DaimlerChrysler Financial Services (debis) Canada Inc. v. Trustee in Bankruptcy [Indexed as: Fields (Re)]

71 O.R. (3d) 11

[2004] O.J. No. 1924

Docket No. C37903

Court of Appeal for Ontario

Laskin, Feldman and Armstrong JJ.A.

May 11, 2004

Bankruptcy and insolvency -- Property of bankrupt divisible among creditors -- Executions Act providing exemptions from property divisible among creditors of bankrupt -- Exemption for vehicle with value not exceeding $5,000 -- No exemption for vehicle worth more than $5,000 -- Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 67(1)(b) -- Execution Act, R.S.O. 1990, c. E.24, ss. 2.6, 3, 4. [page12 ]

F was the owner of a 1998 motor vehicle. The vehicle was subject to a conditional sales contract made between F and DCFS, which had not perfected its security interest in the vehicle under the Personal Property Security Act, R.S.O. 1990, c. P.10. In June 2001, F filed an assignment in bankruptcy. Section 67(1)(b) of the Bankruptcy and Insolvency Act provides that property of a bankrupt divisible among his or her creditors shall not comprise "any property that as against the bankrupt is exempt from execution or seizure under any laws applicable in the province within which the property is situated and within which the bankrupt resides". Section 2.6 of the Execution Act, which was enacted in 2001, exempts from seizure "a motor vehicle not exceeding the prescribed amount, or if no amount is prescribed, $5,000 in value". The agreed value of the car was $11,000. F, however, waived his claim for an exemption. DCFS filed a proof of claim claiming $22,257.41 as owing under the conditional sale contract. The trustee disallowed DCFS's claim as a secured claim because it was unperfected, but allowed it as an unsecured claim. DCFS appealed the disallowance and sought a declaration that the trustee has no interest in or claim to the value of the vehicle up to the amount of $5,000. Master Schreider dismissed the appeal, and DCFS further appealed. The appeal was dismissed and DCFS appealed to the Court of Appeal.

Held, the appeal should be dismissed.

The wording of s. 2.6 of the Execution Act was clear and unambiguous. The vehicle in this case was not exempt because its value exceeded $5,000. Although the legislature may have intended that where a vehicle was worth more than $5,000, an exemption would apply to the first $5,000 of the value of the debtor's equity in the car, which was the approach applied by ss. 3 and 4 of the Executions Act to other exemptions, when the new s. 2.6 was added, ss. 3 and 4 were not amended to make them applicable to motor vehicles that became exempt under s. 2.6. Although the interpretation that s. 4 applied to s. 2.6 made the most sense, would be helpful to debtors and would fit with the intent and purpose of the policy of the Act, the court could not read into s. 4 a reference that was not there. Nor was this reading justified by implication or by analogy. Although it was likely that the failure of the legislature to amend s. 4 when it added s. 2.6 was an oversight, if it was, it was only the legislature and not the court that could make the correction.

APPEAL of a decision of Polowin J. (2001), 2002 ONSC 49483, 59 O.R. (3d) 611, [2002] O.J. No. 570 (S.C.J.) affirming a decision of a Master that affirmed the disallowance of a proof of claim in bankruptcy.

Cases referred to Norkus Estate (Trustee of) v. Direct Rental Centre (West) Ltd. (Re) (2001), 2001 ABCA 233, 205 D.L.R. (4th) 651, 299 A.R. 39 (C.A.); Pearson (Re) (1997), 1997 ABQB 14792, 203 A.R. 109, [1997] A.J. No. 651 (Q.B.); Robinson v. Robinson, 1964 ONCA 240, [1965] 1 O.R. 326, 48 D.L.R. (2d) 42 (C.A.); VW Credit Canada, Inc. v. Roberts (2001), 2001 NSCA 42, 192 N.S.R. (2d) 79, 197 D.L.R. (4th) 274 (C.A.) Statutes referred to Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 67(1)(b) Civil Enforcement Act, R.S.A. 1980, c. C-10.5, ss. 88, 89(1) Execution Act, R.S.O. 1937, c. 125, ss. 2(f), 3, 4 Execution Act, R.S.O. 1960, c. 126, s. 2.5 Execution Act, R.S.O. 1990, c. E.24, ss. 2, 3, 4, 7, 19(1) Personal Property Security Act, R.S.O. 1990, c. P.10, s. 20 Red Tape Reduction Act, 2000, S.O. 2000, c. 26, Sched. A, s. 8 Authorities referred to Ontario Law Reform Commission, Re: The Execution Act -- Exemptions (The Commission, 1966) Driedger, E.A., The Construction of Statutes (Toronto: Butterworths, 1974) [page13 ]

