Canada v. 158377 Canada Inc., docket ITA-4127-95

                                                                                                                                  Date: 20001120

                                                                                                                         Docket: ITA-4127-95

BETWEEN: IN THE MATTER OF THE INCOME TAX ACT

- and -

IN THE MATTER OF AN ASSESSMENT OR ASSESSMENTS

DETERMINED BY THE MINISTER OF NATIONAL REVENUE

UNDER ONE OR MORE OF THE FOLLOWING STATUTES:

THE INCOME TAX ACT,

THE CANADA PENSION PLAN

THE EMPLOYMENT INSURANCE ACT

AGAINST

158377 CANADA INC.

Judgment debtor

AND:

AUBERGE BON CONSEIL (1988) INC.

Garnishee

AND:

SOCIÉTÉ EN COMMANDITE

NOTRE DAME DU BON CONSEIL

Opposing party

REASONS FOR ORDER

NADON J.

[1]         The Société en commandite Notre-Dame du Bon Conseil (the "Société") appeals from the judgment rendered on November 16, 1999 by Prothonotary Richard Morneau, who dismissed its motion in opposition to the immovable seizure of an immovable situated at 201 rue Mathieu in Notre-Dame du Bon Conseil, Province of Quebec (the "immovable"), made by Her Majesty the Queen (the "creditor") on July 8, 1999.

[2]         The prothonotary's judgment reads as follows:

IN VIEW OF the motion by the Société en commandite Notre-Dame du Bon Conseil (hereinafter "the objector") under art. 597 of the Code of Civil Procedure in objection asking the Court to vacate an immovable seizure made on July 8, 1999 of an immovable which the objector claims as owner;

                WHEREAS the parties apparently only recently learned that the garnishee Auberge Bon Conseil (1988) Inc. (hereinafter "Auberge Bon Conseil") had had its registration officially struck off on or about July 31, 1987;

                WHEREAS this deletion, which resulted in the dissolution of Auberge Bon Conseil, was caused by the latter's fault in reporting as required by the provincial legislation;

                WHEREAS further Auberge Bon Conseil left this deletion unchallenged even if since July 25, 1995 it had been subject to a provisional garnishment order herein;

                WHEREAS there was no evidence that since that deletion two of the entities which had a definite interest in seeking the revocation of the deletion, namely the then directors or shareholders of Auberge Bon Conseil or the objector, had in fact taken any action to this effect;

                IN ACCORDANCE WITH the four preceding paragraphs, the Court clearly cannot set up this deletion of Auberge Bon Conseil against the judgment creditor and consider that the final garnishment order issued on December 18, 1998 and the writ of execution issued on May 31, 1999 are invalid and non-executory;

                WHEREAS in the Court's opinion under the Civil Code of Quebec ("C.C.Q.") it is conceivable that two Paulian actions may coexist, namely that of arts. 1776 to 1778 C.C.Q. and that of arts. 1631 to 1636 C.C.Q.;

                WHEREAS the judgment creditor is free to rely on arts. 1631 et seq. C.C.Q. ("the Paulian action"), especially as the Court considers that in the circumstances of the case at bar art. 1778(2) of the C.C.Q. means that the business sale provisions clearly do not apply to the sale of January 26, 1995 between Auberge Bon Conseil and the objector;

                WHEREAS based on Québec (Sous-ministre du revenu) v. Deschênes (Court of Quebec, case 200-02-016759-971, October 17, 1997, Judge Bond) and the case law cited therein, the Paulian action may be relied on to challenge an objection to his seizure and accordingly a creditor may thus act and execute without first obtaining a court ruling that the act may not be set up against him;

                WHEREAS finally the written submissions of the judgment creditor filed on October 1 and October 14, 1999 persuade the Court that all the conditions for the Paulian action have been met;

                WHEREAS further the objector cannot claim damages in this Court in connection with a motion;

                In view of the foregoing, the objection to the seizure by the Société en commandite Notre Dame du Bon Conseil must be dismissed with costs.

