Her Majesty the Queen v. Restaurant & Bar La Seigneurie De Sept-Lles Inc, [1977] CTC 96, 77 DTC 5129

Walsh, J:—On June 28, 1976 a certificate was produced in this Court pursuant to section 223 of the Income Tax Act establishing that defendant was indebted to plaintiff pursuant to section 24 of the Canada Pension Plan and section 79 of the Unemployment Insurance Act for amounts totalling with penalties and interest $16,239.70 with additional interest at 10% on $12,369.43 from June 5, 1976 to the date of payment, the claims for the Canada Pension Plan remittances dating from August 21, 1973, and for unemployment insurance remittances from September 10, 1974. On August 3 a writ of fieri facias was issued for the seizure of the moveables and moveable effects of defendant for recovery of these amounts and the seizure was in due course made on August 24 and September 14, 1976.

Opposant makes an opposition to this seizure alleging that nearly all the objects so seized were subject to a contract of commercial pledge entered into by defendant in its favour on January 14, 1975 and duly registered in the Registry Office of Sept-Iles on January 21, 1975, said contract having been entered into to guarantee a loan by the bank to defendant of $20,000 dated January 14, 1975 and bearing interest at the rate of 14 /z%. Opposant states that defendant has been in default to make its monthly payments of capital and interest due by virtue of the said commercial pledge since January 1976, and that it is therefore entitled to revendicate the property subject to this pledge but that plaintiff refuses to grant main-levee seizure which has been made.

The parties do not dispute the facts, nor that in the event of judicial sale of the moveable property seized the claim of opposant would rank ahead of that of plaintiff pursuant to the provisions of article 1994 of the Quebec Civil Code which ranks the claims of creditors who have a right of pledge or of retention in the fourth rank and the claims of the Crown against persons accountable for its moneys in the tenth rank. It is plaintiff’s contention, however, that the fact that opposant is a creditor in a contract of commercial pledge of the said assets cannot prevent other creditors, whether ordinary creditors or privileged creditors such as plaintiff, from seizing these assets. Opposant has certain rights arising from its contract as set out in articles 1979e to k of the Quebec Civil Code and in particular in the event of default of the debtor whose rights are set out in article 1979i which reads as follows:

19791. In case of default of the borrower to fulfill his obligations, the creditor may, without prejudice to any other recourse,

1. oblige the borrower to deliver to him, on demand, the things pledged;

2. sell the same at auction after notice in the manner provided in article 1671a.

The bank as opposant admits that it has not availed itself of the provisions of this article nor does it at present intend to do so as it wishes to let defendant continue to operate its business in the hope of eventually recovering from its financial difficulties and repaying the bank loan together with interest. Plaintiff contends that a contract of commercial pledge does not protect the assets pledged from claims of any other creditor since the rights of the opposant consist in a privilege upon the proceeds of the sale of the said assets when and if they are brought to judicial sale, as a result of plaintiff’s seizure, or as the result of the opposant undertaking to sell them at auction as provided in article 1979i(2).

Any jurisprudence dealing with contracts of pledge, sales with right to redemption, and similar matters prior to 1962 when articles 1979e to k dealing with commercial pledge were inserted in the Quebec Civil Code is of little help and counsel for both parties agreed that there has been no definitive jurisprudence subsequently which is directly in point although I was referred to various authorities who have commented on same including an article by Notary Roger Comtois on “Commercial Pledge’’ appearing in the McGill Law Journal, Vol 9, No 4, Professor Philippe Ferland’s Traite de Procédure Civile and Professor Jacques Anctil’s Commentaires sur le de Procédure Civile. None of these authorities give a direct answer to the question before the Court, however.

Notary Comtois, a highly respected authority on Quebec civil law, in his article (translated) “New Legislation: Commercial Pledge’’ (supra) which is reprinted in La Revue du Notariat, Vol 66, No 4, states at page 164 in dealing with the effects of registration of a commercial pledge (translated):

. . It is with respect to third parties that registration becomes significant; the creditor of the pledge cannot oppose his right to privileged or hypothecary creditors if he has not first registered his privilege.

Plaintiff in the present case does not dispute that opposant’s commercial pledge was duly registered before the registration of its claim for taxation (even though the origin of the amounts so claimed antedated opposant’s loan), and hence would rank ahead of plaintiff for proceeds of the sale of the property, but this does not settle the issue of opposant’s right to prevent plaintiff from seizing same. Notary Comtois recognized the opposant’s right of revendication and of preference on the price of sale when he stated at page 164 (translated):

. . . The rights of the creditor of the pledge are considerable. He can revendi- cate the thing, can sell it and exercise with respect to it the rights belonging to a privileged creditor, that is to say the right to be preferred on the price and the right of reclaiming same.