Heath Whiteley, for appellant. Martin Z. Black, for respondent.

The judgment of the court was delivered by

FELDMAN J.A.: --

Introduction

[1] This case requires the court to interpret the meaning of a relatively new exemption in the Execution Act, R.S.O. 1990, c. E.24, s. 2.6, which will be important for debtors both within and outside the bankruptcy process. The case also raised an issue that has recently been considered by both the Nova Scotia and Alberta courts of appeal in VW Credit Canada, Inc. v. Roberts (2001), 2001 NSCA 42, 192 N.S.R. (2d) 79, 197 D.L.R. (4th) 274 (C.A.), and Norkus Estate (Trustee of) v. Direct Rental Centre (West) Ltd. (2001), 2001 ABCA 233, 299 A.R. 39, 205 D.L.R. (4th) 651 (C.A.). The issue involves the interplay among the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, the Personal Property Security Act, R.S.O. 1990, c. P.10 ["PPSA"], and the Execution Act, and whether an unperfected secured creditor of a bankrupt can take the benefit of exempt property in priority to the debtor and the trustee in bankruptcy. However, because the result of the first issue finally disposes of the appeal, I will not decide the second issue in this appeal.

Facts

[2] The facts can be simply stated. The debtor, James Allen Fields, filed an assignment in bankruptcy on June 12, 2001. At that date, DaimlerChrysler Financial Services (debis) Canada Inc. (the creditor) held a conditional sale contract with Mr. Fields on a 1998 Chrysler Intrepid, but had not perfected its security interest in the vehicle under the PPSA. The creditor filed a proof of claim in the bankruptcy for the balance of $22,257.41 owing on the car. The agreed value of the car at the time was $11,000. The trustee in bankruptcy disallowed the creditor's claim as a secured claim because it was unperfected, but allowed it as an unsecured claim. The creditor appealed, claiming that it was entitled to its security interest and priority over the trustee to the extent of $5,000, because the debtor has an exemption from [page14 ]execution and from the bankruptcy estate for vehicles up to the value of $5,000 under the Execution Act. The debtor originally claimed no exemption in respect of the car, and later disclaimed his exemption in the car. The Registrar dismissed the creditor's appeal as did the bankruptcy judge on appeal.

The Statutory Background

[3] Section 67(1)(b) of the BIA excludes from property of a bankrupt divisible among the creditors on a bankruptcy "any property that as against the bankrupt is exempt from execution or seizure" under the relevant provincial law. In Ontario, that is the Execution Act.

[4] In April 2001, a new subsection 2.6 was added to the section of the Execution Act that describes chattels that are exempt from seizure to include "[a] motor vehicle not exceeding . . . $5,000 in value".

[5] Section 7 of the Execution Act provides that the exemptions "do not apply to exempt any chattel from seizure to satisfy a debt contracted for the purchase of such chattel" with some exceptions for certain necessities of life.

[6] Finally, s. 20 of the PPSA provides that "until perfected, a security interest . . . (b) in collateral is not effective against . . . a trustee in bankruptcy".

