Mass Polymers Corp. v. Mendlowitz & Associates Inc.

In the Matter of the Proposal of Cotain Plastic Products (1980) Limited, of the
City of Toronto, in the Municipality of Metropolitan Toronto, in the Province
of Ontario

Mass Polymers Corporation, Applicant and Mendlowitz & Associates Inc. as
Proposal Trustee on Behalf of the Estate of Cotain Plastic Products (1980)
Limited, Respondent

Ontario Superior Court of Justice [In Bankruptcy & Insolvency]

Cameron J.

Heard: April 20, 2001
Judgment: April 30, 2001
Docket: 31-OR-377074

Counsel: Grant H. English, for Applicant

Larry W. Keown, for Respondent, Trustee

Subject: Insolvency

Bankruptcy — Avoidance of transactions prior to bankruptcy — Fraudulent preferences — View to prefer — Intention other than to prefer — Intention to remain in business

Creditor supplied plastic polymers and resins to bankrupt over period of years — As bankrupt was constantly remiss with payment, creditor began requiring payment of outstanding invoices before delivery of next order would be made — In May 2000, creditor required that bankrupt grant general security agreement to secure existing and future indebtedness — Having obtained agreement, creditor continued to supply bankrupt — Bankrupt filed proposal under Bankruptcy and Insolvency Act in July 2000 — Creditor filed secured claim for $221,533.49 — Trustee disallowed claim on basis that granting of security agreement constituted fraudulent preference — Creditor appealed — Appeal dismissed — Security for existing or past indebtedness constitutes preference — Granting of security interest was outside ordinary course of relationship between parties — At least one other supplier was available to bankrupt — Nothing in material suggested that bankrupt did not intend what Act presumes, that is, to give creditor preference over other unsecured creditors in order to keep its business operating — Issues of voluntariness or pressure cannot be considered under s. 95(2) of Act — Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 95(2).

Cases considered by Cameron J.:

Bruncor Leasing Inc. v. Zutphen Brothers Construction Ltd. (Trustee of) (1994), 26 C.B.R. (3d) 258, (sub nom. Zutphen Bros. Construction Ltd. (Insolvent), Re) 376 A.P.R. 337, 116 D.L.R. (4th) 692, (sub nom. Zutphen Bros. Construction Ltd. (Insolvent), Re) 132 N.S.R. (2d) 337, 31 C.B.R. (3d) 112 (N.S. C.A.) — considered

Fulton (No. 2), Re, 7 C.B.R. 213, 58 O.L.R. 400, [1926] 2 D.L.R. 277 (Ont. C.A.) — considered

Kisluk v. B.L. Armstrong Co. (1982), 40 O.R. (2d) 167, (sub nom. Pontiac Forest Products Ltd., Re) 44 C.B.R. (N.S.) 251, 143 D.L.R. (3d) 66 (Ont. S.C.) — referred to

Norris, Re (1994), 23 Alta. L.R. (3d) 397, [1995] 1 W.W.R. 292, 28 C.B.R. (3d) 167, (sub nom. Norris (Bankrupt), Re) 161 A.R. 77 (Alta. Q.B.) — referred to

Norris, Re (1996), 45 Alta. L.R. (3d) 1, [1997] 2 W.W.R. 281, (sub nom. Norris (Bankrupt), Re) 193 A.R. 15, 135 W.A.C. 15, 44 C.B.R. (3d) 218 (Alta. C.A.) — referred to

Van der Liek, Re (1970), 14 C.B.R. (N.S.) 229 (Ont. S.C.) — considered

Statutes considered:

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3

s. 66(1) — pursuant to

s. 95 — considered

S. 95(1) — considered

s. 95(2) — considered

s. 135(2) — pursuant to

s. 135(4) — pursuant to

Rules considered:

Rules of Civil Procedure, R.R.O. 1990, Reg. 194

R. 20.04 — considered

Rules of Practice, R.R.O. 1980, Reg. 540

R. 37(13) — referred to

R. 38(10) — referred to

Words and phrases considered

preference

Security for existing or past indebtedness constitutes a preference: Re Fulton, [1926] 2 D.L.R. 277 (Ont. C.A.).

