Canada: Hog Feed Suppliers Assert Priority Over Producer's Secured Creditors -- Developing Law In Manitoba

Last Updated: February 16 2014
Article by Jennifer Spencer and Brian P. Kaliel Q.C.

The Manitoba Court of Appeal will consider an interesting insolvency case involving hog feed suppliers who claim of priority for the cost of feed over Farm Credit Canada and Bank of Montreal, the hog producer's secured creditors. 

In general, the Court found Suppliers may have an unjust enrichment claim arising from an alleged fraud on the part of producer, who allegedly ordered feed while preparing for the Companies Creditors Arrangement Act ("CCAA") application with no intention of paying for the feed.

Puratone Corp. (Re), 2014 MBCA 13 []

Brian Kaliel, QC of our Edmonton office summaries the reasons of the Court of Appeal Chambers judge, A.D. MacInnes J.A., in granting leave (permission) for the appeal to go ahead and be determined on the merits:

In Re Puratone Corp., Farm Credit Canada ("FCC") and the Bank of Montreal ("BMO") applied for leave to appeal an Order made on July 8, 2013 by the Manitoba Court of Queen's Bench in proceedings under the Companies Creditors Arrangement Act (the "CCAA").

Seventeen farming operators (the "Suppliers") who had provided feed to a commercial hog conglomerate involving three corporations - The Puratone Corporation, Pembina Valley Pigs Ltd. and Niverville Swine Breeders Ltd. (collectively "Puratone") claimed priority for the cost of the feed they had supplied over Puratone's secured creditors, being FCC, BMO and the Manitoba Agricultural Services Corporation.

The initial Order under the CCAA contained a "stay" provision. The "stay" provision prevented the commencement of proceedings against Puratone, Puratone's property, and its directors during the CCAA proceedings.

As a result of the CCAA proceedings, Puratone's assets were sold to Maple Leaf Foods Inc. The sale was approved by the Court on November 8, 2012.

A Court Order was then made authorizing the payment of approximately $17.7 million to BMO, approximately $15.8 million to FCC, and approximately $1 million to Manitoba Agricultural Services Corporation.

The Suppliers requested the Court to lift a stay of proceedings so they could commence proceedings against Puratone and its directors. The Suppliers also requested that approximately $900,000.00 be held back from funds otherwise payable to FCC, BMO and the Manitoba Agricultural Services Corporation.

The Justice of of the Manitoba Court of Queen's Bench concluded that the Suppliers may have an unjust enrichment claim arising from an alleged fraud on the part of Puratone, who allegedly ordered feed while preparing for the CCAA application with no intention of paying for it.

The CCAA stay was lifted and approximately $900,000.00 was held back from the interim distribution.

Decision: MacInnes, J.A. granted FCC and BMO leave to appeal [at para. 43].

MacInness, J.A. reviewed the legal test for granting leave to appeal in CCAA matters at para. 15, and concluded [at para. 16] that, as a general rule, leave to appeal decisions given by a Judge under the CCAA are only granted "sparingly" but in this case leave was appropriate, following authority from the BC Court of Appeal.

FCC and BMO argued, among other things that:

  • The holdback Order elevated the unproven claims of unsecured creditors above the proven secured claim of FCC and BMO and effectively elevated the unsecured claim the status ahead of, or equal to, their proven claims.
  • There was no evidence of any legal basis for the holdback claims before the Queen's Bench Justice.
  • The case was important for its precedential value, as it now appeared open for any subordinate or unsecured creditor that had supplied goods or services prior to CCAA filing to obtain an Order that funds be held back pending legal action, and that similar claims could overwhelm CCAA Courts.
  • There was insufficient evidence to establish the elements of unjust enrichment relied upon by the Suppliers and that the juristic reason for any enrichment might be found in the pre-existing legal rights of BMO and FCC - a point which was never considered by the Queen's Bench Justice.

MacInnes, J.A. concluded [at para. 45 and 47] that the leave application raised questions of important practice and questions of law which were not expressly addressed by the Queen's Bench Judge. 

This case will be one to watch!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Jennifer Spencer
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