[7] In the context of this statutory matrix, the creditor argues that in a bankruptcy the unsecured creditors are not entitled to the distribution of any property of the bankrupt that is exempt from execution. Under s. 2.6 of the Execution Act, up to $5,000 of the value of the debtor's car is exempt, and that exemption is automatic or may be claimed by a secured creditor on behalf of the debtor in the bankruptcy. As a secured creditor with an unperfected purchase money security interest (PMSI) in the car, although the security is not valid against the trustee, it remains valid against the debtor, so that the unperfected secured creditor becomes entitled to the portion of the value of the car that is exempt from execution in priority to the debtor and the trustee in bankruptcy.

The Findings of the Bankruptcy Judge

[8] The bankruptcy judge held: (1) the vehicle in this case was not exempt because its value exceeded $5,000; (2) even if there was an exemption for up to $5,000 of the value of the vehicle, that exemption would not apply in this case because of the PMSI held by the creditor in the vehicle; and (3) if the vehicle had been exempt in respect of up to $5,000 of its value, the [page15 ]debtor was entitled to waive that exemption and the creditor cannot claim the $5,000 exemption for the vehicle on the debtor's behalf.

Issues

[9] There are three issues raised in this appeal:

(1) Under s. 2.6 of the Execution Act, does the exemption from seizure apply only when the total value of a car is $5,000 or less, or does it apply to exempt the first $5,000 of the value of the debtor's equity in the car?

(2) Does s. 7 of the Execution Act operate on bankruptcy to negative the exemption from seizure where the car was purchased with a PMSI but the secured creditor failed to perfect its secured interest?

(3) Can the creditor claim the exemption in a bankruptcy on behalf of the debtor if the debtor wishes to waive it?

Analysis

Interpretation of s. 2.6 of the Execution Act

[10] The trustee in bankruptcy argued successfully before the bankruptcy judge that the wording of s. 2.6 of the Execution Act is clear and unambiguous. On the plain meaning, it provides an exemption from execution for a motor vehicle not exceeding $5,000 in value. Therefore, any vehicle valued at $5,000 or less is exempt and any vehicle over $5,000 is not exempt. In this case the value of the motor vehicle in issue is $11,000. Consequently, the exemption does not apply.

[11] The alternative argument is that the section, properly interpreted, means that where the vehicle is valued at more than $5,000, the exemption applies to the first $5,000 of the vehicle's value. In that situation, the vehicle would be sold and the first $5,000 would be remitted to the debtor with the balance over $5,000 going to the execution creditor. Whereas, following the trustee's interpretation, where the debtor has a vehicle valued at over $5,000, the execution creditor receives the entire car and the debtor receives nothing.

[12] From a policy point of view, the alternative argument that gives the most benefit to the judgment debtor is compelling. The purpose of the exemptions from execution is to allow a debtor to retain the basics of life while making the bulk of his or her assets available to satisfy judgment creditors. The legislature sets and [page16 ]revises from time to time both the type and the value of exempt assets with a view to allowing contemporary debtors to retain a modest and dignified lifestyle, while still making funds and assets available to pay legitimate judgment creditors.

[13] While some people of modest means may own an old car that has depreciated in value down to $5,000 or less, in today's society many people who are able to do so, rather choose to finance an inexpensive model vehicle by making monthly payments to a secured lender. The alternate approach recognizes this reality by allowing the secured creditor to repossess the car, sell it and return up to $5,000 of the debtor's equity to the debtor on an exempt basis. The trustee's interpretation would require the secured lender, who repossesses a car worth over $5,000, to remit any amount over and above what was owed to the lender not back to the debtor, but to the sheriff to satisfy a writ of execution, thereby denying the debtor any benefit from his or her equity in the car.

[14] The amendment that added the new exemption in s. 2.6 to the Execution Act in 2000 was part of an omnibus bill, the Red Tape Reduction Act, 2000, S.O. 2000, c. 26, Sch. A, s. 8, that contained amendments to many Acts. The new exemption reads as follows:

2. The following chattels are exempt from seizure under any writ issued out of any court:

3. A motor vehicle not exceeding the prescribed amount or, if no amount is prescribed, $5,000 in value. [See Note 1 at end of the document]

[15] Before the addition of this subsection, motor vehicles up to $2,000 in value could be exempt under a different subsection (s. 2.3) if they were ordinarily used by the debtor in his or her business: See R.S.O. 1990, c. E.24 [see Note 2 at end of the document]. The new subsection now allows any debtor the ability to retain a motor vehicle, whether or not the vehicle is used in the debtor's business. The 2000 amendments, which came into force in 2001, also increased the exempt value for items used in business to $10,000.

