2005 BCSC 53 In the Matter of Western Express Air Lines Inc.

Before: The Honourable Chief Justice Brenner

Reasons for Judgment

Counsel for Pack/Wikert, Alaska Flight Services:	Shelley Fitzpatrick
Counsel for Citicapital:	William Kaplan, Q.C., Jeffrey Oliver
Counsel for Aerocentury:	David Moonje
Date and Place of Trial/Hearing:	November 5 & 9, 2004
	Vancouver, B.C.

[1] On June 18, 2004, Western Express Airlines Inc. (“Westex”) filed for protection from its creditors pursuant to the Companies Creditors Arrangement Act, R.S.C. 1985, c C-36. On this application Citicapital Ltd. seeks an amendment to the Interim Receivership Order to require the aircraft lessors to bear a share of certain charges created during the course of the CCAA proceeding.

[2] In 2003 Westex signed long term aircraft leases covering five aircraft with Pack/Wikert LLC (“Pack/Wikert”), Alaska Flight Services, LLC (“AFS”) and Aerocentury Corporation (“Aerocentury”). These were “pure” and not “financing” leases insofar as title remained with the lessors and a security interest was not created for the purpose of securing a financing arrangement. Citicapital is a secured creditor of Westex.

[3] As is customary in proceedings of this nature and to facilitate the prospects of reorganization, the terms of the CCAA First Day Order created a number of charges which primed the existing pre-filing creditors. The First Day Order provided:

6. THIS COURT FURTHER ORDERS that, subject to the terms of this Order, the Petitioner shall remain in possession of its undertaking, property and assets (collectively the “Assets”) …

14. THIS COURT FURTHER ORDERS that the Monitor, any legal counsel appointed by the Monitor and Fasken Martineau DuMoulin LLP, the legal counsel for the Petitioner, shall be entitled in respect of their remuneration, costs and expenses whenever and wherever incurred to an indemnity out of, and shall have a charge and security interest (the “Administration Charge”) over, all of the Assets in priority to all creditors of the Petitioner …

15. THIS COURT FURTHER ORDERS that

…

(b) the current and former directors and officers shall be entitled to the benefit of, and are hereby granted, a charge and security interest (the “Directors’ Charge”) over all of the Assets in priority to all other creditors …

18. THIS COURT FURTHER ORDERS that the CCAA Lender shall have a charge and security interest (the “DIP Charge”) over all of the Assets in priority to all other creditors …

19. THIS COURT FURTHER ORDERS that the Administrative Charge, the Directors’ Charge and the DIP Charge shall each attach to all of the Assets, including, without limitation, any lease, licence, permit or other contract, notwithstanding any requirement for the consent of the lessor, licensor or other party to any such contract, licence, permit, or any other person, and the necessity for registration or the giving of any such consent is hereby dispensed with, and the absence of any such consent shall not constitute a breach of or default under any such lease, licence, permit or other contract.

21. THIS COURT FURTHER ORDERS that the Administrative Charge, the Directors’ Charge and the DIP Charge shall each rank in priority to any and all charges, encumbrances or security of whatsoever nature or kind which may at any time exist with respect to the Assets and no filing, including any filing at any aircraft registry, shall be required to perfect such Administrative Charge, Directors’ Charge and the DIP Charge.

(emphasis added)

[4] In subsequent orders the Administrative, Director’s and DIP charges are referred to as the “Existing Charges”. The Interim Receivership Order does not require the Aircraft lessors to pay any portion of the Existing Charges when their leased aircraft are returned. Citicapital seeks to have this rectified; it submits that a share of these charges should be allocated to the Aircraft lessors.

[5] Citicapital advances two arguments:

1. Because the Personal Property Security Act creates a deemed security interest in the leased aircraft those aircraft are “assets” within the meaning of the First Day Order and hence the Existing Charges should apply to them.

2. The Court ought to exercise its discretion under the CCAA and order the aircraft lessors to pay a portion of these charges.

THE PERSONAL PROPERTY SECURITY ACT

[6] The submission of Citicapital is that:

By virtue of the definition of “security interest” in s. 1(1) and by s. 3 of the PPSA, the leases are undoubtedly subject to the PPSA. The Existing Charges therefore attach to the Aerocentury, Pack/Wikert and AFS’ aircraft, in a fashion that is no different than those charges’ attachment to the Aircraft Financiers’ aircraft.

[7] But this submission in my respectful view conflates the notion of a “security interest” under the PPSA with a “deemed security interest”.

[8] Under s. 2(1)(a) the PPSA applies to every transaction that in substance creates a security interest. But no such interest was created through these aircraft leases. Title to the aircraft remained at all times with the lessors. The relationship with Westex was one of bailment. These were “pure” leases as opposed to financing leases in which a lease agreement is used to collateralize a financing.

