ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST)
COURT FILE NO.: CV-12-9896-00CL
DATE: 20150703
BETWEEN:
BONNIE CUMMINGS IN HER CAPACITY AS ESTATE EXECUTRIX OF THE ESTATE OF THE LATE JOHN CUMMINGS
Applicant
– and –
PEOPLEDGE HR SERVICES INC., WINSTON PARK FINANCIAL SERVICES LTD., CMC FRASER LTD., 1624452 ONTARIO LIMITED
Respondents
Joseph Bellissimo and Eleonore L. Morris, for the Receiver, BDO Canada Limited
Edmond Lamek, for the Respondents
HEARD: January 14, 2015
L. A. PATTILLO J.:
Introduction
[1] By order dated October 29, 2012, BDO Canada Limited (“BDO”) was appointed as receiver (the “Receiver”) over all of the assets, undertakings and properties owned by Peopledge HR Services (“Peopledge”) and other related companies (collectively the “Debtors”) (the “Receivership Order”).
[2] The Receivership Order provides, among other things, that all rights and remedies against the Debtors or affecting the property of the Debtors are stayed and suspended except with the written consent of the Receiver or leave of the court.
[3] The Receiver seeks a declaration that the Durham College of Applied Arts & Technology (“Durham College”) has breached the stay provision of the Receivership Order and an order requiring it to return $256,536.38 (plus interest) to the Receiver which it alleges was wrongly recalled by Durham College from Peopledge’s bank account after it had received notice of the Receivership Order.
[4] For the reasons that follow, I allow the Receiver’s motion. In my view, Durham College’s actions in recalling the monies from Peopledge’s bank account after it had notice of the Receivership Order constituted a breach of the stay provision. Durham College must repay the monies to the Receiver.
Background
[5] Peopledge provided payroll processing, human resources and benefits services to both Canadian and U.S. customers.
[6] As part of its administration of its customer’s payrolls, Peopledge received the funds designated for payroll and related governmental and other remittances (collectively “Payroll Funds”) from its customers, generally three days in advance of their required distribution date. The Canadian customer funds were deposited into Peopledge’s “Canadian Consolidated Account” held with the Bank of Montreal, Burlington (“BMO Burlington”) and its American customer funds were deposited into the “U.S. Consolidated Account” held with BMO Harris Bank in the U.S.
[7] Durham College is an applied arts and technology school established in 1967 as a result of Ontario legislation. Durham College bank is the Bank of Montreal, Oshawa, (“BMO Oshawa”).
[8] Peopledge provided payroll services to Durham College pursuant a master services agreement entered into by them and dated October 26, 2010 (the “Master Services Agreement”). Among other things, it sets out, in Schedules attached to the agreement, various agreements in respect of the processing of Durham College’s payroll and the transfer of Payroll Funds from Durham College to Peopledge by way of pre-authorized debit transaction. In particular:
a) Schedule 3 - Authorization to Debit Corporate Account;
b) Schedule 5 – Service Level Agreement; and
c) Schedule 6 – Banking Agreement.
[9] Schedule 3 to the Master Services Agreement is a pre-authorized debit agreement signed on behalf of Durham College, the terms and conditions of which provide, in part, that Durham College agrees to provide the funds required for Peopledge to process Durham College’s payrolls by way of pre-authorized debit of a specific account and authorizes its financial institution, BMO Oshawa, in that regard. Paragraph 5 waives the 10 calendar day pre-notification otherwise required for business pre-authorized debits.
[10] Schedule 5 sets out, among other things, a Processing Schedule which provides that Peopledge will initiate a pre-authorized debit request three days in advance of pay day and that Durham College’s Payroll Funds must be received by Peopledge two days before pay day.
[11] Schedule 6, the Banking Agreement, provides, among other things, that Durham College will provide funds required for Peopledge to process Durham College’s payroll by way of electronic funds transfer initiated three days in advance of pay day (paragraph 1(a)). Further, Peopledge acknowledges that the financial institution is not required to verify that a pre-authorized debit against Durham College is issued in accordance with the terms of the agreement or that the funds received by Peopledge from the pre-authorized debit are used for the purposes of the agreement (paragraph 4).
[12] Paragraph 7 of the Banking Agreement provides:
The Employer [Durham College] may dispute a pre-authorized debit made by the Service Bureau [Peopledge], on any of the following grounds: one, the pre-authorized debit was not issued in accordance with this agreement; and, two, the Employer’s authorization was withdrawn before the debit was initiated by the Service Bureau. Such a dispute must be filed with a branch of the Employer’s own financial institution within 10 business days after the date the pre-authorized debit is posted to the Employer’s account. A pre-authorized debit disputed by the Employer constitutes a return or rejection of clearing, as per the following paragraphs, and is to be settled solely between the Employer and the Service Bureau.
The Events in Issue
[13] The events in issue relate to Durham College’s October 30, 2012 staff payroll. They are not in dispute.
[14] As of October 25, 2012, Durham College had no monies on hand with Peopledge as all prior payrolls and government remittances on its behalf had been made by Peopledge in accordance with the Master Services Agreement.
