Date:
20110516
Dockets: A-472-09
A-473-09
Citation: 2011 FCA 166
CORAM : LÉTOURNEAU J.A.
PELLETIER J.A.
TRUDEL J.A.
A-472-09
BETWEEN:
CAISSE
POPULAIRE DESJARDINS CHUTES MONTMORENCY
Appellant
and
ATTORNEY
GENERAL OF CANADA
Respondent
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A-473-09
BETWEEN:
CAISSE
POPULAIRE DESJARDINS DU BAS-RICHELIEU
Appellant
and
ATTORNEY
GENERAL OF CANADA
Respondent
REASONS FOR
JUDGMENT
LÉTOURNEAU
J.A.
Issues on appeal
[1]
These are
two appeals of a decision of Justice Martineau of the Federal Court
(judge) in dockets T‑1070‑08 and T‑1071‑08. Although
the amounts in dispute in each docket are different, the legal issue is the
same. On grounds of prematurity, the appellants were refused the claim for
payment they submitted to the Canada Small Business Financing Program (Program)
for the losses they sustained when the loans they had granted to small
businesses were not paid back at maturity.
[2]
Claims for
payment are authorized under and governed by the Canada Small Business
Financing Act, S.C. 1998, c. 36 (Act), while some aspects of their
administration are set out in the Canada Small Business Financing
Regulations, SOR/99‑141 (Regulations).
[3]
Essentially,
as stated by the respondent at paragraph 2 of his Memorandum of Fact and
Law, [translation] “the Program
encourages financial institutions to lend to small businesses by covering some
of their residual losses when their loans are not paid back at maturity, on the
condition that these institutions minimize those losses by first realizing on
any insurance policy under which the they are a beneficiary”.
[4]
The
appellants submit that the judge erred in determining the appropriate standard
of review for the Program authorities’ decision.
[5]
They are
also attacking the interpretation given to paragraph 37(3)(c) of
the Regulations. They state that the judge erred in law as regards the scope of
this paragraph when he ruled that the Program authorities were correct in
concluding that the paragraph applied to the blanket insurance policy with
Desjardins Assurances Générales.
[6]
More
specifically, they allege that the judge erred in law in finding that the
Regulations created a requirement to realize on any insurance policy before
approaching the Program for payment of the lender’s residual losses.
[7]
The
appellants also submit that the judge misdirected himself in giving precedence
to the Act and the Regulations over one of the conditions of the blanket
insurance contract which required that the insurer institute [translation] “any other proceedings
necessary to realize its guarantees in order to reduce any potential loss
covered under this insurance contract”: see clause 5.3c) of the blanket
insurance contract, Appeal Book in docket A‑427‑09, at
page 106 of Tab 13.
[8]
Last, the
appellants submit that the judge erred in confirming the Program authorities’
decision that the claim for payment submitted to them was premature.
Relevant legislation
[9]
I
reproduce subsection 5(1) of the Act and subsection 38(1) and paragraphs 37(3)(a),
(b) and (c) of the Regulations, in that order:
|
Liability of Minister
5. (1) Subject to subsection (2), the Minister is liable to
pay a lender any eligible loss, calculated in accordance with the
regulations, sustained by it as a result of a loan in respect of which the
requirements set out in this Act and the regulations have been satisfied.
CLAIMS PROCEDURE
38. (1) A lender must take all of the measures described in
subsection 37(3) that are applicable before submitting a claim to the
Minister for loss sustained as a result of a loan.
PROCEDURE ON DEFAULT
37.
…
(3) If the outstanding amount of the loan is not repaid
within the period specified, the lender must take any of the following
measures that will minimize the loss sustained by it in respect of the loan
or that will maximize the amount recovered:
(a) collect the principal and interest outstanding
on the loan;
(b) fully realize any security, guarantee or
suretyship;
(c) realize on any insurance policy under which
the lender is the beneficiary;
…
|
Responsabilité du ministre
5. (1) Sous réserve du paragraphe (2), le ministre est tenu
d’indemniser les prêteurs de toute perte admissible — calculée conformément
aux règlements — résultant d’un prêt conforme aux règles énoncées à la
présente loi et à ses règlements.
