Court appointed receivers commonly assume control over all of a debtor’s property. In assuming that control, the receiver may collect various pieces of the debtor’s leased equipment, and include that equipment in a sale of the debtor’s assets. Further, the court order appointing the receiver will typically grant the receiver a priority charge over all such equipment for its fees, including the fees of its counsel, and any borrowings it may make in the course of the receivership.
Equipment lessors often object to their equipment being included in a receivership. The equipment lessors usually consider that the receivership is really for the benefit of a bank or other general security holder, and complain that their equipment should not be subject to the receiver’s control or its priority charges. They argue that their remarketing expertise is better than the receiver’s to liquidate their leased equipment, and that their security priority position ought to prevail despite the receivership.
A court has recently heard the equipment lessors’ complaints, and agreed. In Integris Credit Union v. Mercedes-Benz Financial Services Canada Corporation (2016 BCCA 231) (“Integris”), a recent B.C. Court of Appeal case, the Court held that there are limits on the scope of the property under a receiver’s control, and that the receiver may not be entitled to rely upon its priority charge over equipment of creditors who do not wish their equipment to form part of the receivership proceedings. This may have a significant effect on the receiver’s priority charge.
In Integris, the Court granted an appeal sought by Mercedes-Benz Financial Services Canada Corporation and BHL Capital (together, the “Equipment Lessors”), who wished their equipment to be excluded from the receiver’s control and charges. The Court had appointed the Receiver, pursuant to the terms of a “Model Receivership Order”, over all of the property of All-Wood Fibre Ltd. (“All-Wood”), a company that had various trucks under typical leases with the Equipment Lessors, and had granted a general security agreement to Integris Credit Union (the “Credit Union”). All-Wood’s business had ceased, and its property was dispersed at various sites. The Credit Union obtained the appointment of the Receiver primarily to gather up and liquidate All-Wood’s assets.
From the outset, neither of the Equipment Lessors wished to have the Receiver take possession and control of their equipment. Mercedes-Benz Financial Services obtained an amendment to the Model Receivership Order to specifically authorize an application to have its equipment excluded from the order. The Equipment Lessors brought such an application shortly after the receivership order was granted.
The Equipment Lessors had each established a purchase money security interest (“PMSI”), so that they held priority over the Credit Union to the trucks they had financed. The Receiver initially reviewed their leases and claimed the trucks fell within the scope of the receivership orders, on the basis that the leases were “security leases” rather than “true leases”. On the basis of that analysis, both the Receiver and the Credit Union asserted that the equipment was subject to the control and the charges of the Receiver.
The Chambers Judge agreed with the Receiver that the Equipment Lessors’ trucks were included in the definition of “property” under the model receivership order and were security leases; therefore, he held that the Receiver could look to the sale proceeds of the trucks for payment of its fees.
The Court of Appeal disagreed. It held that the “security lease/true lease” distinction was irrelevant, and that to include the trucks in the receivership would alter the PMSI priority enjoyed by the Equipment Lessors, without their consent. The Court held that a receiver has no greater rights to leased equipment than does the debtor, and is therefore subject to the title retention provisions that exist in most equipment leases.
It was significant that the Equipment Lessors asserted their positions early to the Receiver, and established their PMSI priority. As well, the Receiver did not claim to use the equipment in carrying on the debtor’s business.
This case may have a significant practical effect on receiverships. Receivers typically rely upon all assets of a debtor in claiming its priority for fees and borrowings. However, other secured creditors who advise the receiver that they do not wish to have their assets included, and establish their PMSI priority, may be able to exclude their equipment from the scope of the receivership. Further, the legal principles relied upon by the Court would also apply to other kinds of property, so various secured creditors who disagree with a receiver’s claim to control over their security might benefit from this decision.
Therefore, receivers, and the general creditors who typically appoint them, will need to consider whether the remaining general security will be sufficient to satisfy their charges, and other secured creditors will have an easier opportunity to seek the exclusion of their security from a receivership.