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Date: Fri, 11 Jul 2003 11:01:25 -0400 From: Jason Neyers Subject: Estoppel Question
Dear Colleagues, I just wanted to 'pick your brains' if you did not mind. The facts I have in mind are as follows: Suppose
X represents to Y that, in case of bankruptcy, any claims that Y might
have on the basis of a particular transaction will have priority over
all past and future encumbrances/debts. Y relies on that statement (detrimentally
as it turns out) and enters into the transaction with X. X's business
is suffering hardship. Z, knowing of this representation, and trying to
help X, lends X a substantial amount of money. X subsequently goes into
bankruptcy. It turns out that as a matter of positive law and statute,
Y does not have priority and will now have to share pari passu with Z.
Any opinions and guidance as to relevant estoppel cases dealing with a 'transferred representation' or being 'affixed with another's representation' would be most welcome. PS: The facts are distilled from the somewhat more complicated Ontario case on which I am attempting to comment (see attached if interested). Thank you in advance,
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Sittuk Investments Limited v. A. Farber & Partners Inc. et al.[Sittuk Investments Ltd. v. A. Farber & Partners Inc.] 61
O.R. (3d) 546 Superior
Court of Justice, September 20, 2002 Bankruptcy and Insolvency - Priorities - Landlord and tenant - Time share contract - Bankrupt company having sold vacation time share units purporting to be 40-year leases - Time share contracts allowing owner use of unit for designated or assigned weeks each year of the lease - Time share contract not constituting an interest in property - Time share owner having an interesse termini and not property interest - Bankrupt's property to be sold without any property claim by time share owners - However, unconscionable for related company creditor with unsecured claim to share pari passu in proceeds of sale - Unsecured claims of time share owners to have priority in distribution of proceeds of sale. Landlord and tenant - Priorities - Bankrupt company having sold vacation time share units purporting to be 40-year leases - Time share contracts allowing owner use of unit for designated or assigned weeks each year of the lease - Time share contract not constituting an interest in property - Time share owner having an interesse termini and not [page547] property interest - Bankrupt's property to be sold without any property claim by time share owners - However, unconscionable for related company creditor with unsecured claim to share pari passu in proceeds of sale - Unsecured claims of time share owners to have priority in distribution of proceeds of sale. Before its bankruptcy, Western Hemlock Ltd. ("WHL") operated a motel and restaurant on a property it owned in the District of Parry Sound. On its property, there were three buildings in which WHL provided time share units for vacations. WHL sold the units under a standard form document described as a lease under which the time share owner prepaid rent for 40 years and became entitled to use the unit for designated or assigned weeks each year over the term of the lease. The marketing materials stated that if WHL went bankrupt, the leases had been structured so as to have priority over existing and future encumbrances. The lease contract provided that the lessees would have priority over mortgages. WHL's business failed and it became bankrupt. Its largest unsecured creditor was Sittuk Investments Limited ("Sittuk"). Sittuk was a related company and its sole officer and director, K, was also the sole officer and director of WHL. Although K was aware that purchasers had been advised that the time share interests were leases, Sittuk took the position that the time share contracts were licences and not leases and therefore the owners had unsecured claims. Pursuant to an order made under s. 38 of the Bankruptcy and Insolvency Act, Sittuk applied for an order that WHL's trustee in bankruptcy sell the bankrupt's property free of any interest claimed by the time share owners. Held, the bankrupt's property should