T-2285-71
Penn Central Transportation Company (Debtor)
v.
Robert W. Blanchette et al., Trustees of Penn
Central Transportation Company (Applicants)
In re Canada Southern Railway Company
(Applicant)
Trial Division, Walsh J.—Ottawa, November 9
and 17, 1976.
Railways — Contract — Proposed sale of shares in Canada
Southern by Penn Central — Scheme approved by Court
pursuant to Railway Act — Application for order restraining
Penn Central from removing proceeds of sale from Canada or
for appointment of receiver pending settlement of dispute —
Jurisdiction of Court — Possible conflict of laws — Power of
Court to grant remedies applied for — Railway Act, R.S.C.
1970, c. R-2, s. 95 — Regional Railway Organization Act
(1973, U.S.A.) — Federal Court Act, R.S.C. 1970 (2nd
Supp.), c. 10, ss. 3, 23 and 64 — Federal Court Rules 2004
and 2405.
The applicant, Canada Southern Railway Company, seeks an
injunction or order restraining the ,trustees of Penn Central
Transportation from removing the proceeds of its sale of shares
in the Toronto, Hamilton and Buffalo Railway Company from
Canada to the United States. Alternatively the applicant asks
for the appointment of a receiver to hold the proceeds of sale
until the dispute between the parties is settled. The applicant
claims that if the funds are paid unconditionally to the trustees
of Penn Central, they will be moved to the U.S. This contention
is supported by the opinion evidence of the senior attorney for
the trustees of Penn Central who considers that an order by a
District Judge in the U.S. District Court for the Eastern
District of Pennsylvania authorizing the sale of the shares on
condition that the proceeds be held in escrow means that the
funds must be held in escrow in the United States, although it
does not say so specifically.
Held, the application for appointment of a receiver is grant
ed. It is obviously desirable that the funds remain in Canada in
order to avoid irreparable prejudice to the applicant and the
balance of convenience favours such a move, since no creditor
will suffer prejudice even should the trustees be forced by final
judgment of an appropriate court to transfer the funds to the
United States. The Court has jurisdiction to make an order in
this case since it is an incident of proceedings involving the.
approval of the Court of a scheme of arrangement for creditors
of the company in Canada pursuant to section 95 of the
Railway Act. The only enforceable order that can be made in
the circumstance is to appoint a receiver and the Court derives
its authority to make such an order under section 3 of the
Federal Court Act, which establishes that the Federal Court is
a court of equity.
Canadian Pacific Ltd. v. Quebec North Shore Paper
Company (1976) 9 N.R. 471, distinguished.
APPLICATION for interlocutory relief.
COUNSEL:
Duncan Finlayson, Q. C., for the trustees of
the property of Penn Central Transportation
Company.
Gerald C. Hollyer, Q.C., for the trustees of
the property of Michigan Central Railroad
Company.
John D. McElwain, Q.C., and J. Edgar
Sexton for Canada Southern Railway
Company.
B. K. Laird for Albert D. Segal and certain
minority shareholders of the Canada South
ern Railway Company.
M. S. Bistrisky for Canadian Pacific Limited.
SOLICITORS:
Lafleur & Brown, Montreal, for the trustees
of the property of Penn Central Transporta
tion Company.
The following are the reasons for judgment
rendered in English by
WALSH J.: This deals with an application on
behalf of the Canada Southern Railway Company
for an order:
1. restraining Robert W. Blanchette, Richard C.
Bond and John H. McArthur as trustees of the
property of Penn Central Transportation Company
from removing any of the proceeds from the pro
posed sale of shares in the Toronto, Hamilton and
Buffalo Railway Company to Canadian Pacific
Limited from Ontario pursuant to the order of The
Honourable Mr. Justice Addy dated September
27, 1974;
2. in the alternative, for an order appointing a
receiver to take charge of the said proceeds until
such time as the dispute between the Canada
Southern Railway Company and Penn Central
Transportation Company has been settled.
3. in the further alternative, for an injunction
restraining Robert W. Blanchette, Richard C.
Bond and John H. McArthur as trustees of the
property of Penn Central Transportation Company
from removing any of the proceeds from the pro
posed sale of shares in the Toronto, Hamilton and
Buffalo Railway Company to Canadian Pacific
Limited from Ontario;
4. in the further alternative, for an injunction
restraining Canadian Pacific Limited from making
payment for the shares in the Toronto, Hamilton
and Buffalo Railway Company outside Ontario.
Alternatives 1 and 3 seek substantially the same
relief.
Because of convenience and because some of the
relevant documentation is in other files the
application was heard at the same time and on the
same evidence and arguments as an application
under File No. 76-T-615 by the Canada Southern
Railway Company against Douglas Campbell,
trustee of the property of the Michigan Central
Railroad Company asking for similar relief. In this
second file there was also a motion by Albert D.
