CIBC v. The Queen, 81 DTC 5345, [1981] CTC 435 (FCTD)

Grant, DJ:—This is a hearing to dispose of the issues involved, as set forth in the order granted by Mr Justice Cattanach dated December 10, 1980. The stated case is in the following words and figures:

“1. The plaintiff, Canadian Imperial Bank of Commerce, (hereinafter referred to as “the Bank”), is a bank chartered under the laws of Canada, having its head office in the City of Toronto, in the Municipality of Metropolitan Toronto.

2. Canbury Industries Ltd, (hereinafter referred to as “the Company”), is a company incorporated pursuant to the laws of the Province of Ontario with its head office located in the City of Oakville, in the Regional Municipality of Halton, and carried on business under the registered firm name of Mefab Products at 1339 Spears Road, in the City of Oakville, in the Regional Municipality of Halton, and was at all material times engaged in the business of manufacturing iron products.

3. The Company was indebted to the Bank with regard to certain loans given by the Bank to the Company, and as security for the indebtedness the Bank held the following security:

(a) General Assignment of Accounts dated the 8th day of December, 1977, registered by way of financing statement pursuant to The Personal Property Security Act, Ontario, on December 16, 1977 as No. 7712161056883363;

(b) Security pursuant to Section 88 of The Bank Act, Canada, as follows:

(i) Notice of Intention to give security dated the 6th day of December, 1977;

(ii) Application for Credit and promise to give security dated December 23, 1977;

(iii) Assignment under section 88 dated December 23, 1977;

(iv) Contract relative to section 88 security dated December 23, 1977;

(v) Application for Credit and promise to give security dated March 2,1978;

( vi) Assignment under section 88 dated March 2, 1978.

4. The Company defaulted with regard to the repayment of loans to the Bank and the Bank demanded payment on the 26th day of September, 1978, which formal demand letter was received by the Company on the 26th day of September, 1978.

9. On the 27th day of September, 1978, the Bank appointed Peat Marwick Limited as its Agent under the aforesaid general assignment of accounts and section 88 security to take all necessary action to seize, protect and realize the properties of the Company subject to the aforesaid security of the Bank. On the 27th day of September, 1978, Peat Marwick Limited made formal demand upon Ecodyne Limited, a customer of the Company, (hereinafter referred to as “Ecodyne”), pursuant to the aforesaid general assignment of accounts, for the payment to it of all present and future indebtedness of Ecodyne to the Company. Ecodyne was indebted to the Company pursuant to certain invoices which are set out as follows:

/. The defendant, in or about the month of August, 1978, conducted an audit of the payroll records of the Company and the said audit disclosed that tax deductions at source, Canada pension plan contributions and unemployment insurance premiums were not remitted to the Receiver General of Canada in accordance with the applicable provisions of the Income Tax Act, RSC, 1952 as enacted by SC 1970-71-72, c 63, s 1, Canada Pension Plan, RSC 1970, c C.5 and the Unemployment Insurance Act, 1971, SC 1970-71-72, c 48, as amended.

8. On or about the 7th day of September, 1978, the defendant issued a notice of assessment to the Company, whereby the defendant assessed the sum of $8,639.26 against the said Company for failure to remit as required by law as more particularly described in paragraph 7 herein.

9. On or about the 7th day of September, 1978, the defendant delivered to Ecodyne a formal demand on third parties pursuant to subsection 224(1) of the Income Tax Act, RSC, 1952, as enacted by SC 1970-71-72, c 63, s 1.

10. On or about the 21st day of September, 1978, Ecodyne, pursuant to the demand on third parties, paid to the Receiver General of Canada the sum of $8,662.68.

11. On the 2nd day of October, 1978, Ecodyne paid to Peat Marwick Limited as Agent of the Bank, the sum of $2,672.52, which sum represented all of the monies outstanding with regard to the indebtedness of Ecodyne to the Company less the sum of $8,662.68, paid to the Defendant.

QUESTIONS TO BE ANSWERED

1. Does the section 88 security pursuant to the Bank Act, Canada, and the general assignment of accounts held by the Bank have priority over the demand on third parties of the defendant?

AGREEMENT BY THE PARTIES AS TO JUDGMENT TO BE DELIVERED BY THE COURT ACCORDING TO ITS CONCLUSIONS ON THE

QUESTION RAISED BY THE SPECIAL CASE

1. If the question raised by the Special Case is answered in the affirmative, then the parties agree that this Court should order:

(a) Judgment for the plaintiff in the sum of $8,662.68;

(b) Interest on the said sum of $8,662.68 to be left to the discretion of the Court hearing this matter;

(c) Costs left to the discretion of the Court hearing this matter.