be sold without any property claim by the time share owners but they should have priority over Sittuk with respect to the proceeds of sale. The nature of the rights acquired under the time-share agreements did not create an interest in property. The test for whether a lease has been granted is whether there has been a grant of a right to exclusive possession of the property. For a lease to be in effect, the tenant must have taken up possession under its terms. The time share contracts did not provide for exclusive possession without qualification during the periods of permitted occupancy. Further, the contracts provided that the tenant could not go into possession until the authorized week and at the conclusion of that week, the tenant was obliged to relinquish possession. In such circumstances, when the tenant was properly out of possession because of the expiry of the designated week, the tenant could not be said to be in possession. The tenant's interest was an interesse termini. Such an interest would permit a personal claim in contract but not against the property itself. Accordingly, the rights did not constitute rights in property. However, this conclusion was not determinative of the matter. There were also the questions of estoppel and unconscionability. The time share claimants had been treated unconscionably based on the fact that K as a principal in WHL authorized the marketing of the units as leases and this marketing included the representation that the time share owners would have priority if there was a bankruptcy. Having marketed the units on this basis, it would be unconscionable for K to be able to take action on behalf of the bankrupt company, through a borrowing from this other company, the applicant, to provide a claim to that other company that would not be subject to the priority of the time share contracts. This analysis did not involve a lifting of the corporate veil, and it was to be noted that the borrowing was not made by an unrelated third party without actual or constructive knowledge. The factor that gave rise to the unconscionability in the case of Sittuk [page548] was its relationship to K who knew or had reason to know that a borrowing authorized by him on behalf of the bankrupt company and Sittuk would prospectively give to Sittuk a pari passu claim against the time share owners. The appropriate order in the circumstances was that the trustee may sell the property free from any claim that the time share owners had an interest in the property but, in dealing with the proceeds, the claims of the time share owners should have priority to Sittuk. Cases referred to Atlas Supply Co. of Canada Ltd. v. Yarmouth Equipment Ltd. (1991), 103 N.S.R. (2d) 1, 282 A.P.R. 1, 37 C.P.R. (3d) 38 (C.A.), revg in part (1990), 30 C.P.R. (3d) 380 (N.S.S.C.); Constitution Insurance Co. of Canada v. Kosmopoulos, [1987] 1 S.C.R. 2, 21 O.A.C. 4, 34 D.L.R. (4th) 208, 74 N.R. 360, 36 B.L.R. 233, [1987] I.L.R. 1-2147; Harry v. Kreutziger (1978), 95 D.L.R. (3d) 231, 9 B.C.L.R. 166 (C.A.); Re Bodair Ltd. (1969), 13 C.B.R. (N.S.) 51 (Ont. S.C.); Re Country Kitchen Donuts Ltd. (1980), 34 C.B.R. (N.S.) 252, 1 P.P.S.A.C. 176 (Ont. S.C.); Salomon v. Salomon & Co., [1895-7] All E.R. 33, [1897] A.C. 22, 66 L.J. Ch. 35, 75 L.T. 426, 45 W.R. 193, 13 T.L.R. 46, 41 Sol. Jo. 63, 4 Mans. 89 (H.L.); Wallis v. Hands, [1891-4] All E.R. Rep. 719, [1893] 2 Ch. 75, 62 L.J. Ch. 586, 68 L.T. 428, 41 W.R. 471, 9 L.T.R. 288, 37 So. Jo. 284, 3 R. 351 Statutes referred to Bankruptcy
and Insolvency Act, R.S.C. 1985, c. B-3, ss. 30(1) (k), 81(1), (4)
APPLICATION for an order that the trustee in bankruptcy sell property
free from the claims of time share contracts. ---------- [1] SPENCE J.: - The applicant seeks an order that A. Farber & Partners Inc., the trustee in bankruptcy of Western Hemlock Inn (the "Trustee"), is to sell the property of the bankrupt company free of any interest claimed by the respondents under their time share contracts, principally on the basis that those contracts give to the respondents only a licence or other right not constituting a lease and consequently have no interest in the property itself but only a claim as creditors.
