Municipalities Can Claim Priority Over Fully Secured Creditors

In The Corporation of the City of Hamilton v. Coopers & Lybrand Limited et al., a precedent-setting ruling that municipalities and receivers across the country should be aware of, the Ontario Court of Appeal determined that a municipality’s claim for property taxes in a receivership has priority over the claims of fully secured creditors. In 1989, Usarco Limited, a Hamilton, Ont. scrap metal dealer and processor, was failing. It owed the Toronto-Dominion Bank approximately $18 million, which was fully secured by a registered general security agreement, a registered demand debenture, a general assignment of book debts, and mortgages on the real property. Coopers & Lybrand was appointed Usarco’s Receiver in 1990, and at that time tax arrears of $186,000 were owed to the City of Hamilton. The Receiver did not make any payments on account of arrears of taxes or ongoing accumulation of property taxes during the course of the receivership, and by June 1997, total tax arrears had reached $2,588,000.

The Receiver made payment during the receivership of expenses related to the property, and received its fees and made payment of ongoing legal fees as approved by the court. In 1993, pursuant to a court order, it made an interim payment of $900,000 to the bank as secured creditor. In 1997, the Receiver brought a motion before Mr. Justice Rosenberg to discharge the receivership and payment to the bank of the net funds remaining from the Receivership of approximately $1 million. The City of Hamilton brought a cross-motion seeking repayment of the $900,000 interim payment previously made to the TD Bank and seeking payment of all the net remaining funds from the receivership on the basis of priority of its claim for property taxes over all claims of the secured creditor. Mr. Justice Rosenberg found that the net proceeds realized by the Receiver, including the $900,000 previously paid to the bank, should be paid to the city. The bank appealed.

Mr. Justice Austin of the Court of Appeal held that the claim of a municipality for ongoing payment of municipal property taxes and payment of any accumulated arrears has priority to the claims of secured creditors in the receivership and that the Receiver has a duty to pay municipal taxes on an ongoing basis as part of the cost of preserving the property.

F. Paul Morrison and David E. Leonard of McCarthy Tétrault represented the City of Hamilton. John A. Campion, Michael J. MacNaughton and Carole J. Hunter of Fasken Martineau DuMoulin LLP acted for the Toronto-Dominion Bank. Neil C. Saxe of Borden Ladner Gervais LLP represented Coopers & Lybrand.