[3]         The relevant facts may be summarized as follows: 158377 Canada Inc. became a debtor of the creditor in the amount of $36,255.32 for failing to pay its taxes. The debtor's financial statements for the fiscal year ending December 31, 1992 disclosed the existence of an advance of funds in the amount of $139,056.00 in favour of Auberge Bon Conseil (1988) Inc. ("Auberge").

[4]         On August 29, 1994, the Minister sent Auberge a Requirement to Pay notice for the purpose of recovering the tax debt of 158377 Canada Inc.

[5]         On July 25, 1995, the creditor obtained an interim garnishee order against Auberge. The order of Rouleau J. inter alia ordered Auberge to declare under oath all the sums it owed or might owe to 158377 Canada Inc. and more particularly pursuant to advances granted by 158377 Canada Inc. in its favour.

[6]         On September 12, 1995, Auberge filed a negative declaration. On December 18, 1998, the creditor obtained a garnishee order absolute against Auberge in the amount of $36,255.32.

[7]         On May 31, 1999, this Court issued a writ of execution enjoining the sheriff and deputy sheriffs of the judicial district of Drummondville, and any other bailiff who is a member of the Ordre professionnel des huissiers de justice du Québec, to seize the immovable or real property located within their jurisdiction and belonging to Auberge, and to sell it in order to realize the sums indicated in the said writ.

[8]         On July 8, 1999, the immovable was seized in execution of the writ of execution issued on May 31, 1999. This seizure is the subject matter of the present proceedings.

[9]         At this point I must interrupt the chronology of events to go back and relate certain other facts that are essential to a proper understanding of the dispute between the parties.

[10]       On January 26, 1995, Auberge sold the immovable with structure to the Société. Auberge also sold the purchaser the custom and goodwill of its business, a home for senior citizens, the inventoried merchandise, all the furniture, accessories and equipment used in the operation of the business, and its rights to the telephone numbers now in use as well as the exclusive right for the purchaser to use the corporate name. Excluded from this sale were Auberge's bank accounts and customer accounts. The sale price, as it appears in the contract, is as follows:

[Translation]

1.              the sum of ONE DOLLAR ($1.00) for the custom and goodwill;

2.              the sum of ONE HUNDRED THOUSAND DOLLARS ($100,000.00) for the land;

3.              the sum of SEVEN HUNDRED TWENTY-FIVE THOUSAND DOLLARS ($725,000.00) for the buildings;

4.              the sum of FIFTY-FIVE THOUSAND DOLLARS ($55,000.00) for the equipment;

5.              the sum of SIXTY-FOUR THOUSAND DOLLARS ($64,000.00) for furnishings;

6.              the sum of TEN THOUSAND DOLLARS ($10,000.00) for the rolling stock;

7.              the sum of SIXTEEN THOUSAND DOLLARS ($16,000.00) for the parking.

MAKING a total of NINE HUNDRED AND SEVENTY THOUSAND AND ONE DOLLARS ($970,001.00) payable as follows:

A. A sum of THREE HUNDRED FIFTY-NINE THOUSAND FIVE HUNDRED DOLLARS ($359,500.00) payable for and to the discharge of the vendor, to Crédit Industriel Desjardins Inc. to whom an equal sum is owing under the following instrument, namely:

– Deed of obligation by Auberge Bon Conseil Inc. in favour of Crédit Industriel Desjardins Inc. received by Mr. Jean-Pierre Gauvreau, Notary, on December 14, 1988 and published in the registry office of the registration division of Drummond on December 16, 1988, under number 317924;

– Deed of sale with assumption by Auberge Bon Conseil Inc. in favour of 2627-5164 Québec inc. received by Mr. Jean-Pierre Gauvreau, Notary, on December 14, 1988, and published in the registry office of the registration division of Drummond on December 16, 1988, under number 317925;

The purchaser declares that it has examined the said deeds and undertakes, to the complete exoneration of the vendor, to fulfill each and every one of the clauses, obligations and conditions in the place of the said hypothecary creditor.

B. Through the issuance of a non-interest bearing demand note in the amount of FOUR HUNDRED THIRTY-EIGHT THOUSAND TWO HUNDRED FIFTY-EIGHT DOLLARS ($438,258.00) payable by the purchaser to the vendor.