Background Facts [2] The respondents other than the Trustee (the "respondents" or the "Time Share Claimants") purchased Time Share Contracts (as that term is defined later) from the bankrupt Western Hemlock Limited ("WHL"). [3] The applicant, Sittuk Investments Limited ("Sittuk"), a company related to WHL, is the largest unsecured creditor of WHL, with a claim for the amount of $2,534,274.24 out of unsecured claims, the exact total of which is as at this date unknown. [page549] [4] The respondents say that, if their Time Share claims are found to be unsecured claims, the claim of Sittuk will represent approximately 90 per cent of the total value of the unsecured claims against WHL and the claims of the respondents would only share in approximately 10 per cent of the proceeds of the sale of the property. [5] By Order dated September 13, 2001, the Registrar in Bankruptcy granted Sittuk a s. 38 Order (the "s. 38 Order"). [6] Pursuant to the provisions of the s. 38 Order, the Trustee, by assignment dated September 13, 2001, transferred and assigned all of its right, title and interest in, and, as well, the right to pursue, these proceedings to the applicant. [7] Sittuk, in pursuance of the authority so assigned, caused to be delivered to each of the respondents at the addresses listed in Schedule "A" to the s. 38 Order the following:
[8] No Time Share Claimant elected, within the time limited, to participate in these proceedings pursuant to the provisions of the s. 38 Order. [9] No Time Share Claimants filed, in accordance with the Notice to Prove Property Claim, within the time limited, a proof of claim verified by an affidavit giving the grounds on which the claim is based and sufficient particulars to enable the property to be identified, as required by s. 81(1) of the Act. [10] Of the Time Share Claimants, only Harry Huskins and Susan DeGruchy delivered a Notice to Prove Property Claim to the applicant's counsel, on October 26, 2001, which was subsequent to the deadline.
The Property and Business of WHL [11] WHL owns a property (the "Property") comprising approximately 8.5 acres of land in the Township of Strong in the District of Parry Sound, Ontario (the "Municipality"). WHL operated on the property a business called North Ridge Inn, consisting of the following components:
[12] The "Time Share Units" are shown as buildings 601, 603 and 604 on a sketch of the proposed finished development of all buildings to be constructed on the Property indicating the three buildings which are the subject of time share claims. The three buildings designated as Time Share Units occupy approximately 1/2 acre of the land. [13] Some of the Time Share Claimants registered Notices of Lease on the title to the Property. [14] WHL operated the motel, the restaurant, the Time Share Units and the fourth building, and as well provided to the occupants of the Time Share Units the services contemplated by the 40-Year Vacation Leases (as that term is later defined). WHL, throughout, enjoyed the right of access to, and retained keys to, the Time Share Units for the purpose of providing these services. These services included maintenance, repairs to equipment, including dishwashers, VCRs, toilets and, as well, the provision of cleaning, towels, room service, meals and alcoholic and other beverages, and other assistance to the Time Share Units and occupants. [15] The business of WHL failed. There were insufficient revenues from the entire project. In the course of operations, accumulated operating deficits in excess of $2.5 million were incurred which were met by advances from Sittuk.
The Vacation Lease [16] Each of the Time Share Claimants signed a standard form of "40-Year Vacation Lease" (the "Lease" or "Time Share Contract") to which was annexed a number of schedules. Schedule "C", "D", "E" and "F" were in a standard form. Schedule "A" was completed to designate whether the period sold was for a fixed week in each year or for a floating week, i.e. a week to be selected in each year. [17] Schedule "A" to all of the Time Share Contracts reads in part as follows:
[18] Schedule "F" to all of the Time Share Contracts reads in part as follows: [page551]
[19] The applicant is related to the bankrupt company. John Kuttis is the president, sole officer and director of both corporations. [20] The Leases were for a period of 40 years, with all rent pre-paid at the start of the term. The Financial Statements of Western Hemlock show that this rental revenue exceeded $600,000. [21] The Leases were prepared by counsel for WHL. [22] John Kuttis, as President of WHL, executed the Leases. [23] Prior to purchasing time share Leases, a number of the prospective purchasers expressed concern that they were [required] to pre-pay rent for a 40-year period. One concern was the possibility of a future bankruptcy or sale of the North Ridge Inn. [24] The matter of bankruptcy and its effect on the Leases was addressed in North Ridge Inn's marketing materials. In the document entitled "Twenty Questions", Western Hemlock and the other partners stated:
[25] The issue of the priority of the Lease was also raised in an exchange of correspondence between a prospective purchaser and [page552] Mr. McGuinty, a representative for the business. Mr. McGuinty was asked to ensure that para. 22 of the Lease gave priority over all encumbrances. It is admitted by Mr. Kuttis that Mr. McGuinty had authority to market the Time Share Units on behalf of the North Ridge Inn partnership, and that Mr. Kuttis was aware that the purchasers were being advised that the time share interests were leases. Paragraph 22 of the Lease provides as follows:
[26] Mr. McGuinty responded by saying that "[t]his section satisfies our lawyer that the lease does have priority." [27] It is admitted by Mr. Kuttis that Mr. McGuinty had authority to market the Time Share Units on behalf of the North Ridge Inn partnership, and that Mr. Kuttis was aware that the purchasers were being advised that the time share interests were leases. [28] Some of the Notices of the Lease were registered on title by counsel for WHL.
