Canada v. Transport H. Cordeau Inc., 2002 FCA 228

Date: 20020531

Docket: A-64-01

Ottawa, Ontario, May 31, 2002

CORAM:        LÉTOURNEAU J.A.

NADONJ.A.

PELLETIER J.A.

BETWEEN:

                                                        HER MAJESTY THE QUEEN

                                                                                                                    Judgment creditor, Appellant

                                                                                 and

                                                    TRANSPORT H. CORDEAU INC.

                                                                                                                              Garnishee, Respondent

                                                                                 and

                                                    J.L. MICHON TRANSPORT INC.

                                                                                                                                                      Garnishee

                                                                                 and

                                                                GILBERT GADBOIS

                                                                                                                  Judgment debtor, Respondent

                                                                                 and

                                                            2951-7539 QUÉBEC INC.

Mise-en-cause, Respondent

                                                                        JUDGMENT

For these reasons, the appeal is allowed with costs and the order of the Trial Division dated February 1, 2001, in docket ITA-1384-97 is set aside. It is declared that the prothonotary had jurisdiction to make the final order of garnishment dated March 7, 2000, ordering Transport H. Cordeau Inc. to pay Her Majesty the Queen the sum of $100,000 with interest and costs. It is also declared that the Trial Division has jurisdiction to dispose of the appeal filed by the respondent, Transport H. Cordeau Inc., from the order of the prothonotary and the case is referred back to it for that purpose. Having regard to the delays incurred and in order to avoid a miscarriage of justice, it is ordered that the appeal before the Trial Division be disposed of on a priority basis as quickly as possible.

                                                                                                                                       "Gilles Létourneau"                 

                                                                                                                                                                  J.A.

Certified true translation

Sophie Debbané, LLB

Date: 20020531

Docket: A-64-01

Neutral Citation: 2002 FCA 228

CORAM:        LÉTOURNEAU J.A.

NADONJ.A.

PELLETIERJ.A.

BETWEEN:

                                                        HER MAJESTY THE QUEEN

                                                                                                                    Judgment creditor, Appellant

                                                                                 and

                                                    TRANSPORT H. CORDEAU INC.

                                                                                                                              Garnishee, Respondent

                                                                                 and

                                                    J.L. MICHON TRANSPORT INC.

                                                                                                                                                      Garnishee

                                                                                 and

                                                                GILBERT GADBOIS

                                                                                                                  Judgment debtor, Respondent

                                                                                 and

                                                            2951-7539 QUÉBEC INC.

Mise-en-cause, Respondent

Page: 2

                                       Hearing held at Montréal, Quebec, on May 22, 2002.

                                    Judgment delivered at Ottawa, Ontario, on May 31, 2002.

REASONS FOR JUDGMENT:                                                                               LÉTOURNEAU J.A.

CONCURRED IN BY:                                                                                                         NADON J.A.

                                                                                                                                           PELLETIER J.A.

Date: 20020531

Docket: A-64-01

Neutral Citation: 2002 FCA 228

CORAM:        LÉTOURNEAU J.A.

NADON J.A.

PELLETIER J.A.

BETWEEN:

                                                        HER MAJESTY THE QUEEN

                                                                                                                    Judgment creditor, Appellant

                                                                                 and

                                                    TRANSPORT H. CORDEAU INC.

                                                                                                                              Garnishee, Respondent

                                                                                 and

                                                    J.L. MICHON TRANSPORT INC.

                                                                                                                                                      Garnishee

                                                                                 and

                                                                GILBERT GADBOIS

                                                                                                                  Judgment debtor, Respondent

                                                                                 and

                                                            2951-7539 QUÉBEC INC.

Mise-en-cause, Respondent

                                                       REASONS FOR JUDGEMENT

LÉTOURNEAUJ.A.

[1]         This Court must answer the following questions in this appeal:

(a)        Does the Trial Division have jurisdiction, in garnishment proceedings, to determine whether an assignment of debt by Transport H. Cordeau Inc., the respondent garnishee, made allegedly in fraud of the rights of the creditors, may be set up against the appellant?

