Atlantic Crane & Material Handling Limited (Re), 2022 NSSC 342

Does registering a judgment give the judgment creditor priority over other creditors?

Three debtors—Atlantic Crane, Labrador Cranes and LCB—each filed a Notice of Intention to Make a Proposal pursuant to s. 50.4 of the Bankruptcy and Insolvency Act in June 2021, triggering the stay of proceedings. The Court issued a Sale Approval and Vesting Order in September 2021 pursuant to s. 65.13, approving an Asset Purchase Agreement between the debtors and the purchaser, including the sale of a warehouse owned by LCB. The purchaser was vested with the debtors’ interest in the property “free and clear of any Claims or Encumbrances …[,] security, charge or other restriction pursuant to Section 65.13(7) of the BIA…”. The trustee, MNP, was directed to “receive and hold in trust” the proceeds of the sale.

The sale closed on October 15, 2021. The stay of proceedings expired when none of the three debtors presented proposals by October 22, 2021, and they were deemed to have made assignments in bankruptcy, pursuant to s. 50.4(8) of the BIA. Bank of Montreal, a judgment creditor of LCB, claimed priority outside the BIA distribution process to the proceeds of sale. BMO had obtained judgments against each of the three debtors on March 4, 2020, more than a year prior to the filing of the NOIs. These judgments were registered in New Brunswick pursuant to the Land Titles Act and the Enforcement of Money Judgments Act.

BMO sought an order (1) declaring, for purposes of creditor distribution, the allocated value of the warehouse from the proceeds of the en bloc sale of assets; and (2) directing the manner of distribution of certain residual proceeds of the asset sale approved by the Sale Order, which were being held by MNP in trust. At issue was whether BMO had a priority claim by virtue of its registered judgment to the proceeds of the sale of the warehouse previously owned by LCB. BMO argued that it only needed to establish that, at the time of the sale, it held a “charge” for the purposes of s. 65.13(7) of the BIA. This status, it argued, was accomplished by the registration of the judgment under the New Brunswick Land Titles Act.

The Court held that BMO’s argument had an unsupported legal foundation and was contrary to the well-established principles of insolvency law. Provincial legislation cannot alter the priorities otherwise set by the BIA. Any charge or security-like interest held by BMO arising from the New Brunswick judgment was terminated by LCB’s bankruptcy and the effect of s. 70(1) of the BIA.

Section 65.13 of the BIA is premised on the expectation of an eventual proposal or a bankruptcy. When LCB filed the NOI, creditors could expect either there would eventually be a proposal or a bankruptcy. Instead, BMO claimed a priority right to the proceeds of the warehouse ahead of the other unsecured creditors, which was never approved by the creditors under a proposal. Any priority BMO held in the proceeds was lost in the bankruptcy.

Upon LCB’s bankruptcy, the proceeds vested in MNP in its capacity as the trustee in bankruptcy pursuant to s. 70(1) of the BIA. The Court ordered that the proceeds be paid to the Trustee to be distributed in accordance with the scheme of the BIA. The Trustee would then determine the appropriate amount of proceeds that constitutes an LCB asset. The warehouse proceeds would then be distributed among the creditors in accordance with the BIA bankruptcy distribution scheme.

The Court held that BMO had not established an entitlement to the proceeds in advance of the bankruptcy claims process. The Court did not accept BMO’s claim that its registered judgment gave it a priority status ahead of other creditors because the status it held at the time of the sale was that of an unsecured judgment creditor. Accordingly, the Court dismissed BMO’s application with costs.

Judge: Justice John Bodurtha

Counsel: Benjamin Durnford of McInnes Cooper for BMO; D. Bruce Clarke, K.C. of Bruce Clarke Law Services Company for TD Bank; Sara Scott of Stewart McKelvey for BDC Capital; Greg MacIntosh for the Department of Justice