APPEAL by creditor from trustee’s disallowance of secured claim.

Cameron J.:

Issues

1 The creditor Mass Polymers Corporation (“MPC”) appeals under s. 135(4) of the Bankruptcy and Insolvency Act (“BIA”) from the disallowance by the respondent trustee under a proposal (the “Trustee”) pursuant to BIA ss. 135(2) and 66(1), of MPC’s claim for security. The Trustee disallowed the claim alleging it was a fraudulent prefer-ence under BIA s. 95(1).

2 Failing allowance of its appeal on the record, MPC seeks a trial of the issue of whether the granting of security was made “with a view to giving [MPC] a preference over the other creditors”.

Facts

3 MPC manufactures plastic polymers and resins in the U.S.A. During 1999 and 2000 it supplied resin to Cotain Plastic Products (1980) Limited (“Cotain”) on terms of “net 30 days” or “net 45 days”.

4 Almost from the inception of its relationship with Cotain, MPC experienced difficulty in receiving timely pay-ment from Cotain. In August 1999, MPC insisted on payment for a prior shipment before it would supply more resin ordered by Cotain. Thereafter new shipments of resin were withheld pending payment of outstanding invoices and MPC frequently requested payment of outstanding invoices with a view to trying to keep Cotain’s payments current. Notwithstanding these efforts, by the end of May 2000, Cotain owed MPC over $221,000 for prior shipments.

5 In late May 2000, Cotain placed an order with MPC for $62,700 worth of resin. MPC demanded cash which Cotain could not pay. Cotain said it needed the shipment to keep its plant running while negotiations for sale of its business were ongoing. MPC refused to deliver any further shipments unless it received a general security agree-ment (“GSA”) granting a security interest in Cotain’s property to secure “payment of all existing and future indebt-edness and liability” of Cotain to MPC. Cotain executed the GSA on June 1, 2000, and MPC delivered the order.

6 The president of Cotain has sworn in an affidavit:

Cotain executed the General Security Agreement in order to secure the supply of the shipment which was valued at approximately $62,706.71.

7 On June 16, 2000, MPC supplied $43,300 worth of products ordered by Cotain.

8 On June 20, 2000, MPC supplied Cotain with another $5,000 worth of products.

9 On June 29, 2000, Cotain filed Notice of Intention to file a proposal. At this time Cotain owed MPC over $300,000.

10 In July 2000, Cotain obtained a shipment of $40,000 worth of resin from a supplier other than MPC, for which it paid cash.

11 Contain filed a proposal to its creditors under the BIA on July 25, 2000 (the “Proposal”). The accompanying report of the Trustee showed liabilities of $2.5 million of which $1.5 million were unsecured. Thirty-eight unsecured creditors had claims exceeding $1,000. Cotain’s assets had an estimated realizable value of not more than $1.2 mil-lion. Cotain’s annual sales were about $4 million. Losses in the 11 months to May 31, 2000 were over $400,000, up from $255,000 in the 12 months ending June 30, 1999, and a smaller loss the preceding year.

12 In the list of creditors accompanying the Proposal, MPC was shown as a secured creditor for $111,036 and an unsecured creditor for $221,533.49.

13 The notice of a meeting of creditors to approve the Proposal to be held August 15, 2000 was mailed on August 3, 2000. MPC did not receive its notice until August 15 due to insufficient postage.

14 The Proposal was approved unanimously by the two unsecured creditors who attended the meeting having claims totalling $152,000.

15 On September 13, 2000, the Trustee allowed MPC’s claim as a secured creditor to the extent of $110,166 for goods shipped in June 2000, but disallowed as a secured claim MPC’s claim as a secured creditor in respect of $221,246 of product delivered prior to June 2000. This latter amount was allowed as an unsecured claim.

