Supreme Court of Canada
Mercure v. Marquette & Fils Inc., [1977] 1 S.C.R. 547
Date: 1975-10-27
L. Claude Mercure Appellant;
and
A. Marquette & Fils Inc. Respondent.
1975: March 7; 1975: October 27.
Present: Laskin C.J. and Pigeon, Dickson, Beetz and de Grandpré JJ.
ON APPEAL FROM THE COURT OF APPEAL FOR QUEBEC
Bankruptcy—Fault of omission by trustee—Action admissible without leave of the court—Cancellation of an insurance policy for non-payment of premiums—Obligation of the trustee to insure all property of the bankrupt, including all property burdened by a hypothec—Bankruptcy Act, R.S.C. 1952, c. 14, ss. 2(u) and (r), 9(1) and (2), 171.
Respondent held a hypothec on certain buildings belonging to Cie de Grain des Saults Ltée. The hypothec deed contained the standard insurance clause and the debtor did in fact sign an insurance policy for $5,000 payable to itself and expiring on June 2, 1966. Respondent did not have its name entered as beneficiary as the insurance clause entitled it to do. The debtor went bankrupt early in 1966 and appellant was appointed trustee on January 27. On March 23 appellant received notice of the cancellation of the policy because the premiums had not been paid. At no time did appellant take any action either to keep the policy in force or to reinsure the buildings; nor did he notify respondent of the cancellation of the policy. During the night of April 28-29, 1966 a fire destroyed the buildings mentioned in the hypothec deed. Respondent asked the Superior Court to order the trustee personally to pay it $5,000, namely the amount it would have collected if the insurance policy had been in force. The Superior Court and the Court of Appeal both found that appellant had been negligent, but the trial judge dismissed the action because the proceedings had not been authorized in accordance with s. 171 of the Bankruptcy Act. The Court of Appeal set aside that decision and ordered appellant to pay respondent $5,000. Hence the appeal to this Court.
Held: The appeal should be dismissed.
The contention that except by leave of the Court, as required by s. 171 of the Bankruptcy Act, no action lies against “a trustee with respect to any report made under, or any action taken pursuant to, the provisions of the Act” does not apply in the case at bar. On the contrary, the trustee is blamed for not having taken
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action required by the Act, that of insuring the buildings.
The trustee committed a fault by not keeping the insurance policies in force and not insuring the buildings, which, according to the evidence, were insurable although the insurers could request an additional premium in view of the bankruptcy. This obligation arises out of subss. (1) and (2) of s. 9 of the Bankruptcy Act and prevails although respondent had not had its name entered on the cancelled policy. The trustee was required not only to keep the insurance policies in force but, if they were found to be insufficient, to insure all insurable property of the bankrupt. When one reads together the definitions of the words “property” and “secured creditors” given in the Act, one must conclude that the bankrupt’s property in principle includes property burdened by a hypothec. The trustee must keep the insurance in effect for the benefit of a hypothecary creditor although, as appellant contends, the premiums should not be borne by the estate. Appellant was also required to notify respondent of the situation, which would have enabled it to protect its rights.
Crown Trust Co. et al. v. Workmen’s Compensation Board et al. (1975), 7 O.R. (2d) 466, referred to.
APPEAL from a judgment of the Court of Appeal of Quebec, setting aside an appeal of the Superior Court. Appeal dismissed with costs.
Pierre Bourque, Q.C., for the appellant.
Yves Morier, for the respondent.
The judgment of the Court was delivered by
DE GRANDPRÉ J.—The main question this appeal raises is as follows: if a trustee neglects to keep in force the insurance that existed at the time of the bankruptcy, fails to replace it when it is cancelled for non-payment of premiums and does not notify the hypothecary creditor of the situation, does he incur personal liability toward the latter when a fire destroys the buildings mentioned in the hypothec deed? It should be added that this hypothecary creditor has the standard additional guarantee which transfers to it insurance benefits; I shall return to this point.
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The Court of Appeal replied to this question in the affirmative, thus quashing the decision of the Court of first instance, which had not expressed an opinion on the matter, but dismissed the action because the proceedings had not been authorized in accordance with s. 171 of the Bankruptcy Act, R.S.C. 1952, c. 14. The facts date back to 1966 so it is to this Act that reference must be made.
