Polyco Window Manufacturing Limited v. The Prudential Assurance Company Limited and Berlinex Polymers Inc., Equibuilt Window Systems Inc., K & K Glass Limited, the Minister of National Revenue, Debonair Industries (1987) Limited, Advance Door Systems Limited, Thompson Plastics Limited, 302602 Alberta Limited, C/O A.B.P. Aluminum Building Products, Western Profiles Limited, Moose Jaw Sash & Door Company (1963) Limited and the Director of Labour Standards, [1994] 2 CTC 399

Halvorson J.:— This was a hearing to determine the priority among claimants to insurance money paid into Court by the defendant, The Prudential Assurance Co.

Execution creditors contend the money should be shared pro rata pursuant to the Creditors' Relief Act, R.S.S. 1978, c. C-46. Garnishors assert prior rights under the Attachment of Debts Act, R.S.S. 1978, c. A-32. If the latter Act governs, there is an issue concerning the date upon which the insurance money became due and therefore attachable.

Facts

For the most part, the facts are not contentious. The plaintiff, Polyco Window Manufacturing Ltd., suffered a fire loss to its manufacturing plant in November, 1991. Liability was acknowledged by the insurer, Prudential; however, the quantum of damage was not resolved. An initial advance was paid towards the loss.

By January 1992, creditors of Polyco had become anxious for their money. Some were aware of a pending second insurance advance and obtained directions to pay from Polyco. By agreement, these creditors in due course, shared that advance.

Eventually, creditors began to sue Polyco and garnishee Prudential. In response to the summonses, Prudential routinely informed the Court there was no "debt due or accruing due” from it to Polyco as contemplated by subsection 5(1) of the Attachment of Debts Act. Prudential maintained that any balance which might be owing to Pol co was unascertained because of the ongoing dispute respecting quantum of damages. Polyco sued and Prudential invoked the statutory dispute resolution condition of the insurance policy. Finally, on May 17, 1993, an umpire awarded Polyco an additional $179,500. Numerous garnishees were served on Prudential before and after that date.

The claimant, Berlinex Polymers Inc., was first to garnishee. Its summons was served on February 11, 1992. Accordingly, Berlinex says its claim on the $179,500 should be paid in priority to other unsecured creditors. Berlinex contends the $179,500 was a "debt due or accruing due" from Prudential to Polyco at the time of the garnishee.

Creditors of Polyco who garnisheed after the date of the umpire’s award, claim priority to the insurance money on the grounds it was only then that there was a "debt due or accruing due" from Prudential.

Execution creditors argue all this is irrelevant because there must be a rateable division of the money as dictated by the Creditors' Relief Act.

To extricate itself from these rival claims, Prudential applied under section 116 of the Saskatchewan Insurance Act, R.S.S 1978, c. S-26, for leave to pay the money into Court together with any further sums which might become due to Polyco under the policy. Berlinex objected arguing that the priority of its garnishee should be determined first pursuant to its motion under subsection 11(2) of the Attachment of Debts Act.

The chambers judge agreed with Prudential and fixed a date for this hearing at which all claimants to the $179,500 could present their cases. Prudential paid the funds into Court on December 24, 1993. Thereafter, a claimant applied under section 31 of the Creditors' Relief Act for an order that the $179,500 be paid over to the sheriff for distribution according to the provisions of that statute. The chambers judge adjourned that motion to be dealt with at this hearing.

The Creditors' Relief Act

Most of the claimants are both execution creditors and garnishors. Out of a sense of fairness, most would be content with a pro rata division of the money. To achieve that end, they seek to invoke the Creditors' Relief Act. This raises jurisprudence problems which initially appear formidable.

Wearing their execution creditor hats, these claimants argue that the insurance money is a "fund" envisaged by section 31 of that Act. It reads:

31. Where there is in a court a fund belonging to an execution debtor or to which he is entitled, the fund or a sufficient part thereof to pay the executions and certificates in the sheriff's hands may, on application of the sheriff or any party interested, be paid over to the sheriff and the fund shall be deemed to be money levied under execution within the meaning of this Act.

[Emphasis added.]

By their reasoning, the $179,500 is a fund caught by the section and therefore payable to the sheriff for distribution.