[15] Sometime shortly before October 24, 2012, Peopledge prepared a Funds Summary Report for the October 30, 2012 payroll based on payroll data electronically supplied by Durham College to Peopledge. The Funds Summary Report specified the amount to be debited from Durham College’s bank account and transmitted to it by Durham College in respect of the payroll.
[16] On or prior to October 24, 2012, Durham College approved the Fund Summary Report and on October 24, 2012, Peopledge prepared and submitted an electronic funds transfer debit to Durham College’s bank account at BMO Oshawa for the amount approved by Durham College.
[17] The electronic funds transfer debit request submitted by Peopledge specified that the “Due Date” for the pre-authorized debit was to be October 26, 2012.
[18] In accordance with the electronic funds transfer request submitted by Peopledge, on October 26, 2012, Durham College’s bank account was debited $845,164.34 and Peopledge’s Canadian Consolidated Account was credited with the identical amount (the “First Payroll Deposit”).
[19] On October 29, 2012, Peopledge’s Canadian Consolidated Account received a further $1,998,615.03 from Durham College’s account by way of pre-authorized debit on account of the October 30, 2012 payroll (the “Second Payroll Deposit”).
[20] On October 29, 2012, following the granting of the Receivership Order, the Receiver sent notice of the receivership and the Receivership Order to Peopledge’s customers, including Durham College.
[21] Immediately after it had received notice of the Receivership Order on October 29, 2012, Durham College contacted BMO Oshawa and requested a stop payment of both the First Payroll Deposit and the Second Payroll Deposit.
[22] Shortly after Durham College’s stop payment request had been processed by BMO Oshawa, it was discovered that Peopledge had automatically distributed to or on behalf of Durham College employees $588,627.96 in respect of the First Payroll Deposit and $1,467,769.33 in respect of the Second Payroll Deposit.
[23] Durham College subsequently returned the $588,627.96 of the First Payroll Deposit to the Receiver but has refused to return the balance of $256,538.38. The parties have resolved all issues relating to the Second Payroll Deposit.
The Receivership
[24] The Receivership Order required that the Receiver set down a comeback date on notice to all parties within 30 days of the issuance of the Receivership Order. It also provided that any interested party may apply to the court to vary or amend the Receivership Order on the comeback motion or on not less than seven days’ notice to the Receiver and other interested parties.
[25] Although a number of Peopledge’s customers participated in the comeback motion, Durham College did not nor did it bring any motion with respect to the Receivership Order.
[26] Subsequently in the receivership, the Receiver received customer deposit claims in respect of amounts paid to Peopledge for the purpose of funding payroll services which Peopledge failed to complete in whole or in part. The aggregate claim amount for Canadian customers in respect of the Canadian Consolidated Account was in excess of $5.7 million and for US customers in respect of the US Consolidated Account it was $180,000.
[27] In a decision dated May 15, 2013, (2013 ONSC 2781), Newbould J. held that both the Canadian Consolidated Account and the US Consolidated Account should be treated as trust accounts and ordered that the monies in those accounts should be distributed to the Canadian and US customers who had proven deposit claims on a pro rata basis, subject to prior payment of the allocated portion of the receivership costs (the “Claim Determination and Interim Distribution Order”).
Position of the Parties
[28] The Receiver submits that Durham College’s action in recalling the First Payroll Deposit on October 29, 2012, was a breach of the stay provisions of the Receivership Order.
[29] The Receiver submits that prior to October 29, 2012; all of the necessary steps and actions had been taken by both Peopledge and Durham College in connection with the First Payroll Deposit to fully effectuate the transfer of the First Payroll Deposit into Peopledge’s bank account in accordance with the terms of the Master Service Agreement. Once in Peopledge’s bank account, the monies became the property of Peopledge within the meaning of the Receivership Order. Durham College’s subsequent request to its bank to recall those monies after the Receivership Order had been granted constituted a clear breach of the Receivership Order’s stay provisions.
[30] Durham College denies that it ever took possession of any monies in Peopledge’s bank account or that it exercised a remedy against Peopledge or its property. Durham College submits that it sought reimbursement of the debited amounts from its bank and that its bank complied with its obligations under the Rules of the Canadian Payment Association (“CPA”) and reimbursed Durham College from its own funds. Thereafter, the CPA Rules governed the rights and obligations as between Durham College’s bank and Peopledge’s bank and the banker-customer relationship governed the actions taken by Peopledge’s bank against its Canadian Consolidated Account.
[31] Durham College also takes issue with Peopledge’s actions in initiating the pre-authorized debit for the First Payroll Deposit when it knew it would be applying for a receivership order and then proceeding ex parte, in the absence of any notice. Had Durham College received advanced notice of the receivership application, it submits it could have cancelled the pre-authorized debit in advance of it happening.
Analysis
[32] Pursuant to the Master Services Agreement, the payment and clearing schedule that applied between Peopledge and Durham College is clearly set out in Schedule 5 to the Agreement. It provides that the electronic transfer of payroll funds must “clear” two days before the applicable payroll date.
