GMAC Commercial Credit Corporation - Canada v. TCT Logistics Inc. and Travelers Transportation Services Inc. et al. [Indexed as: GMAC Commercial Credit Corp. - Canada v. TCT Logistics Inc.]
74 O.R. (3d) 382
[2005] O.J. No. 589
Docket: C38655 and C38656
Court of Appeal for Ontario,
Doherty, Laskin and Feldman JJ.A.
February 18, 2005
Bankruptcy and insolvency -- Property of the bankrupt -- Priorities -- General security agreement -- Statutory deemed trust -- Before bankruptcy, bankrupt operating freight brokerage business -- Provincial law requiring freight broker to hold funds for carriers' charges in trust -- Bankrupt failing to maintain separate trust account and co-mingling funds -- Statutory deemed trust not trust within bankruptcy unless it was trust under general trust principles -- Funds relating to carriers' fees losing character as trust funds when co-mingled with other funds -- Had funds been segregated, they would have had priority over general security agreement -- Truck Transportation Act, R.S.O. 1990, c. T.22 -- Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 67(1)(a) [page383]
TCT Logistics Inc. ("TCT") operated a freight brokerage and warehousing business in Canada and the United States. TCT contracted with carriers to transport individual loads, and it invoiced its customers for all services provided. However, contrary to the requirements of s. 15 of the Load Brokers Regulation, which was enacted under Ontario's Truck Transportation Act, TCT did not maintain a separate trust account for the moneys it received from customers for the portion of its invoices that related to the charges of the carrier.
In 2001, TCT defaulted on its obligations under a general security agreement with GMAC Commercial Credit Corporation -- Canada ("GMAC"), which security was comprehensive and included TCT's accounts receivable. On January 24, 2002, KPMG Inc. ("KPMG") was appointed interim receiver, and it became trustee in bankruptcy in February 2002.
In the bankruptcy proceedings, the carriers and KPMG disagreed about who had priority to amounts referable to the services performed by the carriers. To facilitate the operation of the receivership and the bankrupt estate, KPMG obtained two court orders, one of which was for TCT's freight brokerage business. The court orders compelled customers to pay amounts owing to TCT to KPMG, and KPMG was authorized to hold funds relating to carriers' services in a separate bank account, pending the determination of the right to the funds.
KPMG moved to have the priority dispute determined. Greer J. found that s. 15 of the regulation imposed a deeded trust and, although TCT had not physically segregated it funds, its computer accounting program identified the funds, which was sufficient to constitute the funds as trust funds. She held that both (a) the amounts collected by TCT before January 24, 2002 that were owed to carriers, and also (b) the amounts collected by the interim receiver after January 24, 2004 that were held in a segregated bank account were trust funds held for the carriers. She held that the amounts were excluded from the security interest of GMAC and from the bankrupt estate pursuant to s. 67(1)(a) of the Bankruptcy and Insolvency Act ("BIA"), which provides that the property of a bankrupt divisible among creditors shall not comprise property held by the bankrupt in trust. GMAC and KPMG appealed.
Held, the appeal should be allowed in part.
A series of cases from the Supreme Court of Canada is authority that because bankruptcy is a matter under federal jurisdiction, provincial statutory deemed trusts that do not conform to general trust principles cannot operate to reorder the priorities in a bankruptcy. The BIA was amended to provide exceptions for certain statutory deemed trusts in favour of the Crown, but these exceptions did not apply to the immediate case of the carriers' claim. Thus, deemed trusts under provincial legislation are effective when a person or business is solvent and operating but, upon bankruptcy, the funds that are subject to a deemed trust must satisfy the requirements of general trust principles to be excluded from the property of the bankrupt under s. 67(1)(a) of the BIA. Therefore, in the immediate case, even if s. 15 of the regulation created a deemed trust, it would not be a trust within the bankruptcy unless it was a trust under general trust principles, which require trusts to satisfy the three certainties of intention, object and subject matter. Under these principles, once trust funds are co-mingled with other funds, they can no longer be said to be effectively segregated for the purpose of constituting a trust under general trust principles. In the immediate case, the funds relating to the carriers' fees collected by TCT before January 24, 2002 lost their character as trust funds when they were co-mingled with other TCT funds. [page384]
However, had the funds been segregated, then the carriers' claim would have had priority over the security interest of GMAC. In other words, the security interest of GMAC was subject to the trust mandated by s. 15 of the regulation, so long as TCT carried out its trust obligations. GMAC and KPMG incorrectly argued that because of the Supreme Court of Canada's decision in Royal Bank of Canada v. Sparrow Electric Corp., GMAC's security interest had attached before the statutory trust obligation. The result in the Sparrow case did not apply to the trust imposed by the Load Brokers Regulation. The Sparrow decision recognized that a creditor's security could be subject to an implied licence that would extend to "legal incidents" of the sale of a debtor's inventory. To carry on business in Ontario, a load broker must comply with the trust obligations in s. 15 of the regulation, and must collect, hold in trust, and pay to the carriers their fees. That trust obligation was a legal inci dent of the provision of load brokerage services and therefore was subject to the implied licence accorded by the secured lender.
