Date: 19980923
Docket: T-1416-98
BETWEEN:
RICHARD M. DORIS,
Plaintiff,
- and -
THE OWNERS AND ALL OTHERS INTERESTED IN
the Ship Ferdinand (in rem), the Ship Sir Robert Peel (in rem),
the Ship Robert M. Hull (in rem), the Ship Robert Desormeans (in rem),
the Ship Robert Van Allen (in rem), the Ship Vandenburg (in rem),
the Ship Joseph Dubrule (in rem), the Ship Fort Town (in rem),
the Ship Lieutenant Red George McDonnell (in rem), the Ship Gladys (in rem),
the Ship J. P. Wiser (in rem), and the Ship Prescottonian (in rem),
AND THE PROCEEDS OF THE SALE OF
the Ship Ferdinand, the Ship Sir Robert Peel,
the Ship Robert M. Hull, the Ship Robert Desormeans,
the Ship Robert Van Allen, the Ship Vandenburg,
the Ship Joseph Dubrule, the Ship Fort Town,
the Ship Lieutenant Red George McDonnell, the Ship Gladys,
the Ship J. P. Wiser, and the Ship Prescottonian,
and THE NATIONAL BANK OF CANADA,
THE ROYAL BANK OF CANADA
and PRICEWATERHOUSECOOPERS INC.
Defendants.
REASONS FOR JUDGMENT
DUBÉ J:
[1] This motion is for summary judgment under Rule 213 of the Federal Court Rules, 1998 filed by the defendants, the National Bank of Canada and the Royal Bank of Canada (collectively "the Banks") and their receiver, PricewaterhouseCoopers Inc. (formerly Coopers & Lybrand Limited)("the Receiver") dismissing the plaintiff's claim and setting aside twelve arrest warrants dated July 13, 1998, obtained by the plaintiff for twelve floating homes ("the ships") which are the subject-matter of this action.
[2] The plaintiff claims a master's disbursements lien against the ships in the amount of $536,640.41 in priority to the first mortgages held by the Banks. He is from Prescott, Ontario, and his claims relate to the period from May 9, 1994 to October 31, 1997.
1- Facts
[3] The plaintiff alleges that the ships are high-quality floating homes owned by twelve individually numbered companies ("the Owners") which were in turn owned by the North Channel Nautical Village Ltd. ("NCNV"), which operated them for resale on a recreational basis and as a time-share vacation project.
[4] In 1997, NCNV was a limited company. The plaintiff was the Chief Executive Officer of NCNV holding 47% of the common shares. He claims that as the master of all twelve ships, he expanded a total of $536,640.41 towards the upkeep and maintenance of the ships and to support the commercial operation. He asserts that he has a master's disbursements lien to that amount. In 1995, the Banks financed the acquisition of the ships through mortgage loans in the amount of $250,000.00 per ship. The National Bank provided eleven of the loans and the Royal Bank provided the other one. The Owners are wholly owned subsidiaries of NCNV. NCNV was contractually obligated to maintain the ships for the Owners and to operate the time-share business. The plaintiff admits that he was de facto the sole operating officer of NCNV and of the Owners.
[5] At the time the Owners negotiated their loans from the Banks in 1995, the plaintiff, on their behalf, represented in writing that the ships were free of all prior security interests, encumbrances and liens and that the Owners would not, without the consent of the Banks, create any charge or encumbrance on the ships ranking, or purporting to rank, in priority to or pari passu with the Bank's interest.
[6] The Banks claim that they relied on the plaintiff's representations, made the loans and took comprehensive securities from the Owners. The plaintiff personally guaranteed a portion of each mortgage in favour of the Banks and is indebted to the Banks in an amount in excess of $325,000.00 pursuant to his guarantees. Each guarantee provides that all indebtedness and liability of the Owners to the plaintiff are assigned to the Banks.
[7] In 1995, the plaintiff had a serious falling out with his business partner, Mr. Randall Pelehos (the holder of the remaining 53% of NCNV) and in the result was forced to expend funds for the maintenance of the ships and the common venture to which they belonged, that is the operation of the time-share resort. From time to time, the plaintiff received reimbursements from NCNV on account of these expenses.
[8] The Owners and NCNV are now all bankrupt and in default of their obligations to the Banks to the sum of $3,000,000.00. The plaintiff himself is insolvent and has filed a bankruptcy proposal. Thus, the Banks appointed the Receiver in order to realize on the assets of the Owners. The Receiver held a widely advertised public auction on June 24, 1998, and entered into twelve separate agreements of purchase and sale with the highest bidders from the auction for cumulative sale proceeds in the amount of $412,600.00.
[9] The sales to the auction purchasers were scheduled to close on July 13, 1998. On that very date, the plaintiff obtained twelve arrest warrants based on the repayment of his alleged master's disbursements lien. As a result, the sales are now suspended due to the arrest of the ships.
