Date: 19991027
Docket: A-139-98
OTTAWA, ONTARIO, WEDNESDAY, OCTOBER 27, 1999
| CORAM: DESJARDINS J.A. |
LÉTOURNEAU J.A.
CHEVALIER D.J.
BETWEEN:
TRANSPORT H. CORDEAU INC.,
Appellant - garnishee,
AND:
HER MAJESTY THE QUEEN,
Respondent,
In re the Income Tax Act,
and
In re one or more assessments made by the
Minister of National Revenue pursuant to one
or more of the following statutes: the Income Tax Act, the
Canada Pension Plan and the Unemployment Insurance Act,
AGAINST:
GILBERT GADBOIS,
Judgment debtor,
AND:
J.L. MICHON TRANSPORT INC.,
Garnishee,
AND:
2951-7539 QUÉBEC INC.,
Mis-en-cause.
JUDGMENT
The appeal is dismissed with costs in this Court and the Trial Division and before the prothonotary. The matter is referred back to the prothonotary for him to proceed with the hearing of the respondent"s application for a court-ordered garnishment against the appellant.
| Alice Desjardins J.A. |
Certified true translation
Bernard Olivier, LL. B.
Date: 19991027
Docket: A-139-98
| CORAM: DESJARDINS J.A. |
LÉTOURNEAU J.A.
CHEVALIER D.J.
BETWEEN:
TRANSPORT H. CORDEAU INC.,
Appellant - garnishee,
AND:
HER MAJESTY THE QUEEN,
Respondent,
In re the Income Tax Act,
and
In re one or more assessments made by the
Minister of National Revenue pursuant to one
or more of the following statutes: the Income Tax Act, the
Canada Pension Plan and the Unemployment Insurance Act,
AGAINST:
GILBERT GADBOIS,
Judgment debtor,
AND:
J.L. MICHON TRANSPORT INC.,
Garnishee,
AND:
2951-7539 QUÉBEC INC.,
Mis-en-cause.
Hearing held at Montréal, Quebec, Tuesday, October 5, 1999
Judgment rendered at Ottawa, Ontario, Wednesday, October 27, 1999
REASONS FOR JUDGMENT BY: LÉTOURNEAU J.A.
CONCURRED IN BY: DESJARDINS J.A.
CHEVALIER D.J.
Date: 19991027
Docket: A-139-98
| CORAM: DESJARDINS J.A. |
LÉTOURNEAU J.A.
CHEVALIER D.J.
BETWEEN:
TRANSPORT H. CORDEAU INC.,
Appellant - garnishee,
AND:
HER MAJESTY THE QUEEN,
Respondent,
In re the Income Tax Act,
and
In re one or more assessments made by the
Minister of National Revenue pursuant to one
or more of the following statutes: the Income Tax Act, the
Canada Pension Plan and the Unemployment Insurance Act,
AGAINST:
GILBERT GADBOIS,
Judgment debtor,
AND:
J.L. MICHON TRANSPORT INC.,
Garnishee,
AND:
2951-7539 QUÉBEC INC.,
Mis-en-cause.
REASONS FOR JUDGMENT
LÉTOURNEAU J.A.
[1] In the case of a garnishment from a third party, is the respondent subject to having the third party so garnished set up against her a counter-letter concluded between itself and the respondent"s debtor? That is the question posed by the appeal at bar and which the parties agreed to raise as a preliminary question in the dispute between them. Though the problem may be simply stated, the solution is not so straightforward.
Facts and procedure
[2] The appellant Transport H. Cordeau Inc., which is the garnisheed third party in the case at bar, operates a transportation and snow removal business. In 1995 it was having serious financial problems. It had an immediate need for liquidity. It borrowed money from several people, including the company 2951-7539 Québec Inc. ("Cie Québec Inc.") owned by Gilbert Gadbois. The latter owes the respondent a tax debt incurred for the 1991 to 1995 taxation years and determined on February 14, 1997 at $1,285,674.06 with compound interest. Mr. Gadbois" tax debt thus predates the transactions which are at issue in the case at bar. The appellant also borrowed from one of its competitors, J.L. Michon Transport Inc., the property of Jean-Louis Michon. I mention this creditor, which was also the subject of a garnishment, as its name appears in the transactions which are at issue in the case at bar; but I hasten to add that this garnishee is not at issue in the appeal.
