Gadbois v. Transport H. Cordeau Inc., [1998] 3 CTC 68

Noel J.:

This is an appeal by Her Majesty from a decision of the Prothonotary dated December 19, 1997 that reads as follows:

In the circumstances of the case at bar, Her Majesty the Queen cannot consider herself a third person in good faith within the meaning of article 1452 C.C.Q. and accordingly cannot rely on the said article to avail herself of the apparent act, that is, the notarial act entered into between the garnishee Cordeau and the judgment debtor Gadbois, without regard for a different agreement the same parties had entered into the months preceding the apparent agreement I [1]

The article in question reads as follows:

1452. Third persons in good faith may, according to their interest, avail themselves of the apparent contract or the counter letter; however, where conflicts of interest arise between them, preference is given to the person who avails himself of the apparent contract.

Article 1451 is also relevant. It reads as follows:

1451. Simulation exists where the parties agree to express their true intent, not in an apparent contract, but in a secret contract, also called a counter letter.

The relevant facts are not in dispute. The Prothonotary summarized them as follows:

This entire issue of precedence of an apparent act over an undisclosed agreement relates to the following facts, which are worth outlining.

At all relevant times, Cordeau was involved in general transportation and snow removal.

In 1995, it was experiencing liquidity problems and was having serious difficulty meeting its obligations, especially to its subcontractors and suppliers.

In this difficult financial situation, the judgment debtor, Gilbert Gadbois, in his capacity as president of 2951-7539 Québec Inc., granted advances totalling some $63,000 to Cordeau between February and May 1996. (...)? [2]

These advances or loans from Gadbois were apparently granted pursuant to an open-end oral agreement that neither provided for the payment of interest nor set out terms for repayment of the principal.

Because these advances from Gadbois and the financing Cordeau obtained from other sources ... proved to be insufficient, Cordeau, according to paragraph 21 of its affidavit in the file, had no choice but to turn to Gadbois once again for further injections of funds, pursuant to their oral agreement.

This was when the apparent act mentioned supra, namely a notarial act between Gadbois and Cordeau dated May 10, 1996 (the notarial act), was executed.

Gadbois, realizing that he had Cordeau financially at his mercy, required Cordeau to agree that the notarial act, in addition to providing for a new loan of $75,000, would indicate pas advances in the amount of $250,000 - rather than $63,000 - so that, should Cordeau go bankrupt, Gadbois could use the act to assume a position of control in the bankruptcy proceedings....

The relevant passages from the notarial act read as follows:

[TRANSLATION]

1. Loan and Advance

The debtor is or shall be in debt to the creditor in respect of the following financial commitments:

-An amount of TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000.00), representing advances already made;

-An amount of SEVENTY-FIVE THOUSAND DOLLARS ($75,000.00), which shall be paid, before May 14, 1996, to the notary in trust to be delivered to the debtor.

This amount shall bear interest at the rate of ONE PERCENT (1%) per month, which interest shall be payable monthly on the first of each month until final repayment of the principal amount.

All amounts and obligations owed to the creditor shall be repaid no later than May 1, 1997.

The debtor may make repayments in advance without notice or indemnity.

Should the property hypothecated under this act be sold, any balance remaining due shall be payable at the creditor’s discretion.

Any interest unpaid upon its expiry shall bear interest at the same rate but shall remain payable at all times without notice or putting in default.

This act is made without novation and without derogation from any resulting rights in the creditor’s favour pursuant to any other acts establishing claims.

2. Movable Hypothec without Delivery

[Description of the hypothec on Cordeau’s equipment]

(Emphasis added)

It can accordingly be seen that this act bears a total amount of $325,000. The act further provides that this amount will bear interest and fixes a date for the repayment of all amounts owing. Finally, it implicitly provides that it creates a claim.

Despite the notarial act, it appears in reality that Gadbois ultimately advanced only $160,300 to Cordeau. It must be borne in mind that the parties to the notarial act at no time contemplated that Gadbois would advance $325,000.

It is also clear that following the oral agreement mentioned supra and, it must be understood, at the time of the notarial act, Gadbois fixed the total that Cordeau would have to repay him under the notarial contract at $225,000. Contrary to all expectations, Cordeau did not go bankrupt and Gadbois eventually $225,000 in repayment.

However, the Crown undertook to attach the difference between the total amount of the notarial act and that of the oral agreement, that is, $100,000, in Cordeau’s hands.

In his summary, the Prothonotary also stressed the fact that the original issue in the case did not relate to article 1452. Cordeau and Gadbois originally tried to block the attachment by showing that according to their secret agreement the debt in question amounted to $225,000, not $325,000 as suggested b the notarial act.

Counsel for the Crown then raised article 1452, arguing that his client was entitled to rely on the notarial act without regard for the secret agree- ment Cordeau and Gadbois intended to prove.

