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Bulletproof Vest : Vesting Orders and Municipal Tax Claims in a CCAA Context - The Bloom Lake Decision

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Insolvency & Restructuring Bulletin

On November 17, 2016, the Superior Court of Québec ("Court") rendered a judgment declaring that under the Companies' Creditors Arrangement Act ("CCAA"), municipalities cannot claim from subsequent acquirers unpaid municipal taxes in connection to the assets purchased from the debtor through a vesting order.[1]

The Case

Société ferroviaire et portuaire de Pointe-Noire s.e.c. and the Sept-Îles Port Authority (collectively, the "Purchasers") acquired immovable properties (the "Purchased Assets") located in the City of Sept-Îles (the "City"), owned by the Bloom Lake and Wabush entities (collectively "Bloom Lake"). Bloom Lake had been conducting a liquidation process under the CCAA since May of 2015 and the sale of the Purchased Assets (collectively, the "Transactions") were done pursuant to a formal solicitation process. The Transactions were authorized by the Court pursuant to typical vesting orders (the "Vesting Orders"). At the time of the Transaction, the City's claim for unpaid municipal taxes was for approximately $9.2M (the "Pre-Transaction Taxes").

Following the completion of the Transactions, the Purchasers applied for a subdivision of their respective Purchased Assets. However, the City refused the applications, relying on the City's Subdivision Regulations to support its position that it could not subdivide the Purchased Assets until the Pre-Transaction Taxes were paid in full.

The City also asserted a claim against the Purchasers as "subsequent acquirers" based on Section 498 of the Cities and Towns Act ("CTA"), which states as follows:

498. Municipal taxes, imposed on any immovable, may be collected from the tenant, occupant or other possessor of such immovable as well as from the owner thereof, or from any subsequent acquirer of such immovable, even where such tenant, occupant, possessor or acquirer is not entered on the valuation roll.

In the case of any tax imposed on any partnership, in respect of the business of such partnership, such tax may be claimed and recovered in full from any member thereof.

The Purchasers applied to the Court seeking declaratory reliefs to confirm that the City's claim for Pre-Transaction Taxes could not be claimed from the Purchasers considering that (i) such claim had been purged pursuant to the Vesting Orders and (ii) it would result in giving the City a preference over other creditors of the Debtors.

The Honourable Stephen W. Hamilton, S.C.J. granted the Purchasers' motions. In its analysis, the Court held that the Vesting Orders were sufficiently broad so as to encompass the Pre-Transaction Taxes. Indeed, the Vesting Orders provided that the Purchased Assets would vest "free and clear" of, namely, all "right", "prior claims", "charges", "taxes", "restrictions on transfer of title", and "encumbrances".

In such a context, the Court also held that the purpose of the Vesting Orders was namely to allow a debtor to sell its assets for the highest possible price: as such, any prospective purchaser faced with an eventual claim such as the City's claim for Pre-Transaction Taxes would have necessarily offered a lower purchase price, thereby reducing the funds available for distribution amongst the creditors and giving a preference to the City.

With regards to the City's claim against the Purchasers as "subsequent acquirers" pursuant to article 498 CTA, the Court held that this provision is ineffective against purchasers in a CCAA context. The Court's ruling therefore completes the Québec Court of Appeal's ruling in Château d'Amos ltée (Syndic de) ([1999] RJQ 2612), where the Court held that Section 498 CTA was ineffective in proceedings under the Bankruptcy and Insolvency Act ("BIA"). The Court further added that the adoption of article 2654.1 of the Civil Code of Québec ("CCQ"), a direct result of the ruling in Château d'Amos, cannot be interpreted in a manner that would allow the City to bypass the effect of Section 36(6) CCAA by relying on its recourse against the subsequent acquirers to get full payment of Pre-Transaction Taxes.  Instead, the adoption of article 2654.1 CCQ allowed the City to claim the Pre-Transaction Taxes from the sales proceeds upon which its secured rights were transferred as a result of the Vesting Orders. 

This is an important decision in insolvency law as it completes Château d'Amos, extending its application to the CCAA context. It also holds that vesting orders can indeed extend to purge property of personal rights related thereto.

Fasken Martineau counseled the Sept-Îles Port Authority with a team consisting of Luc Morin and Nicolas Mancini.

[1] Bloom Lake, g.p.l. (Arrangement relatif à), 2016 QCCS 5620, Nov. 17, 2016 (Hamilton J.). (PDF - available in French only)

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