factum · 2017. 6. 12. · campbell (the "bankruptcy order"). mf global canada was, prior...

Court File No. 31-0R-207854-T

ONTARIOSUPERIOR COURT OF JUSTICE

(IN BANKRUPTCY AND INSOLVENCY)

IN THE MATTER OF THE BANKRUPTCY OFMF GLOBAL CANADA CO.,

OF THE CITY OF TORONTO, IN THE PROVINCE OF ONTARIO

FACTUM(Returnable June 12, 2017)

BORDEN LADNER GERVAIS LLPBay Adelaide Centre, East Tower22 Adelaide St. W.Toronto, ON M5H 4E3

JAMES D.G. DOUGLAS / LSUC #20569HTel: (416) 367-6029Fax: (416) 367-6749Email: [email protected]

ROGER JAIPARGAS / LSUC # 43275CTel: 416-367-6266Fax: (416) 367-6749Email: [email protected]

EVITA FERREIRA / LSUC# 69967KTel: 416-367-6708Fax: (416) 367-6749Email: [email protected]

Lawyers for KPMG Inc., in its capacity asTrustee of MF Global Canada Co., a bankrupt

Court File No. 31-OR-207854-T



IN THE MATTER OF THE BANKRUPTCY OFMF GLOBAL CANADA CO.,


PART I — OVERVIEW

1. The Trustee has brought this motion to seek an Order substantially in the form of

order attached at Tab 4 of the Motion Record, for, inter alia, the following relief:

(a) advice and directions in connection with the payment of the CIPF Top-Up Claim,

as agreed to by the Trustee and CIPF;

(b) that there shall be no levy payable to the Superintendent of Bankruptcy in respect

of the payment of the CIPF Top-Up Claim;

(c) that upon payment by the Trustee of the CIPF Top-Up Claim to CIPF, CIPF shall

have no further claims against the estate of MI Global Canada;

(d) approving the Ninth Report dated May 26, 2017, and the activities and actions of the

Trustee as set out therein;

(e) approving the Statement of Receipts and Disbursements for the period November 4,

2011 to April 30, 2017;

(f) approving the Fourth Report of the Independent Cost Counsel dated February 22,

2017;

(g) approving the accounts of the Trustee for the period from June 1, 2016 to December

31, 2016 (the "Trustee Fee Period"), for fees in the amount of $64,988 and

disbursements in the amount of $7,917 (plus applicable HST on the foregoing

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amounts) for services rendered and recorded during the Trustee Fee Period;

(h) approving the accounts of BLG for the period from June 1, 2016 to December 31,

2016 (the "BLG Fee Period"), for fees in the amount of $92,609 and disbursements

in the amount of $1,719 (plus applicable HST on the foregoing amounts) for services

rendered and recorded during the BLG Fee Period;

(i) approving the accounts of Gardiner Roberts LLP, as Independent Cost Counsel

appointed by Order of Mr. Justice Campbell dated November 23, 2012, for the period

from November 20, 2012 to April 5, 2015 and for the period from May 5, 2015 to

February 28, 2017 (collectively, the "ICC Fee Periods"), including fees in the

amount of $77,009 and disbursements in the amount of $249.75 (plus applicable

HST on the foregoing amounts) for services rendered and recorded during the ICC

Fee Periods; and

(j) such further and other relief as counsel may advise and this Court may permit.

2. On November 4, 2011, KPMG Inc. was appointed as trustee-in-bankruptcy

("Trustee") of MF Global Canada Co. ("MF Global Canada") by Order of Mr. Justice

Campbell (the "Bankruptcy Order"). MF Global Canada was, prior to the making of

the Bankruptcy Order, a securities firm within the meaning of Part XII of the Bankruptcy

and Insolvency Act, R.S.C. 1985, c B-3 (the "BIA").

3. The Canadian Investor Protection Fund ("CIPF") is a "customer compensation

body" as defined at section 253 of the BIA. As a customer compensation body, CIPF

is given specific recognition of its unique role in respect of a bankruptcy under Part

XII of the BIA, including the power to file an application for a bankruptcy order

pursuant to section 256(1)(c) of the BIA, the right to be consulted by the Trustee and

the right to act as an inspector in a Part XII bankruptcy pursuant to section 264 of the

BIA.

4. CIPF issued the application for the Bankruptcy Order.

5. On April 23, 2014, CIPF filed a proof of claim on a without prejudice basis with the

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Trustee in respect of certain claims it has advanced in the MF Global Canada Estate.

On August 29, 2016, Regional Senior Justice Morawetz issued an Order approving

the components of CIPF's claim related to the costs of administration and assistance

with estate matters, as further set out below at paragraphs 9 and 10.

6. Goodmans LLP, counsel to CIPF, delivered a letter dated May 4, 2017 (the

"Goodmans Letter") to Borden Ladner Gervais LLP ("BLG"), counsel to the

Trustee, detailing the remaining claims advanced by CIPF in the estate of MF Global

Canada, as set out in the ninth report of the Trustee dated May 26, 2017 (the "Ninth

Report").

7. The Trustee has reviewed the claims advanced in the Goodmans Letter with the

inspectors, who have authorized the Trustee to bring a motion for advice and

directions in connection with the payment of certain claims advanced by CIPF in the

estate of MF Global Canada, in the amount of $1,927,521.86, plus interest thereon up

to the date of payment to CIPF, as described in the Ninth Report (the "CIPF Top-Up

Claim").

8. The Trustee recommends that the Court authorize the Trustee to pay to CIPF the CIPF

Top-Up Claim, as that would be a fair and equitable result given the circumstances under

which the claim arose, the unique role that CIPF has played in the MF Global Canada

bankruptcy and the support that CIPF provided to the Trustee in the administration of the

estate of MF Global Canada.

PART II — FACTS

9. One of the primary outstanding items in the administration of the estate from a claim

perspective, as described in the eight report of the Trustee dated August 19, 2016 (the

"Eighth Report") and the Ninth Report, is the resolution of the claim filed by CIPF on

April 23, 2014, in the total amount of $2,789,117, which claim asserted a priority over

unsecured creditors. The components of CIPF's claim are as follows:

a. Costs of Administration - $56,344 — CIPF retained BLG to prepare materials to

obtain the Bankruptcy Order in respect of MF Global Canada. Pursuant to

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s.136(1)(b) of the BIA, such disbursements rank in priority to the claims of

unsecured creditors;

b. Assistance with estate matters - $322,768 — At the beginning of the estate's

administration, CIPF retained Goodmans LLP to, amongst other things, assist it in

providing assistance to the Estate. Such assistance was requested by the Trustee

and included, inter alia, the following:

i. assisting with the transfer of the majority of customer accounts to RBC

Dominion Securities Inc. (the "RBCDS Transaction"), pursuant to the

Account Transfer and Support Agreement between the Trustee and RBC

Dominion Securities Inc. ("RBCDS") dated November 17, 2011 (the

"Transfer Agreement") and the Account Transfer, Vesting and Approval

Order dated November 14, 2011 (the "Support Order"). A copy of the

Transfer Agreement and the Support Order are attached to the Ninth

Report as Appendix "D" and Appendix "E" respectively;

ii. the provision of liquidity and financial support to the Trustee to effect the

RBCDS Transaction;

iii. negotiating the cross-border settlement with the Securities Investor

Protection Act Trustee of MF Global Inc.;

iv. various settlements with creditors involving the Trustee and CIPF; and

v. Court appearances in support of the steps taken by the Trustee in the

administration of the estate.

c. "Top ups" paid by CIPF to customers - $30,106 — These amounts were paid by

CIPF to customers that were excluded from the RBCDS Transaction

notwithstanding that these customers would have qualified to be included in this

transaction (the Trustee's inability to access certain customer information on a

timely basis was the reason these accounts were excluded); and

d. "Top ups" paid by CIPF to customers pursuant to tri-partite settlement

agreements - $2,379,899 — These customers were initially excluded from the

RBCDS Transaction as the cash balances required to transfer the accounts

exceeded CIPF's coverage limits. The "top up" amounts were paid by CIPF to the

customers after consultation with the Trustee, and pursuant to three party

settlements between the Customer, the Trustee and CIPF.

Ninth Report at para 16.

10. In the Eighth Report, the Trustee recommended to the Court that it approve the

reimbursement of CIPF for components (a) and (b) of their claim, as noted above, which

was accepted by the Court pursuant to an Order made by Regional Senior Justice

Morawetz on August 29, 2016 (the "Fee Approval Order"). A copy of the Fee

Approval Order is attached to the Ninth Report as Appendix "F". The Trustee

subsequently paid components (a) and (b) of the CIPF claim in two separate distributions

on August 31, 2016 and January 23, 2017, in the amount of $379,112, plus post judgment

interest at the rates specified under s. 127 of the Courts of Justice Act.


11. The Goodmans Letter restated CIPF's claim in relation to the "top up" payments made by

it as referenced in sub-paragraphs 9(c) and (d) above. The claim for these payments is in

respect of amounts paid by CIPF to five former customers of MF Global Canada, whose

accounts were transferred as part of the RBCDS Transaction at less than their full net

equity value at the date of transfer, thereby giving rise to the customers' claims against

CIPF, which in turn gave rise to CIPF's claim for what it characterizes as the "Excluded

Top-up Claims". The five former customers of MF Global Canada were Thi Dong Tam

Phan ("Phan"), Synergy Applied Numerics ("Synergy"), HyLife Ltd. ("HyLife"), XL

Foods Inc. ("XL Foods") and Munday Home Sales Ltd. ("Munday" and collectively, the

"Excluded Five"). The aggregate net amount claimed by CIPF in respect of the

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Excluded Top-up Claims is $2,410,006, together with interest at the statutory rate of 5%

per annum from the date that the top up payments were made by CIPF to the date of

payment of the claim by the Estate.


12. The Trustee accepts and adopts as substantially correct the facts as detailed in the section

of the Goodmans Letter entitled "Background". More particularly, the Trustee agrees that

both it and CIPF shared the view at the date of bankruptcy of MF Global Canada that an

early bulk transfer of the customer accounts of MF Global Canada was in the best

interests of the customers and the estate. A significant proportion of the securities held in

the customer accounts of MF Global Canada were futures contracts which were subject to

daily and potentially volatile fluctuations in value and to daily cash calls or cash deposits

in relation to those fluctuations in value. As a result, the value of the "net equity" of a

customer's account at the date of bankruptcy for the purposes of Part XII of the BIA

could vary significantly from the value of the account holdings calculated on the same

basis at the date of transfer of the account to a new dealer, which variance would likely

only be exacerbated by the passage of time.


13. Neither RBCDS nor any other securities dealer was prepared to accept a bulk transfer of

the MF Global Canada customer accounts at less than full value at the date of transfer,

with no margin deficiencies. The fluctuations in value described in paragraph 12 above,

coupled with the fact that the Trustee was limited under Part XII of the BIA to

transferring the customers' net equity at the date of bankruptcy, meant that a bulk transfer

to RBCDS could only be executed with the liquidity and financial support of CIPF.

Moreover, in light of the uncertainties of asset recovery in the estate at the time of the

RBCDS Transaction, the Trustee determined that it could only provide irrevocable

funding for the bulk transfer equal to 80% of the customers' net equity at the date of

bankruptcy.


14. Accordingly, and at the request of the Trustee, CIPF agreed to provide financial support

for the remaining 20% of the customers' net equity at the date of bankruptcy and for the

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difference between the value of the customers' net equity at the date of bankruptcy and

the full value of the customers' accounts, with no margin deficiencies, at the date of

transfer (i.e., effectively, "net equity" at the date of transfer), provided that the aggregate

of these two amounts fell within CIPF's coverage limit of $1 million.


15. In order to provide the financial support referred to in paragraph 14 above, CIPF

extended its coverage period for all MF Global Canada customers from the date of

bankruptcy, being the date to which CIPF coverage would normally apply, to the date of

transfer of the accounts pursuant to the RBCDS Transaction. This exposed CIPF to

claims by all MF Global Canada customers up to its coverage limit of $1 million, not

only for any shortfall in the customer pool as at the date of bankruptcy, but also for the

difference between the value of the customers' net equity at the date of bankruptcy and

the value of their net equity at the date of transfer, regardless of whether the customers

qualified for the RBCDS Transaction.


16. The RBCDS Transaction allowed the Trustee, with the financial support of CIPF, to

move the vast majority of the MF Global Canada customer accounts, at full value and

with no margin deficiencies, in a bulk transfer to RBCDS on or about November 17,

2011. The bulk transfer was completed in accordance with the terms of the Transfer

Agreement. Pursuant to the Support Order, the Court authorized the Trustee to enter into

the Transfer Agreement and to complete the RBCDS Transaction. Insofar as CIPF

provided financial and liquidity support to the Trustee in order to complete the Transfer

Agreement, the Support Order further granted CIPF a claim against the "customer pool

fund" as defined in section 261 of the BIA and a priority charge (subject to express

exceptions) against all of the property of the Estate vested in the Trustee. The terms of

the financial and liquidity support arrangements between the Trustee and CIPF were

subsequently memorialized in the Indemnity, Funding and Reimbursement Agreement

between the Trustee and CIPF dated March 5, 2012 (the "Support Agreement").


17. The accounts of HyLife, XL Foods and Munday did not qualify for full financial support

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from CIPF in relation to the RBCDS Transaction by virtue of the fact that the aggregate

size of the financial support required to fund each of their individual account transfers at

the date of transfer exceeded the CIPF coverage limit. Accordingly, they were designated

as "Excluded Accounts" under the Transfer Agreement and were not covered by the

terms of either the Support Order or the Support Agreement. The accounts of Phan and

Synergy, on the other hand, would in retrospect have qualified for financial support from

CIPF in relation to the RBCDS Transaction, but were nevertheless similarly designated

as Excluded Accounts under the Transfer Agreement because the Trustee was missing

information in respect of the accounts at the relevant time and was therefore unable to

accurately quantify the value of the accounts and any shortfalls in net equity at the date of

bankruptcy or the date of transfer.


18. Due to the fact that CIPF had extended its coverage period for all MF Global Canada

customers to the date of transfer under the RBCDS Transaction and due to CIPF's

concerns about whether therefore the claims of the Excluded Five might exceed its

coverage limit, the Trustee and CIPF agreed that the Trustee would transfer the accounts

of HyLife, XL Foods and Munday to RBCDS at the value of their net equity at the date

of bankruptcy, subject to the CIPF $1 million coverage limit. In the case of Phan and

Synergy, the accounts were transferred to RBCDS at the estimated value of their net

equity at date of bankruptcy. In other words, the accounts of the Excluded Five (the

"Excluded Five Accounts") were not transferred to RBCDS at the value of their net

equity at the date of transfer as was the case with the other MF Global Canada customer

accounts that were subject to the bulk transfer.


19. As matters turned out, the estate recovery was sufficient to allow the Trustee to

ultimately fund 100% of all customers' claims at the higher of either the net equity at the

date of bankruptcy or the net equity at the date of transfer to RBCDS. However, since

the Trustee only funded the Excluded Five Accounts for transfer purposes up to 100% of

the value of their net equity at the date of bankruptcy (except in the case of Munday

where CIPF's coverage limit of $1 million resulted in Munday receiving less than 100%

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of the value of its net equity at the date of bankruptcy), this left CIPF exposed to claims

by the Excluded Five for the difference between the value of their net equity at the date

of bankruptcy and the value of their net equity at the date of transfer to RBCDS, subject

to the CIPF coverage limit of $1 million. These claims were paid by CIPF as outlined in

the Goodmans Letter, thereby giving rise to the equitable claim by CIPF against the

estate as detailed in that letter.


20. The total of the claims or top up payments made by CIPF to the Excluded Five was

$2,410,006. However, the net amount claimed by CIPF against the estate in respect of

the top up payments is $1,927,522, due to the fact that an overpayment of $482,484 was

made by the Trustee to HyLife at the time of the RBCDS Transaction which, as further

particularized in the Goodmans Letter, CIPF agreed to reimburse the Trustee for at the

time of the settlement of HyLife's claim.


21. The amount claimed by CIPF after conversion to Canadian currency is $1,927,522. In

making this conversion, CIPF has used the exchange rate applicable at the date that the

top up payments to the Excluded Five were actually made, as opposed to the exchange

rate applicable at the date of bankruptcy. The benefit to the estate of using the exchange

rate applicable at the date of payment is approximately $54,000. Similarly, CIPF is

claiming interest on the amounts paid to the Excluded Five at the rate of 5% per annum,

but only from the date the payments were actually made as opposed to from the date of

bankruptcy.


22. CIPF is also seeking the payment of its claim without a deduction on account of the levy

payable to the Superintendent of Bankruptcy pursuant to s.147(1) of the BIA.


23. On May 18, 2017, the Inspectors of the MF Global Canada estate approved, subject to

Court approval, the Trustee's recommendation to admit components (c) and (d) of the

CIPF claim with interest at the statutory rate of 5% per annum from the date that the top

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up payments were made by CIPF to the date of payment of the claim by the estate.


PART III — ISSUES

24. The issues on this motion are:

(a) Should this Court authorize and direct the Trustee to pay the CIPF Top-Up Claim?

(b) If so, should this Court authorize and direct the Trustee to pay the CIPF Top-Up

Claim without a deduction on account of the levy payable to the Superintendent of

Bankruptcy pursuant to section 147(1) of the BIA?

PART IV — ARGUMENT

A. Payment of CIPF Top-Up Claims

Deference to Trustees on Motions for Advice and Directions

25. Section 34(1) of the BIA provides a mechanism by which the trustee may apply to the

Court for directions in relation to any matter affecting the administration of the estate of

the bankrupt. The court will give its directions in writing, if any, that "appear proper in

the circumstances".

BIA, s. 34(1).

26. Where the trustee has offered a solution in its motion for directions, courts have deferred

to the trustee, particularly where the relief sought was not prejudicial to any of the

creditors. In Re Poisson, the Saskatchewan Court of Queen's Bench agreed with the

trustee and granted the request for equitable relief on the ground that it did not prejudice

any of the creditors of the bankrupt's estate. The Court also deferred to the trustee's

judgment where the solution proposed was practical:

19 The solution proposed by the trustee offers a practical resolution to this

matter. It provides flexibility to the court to fashion an order which does justice to

the parties while at the same time preserves the integrity of the bankruptcy

process.

Re Poisson, 2000 CarswellSask 316, 17 CBR (4') 292 at paras 18-20; see also Re

Cattell, 1991 CarswellBC 479, 6 CBR (3d) 178 at paras 12-13.

27. The Courts have recognized the importance of accepting the proposed solution by a

trustee where it is equitable and is in line with common sense and reason. In considering

a motion brought under section 34 of the BIA, the Saskatchewan Court of Queen's Bench

noted the following in (Trustee of) v Nelson:

It is well established that in exercising its discretion a court must balance threethings: the interest of the creditors in being paid, the interest of the rehabilitationof the bankrupt and the integrity of the bankruptcy process and the public'sperception of it (see for example Re Shakell (1988), 70 C.B.R. (N.S.) 270 (Ont.S.C.)). In an oft-quoted passage, the court in Re Crowell (1989), 74 C.B.R. (N.S.)121 (N.S.T.D.), said that the whole matter must be looked at in "the light ofreason, common sense and humanity", having regard to the fundamental policy ofthe Act.

Nelson (Trustee of) v Nelson, 1995 CarswellSask 868, 186 Sask R 314 at para 17.

28. In particular, where the trustee is administering a bankrupt's estate with surplus income,

Justice Iacobucci, writing for the majority in Marzetti v Marzetti, recognized the broad

discretion that should be given to trustees.

Marzetti v Marzetti, [1994] 2 SCR 765, 1994 CarswellAlta 346 at para 86.

Trustee's Recommendation given CIPF's Assistance to MF Global Canada

Estate

29. The Trustee is prepared to support the CIPF Top-Up Claim due to the fact that CIPF

would not have been exposed to the claims made by the Excluded Five for the top up

payments had CIPF not acceded to the Trustee's request for financial support as referred

to in paragraph 14 above and therefore extended its coverage period for all customers of

MF Global Canada to the date of transfer under the RBCDS Transaction.

Ninth Report para 27.

30. General equitable and restitutionary principles require that CIPF be repaid the amounts

that it has advanced to or on behalf of the Trustee in the administration of the MF Global

Canada estate.

Goldin, Re, 2003 CarswellOnt 2626, 65 OR (3d) 691 at paras 42-44.

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31. CIPF is a "customer compensation body" as defined at section 253 of the BIA. As a

customer compensation body, CIPF is given specific recognition of its unique role in

respect of a bankruptcy under Part XII of the BIA, including the power to file an

application for a bankruptcy order pursuant to section 256(1)(c) of the BIA, the right to

be consulted by the Trustee and to act as an inspector in a Part XII bankruptcy pursuant

to section 264 of the BIA.

BIA, ss. 253, 256 and 264.

32. The liquidity support provided by CIPF not only benefitted the customers of MF Global

Canada, who were able to have their losses and disruption minimized, but the Trustee as

well by being able to effect the RBCDS Transaction while at the same time being able to

maintain the Holdback to protect itself, both for its fees and against potential liability.

Goodmans Letter at 10.

33. The payments made by CIPF with respect to the Excluded Five Accounts were not made

gratuitously. The Trustee decided to transfer the Excluded Five Accounts and CIPF was,

as a result, required to pay the amounts of the CIPF Top-Up Claim, regardless of the fact

that the Excluded Five Accounts were initially intended to be excluded from the RBCDS

Transaction.


34. The Trustee as well as this Court should be guided by the principles set out in Alary, Re

regarding when it is appropriate to use its discretion to make a payment. In Alary, Re, the

Court held that when exercising its discretion in bankruptcy and insolvency proceedings,

the Court should be guided by the following factors:

what is just and equitable in the particular circumstances from the perspective of

the creditors and the bankrupt;

(ii) discretion should properly balance the interests of the parties and any prejudice;

(iii) the Court's exercise of discretion must be reasonable;

(iv) the Court must not erode confidence in, or frustrate the purposes of, the

insolvency legislation; and

(v) the Court should endeavor to provide certainty to other commercial parties when

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addressing a similar situation.

Alary, Re, 2016 BCSC 2108, 2016 CarswellBC 3189 at para 27.

35. Considering the factors set out above, the Trustee submits that, similar to Alary, Re, while

there is no specific provision in the relevant legislation that provides clear guidance on

the relief sought, "from a public policy perspective, and based on a proper interpretation

of the Bankruptcy and Insolvency Act, the Court should exercise its discretion in favour

of an order" authorizing and directing the Trustee to pay the CIPF Top-Up Claim.

Alary, Re, 2016 BCSC 2108, 2016 CarswellBC 3189 at para 10.

36. Moreover, there is a surplus in the estate of MF Global Canada. There are no creditors

competing with CIPF for payment and all creditors will be paid what they are owed, with

interest. It would be inequitable if the shareholder of MF Global Canada were to be paid

any portion of the surplus when CIPF has not been repaid the amounts that it advanced

for the benefit of the administration of the estate and the customers of MF Global

Canada.

Goodmans Letter at 10-11.

37. Given that there is a surplus in the estate, the Trustee also submits that interest should be

paid on the amounts to be repaid to CIPF. The Trustee is of the view that the appropriate

interest rate is that which is being paid to the other creditors of the MF Global Canada

estate, being 5% per annum, which is the amount prescribed by the BIA. The interest

payable to CIPF would only start on the dates that CIPF made the payments giving rise to

the CIPF Top-Up Claim to the date of repayment by the Trustee. The Trustee also

supports CIPF's claim for interest because it is reasonable in duration in light of the

expenditures made by CIPF to settle the top up claims of the Excluded Five.

Goodmans Letter at 11; Ninth Report at para 28.

38. The Trustee recommends that the Court authorize and direct the Trustee to pay to CIPF

the CIPF Top-Up Claim with 5% interest per annum from the dates that CIPF made the

payments to the date that CIPF is-repaid, as that would be a fair and equitable result

given (i) the circumstances under which the claim arose, (ii) the unique role that CIPF has

played in the MF Global Canada bankruptcy and (iii) the support that CIPF provided to

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the Trustee in the administration of the MF Global Canada estate and its customers.

B. Payment of CIPF Top-Up Claim Without Deduction of Superintendent's Levy

39. The Trustee submits that the CIPF Top-Up Claim is not a "claim provable" in bankruptcy

under section 121 of the BIA. Instead it is a remedial claim against the MF Global

Canada estate for repayment of amounts advanced during the administration of the estate.

As such, the Trustee is of the view that the levy of the Superintendent of Bankruptcy

pursuant to section 147 of the BIA is inapplicable here.


40. Section 147(1) of the BIA provides that the levy of the Superintendent is applicable to

"all payments, except the costs referred to in subsection 70(2), made by the trustee by

way of dividend or otherwise on account of the creditor's claims..." The definition of

"creditor", pursuant to section 2 of the BIA, is "a person having a claim provable as a

claim under this Act". Since only payments "on account of the creditor's claims" are

subject to the Superintendent's levy, and a "creditor" means a person with a "claim

provable", it follows that only those persons with a "claim provable" must bear the levy.

BIA, s. 147(1).

41. The Trustee submits that the CIPF Top-Up Claim is not a "claim provable" within the

meaning of section 121(1) of the BIA, which provides as follows:

Claims provable

121 (1) All debts and liabilities, present or future, to which the bankrupt is subject on the

day on which the bankrupt becomes bankrupt or to which the bankrupt may become

subject before the bankrupt's discharge by reason of any obligation incurred before the

day on which the bankrupt becomes bankrupt shall be deemed to be claims provable

in proceedings under this Act.

BIA, s. 121(1).

42. The CIPF Top-Up Claim arose as a result of payments made by CIPF after the date of

bankruptcy, on account of the Trustee including the Excluded Five Accounts in the

RBCDS Transaction. The Trustee submits that the CIPF Top-Up Claim is a remedial

claim against the MF Global Canada estate for repayment of amounts advanced during

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the administration of the estate, and not a "claim provable" to which the levy of the

Superintendent would normally apply.

43. For the foregoing reasons, the Trustee submits that the levy of the Superintendent

contemplated by section 147 of the BIA is inapplicable to the CIPF Top-Up Claim.

PART V — RELIEF REQUESTED

44. The Trustee requests that this Court grant the Order in the form included at Tab 4 of the

Motion Record.

ALL OF WHICH IS RESPECTFULLY SUBMITTED this 2nd day of June, 2017.

g rmaksJames D.G. Douglas / Roger Jaipargas / Evita 1-rreira

Lawyers for KPMG Inc., in its capacity asTrustee of MF Global Canada Co., a bankrupt

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SCHEDULE "A"

LIST OF AUTHORITIES

1. Re Poisson, 2000 CarswellSask 316, 17 CBR (4th) 292.

2. Re Cattell, 1991 CarswellBC 479, 6 CBR (3d) 178.

3. Nelson (Trustee of) v Nelson, 1995 CarswellSask 868, 186 Sask R 314.

4. Marzetti v Marzetti, [1994] 2 SCR 765, 1994 CarswellAlta 346.

5. Goldin, Re, 2003 CarswellOnt 2626, 65 OR (3d) 691.

6. Alary, Re, 2016 BCSC 2108, 2016 CarswellBC 3189.

SCHEDULE "B"

STATUTES

Bankruptcy and Insolvency Act, RSC 1985, c B-3, as amended

Trustee may apply to court for directions

34 (1) A trustee may apply to the court for directions in relation to any matter affecting the

administration of the estate of a bankrupt and the court shall give in writing such directions, if

any, as to it appear proper in the circumstances.

To report to court after three years

(2) Where an estate has not been fully administered within three years after the bankruptcy, the

trustee shall, if requested to do so by the Superintendent, report that fact to the court as soon as

practicable thereafter, and the court shall make such order as it considers fit to expedite the

administration.

Notice to Superintendent's division office

(3) The trustee must send notice to the Superintendent's division office of the day and time when

any application for directions made under subsection (1) is to be heard and of the day and time

when the trustee intends to report to the court as required by the Superintendent under subsection

(2).

Claims provable

121 (1) All debts and liabilities, present or future, to which the bankrupt is subject on the day on

which the bankrupt becomes bankrupt or to which the bankrupt may become subject before the

bankrupt's discharge by reason of any obligation incurred before the day on which the bankrupt

becomes bankrupt shall be deemed to be claims provable in proceedings under this Act.

Contingent and unliquidated claims

(2) The determination whether a contingent or unliquidated claim is a provable claim and the

valuation of such a claim shall be made in accordance with section 135.

Debts payable at a future time

(3) A creditor may prove a debt not payable at the date of the bankruptcy and may receive

dividends equally with the other creditors, deducting only thereout a rebate of interest at the rate

of five per cent per annum computed from the declaration of a dividend to the time when the

debt would have become payable according to the terms on which it was contracted.

Family support claims

(4) A claim in respect of a debt or liability referred to in paragraph 178(1)(b) or (c) payable

under an order or agreement made before the date of the initial bankruptcy event in respect of the

bankrupt and at a time when the spouse, former spouse, former common-law partner or child was

living apart from the bankrupt, whether the order or agreement provides for periodic amounts or

lump sum amounts, is a claim provable under this Act.

