Legal Blog

Bulky

It is unusual to hear of a decided case under the Bulk Sales Act so when one crops up, it is worthy of mention. When the same case contains withering shots at one of the counsel involved, it becomes doubly relevant, if only because of prurient interest. The case of which we speak is Toronto (Overseas) Freight Services Inc. v. Grover, a 2001 unreported Ontario Superior Court decision.

What is it?

A vendor sold part of its business to a purchaser. The purchaser’s lawyer dutifully requested a Bulk Sales affidavit. The vendor’s lawyer opined that one was not necessary, taking the position that, since the vendor was continuing to carry on business and the assets being sold were not a substantial part of the vendor’s business, there was no sale in bulk. The purchaser’s lawyer accepted this rubbish and closed the transaction. We can only hope that the purchaser’s lawyer explained the consequences to his client and obtained instructions to close anyway.

Of course, the vendor went out of business and a creditor of the vendor, who alleged that it was owed $30,000, commenced an application against the purchaser to force the purchaser to pay the creditor the amount of its debt. The purchaser had purchased the assets for $51,000.

The judge made short shrift of the purchaser’s argument regarding liability. As far as she was concerned, the answer to the “What is it?” question was obvious. It was a sale “out of the ordinary course of the business or trade of the seller.” Therefore, it was a sale in bulk. The assurances received from the vendor’s lawyer were irrelevant. There is no requirement that there be a sale of substantially all of the assets before there is a sale in bulk.

The judge then noted that the law firm that had represented the purchaser on the purchase of the business was also representing the purchaser on the application. The solicitor acting had assured the judge that he had explained the situation and that the purchaser had directed him to act, regardless of the possible conflict.

Value

The purchaser then argued that the amount to be paid to the creditors of the vendor should not be the amount of the purchase price as allocated in the bill of sale. He swore that the allocation was meaningless and that the goods sold were virtually of no real value. Allegedly, he had purchased the assets merely as a thrown-in in his quest to purchase the goodwill and reputation of the business. This argument aptly illustrates an attempt to suck and blow simultaneously.

The judge was unimpressed with this argument. She noted that the purchaser gave no evidence of the actual value of the goods, but simply asserted a “self-serving bald statement.” The judge felt that the best evidence of the value of the goods was the value attributed to them by two arms-length contracting parties.

Remedy

This is where the report becomes interesting. The creditor wanted the judge to order that the purchaser pay the creditor the monies that the vendor owed to the creditor. The judge noted that the purpose of the Act was to protect all trade creditors of the vendor, not just the one who sued. Neither of the lawyers had dealt with this aspect of the case in their submissions and, accordingly, the judge had requested written submissions on the point.

In those subsequent submissions, the creditor’s lawyer “made passing reference to a (Court of Appeal case) without enclosing the case itself and stated that it merely provides that creditors may apply to be added as parties and does not deal with how the payment to creditors should be made.” The lawyer “further stated that he was unable to find any authority in case law or in the Act as to how the scheme of distribution should work.” He therefore suggested that the purchaser should advertise for creditors at his own expense and if no creditors came out of the woodwork after three weeks, the proceeds be paid to his client. The judge was not impressed with this solution.

She first noted that the lawyer’s representation of the Court of Appeal case was incorrect. The case did deal with distribution of the proceeds. The case directed that the proceeds be paid to a trustee and that the provisions of the Act would then apply to the trustee. The Court of Appeal judges also noted that the action should have been brought on behalf of all creditors so that creditors who were not party to the proceedings would not be bound by the valuation of the alleged debt of the creditor who was suing. This is exactly what the judge in our case felt.

The judge then added a further barb as follows: “Reluctant to rely upon the research done by the (lawyer), I had further investigations done by the Court’s own staff. As it turns out, there is other authority.” She then referred to a 1921 case in which the judge ordered a reference to a Master; that judge held that the formal judgment would be analogous to one adopted in a fraudulent conveyance action.

Solution

The judge spent some time trying to determine whether the vendor had assigned into bankruptcy, which would mean that there was an existing trustee. The creditor’s lawyer had not referred to one. However, the purchaser’s lawyer had mentioned in submissions that, from what he had been informed in a conversation with the vendor’s lawyer, there was a trustee.

The judge therefore ordered that the purchaser pay the $51,000 into court with a reference to the Master to determine the identities of the creditors of the vendor and the pro rata entitlement of the creditors to the monies paid into court. If there was a trustee, however, the proceeds would be paid out of court to the trustee and the distribution would be determined under the bankruptcy; the reference would then terminate.

Costs

The judge allowed the creditor its party and party costs against the purchaser. This is an appropriate award because there was no reason why the purchaser should pay solicitor-client costs. However, the judge limited the party and party costs by excluding the lawyer’s time on the subsequent submissions. The judge noted that the submissions of the creditor’s lawyer were “misleading and unhelpful” while the submissions of the purchaser’s lawyer were helpful. To add further insult, the judge allowed the purchaser its party and party costs relating to the subsequent submissions, which were “only necessary because the applicant did not address an important point in the original material filed on the application”, to be set off against the costs awarded in favour of the creditor.

Salvage Costs

In a case like this, as in a case under the Construction Lien Act, the creditor would ordinarily be awarded the difference between its solicitor-client costs and its party and party costs as a first charge against the fruits of the application. After all, why should the other creditors be given the advantage of obtaining judgment for free? Why should the suing creditor, who takes the risk of loss, be out of pocket for part of its legal fees after successfully prosecuting the application?

The judge, however, decided that she did not want to pre-judge the reference and left the issue to be determined by the Master, or if there was a bankruptcy, in the bankruptcy. Although a Master would have jurisdiction to award the salvage costs, we cannot see why a trustee in bankruptcy would have any jurisdiction to do so. This aspect of the order makes no sense. Could it have been made because of the judge’s antipathy to counsel’s performance?

This Hurts

This case does not show lawyers at their best. The purchaser’s lawyers in the original purchase transaction do not look good and the creditor’s lawyer in the application had egg all over his face.