C. Through the issuance in favour of the vendor of one hundred seventy-two thousand two hundred forty-three (172,243) shares in the pooled funds of the "Société en commandite Notre-Dame du Bon Conseil" of a value of ONE DOLLAR ($1.00) per share.

[11]       Appended to the contract of sale is a sworn statement by Messrs Yves Martineau and Denis Custeau, respectively president and secretary of Auberge, according to which the sole creditor of Auberge is, as of January 26, 1995, Crédit Industriel Desjardins Inc. in the amount of $354,500.00. The name of the creditor in this proceeding, and the amount of her claim, do not appear anywhere in the Auberge statement.

[12]       It should be noted that Messrs Martineau and Custeau also signed the deed of sale for the Société, Mr. Custeau as president and Mr. Martineau as secretary.

[13]       On July 31, 1997, Auberge was voluntarily dissolved under section 28 of the Quebec Companies Act.

[14]       I come back now to the events of July 1999. On July 21, the Société filed a notice of motion to oppose and vacate the execution made on the immovable on July 8, 1999.

[15]       On August 31, 1999, the Société filed an amended notice of motion asking this Court, inter alia, to declare that the seizure made on July 8, 1999 was contrary to law, to rule that it be vacated and to order the release of the property.

[16]       On October 1, 1999, the creditor filed a record in reply. The component parts of this record are the affidavit of Mr. Owen Duguay, dated September 30, 1999, and the written submissions of the creditor. Mr. Duguay's affidavit reads as follows:

[Translation]

1.              I am the collection officer responsible for the case of 158377 Canada Inc.;

2.              On or about August 29, 1994, I sent a Requirement to Pay to Auberge Bon Conseil (1988) Inc., as is indicated in exhibit A in support of my affidavit;

3.              I learned of the sale between Auberge Bon Conseil (1988) Inc. and Société en commandite Notre-Dame du Bon Conseil dated January 26, 1995 (the deed of which appears as exhibit B in support of my affidavit), on December 1, 1998;

4.              The sale of January 26, 1995 between Auberge Bon Conseil (1988) Inc. and Société en commandite Notre-Dame du Bon Conseil was made in fraud of the rights of the Department of Revenue Canada since Auberge Bon Conseil (1988) Inc. did not declare the Department as creditor, as is apparent from the sworn statement of Auberge Bon Conseil (1988) Inc. placed in support of my affidavit as exhibit C;

4. [sic]     Notwithstanding all of my inquiries, including those addressed to the Société en commandite Notre-Dame du Bon Conseil, I have been unable to determine whether the portion of the sale price that should have been paid by demand note was in fact paid;

[17]       Included as exhibits in support of Mr. Duguay's affidavit are the Requirement to Pay sent to Auberge, the contract of sale between Auberge and the Société, and Auberge's sworn statement made by Messrs Martineau and Custeau to comply with article 1768 of the Civil Code of Québec.^[1]

[18]       Mr. Duguay's affidavit was filed in support of the written submissions of the creditor. I note, incidentally, that the creditor did not file any motion or other proceeding asking this Court to declare that the sale of the immovable not be set up against it.

[19]       In its written submissions, the creditor does, however, raise the fact that the sale may not be set up. The following are the creditor's arguments:

1.          Her claim is prior to the sale. She says Auberge became a debtor when it received the Requirement to Pay, exhibit A in Mr. Duguay's affidavit.

2.          Auberge's sale to the Société is a juridical act within the meaning of article 1631 of the Civil Code of Québec,^[2] causing prejudice to the creditor. The creditor says Auberge sold all of its assets other than its bank accounts and customer accounts to the Société. Moreover, there is a non-arm's length relationship between the Société and Auberge, in that the shareholders and directors of Auberge, Messrs Custeau and Martineau, are also the shareholders and directors of 9004-0114 Québec Inc., which at the time was the active partner of the Société.

3.          The sale price of $970,001.00 was to be paid as follows:

(i)          $359,500.00 by subrogation to the rights and obligations of the mortgagee;

(ii)         the issuance of a demand note of $438,258.00;

(iii)        the issuance of 172,243 shares in the pool of the Société's capital;

The creditor's investigation, conducted by Mr. Duguay, was unable to find out whether the portion of the sale price that was to be paid by demand note had in fact been paid.