Segal, a minority shareholder of the Canada
Southern Railway Company, allegedly represent
ing by proxy some 43 additional shareholders seek
ing the right to intervene to oppose the appoint
ment of a receiver to take charge of the proceeds
from the proposed sale of shares in the Toronto,
Hamilton and Buffalo Railway Company by
Douglas Campbell in his quality as trustee of the
property of the Michigan Central Railroad Com
pany to Canadian Pacific Limited until such time
as the arbitration between the Canada Southern
Railway Company and the Michigan Central Rail
road Company has been completed, unless the
arbitration occurs between the alleged proper par
ties, namely, Canada Southern Railway Company
and Consolidated Rail Corporation of America
(Con. Rail) rather than between Canada Southern
Railway Company and Michigan Central Railroad
Company.
Also heard at the same time and on the same
evidence and arguments was an application made
on short notice in proceedings instituted in File
No. T-4367-76 between Canada Southern Railway
Company, plaintiff, and Robert W. Blanchette,
Richard C. Bond, John H. McArthur, trustees of
the property of Penn Central Transportation Com
pany, Douglas Campbell, trustee of the property of
the Michigan Central Railroad Company, and
Canadian Pacific Limited, defendants, seeking the
same relief. The latter application contained cer
tain procedural irregularities aside from being pre
sented on short notice but counsel for all parties
represented at the hearing indicated that they did
not object to its introduction, waiving these
irregularities although not in agreement with the
merits of it. It is of considerable importance that
this record should also be before the Court since it
alone contains a statement of claim setting forth
the basis on which plaintiff in that action, Canada
Southern Railway Company, seeks the relief
claimed in its several applications. Counsel for
Canada Southern Railway Company conceded
that in effect this proceeding would replace the
earlier proceeding bearing File No. 76-T-615
which was brought in haste and originally sought
an ex parte order and in which no statement of
claim had been filed and which merely sought
relief against Douglas Campbell, trustee of the
property of the Michigan Central Railroad Com
pany, whereas the action brought under File No.
T-4367-76 was directed not only against him but
also against the trustees of the Penn Central
Transportation Company and Canadian Pacific.
This is the proceeding with which he intends to
proceed.
In explanation of the reason for having made a
similar application in the present file, No. T-2285-
71 which concerns only the Penn Central Trans
portation Company, it was explained that this was
done because this is the case in which the order of
Addy J. of September 27, 1974, confirming the
scheme of arrangement of the applicant for credi
tors in Canada under section 95 and following of
the Railway Act' was made. It was necessary to
make a separate application against the trustee of
the property of the Michigan Central Railroad
Company on the same date in the record No.
76-T-615 referred to above, for which no scheme
of arrangement had ever been made or approved in
Canada. It may well have been wise to have
proceeded in this manner since a serious question
was raised as to the jurisdiction of this Court over
the trustee of the Michigan Central Railroad
Company and there appears to be a distinction
R.S.C. 1970, c. R-2.
between it and the Penn Central Transportation
Company whose scheme of arrangement was
approved by this Court, whereas the scheme of
arrangement of the Michigan Central Railroad
Company did not require any approval in Canada.
I will deal first with the application of Mr. Segal
to intervene in File No. 76-T-615. Counsel for
Canada Southern Railway Company has indicated
that he proposes to leave this file dormant
although without formally desisting from the pro
ceedings at this stage and instead to proceed with
the action bearing number T-4367-76, and Mr.
Segal will no doubt in due course seek to intervene
in the latter proceedings, since his contentions
affect not only the shares owned by Michigan
Central Railroad Company but also those owned
by Penn Central Transportation Company in the
Toronto, Hamilton and Buffalo Railway Com
pany. In such event any order made in 76-T-615
would have little practical effect and would tend to
be redundant with an order which might be made
subsequently in File No. T-4367-76. Furthermore
there is grave doubt, although I express no firm
opinion thereon, since I am not required to so
decide in the present proceedings, whether a
minority shareholder or group of minority share
holders can intervene in an action brought by the
corporation of which they are shareholders to
oppose same on the ground that it should have
been brought against a different defendant. Mr.
Segal's contention is that the action should have
been brought by Canada Southern Railway Com
pany against Consolidated Rail Corporation of
America (Con. Rail) as lessees of the property
from Canada Southern Railway Company as of
June 25, 1976, the date of the latter's demand
rather than against the trustees of Michigan Cen
tral Railroad Company and Penn Central Trans
portation Company respectively, and that this was
not done because Canada Southern Railway Com
pany is controlled by Con. Rail. It may well be
that the minority shareholders may have some sort
of action against the company or its directors but
that is certainly not an issue to be decided on the
present applications which consist of an attempt to
retain in Canada for the benefit of Canadian
creditors the proceeds of the proposed sale of
shares in Toronto, Hamilton and Buffalo Railway
Company by the respective trustees of Michigan
Central Railroad Company and Penn Central
Transportation Company to Canadian Pacific. Mr.