Levy payable out of dividends for supervision

147 (1) For the purpose of defraying the expenses of the supervision by the Superintendent, there

shall be payable to the Superintendent for deposit with the Receiver General a levy on all

payments, except the costs referred to in subsection 70(2), made by the trustee by way of

dividend or otherwise on account of the creditor's claims, including Her Majesty in right of

Canada or of a province claiming in respect of taxes or otherwise.

Rate of levy

(2) The levy referred to in subsection (1) shall be at a rate to be fixed by the Governor in Council

and shall be charged proportionately against all payments and deducted therefrom by the trustee

before payment is made.

Definitions

253 In this Part,

customer includes

(a) a person with or for whom a securities firm deals as principal, or agent or mandatary,

and who has a claim against the securities firm in respect of a security received, acquired

or held by the securities firm in the ordinary course of business as a securities firm from

or for a securities account of that person

(i) for safekeeping or deposit or in segregation,

(ii) with a view to sale,

(iii) to cover a completed sale,

(iv) pursuant to a purchase,

(v) to secure perfoiiiiance of an obligation of that person, or

(vi) for the purpose of effecting a transfer,

(b) a person who has a claim against the securities firm arising out of a sale or wrongful

conversion by the securities firm of a security referred to in paragraph (a), and

(c) a person who has cash or other assets held in a securities account with the securities

firm,

but does not include a person who has a claim against the securities firm for cash or securities

that, by agreement or operation of law, is part of the capital of the securities firm or a claim that

is subordinated to claims of creditors of the securities firm; (client)

customer compensation body means a prescribed body and includes, unless it is prescribed to be

excluded from this definition, the Canadian Investor Protection Fund; (organisme

d'indemnisation des clients)

customer name securities means securities that on the date of bankruptcy of a securities firm are

held by or on behalf of the securities firm for the account of a customer and are registered or

recorded in the appropriate manner in the name of the customer or are in the process of being so

registered or recorded, but does not include securities registered or recorded in the appropriate

manner in the name of the customer that, by endorsement or otherwise, are negotiable by the

securities firm; (valeur mobiliere immatriculee)

deferred customer means a customer whose misconduct, either in the customer's capacity as a

customer or otherwise, caused or materially contributed to the insolvency of a securities firm;

(client responsable)

eligible financial contract [Repealed, 2007, c. 29, s. 101]

hold, in relation to a security, includes holding it in electronic form; (detenir)

net equity means, with respect to the securities account or accounts of a customer, maintained in

one capacity, the net dollar value of the account or accounts, equal to the amount that would be

owed by a securities firm to the customer as a result of the liquidation by sale or purchase at the

close of business of the securities firm on the date of bankruptcy of the securities firm, of all

security positions of the customer in each securities account, other than customer name securities

reclaimed by the customer, including any amount in respect of a securities transaction not settled

on the date of bankruptcy but settled thereafter, less any indebtedness of the customer to the

securities firm on the date of bankruptcy including any amount owing in respect of a securities

transaction not settled on the date of bankruptcy but settled thereafter, plus any payment of

indebtedness made with the consent of the trustee after the date of bankruptcy; (capitaux nets)

open contractual commitment means an enforceable contract of a securities firm to purchase or

sell a security that was not completed by payment and delivery on the date of bankruptcy;

(contrat en cours)

securities firm means a person who carries on the business of buying and selling securities from,

to or for a customer, whether or not as a member of an exchange, as principal, or agent or

mandatary, and includes any person required to be registered to enter into securities transactions

with the public, but does not include a corporate entity that is not a corporation within the

meaning of section 2; (courtier en valeurs mobilieres)

security means any document, instrument or written or electronic record that is commonly

known as a security, and includes, without limiting the generality of the foregoing,

(a) a document, instrument or written or electronic record evidencing a share,

participation right or other right or interest in property or in an enterprise, including an

equity share or stock, or a mutual fund share or unit,

(b) a document, instrument or written or electronic record evidencing indebtedness,

including a note, bond, debenture, mortgage, hypothec, certificate of deposit, commercial

paper or mortgage-backed instrument,

(c) a document, instrument or written or electronic record evidencing a right or interest in

respect of an option, warrant or subscription, or under a commodity future, financial

future, or exchange or other forward contract, or other derivative instrument, including an

eligible financial contract, and

(d) such other document, instrument or written or electronic record as is prescribed.

(valeur mobiliere ou titre)

Applications re securities firm

256 (1) In addition to any creditor who may file an application in accordance with sections 43 to

45, an application for a bankruptcy order against a securities firm may be filed by

(a) a securities commission established under an enactment of a province, if

(i) the securities firm has committed an act of bankruptcy referred to in section 42

or subsection (2) of this section within the six months before the filing of the

application and while the securities firm was licensed or registered by the

securities commission to carry on business in Canada, and

(ii) in the case in which the act of bankruptcy was that referred to in subsection

(2), the suspension referred to in that subsection is in effect when the application

is filed;

(b) a securities exchange recognized by a provincial securities commission, if



application and while the securities firm was a member of the securities exchange,

and



is filed;

(c) a customer compensation body, if



application and while the securities firm had customers whose securities accounts

were protected, in whole or in part, by the customer compensation body, and



is filed; and

(d) a person who, in respect of property of a securities firm, is a receiver within the

meaning of subsection 243(2), a receiver-man-ager, a liquidator or any other person with

similar functions appointed under a federal or provincial enactment relating to securities

that provides for the appointment of that other person, if the securities firm has

committed an act of bankruptcy referred to in section 42 within the six months before the

filing of the application.

Interpretation

(2) For the purposes of paragraphs (1)(a) to (c),

(a) the suspension by a securities commission referred to in paragraph (1)(a) of a

securities firm's registration to trade in securities, or

(b) the suspension by a securities exchange referred to in paragraph (1)(b) of a securities

firm's membership in that exchange

constitutes an act of bankruptcy if the suspension is due to the failure of the firm to meet capital

adequacy requirements.

Service on securities commission

(3) If

(a) a securities exchange files an application under paragraph (1)(b), or

(b) a customer compensation body files an application under paragraph (1)(c),

a copy of the application must be served on the securities commission, if any, having jurisdiction

in the locality of the securities firm where the application was filed, before

(c) any prescribed interval preceding the hearing of the application, or

(d) any shorter interval that may be fixed by the court and that precedes the hearing of the

application.

Trustee to consult customer compensation body

264 Where the accounts of customers of a securities firm are protected, in whole or in part, by a

customer compensation body, the trustee shall consult the customer compensation body on the

administration of the bankruptcy, and the customer compensation body may designate an

inspector to act on its behalf.

Bankruptcy and Insolvency General Rules, CRC, c 368, as amended

Rate of Levy

123 (1) Subject to subsection (2) and (3), the rate of levy payable on all payments, pursuant to

section 147 of the Act, is

(a) five per cent, if the amount of payments is $1,000,000 or less;

(b) five per cent of the first $1,000,000, plus one and one-quarter per cent of the amount

in excess of $1,000,000, if the amount of payments exceeds $1,000,000 but is not more

than $2,000,000; or

(c) five per cent of the first $1,000,000, one and one-quarter per cent of the second

$1,000,000, plus one-quarter of one per cent of the amount in excess of $2,000,000, if the

amount of payments exceeds $2,000,000.

(2) The rate of levy payable in a proposal is

(a) five per cent, if the amount of payments is $1,000,000 or less;

(b) five per cent of the first $1,000,000, plus one and one-quarter per cent of the amount

in excess of $1,000,000, if the amount of payments exceeds $1,000,000 but is not more

than $2,000,000; or

(c) five per cent of the first $1,000,000, one and one-quarter per cent of the second

$1,000,000, plus zero per cent of the amount in excess of $2,000,000, if the amount of

payments exceeds $2,000,000.

(3) The rate of levy payable for an estate under summary administration is

(a) 100 per cent, if the amount of payments is $200 or less; or

(b) 100 per cent of the first $200 plus zero per cent of the amount in excess of $200, if the

amount of payments exceeds $200.

(4) The rate of levy set out in subsection (3) applies to all estates under summary administration

for which the final statement of receipts and disbursements has been received by the Division

Office on or after the date of coming into force of that subsection.

Court Fil

e No. 31-OR-207854-T

IN THE MATTER OF THE BANKRUPTCY OF MF GLOBAL CANADA CO., OF THE CITY OF TORONTO, IN THE

PROVINCE OF ONTARIO

TOR01: 68

20398: v2

ONTARIO

SUPERIOR COURT OF JUSTICE


PROCEEDINGS COMMENCED AT TORONTO

FACTUM

(Re

turn

able

June 12,

2017)

BORDEN LADNER GERVAIS LLP

Bay

Ade

laid

e Ce

ntre

, Eas

t Tower

22 Ade

laid

e St

. W.

Tor

onto

, ON M5H 4E3

James D.G. Douglas / LSUC #20569H

Tel

: (416) 367-

6029

Fax

: (416) 367-

6749

Email: jdo

ugla

s@bl

g.co

m

Rog

er Jaipargas / LSUC #43275C

Tel

: (416) 367-6266

Fax

: (416) 367-

6749

Email: rj

aipa

rgas

@b1g

.com

Evita Ferreira / LSUC #69967K

Tel

: (416) 367-6708

Fax

: (416) 367-

6749

Email: [email protected]

Law

yers

for

KPMG Inc., in

its cap

acit

y as

Trustee of MF Global Canada Co.

, a bankrupt




IN THE MATTER OF THE BANKRUPTCY OFMF GLOBAL CANADA CO.


BOOK OF AUTHORITIES(Returnable June 12, 2017)

BORDEN LADNER GERVAIS LLPBarristers and SolicitorsBay Adelaide Centre, East Tower22 Adelaide St. W.Toronto, OntarioM5H 3Y4

James D.G. DouglasTel: (416) 367-6029Fax: (416) 367-6749Email: [email protected] No. 20569H

Roger JaipargasTel: (416) 367-6266Fax: (416) 367-6749Email: [email protected] No. 43275C

Evita FerreiraTel: (416) 367-6708Fax: (416) 367-6749Email: [email protected] No. 69967K

Lawyers for KPMG Inc., in its capacity asThe Trustee of MF Global Canada Co., abankrupt




IN THE MATTER OF THE BANKRUPTCY OFMF GLOBAL CANADA CO.


LIST OF AUTHORITIES

1 Re Poisson, 2000 CarswellSask 316, 17 CBR (4th) 292.

2. Re Cattell, 1991 CarswellBC 479, 6 CBR (3d) 178.

3. Nelson (Trustee of) v Nelson, 1995 CarswellSask 868, 186 Sask R 314.

4. Marzetti v Marzetti, [1994] 2 SCR 765, 1994 CarswellAlta 346.

5. Goldin, Re, 2003 CarswellOnt 2626, 65 OR (3d) 691.

6. Alary, Re, 2016 BCSC 2108, 2016 CarswellBC 3189.

Poisson, Re, 2000 CarswellSask 316

2000 CarswellSask 316, 17 C.B.R. (4th) 292, 192 Sask. R. 308

2000 CarswellSask 316

Saskatchewan Court of Queen's Bench

Poisson, Re

2000 CarswellSask 316, 17 C.B.R. (4th) 292, 192 Sask. R. 3o8

In the Matter of the Bankruptcy of Lane Michael Poisson

Registrar Herauf

Judgment: May 9, 2000

Docket: Bankruptcy 4120, Estate No. 023047

Counsel: Lane Michael Poisson, bankrupt.

James M. Peltier, for bankrupt.

Joseph A. Okolita, Trustee (Cameron-Okolita Inc.).

Merina Pollard, Official Receiver.

Subject: Insolvency

Related Abridgment ClassificationsFor all relevant Canadian Abridgment Classifications refer to highest level of case via History.Bankruptcy and insolvency

II Assignments in bankruptcy

11.6 Miscellaneous

Headnote

Bankruptcy --- Assignments in bankruptcy — Miscellaneous issues

Bankrupt made assignment in bankruptcy in 1998 while still undischarged from previous bankruptcy — Bankrupt

had been granted conditional order of discharge in 1992 and trustee was discharged in 1994 — Order of absolute

discharge on first bankruptcy was ultimately granted in March, 2000 after arrangements were made to comply with

requirements of outstanding conditional order — Trustee brought application for equitable order that trustee not

proceed to annul second bankruptcy assignment— Bankrupt had legitimate belief that he had been discharged from

his first bankruptcy at time of his second assignment— Section 181(1) of Bankruptcy and Insolvency Act provides

discretion to annul bankruptcy if assignment "ought not to have been filed" — Bankrupt cannot be insolvent person

and does not have capacity to file assignment — Section 183(1) of Act confers equitable jurisdiction in bankruptcy

court — Unique and unusual factors in situation warranted equitable relief— Bankrupt was only person who would

be prejudiced if second bankruptcy were annulled — Solution proposed by trustee offered practical resolution to

matter — Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, ss. 181(1), 183(1).

Table of Authorities

Cases considered by Registrar Heraufi

Bateman, Re (1998), 99 G.T.C. 7056, [1999] G.S.T.C. 26, 10 C.B.R. (4th) 197 (N.S. S.C.) — applied

Cameron, Re (1972), 18 C.B.R. (N.S.) 99 (C.S. Que.) — referred to

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Haley, Re, 25 C.B.R. 170, [1944] O.W.N. 271, [1944] 2 D.L.R. 765 (Ont. H.C.) — referred to

Hazel, Re (1998), 10 C.B.R. (4th) 204 (N.S. S.C.) — referred to

Lararnee, Re (1966), 10 C.B.R. (N.S.) 182, 1966 CarswellQue 68, [1967] C.S. 34 (C.S. Que.) — referred to

Newman, Re, 35 C.B.R. 235, [1956] O.W.N. 465, 5 D.L.R. (2d) 160 (Ont. S.C.) — referred to

Schendal, Re (1969), 13 C.B.R. (N.S.) 327 (Ont. S.C.) referred to

Statutes considered:

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3

s. 2(1) "insolvent person" [renumbered 1997, c. 12, s. 1] — considered

s. 34(1) — pursuant to

s. 49 — considered

s. 49(5) — considered

s. 178(2) — referred to

s, 181 — considered


s. 183 — considered


APPLICATION by trustee for equitable order that trustee not proceed to annul second bankruptcy assignment.

Registrar Herauf

The Issue

1 The trustee applied under s. 34(1) of the Bankruptcy and Insolvency Act for directions. The issue relates to the

validity of a second assignment into bankruptcy by Mr. Poisson while he was still an undischarged bankrupt from a

previous bankruptcy.

The Facts

2 The facts are as follows. Lane Michael Poisson assigned into bankruptcy on June 10, 1992. On November 30, 1992

Registrar Newis granted a conditional order of discharge requiring the bankrupt to provide "the trustee with payment

of $1,060.00 or receipt by the trustee of the 1992 pre and post bankruptcy income tax refunds, whichever is greater..."

3 On February 4, 1998 a second assignment was filed by Lane Poisson. Mr. Poisson was granted a suspended order of

discharge for a period of six months on December 14, 1999. The bankrupt would be discharged effective May 16, 2000.

An absolute order of discharge on the first bankruptcy was granted on March 29, 2000.

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4 There is uncontroverted evidence that Lane Poisson advised the trustee of the previous bankruptcy and hisuncertainty as to whether he had been absolutely discharged. The trustee conducted an insolvency search and theinformation disclosed the first assignment of June 10, 1992 but also reported that the bankrupt received a suspendeddischarge with an effective discharge date of September 1, 1993. Based upon this information the second assignment wasfiled on February 4, 1998.

5 On March 3, 2000 the trustee was advised by the Official Receiver's office in Regina that Lane Poisson had not beendischarged and the information contained on the insolvency search advising otherwise was in error.

6 The material filed in support of the application indicates that Lane Poisson, through his accountant, providedKPMG Inc., his first trustee with his 1992 post-bankruptcy return. There was a small refund of $260.30 which wasintercepted by the Saskatchewan Maintenance Enforcement Program. It should also be mentioned that KPMG Inc. wasdischarged as trustee on December 23, 1994.

7 As soon as the current trustee and the bankrupt became aware that he was undischarged from the first bankruptcyarrangements were immediately made to comply with the requirements of the outstanding conditional order grantedin the first bankruptcy. As already indicated the absolute order of discharge was granted on March 29, 2000 upon thecourt being notified that the conditional order had been satisfied. This factor combined with the details of the insolvencysearch, the fact that the bankrupt advised the trustee of the prior bankruptcy and the bankrupt had reason to believehis tax refund may have been provided to the trustee (even though it was less than the amount of the conditional order)leads me to conclude that Lane Poisson had a legitimate belief that he had been discharged from his first bankruptcyat the time of his second assignment.

8 The trustee succinctly sets out his position in material filed with the court. It is worthwhile to repeat the twoparagraphs which are germane to his application:

The annulment of the second assignment will provide no benefit to the creditors under the first assignment inbankruptcy insofar as the terms of Lane Poisson's discharge had been set and are concurrently being satisfied andthe former trustee, KPMG Inc. had been discharged. The interests of the creditors in the second bankruptcy mayconceivably be prejudiced insofar as the annulment of the second assignment will re-vest in Mr. Poisson the assetsrealized in the second assignment. Mr. Poisson would some time thereafter re-file the second assignment. Therefore,from a practical perspective, the annulment of the second assignment in bankruptcy would provide no apparentbenefit to either the creditors of the first or second assignments.

Lane Poisson will be significantly prejudiced by the annulment of the second assignment insofar as he has alreadybeen bankrupt for over two years, having filed the second assignment on February 4, 1998.

9 Based upon these factors the trustee and counsel for Lane Poisson assert that the court can invoke its equitablejurisdiction as set out in s. 183(1) of the Act and maintain the second assignment.

The Relief Sought

10 The specific relief requested by the trustee is for "an equitable order that the trustee not proceed to annul thebankruptcy assignment filed by Lane Michael Poisson effective February 4, 1998, and further, that this Court's orderdated December 14, 1999, suspending the bankrupt's discharge be binding as it relates to those creditors under theFebruary 4, 1998 assignment and section 178(2) of the Bankruptcy and Insolvency Act."

The Law

1 1 There is substantial authority that an undischarged bankrupt does not come within the definition of "insolventperson" in section 2(1) and therefore an assignment by an undischarged bankrupt is null and void. (See Laramee, Re

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(1966), 10 C,B,R. (N.S.) 182 (C.S. Que.), Re Newman (1956), 35 C.B.R. 235 (Ont. S.C.), Re Haley (1944), 25 C.B.R. 170(Ont. H.C.) , Re Cameron (1972), 18 C.B.R. (N.S.) 99 (C.S. Que.), Re Hazel (1998), 10 C.B.R. (4th) 204 (N.S. S.C.)

12 These decisions also provide that after-acquired property belongs to the creditors in the first bankruptcy, and, if asecond trustee is appointed, the second trustee should turn the property in his hands over to the first trustee, subject toa reasonable allowance for realizing the assets. (For example, see Re Schendal (1969), 13 C.B.R. (N.S.) 327 (Ont. S.C.).

13 Although this line of reasoning is compelling, in my view it tends to diminish or even curtail the court's discretionarypower under s. 181 or its equitable jurisdiction under s. 183. From my reading of s. 49, when a properly executedassignment is presented to the Official Receiver it must be accepted and filed. The only exception is in s. 49(5) whichprovides the Official Receiver with a mechanism to "cancel the assignment" if a licensed trustee cannot be found toadminister the bankruptcy. Once a valid assignment is filed with the Official Receiver a legal process has been initiatedwhich can only be terminated by an application to the court for directions or an application to annul the bankruptcy.

14 I note that in Re Hazel, supra, Registrar Hill stated at p. 206:

The assignment certainly out not to have been filed because the individual filing the assignment, Mr. Hazel, lackedthe capacity to do so. In my view it is not necessary to issue an order annulling the assignment as I see no necessityto do so where the assignment was, on its face, absolutely void when filed,

15 In my opinion this type of application requires a determination as to whether an order should be granted toeither annul or maintain the second assignment. To do so requires the court to exercise its discretion in s. 181 and ifthe circumstances warrant make an order annulling the assignment. I do not believe that it is sufficient for a court todetermine that the assignment was void as in Re Hazel, supra without making an order annulling the assignment.

16 As stated previously to do so prevents the court from considering the mechanism provided for in s. 181(1) to annulthe bankruptcy if an assignment "ought not to have been filed." The key word in the provision is "may". It is apparentthat the remedy under s. 181(1) is discretionary (see Re Bateman (1998), 10 C.B.R. (4th) 197 (N.S. S.C.).

17 It is also apparent that a bankrupt cannot be an insolvent person and therefore does not have the capacity tofile an assignment. Generally, this would lead a court to determine that the second assignment ought not to have beenmade. The exercise of the court's discretion then comes into play as the power to annul is permissive and not mandatory,even in these circumstances, I agree that absent extraordinary circumstances it would be difficult for a court to maintaina second assignment made by an undischarged bankrupt. However, the matter does not end here. S. 183(1) confersequitable jurisdiction in the Bankruptcy Court and equitable relief is available to Lane Poisson if the situation warrantsit. Due to the unique and unusual factors at play in this situation I would prefer to utilize this provision to provide reliefto Lane Poisson.

18 I agree with the submission of the trustee that Lane Poisson is the only one who would be prejudiced if thesecond bankruptcy was annulled. The creditors from the first would not be in any better position as there is basicallyno after acquired property available that could potentially provide them with a benefit. The creditors from the secondbankruptcy, none of whom appeared on the return date of this motion nor objected to the bankrupt's discharge, wouldlikely be subjected to notification of another bankruptcy as Lane Poisson would probably re-file which would meanlittle other than their requirement to complete additional forms for the trustee. Lane Poisson, on the other hand, hasbeen in bankruptcy since February, 1998 and as already mentioned would probably have to re-file if the bankruptcywas annulled.

19 The solution proposed by the trustee offers a practical resolution to this matter. It provides flexibility to the court to

fashion an order which does justice to the parties while at the same time preserves the integrity of the bankruptcy process.

20 I have concluded that I will grant the relief sought and there will be an order that the trustee not proceed to annulthe bankruptcy assignment filed by Lane Poisson effective February 4, 1998 and further, that the Court's order dated

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December 14, 1999 suspending the bankrupt's discharge be binding as it relates to those creditors under the February 4,

1998 assignment and s. 178(2) of the Bankruptcy and Insolvency Act.

21 My compliments to the trustee for his excellent written and oral submissions.

Application granted.

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reserved.

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Cattell, Re, 1991 CarswellBC 479

1991 CarswellBC 479, [1991] B.C.W.L.D. 1558, 27 A.C.W.S. (3d) 165...

1991 CarswellBC 479British Columbia Court of Appeal

Cattell, Re

1991 CarswellBC 479, [1991] B.C.W.L.D. 1558, 27 A.C.W.S. (3d)165, 56 B.C.L.R. (2d) 233, 6 C.B.R. (3d) 178, 8o D.L.R. (4th) 481

Re TERENCE M.B. CATTELL and FRANK W. MUSSON

Macfarlane, Toy and Hollinrake JJ.A.

Heard: March 20, 1991

Judgment: May 31, 1991

Docket: Doc. Vancouver CA012538

Counsel: Stephen R Ross, for appellant Hanil Bank Canada.

Gordon C. Plottel, for respondent Dunwoody Limited, trustee under the proposals of Terence M.B. Cattell and Frank

W. Musson.

Subject: Corporate and Commercial; Insolvency


IX Proving claim

IX.3 Right to interest

Bankruptcy and insolvency

X Priorities of claims

X.1 Secured claims

X.1.b Forms of secured interests

X.l.b.ii Mortgages and hypothecs

Headnote

Bankruptcy --- Proving claim — Right to interest

Bankruptcy --- Priorities of claims — Secured claims — Forms of secured interests — Mortgages and hypothecs

Dividends and distributions — Bank filing claim under proposals filed by mortgage guarantors — Bank

subsequently recovering greater amount upon realization of its security and applying excess to post-proposal interest

— Bank required to apply sale proceeds first to principal and then to interest in determining amount recoverable

against guarantors.

The debts of a company to the bank were guaranteed by two individuals. On the same day that the guarantees were

executed, the company granted a mortgage to the bank. The company subsequently filed a proposal to its creditors

under Pt. III of the Bankruptcy Act. The bank commenced foreclosure proceedings. The company's proposal was

defeated and it was deemed to be in bankruptcy as of the date it filed its proposal. The guarantors filed proposals

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under the Bankruptcy Act which were approved by the court. The trustee paid dividends to the bank under the

proposals in the sum of $65,508. The bank then received $1,179,346 from the sale of the mortgaged land and $90,337

in rents from the company's receiver. As between itself and the trustee, the bank applied those funds first on account

of accrued interest owing pursuant to the figures in the order nisi and secondly to the principal sum, leaving a deficit

of $103,555 to which the bank claimed it was entitled out of the guarantors' estates. The trustee asserted that the

bank had been paid $121,178 in excess of its claim in the two proposals and that the bank's position violated the

rules against post-proposal interest and against a creditor receiving more than 100 cents on the dollar. The trustee

obtained an order for recovery of the $65,508 paid out in dividends under the guarantors' proposals. The bank

appealed.

Held:

The appeal was dismissed.

Per Macfarlane J.A. (Toy J.A. concurring): The bank had been paid in full by realization of the security, the proceeds

of which had to be applied first to principal and then to interest as required by the terms of the mortgage.

Section 134 of the Bankruptcy Act provides that a creditor shall in no case receive more than 100 cents on the dollar,

plus interest as provided by the Act. The $1,149,278 claimed by the bank against the guarantors' estates was only

part of the company's final indebtedness to the bank, the additional amount being for post-proposal interest. The

bank's recovery of $1,270,456 more than satisfied its claim in respect of the guarantors' proposals. The amount

which the company, the principal debtor, still owed was an amount incurred after the date of the "bankruptcy" of

the guarantors, and the bank had to look to the company to recover that debt.

Per Hollinrake J.A. (dissenting in part): The terms of the guarantee governed the relationship between the bank and

the trustee, and the bank could not rely on the guarantee to change the fact that as between it and the principal

debtor, it was contractually bound to apply the proceeds of sale first to principal and then to interest. That being

the case, it was obliged to similarly apply the funds as between itself and the trustee. Accordingly, the bank was not

entitled to further dividends up to the sum of $103,555.

Because the bank's claim against the company was not paid in full, the bank was entitled to keep the dividend. Its

doing so would not offend the rule as to post-proposal interest or the rule that a creditor cannot receive more than

100 cents on the dollar.


Cases considered:

Per Macfarlane J.A. (Toy J.A. concurring):

Crown Royal Clothing Co., Re (1969), 15 C.B.R. (N.S.) 203 (Que. S.C.) — distinguished

J. LeBar Seafoods Inc., Re (1981), 38 C.B.R. (N.S.) 64 (Ont. S.C.) — distinguished

Satin, Re (1872), 7 Ch. App. 760 applied

Per Hollinrake J.A. (dissenting in part):



1991 CarswelIBC 479, [1991] B.C.W.L.D. 1558, 27 A.C.W.S. (3d) 165...

Alliance Credit Corp., Re; Gagnon v. Montreal Trust Co. (1971), 17 C.B.R. (N.S.) 136 (C.S. Que.) — considered

Blakeley, Re; Ex parte Aachener Disconto Gesellschaft (1892), 9 Morr. 173 (Div. Ct.) — considered

Crown Royal Clothing Co., Re (1969), 15 C.B.R. (N.S.) 203 (Que. S.C.) — considered

Developpements du Nord-Est Ltee, Re; Banque Nationale du Canada v. Gagnon (1983), 51 C.B.R. (N.S.) 142

(Que. C.A.) — considered

J. LeBar Seafoods Inc., Re (1981), 38 C.B.R. (N.S.) 64 (Ont. S.C.) — considered

Sass, Re; Ex parte National Provincial Bank of England Ltd., 65 L.J.Q.B. 481, [1896] 2 Q.B. 12 — referred to

Savin, Re (1872), 7 Ch. App. 760 — considered


Bankruptcy Act, R.S.C. 1985, c. B-3 — Pt. 3

s. 34(1)

s. 134

Appeal from order of Sheppard L.J.S.C., 79 C.B.R. (N.S.) 237, requiring repayment to trustee of dividends paid out to

bank pursuant to bankruptcy proposals.

Macfarlane J.A. (Toy J.A. concurring):

1 I have had the advantage of reading the reasons of Mr. Justice Hollinrake [appeal from (1990), 79 C.B.R. (N.S.)

237], and agree that the bank has been paid its provable claim against the estates of Cattell and Musson in full by the

realization of the Arcan security, the proceeds of which must be applied firstly to principal and then to interest. That

was the application required by the terms of the mortgage granted by Arcan to the bank, and guaranteed by Cattell

and Musson.

2 The alternative ground of appeal concerns the payment of a dividend of $65,508.84 to the bank before it was known

that the credit arising out of the realization of the mortgage granted by Arcan would result in full satisfaction of the

bank's provable claim in respect of the proposals by Cattell and Musson. I cannot agree with Mr. Justice Hollinrake

that the bank is entitled to keep that dividend.

3 Section 134 of the Bankruptcy Act, R.S.C. 1985, c. B-3, provides:

134. Subject to section 130, a creditor shall in no case receive more than one hundred cents on the dollar and interest

as provided by this Act. R.S., c. B-3, s. 105.

