CITATION: In the Matter of the Bankruptcy of SHS Services,... COURT FILE NO.: CV-13-10370-00CL

CITATION: In the Matter of the Bankruptcy of SHS Services, 2015 ONSC 2798
COURT FILE NO.: CV-13-10370-00CL
DATE: 20151120
SUPERIOR COURT OF JUSTICE - ONTARIO
COMMERCIAL LIST
IN THE MATTER OF THE BANKRUPTCY OF SHS SERVICES
MANAGEMENT INC/GESTION DES SERVICES SHS INC. AND SHS
SERVICES LIMITED PARTNERSHIP
IN THE MATTER OF AN APPLICATION PURSUANT TO SECTION 243
OF THE BANKRUPTCY AND INSOLVENCY ACT, R.S.C 1985, c3.3, AS
AMENDED
BEFORE:
L. A, Pattillo J.
COUNSEL: Brett Harrison and Stephen Brown-Okruhlik
For the Receiver
Douglas Langley
For the Respondents
Adam Slovens
For Sears Canada Inc.
HEARD:
April 28> 2015
ENDORSEMENT
Introduction
[1] ^ This is a motion by PricewaterhouseCoopers Inc. (PwCw) in its capacity as
receiver (the "Receiver") of SHS Services Management Inc/Gestion Des Services
SHS Inc. and SHS Services Limited Partnership (collectively "SHS") for an order
compelling the ten respondents identified in Appendix "A" hereto (the
"Respondents") to pay to the Receiver amounts it alleges are owed to SHS for
work performed following the receivership order.
Page: 2
Background
[2] On December 13, 2013, the Receiver was appointed as interim receiver
under s, 47 of the Bankruptcy and Insolvency Act (BIA) and receiver under s. 101
of the Courts of Justice Act of all the assets, undertakings and properties of SHS.
By order dated January 9, 2014, PwC was discharged as interim receiver and
appointed as receiver under s. 243 of the BIA (both orders the "Receivership
Order").
[3] Paragraphs 14 and 15 of the January 9, 2014 Receivership Order (paragraphs
10 and 11 of the December 13, 2013 order) provide as follows:
.
14. THIS COURT ORDERS that no Person shall discontinue, fail to
honour, alter, interfere with, repudiate, terminate or cease to perform any
right, renewal right, contract, agreement, license or permit in favour of or
held by the Debtors, without written consent of the Receiver or leave of this
Court,
15. THIS COURT ORDERS that all Persons having oral or written
agreements with the Debtors or statutory or regulatory mandates for the
supply of goods and/or services, including without limitation, all computer
software, communication and other data services, centralized banking
services, payroll services, insurance, transportation services, utility or other
services to the Debtors are hereby restrained until further Order of this Court
from discontinuing, altering, interfering with or terminating the supply of
such goods or services as may be required by the Receiver, and that the
Receiver shall be entitled to the continued use of the Debtors' current
telephone numbers, facsimile numbers, internet addresses and domain
names, provided in each case that the normal prices or charges for all such
goods or services received after the date of this Order are paid by the
Receiver in accordance with normal payment practices of the Debtors or
such other practices as may be agreed upon by the supplier or service
provider and the Receiver, or as may be ordered by this Court,
[4] At the time of its receivership, SHS operated the full suite of interior and
exterior home renovations, repairs and home maintenance services on behalf of
Sears Canada Inc. ("Sears") pursuant to an agreement dated December 20, 2012
between Sears and SHS called the Branded Concession Agreement (the "BCA").
Also on December 20, 2012, Sears and SHS entered into an agreement called the
Page: 3
Asset Transfer Agreement (the "ATA") by which Sears transferred to SHS those
assets needed to carry out the BCA.
[5] Prior to both the BCA and the ATA, Sears had been providing home
services to its customers for years through agreements with various individuals and
companies across Canada. In respect of both carpet cleaning and duct cleaning
services, Sears entered into license agreements with the service providers.