4.          Since the shareholders and directors of Auberge are the same as those of the Société's active partner, the Société "[Translation] undoubtedly knew that this sale would render Auberge Bon Conseil (1988) Inc. insolvent". Furthermore, when it declared its list of creditors under oath, Auberge failed to enter the name of the creditor in this action and the amount of its claim.

[20]       The parties raised a number of issues both before the prothonotary and before me on appeal. They are the issues addressed by the prothonotary in his decision. For the purposes of the decision that I must render on this case, I am of the opinion that an answer to the issue in relation to article 1631 of the Civil Code of Québec is sufficient to dispose of the matter. On this issue, the prothonotary held that the creditor had discharged her burden of proof. He stated:

WHEREAS finally the written submissions of the judgment creditor filed on October 1 and October 14, 1999 persuade the Court that all the conditions for the Paulian action have been met;

[21]       The prothonotary refers in his order to the creditor's written submissions of October 1 and October 14, 1999. The only issue discussed by the creditor in her written submissions of October 14, 1999 is the issue concerning the Minister's need to obtain, prior to the execution of an immovable seizure, a declaration that the contract of sale of January 26, 1995 may not be set up against her.

[22]       In support of her written submissions, the creditor drew my attention to a fair number of decisions rendered by the Quebec Superior and Provincial courts. This case law is clear authority for the proposition that a creditor may obtain and execute a writ of seizure without first obtaining a judicial declaration of inopposability. However, it is also clear from the judgments cited by the creditor that where a Paulian action is filed, the creditor must contest this opposition and ask the Court to declare that the impugned transaction may not be set up in opposition to her. Among the conclusions of the relevant judgments to which I was referred is one declaring the impugned transaction inopposable to the creditor. This conclusion, needless to say, is absolutely necessary in order to defeat an opposition such as the one filed by the Société in the case at bar. Although he held that the conditions for the Paulian action had been met, the prothonotary did not hold that the transaction of January 26, 1995 was inopposable to the creditor. I presume that this was what he had in mind, but it is not what he did. He simply held that there were grounds to dismiss the opposition filed by the Société. I am far from certain that the prothonotary could find that the sale of January 26, 1995 was inopposable, since the creditor had not filed any request for such a finding. The only request appears to be the one made by the creditor's counsel, Mr. Bernard, in his written submissions. I strongly doubt that this was sufficient to enable the prothonotary to render an order holding that the sale of January 26, 1995 was inopposable. In all the decisions cited by the creditor on this point, there is always a motion filed by the creditor, in the context of its contestation of the opposition, asking the Court to declare the impugned transaction inopposable against it.

[23]       In any event, for the reasons that follow, I conclude that the Société's appeal should be allowed, since the creditor has in my opinion in no way demonstrated that the conditions for the Paulian action prescribed by article 1631 of the Civil Code of Québec have been met.

[24]       The only evidence filed by the creditor in support of her claims is Mr. Duguay's affidavit and the exhibits it contains. The Société, in its written arguments of October 21, 1999, filed in reply to the creditor's written submissions, submits that this evidence is insufficient. I agree with the Société that the evidence filed by the creditor does not enable me to declare that the sale of January 26, 1995 cannot be set up against the creditor.

[25]       To obtain such a declaration under article 1631 of the Civil Code, a creditor must demonstrate that he suffers prejudice through a juridical act made by his debtor in fraud of his rights, and more particularly an act by which the debtor renders or seeks to render himself insolvent, or by which, being insolvent, he grants preference to another creditor. The evidence provided by the creditor does not demonstrate in any way that she suffered prejudice through the sale of January 26, 1995. We know absolutely nothing about Auberge's financial situation at the time of the sale of January 26, 1995. Was Auberge insolvent at that date? Did Auberge render itself or did it seek to render itself insolvent through the sale of the immovable? There are no answers to these questions in the record. All we know is that Auberge sold to the Société the immovable, the custom and goodwill of its business, the inventoried merchandise, the furniture, accessories and equipment used in the operation of the business, its rights to the telephone numbers and the exclusive right to the use of the corporate name. Excluded from this sale were Auberge's bank accounts and customer accounts.

