Canada: Dianor Resolved – Jurisdiction To Vest Off Interests In Land In Receivership Upheld, But GORs Hard To Impair

Last Updated: July 18 2019
Article by Stuart Brotman and Dylan A. Chochla

Introduction

In a number of recent cases, Canadian courts have demonstrated a willingness to vest mining claims free of royalty rights notwithstanding that those rights might constitute interests in land. One such case before the courts in Ontario is Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc.

Overview

On June 19, 2019 the Court of Appeal released its decision in Dianor upholding the jurisdiction of the courts to grant vesting orders impairing third party rights, and setting out a test for when assets can be vested free and clear of interests in land. This highly anticipated decision has provided much needed guidance on this issue.

Facts

Dianor was an early stage exploration company that owned a number of mining claims in Ontario and Quebec. On the application of its secured lender, Third Eye Capital Corporation, the Ontario Superior Court of Justice granted an order appointing a receiver over Dianor's assets. Fasken acted as counsel to the receiver.

The receivership proceeding involved a contested sale by the receiver of Dianor's Ontario mining claims free of gross overriding royalty ("GOR") rights held by certain third parties. One of the royalty holders opposed court approval of the sale on the basis that the court has no jurisdiction to vest mining claims free of existing royalty rights (effectively terminating the royalty). The primary position of the opposing royalty holder was that its GOR was an interest in land that could not, or should not, be extinguished by a vesting order.

Prior Decisions

The receivership court found that the GORs did not constitute an interest in land and granted the order approving the sale free and clear of the GORs. In its reasons for decision, the receivership court stated as follows:

"I need not consider the claim of Third Eye that even if the royalty rights were an interest in land, a vesting order could be made vesting clear title in the assets being sold on the proviso that fair value be paid to the holder of the royalty rights. I see no reason in logic, however, why the jurisdiction would not be the same whether the royalty rights were or were not an interest in land.1"

The opposing royalty holder appealed the receivership court's decision to the Court of Appeal. The Court of Appeal released a preliminary decision in March 2018 holding that the GORs did constitute an interest in land and requesting further submissions from the parties relating to the implications of that holding, and in particular whether and under what circumstances a court has jurisdiction to extinguish a third party's interest in land by issuance of a vesting order.2 Those further submissions were made in September 2018, and on June 19, 2019, the Court of Appeal released its highly anticipated decision.

The Second Court of Appeal Decision

The Court of Appeal found that receivership courts have jurisdiction under section 243(1) of the Bankruptcy and Insolvency Act3 to authorize a receiver to enter into an agreement to sell property and, in furtherance of that power, to grant an order vesting the property in the purchaser free and clear of encumbrances.4 In reaching this conclusion, the Court of Appeal undertook a lengthy review of the history of vesting orders, and of the interim and national receivership provisions in the BIA.

The Court of Appeal went on to consider whether such jurisdiction extends to the extinguishment of third party rights, including interests in land. With respect to interests in land, the Court of Appeal stated that the key inquiry is whether the interest in land is more akin to a fixed monetary interest that is attached to real or personal property subject to the sale, or whether the interest is more akin to a fee simple that is in substance an ownership interest.5 The Court of Appeal set out the following test when considering whether to extinguish an interest in land:

"[109] Thus, in considering whether an interest in land should be extinguished, a court should consider: (1) the nature of the interest in land; and (2) whether the interest holder has consented to the vesting out of their interest either in the insolvency process itself or in agreements reached prior to the insolvency.

[110] If these factors prove to be ambiguous or inconclusive, the court may then engage in a consideration of the equities to determine if a vesting order is appropriate in the particular circumstances of the case. This would include: consideration of the prejudice, if any, to the third party interest holder; whether the third party may be adequately compensated for its interest from the proceeds of the disposition or sale; whether, based on evidence of value, there is any equity in the property; and whether the parties are acting in good faith. This is not an exhaustive list and there may be other factors that are relevant to the analysis.6"

The Court of Appeal found that, in this case, the GORs in question were less than a fee simple interest, but more than a fixed monetary interest that attached to the property. The GORs were in substance an interest in a continuing and inherent feature of the property itself.7 On the facts of this case, the Court of Appeal found that, given the nature of the opposing royalty holder's interest and the absence of any agreement that subordinated the priority of that interest, the receivership court erred in granting a vesting order extinguishing the GORs.8

The Court of Appeal ultimately held, however, that the applicable appeal period was 10 days from the date of the receivership court's decision (as prescribed by rule 31 of the BIA) and that the opposing royalty holder's appeal was out of time.9 The Court of Appeal therefore dismissed the appeal.

In addition to the important holdings regarding vesting orders and interests in land, the Court of Appeal also made findings regarding the appropriateness of a receiver closing a sale transaction in the face of a threatened (but not commenced) appeal of an approval and vesting order. Having regard to the history of dealings between the parties, the Court of Appeal held that the receiver had not acted improperly in closing the transaction in the face of a threatened appeal from the royalty holder (which was only made after the expiry of the appeal period).10 As a practice point, the Court of Appeal did state that, absent some emergency that is highlighted to the court in a receiver's report, a receiver should wait until the expiry of the 10-day appeal period before closing a sale transaction to which a vesting order relates.11 The Court of Appeal also refused to grant the royalty holder an extension of the time to appeal nunc pro tunc.12

Concluding Remarks

In its reasons for decision, the Court of Appeal recognized that there has been no consistently applied framework of analysis in the case law to determine whether a vesting order extinguishing interests should be granted.13 This decision provides courts in Ontario and elsewhere with meaningful guidance on how to approach the analysis.

Footnotes

[1] Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc., 2016 ONSC 4472 at para 40.

[2] Third Eye Capital Corporation v. Ressources Dianor Inc., 2018 ONCA 253 at para 121.

[3] Bankruptcy and Insolvency Act, RSC 1985, c. B-3 ("BIA").

[4] Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc., 2019 ONCA 508 at para 85.

[5] Ibid, at para 105.

[6] Ibid, at paras 109-110.

[7] Ibid, at para 111.

[8] Ibid, at para 115.

[9] Ibid, at para 131.

[10] Ibid, at para 140.

[11] Ibid, at para 139.

[12] Ibid, at paras 144-145.

[13] Ibid, at para 101.

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