[6] The license agreements entitled the licensees to provide specified products
and services within designated geographical areas to Sears' customers. They also
permitted the licensees to use certain trademarks belonging to Sears and received
support from Sears, including the generation of leads, advertising and other
business infrastructure and support. The license agreements provided for the
remittance of payment made by customers to the licensees back to Sears. Sears
would then pay the licensees according to a formula specified in the license
agreements.
[7] As part of SHS taking over Sears' home services business, it acquired the
rights and obligations of Sears under the license agreements pursuant to the terms
of the ATA.
[8] The Respondents are small operators from across Canada who provided
caipet cleaning and duct cleaning on behalf of Sears for a number of years and had
all entered into license agreements with Sears setting the terms and conditions of
their contractual relationship. Although their license agreements had expired by
their terms prior Sears assigning them to SHS, the Respondents continued to
provide the services in accordance with their terms, both to Sears and subsequently
SHS. At the time of the receivership, the Respondents were owed a total of
$597,478.84 by SHS for services rendered but not yet paid.
[9] On December 14, 2013, the day following its appointment, the Receiver shut
down the SHS computer system (the "Centah System") by which the licensees
received leads for service calls. On December 16, 2013, the Receiver sent an email
to the Respondents, among others, stating that it would not be carrying on or
continuing the operations of SHS, except for very limited transitional services.
[10] The Respondents, many of whom had worked on behalf of Sears for many
years, suffered great hardship because of the actions of the Receiver in shutting
down the Centah System and from the provisions of the Receivership Order which
prevented them from terminating the license agreements and requiring them to
continue to provide services to SHS (paras. 14 and 15 of the Receivership Order).
Page: 4
The absence of leads or service calls as generated by Centah resulted in a large loss
of business for each Respondent with substantial consequences, The service calls
they received were generated by local advertising and their reputation in the
community.
[11]. Further, the terms of the Receivership Order prevented the Respondents
from being able to obtain work from other service providers who were not
prepared to risk being in violation of the Receivership Order.
[12] On January 2, 2014, the Receiver sent notice to the Respondents and other
licensees who had previously performed carpet, upholstery and duct cleaning
services stating that SHS wished to confirm the provision of services under the
terms of an enclosed Confirmation Agreement. The Confirmation Agreement set
out the terms under which the work would be performed. It required, among other
things, that the licensees acknowledge and agree that entering into the agreement
would not in and of itself entitle the licensee to receive any pre-receivership
amounts owed by SHS. The email stated that once the Confirmation Agreement
was signed and confirmation of insurance coverage provided, "we will reactivate
your access to the Centah customer management system in order to resume access
to leads generated through our call centre." The Respondents all refused to sign the
Confirmation Agreement,
[13] ^ On January 14, 2014, and in order to address the concerns of other service
providers, the Respondents requested the Receiver consent to their release from the
provisions of paragraphs 14 and 15 of the Receivership Order preventing
termination of the license agreements. The Receiver declined.
[14] The Receiver's position resulted in the Respondents having to bring a
motion. On February 4, 2014, the Respondents obtained an order from the court
lifting the stay in paragraph 14 and 15 of the January 9, 2014 Receivership Order
as against them for the limited purpose of permitting the Respondents to terminate
their respective license agreements and terminating such license agreements (the
"Termination Order"),
[15] The Termination Order was granted on the agreement of the parties that it
was without prejudice to the Respondents taking the position that the license
agreements had been terminated at. an earlier date. It also required each of the
Respondents to provide the Receiver with an accounting of the work performed by
them under the license agreements during the 53 days between the date of the
December 13,2013 Receivership Order and the Termination Order.
Page: 5
[16] On February 14, 2014, the Respondents provided the Receiver with an
accounting of monies received for the work performed by them during the 53 days.
The amount of commission owing by the Respondents pursuant to the license
agreements is $266,295.62. At the same time, the Respondents provided details of
the respective amounts owing to each of them by SHS prior to the receivership and
advised the Receiver that no amounts were owing by them to the Receiver due to
the Receiver's repudiation of the license agreements and/or their set-off of any
amounts owing against monies owing to them by SHS which are well in excess of
the amounts claimed by the Receiver. A listing of the individual Respondents
together with the amounts owed to them by SHS prior to the Receivership and the
commissions due pursuant to the license agreements for work performed by them
during the subsequent 53 day period is set.forthin Appendix "A".