4 In my opinion the payment of $65,508.84 to the bank violates s. 134. The amount claimed by the bank against

the estate of the guarantors is $1,149,278.00 (part only of the final indebtedness of Arcan to the bank at the date of the

bankruptcy of Arcan; the additional debt being mainly for post-proposal interest). The bank recovered in the aggregate

$1,270,456.84 from the realization of the Arcan mortgage, plus rents, dividends, less taxes paid which, properly applied,

more than satisfied the bank's claim in respect of the Cattell/Musson proposals. The amount which Arcan, the primary

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debtor, now owes is an amount incurred subsequent to the date of the "bankruptcy" of Cattell/Musson. The bank mustrecover that amount from Arcan, and cannot recover any more from the estates of Cattell or Musson.

5 What I have said involves the application of certain general rules extracted from Re Savin (1872), 7 Ch. App. 760

at p. 764:

There is a general rule in bankruptcy whether a right and a reasonable rule or not — that there is to be no proof inbankruptcy for interest subsequent to the bankruptcy. There was also a rule in bankruptcy, that a creditor holdinga mortgage security is to make up his mind whether he will rely upon his security or give it up and come in andprove with the other creditors. This rule was relaxed in favour of the creditor by a rule that his security might besold, and then he was to apply the realised proceeds in payment of his debt. On this rule a judicial decision wasmade nearly eighty years ago, that the proceeds of the sale were, in case of deficiency, to be applied in payment ofprincipal and interest up to the date of the bankruptcy, and up to the date of the bankruptcy only; and then thecreditor was to prove for the residue of his debt, which, of course did not include any interest subsequent to the

date of the bankruptcy.

6 I pause to note that those rules are at the heart of the resolution of the first issue in this case.

7 Re Savin was not a case involving a claim against guarantors but one involving a claim by a creditor in the primary

debtor's estate, when the creditor held security.

8 The appellant submits that despite the fact its provable claim against the estates of Cattell and Musson has beenfully satisfied, it is entitled to receive dividends from those estates based on its claim as filed so long as the amountsreceived from any source do not fully satisfy the total indebtedness of Arcan. That submission is based upon dicta from

Re J. LeBar Seafoods Inc. (1981), 38 C.B.R. (N.S.) 64 (Ont. S.C.), and Re Crown Royal Clothing Co. (1969), 15 C.B.R.(N.S.) 203 (C. S . Que.).

Neither Re J. LeBar nor Re Crown Royal Clothing Co. addresses the question in this case.

10 In Re J. LeBar the creditor did not hold and had not realized any security granted by the principal debtor. Therewas no evidence of any payment by the debtor to the creditor. It was held that any dividends which might be declaredin the debtor's estate should not be applied to reduce the claim against the estate of the guarantor. In short, the creditorcould look to both estates for satisfaction of the debt, but could not recover more than 100 per cent of its claim againstthe debtor. It appears that this dicta had regard to a situation where the guarantor was liable for the whole of the debtclaimed by the creditor. In this case the guarantors are liable for only part of the debt. There is no indication in Re J.LeBar that the guarantor could be called upon to pay more than the amount of the debt at the date of the bankruptcyof the guarantor, or that the estate of the guarantor should not be given credit for the amount by which the liability ofthe guarantor was reduced by realization of security.

1 1 In Re Crown Royal Clothing Co. it was held that security granted by the debtor to the creditor did not have tobe valued in a claim by the creditor against the estate of the guarantor, and that the creditor should be treated as anordinary creditor, rather than as a secured creditor. (There is no suggestion in the case at bar that the bank must prove

as a secured creditor, or give up its security.) It was held [p. 205] that the creditor was entitled to receive dividends from

the guarantor's estate as an ordinary creditor up to the amount owing "by its primary debtor after credit for the latter'spayments or realization of security." Again, there was no indication that the guarantor would be liable for more than the

amount of the debt at the date of the bankruptcy of the guarantor or that the debt for which the guarantor could be

liable would not be reduced by the amount of the proceeds arising from realization of security granted to the creditor by

the primary debtor. Again, that was not a case where realization of security resulted in full satisfaction of the provable

claim against the estates of the guarantors.

12 In my opinion there is nothing in those cases which detracts from the proposition that a creditor cannot recovermore than 100 per cent of the amount for which the guarantors are liable. Obviously, any overpayment would be to the

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Cattell, Re, 1991 CarswelIBC 479


prejudice of the other creditors of Cattell and Musson. In my view, the bank holds $65,508.84 in trust for the trustee in

the matter of the proposals of Cattell and Musson and must repay it.

13 I would dismiss the appeal, but would accede to the submissions of both counsel that the costs of both parties will

come out of the estates on a party-and-party basis.

Hollinrake J.A. (dissenting):

14 This is an appeal from a judgment of a chambers Judge [(1990), 79 C.B.R. (N.S.) 237] pursuant to an application

by the trustee under the proposals of T.M.B. Cattell and F.W. Musson for directions under s. 34(1) of the Bankruptcy

Act, R.S.C. 1985, c. B-3. The chambers Judge accepted the position of the trustee and the Hanil Bank Canada now

appeals that decision. The chambers Judge held that the bank had recovered its provable debt against the estates of the

guarantors and ordered it to pay to the trustee the sum of $65,508.84 being the dividend paid to the bank after the date

of the proposals but before the bank realized on its mortgage security being property owned by Arcan Investments Ltd.

15 The facts are straightforward.

16 On November 30, 1983, Messrs. Cattell and Musson executed unlimited guarantees and postponements of claim

in favour of the bank of all debts and liabilities at any time owing by Arcan Investments Ltd. to the bank.

17 On that same date Arcan granted to the bank a mortgage on property it owned in Chilliwack, British Columbia.

18 On December 21, 1983, the bank advanced $1,065,000 to Arcan.

19 On December 3, 1985, Arcan filed a proposal to its creditors under Pt. III of the Bankruptcy Act.

20 On February 18, 1986, the bank commenced foreclosure proceedings against Arcan.

21 On February 21, 1986, Arcan's proposal was defeated by its creditors and Arcan was thereby deemed to be in

bankruptcy as of December 3, 1985, the date it filed its proposal.

22 On March 10, 1986, Messrs. Cattell and Musson filed proposals under the Bankruptcy Act which were accepted

by the creditors in an amended form and approved by the court.

23 On March 20, 1986, the bank filed proofs of claim under the Cattell and Musson proposals and incorrectly claimed

security against the assets of Cattell and Musson valued at $1,000,000. Nothing turns on this.

24 On March 26, 1986, the bank obtained an order nisi of foreclosure with the redemption period expiring September

26, 1986. On December 1, 1986, the bank obtained an order for conduct of sale of the mortgaged property.

25 On February 2, 1987, the bank received dividends from the trustee under the proposals of Cattell and Musson of

$65,508.84. It is this sum which the chambers Judge ordered be paid by the bank to the trustee.

26 On March 24, 1987, the court approved the sale of the mortgaged property and a vesting order was granted to

Vanalta Investments Ltd. In early July, 1987, the bank received the sum of $1,179,346.43 from the sale proceeds of the

mortgaged property to Vanalta.

27 In July 1986 and again in July 1987 the bank received rents from Arcan's receiver totalling $90,337.09, and in

October 1986 the bank paid property taxes on the mortgaged property of $64,735.83.

28 On receipt of the sale proceeds of $1,179,346.43, the bank as between itself and the trustee under these two proposals

sought to apply those funds, as it had the rent proceeds, firstly, to accrued interest owing pursuant to the figures in the

order nisi, and then to outstanding principal which on the bank's accounting left a deficit as between it and Arcan of

$103,555.70. This is how the bank sees the accounting as set out in its factum.

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Date Event Indebtedness

March 10, 1986 Proposals filed $1,149,278.00

July 24, 1986 Rents received from Receiver ( 25,000.00)

October 24, 1986 Taxes paid 64,735.83

February 2, 1987 Dividends received ( 65,508.84)

July 13, 1987 Accrued interest from

March 10, 1986 at

$458.64 per day 224,733.60

Subtotal $1,348,238.79

July 13, 1987 Sale proceeds received (1,179,346.43)

July 23, 1987 Rents received from Receiver ( 65,337.09)

Total $ 103,555.70

29 The bank submitted before the chambers Judge that it was entitled to further dividends from the estates of Cattelland Musson in this sum of $103,555.70.

30 The fact is that the bank in its books applied the sale proceeds of the mortgaged property firstly to principal andthen to interest. More about that later. The trustee of the Cattell and Musson proposals says the bank has been paid$121,178.84 in excess of the amount claimed by it in the two proposals. The trustee sees the accounting in his factumas follows:

Rents received from

Arcan Property: $25,000.00

65,337.00

Total: $ 90,337.00

Net Proceeds from Sale

of Arcan Property: 1,179,346.00

Less Taxes Paid by Bank (64,735.00)

Dividends Paid Musson -- $43,454.20

by Trustee Cattell -- 22,054.64

Total: 65,508.84

Total Funds Recovered by Bank: $1,270,456.84

Proof of Claim Filed in Each

Proposal (Proofs include

principal and interest to

March 10, 1986) $1,149,278.00

Excess of Amount Recovered Over

Amount Claimed in Each Proposal $ 121,178.84

31 The trustee, asserting that the bank had been paid $121,178.84 in excess of its claim in the proposals, sought

recovery successfully of the dividends paid out of the two estates of $65,508.84.

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32 The position taken before the chambers Judge by the bank was that it had not received more than 100 cents onthe dollar of its claims against the estates of Cattell and Musson because it was entitled by the terms of the guaranteesto apply the proceeds of the sale of the mortgaged property firstly to interest and then to principal. This would leave$103,555.70 still owing and the bank submits it is entitled to further dividends up to that sum out of the two estates.

33 The response of the trustee to this is that the position of the bank violates the rule against post-proposal interestand the rule against a creditor recovering more than 100 cents on the dollar (Bankruptcy Act, s. 134). The trustee alsoasserts that to permit the bank to receive post-proposal interest on the mortgage debt, albeit that interest is not claimedin the bankruptcy and results from the bank's secured position, is inequitable to the other creditors of the two estates.The point is made that by reason of the rule against post-proposal interest, the bank could not prove for such interestin the Arcan bankruptcy, and therefore the guarantors should not be liable for post-proposal interest on the mortgagedebt as between the bank and Arcan. To this the bank responds that the bankruptcy of Arcan is irrelevant and that itsdebt vis-à-vis Arcan is outside the Bankruptcy Act inasmuch as it was relying on its security.

34 The chambers Judge held that any amount paid to the creditor (the bank) from the debtor's estate (Arcan) shouldgo to reduce the creditor's claims in the two estates, and the bank in this case is not permitted to recover more than100 per cent of its claim, whether the source of that recovery is the guarantor's estate or the debtor's estate. For thesepropositions the chambers Judge relied on the judgment of Henry J. in Re J. LeBar Seafoods Ltd. (1981), 38 C.B.R.(N.S.) 64 at p. 68 (Ont. S.C.). Before us the bank submits the chambers Judge erred in how he saw this case and howhe applied it on the facts before him. In the court below, the bank relied on what was said in Re Crown Royal ClothingCo. (1969), 15 C.B.R. (N.S.) 203 (Que. S.C.), and Re Developpements du Nord-Est Ltee; Banque Nationale du Canada v.Gagnon (1983), 51 C.B.R. (N.S.) 142 (C.A. Que.). I will deal with these cases later in these reasons.

35 In the alternative to its submission that it is entitled to further dividends out of the two estates up to the sum of$103,555.70, the bank submits there is no authority for the order made by the chambers Judge directing it to return thesum of $65,508.84 to the trustee.

36 It is crucial to the argument of the bank that as between it and the guarantors Cattell and Musson, it has thecontractual right to apply the proceeds of realization of the Arcan mortgage as it sees fit. The bank asserts for the purposeof its claim against the trustee that it has applied these proceeds, firstly, to the interest on the Arcan mortgage, andsecondly, to the debt guaranteed.

37 The Arcan mortgage permits the bank to appoint a receiver as it did and it further permits the receiver to sell theproperty. In reference to the application of the net proceeds of any sale of the mortgaged property, the mortgage says:

And the net proceeds of any sale or lease, or both, hereunder shall be applied, subject to the claims of all securedand unsecured creditors (if any) ranking in priority to this mortgage:

FIRSTLY: in payment of any costs, charges, expenses and legal fees (between solicitor and client):

(i) incurred in taking, recovering or keeping possession of the Lands or by reason of non-payment of the monieshereby secured;

(ii) of and incidental to the appointment of the Receiver or Receiver Manager and the exercise by him of all orany of the powers aforesaid including his reasonable remuneration and all outgoings properly payable by him;

SECONDLY: in or toward payment to the Mortgagee of the Principal or so much thereof as remains unpaid;

THIRDLY: in payment of interest as aforesaid;

FOURTHLY: in payment of other monies owing hereunder; and


Cattell, Re, 1991 CarswelIBC 479


FIFTHLY: any surplus shall be paid to the Mortgagor.

And so, when the bank applied the proceeds of the sale of the mortgaged property, firstly, to principal, and then to

interest on its books, it did so because as between itself and the mortgagor, Arcan, it was contractually obliged so to do.

38 The words in the guarantee that the bank relies on in taking the position vis-à-vis the guarantors that the sale funds

can be applied firstly to interest and then to principal are:

(1) The Bank may grant time, renewals, extensions, indulgences, releases and discharges to, take securities (which

word as used herein includes other guarantees) from and give the same and any or all existing securities up to, abstain

from taking securities from or from perfecting securities of, cease or refrain from giving credit or making loans or

advances to, accept compositions from and otherwise deal with, the customer and others and with all securities as

the Bank may see fit, and may apply all moneys at any time received from the customer or others or from securitiesupon such part of the liabilities as the Bank deems best and change any such application in whole or in part from time to

time as the Bank may see fit, the whole ivithout in any way limiting or lessening the liability of the undersigned under this

guarantee, and no loss of or in respect of any securities received by the Bank from the customer or others, whether

occasioned by the fault of the Bank or otherwise, shall in any way limit or lessen the liability of the undersignedunder this guarantee.

[Emphasis added.]

39 The bank submits that the terms of the guarantee govern the legal position between it and the trustee citing Re

Blakeley; Ex parte Aachener Disconto Gesellschaft (1892), 9 Morr. 173 at pp. 178-179 (Div. Ct.). In that case the Courtreferred to the terms of the guarantee in a contest between the trustee of the guarantor and the lender and said that thefullest effect must be given to the language of the guarantee. In this regard see also Re Sass; Ex parte National Provincial

Bank of England Ltd., 65 L.J.Q.B. 481, [1896] 2 Q.B. 12.

40 Counsel for the trustee submits that the guarantees themselves do not survive the proposals of the guarantors.

41 It is my opinion that Blakeley is authority for the proposition that the terms of the guarantee govern the relationship

between the creditor and the trustee, subject of course to the Bankruptcy Act itself. In Blakeley the Court gave effect tothe terms of a guarantee in deciding what amounts were to be deducted from a creditor's claim in bankruptcy, and I see

no reason why that should not be the case here.

42 It is my opinion that even with the terms of the guarantee governing the relationship between the bank and the

trustee in this case, the bank cannot rely on the guarantee to change the reality of the fact that as between it and the

principal debtor it was contractually bound to apply the proceeds of the sale firstly to principal, and then to interest. Inmy opinion, and I did not understand counsel for the bank to submit differently, if the proceeds of the mortgage haveto be applied vis-à-vis the guarantors, firstly to principal and then to interest, the bank cannot succeed on its argumentthat it is entitled to further dividends out of the estate up to the sum of $103,555.70.

43 In my opinion, the words "and may apply all monies at any time received from the customer or others or fromsecurities upon such part of the liabilities as the bank deems best and change any such application in whole or in part fromtime to time as the Bank may see fit" do not permit the bank to apply sale proceeds differently as against the guarantorthan as against the principal debtor where the application made against the principal debtor is made under a contractual

obligation with no discretion open to the bank as to the application of the funds. The law of principal and surety has

always obliged the creditor to deal with the surety on the basis of the terms of the contract evidencing the principal

debt at the time the guarantee is given in the absence of anything to the contrary in the terms of the guarantee itself. In

my opinion, if a lender seeks to hold its guarantor liable on a basis different than it is contractually obliged to with its

principal debtor, the words in the guarantee must clearly state this. My view is this guarantee does not permit what the

bank seeks to do vis-a-vis the guarantors as to the application of the proceeds of the sale of the mortgaged property. I

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do not doubt that if for some internal reason, and in the absence of a contractual obligation, the bank chose to applythe sale proceeds vis-à-vis its principal debtor firstly to principal and then to interest, and then sought to apply thosesame proceeds, vis-à-vis the guarantors, on a different basis, the words in the guarantee would permit this. However,this is not the case here.

44 I conclude that because the bank was contractually obliged to apply the sale proceeds as between itself and Arcanfirstly to principal and then to interest, it is obliged to make a similar application of the funds as between itself andthe trustee of the proposals of Cattell and Musson. That being so, the bank fails on its principal argument that it isentitled to further dividends out of the estate up to the sum of $103,555.70. Having concluded as I have on the issue ofthe bank's right to apply the sale proceeds as between itself and the trustee, I need not deal with the remainder of theargument advanced by the bank. My conclusion then is that the bank has been paid everything it is entitled to underthe two proposals.

45 I turn now to the bank's alternative position that it is not obliged to refund the $65,508.84 in dividends it hasreceived from the trustee before it received the proceeds of the sale of the mortgaged property.

46 The first point to be made is that in my opinion it does not necessarily follow that because the proceeds of therealization of the security must be applied such that in this case the bank's claim against the two estates is paid in full,the dividends of $65,508.84 must be returned to the trustee on the ground that the bank has been paid 100 cents onthe dollar in its claims against the estates. There is no issue that as at the time of this payment the bank was entitled tothese dividends. What has been paid to the bank out of the estates is $65,508.84 on its claims of $1,149,278.00. In myopinion, it cannot be said in this case that the bank has received more than 100 cents on the dollar of its claims againstthe guarantors unless the bank is obliged to bring into the accounting the funds it has received, not from the guarantors'estates, but from the security it held from the primary debtor Arcan. The law is clear that if the mortgage here was onegiven by the guarantors, then on its realization the proceeds of sale would have to be applied in payment of principal andinterest up to the date of the bankruptcy and up to the date of the bankruptcy only. See Re Savin (1872), 7 Ch. App. 760at p. 764. In this case, had the mortgage been given to the bank by Cattell and Musson in support of their guarantees,then on the realization of that security the bank would have recovered more than 100 cents on the dollar in its claims inthe proposals and would clearly have to return the dividends of $65,508.84. Here, the funds come not out of the estatebut out of the hands of a third party by way of security held by the bank in support of the primary debt. The issue thenis does the rule that would apply in this case had the mortgage been given by Cattell and Musson — Re Savin — applyto the case where the mortgage is given by a third party, in this case the primary debtor Arcan. My conclusion is that itdoes not. I turn now to the cases that border on this issue. I use the phrase "border on" because none of the cases referredto us is on point in terms of its ratio. What is said on this issue in all of them is at best dicta.

47 The first case I deal with is Re J. LeBar Seafoods Inc., supra. In that case Ocean Garden Products Inc. sold itsproduct in Ontario through a broker, J. LeBar Seafoods Inc., on commission. One of Ocean Garden's customers wasS. & C. Foods Limited. Under the brokerage agreement LeBar Seafoods guaranteed the obligations of the customers,including S. & C. Foods. LeBar Seafoods and S. & C. Foods went into bankruptcy and Ocean Garden claimed againstboth estates as an unsecured creditor. Referring to Re Blakeley, Henry J. said at p. 68:

As I apprehend the law, the right of the principal creditor, Ocean Garden, to claim against the estate of the guarantorLeBar is governed by Re Blakeley,. Ex parte Aachener Disconto Gesellschaft (1892), 9 Morr. 173 (D.C.). The principleestablished in that decision is that upon the bankruptcy of its debtor, the creditor is entitled to claim against theestate of the bankrupt guarantor for the full amount of the debt. The claim is to be reduced only by any amountpaid to the creditor by the debtor or by the debtor's estate and by the amount of any dividend declared in favour ofthe creditor prior to proof of the creditor's claim in the estate of the guarantor. There is no evidence of any paymentto the creditor, Ocean Garden, by the debtor, S. & C. Foods. There is a projected dividend to be paid by the trusteeof S. & C. Foods to Ocean Garden but no dividend has as yet been declared. Ocean Garden may therefore claimin full against the estate of LeBar. That is not an unliquidated or contingent claim; it is liquidated, immediate anddirect. Subsequently declared dividends in the estate of S. & C. Foods and paid to Ocean Garden are not to be applied

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in reduction of the claim against the LeBar estate, subject only to the overriding principle that Ocean Garden is notentitled to recover more than 100 per cent of its claim: see Re Houlder, [1929] 1 Ch. 205. Any excess will be held in

trust for the trustee of LeBar.

[Emphasis added.]

48 I think what Henry J. is saying here is "100 per cent of its claim" against S. & C. Foods, but what is not clearto me is whether he is saying "100 per cent of its claim" against S. & C. Foods as fixed at the time of the bankruptcyof the guarantor LeBar or "100 per cent of its claim" against S. & C. Foods without reference to what was proved inthe LeBar bankruptcy. I can see no reason why it should be the S. & C. Foods claim as fixed at the date of the LeBarbankruptcy because the claim against S. & C. Foods is outside the LeBar bankruptcy. The significance of the date ofthe LeBar bankruptcy is that the creditor Ocean Garden can recover no more out of the estate of the guarantor, LeBar,than it has proved for, and that figure is the amount owing by S. & C. Foods, the primary debtor, at the time of theguarantor's bankruptcy.

49 In his judgment the chambers Judge referred to Re J. LeBar Seafoods Inc. and then referred to Re Blakeley. He

concluded his reference to these two cases by referring to what Henry J. said in Re J. LeBar Seafoods Inc. as follows[p. 241 C.B.R,]:

His statements make two points. The first is that any amount paid to the creditor from the debtor's estate shouldgo to reduce the creditor's claim. Secondly, the bank is not permitted to recover more than 100 per cent of its claim,whether the source of that recovery is the guarantor's estate or the debtor's estate,

50 I cannot agree that what Henry J. said is necessarily that "the bank is not permitted to recover more than 100 percent of its claim, whether the source of that recovery is the guarantor's estate or the debtor's estate" if the chambers Judgemeant more than 100 per cent of its claim as at the date of the proposals of Cattell and Musson unless, of course, all thefunds came out of those two estates which is not the case. In view of the result reached by the chambers Judge, he musthave been referring to the claim as fixed by the date of the proposals, and if that be the case, with respect, I cannot agree.

51 In Re Crown Royal Clothing Co. the creditor was Societe Financiere, the primary debtor was Prima Brand Inc.,and the guarantor, Crown Royal. Crown Royal filed a proposal on March 14, 1968, and Societe Financiere filed a proofof claim for contractual interest up to April 30, 1968; The claim for contractual interest after March 14, 1968, the datethe proposal was filed, was rejected by the court. At p. 205 [15 C.B.R. (N.S.)], Hannen J. said:

Concerning the amount of the creditor's claim, considering it as an ordinary claim for the moment, and notably onthe matter of interest, the Act provides in s. 38(1) that all the provisions of the Act, insofar as they are applicable,apply mutatis mutandis to proposals, and it is provided in s. 83(6) that the creditor may prove for interest to the dateof the bankruptcy. So unless the proposal provided otherwise, this rule applies to this claim and it must be amendedin consequence by deduction of the contractual interest from 14th March to 30th April 1968; and, subject to thatcondition, it would be entitled to receive dividends under the proposal based upon that figure, but obviously never toexceed the balance at any time including contractual interest owing to it by its primary debtor, Prima, after credit forthe latter's payments or realization of security.

[Emphasis added.]

52 The chambers Judge referred to this quote as follows [p. 242, 79 C.B.R. (N.S.)]:

Counsel for the bank submits that the phrase "the balance at any time including contractual interest owing to itby its primary debtor" means that the contractual interest receivable is that which is owing at any time. It is myunderstanding that the phrase "at any time" modifies the word "balance," and that it is clear from the context of the

paragraph that the amount received must never exceed the balance owing at any time, including contractual interest

calculated in accordance with the rules against post-proposal interest as set out earlier in the paragraph.

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53 With respect I cannot agree with this view of what Hannen J. said in the Crown Royal case. I think what Hannen J.

was saying was that the creditor could never be paid dividends out of the guarantor's estate beyond the claim it proved

in that estate but that it could receive such dividends up to the figure proved in the bankruptcy of the guarantor as long

as, after realization of its security, including contractual interest on that secured principal sum, it would not receive by

way of those dividends out of the guarantor's estate and the realization on the security a sum in excess of what was owed

to it by the principal debtor. This is precisely the case before us. The bank has received funds from the two estates as well

as realized on its security. Those two figures together still leave the bank with a deficit on the loan to Arcan guaranteed

by Cattell and Musson, and the amount received from the two estates is well under the claim of the bank against those

estates. What Hannen J. said is dicta, but in my opinion he correctly stated the position of the creditor against thatcreditor's bankrupt guarantor where the creditor holds security from, and only from, the primary debtor. That being so,

in my opinion, the bank is entitled to keep the dividends paid to it of $65,508.84.

54 The last case I refer to on this issue is Re Developpements du Nord-Est Ltee, where Beauregard J.A. said at p. 144:

Bref je partage l'opinion exprimee dans l'affaire Savin, supra, qui a depuis toujours ete consider& comme

representant la regle de droit qui prevaut au Canada. Dans cette affaire Savin, decidee en 1872, le juge notait que

la regle etait connue en Angleterre depuis déjà 80 ans:

There is a general rule in bankruptcy — whether a right and a reasonable rule or not — that there is to be no

proof in bankruptcy for interest subsequent to bankruptcy. There was also a rule in bankruptcy that a creditor

holding a mortgage security is to make up his mind whether he will rely upon his security or give it up and

come in and prove with the other creditors. This rule was relaxed in favour of the creditor by a rule that his

security might be sold, and then he was to apply the realized proceeds in payment of his debt. On this rule a

judicial decision was made nearly eighty years ago, that the proceeds of the sale were, in the case of deficiency,

to be applied in payment of principal and interest up to the date of the bankruptcy, and up to the date of the

bankruptcy only; and then the creditor was to prove for the residue of his debt, which, of course did not include

any interest subsequent to the date of the bankruptcy.

Dans sa critique de cette jurisprudence l'avocat de l'appelant fait une analogie avec le cas ou la creance est garantie

non pas par les biens du failli mais par une tierce personne. Dans ce cas, affirme l'avocat de l'appelant, le creancier

garanti peut se faire payer les interets gagnes apres la faillite par cette tierce personne pour ensuite s'inscrire comme

creancier ordinaire dans la faillite. Cela est peut-titre vrai mais la situation est bien differente puisque dans ce cas,

comme les biens du failli ne servent pas a payer les interets gagnes apres la faillite, les autres creanciers ordinaires

de la faillite ne subissent aucun prejudice du fait que le premier creancier se fasse payer des interets gagnes apres

la faillite.

The translation of the last paragraph is:

In his criticism of this jurisprudence, counsel for the appellant draws an analogy with the situation where a debtis guaranteed not by the property of the bankrupt but by a third party. Counsel for the appellant argues that in

such a situation, the creditor with the guarantee can have interest earned after the bankruptcy paid by the thirdparty in order that he can thereafter make a claim as an ordinary creditor in the bankruptcy. This may be true, but

this situation is very different because, in such a case, since the property of the bankrupt is not used to pay interest

earned after the bankruptcy, the other ordinary creditors in the bankruptcy will suffer no prejudice from the fact

that the first creditor has paid to him interest earned after the bankruptcy.

55 This is what the chambers Judge said in dealing with this case [p. 242, 79 C.B.R. (N.S.)]:

The bank also relies on the decision of the Quebec Court of Appeal in Re Developpements du Nord-Est Ltee; Banque

Nationale du Cana v. Gagnon (1983), 51 C.B.R. (N.S.) 142. The court agreed in obiter dicta that the rule against a

creditor receiving interest subsequent to the date of the bankruptcy of the debtor may not apply when the debt is

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guaranteed not by the property of the bankrupt, but by a third party. In the case at bar, the trustee admits that the

bankruptcy of a principal debtor does not limit the liability of a guarantor. However, and this is the distinguishing

factor, the bankruptcy of a guarantor does. The rationale for the rule against post-proposal interest is the same forbankrupt guarantors as for bankrupt debtors.

56 It will be seen that the chambers Judge distinguished this case on the basis of the rule against post-proposal interest

being the same for bankrupt guarantors as it is for bankrupt debtors. With respect, I do not view this as a distinguishing

feature. The fact is that in the guarantors' estates post-proposal interest has not been proved for nor can it be. When I say

post-proposal interest I refer to the interest that is contractually payable by the guarantors on the guaranteed debt. In

my opinion, the guaranteed debt here includes both principal and interest on the principal debt. What cannot be proved

for and what has not been proved for in this case is the contractual interest on the guarantee itself.