In the immediate case, contrary to the argument of GMAC and KPMG, as the interim receiver stands in the shoes of the debtor and is an officer of the court, it was incumbent on it to comply with the regulations as funds are received and to hold the carriers' portion in trust for the carriers. Accordingly, the appeal should be allowed in part. The carriers' portion of the pre-January 24, 2002 accounts receivable collected by the interim receiver was held in trust. However, the carrier's portions of the pre-January 24, 2002 accounts that were collected by TCT and co-mingled with other moneys lost their character as trust funds and were subject to GMAC's security interest.
APPEAL from an order of Greer J., reported at (2002), 2002 21216 (ON SC), 61 O.R. (3d) 85, [2002] O.J. No. 3244.
Cases referred to British Columbia v. Federal Business Development Bank, 1987 156 (BC CA), [1987] B.C.J. No. 1834, 17 B.C.L.R. (2d) 273, 43 D.L.R. (4th) 188, [1988] 1 W.W.R. 1, 65 C.B.R. (N.S.) 201 (C.A.) (sub nom. R. v. Federal Business Development Bank); British Columbia v. Henfrey Samson Belair Ltd., 1989 43 (SCC), [1989] 2 S.C.R. 24, [1989] S.C.J. No. 78, 38 B.C.L.R. (2d) 145, 59 D.L.R. (4th) 726, 97 N.R. 61, [1989] 5 W.W.R. 577, 75 C.B.R. (N.S.) 1, 34 E.T.R. 1; Deloitte Haskins & Sells Ltd. v. Alberta (Workers' Compensation Board), 1985 82 (SCC), [1985] 1 S.C.R. 785, [1985] S.C.J. No. 35, 38 Alta. L.R. (2d) 169, 19 D.L.R. (4th) 577, 60 N.R. 81, [1985] 4 W.W.R. 481, 55 C.B.R. (N.S.) 241 (sub nom. Jacs Jackets and Crests Ltd. (Re)); Federal Business Development Bank v. Québec (Commission de la santéé et de la securitéé du travail), 1988 105 (SCC), [1988] 1 S.C.R. 1061, [1988] S.C.J. No. 44, 14 Q.A.C. 140, 50 D.L.R. (4th) 577, 84 N.R. 308, 68 C.B.R. (N.S.) 209; Giffen (Re), 1998 844 (SCC), [1998] 1 S.C.R. 91, [1998] S.C.J. No. 11, 45 B.C.L.R. (3d) 1, 155 D.L.R. (4th) 332, 222 N.R. 29, [1998] 7 W.W.R. 1, 1 C.B.R. (4th) 115; Husky Oil Operations Ltd. v. M.N.R., 1995 69 (SCC), [1995] 3 S.C.R. 453, [1995] S.C.J. No. 77, 128 D.L.R.(4th) 1, 188 N.R. 1, [1995] 10 W.W.R. 161, 137 Sask.R. 81, 35 C.B.R. (3d) 1, 24 C.L.R. (2d) 131, Quebec (Deputy Minister of Revenue) v. Rainville, 1979 2 (SCC), [1980] 1 S.C.R. 35, 105 D.L.R. (3d) 270, 30 N.R. 24, 33 C.B.R. (N.S.) 301 (sub nom. Bourgeault's Estate (Re), Bourgault (Re)); Royal Bank of Canada v. Sparrow Electric Corp., 1997 377 (SCC), [1997] 1 S.C.R. 411, [1997] S.C.J. No. 25, 46 Alta. L.R. (3d) 87, 143 D.L.R. (4th) 385, 208 N.R. 161, [1997] 2 W.W.R. 457, 44 C.B.R. (3d) 1, 97 DTC 5089; Ward-Price v. Mariners Haven Inc. (2001), 2001 24088 (ON CA), 57 O.R. (3d) 410, [2001] O.J. No. 1711, 199 D.L.R. (4th) 68, 42 R.P.R. (3d) 39 (C.A.) Statutes referred to Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 67 [as am.] Employment Standards Act, 2000, S.O. 2000, c. 41, s. 40 Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) Pension Benefits Act, R.S.O. 1990, c. P.8, s. 57 [page385] Personal Property Security Act, R.S.O. 1990, c. P.10, ss. 11, 30(7), (8) Truck Transportation Act, R.S.O. 1990, c. T.22 Rules and regulations referred to Load Brokers Regulation, O. Reg. 556/92, ss. 4, 5, 15 Authorities referred to Ziegel, J.S., and D.L. Denomme, The Ontario Personal Property Security Act: Commentary and Analysis, 2nd ed. (Toronto: Butterworths, 2000)
John T. Porter, for appellant GMAC Commercial Credit Corp. Frederick L. Myers and Nando De Luca, for appellants TCT Logistics, by their Interim Receiver KPMG Inc. Gerard V. Thompson and Charlie Chang, for respondents Travelers Transportation Services Inc. et al (the Carriers)
The judgment of the court was delivered by
FELDMAN J.A.: --
Introduction