[3] The appellant"s loan from Cie Québec Inc. was made by a verbal agreement between February and May 1996 in an initial amount of $63,000, described as [TRANSLATION] "advances", and it proved to be insufficient. The appellant again turned to its creditor, who this time in return for fresh advances of money required a second hypothecary guarantee in its favour over the appellant"s business equipment and a similar third level guarantee to J.L. Michon Transport Inc.
[4] Further, fearing and even expecting that the appellant would go bankrupt,1 Cie Québec Inc. required that the hypothecary deed on the movable property indicate as the amount of advances made or loan secured the sum of $325,000. The purpose of this requirement was simple. In the event that the appellant went bankrupt Cie Québec Inc. and J.L. Michon Transport Inc. wanted, by the size and nature of their debt, to have the best position in the bankruptcy and ensure that they controlled it. However, according to the alleged verbal agreement between the appellant and Cie Québec Inc., the loan was to be repaid by the payment of $225,000, contrary to the sum of $325,000 officially appearing in the hypothecary deed made on May 10, 1996. To complete the picture, I should add that the advances of money for the period February to September 1996 did not exceed $160,300 despite the official and unofficial undertakings by the appellant to repay a much larger amount.
[5] Mr. Gadbois, the owner of Cie Québec Inc., was subject to pressure by Revenue Canada, which was seeking to obtain payment of its tax debt.2 Further, on October 30, 1996 the respondent seized the sum of $3,337 in Mr. Gadbois" bank account.3 Also on November 5, 1996, to avoid a new seizure by Taxation,4 he made an assignment of his $325,000 debt to J.L. Michon Transport Inc. for the sum of $225,000 and received payment by cheque dated the following day. However, the appellant intervened in the assignment, though allegedly with reluctance, but confirmed that the capital hypothecary balance was $325,000 and that it had paid no interest since the loan was made.5 In his affidavit Jean-Louis Michon confirmed that the amount owed by the appellant was $325,000 and that he had to give Cie Québec Inc. any amount he received from the appellant over $225,000 and the interest to which he was entitled.6
[6] Contrary to all expectations, the appellant avoided bankruptcy by a refinancing and on December 2, 1996 paid J.L. Michon Transport Inc. $225,000.
[7] On learning of the transfer of the debt the respondent, on January 9, 1997, made an administrative garnishment by a peremptory request for payment to the appellant for a balance of $100,000 owed by the latter, which J.L. Michon Transport Inc. undertook to pay Cie Québec Inc. under the said debt transfer. The appellant filed a negative declaration dated May 29, 1997, based on a release executed and signed by Mr. Gadbois and Cie Québec Inc. subsequent to the peremptory demand for payment made.
[8] It is interesting to note that, first, this release dated February 12, 1997, released the appellant from any amount owed to Cie Québec Inc. both under the hypothec and the debt assignment, and second, it released J.L. Michon Transport Inc. from any amount exceeding $225,000 which the latter was to repay Cie Québec Inc. The release thus confirmed that the appellant"s debt was $325,000.
[9] On April 27, 1997 the respondent applied to the prothonotary of the Federal Court for a provisional court-ordered garnishment against the appellant and J.L. Michon Transport Inc., and received it the following day.
[10] This was the background to the dispute between the parties. Against the seizure, the appellant set up the secret verbal agreement which it claimed it had with Mr. Gadbois and Cie
Québec Inc. as to the amount owed, which was allegedly $225,000, contrary to the sum of $325,000 appearing in the official documents. The respondent retorted that this was a counter-letter which could not be set up against it under art. 1452 of the Civil Code of Quebec ("the Code"), which reads:
|
|
[11] When the matter became before the prothonotary, he ruled in the appellant"s favour for the following reasons: the apparent contract and counter-letter were not made for the purpose of defrauding the respondent, the respondent did not have to deal with the parties to the simulation, the respondent did not rely on the apparent contract in making the assessment of Mr. Gadbois or in making any other undertaking, the respondent is not a third person in good faith and the respondent did not discharge the burden upon it of establishing the conditions for application of art. 1452 of the Code.