Although most of the circumstances are summarized in the decision a quo, I feel it would be useful to mention the most significant of these:
—on October 8, 1964 plaintiff granted a credit of $12,000 to the Compagnie de Grain des Saults Limitée, and at that time obtained a hypothec on some immovable property, including a sawmill, a grist mill and a storage building, the extensive fire damage to which is the reason for the proceedings;
—the insurance clause contained in the hypothec deed is worded as follows:
[TRANSLATION] For the sake of safety, the debtor (Cie de Grain des Saults Ltée) undertakes to insure against fire the said buildings to the extent of the total amount of the hypothecs that may encumber or affect the same at any time, or up to the amount of their full insurable value, whichever is the less, to transfer this insurance to the creditor, and to cause the policies to be forwarded to the said creditor and to keep them in force at all times during the term of the loan; if this is not done the creditor may, if he so wishes, take such insurance at the debtor’s expense.
In the event of fire, the compensation resulting from all the insurance policies in effect on the said property, even those which have not been transferred to the creditor, will be paid to the latter to the extent of his interest, a copy hereof availing as signification of the transfer, if need be.
—early in 1966, when bankruptcy occurred, the debtor’s property, including the above mentioned buildings, was encumbered with two hypothecary claims:
(a) a first hypothec for $5,526 was held by the Caisse Populaire in Ste-Brigitte des Saults;
(b) the hypothec held by plaintiff was in the amount of $8,064;
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—at that time there were two policies on these buildings issued by the North British & Mercantile Insurance Co. Ltd.:
(a) Policy No. 2058939, expiring on September 9, 1966 and, regarding the buildings, specified compensation in the amount of $5,000, payable to the Caisse Populaire;
(b) Policy No. 2061730, expiring on June 2, 1966, in the amount of $5,000, payable to the debtor;
—plaintiff knew of the existence of the policies but had not had its name entered on the second policy as the insurance clause entitled him to do;
—the trustee was appointed on January 27, 1966, and the inspectors on March 2 of the same year;
—the trustee learned of the existence of the hypothecs at the beginning of his administration, their existence being corroborated subsequently in various ways, including the proof of claim submitted by plaintiff, followed by a report prepared by the trustee’s notary on April 12, 1966;
—on March 18, the insurer gave notice of the cancellation of both policies, for the sole reason that the premiums had not been paid; in the first case, notification was given to both the policyholder and the hypothecary creditor, while in the second only the policyholder was notified;
—these notifications were forwarded to the trustee by the president of the debtor company on March 23;
—prior to this the trustee had taken no action with respect to insurance and had done nothing regarding the payment of premiums; subsequently, he spoke to only one broker, who, on March 28 wrote to him as follows: [TRANSLATION] “we have serious doubts as to the possibility of your obtaining insurance”;
—neither the cancellation nor the absence of insurance were reported to respondent;
—the fire occurred during the night of April 28-29, 1966.
To these facts must be added two important statements by the Court of Appeal:
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(1) the insurer [TRANSLATION] “would have kept the policies in force, at least until their respective expiry dates, upon payment of premium arrears” (at p. 576);
(2) if respondent had been notified of the cancellation [TRANSLATION] “it would have had the buildings insured” (at p. 576).
These statements have their origin in the decision of the Superior Court and the evidence bears them out. I have no hesitation in adopting them.
On the basis of these facts, both the Superior Court and the Court of Appeal found that the trustee had been negligent. Both Courts expressly found negligence in the failure of the trustee to obtain insurance. In my opinion, the Court of Appeal also considered that the trustee committed another fault: he did not notify plaintiff-respondent of the situation.
The Superior Court, however, refused to make a ruling, and dismissed the action subject to recourse, because the provisions of s. 171 had not been complied with.
171. Except by leave of the court no action lies against the Superintendent, an official receiver or a trustee with respect to any report made under, or any action taken pursuant to, the provisions of this Act.
The Court of Appeal, in the words of Salvas J., rejects this conclusion for reasons I find entirely acceptable (at p. 577):
[TRANSLATION] Plaintiff does not complain of ‘any report made under, or any action taken pursuant to, the provisions of this Act’. On the contrary, it blames the trustee for not having taken action expressly required by the Act (s. 9(1)), that of insuring the debtor’s buildings against fire. It seems obvious to me that s. 171, the wording of which does not lend itself to misinterpretation, cannot apply in this case.