[26]       I have no evidence concerning the bank accounts or Auberge's customer accounts. In fact, I repeat, the evidence does not support any of the creditor's claims that Auberge was insolvent as of January 26, 1995, or was seeking to render itself insolvent through the sale of the immovable.

[27]       The prothonotary accepted the creditor's claims and concluded that the conditions for the Paulian action had been fulfilled. In my opinion the creditor's claims, to which I have already alluded, in no way lead to the conclusion reached by the prothonotary. Those claims -- and I say this with respect for the prothonotary -- in no way address the relevant issue, namely, whether Auberge was insolvent as of January 26, 1995. The fact that there was a non-arm's length relationship between the Société and Auberge in no way leads to the conclusion that it was insolvent. What the creditor had to show was Auberge's insolvency. The creditor presumes, from the fact of the sale of January 26, 1995, that Auberge had become insolvent, and this presumption appears to have been accepted by the prothonotary. With respect, I do not see how Auberge's insolvency can be presumed by reason of the sale of January 26, 1995. Nor can it be presumed that the sale constituted an attempt by Auberge to avoid its financial obligations to its creditors, including the creditor in this case.

[28]       The creditor could easily have subpoenaed Messrs Martineau and Custeau and obtained from them the relevant information concerning Auberge's financial situation before and after the sale of January 26, 1995. The creditor made no attempt along these lines and consequently she has failed to persuade me of the need to declare that the sale of January 26, 1995 may not be set up against her.

[29]       In his affidavit of September 30, 1999, Mr. Duguay states in paragraph 3 that he has known since December 1, 1998 that Auberge had sold the immovable to the Société on January 26, 1995. In paragraph 4 he states that Auberge sold the immovable in fraud of the creditor's rights since Auberge failed to declare the name of the creditor and the amount of its claim, as required by article 1768 of the Civil Code of Québec.

[30]       Article 1776 of the Civil Code of Québec^[3] provides that where the prescribed formalities have not been observed, the sale of an enterprise may not be set up against creditors of the seller who have claims prior to the date of conclusion of the sale. The article also provides that the fact that the sale may not be set up may be invoked, on pain of forfeiture, no later than three years from the act of sale. In the case at bar, the fact that the sale may not be set up was raised by the creditor more than three years after the act of sale, and consequently article 1776 can be of no assistance to her. However, the failure to raise this fact within three years of the act of sale does not prevent a creditor, and especially the creditor in this case, from resorting to the provisions of articles 1631 et seq. of the Civil Code of Québec where there is fraud.

[31]       To raise articles 1631 et seq., a creditor must bring his claim within one year from the day on which the creditor learned of the injury resulting from the act which is attacked. In this case, Mr. Duguay learned of the act of sale of January 26, 1995 on December 1, 1998. Consequently, the creditor is not out of time and may rely on articles 1631 et seq. It should be noted that under articles 1767 et seq., and more particularly under article 1776, a creditor need not demonstrate fraud on the part of his debtor, but simply that the prescribed formalities have not been observed. Accordingly, the vendor's failure to observe the prescribed formalities for the sale of an enterprise do not, in my opinion, create a presumption of fraud. The consequence of failing to observe the formalities is to render the transaction inopposable against creditors whose names and the amount of whose debts were not mentioned in the sworn statement signed by the vendor. I am therefore of the opinion that Auberge's failure to observe the formalities prescribed by article 1768 of the Civil Code of Québec does not entitle me to conclude in this case that the purpose of the sale of January 26, 1995 was to enable Auberge to avoid its obligations to the creditor.