PROCÉDURE À SUIVRE EN CAS DE
RÉCLAMATION
38. (1) Le prêteur doit prendre les mesures applicables
prévues au paragraphe 37(3) avant de présenter au ministre une réclamation
pour la perte occasionnée par un prêt.
PROCÉDURE EN CAS DE DÉFAUT
37.
[…]
(3) Si le solde impayé du prêt n’est pas remboursé dans
le délai précisé, le prêteur doit prendre celles des mesures suivantes qui
réduiront au minimum la perte résultant du prêt ou permettront de recouvrer
le montant maximal :
a) le recouvrement du principal et des intérêts impayés du
prêt;
b) la réalisation intégrale de toute sûreté ou garantie ou
de tout cautionnement;
c) la réalisation des polices d’assurance dont le prêteur
est le bénéficiaire;
[…]
|
Analysis of the judge’s decision and the
parties’ submissions
[10]
For
reasons that will become apparent, there is no need for me to examine each of
the grounds for appeal that have been raised. I will begin with the issue of
the standard of review.
Standard of review applicable
to the Program authorities’ decision
[11]
I
concede that the terms used by the judge, and especially the sequence in which
they are used at paragraphs 9 to 13 of his decision, require careful and
repeated reading.
That being said, he evidently determined that
questions of interpretation of the Act and the Regulations are to be reviewed
on a correctness standard.
[12]
The
parties are in agreement on this point. Therefore,
they agree that determining whether the Program is a guarantee, as the
appellants submit, involves a question of law. They
also agree on the question of whether the Regulations do or do not have
priority over clause 5.3c) of the blanket insurance contract: this
is a question of law, also reviewable on a correctness standard.
[13]
I
note that clause 5.3(c) of the blanket insurance contract and
paragraph 37(3)(b) of the Regulations both require that insureds
realize their guarantees before they can submit a claim to the insurer and the
Program. In colloquial terms, they are both trying to pass the buck:
according to the insurer, insureds must first claim from the Program and,
according to the Program, insureds must first submit the claim to their insurer
for assessment. These two provisions, that is,
clause 5.3(c) and subsection 37(3), give rise in this case,
just as in McGeough v. O’Donals Restaurant of Canada Ltd., 92 B.C.L.R.
(2d) 288 (B.C.C.A.), where the issue was which insurance company had to pay
first, to circular reasoning that here results in an impasse: both the Program
and Desjardins Assurances Générales were of the opinion that the claim for
payment they received was premature because it had to be submitted to the other
party first!
[14]
In
light of my finding on the interpretation of subsection 37(3) and
paragraphs 37(3)(b) and (c) of the Regulations, there is no
need to dwell further on the standard of review.
Did the judge err in his
interpretation of paragraph 37(3)(c) of the Regulations?
[15]
Counsel
for the appellants submits that the insurance policies benefiting the lender,
referred to at paragraph 37(3)(c), are limited to either insurance
covering the lender’s personal liability on account of the loan, such as loan,
life or disability insurance, or insurance protecting the hypothecated
property, in the event of loss, for example.
[16]
I
do not believe that the language of paragraph 37(3)(c), considering
its generality (“realize on any insurance policy”) limits the
application of the provision to these insurance contracts alone, although these
contracts are the most obvious and the most frequent examples.
[17]
However,
I fully agree with counsel for the appellants that two essential conditions
must be met in order for the paragraph to apply. First, the
policy must be realizable, that is, that a loss covered by the insurance must
have been sustained. Failure to meet either
one of these two requirements means that it is not possible to realize on the
policy. No one is bound to do the impossible.
In addition, the policy must be for the lender’s
benefit.
[18]
In
the case at bar, the blanket insurance policy is for the benefit of the
appellants in their capacity as lenders. This is a
policy that covers the property against theft, embezzlement, fire damage,
counterfeiting and forgery, and losses sustained by the insured as hypothecary
creditor or creditor for loans granted to a business through instalment or
conditional sales contracts or through sales contracts guaranteed by movable
hypothec.
