Salter & Arnold, Ltd. v. Dominion Bank, [1926] SCR 621

Supreme Court of Canada

Salter & Arnold, Ltd. v. Dominion Bank, [1926] S.C.R. 621

Date: 1926-05-04

Salter & Arnold, Ltd. (Plaintiff) Appellant;

and

The Dominion Bank (Defendant) Respondent.

1926: February 9, 10; 1926: May 4.

Present: Anglin C.J.C. and Duff, Mignault, Newcombe and Rinfret JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR MANITOBA

Bankruptcy—Alleged preferential payments by debtor—“Intention”to give a preference—Bankruptcy Act, D., 1919, c. 36, s. 31—Banks and banking—Bank’s lien on, and right to appropriate, credit balance in current account.

Appellant, trustee in bankruptcy, sued to recover from respondent bank the amount of certain payments to the bank made within three months of the assignment in bankruptcy, alleging that said payments were illegal, as made with a view to giving the bank a preference over other creditors and therefore obnoxious to s. 31 of the Bankruptcy Act. The debtor firm had with the bank a current account and a “liability account.” All moneys were paid into the current account and the firm’s cheques were charged to that account. When that account became overdrawn the credit balance was restored by a loan secured by a demand note, the amount of which was credited in the current account, the note being recorded in the liability account. Interest was charged on these notes, and it was the practice when, from time to time, the current account was in funds, to transfer moneys available to the firm’s credit in the liability account so as to reduce the interest bearing obligations. Of the six impeached payments, five were made by cheque, charged to the firm’s current account, retiring notes previously given, in accordance with this practice, and one was effected by the bank charging the amount of an unpaid note to the current account without the formal authority of a cheque.

Held, on the evidence, the prima facie presumption under s. 31 (2) that the payments were made with a view to giving a preference to the bank had been displaced. There was not, within the meaning of said Act, an intent to create a preference on the part of the debtor firm or of the bank. The circumstances in evidence indicated that the firm gave the cheques without any expectation that the bank would obtain advantage over any other creditor. It is settled law that the intention to give a preference envisaged by s. 31 is an intention in fact, and it must be an intention entertained by the debtor. As to the payment effected by appropriating the credit balance in the current account for the payment of the note, the bank possessed a lien upon any such balance as security for any indebtedness and a right to set off such indebtedness against any such balance. The question would have been different if it could have been maintained that the credit balance was composed of moneys deposited in such circumstances as to mark the deposits themselves as preferential payments, but any such contention in this case was untenable.

Judgment of the Court of Appeal for Manitoba (34 Man. R. 565) aff.

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APPEAL from the judgment of the Court of Appeal for Manitoba[1] reversing the judgment of Galt J. in favour of the plaintiff[2] on the trial of issues directed to be tried pursuant to the provisions of The Bankruptcy Act and rules thereunder.

The plaintiff (appellant) was the authorized trustee in bankruptcy of the estate of Daniel Coughlin and J. L. Coughlin, carrying on business as “D. Coughlin & Company,” and claimed to recover from the defendant (respondent) bank the amount of six payments made by the debtor firm to the bank within three months preceding the authorized assignment.

The trial judge, Galt J., found that the payments in question had the effect of giving the bank a preference over other creditors of D. Coughlin & Company, and that the bank had failed to rebut the presumption raised by the statute against it, and gave judgment in favour of the plaintiff for the amount of its claim. The Court of Appeal for Manitoba set aside this judgment and ordered that the issues directed to be tried be decided in favour of the defendant and that the action and claim of the plaintiff be dismissed. The plaintiff appealed to the Supreme Court of Canada (on leave given by a judge of that court).

Hugh Phillips K.C. and C. K. Guild for the appellant.

