Ouellet (Trustee of), 2004 SCC 64, [2004] 3 SCR 348

Ouellet (Trustee of), [2004] 3 S.C.R. 348, 2004 SCC 64

National Bank of Canada                                                                                Appellant

v.

Samson Bélair Deloitte & Touche Inc., Trustee                                         Respondent

Indexed as:  Ouellet (Trustee of)

Neutral citation:  2004 SCC 64.

File No.:  29864.

2004:  April 20; 2004:  October 28.

Present:  McLachlin C.J. and Major, Bastarache, Binnie and LeBel JJ.

on appeal from the court of appeal for quebec

Bankruptcy and insolvency — Instalment sale — Setting up of trustee’s reservation of ownership — Failure to publish reservation within legislated time limit — Whether reservation of ownership not published within time limit provided for in art. 1745 C.C.Q. can be set up against trustee — Whether trustee can be considered third person for purposes of art. 1749 C.C.Q.

In 1997, the debtor bought property from a dealer in instalment sales, and the dealer assigned its rights to the appellant bank.  A few years later, the debtor made an assignment in bankruptcy and the respondent was appointed trustee in bankruptcy.  The bank then sent the respondent a proof of claim for its reservation of ownership in respect of the property.  The trustee disputed the claim because the bank had not published the reservation within the time limit provided for in art. 1745 C.C.Q.  The Superior Court and Court of Appeal agreed with the trustee.  They felt that the reservation could not be set up against the trustee because of the failure to publish it within the prescribed time limit. 

Held:  The appeal should be allowed.

Based on the law applicable to this case, the reservation of ownership could be set up against the trustee. According to art. 1745 C.C.Q., an instalment sale is a term sale by which the seller reserves ownership of the property until full payment of the sale price, and this reservation of ownership must be published to have effect against third persons.  If it is not published or if it is published late, art. 1749 C.C.Q. provides that the seller (or transferee) may take the property back only if it is in the hands of the original buyer.  The reservation of ownership must not be equated with a security within the meaning of the Civil Code of Québec.  The legal relationship between the original buyer and the seller must be interpreted as one of ownership.  In this context, the rules regarding the scope of the trustee’s seisin are relevant.  Since a failure to publish does not have the effect of conveying ownership to the original buyer, the property sold does not become part of his or her patrimony.  Upon bankruptcy, the trustee is vested with only the rights the bankrupt had in the property.  He or she cannot be considered a third person acquirer for the purposes of art. 1749 C.C.Q. and cannot contest the claim of the seller, who still holds the right of ownership in the property.

Cases Cited

Referred to:  Lefebvre (Trustee of), [2004] 3 S.C.R. 326, 2004 SCC 63, rev’g [2003] R.J.Q. 819, 229 D.L.R. (4th) 697, and [2003] Q.J. No. 2305 (QL); Giffen (Re), [1998] 1 S.C.R. 91; Venne v. Quebec (Commission de protection du territoire agricole), [1989] 1 S.C.R. 880.

Statutes and Regulations Cited

Act to amend the Civil Code and other legislative provisions as regards the publication of personal and movable real rights and the constitution of movable hypothecs without delivery, S.Q. 1998, c. 5, s. 2.

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 81 .

Civil Code of Québec, S.Q. 1991, c. 64, arts. 1745, 1749, 2941.

Federal Law — Civil Law Harmonization Act, No. 1, S.C. 2001, c. 4, ss. 25  to 28 .

APPEAL from a judgment of the Quebec Court of Appeal, [2003] R.J.Q. 1434, [2003] Q.J. No. 5544 (QL), affirming a decision of the Superior Court, [2002] Q.J. No. 410 (QL).  Appeal allowed.

Reynald Auger and Lucien Godbout, for the appellant.

Alain Vachon and André J. Brochet, for the respondent.