Segal's application in File No. 76-T-615 will
therefore be dismissed without costs as it cannot
and should not be dealt with at this time.
The facts on which Canada Southern Railway
Company's claim is based indicate that it owns
certain rail properties in Ontario including a main
line running from Welland to Windsor and two
branch lines from Welland to Fort Erie and from
Welland to Niagara Falls as well as the Niagara
River Bridge running between Canada and the
United States through a wholly owned subsidiary
in the Niagara River Bridge Company all of which
properties are subject to lease entered into in June,
1903, ratified and confirmed by Act of Parliament
in 1904 2 , the lessee being Michigan Central. Also
included in the lease were controlling interests in
other railway companies operating in the United
States. Prior to April 1, 1976, the trustees of Penn
Central Transportation Company together with
the trustee of Michigan Central Railroad Com
pany held 107,163 shares of Canada Southern
Railway Company constituting approximately
71.4% of its outstanding stock and on that date
pursuant to the Regional Railway Organization
Act of 1973, as amended by the United States
Congress, these shares were transferred to Con.
Rail Corporation duly organized under the law of
Pennsylvania. The lease provided that in case of
any disagreement between the parties thereto there
should be arbitration by two persons, one chosen
by each company, who should choose a third and
in default of such choice a judge of the High Court
of Justice for the Province of Ontario would make
the choice. Arbitration was to be binding and any
award enforceable in the Courts of the State of
Michigan or the Province of Ontario. The state
ment of claim refers to certain "liquidated" claims
against Penn Central and Michigan Central con
sisting of income improperly paid to Penn Central
on proceeds of sales of leased land from 1963 to
1975 in the amount of $1,486,116.05; amounts due
for disposition of depreciable assets, $13,000,000;
a claim arising out of Michigan Central's improp-
2 4 Edward VII, c. 55.
erly causing Canada Southern to turn over shares
and bonds of Toledo, Canada Southern and
Detroit Railway Company for inadequate con
sideration, $3,100,000; a claim against Penn Cen
tral and Michigan Central arising out of past
treatment of Canada Southern's capital cost allow
ance under the Income Tax Act of Canada, in the
amount of $3,560,000; as well as other alternative
claims referred to as unliquidated such as for an
accounting with respect to shares and assets of
various controlled companies.
On June 25, 1976, Canada Southern invoked the
arbitration clause but has been advised by Penn
Central and Michigan Central that in order to
name an arbitrator they required the authority
from the Reorganization Court in the United
States to participate in the arbitration and that in
fact they have not decided whether they will seek
such authority. I seriously doubt the validity of
this position at least with respect to the trustees of
Penn Central who are acting in Canada by virtue
of a scheme of arrangement approved by this
Court, and the proposed arbitration arises out of a
clause in a lease approved in Canada for railway
property primarily in Canada. Some discussion has
taken place with reference to terms of arbitration
without any agreement having been reached
although they have agreed that it should take
place in Toronto and Ontario law should apply.
Canada Southern Railway Company contends
that any enforcement of any such award in Michi-
gan is unlikely since the assets of both Penn Cen
tral and Michigan Central in Michigan are subject
to the claims of the Reorganization Court which
claims are very large. The only assets which the
trustees of Penn Central still retain in Canada are
20,120 shares of the Toronto, Hamilton and Buf
falo Railway and the only assets which Michigan
Central retain in Canada are 11,180 shares of the
said company which by agreement dated May 27,
1976, both agreed to sell to Canadian Pacific
Limited for $3,400,280 and $1,995,890 respective
ly, the transaction to close in the City of Hamilton.
Applicant has requested that trustees hold the sale
monies received from Canadian Pacific in Ontario
pending the resolution of the arbitration proceed
ings but no such assurance has been given and it is
applicant's contention that if the said monies are
paid unconditionally to the trustees they will be
moved to the United States where they will be
subject to claims of all creditors in the United
States running into several billion dollars which
would cause them irreparable harm. It is for that
reason that they are seeking the relief they now
claim pending the outcome of the arbitration
proceedings.
Reference should here be made to the order of
Addy J. dated September 27, 1974, approving the
scheme of arrangement for the creditors in Canada
of Penn Central Transportation Company under
section 95 and following of the Railway Act. In
the preamble of his order on page 3, with reference
to the trustees, he states:
In the United States they may also exercise the powers of a
receiver in equity and all executions against property belonging
to or in the possession of the Company in the United States are
restrained except for the rights of owners of rolling stock to
take possession thereof pursuant to their equipment contracts.
