) costs in the Court below in connection with the Marshalling Order in accordance with the applicable tariff and one set of costs in this Court in accordance with Tariff C, both in favour of Taylor/067, to be paid by RLW; (2) one set of costs in this Court in accordance with Tariff C in favour of each of the Wiebes and the liquidator to be paid by Taylor/067 in respect of the Distribution Order appeal—we order no costs on the intercompany debt issue to any party but direct that the costs be dealt with by the liquidation judge upon the hearing of the matter; and (3) as to the Pitblado claims, given the relative success of both parties, we order no costs in this Court and, as no costs were provided in the Court below, we make no disposition with respect to those costs.

JA JA

I agree: CJM