Edmonton (City) v Alvarez & Marsal Canada Inc, 2019 ABCA 109

Can municipal taxes prime a receiver’s fees?

The Appellant is the court-appointed receiver of a group of companies collectively referred to as Reid-Built, a residential home builder. The receivership order gives priority to the Receiver’s chargers over other claims.

The Receiver applied for an order granting it the authority to repair, maintain and complete Reid-Built’s properties, and a corresponding first priority charge as against each specific property for any expenses incurred (the “Property Powers Order”). Two of Reid-Built’s secured creditors also filed applications, disputing the priority for the Receiver’s charge. Before those applications were disposed of, the Respondent—the City of Edmonton—applied to modify the Property Powers Order, or alternatively for a declaration that its special lien for unpaid property taxes ranked ahead of the Receiver’s charge. The chambers judge dismissed the applications of the secured creditors, but granted Edmonton’s application. The Receiver appealed.

Section 243 of the Bankruptcy and Insolvency Act deals with the appointment of a receiver by the court on the application of a secured creditor. This appeal concerned the discretion granted the court by s. 243(6), which governs the making of orders respecting the payment of the receiver’s fees and disbursements and, in particular, gives the court the discretion to grant a super priority to a receiver’s claim for fees and disbursements. Edmonton objected to the Receiver’s charge being granted priority over its claim to unpaid property taxes. It argued that as its claim will be paid out in full regardless of the receivership, it should not have to bear the cost of the receivership.

Secured creditors may not be subject to the charges and expenses of a receivership because the purpose of a general receivership is to preserve and realize the property for the benefit of creditors in general. No receivership may be necessary to protect or realize the interests of lienholders. There are, however, three exceptions to this general rule:
  1. if a receiver has been appointed at the request or with the consent or approval of the holders of security, the receiver will be given priority over the security holders;
  2. if a receiver has been appointed to preserve and realize assets for the benefit of all interested parties, including secured creditors, the receiver will be given priority over the secured creditors for charges and expenses properly incurred; or
  3. if the receiver has expended money for the necessary preservation or improvement of the property, the receiver may be given priority for those expenditures over secured creditors.
Super priority is necessary to protect receivers; without security for their fees and disbursements, they would be understandably concerned about taking on receiverships.

These policy considerations were equally apposite to the application by Edmonton. However, the chambers judge approached Edmonton’s application differently. Having decided that Edmonton’s position “may be properly subordinate to the Receiver’s fees, disbursements, and borrowings”, the chambers judge held that this was not an appropriate case in which to subordinate the municipal tax claims to the costs of the receivership.
 
The Court of Appeal held that there was no principled reason for drawing this distinction between Edmonton’s position and that of the secured creditors. The policy behind receiverships is that collective action is preferable to unilateral action. The receiver maximizes the returns for the benefit of all creditors and streamlines the process of liquidation.
There was nothing on the record to suggest that Edmonton would receive no benefit from the process undertaken by the Receiver on behalf of all creditors. Edmonton would have to run individual auction proceedings for each property over which it has a municipal tax claim, and would incur costs in doing so. Under the receivership process, Edmonton’s outstanding taxes will be paid out as properties are sold in an orderly fashion. Its security is not at risk in this process.

The Court of Appeal acknowledged that courts have discretion under s. 243(6) with respect to the priority to be given to a receiver’s charges, but affirmed that discretion must be exercised on a principled basis. The Court allowed the appeal with respect to Edmonton’s application for priority and upheld the provision in the original receivership order, which granted super priority to the Receiver for its fees and disbursements.

CounselHoward Gorman and  Aditya Badami of Norton Rose Fulbright for the Appellants and Anna Turcza-Karhut and Carly Androschuk for the Respondent

 

 
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