It is of course evident that the reorganization of
the railroad approved by the Reorganization Court
in the United States would not have extraterritori-
al effect so as to prevent any execution against
property in Canada any more than the decision of
a Canadian court would have extraterritorial
effect with respect to property in the United
States. In paragraph 5 of Mr. Justice Addy's order
he gives the trustees the power to "sell, convey or
lease property in Canada not needed for the opera
tion of the Company". In paragraph 6 he gives the
trustees in Canada substantially the same powers
as those specified by the Reorganization Court
including the right "to defend and liquidate, com
promise, adjust or settle any actions, proceedings,
or suits now pending against the Company or the
Trustees or which may hereafter be asserted or be
brought in any court or before any officers, depart
ments, commission or tribunal to which the Com
pany or the Trustees are or shall be a party in
Canada".
He refers to the scheme of arrangement for the
creditors in Canada of Penn Central Transporta
tion Company and on page 7 proposes that the
outstanding claims of all creditors of the Company
in Canada be disposed of as follows:
1. The current and future valid claims of the Company's
creditors in Canada arising from the continued operation of the
Company's railway business in Canada after June 21, 1970
shall be paid generally and as they become due and payable
and liquidated as to amount.
2. Within a period of six months (or in the case of claims
unliquidated as to amount such additional time as may be
necessary for the unliquidated claims to be liquidated) from the
date of a final judgment of the Federal Court of Canada (the
"Federal Court") in confirmation of the Scheme as prescribed
by the Railway Act of Canada (the "Railway Act") or within
such extended period of time as the Federal Court may order,
the Trustees shall pay in full the valid claims of the Company's
creditors in Canada arising prior to June 22, 1970 from the
operation of the Company's railway business in Canada or from
obligations contracted and payable by the Company in Canada
which are due and payable, but without interest after June 21,
1970, and have one or more of the following characteristics:
(e) obligations under leases of Canadian railway property.
It is interesting to note that in clause 3 on pages
8 and 9 of the judgment he deals with obligations
of the Company (i.e. Penn Central) to creditors in
Canada arising prior to June 22, 1970 as a result
of the Company's, or the Canadian creditors' busi
ness activities outside of Canada and especially
within the United States pointing out that since
these claims were not "incurred in connection with
Canadian railway operations they shall be
adjudicated in the District Court of the United
States for the Eastern District of Pennsylvania
(the `Reorganization Court') and shall be treated
equally and rateably in the Reorganization Court
with the claims of other creditors of the Company
of corresponding classes or classifications whereso
ever residing or domiciled". It is clear that con
versely, with respect to claims of Canadian credi
tors incurred in Canada, these would be paid out
of Canadian assets, and that with respect to these
assets Canadian creditors would not be treated
"equally and rateably in the Reorganization Court
with the claims of other creditors of the Company
of corresponding classes or classifications whereso
ever residing or domiciled".
Other material pertinent to the decision of this
issue is as follows:
Order No. 2506 respecting Penn Central Trans
portation Company and No. 75 respecting
Michigan Central Railroad Company of John P.
Fullam, District Judge in the United States
District Court for the Eastern District of Penn-
sylvania dated August 17, 1976, authorizing the
trustees of the two railroad companies to sell
their stock interest in the Toronto, Hamilton
and Buffalo Railway Company to Canadian
Pacific Limited for $169 a share or a total of
$5,396,170. Clause 2 of this order reads:
The net proceeds of such sale shall be deposited in escrow
subject to any liens thereon and subject to any claims to the
proceeds of this sale which may arise on account of such sale
until further order of the court.
While the order does not state where the funds
shall be deposited in escrow it is the contention of
the trustees that the Court had in mind the United
States where all the trustees are resident and the
other assets of the two railroad companies are
being dealt with. Certainly this is the interpreta
tion placed on it by Mr. Siembieda, senior attorney
for the trustees of the Penn Central Transportation
Company who in his affidavit states in
paragraph 3 that it is his opinion that the sale was
approved by Judge Fullam "upon condition that
the proceeds would be escrowed in the United
States subject to any liens thereto and subject to
any claims until further Order of the Reorganiza
tion Court". On the other hand it appears that
there is nothing in the order that would specifically
prevent the trustees from escrowing the funds in
Canada. Reference is also made in Mr. Siem-
bieda's affidavit to two further orders of Judge
Fullam being Order 343 dated July 23, 1971, and
Order 713 dated May 16, 1972, respectively
authorizing the trustees to make effective a plan
for the filing and treatment of claims of Canadian
creditors, and authorizing the trustees to amend
the scheme of arrangement for Canadian creditors.