[12] On appeal the Trial Division judge concluded that the prothonotary had misunderstood two points. First, the respondent did not have to prove her good faith in relying on art. 1452, as under art. 2805 of the Code good faith is always presumed unless the law expressly requires that it be proved. I feel that in referring to the respondent"s burden of establishing the conditions for application of art. 1452 the prothonotary was not unaware of the well-known presumption under art. 2805, and actually had in mind what he also considered as conditions for the article to apply, namely the causal link between the apparent contract and the respondent"s actions and the harm resulting from the counter-letter. In any event, the formulation he used also covered good faith, which is a condition for the article in question to apply, and the judge cannot be blamed for having so understood him.
[13] Second, the Trial Division judge considered that the purpose of the apparent contract was to defraud the Crown for, as made, it did not exclude the National Revenue Department from its scope.
Is the verbal agreement between the garnishee and Cie Québec Inc. a counter-letter which can be set up against the respondent?
[14] Articles 1451 and 1452 of the Code protect third persons in good faith against simulation by stating that a counter-letter may not be set up against them. I have already reproduced art. 1452, but I feel it is worth reproducing again together with art. 1451:
|
| IV - SIMULATION
|
[15] There is no doubt that, though merely verbal, the agreement concluded between the appellant and Cie Québec Inc. constituted a counter-letter within the meaning of arts. 1451 and 1452. Indeed, it would be absurd to limit the application of that article to cases in which the agreement was written, as all the parties to the agreement would have to do to deprive third parties of any protection is be clever enough not to commit the agreement to writing. As Rivard J.A. of the Quebec Court of Appeal said in Gilbert, ès-qualité v. Lefaivre, ès-qualité:7
| [TRANSLATION] |
| If it were not so, we would have to say that secret agreements designed to cancel the effect of an apparent contract had greater force when they were verbal than when they were made by a written counter-letter proving simulation. That would be illogical. |
[16] In short, it is not the form of the counter-letter which prevents it from being set up, but its nature. In other words, it is not the fact that the agreement is oral or written but the fact that it is secret which justifies the protection given to third parties in good faith.
[17] It is also clear that there was a simulation in the case at bar, resulting from the apparent agreement the effects of which were altered by the parties by a verbal agreement which was intended to remain secret.
[18] French commentators recognize three categories of persons who may be affected by a contract: the particular beneficiaries, the unsecured creditors of the parties and the penitus extranei,8 the latter being persons who are complete strangers to the contract and to the contracting parties. It goes without saying that such a contract does not affect them. However, I would note nevertheless that they are also entitled to protection against the concealed contract in the rare cases where an attempt is made to set the contract up against them.9
[19] The appellant did not deny that the respondent is an unsecured creditor of Mr. Gadbois and is thus a third person for the purposes of art. 1452 of the Code. It was also agreed for the purposes of the case at bar to lift the corporate veil between Mr. Gadbois and Cie. Québec Inc. controlled by him. However, it maintained that the respondent is not a third party in good faith who has been adversely affected by the apparent contract, that the apparent contract was not intended to deceive her, and finally, that the respondent is a universal beneficiary of her debtor Mr. Gadbois so that she has no more right than her debtor.
