Her Majesty the Queen v. Bank of Montreal, [1995] 2 CTC 244, 95 DTC 5490

Desjardins J.A. (Chevalier D.J. concurring):-The respondent (the "Bank”) sued the appellant (the "Crown”) under article 1140 of the Civil Code of Lower Canada, (the "C.C.L.C.") for recovery of an amount of $293,869.58 paid to the Department of National Revenue ("Revenue Canada”) following a permanent mandatory injunction issued against the bank by the Superior Court of Quebec on June 30, 1987.

Judgment in the Trial Division of this Court was rendered in favour of the bank (Bank of Montreal v. M.N.R., [1994] 1 C.T.C. 377, 94 D.T.C. 6309). The Crown has appealed.

The circumstances of this case are rather unusual.

The Facts

From 1978 until he was fired in October 1984, an employee of the bank, Philippe Leong, Chief Foreign Currency Trader for its eastern region, made large personal profits by using funds of the bank to speculate in foreign currency. He operated in two ways: he made transactions for the account of a client without the client’s knowledge, and made in fact for his Own account using the bank’s funds; he also made transactions for two of the bank’s clients on the secret condition that he receive one half of any trading profits. Shortly after firing him, the bank instituted an action against Mr. Leong in the Superior Court of Quebec claiming, among other things, the payment to it of $777,650 plus interest and a declaration that a certificate of deposit in the amount of $230,210.98 was its property.

Mr. Leong was assessed by Revenue Canada in December 1984 for the taxation years 1980, 1981, 1982 and 1983 for income tax in the amount of $340,059.90 with interest on the sum of $215,829.07 from December 13, 1984. Two houses, a Porsche and an Oldsmobile Cutlass belonging to Mr. Leong were immediately seized under orders issued at the request of Revenue Canada. Revenue Canada also obtained an interim garnishment order to permit the attachment of funds owing to Mr. Leong from Investors Group Trust G. Ltd. which administered an employee share ownership program for the bank. In addition, it obtained an interim garnishment order to attach the funds in a bank account and the moneys allegedly due by the bank to Mr. Leong in a certificate of deposit in U.S. funds held by the bank. The bank claimed it owed nothing to Mr. Leong. The hearing to obtain a final order of garnishment was adjourned sine die.

The action instituted by the bank against Mr. Leong was rejected both by the Superior Court of Quebec and by the Court of Appeal for Quebec.

Shortly thereafter, Mr. Leong brought an application in the Superior Court of Quebec. for an injunction to compel the bank to pay to Revenue Canada the moneys represented by the certificate of deposit in U.S. funds held by the bank and to his lawyers. On or about June 23, 1987, the bank served Revenue Canada with an affidavit in the garnishment proceedings informing it of its intention to seek leave to appeal the judgment of the Court of Appeal for Quebec to the Supreme Court of Canada within the appropriate time period. On or about June 26, 1987, the bank filed in the Supreme Court of Canada an application for leave to appeal. The application by Revenue Canada for a garnishment order was adjourned on June 26, 1987.

On June 30, 1987, the Superior Court of Quebec, presided by Trudeau J., issued a permanent injunction ordering the bank to convert the certificate of deposit which was in the name of Mr. Leong into Canadian funds, and to pay the moneys to Revenue Canada in satisfaction of the income tax debt of Mr. Leong. The order was made subject to the proviso that Mr. Leong be given in return a discharge of the order of seizure held by Revenue Canada on the certificate of deposit. In its reasons for granting the injunction, the Superior Court of Quebec indicated that the decision of the Court of Appeal, as between Mr. Leong and the bank, had now become final and executory and that the Court of Appeal had confirmed the decision of the Superior Court which had found that no evidence had established that the funds used to buy the certificates belonged to the bank. It noted, moreover, that the filing of the leave application to the Supreme Court of Canada had been done after the expiry of sixty days from the judgment of the Court of Appeal.

The bank did not appeal the order of Trudeau J. nor did it seek, in any way, a stay of execution of that order.

In a telephone conversation on July 3, 1987, counsel for the bank and Revenue Canada discussed the possibility of the bank paying under protest the moneys represented by the certificate of deposit to Revenue Canada on account of the income tax debt of Mr. Leong. They further discussed the possibility of Revenue Canada granting conditional discharges of its orders of seizure. Counsel for Revenue Canada made no commitment to give conditional discharges in the event the bank would pay the moneys under protest.