English version of the judgment of the Court delivered by

LeBel J. —

I.       Introduction

1                                In this appeal, the Court must decide whether a reservation of ownership in respect of an automobile and a mobile home sold in instalment sales can be set up against the buyer’s trustee in bankruptcy when the seller has failed to publish his or her rights in a timely manner in the register of personal and movable real rights (“RPMRR”) as required under the Civil Code of Québec, S.Q. 1991, c. 64 (“C.C.Q.”).  The case at bar was heard at the same time as two others that raise a similar issue, namely whether a lessor’s right of ownership under a long‑term lease of an automobile can be set up against the lessee’s trustee in bankruptcy (Lefebvre (Trustee of); Tremblay (Trustee of), [2004] 3 S.C.R. 326, 2004 SCC 63 (hereinafter “DaimlerChrysler” and “GMAC”)).  A separate judgment is being filed today in those cases.

2                                In the case at bar, the Quebec Superior Court and Court of Appeal both ruled that the reservation of ownership relied on by the appellant could not be set up against the trustee because it was not published within the time limit provided for in the Civil Code of Québec.  For the reasons that follow, I find that the reservation of ownership could in fact be set up against the trustee.  In the context of the facts relevant to this appeal, the trustee did not have the status of a third person for the purposes of the Civil Code of Québec.  Consequently, I would allow the appeal and admit the claim of the appellant, the National Bank of Canada (“Bank”).

II.      Origin of the Case

3                                On August 25, 1997, Stéphane Ouellet bought a mobile home, and on April 8, 1998, he purchased a Chevrolet Silverado.  He bought this property from a dealer in instalment sales, and the dealer assigned its rights to the Bank on the day the contracts were signed.  The reservation of ownership and the assignment thereof were not published in the RPMRR until February 28, 2001.

4                                In the meantime, on December 1, 2000, Mr. Ouellet made an assignment under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B‑3  (“B.I.A. ”).  The respondent was appointed trustee in bankruptcy.  On February 1, 2001, the appellant sent the respondent a proof of claim for its reservation of ownership in respect of the property and requested that it be put in possession of the property pursuant to s. 81  B.I.A.  On February 8, 2001, the trustee gave notice that it disputed the claim because the Bank had not published the reservations of ownership, which consequently had no effect against the trustee.  On February 23, 2001, the Bank brought a motion for appeal in the Superior Court against the notice of dispute.

III.    Judicial History

A.     Superior Court

5                                Barakett J. dismissed the Bank’s motion: [2002] Q.J. No. 410 (QL).  He pointed out that a reservation of ownership in the context of an instalment sale must be published in the RPMRR.  In his view, a reservation of ownership must be regarded as a security.  Based on what he understood to be the principles laid down in Giffen (Re), [1998] 1 S.C.R. 91, he held that, as the reservation of ownership had not been published within the legislated time limit, it had no effect against the buyer’s trustee in bankruptcy.  In his opinion, this conclusion also applied to the buyer’s ordinary creditors.

B.      Court of Appeal (Rousseau‑Houle, Rochette and Morin JJ.A.)

6                                The Bank appealed to the Court of Appeal, which unanimously affirmed the trial judgment: [2003] R.J.Q. 1434.  The court relied on its own consistent case law, including the judgments rendered on March 19, 2003, in Lefebvre (Syndic de), [2003] R.J.Q. 819, 229 D.L.R. (4th) 697, and Tremblay (Syndic de), [2003] Q.J. No. 2305 (QL), which were subsequently appealed to this Court.  The Court of Appeal expressed the opinion, based on its case law, that a reservation of ownership in respect of the sale of a road vehicle is in the nature of a security and must be published as required by law.  Failing this, it cannot be set up against a trustee, who is a third person for the purposes of art. 1749 C.C.Q. and may therefore rely on the failure to publish.

IV.    Relevant Legislative Provisions

7                                Civil Code of Québec, S.Q. 1991, c. 64

1745.   An instalment sale is a term sale by which the seller reserves ownership of the property until full payment of the sale price.