Lack of injury suffered by respondent and fact simulation was not intended to apply to her
[20] Both in French law10 and in Quebec law, third persons in good faith may rely on an apparent contract even if no loss has resulted from the simulation. Further, it is not necessary as in the Paulian action (now in Quebec under the new Code the action for a Paulian declaration, art. 1631) for the simulation or subterfuge to be directed against the person relying on the apparent contract.11 Applying this principle, Rivard J.A. of the Quebec Court of Appeal wrote in Gilbert, ès-qualité, supra:12
| [TRANSLATION] |
| There is not even any need to distinguish whether the simulation originally caused the creditors any loss: this would be to confuse the conditions for the Paulian action and those for the action based on simulation. |
[21] The remarks of the writers Baudry-Lacantinerie and Barde are to the same effect:13
[TRANSLATION]
| Finally, it is not necessary for them [the third parties] to establish that the counter-letter originally caused loss: it will suffice if at the time it is set up against them they have an interest in rejecting it. |
[22] It is wrong to argue or to believe in the case at bar that the respondent may only rely on the apparent contract if it was used by her to determine and set the amount of the assessment of tax owed by her debtor. First, that would be to require the respondent to suffer loss originally from the simulation. Second, it would be to unnecessarily limit the scope and ambit of art. 1452 of the Code by confining it to the case in which the apparent contract contributed in whole or in part to arriving at the amount of the claim held by the unsecured creditor. That claim does not have to arise from or be influenced by the parties" apparent contract or agreement: it may result from a delict,14 or as in the case at bar, from the law. This extract from the writers Planiol and Ripert clearly summarizes the rule applicable in such cases:15
[TRANSLATION]
| Third parties are not only those who, in concluding a contract, took the apparent contract into consideration and expected the situation created by it, as for example by acquiring real rights from the apparent owner. The unsecured creditors of the apparent owner are also third parties. They are beyond the scope of a claim by the holder of a counter-letter which recognizes him as owner of the property seized by them, without it being necessary, when they became creditors, for their debtor to have already been apparent owner. Similarly, they can take precedence over a creditor claiming under a counter-letter without it being necessary for their claims to be prior to his own or that the simulation was intended to infringe on their rights. |
[23] It will suffice, as in the case of the respondent at the time she wished to execute her debt, that she has an interest in relying on the apparent contract and rejecting the counter-letter.
Respondent"s absence of good faith
[24] In my opinion, the appellant"s argument that the respondent is not a third party in good faith as she knew of the existence of the counter-letter is also without merit. The apparent contract, that is the hypothecary contract, was concluded on May 10, 1996 and disclosed a debt to Mr. Gadbois in the amount of $325,000. The transfer of the debt held by Mr. Gadbois took place on November 5, 1996, when the respondent was trying to garnish the latter"s assets. There again, the amount of the debt was confirmed at $325,000. On January 9, 1997 the respondent proceeded with the administrative garnishment of the appellant (see Exhibit S in the appeal case, vol. 4, p. 691). What is more, the release made and signed subsequently to the administrative seizure again confirmed that the now extinguished debt was $325,000. It was not until the examinations in June and October 1997 on the negative declaration by the third party garnishee that the respondent learned of the counter-letter which was to be set up against her at that point. The appellant had a duty to prove that the respondent knew of the existence of the counter-letter at the time she relied on the apparent contract, that is, when she began proceedings for the administrative garnishment, and in my opinion the appellant did not discharge this burden.
Can counter-letter be set up against the respondent as a universal beneficiary?
[25] The appellant relied on the Superior Court of Quebec judgment in American Home Insurance Co. v. Rapid Transport Terminal Ltd., [1992] R.R.A. 723, in arguing that it could set up against the respondent, the garnishing third party, any form of defence it could set up against its own creditor. In that case the Superior Court ruled that in a garnishment of a third party the garnishee, which was an insurance company, could set up against the garnishing party the defences it could plead against its insured, such as the nullity of the insurance contract ab initio or any other infringement by the insured that would justify it in claiming that it owed the insured nothing.
[26] I do not dispute the validity of this conclusion arrived at by the Superior Court, but the rule applicable to a simulation by counter-letter is different. It was clearly stated by the writers Baudry-Lacantinerie and Barde, supra, in relation to art. 1321 of the French Civil Code, which is the equivalent of art. 1452 cited by the respondent:16
[TRANSLATION]
| Undoubtedly unsecured creditors, as universal beneficiaries of their debtor, have no more right than he does and are required to bear the consequences of all his acts on his property, which is their security, at least when such acts are done in good faith. However, the purpose of the legislature in art. 1321 was to prevent the loss that might result to the public in general from the application of an unknown counter-letter, and consequently its provision protects not only persons against whom the act is directed with fraudulent intent but also those whose interest it may affect, seen from the standpoint of their principal"s apparent situation. Unsecured creditors rely on their debtor"s worth, as demonstrated by the apparent contracts: they would be just as much misled as secured creditors if secret documents limiting that worth could be set up against them. |