[19]
It
is not disputed that this blanket insurance policy was not entered into as part
of the loan. However, I agree with the respondent that it is relevant in
this case. As evidence of this, he points to
the fact that the insured took steps to obtain this policy’s protection and
that Desjardins Assurances Générales did not reject the insured’s claim, having
merely considered it premature, as mentioned above.
[20]
With
respect, I do not think that the judge can be accused of having misunderstood
this aspect of paragraph 37(3)(c) of the Regulations.
Is the Program a guarantee of
repayment or a surety of the loans granted by the lenders?
[21]
It
seems to me beyond doubt that the Program is neither a guarantee nor a surety
of the loan. This is amply shown by the fact that the Program does not
provide for the reimbursement of the loan, but only for the partial
compensation of the losses caused by the granting of the loan, with absolute
ceilings on liability per part of the aggregate principal: see sections 6
to 9 of the Act.
[22]
What
is more, once the amount of the losses has been established, the Program
requires that the lending financial institution mitigate its losses, which
would not be the case if the Program were a guarantee of repayment of the loan. It
would then have to assume all of the losses, which is incompatible with the
minimization requirement imposed on lenders. To
facilitate the fulfillment of this requirement to minimize losses, the
provisions state that the Program must repay, in part only and subject to a
ceiling, some of the costs incurred by the lending financial institution in
collecting or attempting to collect the loan or in realizing on insurance: see
subsection 38(7) of the Regulations. The
Program’s repayment of the collection costs incurred by the lender in
proceedings against other guarantors makes no sense if the Program is itself a
guarantor liable for the repayment of the loan.
[23]
To
conceive of the Program as a guarantee of the loan, as the appellants are
demanding, would render paragraph 37(3)(b) of the Regulations void
and nonsensical. In fact, this paragraph provides that the lender must
realize any guarantee in its favour to minimize the losses resulting from the
loan before it can benefit from the Program. This
is a mandatory precondition for the Program to grant a claim for payment.
[24]
Yet,
if the Program were a guarantee of repayment of the loans, this would mean that
although the Act and the Regulations require the lender, who is, after all,
responsible for the loan, to minimize its losses, the Program becomes, in that
respect, the first agent, even a preferred agent, of that minimization. However,
it is clear that this was not the drafter’s intention in adopting
paragraph 37(3)(b).
[25]
In
short, although attractive at first glance, the appellant’s submission does not
stand up to an analysis attuned to the basis for, requirements of and purposes
of the Act and the Regulations.
Does subsection 37(3) of
the Act take precedence over clause 5.3c) of the blanket insurance
contract?
[26]
This
question only arises if the Program is a guarantee. Given my finding, there is
no need to answer it.
Did the judge err in confirming
the Program authorities’ conclusion that the appellants’ claim submitted to the
Program was premature?
[27]
When
he made his decision, the judge was satisfied on the evidence in the record
that Desjardins Assurances Générales had not “formally notified the applicants
of its refusal to pay them under the limited warranty clause in the blanket
insurance policy”: see paragraph 30 of his decision. At the hearing,
counsel for the appellants acknowledged that their claim submitted to
Desjardins Assurances Générales was still pending. With our
decision that the Program is not a guarantor, there is nothing standing in the
way of an assessment by Desjardins Assurances Générales on the merits of the
appellant’s claim. However, the claim
submitted to the Program remains pending.
Conclusion
[28]
For
these reasons, I would dismiss the appeal in this docket and in docket A‑473
with costs, limited, however, to a single set for the hearing. A copy of these reasons will
be placed in docket A‑473 in support of the formal judgment to be
rendered.
[29]
We
thank both parties’ counsel for the quality of their arguments.
“Gilles Létourneau”
“I agree.
J.D. Denis Pelletier J.A.”
“I agree.
Johanne Trudel J.A.”
Certified true translation
Michael Palles
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