2. If the question raised by the Special Case is answered in the negative, then the parties agree that this Court should render the followin judgment:

(a) The action of the plaintiff herein is dismissed;

(b) Costs left to the discretion of the Court hearing this matter.

The parties hereto, by their respective solicitors hereby consent, pursuant to Rule 475 of the Federal Court Rules, to the herein Stated Case, and ask this Court to adjudicate upon the question set out above.

STRATHY, ARCHIBALD & SEAGRAM

Per:

“W. Burden”

Solicitors for the Plaintiff.

HER MAJESTY THE QUEEN

Per: “Deputy Attorney General of

Canada. R. Tassé

per: “David Olsen”

The authority of the bank to make loans to Canbury Industries Ltd. (hereinafter referred to as “the Company” and take security therefore is found in paragraph 88(1 )(b) of the Bank Act, Canada, RSC 1970, c B-1. The giving of the security permitted vests in the bank in respect of the property therein described, the same rights and powers as if the bank had been given a warehouse receipt or bill of lading covering the same. Such subsection reads as follows:

88. (1) The bank may lend money and make advances . . .

(b) to any person engaged in business as a manufacturer, upon the security of goods, wares and merchandise manufactured or produced by him or procured for such manufacture or production and of goods, wares and merchandise

used in or procured for the packing of goods, wares and merchandise so manufactured or produced; . . .

and the security may be given by signature and delivery to the bank by or on

behalf of the person giving the security of a document in the form set out in the appropriate schedule or in a form to the like effect.

The contract between the bank and Canbury dated December 23, 1977 relative to loans to be made thereunder and referred to in paragraph 3 of the stated case contained the following paragraph:

4. The undersigned shall not remove any property covered by a security under said Section 88 except in accordance with the terms of the Bank’s written consent; provided that until default by the undersigned in payment of all or any part of the indebtedness and liability of the undersigned to the Bank or until notice by the Bank to the undersigned to cease so doing, the undersigned may sell such property from time to time in the ordinary course of business and remove the same for the purpose of delivery to purchasers thereof. The proceeds of all sales of any such property, including, without limitation, cash, debts arising from such sales or otherwise, bills, notes, evidences of title, documents and securities which the undersigned may receive or be entitled to receive in respect thereof, shall be paid or transferred to the Bank forthwith upon receipt thereof and until so paid or transferred shall be held by the undersigned in trust for the Bank. All such proceeds received by the Bank may be appropriated to such part of the indebtedness and liability of the undersigned to the Bank as the Bank in its sole discretion may see fit and the Bank may hold such proceeds unappropriated in a collateral account. Acceptance by the Bank of any assignment of such proceeds shall not be deemed an acknowledgement of any right in the undersigned to such proceeds.

It is to be noted from the above section that the proceeds from sales of property covered by the security, including debts arising from such sales and covered by such security shall be held in trust for the Bank until paid over to it.

Subsection 88(2) of such Act describes the rights and powers of the Bank under such security and the applicable portions of such section read:

(2) Delivery of a document giving the security upon property to a bank under the authority of this section vests in the bank in respect of the property therein described

(a) of which the person giving security is the owner at the time of the delivery of the document, or

(b) of which that person becomes the owner at any time thereafter before the release of the security by the bank, whether or not the property is in existence at the time of the delivery,

the following rights and powers, namely:

(c) if the property is property on which security is given under paragraph 1(a), (b), (e), (h), or (i), the same rights and powers as if the bank had acquired a warehouse receipt or bill of lading in which such property was described; or

(d) if the property is property on which security is given under paragraph 1(c), (d), (f) or (g), a first and preferential lien of claim thereon for the sum secured and interest thereon, and as regards a crop as well before as after the severance from the soil, harvesting or threshing thereof, and, in addition thereto, the same rights and powers in respect of the property as if the bank had acquired a warehouse receipt or bill of lading in which the property was described; and all rights and powers of the bank subsist notwithstanding that the property is affixed to real or immoveable property and notwithstanding that the person giving the security is not the owner of that real or immoveable property;

and all such property in respect of which such rights and powers are vested in the bank under this section is for the purposes of this Act property covered by the security.

The effect of the bank taking a warehouse receipt or bill of lading is set out in section 86:

86. (1) The bank may acquire and hold any warehouse receipt or bill of lading as security for the payment of any debt incurred in its favour, or as security for any liability incurred by it for any person, in the course of its banking business.

