Court of Appeal Summaries (June 29 – July 3, 2020)

Following are our summaries of last week’s civil decisions of the Court of Appeal for Ontario. Not surprisingly, it was a light week.

The most notable decision is Hutchingame Growth Capital Corporation v. Independent Electricity System Operator. The Court in that decision discusses the “anti-deprivation” rule of bankruptcy law that prevents the enforcement of contractual provisions that have the effect of removing assets from a bankrupt estate that would amount to a “fraud on the bankruptcy law”. The Court determined that in this case, however, a clause in a contract that provided for the termination of the contract upon bankruptcy of one of the contracting parties did not run afoul of the anti-deprivation rule.

Other topics covered included anti-SLAPP, breach of contract/fraud and security for costs.

 

Hutchingame Growth Capital Corporation v. Independent Electricity System Operator, 2020 ONCA 430

[Lauwers, Hourigan and Thorburn JJ.A.]

Counsel:

Michael S. Hebert and Cheryl Gerhardt McLuckie, for the appellant

Thomas G. Conway and Benjamin Grant, for the respondent

Keywords: Contracts, Interpretation, Assignments, Duty of Good Faith in Contractual Performance, Bankruptcy and Insolvency, Fraud on the Bankruptcy Law Principle, Anti-Deprivation Rule, Statutory Interpretation, Torts, Negligence Misrepresentation, Civil Procedure, Standard of Review, Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 69.3, Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, MacDonald v. Chicago Title Insurance Co. of Canada, 2015 ONCA 842, leave to appeal refused, [2016] S.C.C.A. No. 39, Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, Housen v. Nikolaisen, 2002 SCC 33, Aircell Communications Inc. (Trustee of) v. Bell Mobility Cellular Inc., 2013 ONCA 95, Canadian Imperial Bank of Commerce v. Bramalea Inc. (1995), 33 O.R. (3d) 692 (C.J.), Capital Steel Inc. v. Chandos Construction Ltd., 2019 ABCA 32, leave to appeal granted, [2019] S.C.C.A. No. 109, Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc., 2019 ONCA 508, Bhasin v. Hrynew, 2014 SCC 71, Bhasin v. Hrynew, 2014 SCC 71, Bankruptcy and Insolvency Law, 2nd ed. (Toronto: Irwin Law Inc., 2015)

Facts:

In 2007, Greenview Power entered into a Renewable Energy Standard Offer Program Contract (“RESOP Contract”) to build a biomass renewable energy facility to generate and supply electricity to the Ontario Power Authority. The respondent, the Independent Electricity System Operator (“IESO”), is the Authority’s successor.

Greenview Power’s obligations under the RESOP Contract were to build a renewable energy facility and supply electricity for a period of 20 years beginning in 2010. Greenview Power could not meet this completion deadline, nor subsequent extensions of the deadline.

To save the project, in the fall of 2012, HGC, led by its principal EH, purchased some of Greenview Power’s secured debt and assumed its effective control.

In 2013, HGC entered into the Waiver and Amending Agreement with Greenview Power, the IESO, and Greenview Power’s other secured creditors. The Agreement waived specified events of default under the RESOP Contract and amended various targets under it, setting November 8, 2015 as the new Commercial Operation Date. However, Greenview Power went bankrupt on February 24, 2014 and the RESOP Contract terminated.

HGC could have revived the RESOP Contract under s. 9.2(3), a provision in the Contract that permitted it, as a secured creditor, to step into the bankrupt’s shoes. Instead of invoking this provision, HGC tried to assign its rights under the RESOP Contract to Truestar Investments Ltd., including the RESOP Contract, using s. 9.2(2). The trustee obtained a vesting order from the bankruptcy court that approved Truestar’s purchase of Greenview Power’s assets.

The trial judge found that the RESOP Contract clearly stated that it would terminate on bankruptcy, that HGC’s efforts to assign the Contract to Truestar failed, and that HGC had failed to prove that it was entitled to damages for breach of contract or negligence. He dismissed HGC’s action. HGC appealed.