[16] There is, however, a significant difference in the operation of the exemptions provided for chattels used by a debtor in business and in farming from the other exemptions, including the new motor vehicle exemption. This can best be explained by first setting out in full ss. 2, 3 and 4 of the Execution Act: [page17 ]

2. The following chattels are exempt from seizure under any writ issued out of any court:

3. Necessary and ordinary wearing apparel of the debtor and his or her family not exceeding the prescribed amount or, if no amount is prescribed, $5,000 in value.

4. The household furniture, utensils, equipment, food and fuel that are contained in and form part of the permanent home of the debtor not exceeding the prescribed amount or, if no amount is prescribed, $10,000 in value.

5. In the case of a debtor other than a person engaged solely in the tillage of the soil or farming, tools and instruments and other chattels ordinarily used by the debtor in the debtor's business, profession or calling not exceeding the prescribed amount or, if no amount is prescribed, $10,000 in value.

6. In the case of a person engaged solely in the tillage of the soil or farming, the livestock, fowl, bees, books, tools and implements and other chattels ordinarily used by the debtor in the debtor's business or calling not exceeding the prescribed amount or, if no amount is prescribed, $25,000 in value.

7. In the case of a person engaged solely in the tillage of the soil or farming, sufficient seed to seed all the person's land under cultivation, not exceeding 100 acres, as selected by the debtor, and fourteen bushels of potatoes, and, where seizure is made between the 1st day of October and the 30th day of April, such food and bedding as are necessary to feed and bed the livestock and fowl that are exempt under this section until the 30th day of April next following.

8. A motor vehicle not exceeding the prescribed amount or, if no amount is prescribed, $5,000 in value.

3(1) Where exemption is claimed for a chattel referred to in paragraph 3 of section 2 that has a sale value in excess of the amount referred to in subsection (1.1) [the prescribed amount or $10,000] plus the costs of the sale and other chattels are not available for seizure and sale, the chattel is subject to seizure and sale under a writ of execution and the amount referred to in subsection (1.1) shall be paid to the debtor out of the proceeds of the sale.

(2) The debtor may, in lieu of the chattels referred to in paragraph 4 of section 2, elect to receive the proceeds of the sale thereof up to the amount referred to in subsection (4.1) [the prescribed amount or $25,000], in which case the officer executing the writ shall pay the net proceeds of the sale if they do not exceed the amount referred to in subsection (4.1) or, if they exceed the amount referred to in subsection (4.1), shall pay that sum to the debtor in satisfaction of the debtor's right to exemption under that paragraph.

4. The sum to which a debtor is entitled under subsection 3(1) or (2) is exempt from attachment or seizure at the instance of a creditor. [page18 ]

[17] The effect of ss. 3(1) and (2) in the case of business or farming chattels where the value exceeds the prescribed exempt value is that they can be sold and the sum representing the exempt value can be given to the debtor. Then s. 4 protects from seizure the sum that is paid to the debtor. Otherwise, under s. 19(1), those funds would be subject to immediate seizure for the benefit of the judgment creditors. [See Note 3 at end of the document]

[18] Unfortunately, when the new s. 2.6 was added in 2000, ss. 3 and 4 were not amended to make them applicable to motor vehicles that became exempt under that subsection. The appellant submits that those sections should be applied by analogy in order to maintain the intent and purpose of the Act.