[1] TCT Logistics Inc. and its related companies ("TCT") were in the business of warehousing and transporting goods by truck. An interim receiver was appointed for TCT on January 24, 2002, and an order for bankruptcy was made on February 22, 2002. The dispute in this case is between the secured creditor of TCT and the carriers who were contracted to transport individual loads. Contrary to the requirements of a regulation under the Truck Transportation Act, R.S.O. 1990, c. T.22, TCT did not maintain a separate trust account for the moneys it received from its customers for the portion of its invoices that related to the charges of each carrier. The issue in this case is whether, despite that non-compliance, those funds are trust funds within the meaning of s. 67(1)(a) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA") and therefore are not property of the bankrupt for distribution to creditors in the bankruptcy and take priority over the secured creditor's general security over all of the assets of TCT.
Facts
[2] TCT operated a freight brokerage and warehousing business in Canada and the United States. Under a general security agreement, GMAC Commercial Credit Corporation û Canada ("GMAC") [page386] held comprehensive security over all of TCT's assets, including its accounts receivable. In 2001, TCT began to default on its obligations to GMAC, and on January 24, 2002, KPMG Inc. ("KPMG") was appointed interim receiver over all the assets and undertaking of TCT. At that date, TCT owed GMAC over $71 million.
[3] The interim receiver discovered that carriers were not being paid, even though TCT had received payment on its invoices for the carried loads. TCT's cheques were being returned for insufficient funds. Furthermore, the interim receiver encountered significant difficulties collecting accounts receivable of approximately $2.5 million. Carriers began contacting customers directly seeking to collect their fees, and customers refused to pay TCT because they did not want to pay twice. In one case, a carrier seized a customer's goods, which were later released under court order. An order dated February 22, 2002 authorized the interim receiver to file an assignment in bankruptcy; it became trustee in bankruptcy on February 25, 2002.
[4] Following the appointment of the interim receiver, a dispute arose between the secured creditor, GMAC, and the carriers regarding priority entitlement to amounts referable to services performed by the carriers and invoiced to customers as part of TCT's freight transportation services to those customers. The amounts fell into two categories: (1) amounts already collected by TCT before January 24, 2002 but not paid to the carriers, and (2) accounts receivable for services rendered by TCT but not collected as of January 24, 2002.
[5] To facilitate the operation of the receivership and bankrupt estate, the interim receiver obtained two court orders, one for TCT's freight brokerage business and one for its warehousing business. Those orders did three things: (1) they prevented carriers from pursuing customers directly for payment of amounts that had already been collected by TCT as of January 24, 2002; (2) they compelled the customers to pay amounts owing to TCT as of January 24, 2002 to the interim receiver; and (3) they authorized the interim receiver to hold the funds relating to carriers' services in a separate bank account, pending determination of the right to those funds. The orders also provided that they were effectively standstill provisions only and would not affect the rights of the carriers or of GMAC to the funds.
[6] Pursuant to these orders, the interim receiver brought a motion to determine the priority entitlement between the secured creditor and the carriers to the funds it was collecting and holding and to the funds collected by TCT prior to the interim receivership but not paid to the carriers. [page387]
[7] The carriers' claim to priority was based on s. 67(1)(a) of the BIA and s. 15 of O. Reg. 556/92 under the Truck Transportation Act (the "Load Brokers Regulation").
[8] Section 67(1)(a) of the BIA provides:
67(1) The property of a bankrupt divisible among his creditors shall not comprise
(a) property held by the bankrupt in trust for any other person ...
