Date: 20070424
Docket: T-1588-06
Citation: 2007 FC 434
Ottawa, Ontario, April 24, 2007
PRESENT: The Honourable Mr. Justice Harrington
BETWEEN:
NORDEA BANK NORGE ASA
Plaintiff
and
THE OWNERS AND ALL OTHERS INTERESTED
IN THE SHIP "KINGUK", THE SHIP
"KINGUK",
THE OWNERS AND ALL OTHERS INTERESTED
IN THE SHIP "AQVIQ", THE SHIP
"AQVIQ",
AND FAROCAN INCORPORATED
Defendants
REASONS FOR
ORDER
[1]
The
defendant ships “KINGUK” and “AQVIQ” were sold by this Court in exercise of its
admiralty jurisdiction “en bloc” for the sum of $5,800,000. The proceeds were
deposited into Court and have earned some interest. As is usually the case in
such matters, the approved claims exceed the proceeds of sale. These are the
reasons for my orders of 8 March and 4 April 2007 by which the proceeds were
distributed, with priority given to some claimants, and the claim of one
subordinated to all others.
[2]
Although
Madam Justice Gauthier’s order for sale made provision for the establishment of
two separate funds should the need arise, it was not necessary to do so. The
funds were distributed on the same basis as if one ship had been sold.
[3]
There
is no specific statute, and indeed no specific case, which establishes an
exhaustive ranking of claims should insufficient funds be available. Priorities
were established in English maritime law and, in turn, form part of our
Canadian maritime law (ITO – International Terminal Operators Ltd. v. Miida
Electronics Inc., [1986] 1. S.C.R. 752 (The Buenos Aires Maru)).
There has been some divergence in the case law between the two countries which
is not necessary to discuss here, and in addition certain Canadian statutes
give priority to specific claims. By way of background, reference may be had to
Admiralty Practice, by McGuffie, Fugeman and Gray, British Shipping
Laws, Stevens & Sons Ltd., London, 1964, chapter 39, Gold et al., Maritime
Law, Irwin Law Inc., Toronto, 2003 at pages 795 and following, and Maritime
Liens and Claims, by Tetley, 2nd Ed., Montreal, 1998, chapter
24. Prothonotary Hargrave was a great authority in this area as evidenced by such
cases as Scott Steel Ltd. v. The Alarissa, [1996] 2 F.C. 883, affirmed
(1997), 125 F.T.R. 284, and Fraser Shipyard and Industrial Centre Ltd. v.
Expedient Maritime Co., [1999] 170 F.T.R. 1, varied (1999), 170 F.T.R. 57
(T.D.). However not every conceivable type of claim had been asserted therein,
and so language of apparent general application must be considered in context.
[4]
The
amount of money available dictated the manner in which the fund was distributed,
more specifically in two stages. The plaintiff, Nordea Bank Norge ASA, had a
judgment on its mortgages. A mortgage outranks ordinary claims, but in turn is
outranked by other claims such as Marshall’s fees and
disbursements, and maritime liens. The available funds were more than
sufficient to satisfy the Bank’s claim, which in turn was ten times greater
than all the other claims combined. Thus it was only necessary to first
consider the claims which might possibly outrank the Bank’s mortgage, then determine
what was payable in virtue of the mortgage and finally to deal with the other
claims, and priorities, if any, amongst them.
[5]
The
Bank moved on 4 March for an order for payment out on its mortgage, as well the
payment out of certain claims it recognized had priority over it. I granted
that motion in part. The documentation with respect to one crew claim, which
enjoyed a maritime lien, was incomplete, and I wanted to make sure that
everyone had an opportunity to make representations with respect to certain
aspects of the Bank’s claim. The Bank was claiming fees and disbursements of
its solicitors in the amount of $96,471.43 and other disbursements of
$58,168.36. If those disbursements had been incurred by the shipowner directly,
they would normally have been necessaries claims or other claims without
priority. I issued directions that day putting those matters over to the
general sittings in Halifax on 4 April, called upon certain claimants to
deal with specific points and stated that the balance of the fund would be paid
out. The parties were entitled to file supplemental submissions, and, of
course, to make representations at the hearing.
