In Re Norame Inc. (2008), 90 O.R. (3d) 303(Ont. C.A.), the Ontario Court of Appeal was again called upon to consider various issues of importance to insolvency practitioners. In a decision released on April 28, 2008, Mr. Justice LaForme delivered the judgment for the Court of Appeal and in so doing dismissed the appeal of Paddon + Yorke Inc., in its capacity as trustee in bankruptcy of Norame Inc. (the "Trustee"). The issue that the Court of Appeal was required to consider was whether certain funds paid to a load brokers trustee in bankruptcy for the shipping services of an independent carrier are held in trust by the trustee in bankruptcy pursuant to the provisions of the Load Brokers Regulation, O. Reg. 556/92, made under the Truck Transportation Act, R.S.O. 1990, c. T.22, as amended (the "Regulation").

Background

Norame Inc. ("Norame"), prior to its bankruptcy, carried on the business of a load broker, essentially arranging transportation services for the goods of its clients, including Dimplex North America Limited ("Dimplex"). In the course of its business operations, Norame engaged Vitran Corporation ("Vitran") as the carrier to ship the goods of Dimplex.

Prior to its assignment into bankruptcy, Norame had co-mingled funds it received from its customers with its own funds rather than segregating those funds in a trust account as required by the Regulation. Upon the occurrence of the bankruptcy, the Trustee brought a motion for advice and directions and Mr. Justice Pitt ordered that all moneys owed by shippers in respect of carriage services were to be paid to the Trustee to be held in a separate account pending further Order of the Court. Vitran subsequently commenced an action against Norame and Dimplex seeking payment of its outstanding accounts. Madam Justice Mesbur issued a Consent Order which provided that Dimplex pay certain sums to the Trustee for Vitran’s shipping services and that the Trustee deposit these moneys into a separate trust account. Subsequently, the Trustee brought a motion seeking a determination of the priority and entitlement to the funds held by the Trustee. Vitran argued that it was entitled to the funds pursuant to section 67(1)(a) of the Bankruptcy and Insolvency Act ("BIA"), the Regulation and the Order of Justice Mesbur, while the Trustee argued that it was entitled to distribute the funds to Norame’s creditors in accordance with the provisions of the BIA.

The motions judge concluded that the funds which the Trustee had segregated satisfied the conditions for a trust such that the funds must be paid to the carrier, as opposed to for a distribution to the creditors of the bankrupt. The Court of Appeal affirmed the decision of the lower Court.

Court of Appeal Analysis

In considering the appeal of the Trustee from the decision of the Ontario Superior Court of Justice, the Court of Appeal framed the two issues for consideration as follows:

  1. Whether the trust obligations imposed by s.15 of the Regulation apply to carrier fees paid to and held by a trustee in bankruptcy; and
  2. Whether the carrier fees segregated by the Trustee were held in trust pursuant to s.67(1)(a) of the BIA. Section 67(1)(a) of the BIA provides as follows:

67(1) Property of Bankrupt – The property of a bankrupt divisible among his creditors shall not comprise

(a) property held by the bankrupt in trust for any other person …

Section 15 of the Load Brokers Regulation provides that every load broker "shall hold in trust, for the benefit of the carriers to whom the load broker is liable" all money that the load broker receives in respect to the carriage of goods. Accordingly, for the purposes of the Regulation, a load broker is required to hold such funds in a segregated trust account. In discussing the appeal of the Trustee, Justice LaForme considered the "only guiding authority" namely, the previous decision of the Court of Appeal in GMAC Commercial Credit Corp. – Canada v. TCT Logistics Inc. (2005), 74 O.R. (3d) 382 ("GMAC"). In so doing, Justice LaForme concluded as follows:

In my opinion, the motion judge correctly concluded that GMAC – which dealt with an interim receiver who collected carrier fees as required by the Regulation – also applies to the similarly situated trustee in bankruptcy. As a result, and for the reasons that follow, I would dismiss the appeal.