A reservation of ownership in respect of a road vehicle or other movable property determined by regulation, or in respect of any movable property acquired for the service or operation of an enterprise, has effect against third persons only if it has been published; effect against third persons operates from the date of the sale provided the reservation of ownership is published within fifteen days.  As well, the transfer of such a reservation has effect against third persons only if it has been published.

1749.   A seller or transferee who, upon the default of the buyer, elects to take back the property sold is governed by the rules regarding the exercise of hypothecary rights set out in the Book on Prior Claims and Hypothecs; however, in the case of a consumer contract, only the rules contained in the Consumer Protection Act are applicable to the exercise by the seller or transferee of the right of repossession.

If the reservation of ownership required publication but was not published, the seller or transferee may take the property back only if it is in the hands of the original buyer; the seller or transferee takes the property back in its existing condition and subject to the rights and charges with which the buyer may have encumbered it.

If the reservation of ownership required publication but was published late, the seller or transferee may likewise take the property back only if it is in the hands of the original buyer, unless the reservation was published before the sale of the property by the original buyer, in which case the seller or transferee may also take the property back if it is in the hands of a subsequent acquirer; in all cases, the seller or transferee takes the property back in its existing condition, but subject only to such rights and charges with which the original buyer may have encumbered it at the time of the publication of the reservation of ownership and which had already been published.

2941.   Publication of rights allows them to be set up against third persons, establishes their rank and, where the law so provides, gives them effect.

Rights produce their effects between the parties even before publication, unless the law expressly provides otherwise.

V.     Analysis

A.     Issues

8                                This appeal, like the appeals considered in GMAC and DaimlerChrysler, raises the issue of the interplay between the rights of the owner of property and the rights of the trustee in bankruptcy of the user of the property.  However, this appeal presents the issue in a different context, as has already been mentioned.  The dispute arises out of a contract for an instalment sale within the meaning of art. 1745 C.C.Q.  It must therefore be determined whether the reservation of ownership in favour of the seller has effect against the buyer’s trustee in bankruptcy even though the reservation was not published in the RPMRR within the legislated time limit.

9                                In addressing this issue, I do not intend to go back over the distinction between the right of ownership and real security, the classification and definition of these concepts in the Civil Code of Québec, or the nature and effects of the publication of rights, or over the trustee’s status and role and the scope of his or her seisin following a bankruptcy.  On these topics, I refer the reader to the reasons for judgment in GMAC and DaimlerChrysler.  In the instant case, it will suffice to review the aspects of the effect against third persons specific to the instalment sale and to the failure to publish the reservation of ownership provided for in the case at bar.  In my opinion, by relying on its consistent line of authority, the Court of Appeal incorrectly equated the reservation of ownership with a security within the meaning of the Civil Code of Québec and treated the trustee as a third person for all purposes without giving adequate consideration to the complex nature of the trustee’s role.  As a result, the Court of Appeal found that a trustee was in the same position as a third person for the purposes of art. 1749 C.C.Q. and could argue that the reservation of ownership had no effect against it owing to the failure to publish.  If the Court of Appeal had correctly characterized the rights arising out of the instalment sale and had accurately defined the trustee’s position in relation to the bankrupt and hence the scope of the trustee’s seisin, it would have recognized the appellant’s right to claim the property to which its reservation of ownership applied.

B.      The Instalment Sale and the Reservation of Ownership

10                            The definition of an instalment sale has been debated often in Quebec civil law.  In 1989, a decision of this Court settled the difficulties involved in defining the nature of such a contract.  In Venne v. Quebec (Commission de protection du territoire agricole), [1989] 1 S.C.R. 880, Beetz J. expressed the opinion that an instalment sale in respect of an immovable should be considered a term sale under which the transfer of ownership is suspended until the sale price is paid (pp. 900 and 902).  Article 1745 C.C.Q. entrenched this analysis of this type of contract by defining the instalment sale as “. . . a term sale by which the seller reserves ownership of the property . . .”.  Ownership of the property thus remains with the seller until the term is fulfilled.  Since the transfer of ownership takes effect only at that time, the property continues to be part of the seller’s patrimony.  The seller retains ownership rather than a mere security interest, according to the definition of an instalment sale contract adopted in art. 1745 C.C.Q.

