962789 Ontario Limited v. Newmarket Plaza Limited

[Indexed as: 962789 Ontario Ltd. v. Newmarket Plaza Ltd.]

Ontario Reports

Ontario Superior Court of Justice,

Divisional Court,

Czutrin S.F.J.S.C., Kiteley and Whitaker JJ.

April 9, 2014

119 O.R. (3d) 610 | 2014 ONSC 2254

Case Summary

Debtor and creditor — Payment out of court — S's company ordered to post security for costs in civil action — S paying his own money into court so that his company would pursue its claim for damages — Defendant obtaining judgment against company — No costs awarded — Motion judge erring in directing that funds be paid out of court to defendant under Creditors' Relief Act — S being owner of funds — Creditors' Relief Act, R.S.O. 1990, c. C.45.

In an action by S's company, the plaintiff was ordered to pay $15,000 into court as security for costs. S paid that amount with his own money so that the action could proceed. The defendant obtained judgment against the plaintiff on its counterclaim. No costs were awarded. The defendant obtained an order under the Creditors' Relief Act that the money paid into court be paid out to it. The plaintiff and S appealed.

Held, the appeal should be allowed.

Section 23 of the Act requires that the funds belong to the execution debtor before they become available for distribution to creditors. The funds in question belonged to S and never belonged to the execution debtor.

Barclays Bank, Ltd. v. Quistclose Investments, Ltd., [1970] A.C. 567, [1968] 3 All E.R. 651, [1968] 3 W.L.R. 1097 (H.L.); Del Grande v. McCleery, 2000 10425 (ON CA), [2000] O.J. No. 61, 127 O.A.C. 394, 31 E.T.R. (2d) 50, 94 A.C.W.S. (3d) 132, 2000 CarswellOnt 57 (C.A.), affg [1998] O.J. No. 2896, 70 O.T.C. 127, 40 B.L.R. (2d) 202, 5 C.B.R. (4th) 36, 24 E.T.R. (2d) 30, 80 A.C.W.S. (3d) 1276 (Gen. Div.); Ontario (Minister of Training, Colleges and Universities) v. Two Feathers Forest Products LP (2013), 117 O.R. (3d) 227, [2013] O.J. No. 4431, 2013 ONCA 598, 6 C.B.R. (6th) 129, 368 D.L.R. (4th) 714, 91 E.T.R. (3d) 167, 311 O.A.C. 147; Stewart v. Hoch (1999), 1999 19937 (ON SC), 43 O.R. (3d) 286, [1999] O.J. No. 687, 173 D.L.R. (4th) 520, 30 C.P.C. (4th) 404, 86 A.C.W.S. (3d) 718, 1999 CarswellOnt 681 (Div. Ct.), consd

Other cases referred to

Assaf Estate (Re), 2008 42420 (ON SC), [2008] O.J. No. 3300, 51 B.L.R. (4th) 257, 46 C.B.R. (5th) 227, 297 D.L.R. (4th) 694, 43 E.T.R. (3d) 93, 168 A.C.W.S. (3d) 991, 167 A.C.W.S. (3d) 407, 2008 CarswellOnt 4976 (S.C.J.); Housen v. Nikolaisen, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31, 2002 SCC 33, 211 D.L.R. (4th) 577, 286 N.R. 1, [2002] 7 W.W.R. 1, J.E. 2002-617, 219 Sask. R. 1, 10 C.C.L.T. (3d) 157, 30 M.P.L.R. (3d) 1; [page611] Ristimaki v. Cooper (2006), 2006 12415 (ON CA), 79 O.R. (3d) 648, [2006] O.J. No. 1559, 268 D.L.R. (4th) 155, 210 O.A.C. 11, 26 R.F.L. (6th) 256, 147 A.C.W.S. (3d) 510, 2006 CarswellOnt 2373 (C.A.), revg [2004] O.J. No. 2699, [2004] O.T.C. 547, 131 A.C.W.S. (3d) 1159, 2004 CarswellOnt 2613 (S.C.J.); Twinsectra Ltd. v. Yardley, [2002] UKHL 12, [2002] 2 A.C. 164 (H.L.)