[32]       One last point. Recently, in Wellgate International Ltd. v. The Minister of National Revenue (Docket T-662-99, decision dated June 19, 2000), my colleague Mr. Justice Rouleau questioned the jurisdiction of this Court on a motion filed by the Minister of National Revenue asking the Court to declare that a transaction between two or more parties could not be set up against him. Relying on the Supreme Court of Canada decision in Canadian Human Rights Commission v. Canadian Liberty Net , [1998] 1 S.C.R. 626 and Mr. Justice Marceau's dissenting opinion in Le Bois de Construction du Nord (1971) Ltée. v. The Queen [1986] 2 C.T.C. 227, Rouleau J. writes, at paragraph 34 (page 18) of his reasons:

The contractual issue therefore, cannot be considered to be in some way incidental to the Court's jurisdiction nor is it merely a phase of compulsory execution. Neither the Income Tax Act, which confers jurisdiction on the Court to review the Minister's discretion in issuing the Requirement to Pay notices, nor the Federal Court Rules , which grant jurisdiction to issue a final garnishment order, can in any way seem to bestow or nourish jurisdiction on this Court to undertake an examination of the circumstances surrounding the transactions and agreements in question and to make a determination with respect to the Crown's allegations of fraud, allegations which concern incidents that occurred some 8 months prior to this event. The question to be determined here and the remedies being sought are, in my view, completely outside the scope of execution proceedings or judicial review.

And at paragraph 36 (page 19) of his reasons, he adds:

In any event, even if I am wrong with respect to the jurisdictional question, a resolution of the issues involved here can not be fairly or adequately achieved on the basis of affidavit evidence alone, by this or any other Court. The allegations of fraud being made by the Minister are profound and have far-reaching consequences, not only for the parties to the litigation, but for the other signatories of the impugned agreements as well. A determination of that nature requires that the best evidence be available to the Court, namely, viva voce evidence subject to vigorous and meaningful cross-examination. It is understandable that the best evidence is not available here since the applications now before me are clearly intended to be dealt with in a summary fashion. The relevant sections of the Income Tax Act and the Federal Court Rules were never intended to deal with complex and intricate disputes of this nature nor are they procedurally designed to allow for the type of inquiry which needs to be undertaken.

Finally, at paragraph 37 (page 20) of his reasons, Rouleau J. concludes as follows:

Given the uncertainty concerning the Federal Court"s jurisdiction and the inadequacy of summary proceedings for resolving the complex and difficult questions involved, I am convinced that the Quebec Superior Court, where an action has already been commenced, and which unquestionably has jurisdiction over the impugned contracts, is the proper forum for the resolution of the dispute between the parties.

[33]       Since the jurisdiction of this Court was not raised in the case at bar, I am not ruling on this issue. However, I hasten to add that I am in full agreement with Rouleau J. that the summary proceedings prescribed for resolving the questions of execution of judgments is not the appropriate way in which to resolve such issues as the inopposability of a transaction. The record before me is a perfect example of a situation in which it would have been preferable to proceed by way of viva voce evidence.

[34]       The Société's appeal, and consequently its opposition, will be allowed. The immovable seizure made on July 8, 1999 on the immovable situated at 201 rue Mathieu in Notre-Dame du Bon Conseil will be vacated because it is invalid. An order will go to the registrar of the registration division of Drummond to strike out and remove the said immovable seizure made on July 8, 1999 and registered under number 1870 in the registry office of the registration division of Drummond.

[35]       An order will also go to the sheriff of the judicial district of Drummond to deliver promptly to the Société the sum of $37,593.98, subject to any updating. The Société will be entitled to its costs.

                         "Marc Nadon"

                                   J.

VANCOUVER, British Columbia

November 20, 2000

Certified true translation

Suzanne M. Gauthier, LL.L., Trad. a.

FEDERAL COURT OF CANADA

TRIAL DIVISION

NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET NO:                         ITA-4127-95   

STYLE:                                     158377 Canada Inc. et al. v. Société en Commandite

Notre Dame du Bon Conseil

PLACE OF HEARING:            Montréal, Quebec

DATE OF HEARING: May 12, 2000

REASONS FOR ORDER OF NADON J.

DATED:                                   November 20, 2000

APPEARANCES:

Maurice Laplante                                                           FOR THE APPLICANT

Claude Bernard                                                             FOR THE RESPONDENT

SOLICITORS OF RECORD:

Clair, Laplante, Côté

1320 boulevard Lemire

Drummondville, Quebec

J2C 6W5                                                                      FOR THE APPLICANT

Morris Rosenberg

200 boulevard René-Lévesque Ouest

East Tower, 9^th Floor

Montréal, Quebec

J2C 7W5 [sic]                                                               FOR THE RESPONDENT