| [My emphasis.] |
[27] In proceeding to the garnishment of her debtor"s debt, the respondent acted in his name under art. 2644 to 2646 of the Code, which provide that the debtor"s property is the common pledge of creditors and the latter may institute judicial proceedings to cause the property to be seized. She is not exercising on her debtor"s behalf the remedy of the oblique action provided for in art. 1627 of the Code, which ensures that a debtor cannot extinguish the rights belonging to him by carelessness, neglect or disinterest. If it were a remedy under art. 1627, the respondent would be in the same position as her debtor, would probably have no greater rights than the debtor and it could more readily be argued that the counter-letter could be set up against her. That undoubtedly is the position taken by Prof. Tancelin.17 However, art. 1452 of the Code is specifically designed, like arts. 1166 and 1321 in French law, to provide protection to an unsecured creditor by allowing him to exercise the rights his debtor holds under the apparent contract:18
[TRANSLATION]
| However, some suggest that a distinction should be made depending on whether the unsecured creditors are asserting their own rights or are exercising the rights of their debtor under art. 1166. In the first case, there is no question they are third parties. In the second, however, as they can have no greater rights than their debtor, they would be the latter"s beneficiaries and so the counter-letter could be set up against them. |
| This distinction may be disposed of simply by observing that art. 1321 was written specifically to ensure that the debtor"s rights in respect of third parties would be determined by the apparent contract, not by the counter-letter. Accordingly, as to unsecured creditors the debtor is deemed to have all the rights resulting to him from the apparent contract, and the said creditors can thus assert those rights in the debtor"s name.19 |
[My emphasis.]
[28] This position was taken by the Quebec Court of Appeal in Gilbert, ès-qualité, supra, at 560 and 561, and in 1990 in Dans l"affaire de faillite de L"ami du Consommateur M.L. Inc., La Corporatio Headway Ltée v. Gilles Tremblay, ès-qualité et la Caisse populaire de Ste-Marie-de-Beauce, Q.C.A., No. 200-09-000703-865, at 7 to 9.
[29] In fact, under art. 1452 the third party in good faith has the option of relying on the apparent contract or the counter-letter, depending on what is in his interest. This is the penalty for simulation by counter-letter, for as the writers Mazeaud, supra, mentioned at p. 925, even if the contracting parties did not try to deceive the Revenue Department or their creditors by their simulation, it should not be [TRANSLATION] "forgotten that the parties did not confine themselves simply to not disclosing the contract; they went further: to ensure the contract remained a secret they created a deceptive appearance, they concluded an apparent contract which was incorrect; they deceived everyone who had knowledge of that simulated contract". The legislature wished to protect third parties who relied on the apparent contract after [TRANSLATION] "placing in appearances a trust which should not have been deceived".20
[30] The writers Mazeaud, supra, at p. 926, described the approach taken by the French legislature in its fight against simulation as follows:
[TRANSLATION]
| It departed from the ordinary rules regarding the effects and opposability of contracts: first, by stating that in certain cases the parties were required to perform not the actual contract they concluded but the apparent contract; second, by allowing anyone who had been misled by the apparent contract to rely on that contract and disregard the actual one when this was in their interests. In all cases, the apparent contract takes precedence over the actual contract; the rules of the counter-letter are an application of the general theory of appearance. |
| It allows any interested party to restore the true situation by demonstrating the simulation, by bringing an action for a declaration of simulation. This time, it is the actual contract which takes precedence over the apparent contract. |
[31] This approach is no different from that used by the Quebec legislature in art. 1452 of the Code.
[31] The appellant argued that the Court of Appeal"s judgment in Gilbert, ès-qualité , supra, cannot be used as a precedent as it was reversed on appeal by the Supreme Court of Canada, [1928] S.C.R. 333.
[32] It is true that the decision was reversed, but on grounds that did not call in question the rules applicable to a counter-letter. The case concerned a dispute between two trustees who cited the rights of creditors of the bankrupt parties. The Court held that for the resolution of the case it was not necessary to determine whether there had been simulation. It came to the conclusion that the debt had first been paid to a Mr. Dubé and that if the bankruptcy of the said Dubé received payment again, the debtor would then have paid the same creditor twice, that is, Mr. Dubé and his bankruptcy. In our case, the respondent is not claiming double payment of the debt, only the unpaid balance of $100,000 as appears in the hypothecary deed. It is wrong to suggest, as the appellant did, that there would be an unjust enrichment to the Crown if the clauses of the hypothecary deed were given effect. Certainly, the appellant might sustain a loss, but as Chevalier J. said in Dans l"affaire de faillite L"Ami du Consommateur J.L. Inc., at 9 and 10, it is hardly in a position to complain of the financial loss it may suffer as it was a party to the simulation and an accomplice in the misrepresentation designed to benefit Gadbois and J.L. Michon Transport Inc. in the event of a possible bankruptcy. I recognize that the appellant was in a difficult financial position at the time and so vulnerable; but the third party in good faith does not have to suffer the consequences of that now.
