A decision by the majority of the Ontario Court of Appeal has apparently created an equitable exception to the accepted “first-in-time” principle for ranking secured creditors queuing to collect their share from a bankrupt estate.
The case, Bulut v Brampton (City), involved bankruptcy proceedings against two companies—Everingham Brothers (Everingham) and Royal Spas (Royal)—both of which had Mr. Nicholas Bulut as their president. Both companies carried on their business on property at Tilbury Court in Brampton, which was owned by Everingham. In 1992, Everingham had borrowed $2.25 million from Sun Life Assurance, secured by a mortgage on the property. Bulut also lent the company money under a revolving line of credit, which he subsequently registered under the Personal Property Security Act (PPSA) in April, 1997. Bulut also lent money to Royal via a number company controlled by his family and nominally run by his son. The number company became a secured lender when Bulut assigned his $2 million, PPSA-registered interest to the company on May, 1997.
Everingham defaulted on its mortgage and Sun Life sought vacant possession on the Tilbury property. Everingham and Royal failed to remove their personal property from the premises and Sun Life obtained an order of the court that it was entitled to occupancy costs from the companies of $1,300 a day by way of judicial charge dated June 4, 1997. Both companies failed to make these payments or remove the property and both subsequently went bankrupt.
The result was three creditors, Bulut and the number company (their PPSA interests) and Sun Life (its judicial charge interest) claiming priority in dividing the assets of the companies. In the decision at first instance, Justice Donald MacKenzie of the General Division (now Superior Court and who presided over the initial judicial charge order) ultimately decided in Sun Life’s favour in the priority dispute, holding that the judicial charge took priority over the PPSA-registered debts even though those debts had been registered prior to the judicial charge. MacKenzie held that the application of equitable principles brought Sun Life to the front of the line, as that result “would be just and equitable... since the evidence establishes a continuing and concerted course of action between the Buluts and their corporations in delaying payment of the occupancy costs.” Bulut appealed the decision, however the majority of the Court of Appeal upheld the decision on appeal, holding that the judge’s reasons for applying equitable principles were “sound” and that the evidence supported his application of the principles. Bulut has advised that the decision will be appealed to the Supreme Court.
Peter Biro of Goodman and Carr represented Sun Life. Harvin Pitch of Toronto’s Teplitsky, Colson represented Bulut and the number company.