57 Counsel for the trustee cited Re Alliance Credit Corp.; Gagnon v. Montreal Trust Co. (1971), 17 C.B.R. (N.S.) 136at p. 142 (Que. S.C.), for the proposition that a creditor cannot recover more than 100 cents on the dollar (Bankruptcy

Act, s. 134). To this the bank responds that as a secured creditor and outside the Bankruptcy Act, it has not realized 100cents on its security which includes interest, and it seeks from the two estates only that part which it asserts is principal.

That is, the guaranteed debt is composed of both principal and interest and it is the total of the principal and interestwhich is the principal sum of the guaranteed debt. The bank says, and this is the fact, that it has not recovered 100 cents

on the debt as between it and Arcan.

58 In Re Alliance Credit Corp., the Montreal Trust Company was the trustee under certain trust deeds and had declaredthe security constituted by the trust deeds to have become enforceable. The debtor was Alliance Credit, The trustee of

Alliance Credit, Gagnon, was seeking an order from the court that certain premiums under the trust deeds be paid tothe estate for the benefit of the creditors rather than to the trustee under the trust deeds. Prior to the receiving order

being made against Alliance Credit, the trustee under the trust deeds had distributed a substantial sum to the secured

noteholders. These distributions included capital, interest and premiums without any breakdown. The issue before the

court was whether the trustee, Gagnon, was entitled to an amount of money represented by these premiums and interest

accrued thereon, or whether the trustee under the trust deeds was entitled to this sum for distribution to the securednoteholders. On the facts the secured noteholders had received the entire amount represented by the face amount of thenotes as well as interest, The trust deeds did not stipulate that a premium was automatically payable in the case of apremature redemption as a result of default as was the case here,

59 The basic argument of the trustee of the bankrupt company was that it would be unjust and inequitable to allow thetrustee under the trust deeds to enforce payment of the premium. It was found as a fact that, as a result of this prematureredemption, the secured noteholders had obtained substantial and unanticipated benefits. For instance, they received100 cents on the dollar and all accrued interest, whereas had they sold on the open market they would have realized

somewhere between 60-67 cents on the dollar.

60 The Judge said [p. 145] that in these circumstances to give the secured noteholders "yet additional advantage, apremium which would deprive the unsecured creditors of any meaningful dividend, borders on the immoral." The Judgeheld [p. 146] "that the payment of the 'premium' by the respondent [trustee under the trust deeds] would be inequitableand unjust." The funds were awarded the trustee of the bankrupt company for the benefit of the creditors. The Judge

referred in his reasons to the right of the trustee under the Bankruptcy Act to seek equitable relief. He posed the question

[p. 149]: Can they and should they [secured noteholders] obtain more at the expense of the unsecured creditors? Having

posed that question, the Judge then referred to what was then s. 93 of the Act (now s. 134), which said, "a creditor shall in

no case receive more than one hundred cents in the dollar and interest as provided by this Act." He then went on to discuss

the concept of equity in the Bankruptcy Act and, quoting from a Supreme Court of the United States case, said at p. 151:

The broad purpose of the Bankruptcy Act is to bring about an equitable distribution of the bankrupt's estate among

creditors holding just demands based upon adequate consideration. Any agreement which tends to defeat that

beneficent design must be regarded with disfavor.

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61 In the Re Alliance Credit Corp. case, the contest was between a creditor and his bankrupt debtor. Here, the bank

does not seek from the estates of the guarantors anything more than it proved for. When the bank was paid the dividend

of $65,508.84 the realization by it on the mortgaged property had yet to happen. There is no issue as to the entitlement

of the bank at that time to receive this dividend.

62 The fact is that as a secured creditor of Arcan the bank has not been paid this debt in full to this day. The issue is

whether the bank is obliged to return this sum to the trustee as ordered by the chambers Judge. My conclusion, as I have

indicated above, is that the bank, not having been paid its claim against Arcan in full, is entitled to keep the dividend. I

do not think this offends the rule as to post-proposal interest, nor the rule that a creditor cannot receive more than 100

cents on the dollar. I think this is consistent with what was said by the judges, albeit dicta, in Re J. LeBar Seafoods, Re

Crown Royal Clothing and Re Developpements du Nord-Est Ltee. I think what was said in those cases represents the law.I do not think it unjust or inequitable vis-à-vis the unsecured creditors in this case for the bank to rely on third party

payments resulting from the realization of its security where the bank has a shortfall on a principal debt and where the

property of the two estates is not used to pay interest earned after the proposal. I think the bank is entitled to keep the

dividend paid to it before it real ized on its security as long as it cannot be said that the bank has been paid more than

100 cents on the dollar which, in my opinion, is the case here.

63 In summary, it is my opinion that the bank has been paid its provable claim against the estates of Cattell and Musson

in full by the realization of the Arcan security, and applying those funds, as I think it must, firstly to principal and then to

interest. I conclude that the bank is entitled to keep the dividend of $65,508.84 paid to it before it realized on its security.

64 This case came before the Court for directions in an area of unsettled law as both counsel agreed was the situation.

In keeping with what I understand the submissions of both parties were at the conclusion of the hearing, the costs of

both parties will come out of the estates on a party-and-party basis.

Appeal dismissed.

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reserved.

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Nelson (Trustee of) v. Nelson, 1995 CarswellSask 207

1995 CarswellSask 207, [1995] 8 W.W.R. 249, [1995] S.J. No. 384, 133 Sask. R. 178...

Most Negative Treatment: Distinguished

Most Recent Distinguished: Huber, Re1 1999 CarswellSask 868, 186 Sask. R. 314 1 (Sask. Q.B., Dec 20, 1999)

1995 CarswellSask 207

Saskatchewan Court of Queen's Bench

Nelson (Trustee of) v. Nelson

1995 CarswellSask 207, [1995] 8 WW.R• 249, [1995] S.J. No.

384, 133 Sask. R. 178, 33 C.B.R. (3d) 292, 56 A.C.W.S. (3d) 462

Re Bankruptcy of ELVIN HALVOR NELSON, Court No. 609

JEFFREY PINDER & ASSOCIATES INC. (Trustee of Estate of ELVIN HALVOR

NELSON) v. ELVIN HALVOR NELSON and BERNADETTE MARIE NELSON

Wedge J.

Judgment: June 9, 1995

Docket: Doc. Saskatoon 609; Estate No. 020596

Counsel: W. J. Matkowski, for trustee.

Grant Scharfstein, for Elvin Nelson.

Christine Haynes, for Department of Justice.

Subject: Corporate and Commercial; Civil Practice and Procedure; Insolvency


VIII Property of bankrupt

VIII.1 Property exempt from execution under provincial statutesVIII.Lb Home of bankrupt


XV Discharge of bankrupt

XV.8 Conditional discharge

XV.8.a General principles

Headnote

Bankruptcy --- Property of bankrupt — Property exempt from execution under provincial statutes — Home of bankrupt

Bankruptcy --- Discharge of bankrupt — Conditional discharge

Property of bankrupt — Property exempt from execution — Bankrupt having non-exempt equity in homestead —Trustee registering caveat — Trustee becoming half-owner of bankrupt's interest — Trustee applying for sale ordirections for realizing on bankrupt's non-exempt equity — Court not allowing sale of homestead to realize non-exempt value while bankrupt in occupation — Trustee's caveat lapsing when bankrupt and trustee discharged and




requiring non-exempt interest to be returned to bankrupt — Court ordering bankrupt's discharge conditional upon

paying trustee $75,000 over three years — Court ordering re-transfer to bankrupt of trustee's interest after bankrupt

paying value of non-exempt equity.

Discharge of bankrupt — Conditional discharge — Bankrupt having $65,000 equity in homestead — Bankrupt

owning $185,000 exempt RRSPs and earning $2,000 per month — Court holding that bankrupt's leaving bankruptcy

with $250,000 in assets undermining system's integrity — Court ordering bankrupt's discharge conditional upon

paying trustee $75,000 over next three years.

A bankrupt's interest in his homestead was worth $65,000. He claimed a $32,000 exemption of the interest as allowed

under s. 2(1)11 of The Exemptions Act (Sask.). The trustee in bankruptcy registered a caveat against the homestead.

It also became registered owner of half of the bankrupt's interest. The bankrupt also owned $185,000 worth of

exempt RRSPs, had put $24,000 into his wife's RRSPs in the last five years, and earned $2,000 per month. The

trustee applied under s. 34 of the Bankruptcy and Insolvency Act for either sale of the homestead or directions as to

how it might realize on the bankrupt's non-exempt equity. It also applied for the bankrupt's discharge.

Held:

The application was granted.

The law in Saskatchewan is that so long as a bankrupt occupies his house, the trustee in bankruptcy cannot sell it to

realize the value above the statutory exemptions. The trustee's caveat against the house could not protect its non-

exempt interest. After the discharge of the bankrupt and trustee, the caveat must lapse and property incapable of

realization must be returned. However, nothing in law required that the trustee's interest be transferred back to the

bankrupt as long as the trustee administered the estate.

Section 172(1) of the Bankruptcy and Insolvency Act gives the court discretion to refuse an absolute discharge

although no bankruptcy offence has been committed. In exercising its discretion the court must consider creditors'

interests in being paid, the bankrupt's rehabilitation, and the integrity and public perception of the bankruptcy

system. Here, the bankrupt's lifestyle and financial security would not change drastically were he to obtain a small

mortgage on his house or cash in some of his RRSPs. His leaving the bankruptcy with $250,000 in assets would

undermine the system's integrity. In the circumstances, his discharge should be conditional upon paying the trustee

$75,000 over the next three years.

When he had paid $33,000, the non-exempt value of his homestead interest, the trustee had to transfer back its

interest in the homestead.


Cases considered:

Chetty v. Burlingham Associates Inc., 31 C.B.R. (3d) 161, [1995] 3 W.W.R. 153, 8 P.P.S.A.C. (2d) 130, 125

Sask. R. 249, 121 D.L.R. (4th) 297 (C.A.) [leave to appeal to S.C.C. refused (September 14, 1995), Doc. 24590

(S .C. C. )] — distinguished

Crowell Re (1989), 74 C.B.R. (N.S.) 121 (N.S.T.D.) — considered

Hayes, Re, 12 C.B.R. 225, [1931] 1 W.W.R. 301, 25 Sask. L.R. 257 (K.B.)— applied

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1995 CarswellSask 207, [1995] 8 W.W.R. 249, [1995] S.J. No. 384, 133 Sask. R. 178:..

Kreutzweiser, Re (1966), 10 C.B.R. (N.S.) 217 (Ont. S.C.) [affirmed [1967] 2 O.R. 108, 62 D.L.R. (2d) 455

(C.A.)] — distinguished

Munro, Re (1986), 62 C.B.R. (N.S.) 269, 49 Sask. R. 152 (Q.B.) [reversed in part (1987), 62 Sask. R. 309 (C.A.)]

considered

Neuls, Re (1985), 56 C.B.R. (N.S.) 132, 37 Sask. R. 60, (sub nom. Touche Ross Ltd. v. Neuls) 17 D.L.R. (4th)

554 (C.A.) — considered

Robinson v. Robinson (1964), 7 C.B.R. (N.S.) 209, [1965] 1 O.R. 326, 48 D.L.R. (2d) 42 (C.A.) distinguished

Satish, Re (1990), 1 C.B.R. (3d) 220, 86 Sask, R. 197 (Q.B.) — considered

Shakell, Re (1988), 70 C.B.R. (N.S.) 270 (Ont. S.C.) — referred to

Zemlak (Trustee of) v. Zemlak, 66 C.B.R. (N.S.) 1, [1987] 6 W.W.R. 114, (sub nom. Deloitte, Haskins & Sells

Ltd. v. Zemlak (Bankrupt)) 58 Sask. R. 203, 42 D.L.R. (4th) 395 (C.A.) — considered


Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 —

s. 2 "property"

s. 34

s. 67(1)

s. 67(1)(b)

s. 158(k)

s. 172(1)

Exemptions Act, The, R.S.S. 1978, c, E-14 —

s. 2(1)

s. 2(1)11 [am. S.S. 1983, c. 41, s. 2(c)]

Land Titles Act, The, R.S.S. 1978, c, L-5 —

s. 176

s. 240

Application by trustee under s. 34 of Bankruptcy and Insolvency Act for sale of homestead or directions and discharge

of bankrupt.

Wedge J.:

1 A trustee in bankruptcy has applied for the following relief:

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1. An order that the home owned by the bankrupt, Elvin Nelson, and his wife and in which they reside, be sold

and the proceeds split among registered owners or an order giving directions as to how the trustee can realize upon

Elvin's non-exempt equity in his home.

2. The discharge of the bankrupt upon certain conditions.

2 These facts were agreed upon by the parties:

1. On July 13, 1993, Elvin Nelson filed an assignment in bankruptcy with Jeffrey Pinder & Associates Inc.

2. At the time of his bankruptcy and up to the present date, Elvin resided with his wife, Bernadette Nelson, at 242

Christopher Crescent, Saskatoon, Saskatchewan. Each party held an undivided one-half interest in the property.

3. 242 Christopher Crescent is Elvin's "Homestead", pursuant to the provisions of the Bankruptcy and Insolvency

Act and s. 2(1)11 of The Exemptions Act. Nelson was entitled to and did claim exempt, at a minimum, his $32,000interest in 242 Christopher Crescent, with the Trustee allowing the $32,000 exemption claim without making Elvin

proceed pursuant to s. 176 of The Land Titles Act.

4. The Elvin title indicates that a caveat has been registered against this title. That caveat Will not be pursued and

will be discharged.

5. By agreement, Elvin and Pinder valued Elvin's one-half interest in 242 Christopher Crescent at $65,000.

6. On or about October 5, 1994, Pinder submitted an application for transmission to the registrar whereby Pinder,as trustee of the estate of Elvin, became registered owner as such Trustee in 50.77% of Elvin's undivided one-halfinterest in 242 Christopher Crescent.

7. The Trustee has asked that he be given his right to possession of 242 Christopher Crescent, which right has been

refused by Elvin and Bernadette through their solicitor. The Trustee has asked that 242 Christopher Crescent be

sold, or that the Trustee be paid $33,000, the value of the non-exempt equity in the home with Elvin and Bernadette,

through their solicitor, again rejecting these requests. Elvin has asked that the title now in the Trustee's name betransferred back to him. The Trustee has rejected this request.

8. The Trustee has brought forward an application pursuant to s. 34 of the Bankruptcy and Insolvency Act seekingeither a sale of 242 Christopher Crescent or directions from this Honourable Court as to how the Trustee is to realizeon Elvin's non-exempt equity in the home.

9. The Trustee has retained a solicitor and expended time and money in the handling of this estate and seeksreimbursement in respect to its costs.

The Home

3 Section 67(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended S.C. 1992, provides:

67.(1) The property of a bankrupt divisible among his creditors shall not comprise

(b) any property that as against the bankrupt is exempt from execution or seizure under the laws of the province

within which the property is situated and within which the bankrupt resides.

4 Section 2(1) of the Saskatchewan Exemptions Act, R.S.S. 1978, c. E-14, provides that the house and buildings

occupied by an execution debtor and the lots on which they are situated are "free from seizure, by virtue of writs of

execution" to the extent of $32,000.



1995 CarswellSask 207, [1995] 8 VV.W.R. 249, [1995] S.J. No. 384, 133 Sask. R. 178...

5 For 64 years, since the case of Re Hayes, [1931] 1 W.W.R. 301 (Sask. K.B.), the law in Saskatchewan has been that

the trustee will not be able to sell the home to realize the value above the statutory exemptions so long as it is occupied by

the bankrupt. Knowles J. said (at p. 303) that it was up to the legislature to provide for the sale, with exemptions being

given to the bankrupt, but it did not do so. He acknowledged that this interpretation resulted in "almost making a nullity

of the statute's words which limit the prohibition on the sheriff to the extent of $3,000" (the amount exempted in 1931).

6 In 1985, the Court of Appeal (per curiam) reviewed the Hayes case in Re Neuls (1985), 56 C.B.R. 132. Tallis J.A.,

speaking for the court, said (p. 137):

My first reaction to this judgment was one of doubt as to its correctness but upon further reflection I am now satisfied

that it is correct. I can find no case which disputes its basic premise and in the over 50 years since the judgment was

handed down there has been no amendment to the Act providing for the relief which the case denied. I am, therefore,

of the opinion that Knowles J. correctly interpreted the Act and the learned chambers Judge was right to follow it.

7 A year later, Mr. Justice Matheson, in Re Munro (1986), 49 Sask, R. 152 (Q.B.), without reference to Neuls, also

held that a bankrupt's home is exempt from seizure under provincial law.

8 According to the trustee, there are several arguments which should convince me that Hayes and Neuls were wrongly

decided, and which were not advanced before the Court of Appeal.

9 The essence of the argument is that Hayes and Neuls have re-written the bankruptcy legislation. The scheme of the

Bankruptcy and Insolvency Act is that all property of a bankrupt vests in and passes to the trustee, except that exempted

by law (s. 67(1)) for the benefit of creditors. Therefore the non-exempt percentage of the bankrupt's interest in his home

vests and title passes to the trustee, subject only to filing necessary documents in a land titles office. The trustee then has

the duty and the implicit power to realize upon his percentage of the total by means of partition and sale. After sale, an

amount equal to the bankrupt's exempt interest would be returned to him.

10 In support of this position, the trustee relied upon several Ontario cases (decided before Neuls), a recent

Saskatchewan decision and sections of a manual Land Titles in Saskatchewan prepared by Madam Justice Georgina

Jackson when she was Master of Titles. The sections in the manual referred to are simply explanatory of what happens

when an assignment in bankruptcy has been filed at the land titles office. Section 240 of The Land Titles Act, R.S.S. 1978,

c. L-5, which provides that the trustee may apply for an undivided interest in real property in which the bankrupt hasan interest, does not address the question of how to deal with a statutory exemption. The Ontario cases Re Kreutzweiser(1966), 10 C.B.R. (N.S.) 217 (S.C.), and Robinson. v. Robinson (1964), 48 D.L.R. (2d) 42 (C.A.), are concerned with

chattel exemptions and a recent Saskatchewan case Chetty v. Burlingham Associates Inc., [1995] 3 W.W.R. 153 (C.A.),

deals with the question of whether certain legal fees were "property" as defined in s. 2 of the Bankruptcy and InsolvencyAct. I do not think these cases are of assistance.

1 1 A rather more compelling aspect of the non-availability to creditors of the non-exempt portion of a homestead

is demonstrated by a simple example used by the trustee: if a bankrupt, who had sole clear title to his home valued at

$300,000, was given an absolute discharge, he would leave bankruptcy with net worth of $300,000 none of which could

be realized for the benefit of his creditors — a result surely not contemplated by the Act. But no matter how persuasive

this argument may be, I must leave it to the Court of Appeal to re-visit Neuls if the opportunity presents itself.

12 Since it was agreed that the trustee would discharge the existing caveat, how does he protect his non-exempt interest

in the property? The difficulty in maintaining such a caveat was apparent to the Court of Appeal in Zemlak (Trustee

of) v. Zemlak (1987), (sub nom. Deloitte, Haskins & Sells Ltd. v. Zemlak ( Bankrupt)) 66 C.B.R. (N.S.) 1. The court

decided that after the absolute discharge of a bankrupt and the discharge of the trustee, a caveat must lapse and property

which was "incapable of realization" must be returned. In Zemlak, a non-exempt equity did not exist. Mr. Justice Tallis

distinguished the Neuls case in which the Neuls' trustee had applied for directions before his discharge and had continued




to administer the estate pending realization of the non-exempt equity in the home. It is interesting to note that in Zeinlak(decided two years after Neuls), Mr. Justice Tallis did not suggest that Neuls might have been wrongly decided.

13 Elvin has requested that Pinder's title to 50.77% of Elvin's undivided half interest be transferred back to him. I donot think there is anything in law which would require that as long as the trustee administers the estate. The protectionfrom realization contains the proviso that the bankrupt reside in the home. If at any time the Nelsons decide to sell thehome, they should have no problem obtaining the consent of the co-owner, the trustee, on the condition that Elvin pay$33,000 out of the proceeds for the benefit of the creditors.

The Discharge

14 Revenue Canada, which is owed $41,256, has filed an objection to an absolute discharge, and supports the trustee'srecommendation that Elvin Nelson be discharged on the conditions that he pay $33,000, the value of the non-exemptreal property and also $67,000 to be realized out of Elvin's R.R.S.P.'s. It is conceded that R.R.S.P.'s are exempt underthe present state of the law.

15 The trustee claims that Elvin failed to perform his duty, under s. 158(k), to "aid to the utmost of his power in therealization of his property and distribution of the proceeds among his creditors." Page 2 of the trustee's application fordischarge states the reason for the recommendation:

The purpose of the Bankruptcy and Insolvency Act, as stated in Houlden & Morawetz, is to permit an honestbut unfortunate debtor to obtain a discharge from his debts subject to reasonable conditions. We feel that to exitbankruptcy with a net worth of $250,000.00 is contrary to the integrity of the bankruptcy process and places thepublic's perception of the bankruptcy system in doubt.

16 The trustee had requested a key to the home, in keeping with its position as a co-owner and its right to unity ofpossession. This was refused by Elvin, on the advice of his counsel. I do not think that the refusal to give up possessionand agree to sale of the home constitutes a bankruptcy offence in view of the law as enunciated in Neuls.

17 Section 172(1) gives this court the discretion to grant or refuse an absolute discharge although no bankruptcyoffence has been committed. It is well established that in exercising its discretion a court must balance three things: theinterest of the creditors in being paid, the interest of the rehabilitation of the bankrupt and the integrity of the bankruptcyprocess and the public's perception of it (see for example Re Shakell (1988), 70 C.B.R. (N.S.) 270 (Ont. S.C.)). In an oft-quoted passage, the court in Re Crowell (1989), 74 C.B.R. (N.S.) 121 (N.S.T.D.), said that the whole matter must belooked at in "the light of reason, common sense and humanity", having regard to the fundamental policy of the Act.

18 Closer to home, Mr. Justice Kyle held in Re Swish (1990), 1 C.B.R. (3d) 220 at 221 (Sask. Q.B.):

It is said that the prime purpose of the Bankruptcy Act is to allow a citizen, burdened by debt, to become a usefulcitizen free from the crushing burden of his debts. I am charged with achieving a balance between the creditors'rights to payment and the debtor's right to the opportunity of rehabilitation.

In that case, a debt to Revenue Canada was the principal cause of the bankruptcy and, according to Mr. Justice Kyle:

In the eyes of the community, should he be now discharged upon these terms, he would be seen to have "put oneover on the government".

19 Does a person exiting a bankruptcy with assets of $250,000 have a "crushing burden of debt"? Would "reasonablepeople, using common sense" feel that he is putting something over on his creditors?

20 The factors to which I may look include the non-exempt value of the Nelson's home ($98,000), the value of Elvin'sR.R.S.P.'s ($185,000), the amount of money he put into his wife's R.R.S.P.'s ($24,000 since 1990), the fact that Elvinis only 54 years old and is acting as a consultant for the new Centennial Plumbing and Heating. Taking into account

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1995 CarswellSask 267; [1.995] 8 W.W.R724C1995] S.J. No. 384, 133 Sask. R. 178...

his experience and expertise in that type of business, his prospects of advancement would seem to be good. He is living,granted not extravagantly, on his salary of $2,000 per month now and his lifestyle and future financial security wouldnot change drastically were he to obtain a small mortgage on his house and/or cash in some of his R.R.S.P.'s. I agreewith the trustee that leaving a bankruptcy with $250,00 in assets brings into question the integrity of the bankruptcysystem. Therefore the discharge of the bankrupt will be conditional upon payment to the trustee of $75,000 over a periodof three years from this date. (How he raises this amount is entirely up to him.) When $33,000 has been paid, Pindermust transfer his interest in the home back to Elvin.

21 Costs of this application to be paid out of the estate.

Application granted.

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reserved.

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Marzetti v. Marzetti, 1994 CarswellAlta 346

1994 CarswellAlta 346, 1994 CarswellAlta 942, [1992] S.C.C.A. No. 496...

1994 CarswellAlta 346

Supreme Court of Canada

Marzetti v. Marzetti

1994 CarswellAlta 346, 1994 CarswellAlta 942, [1992] S.C.C.A. No. 496, [1994] 2 S.C.R.

765, [1994] 7 W.W.R. 623, [1994] A.W.L.D. 702, [1994] W.D.F.L. 1190, [1994] S.C.J. No.

64, [1998] B.P.I.R. 732, 116 D.L.R. (4th) 577, 155 A.R. 340, 169 N.R. 161, 20 Alta. L.R.

(3d) 1, 26 C.B.R. (3d) 161, 5 R.F.L. (4th) 1, 73 W.A.C. 340, J.E. 94-1125, EYB 1994-66964

PEAT MARWICK THORNE INC. (trustee of estate of ARDEN ANTHONYMARZETTI, bankrupt) v. DIRECTOR OF MAINTENANCE ENFORCEMENT,

ATTORNEY GENERAL OF CANADA and ATTORNEY GENERAL OFALBERTA; SUPERINTENDENT OF BANKRUPTCY (intervenor);

JACQUELINE JEANNINE MARZETTI v. ARDEN ANTHONY MARZETTI

La Forest, L'Heureux-Dube, Sopinka, Gonthier, Cory, McLachlin and Iacobucci JJ.

Heard: February 2, 1994Judgment: July 14, 1994

Counsel: Michael J. McCabe, for appellante.

Jeanette Fedorak, for respondent Director of Maintenance Enforcement.

Ingrid C. Hutton, Q. C., and Robert Moen, for respondent Attorney General of Canada.

No one appeared for respondent Attorney General of Alberta.

Rick T G. Reeson, for intervenor.

Subject: Corporate and Commercial; Insolvency; Family; Property



VIII.10 Tax credits or refunds

Family law

III Division of family property

111.4 Determination of ownership of property

III.4.d Rights against trustee in bankruptcy

Family law

IV Support

1\7.1 Spousal support under Divorce Act and provincial statutes

IV.1.1 Enforcement of award

IV.1.I.iii Garnishment

Headnote

Bankruptcy --- Property of bankrupt — Tax credits or refunds

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1994barsweilAita 346, 1994 CarswellAlta 942, [1992] S.C.C.A. No. 496...

Family Law --- Family property on marriage breakdown — Determination of ownership of property — Rights againsttrustee in bankruptcy

Family Law --- Support — Spousal support under Divorce Act — Enforcement of award — Garnishment

Property of bankrupt — Wages — Income tax refund — Husband owing money to Director of MaintenanceEnforcement because of arrears accruing under corollary relief order to pay child and spousal support — Directorinitiating proceedings against husband — Husband making voluntary assignment in bankruptcy and assigning post-bankruptcy income tax refund to trustee — Director issuing notice of continuing attachment against federal Crownand Revenue Canada paying tax refund to Director — Trustee's appeals unsuccessful — Refund properly paid toDirector as refund not constituting "property of a bankrupt divisible among his creditors" for purposes of s. 67 ofBankruptcy Act — Assignment of refund to trustee invalid by virtue of s. 67 of Financial Administration Act —Bankruptcy Act, R.S.C. 1985, c. B-3, s. 67 — Financial Administration Act, R.S.C. 1985, c. F-11, s. 67.

A husband was ordered to pay monthly child and spousal support under a corollary relief order. When he fell intoarrears, the Director of Maintenance Enforcement initiated proceedings against him. Shortly thereafter, he made avolun tary assignment into bankruptcy and executed an agreement letter in which he purported to assign any post-bankruptcy tax refund to the trustee. Prior to the husband's discharge and the filing of the post-bankruptcy incometax return, the Director issued a notice of continuing attachment against the federal Crown in accordance with theprovisions of the Family Orders and Agreements Enforcement Assistance Act. Revenue Canada paid the husband'spost-bankruptcy tax refund to the Director.

The trustee was successful in obtaining an order from a master requiring the Director to pay the refund to thetrustee. The Director's appeal from that order was successful. The trustee's subsequent appeal was dismissed and

the trustee appealed to the Supreme Court of Canada.

Held:

The appeal was dismissed.

The definition of "property" in s. 2 of the Bankruptcy Act is sufficiently broad to cover the income tax refund eventhough the income tax return was not filed until after the husband's discharge from bankruptcy. While a taxpayerwho makes over-payments has no right to compel a refund prior to filing a return, he or she does have a futureand contingent interest in the eventual tax refund. Further, the tax refund could be considered "property" for thepurposes of s. 67(c) of the Act and "property of a bankrupt divisible among his creditors" for the purposes of the

whole of s. 67, ass. 67(d) in no way limits the scope of s. 67(c). Therefore, normally such a refund would automatically

vest in the trustee by virtue of s. 71(2). However, in this case s. 68, which constitutes a complete code controlling abankrupt's salary, wages, or other remuneration, governed. Because of the application of s. 68, salary, wages andother remuneration cannot be considered property divisible among a bankrupt's creditors for the purposes of s. 67.As the tax refund retained its character as wages for the purposes of s. 68, it did not vest in the trustee.

The letter agreement did not constitute a valid assignment of the refund. It was rendered ineffective by s. 67 of theFinancial Administration Act, which provides that, except in certain circumstances, "a Crown debt is not assignable".

A "Crown debt" is defined as including future debts "due or becoming due". Therefore, the Director had priority.