[6]
As
it turns out, the Bank and three other creditors made written submissions.
However, only the Bank attended the hearing. In the circumstances, I consider
it appropriate to explain to all concerned what I did, and why.
DISTRIBUTION OF THE PRINCIPAL
[7]
Marshall’s fees and
other fees and disbursements reasonably incurred in selling a ship, in
converting steel into cash, are given high priority. In this case, all such
fees and disbursements incurred were funded by the Bank itself. Although it may
well be that these fees and disbursements were covered by and form part of the
claims secured by the mortgages, since any in rem creditor could have
taken the initiative and brought the ships to sale, those fees and
disbursements should be identified.
[8]
Under
this heading I granted the Bank two items, brokerage expenses of $92,800 and
fees and disbursements of its solicitors in the amount of $70,000.
[9]
In
charging the Marshall with the
responsibility of finding buyers for a ship, the Court often makes specific
provision entitling him to retain brokers, who are paid a commission which
forms part of his costs. That did not happen in this case.
[10]
The
Marshall was never
put in possession of the ships, and so legally they remained in the possession
of their owners. Considerable difficulty was incurred in developing interest in
their purchase. Finally, the Bank retained brokers and sought approval that the
two ships be sold “en bloc”. This resulted in a greater overall purchase price.
[11]
By
not obtaining prior Court approval, the Bank ran a risk in that the Court had
to consider, after the fact, whether this was a reasonable expense. I am satisfied,
on the facts of this case, that this brokerage fee was reasonably incurred.
[12]
The
mortgages, as is quite common, provided that all the fees and disbursements of
the Bank’s solicitors in connection therewith, and enforcement thereof, formed
part thereof. However, as aforesaid, even without such a contractual provision,
any creditor who incurred fees and expenses in converting the ships into cash
would have been entitled to repayment as Marshall’s fees with
high priority. These fees and disbursements covered such items as preparing,
filing and serving the statement of claim, affidavit to lead warrant, warrant
of arrest and other matters preserving the ship and making it available for
purchase. Then came the crew claims and part of Canada Revenue Agency’s claim.
For the purpose of this case, it is not necessary to determine which has
priority over the other.
[13]
Claims
for crew wages and related matters enjoy a maritime lien. I awarded the
following crew members the following amounts: Mark Hartery $51,931.01, Joe Mitchell
$34,835.23, Jens Andrew Zackarissen $36,723.42, Terry Glenjen $15,000.00 and
Henry Brenton $40, 811.00.
[14]
Canada
Revenue Agency’s claim totalled $157,030.17 of which $57,202.94 was awarded in
priority as relating to employee deductions at source which the shipowner
should have, but did not, remit. Section 227 of the Income Tax Act
establishes a trust in favour of Her Majesty. That trust extends to any
property subject to security interests in favour of others, and is treated as property
beneficially owned by Her Majesty notwithstanding such security interests. That
provision is broad enough to give Her Majesty a statutory lien on the ships.
The balance of the claim will be discussed later.
[15]
Turning
to the mortgage claim, on 8 March I ordered the payment out of $5,252,070.59
which was the amount of the Bank’s judgment. I put over for further argument
its solicitors’ fees and disbursements, and certain other expenses it incurred,
and the rate at which post-judgment interest should be paid out of the fund.
[16]
On
4 April, as part of the mortgage, I awarded $26,471.43 for other legal fees and
disbursements incurred as forming part of the matters covered by the mortgages
as well as $58,168.36 for disbursements of a distress nature which were
reasonably incurred in maintaining the ships in order to make them available
for sale. These items were specifically covered by the mortgage. Our Court
nevertheless, in exercise of its equitable jurisdiction, takes a close look at
such items to determine whether a mortgage creditor has been sitting on its
hands, irrationally pouring good money after bad or taking undue advantage of
its secured position. See for example Prothonotary Hargrave’s decision in Fraser
Shipyard, above. However in this case, I am satisfied that the Bank acted
responsibly at all times.