[9] Section 15 of the Load Brokers Regulation provides:
15(1) Every load broker shall hold in trust, for the benefit of the carriers to whom the load broker is liable to pay carriage charges, all the money the load broker receives from consignors and consignees in respect of the carriage of goods by carriers except,
(a) money in excess of the carriage charges; and
(b) interest on money held by the load broker for less than thirty days.
(2) Every load broker shall,
(a) maintain an account designated as a trust account in a bank, trust corporation or credit union authorized to carry on business and located in Ontario;
(b) keep the money held by the load broker as a trustee under subsection (1) separate from money that belongs to the load broker;
(c) deposit the money held by the load broker as a trustee under subsection (1) in the trust account without delay after its receipt; and
(d) disburse the money held by the load broker as a trustee under subsection (1) only to persons for whom the money is held in trust and who are entitled to such payment.
[10] The carriers' position was that under this regulation, funds owed to carriers by load brokers were the subject of a deemed trust and therefore under s. 67(1)(a) of the BIA, they were not part of the bankrupt estate. The secured creditor's position, supported by the interim receiver, was that the regulation did not impose a deemed trust and that the most the regulation did was impose an obligation on TCT to hold the carriers' moneys in trust. However, TCT breached that obligation because it did not segregate the carriers' funds. There was therefore no "deemed" trust, and no trust attached, either under the terms of the regulation or under the common law. Furthermore, they argued that the security interest of GMAC attached to the accounts receivable as soon as those accounts were created. No trust could attach to the proceeds of the accounts receivable, as the accounts were already encumbered by that security interest.
[11] The motion judge held that both the amounts collected by TCT prior to January 24, 2002 that were owed to carriers and the [page388] amounts collected by the interim receiver and held in a segregated account were trust funds held for the carriers and were excluded from the security interest of GMAC and from the bankrupt estate pursuant to s. 67(1)(a) of the BIA. The motion judge found that the regulation imposed a deemed trust on the funds, and that although the company did not physically segregate the funds, their computer accounting program identified the funds that were collected to be paid to the carriers, which was sufficient to maintain the integrity of the funds as trust funds.
[12] The secured creditor and interim receiver appeal that order.
Issues
(1) Does s. 15 of the Load Brokers Regulation create a deemed trust such that funds in the deemed trust are excluded from the estate of a bankrupt under s. 67(1)(a) of the BIA?
(2) Did the motion judge make a palpable and overriding error of fact or an error of law in concluding that keeping accounting records that tracked the funds that were to be held in trust was sufficient segregation to establish a trust?
(3) How does the trust obligation imposed by s. 15 of the Load Brokers Regulation affect the security interest of GMAC in the accounts receivable?
(4) Regardless of the practice that had been employed by TCT prior to the interim receivership, was the interim receiver obliged to comply with s. 15 of the Load Brokers Regulation when collecting accounts receivable, and hold the carriers' funds in trust?
Analysis
Issue 1: Does s. 15 of the Load Brokers Regulation create a deemed trust?
[13] Section 15 of the Load Brokers Regulation imposes an obligation on a load broker to hold in trust the moneys it receives from its customers that are referable to the carriers' fees portion of its load brokers invoice. If the effect of s. 15 of the Load Brokers Regulation is to make all funds invoiced or collected in respect of carriers' fees "trust funds" within the meaning of s. 67(1)(a) of the BIA, then those funds would not be property of the bankrupt divisible among creditors, and would be payable to the carriers. [page389]
[14] One of the requirements of a valid trust under general trust law is that the trust property must be identified as being held in trust, and not co-mingled with other property owned by the trustee. However, both federal and provincial legislation have created deemed trusts, where the legislation provides that the funds are deemed to be trust funds even if they are not segregated from other funds. Although many of these are deemed trusts in favour of the Crown for taxes collected, others are trusts in favour of other groups such as employees in respect of vacation pay or pension amounts (see, for example, Employment Standards Act, 2000, S.O. 2000, c. 41, s. 40; and the Pension Benefits Act, R.S.O. 1990, c. P.8, s. 57).