[19] Curiously, this court faced a very similar situation in 1965 in the case of Robinson v. Robinson, 1964 ONCA 240, [1965] 1 O.R. 326, 48 D.L.R. (2d) 42 (C.A.), following certain amendments that were made to the Execution Act in the 1942 and 1957 revisions and carried forward into the 1960 revised statutes (R.S.O. 1960, c. 126). Prior to these revisions, the 1937 version of the exemptions (R.S.O. 1937, c. 125), which was virtually unchanged since 1909, included ss. 2(f), 3 and 4, which provided that the sheriff could sell tools used in the debtor's business, without differentiating between farmers and others, where the value of a tool exceeded the exempt amount and where there were not other goods to satisfy the execution. In that case, the exempt amount would be paid to the debtor. In addition, the debtor could elect to receive the proceeds of sale of his or her tools up to the exempt amount, in lieu of keeping the tools. In both cases, the sums received by the debtor in lieu of chattels were also exempt from seizure. The sections read as follows:

2. The following chattels shall be exempt from seizure under any writ issued out of any court, namely:

. . . . . [page19 ]

(f) Tools and implements of, or chattels ordinarily used in, the debtor's occupation, to the value of $200; but if a specific article claimed as exempt be of a value greater than $200 and there are not other goods sufficient to satisfy the writ such article may be sold by the sheriff who shall pay $200 to the debtor out of the net proceeds, but no sale of such article shall take place unless the amount bid therefor shall exceed $200 and the cost of sale in addition thereto;

3. The debtor may, in lieu of tools and implements or of chattels ordinarily used in his occupation referred to in clause (f) of section 2, elect to receive the proceeds of the sale thereof up to $200, in which case the officer executing the writ shall pay the net proceeds of the sale if the same do not exceed $200, or, if the same exceed $200, shall pay that sum to the debtor in satisfaction of the debtor's right to exemption under clause (f).

4. The sum to which a debtor is entitled, under clause (f) of section 2, or under section 3, shall be exempt from attachment or seizure at the instance of a creditor.

[20] In the 1942 revision, the provision for sale if a tool exceeded the exempt value was removed, but the option of the debtor to receive the exempt value in money was retained along with the exemption for that money in the hands of the debtor. In the 1957 revision, the exemption for tools was separated into two subsections of s. 2: s. 2.5 for non-farmers and s. 2.6 for farmers, with the farmers receiving a higher exempt value for their tools. In the revision, s. 3, which provided the option for the debtor to receive money in lieu of the tools, now referred only to s. 2.6 and not s. 2.5. However, s. 4 still exempted the sums received by a debtor under both ss. 2.5 and 2.6. The result of all these amendments was that although there was no longer any explicit provision for sale of non-farm tools and remittance of the exempt value in money to the debtor, the Act still exempted money received by the debtor in respect of both farm and non-farm tools.

[21] The issue of whether non-farm tools that had a value exceeding the exempt value were still subject to sale arose squarely for the court in Robinson. A wife had obtained judgment against her husband for arrears of maintenance owing under a separation agreement. Acting on a writ of execution, the Sheriff seized a car that the husband used in his business as a salesman. At the time, the market value of the car was $1,700. The exempt value for non-farm tools in the 1960 version of the Act was up to $1,000.

[22] The issue for the Court of Appeal was whether the car, which was valued at over $1,000, was exempt, and if the whole car was not exempt, whether it should be sold with the first $1,000 paid to the debtor and the excess to the creditor. The court [page20 ]concluded, looking at the language of the section, that the legislature had not intended by its amendments to change the law that goods over the exempt value of $1,000 were subject to sale. The section provided that they were exempt "to the extent of $1,000", and by s. 4, the debtor was entitled to receive that $1,000 as exempt proceeds of a sale.

[23] Following the Robinson case, the Ontario Law Reform Commission was asked to consider the exemption section of the Act. In its report of December 9, 1966, titled Re: The Execution Act - Exemptions, the Commission noted that there was uncertainty created by the amendments to the exemption section in 1942 and 1957, but that the problem had been resolved by the Court of Appeal in the Robinson case. However, for clarity, the Commission recommended that the pre-1942 statutory language be restored. The recommendations of the Commission were implemented and are reflected in the wording of the current Act, except for the newly-added subsection 2.6.