In the course of his reasons for decision, Justice LaForme placed great weight on the decision of Justice Feldman in GMAC, wherein Justice Feldman had concluded that any statutory deemed trust created by the provincial Regulation would not be a trust within the meaning of section 67(1)(a) of the BIA unless it otherwise conformed with the three common law trust principles of the certainties of intention, object and subject matter. In GMAC, Justice Feldman further concluded that a creditor’s security interest is "subject to the trust mandated by s.15, so long as the debtor carries out the trust obligation". As Justice LaForme put it, "In other words, a creditor’s security interest does not take priority over carriers’ fees provided that the moneys received for those fees have been segregated in a trust account."

In GMAC Justice Feldman had concluded that an interim receiver carrying on the business of the load broker is bound by the Regulation’s trust obligations such that the carrier fees that are collected after the receivership’s commencement are to be segregated and held in trust. Justice Feldman went on to conclude that the interim receiver "stands in the shoes of the [load broker], and is furthermore acting as an officer of the Court."

In the Norame case, the Trustee argued that the principles established in GMAC by the Court of Appeal do not apply in the current situation on account of the fact that unlike an interim receiver, a trustee in bankruptcy does not "step into the shoes of the debtor or of the bankrupt." The Trustee argued that a trustee in bankruptcy is merely "an assignee of the assets of the debtor", and is "neither an agent, nor a substitute of the debtor". Accordingly, as the Trustee argued, the provisions of the Truck Transportation Act do not apply and the provisions of the BIA take precedence. The Court of Appeal rejected this argument.

To begin with, Justice LaForme did not give credence to the Trustee’s argument that a trustee in bankruptcy does not step into the shoes of a bankrupt. Specifically, Justice LaForme noted that section 18(a) of the BIA empowers a trustee in bankruptcy to continue to run the business of the bankrupt and further a Trustee can do so on its own initiative in order to conserve the property of the bankrupt prior to the first meeting of creditors and then subsequently thereafter with the permission of the inspectors pursuant to section 30(1)(c) of the BIA.

In addressing the Trustee’s attempt to distinguish the role of an interim receiver versus that of a trustee in bankruptcy, Justice LaForme made the following observations:

Second, the difference between an interim receiver and a trustee in bankruptcy advanced by the Trustee to distinguish GMAC is not a principled distinction with respect to the issue at hand. While the Trustee relies on the difference between the formal status of a trustee in bankruptcy versus an interim receiver, it offers no plausible reason, and cites no authority, to explain why this difference should determine the applicability of the Regulation’s trust obligations. Indeed, to the contrary, GMAC Commercial Credit Corp. – Canada v. TCT Logistics Inc., [2006] 2 S.C.R. 123, [2006] S.C.J. No. 36 confirmed that, like an interim receiver, a trustee in bankruptcy is also an officer of the court.

Justice LaForme was of the view that the motion judge was correct in reaching the conclusion that the BIA does not entitle a load broker’s creditors to moneys paid to its trustee in bankruptcy in respect of a carrier’s shipping services, where those funds can be segregated in trust. To hold otherwise would be to confer an unexpected windfall to the other creditors to the detriment of the carrier. In essence, the Court of Appeal concluded that the principles enunciated previously by that Court in GMAC apply generally to trustees in bankruptcy. Justice LaForme summarized his conclusions as follows:

Given my conclusion that GMAC applies generally to trustees in bankruptcy as it does to interim receivers, it is clear that the Trustee cannot succeed in its argument that the carrier fees it received and placed in a separate trust account lacked the character of trust property in accordance with general trust principles. If the carrier fees the interim receiver in GMAC collected and held in trust bore the character of trust property, then so do the identically situated fees segregated by the trustee in bankruptcy in this case.

Clearly, this will be an important decision for trustees in bankruptcy to consider in the discharge of their duties in estates where a question arises as to what is or is not property of the bankrupt.