Statutes referred to

Courts of Justice Act, R.S.O. 1990, c. C.43, s. 93

Creditors' Relief Act, R.S.O. 1990, c. C.45, ss. 5(1), 8, 23

Family Law Act, R.S.O. 1990, c. F.3, s. 12

Rules and regulations referred to

Money Paid into Court, R.R.O. 1990, Reg. 190 [rep. by O. Reg. 117/12, ss. 1, 2]

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rules 60.08, (1), 72.03(1)

APPEAL from an order directing that money be paid out of court to the defendant.

Scott Turton, for appellant 962789 and the appellant non-party John Serrago.

Robert W. Calderwood, for respondent.

[1] BY THE COURT: -- This is an appeal by 962789 and John Serrago from the order of Justice S.P. Di Tomaso dated February 12, 2013 in which, pursuant to the Creditors' Relief Act, R.S.O. 1990, c. C.45, he directed that the sum of $15,000 (plus accrued interest) be paid out of court to the defendant execution creditor.

Background

[2] John Serrago was the sole officer and director of the plaintiff company (962), which operated a dollar store at the Newmarket Plaza. In his affidavit, he said that the defendant had rented to a competitor in the same plaza and that that devastated 962's business. In October 2002, the landlord changed the locks for non-payment of rent. Mr. Serrago was never able to re-establish the business. In 2003, 962 started proceedings against Newmarket Plaza.

[3] In 2005, the defendant landlord brought a motion for security for costs on the basis of Mr. Serrago's evidence at examination for discovery that 962 had had no business or income since 2002. On August 30, 2005, Keenan J. made an order requiring the plaintiff to pay into court the sum of $15,000 as security for costs and he adjourned the balance of the motion. On October 4, 2005, Valin J. made an order as to production of documents and disclosure and he ordered that the plaintiff pay the amount ordered as security for costs by October 19, 2005. As indicated below, Mr. Serrago caused the payment to be made to the accountant of the Superior Court of Justice. [page612]

[4] In a judgment dated August 9, 2006, Loukidelis J. ordered that the defendant pay the plaintiff $10,000 and that the plaintiff pay the defendant on the counterclaim the amount of $36,639.15. He ordered that there were no costs of the action or of the counterclaim.

[5] In May 2012, 962 was dissolved.

[6] On July 3, 2012, a writ of seizure and sale was issued in favour of the defendant. On July 17, 2012, a direction to enforce writ was sent to the sheriff instructing the sheriff to demand and receive the moneys held by the accountant pursuant to s. 8 of the Creditors' Relief Act for the purpose of distributing it amongst the execution creditors of 962. The defendant later confirmed that Newmarket Plaza is the sole execution creditor of 962.

[7] A representative of the Toronto Enforcement Office required a court order before releasing the funds.

[8] In February 2013, a motion was brought for an order directing the sheriff to demand and receive from the accountant the moneys held by it in its account for purpose of distribution in accordance with the Creditors' Relief Act; or, alternatively, for an order directing the accountant to pay all moneys to the defendant. The affidavit in support of the motion is from a student-at-law at the law firm for Newmarket. She attached a statement from the accountant indicating that, with interest, the funds on account totalled over $18,000.

[9] In his affidavit sworn February 4, 2013, Mr. Serrago said that he had not wanted the claim to be struck out so he had paid the $15,000 from his own funds. He gave Mr. Turton in trust $10,000 on October 11, 2005 and $11,764.14 on October 18, 2005. The deposit slips from Mr. Turton's trust account are attached to his affidavit which Mr. Serrago asserts indicate that both were his personal cheques.

[10] The "Direction to Receive Funds" in this proceeding is dated October 19, 2005 and indicates that the name of the depositor was "F. Scott Turton Barrister-At-Law for Plaintiff 962789 Ontario Limited" pursuant to the order of Valin J. dated October 4.

[11] Mr. Serrago opposed the motion on the basis that, at the time the order for security for costs was made, the corporate plaintiff had no assets and he used his personal funds to make the payment. The trust account of his lawyer indicated that the funds had come from him. He took the position that the money belonged to him and should be returned to him. He said that he had hoped that the landlord would not oppose the money in court being paid to him but since the landlord did not appear [page613] willing, he let time pass in the hope that the landlord's attitude would change. He asked for an order that the money be paid to his lawyer.