[15] A consistent series of cases from the Supreme Court of Canada has addressed the effect of provincial statutory deemed trusts in a bankruptcy: Quebec (Deputy Minister of Revenue) v. Rainville, 1979 2 (SCC), [1980] 1 S.C.R. 35, 105 D.L.R. (3d) 270; Deloitte Haskins & Sells Ltd. v. Alberta (Workers' Compensation Board), 1985 82 (SCC), [1985] 1 S.C.R. 785, [1985] S.C.J. No. 35; Federal Business Development Bank v. Québec (Commission de la santé et de la securité du travail), 1988 105 (SCC), [1988] 1 S.C.R. 1061, [1988] S.C.J. No. 44; British Columbia v. Henfrey Samson Belair Ltd., 1989 43 (SCC), [1989] 2 S.C.R. 24, [1989] S.C.J. No. 78; Husky Oil Operations Ltd. v. M.N.R., 1995 69 (SCC), [1995] 3 S.C.R. 453, [1995] S.C.J. No. 77, and Re Giffen, 1998 844 (SCC), [1998] 1 S.C.R. 91, [1998] S.C.J. No. 11. These cases hold that because bankruptcy is a matter under federal jurisdiction, provincial statutory deemed trusts that do not conform to general trust principles cannot operate to reorder the priorities in a bankruptcy. Therefore, although such deemed trusts are effective in accordance with the provincial legislation when a person or business is solvent and operating (see, e.g., Ward-Price v. Mariners Haven Inc. (2001), 2001 24088 (ON CA), 57 O.R. (3d) 410, [2001] O.J. No. 1711 (C.A.)), upon bankruptcy the funds that are subject to a deemed trust, but are not held in accordance with general trust principles, will not be excluded from the property of the bankrupt under s. 67(1)(a) of the BIA and will be distributed in the priority prescribed by the BIA.
[16] Following the decisions of the Supreme Court in the first four cases cited above, the BIA was amended in 1992 by the addition of s. 67(2) and (3), to deal specifically with certain statutory deemed trusts in favour of the Crown: S.C. 1992, c. 27, s. 33. Subsections 67(2) and (3) address only the question of when deemed trusts in favour of the Crown will be regarded as trusts under s. 67(1)(a). Subsection 67(2) confirms that statutory deemed trusts in favour of the Crown do not come within s. 67(1)(a), while s. 67(3) creates some limited exceptions. These provisions today read as follows: [page390]
67(2) Subject to subsection (3), notwithstanding any provision in federal or provincial legislation that has the effect of deeming property to be held in trust for Her Majesty, property of a bankrupt shall not be regarded as held in trust for Her Majesty for the purpose of paragraph (1)(a) unless it would be so regarded in the absence of that statutory provision.
(3) Subsection (2) does not apply in respect of amounts deemed to be held in trust under subsection 227(4) or (4.1) of the Income Tax Act, subsection 23(3) or (4) of the Canada Pension Plan or subsection 86(2) or (2.1) of the Employment Insurance Act (each of which is in this subsection referred to as a "federal provision") nor in respect of amounts deemed to be held in trust under any law of a province that creates a deemed trust the sole purpose of which is to ensure remittance to Her Majesty in right of the province of amounts deducted or withheld under a law of the province where
(a) that law of the province imposes a tax similar in nature to the tax imposed under the Income Tax Act and the amounts deducted or withheld under that law of the province are of the same nature as the amounts referred to in subsection 227(4) or (4.1) of the Income Tax Act, or
(b) the province is a "province providing a comprehensive pension plan" as defined in subsection 3(1) of the Canada Pension Plan, that law of the province establishes a "provincial pension plan" as defined in that subsection and the amounts deducted or withheld under that law of the province are of the same nature as amounts referred to in subsection 23(3) or (4) of the Canada Pension Plan,
and for the purpose of this subsection, any provision of a law of a province that creates a deemed trust is, notwithstanding any Act of Canada or of a province or any other law, deemed to have the same effect and scope against any creditor, however secured, as the corresponding federal provision [Se Note 1 at the end of the document].
[17] One of the submissions made by the carriers and accepted by the motion judge was that s. 15 of the Load Brokers Regulation creates a "deemed trust" in favour of the carriers, and that therefore the funds collected by TCT or by the interim receiver in respect of the carriers' fees are trust funds within the meaning of s. 67(1)(a) of the BIA. In my view, the legal conclusion of this submission is wrong in law, and the motion judge erred by accepting it. Based on the consistent line of cases from the Supreme Court of Canada referred to above that excludes statutory deemed trusts from the ambit of s. 67(1)(a), and the limited exceptions in s. 67(3) carved out only for certain deemed trusts where the trust funds are held for the Crown, I conclude that, even if s. 15 creates a deemed trust, any such deemed trust would not be a trust within the meaning of s. 67(1)(a) of the BIA and therefore it would not be excluded from property of the bankrupt for the purpose of determining distribution priorities under the BIA. It is therefore unnecessary for the court to decide whether, besides creating an obligation on load brokers to hold carriers' fees in trust, s. 15 can be characterized as creating a "deemed trust" for any other purpose.