These claimants say their submission is enhanced by the fact the money was paid into Court under the Saskatchewan Insurance Act and not in response to garnishees under the Attachment of Debts Act. There is a countervailing argument that the chambers judge merely selected the Saskatchewan Insurance Act vehicle for resolving the competing claims because it was more expedient in the circumstances than the resolution scheme provided for in the Attachment of Debts Act.

I conclude the $179,500 is a fund in Court envisaged by the plain meaning of section 31, and the statute under which the money was paid in is not determinative of the issue. This conclusion does not necessarily derail the claim of priority asserted by the garnishors in view of authority corroborating their position. The question must be answered whether the garnishors have some binding common law or statutory right which outranks the clear intention of section 31 to catch the $179,500 and share it rateably.

It may be said at the outset that nothing in the Attachment of Debts Act grants priority to a garnishor. The Act is silent on the point. Nor is there any other statutory basis for the alleged preference. There is however, the decision in Mills v. Harris & Craske (1914), 7 W.W.R. 968 (Sask. T.D.), where the court said garnishors have priority over execution creditors. The binding effect of this judgment is called into question by the claimants.

In Mills the chambers judge was faced with a procedural problem. A garnishee paid money into court in response to a summons, and in so doing disclosed rival iens, assignments and garnishees claiming the debt. Like the instant situation, it was argued the money was a “fund” under the Creditors' Relief Act and must be paid over to the sheriff. The chambers judge refused. He concluded the garnishee rules of court, under which the money was paid in, provided the established procedure for settling these competing claims, rather than the little used procedure sanctioned by the Creditors' Relief Act. That is the rationale of the decision. However, the judge, Parke M. went on to state at page 969:

In this province the Creditors’ Relief Act abolishes priority among execution creditors, but not among garnishors. That priority still exists and until these priorities are determined together with the priorities of the lien holders and the assignees I do not think the money should be paid over to the sheriff.

This comment must be classed as obiter. The chambers judge was not asked to rule on the priority of the garnishors and other claimants. He was called upon to answer a procedural question, and he did. Moreover, he quoted no authority for this observation. The judge seems to have simply drawn a conclusion of priority based on the fact the Saskatchewan creditors' relief legislation did not contain a provision like other jurisdictions whereby a judgment creditor is deemed to attach for the benefit of all creditors. The judge put it this way at page 969:

We have no provision in our Act similar to that in the Alberta Act, Statutes of Alberta 1910 (2nd Sess.) c. 4, section 4, or in the Ontario Act, R.S.O. 1897, c. 78. These Acts provide that any judgment creditor, who attaches a debt shall be deemed to do so for the benefit of himself and all execution creditors and express provision is made that any debt so attached by a garnishee summons shall be paid direct to the sheriff and shall be distributed by him in the same manner as moneys levied by him under the provisions of these Acts.

Apparently, his thinking was that a garnishor had priority if the Creditors' Relief Act did not remove it. How the garnishor attained a priority in the first place was not mentioned. Nor was there any attempt to explain why the garnishee money was not encompassed in the plain word "fund" used in the Act.

Notwithstanding the deficiency in the Mills rationale, the decision seems to have gone unchallenged. Indeed, Dunlop, in his text Creditor-Debtor Law in Canada (Toronto: Carswell, 1981), stated at page 428 that: ". . Saskatchewan . . [has] taken the opposite course of eliminating garnishment entirely from the creditors’ relief legislation with the result that the first come, first served rule operates unabated”’.

Contrary authority finally surfaced in 1982, and the execution creditors rely heavily upon it. In Re Yancey's Men's Wear Ltd. (1982), 17 Sask. R. 287 (Q.B.) the Court ordered that a garnishor must share the attached fund pursuant to the Creditors' Relief Act. This decision is not as conclusive as the execution creditors suggest. There, the court was required to rule on the priority of Crown claims to the garnisheed fund. After fixing the Crown preference, the Court stated at page

Section 15 of the Attachment of Debts Act, supra, provides that “. . .a judge may order the third person or any other person to appear and state the nature and particulars of his claim.” Here, no such order was sought or made and the nature and particulars of the several claims of the judgment creditors are already a matter of record and on file. As between the plaintiff and the other judgment creditors there is no priority in the monies which will remain after payment of costs and the claims of the federal and provincial Crowns and in said balance of monies the plaintiff and the other judgment creditors will share pari passu.