Position of the Parties
[17] The Receiver's motion seeks payment of the $266,295.62 from the
Respondents, It submits that the license agreements continued in force up to the
date of the Termination Order and accordingly, pursuant to the terms of the license
agreements, the Respondents are required to pay the monies sought on account of
the work they performed. In the event the court holds the license agreements were
terminated before February 4,2014, the Receiver submits that the Respondents still
owe the monies based on unjust enrichment or quantum meruit.
[18] In response, the Respondents submit that the Receiver, by its actions,
repudiated or frustrated the license agreements such that they were no longer
bound by their terms and were free to carry out the work with no obligation to pay
SHS or the Receiver in respect of such work. In the alternative, the Respondents
submit that, if the license agreements were still in force, they are entitled to an
equitable set-off of the monies earned during the 53 days against the monies SHS
owed to them prior to the Receivership.
[19] The Receiver denies that in the circumstances of the Receivership, equitable
set-off is available to the Respondents.
Discussion
[20J Initially the Receiver took the position hi its factum that the provisions of the
license agreements continue to apply notwithstanding that they expired and were
not renewed by Sears or SHS, The Respondents did not raise the issue and do not
contest it,
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[21] In my view, given that the Respondents continued to provide services to
Sears' customers in accordance with the terms of the license agreements following
their expiry, the license agreements and their terms continued to govern the
relationship between the Respondents and initially Sears and, after December 12,
2012, SHS, See: Saint John Tug Boat Co, Ltd v. Irving Refinery Ltd, [19641
S.C.R. 614 (S.C.C.).
[22] The real issue is whether, by its actions, the Receiver repudiated the license
agreements such that the licensees were no longer bound by them,
Repudiation of the License Agreements
[23] The Parties agree that repudiation of a contract takes place when one of the
parties to the contract, by words or conduct, evinces an intention not to be bound
by the terms of the contract. See: Globex Foreign Exchange Corporation v
Kelcher, 2011 ABCA 240, 337 D.L.R. (4th) 207 (Alberta C.A.) at paras. 46 & 47.
[24] The Respondents submit that the Receiver repudiated the licence agreements
immediately after its appointment on December 13, 2013 by its actions in cutting
off the Centah System on December 14, 2013 which repudiation was confirmed by
its subsequent actions in sending an email saying that it would not be carrying on
or continuing the operations of SHS and sending out the Confirmation Agreement,
[25] The Receiver denies that its actions repudiated the license agreements. It
denies it terminated the operations of SHS and submits that the withdrawal of the
Centah System was not such a defect in performance to give rise to repudiation.
[26] In my view, the actions of the Receiver in shutting down the Centah System
followed almost immediately by the email stating that it would not be carrying on
or continuing the operations of SHS evidenced a clear intention by the Receiver
not to be bound by the license agreements. The sending of Confirmation
Agreements on January 2, 2014 confirmed that the Receiver did not consider itself
bound by the license agreements,
[27] The shutdown of the Centah System was extremely serious. The evidence
supports and I accept that cutting off the Centah System had a devastating impact
on the Respondents5 businesses. All of the Respondents suffered a significant drop
in sales which ranged from 30% to 80%. All had to lay off employees and/or cut
the hours of work. One ended up being driven out of business.
[28] The Receiver submits that as there was no obligation on SHS to provide the
Centah System in the license agreements and therefore the withdrawal of it was not
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significant enough to support an allegation of repudiation on its part. In my view,
however, the Centah System was vital to the relationship between the Respondents
and SHS. Access to it generated the vast majority of the Respondents' business.
The importance of the Centah System is evident from the significant effects its
withdrawal had on the Respondents.