Cases considered:

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Ali, Re (1987), 62 C.B.R. (N.S.) 64, 24 223, 57 O.R. (2d) 685, 34 D.L.R. (4th) 267 (S.C.) - referred to

Beaton, Re (1979), 30 C.B.R. (N.S.) 225, 25 O.R. (2d) 614, 1 P.P.S.A.C. 58, 101 D.L.R. (3d) 338 (C.A.) -

not followed

Bertrand, Re, [1980] 2 N.Z.L.R. 72 (C.A.) - distinguished

Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., [1980] 1 S.C.R. 1182, 33 C.B.R. (N.S.) 107, [1980]

3 W.W.R. 513, [1980] C.T.C. 247, 3 Man. R. (2d) 283, 108 D.L.R. (3d) 257, 31 N.R. 301, (sub nom. Dauphin

Plains Credit Union Ltd. v. R.) 80 D.T.C. 6123 - considered

Federal Commissioner of Taxation v. Official Receiver, 95 C.L.R. 300, [1956] A.L.R. 643 (Aus. H.C.) -

considered

Giroux, Re (1983), 45 C.B.R. (N.S.) 245, 41 O.R. (2d) 351, 146 D.L.R. (3d) 103 (S.C.) - referred to

Goulet, Re (1977), 24 C.B.R. (N.S.) 222 (Ont. S.C.) - considered

Hoffer, Re (1980), 34 C.B.R. (N.S.) 222, 4 Man. R. (2d) 1, 113 D.L.R. (3d) 469 (Q.B.) - not followed

Hughes v. R., [1991] 1 D.T.C. 5290, (sub nom. Hughes v. Canada) [1991] 1 C.T.C. 492, (sub nom. Hughes v.

Minister of National Revenue) 46 F.T.R. 17 - referred to

Industrial Acceptance Corp. v. Lalonde, [1952] 2 S.C.R. 109, 32 C.B.R. 191, [1952] 3 D.L.R. 348 - considered

Kellaway, Re (1977), 24 C.B.R. (N.S.) 14 (B.C. S.C.) - not followedlnon suivi

McCullough, Re (1984), 52 C.B.R. (N.S.) 313 (Ont. S.C.) - referred to

Moge v. Moge (1992), [1992] 3 S.C.R. 813, [1993] 1 W.W.R. 481, 43 R.F.L. (3d) 345, 145 N.R. 1, 81 Man. R.

(2d) 161, 99 D.L.R. (4th) 456 - considered

Munich Reinsurance Co. (Canada Branch) v. Minister of National Revenue (1991), 91 D.T.C. 1137, [1992] 1C.T.C. 2004 (T.C.C.) - distinguished

Northward Airlines Ltd., Re, 37 C.B.R. (N.S.) 137, [1981] 2 W.W.R. 764, 36 A.R. 142 (Q.B.) not followed

Szatmari, Re, [1972] 2 O.R. 348, 18 C.B.R. (N.S.) 309, 25 D.L.R. (3d) 508 (S.C.) - referred to

Tailby v. Official Receiver (1888), 13 App. Cas. 523 (H.L.) - considered

Vachon v. Canada ( Employment & Immigration Commission), [1985] 2 S.C.R. 417, 57 C.B.R. (N.S.) 113, 63

N.R. 81, 23 D.L.R. (4th) 641 - applied

Walker, Re (1982), 43 C.B.R. (N.S.) 319 (Ont. S.C.) - referred to




1994 CarswellAlta 346, 1994 CarswellAlta 942, [1992] S.C.C.A.No. 496...

Bankruptcy Act, S.C. 1919, c. 36 —

s. 25

Bankruptcy Act, R.S.C. 1927, c. 11 —

s. 23(ii)

Bankruptcy Act, R.S.C. 1985, c. B-3 —

s. 2 "property"

s. 67

s. 67(c)

s. 67(d)

s. 68

s. 70(1)

s. 71(2)

s. 158

s. 158(1)

s. 158(o)


s. 68(1)

s. 68(2)

s. 68(4)

Divorce Act, R.S.C. 1985, c. 3 (2nd Supp.).

Family Orders and Agreements Enforcement Assistance Act, R.S.C. 1985, c. 4 (2nd Supp.) —

s. 23 "garnishable moneys"

s. 24

s. 28

Financial Administration Act, R.S.C. 1985, c. F-I 1 —

s. 66 "Crown debt"

s. 67

s. 67(a)

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s. 67(b)

s. 69

s. 70

Income Tax Act, R.S.C. 1952, c. 148 [R.S.C. 1985, c. 1 (5th Supp.)] —

s. 153(3) [R.S.C. 1985, c. 1 (5th Supp.), s. 153(3)]

s. 164(1) [R.S.C. 1985, c. 1 (5th Supp.), s. 164(1)]

Maintenance Enforcement Act, S.A. 1985, c. M-0.5 —

s. 4

Tax Rebate Discounting Act, R.S.C. 1985, c, T-3 —

s. 2(2)

Regulations considered:

Family Orders and Agreements Enforcement Assistance Act, R.S.C. 1985, c. 4 (2nd Supp.) — Family SupportOrders and Agreements Garnishment Regulations,

SOR/88-181/DORS/88-181

s. 3(a)

Words and phrases considered:

property — "Is there, then, a proprietary character to tax overpayments? Not surprisingly the Bankruptcy Act[R.S.C. 1985, c. B-3] defines the word 'property' in very broad terms. In particular, I note that the definition includes'every description of property, whether ... legal or equitable', and it specifically mentions 'every description of ...interest ... present or future, vested or contingent, in, arising out of or incident to property': s. 2. Even if a taxpayerwho makes overpayments has no right to compel a refund prior to filing a return, surely that taxpayer has at leasta future and contingent interest in the ultimate refund."

Appeal from judgment reported at (1992), 14 C.B.R. (3d) 127, 131 A.R. 154, 25 W.A.C. 154, 4 Alta. L.R. (3d) 97, 42R.F.L. (3d) 76, 94 D.L.R. (4th) 394 (C.A.), affirming judgment reported at (1991), 8 C.B.R. (3d) 238, 123 A.R. 1, 82Alta. L.R. (2d) 67, 35 R.F.L. (3d) 225 (Q.B.), giving Director of Maintenance Enforcement priority to income tax refundover trustee in bankruptcy, reversing decision reported at (1990), 2 C.B.R. (3d) 109, 112 A.R. 70 (Master).

The judgment of the court was delivered by lacobucci J.:

1 This appeal involves a priority contest, the subject matter of which is a bankrupt's post-bankruptcy income taxrefund. The contestants are a trustee in bankruptcy and the Director of Maintenance Enforcement. The appeal has beenbrought as a test case, with the parties proceeding on an agreed statement of facts.

I. Facts




2 In 1986, Arden Anthony Marzetti was ordered to pay monthly child and spousal support pursuant to the Divorce Act,R.S.C. 1985, c. 3 (2nd Supp.). He fell into arrears, and a default hearing was held in December 1988. As a consequence,Marzetti was ordered to pay $250 per month to the Director of Maintenance Enforcement (the "DireCtor"), who isappointed pursuant to s. 4 of the Maintenance Enforcement Act, S.A. 1985, c. M-0.5

3 On June 7, 1989, Marzetti filed a voluntary assignment into bankruptcy. On that date, he also executed an "AgreementLetter" as requested by his Trustee in Bankruptcy, Peat Marwick Thorne Inc. The Agreement Letter reads:

I hereby authorize Peat Marwick Limited, as Trustee of my Estate, to complete and file with Revenue Canada-Taxation my post-bankruptcy income tax return for the year 1989. I further authorize that any refund resultingfrom the post-bankruptcy income tax return be mailed to Peat Marwick Limited as an asset pursuant to Section 47of the Bankruptcy Act for distribution to my creditors.

4 On February 15, 1990, the Director filed a Notice of Continuing Attachment against the federal Crown underthe Family Orders and Agreements Enforcement Assistance Act, R.S.C. 1985, c. 4 (2nd Supp.). The Notice instructed theCrown to pay to the Director specified monies, namely, sums otherwise payable to Marzetti under any Act of Parliament.

5 On March 7, 1990, Marzetti was granted an absolute discharge from bankruptcy.

6 On April 13, 1990, the Department of Justice issued a garnishee summons, thus putting into effect the Notice ofContinuing Attachment previously filed.

7 On April 30, 1990, the Trustee filed a post-bankruptcy income tax return for Marzetti. That return summarizedMarzetti's tax liability for the period between June 7, 1989 and December 31, 1989. A post-bankruptcy income tax refundtotalling $2,066.90 became payable.

8 Before the refund was paid, the Trustee applied for a declaration that the refund was properly payable to the Trusteerather than the Director. Although the Crown in right of Canada was served with notice of the Trustee's motion, the taxrefund was nonetheless paid to the Director in August 1990. Counsel for the Attorney General of Canada acknowledgedthat this payment was made in error, and that the Minister of National Revenue did not intentionally make paymentprior to resolution of the priority dispute.

9 In response to the Trustee's motion, an Alberta Master declared that the refund constitutes property of Marzettiwhich vested in the Trustee: (1990), 2 C.B.R. (3d) 109, 112 A.R. 70. The Director was ordered to pay the amount ofthe refund to the Trustee. The Court of Queen's Bench of Alberta allowed the Director's appeal, and ordered that therefund be returned to the Director: (1991), 82 Alta. L.R. (2d) 67, 8 C.B.R. (3d) 238, 123 A.R. 1, 35 R.F.L. (3d) 225. TheCourt of Appeal for Alberta dismissed the Trustee's appeal: (1992), 4 Alta. L.R. (3d) 97, 14 C.B.R. (3d) 127, 131 A.R.154, 25 W.A.C. 154, 442 R.F.L. (3d) 76, 94 D.L.R. (4th) 394. This Court granted leave to appeal from that decision:[1993] 1 S.C.R. vii.

10 The Attorney General of Alberta, a named respondent who participated in the proceedings below, was notrepresented in the appeal before this Court,

II. Relevant Statutory Provisions

A. Bankruptcy Act, R.S.C. 1985, c. B-3

11

2. In this Act,



1994 CarswellAlta 346, 1994 CarswellAlta-942, [1992] S.C.C.A. No. 496...

"property" includes money, goods, things in action, land and every description of property, whether real or personal,legal or equitable, and whether situated in Canada or elsewhere, and includes obligations, easements and everydescription of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident toproperty;

67. The property of a bankrupt divisible among his creditors shall not comprise

(a) property held by the bankrupt in trust for any other person,

(b) any property that as against the bankrupt is exempt from execution or seizure under the laws of the provincewithin which the property is situated and within which the bankrupt resides,

but it shall comprise

(c) all property wherever situated of the bankrupt at the date of his bankruptcy or that may be acquired by ordevolve on him before his discharge, and

(d) such powers in or over or in respect of the property as might have been exercised by the bankrupt for hisown benefit.

68. (1) Notwithstanding section 67, where a bankrupt is in receipt of, or is entitled to receive, any salary, wages orother remuneration from any person employing, or using the services of, the bankrupt, in this section referred to asthe "employer", the trustee, if directed by the inspectors or the creditors, shall apply to the court for an order directingthe payment to the trustee of such part of the salary, wages or other remuneration as the court may determine,having regard to the family responsibilities and personal situation of the bankrupt.

(2) An order under subsection (1) shall be directed to the bankrupt and his employer and shall be expressed tocontinue for such time as the court may fix or until payment of a sum specified in the order and, unless otherwisestated in the order, it ceases to have effect on the discharge of the bankrupt.

(4) An order under subsection (1) shall be served on the bankrupt and is binding on him, and when the order isserved on his employer, it is binding on the employer named therein and any subsequent employer of the bankrupt ifa copy of the order is served on the subsequent employer, but nothing in this section shall be con strued as requiringthe trustee to serve such an order on any employer of a bankrupt if it appears to the trustee inexpedient to do so.

70. (1) Every receiving order and every assignment made in pursuance of this Act takes precedence over all judicialor other attachments, garnishments, certificates having the effect of judgments, judgments, certificates of judgment,judgments operating as hypothecs, executions or other process against the property of a bankrupt, except those thathave been completely executed by payment to the creditor or his agent, and except the rights of a secured creditor.

71 ...

(2) On a receiving order being made or an assignment being filed with an official receiver, a bankrupt ceases to haveany capacity to dispose of or otherwise deal with his property, which shall, subject to this Act and to the rightsof secured creditors, forthwith pass to and vest in the trustee named in the receiving order or assignment, and inany case of change of trustee the property shall pass from trustee to trustee without any conveyance, assignmentor transfer.




158. A bankrupt shall

(I) execute such powers of attorney, conveyances, deeds and instruments as may be required;

(o) generally do all such acts and things in relation to his property and the distribution of the proceeds amonghis creditors as may be reasonably required by the trustee, or may be prescribed by the General Rules, or maybe directed by the court by any special order made with reference to any particular case or made on the occasionof any special application by the trustee, or any creditor or person interested ...

B. Family Orders and Agreements Enforcement Assistance Act, R.S.C. 1985, c. 4 (2nd Sapp.)

12

23. In this Part,

"garnishable moneys" means moneys authorized to be paid by Her Majesty by or under such Acts of Parliament orprovisions thereof or programs thereunder as are designated by the regulations;

24. Notwithstanding any other Act of Parliament preventing the garnishment of Her Majesty, Her Majesty may,for the enforcement of support orders and support provisions, be garnisheed in accordance with this Part in respectof all garnishable moneys.

28. Subject to this Part and the regulations, service of the following documents on the Minister, namely,

(a) a garnishee summons,

(b) a copy of the support order or agreement containing the support provision to which the garnishee summonsrelates, and

(c) an application in the form prescribed by the regulations,

binds Her Majesty for one year in respect of all garnishable moneys payable to the judgment debtor named in thegarnishee summons.

C. Family Support Orders and Agreements Garnishment Regulations, SORI88-181

13

3. The following Acts, provisions thereof and programs thereunder are designated for the purposes of the definition"garnishable moneys" in section 23 of the Act:

(a) sections 164 and 216 of the Income Tax Act as they relate to the personal return of income of the taxpayer fora particular taxation year;

D. Financial Administration Act, R.S.C. 1985, c. F-11

14

66. In this Part,

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"Crown debt" means any existing or future debt due or becoming due by the Crown, and any other chose in actionin respect of which there is a right of recovery enforceable by action against the Crown;

67. Except as provided in this Act or any other Act of Parliament,

(a) a Crown debt is not assignable; and

(b) no transaction purporting to be an assignment of a Crown debt is effective so as to confer on any person anyrights or remedies in respect of that debt.

E. Tax Rebate Discounting Act, R.S.C. 1985, c. T-3

15

(2) For the purposes of this Act, a person acquires a right to a refund of tax where that person, as between himselfand another person, acquires a right to a refund of tax or to an amount equal to the amount of a refund of tax,notwithstanding that, by virtue of section 67 of the Financial Administration Act or any provision of any other Actof Parliament or of the legislature of a province, the refund of tax is not assignable.

III. Judgments

16

A. Alberta Court of Queen's Bench (1990), 2 C.B.R. (3d) 109 (Master Funduk in Chambers)

17 Master Funduk asked whether an income tax refund can be considered property of a bankrupt which vests ina trustee by virtue of the Bankruptcy Act, R.S.C. 1985, c. B-3. He answered that a refund is prima facie "property", asthat term is used in s. 67 of the Bankruptcy Act. However, he realized that some courts have treated refunds as deferredwages, and that such courts, by invoking s. 68 of the Bankruptcy Act, have held that refunds do not automatically vestin trustees under s. 67.

18 Master Funduk was prepared to accept that s. 68 of the Bankruptcy Act removes wages from the scope of s.67(c). But after a comprehensive review of case law, he was not prepared to accept that income tax deductions froman employee's wages retain the character of wages. He stated, plainly: "I do not think that an income tax refund canlogically be considered to be 'deferred wages"' (p. 119).

19 Further, Master Funduk noted that, if the refund retained its character as wages, then the plain language of s.68 would seem to preclude trustees from obtaining orders in respect of the refund. Pursuant to s. 68, while a trustee cansecure an order to obtain wages, the s. 68 order can be directed only toward "the bankrupt and his employer". MasterFunduk stated that s. 68 does not permit the attachment of a debt owed by a third party to a bankrupt.

20 Accordingly, Master Funduk held that the income tax refund is not within the scope of s. 68 of the BankruptcyAct. He held that it is property of the bankrupt within s. 67(c) which vested automatically in the Trustee. In light of theseholdings, Master Funduk did not consider arguments relating to the Agreement Letter.

B. Alberta Court of Queen's Bench (1991), 8 C.B.R. (3d) 238 (Wachowich J.)

21 Wachowich J. (as he then was) agreed with Master Funduk that the tax refund is prima facie property within s.67(c) of the Bankruptcy Act. He also agreed that the refund is neither wages nor deferred wages within s. 68. However,Wachowich J. indicated that "while the tax refund falls within s. 67(c), it seems clear from the language of the Bankruptcy

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Act that s. 67(d) must also apply before the property can be dealt with by the trustee" (pp. 246-247). Wachowich J. stated(at p. 247):

This means that the trustee's right to deal with this property is limited to those rights the bankrupt would have hadhad he not been bankrupt ... if Marzetti had not been bankrupt, he would have had no power to collect the portionof the tax refund garnisheed by the Director because of the Family Orders and Agreements Enforcement AssistanceAct. Similarly then, the trustee has no right to that portion of the tax refund garnisheed and paid to the Director.

Thus, the tax refund does not automatically vest in the trustee under s. 67(c) and (d).

22 Wachowich J. next considered the Agreement Letter. He found that, under ss. 66 and 67 of the FinancialAdministration Act, R.S.C. 1985, c. F-11, "there is a statutory prohibition against the assignment of Crown debts exceptas specifically authorized by federal legislation" (p. 247). Wachowich J. accepted that, by virtue of Re Northward AirlinesLtd. (1981), 37 C.B.R. (N.S.) 137 (Alta. Q.B.), an assignment might nonetheless be effective as between an assignor andan assignee. However, Wachowich J. referred to Tailby v. Official Receiver (1888), 13 App. Cas. 523 (H.L.), and stated(at p. 249):

while the assignment might bind the conscience of the assignor, it cannot bind the property until such time asthe contract becomes capable of being performed ... the contract between the assignor and the assignee cannot beperformed until the assignor has received his tax refund. Because of the nature of the garnishment proceedingsavailable to the Director, the assignor (the bankrupt) never does receive the tax refund. Thus, the assignee's rightsto the property never materialize.

Thus, Wachowich J. distinguished Re Northward Airlines on the ground that it did not involve a prior right to garnisheea Crown debt.

23 On the question of assignment, then, Wachowich J. concluded that the Trustee is "attempting to get through theback door something it could not get through the front" (p. 249). He stated that the Trustee could take action againstthe Director only if Marzetti could similarly take action, which he could not. He found that, once the refund passedto the Director, it ceased to be Marzetti's property under s. 67(c), in that Marzetti had "no power over or in respect ofthat property" (p. 249). Additionally, Wachowich J. stated that even if the assignment were otherwise enforceable, itwould remain unenforceable on the facts because of the Trustee's failure to comply with ss. 69 and 70 of the FinancialAdministration Act.

24 The assignment being ineffective, and s. 67(c) of the Banlcruptcy Act being inoperative, Wachowich J. allowedthe appeal. He declared that the income tax refund was properly attached by the Director. Accordingly, he ordered theTrustee to remit the refund plus interest to the Director.

C. Court of Appeal of Alberta (1992), 14 C.B.R. (3d) 127 (Major J.A. for the Court)

25 Major J.A. (as he then was) first discussed the role of s. 68 of the Bankruptcy Act. In his opinion, s. 68 legislativelyoverruled Industrial Acceptance Corp. v. Lalonde, [1952] 2 S.C.R. 109. Thus, Major J.A. interpreted s. 68 to mean that"only upon application to the court having regard to the enumerated considerations can a trustee access the wages orsalary earned by a bankrupt" (p. 131).

26 Major J.A. next accepted as correct both Federal Commissioner of Taxation v. Official Receiver (1956), 95 C.L.R.300 (Aus. H.C.), and Re Goulet (1977), 24 C.B.R. (N.S.) 222 (Ont. S.C.). This acceptance supported his conclusion,namely, that "tax deductions taken at source by an employer and remitted to Revenue Canada do not lose their characteras wages" (p. 135). Major J.A. explained that "the reality of the situation is that the income tax refund, insofar as itrelates to employer withholdings, represents wages that otherwise would have been paid to the bankrupt" (p. 134). He

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buttressed his conclusion with dicta from Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., [1980] 1 S.C.R.

1 182. But he also qualified his conclusion by stating (at p. 135):

I do not conclude that all tax refunds are wages. It depends on the nature of the refund. In this case the refund

was the result of taxes deducted directly from wages. Tax refunds may arise in other ways and can be determined

when that case arises.

27 Then, as a final point on the wages issue, Major J.A. considered whether the language of s. 68 precludes a wages

characterization for income tax refunds. He described the position of Master Funduk, namely, that since s. 68 does not

contemplate an order against the Crown, a refund cannot constitute s. 68 "wages". For Major J.A., however, the alleged

problem with s. 68 is irrelevant, inasmuch as it "cannot change the characterization of employer withholdings returned

in the form of a tax refund as 'wages' " (p. 135). He stated that any s. 68 problem associated with the making of orders

is a problem for Parliament.

28 In the alternative, Major J.A. agreed with Wachowich J.'s other conclusions relating to the operation of s. 67 of

the Bankruptcy Act, the effectiveness of the Agreement Letter, and the requirements of the Financial Administration Act.

Major J.A. dismissed the appeal, and held that the Director was properly entitled to the refund because of the Notice

of Continuing Attachment.

IV. Issues

29 The central issue in this appeal, as I have already noted, is whether the Trustee or the Director has priority in respect

of Marzetti's post-bankruptcy income tax refund. In discussing this issue, I find it convenient to adopt the following

structure:

A. What is the position under the Bankruptcy Act?

1. In general terms, is the Bankruptcy Act's reference to "property" broad enough to embrace the facts of this case?

2. In specific terms, must a court conclude that both s. 67(c) and (d) of the Bankruptcy Act have been satisfied in

order to conclude that there exists "property of a bankrupt divisible among his creditors" for the purposes of s. 67?

3. Is s. 68 a complete code in respect of a bankrupt's wages?

4. Should a post-bankruptcy income tax refund be considered "wages" for the purposes of s. 68?

B. Did the Agreement Letter create an enforceable assignment?

30 In answering these questions, I will make frequent reference to the Bankruptcy Act. I do so with full knowledge that

the relevant statute is now entitled the Bankruptcy and Insolvency Act: see S.C. 1992, c. 27, ss. 1 and 2. However, since

the statute was known as the Bankruptcy Act at the pertinent times, and since none of the 1992 amendments materially

affects my opinion, I will generally find it unnecessary to have regard to the amended version.

V. Analysis

31

A. What is the position under the Bankruptcy Act?

32 Perhaps more for logic than for law, I consider it helpful, as an initial matter, to consider s. 67 of the Bankruptcy

Act in isolation. That section is of critical importance to the Act's operation, inasmuch as it establishes certain rules

regarding what will, and what will not, comprise "property of a bankrupt divisible among his creditors". These rules, in

turn, rest upon a definition of "property" found in s. 2 of the Bankruptcy Act,

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33 Both s. 67 and the "property" definition can trace their legislative roots back to the original Bankruptcy Act,

S.C. 1919, c. 36. The "property" definition in that early statute is nearly identical to the existing definition found in s. 2.

Likewise, s. 25 of the early statute performed much the same function as the currents. 67. In contrast, s. 68 is historically

rooted in a relatively recent amendment: S.C. 1966-67, c. 32, s. 10. Although I will later conclude that s. 68 is operative

in this case, both the long history and the fundamental importance of s. 67 lead me first to consider that section of the

Bankruptcy Act in isolation.

1. In general terms, is the Bankruptcy Act's reference to "property" broad enough to embrace the facts of this case?

34 Section 67(c) of the Bankruptcy Act provides that "The property of a bankrupt divisible among his creditors ...

shall comprise ... all property wherever situated of the bankrupt at the date of his bankruptcy or that may be acquired by

or devolve on him before his discharge". At the "date of his bankruptcy" in this case, Marzetti had no interest in the tax

refund, since that refund relates to income he earned following his voluntary assignment into bankruptcy. Accordingly,

the relevant issue is whether Marzetti "acquired" any property, or whether any property "devolve[d] on him", prior to

his discharge.

35 In discussing this issue, it must first be observed that Marzetti's income tax return was not filed until after his

discharge from bankruptcy. This means that, if Marzetti acquired property in respect of the refund, or had such property

devolve upon him, the acquisition or devolution cannot depend upon the filing of the income tax return itself. Can it

be said that, prior to his discharge, Marzetti had property in respect of his eventual income tax refund, even though a

return was not filed until after his discharge?

36 According to the Director, it cannot, and for this proposition the Director cited Munich Reinsurance Co. (Canada

Branch) v. Minister of National Revenue (1991), 91 D.T.C. 1137 (T.C.C.). In that case, Rip T.C.J. stated that "the right

to a refund does not arise at the time an overpayment of any tax instalment is made but it arises on the day a return

is filed" (p. 1143). In making this statement, however, Rip T.C.J. was speaking in terms of the taxpayer having "an

enforceable right against the Minister" (p. 1143, emphasis added). In particular, he was considering whether the taxpayer

who overpays an instalment acquires a right to receive interest income.

37 Viewed in context, therefore, the conclusion in Munich does not rest upon Rip T.C.J.'s independent assessment

of the proprietary character of overpayments. Rather, it derives inferentially from the existence of a statutory refund

procedure in s. 164(1) of the Income Tax Act, R.S.C. 1952, c. 148, as amended. In the words of Rip T.C.J., "as section

164 makes clear, a refund is not due and payable until a return is filed" (p. 1143). Accordingly, assuming that Munich

is correctly decided, it is of little assistance to the Director. There is a marked distinction between the existence, and the

statutory enforceability, of a proprietary right.

38 Is there, then, a proprietary character to tax overpayments? Not surprisingly, the Bankruptcy Act defines the word

"property" in very broad terms. In particular, I note that the definition includes "every description of property, whether

legal or equitable", and it specifically mentions "every description of ... interest ... present or future, vested or contingent,

in, arising out of or incident to property": s. 2. Even if a taxpayer who makes overpayments has no right to compel a

refund prior to filing a return, surely that taxpayer has at least a future and contingent interest in the ultimate tax refund.

39 During oral argument, counsel for the Director was asked whether it might be valid to compare a tax overpayment

to a demand promissory note, the suggestion being that each is a form of property, but that neither is enforceable prior

to the satisfaction of certain preconditions. In the case of the promissory note, the precondition is the demand. In the

case of the tax overpayment, the recognized preconditions relate to the filing of the return: see, e.g., Munich, supra, and

Hughes v. R. (1991), 91 D.T.C. 5290 (Fed. T.D.). In my view, the comparison is a good one. The argument of the Director

artificially restricts the Bankruptcy Act definition of "property", and it fails to distinguish between accrued legal debts

and other, inchoate, forms of property.

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40 On this preliminary issue, therefore, I conclude that the Bankruptcy Act's reference to "property" is broad enough to

embrace the facts of this case. More specifically, using the language of s. 67(c), I conclude that Marzetti acquired at least

a future and contingent interest in his income tax refund at the time excess overpayments were withheld on his behalf.

2. In specific terms, must a court conclude that both s. 67( c) and (d) of the Bankruptcy Act have been satisfied in order to

conclude that there exists "property of a bankrupt divisible among his creditors" for the purposes of s. 67?

41 According to Wachowich J., s. 67(c) and (d) of the Bankruptcy Act must both be satisfied before a court can

conclude that there exists "property of a bankrupt divisible among his creditors". Those two paragraphs provide:

67. The property of a bankrupt divisible among his creditors ... shall comprise

(c) all property wherever situated of the bankrupt at the date of his bankruptcy or that may be acquired by or

devolve on him before his discharge, and

(ci) such powers in or over or in respect of the property as might have been exercised by the bankrupt for his own

benefit.

42 In other words, like Master Funduk, Wachowich J. concluded that the income tax refund could be considered

"property" for the purposes of s. 67(c), such that it was capable of vesting automatically in the Trustee. However, for

Wachowich J., s. 67(d) precluded automatic vesting on the facts. He reasoned that, by virtue of s: 67(d), the Trustee could

exercise only those powers in respect of the refund which might have been exercised by Marzetti but for the bankruptcy.

And, he stated, if the bankruptcy had not occurred, Marzetti could have exercised no power over the refund because of

the garnishee instituted by the Director. So while Marzetti had "property" in respect of the refund, there was no "property

of the bankrupt divisible among his creditors". The Court of Appeal approved this reasoning, but without analysis.

43 With respect, Wachowich J. misinterpreted s. 67(c) and (c/). In effect, Wachowich J. characterized s. 67(c) as an

inclusionary provision, and s. 67(d) as an exclusionary provision. Section 67(c) giveth, and s. 67(d) taketh away. But this

interpretation ignores the structure of s. 67 as a whole, since s. 67(a) and (b) are preceded by the phrase "the property

of a bankrupt ... shall not comprise" (emphasis added), whereas s. 67(c) and (d) are preceded by the phrase "the property

of a bankrupt ... shall comprise" (emphasis added). If s. 67(d) were intended to limit the scope of s. 67(c), why would it

not have been placed with (a) and (b)?