(b)        In that same context, does the Trial Divison have jurisdiction to determine whether the releases dated February 12 and March 25, 1997, resulting from the assignment of debt and a secret contract between the respondent garnishee and the judgment debtor, Gilbert Gadbois, may be set up against the appellant?

(c)        Does the Trial Division have jurisdiction to order the lifting of the corporate veil between Gilbert Gadbois, the judgment debtor, and 2951-7539 Québec Inc. that belonged to him?

(d)        And last, does the Trial Division have jurisdiction to rule on the appeal that was before it from the prothonotary's order making the garnishment against the respondent garnishee final and ordering it to pay $100,00 with interest and costs to the judgment creditor, Her Majesty the Queen?

[2]         For the reasons that I will state below, I am of the view that those questions should be answered in the affirmative. But first, certain facts and procedural aspects must be explained if the issue and its implication in relation to the enforcement of Federal Court judgments are to be adequately understood.

Facts and proceedings

[3]         In accordance with subsections 223(2) and (3) of the Income Tax Act, R.S.C.,

(5th Suppl.), c. 1 (Act), hereinafter reproduced, the appellant, Her Majesty the Queen, registered a certificate in the Federal Court certifying the amount payable by Gilbert Gadbois, the judgment debtor, specifically $1,285,674.06, plus interest compounded daily thereon from February 14, 1997. Subsections 223(2) and (3) of the Act read:

The application for a final garnishment order against Transport H. Cordeau Inc. was made and allowed in the following circumstances.

[4]         Transport H. Cordeau Inc. operates a transportation business. In 1995, it was having serious financial difficulties. It borrowed money from a number of sources, including 2951-7539 Québec Inc. (Cie Québec Inc.) that belonged to Gilbert Gadbois.

[5]         The loan with that numbered company was made by oral agreement for an initial amount of $63,000, which proved to be insufficient. Transport H. Cordeau Inc. turned to its creditor for additional amounts, which it obtained. This time, the creditor asked for a second mortgage in its favour on its debtor's business equipment. Furthermore, Cie Québec Inc. insisted that the deed of movable hypothec indicate $325,000 as the amount of the secured loan. However, pursuant to an oral agreement between the two parties, the loan was to be repaid with a payment of $225,000 instead of $325,000, the amount which officially appeared in the deed of hypothec signed on May 10, 1996.

[6]         Revenue Canada sued Mr. Gadbois to recover its tax debt. On November 5, 1996, in order to avoid a new seizure by Revenue Canada, Mr. Gadbois assigned his $325,000 debt to J.L. Michon Transport Inc. for $225,000 and received payment the following day. Intervening in the assignment of debt, Transport H. Cordeau Inc. nevertheless confirmed that the hypothecary balance was $325,000 and that no interest had been paid since the loan had been made. Jean-Louis Michon of J.L. Michon Transport Inc. also stated in an affidavit that the amount owing was $325,000, and that he had to pay Cie Québec Inc. any amount he received from Transport H. Cordeau Inc. in excess of $225,000 plus the interest it was entitled to.

[7]         Upon discovering the assignment of debt, the appellant commenced garnishment proceedings on January 9, 1997, by means of a requirement to pay addressed to Transport H. Cordeau Inc. for the balance of $100,000 that it owed and that J.L. Michon Transport Inc. had agreed to pay to Cie Québec Inc. pursuant to the deed of assignment of debt.

[8]         On April 28, 1997, the appellant obtained an interim court order of garnishment against Transport H. Cordeau Inc. from the prothonotary of the Federal Court. In reply to the garnishment, Transport H. Cordeau Inc. made a negative declaration and set up its alleged secret oral agreement with Mr. Gadbois and Cie Québec Inc. relating to the amount owing, which it claimed was $225,000 and not $325,000 as the official documents indicate.

