Bankruptcy Legal Update Spring 2018

Tenant vs. Landlord re Assignment of Commercial Lease from Trustee – Welcome Ford Revisited

In May 2016, Aeropostale, a casual apparel retailer, filed a Notice of Intention to make a proposal under the Bankruptcy and Insolvency Act (BIA) and commenced a sales process for its various leasehold interests at various malls.  Fellow retailer, Ardene, sought to acquire a specific mall lease and the sale was approved by the Court in June 2016.  The landlord and mall owner, Ivanhoe Cambridge, neither consented to nor opposed the sale of the lease to Ardene.  Of interest, this specific lease contained a rent discount provision which allowed Aeropostale to pay lower rent in certain circumstances, so long as it remained a tenant.

More than a year passed when Ardene noticed the discount provision and sought to enforce it against the landlord.[1]   The landlord objected, claiming that provision was specific to Aeropostale being a tenant and thus could not be and was not assigned.  Aeropostale was seen as a desirable tenant with clout to negotiate this provision.  In the landlord’s eyes, Ardene was not such a tenant.  Ardene relied on the court order approving the assignment of the lease pursuant to s. 84.1 of the BIA[2]. The Court had to determine whether Ardene acquired all the rights and obligations of Aeropostale, including the discount provision, or if the discount provision only applied if the tenant was Aeropostale.  The Court relied on the Alberta Court of Appeal’s decision in Welcome Ford[3].

In Welcome Ford, Welcome Ford operated an automobile dealership franchise under an agreement with Ford Motor Company. It was assigned into bankruptcy and the trustee marketed and sold the dealership agreement.  Ford Motor Company refused to consent to the sale and accept the assignment (even though the purchaser was a Ford-approved dealer and the offer was enough to pay Welcome Ford’s debts to secured creditors and leave a surplus for unsecured creditors).  The trustee applied to the court to approve the assignment and relied on s. 84.1 of the BIA.  The Court of Appeal held that s. 84.1 was intended to preserve the value of the bankrupt’s estate while weighing any adverse effect the assignment may have on the other party.  In this case, the greatest value to the estate was in assigning the dealership agreement which was not personal to Welcome Ford and the assignee (a Ford-approved dealer) was capable of performing the contract.

In applying Welcome Ford to Aeropostale, the Court found that the discount provision was not personal and payment of rent was not a unique personal service.  The Court concluded that Ardene acquired all of the rights and obligations of Aeropostale under the lease, including the discount provision.

Show Me What You’ve Got, Pretty Please

In a recent consumer bankruptcy[4], TD Bank applied to lift the statutory stay of proceedings so that it could commence an action against the bankrupt for fraud and fraudulent misrepresentation.  The bankrupt brought its own application demanding the Bank produce documents to support the allegations of fraud and fraudulent misrepresentation.  The Court held that a party applying to lift the stay of proceedings to commence a fraud action need only plead specific facts that show there are sound reasons for lifting the stay.  The bankrupt has the onus to prove that the action is frivolous, vexatious or has little prospect of success.  A bankruptcy court application is not the appropriate forum for a bankrupt to test a prospective plaintiff’s case.  Once the stay is lifted and the action commenced, the bankrupt is entitled to all discovery available to any defendant in a civil action.

Ponzi Schemes – Winners Need to Account to Losers

A group of companies built on a Ponzi-like scheme made a voluntary assignment into bankruptcy.  Between December 2005 and January 2012, the scheme received approximately $110 million from investors and paid out approximately $99.5 million to investors.  Those investors who received more than their principal investment and were declared Net Winners and the trustee in bankruptcy for the companies sought to recover the excess received by the Net Winners for the benefit of the bankruptcy estate (which would include the Net Losers).  One such Net Winner argued that he was a bona fide investor and the amount he received over his principal investment was a reasonable return on a loan agreement.  The Court[5] held that a Ponzi scheme, by its very nature, is insolvent from its inception and badges of fraud exist and can be inferred by a debtor’s operation of a Ponzi scheme.  While in this case, court did not find a fraudulent conveyance or fraudulent preference under the BC legislation, the Trustee was successful in their claim the Net Winner for the excess they received on two equitable grounds: (a) the Net Winner was unjustly enriched; and (b) money had and received (the Net Winner has received money which, in equity and good conscience, should have been paid to the Net Losers).

[1] Re Aeropostale Canada Corp., 2018 ONSC 1468.

[2] Generally, a court may make an order assigning the rights and obligations of a bankrupt under an agreement to any person who is specified by the court and agrees to the assignment.

[3] Ford Motor Company of Canada, Limited v. Welcome Ford Sales Ltd., 2011 ABCA 158 (CanLII).

[4] Re Gergorio and Antonio Pannia, as reported in the Insolvency Insider.

[5] Boale, Wood & Company Ltd. v. Whitmore, 2017 BCSC 1917.