2. The issues
[10] The central issue is whether the plaintiff has a valid master's disbursements lien and, in the affirmative, whether he is estopped from asserting his alleged lien, or whether he has postponed or assigned his lien to the Banks under his personal guarantee.
3. What is a master's disbursements lien?
[11] Professor William Tetley in Maritime Liens and Claims1 deals with master's disbursement in Chapter 11 (at pp. 419 to 434). Basically, the master of a ship is entitled to be reimbursed by the Owners of the ship for necessaries ordered by him and he is entitled to a maritime lien for those disbursements. Professor Tetley defines master's disbursements as follows, at p. 419:
| Master's disbursements are necessaries for the ship ordered by the master and paid for with his own monies or obtained on his personal credit. The master must have acted for the ship within his authority, explicit or implied. The disbursement is made in some port or place where the master is out of touch with the shipowners. The master has a maritime lien for such disbursements, whether he disbursed his own monies or incurred a debt. |
[12] Professor Tetley notes (at pp. 419 et sq.) that "master's disbursements and the resulting lien are virtually extinct today, because modern means of communication are such that a master is always in touch with the owners". He goes on to explain that "the right of a master to claim against the ship for his disbursements has existed in civil law jurisdictions for centuries and arose over 200 years ago in England". He outlines the six requirements for a master's disbursements lien which may be abridged as follows:
| 1) the goods or services must be necessaries; |
| 2) the goods or services must be for the ship (and common venture) and not for the master's own benefit; |
| 3) the master must have disbursed his own money; |
| 4) the disbursement must be by the master and does not benefit seamen or agents or the mate; |
| 5) the master must have had authority (express or implied) to pledge the owner's credit, and |
| 6) the master must be unable to communicate with the owners. |
4. Does the plaintiff have a valid lien?
[13] The defendants assert that the plaintiff has failed to meet at least three of the six requirements for a master's disbursements lien, as follows.
(a) Were the disbursements for necessaries?
[14] The so-called "necessaries" for a ship have been defined in English Maritime Law by Lord Tenterden in Webster v. Seekamp2 in 1981, at p. 967:
| I am of opinion, that whatever is fit and proper for the service on which a vessel is engaged, whatever the owner of the vessel, as a prudent man, would have ordered, if present at the time, comes within the meaning of the term "necessary", as applied to those repairs done or things provided for the ship by order of the master, for which the owners are liable. |
[15] In Chapter 16, Professor Tetley defines "necessaries" under Canadian Maritime Law as follows (at p. 578):
| Necessaries in Canada are defined in sect. 22(2)(m) of the Federal Court Act, as "goods, materials or services" supplied to a ship and required "for the operation or maintenance". Equipping a ship with a standard engine has been held to be a necessary and today would probably fall under sect. (22)2)(n), "construction, repair or equipping of a ship", as would altering a ship's structure and equipment. Rental of a crane to discharge a grounded ship before refloating it has been held to give rise to a necessaries claim. |
| Radar is a necessity and a necessary. Supplying fish to a fish processing ship is also a necessary as is the supplying of bait and ice to a fishing vessel. Even providing a dock and warehouse for a ship to come alongside and to discharge into was held to be a necessary. The foregoing examples illustrate how wide the definition of necessaries is in Canada, particularly because the Federal Court Act at sect. 22(2)(m) refers to "services" as well as to goods and materials. Of course, bunkers are necessaries in Canada. |
[16] It appears from the plaintiff's list of expenses and his cross-examination that his disbursements were mostly for the operation of NCNV after the departure of the majority shareholder. The highest total of disbursements ($287,197.34) is for principal and interest on loans obtained by the plaintiff on behalf of NCNV. It also includes the monthly interest charge on his personal lines of credit used for both his family and business expenses. The total of $152,061.45 recorded under "NCNV" was for NCNV's general operating expenses. Another total of $35,642.42 is for charges to the plaintiff's credit cards for which he provided no specific details other than that the funds were used for NCNV's general operating expenses. There are also other amounts in payment to members of the plaintiff's family, for lease payments on vehicles, corporate solicitor fees, telephone charges, promotional services, automobile repairs, sale commissions on time-share units, political donations, etc.
[17] These expenses, in my view, were not for "goods, materials or services" supplied to a ship for "her operation and maintenance". They were not "necessaries" related to specific ships. They were mainly for the operation and administration of a company and also for the plaintiff's personal expenses. They were a running account of NCNV carrying out its obligations under the Service Agreement it entered into with the Owners and were treated by the plaintiff as loans from him to NCNV.
(b) Did the plaintiff act in his capacity as master?
[18] The defendants submit that the plaintiff was acting at all times in his dealings with NCNV in his capacity as a minority shareholder and as a financier of NCNV and not in his capacity as a master of a ship.