Both orders make reference to the approval of a
scheme of arrangement for Canadian creditors and
authorize the trustees "subject to the approval of
the Federal Court of Canada to carry out and
make effective the terms and provisions of the
Scheme of Arrangement". It is also stated, how-
ever, "The Court hereby reserves jurisdiction to
approve any further substantial change in the
Scheme of Arrangement". It is evident that the
intent of Judge Fullam is to give effect to and
carry out as far as possible the scheme of arrange
ment eventually approved in Canada for Canadian
creditors. What applicant fears however is that
once the funds are in the United States, then, by
operation of American law, it may well be that any
prior claims which Canadian creditors may have to
Canadian assets will be defeated as the result of
other claims which may have priority in the
United States.
That this is not an idle fear appears from the
affidavit of Mr. E. Roger Frisch, general counsel
of applicant Canada Southern Railway Company
in the United States, who points out in paragraph
9 of his affidavit that Canada Southern Railway
declared a dividend of $60 (U.S.) per share on
March 29, 1976, as a result of which dividends
were paid to Penn Central Transportation Com
pany and Michigan Central Railroad in the
amount of $5,465,315 (U.S.) after deduction of
15% Canadian withholding tax and put into
escrow accounts in the United States in order to
provide Canada Southern Railway with an oppor
tunity to establish its claims and seek recovery
against the escrowed funds. However, it appears
by paragraph 10 that other claims have been made
by creditors against the funds consisting of a claim
of $50,000,000 by the United States of America, a
claim for the full amount of the monies in escrow
by the Wilington Trust Company and a further
claim for the full amount of the monies in escrow
by the Bank of New York. Without in any way
attempting to determine the validity of these
claims, which is a matter for decision by the
American courts, it would appear that the claim
by the United States of America itself may well be
for taxes which might well have priority over
claims of ordinary creditors. The orders of Judge
Fullam of August 17, 1976, referred to above
specifically and very properly made the deposit of
the funds in escrow "subject to any liens thereon"
and the tax claim, if such it is, might well give rise
to a lien should the funds be deposited in escrow in
the United States and the allegedly prior claims of
Canadian creditors be thereby defeated. I am fully
in agreement therefore with the view of applicant,
Canada Southern Railway Company, that it is
desirable that the funds should be kept in Canada
pending the disposition of its proceedings against
the trustees of the two railroad companies, Penn
Central Transportation Company and Michigan
Central Railway Company, and believe that if this
is not done it may well suffer irreparable preju
dice. The balance of convenience is also clearly in
its favour since, if the funds are retained in
Canada in an interest bearing account, no creditor
will suffer prejudice, even should the trustees be
eventually forced by final judgment of an appro
priate Court having jurisdiction to transfer the
said funds to the' United States. The difficulty
arises, however, in determining how the objective
of keeping the funds in Canada is to be
accomplished.
Before considering this I must first deal with an
objection taken by counsel for the trustees, sup
ported by counsel for Canadian Pacific to the
jurisdiction of this Court over these proceedings.
The action taken by Canada Southern Railway
Company under No. T-4367-76 is an action aris
ing out of a 1903 lease by Canada Southern to
Michigan Central of rail properties and the sub
lease in 1930 by Michigan Central to its parent
company, the New York Central Railroad Com
pany, the predecessor of Penn Central. Although
this lease was ratified and confirmed, as was
necessary, by an Act of Parliament in 1904, I do
not consider that the origin of the claim for relief
is the Act of Parliament within the meaning of
those words in section 23 of the Federal Court Act
which reads as follows:
23. The Trial Division has concurrent original jurisdiction as
well between subject and subject as otherwise, in all cases in
which a claim for relief is made or a remedy is sought under an
Act of the Parliament of Canada or otherwise in relation to any
matter coming within any following class of subjects, namely
bills of exchange and promissory notes where the Crown is a
party to the proceedings, aeronautics, and works and undertak
ings connecting a province with any other province or extending
beyond the limits of a province, except to the extent that
jurisdiction has been otherwise specially assigned.
It was contended, however, that the lease related
to "works and undertakings connecting a province
with any other province or extending beyond the
limits of a province" since the lines in question,
although wholly in the Province of Ontario in so
far as Canada is concerned, extended into the
United States by the Canada and Michigan Bridge
and Tunnel Company, and certain connecting lines
operating in the United States were also included
in the lease. However, the recent judgment of the
Supreme Court in the case of Canadian Pacific
Ltd. v. Quebec North Shore Paper Company'
makes it clear that section 23 of the Federal Court
Act cannot be read by itself so as to confer juris
diction. In rendering the judgment of the Court,
Chief Justice Laskin at pages 481-482 of the
judgment stated:
Addy J. did not deal with the effect of s. 101 of the British
North America Act upon s. 23 of the Federal Court Act, and
appeared to assume that he had jurisdiction if the enterprise
contemplated by the agreement as a whole fell within federal
legislative power. As I have already indicated, the question
upon which he proceeded is not reached unless the claim for
relief is found to be one made "under an Act of the Parliament
of Canada or otherwise". In the Federal Court of Appeal, the
majority judgment of Le Damn J., which he delivered for
himself and Ryan J. and which was concurred in with addition
al reasons by Thurlow J. (as he then was), poses the issue in
terms which also overlook the words just quoted. Thus, he says:
The question to be determined, therefore, is whether the
claim for relief in this case relates to a matter coming within
the class of subjects "works and undertakings connecting a
province with any other province or extending beyond the
limits of a province".
