Whose Proceeds Are They: A Creditors’ Dispute.

Written by Catherine Farnell, Eric Vaillant and Danica Fersovitch

In the context of a dispute between creditors in a receivership matter, the recent Court of King’s Bench of Alberta decision in Royal Bank of Canada v. Faissal Mouhamad Professional Corporation, 2024 ABKB 460 examines ownership rights to certain equipment. The application related to a dispute between the Royal Bank of Canada (“RBC”) and Patterson Dental Canada Inc. (“Patterson”) over sale proceeds from the sale of equipment.

The sale proceeds in question were derived from equipment which had originally been sold by Patterson to Dr. Mouhamad. Dr. Mouhamad then entered into a master lease agreement with 52 Dental Corporation (“52 Dental”) in respect of the equipment. Dr. Mouhamad had only partially paid for the equipment and Patterson held a security agreement registered against the equipment for the balance owed.

Dr. Mouhamad was not a debtor of RBC, but his professional corporation, Faissal Mouhamad Professional Corporation (“FMPC”), and related corporations, including 52 Dental, were. RBC argued that Section 51 of the Personal Property Security Act (Alberta) (“PPSA”) should apply to give RBC priority over Patterson because the equipment was actually owned by FMPC. It was argued that the initial payment for the equipment was made by Dr. Mouhamad applying credits that had been accrued with Patterson, but that those credits actually belonged to FMPC and not Dr. Mouhamad personally. Notwithstanding the use of FMPC’s credits to purchase the equipment, the Court found that the equipment was purchased by Dr. Mouhamad and Section 51 of the PPSA did not apply.

The next issue was whether the lease of the equipment by Dr. Mouhamad to 52 Dental was a true lease, in which case the equipment would be subject to the claims of Dr. Mouhamad’s creditors, or a financing lease, in which case Dental 52 would have an equitable interest in the equipment which its creditors could seize. The Court reviewed the legal principles applicable to that determination, providing a summary of the factors to review and the relative weight to be assigned to them. In applying the principles to the fact of this case, the Court found that the lease by Dr. Mouhamad to 52 Dental was a true lease.

The Court did agree that the portion of the purchase price for the equipment paid with credits belonging to FMPC should be directed to RBC from the sale proceeds. The remainder of the sale proceeds were ordered to be paid to Patterson.

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