Date: 20170509

Docket: T-1226-10

Citation: 2017 FC 478

Ottawa, Ontario, May 9, 2017

PRESENT:    The Honourable Mr. Justice Phelan

ORDER AND REASONS

I.                   Introduction

[1]               This is the first of two motions heard by the Court on this litigation on March 16, 2017. This motion is for the payment out of sale proceeds of the ship “QE014226C010” [Vessel], sold by Court order for USD $5 million on June 30, 2014.

The action was commenced by Offshore Interiors Inc. [Offshore], a supplier to the Vessel.

[2]               The moving party, the Intervener Harry Sargeant III [Sargeant], seeks an order for payment out of the sale proceeds less the amount required to secure statutory in rem claims advanced by trade creditors for goods and services supplied to the Vessel (approximately $3.1 million).

Sargeant holds a builder’s mortgage against the Vessel. That mortgage has been assigned to Comerica Bank [Comerica], also an Intervener, who consents to this motion.

[3]               The statutory in rem claimants [in rem claimants] have not yet had their claims adjudicated, but these claims would arguably rank behind Sargeant’s claim. However, for the purposes of this motion, Sargeant is prepared to assume that the in rem claimants would rank ahead of his claim – therefore, he proposes to hold back the amount of $3.1 million in trust to secure these claims.

[4]               Sargeant wants the balance paid out, firstly to Comerica and the remainder to Sargeant.

Worldspan Marine Inc. [Worldspan], the designer/builder of the Vessel, opposes the motion principally on the grounds that the liabilities, particularly of Sargeant, have not yet been resolved.

II.                Facts

[5]               The dispute has a tortured history involving multiple proceedings in several jurisdictions, including in this Court and the Supreme Court of British Columbia [BCSC]. The following is a thumb-nail sketch of the core dispute.

[6]               Under a Vessel Construction Agreement [VCA] dated February 29, 2008, Sargeant commissioned Worldspan to design, construct, outfit, launch, complete, sell, and deliver a 142‑foot custom built luxury yacht to Sargeant. Sargeant had a continuing first priority interest in the Vessel to secure the sums advanced or paid to Worldspan. Sargeant was required to keep Worldspan in a positive cash flow position.

[7]               In May 2008, Worldspan granted Sargeant a builder’s mortgage duly registered in the Vancouver Ship Registry.

[8]               By August 2009, payments made by or on behalf of Sargeant to Worldspan totalled USD $11,064,525.38.

[9]               On August 14, 2009, Sargeant entered into a Construction Loan Agreement [CLA] with Comerica for a further USD $9,400,000 in order to finance the completion of the Vessel. By way of an Assignment of Security Agreement and Mortgage (also dated August 14, 2009), Sargeant assigned his interest in the VCA, the Vessel, and the Builder’s Mortgage to Comerica in exchange for the advanced funds.

[10]           From August 2009 to March 2010, Comerica paid Worldspan USD $9,387,398.67, on Sargeant's behalf, on account of invoices issued by Worldspan pursuant to the terms of the VCA.

[11]           Around April or May of 2010, a dispute arose between Sargeant and Worldspan regarding project costs and construction. By that time, a total of USD $20,651,924.05 had been paid to Worldspan by Sargeant, or by Comerica on his behalf, in connection with the construction of the Vessel.

[12]           On July 28, 2010, Offshore commenced the underlying action against Worldspan, Crescent Custom Yachts Inc., Sargeant and Comerica, all others interested in the Vessel, and the Vessel itself for unpaid invoices for services and materials rendered in connection with the Vessel.

[13]           On July 28, 2010, Offshore arrested the Vessel. It remained under arrest until June 30, 2014, when it was sold by the Federal Court, free and clear of any and all claims, liens, and encumbrances, for the sum of USD $5,000,000.00.

[14]           On May 27, 2011, Worldspan, and its related entities, filed a Petition under the Companies Creditors' Arrangement Act, RSC 1985, c C-36 [CCAA] in the BCSC. The petition resulted in a Claims Process Order which required all creditors to deliver proof of their claims against Worldspan to the BCSC on or before September 9, 2011, failing which the creditor would be forever barred from making or enforcing a claim against Worldspan. The Order also provided that any creditor asserting an in rem claim against the Vessel could pursue its claim outside the CCAA process in the Federal Court.

[15]           On August 29, 2011, Prothonotary Lafrenière issued a Claims Process Order for all creditors asserting an in rem claim against the Vessel. This Claims Process Order gave notice to all creditors of the requirement to file an affidavit in support of their claim against the Vessel. The Order specified that affidavits should describe the nature of the claim and provide any supporting particulars, thereby allowing the Federal Court to determine if the claim constituted an in rem claim against the Vessel and, if so, its priority.