44 This criticism of Wachowich J.'s interpretation is echoed by L.W. Houlden and C.H. Morawetz in Bankruptcy and

Insolvency Law in Canada (3rd ed,, 1993), vol. 1, at p. 3-6, where the authors comment upon Wachowich J.'s trial decision:

Wachowich J. of the Alberta Court of Queen's Bench was of the opinion that if property falls within [s. 67(c)] it

must also meet the requirements of [s. 67(d)] before the trustee can claim it. With respect, this seems wrong. Sections

[67(c)] and (d) have always been treated as alternatives.

45 In other words, because of the statutory structure, it is inappropriate to read paras. (c) and (d) restrictively

when those paragraphs are intended broadly and inclusively to define the "property of a bankrupt divisible among his

creditors". Surely the better view is to give, at least at this stage of the analysis, a wider effect to these paragraphs so as

not to reduce artificially the estate available to creditors. In grammatical terms, the word "and" which appears at the end

of the English version of s. 67(c) must, by reason of its context, be read disjunctively. As stated by E.A. Driedger, "The

inclusive or and the several and produce the same result, and it remains for the context to indicate in what sense these

two little words are used": Construction of Statutes (2nd ed., 1983), at p. 18.

46 Moreover, I am fortified in this conclusion by the French text of s. 67. Although the parties failed to highlight the

point, the word "et" does not appear as a conjunction between s. 67(c) and (d). Although the absence of a conjunction

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in the French version does not make Wachowich J.'s interpretation impossible, it does make the interpretation even less

defensible.

47 For these reasons, a bankrupt's interest in a post-bankruptcy income tax refund can be considered "property" for

the purposes of s. 67(c) of the Bankruptcy Act. Moreover, it can be considered "property of a bankrupt divisible among

his creditors" for the purposes of s. 67 as a whole, since s. 67(d) in no way qualifies the operation of s. 67(c). This, then,

is my initial conclusion.

48 In the absence of other considerations, the logical consequence of my initial conclusion would be that Marzetti's

interest in his refund vested automatically in his Trustee: see s. 71(2). In this way, the Trustee would have obtained

priority over the Director's garnishment: see s. 70(1). However, as I will now proceed to explain, my initial conclusion

cannot govern in this case. It is overruled by s. 68.

49 To assess the importance of s. 68 in this case, I must do two things. First, I must determine whether s. 68 always

controls the disposition of a bankrupt's wages. Is s. 68 a substantive provision, that is, one which always removes wages

from the scope of s. 67, or does it simply create a procedural device for trustees? Second, if I determine that s. 68 is a

complete code in respect of a bankrupt's wages, I must then proceed to consider whether Marzetti's post-bankruptcy in

come tax refund retained its wages character.

3. Is s. 68 a complete code in respect of a bankrupt's wages?

50 Prior to the enactment of what is now s. 68, it was clear that the salary, wages, or other remuneration of a bankrupt

could sometimes constitute after-acquired "property", and so be considered "property of a bankrupt divisible amongst

his creditors" for the purposes of what is now s. 67. The pre-amendment position was clarified by Industrial Acceptance

Corp. v, Lalonde, supra.

51 In Industrial Acceptance Corp., this Court was asked to explain whether wages or salary could be excluded from the

definition of divisible property by s. 23(ii) (later s. 67(b)) of the Bankruptcy Act. According to the respondent bankrupt

in Industrial Acceptance Corp., the terms of s. 23(ii) could not operate to exclude wages or salary, inasmuch as wages

or salary can "only be reached by a garnishee or attachment procedure" (p. 118). This procedural reality was said to be

important because s. 23(ii) excluded from the definition of divisible property only property exempted from "execution

or seizure" under provincial law. Estey J. rejected the distinction between garnishment or attachment procedures on the

one hand, and procedures by way of execution or seizure on the other hand, in the following terms (at p. 117):

It would appear that Parliament, in adopting the language of s. 23(ii) (particularly when compared with the language

of s. 38(2) in the English act) intended that only such portion of the salary as was subject to seizure by legal process

under the law of the respective provinces should vest in the trustee. Moreover, the omission of any such provision

as that contained in s. 51(2) of the English act, under which, on the application of the trustee, an order might be

made against a bankrupt in receipt of a salary to pay the whole or part thereof to the trustee, appears to support

the foregoing view.

In modern terms, Industrial Acceptance Corp. established that the language of s. 67(b), which removes from "property of

a bankrupt divisible among his creditors ... any property that as against the bankrupt is exempt from execution or seizure

under the laws of the province", can operate to exclude wages or salary as contemplated by provincial exemptions.

52 In effect, therefore, the pre-amendment position was this: after taking into account provincial wage and salary

exemptions, any remaining wages or salary of a bankrupt was "property of a bankrupt divisible among his creditors".

These excess wages vested automatically in the trustee. And it is clear from Industrial Acceptance Corp. that this

conclusion was partly driven by the absence of a provision like s. 68, namely, one which permits, "on the application

of the trustee, an order ... against a bankrupt in receipt of a salary to pay the whole or part thereof to the trustee" (p.

1 17). But what is not clear in Industrial Acceptance Corp., and what must be resolved in this appeal, is how the presence

of s. 68 alters this pre-existing structure.

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1994CarswellAlta 346, 1994 CarswellAlta 942, [1992] S.C.C.A. No. 496...

53 Two possibilities present themselves. First, it can be argued that s. 68 is a complete code in respect of a bankrupt's

salary, wages, or other remuneration. Under this view, such forms of property cannot be "property of a bankrupt divisible

among his creditors" for s. 67. They do not automatically vest in the trustee. The trustee can access them only following

a court application as contemplated by s. 68(1). Proponents of this first view characterize the s. 68 amendment as a

substantive amendment to the pre-existing structure, in so far as s. 68 leaves no room for the operation of s. 67 in respect

of a bankrupt's salary, wages, or other remuneration. The substantive view has judicial support: Re Giroux (1983), 45

C.B.R. (N.S.) 245 (Ont. S.C.); Re McCullough (1984), 52 C.B.R. (N.S.) 313 (Ont. S.C.); Re Ali (1987), 62 C.B.R. (N.S.)

64 (Ont. S.C.).

54 The second view, not surprisingly, is that s. 68 is simply a procedural provision. Proponents of this view contend

that the pre-amendment position persists, and that wages, salary, and other remuneration can still vest automatically

in the trustee as non-exempt property under s. 67(6). To explain s. 68's existence, a procedural purpose is advanced to

demonstrate that s. 68 applications can be beneficial from the trustee's perspective. Two variations of the procedural

argument can be identified.

55 The first variation characterizes s, 68 as creating an additional remedy for trustees. It is said that s. 68 permits

a trustee to access not only the non-exempt portion of a bankrupt's wages (which vests automatically), but also the

otherwise exempt portion, subject to the court's discretion as defined by s. 68. This view is expressed in Re Beaton (1979),

30 C.B.R. (N.S.) 225 (Ont. C.A.), where Arnup J.A. stated (at pp. 227-228):

Section 48 [now s. 68], in my view, adopted and enlarged upon the procedure in the English Act. It gave the trustee

an expeditious and convenient means of getting into his hands not only the [non-exempt portion] which by s. 47

[now s. 67] was already the divisible property of the bankrupt ... but possibly more, if the court saw fit to order a

larger portion to be paid to the trustee ...

56 The second variation of the procedural argument, which is not inconsistent with the first, emphasizes the

convenience of s. 68 over its potential to increase a trustee's access to wages. This view is expressed by Kroft J. in Re

Hoffer (1980), 34 C.B.R. (N.S.) 222 (Man. Q.B.), at p. 234:

under s. 47 [now s. 67] alone the trustee could not attach the [non- exempt portion] until it fell due. How wages

were attached as they became due was a source of considerable confusion, and the approaches across Canada were

inconsistent.

Section 48 [now s, 68] appears to have been passed to give trustees a fair and convenient procedure by which they

can ask a court to determine the portion of wages which will be available to creditors and to direct the manner of

payment.

57 In addition to Re Beaton and Re Hoffer, the procedural view was advanced in Re Kellaway (1977), 24 C.B.R.

(N.S.) 14 (B.C. S.C.), though without explanation.

58 To proceed, I restate the question: is s. 68 a substantive or procedural provision in respect of a bankrupt's salary,

wages, or other remuneration? In my opinion, the case law debate summarized above should be resolved in favour of the

substantive view for three reasons. First, that view better accords with the language of s. 68. Second, it permits s. 68 to

remedy more effectively the mischief which led to the original amendment. And, third, it has some support in authority

from this Court. I will now elaborate upon each of these reasons in turn.

59 The language of s. 68 twice favours the substantive view. These points of support were described by Thorson

J.A. dissenting in Re Beaton, supra. I can do no better than quote his cogent discussion of each. First, Thorson J.A.

considered the implications of the phrase "an order directing the payment to the trustee", as that phrase is used in s. 68

(then s. 48(1)) of the Bankruptcy Act. He stated (at p. 237):

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It is not without significance that the only order which s. 48(1) authorizes the court to make is "an order directing

the payment to the trustee" of a part of the bankrupt's earnings. The inference which I draw from this phrasing of

language is that it contemplates a payment being made to the trustee to which the trustee would not be entitled in

the absence of the order. There is no hint or suggestion anywhere in the subsection that the payment which is to

be made is to take the place of, or is to be in addition to, some part of those earnings to which the trustee is in any

event already entitled; rather there is the reverse implication that, but for the order, the trustee would have no right

to be paid whatever part of those earnings he is seeking to have paid to him.

[Emphasis in original.]

60 Second, Thorson J.A. examined the significance of the words "such part of the salary, wages or other remuneration"

as they appear in s. 68(1). In the following passage, Thorson J.A. explains how those words favour the substantive view

(at pp. 237-238):

Furthermore, I cannot conclude that no significance is to be attached to the language of the legislative condition

of s. 48(1), beginning with the words "where a bankrupt is in receipt of, or is entitled to receive, any salary, wages

or other remuneration from any person employing, or using the services of, the bankrupt", when that language is

then followed by language authorizing the making of an order directing payment to the trustee of "such part of the

salary, wages or other remuneration" (the italics are mine) as the court may determine. If the contention of counsel

for the trustee were to be accepted, the only meaning that could be given to the words "such part of the salary, wages

or other remuneration" would be "such part of the portion of the salary, wages or other remuneration that has not

already vested in the trustee", i.e., the portion that remains after deducting the 30 per cent portion of the bankrupt's

wages to which the trustee has already become entitled.

This is equally the result, in my opinion, of the argument of counsel for the Superintendent of Bankruptcy that s.

48 was not intended to, and does not, take away any rights that the trustee might otherwise have to the bankrupt's

wages "at least until he has proceeded under s. 48". If he is correct, the only possible starting point of earnings from

which a court could proceed to make an order under s. 48 would be from the remaining [otherwise exempt] portion

of the bankrupt's earnings.

[Emphasis in original.]

61 I agree with both points made by Thorson J.A. in Re Beaton, supra. In my opinion, a plain language interpretation

of s. 68(1) favours the view that it is a substantive provision. When s. 68(1) indicates that it applies "notwithstanding

section 67", it means that it operates as a complete code in respect of the listed forms of property. Or, as stated by Houlden

and Morawetz, at p. 3-126: "The opening words 'notwithstanding section [67]' are intended to make it clear that wages,

etc. will not come within [s. 67(c)] but will be dealt with by s. 68".

62 My interpretation of s. 68 is reinforced by my understanding of the mischief which that provision was intended

to remedy. As described above, prior to the enactment of s. 68's predecessor, while wages could vest in trustees

automatically, provincial law could operate to exempt wages from the definition of "property of the bankrupt divisible

amongst his creditors": Industrial Acceptance Corp., supra. The necessary, and problematic, consequence of this statutory

structure was that the treatment of a bankrupt's wages for Bankruptcy Act purposes varied from province to province:

Houlden and Morawetz, at p. 3-127.

63 Parliament no doubt considered it unreasonable for the treatment of bankrupt persons to depend upon the

happenstance of provincial residence. Of course, even if one accepts that s. 68 is a complete code in respect of salary,

wages, and other remuneration, the potential for uneven treatment across Canada remains in respect of other provincially

exempted property. But it is hardly surprising that Parliament selected an important form of property — salary, wages,

and other remuneration — and gave that property special treatment. In Re Beaton, supra, Thorson J.A. made the

following statement with which I agree (at p. 235):

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It is thus legitimate to speculate that one of Parliament's objectives in enacting s. 48 [now s. 68] was to avoid

this potential for unevenness (and its consequent potential unfairness both to bankrupts and to creditors alike)

by providing an entirely separate regime for dealing with salary, wages or other remuneration received or entitled

to be received by a bankrupt from his employer, which would apply uniformly throughout Canada regardless of

differences in provincial laws.

64 The view I take is, moreover, reflected in Hansard extracts. Then Minister of Justice, the Hon. Louis-Joseph-

Lucien Cardin, proposed to amend the Bankruptcy Act in the following speech (House of Commons Debates, June 16,

1966, at p. 6488):

Other amendments clearly set out a procedure whereby bankrupts may be required to contribute some part of their

post-bankruptcy income to the trustee for the benefit of the creditors. The present act would seem to indicate that

a contribution may be required but this has been left to the discretion of trustees and the courts with the result that

debtors are treated in a most inconsistent manner across the country.

[Emphasis added.]

65 Accepting as I do that s. 68 is intended to remedy province-to-province disparities in the application of the

Bankruptcy Act, the conclusion necessarily follows that s. 68 is a substantive rather than a procedural modification to

the pre-existing scheme. If s. 68 were only intended to give trustees access to funds in excess of the non-exempt portion

defined by s. 67(b), then uniformity of provincial application could only be achieved if courts in all provinces made

s. 68 orders calculated to reflect the lowest common denominator of provincial exemption. In my view, however, not

only is this outcome anomalous, but it is also probably prevented by the language of s. 68(1) itself, which language

compels courts to have "regard to the family responsibilities and personal situation of the bankrupt" prior to making s.

68 orders. It is thus reasonable to suppose that uniformity of provincial application was intended to be achieved through

the operation of s. 68 as a complete code, whereby courts make orders in respect of a bankrupt's salary, wages, or other

remuneration after considering only one standard: the one specified in s. 68 itself.

66 As a final point of support for the substantive view, I draw attention to the decision of this Court in Vachon v. Canada

(Employment & Immigration Commission), [1985] 2 S.C.R. 417. In Vachon, Beetz J. discussed the rehabilitative purpose

of the Bankruptcy Act. He did so in terms which suggest this Court's acceptance of the substantive view (at p. 430):

The rehabilitation of the bankrupt is not the result only of his discharge. It begins when he is put into bankruptcy

with measures designed to give him the minimum needed for subsistence. These measures are contained in s. 47

[now s. 67] of the Bankruptcy Act concerning, inter alia, the exemption from execution of certain property, and in

s. 48 [now s. 68], regarding the wages of the bankrupt, which applies notwithstanding s. 47 and which empowers the

Court to make

an order directing the payment to the trustee of such part of the salary, wages or other remuneration as the

court may determine having regard to the family responsibilities and personal situation of the bankrupt.

The part of the wages paid to creditors does not necessarily correspond to the part which may attached. It may

be more or less "having regard to the family responsibilities and personal situation of the bankrupt". Houlden and

Morawetz, op cit., vol. 1, write at pp. F-66 and F-69:

Since the enactment of s. 48, wages have been removed from the operation of s. 47 so that no part thereof vests in

the trustee to be divided among creditors unless he makes an application under s. 48 and then only to the extent

allowed by the court: Re Giroux (1983), 45 C.B.R. (N.S.) 245, 41 O.R. (2d) 351, 146 D.L.R. (3d) 103 (S.C.).

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Applications under s. 48 of the Bankruptcy Act come down not to a question of law, but of fact; that is, whether

the bankrupt after being given credit for his reasonable living expenses has excess funds which might be used

to pay creditors.

[Emphasis added.]

As I read the above quotation, Beetz J. approves of the highlighted passage from Houlden and Morawetz, which passage,

in turn, rests upon Re Giroux, supra. Interestingly, while Houlden and Morawetz reach a more qualified conclusion in

the current version of their work, they continue to favour the substantive view. The authors state (at p. 3-126): "The

position in Re Giroux and Re McCullough seems more consonant with the amendment that was made to the Act by the

ad dition of s. 68".

67 To summarize briefly, it is my opinion that the language of s. 68, the inferred purpose of that provision, and the

decision of this Court in Vachon, supra, all support the conclusion that s. 68 is a substantive provision, one which is

intended to operate as a complete code in respect of a bankrupt's salary, wages, or other remuneration. These forms of

property cannot fall within s. 67(c) of the Bankruptcy Act as a bankrupt's after-acquired "property", and they cannot

be considered "property of a bankrupt divisible among his creditors" for the purposes of s. 67. They do not vest in the

trustee through the simple operation of law.

68 Finally, for the sake of completeness, I note that this conclusion is not contradicted by Commonwealth authorities

cited to this Court. The intervener Superintendent of Bankruptcy cited Re Bertrand, [1980] 2 N.Z,L.R. 72 (C.A.). In that

case, McMullin J, considered a provision which the Superintendent argued is similar to s. 68(1) of the Bankruptcy Act,

and characterized it as "primarily a machinery provision" (at p. 77). But it is apparent from reading Re Bertrand that

there is, in fact, no similarity between the two provisions at all. In the New Zealand case, the relevant provision operated

"without prejudice to any other rights conferred by" the Act in which it was found, and McMullin J. recognized that the

provision was, therefore, not "intended to interfere with the pattern of vesting" (p. 77) otherwise apparent in the statute:

cf. Federal Commissioner of Taxation v. Official Receiver, supra.

69 And it is also germane to observe that my reading of s. 68 in no way emasculates the importance of s. 67(b).

There are many provincial exemptions from "execution or seizure" which have nothing to do with salary, wages, or

other remuneration. See, for example, Houlden and Morawetz, at pp. 3-39 et seq., where the authors review provincial

exemptions in respect of such things as pension plans (at p. 3-45), real estate and homesteads (at p. 3-45), and tools

and chattels used in the bankrupt's business, profession or calling (at p. 3-47). See also Canadian Encyclopedic Digest

(Western, 3rd ed.), at pp. 59-83 et seq., and Canadian Encyclopedic Digest (Ontario, 3rd ed.), at pp. 93 et seq.

70 So I proceed upon the footing that anything called "wages" will not vest automatically in a trustee. But this case,

of course, involves not wages per se, but rather Marzetti's post-bankruptcy income tax refund. This means that s. 68's

role as a complete code will only matter if Marzetti's refund retained, for present purposes, its character as wages.

4. Should a post-bankruptcy income tax refund be considered "wages" for the purposes of s. 68?

71 Major J.A. held that Marzetti's refund retained the character of wages to the extent that it represented a return of

employer-withholding deductions. The available authority supports his position, with which I agree.

72 The principal Canadian case is Re Goulet, supra, which raised the precise issue being considered, viz., whether a

bankrupt or a trustee was entitled to a tax refund arising from post-bankruptcy wages. Henry J. held (at p. 223):

When the minister returns the fund it then comes into the hands of the taxpayer, in this case the bankrupt, in the

form of deferred wages. The fund in question is identified throughout as a deduction from wages earned and never

loses its character as wages until it is finally applied by the minister to defray some portion of the tax liability.

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Like Master Funduk, I fail to appreciate how Re Szatmari (1972), 18 C.B.R. (N.S.) 309 (Ont. S.C.), relied upon' by

Henry J. in Re Goulet, supports the passage quoted above. But Re Goulet was followed in Re Walker (1982), 43 C.B.R.

(N.S.) 319 (Ont. S.C.), and I accept that both cases offer some direct support for the proposition that a tax refund can

be characterized as deferred wages for Bankruptcy Act purposes.

73 There is also Commonwealth authority on point. In Federal Commissioner of Taxation v. Official Receiver, supra,

legislation similar to the Bankruptcy Act in all material respects was considered by the Australian High Court. The court

held that a tax refund should be considered "a refund of part of the earnings of the bankrupt and money which he is

entitled to retain in the absence of an order of the court under s. 101 of the Act [the equivalent of s. 68]" (at p. 316 per

Williams J.).

74 In an attempt to suggest that there is also contrary Commonwealth authority, the Trustee again cited Re Bertrand,

supra, to this Court. The attempt must fail. In Re Bertrand, the New Zealand bankruptcy legislation considered by

the Court of Appeal had no provision comparable to the Canadian s. 68 or the Australian s. 101. For this reason, the

potential characterization of a tax refund as wages or earnings was irrelevant, since, under the common law, wages and

earnings, like other forms of property, vest automatically in trustees. The court in Re Bertrand explicitly distinguished

Federal Commissioner of Taxation, supra, on this basis (at pp. 77-78).

75 Finally, the Director cited Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd, supra, and argued that obiter

remarks by Pigeon J. in that case support a wages characterization. At issue in Dauphin was not a tax refund per se,

but rather the nature of an employer's deduction, or withholding, in respect of an employee's taxes. Pigeon J. stated (at

p. 1191):

It is important to consider the nature of the deduction for income tax. It is not a deduction for the benefit of the

employer, it is a withholding for the benefit of the employee because it is to be remitted to the Receiver General of

Canada on account of the employee's tax indebtedness. By virtue of other provisions of the Income Tax Act if, as

happens in a large number of cases, the withholdings exceed the employee's tax liabilities, a refund will be made to

the employee by the Department of National Revenue. Therefore, the amount withheld remains a part of the wages,

and subs. 153(3) provides that it is "deemed to have been received" by him at the time the payment was made less

the deduction.

[Emphasis added.]

76 I am willing to accept that the emphasized line in the above passage supports the Director's position. Certainly,

the support is qualified, inasmuch as Pigeon J.'s opinion must be tied to s. 153(3) of the Income Tax Act, which states

that withholdings are "deemed to have been received" by employees at the time of withholding, but which establishes this

result only "for all the purposes of this Act" (emphasis added). But there is an element of support in Dauphin nonetheless,

since Pigeon J. concludes that "the amount withheld remains a part of the wages" before he discusses s. 153(3).

77 Adopting a stance in opposition to these authorities, Master Funduk thought it was not "logical" to view tax

refunds as deferred wages. He stated that "the statutory deduction requirement is just an enforcement process to ensure

that the employee makes payments on account of his tax liability" (p. 120). I agree with Master Funduk that withholding

provisions are designed to ensure that employees pay taxes, but, with respect, I fail to see how this advances his position.

If an excess of wages is withheld, that excess does not fulfil the enforcement purpose. Accordingly, its character is not

informed by that purpose.

78 In my opinion, the transformation of Marzetti's wages over time does not alter their fundamental character.

Marzetti earned a certain amount as wages after his voluntary assignment into bankruptcy. The fact that some portion

of his wages was, by virtue of statute, automatically directed toward his tax liability does not affect the question. The

intervention of statute speaks to how Marzetti spent his wages, not to how much he earned in the first place. In common

parlance, taxpayers do not draw false distinctions between the wages they earn and the refunds they receive. As stated

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1994 6aiSInfeliAli 46, 1994 CarswellAlta 942, [1992] S.C.C.A. No. 496...

by Fullagar J. in Federal Commissioner of Taxation, supra, "his right to payment arises be cause, and only because, he

worked for a remuneration which is found, on a contingency which was contemplated throughout, not to have been

paid to him in full" (p. 322).

79 Therefore, Major J.A. was, I suggest, entirely justified in concluding that a tax refund is analytically similar to

deferred wages in this case. He noted that "if there is any money that can be easily traced in a modern society, it is theamount of taxes paid and the amount of taxes owed" (p. 133). It is difficult to dispute this statement, and I reject theSuperintendent of Bankruptcy's suggestion that a wages-characterization is precluded by the commingling of withheld

sums in the Consolidated Revenue Fund. Equally, I agree with Major J.A. that there is no necessary inconsistency

between holding that a tax refund is a debt owed by the Crown, and holding that a tax refund represents deferred wagesoriginally owed by an employer. Again, as stated by Fullagar J. in Federal Commissioner• of Taxation, supra, "to say thatpayment of the sum ... will be a repayment of income tax overpaid is not inconsistent with saying that that sum representspersonal earnings of the bankrupt for the purposes of the Bankruptcy Act" (p. 321).

80 Furthermore, like Major J.A., I note that there is no doubt in this case that the post-bankruptcy income tax refundderived from Marzetti's wages. Of course, tax refunds can be generated by other sources of income. In the words ofMajor J.A., therefore, the wages-characterization "depends on the nature of the refund" (p. 135).

81 The only problems with the characterization of an income tax refund as deferred wages for the purposes of s.68 of the Bankruptcy Act are structural ones which relate to the trustee's ability to make applications, and the court'sability to make orders. The former problem causes me little concern. It is said that s. 68(1) of the Bankruptcy Act permitsa trustee to make an application only "if directed by the inspectors or the creditors", and that the trustee's inability toact independently is a reason to reject the wages characterization. But this aspect of s. 68(1) is an inherent flaw, and itequally affects the trustee's ability to access a bankrupt's salary, wages, and other remuneration per se. The flaw does notbecome more serious simply because the definition of "wages" is expanded. Moreover, the flaw has now been correctedsuch that s. 68(1) permits applications "on the trustee's own initiative": see S.C. 1992, c. 27, s. 34(1).

82 A bigger problem exists with respect to the making of s. 68(2) orders. Such orders can be directed only toward "thebankrupt and his employer", and not, for example, against third-party revenue authorities. Although s. 68(2) has alsobeen amended by S.C. 1992, c. 27, s. 34(1), the amendment does not seem to resolve this problem.

83 Like Major J.A. at the Court of Appeal, I am content to state that any deficiency in s. 68(2) cannot affect theconclusion that an in come tax refund retains its character as wages. Major J.A. stated (at p. 135):

the master opined that even if the refund could be characterized as "wages," s. 68 does not contemplate an orderagainst the Crown. Therefore, he concluded, the refund could not possibly be wages under the Bankruptcy Act. Withrespect, that is irrelevant. The trustee has not nor is not seeking an order under s. 68. The difficulties, if any, in thewording of s. 68 cannot change the characterization of employer withholdings returned in the form of a tax refundas "wages." That may be a problem for Parliament but not in this appeal.

84 Although it would be preferable, from a trustee's point of view, to obtain an order directly against the Crown inrespect of an income tax refund, the deficiency in s. 68(2) does not entirely remove refunds from a trustee's grasp. Orderscan still be obtained as against bankrupt persons and employers under s. 68(2). Of course, in the circumstances of anincome tax refund, service of a s. 68(2) order upon the employer would be meaningless. In this respect, I note that s.68(4) of the Bankruptcy Act permits trustees to withhold service of the s. 68(2) order where the trustee regards same as"inexpedient". Thus, the trustee can effectively obtain a s. 68(2) order as against the bankrupt person alone, and althoughsuch an order is not ideal, it does provide the trustee with the necessary legal entitlement to the refund.

85 My opinion is, furthermore, fortified by public policy considerations. Although the absence of language in s. 68(2)permitting an order to be made against the Crown weighs in favour of the Trustee in this case, when family needs are atissue, I prefer to err on the side of caution. In s. 68 of the Bankruptcy Act, Parliament has indicated that, before wages

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become divisible among creditors, it is appropriate to have "regard to the family responsibilities and personal situation

of the bankrupt". This demonstrates, to my mind, an overriding concern for the support of families.

86 Furthermore, the discretion given to courts by s. 68 is amplified by the discretion which is necessarily left in the

trustee, creditors, and inspectors. As stated by Houlden and Morawetz: "It is unlikely that the trustee would make, or

that the inspectors or creditors would authorize [a s. 68], application, unless the earnings of the bankrupt were in excess

of what was needed for the adequate maintenance of the bankrupt and of his family" (at p. 3-127). Since these kinds

of discretion are better able to respond to the costs of raising families, I favour a purposive interpretation of the word

"wages" in s. 68, notwithstanding difficulties associated with s. 68(2).

87 Moreover, there are related public policy goals to consider. As recently recognized by L'Heureux-Dube J. in Moge

v. Moge, [1992] 3 S.C.R. 813, "there is no doubt that divorce and its economic effects" (p. 854) are playing a role in the

"feminization of poverty" (p. 853). A statutory interpretation which might help defeat this role is to be preferred over

one which does not.

88 To summarize briefly, s. 68 governs in this case as a complete code. Marzetti's post-bankruptcy income tax refund

retained its character as wages for the purposes of s. 68. The Trustee could access that refund only through a s. 68

application. None was made.

89 Accordingly, the contest in this case narrows, and priority will be accorded in respect of one of two happenings:

first, the execution of the Agreement Letter; second, the Director's garnishment. Since the Agreement Letter came first

in time, if it is effective, it will prevail over the garnishment because the latter could have taken effect only once statutory

requirements were satisfied: Family Orders and Agreements Enforcement Assistance Act, s. 28. And so I turn to the final

issue, and ask whether the Agreement Letter created an enforceable assignment.