Issue 2: Did TCT hold the carriers' funds in trust?
[18] TCT would invoice the customer for all services provided, usually adding its own fee onto the fee invoiced by the carrier. When the funds were received, they were deposited into one account, and the carrier was paid from that account. The funds received were not segregated. However, TCT maintained a computerized accounting system that recorded the receipt and payment of the carriers' fees. The motion judge found that the computer system met the trust requirements of s. 15 of the Load Brokers Regulation and that the effect of the system was to segregate the carriers' funds, even though the actual funds received were co-mingled in one account with other company money. She stated (at para. 30):
As I have earlier noted, I am satisfied on the answers of Denise Cardy that the load broker's computer accounting records effectively did segregate the money in question, even though the actual moneys on deposit in the load broker's account may have been co-mingled with other company moneys.
[19] With respect to the motion judge, in my view, this conclusion was not open to her in law, and is contrary to the Supreme Court cases referred to above. Once the purported trust funds are co-mingled with other funds, they can no longer be said to be "effectively segregated" for the purpose of constituting a trust at common law. For example, in British Columbia v. Henfrey Samson Belair Ltd., supra, the funds involved were sales taxes collected on behalf of the province for which full accounting records were maintained. Cory J., in dissent, concluded at pp. 44-45 S.C.R. that because the statute provided a formula for establishing the trust property and because the vendor in that case clearly identified the subject- matter when each sale was made, the funds initially impressed with the trust remained identifiable and therefore "certainty of subject matter does indeed exist" (the three trust certainties being intention, object and subject matter). However, the majority found to the cont rary. McLachlin J. (as she then was) held that once the funds were co-mingled they were no longer identifiable and therefore no longer subject to the trust. She explained at p. 34 S.C.R.:
I turn next to s. 18 of the Social Service Tax Act and the nature of the legal interests created by it. At the moment of collection of the tax, there is a [page392] deemed statutory trust. At that moment the trust property is identifiable and the trust meets the requirements for a trust under the principles of trust law. The difficulty in this, as in most cases, is that the trust property soon ceases to be identifiable. The tax money is mingled with other money in the hands of the merchant and converted to other property so that it cannot be traced. At this point it is no longer a trust under general principles of law. In an attempt to meet this problem, s. 18(1)(b) states that tax collected shall be deemed to be held separate from and form no part of the collector's money, assets or estate. But, as the presence of the deeming provision tacitly acknowledges, the reality is that after conversion the statutory trust bears little resemblance to a true trust. There is no property which can be regarded as being impressed with a trust. Because of this, s. 18(2) goes on to provide that the unpaid tax forms a lien and charge on the entire assets of the collector, an interest in the nature of a secured debt.
[20] In my view, the facts in this case regarding how the funds were held and accounted for are not distinguishable from the Henfrey Samson Belair case, and consequently, the legal result must also be the same. The funds relating to the carriers' fees collected by TCT prior to January 24, 2002 lost their character as trust funds when they were not segregated and were co-mingled with other TCT funds.
Issue 3: Did the GMAC security attach to TCT's accounts receivable including the s. 15 trust funds?
[21] GMAC held general security over all the property, assets, and undertaking of TCT, including accounts receivable, under a General Security Agreement. Both GMAC and the interim receiver argued that because GMAC's security attached to TCT's accounts receivable before any funds were received by TCT, the security attached before the statutory trust obligation was imposed by s. 15 of the Load Brokers Regulation. They rely on the decision of the Supreme Court of Canada in Royal Bank of Canada v. Sparrow Electric Corp. 1997 377 (SCC), [1997] 1 S.C.R. 411, [1997] S.C.J. No. 25, which held that the deemed trust in favour of the Crown in respect of employee source deductions under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) was subject to the security interest of the secured creditor in inventory, because the deemed trust only attached to the company's interest in the inventory after the inventory was already subject to the creditor's security interest.
[22] If this argument is correct, the effect is to emasculate the trust imposed for the benefit of carriers by s. 15 of the Load Brokers Regulation in all cases where the operations of the load broker are financed so that its assets and undertaking are subject to a lender's secured interest. This would, I believe, cover many, if not most substantial business operations in Ontario. [page393] Furthermore, the effect would be to thwart the intention of the legislature in imposing the trust obligation for the benefit and protection of carriers.