[24] The question before this court now is whether an analysis similar to the one conducted by the court in Robinson, can be used to read s. 2.6 as providing an exemption for the value of a car up to $5,000, and by implication or analogy, for the sale of such a car with payment of the first $5,000 to the debtor. Although this would give the provision a common sense meaning and a purposeful interpretation, the court is obliged to interpret the words of a statute in the context of the language of the entire statute and of the sections of which it forms part. This is the thrust of the now oft-quoted statement from Elmer A. Driedger in The Construction of Statutes (Toronto: Butterworths, 1974) at p. 67:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context, in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

[25] In the Robinson case, although the sale provision for non-farm tools had been removed from the statute (s. 2.5), s. 4 specifically exempted monies to which a debtor was entitled under s. 2.5. The court was therefore able to conclude that the intent of the legislature was to continue to allow for the sale of non-farm tools and payment of the exempt proceeds up to the exempt value to the debtor.

[26] The problem with interpreting s. 2.6 as suggested by the appellant is that it requires reading a reference to s. 2.6 into s. 4. As noted above, s. 4 is an essential component of the exemption scheme. It makes the moneys received by a debtor as proceeds [page21 ]from the sale of an exempt chattel also exempt. Without that exemption, the sheriff could seize those moneys immediately from the debtor (s. 19(1)).

[27] Although the same issue arose in the Alberta case of Re Pearson (1997), 1997 ABQB 14792, 203 A.R. 109, [1997] A.J. No. 651 (Q.B.), respecting the interpretation of the comparable exemption provision in the Alberta Civil Enforcement Act (R.S.A. 1980, c. C-10.5) to s. 2.6, the wording of that Act is different from the Ontario Execution Act and therefore the analysis of the court in that case does not assist. After prescribing the exempt values in s. 88, s. 89(1) provides:

89(1) Where the enforcement debtor's equity in the property referred to in section 88 exceeds the prescribed value of the exemption for the property, that property is subject to sale pursuant to writ proceedings.

[28] Based on s. 89, the Alberta court was able to conclude that the exemption applied to the debtor's equity in the motor vehicle even if the value of the vehicle was higher than the prescribed value.

Conclusion

[29] Although it would give the section the interpretation that makes the most common sense, would be most helpful to debtors and would fit with the intent and purpose of the philosophy of exemptions, the court cannot read into s. 4 a reference that is not there. Nor can it be justified either by implication or by analogy. Although it is likely that the failure of the legislature to amend s. 4 when it added s. 2.6 was an oversight, if it was, it is only the legislature and not the court that can make the correction.

[30] Therefore, I conclude that reading the section as worded, because the value of the motor vehicle in this case is over $5,000, it is not exempt under s. 2.6.

[31] The effect of affirming the conclusion of the bankruptcy judge on the first issue means that there is no exemption in this case. In the result, the appeal must be dismissed. There is, therefore, no need to address the second and third issues which are now hypothetical, as they only arise if the exemption applies.

[32] For the above reasons, I would dismiss the appeal with costs to the respondent fixed in the amount of $9,000 inclusive of disbursements and GST.

Appeal dismissed with costs [page22]

Notes

1. There is no prescribed amount for motor vehicles.

2. Previous versions of that section required that tools and implements be "necessary to and actually in use by the debtor in his business" to be exempt: See R.S.O. 1960, c. 126, s. 2.5.

3. 19(1) The sheriff shall seize any money or banknotes, including any surplus of a former execution against the debtor, and any cheques, bills of exchange, promissory notes, bonds, mortgages, specialties or other securities for money belonging to the person against whom the execution has been issued, and, subject to the Creditors' Relief Act, shall pay or deliver to the party who sued out the execution the money or banknotes so seized, or a sufficient part thereof, and hold such cheques, bills of exchange, promissory notes, bonds, mortgages, special- ties or other securities for money as security for the amount directed to be levied, or so much thereof as has not been otherwise levied or raised, and the sheriff may sue in his or her own name for the recovery of the sums secured thereby.