I. Pitblado K.C. and E. F. Haffner for the respondent.

The judgment of the court was delivered by

Duff J.—The questions involved in this appeal are, in substance, questions of fact only. The claim of the appellants, the trustees in bankruptcy of Daniel Coughlin and J. L. Coughlin, trading under the firm name of D. Coughlin & Company, is to recover from the respondent bank the amount of six several payments in the months of September and October, 1920, which are alleged to have been illegal, as made with a view to giving the bank a preference over the other creditors of D. Coughlin & Company, and therefore obnoxious to s. 31 of The Bankruptcy Act.

[Page 623]

The assignment in bankruptcy took place on November 30, 1920. Since 1906, the firm had been carrying on business as live stock brokers, buying and selling live stock on commission, and occasionally as principals, and financing cattle buyers. The firm banked with the respondent bank, and for some years, at all events, before the assignment, working capital was provided chiefly through advances by the bank. From the year 1918 onwards, the firm had two accounts with the bank—a current account and an account known as the “liability account.” All moneys were paid into the current account, and the firm’s cheques were charged to that account. When the current account became overdrawn, the credit balance was restored by a loan secured by a demand note, the amount of which was credited in the current account, the note being recorded in the liability account. Interest was charged on these notes at the rate of seven per cent, and, as no interest was allowed to the firm upon its credit balances in the current account, it was the practice when, from time to time, the current account was in funds, to transfer moneys available for that purpose to the firm’s credit in the liability account, with the object of reducing the interest-bearing obligations. Of the impeached payments, five were made by cheque, charged to the firm’s current account, retiring notes previously given, in accordance with this practice. One was effected by the bank charging the amount of an unpaid note to the current account, without the formal authority of a cheque.

These payments were made within three months of the assignment in bankruptcy, and consequently fall within subsection 2 of section 31. There is therefore what the statute describes as “a prima facie” presumption that they were made with a view to giving a preference to the bank, and the question of fact is whether or not that presumption has been displaced.

The Court of Appeal unanimously held that there was not, within the meaning of the statute, an intent to create a preference on part either of the debtors or of the bank. This view is, I think, well founded.

In the summer of 1920, the position of the firm was considered by Mr. Patton, the assistant general manager

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at Winnipeg, who had before him a report of Mr. Sheffield, the local manager of the stock yards branch at St. Boniface, where the account was kept. Mr. Patton’s view, after a careful survey of the assets of the firm, as well as of those belonging to Mr. Daniel C. Coughlin, personally, was that, taking into account these last mentioned assets, there was a surplus, and he informed Mr. Daniel Coughlin that, if certain named conditions were complied with, the bank would carry on the account as before. The evidence of Mr. Sheffield and Mr. Patton is explicit that, if these conditions were met, there was no question of the willingness of the bank to continue to do business with the firm on the existing footing. Mr. Patton was absent from Winnipeg in September and the early part of October. Unfortunately, disputes arose between Mr. Coughlin and Mr. Bearsto, who was left in charge. There was ultimately, on the 8th of October, a heated interview: Mr. Bearsto demanded instant compliance with the conditions; Mr. Coughlin demanded that action should be postponed until Mr. Patton’s return; and, as he remained obstinate in this, he was informed that he must make banking arrangements elsewhere. In the meantime, large sums of money had been paid in to the credit of the current account, and, in the ordinary way, cheques had been given on that account, five of which are among the impeached payments. No hint of difficulty seems to have arisen until October. During the month of September (September 4), Mr. Bearsto authorized an advance of $25,000, and in explanation of that advance he states in his evidence that the firm was not insolvent when the personal assets of Daniel Coughlin were taken into account; and further, that in October, if the security demanded by the bank had been given, there would have been no rupture of the relations between the bank and the Coughlins. His evidence is entirely in accord with that of Mr. Patton, who says that, if the conditions were complied with, there was no thought of requiring the firm to liquidate its obligations: what the bank wanted was formal security upon Daniel Coughlin’s assets.