CLAIMS RANKING BELOW THE
MORTGAGE
[17]
I
allowed three necessaries claims. They have a statutory right in rem in
accordance with section 22 of the Federal Courts Act. They do not enjoy
priority but rather are treated as ordinary creditors. The claim of Atlantic
Marines Supply Services Inc. was allowed in the amount of $23,305.28, Atlantic
Custom Brokers for $7,321 and Blue Water Greenland A/S for $21,943.17. Blue
Water Greenland asserted a maritime lien under the laws of Denmark. However, it
failed to establish that Denmark was the proper law of
its claim, and failed to prove that Danish law differed from Canadian law.
Although some countries do give necessaries claims the status of a maritime
lien, the law of that country has to be proved as a fact to differ from our own
domestic law. That was not done.
[18]
I
also allowed the balance of Canada Revenue Agency’s claim of $99,821.23 and the
Workers’ Compensation Board of Nova Scotia $88,284.60.
[19]
There
remained one other claim, that of Esperg Kjolbro, the vice-president of the
ship owning company. He personally incurred certain expenses with respect to
the crew. Even assuming that the crew members would have had a maritime lien
had not their claims been paid, it is well established that one cannot obtain
subrogation of a claim secured by a maritime lien for wages without prior Court
approval (Finansbanken ASA v. GTS Katie (The) (2002), 216 F.T.R. 176).
No such approval was obtained. In addition, in the directions of 8 March, I
called upon Mr. Kjolbro’s solicitors to make representations as to why his
claim should not be subordinated to all other claims on the grounds that he was
not dealing at arms length with the defendant shipowner. The solicitors replied
that they had no representations to make.
[20]
Drawing
on principles of bankruptcy law, which are equitable in nature, I have
subordinated Mr. Kjolbro’s claim. As the fund has been exhausted, he gets
nothing. The claims which ranked below the mortgage cannot be satisfied in full
from the remaining proceedings of the sale, and so recovery will be pari
passu.
[21]
It
has been held in such cases as The Alarissa, above, that statutory
rights in rem rank pari passu amongst themselves and with the
claims of ordinary non-marine unsecured creditors. However, it may well be that
in that case, as in this, the parties did not advance all possible arguments. Indeed,
inertia on their part may have been wise, for any assertion by one creditor of
priority entitlement would be bound to have been met with an argument that that
creditor’s claim should actually be subordinated. All the various permutations
and combinations were not fully argued here.
[22]
For
instance, the Crown could have argued that as an ordinary creditor, it outranks
other ordinary creditors in virtue of the Crown prerogative. On the other hand,
the marine creditors could have argued that although the Federal Court has
jurisdiction to issue process for the collection of tax indebtedness, the Canada
Revenue Agency could not have brought the ships to sale in an admiralty action,
a sale in rem which gives clear unblemished title to the purchaser, and
thus increases the ships’ value. If the Crown could not have moved for sale,
why should it rank with those who could? What about creditors who had a statutory
right in rem because the subject matter of their action was one of the
two ships, as opposed to others who might have had a maritime action in
personam, but no statutory right in rem? Could it be argued that
those who have an admiralty cause of action in personam should be paid
in priority to those who have no admiralty cause of action over which this
Court would otherwise have jurisdiction?
[23]
In
any event, no one suggested that The Alarissa, above, upheld by this
Court, was wrongly decided or overcome by subsequent case law, and so in comity
I held that the ordinary creditors, with the exception of Mr. Kjolbro, would
rank pari passu.
POST-JUDGMENT INTEREST
[24]
In
an effort to speed up the process, the Bank negotiated with those creditors it
acknowledged outranked it. The settlements it made, subject to Court approval,
were inclusive of principal, interest and cost. The settlements accurately
reflected the law. I did not grant them any part of the interest earned on the
Court deposit, but on the other hand the order for payment out to them was made
one month earlier than the order covering the remainder of the claims.