Analysis [29] The dispute between the parties cannot be determined without addressing the question: what was the nature of the rights which the applicants acquired from the bankrupt under the contract for their time-sharing arrangements? This question has been expressed in the [following] terms: Was their right a lease or a licence? Certainly the term "lease" was used a great many times in the documentation. The term "licence" was never used. Other terms such as "membership in a club" were also used. The operative document, by which the rights were created, is called a lease and has many of the attributes of a form of lease. The bankrupt company assisted with the registration of these instruments against the title to the property. [30] It was not seriously disputed that if the contracts are leases, the rights of the respondents will in effect be secure against the bankruptcy proceedings (in principle, i.e., if all related requirements are complied with and no valid steps are [page553] taken to disclaim the leases), but if the contracts are only ongoing or executory contracts, they will not bind the Trustee. [31] It is useful to consider the basis for this difference. It can be put in terms of the ancient and well-established distinction between interests in rem and interests in personam: i.e., interests assertable against the property itself as opposed to interests assertable only against a person. The trustee is the trustee of the estate, that is, the property, of the bankrupt. If certain property belongs not to the bankrupt but to another person, then that property is not part of the estate that is vested in the Trustee. [32] A proper lease is recognized in law as creating an interest in property. The lessee is considered to hold the leased property on and subject to the terms of the lease during the term of the lease. The landlord's interest in respect of possession of the property is deferred to that of the tenant until the lease terminates, at which time the property reverts to the landlord. [33] The courts have determined that the test as to whether a lease has been granted is whether there has been a grant of a right to exclusive possession of the property in question. For a lease to be in effect, the tenant must have taken up possession under its terms. In such circumstances, the tenant has rightful exclusive possession and is, therefore, entitled to enforce that possession against the landlord and others. These are the characteristics of a right that is a right to property and not merely a right between persons. [34] The latter type of right, i.e. a right only between persons, is enforceable only between them and not as against third parties. Personal rights can be affected by the bankruptcy. The Trustee takes the property of the bankrupt subject to the equities existing between the bankrupt and other persons by reasons of such contracts, but the Trustee is not obliged to carry on with contracts which would require performance by the Trustee. [35] The submissions that were made did not raise an issue that would bear on the above outline of the law. In the light of the above outline, it can be seen that the question of "lease or licence" must be addressed in terms of the nature of the rights that the parties have created by their contract. Cases have properly held that the choice of the parties to use one name or another to characterize their arrangement cannot be determinative. The parties could call a contract a licence but create rights which would constitute a lease and vice versa. [36] The Time Share Contracts do not provide for exclusive possession without qualification during the periods of permitted occupancy. The landlord is entitled to come onto the premises to carry out its duties under the contract, including the maintenance of the project generally. [page554] [37] The right of the landlord to enter the premises for various maintenance functions does not constitute a factor indicating a licence rather than a lease. The right is consistent with the landlord having only a reversionary interest in the property. There was nothing to suggest that the particular rights reserved to the landlord would interfere with the tenants' quiet enjoyment of the premises. [38] The Time Share Unit holders have rights of access to various facilities of the project as well as the use and occupation of their respective units. These additional rights are compatible with the arrangements being either leases or licences. [39] The difficulty lies with the periodic nature of the rights of possession given to the unit holders. [40] The contracts provide that the tenant may not go into possession until the commencement of a week that is authorized for the occupancy of the tenant. The tenant must relinquish possession at the conclusion of the week, at which time another tenant may go into possession. [41] All the respondents had possession of Time Share Units for periods of time over a number of years, until the business ceased operating. [42] To determine the nature of the right of the time share tenant, it is necessary to address that right in terms of the circumstances that obtained when the business was still