[9]         The prothonotary hearing the case ruled in favour of the opposition made by Transport H. Cordeau Inc. That ruling was set aside on appeal at the Trial Division. In a decision dated October 27, 1999, the Court of Appeal affirmed that the counter-letter could not be set up against Her Majesty the Queen: Transport H. Cordeau and Her Majesty the Queen v. Gadbois and J.L. Michon Transport Inc. and 2951-7539 Québec Inc., A-139-98, October 27, 1999 (F.C.A).

[10]       Following the Court of Appeal's decision, the prothonotary heard the case again and on March 7, 2000, made a final order of garnishment, and ordered the garnishee to pay the amounts owing. The garnishee appealed the prothonotary's decision, and the appeal was heard on November 23, 2000. While the matter was under consideration, the judge hearing the appeal sent the parties a direction on December 6, 2000. Referring to Wellgate International Ltd. v. Canada (Minister of National Revenue), 2000 DTC 6420 (F.C.T.D.), she asked the parties to submit their arguments concerning the jurisdiction of the Federal Court Trial Division to dispose of the questions raised by the garnishee in reply to the garnishment. On February 1, 2001, the Trial Division held that only provincial courts "are competent to try this matter." The judge declined jurisdiction with costs. That decision is the subject of this appeal by Her Majesty the Queen.

Analysis of the decision of the Trial Division

[11]       Before analyzing the decision under appeal, it is worth mentioning that at no time did the garnishee make the argument that the Federal Court lacked jurisdiction to dispose of the issues. In fact, it is the garnishee who availed itself of the jurisdiction of the Court to ask that its secret oral agreement, the assignment of debt and the releases be set up against the judgment creditor. That is an important fact to keep in mind in analyzing the arguments now being raised by the respondent garnishee. I will address this point later.

[12]       At the hearing, counsel for the respondent, an experienced lawyer, did not really deny that the Trial Division had jurisdiction to order the garnishment that is being contested. Shifting from the firm position he took on that point in his written memorandum, he emphasized instead the second part of his memorandum and argued forum conveniens, that is, that the Quebec Superior Court would be a more appropriate forum in which to argue the issues raised in the negative declaration of the garnishee and its opposition to the garnishment. Nevertheless, I will address both aspects of the issue beginning with the jurisdiction of the Federal Court.

Does the Federal Court have jurisdiction to dispose of the issue raised by the opposition to the garnishment?

[13]       Under subsections 223(2) and (3) of the Act, the certificate of the Minister registered in the Court has the same effect as if the certificate were a judgment obtained in the Court. It is deemed to be a judgment of the Court. All proceedings may be taken thereon as if the certificate were a judgment obtained in the Court. It is therefore at the stage and in the context of the enforcement of the Court judgment that the application for garnishment based on section 224 of the Act was made.

[14]       There is no doubt that the Court has the power to ensure that its judgments are enforced, and in that context, it may be required to dispose incidentally of issues under provincial law that are raised against that enforcement: Le Bois de Construction du Nord (1971) Ltée v. The Queen, [1986] 2 CTC 227 (F.C.A.). As Mr. Justice Marceau wrote at page 233, "the Court's power to rule on a point of provincial law which arises incidentally in the course of exercising its proper jurisdiction is not in any doubt." The Supreme Court of Canada expressly recognized that jurisdiction in ITO - Int'l Terminal Operators v. Miida Electronics, [1986] 1 S.C.R. 752, at page 781:

The Federal Court is constituted for the better administration of the laws of Canada. It is not, however, restricted to applying federal law in cases before it. Where a case is in "pith and substance" within the court's statutory jurisdiction, the Federal Court may apply provincial law incidentally necessary to resolve the issues presented by the parties.