I would add only this: appellant asks this Court to read s. 171 as if any action arising out of his administration came under the provisions of this section. To be more precise, he asks the Court to find that leave of the Court is a prerequisite whenever an action is brought against a trustee by reason of his fault, whether this be an act of
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omission or commission. This is not the way in which the legislation is worded, however. Since the legislator used a much more restrictive wording in s. 171, it is not possible to come to any conclusion other than the one reached by the Court of Appeal.
I turn now to another argument of appellant, which I dismiss outright: the absence of fault. The Quebec Courts agree as to its existence, and this conclusion is fully justified by the evidence. It is true that the trial judge uses the words [TRANSLATION] “the trustee did not do everything possible to fulfill his obligation to insure”; this at first sight would seem to involve the application of the principle that has been upheld by the courts on many occasions: that the criterion in the area of fault is not perfection, but reasonable conduct. It is not my intention to question this principle, although, should the occasion arise, certain distinctions should be made, where the fault is delictual in nature or where it has been committed within another context. In this case a second reading of the entire paragraph of the first decision would suffice to show that the words “everything possible” do not correspond with what the judge had in mind:
[TRANSLATION] The evidence shows that the trustee did not do everything possible to fulfill his obligation to insure the property of the bankrupt company. The only way in which he could free himself of this responsibility was by proving that the buildings were not “insurable”, but from the testimony of Mr. Guy Tremblay of Agence Pierreville Inc. it would appear that the buildings were insurable, even if the insurers could request an additional premium in view of the bankruptcy. The Court thus comes to the conclusion that defendant, in his capacity of trustee, was negligent in failing to obtain insurance on the buildings owned by the Cie de Grain des Saults Ltée. (see Bankruptcy in Canada, Duncan & Honsberger, 3rd ed., p. 106).
In this context, the decision reached by the trial court is that appellant could have and should have done better, and this conclusion was correctly endorsed by the Court of Appeal.
Nevertheless, appellant argues, even if my conduct was faulty it cannot give rise to liability, because if insurance policy No. 2061730 had existed at the time of the fire, compensation would
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have been payable to the estate, since respondent’s name did not appear in the policy as beneficiary. In other words, it is argued, with respect to compensation respondent is only an unsecured creditor. Is there any basis for this contention? I think not.
When the trustee is appointed he assumes responsibility in two areas:
(a) he becomes the debtor’s representative;
(b) he becomes the representative of all the general creditors to the extent that he can even act on their behalf against the debtor.
When reading subss. (1) and (2) of s. 9 the trustee’s twofold responsibility must be kept in mind:
9. (1) The trustee shall forthwith temporarily insure and keep insured in his official name all the insurable property of the bankrupt, for such amount and against such hazards as he may deem advisable until the inspectors are appointed, whereupon the inspectors shall determine the amount for which and the hazards against which the bankrupt’s property shall be insured by the trustee.
(2) All insurance covering property of the bankrupt in force at the date of the bankruptcy shall immediately, and without any notice to the insurer or other action on the part of the trustee, and notwithstanding any statute or rule of law or contract or provision to a contrary effect, become and be, in the event of loss suffered, payable to the trustee as fully and effectually as if the name of the trustee were written in the policy or contract of insurance as that of the insured or as if no change of title or ownership had come about and the trustee were the insured.
From the time of the bankruptcy onward, all insurance policies should read as if the trustee’s name appeared in place of that of the debtor: nothing more. Other entries in the insurance contracts remain unchanged, from which it follows that the beneficiaries of insurance policies continue to enjoy their privileged position except, obviously, for exceptional cases such as undue preference. Furthermore, if at the time of the bankruptcy no insurance exists or it is insufficient, the trustee must insure all the insurable property of the bankrupt, for such amount as he may consider advisable. I hasten to add that as to the
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amount the fact that the trustee has discretionary powers does not mean that he is permitted to insure inadequately; I take this discretionary power to be that generally exercised by a prudent administrator.
It seems to me that what should be emphasized and what is essential is that the insurance should cover all the bankrupt’s property, rather than only that property which may not be affected by a hypothec. The wording used in s. 9(1) is clear, particularly if one rereads the definitions of the words “property” and “secured creditor” in s. 2 of the Act.
o) “property” includes money, goods, things in action, land, and every description of property, whether real or personal, movable or immovable, legal or equitable, and whether situate in Canada or elsewhere and includes obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, in, arising out of, or incident to property;
r) “secured creditor” means a person holding a mortgage, hypothec, pledge, charge, lien or privilege on or against the property of the debtor or any part thereof as security for a debt due or accruing due to him from the debtor, or a person whose claim is based upon, or secured by, a negotiable instrument held as collateral security and upon which the debtor is only indirectly or secondary liable.