[23] In my view, the result in the Sparrow case does not apply to the trust imposed by the Load Brokers Regulation. In Sparrow, the majority rejected the theory of the minority that the security of the secured creditor was subject to an implied licence that allowed the debtor to sell its inventory in the ordinary course of business and to use the proceeds to pay wages and payroll deductions. However, in distinguishing the case of British Columbia v. Federal Business Development Bank, 1987 156 (BC CA), [1987] B.C.J. No. 1834, 43 D.L.R. (4th) 188 (C.A.) ("FBDB"), the majority acknowledged that such an implied licence would extend to "legal incidents" of the sale of the inventory such as the collection and remittance of sales tax, something which must be done in order to make sales.
[24] Iacobucci J., who wrote for the majority in Sparrow, distinguished the FBDB decision in the following passage at paras. 102-03:
My colleague also relies on comments made in FBDB. In that case, the British Columbia Court of Appeal said, after having disposed of the appeal on another ground, that a licence to sell inventory carries with it a requirement that the licencee should satisfy obligations incurred in "dealing with the stock in the ordinary course of business": FBDB, supra, at p. 40. Because the obligation to set aside provincial sales taxes is a "legal incident" of the sale of inventory, a lien for unpaid sales taxes comes within the scope of the licence and so is excepted from any security interest that is subject to it: idem.
As I understand the comments in FBDB, a licence to sell inventory permits the satisfaction of obligations out of the proceeds only to the extent of the "legal incidents" of the sale. In itself, this greatly limits the scope of the theory. Because the payment of wages, except perhaps to the sales agent, is not a "legal incident" of the sale of inventory, deduction of income taxes from wages does not come within the scope of the licence. This alone would appear sufficient to distinguish FBDB from the instant appeal.
[25] In the same way, in order to carry on business in Ontario, a load broker must comply with the trust obligations in s. 15 of the regulation, and must collect, hold in trust, and pay to the carriers their fees. That trust obligation is a legal incident of the provision of load brokerage services and therefore would be subject to the implied license accorded by the secured lender.
[26] This approach is also consistent with the business intent of the lending relationship between the secured lender and the debtor company. The General Security Agreement provides that it is to be governed by and construed in accordance with the [page394] laws of Ontario and of Canada where applicable. The business of the debtor is as a load broker. If it did not comply with the Load Brokers Regulation and with the law generally, the debtor would lose its load brokerage certificate and could not thereafter legally carry on business in Ontario [See Note 2 at the end of the document]. The lender's security would be in immediate jeopardy if it precluded the debtor from carrying on its business by preventing it from holding the carriers' fees in trust for their benefit.
[27] In oral argument, counsel for GMAC suggested that, conceptually, what may occur is that the security attaches to the accounts receivable of the debtor company when they are created (s. 11 of the Personal Property Security Act, R.S.O. 1990, c. P.10), but the security becomes unattached when the carriers' funds are received and the trust obligation is imposed. The security later reattaches if the funds are co- mingled by the load broker with its own funds [See Note 3 at the end of the document].
[28] This analysis accords with an alternative analysis suggested by Iacobucci J. in Sparrow when discussing the FBDB case. He suggested at para. 104:
... the sales taxes that were at issue in FBDB were not against the value of the inventory. Rather, they were superadded to the underlying value, which is to say that they were calculated on the basis of the sale price of the inventory. Thus, the sales taxes that attend a sale of inventory represent something over and above the value of the inventory. Because a bank's charge is against the inventory, it does not extend so far as the sales taxes generated by a sale of inventory.
(Original emphasis)
In other words, the security interest may not attach to the sales taxes collected on the sale of inventory. In the same way in this case, the security interest cannot attach to the portion of the funds that is to be kept in a separate trust account in accordance with s. 15 of the Load Brokers Regulation, which are then [page395] distinct from the accounts receivable to which the secured creditors' interest attaches.
[29] On either analysis, in my view, the security interest of GMAC is subject to the trust mandated by s. 15, so long as the debtor carries out the trust obligation.
[30] Before leaving this issue, I note the interim receiver and secured creditor's argument is given some force by s. 30(7) and (8) of the PPSA, supra, which provide:
30(7) A security interest in an account or inventory and its proceeds is subordinate to the interest of a person who is the beneficiary of a deemed trust arising under the Employment Standards Act or under the Pension Benefits Act.
(8) Subsection (7) does not apply to a perfected purchase- money security interest in inventory or its proceeds.á
Subsection 30(7) addresses the priority of deemed trust beneficiaries under two Ontario statutes over the interest of secured creditors in accounts. Applying the interpretive maxim expressio unius est exclusio alterius, because the PPSA has not similarly provided that carrier beneficiaries under the Load Brokers Regulation have priority over secured creditors of the load broker, the argument that the secured creditor has priority takes on more credence.