[15]       Still at page 233 of Le Bois de Construction du Nord (1971) Ltée, Marceau J.A. properly described as follows the complementary aspect, which is essential and necessary for the jurisdiction of a court, that the compulsory execution of judgments represents:

The Court's power to rule on a point of provincial law which arises incidentally in the course of exercising its proper jurisdiction is not in any doubt. It is clear that the power conferred on the Court to dispose of an action is not limited to that of ruling on the existence of the right claimed, but carried with it that of ensuring by legal means that the judgment is enforced. Otherwise its function would be a purely academic one. The power of jurisdiction implies the complementary one of compulsory execution, a power of execution which, be it said in passing, is necessarily the same whatever the source of the power of jurisdiction, that is, whatever the Act of the Parliament of Canada on which the judgment is based. Just as the Court has the power to rule on a question of provincial law which arises incidentally in the course of exercising its jurisdictional power, so it has the power to dispose of a question of provincial law which arises in exercising its power of execution. Accordingly, it cannot be concluded merely from the fact that in the case at bar the objection made by the respondent to negative declarations raises question of provincial law that the Court does not have jurisdiction to determine.

[16]       For instance, with respect to seizures, this Court has determined the scope of the privilege of exemption from seizure of the instruments of work needed for the personal exercise of a professional activity provided in article 552 of the Code of Civil Procedure of Quebec (Belliard v. Deputy Minister of Revenue of Québec, A-504-94, December 23, 1997); the effect of partition following the dissolution of the community of property under article 746 of the Civil Code of Lower Canada, (Wolf v. The Queen, A-865-91, October 20, 1992); the validity of the priority of registration of a real right under articles 2090 and 2091 of the Civil Code of Lower Canada (Wolf v. The Queen, supra); the significance of the concept of common pledge of creditors that is found in articles 2644 and 2646 of the Civil Code of Québec (Wolf v. The Queen, supra); the nature of the right of ownership of a spouse of community property under Quebec legislation (Côté v. The Queen, A-1047-96, November 10, 1999 (F.C.A.), leave to appeal to the S.C.C. denied on August 30, 2000); the concept and principles of the disclaimer of an estate in Ontario law (Biderman v. The Queen, A-537-98, February 4, 2000 (F.C.A.), leave to appeal to the S.C.C. denied on October 19, 2000); and the status of a transferor under An Act respecting bills of lading, receipts and transfers of property in stock, S.Q. 1982, c. 55, and of the person being sued or against whom seizure proceedings are brought for the payment of the consumption and sales tax (Caisse populaire de Daveluyville v. The Queen, A-316-94, October 29, 1998 (F.C.A.). Furthermore, in this very case, this Court interpreted article 1452 of the Civil Code of Québec to determine whether the counter-letter between Transport H. Cordeau Inc., Mr. Gadbois, and Cie Québec Inc. could be set up against the judgment creditor (Transport H. Cordeau Inc. and Her Majesty the Queen v. Gadbois and J.L. Michon Transport Inc. and 2951-7539 Québec Inc. (F.C.A.), supra).

[17]       The respondent relied on the decision by Mr. Justice Rouleau in Wellgate International Ltd. v. M.N.R., 2000 DTC 6420 (F.C.T.D.), brought to his attention by the judge's direction, to argue that the Federal Court Trial Division does not have jurisdiction in this case. Without determining the merits of that decision, I am of the view that it does not apply to these proceedings.

[18]       In Wellgate International Ltd., supra, it was clear that the Minister of National Revenue was challenging the validity of the transactions between the parties. He had brought an action before the Quebec Superior Court to set aside a transfer of the contractual and economic benefits for reasons of fraud. Mr. Justice Rouleau concluded that, in the circumstances, the Minister was not merely seeking to realize a debt of the judgment debtor and that, as a result, the Superior Court was the proper forum for the resolution of the dispute between the parties: ibid., paragraphs 30 and 37.

[19]       In this case, the appellant is not seeking in any way to set aside the transactions between the parties. It must be understood that it is the garnishee who, by making its declaration concerning the garnishment, intended to set up a secret contract, an assignment of debt and releases that had the effect of reducing the amount owed to the judgment debtor, as it appeared in the deed of movable hypothec. Without challenging the validity of the secret contract, this Court ruled that it could not be set up against the appellant and that this was the penalty for simulation which, under article 1451 of the Civil Code of Québec, "exists where the parties agree to express their true intent, not in an apparent contract, but in a secret contract, also called a counter letter.": see Transport H. Cordeau Inc. v. Her Majesty the Queen, supra.