11                            Next comes the issue of the publication of rights.  Since 1998, art. 1745 C.C.Q. has required that reservations of ownership be published in the RPMRR to have effect against third persons.  This requirement was introduced into the Civil Code of Québec by s. 2 of the Act to amend the Civil Code and other legislative provisions as regards the publication of personal and movable real rights and the constitution of movable hypothecs without delivery, S.Q. 1998, c. 5.  It is therefore necessary to consider the consequences of a failure to publish.

12                            Article 1749 C.C.Q. attaches consequences to a failure to publish a reservation of ownership.  In such cases, the seller may take the property back only if it is still in the hands of the original buyer, and subject to any charges with which it may have been encumbered in favour of a third person.  In cases of late publication, repossession of the property is subject to any charges with which it may have been encumbered since the property was delivered to the buyer.  In light of the facts of this appeal, it must now be determined whether the trustee should be considered a third person for the purposes of art. 1749 C.C.Q. and whether the trustee should be allowed to argue that the reservation had no effect against it because it had not been published at the time of the debtor’s bankruptcy.

13                            In considering this issue, we must avoid equating the reservation with a simple security interest.  As has been noted above, art. 1745 of the Civil Code of Québec defines a reservation of ownership as a right of ownership.  Article 1749 C.C.Q. recognizes the right to take the property back if it is still in the hands of the original buyer.  Thus, despite the economic function of this type of contract in the automobile business, the legal relationship between the original buyer and the seller must always be interpreted as one of ownership in the legal sense and not as a security relationship.

14                            In this context, the rules regarding the scope of the trustee’s seisin, which I have discussed in the reasons for judgment in GMAC and DaimlerChrysler, remain relevant.  A failure to publish does not have the effect of conveying ownership to the original buyer.  The property sold does not become part of his or her patrimony.  Upon bankruptcy, the trustee is vested with only the rights the bankrupt had in the property.  In terms of this aspect of the trustee’s role at the time of the bankruptcy, the trustee cannot be considered a third person acquirer and cannot contest the claim of the seller, who still holds the right of ownership in the property.

15                            This is the conclusion that must be drawn from the law applicable to this case.  However, it should be noted that amendments made to the Bankruptcy and Insolvency Act  since the relevant time would have led to a different result had they been applicable to this case.  The amendments made to this federal Act’s definition of  “secured creditor” by ss. 25  to 28  of the Federal Law — Civil Law Harmonization Act, No. 1, S.C. 2001, c. 4 , equate a reservation of ownership in an instalment sale with a security for the trustee’s purposes.  In the context of a bankruptcy, this right now is of no effect against the trustee if it is not published.

16                            For the purposes of this appeal, the reservation of ownership retains its full effect.  Thus, as the Civil Code of Québec does not permit this right of ownership to be characterized as a security, Giffen does not apply and the Bank’s claim should have been admitted.  The Bank’s appeal was well founded in all respects.

C.     Costs

17                            As in DaimlerChrysler, the circumstances of this appeal justify awarding costs to the respondent on a solicitor‑client basis even though the appeal is being allowed.  The appellant wished to bring before this Court a broad issue relating to the law of security and insolvency that went far beyond the individual interests at stake in this case, especially for the trustee.  The trustee, through its counsel, played a helpful role in the conduct of the appeal and the analysis of the problems it raised.  It would accordingly be unfair to expect the respondent to bear the full burden of its participation in the case before this Court.

VI.    Conclusion

18                            For these reasons, I would allow the appeal so as to admit the appellant’s claim to the property to which its reservation of ownership applied.  However, I would award the respondent reasonable costs in this Court on a solicitor‑client basis.

Appeal allowed.

Solicitors for the appellant:  Langlois Kronström Desjardins, Lévis, Quebec.

Solicitors for the respondent:  Brochet Dussault Larochelle, Sainte-Foy, Quebec.