[12] The defendant judgment creditor did not file evidence in opposition to that affidavit nor otherwise challenge it.

Order under Appeal

[13] The motion judge identified the critical issue as whether the funds were owned by Mr. Serrago or the money was a fund available for distribution to creditors. He held as follows:

I find that while the source of the funds came from Mr. Serrago, those funds were paid to his solicitor who deposited those funds into the solicitor's trust account for 962. Those monies were held in trust for the benefit of 962. Thereafter, that solicitor paid $15,000 into Court as security for costs on behalf of 962. It was 962 that was ordered to pay the money into Court (see Order of Valin Exhibit B Tab 2 Affidavit of Sabrina Adamski) (see deposit slip Exhibit C, Tab 2, Affidavit of Sabrina Adamski Motion Record). I follow the decision of the Divisional Court in Stewart v. Hoch 1999 19937 (ON SC), 1999 CarswellOnt 681 which held that a fund paid into Court was a fund "belonging" to an execution creditor (see s. 23 Creditors Relief Act RSO 1990 c. C45 as amended). Stewart was referred to and considered in Re Assaf Estate 2008 42420 (ON SC), 2008 CarswellOnt 4976, Ristimaki v. Cooper 2004 CarswellOnt 2613.

I find that the monies paid into Court held by the Accountant of the SCJ in Acct No. 496 957 constitutes an amount that belongs to the plaintiff/execution debtor 962 or an amount to which the plaintiff/execution debtor 962 is entitled pursuant to s. 8 of the Creditors' Relief Act, 2010.

Further, s. 23 of the CRA provides that where there is in Court a fund belonging to an Execution Creditor or to which an Execution Creditor is entitled an application by the Sheriff or any person interested (def. Newmarket) it (the fund) shall be deemed to be money levied under execution within the meaning of this Act.

In any event, the Court is satisfied that there could be an order for the payment out of funds directly to the Defendant Newmarket as Judgment Creditor of 962[.]

(Emphasis added)

Standard of Review

[14] Errors of mixed fact and law are reviewable on the basis of palpable and overriding error while questions of law are reviewable on the standard of correctness.[^1] [page614]

Analysis

[15] We begin by considering the decisions on which the motions judge relied.

[16] In Stewart v. Hoch,[^2] the plaintiff creditor had obtained default judgment which was set aside on condition that the debtor pay into court $12,000 as a result of which the writs of seizure and sale were withdrawn. Two additional creditors obtained judgment against the debtor before the plaintiff creditor obtained another judgment against the debtor. The plaintiff creditor moved for a declaration that he had priority over claims of the other creditors. The motion judge agreed, holding that once money was paid into court, it ceased to be "property of the debtor" within the meaning of s. 5(1) of the Creditors' Relief Act (the "Act") or "a fund belonging to an execution debtor or to which the execution debtor is entitled" within the meaning of s. 23 of the Act. Two other creditors appealed the order giving priority to the plaintiff creditor.

[17] The majority of the Divisional Court panel allowed the appeal, holding that although the defendant temporarily gave up control of the funds, she remained the owner of them and the plaintiff creditor had no ownership interest as he then had no judgment. They held that the defendant remained entitled to her funds unless a judge at the conclusion of the action ordered otherwise. Accordingly, the funds paid into court by the debtor were funds "belonging to execution debtor". In his dissenting reasons, Southey J. held that the motion judge was correct in holding that once the defendant paid the money into court, she had lost all authority to direct its disposition and had none of the incidents of ownership over it. She was only a claimant and had no rights with respect to the money.