However, Le Dain J. does consider the import of the words "or
otherwise" and goes on to say that he understands them to refer
"to any other law that can be considered to form part of the
'laws of Canada' within the meaning of s. 101 of the B.N.A.
Act".
On page 483 he states:
If independently valid and applicable, as Quebec law obviously
is in the present case (indeed, as being the law chosen by the
parties to govern the agreement), it is not federal law nor can it
be transposed into federal law for the purpose of giving juris
diction to the Federal Court. Jurisdiction under s. 23 follows if
the claim for relief is under existing federal law, it does not
precede the determination of that question.
It was argued that the present situation can be
distinguished from that dealt with in the said
judgment in that the Act of 1904 approving the
lease by Canada Southern Railway Company 4 ,
states in section 4 that "the undertaking of the
Leamington and St. Clair Railway Company is
declared to be a work for the general advantage of
Canada". The Act confers on Canada Southern
Railway Company the franchises, powers, authori
ties, rights and privileges of the Leamington Com
pany. The fact that the undertakings of a railway
3 (1976) 9 N.R. 471.
4 4 Edward VII, c. 55.
are specifically declared to be a work for th(
general advantage of Canada by Canadian statut(
does not, however, in my view and by virtue of th(
interpretation of section 23 of the Federal Cour
Act made by the Supreme Court in the Quebec
North Shore Paper Company case give jurisdic
tion to the Federal Court over all proceedings o1
whatsoever nature brought by that railway com
pany when such proceedings are clearly of a civi
nature which should be brought in the provincia
courts, and the claim against the Michigan Cen
tral Railroad Company arising out of the lease
appears to be a civil claim for breach of contract.
The situation with respect to the jurisdiction of
the Court over the relief sought in the present
application against Penn Central Transportation
Company is, however, quite different since it is an
incident of proceedings which have already been
before this Court since 1971 and which involved
the approval by Addy J. on September 27, 1974, of
the scheme of arrangement for the creditors in
Canada of that company pursuant to section 95
and following of the Railway Act, a valid federal
statute. While counsel for the trustees and for
Canadian Pacific argued that the mere approval of
the arrangement by this Court does not give this
Court jurisdiction over actions otherwise of a
purely civil nature brought by creditors against the
trustees and that to do so would open the door to a
multiplicity of such actions which the scheme of
arrangement was intended to prevent I do not find
this to be the case at least in the present proceed
ings, No. T-2285-71. This argument may well be
applicable to the proceedings brought under No.
T-4367-76, but I am not called upon to so decide
in connection with the present application and
therefore refrain from expressing any views there
on. I have, however, before me an application
seeking substantially the same relief in the present
case, in which the judgment of Addy J. was ren
dered and I find that the application seeking to
keep in Canada the funds arising out of the pro
posed sale by the trustees of Penn Central Trans
portation Company of the shares it owns in the
Toronto, Hamilton and Buffalo Railway to
Canadian Pacific for $3,400,280 is ancillary to and
a reasonable and foreseeable consequence of Addy
J.'s order and necessary in order to give full effect
thereto. If the creditors in Canada are to be paid
(to the extent that the funds in Canada so permit)
in priority to creditors in the United States out of
assets available for such payment in Canada, it is
desirable that the funds be kept in Canada to
ensure that such payment be made in compliance
with Mr. Justice Addy's order.
In further support of its contention that this
Court has jurisdiction over Canada Southern's
claim against both Penn Central Transportation
Company and Michigan Central Railroad, Canada
Southern Railway's counsel made reference to sec
tion 64(1) of the Federal Court Act which pro
vides that sections 26 to 28 of the Exchequer
Court Act remain in force. He then relied on
section 26 of the Exchequer Court Act to give
jurisdiction but the reading of that section clearly
indicates in my view that it is not applicable to the
present circumstances, for the claim does not
relate to the sale of a railway or rolling stock or to
a foreclosure at the instance of a mortgagee.
I therefore conclude that in the present proceed
ings, No. T-2285-71, the Court has jurisdiction
over the proceeds of the sale of the Toronto,
Hamilton and Buffalo Railway stock belonging to
Penn Central Transportation Company, but that it
has no jurisdiction over the proceeds of the sale of
the shares of the said stock belonging to Michigan
Central Railroad Company. That is not to say that
the Ontario Supreme Court cannot entertain such
proceeding, but it is evident that this Court cannot
grant injunctive or other relief affecting the dispo
sition of funds arising from the sale of property of
Michigan Central Railroad Company against
which Canada Southern Railway Company has an
unliquidated claim and which must be proceeded
with in another court. I might add at this time that
I have concluded that despite the reference to
Canada Southern's claim being for liquidated
damages in its statement of claim, File T-4367-76,
and a similar reference in the affidavit of Mr.