Issues:

1. Did the RESOP Contract terminate automatically when Greenview Power made an assignment in bankruptcy?
2. Was the vesting order effective in vesting the RESOP Contract in Truestar?
3. Did the IESO breach its contractual obligations?
4. Did the IESO owe HGC a duty of care in negligence?
5. Was HGC entitled to damages?

Holding:

Appeal dismissed.

Reasoning:

The standard of review for the interpretation of the Bankruptcy and Insolvency Act (“BIA”) and the applicable common law are questions of law subject to the correctness standard of review. This standard also applies to the interpretation of the RESOP Contract as a standard form contract, standing alone. The Waiver and Amending Agreement was a negotiated contract that amended the RESOP Contract. Accordingly, the interpretation of both contracts together with the remaining issues engage questions of mixed fact and law and are subject to the standard of palpable and overriding error, except for any extricable errors of law, which are subject to the correctness standard.

1. Yes.
   1. The Waiver and Amendment Agreement did not supersede the termination provisions in the RESOP Contract that provided for termination upon bankruptcy.
   2. The termination provision in the RESOP Contract was not invalid under the automatic stay of proceedings provision in s. 69.3 of the BIA. The automatic stay only prevents creditors from pursuing claims against the insolvent person. The automatic stay of proceedings in bankruptcy has never been interpreted as preventing the exercise of the right of a contracting party to terminate an agreement between it and the debtor. The presence of express provisions having that effect in proceedings under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 and in the restructuring provisions of the BIA supports the view that the automatic stay of proceedings was not intended to extend to the termination of executory contracts, since those provisions would not be needed otherwise.
   3. The termination provision in the RESOP Contract did not violate the common law “anti-deprivation rule”.

Canadian courts have recognized that a contractual provision that is designed to remove value from the reach of an insolvent person’s creditors is void on the basis that it violates the public policy of equitable and fair distribution on bankruptcy. This is referred to as the “fraud on the bankruptcy law principle.” The principle can be usefully broken down into two distinct components: the anti-deprivation rule and the pari passu rule. The anti-deprivation rule operates by invalidating provisions that withdraw an asset that would otherwise be available to satisfy the claims of creditors upon the insolvency of the party or the commencement of insolvency proceedings.

Clauses that operate to terminate executory agreements and therefore eliminate a debtor’s opportunity to perform a contract do not necessarily result in a deprivation of value that would prejudice creditors.

In this case, IESO received no financial benefit from the automatic termination of the RESOP Contract and removed no value from the reach of Greenview Power’s creditors to its benefit. The anti-deprivation rule therefore did not apply.

4. HGC could not assign its interest in the RESOP Contract to Truestar under s. 9.2(2) without curing the outstanding defaults and reviving the RESOP Contract under s. 9.2(3).

2. No. Since the RESOP Contract had already terminated upon Greenview Power’s bankruptcy, there was nothing left of the RESOP Contract to vest in Truestar.
3. No. While it was true that IESO did not give HGC notice of the automatic termination of the RESOP Contract, HGC’s argument that the IESO was required to give at least 30 days’ written notice of termination as the result of the Waiver and Amending Agreement, was properly rejected by the trial judge. The fact that IESO might have acted more transparently upon learning that Greenview had filed for bankruptcy, rather than waiting silently for the 90-day period to expire did not amount to a breach of IESO’s duty of good faith contractual performance and the common law duty to act honestly in the performance of contractual obligations. The automatic termination of the RESOP Contract should have been quite obvious to HGC from the clear language of the contract. The duty of honesty in contractual performance ‘does not impose a duty of loyalty or of disclosure or require a party to forgo advantages flowing from the contract.
4. No. HGC failed to prove that IESO made any statement that was untrue, inaccurate or misleading, or that HGC relied on such a statement to its detriment.
5. No.