Apparently, Mills was not cited, but the court simply assumed the Creditors' Relief Act intervened to outrank the rights of the garnishors.

In any event, I agree with the decision in Yancey's. Apart from obiter comments in Mills, there is no authority for ruling that a garnishor has priority over execution creditors. The clear intent of the Creditors' Relief Act to abolish priority among execution creditors must prevail. If a garnishor is to be rewarded for his diligence, beyond a preference in costs, it must be through legislative enactment not judicial pronouncement.

It is fitting as well, that a garnishor should not receive a preference inasmuch as service of a summons does not give the garnishor an interest in the attached money. He has no claim in the nature of a lien. All he acquires is the right to have the money diverted away from the debtor and into court. This is apparent from subsection 5(1) of the Attachment of Debts Act which stipulates that the summons “shall bind any debt due or accruing due". The right escalates to a proprietary interest when the court orders payment out to the garnishor.

Furthermore, it is fitting that there should be rateable sharing where, as here, numerous creditors proceeded against Polyco over an extended period of time. Garnishees were served randomly on Prudential. It would be purely fortuitous if certain garnishors were more successful than others.

A ruling favouring priority for garnishors would be hollow in most situations under the Creditors' Relief Act. Disappointed execution creditors could easily launch insolvency proceedings against the debtor. This would result in all the attached funds being paid to the trustee for distribution among all creditors. The garnishors would have no priority in bankruptcy. This reinforces the conclusion that the garnishors never acquired priority in the first place, by service of their summonses.

Two other judgments were cited, but neither is very helpful in resolving the issue of preference to garnishors. In F.W. Woolworth Co. v. Zimmer (1978), 94 D.L.R. (3d) 766 (Sask. Q.B.) the Court held that as between garnishors, they ranked according to date of service of the summonses. There were no execution creditors involved, so the Creditors' Relief Act was not part of the mix.

As well, the British Columbia case of Hale v. Ross (1958), 26 W.W.R. 47 (B.C. S.C.) was referred to for corroboration of the submission that execution creditors and garnishors must share. There, the court commented that a garnishor has priority only if there are no writs of execution in the hands of the sheriff at the time of attachment, otherwise the intercepted money would be divisible under creditors' relief legislation.

Hale does not reflect the law in Saskatchewan. As previously alluded to, creditors' relief legislation in British Columbia and other provinces, specifically dictates that a garnishor is deemed to have attached money for the benefit of all creditors. However, the case is troublesome from another perspective. It too, seems to assume a garnishor has some inherent priority which has been taken away by statute.

Be that as it may, there will be an order that the $179,500 be paid over to the sheriff for distribution pursuant to the provisions of the Creditors’ Relief Act. This will be subject, of course, to what I shall say shortly respecting Crown preference and assignments.

The foregoing will not affect garnishors in requesting orders to pay out funds under the Attachment of Debts Act in ordinary situations because the Creditors' Relief Act is not usually triggered. Unless an execution creditor specifically invokes that Act or applies under section 15 of the Attachment of Debts Act, the funds will routinely be released to the garnishor.

Debt due or accruing due

The ruling that the garnishors must share the $179,500 rateably under the Creditors' Relief Act renders academic the competition for priority among the various garnishors based on the date the Prudential money became a "debt due or accruing due” to Polyco.

Considerable effort was extended by Berlinex in an attempt to establish its priority to the money. The effort deserves an answer, obiter as it may be.

Berlinex contends it has first right to the $179,500 based on its prompt garnishee. As Berlinex assesses the situation, the insurance was a "debt due or accruing due” from Prudential to Polyco at the time of service of the summons on February 11, 1992, and the garnishee was not vitiated by the fact the amount owing was not ascertained until May 17, 1993, the date of the award.