In these circumstances, it was agreed that the issue of the Crown’s right to avail itself of article 1452 would be dealt with in a preliminary proceeding. As mentioned above, the Prothonotary decided the matter in favour of the garnishees on the basis that the Crown is not a third person in good faith within the meaning of article 1452 C.C.Q.

In its notice of appeal, the Crown raised the following four grounds:

[TRANSLATION]

1.	The Prothonotary erred in law in determining (paragraphs 42-45 of the
	reasons) that to be considered a third person in good faith within the
	meaning of article 1452 C.C.Q. and be entitled to avail him or herself of
	an apparent act, the third person (creditor) must have been a party to a
	contract or transaction with one of the parties to the apparent act, which
	excludes Her Majesty, as her claim derives from the law alone (namely
	the tax liability of Gilbert Gadbois);
2.	The Prothonotary also erred in law in determining (paragraph 48 of the
	reasons) that Her Majesty is not a third person in good faith;
3.	The Prothonotary also erred in law in determining (paragraph 43 of the
	reasons) that in order to avail themselves of article 1452 C.C.Q., third
	persons must show that they would be injured were the counter letter to
	be raised against them;
4,	Her Majesty further submits (in relation to the third question raised,
	which was not disposed of; see paragraph 50 of the reasons) that the
	actual effect of article 1452 C.C.Q. is to make it impossible to argue
	that a third person (creditor) has no greater right than his or her debtor
	under the secret agreement.

Regarding the first ground, my interpretation of the relevant paragraphs of the Prothonotary’s reasons is not the same as that of the appellant. As I understand it, the Prothonotary did not exclude claims arising by operation of the law from the application of article 1452. The Prothonotary recognized that when the Crown relies on an apparent contract in taking action, it, like any other creditor, can avail itself of article 1452 without regard for the fact that its claim does not derive from a contract. However, he suggested that in this instance, the Crown did not rely on the apparent contract. [3]

As for the appellant’s third ground, the Prothonotary did not state that in order to avail him or herself of article 1452 a third person, the Crown in the case at bar, must show that the secret act would result in injury. The comments he made in paragraph 43 of his reasons are based on the situation in which this article is ordinarily raised in light of certain decisions cited by the appellant.

Regarding the fourth ground, while the appellant’s submission is certainly correct, the question did not arise, since according to the Prothonotary, the Crown had not established that it was in good faith within the meaning of article 1452.

This brings me to the second ground for the appeal, which in my view raises a more serious issue. The relevant passage from the decision reads as follows:

In the case at bar, it has not been established, at lease not clearly, that the Crown knew about the oral agreement when the affidavit in support of the garnishee order to show cause was drafted. However, it is hard to believe in light of the evidence in the record that the employee responsible for the file did not learn about the agreement in the discussions held by the Crown in the course of its investigation. In my view, since it was the Crown that raised the application of article 1452, the burden was on it to clearly establish the conditions under which the article would be applicable.^ [4]

It was on the basis of this reasoning that the Prothonotary held in the following sentence of his reasons that the Crown is not a third person in good faith within the meaning of article 1452 C.C.Q. [5]

The appellant challenges the ambiguity of this passage, and in particular the fact that the Prothonotary appears to have recognized that, based on the evidence, the Crown did not know about the secret agreement, but he suggested that it had not established this fact clearly. According to the appellant, this passage shows that the Prothonotary imposed on the Crown the burden of proving that it did not know about the secret agreement and was accordingly a “third person in good faith” within the meaning of article 1452. [6]

In my view, the Prothonotary did in fact err as to the appropriate burden of proof in this matter. For article 1452 to apply, the Crown had to prove the apparent act and the action it took as a result of that act. I do not believe it had to go further than this by proving its good faith with respect to the apparent act. In my view, the opposite conclusion would of necessity imply a presumption of bad faith, which is prohibited by article 2805 C.C.Q. [7] The effect of the modifier “in good faith” found in article 1452 is that only third persons with this characteristic can avail themselves thereof, but this article in no way presumes that a person raising it is acting in bad faith.

At first glance, the Crown, like all affected third persons, is entitled to rely on the apparent act employed by the parties to deceive and to conceal the truth. The allegation that this act was constituted to defraud creditors in bankruptcy proceedings rather than the tax authorities changes nothing whatsoever, since the act in question reveals no such restriction. [8]

Inasmuch as the authors of the sham believed that the Crown had acted in bad faith with respect to the apparent act they had devised, the burden to establish this rested upon them. Now, it is clear from the record and from the reasons that the evidence in this regard did not allow for a conclusion to be drawn either way, and that it is by presuming that the Crown knew about the counter letter that the Prothonotary found it had acted in bad faith. In so doing, the Prothonotary imposed on the Crown a burden that it was not required to discharge.

For these reasons, the appeal is allowed and the matter is referred back to the Prothonotary to be disposed of on the basis that the Crown is a third person in good faith within the meaning of article 1452 C.C.Q.

Appeal allowed.