(2) Any warehouse receipt or bill of lading acquired under subsection (1) vests in the bank, from the date of the acquisition thereof,

(a) all the right and title to the warehouse receipt or bill of lading and to the goods, wares and merchandise covered thereby of the previous holder or owner thereof, and

(b) all the right and title to the goods, wares and merchandise mentioned therein of the person from whom the goods, wares and merchandise were received or acquired by the bank, if the warehouse receipt or bill of lading is made directly in favour of the bank, instead of to the previous holder or owner of the goods, wares and merchandise. 1966-67, c 87, c 86.

The right of the Bank to priority in such cases is described in subsection 89(1), which reads:

89. (1) All the rights and powers of the bank in respect of the property mentioned in or covered by a warehouse receipt or bill of lading acquired and held by the bank, and those rights and powers of the bank in respect of the property covered by a security given to the bank under section 88 are the same as if the bank had acquired a warehouse receipt or bill of lading in which such property was described, have, subject to the provisions of subsection 88(4) and of subsection

(2) and (3) of this section, priority over all rights subsequently acquired in, on or in respect of such property, and also over the claim of any unpaid vendor, but this priority does not extend over the claim of any unpaid vendor who had a lien upon the property at the time of the acquisition by the bank of the warehouse receipt, bill of lading or security, unless the same was acquired without knowledge on the part of the bank of such lien, and where security is given upon property under paragraph 88(1 )(g), such priority shall exist notwithstanding that such property is or becomes affixed to real or immoveable property.

In the case of Flintoft v Royal Bank of Canada, [1964] SCR 631, the facts were similar to those in the present case, except that the contest was between the bank and the customer’s trustee in bankruptcy. There, the agreement between the bank and its customer, relative to the book debts owing to the customer for goods sold by it and covered by the bank’s security was also similar.

The Court of Appeal for Manitoba held that to the extent that the book debts of the customer, outstanding at the time of the bankruptcy represented debts owing to the customer for goods sold and covered by the bank’s section 88 security, they should be paid to the bank. An appeal therefrom to the Supreme Court of Canada was dismissed.

Judson, J, in delivering the judgment of the Court stated, at page 633:

By agreement in writing between bank and customer an express trust of these accounts was created in favour of the bak in the following terms:

The proceeds of all sales by the Customer of the property or any part thereof, including, without limiting the generality of the foregoing, cash debts arising from such sales or otherwise, evidences of title, instruments, documents and securities, which the Customer may receive or be entitled to receive in respect thereof, are hereby assigned to the Bank and shall be paid or transferred to the bank forthwith, and until so paid or transferred shall be held by the Customer in trust for the Bank. Execution by the Customer and acceptance by the Bank of an assignment of book debts or any additional assignment of any of such proceeds shall be deemed to be in furtherance hereof and not an acknowledgement by the Bank of any right or title on the part of the Customer to such book debts or proceeds.

In addition to the creation of the trust, the agreement rejects in advance any suggestion that the bank’s right to these accounts will depend upon a valid assignment of book debts. This agreement does no more than set out the terms upon which a bank as holder of a s 88 security permits a customer to sell the property of the bank in the ordinary course of business.

and at page 634-5:

When these debts, the proceeds of the sale of the s 88 security, come into existence they are subject to the agreement between bank and customer. As between these two the customer has nothing to assign to the bank. The actual assignment of book debts which was signed does no more than facilitate collection. Any other assignment, whether general or specific, of these debts by the customer to a third party would fail unless the third party was an innocent purchaser for value without notice.

and at page 636:

There has never been any doubt of the right of the owner to trace the money or any other form of property into which the money has been converted (Underhill’s Law of Trusts and Trustees, 11th ed, p 561).

His Lordship also referred to the case of Banque Canadienne Nationale v Lefaivre et al, [1951] Que KB 83; 32 CBR 1, in which the facts were identical with those in the Flintoft case and in which it was held that the claims against the buyers of the goods became the property of the bank by virtue of its section 88 security and never were the property of the customer so as to be affected by the assignment in bankruptcy.

The Fl intoft case was followed in Royal Bank of Canada v Government of Manitoba, [1978] 1 WWR 712; 27 CBR (NS) 30 (Man QB). This was a contest between the bank, which held security under section 88 of the Bank Act and wage earners claiming, under a statutory lien created by the Payment of Wages Act. The bank had obtained its security under section 88 prior to the date that the workmen’s claim for wages arose. At page 38 of 27 CBR (NS), it is stated by Dewar, CJQB:

From the time the bank took the security from Walden all property of the nature described in the security then owned by Walden and, upon acquisition, all property of like nature acquired at a later time while the security remained in effect became the property of the bank. Walden’s position was that of a bare trustee for the bank. The lien contended for here could not and did not attach to any of the property either before the security was perfected or, in the case of after-acquired property, before acquisition.