[20]       In reply to the arguments of the garnishee relating to the assignment of debt, the appellant cited, as an additional argument, article 1631 of the Civil Code of Québec, which reads:

Before the reform of the Civil Code, that article was article 1032 of the Civil Code of Lower Canada. This argument put forward by the appellant gives rise to two important points.

[21]       First, the Crown is not exercising a Paulian action. It relied on article 1631 to show that the Paulian action brought by a creditor in the case of fraud results, at the very most, in not having the juridical acts set up against that creditor.

[22]       Second, the Crown is not disputing in any way the validity of the juridical acts between the parties to those acts. As Marceau J.A. wrote in Le Bois de Construction du Nord (1971) Ltée v. The Queen, supra, at page 233, "the Paulian action [art. 1032 et seq. of the Code] contained in these provisions does not make the disputed contract void as such and lead to the property involved in the action being returned to the estate of the debtor. It leads only to what commentators have long called 'unopposability', that is a kind of setting aside of the contract with regard to the suing creditor or creditors only, the contract continuing to be valid for the contracting parties and third parties."

[23]       In Les Bois de Construction du Nord (1971) Ltée v. The Queen, supra, the issues were similar to those raised today and, on page 234, this Court unanimously ruled that the Federal Court had jurisdiction to dispose of those questions with respect to a garnishment:

In my opinion, a finding by a court that the contract on which the third party relies to challenge the legitimacy of the seizure, or to argue that it has nothing to pay, is a sham, or, though real, cannot be set up against the garnisher . . . is still a decision directly connected with compulsory execution of the judgment.

[24]       I would add that the case of Wellgate International Ltd. v. M.N.R., supra,does not have the significance the respondent suggests. First, Rouleau J. merely expressed his doubts about the Court's jurisdiction in a very different context than the one in this case. He did not rule that the Court had no jurisdiction. He did rule that the Superior Court, which was hearing the merits of the same issues at the time, seemed a more appropriate forum, in the circumstances, for their disposition. Moreover, in Arruba Holdings Ltd. and Teixeira and Pereira and 153161 Canada Inc., ITA-2418-00, June 30, 2000 (F.C.T.D.), a subsequent but almost concurrent case since it was disposed of only a few days later, Rouleau J. said, with respect to a garnishment, that a deed of assignment of debt between the judgment debtor and the mise-en-cause could not be set up against Her Majesty the Queen on the ground that the assignment was made in fraud of the rights of Her Majesty.

[25]       The respondent also relied, in one submission, on the fact that, in support of its reply to the respondent's opposition, the Crown referred to article 317 of the Civil Code of Québec and to the case law on that article to ask that the corporate veil be lifted. Article 317 reads:

[26]       I agree with the appellant. That argument does not challenge the validity of the transactions but, rather, is intended to prevent the immunity of the legal person being set up against a person in good faith in cases where the juridical personality of that legal person is set up to conceal fraudulent acts. Again, the appellant's reply to the respondent's opposition does not go beyond the recovery of a debt in a situation involving the execution of a judgment made by an appropriate court. The following observations of Marceau J.A. in Le Bois de Construction du Nord (1971) Ltée v. The Queen, supra, at page 233, seem appropriate in this case:

If the Court thus had to withdraw immediately a question of provincial law came before it in connection with the disposition of an action in the Court, not many actions could be taken to their conclusion. It is actions based on a cause independent of federal law which the Court cannot hear and dispose of, and in fact, to be precise, completely independent.

[27]       In summary, I am of the view that the appellant's reply to the respondent's oppositions does not go beyond the context of the "unopposability" of acts between a garnishee and a judgment debtor. Accordingly, that reply based on provincial law, in this case Quebec law, does not go further than those that are found in one form or another in the context of enforcement of judgments which is merely aimed at recovering a debt from the judgment debtor.