[19] In his own affidavit, the plaintiff states that he had a serious falling-out with the majority shareholder and President of NCNV, Mr. Randall Pelehos. As a result, in order to preserve the project and protect the interests of the time-share owners and to keep the business operating, he was forced to expend funds. He was de facto the sole operating officer of NCNV. It was in that capacity and not as master of a ship that he made the disbursements. In fact, he maintained an account in the general ledger of NCNV in which he kept a running total of both his advances to NCNV and NCNV's repayments to him.
[20] The plaintiff also states in his affidavit that the acquisition of the ships by the numbered companies which he described as the "Owners" was nothing more than an internal corporate reorganisation that did not affect the beneficial ownership of the ships for any reason whatsoever. Thus, the plaintiff was de facto the sole operating officer and the sole directing mind of NCNV and or the Owners of the ships. When he reported to the Owners he was reporting to himself. He was not a captain acting within his traditional and historical authority as master, but a businessman operating a time-share resort. A contractor providing services cannot suddenly decide to become a master of a ship so as to upgrade his administrative expenses to the level of a priority lien ranking above mortgages that he himself placed on that ship.
(c) Inability to communicate with Owners of the ships
[21] As mentioned earlier, master's disbursements liens are virtually extinct today because modern means of communication are such that a master is always in touch with the owners, even when the ship is far out at sea on a long voyage. Thus, the inability to communicate with the owners before getting involved in expenses for necessaries on a ship was and remains an essential element to the creation of a master's disbursements lien. Clearly, this element is totally missing in the instant case.
[22] The plaintiff was not acting in the traditional capacity of a captain on board a ship, unable to communicate with the Owners of the ship. The ships in question are time-share floating homes anchored to shore and part of a nautical village. The plaintiff was the operating officer of the village and the sole directing mind of the Owners of those ships. (It is common ground that these floating homes are ships as defined by the common law and the Canada Shipping Act). Obviously, the plaintiff was able to communicate with the Owners before undergoing all those expenses.
5. The issue of estoppel
[23] The defendant claims that if the plaintiff had a valid master's disbursements lien on the ships, he was estopped from asserting it due to his representation to the Banks before they advanced the financing that they would be granted a first mortgage with no prior liens or encumbrances. In fact, the plaintiff failed to advise the Banks of his potential claim for a master's disbursements lien at the time of securing the loans for the ships and not before the day he arrested the ships.
[24] The Bills of Sale for all twelve ships, duly signed by the plaintiff, state that "the transferor covenants with the transferee that the transferor has power to transfer in the manner aforesaid the premises hereinbefore expressed to the transferred and that the same are free from encumbrances". The Mortgages for all ships, also duly signed by the plaintiff, are to the effect that "the mortgagor covenants with the mortgagee that the mortgagor has the power to mortgage in the manner aforesaid the above-mentioned shares and that the same are free from encumbrances save as appears on the register of the said ship".
[25] These documents were preceded by an "Offer to Finance" by the Banks dated April 12, 1995, which outlines all the conditions of the loans including that "the bank is relying on said representation and warrantees". The document is followed by an acceptance on behalf of NCNV by the plaintiff and Mr. Pelehos as guarantors. Another document entitled "General Security Agreement", also signed by the plaintiff, is to the effect that "the debtor hereby warrants and covenants with the bank that it: (a) owns the collateral free of all security interests or other encumbrances".
[26] Dickson J. of the Supreme Court of Canada in Scotsburn Co-operative Services Limited v. W.T. Goodwin Limited3 defined the doctrine of estoppel as follows: "The essence of estoppel is representation by words or conduct which induces detrimental reliance".
[27] The financing with the Banks took place in April 1995. The amounts for which the plaintiff seeks reimbursements were spent between May 9, 1994 and October 31, 1997. If the plaintiff intended to seek the reimbursement of these disbursements from the Owners and eventually from the sale of the ships, these amounts ought to have been disclosed to the Banks at the time of the loans. A lienholder is under legal duty to disclose its prior charges to a potential secured creditor. In Union Bank v. Irish4, Prendergast, J.A. of the Manitoba Court of Appeal, quoted Turner L.J. in Stronge v. Hawkes5 as follows, at p. 536:
| It has long been settled that where a party having a charge upon an estate, encourages or even permits another to advance money upon the security of the estate without giving notice of the charge, the party who has thus been encouraged or permitted to make the advance is entitled to priority over the party who has thus encouraged or permitted the advance to be made. The fact of the party having the charge standing by and permitting the further advance to be made, without giving notice of the charge, is alone sufficient to support this equity on the part of the subsequent incumbrancer. |
[28] Thus, in my view, even if the plaintiff had a valid master's disbursements lien based on necessaries for the ships in question, his claim would not have a priority over the loans because he failed to advise the Banks of these claims which were in progress at the time of the loans and continued thereafter.