[9] However under s. 3(c) of the PPSA the Act does apply to a lease for a term of more than one year that does not secure payment or performance of an obligation. The leases in the case at bar fall within this definition and hence are what is commonly characterized as “deemed security interests”.

[10] This distinction between a security interest under s. 2 and a deemed security interest under s. 3 is significant. In the British Columbia Personal Property Security Handbook (4^th ed.) Cumming and Wood state at p. 33:

The re-characterization of transactions that is a necessary feature of a PPSA should not be confused with another, and clearly subsidiary feature. As a result of s. 3, the Act (other than Part 5) applies to a lease for a term of more than one year… The effect of the section is to deem these transactions to be security agreements for limited purposes but not to view them as transactions that are in substance security agreements.

[11] As they go on to point out at p. 34: “Section 3 brings non-security transactions that fall within the definition of a lease for a term of more than one year … into the scope of the conflicts, perfection and priority provisions of the Act (but not the enforcement remedies in Part 5)”.

[12] So while the interest of a lessee under such a “pure” lease is deemed to be a security interest for these purposes it is clear that as stated by Cumming and Wood at p. 114 “this does not mean that a secured creditor who takes a security interest in leased goods can claim priority over the lessor. The security interest attaches only to the interest of the lessee.”

[13] What a deemed security interest (such as a lease for more than one year) does is to treat the lease as a security agreement and treat the lessee as the owner, but only for registration and priority purposes.

[14] If one applies this principle of the “limited purpose” nature of the security interest, i.e. for only registration and priority, the aircraft lessors in this case with their properly registered leases take priority as against any of the secured creditors holding general security agreements. Those other secured parties cannot attach or charge the interest of the aircraft lessors in these circumstances. The only interest they could attach would be the interest of Westex under the terms of the leases.

[15] The unique nature of deemed security interest can also be seen in s. 55(2)(a) of the PPSA. This section provides that Part 5 (Rights and Remedies) of the PPSA does not apply to a true lease. In the event of default, a true lessor with a deemed security interest cannot avail itself of the rights set out in the PPSA. Instead the contractual rights as set out in the lease, as well as any common law rights, will apply. It is clear that as between the lessor and the lessee, a true lease never really takes on the characteristics of a security interest.

[16] In my view ss. 3 and 55(2)(a) when read together make it clear that under the PPSA the perfection requirements for deemed security interests are there only to regulate the lessor’s interest as against third parties.

[17] Similarly and following this analysis, the Existing Charges cannot attach to the perfected interests of the aircraft lessors in the aircraft assets, only to the interest of Westex under the leases.

COURT DISCRETION UNDER CCAA

[18] Citicapital also submits that the Court has a discretion to order the Aircraft Lessors to pay an allocated portion of the Existing Charges. It says:

That discretion is generally exercised in a fashion that acknowledges that all parties should pay a certain allocated portion of the general restructuring costs, such as costs relating to DIP financing and the Monitor’s expenses and should pay additional coasts if a party benefited from the restructuring.

[19] In Re Hunters Trailer & Marine Ltd., [2001] A.B.Q.B. 1094 a mortgagee who held mortgages on the Hunters’ real property claimed that since it did not benefit from the CCAA proceedings to the same extent as other creditors, it should pay a smaller percentage of the expenses related to the restructuring. The court held that the mortgagee was responsible for paying a portion of the costs on the basis that it would potentially benefit if the company was maintained as a going concern. So the principle from the Hunters case is that all secured creditors contribute to the costs of restructuring but in a proportion that is just.

[20] However in the case at bar, with the exception of the outstanding lease payments on the filing date, the aircraft lessors are not creditors of Westex and they are certainly not secured creditors. If costs are to be allocated in the basis of the benefit to be derived from a successful restructuring, then the lessors should arguably pay nothing. As ordinary creditors for the outstanding lease payments they will likely receive nothing. They continue to own the aircraft. That will not change whether the restructuring succeeds or fails.

[21] Post filing they have continued to receive payments for aircraft leases that Westex has chosen not to disclaim. However under the First Day Order they were obligated to continue leasing these aircraft to Westex. They were prevented from relying on the outstanding unpaid pre-filing lease payments and repossessing the aircraft.

[22] Accordingly under the general equitable principles of the CCAA I see no basis for requiring the aircraft lessors to bear a portion of the Existing Charges.

[23] The application will be dismissed with costs.

“D.I. Brenner, C.J.S.C.”
The Honourable Chief Justice D.I. Brenner