The disputed fund consisted entirely of moneys payable upon the disposition of the bank’s property and cannot be considered in any sense as being Walden’s property. Accordingly, it is not affected by the statutory lien the defendant relies upon.

Other similar decisions are Canadian Imperial Bank of Commerce v Sur- kan (1978), 84 DLR (3d) 548; 27 CBR (NS) 167 (Alta Dist Ct), and Re Otto Grundman Implements Ltd (1970), 9 DLR (3d) 206; 72 WWR 1 (Man CA).

In Re Trilateral Enterprises Ltd (1977), 74 DLR (3d) 517; 14 OR (2d) 712 (OSC), the assignment of the book debts in favour of a bank was in the same form as to vesting of the assets covered thereby as in the present case. At page 714 thereof, Henry, J stated:

It is important to note that this assignment took effect immediately upon its execution to vest the debtor’s book debts in the bank. It was therefore not merely a floating charge which required some further step or event such as notice or default to crystallize it and create a specific charge. It was from the outset a specific charge on all the debtor’s book debts then existing or arising in future.

In Dauphin Plains Credit Union Limited v Xyloid Industries Ltd and B (1980), 33 CBR 107, Pigeon, J, in delivering the judgment of the Court at page 120, stated:

It should be first observed that, for reasons similar to those on which the decision in the Avco case, surpa, was based, the claim for Pension Plan and unemployment insurance deductions cannot affect the proceeds of realization of property subject to a fixed and specific charge. From the moment such charge was created, the assets subject thereto were no longer the property of the debtor, except subject to that charge. The claim for the deductions arose subsequently and thus cannot affect this charge in the absence of a statute specifically so providing.

However, the floating charge did not crystallize prior to the issue of the writ and the appointment of the receiver. In the present case it makes no difference which of the two dates is selected, both are subsequent to the deductions.

(See Industrial Bel at io ns Board v Avco Financial Services Realty Limited, [1979] 2 SCR 699.)

In Alberta Energy Company Ltd v Project Management Corporation, [1981] 2 WWR 50, (Alta QB), it was held that a prior general assignment of book debts granted by a bankrupt to a bank took priority over a claim by the Crown for the employer’s contributions to the Unemployment Insurance Act and the Canada Pension Plan Act and that it was not necessary to complete the assignee’s interest in the book debts that notice be given to those owing such debts. The plaintiff, hereinafter also referred to as “the bank”, submits that by the terms of the security agreement between the company and the bank dated December 23, 1981 and particularly paragraph 4 thereof (supra), and also by virtue of section 88 of the Bank Act, the plaintiff became the owner of all its said customer’s inventory and when the latter disposed of part thereof to Ecodyne Limited, all amounts owing by such customer for the same became the property of the bank and no portion thereof remained owing by Ecodyne to Canbury to which the Crown’s formal demand on third parties, issued pursuant to subsection 224(1) of the Income Tax Act could attach. It is, however, submitted that all such moneys owing by Ecodyne were trust funds belonging to the bank and that on payment thereof to the defendant, the plaintiff is entitled to follow and recover the same from the defendant.

On the authority of the cases above referred to, I accept such submissions.

Subsections 224(1) and (2) of the Income Tax Act read as follows:

224. (1) When the Minister has knowledge or suspects that a person is or is about to become indebted or liable to make any payment to a person liable to make a payment under this Act, he may, by registered letter or by a letter served personally, require him to pay the moneys otherwise payable to that person in whole or in part to the Receiver General of Canada on account of the liability under this Act.

(2) The receipt of the Minister for moneys paid as required under this section is a good and sufficient discharge of the original liability to the extent of the payment.

Counsel for the Crown contends that when it served its notice under subsection 224(1) of such Act it became an innocent purchaser of the debt owing by Ecodyne for value without notice and refers to the case of Union Bank of Halifax v Edgar K Spinney and George B Churchill, [1906] 38 SCR 187, where it is stated, at page 196:

The full protection of the court will be extended to bona fide purchasers without notice either express or constructive . . .

It is urged that the defendant was a purchaser for value by reason of the fact that it gave to Ecodyne a discharge of its liability to pay either the bank or Canbury by virtue of subsection 224(2) (supra). Such also refers to Williams v Leonard and Sons (1896), 26 SCR 406.