16 I am satisfied that a proposal trustee has the authority to disallow a claim where such a power is contemplated in the proposal: Bruncor Leasing Inc. v. Zutphen Brothers Construction Ltd. (Trustee of), [1994] N.S.J. No. 321, 26 C.B.R. (3d) 258 (N.S. C.A.); See also commentary by Vern W. DaRe, 31 C.B.R. (3d) 112.

17 The Trustee here disallowed MPC’s claim with respect to indebtedness existing prior to June 2000 because the security interest in the GSA was given by Cotain with a view to giving a preference to MPC over other creditors and so was void.

18 The proposed sale of Cotain’s business fell through on September 21, 2000. Some of its assets have been sold. The Proposal has not been approved by the court.

Discussion

19 The conditions required by BIA s. 95(1) have been satisfied, namely:

1. On June 1, 2000, Cotain was insolvent;

2. The granting of the security interest in the GSA occurred within 3 months of the “date of the initial bank-ruptcy event” i.e. the Proposal; and

3. The security given for indebtedness then existing had the effect of giving MPC a preference over other unsecured creditors at the time.

20 Security for existing or past indebtedness constitutes a preference: Re Fulton (No. 2), [1926] 2 D.L.R. 277 (Ont. C.A.). In considering this reference I note that there is no issue before me as to the validity of the security for contemporaneous and future advances.

21 The “view” referred to in BIA s. 95 refers to the dominant intent of the debtor determined objectively: Re Van der Liek (1970), 14 C.B.R. (N.S.) 229 (Ont. S.C.), at pp. 231-232 (per Houlden J.).

22 The Trustee having established the three preconditions in BIA s. 95(1), the intent of Cotain to grant a prefer-ence to MPC is presumed under BIA s. 95(2). The onus then shifts to MPC to rebut the presumption by establishing, on the balance of probabilities, that the dominant intent of Cotain was other than an intent to give a preference to MPC over other creditors: BIA s. 95(2), Re Van der Liek (above); Kisluk v. B.L. Armstrong Co. (1982), 40 O.R. (2d) 167 (Ont. S.C.); Re Norris, [1994] A.J. No. 699 (Alta. Q.B.); (1996), 44 C.B.R. (3d) 218 (Alta. C.A.).

23 Neither party has cross-examined on the affidavits used on this motion. On the evidence in the record before me I have no reason to doubt the truth of any of the material facts stated therein.

24 MPC says the facts before me raise an issue deserving of a trial as contemplated in the Ontario Rules of Prac-tice 37(13) or 38(10). I see no conflict in the evidence requiring a trial for its resolution. In the absence of cross-examination I presume that there are no further relevant facts to be presented to the court. There appears to be no dispute as to credibility.

25 In view of the consequences to the interested parties it is reasonable that in considering the records I apply the test in Rule 20.04 on motions for summary judgment, namely whether there is a genuine issue for trial.

26 The onus is on the creditor to rebut the presumption in BIA s. 95(2). If it fails to establish a triable case it risks losing.

27 The granting of the security interest was out of the ordinary course of the relationship between the parties of unsecured short-term credit and cash payment. At least one other producer of resin was available to supply Cotain.

28 While the president of Cotain has sworn that he gave the security interest in order to keep the business operat-ing, there is nothing to suggest that Cotain did not intend what the statute presumes, namely, to give MPC a prefer-ence over Cotain’s other unsecured creditors if that was what was necessary to achieve its objective of keeping the business operating. Cotain’s president appears to have believed that if he had not given the GSA to MPC, Cotain would have been forced to close down or to deal with another supplier for cash. Cash was in short supply. It was more than just an intent to pay a diligent creditor to grease the squeaky wheel by getting rid of MPC’s annoying re-quests for payment. It was a matter of survival to Cotain; it had to obtain the product at any reasonable cost.

29 Inasmuch as the issue of voluntariness or pressure cannot be considered under BIA s. 95(2), I find there is nothing to warrant a trial of an issue and insufficient evidence on the record which, on the balance of probabilities, would rebut the presumption that Cotain intended to give MPC a preference.

Conclusion

30 The appeal of the Trustee’s disallowance is dismissed.

31 Costs may be spoken to.

Appeal dismissed.