Frisch the claim is clearly an unliquidated one
until both the validity and quantum of same have
been determined either as a result of the arbitra
tion proceedings which Canada Southern Railway
Company proposes to institute in Ontario or as a
result of a final judgment by the appropriate court.
I have no hesitation in concluding, however, as I
have already indicated, that the sums to be
received by the trustees of the Penn Central Trans
portation Company arising out of the sale of its
shares to the Toronto, Hamilton and Buffalo Rail
way Company should be kept in Canada by the
trustees in order to give full effect to the judgment
of Addy J. confirming the scheme of arrangement
for that railway in Canada. The question to be
decided is how this can best be accomplished.
Certainly an amendment by Fullam J. to his Order
No. 2506 and Order No. 75 of August 17, 1976,
affecting not only the Penn Central Transportation
Company but also the Michigan Central Railroad
Company, authorizing the trustees of those respec
tive railroads to deposit funds in escrow so as to
state that they can be so deposited in escrow in
Canada, together with an undertaking by the trus
tees after such order is issued that they will deposit
the funds in escrow in Canada rather than in the
United States, would accomplish the purpose
sought by applicant and be fair to all the Canadian
creditors by protecting these funds until determi
nation of whatever claims in Canada can be validly
sustained against them. While there would seem to
be no reason why Fullam J. would not be prepared
to make such an amendment to his order since he
authorized the trustees to enter into the scheme of
arrangement in Canada which was subsequently
approved by Addy J., the order as it now stands is
open to the interpretation given to it by Mr.
Siembieda that the trustees would be obliged to
deposit the proceeds of the sale of the shares in
escrow in the United States, with its attendant
dangers to applicant and other Canadian creditors
to which I have already referred. It goes without
saying that this Court cannot and should not sug
gest what further steps Fullam J. might take so as
to protect the interest of creditors in Canada pur
suant to Addy J.'s order, and no doubt it is his
intention that it should be fully complied with, and
there is no reason to believe that the trustees
themselves are not quite prepared to comply with
it. It is not difficult to foresee, however, if the
funds are transferred to the United States the
grave danger of liens being placed on these funds
by American creditors including the Government
of the United States, which at best would lead to
prolonged litigation there, and at worst might have
the effect of entirely defeating the claims. of appli
cant in the present proceedings and other Canadi-
an creditors. There is no doubt that an injunction
could be issued against Messrs. Robert W. Blan-
chette, Richard C. Bond and John H. McArthur
as trustees of the property of Penn Central Trans
portation Company directing them not to remove
the funds from Canada pending the determination
of any outstanding litigation or of the arbitration
proceedings in Canada, but there is some doubt as
to whether this would be effective so as to accom
plish the end sought. Unless Fullam J.'s order is
amended before the sale of the shares is concluded
so as to clearly permit the trustees to deposit the
funds in escrow in Canada, and they undertake to
exercise this option, they might well be placed in a
difficult position. On the one hand they would be
subject to an injunction from this Court directing
them not to remove the funds from Canada, while
on the other hand they would be faced with an
opinion from their own counsel, Mr. Siembieda,
that Fullam J.'s order as it now stands should be
interpreted so as to require the funds to be deposit
ed in escrow in the United States. When the
scheme of arrangement was approved in Canada
the trustees were not required to give security by
way of bond or otherwise. They are all American
residents and once the funds have been transferred
to the United States it would appear that neither
the funds nor the trustees would be subject to any
effective control by this Court. The injunction
might then well become ineffective. Certainly a
conflict of laws situation would arise which it is
desirable to avoid.
The only effective remedy therefore would
appear to be the appointment of a receiver, one of
the alternative remedies which Canada Southern
Railway Company suggests. The question is
whether I have authority to do so. There is nothing
in the Rules of the Federal Court which expressly
so permits. Rule 2405 refers to the appointment of
a receiver by way of equitable execution, but in the
present case Canada Southern Railway has no
judgment against the trustees so there can be no
question of equitable execution. Rule 2004 refers
to writs of sequestration. This rule appears how
ever in Division C of the Rules dealing with writs
of execution so again it presupposes the existence
of a judgment. Rule 5 sometimes referred to as the
"Gap Rule" provides that:
Rule 5. In any proceeding in the Court where any matter
arises not otherwise provided for by any provision in any Act of
the Parliament of Canada or by any general rule or order of the
Court (except this rule), the practice and procedure shall be
determined by the Court (either on a preliminary motion for
directions, or after the event if no such motion has been made)
for the particular matter by analogy
(a) to the other provisions of these Rules, or
(b) to the practice and procedure in force for similar pro
ceedings in the courts of that province to which the subject
matter of the proceedings most particularly relates,
whichever is, in the opinion of the Court, most appropriate in
the circumstances.
