Can a landlord’s distress proceedings be caught by Section 95 of the BIA?
Robix declared bankruptcy on December 5, 2017. Prior to the date of bankruptcy, its landlord distrained on substantially all of Robix’s assets, and liquidated these assets in satisfaction of unpaid rent. The landlord realized $223,990.37 from the sale of the assets.
Robix’s trustee wrote to the creditors of Robix to advise of the distress proceedings and noted that if creditors wished to take an action to pursue an alleged $156,800.87 excess from the distrained funds, they could do so by making an application to the court under s. 38 of the Bankruptcy and Insolvency Act (the “BIA”).
The Royal Bank of Canada (“RBC”), a secured creditor of Robix, obtained an order to bring such an application. As of the date of the bankruptcy, Robix owed RBC $498,799.02. RBC sought a declaration that the $223,990.37 that was paid to Robix’s landlord was a preferential payment pursuant to s. 95 of the BIA. In the alternative, RBC argued that the Landlord improperly seized and sold assets of Robix of value that greatly exceeded the amount of rent owed for which the subject distress was levied.
The Landlord argued that s. 95 of the BIA did not apply in the circumstances since distress proceedings are not captured by this section. Further, the Landlord maintained that the seizure was lawful and appropriate, so no money was owing to the Trustee, or to RBC standing in its stead.
Normally, a completely executed payment to a creditor will not be affected by a subsequent bankruptcy except in limited circumstances. Section 95 is one such exception. Section 95 delineates certain transactions that do not profit from this protection and will be deemed a preference.
RBC argued that, in Alberta, the landlord’s right of distress is governed by the Civil Enforcement Act (“CEA”), and the “substantial” procedure contained therein means that distress amounts to a “judicial proceeding” or is otherwise a form of property transfer or payment that is addressed by section 95 of the BIA. The landlord argued that s. 95 of the BIA does not apply in Alberta to set aside distress proceedings taken and completed prior to bankruptcy.
Sections 70 and 95 of the BIA can be read together, and s. 70 may be qualified by s. 95 if a transaction is executed within three months of the bankruptcy. However, s. 95 does not cover all transactions. It does not speak of many attachments and processes that might be involved in obtaining satisfaction of a debt listed in s. 70 including “executions or other processes” or “realization from property under lease”. Had Parliament wanted to include landlord distress proceedings in s. 95, they could have done so by expanding the scope of s. 95 to either mirror s. 70 or expand on it.
The purpose of s. 95 is to avoid an insolvent person from intentionally preferring one unsecured creditor over another. Section 95 does not include “payments suffered” by an insolvent person, but only “judicial proceedings suffered” by an insolvent person. In other words, s. 95 only includes “payments made”. Robix did not make a payment to the landlord—it “suffered” the results of a landlord’s distress.
The Court then considered whether a landlord’s distress in Alberta is a “judicial proceeding” for the purpose of s. 95 of the BIA. “Judicial proceeding” is defined in Black’s Law Dictionary as: “[a]ny court proceeding; any proceeding initiated to procure an order or decree, whether in law or in equity.” Simply because the landlord’s distress may involve court supervision or court orders in certain circumstances pursuant to the CEA, does not necessarily make it a “judicial proceeding”. No such court supervision or involvement occurred in this case. Courts in Alberta have repeatedly treated a landlord’s distress as an “extra judicial procedure”, not a “judicial procedure”. Provincial law governs and needs to be taken into account in the interplay with the BIA.
As such, the landlord’s distress did not amount to a preference under s. 95 of the BIA. Rather, it was a protected executed transaction under s. 70 of the BIA. The amount obtained through the appropriate distress proceedings in this instance was not “a transfer of property”, “a provision of services made”, a “charge on property” “a “payment made” or “an obligation incurred”. Since there was no court assistance or order involved, the landlord’s distress was not a “judicial proceeding taken or suffered” by Robix. It was an enforcement of the landlord’s rights without judicial process, which is not captured by s. 95.
The Court found that there was no preference pursuant to s. 95 of the BIA with respect to the appropriate amount obtained pursuant to the landlord’s distress proceedings.
Counsel: Dean Hutchison of MLT Aikins LLP for the Applicant and Daniel Jukes of Miles Davison LLP for the Respondent.