[18] In Assaf Estate (Re), Dambrot J. had dismissed an action commenced by the wife of the deceased Edward Assaf and ordered Mrs. Assaf to pay costs of $20,000 to the estate of Bosada and $15,000 to Burton. Under the will of her late husband, Mrs. Assaf was entitled to an annual payment from the estate. The assets of the estate had been liquidated and all moneys were held by the accountant to the credit of the Assaf estate. A notice of garnishment was issued on behalf of the estate of Bosade which directed the accountant to pay to the sheriff the sum of $22,350 representing, the amount due under [page615] the costs order. Shortly after, Brown J.[^3] granted a motion to make early payment to Mrs. Assaf in the amount of $24,000. After that order, Burton issued a notice of garnishment directed to the accountant requiring payment to the sheriff in the amount of $17,351, representing the amount due to him under the costs order. The accountant's office wrote to the enforcement office refusing to honour the notices of garnishment until an order was made pursuant to rule 72.03(1) [of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194], which provides that money may be paid out of court only in accordance with an order, report or on consent. Burton issued a second notice of garnishment again directing the accountant to pay to the sheriff the sum of $3,730 in respect of a costs order in the Court of Appeal.

[19] At para. 22, Brown J. distinguished the decision in Stewart v. Hoch on the basis that the reasons do not refer to s. 93 of the Courts of Justice Act, R.S.O. 1990, c. C.43 nor R.R.O. 1990, Reg. 190, Money Paid into Court. Brown J. preferred the dissenting reasons which held that once the debtor paid money into court it lost any incident of ownership to the funds. Brown J. held that the payment of $24,000 was not a "debt payable" by the accountant to Mrs. Assaf pursuant to rule 60.08(1) and therefore could not be the subject of garnishment. He set aside the notices of garnishment.

[20] In Ristimaki v. Cooper,[^4] the plaintiff sued her former lawyer. The trial judge considered the implications if funds had been paid into court pursuant to an order under s. 12 of the Family Law Act, R.S.O. 1990, c. F.3. At para. 200, Stinson J. referred to the majority decision in Stewart v. Hoch and held that where funds are paid into court, the court is a mere stakeholder and depositing funds in court to await the outcome of an action does not divest the depositor of all ownership interest in those funds. The Court of Appeal[^5] allowed the appeal and ordered a new trial without commenting on that specific issue.

[21] None of the cases relied on by the motion judge address the question of ownership as between the person who made a payment on the one hand and the person on whose behalf the payment was made on the other hand. [page616]

[22] Section 23 of the Creditors' Relief Act is as follows:

23. Where there is in a court a fund belonging to an execution debtor or to which the execution debtor is entitled, it or a sufficient part thereof to meet the executions and certificates in the sheriff's hands may, on the application of the sheriff or any person interested, be paid over to the sheriff, and it shall be deemed to be money levied under execution within the meaning of this Act.

(Emphasis added)

[23] Rule 60.08(1) is as follows:

60.08(1) A creditor under an order for the payment of recovery of money may enforce it by garnishment of debts payable to the debtor by other persons.

(Emphasis added)

[24] The key issue was whether the funds paid into court pursuant to the orders of Keenan J. and Valin J. constituted a debt payable to 962; or whether the funds paid into court by Mr. Serrago were impressed with a trust in his favour.

[25] To make that determination, it is necessary to consider what is referred to as a "Quistclose trust". That concept derives from the decision in Barclays Bank Ltd. v. Quistclose Investments Ltd.[^6] in which Quistclose loaned to Rolls Razor a sum necessary to pay a dividend on the condition that the funds would be used only for that purpose and that they would be held in a special account, newly opened for that purpose, until the dividend was paid. The bank used the funds to pay off a debit balance owed to it and Quistclose sued the bank for the return of the funds. Lord Wilberforce held that Quistclose had met the two requirements, namely, it had established that the funds were impressed with a trust in its favour if the funds were not used to pay the dividend; and second, that the bank had such notice of the trust or of the circumstances giving rise to it as to make the trust binding on the bank. He ordered the return of the funds to Quistclose. He held that this type of arrangement created a fiduciary obligation to hold the funds in trust:

That arrangements of this character for the payment of a person's creditors by a third person, give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and secondarily, if the primary trust fails, of the third person, has been recognized in a series of cases over some 150 years. [page617]

[26] In Del Grande v. McCleery,[^7] the wife had advanced $200,000 to her husband (the plaintiff), who delivered it to the defendant to finance a "shot gun" clause in a shareholder agreement between the parties. The wife asserted that the funds were advanced only for the share purchase and were the subject of a "Quistclose" trust such that if the shares were not purchased, the funds remained her property and were to be returned to her. The transaction did not close. The proceedings were commenced and a counterclaim was issued by McCleery. The reasons indicate that a judicial sale had occurred pursuant to an order made in July 1995, but do not indicate how the funds paid by Mrs. Del Grande came to be deposited with the accountant to the credit of the action.