[31] However, having noted these provisions, I do not find them determinative of the issue. The PPSA only applies to consensual agreements (see Jacob S. Ziegel & David L. Denomme, The Ontario Personal Property Security Act: Commentary and Analysis, 2nd ed. (Toronto: Butterworths, 2000), at p. 48 et seq. and pp. 71-72); it does not apply to statutory trusts, which are non-consensual. Ziegel and Denomme, at p. 81 of their text, point out that s. 4(1)(b) of the PPSA, which provides that the Act does not apply to statutory deemed trusts except under s. 30(7), seems "to have been added out of an abundance of caution". I would add that the same can be said of s. 30(7) (subject to ss. (8)). As the trust imposed by s. 15 of the Load Brokers Regulation is non-consensual, the Act does not apply to that trust.
[32] I agree with the motion judge's rejection of the argument that the GMAC security takes priority over the trust.
Issue 4: Was the interim receiver obliged to hold the carriers' funds it collected after January 24, 2002 in trust?
[33] We are dealing on this appeal with two separate funds of money collected during two different time periods. The first is the carriers' funds collected by TCT prior to January 24, 2002 and co-mingled with TCT's own funds. The second is the pre- January 24, 2002 [page396] accounts receivable of TCT collected by the interim receiver, the carriers' portion of which has been placed into a separate bank account pursuant to court orders.
[34] With respect to the second fund, the secured creditor and the interim receiver submit that the creditor's and the carriers' rights were fixed as of January 24, 2002, and that because the interim receiver stands in the shoes of TCT, it is bound to continue the practice of depositing the receipts into one account and not segregating the carriers' fees in a separate account. They also rely on the fact that the subsequent court orders, by their terms, did not affect established rights.
[35] I agree that the subsequent court orders have no substantive effect on the legal rights of any of the parties. However, I do not agree with the submission that those rights are frozen upon bankruptcy. What is frozen on bankruptcy is the ability for creditors to make or to enforce any claims against a debtor, as all proceedings must be taken by the trustee: see Re Giffen, supra, at para. 39. What are also frozen at the date of bankruptcy are the secured creditor's rights in the accounts receivable.
[36] However, in the regime created by s. 15 of the Load Brokers Regulation, the security interest in the accounts receivable and in the funds when they are received is different. It is upon receipt of the carriers' fees that the trust obligation is imposed on the load broker. Contrary to the argument of the interim receiver and the secured creditor, as the interim receiver stands in the shoes of the debtor, and is furthermore acting as an officer of the court, it is incumbent on the interim receiver (as it was on TCT), irrespective of the subsequent court orders, to comply with the regulation as funds are received, and to hold the carriers' portion of the collected accounts in trust for the carriers. There is no estoppel preventing the interim receiver from complying with the law.
[37] As discussed above, if the funds are not co-mingled with other corporate funds, the security interest of GMAC is subject to the interest of the trust beneficiaries in the trust funds.
Conclusion
[38] The appeal is allowed in part. The carriers' portion of the pre-January 24, 2002 accounts receivable collected by the interim receiver is held in trust for the carriers and is payable to them. The pre-January 24, 2002 accounts that were collected by TCT and co-mingled with other TCT moneys lost their character as trust funds, and therefore they are subject to the security interest of the secured creditor. [page397]
Costs
[39] As the carriers were successful on the major issue, costs are payable to the respondents fixed in the amount of $15,000, plus disbursements and GST.
Order accordingly.
Notes
Note 1: Further amendments followed in 1996, 1997 and 1998: S.C. 1996, c. 23, s. 168; S.C. 1997, c. 12, s. 59; S.C. 1998, c. 19, s. 250).
Note 2: See ss. 4 and 5 of the Load Brokers Regulation, supra. Section 5 states: "The Registrar may cancel or suspend a load brokerage certificate for failure to comply with the requirements of the Act or this Regulation." Section 4(b) states: "The Registrar may refuse to issue or renew a load brokerage certificate if, [...] (b) the past conduct of the applicant affords reasonable grounds for belief that the applicant will not carry on a load brokerage service in accordance with the law and with intergrity and honesty ..." Sections 4(c) and (d) give the Registrar of Motor Vehicles discretion to refuse to issue or renew a certificate if the misconduct is that of an officer, director, controlling shareholder or partner.
Note 3: This analysis formed part of the argument in Issue No. 4 that upon bankruptcy, the rights of the secured creditor in the accounts receivable are frozen and the trust cannot take effect.