While the giving of such a release by the Crown may amount to valuable consideration, it is my Opinion that the Crown is not a purchaser of such debt, but the giving of the notice under subsection 224(1) is entirely a process of attachment. There is no element of purchase in the seizure.

I am of the opinion that while the bank, by virtue of section 88, became the owner of inventory and proceeds of sale thereof by the company, the interest of the bank and proceeds of sales made by the company following the giving of such security was of a fixed equitable nature and that it was not necessary it should give notice to the Crown or Ecodyne of its interest to crystallize the same. (See Hamilton Avnet International v Canatron Controls Ltd (1978), 20 OR (2d) 54 (Co Ct).)

In such case, there was no security under section 88 of the Bank Act. The latter relied entirely on a general assignment of book debts which is therein described as a purely equitable agreement given for valuable consideration and referred to a specific fund and operated as a fixed and specific security and not by way of a floating charge. To the ordinary execution creditors, it was held that the moneys should be paid to the bank but as to the claim of the Crown under section 224 of the Income Tax Act, (supra), it was held that the demand formed an equitable charge in favour of the Crown as such notice was prior in time to any claim made therefor by the bank.

Relying on such case, counsel for the Crown then submits that the interest of the Crown is also of an equitable nature and that as between the two claimants herein, the Crown should succeed in retaining such funds because it served a demand under section 224(1) before the bank took any steps by way of recovery thereof. (See Bank of Montreal v Union Gas Co of Canada Ltd (1970), 7 DLR (3d) 25; [1969] 2 OR 776, (OCA).)

However, in Royal Bank of Canada v Attorney General of Canada, [1977] 6 WWR 170, at page 182, Mr Justice HJ MacDonald stated:

The decision in Bank of Montreal v Union Gas Co [1969] 2 OR 776, [1969] CTC 686; 69 DTC 5441, 7 DLR (3d) 25 (CA), which I very respectfully feel erred in considering that the garnishment under the Income Tax Act created an equitable charge, relied upon Tailby v Official Receiver, supra, in defining an equitable charge.

The Tailby case, in my respectful opinion, is of no assistance in support of the proposition advanced that the Income Tax Act creates an equitable charge. The case relied on for this proposition is AG Can v Workmen’s Compensation Bd of BC, 63 WWR 480, [1968] CTC 111; 68 DTC 5072, 67 DLR (3d) 16 (BC). This latter case was a contest as to priority between a garnishee under the Income Tax Act and claims for unpaid assessments under the Workmen’s Compensation Act, RSBC 1960, c 413. In light of the authorities I have quoted, I have difficulty in accepting the statement in this case that a garnishing order forms an equitable charge on a debt owing by the garnishee. If the Income Tax Act intended to create such a charge it would have been very simple to say so in the legislation. My understanding is that the provision in the Income Tax Act means no more and no less than what it says. The Act does not give the receiver general power to take property of one to pay the debt of another.

Such decision was approved by the Appellate Division of the Alberta Supreme Court found at [1979] 1 WWR 479; 29 CBR (NS) 227, where it is stated, at 229 by McGillivray, CJA:

We are all of the view that the decision of this court in University of Calgary v Receiver Gen of Can, [1978] 2 WWR 465, CBR (NS) 41, 85 DLR (3d) 392, 8 AR 533, enunciated two propositions: firstly, a demand made under s 224 does not convey the indebtedness to the Crown, nor does it impress it with a trust; and, secondly, the minister does not, by virtue of the demand, become a holder of a security. In short, the Crown does not acquire an equitable interest in the indebtedness.

In this regard, we respectfully differ from the alternate reasons for judgment given by the Ontario Court of Appeal in Bank of Montreal v Union Gas Co, [1969] 2 OR 776 at 781. [1969] CTC 686, 69 DTC 5441, 7 DLR (3d) 25.

I prefer, in this case, to follow the judgment of the Alberta Court of Appeal and hold that the Crown had not secured an equitable interest in the moneys in question, by virtue of the notice served by it. It is also important to note that in the Bank of Montreal v Union Gas case, the bank did not have security under section 88 of the Bank Act in that they relied on an assignment of book debts.

The answer, therefore, to the question:

“Does the section 88 security pursuant to the Bank Act, Canada, and the general assignment of accounts held by the Bank have priority over the demand on third parties of the defendant?” is “Yes”.

Judgment, therefore should go for the plaintiff against the defendant in the sum of $8,662.29, together with interest on the said sum of money from the 21st day of September, 1978 at the rate of 8% per annum.

Pursuant to the request of counsel for both parties, there should be no order as to costs.

If counsel wish to speak to me as to the rate of interest I have granted they may secure an appointment for the purpose.