Berlinex began its rationale by referring to the venerable judgment in Barsi v. Farcas, [1924] 1 W.W.R. 707, [1924] 1 D.L.R. 1154 (Sask. C.A.) where the Court of Appeal explained the meaning of the phrase "debt due or accruing due”. Among other observations, the Court stated at W.W.R. page 709:

. . .To constitute an attachable debt, there must be an actual debt, legal or equitable, due from the garnishee to the judgment debtor. His debts must be either presently payable, or presently due though payable at a future date. Lindley L.J. said, in Webb v. Stenton, 11 Q.B.D. 518, 52 L.J.Q.B. 584:

An accruing debt is therefore a debt which is not yet actually payable but is represented by an existing obligation.

(See also judgment of Brett M.R.) The moneys garnished, therefore, in order to be bound must constitute an existing obligation, payable either presently or at a future date.

Essentially, Berlinex must establish two elements: firstly, that the insurance money was a debt, and secondly, that at the time of the garnishee, the money constituted an existing obligation by Prudential, payable either presently or at a future date.

The Berlinex submission goes on to assert that because Polyco had filed a proof of loss and Prudential had admitted liability, an existing obligation therefore arose which Prudential was bound to satisfy albeit, at a future date when damages had been fixed. Significantly as well, Prudential had already made advances towards the loss. A number of authorities were cited including O'Driscoll v. Manchester Insurance Committee, [1915] 3 K.B. 499, 85 L.J.K.B. 83 (C.A.) and Sandy v. Yukon Construction Co. (1960), 33 W.W.R. 490, 26 D.L.R. (2d) 254 (Alta. C.A.). In both cases unascertained amounts owing were successfully garnisheed.

In O'Driscoll, fees payable to a doctor by a health insurance committee were attached although the precise balance due had to await further calculation. In Sandy, money owing by a contractor to his subcontractor was effectively intercepted by a creditor of the latter despite the fact an architect's certificate was needed before the amount due to the subcontractor could be ascertained.

These decisions are helpful to Berlinex insofar as they confirm that an obligation payable at a future date is attachable provided it is an existing obligation. The decision does not particularly assist Berlinex in overcoming the first hurdle of showing the insurance money owing is a debt as distinguished from damages.

In both O'Driscoll and Sandy, the obligation of the garnishee to the debtor sounded in debt, not damages. Present debts may be attached even though the precise amount owing is not yet ascertained. The remedy of attachment is allowed because the amount owing can be measured accurately by use of objective standards. For example, an architect does a calculation. Damages are quite different. They are the result of a subjective analysis and are, for that reason, imprecise. The law does not permit attachment of unliquidated damages because the garnishee does not know the exact amount of his obligation Of course, once the damages are fixed, they are attachable because they take on the complexion of a debt.

Berlinex attempted to explain away a number of adverse decisions where garnishees of insurance money were deemed inappropriate. Among these cases were: Shierman v. Harris & Craske (1915), 8 W.W.R. 514, 22 D.L.R. 694 (Sask. C.A.); Randall v. Lithgow (1884), 12 Q.B.D. 525, 53 L.J.Q.B. 518 (Chamb.) and Hartt v. Edmonton Steam Laundry Co. (1909), 10 W.L.R. 664, 2 Alta. L.R. 130 (Master).

As Berlinex points out, these judgments are all distinguishable on their facts. In Shierman, liability under the policy was not admitted at the time of the garnishee. In Lithgow, the garnishee had failed to plead "no debt" in response to the summons. In Hart, there was no proof of loss or admission of liability. Berlinex concludes that the insurance money would have been attachable in those cases had there been proofs of loss and admissions of liability. Another view is that the garnishees would have failed anyway, because the obligation was to pay damages which could not be attached until the amount was ascertained.

This comment in Shierman, page 515 (D.L.R. 695) appears to be as valid today as it was in 1915:

The law is well settled that a claim against an insurance company under a policy of fire insurance for loss suffered is not a debt due or accruing due until the amount is fixed and liability therefor admitted by the company.

There is a further argument why the $179,500 was not a "debt due or accruing due" on February 11, 1992, or at any time before May 17, 1993. It is found in the policy conditions prescribed by section 128 of the Saskatchewan Insurance Act. Condition 11 reads:

11. In the event of disagreement as to the value of the property insured, the property saved or the amount of the loss, those questions shall be determined by appraisal as provided under the Saskatchewan Insurance Act before there can be any recovery under this contract whether the right to recover on the contract is disputed or not, and independently of all other questions. There shall be no right to an appraisal until a specific demand therefor is made in writing and until after proof of loss has been delivered.