[25]
As
the causes of action, which led to claims against the fund, did not arise in a
single province, section 37 of the Federal Courts Act provides for
post-judgment interest at the rate the Court considers reasonable in the
circumstances. In giving judgment last year, Prothonotary Morneau awarded the Bank
post-judgment interest “to be assessed upon further motion”.
[26]
The
mortgage contemplated post-judgment interest. It is difficult to fix the exact contractual
rate with certainty because it was tied in to lending rates in several
currencies. The Bank’s calculations put the contractual post-judgment rate at
about 5%. This is an eminently reasonable rate, and equates with the legal rate
under the Interest Act. However, the funds on deposit with the Court
have earned interest at a far lesser rate.
[27]
I
have decided that post-judgment interest should be at the rate at which the
proceeds of sale have earned interest. Several factors have influenced my
discretion.
[28]
While
an agreement as to post-judgment interest may be relevant, it does not fetter
the Court’s discretion under section 37 of the Federal Courts Act (Mount
Royal/Walsh Inc. v. Jensen Star (The) (1988), 17 F.T.R. 289, varied in
appeal, but not on this point, [1990] 1 F.C. 199 and Kirgan Holding S.A. v.
Panamax Leader (The) (2002), 225 F.T.R. 273. See also Governor and
Company of the Bank of Scotland v. Nel (The), [2001] 1
F.C. 408).
[29]
Often
the mere threat of arrest is enough to cause the in personam defendant
to furnish security. At times that security takes the form of a cash deposit
with the Court. Although dealing with pre-judgment interest, the Court of
Appeal has stated in admiralty matters that a rate ascertainable by reference
to that payable on monies paid into Court may be applied (Davie Shipbuilding
Ltd. v. Canada, [1984] 1 F.C. 461).
[30]
The
award of interest at a contractual rate could, in some circumstances, have the
effect of giving some priority to a claim which is actually outranked. For
instance, a maritime claim arising ex delicto, such as from a collision,
outranks a mortgage. An award of contractual interest would eat into the
principal amount of the claim secured by the maritime lien. Although the Bank
outranks the ordinary creditors, who shall be paid considerably less than 100
cents on the dollar, I consider it inequitable that their claims be further
eroded by awarding an interest differential.
[31]
Furthermore,
an action in rem has retroactive effect relating back to when the cause
of action arose or to a more recent time depending on whether or not a maritime
lien is involved. In a perfect world there would be no post-judgment interest,
as proceeds of sale would be disbursed immediately. Time was required to allow
creditors to advance their claims, and to give each the opportunity of
challenging the claims of the others. However, this does not detract from the
principle stated by Lord Esher, M.R., in The Cella (1888), 13
Probate 92, where in speaking of rights to be satisfied out the proceeds of the
ship sale, he said at pages 86 and 87:
[…] These rights must exist before the
ship is seized, for the Court adjudicates upon the ship on the ground that it
had jurisdiction to seize it and realize it for the plaintiff, on account of
something which happened before the seizure, which in this case was repairing
her. Even without the cases cited for the plaintiff, it would seem to me to be
clear that whatever may be the judgment of the Court it must take effect from
the time of the writ. The judge is to enforce the writ, and to determine the
rights of the parties at the time the writ is served. That is so, as it seems
to me, in every action. But in every action we may have bankruptcy and I know
not what intervening, so that when judgment is given it cannot be effectually
carried out. But if the money be in court, or the Court has possession of the
res, it can give effect to its judgment as if it had been delivered the moment
after it took possession of the res. It is contrary to the principle of these
cases and to justice that the rights of the parties should depend not upon any
act of theirs but upon the amount of business which the Court has to do.
Therefore the judgment in regard to a thing or to money which is in the hands
of the Court, must be taken to have been delivered the moment the thing or the
money came into the possession of the Court.
COSTS
[32]
The
Bank did not seek costs, and none were awarded, save of course that some of the
fees and disbursements awarded as equivalent to Marshall’s expenses,
or as part of the mortgage, could also have been characterized as taxable costs
and disbursements.
“Sean Harrington”
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