[33] For these reasons, I consider that the counter-letter between Mr. Gadbois and the appellant, by which those parties agreed on a reimbursement of $225,000 for the loan, cannot be set up against the respondent. I would accordingly dismiss the appeal with costs in this Court and the Trial Division and before the prothonotary and refer the matter back to the prothonotary for him to proceed with the hearing on the respondent"s request for a court-ordered garnishment against the appellant.
| Gilles Létourneau J.A. |
I concur.
Alice Desjardins J.A.
I concur.
François Chevalier D.J.
Certified true translation
Bernard Olivier, LL. B.
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
| COURT FILE No.: A-139-98 |
APPEAL FROM TRIAL DIVISION JUDGMENT ON FEBRUARY 26, 1998, FILE No. ITA-1384-97.
| STYLE OF CAUSE: Transport H. Cordeau Inc. v. Her Majesty the Queen |
PLACE OF HEARING: Montréal, Quebec
| DATE OF HEARING: October 5, 1999 |
REASONS FOR ORDER BY: Létourneau J.A.
| CONCURRED IN BY: Desjardins J.A. |
Chevalier D.J.
DATED: October 27, 1999
APPEARANCES:
| Marie-Claude Jarry for the appellant |
| Chantal Comtois for the respondent |
SOLICITORS OF RECORD:
| Dunton Rainville for the appellant |
Attorneys
Montréal, Quebec
Morris Rosenberg for the respondent
Deputy Attorney General of Canada
Ottawa, Ontario
__________________1 In the event of bankruptcy the competitor J.L. Michon Transport Inc., whose president had previously been an employee of the appellant and who was closely connected to Mr. Gadbois, would have repaid the first hypothecary creditor"s debt, estimated at $550,000, and acquired the appellant"s assets, its bank sureties and its snow removal contracts, a total estimated at $1,300,000 or $1,400,000.
2 See testimony of H. Cordeau, appeal case, vol. 2, pp. 380-381.
3 Appeal case, vol. 4, pp. 577 and 585.
4 See Mr. Gadbois"s admission, appeal case, vol. 3, pp. 467 to 469.
5 Appeal case, vol. 4, p. 684, p. 684 to p. 686.
6 Appeal case, vol. 4, pp. 536 and 538, paras. 12 and 20.
7 (1927) 43 Rapports judiciaires de Québec 557, at 560.
8 Mazeaud, Leçons de droit civil, Tome 2, vol. 1, "Obligations", 9th ed., Éditions Montchrestien, Paris, 1998, pp. 929 and 931.
10 Mazeaud, supra, note 8, p. 931.
13 G. Baudry-Lacantinerie and L. Barde, Traité théorique et pratique de droit civil, "Des Obligations", Tome 4, 3rd ed., Librairie de la Société du Recueil J.-B. Sirey et du Journal du Palais, 1908, p. 136.
14 Rougeau v. Degagné, [1950] Rapports Judiciaires 421 (S.C.).
15 M. Planiol and G. Ripert, Traité pratique de droit civil français, Tome VI, "Obligations", Librairie générale de droit et de jurisprudence, Paris, 1952, p. 433.
16 Supra, note 13, at pp. 128 and 129.
17 M. Tancelin, Sources des Obligations, "L"acte juridique légitime", Éditions Wilson et Lafleur Ltée, Montréal, 1993, pp. 230-231. In French law, see art. 1321 of the Civil Code , Litec, Paris, 1998-1999, pp. 694-695.
19 Article 1166 of the French Civil Code states that creditors may exercise all their debtor"s rights and actions, except for those exclusively attaching to the individual.
20 Jean Carbonnier, Droit civil, 4/"Les Obligations", Presses Universitaires de France, Paris, 1991, p. 165.