He does not deal specifically, however, with the interpretation to be given to article 597 of the Quebec Code of Civil Procedure and its interpretation in the light of article 604 which gives rise to the present issue. These articles read respectively as follows:

597. The opposition may also be taken by a third party who has a right to revendicate any part of the property seized.

604. The creditors of the debtor, for any reason, even for rental, cannot oppose the seizure or the sale; they can only exercise their privilege upon the proceeds of the sale, by opposition for payment. Such opposition must be served at the latest on the tenth day after the sale, and is made and contested in the manner set forth in articles 600, 601 and 602.

Professor Philippe Ferland in his Traite de Procédure Civile (supra) states in Vol 2, page 220 (translated):

If the debtor has a loan covered in the form of sale or any other contract and as a guarantee of repayment he gives moveable property as a pledge the problem is simple to resolve: if the pledge was not handed over to the creditor or another person agreed upon “the privilege subsists only while the thing pawned remains in the hands of the creditor or of the person appointed by the parties to hold it’’, (Article 1970 CC) and with the exception of the pledge of agricultural property (Article 1979a CC) or commercial pledge, (Article 1979e CC) the opposant, since he is not in possession of the pledge cannot succeed in taking advantage of Article 597 CP.

This would imply a conclusion by him that in the case of commercial pledge article 597 of the Quebec Code of Civil Procedure can be used to revendicate the property seized. As authority for this conclusion, however, he cites considerable jurisprudence but all dating to a period before the 1962 amendments to the Quebec Civil Code which first established commercial pledge, the very essence of which is that the property pledged can remain in the hands of the debtor, unlike ordinary pledge or pawning where possession becomes vested in the lender.

Professor Anctil in his Commentaires sur le Code de Procédure Civile (supra) which appeared in the Publication de la Revue de Droit de Sherbrooke 1974, states at page 159 (translated):

If the vendor has conserved the ownership of the object until payment in full he can make an opposition to seizure. If the third party invokes a right of pledge it is necessary that he must have been dispossessed of it. It is to be noted, however, that the lessor cannot oppose the seizure of the moveable effects affected by his pledge. In effect, he has no right of retention over these objects; he only has a privilege which he will exercise on the product of the sale by an opposition to payment.

Again the jurisprudence which he cites dates prior to 1962.

Plaintiff contends that if article 597 of the Quebec Code of, Civil Procedure is interpreted without reference to article 604 so that the opposant who has not exercised its right to revendicate the property seized can nevertheless prevent any other creditor, even a privileged creditor, from seizing same this would lead to an absurd situation. For example, the loan, as security for which the commercial pledge is given, which in the present case amounts to $20,000, might be made on moveable property worth a great deal more, or alternatively, even if it were made on property of a value merely sufficient to protect the loan, might as a result of subsequent payments have been reduced to a point where if the property were brought to sale it could be expected to realize considerably more than the amount of the outstanding balance. The lender as creditor of the commercial pledge might then be quite content not to take any steps to collect the outstanding indebtedness, even if it were overdue as it allegedly is in the present case, especially as it bears 14 /2% interest, and thereby this property of the debtor would be protected from any other creditor if opposant’s contentions are upheld. The inequity is all the more evident in the present case where it may well be that the moveable effects consisting of the entire equipment of defendant’s restaurant may constitute its only asset. Opposant’s answer to this argument is that the registration of the commercial pledge warns subsequent creditors that they cannot count on this property as security for any debts which the debtor may incur towards them. This is hardly the situation in the present case, however, where the indebtedness to the plaintiff did not result from any voluntary act of plaintiff by way of making loans or advances to defendant but arose from the operation of the taxation statutes by virtue of which defendant became obliged to collect and remit to plaintiff certain sums which it has failed to do. On the other hand, if property subject to a duly registered commercial pledge can be seized by another creditor, this certainly diminishes the security of a creditor in such a contract.

In these proceedings it is the effect of the law as it stands at present which must be applied, and the correct interpretation of it decided without taking into consideration the value of the property pledged, the amount of the loan or overdue balance on same, or the rate of interest, as the problem is a general one and not one which only arises in this case.