[27] The wife brought a motion for payment out of court of the $200,000. The motion judge held that the time for ascertaining ownership was at the time of the delivery of the $200,000 to the solicitor for the husband. MacKenzie J. quoted from Barclays Bank and he accepted the submission on behalf of the McCleery Group that where a third party receives money [at para. 10]:

(a) with knowledge that the lender and the borrower intended to create a trust;

(b) with knowledge of the purpose of the trust;

(c) with knowledge that the money is only to be used to fulfill the purpose of the trust; and

(d) where there was an intention to create a secondary trust in favour of the lender if the primary purpose of the trust cannot be carried out,

the third party is bound to use the money only to fulfill the specific purpose of the trust.

[28] At para. 12, extrapolating from Quistclose, he established the following criteria:

1. whether the terms of the loan were such as to impress upon the loan sum a trust in favour of the lender if the specific purpose of the loan was not achieved or fulfilled;

2. whether the party receiving the loan proceeds had notice of the trust or of the circumstances giving rise to the trust so as to bind such party.

[29] The motion judge held that the wife had failed to discharge the onus on her to establish those criteria and the motion was dismissed. That decision was upheld on appeal.[^8] [page618]

[30] Neither counsel referred to Ontario (Minister of Training, Colleges and Universities) v. Two Feathers Forest Products LP[^9] in which the Court of Appeal considered Quistclose and the historical cases to which Lord Wilberforce had referred. In the end, Feldman J.A. noted that on the issue of the intention to create a trust, it is not the subjective intention of the lender (or in that case the intention of the grantor), but the intention of the two parties, discerned from the terms of the loan (in that case the terms of the grant). She found that there was no trust because a close examination of the terms of the funding agreement showed that the parties did not intend that Two Feathers would hold the funds in trust for the ministry.

[31] Before arriving at that conclusion, Feldman J.A. considered the more recent decision of the House of Lords in Twinsectra Ltd. v. Yardley,[^10] which she said significantly broadened the parameters of the trust as indicated in the following [at paras. 20-23]:

Lord Millett's main focus was to properly characterize the operation of the Quistclose trust under trust principles by conducting an analysis of the locus of the legal and beneficial interest in the trust property. [footnote omitted] He concluded that the monies are always held on a resulting trust for the lender who never parts with the entire beneficial interest in them and that it is the lender who is the person who can enforce the trust. He rejected the theory that anyone but the lender can enforce the trust, including the persons who are the primary objects of the trust, such as a subgroup of the borrower's creditors. In the context of that analysis, he addressed the question whether a Quistclose trust's primary purpose must be to benefit a subset of identified creditors as in the Barclays Bank case itself. He rejected that premise, referring to cases where his characterization of the purpose of the loan was not to benefit a group of people but to purchase equipment or to enable a bank to meet a run and where only the lender could oversee its enforcement. He concluded that, as in the Twinsectra circumstances, a Quistclose trust "must be able to accommodate gifts and loans for an abstract purpose" (at para. 89).

Lord Millett also reviewed the three certainties required for a trust: certainty of intention, of subject-matter and of objects, at paras. 71, 101. On the issue of the significance of certainty of the objects of the trust, Lord Millett agreed with Lord Hoffmann, pointing out as well that if the objects were not sufficiently certain, the result in law is that the monies revert back to the lender under a resulting trust -- the same result as when the purpose cannot be carried out. (para. 101)

One could conclude that after Twinsectra, any time monies are advanced on an undertaking to use the monies only for a stated purpose, which can be an abstract purpose, then regardless of the subjective intention of the [page619] person providing the funds and of the nature of the purpose, there is a resulting trust for the lender. This represents a significant expansion of the Quistclose trust, which had been narrowly described in the Barclays Bank case.

As I have concluded that the requirements for a Quistclose trust have not been met in this case, I do not need to decide to what extent that expansion should be adopted in Ontario. However, when that decision does have to be made, the court will have to consider a number of commercial consequences, one of the most significant of which is the potential effect on the creditors of the borrower (or grantee) of the subject funds.