[29] The Receiver submits that it did not terminate the operations of SHS but
rather endeavored to continue its operations, That is contrary to the Receiver's
First Report which states that the Receiver suspended substantially all business
operations of SHS. There is no question that the Receiver dealt with completion of
existing orders and agreed with Sears to make efforts to re-commence the caipet
upholstery cleaning and duct cleaning businesses. It did not, however, confirm or
reinstate the license agreements. Rather, as noted, it sought to enter into a new
agreement with the Respondents. That action confirms that the Receiver did not
consider itself bound by the license agreements.
[30] The Receiver further submits that the Respondents are estopped from
asserting repudiation given the position they took on their motion for the
Termination Order, That position is not tenable given the notation of the motion
judge in his endorsement that the parties agreed that the Respondents5 motion was
without prejudice to its position that the license agreements had been terminated at
an earlier date. Accordingly, the Respondents' position that the license agreements
had ended before the Termination Order was clearly in issue,
[31] In my view, the Receiver by its actions as set forth herein clearly repudiated
the license agreements with the Respondents on December 14, 2013, Further, the
Respondents accepted the repudiation by subsequently attempting to obtain work
from other service providers and by asking the Receiver to terminate the license
agreements to release them from the stay provisions of the Receivership Order.
Unjust Enrichment and Quantum Meruit
[32] In my view, the Receiver is also not entitled to payment of the monies
sought from the Respondents based on either unjust enrichment or quantum meruit.
[33] The Receiver's claims for both unjust enrichment and quantum meruit are
based on its position that the Respondents were enriched by delivering goods and
services to customers using trademarks, goodwill, advertising infrastructure and
the existing client relationships of Sears and SHS.
[34] The Respondents evidence, which I accept, is that the service calls after
December 13, 2013 were generated by local advertising and their reputation in the
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community. Them is no evidence that SHS carried out any advertising. Further,
three of the Respondents had ceased using all Sears' trademarks and the remaining
seven were in the process of removing them from their businesses. Even accepting
that the Respondents utilized Sears* trademarks during the relevant period, SHS
did not acquire any title to or interest in Sears' intellectual property under the
ATA. Any claim for use of Sears' intellectual property therefore remains with,
oears.
[35] Unjust enrichment and quantum meruit are equitable remedies. In my view,
even [f the facts might support such claims, the actions of the Receiver in
repudiating the license agreements and then requiring the Respondents to abide by
the stay in the Receivership Order do not entitle it to any relief against the
Respondents in equity. The Receiver's actions placed the Respondents in an
impossible position,
[36] In light of my determination that the license agreements were repudiated by
the Receiver on or about December 14, 2013 and that it is not entitled to any
equitable relief against the Respondents, the Receiver's motion is dismissed.
[37] Having dismissed the Receiver's motion, it is not necessary to deal with the
Respondents' alternate claim for relief based on equitable set-off.
[38] The Respondents have been successful on the motion and are entitled to
their costs on a partial indemnity basis. The Receiver and. the Respondents have
agreed that the successful party should receive costs of $30,000, In my view, given
the issues, that amount is both fair and reasonable.
[39] Accordingly, costs to the Respondents, fixed at $3 0,000.
L. A, Pattillo J.
Released: November 20,2015
Page: 9
APPENDIX "A"
Respondent
144700 Ontario Ltd.
484081 B.C. Ltd
709999 Alberta Ltd.
777911 Alberta Ltd.
3543978 Canada Inc.
Gestion Cristofai'o Ltee
977218 Ontario Inc.
1847135 Ontario Inc.
1812731 Ontario Inc.
2177059 Ontario Inc.
Total;
Amount Owing by SHS Pre
Commission on Amount
Receivership
Earned During the 53 Bays
$32,000.00
$18,618.40
$66,173,83
$55,630.72
$127,823.31
$97,181.59
$36,294.30
J
$24,061.52
$99,988.89
$12,196.71
$77,142.70
$9,023.40
$47,000,00
$30,388,08
$45,396.80
$5,034.89
$26,661,73
$9,702.05
$38,997,28
$4,458.26
$597,478.84
$266,295.62