The words which I have underlined have but one meaning: the bankrupt’s property in principle includes property affected by a hypothec.
In other contexts it may have been considered that the expression should have a narrower interpretation and be limited to the owner’s interest in the property, as for example when it is a case of determining the order of priority of certain privileges. In this regard see Crown Trust Co. et al. v. Workmen’s Compensation Board et al., and the decisions referred to therein. Even if this interpretation is correct, which is a point about which I refrain from expressing any opinion, it seems to me that the usual interpretation of the words is appropriate here.
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One must continue to take into account the trustee’s dual responsibilities in reading the other sections of the Act, as for example those dealing with proof of claims (ss. 85 to 93) or those governing sales in the Province of Quebec (ss. 55 to 59). The trustee must equilibrate the debtor’s obligations toward secured creditors and the debtor’s obligations toward unsecured creditors. Except in very definite cases for which the Act prescribes an exception (for example, s. 93, which rules out any additional compensation), the secured creditors receive the same protection as if the debtor had not gone bankrupt. In the case at bar this protection includes the transfer of insurance compensation, the clause cited at the beginning of these reasons making clear provision for the case before the Court, namely one in which the creditor, despite entitlement, did not appear to have its name written in the policy. I conclude from this that as the debtor’s successor, trustee-appellant had a general obligation to respect the right of respondent as stipulated in the insurance clause. In practice this means that appellant was required to do his utmost to keep in force any insurance existing at the time of the bankruptcy, and was also required to replace any insurance that was cancelled, and at any rate, was required to notify respondent of the situation if it was in fact impossible for him to obtain insurance.
Appellant raised the argument that he could not be forced to keep the insurance in effect for the benefit of a hypothecary creditor, or be obliged to obtain other insurance if the earlier insurance is cancelled, because the premiums he would have to pay should not be borne by the estate. Without expressing an opinion on the merits of this objection, I wish to emphasize that if there is, as I believe, an obligation for the trustee to respect the rights given to respondent by the insurance clause in the hypothec deed, this clause cannot be voided merely by the fact that compliance with it would give the trustee the right to recover the amount of the premium from the creditor.
If appellant is right, and if, notwithstanding his obligation to adequately insure all the bankrupt’s insurable property, he is not required to protect the rights of the secured creditor, what steps should
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the latter take to protect itself for the period from the date of bankruptcy to the expiry of the time limits prescribed by s. 86 et seq. of the Act? If the creditor itself must obtain insurance covering its interest in the buildings, a number of problems would require solution as a result of this double insurance for a total amount exceeding the value of the property. The solution of the Court of Appeal is a much better one: appellant’s fault makes him liable because respondent was entitled to preference with regard to insurance compensation. Furthermore, the Court of Appeal was also right in concluding that respondent was also entitled to be notified of the situation by the trustee, which would have enabled it to protect its rights.
Before going on to another point it is perhaps not inappropriate to recall that the Bankruptcy Act, while not business legislation in the strict sense, clearly has its origins in the business world. Interpretation of it must take these origins into account. It concerns relations among businessmen, and to interpret it using an overly narrow, legalistic approach is to misinterpret it. It seems to me that appellant is urging the Court to so interpret it.
There remains the question of damages. I shall not dwell on this point. Although the evidence might have been more complete, it was considered adequate by the Court of Appeal and no error in principle has been proven to the Court. At bottom, appellant argues that notwithstanding his fault which resulted in respondent’s loss of a substantial guarantee, respondent should first be required to exhaust all other remedies open to him under the terms of the hypothec deed. This seems to me to be contrary to the very idea of security as expressed in the insurance clause. Nevertheless, regarding the order to pay $5,000 made by the Court of Appeal, I would be prepared to subrogate appellant to all of respondent’s rights arising out of the hypothec with appellant ranking after respondent with respect to the hypothec balance of $3,064.
I would therefore affirm the decision a quo with the modification stated above, and dismiss the appeal with costs.
Appeal dismissed with costs.
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Solicitors for the appellant: Bisaillon, Leduc & Vallée, Montreal.
Solicitor for the respondent: Yves Morier, St-Hyacinthe.
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