B. Did the Agreement Letter create a valid assignment?

90 The parties debated the effectiveness of the Agreement Letter under several heads, most of which I will not

examine. They disagreed as to whether the Director's garnishee, in substance, created an equitable assignment, such

that the priority contest might truly involve two equitable assignees. And, leaving aside other statutory considerations,

they fundamentally disagreed as to whether the Agreement Letter could have created an effective assignment. This latter

disagreement involved component disputes. Does the Letter demonstrate an intention to assign, or does it merely direct

a Crown payment? Is the characterization of the assigned interest as future property significant? And, is it necessary to

find consideration to support the Agreement Letter?

91 In my opinion, these points of contention do not require resolution in this appeal, inasmuch as the Agreement

Letter is rendered ineffective by s. 67 of the Financial Administration Act. Section 67 provides, in part, that "except as

provided in this Act or any other Act of Parliament ... a Crown debt is not assignable". The expression "Crown debt" is

defined in s. 66 to include not only existing debts, but also future debts "due or becoming due". Marzetti did not obtain

an accrued legal debt in respect of his post-bankruptcy income tax refund until his income tax return was filed, as I

have already mentioned. But his interest in that return can legitimately be described as an interest in a future Crown

debt becoming due.

92 This Crown-debt characterization means that the Financial Administration Act operates to prohibit assignment

of an income tax refund, due or becoming due from the Crown, unless assignment is permitted by that Act or another

"Act of Parliament". There is no question that the Financial Administration Act fails to permit such assignment, and no

express authorization appears in any other federal statute.

93 In this context, I pause to note s. 2(2) of the Tax Rebate Discounting Act, R.S.C. 1985, c. T-3. That section

permits a person to "[acquire] a right to a refund of tax ... notwithstanding that, by virtue of section 67 of the Financial

Administration Act ... the refund of tax is not assignable". This provision effectively illustrates a simple point: when

Parliament means to make income tax refunds assignable, it can do so easily and with clarity.

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94 The only effort made in this appeal to find statutory authorization for the Agreement Letter involved s. 158 of the

Bankruptcy Act, but that effort must go unrewarded. Under s. 158(1), bankrupt persons are obliged to execute specified

documents "as may be required", but this obligation says nothing about the independent validity of such documents

in the face of a statutory proscription. Likewise, under s. 158(o), a bankrupt may be obliged to do "all such acts and

things in relation to his property ... as may be reasonably required by the trustee", but it cannot be said that a trustee

can "reasonably require" that which Parliament expressly prohibits.

95 In ss. 67 and 68 of the Bankruptcy Act, Parliament has established a regime which determines whether there exists

"property of a bankrupt divisible among his creditors". In my opinion, it would be very odd if trustees could attain that

which appears to be unattainable on the face of those provisions, namely, an entitlement to an income tax refund without

the need for a court application. In other words, I do not believe that a trustee and a bankrupt can use contract law to

circumvent statutory law in this area.

96 In the absence of clear statutory authority to permit the assignment envisioned by the Agreement Letter, s. 67(a) of

the Financial Administration Act takes hold and renders that Crown debt not assignable. Moreover, the grip of s. 67(a)

is not loosened by Re Northward Airlines Ltd., supra, which was cited by the Trustee.

97 In Re Northward, an airline company purported to assign its book debts to a bank. The company later declared

bankruptcy at a time when the federal Crown was the company's debtor. The bank claimed the value of the Crown debt as

assignee, but the trustee relied upon the Financial Administration Act. MacDonald J. in Re Northward responded to these

facts by holding that the rules of equity continued to apply as between the assignor and the assignee, notwithstanding the

Financial Administration Act, MacDonald J. reasoned that the company as assignor would hold monies received from

the Crown in trust for the bank, and that trust monies, under the equivalent of s. 67(a) of the Bankruptcy Act, would not

constitute property of the bankrupt which could vest in the trustee.

98 With respect, I think that Re Northward is wrongly decided. MacDonald J. stated that the Financial Administration

Act "does not abrogate the rights of parties except to the extent of exercising rights or remedies in respect of the Crown

debt" (at p. 140). In other words, MacDonald J. held that an assignment will be invalid only to the extent that an assigneeattempts to exercise "rights or remedies" directly against the Crown debtor. But this holding ignores the broad language

chosen by Parliament in s. 67(b).

99 MacDonald J. in Re Northward interpreted s. 67(b) as if Parliament enacted a prohibition against attempts to assign

to "any person any rights or remedies against the Crown as debtor in respect of [the Crown] debt". But, of course, section

67(b) renders ineffective attempts to assign to "any person any rights or remedies in respect of [the Crown] debt" (emphasis

added). I do not think it is possible to go behind this broad language as Re Northward suggests. Moreover, since s. 67(a)prohibits the assignment of a Crown debt, that prohibition alone would presumably give the Crown the same protectionas would s. 67(b) under the Re Northward interpretation. In my view, s. 67(b) amplifies the broad prohibition apparentin s. 67(a), so that a purported assignment of a Crown debt is rendered absolutely ineffective, as between debtor and

creditor, and as between assignor and assignee.

100 For these reasons, I conclude that the Agreement Letter executed by Marzetti was statutorily incapable of

creating an effective assignment. Priority in respect of the post-bankruptcy income tax refund remains unaffected by that

instrument, and falls to be determined according to the principles I have already described.

VI. Conclusion and Disposition

101 Under s. 24 of the Family Orders and Agreements Enforcement Assistance Act, the Crown may be garnisheed in

respect of "garnishable moneys". By virtue of s. 23 of that Act, read in conjunction with s. 3(a) of the Family Support

Orders and Agreements Garnishment Regulations, SOR/88-181, an income tax refund constitutes "garnishable moneys".

Accordingly, the Director was properly able to file the Notice of Continuing Attachment as against the Crown to recover

Marzetti's income tax refund, and thus to instigate the process which led to the garnishee summons.

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1994 CarswellAlta 346, 1994 CarswellAlta 942, [1992] S.C.C.A.No. 496...

102 In conclusion, by taking steps to garnish the income tax refund, the Director necessarily obtained priority in this

case. That is because the refund did not automatically vest in the Trustee. It could have been accessed by the Trustee

only through an application under s. 68 of the Bankruptcy Act. However, since no application was made prior to the

garnishment — indeed, since no application was ever made the Director's claim to priority is effectively unchallenged.

103 I would dismiss the appeal. By agreement among the parties, there will be no order as to costs.

Appeal dismissed.


reserved.

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Goldin, Re, 2003 CarswellOnt 2626

2003 CarswellOnt 2626, [2003] O.J. No. 2778, 124 A.C.W.S. (3d) 237, 174 O.A.C. 117...

Most Negative Treatment: Distinguished

Most Recent Distinguished: Nadeau v. Clement 12008 SKQB 1, 2008 CarswellSask 16, 67 R.P.R. (4th) 124, 163 A.C.W.S.

(3d) 652 1 (Sask. Q.B., Jan 2, 2008)

2003 CarswellOnt 2626

Ontario Court of Appeal

Goldin, Re

2003 CarswellOnt 2626, [2003] O.J. No. 2778, 124 A.C.W.S.

(3d) 237, 174 O.A.C. 117, 229 D.L.R. (4th) 736, 65 O.R. (3d) 691

IN THE MATTER OF THE BANKRUPTCY OF ROBERT IRVING GOLDIN, OF THECITY OF TORONTO, IN THE PROVINCE OF ONTARIO (RETIRED LAWYER)

SOBERMAN ISENBAUM COLOMBY TESSIS INC., TRUSTEE IN BANKRUPTCY OF THE ESTATE OF

ROBERT IRVING GOLDIN (Appellant) and BENNETT & COMPANY (Respondent / Cross-Appellant)

Gillese J.A., McMurtry C.J.O., and Rosenberg J.A.

Heard: April 3, 2003

Judgment: July 9, 2003

Docket: CA C38398

Proceedings: affirming on other grounds Goldin, Re (2002), 2002 CarswellOnt 2037, 34 C.B.R. (4th) 196 (Ont. S.C.J.);

affirming Goldin, Re (2002), 2002 CarswellOnt 388, 32 C.B.R. (4th) 38 (Ont. S.C.J.)

Counsel: Hillel David for Appellant

Frank Bennett for Respondent / Cross-Appellant

Subject: Estates and Trusts; Civil Practice and Procedure; Insolvency


X Priorities of claims

X.2 Preferred claims

X.2.c Costs and expenses of administrators

X.2.c.i Entitlement to preferred status


XIV Administration of estate

XIV.2 Trustees

XIV,2.f Legal proceedings against trustee

XIV.2.f.iii Personal liability of trustee



XIV.2 Trustees

XIV.2.k Remuneration of trustee

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XIV.2.k.i General principles

Equity

III Equitable doctrines

111.12 Miscellaneous

Torts

VII Fraud and misrepresentation

VII.1 Fraudulent misrepresentation

VII.1 .d Particular relationships

VII.1 Fiduciary relationship

VII. 1 .d.iii.0 Miscellaneous

Headnote

Bankruptcy and insolvency --- Administration of estate — Trustees — Remuneration of trustee — General principles

Property held by A Inc. and bankrupt's holding company was sold prior to bankruptcy — Solicitor was retained

to bring motion for declaration of trustee in bankruptcy's entitlement to half of proceeds from property A Inc.

agreed to pay trustee proceeds if court order obtained — Motion for court order was unexpectedly opposed by

bankrupt's remaining creditors — Remaining creditors became aware of potential claim to A Inc. funds as result

of trustee's investigation — Solicitor's retainer was terminated — Trustee entered settlement as to entitlement to A

Inc. funds — Solicitor's bill of costs was approved — Trustee claimed insufficient funds existed in estate to cover

solicitor's bill of costs — Solicitor opposed taxation of trustee's final statement of receipts and disbursements —

Trustee ordered to prepare amended statement of receipts and disbursements — Trustee did not have absolute

priority over solicitor's bill of costs — Solicitor's bill of costs could be considered "expense" within s. 136(1)(b)(11)

of Bankruptcy and Insolvency Act and was on equal footing with other expenses and fees of trustee — Legal fees

incurred by trustee to be paid on basis that legal fees form first charge on receipt — Trustee appealed — Appeal

dismissed — Equity will not permit statute to be used as instrument of fraud — Special relationship existed between

trustee and solicitor — At time trustee retained solicitor and instructed solicitor to pursue A Inc. funds, trustee knew

there were insufficient funds in estate to pay fees that would be incurred as result of those instructions — Trustee

did not pursue means of securing funds proposed by solicitor — Trustee terminated solicitor's retainer, thereby

precluding solicitor from completing A Inc. matter or taking any other steps to secure payment of fees — Trustee

chose to exhaust estate's assets and preclude recovery by solicitor with practical consequence that trustee made itself

beneficiary of solicitor's work — To permit trustee to rely on provisions of s. 136 in such circumstances would be

unconscionable as it would enable trustee commit equitable fraud with impugnity.

Bankruptcy and insolvency --- Priorities of claims — Preferred claims — Costs and expenses of administrators —

Entitlement to preferred status


to bring motion for declaration of trustee in bankruptcy's entitlement to half of proceeds from property — A Inc.


bankrupt's remaining creditors — Remaining creditors became aware of potential claim to A Inc. funds as result

of trustee's investigation — Solicitor's retainer was terminated — Trustee entered settlement as to entitlement to A

Inc. funds Solicitor's bill of costs was approved — Trustee claimed insufficient funds existed in estate to cover

solicitor's bill of costs — Solicitor opposed taxation of trustee's final statement of receipts and disbursements —


priority over solicitor's bill of costs — Solicitor's bill of costs could be considered "expense" within s. 136(1)(b)(ii)



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did not pursue means of securing funds proposed by solicitor — Trustee terminated solicitor's retainer, thereby



beneficiary of solicitor's work — To permit trustee to rely on provisions of s. 136 in such circumstances would be


Fraud and misrepresentation --- Fraudulent misrepresentation — Particular relationships — Fiduciary relationship —

General


to bring motion for declaration of trustee in bankruptcy's entitlement to half of proceeds from property — A Inc.


bankrupt's remaining creditors Remaining creditors became aware of potential claim to A Inc. funds as result

of trustee's investigation Solicitor's retainer was terminated — Trustee entered settlement as to entitlement to A

Inc. funds Solicitor's bill of costs was approved — Trustee claimed insufficient funds existed in estate to cover

solicitor's bill of costs Solicitor opposed taxation of trustee's final statement of receipts and disbursements —


priority over solicitor's bill of costs— Solicitor's bill of costs could be considered "expense" within s. 136(1)(b)(ii)





there were insufficient funds in estate to pay fees that would be incurred as result of those instructions — Trusteedid not pursue means of securing funds proposed by solicitor — Trustee terminated solicitor's retainer, therebyprecluding solicitor from completing A Inc. matter or taking any other steps to secure payment of fees — Trustee

chose to exhaust estate's assets and preclude recovery by solicitor with practical consequence that trustee made itselfbeneficiary of solicitor's work — To permit trustee to rely on provisions of s. 136 in such circumstances would beunconscionable as it would enable trustee commit equitable fraud with impugnity.

Equity --- Equitable doctrines — General

Property held by A Inc. and bankrupt's holding company was sold prior to bankruptcy — Solicitor was retainedto bring motion for declaration of trustee in bankruptcy's entitlement to half of proceeds from property — A Inc.agreed to pay trustee proceeds if court order obtained — Motion for court order was unexpectedly opposed bybankrupt's remaining creditors — Remaining creditors became aware of potential claim to A Inc. funds as resultof trustee's investigation — Solicitor's retainer was terminated — Trustee entered settlement as to entitlement to AInc. funds — Solicitor's bill of costs was approved — Trustee claimed insufficient funds existed in estate to coversolicitor's bill of costs — Solicitor opposed taxation of trustee's final statement of receipts and disbursements —Trustee ordered to prepare amended statement of receipts and disbursements — Trustee did not have absolutepriority over solicitor's bill of costs — Solicitor's bill of costs could be considered "expense" within s. 136(1)(b)(ii)

of Bankruptcy and Insolvency Act and was on equal footing with other expenses and fees of trustee — Legal feesincurred by trustee to be paid on basis that legal fees form first charge on receipt — Trustee appealed — Appeal




did not pursue means of securing funds proposed by solicitor Trustee terminated solicitor's retainer, thereby



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beneficiary of solicitor's work - To permit trustee to rely on provisions of s. 136 in such circumstances would be



Cases considered by Gillese J.A.:

Goldin, Re (2000), 2000 CarswellOnt 2799 (Ont. Bktcy.) - referred to

Guerin v. R. (1984), [1984] 6 W.W.R. 481, [1984] 2 S.C.R. 335, 13 D.L.R. (4th) 321, (sub nom. Guerin v. Canada)

55 N.R. 161, [1985] 1 C.N.L.R. 120, 20 E.T.R. 6, 36 R.P.R. 1, 59 B.C.L.R. 301, 1984 CarswellNat 813, 1984

CarswellNat 693 (S.C.C.) - considered

Kitchen v. Royal Air Force Assn. (1958), [1958] 2 All E.R. 241, [1958] 1 W.L.R. 563 (Eng. C.A.) - considered

McCormick v. Grogan (1869), L.R. 4 H.L. 82 (U.K. H.L.) - considered

Treacy, Re (1997), (sub nom. Treacy (Bankrupts), Re) 99 O.A.C. 122, 1997 CarswellOnt 1360, 46 C.B.R. (3d)

69, 32 O.R. (3d) 717, [1998] B.P.I.R. 528 (Ont. C.A.) - distinguished

Zaidan Group Ltd. v. London (City) (1990), 71 O.R. (2d) 65, 64 D.L.R. (4th) 514, 35 E.T.R. 162, 36 O.A.C.

384, 47 M.P.L.R. 1, 1990 CarswellOnt 474 (Ont. C.A.) - referred to

Zeitel v. Ellscheid (1994), 21 M.P.L.R. (2d) 247, 113 D.L.R. (4th) 609, 71 O.A.C. 134, [1994] 2 S.C.R. 142, 165

N.R. 214, 17 O.R. (3d) 782 (note), 1994 CarswellOnt 614, 1994 CarswellOnt 1156 (S.C.C.) - referred to



Generally - referred to

s. 38(1) - referred to

s. 136 - referred to

s. 136(1)(b) - referred to

s. 136(1)(b)(ii) - referred to

s. 136(1)(b)(iii) - referred to

s. 197(3) - referred to

s. 197(6)(a) - referred to

Limitation Act, 1939 (2 & 3 Geo. 6), c. 21

Generally - referred to

Solicitors Act, R.S.O. 1990, c. S.15

Generally referred to

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APPEAL by trustee in bankruptcy of judgment reported at 2002 CarswellOnt 2037 (Ont. S.C.J.) ordering that law firm's

account for legal fees should take priority over expenses and fees of trustee.

Gillese J.A.:

1 When will a trustee's statutory priority to the assets of the estate, for payment of its fees, be set aside in favour of

the estate solicitor's competing claim for payment of legal fees? It is that question which this appeal must address.

BACKGROUND

2 Robert Irving Goldin, a former lawyer and business advisor, allegedly misdirected $6.5 million that his family,

friends and business associates advanced for investment purposes. On October 12, 1999, Goldin made an assignment

in bankruptcy.

3 Initially, Ernst & Young was appointed trustee of the Goldin estate. The first creditors meeting was held on October

22, 1999, at which time the appellant, Soberman Isenbaum Colomby Tessis Inc. (the "Trustee") was appointed to replace

Ernst & Young. At the same meeting, the respondent, Bennett & Company ("Bennett"), was appointed estate solicitor.

4 Bennett was instructed to, among other things, collect $319,000 U.S.D. that was being held in trust by Artor Holdings

Inc. (the "Artor funds"). Bennett immediately brought a motion, returnable on December 1, 1999, for an order that the

Artor funds be released to the estate.

5 The Artor funds arose from a sale of property in Arizona over which Artor held a mortgage receivable. Goldin

had arranged for the mortgage through Goldwest Holdings LLC, an Arizona company. Goldin and his wife, Nancy,

were the registered stakeholders in Goldwest. Artor sold the property and took $319, 000 U.S.D. for itself. It held the

balance of the proceeds of $319, 000 U.S.D. in trust for Goldwest creditors. Artor would not release the money without

a court order.

6 At the outset, Bennett, the Trustee, and the inspectors all believed that Goldin's estate was entitled to the entire

$319, 000 U.S.D. But the Artor matter quickly became complicated. Nancy Goldin requested an adjournment in order

to bring a competing claim and to file materials. For that reason and others, the motion was adjourned to December

7, then to December 16 and again to December 23. On December 23, the motion was adjourned to February 2000 in

order to allow service on other competing claimants. On February 10, 2000, the matter was set to be heard on February

24 th . Nancy Goldin ultimately abandoned her claim.

7 The other competing claimants were, unsecured creditors of the Goldin estate. All of the competing claimants were

represented by the inspectors; they comprised a substantial part of the unsecured claims against the estate.

8 _As a result of the competing claims, the Trustee reviewed the bankrupt's records and determined that there was

some merit to one of the claims, amounting to $10, 000, and that the funds of some of the other claimants might have

been invested in Goldwest.

9 The Trustee and the inspectors had notice of the competing claimants prior to engaging Bennett.

10 Shortly after being retained, Bennett wrote to the Trustee on the issue of fees. In a letter dated November 22,

1999, Bennett wrote:

As we have discussed previously, there is no money in the estate at this time to fund any litigation or take any

examination. As a result, we are proceeding to obtain a declaration as soon as possible with respect to the sale

proceeds of the Arizona property being held by Artor Enterprises Inc . . .

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I think it advisable to set out a list of matters to be reviewed or investigated, and have an inspectors' meeting by telephone.

Unless any one or all of the inspectors are prepared to advance the moneys into the estate, or unless the trustee is prepared

to cover fees and disbursements, I would recommend to the inspectors and creditors that section 38 proceedings be taken

at this time. 1

1 1 On December 3, 1999, just after the Artor motion was first adjourned to permit Nancy Goldin to file materials,

Bennett again wrote to the Trustee regarding fees, saying:

We should discuss fees at this time. As you are aware, we have both spent a considerable amount of time since the

first meetings of the creditors. There is not sufficient funds in the Estate to cover extensive examinations and legal

proceedings at this time. We were hopeful to have obtained an order last Wednesday entitling you to the Arizona

moneys. That matter has been adjourned pending the filing of materials by Mr. Roher on behalf of Nancy Goldin.

Subject to Nancy Goldin contesting your motion, I think that it may be desirable from our mutual point of view

to request that any one or all of the inspectors advance money to the trustee by way [sic] a loan to finance more

immediate concerns. I am not able to finance the costs of litigation without knowing there [sic] that there are moneys

in the Estate to cover the legal fees and disbursements. We should come to some understanding about our respective

fees as soon as possible.

12 The Trustee did not respond to the two letters.

13 On January 31, 2000, the inspectors held another creditors meeting at which they reported that they had conflicts

of interest and were going to claim against the Artor funds.

14 On February 14, 2000, just as Bennett was about to argue the motion, the Trustee terminated Bennett's retainer

without cause. The Trustee then retained the firm Thornton Grout Finnigan ("TGF"), as the estate solicitors, to carry

on with the motion.

15 The motion did not proceed. Instead, the Trustee reached a tentative settlement with the claimants. Under the terms

of the settlement, the estate was to receive a total of $50,000 U.S.D. plus half the accrued interest (for a total amount

of $79,195 CDN), of the $319,000 U.S.D initially sought.

16 On March 8, 2000, the Trustee made a report to the creditors, which stated:

Receipt of [the settlement amount] ought to enable the Trustee to complete the administration of the estate.

The Trustee entered into this settlement, subject to the appropriate approvals, to ensure that the Trustee has

sufficient funding to complete the administration of the Estate, to avoid the risk of losing the litigation and to avoid

the risk of being liable for costs awards if the motion was adjourned to permit a trial and further costs awards if

the issue was tried and the Trustee was unsuccessful.

17 The Trustee called a meeting of creditors to approve the settlement on March 10, 2000. At the meeting, the

Trustee reported that with the money from the Artor settlement, there would be sufficient funds to "complete the

administration of the estate". The total funds in the estate were $161,065, including the $79,195 from the Artor funds.

After disbursements of $8,355, there was $152,710 available to pay trustee and legal fees, which was sufficient to pay the

fees of both the Trustee and Bennett at that time. The Trustee's fees, as of January 27, 2000, were approximately $80,000.

18 After the March 10th meeting, the Trustee incurred further expenses that, if paid, would exhaust the estate and

preclude payment of Bennett's fees.

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19 The final statement of receipts and disbursements showed the Trustee as claiming fees of $183,746. Bennett's

account was taxed at $53,494.43 on August 2, 2000.

20 The Trustee made no complaints regarding Bennett's services. It signed the certificate on Bennett's bill indicating

that the services were duly authorized and rendered and that the charges were fair and reasonable. However, the Trustee

took the position that it enjoyed a statutory priority to payment over Bennett, and therefore approved payment of only

$15,000 for Bennett's fees.

21 Bennett brought a motion to compel payment of its bill of costs. That motion was combined with the taxation of

the Trustee's fees and heard by the Deputy Registrar in Bankruptcy on September 7, 2001,

THE DECISIONS BELOW

22 At the hearing before the Deputy Registrar, the Trustee suggested that Bennett was terminated because the

inspectors were not satisfied with the solicitors' performance. The Deputy Registrar rejected this suggestion, noting that

there were no complaints from the inspectors until after Bennett's final bill was rendered and, in any event, Bennett was

prevented from achieving any measure of success by the actions of the Trustee in terminating Bennett's retainer.

23 The Deputy Registrar in Bankruptcy found that the time spent by the Trustee was reasonable and that the Trustee

did not act improperly in settling the claim to the Artor funds. 2 She allowed the sum of $176,283.14 for the Trustee's fees.

24 The Deputy Registrar also found that all of the steps taken by Bennett were authorized and that Bennett's work laid

"a significant foundation" for the recovery of the Artor funds. In an earlier decision, the Deputy Registrar found that

Bennett's fees were reasonable; there were no grounds for reducing Bennett's bill; and, the Trustee's refusal to approve

the bill in full was improper. 3

25 The Trustee argued that it was entitled to priority of payment under s. 136 of the Bankruptcy and Insolvency Act,

R.S.C. 1985 c. B-3 ("BIA").

26 The Deputy Registrar rejected this argument. She concluded that Bennett's taxed costs should be paid in full, after

payment of the Trustee's disbursements but in priority to payment of the Trustee's fees.

27 The Trustee moved to set aside the Deputy Registrar's order. The bankruptcy judge dismissed the appeal on the

basis that Bennett was entitled to priority on the ground of unjust enrichment. He reasoned as follows:

In referring to the Rule in ex parte James, the Ontario Court of Appeal in Treacy, Re (1997), 32 O.R. (3d) 717 (Ont.

C.A.) stated "Under [the rule in ex parte James], where it would be unfair or dishonest for the trustee to take full

advantage of his legal rights, the court will order him not to do so and to return money which it may have collected."

In my view, the principle to be extracted from these decisions is that, in a situation where the estate of the bankrupt

has been enriched through the efforts of, or at the expense, of a claimant, and the trustee is invoking a legal right

to retain the amount by which the estate has been enriched, the court will where it would be unfair or dishonest for

the Trustee to take advantage of its legal rights, order the Trustee to return the enrichment amount to the claimant.

In my view, the principle is explicable [sic] to the case at bar. The estate of Goldin has clearly been enriched through

the efforts of Bennett & Company to the extent of $79,195 of which $53,494.43 is claimed by Bennett & Company

as fees for its legal services toward collecting such amount. The court should not permit the Trustee to retain the

enrichment amount by asserting its legal right to statutory priorities in the BIA. It is clearly, in the circumstances

of this case, unfair to Bennett & Company for the Trustee to be permitted to rely upon its statutory priority for the

expenses and fees over legal costs in order to retain proceeds realized substantially through the efforts of Bennett &

Company in a legal proceeding in which such legal costs were incurred. I therefore conclude the Registrar did not

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err in determining that the claim of Bennett & Company should be given priority over the claim of the Trustee for

its expenses and fees based upon the principle of unjust enrichment.

THE ISSUES

28 On appeal, the Trustee argues that the bankruptcy judge erred in finding that Bennett's claim had priority over the

Trustee's claim on the equitable grounds of unjust enrichment. The Trustee maintains that, by operation of s. 136 of the

BIA, payment of its fees is to be given priority over payment of legal costs.

29 Section 136 reads as follows:

136(1) Subject to the rights of secured creditors, the proceeds realized from the property of a bankrupt shall be

applied in priority of payment as follows:

(b) the costs of administration, in the following order,

(ii) the expenses and fees of the trustee, and

(iii) legal costs;

30 Bennett raises four issues by way of cross-appeal.

I Did Bennett's account constitute a first charge under s.197 (6)(a) BIA so as to give it priority over the Trustee's

claim under s.136 (1)(b)(ii) BIA?

2. Was the Trustee personally liable for Bennett's account under s.197 (3) BIA?

3. Was Bennett's account an "expense" of the trustee under s.136 (1)(b)(ii) BIA, thereby ranking ahead of the

Trustee's fees?

4. Was Bennett entitled to a charging order under the Solicitors Act, R.S.O. 1990, c. S.15?

ANALYSIS

The Appeal

31 The appellant argues that the principle of unjust enrichment, relied on by the Deputy Registrar and the Judge in

Bankruptcy, does not apply in the circumstances of this case. I agree.

32 The principle enunciated in Treacy, Re, supra, and relied upon by the bankruptcy judge applies where a) the estate

is unjustly enriched and b) there is a contest between a creditor of the estate and the estate itself. Neither condition exists

in the instant appeal. The Trustee and Bennett are both creditors of the estate; the estate has been enriched by the efforts

of both. The issue is not whether the estate has been unjustly enriched - it has not. Rather, the question is whether, in the

circumstances of this case, the Trustee is entitled to exercise its statutory priority to payment when to so do will prevent

Bennett from recovering his fees from the estate.

33 That said, I agree with the bankruptcy judge that, on the facts of this case, it would be contrary to the principles

of equity to permit the Trustee to exercise its statutory priority. However, in my view, it is not the equitable doctrine of

unjust enrichment that properly supports this conclusion; rather, it is the doctrine of equitable fraud.

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34 Before setting out the law on equitable fraud, it is important to note that there is nothing improper in a trustee

exercising its statutory priority to payment under s.136 (1)(b). The legislature clearly intended to protect the interests of

trustees by giving priority to payment of their fees over legal costs. The bald fact that the Trustee would benefit from

application of the statutory scheme does not give rise to a claim in equity. Taking advantage of legal rights created

by statute, with nothing more, cannot be characterized as unfair or equitable fraud. To do so would be, in effect, to

characterize competent legislation as unjust. That is impermissible. Zaidan Group Ltd. v. London ( City) (1990), 71 O.R.

(2d) 65 (Ont. C.A.) at 69. A court cannot interfere with a legislative scheme merely because it does not approve of the

result produced by the statute. Zeitel v. Ellscheid (1994), 113 D.L.R. (4th) 609 (S.C.C.), at 622.