operating. In such circumstances, at a time when the tenant is properly out of possession by reason of the expiry of the tenant's designated week or weeks, how is the right of the tenant to be characterized? The tenant cannot be said to be in possession. Nor is the tenant entitled to possession except at a future time in accordance with the terms of the contract. This type of interest has traditionally been characterized in law as an interesse termini. What is important is not the label itself but the rights that have been held to apply to such an interest. According to the decision in Wallis v. Hands, [1893] 2 Ch. 75 at pp. 85-86, [1891-94] All E.R. Rep. 719, this interest will support a claim by the tenant against the landlord for failure to put the tenant into possession but it will not support an action for trespass. That is, it will support a claim against the person who is the landlord but it will not support a claim against the property itself. [43] While the respondents are all persons who have previously been in possession, the particular periods for which they were entitled to be in possession expired and the respondents surrendered possession as they were required to do, and no basis has been shown to justify regarding them as being in a different position from the holder of an interesse termini who at the time of asserting the interest has not yet come into possession of the [page555] property. They share the common attribute that they are properly not yet in possession. [44] Based on the above considerations, the rights of the respondents are rights under an interesse termini. The interest is not of a kind granted by a lease which the tenant can assert against the property and therefore against third parties, such as the creditors of the estate. [45] Accordingly, the rights do not constitute rights in property. If that were the only issue in this case, the conclusion would have to be that, with respect to the bankruptcy, the Time Share Claimants are therefore unsecured creditors whose claims rank alongside other unsecured creditors including the applicant.
Estoppel and Unconscionability [46] In Re Bodair Ltd. (1969), 13 C.B.R. (N.S.) 51 (Ont. S.C.), the doctrine of estoppel was applied in respect of dealings relating to the assets of the bankrupt company. The company allowed its president to register a car owned by the company in his own name and the president then gave a chattel mortgage on the car to the bank. Houlden J. held that the bank had acted bona fide and without knowledge of the true ownership of the goods, and that the chattel mortgage was valid by estoppel against the trustee in bankruptcy of the company. So, it is argued, in the present case, the company held out that the time sharing arrangements were leases and there should be an estoppel against the Trustee taking a different position. [47] From the decision of Houlden J., it appears that the court accepted the reasoning that where the bankrupt would be estopped from contesting the security instrument given to a third party, the Trustee in bankruptcy is also estopped. The submission of the respondents here is that the company in this case would be estopped from denying that there is a lease and therefore the Trustee should be estopped also. [48] The decision in Re Bodair Ltd. was adopted in Re Country Kitchen Donuts Ltd. (1980), 34 C.B.R. (N.S.) 252, 1 P.P.S.A.C. 176 (Ont. S.C.). In that case, a chattel mortgage was given to the bank by two principals of the bankrupt corporation. Saunders J. said at p. 260 C.B.R. that if the assets were found to be owned by the company at the time of the execution of the chattel mortgage, it would still be valid as against the Trustee on the basis of estoppel. The bank had received a partnership declaration and an account agreement from an unincorporated body. The bank had no knowledge of the existence of the corporation. [49] It might be argued there is an important difference between these two cases and the present one. The bank in each of [page556] the two cases was not in a position to determine that the ownership was not held by the mortgagors. In the present case, the applicants arguably knew all the relevant facts about the terms of the time share contract that are determinative of the status of those contracts. So their position is not the same as that of the mortgagee banks in the two cases. Their position is more akin to that of a party who has been given an instrument that is called a mortgage but lacks a clause charging the property in question. All persons are equally able to obtain adequate advice in order to assess whether such an instrument is legally a mortgage. With respect to other creditors of the purported mortgagor, the analysis would be that, as regards them, no mortgage had been given. [50] If there were a basis for a claim of rectification that would present a different case, but there is nothing to suggest that there is any basis for rectification here. The features of the time share contracts which preclude them from being leases are features that the parties intended. [51] It was submitted that a further ground for estoppel in this case is that it is the