It is therefore necessary to examine the pertinent sections of the Quebec Civil Code and of the Quebec Code of Civil Procedure. Article 1979; of the Quebec Civil Code provides that 8 days after the sale (in the event that the creditor of the pledge decides to have the moveables subject to the pledge sold by auction) the creditor must account to the borrower for the proceeds of the sale and remit any surplus remaining in his hands after the payment of the debt and the costs of the sale. This surplus would then of course be subject to the claims of other creditors according to their rank pursuant to article 1994 of the Quebec Civil Code, and they could make an opposition to payment of same to the debtor.

Article 607 of the Quebec Code of Civil Procedure provides:

607. A first seizing creditor who fails to proceed with diligence cannot prevent the sale by a second seizing creditor.

This is necessary to protect subsequent creditors from effects of lack of diligence on the part of a first seizing creditor. In the present case the bank has not taken the moveable effects pledged back, and has indicated that it does not intend to do so nor to bring them to sale at present, so there is perhaps some analogy to be made although the article in question is not directly applicable.

It is clear from article 19791 (supra) that the rights of the creditor of the pledge include the right to require the borrower to deliver on demand the things pledged. This, however, gives the creditor only the possession of the property so pledged, and does not confer any rights of ownership in it. Article 1979d of the Quebec Civil Code appears in the chapter entitled “Of the Pledge of Agricultural Property’’ but by article 1979K appearing in the chapter dealing with commercial pledge it is stated “Article 1979d applies to the pledge contemplated by this chapter’’. The said article 1979d reads as follows:

1979d. Whatsoever is pledged shall be seizable for what is owing to the creditor; it cannot be stipulated that in default of payment the latter shall become owner, and, when he has obtained possession of what was pledged, he must, if the person who pledged the same requires it, realize upon same without needless delay.

Article 1979h applies to the pledge contemplated in this chapter.

The opposant bank therefore cannot under any circumstances become the owner of the property pledged (unless of course it purchases it if it is put up for sale as a result of seizure by another creditor) and even if it exercised its option to take possession of the property it would then have to realize upon same without needless delay if the person pledged required it. Surely it cannot have been contemplated that, since the debtor would not of course require that the property so repossessed by the bank be brought to sale to satisfy plaintiff’s claim, the bank could if it took possession of the property defeat plaintiff’s rights by not proceeding with the sale of same. Even less can it have been contemplated that the bank, by refusing to exercise its rights under either of the options of article 1979i, despite the debtor’s default, can defeat plaintiff’s claim against these assets.

I am of the view therefore that article 597 of the Quebec Code of Civil Procedure should not be interpreted as permitting an opposition to seizure being made by a third party who has a right to revendicate the property seized unless it has a right of ownership in same. By virtue of the contract of commercial pledge the bank has the right as creditor of the pledge to take back possession of the property by obliging the borrower to deliver to it on demand the things pledged but this is not an act of revendication by an owner whose property has been seized while in the possession of a third party.

Opposant contends that since article 597 refers to an opposition by a third party “who has a right to revendicate’’ it is not necessary that the revendication should actually have taken place. While this would be a reasonable literal interpretation of the article it would appear to be in conflict with article 604, and this is especially striking in the present case where, although the opposant has a right to revendicate the possession, although not the ownership of the property, it has no immediate intention of exercising this right. Article 604 provides specifically that the creditors even for rental (which gives a privileged right over property in the premises by articles 1637 to 1640 CC) cannot oppose the seizure or sale and that they can only exercise their privilege upon the proceeds of the sale by opposition for payment. It is opposant’s contention that while it is undoubtedly a creditor it cannot be considered as a creditor within the meaning of the said article 604, but is in a special position as pledgee by virtue of its contract of commercial pledge. The wording of article 604 is very broad however, indicating that the creditors cannot “for any reason” oppose the seizure or sale. While the opposant has certain special rights as a pledgee in a contract of commercial pledge it must confine itself to the rights given to it under articles 1979e to k of the Quebec Civil Code, and although it would have the right to take possession of the property pledged by obliging the borrower to deliver things pledged to it pursuant to article 1979i(1 ) this is not equivalent to the right of revendication of an owner provided for in article 597 of the Quebec Code of Civil Procedure which allows him to make an opposition to seizure, but rather the matter falls within article 604 and the opposant as a creditor, even a very special sort of creditor, cannot oppose the seizure, but is merely entitled to exercise its privilege upon the proceeds of the sale by an opposition for payment.

For the above reasons the opposition to seizure is dismissed with costs.