35 I turn now to consider when equitable principles may apply to alter the statutory scheme of priorities. It is a

well-established principle that equity will not permit a statute to be used as an instrument of fraud. This principle was

articulated by Lord Westbury in McCormick v. Grogan (1869), L.R. 4 H.L. 82 (U.K. H.L.), at p. 97:

The Court of Equity has, from a very early period, decided that even an Act of Parliament shall not be used as an

instrument of fraud; and if in the machinery of perpetrating a fraud an Act of Parliament intervenes, the Court of

Equity, it is true, does not set aside the Act of Parliament, but it fastens on the individual who gets title under that

Act, and imposes upon him a personal obligation, because he applies the Act as an instrument for accomplishing

fraud.

36 A much quoted statement of the scope of the doctrine of equitable fraud comes from Kitchen v. Royal Air Force

Assn., [1958] 2 All E.R. 241 (Eng. C.A.). In Kitchen , the English Court of Appeal considered whether a limitation

period arising under the Limitation Act should be postponed because the defendant solicitor had concealed the cause of

action. The court held that there was no finding, and no justification for any finding, that the defendant solicitor acted

dishonestly to conceal the plaintiffs cause of action. However, it concluded that it is not necessary to demonstrate any

improper motive in order to establish equitable fraud. The court stated, at p. 249, that:

no degree of moral turpitude is necessary to establish fraud within the section. What is covered by equitable fraud

is a matter which LORD HARDWICKE did not attempt to define two hundred years ago, and I certainly shall not

attempt to do so now, but it is, I think, clear that the phrase covers conduct which, having regard to some special

relationship between the two parties concerned, is an unconscionable thing for the one to do towards the other.

37 This description of equitable fraud has been adopted in numerous Canadian judgments. For example, in Guerin

v. R., [1984] 2 S.C.R. 335 (S.C.C.) at p.390, the Supreme Court of Canada relies upon this statement from Kitchen .

Guerin also addressed the question of the applicability of a limitation period where a cause of action had been concealed.

In Guerin ,the Indian Affairs Branch concealed the terms of a lease from a First Nations Band thereby preventing the

band from discovering a cause of action. There was no evidence of dishonesty or improper motive on the part of the

government. Nonetheless, the Court found that, considering the fiduciary relationship between the Branch and the Band,

the government's conduct amounted to equitable fraud.

38 There is a special relationship between the trustee of a bankrupt estate and the estate solicitor. The trustee has

all of the normal powers of retaining, instructing and discharging a solicitor but, as the estate is responsible for paying

the fees, the trustee does not bear the normal obligation of a client to pay the solicitor's fees incurred as a result of

those instructions. Moreover, the trustee has the best access to information about the estate's assets and best ability to

determine the estate's capacity to pay the solicitor's fees.

39 On the facts of this case, at the time the Trustee retained Bennett and instructed Bennett to pursue the Artor funds,

it knew there were insufficient funds in the estate to pay the fees that would be incurred as a result of those instructions.

40 The Trustee was twice notified in writing of Bennett's concerns over payment of fees and Bennett's desire to address

the issue as soon as possible. The Trustee did not pursue any of the means of securing funds proposed by Bennett. Instead,

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the Trustee terminated Bennett's retainer, thereby precluding Bennett from completing the Artor matter or taking any

other steps to secure payment of its fees.

41 After discharging Bennett, the Trustee told the creditors that approval of the proposed settlement would enable

it to pay all administrative expenses. In the face of that statement, it obtained the creditors approval of the settlement.

The Trustee then proceeded to incur further fees when it knew or ought to have known that payment of its additional

fees would preclude payment of Bennett's legal fees because of the priorities established by s.136 (1)(b) of the BIA. In

effect, the Trustee chose to exhaust the estate's assets and preclude recovery by Bennett with the practical consequence

that it made itself the beneficiary of Bennett's work.

42 In this case, the Trustee claims entitlement to the fruits of Bennett's labour by virtue of its priority under s.136

after: instructing Bennett to undertake legal work for the estate; ignoring Bennett's concerns over payment of fees and

suggestions for addressing the problem of fees; terminating Bennett's retainer without cause thereby preventing Bennett

from potentially collecting assets from which to recover its fees; taking a substantial benefit for the estate that had been

largely generated by Bennett's efforts; settling the Artor matter on the basis that the costs of administration would be

covered; and incurring additional fees while possessed of the knowledge that the assets of the estate would be exhausted

in paying its own claim.

43 The Trustee argues that Bennett voluntarily accepted the risk of non-payment when it accepted the retainer. That

may be, but it did not voluntarily accept the risk of having its retainer terminated, without cause, at a point where it had

played a substantial and integral role in positioning the estate to recover assets from which its fees could be paid.

44 To permit the Trustee to rely on the provisions of s. 136 in such circumstances, in my view, would be unconscionable

as it would enable the Trustee to take unfair advantage of its legal rights. In that sense, it would be to permit the Trustee

to use s. 136 as an instrument of equitable fraud.

The Cross-Appeal

45 Given the result of the appeal, there is no need to address the issues raised on the cross-appeal.

DISPOSITION

46 Accordingly, I would dismiss the appeal and the cross-appeal with costs to the respondent fixed in the amount

of $13,000, inclusive of GST and disbursements.

McMurtry J.A.:

47 I agree.

Rosenberg J.A.:

48 I agree.Appeal dismissed.

Footnotes

1 Section 38(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 provides: Where a creditor requests the trustee to take

any proceeding that in his opinion would be for the benefit of the estate of a bankrupt and the trustee refuses or neglects to

take the proceeding, the creditor may obtain from the court an order authorizing him to take the proceeding in his own name

and at his own expense and risk, on notice being given the other creditors of the contemplated proceeding, and on such other

terms and conditions as the court may direct.

2 The reasons of the Deputy Registrar are reported at (2002), 32 C.B.R. (4th) 38 (Ont. S.C.J.).

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3 Goldin, Re, [2000] 0.J. No. 2955 (Ont. Bktcy.).

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Alary, Re, 2016 BCSC 2108, 2016 CarswelIBC 3189

2016 BCSC 2108, 2016 CarswelIBC 3189, [2016] B.C.W.L.D. 7777...

2016 BCSC 2108

British Columbia Supreme Court

Alary, Re

2016 CarswellBC 3189, 2016 BCSC 2108, [2016] B.C.W.L.D. 7777, [2016] B.C.W.L.D.

7778, [2016] W.D.F.L. 6377, 2016 D.T.C. 5123, 272 A.C.W.S. (3d) 475, 42 C.B.R. (6th) 304

In the Matter of the Bankruptcy of Brigitta Dora Alary (Summary Administration)

Bruce J.

Heard: September 22, 2016

Judgment: November 16, 2016

Docket: Vancouver R142523 VA92

Counsel: Murray K. Morrison, for Trustee in Bankruptcy, Smythe Ratcliffe Insolvency Inc.

M. Scott Kerwin, for Royal Bank of Canada and the Royal Trust Company

Subject: Estates and Trusts; Family; Income Tax (Federal); Insolvency; Property



VIII.5 Trust property

VIII.5.e Miscellaneous



XIV.3 Trustee's possession of assets

XIV.3.a Jurisdiction of courts

Headnote

Bankruptcy and insolvency --- Property of bankrupt — Trust property — Miscellaneous

Bankrupt was declared to be entitled to disability tax credit and eligible for Registered Disability Savings Plan

(RDSP) that was long-term savings plan designed to assist disabled persons to save for future old age needs —Bankrupt's application for RDSP was approved by Government of Canada, with trust company designated astrustee and issuer — Bankrupt was sole beneficiary of plan and "holder" within meaning of s. 146.4 of Income Tax

Act (ITA) — Bankrupt's parents contributed $6,800 to RDSP and balance was made up of government grants and

market growth — Bankrupt filed assignment into bankruptcy, owing about $24,000 in unsecured debt — Trusteein bankruptcy asserted its interest in monies held in RDSP while trust company took position that funds were

exempt from seizure — Trustee applied for declaration as to whether funds were exempt from seizure and for order

permitting funds to be paid out— Application dismissed — Trustee limited its claim to monies contributed privately

to RDSP When bankrupt's property vested in trustee in bankruptcy pursuant to s. 67(1)(c) of Bankruptcy and

Insolvency Act (BIA), trustee could take no greater interest than bankrupt herself had in her property — Bankrupt's

right to receive funds from her RDSP was strictly limited by approved language of trust instrument — Because

bankrupt's interest in funds was limited by requirement that no funds could be paid out to creditors or to her for

purpose of satisfying creditors, trustee's ability to deal with funds was similarly restricted and it could not demand

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Alary, Re, 2016 BCSC 2108, 2016 CarswellBC 3189

2016 BCSC 2108, 2016 CarswellBC 3189, [2016] B.C.W.L.D. 7777...

release of funds to satisfy creditors — While court could exercise discretion to release funds to satisfy creditors, it

would not be fair and equitable to do so.

Bankruptcy and insolvency --- Administration of estate — Trustee's possession of assets — Jurisdiction of courts

Bankrupt was declared to be entitled to disability tax credit and eligible for Registered Disability Savings Plan

(RDSP) that was long-term savings plan designed to assist disabled persons to save for future old age needs —

Bankrupt's application for RDSP was approved by Government of Canada, with trust company designated as

trustee and issuer — Bankrupt was sole beneficiary of plan and "holder" within meaning of s. 146.4 of Income Tax

Act (ITA) — Bankrupt's parents contributed $6,800 to RDSP and balance was made up of government grants and

market growth — Bankrupt filed assignment into bankruptcy, owing about $24,000 in unsecured debt — Trustee

in bankruptcy asserted its interest in monies held in RDSP while trust company took position that funds were

exempt from seizure — Trustee applied for declaration as to whether funds were exempt from seizure and for order

permitting funds to be paid out — Application dismissed — Despite limitations on rights of trustee due to terms

of trust instrument restricting bankrupt's ability to deal with funds, court could exercise discretion to release funds

to satisfy creditors Being guided by s. 183(1) of BIA and authorities revealing relevant factors to exercise of

such discretion, it was not fair and equitable to permit monies from RDSP to be paid for benefit of creditors —

Permitting funds to be paid out from plan at this time, prior to bankrupt's 59th birthday, would result in substantial

depletion of trust fund far beyond monies available to creditors — Release of funds at this time would cause refund

to government of three dollars for each dollar paid out, causing significant prejudice to bankrupt while according

minimal benefit to creditors — Bankrupt did not contribute monies to RDSP to defeat creditors — RDSP was

designed to protect significantly disadvantaged and vulnerable group of older disabled persons — Refusing to permit

trust monies to be paid out for benefit of creditors would not erode public confidence in bankruptcy scheme.


Cases considered by Bruce J.:

Allen-Meyrick's Will Trusts, Re (1966), [1966] 1 All E.R. 740 (Eng. Ch. Div.) — referred to

Carley Estate, Re (1994), 2 E.T.R. (2d) 142, 1994 CarswellOnt 646 (Ont. Gen. Div.) — referred to

Cole, Re (1995), 32 C.B.R. (3d) 213, 1995 CarswellBC 395 (B.C. S.C.) — referred to

Copthorne Holdings Ltd. v. R. (2011), 2011 SCC 63, 2011 CarswellNat 5201, 2011 CarswellNat 5202, 339 D.L.R.

(4th) 385, [2012] 2 C.T.C. 29, 2012 D.T.C. 5006 (Fr.), 2012 D.T.C. 5007 (Eng.), (sub nom. Copthorne Holdings

Ltd. v. Minister of National Revenue) 424 N.R. 132, (sub nom. Copthorne Holdings Ltd. v. Canada) [2011] 3

S.C.R. 721 (S.C.C.) — referred to

Lifshen, Re (1977), 25 C.B.R. (N.S.) 12, 78 D.L.R. (3d) 444, 1977 CarswellSask 8 (Sask. Q.B.) — considered

Lowther v. Bentinck (1874), L.R. 19 Eq. 166 (Eng. Ch.) — referred to

Price, Re (1887), 34 Ch. D. 603 (Eng. C.A.) — referred to

Swintuch Estate v. Erickson (2016), 2016 BCSC 1623, 2016 CarswellBC 2448 (B.C. S.C.) — referred to

Vancouver A & W Drive-Ins Ltd. v. United Food Services Ltd. (1981), 13 B.L.R. 89, 10 E.T.R. 34, 38 B.C.L.R.

30, 1981 CarswellBC 409 (B.C. S.C.) — referred to

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Yorkshire Trust Co. v. 239745 British Columbia Ltd. (1983), 45 B.C.L.R. 361, 1983 CarswellBC 164 (B.C. S.C.)

— referred to



Generally — referred to


s. 67(1)(c) — considered

s. 67(1)(d) — considered

s. 183(1) considered

Canada Disability Savings Act, S.C. 2007, c. 35, s. 136


Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.)


s. 118.3 — referred to

s. 128(2)(a) — referred to

s. 146.4 [en. 2007, c. 35, s. 115] considered

Regulations considered:

Canada Disability Savings Act, S.C. 2007, c. 35, s. 136

Canada Disability Savings Regulations, SOR/2008-186


APPLICATION by trustee in bankruptcy for declaration as to whether funds in bankrupt's Registered Disability Savings

Plan were exempt from seizure and for order permitting funds to be paid out.

Bruce J.:

INTRODUCTION

1 This is an application by Smythe Ratcliffe Insolvency Inc., the Trustee in Bankruptcy for an undischarged bankrupt,

Ms. Dora Alary (the "Trustee"), for a declaration as to whether funds held in trust for the benefit of Ms. Alary in a

Registered Disability Savings Plan ("RDSP") are exempt from seizure under s. 67(1) of the Bankruptcy and Insolvency

Act, R.S.C. 1985, c. B-3. The respondent in this application is the Royal Bank of Canada as agent for the Royal Trust

Company (collectively "the Royal Bank"), which is the trustee of the RDSP in question.

2 The parties agree that there is no specific provision of the Bankruptcy and Insolvency Act or the Income Tax Act,

R.S.C. 1985, c. 1 (5th Supp.), that governs the issue. Instead, the parties agree that I have a discretion to permit the Royal

Bank, as trustee, to pay out monies from Ms. Alary's RDSP in satisfaction of her debts to identified creditors.

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SUMMARY OF THE FACTS

3 The facts are not in dispute. Ms. Alary was born in 1963 and is currently 53 years old. She has one or more severe and

prolonged impairments in physical or mental function and was declared by the Government of Canada to be entitled to

the disability tax credit under s. 118.3 of the Income Tax Act and eligible for an RDSP.

4 An RDSP is a long-term savings plan designed to assist people with disabilities to save for their future old age

needs similar to a Registered Retirement Savings Plan ("RRSP"). Unlike an RRSP, however, the Government of Canada

matches contributions to an RDSP and restricts who may contribute to such a plan and how the funds may be disbursed.

In particular, only a parent, legal guardian or trust institution may open and contribute to an RDSP and only the

beneficiary can access the funds.

5 Section 146.4 of the Income Tax Act governs RDSPs and establishes the conditions that must be satisfied before a

plan may be registered. This section of the Act effectively dictates the terms of the trust instrument for the RDSPs. In

addition, RDSPs are governed by the Canada Disability Savings Act, S.C. 2007, c. 35, and the Canada Disability Savings

Regulations, SOR/2008-186, which also mandates the preconditions for registration.

6 In or about February 2010, Ms. Alary applied to the Royal Bank for an RDSP and asked the bank to submit a plan

to the Government of Canada for its registration under the Income Tax Act, Ms. Alary's RDSP was approved with the

Royal Trust Company designated as the trustee and issuer of the plan. The Royal Bank administers Ms. Alary's plan as

agent for the Royal Trust Company. Ms. Alary is the sole beneficiary of the plan and the "holder" within the meaning

of s. 146.4 of the Income Tax Act.

7 The only privately contributed funds currently held in Ms. Alary's RDSP are in total $6,800. This money apparently

came from Ms. Alary's parents and was deposited in 2012. The balance of her RDSP is made up of grants from the

Government of Canada under the Canada Disability Savings Act and some market growth. In total the fund holds in

trust $32,250.

8 On December 18, 2015, Ms. Alary filed an assignment into bankruptcy owing about $24,000 in unsecured debt. On

December 22, 2015, the Trustee in Bankruptcy wrote to the Royal Bank advising it of the bankruptcy and asserting its

interest in the monies held in Ms. Alary's RDSP. On January 5, 2016, the Royal Bank responded that the monies held

in the plan were exempt from seizure and did not form part of the property available for distribution to creditors.

9 The relevant terms of the trust instrument governing Ms. Alary's RDSP are as folllows:

1. DEFINED TERMS

"Disability Assistance Payment" means any payment from the Plan to the Beneficiary or to the Beneficiary's estate.

2. PURPOSE OF THE PLAN

The Trustee agrees to act as trustee of the Plan, and to administer the Assets in accordance with the terms of this

Trust Agreement.

The Plan will be operated exclusively for the benefit of the Beneficiary. The Beneficiary's designation is irrevocable

and no right of the Beneficiary to receive payments from the Plan is capable of surrender or assignment. For further

clarity, an execution, seizure or other payment made to or on behalf of a creditor of the Beneficiary is deemed not

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for the benefit of the Beneficiary and the Trustee and Agent will not make any such payment without an orderissued by a court in Canada requiring the same.

7. PAYMENTS FROM THE PLAN

No payments will be made from the Plan other than:

i) Disability Assistance Payments to or for a Beneficiary; .

ARGUMENT

10 The Trustee agrees that all of the grant money contributed to the RDSP by the Government of Canada is exemptfrom seizure and limits its claim to the monies contributed to the RDSP privately. Further, the Trustee maintains thatwhile there is no specific provision in the relevant legislation that governs the seizure of monies held in RDSPs, from apublic policy perspective, and based on a proper interpretation of the Bankruptcy and Insolvency Act, the Court shouldexercise its discretion in favour of an order permitting the Royal Bank to release the funds.

1 1 In particular, the Trustee points to s. 67(1) of the Bankruptcy and Insolvency Act that exempts other types ofregistered plans, including RRSPs, but does not expressly exempt RDSPs from seizure. The fact that RDSP funds arenot included in this provision implies that they are not exempt property: Copthorne Holdings Ltd. v. R. , 2011 SCC 63(S.C.C.) at para. 108.

12 Further, the Trustee refers to s. 67(1)(c) of the Bankruptcy and Insolvency Act, which vests in the trustee inbankruptcy all property of the bankrupt and s. 67(1)(d) of the Act, which grants the trustee the same powers as thebankrupt has over all their property wherever situated.

13 In terms of public policy, the Trustee argues that while the RDSP is a benefit conferred on the bankrupt by theGovernment of Canada and federal legislation, the ability to assign oneself into bankruptcy is also a benefit. As such,the bankrupt should not be entitled to rely on both benefits to the unfair advantage of creditors.

14 In addition, the Trustee says that notwithstanding s. 146,4 of the Income Tax Act, s. 128(2)(a) of the Act deemsthe trustee in bankruptcy to be the agent of the bankrupt for all purposes of the Act. Because the trustee is the agent ofthe bankrupt, a seizure of the RDSP monies does not amount to a transfer or assignment in contravention of s. 146.4.

15 Lastly, the Trustee argues that the case law about the exempt status of RRSP monies prior to the amendment ofthe Bankruptcy and Insolvency Act (s. 67(1)), supports the proposition that RDSP monies should be able to be seized inbankruptcy: Vancouver A & W Drive-Ins Ltd. v. United Food Services Ltd. (1981), 38 B.C.L.R. 30 (B.C. S.C.).

16 The Royal Bank argues that the specific terms of the trust instrument are consistent with s. 146.4 of the Income TaxAct and were expressly approved by the Government of Canada when it approved the registration of the RDSP. Theterms of the trust instrument do not permit any payment that is not for the exclusive benefit of Ms. Alary and paymentsto creditors are deemed not to be for her benefit. In addition, the trust instrument stipulates that the funds cannot besurrendered or assigned or otherwise dealt with except as disability assistance payments to the beneficiary. These terms,argues the Royal Bank, ensure that no funds can be paid out to a creditor or to a trustee in bankruptcy for the purposeof paying creditors, without a court order to that effect. The Royal Bank also maintains that the principles of trust lawsupport its position because the law mandates the trustee to comply with the terms of the trust instrument: SwintuchEstate v. Erickson, 2016 BCSC 1623 (B.C. S.C.) at para. 47.

17 While the Royal Bank agrees that the monies contributed privately to the RDSP would constitute "property"within the meaning of the Bankruptcy and Insolvency Act, it argues that the language of the trust instrument and s. 146.4of the Income Tax Act take priority and exempt the funds from seizure in bankruptcy.

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2016 BCSC 2108, 2016 CarswelIBC 3189, [2016] B.C.W.L.D. 7777...

18 The Royal Bank argues it is an open question whether the monies in the RDSP vest in a trustee in bankruptcy. Itargues that A & W Driiie-Ins Ltd. is not conclusive because the RRSP funds in that case were fully vested in the holderof the fund and thus in the trustee in bankruptcy based on the right of the fund holder to withdraw all of the funds. Therestrictions on access to the monies held in an RDSP and the presence of government grant monies, distinguish this typeof fund. See, Yorkshire Trust Co. v. 239745 British Columbia Ltd. (1983), 45 B.C.L.R. 361 (B.C. S.C.), where the absenceof a right to withdraw the monies in an RRSP precluded creditors from seizing the funds.

19 Further, the Royal Bank maintains there is authority for the proposition that payments to creditors are not forthe "benefit" of the beneficiary of a trust fund: Lowther v. Bentinck (1874), L.R. 19 Eq. 166 (Eng. Ch.), 44 L.J. Ch. 197;Carley Estate, Re (1994), 2 E.T.R. (2d) 142 (Ont. Gen. Div.); Price, Re (1887), 34 Ch. D. 603 (Eng. C.A.); Allen-Meyrick'sWill Trusts, Re, [1966] 1 All E.R. 740 (Eng. Ch. Div.), and In re Esteem Settlement 2001 JLR 7, affd 2001 JLR 540.

20 In the alternative, the Royal Bank argues that if Ms. Alary's rights to receive the funds in the RDSP vest in theTrustee in Bankruptcy, the Trustee can have no greater rights than Ms. Alary. In this regard, prior to her 59th birthday,Ms. Alary is only entitled to withdraw 10% of the market value of the RDSP each year: Trust Instrument clause 8. In thiscase, the total permissible withdrawal would be approximately $3,229. Further, because the withdrawal occurred priorto Ms. Alary's 59th birthday, the terms of the trust instrument and the Canada Disability Savings Regulations requirethat $3 of grant money be returned to the Government of Canada for every $1 of private contribution withdrawn. Ineffect, such a withdrawal would lead to the repayment of most of the grant monies. The Royal Bank argues that thisis a huge penalty to the disabled beneficiary and one not contemplated by the Government of Canada when it enactedthe Canada Disability Savings Act.

DECISION

21 The question in this case involves a balancing between s. 67(1)(c) of the Bankruptcy and Insolvency Act, whichdefines the property of the bankrupt available for distribution to creditors, and the provisions of the Income Tax Actthat define RDSPs and the terms of the trust instrument governing distribution of trust funds.

22 "Property" is defined in s. 67(1)(c) as including, "all property wherever situated of the bankrupt at the date of thebankruptcy or that may be acquired by or devolve on the bankrupt before their discharge, including any refund owingto the bankrupt under the Income Tax Act." Whereas specific types of retirement savings plans are expressly excludedfrom the definition of "property" in s. 67(1)(c), the RDSP is not one of the enumerated plans.

23 In contrast, s. 146.4 of the Income Tax Act stipulates that an RDSP must be operated exclusively for the benefitof the plan's beneficiary and none of the benefits can be surrendered or assigned. Further, in this case the approvedlanguage of the trust instrument precludes any payment out to creditors as such payments are expressly defined as notfor the benefit of the beneficiary under the plan.

24 In my view, these seemingly conflicting statutory provisions can be reconciled. Although s. 67(1)(c) of the Bankruptcyand Insolvency Act vests in the trustee in bankruptcy any property interest held by the bankrupt, the trustee can take nogreater interest than the bankrupt in such property. In Lifshen, Re (1977), 78 D.L.R. (3d) 444 (Sask. Q.B.), MacLeod J.held that the funds held in RRSPs vested in a trustee in bankruptcy (prior to their exemption from the Act). However, theplan in question accorded the beneficiary the right to redeem funds upon request. In contrast, Ms. Alary's right to receivefunds from her RDSP is strictly limited by the trust instrument. In particular, no funds can be paid out to creditors orto her for the purpose of satisfying creditors. Because Ms. Alary's interest in the funds is limited in this manner, theTrustee's interest in and ability to deal with the funds is similarly restricted.

25 Neither Ms. Alary, nor the Trustee, may demand the release of funds in the RDSP for the purpose of satisfyingcreditors.

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Alary, Re, 2016 BCSC 2108, 2016 CarswelIBC 3189


26 Despite the limitations on the rights of the Trustee, based on the limited interest possessed by Ms. Alary in the fundswithin the RDSP, the trust instrument permits the Court to exercise a discretion to release funds to satisfy creditors.There are no enumerated factors governing the exercise of discretion by the Court. However, there is guidance in s.183(1) of the Bankruptcy and Insolvency Act, which grants the Court jurisdiction in bankruptcy to apply both law andequity in the resolution of proceedings before it.

27 A review of the authorities reveals the following factors relevant to the exercise of discretion in bankruptcyand insolvency proceedings. Generally, the Court should be guided by what is just and equitable in the particularcircumstances from the perspective of the creditors and the bankrupt. The exercise of discretion should properly balancethe interests of the parties and any prejudice. The Court's exercise of discretion must be reasonable. It must not erodeconfidence in, or frustrate the purposes of, the insolvency legislation. Lastly, the Court should endeavour to providecertainty to other commercial parties when addressing a similar situation. See, Bennett on Bankruptcy, 13th edition(Toronto, CCH Canadian Limited, 2011) at p. 564; Cole, Re, [1995] B.C.J. No. 1280 (B.C. S.C.) at para. 94; and MadamJustice Jackson & Dr. Jannis Sarra, "Selecting the Judicial Tool to get the Job Done: An Examination of StatutoryInterpretation, Discretionary Power and Inherent Jurisdiction in Insolvency Matters", in Jannis Sarra ed., Annual Reviewof Insolvency Law: 2007 (Toronto: Thomson Carswell, 2008) at 41.

28 Applying these factors to Ms. Alary's circumstances, I find that it is not fair and equitable to permit moneys fromthe RDSP to be paid for the benefit of creditors. Permitting funds to be paid out from the plan at this time (prior toMs. Alary's 59th birthday), would result in a substantial depletion of the trust fund far beyond the monies available tocreditors. A release of funds at this time would cause three dollars for each one dollar paid out to be refunded to theGovernment. In this case, Ms. Alary would be required to forgo approximately $13,000, which represents a substantialpercentage of the total funds in the trust, in order to reduce her indebtedness by $3,229. This result causes significantprejudice to Ms. Alary while according minimal benefit to her creditors.

29 There is no evidence that Ms. Alary contributed monies to the RDSP in order to defeat her creditors. Nor is thereevidence that the funds were pledged as security for credit. Moreover, there are no general concerns about fraud or deceiton the part of Ms. Alary that would dictate the exercise of the court's discretion in favour of the Trustee.

30 The underlying purpose of the RD,SP is to ensure that severely disabled persons are able to save for their retirement.In the case of disabled persons, there is an even greater societal interest in preserving the integrity of such trust funds thanin the case of an RRSP. Clearly, a severely disabled person has less ability to work and save for their old age. In my view,an RDSP is designed to protect this small and significantly disadvantaged and vulnerable group in our society. Withoutaccess to such funds, the older disabled person may no longer be able to live with dignity or even satisfy their basic needs.

31 In light of the purpose underlying the creation of an RDSP, I find that refusing to exercise my discretion to permittrust monies to be paid out for the benefit of creditors on the facts of this case would not erode public confidence inthe bankruptcy scheme. These plans can only be created with the approval of the Canada Revenue Agency and thereare strict guidelines for the identification of eligible beneficiaries, who can make contributions to the plans, and how thefunds may be distributed. In these circumstances, there are few opportunities for abuse by the beneficiary.

32 Balancing the relevant factors, I find it is not appropriate to exercise my discretion to permit trust funds to bepaid out for the benefit of Ms. Alary's creditors. Accordingly, the Royal Bank is not permitted to release funds fromMs. Alary's RDSP to the Trustee.

33 Neither party has sought costs. Thus no costs order is granted.

Application dismissed.


Court File No. 31-OR-207854-T

IN THE MATTER OF THE BANKRUPTCY OF MF GLOBAL CANADA CO., OF THE CITY OF TORONTO, IN THEPROVINCE OF ONTARIO

TOR01: 6863373: vl



PROCEEDINGS COMMENCED AT TORONTO

BOOK OF AUTHORITIES(Returnable June 12, 2017)

BORDEN LADNER GERVAIS LLPBay Adelaide Centre, East Tower

22 Adelaide St. W.Toronto, ON M5H 4E3

James D.G. Douglas / LSUC #20569HTel: (416) 367-6029Fax: (416) 367-6749


Roger Jaipargas / LSUC #43275CTel: (416) 367-6266Fax: (416) 367-6749


Evita Ferreira / LSUC #69967KTel: (416) 367-6708Fax: (416) 367-6749


Lawyers for KPMG Inc., in its capacity asThe Trustee of MF Global Canada Co., a bankrupt

factum · 2017. 6. 12. · campbell (the "bankruptcy order"). mf global canada was, prior...

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