applicant company, as an unsecured creditor, who stands to benefit from a determination that the contracts are not leases, and the applicant company is owned by Mr. Kuttis, the principal in the bankrupt company that, according to the respondents, marketed the contracts as leases. The respondent says it is unconscionable that Mr. Kuttis should stand to benefit in these circumstances. [52] There is no suggestion that the bankruptcy is invalid. Accordingly, the Trustee is properly engaged in the realization of the estate for the benefit of the creditors in accordance with their interests. There is no suggestion that the debt owing to the applicant is not valid. Indeed there is evidence that advances from the applicant were an important factor in keeping the bankrupt company going as long as it did. Moreover, the applicant argues that no basis is advanced for lifting the corporate veil to look beyond the applicant company to Mr. Kuttis personally as the prospective beneficiary. The well-established principle in this regard is that shareholders are not liable for the debts of their corporation because the corporation is considered in law to be a separate entity from its shareholders except where the corporation is in fact their agent, or is a sham or a device: Salomon v. Salomon & Co., [1895-7] All E.R. 33, [1987] A.C. 22 (H.L.). [53] The principle of the corporate veil as a protection against the liability of the shareholders of the corporation is enshrined in statute law. See, for example s. 92(1) of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 which provides as follows: [page557]
[54] These considerations do not exhaust the issue of unconscionability. To address that issue adequately it is necessary to carry the analysis beyond the submissions made in the hearing. [55] In considering the application of the principle of the corporate veil, particularly in circumstances where it is invoked for a purpose other than the protection of a shareholder from liability for the acts of a corporation, it is important to keep in mind the counsel of caution set out in the following frequently cited remarks of Wilson J. in Constitution Insurance of Canada v. Kosmopolous, [1987] 1 S.C.R. 2 at pp. 10-11, 34 D.L.R. (4th) 208:
[56] As set out in the decision of the Court of Appeal for British Columbia in Harry v. Kreutziger (1978), 95 D.L.R. (3d) 231, 9 B.C.L.R. 166 (C.A.) and other cases, the courts may grant relief from the consequences that would otherwise flow from a transaction where that transaction is unconscionable; i.e. it has been obtained by taking advantage of the weaker bargaining position of the complainant party and has had an improvident result for that party. [57] McIntyre J.A. stated the principle as follows at p. 237 D.L.R.:
[58] The issue of unconscionability was addressed more recently in the decision of the Court of Appeal for Nova Scotia in Atlas Supply Co. of Canada Ltd. v. Yarmouth Equipment Ltd. (1991), 103 N.S.R. (2d) 1, 37 C.P.R. (3d) 38 (C.A.). The plaintiff [page558] corporation had entered into a franchise agreement with the defendant. The agreement contained exclusion clauses which precluded reference to representations not set out in the agreement. The majority of the court found that Atlas was in a superior bargaining position to the defendant because it possessed information which it did not divulge to the defendant and which showed that it understood that the information it disclosed to the defendant was inaccurate. The fact situation in Atlas is materially similar to the present case, as is explained below. [59] The argument that the respondents have been treated unconscionably in respect of their investment in the time share units is based on the fact that Mr. Kuttis as a principal in the bankrupt company authorized the marketing of the units as leases and that this marketing included Question 19 and the answer given to it in the information sheet which reads as set out above in these reasons. [60] With reference to Question 19, the applicant submitted that the answer to the question states that members' leases have priority over all other encumbrances and that this was true at the time as there were in fact no prior encumbrances in existence. Moreover, the applicant is not claiming as the holder of a security but simply as an unsecured creditor ranking, not in priority to the "members' leases" but pari passu with, i.e. alongside them. But these considerations do not exhaust the significance of what Question 19 and the answer to it say and imply. Reading the relevant portions, they say that "if the Resort goes bankrupt", "the development has been structured in such a manner that the members' leases have priority over all existing or future encumbrances on the property" (emphasis added). [61] This wording is important. It does not say that there are no existing encumbrances but that there is priority over all existing encumbrances, which is quite a different matter. It does not address only existing encumbrances but also potential future encumbrances. Also it does not refer to the terms of the contracts, which were fully known to the respondents, but to "the structure of the