[Emphasis added.]

Seemingly, by a demand term of the policy, Polyco could not enforce "any recovery" of insurance “whether the right to recover on the contract is disputed or not", until the value of the lost property was determined by the statutory appraisal process. This value was not known until May 17, 1993.

There remains the argument too, that while Prudential accepted liability to pay certain sums under the policy, and indeed, paid these by way of advances, Prudential did not admit an obligation to pay any further money, so no debt was due.

There is a ring of artificiality to the reasoning which traditionally precludes garnishment of insurance money prior to the damages being fixed. This is not lost on Berlinex. So, Berlinex asks this Court, in effect, to break new ground and find the insurance money was "due or accruing due” on February 11, 1992. There is merit to this request. Once an insurance company has admitted liability for damages and in particular, where advances have already been paid towards the loss, there would I be no prejudice if the insurer was then obliged to respond to a garnishee acknowledging a debt due and agreeing to pay the amount into court once the quantum of damages is ascertained.

The obligation to the assured in these circumstances takes on all the characteristics of a debt as outlined in Barsi, supra. The assured could sue for his money. The claim would accrue to a trustee in bankruptcy. There is nothing more for the assured to do save participate in ascertaining the balance due. Payment of the insurance money is not conditional upon some performance by the assured.

In the situation here, the unliquidated damages owing by Prudential to Polyco assumed the appearance of a debt, for all intents and purposes, and should be recognized as such under subsection 5(1). It would be perverse to maintain the unpaid damages are not a debt because the quantum is not yet ascertained, when unascertained sums are treated as debts if there is a prior debtor-creditor relationship between the debtor and the garnishee.

Assignments

Berlinex also advanced a priority position by virtue of an alleged assignment of the insurance proceeds arising from a series of directions to pay executed by Polyco. On January 13, 28 and 29, 1992, Polyco signed documents directing the Weyburn Credit Union (a secured creditor of Polyco) to pay a specified amount: [F]rom insurance proceeds payable jointly to Polyco and Weyburn Credit Union. . . (or "payable either to Polyco or to Weyburn Credit Union or to any or all of Polyco, Weyburn Credit Union”) from Prudential. . . .

Seemingly, the purpose in directing Weyburn Credit Union to make payment was the fact it held a security interest on the Polyco business damaged in the fire. Therefore, the Weyburn Credit Union was entitled to the insurance proceeds. The directions were given in anticipation of the pending aforesaid, second advance of insurance money which would be forthcoming to the Credit Union, and indeed, was received March 2, 1992.

The question arises whether Prudential was bound by the direction given to the Credit Union. Berlinex argues it had at least an equitable assignment if not a legal one, and that Prudential was given notice of this on February 25, 1992.

I do not agree with this submission. The direction to pay was not an assignment of insurance. As it stated, the document simply required the Credit Union to pay over a share of insurance money to Berlinex, when received. Berlinex had no right to insurance money not disbursed by Prudential to the Credit Union. Indeed, the circumstances surrounding the taking of the directions do not support an intention by the parties to effect an assignment of insurance.

A similar rationale applies to the virtually identical directions to pay obtained by some of the other claimants.

This is quite unlike the clear assignment given to the claimant, Advance Door Systems Ltd., on February 25, 1992. There, a true assignment of insurance was intended and perfected. The document provided that Polyco:

2. . . .for value received, hereby assigns and sets over to Advance Door Systems Ltd. insurance proceeds due to the company under a policy of insurance with Prudential of America General Insurance Company Canada or Prudential Assurance, as the case may be.

3. The company further undertakes to take all steps necessary to give notice and claim insurance and to do, perform and execute every act necessary to claim and obtain insurance proceeds as a result of a fire.

[Emphasis added.] Prudential became aware of the assignment through its counsel, by March 13, 1992. Seemingly, this is a valid assignment which outranks all other claimants herein except Crown preferences.

A potential priority problem was alluded to regarding this assignment. Subsection 4(b) of the Personal Property Security Act, S.S. 1979-80, c. P-6.1 specifies the Act does not apply to the assignment of an interest under a policy of insurance except for loss to collateral. Apparently, the advance assignment does not fall within the exception, so the document is not governed by that Act. What effect that might have on the priority of the assignment was not developed in argument.