[16]           On October 14, 2011, Sargeant filed an affidavit in support of his claim against the Vessel. According to this affidavit, his claim derived from payments in excess of USD $20 million made by him, or on his behalf, to Worldspan for the construction of the Vessel and from the security interest in the Vessel granted to him by Worldspan to secure those payments.

[17]           Several other parties have also asserted claims against the Vessel, including Worldspan, Comerica, Mr. Farid Al-Saleh, Supreme Fuels Trading FZE, and the in rem claimants, Offshore, Arrow Transportation Systems Inc, CCY Holdings, Cascade Raider Holdings Ltd., Continental Hardwood Co., Paynes Marine Group, Restaurant Designs and Sales LCC, and Capri Insurance Services Ltd. Two of the claims have been eliminated.

[18]           The Federal Court of Appeal has, in two separate decisions, a) confirmed that the mortgage secures advances exceeding $20 million and b) upheld the decision dismissing Worldspan’s priority over the claim and dismissing Sargeant’s motion for the in personam claims to proceed in the BCSC.

[19]           This motion is governed by Rule 491 of the Federal Courts Rules, SOR/98-106:

[20]           I note particularly that this is a matter of discretion and that such discretion may involve the determination of the rights of claimants.

The issue before me is whether to exercise judicial discretion to order partial payment out of Court.

III.             Analysis

[21]           A central point of Worldspan’s argument is that Sargeant’s relief cannot be granted until there is a conclusion that Worldspan is in breach of the VCA and monies are owing to Sargeant/Comerica – no such conclusion had been made. Worldspan contends that Sargeant breached the VCA and that Sargeant owes Worldspan approximately USD $6.2 million.

[22]           It would seem that Worldspan claims that the equities are in its favour. It suggests that Sargeant deliberately breached the VCA obligation to keep Worldspan in a positive cash position, which caused Worldspan to go into creditor protection. It is suggested that as part of the “plan”, Sargeant and Comerica intended to buy the Vessel in a “credit bid” process for only a fraction of its cost and to complete the Vessel at a shipyard in Richmond, BC, which was created for this purpose. However, the sale of the Vessel allegedly derailed this plan.

[23]           These allegations have not been proven, but they are the subtext to Worldspan’s argument that payment out of court is not justified.

[24]           The Court can draw little from these allegations because, as pointed out by Prothonotary Hargrave in Bank of Scotland v “Nel” (The) (1998), 144 FTR 47, 77 ACWS (3d) 917 (FCTD) [The Nel], it is inappropriate to look at the merits of the claims in a motion such as this. However, the Court does note that Sargeant and Comerica’s representative have an unexplained (or inadequately explained) reluctance to attend for cross-examinations in Vancouver. This matter is dealt with in the decision on the second motion.

[25]           The difficulty for Worldspan is that a number of its arguments on the status of legal interests in and about the VCA, CLA, and mortgage have been dealt with and rejected by Justice Strickland in Offshore Interiors Inc v Worldspan Marine Inc, 2013 FC 1266, 444 FTR 283, aff’d 2015 FCA 46, and by Justice Southcott in Offshore Interiors Inc v Worldspan Marine Inc, 2016 FC 27, 262 ACWS (3d) 362, aff’d 2016 FCA 307. Those decisions are more than mere “interpretative exercises”, as Worldspan attempted to argue.

[26]           However, I note that there is little precedent to guide the Court on the issue of partial payment out of Court. This is likely because such relief is unusual – the normal course being the resolution of the issues between the parties, followed by payment.

[27]           In The Nel decision, the Court pointed out that no one would be prejudiced or jeopardized by the payment out of “surplus” funds. The issue of “prejudice” is a relevant matter for the exercise of discretion, although the facts in The Nel case are remarkably more tranquil than in this case.

[28]           Sargeant and Comerica have not shown that no prejudice or disadvantage to any party will arise from payment out of the sale proceeds. In fact, they have not shown any real prejudice to themselves to maintaining the status quo and getting on with the litigation, particularly the setting of a priorities hearing.

[29]           On the strength of the record before me, I cannot determine “the rights of all claimants hereto” as provided in Rule 491(a). Nor can I determine that Worldspan’s arguments are bereft of any chance of success.

[30]           If it is the moving party’s contention that Worldspan’s position is not sustainable, it has other options, such as a motion to strike or a motion for summary judgment, to put that issue squarely before the Court. A motion for payment out of court is not a fitting forum for this multi-layered dispute.

[31]           It would be premature and potentially prejudicial to make a partial payment out of Court.

IV.             Conclusion

[32]           This motion will be dismissed with costs. The parties will be directed to contact the case management judge within 30 days to deal with the next steps in the litigation, including the priorities hearing discussed on this motion.

ORDER in T-1226-10

THIS COURT ORDERS that this motion is dismissed with costs. The parties are directed to contact the case management judge within 30 days to deal with the next steps in the litigation, including the priorities hearing discussed on this motion.

"Michael L. Phelan"

FEDERAL COURT

SOLICITORS OF RECORD

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