8. Priorities
[29] The defendants argue that whatever lien the plaintiff may have would rank behind the rights of the Banks because he personally guaranteed a percentage of the funds advanced by the Banks to each of the Owners. In fact, paragraph 11 of the Letter of Guarantee, endorsed personally by the plaintiff, reads as follows:
| 11. All indebtedness and liability, present and future of the Customer to the Guarantor are hereby assigned to the Bank and postponed to the present and future debts and liabilities of the Customer to the Bank. All monies received from the Customer or on his behalf by the Guarantor shall be held as in his capacity as agent, mandatary and trustee for the Bank and shall be paid over to the Bank forthwith. This provision will remain in full force and effect, notwithstanding the termination of the guarantee pursuant to the provisions of paragraph 7 in which event it will terminate when the debts and liabilities of the Customer to the Bank covered by this guarantee pursuant to paragraph 7 hereof have been paid in full. |
[30] In Stone v. S.S. "ROCHEPOINT."6, the Exchequer Court of Canada held that the liens of a master and mate of a ship for wages will not be preferred against the claim of a mortgagee where the payment of the mortgage has been guaranteed by them. In his affidavit, the plaintiff agrees that he personally executed guarantees in favour of the Banks in the amounts of $25,000.00 to $50,000.00 per ship for a total amount of $350,000.00.
[31] The plaintiff claims that the Banks are no longer entitled to rely on his personal guarantees because his guarantees have been vitiated by an improvident realization of the ships. Those ships have been assessed at a value of $3,000,000.00 in 1995 and sold for only $412,600.00 in 1998. According to him, the Banks failed to make a reasonable effort to cooperate with other secured creditors to secure the sale of the business as an ongoing venture.
[32] It is indeed unfortunate that the publicized sale of these ships did not bring in better offers. However, the evidence is to the effect that the Receiver held a public auction on June 24, 1998, and two days later entered into twelve separate agreements of purchase and sale with the highest bidders from the auction. But, as mentioned earlier, the sales to the auction purchasers scheduled to close on July 13, 1998, could not be completed because the plaintiff arrested the ships.
[33] According to the affidavit of D. William Kennedy, a Senior Manager of the National Bank, the Receiver conducted a widely advertised public auction for the ships and the auction was attended by approximately 300 people of which over 100 were registered as bidders. The plaintiff himself did not submit any bids at the auction.
[34] There is no allegation and no evidence that the sale was unlawful or conducted improperly.
9. Disposition
[35] Under Rule 213(2) of the Federal Court Rules, 1998, a defendant may bring a motion for summary judgment dismissing a statement of claim. These new summary judgments rules are similar to the former Rules 432.1 to 432.7 and subject to the same jurisprudence. Where the Court is satisfied there is no genuine issue for trial, it must grant summary judgment. In Feoso Oil. Ltd. v. Sarla (The)7, the Court of Appeal dealt with an application for summary judgment. Stone J.A. said as follows, at pp. 81-82:
| In my view, the new process available under Rules 432.1 to 432.7 should not be construed as to prevent a motions judge from doing that which it surely envisages--allowing a summary judgment to be rendered in a proper case with consequent savings in time and expense that a trial would otherwise entail. The intention appears to be that claims or defences clearly without foundation should not take up the time and incur the costs of a trial. To this end, as Henry J. stated in Pizza Pizza, supra, both sides are required to "put their best foot forward". The responding party cannot hold back in the hope that the motion will fall of its own weight because the evidence in support is insufficient. Subsection 432.2(1) of the Rules places upon that party an obligation not to "rest on the ... pleadings" but to file evidence setting out "specific facts showing that there is a genuine issue for trial". The new Rules should be approached with all of this in mind. |
| (my emphasis) |
[36] In the instant case, counsel for the plaintiff did not indeed hold back but put his best foot forward. He marshalled an impressive array of arguments, knowledge and jurisprudence in maritime law. He was not successful, however, in convincing the Court the plaintiff had a valid master's disbursements lien based on necessaries and, even if he had one, he was not estopped from asserting it due to his representations and, in any event, the lien had priority over the mortgages.
[37] Consequently, summary judgment is granted to the defendants dismissing the plaintiff's statement of claim, with costs to the defendants. The arrest warrants against the twelve defendant ships are set aside.
OTTAWA, Ontario
September 23, 1998
Judge
__________________1 Éditions Blais, second edition, 1998.
2 (1821) 4 B. & Ald. at p. 354, 106 E.R. 966.
3 [1985] 1 S.C.R. 54 at p. 65.
4 [1926] 1 D.L.R. 529.
5 (1853), 4 DeG. M. & G. 186 at p. 196, 43 E.R. 482.
6 (1921), 68 D.L.R. 651 (Exchequer Court of Canada).
7 [1995] 3 F.C. 68.