[32] In the case before us, the uncontradicted and unchallenged evidence is that Mr. Serrago advanced the funds for a specific purpose, namely, to comply with two court orders that required 962 to pay $15,000 into court as security for costs. There is no evidence that either the accountant or Newmarket was made aware that the funds were paid by Mr. Serrago for that specific purpose. However, at the point when the funds were paid into court, it did not matter that the accountant or Newmarket was informed as to the source of the funds because the source of the funds was irrelevant to the accountant and the only reliance that the defendant could have had was that those funds would be available to pay costs, should costs be ordered. The funds were not applied to that specific purpose because the judgment provided that there would be no costs of the action or of the counterclaim.

[33] It is a challenge to strictly apply the criteria articulated by MacKenzie J. because the party receiving the funds was, as Stinson J. observed in Ristimaki, a court official who was only a stakeholder. I prefer to extrapolate from the passages above in Two Feathers. Mr. Serrago was the sole officer and director of 962. Mr. Serrago was the lender and 962 became a debtor. He advanced the money intending to fulfill a legal obligation of 962 in order that 962 could pursue its claim for damages. The fact of paying money into court on account of an order for security for costs did not change ownership. As between Mr. Serrago and 962, the three certainties exist: intention, subject matter and objects. We are satisfied that Mr. Serrago never lost ownership of the funds.

[34] As indicated, in paras. 20 and 22 in the excerpt from Twinsectra above, the court must be able to accommodate this transaction. This is an example of how the significantly broadened parameters of the Quistclose trust, as summarized by the Court of Appeal in Two Feathers above, should be applied to prevent an injustice.

[35] As indicated above, the conclusion of the motion judge was that the funds variously belonged to the execution creditor and the execution debtor. Without deciphering his meaning, we [page620] are satisfied that the motion judge's conclusion demonstrated a palpable and overriding error or constituted an error in law. Section 23 requires that the funds belong to the execution debtor before they become available for distribution to its creditors. We find that the funds belonged throughout to Mr. Serrago and never belonged to the execution debtor. The funds held by the accountant did not constitute a debt payable to 962 pursuant to rule 60.08.

[36] If the appeal was successful, the appellant sought costs in the amount of $4,500, inclusive of fees and disbursements. If the appeal was not successful, the respondent sought costs against Mr. Serrago in the amount of $5,300 all in. In view of the unique circumstances of this case, we are of the view that each party should bear its own costs before the motion judge and on appeal.

Order to go as Follows

[37] The appeal is allowed. The order of Di Tomaso J. dated February 12, 2013 is set aside.

[38] The accountant of the Superior Court shall pay to John Serrago (or to whomever he may direct) all of the moneys held in account no. 496 957.

[39] Neither party shall recover costs of this appeal.

Appeal allowed.

[^1]: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, [2002] S.C.J. No. 31. [^2]: (1999), 1999 19937 (ON SC), 43 O.R. (3d) 286, [1999] O.J. No. 687, 1999 CarswellOnt 681 (Div. Ct.). [^3]: 2008 42420 (ON SC), [2008] O.J. No. 3300, 2008 CarswellOnt 4976 (S.C.J.). [^4]: [2004] O.J. No. 2699, 2004 CarswellOnt2613 (S.C.J.). [^5]: (2006), 2006 12415 (ON CA), 79 O.R. (3d) 648, [2006] O.J. No. 1559, 2006 CarswellOnt 2373 (C.A.). [^6]: [1970] A.C. 567, [1968] 3 All E.R. 651 (H.L.). [^7]: [1998] O.J. No. 2896, 24 E.T.R. (2d) 30 (Gen. Div.), affd 2000 10425 (ON CA), [2000] O.J. No. 61, 31 E.T.R. (2d) 50 (C.A.). [^8]: Barclays Bank, Ltd. v. Quistclose Investments, Ltd., supra (C.A.). [^9]: (2013), 117 O.R. (3d) 227, [2013] O.J. No. 4431, 2013 ONCA 598. [^10]: [2002] 2 A.C. 164, [2002] UKHL 12 (H.L.).