What then happened is the following. During the course of a meeting in the morning of July 8, 1987, a peremptory demand for payment in the amount of $352,985.28 was given to the bank by Revenue Canada. This sum represented taxes, penalties and interest owed by Mr. Leong to Revenue Canada as of that date. Counsel for the bank gave the representative of Revenue Canada a cheque in the amount of $353,898.52 which included legal fees and disbursements payable by Mr. Leong to Revenue Canada. Except for the amount of $59,728.94, the money paid by the bank came entirely from the profits made by Mr. Leong by speculating in foreign currencies in the course of his employment. Counsel for Revenue Canada provided counsel for the bank with an abandonment of the interim garnishment order in relation to the certificate and advised counsel for Mr. Leong that he could dispose of the sum of $20,000 in his trust which represented the proceeds of the sale of the Porsche. On his return to his office that morning, counsel for Revenue Canada signed and filed with the Registry of this Court a discharge of the order of seizure of the house which Mr. Leong had previously sold to his wife. On account of a clerical error, an amended discharge was filed the next day.

At approximately 1:24 p.m. that afternoon on July 8. 1987, a bailiff served counsel for Revenue Canada with a letter from counsel for the bank. The letter had been given to the bailiff for service on counsel for Revenue Canada prior to the meeting held that morning. The letter delivered in the afternoon stated in part:

Pursuant to the judgment of June 30, 1987 of The Honourable Mr. Justice Paul Trudeau of the Quebec Superior Court we have today provided you with a Bank of Montreal official cheque dated July, 8, 1987 and payable to Ministere du revenu official in the amount of $353,598.52.

Please be advised that while the bank is respecting the judgment it makes this payment to the Department under protest.

It was further indicated that the bank would seek reimbursement of the moneys paid in the event the bank would be successful in its appeal before the Supreme Court of Canada.

Revenue Canada wrote back the following answer which was sent by ordinary mail and was received by the bank on July 10, 1987: In the afternoon of July 8, 1987, we were served with your letter to my attention, in which the bank claims that it paid the above- mentioned amounts of $353,598.52 under protest, even though it did not appeal Mr. Justice Trudeau’s judgment of June 30, 1987, and that it will claim reimbursement from Her Majesty in the event that the Supreme Court declares that the bank was the owner of a certain certificate of deposit. Be informed that any claim by the bank will be vigorously contested. Even if the Supreme Court eventually grants the appeal of the bank, we deny that there is any basis for any claim to be reimbursed. Not only your letter of protest has been served after payment, but also, in deciding not to appeal Mr. Trudeau’s judgment, it is absolutely clear that the bank has waived and renounced to any claim for reimbursement that it could possibly have against the Federal Crown.

Counsel for Revenue Canada then proceeded to give release without informing the bank of all of the securities it held on Mr. Leong’s assets.

On September 28, 1989, the Supreme Court of Canada allowed the appeal by the bank. (See Bank of Montreal v. Kuet Leong, [1989) 2 S.C.R. 429, at page 435ff.) It held that, with respect to the first group of transactions, namely those made by Mr. Leong for the account of a client without the client’s knowledge and made in fact for his own account us the bank’s money, Mr. Leong was in the position of a possessor in bad faith (art. 411 of the C.C.L.C.) and was obligated to remit to the bank not on], the capital of the funds which he used, but also any increase in value and fruits thereof. Mr. Leong, it said. appropriated to himself funds of the appellant fraudulently and without colour of right and had no legal title to the benefits of his fraud. With respect to the second type of transactions namely those made under private arrangements with two of the bank’s clients, the Supreme Court of Canada held that Mr. Leong had acted in a representative capacity for the bank carrying on its business. It applied the principle set forth in article 1713 of the C.C.L.C. whereby the mandatory is bound to render an account of his administration and to deliver and pay over all that he has received under the authority of the mandate, even if it were not due. This obligation, it added, gave effect to a much broader policy of the civil law aiming at the protection of honesty and good faith in the execution of contracts.

The bank then kept to its word. As stated in its letter of July 8, 1987, it sued Revenue Canada for recovery of the moneys it paid pursuant to the permanent mandatory injunction pronounced by the Superior Court of Quebec at the request of Mr. Leong whose assets had been completely frozen by Revenue Canada.