Is the summary procedure unfair and inappropriate in this case?

[28]       The respondent contended that the questions raised by the appellant could not be resolved in a fair and appropriate manner with the use of affidavit evidence, even if the affiants were cross-examined. Again, we should recall that it is not the appellant who raises questions with respect to opposability and simulation but, in fact, the respondent who is seeking to avail itself of a secret contract, an assignment of debt and releases by setting them up against the appellant. The respondent is hard-pressed to complain of a dispute that it created and of the process associated with it.

[29]       Furthermore, I am not satisfied that in this case the issues in dispute cannot be adequately argued on the basis of the documentary evidence in the record, affidavit evidence and cross-examinations of the affiants, as is the usual procedure in connection with motions in Federal Court, and consequently, that we must deviate from the general scheme applicable to motions. The arguments of the garnishee, for the most part, raise issues of law, as is often the case when enforcing a judgment, whether it is a Federal Court judgment or a judgment from a provincial court.

[30]       As provided in rule 371 of the Federal Court Rules, (1988), it is always possible for a party to a motion to request, in special circumstances, leave to call a witness on issues of fact. The Court may then grant that request if it considers it vital to the exercise of its jurisdiction, which, need we point out, is not dependent on difficulties in assessing evidence.

[31]       Furthermore, when a garnishment is being disputed, rule 453 specifically gives the Court the authority to order that the questions concerning the garnishee be determined in such a manner as it may direct rather than by summary procedure. That rule therefore provides the flexibility needed to do justice between the parties.

[32]       For these reasons, I would allow the appeal with costs and set aside the Trial Division order dated February 1, 2001, in docket ITA-1384-97. I would declare that the prothonotary had jurisdiction to make the final order of garnishment that he made on March 7, 2000, ordering Transport H. Cordeau Inc. to pay Her Majesty the Queen the sum of $100,000 with interest and costs. I would also declare that the Trial Division has jurisdiction to dispose of the appeal filed by the respondent, Transport H. Cordeau Inc., from the order of the prothonotary and would refer the case back to it for disposition of the appeal. Having regard to the delays incurred and in order

to avoid a miscarriage of justice, I would order that the appeal before the Trial Division be

disposed of on a priority basis as quickly as possible.

                                                                                                                                         "Gilles Létourneau"                

                                                                                                                                                                  J.A.

"I concur.

Marc Nadon J.A."

"I concur.

J.D. Denis Pelletier J.A."

Certified true translation

Sophie Debbané, LLB

                                                    FEDERAL COURT OF APPEAL

                                                          SOLICITORS OF RECORD

DOCKET:                                             A-64-01

STYLE OF CAUSE:                          

HER MAJESTY THE QUEEN

                                                                                                                          Judgment creditor, Appellant

-and-

TRANSPORT H. CORDEAU INC.

Garnishee, Respondent

-and-

J.L. MICHON TRANSPORT INC.

                                                                                                                                                        Garnishee

-and-

GILBERT GADBOIS

                                                                                                                        Judgment debtor, Respondent

-and-

2951-7539 QUÉBEC INC.

Mise-en-cause, Respondent

PLACE OF HEARING:                     Montréal, Quebec

DATE OF HEARING:                       May 22, 2002

REASONS FOR JUDGMENT:       Létourneau J.A.

CONCURRED IN BY:                      Nadon J.A.

Pelletier J.A.

DATED:                                                May 31, 2002

APPEARANCES:

Chantal Comtois                                                                             FOR THE APPELLANT

Gérald Bélanger                                                                              FOR THE RESPONDENT

SOLICITORS OF RECORD:                                                                                                                  

Morris Rosenberg

Deputy Attorney General of Canada

Montréal, Quebec                                                                          FOR THE APPELLANT

Gérald Bélanger

Montréal, Quebec                                                                          FOR THE RESPONDENT