The subject matter of the present proceedings
clearly relates to the Province of Ontario and the
Ontario Rules of Practice make no provision for
the appointment of a receiver or for attachment
before judgment (unlike the Quebec Code of Civil
Procedure which has such provision, article 733 et
seq.) to protect the interest of a creditor whose
claim has not yet been liquidated in funds which
he has reasonable cause to believe may be dealt
with in such a way as to defeat his claim if they
are not placed in receivership or attached pending
the outcome of the litigation by which he seeks to
have his claim established.
In the absence of a specific rule, however, I am
encouraged by the fact that section 3 of the Feder
al Court Act which reads as follows:
3. The court of law, equity and admiralty in and for Canada
now existing under the name of the Exchequer Court of
Canada is hereby continued under the name of the Federal
Court of Canada as an additional court for the better adminis
tration of the laws of Canada and shall continue to be a
superior court of record having civil and criminal jurisdiction.
establishes that this is a court of equity. Reference
to British decisions in equity is therefore permissi
ble. Dealing with British law on the subject, Kerr
on Receivers, 14th ed. has this to say at page 6:
The second class of cases includes those in which the appoint
ment is made to preserve property pending litigation to decide
the rights of the parties, or to prevent a scramble among those
entitled, as where a receiver is appointed pending a grant of
probate or administration, or to preserve property of persons
under disability, or where there is danger of the property being
damaged or dissipated by those with the legal title, such as
executors or trustees, or tenants for life, or by persons with a
partial interest, such as partners, or by the persons in control,
as where directors of a company with equal powers are at
variance. In all cases within this second class it is necessary to
allege and prove some peril to the property; the appointment
then rests on the sound discretion of the court. In exercising its
discretion the court proceeds with caution, and is governed by a
view of all the circumstances. No positive or unvarying rule can
be laid down as to whether the court will or will not interfere by
this kind of interim protection of the property.
Reference was also made to the case of Oldfield v.
Cobbett, 4 L.J. Ch. 271, in which at page 272 the
Master of Rolls stated:
The question is, whether it is not the duty of the Court to
prevent the property from getting into the hands of this defend
ant: and I think there are circumstances here which will justify
the Court in putting this property where it will be safe.
It is true that in that case the executor had a bad
reputation with various judgments and convictions
against him, and it is not in any way suggested in
the present case that the trustees are not persons of
the highest reputation and probity, but despite this
the circumstances would appear to justify the
Court in having the money held for eventual distri
bution to Canadian creditors whose claims may be
recognized by this Court.
Moreover The Judicature Act 5 of Ontario con
tains a section reading in part as follows:
19.—(1) A mandamus or an injunction may be granted or a
receiver appointed by an interlocutory order of the court in all
cases in which it appears to the court to be just or convenient
that the order should be made, and any such order may be
made either unconditionally or upon such terms and conditions
as the court considers just, and if an injunction is asked, either
before, or at, or after the hearing of any cause or matter, to
prevent any threatened or apprehended waste or trespass, the
injunction may be granted, whether the person against whom it
is sought is or is not in possession under any claim of title or
otherwise, or, if out of possession, does or does not claim a right
to do the act sought to be restrained under a colour of title, and
whether the estates claimed by both or by either of the parties
are legal or equitable.
Receivers have been appointed in Ontario while
litigation is in progress in Gooderham v. Toronto
and Nipissing Railway Co. (1880) 8 Ontario
Appeal Reports 685, General Host Corp. v. Chem-
alloy Minerals Ltd. [1972] 3 O.R. 142, and Wahl
v. Wahl [No. 2J [1972] 1 O.R. 879 (see pages
889-891).
5 R.S.O. 1970, c. 228.
While I am reluctant to direct that the proceeds
of the sale of the shares owned by the Penn
Central Transportation Company should be taken
out of the hands of its trustees and placed in the
hands of a receiver to be appointed I find this to be
necessary unless the trustees or other interested
person can obtain an amendment by way of clarifi
cation of Fullam J.'s order permitting them to
keep the funds in escrow in Canada, and they
agree to do this, or, alternatively, in the event that
they maintain their right to remove them to the
United States, that they first furnish a bond
approved by this Court in the amount of $3,400,-
280 to satisfy any claims of Canadian creditors
established by judgment or arbitration or admitted
by the trustees and approved by this Court.
I invite the parties to speak to the appointment
of a suitable receiver and the conditions to be
established for such receivership which must how
ever be established before November 26, 1976, to
which date I am informed the closing of the sale of
the shares in question has now been postponed.
The costs of this application shall be in the event
of the cause.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.