The judgment under appeal

The trial judge found as a fact that the bank had paid under protest the moneys resulting from the certificate of deposit so as to pay the income tax debt of Mr. Leong and that counsel for Revenue Canada knew or ought to have known this prior to the meeting of July 8, 1987. "In any event", she said, "it is clear beyond any question that counsel for the Department knew at 1:24 p.m. on July 8, 1987, the date and time of the service of the letter from counsel for the bank, that the payment was made under protest and nevertheless chose to release the security held by the Department. (See Bank of Montreal v. M.N.R., supra, page 381 (D.T.C. 6312).) She applied principles enunciated in The Queen v. Premier Mouton Products Inc., [1961] S.C.R. 361, [1961] C.T.C. 160, 61 D.T.C. 1105, and concluded that the bank had intended to keep alive its right to recover the sum paid to Revenue Canada. Since the Supreme Court of Canada in the Kuet Leong NG case had determined that the bank was the owner of the funds gained illegally by Mr. Leong, the bank was entitled to recovery of the moneys. She held alternatively that the bank never paid the moneys voluntarily or with a view to relinquishing its right to dispute its ownership of the funds before the Supreme Court of Canada and was, for these reasons also, entitled to recovery. She concluded that no error of fact or law had been committed by the bank in making the payment to Revenue Canada. Hence, under the reasoning of the Supreme Court of Canada in Premier Mouton Products Inc., articles 1047 and 1048 of the C.C.L.C. did not apply.

Analysis

The trial judge manifestly erred on the facts when she made the finding "that the income taxes owed to the Department by Mr. Leong were paid by the bank under protest and that counsel for the Department knew or ought to have known this prior to the meeting on July 8, 1987". (See Bank of Montreal v. M.N.R., supra, at page 381 (D.T.C. 6311-12).) Counsel for Revenue Canada was aware, on or about June 23, 1987, of the bank’s intention to appeal the Court of Appeal for Quebec’s decision to the Supreme Court of Canada. Also, counsel for Revenue Canada had been informed in a telephone conversation on July 3, 1987 of the "possibility" of the bank paying under protest. However, during the course of the meeting on the morning of July 8, 1987, no protest was made by the bank when it handed the cheque of $353,898.52 to Revenue Canada. The payment was made unconditionally. The letter of protest of the bank was served on Revenue Canada after the meeting of July 8 and referred in the past tense to the bank having provided Revenue Canada that day with a cheque of $353,598.52. When the bank, in that letter, stated it "makes this payment...under protest", it was around 1:24 p.m. that afternoon of July 8. To be timely, a protest. should have been made either prior to or at the time of payment.

The respondent argues that since the Supreme Court of Canada has finally determined that it is the owner of the funds represented by the certificate of deposit, it is entitled to recovery under article 1140 of the C.C.L.C. and that Revenue Canada incorrectly granted unconditional discharges of the properties owned by Mr. Leong after July 8, 1987. It submits that any appeal from the order of Trudeau J. would have been futile considering the two judgments of the Superior Court and the Court of Appeal on the merits and the severe criticism of Trudeau J. vis-à-vis the bank. An appeal to the Court of Appeal, it says, would not have suspended the effect of an injunction. [1] Suspension of an injunction pending appeal be ordered by a judge of the Court of Appeal, but this is a discretionary remedy. Considering the recent decision of the Court of Appeal, the prospect that a judge of that Court would have overturned the finding that the money was the property of Mr. Leong was, in the bank’s estimates, unlikely. The bank says it had no duty to launch a futile appeal. It chose to follow the course of pursuing the appeal on the merits to the Supreme Court of Canada. Having won, Revenue Canada is under an obligation to return the moneys the Supreme Court of Canada said belonged to the bank.

In a recent decision, that of Willmor Discount Corp. v. Vaudreuil (City), [1994] 2 S.C.R. 210, 167 N.R. 381, at page 389 (D.T.C. 218), the Supreme Court of Canada refers to French and Quebec writers who agree that the recovery of a thing not due must meet two conditions in addition to payment. The first is that no debtor-creditor relations in contract or by law should exist between the solvens and the accipiens with respect to the payment made. The second is that payment must have been made in error. [2]

Article 1140, on which this action is based, establishes a presumption and a principle. [3] It must now be read in conjunction with articles 1047 and 1048 of the C.C.L.C. [4] which set out the rules governing recovery.