More significantly, the assignment may be void as a preference under the Fraudulent Preferences Act, R.S.S. 1978, c. F-21 in light of the probable insolvency of Polyco. However, this point was not argued, nor is there sufficient evidence presently before the Court upon which the Act could be invoked. Creditors may choose to explore this route if Advance does not accept pro rata sharing.

Revenue Canada

There are two claims to the $179,500 which are conceded as superior. The Minister of National Revenue asserts a prior right to $33,108 being unremitted source deductions, penalty and interest owing by Polyco pursuant to subsection 227(10.1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

A “requirement to pay" was served on Prudential on October 29, 1993. This had the effect of transferring the $33,108 to the Crown as provided in subsection 224(1.2). Moreover, as stipulated in that section, the money became the property of the Crown "...notwithstanding a security interest in those moneys. . . ." In the result, claimants who are assignees respecting the $179,500 must rank after the Crown. (See also Bonavista (Town) v. Atlantic Technologists Ltd. (unreported), Nfld. S.C. Doc. No. St. J. 2761/93, Orsborn J., January 10, 1994; and Royal Bank v. Sask. Power Corp. [1991] 1 W.W.R. 1, [1991] 1 C.T.C. 532 (Sask. C.A.).

As well, even claimants relying on garnishees, must likewise, line up behind the Crown. This is a consequence of the opening words of subsection 224(1.2) which state: “Notwithstanding. . . any enactment of a province. . .". In effect, any alleged priority given to a garnishor under provincial legislation must yield to the Crown preference in the Income Tax Act.

There will be an order that the Minister of National Revenue has first claim to the $179,500.

Labour Standards Act

The second uncontested, preferred claim arises out of proceedings under the Labour Standards Act, R.S.S. 1978, c. L-1. A long-time employee of Polyco made a complaint under the Act when he was dismissed without notice. His entitlement to pay in lieu of notice was assessed at $6,000. The Director of Labour Standards issued a certificate for that sum under section 60, and it was entered as a judgment of this Court on February 2, 1994.

By virtue of subsection 56(1.2) wages due to an employee "... are deemed to be secured by a security interest upon the property and assets of the employer. . . payable in priority to any other claim or right in the property. . .” of the employer By section 82 "All money payable by an employer to an employee under this Act shall be deemed to be wages. . . ." (See Meyers v. Walters Cycle Co. (1990), 85 Sask. R. 222, 71 D.L.R. (4th) 190 (C.A.).

Clearly, the $6,000 judgment under the Labour Standards Act is subordinate only to the Revenue Canada claim. The amendment increasing the debt to $6,300 is not a proven claim because no certificate was filed respecting the added amount.

Costs

Prudential requested costs of its application to pay the $179,500 into Court. These are calculated to be $2,770.54. By its reasoning, the application was in the nature of an interpleader for the benefit of the competing claimants, so the costs should be borne by the fund.

Polyco and several claimants oppose an order for costs to Prudential on the grounds Prudential held the $179,500 from May 17, 1993, the date of the award, until December 24, 1993, when the money was finally deposited in Court. During these seven months, Prudential retained the interest the money could have generated. Prudential denies this and says there are extenuating circumstances. Anyway, in its application Prudential reserved the issue of interest for further resolution.

There is an additional problem. The $2,770.54 includes $650 in travelling expenses for the Winnipeg counsel of Prudential to appear in this jurisdiction. Seemingly, this could have been avoided by using local counsel, as agent. Further, other claimants seek costs. Some want Berlinex to be penalized. A variety of cost structures is proposed.

Weighing all these factors leads me to conclude that my discretion regarding costs is best exercised by awarding costs to no one in this proceeding or on the applications leading up to this hearing.

Prudential is discharged in respect of the $179,500.

Disbursing funds

These claims were proved at the hearing:

In summary, the $179,500 shall be disbursed as follows:

Funds otherwise payable to Advance shall remain in Court to the credit of the action between Advance and Polyco, until such time as that defended lawsuit is resolved.

Funds payable to the Director of Labour Standards shall be retained by him in trust pending determination of the appeal mounted by Polyco against the award to the employee.

Order accordingly.