development", which could reasonably be taken to refer to matters known to the bankrupt company but not set out in the information made available to investors or otherwise discoverable by them. Thus, they were placed in a position of vulnerable ignorance by the statement of the bankrupt company. [62] In view of the phrasing of Question 19, and the answer to it, the investor was invited to understand and rely on the position [page559] [that] the leases had priority and that they could rely on that condition continuing. "Encumbrances" would fairly be taken to mean "secured claims". The statement that "the leases have priority over all existing and future encumbrances" fairly implies that they would also have priority over unsecured claims, i.e. claims which are subordinate in status to encumbrances. Otherwise, the assurance evidently intended to be offered by the answer would be without substance. There is nothing to suggest that the bankrupt company had any basis for making this statement. Having marketed the units on the basis that they had a structured priority, it would be unconscionable for Mr. Kuttis to be able to then take action on behalf of the bankrupt company, through a borrowing from his other company, the applicant, to provide a claim to that other company which would not be subject to the priority of "the members' leases" in accordance with the implication of the answer to Question 19, and the answer to it. Accordingly, the appropriate remedy is to treat the unsecured claim of the applicant as if it were subordinate to the units. [63] This analysis does not involve a lifting of the corporate veil to impose liability on a shareholder. What it does is effectively to deny to the applicant company and indirectly to Mr. Kuttis a benefit in the form of a pari passu claim that Mr. Kuttis, through his role in the bankrupt company, provided to the applicant company, in circumstances that made his doing so unconscionable. [64] The factor that gives rise to the unconscionability in the case of the applicant company is its relationship to Mr. Kuttis. As president and sole shareholder and director of the applicant company, he was and is its controlling mind. He knew or had reason to know that a borrowing authorized by him on behalf of the bankrupt company and the applicant company would prospectively give the applicant company a pari passu claim against the unit holders. Thus, it was unconscionable for him to authorize the borrowing transaction for each of the parties to it. If the borrowing had instead been made from an unrelated third party such as a bank, without actual or constructive knowledge on its part, the case would be a different one as regards any claim that might have been asserted by the unrelated third party. It would have been a stranger to the unconscionable conduct.
Disclaimer [65] The applicant submitted that a trustee in bankruptcy for a bankrupt landlord may disclaim a lease at common law and also [page560] pursuant to s. 30(1)(k) of the Bankruptcy and Insolvency Act. The respondents submit the contrary. [66] The conclusion reached above is not that the contracts are leases but rather that it would be unconscionable for the Trustee or the applicant as the s. 38 claimant to be able to deny that they have priority to the claim of the applicant. In view of that determination it is not necessary to address the issues raised concerning disclaimer.
Section 81(4) of the Bankruptcy and Insolvency Act [67] The applicant submits that the Trustee is entitled with leave of the court to sell the Property free and clear of the claims of any creditor who fails to file, pursuant to the provisions of s. 81(4) of the BIA, a Proof of Property claim in the form prescribed by the BIA within the time limit. The respondents dispute the applicability and the appropriateness of the applicant seeking to exercise authority under s. 81(4). [68] The determination of unconscionability effectively deals with the s. 81(4) issue. No reason is advanced why the s. 81 notice process followed here should overcome the result that follows from the determination of unconscionability.
Conclusion [69] The respondents request an order declaring that the contracts held by the respondents create valid interests in land which survive the bankruptcy. An order in those terms would go well beyond the determination made above. The proper order to be made is that the Trustee may sell the Property free from any claim by the respondents of an interest in the Property but in dealing with the proceeds of sale as between the respondents and the applicant, the claims of the respondents in respect of the unexpired portions of their leases are to be valued and the amount of their claims as valued is to be payable to them to the extent of the sale proceeds available for that purpose, in priority to the claim of the applicant. The parties may seek direction from the court as to the terms of the order and, in particular, as to the implementation of the valuation and priority provisions contemplated by the foregoing disposition. The parties may consult me as to costs.
Order accordingly. [page561]
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