The mandatory injunction issued by the Superior Court of Quebec was clearly based on the proposition that the moneys represented by the certificate of deposit belonged to Mr. Leong and that the bank had no right over it. Since the bank made no effort to obtain the provisional suspension of the injunction pronounced against it, pending the appeal to the Supreme Court of Canada of its own action as against Mr. Leong, the order of the Superior Court of Quebec became res judicata as between the bank and Revenue Canada. In those particular circumstances, the bank cannot claim that at law it was not debtor of the amount it paid to Revenue Canada when the payment was made. The protest came after the unconditional payment made by the bank and it is more than doubtful that a payment made by virtue of a court order, which was not appealed and provisionally suspended, could have been made conditional. At this point, Revenue Canada had no choice but to release all the frozen assets of Mr. Leong. Had it not done so it would have risked an action in damages by Mr. Leong in whose favour the final injunction had been pronounced.

The decision of the Supreme Court of Canada redressed the matter as between Mr. Leong and the bank. But it had no effect on the order given to the bank by the Superior Court of Quebec, since the bank did not protect its interests vis-à-vis that order. This is not a case of an appearance of a debt overturned by a successful appeal to a higher court. The bank’s recourse against Revenue Canada must, therefore, fail.

I would allow this appeal, I would set aside the judgment of the Trial Division and I would dismiss the action of the respondent the whole with costs on appeal and at trial.

Marceau J.A.:-I have had the advantage of reading in draft the reasons for judgment prepared by Madame Justice Desjardins. My conclusion is the same as hers, but I arrived at it in a somewhat different and shortened route. It may be convenient if I add some brief comments.

With respect, it does not appear to me that anything in this litigation turns on the facts surrounding the service of the respondent’s protest. I simply do not see what legal effect may be attached to a ’’protest" accompanying a payment when the legal right of the creditor to receive it flows from a court order which has not been challenged. A protest may be relevant when a payer disputes the validity of the payee’s claim, but is, for some valid reason, unable to make good his objection immediately and feels he has no choice but to comply with the demand for payment. The protest will obviously dispel any inference that the payment constitutes an acknowledgement of liability and it might also, in special circumstances I suppose, serve to establish bad faith on the part of the payee and reinforce an eventual action in recovery based on the civil law quasi-contract "resulting from the reception of a thing not due" (art. 1047 and following, Civil Code of Lower Canada), itself a particular application of the principles of unjust enrichment. This was, to a certain extent the situation in the case of Premier Mouton, supra, relied on by the learned trial judge. There, the protest was seen as having clearly established that the payer contested its liability to pay excise tax and its submission to the claim had not been motivated by the desire to discharge a legal obligation with the result that an essential requisite to the existence of a payment was lacking so there had been no legal payment. The present case does not lend itself to a similar approach since the respondent never challenged the appellant’s right to be paid pursuant to the injunction. The respondent’s protest which was only reiterating its defence to the action in injunction, even if it had been open, unconditional and contemporaneous with the payment, could have had, in my view, no legal significance.

It is clear, in my respectful opinion, that protest or not the respondent’s action in recovery could not find support in article 1140 of the Civil Code of Lower Canada. The principle confirmed by this article, that every payment presupposes a debt and that which has been paid in the absence of a debt may be recovered, had no application whatsoever. The injunction ordered the respondent to pay to the appellant the amount represented by the certificate, an order made at the request of the certificate’s named beneficiary, Mr. Leong: that there was an obligation to pay in satisfaction of which the payment was made is indisputable. The payment was not made by "mistake of law or fact", since it was required by an unequivocal Court order; nor was it made under illegal compulsion since the well foundedness of the Court order was not challenged. I may add that in my view, even if the Supreme Court, in disposing of the litigation between the respondent and Mr. Leong, had directly or incidentally agreed with the respondent’s contention that it was the owner of the certificate, the action in recovery against the appellant would not have had any more basis. The proceedings in the Supreme Court were not directed against the injunction and they could have no effect whatsoever on its validity; furthermore, the appellant was not a party to those proceedings. But in any event, the Supreme Court never even implied that the respondent could have had ownership of the certificate, it simply established the existence of a debt owing to the bank by Mr. Leong for the amount of money realized by the latter’s unethical activities.

One may, at first, be somewhat disturbed by the result: the applicant benefits from a tax-assessment levied on profits that are offset by a debt of an equivalent amount, while the respondent has a right to be paid moneys that it will most probably never recover. It remains, however, that, even if it is unethically, Mr. Leong actually earned money on his own behalf that was taxable, and even if it was the victim of its employee’s unethical conduct, the respondent did not suffer any financial loss.

I would dispose of the matter as suggested by my colleague.

Appeal allowed.