[Page 625]

In considering the question of intent, the acts of the bank officials in August and September must be regarded as affording weighty evidence. There was an investigation by the bank officials directly concerned—the assistant general manager at Winnipeg and the local manager charged with the supervision of the account—of the value of the available assets; an investigation conducted with the specific object of ascertaining whether or not the resources of the firm and of the members of the firm were such as to justify the bank in continuing to extend credit to the firm as before. There was a decision that the assets were sufficient, and that the credits might be continued if certain conditions, quite within the power of D. Coughlin & Company, should be complied with. This decision was communicated to Daniel Coughlin, and upon the view thus arrived at, as to the value of the assets, the bank acted, in September, in making the advance mentioned.

As to Daniel Coughlin, there seems no room for dispute that he not only believed himself to be solvent, but that he had so much confidence in his financial solidity as to suppose that a refusal by the Dominion Bank to give him further credit would not gravely embarrass him.

Such being the circumstances, the conclusion of the Court of Appeal seems founded on sufficient grounds that D. Coughlin & Company gave the impeached cheques in the full expectation, an expectation not without reason, that the account would be carried on, as it always had been, and that the outstanding cheques would be fully paid, and, in a word, that the bank would obtain no advantage over any other creditor in consequence of these payments.

As regards the payments made by cheque, this seems sufficient to dispose of the appeal. It is settled law that the intention to give a preference envisaged by s. 31 is an intention in fact, and whatever else may be said about it, it must be an intention entertained by the debtor.

As to the payment effected by appropriating the credit balance in the current account for the payment of the note of $14,000, I see no reason to differ from the opinion of two of the learned judges in the court below, that the bank possessed a lien upon any such balance as security for any indebtedness to it from the firm, and a right to

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set such indebtedness off against any such balance. The question presented would of course have been a very different one if it could have been maintained that the credit balance was composed of moneys deposited in such circumstances as to mark the deposits themselves as preferential payments. Sufficient has already been said to shew that in this case any such contention would be untenable.

It is necessary to refer to the able and elaborate judgment of the learned trial judge, Mr. Justice Galt. With great respect, I think the learned judges of the Court of Appeal are right in considering that the learned trial judge misdirected himself in relation to two rather important subjects: First, in considering the question of intent, an adequate survey of the facts would necessarily seem to embrace the fact that the bank was relying upon, and that D. Coughlin & Company knew that the bank was relying upon, the separate assets of Daniel Coughlin, as included in the resources justifying the credit extended to the firm; the full force of this was not appreciated by the learned judge. Second, the claim of the appellant was not based upon an allegation—and, indeed, it is difficult to understand how such a claim could be successfully advanced— that the bank was in possession of moneys received by D. Coughlin & Company in a fiduciary capacity, and therefore not subject to their disposition, and that such moneys they wrongfully, and with the bank’s knowledge of their fraud, transferred to the bank in liquidation of their indebtedness. The statement of claim as originally drafted comprised a claim on this basis, but the relevant allegations were struck out, and there was no issue properly before the learned trial judge as to the right of the customers of D. Coughlin & Company to recover from the bank moneys which the learned judge seemed to think were held by D. Coughlin & Company in trust for such customers. The case, as presented on the pleadings, rested upon the allegation that moneys, the property of D. Coughlin & Company, available for the satisfaction of the claims of their general creditors, were improperly and illegally paid by way of preference to the respondent bank. That allegation would not be established by making out that the payments alleged to constitute the preferences charged

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were effected by transfers of funds which in equity were the property of D. Coughlin & Company’s principals, who, so far as appears, have never complained of these transfers, and who, again, for aught that appears to the contrary, may, by their conduct or otherwise, have sanctioned them. The appellants’ claim rests upon the hypothesis that the payments were made out of moneys subject to the disposition of D. Coughlin & Company, and it is on that hypothesis that the litigation must be decided.

Appeal dismissed with costs.

Solicitors for the appellant: Phillips & Scarth.

Solicitors for the respondent: Munson, Allan, Laird, Davis, Haffner & Hobkirk.