[33] In accordance with the Master Services Agreement, therefore, effective on October 26, 2012, all of the authorizations, steps and actions necessary to fully complete the pre-authorized deposit transfer of the First Payroll Deposit from Durham College to Peopledge as provided for in the Master Services Agreement had been completed. The pre-authorized debit transfer was processed as authorized and the funds were deposited into Peopledge’s Canadian Consolidated Account. At that point, they became fully available for use by Peopledge, in accordance with the provisions of the Master Services Agreement.
[34] The definition of “Property” in the Receivership Order is very broad. It defines “Property” as “all of the assets, undertakings and properties of the Debtors acquired for, or used in relation to a business carried on by any of the Debtors, including proceeds thereof, whether such assets or funds are subject to third party interests or are considered trust assets held by any of the Debtors for the benefit of third parties.”
[35] Notwithstanding that the First Payroll Deposit was to be used for Durham College’s payroll, given the broad definition of “Property” in the Receivership Order, when it was deposited into Peopledge’s Canadian Consolidated Account on October 26 2012, it constituted “Property” of Peopledge as defined in the Receivership Order.
[36] Paragraph 7 of the Receivership Order provides in part that “all rights and remedies against any of the Debtors, the Receiver, or affecting the Property, are hereby stayed and suspended except with the written consent of the Receiver or leave of this Court, …”. The paragraph goes on to list certain exceptions, none of which apply in this case.
[37] In my view, Durham College’s action on October 29, 2012 in contacting its bank to seek reimbursement of, among other things, the First Payroll Deposit, constituted an exercise of a right or remedy on its part either against or affecting the Property or affecting the rights and entitlements of Peopledge or the Receiver. As such, it was in direct breach of the stay provision in Paragraph 7 of the Receivership Order.
[38] By its action, Durham College was clearly disputing Peopledge’s pre-authorized debit in respect of the First Payroll Deposit. The Master Services Agreement, Schedule 6, paragraph 7 specifically sets out the grounds upon which such a dispute may be raised by Durham College and the timing for bringing it. The paragraph specifically states that such a dispute is to be settled solely between Durham College and Peopledge.
[39] Nor do I consider that the CPA Rules provide Durham College with a defence to the Receiver’s submission that its actions in recalling the pre-authorized debit constitute a breach of the Receivership Order for the following reasons.
[40] Generally speaking, electronic fund transfers which include pre-authorized debits between Canadian banks and CPA member institutions are processed in accordance with the CPA Rules.
[41] The law is clear, however, that the CPA Rules do not override the contractual and legal rights and entitlements between parties. The CPA Rules dealing with clearance and settlement of transactions only apply between (and may only be relied on by) the CPA member institutions to govern the processing of transactions as between the banks themselves. See: B.M.P. Global Distribution Inc. v. Bank of Nova Scotia, 2009 SCC 15, [2009] 1 S.C.R. 504 at paras 56 and 57; National Bank of Greece (Canada) v. Bank of Montreal, [2000], 2 FCR 288 (FCA) at paras 13 and 19.
[42] The above authorities make it clear that the clearance and settlement provisions of the CPA Rules should not be used to determine the substantive rights and entitlements as between private parties. As the issue of whether the First Payroll Deposit was provided to Peopledge prior to the Receivership Order is between Peopledge and Durham College, it is the Master Services Agreement that governs. As a result, Durham College cannot rely on the CPA Rules.
[43] Durham College relies on the CPA Rules governing the clearing and settlement of pre-authorized debit transactions between member institutions. Rule H1 of the CPA Rules governs the clearing and settlement of pre-authorized debits. Part IV deals with pre-authorized debit authorization. Part VII deals with reimbursement and recourse.
[44] Part IV of Rule H1, section 15(b) requires that, based on the relationship that existed between Peopledge and Durham College, a Payee (Peopledge) must provide a Payor (Durham College) with at least 10 calendar days’ notice of the debit. This “pre-notification” requirement allows the Payor to correct any errors or stop the debit if necessary. Section 15(e) provides that the parties may waive the 10 day notice period. As noted, Peopledge and Durham College agreed to waive the 10 day pre-notification period (Master Services Agreement, Schedule 3, paragraph 5; Schedule 6, paragraph 5).
[45] Section 20 (a) and (b) of Rule H1 provide that where a “Payor” of a pre-authorized debit (Durham College) makes a claim for reimbursement for a business pre-authorized debit within 10 business days of disputed debit of its account, the Processing Member (BMO Oshawa) must reimburse the Payor for the full amount and can claim reimbursement from the “Sponsoring Member” (BMO Burlington). The Processing Member must receive a “Written Reimbursement Claim” from the Payor and can only accept the claim if it meets one of three conditions:
The pre-authorized debit was not drawn in accordance with Payor’s Pre-Authorized Debit Agreement;
The Payor’s Pre-Authorized Debit Agreement was revoked; or
Notice or confirmation was not given in accordance with section 15, 16, 25 or 26 as may be applicable.
[46] Durham College has not produced the “Written Reimbursement Claim” it provided to BMO Oshawa. Based on the facts, however, I assume that its claim for reimbursement was based on the first condition – that the pre-authorized debit was not drawn in accordance with the Master Services Agreement. The other two conditions are not applicable.
[47] Notwithstanding that Durham College initiated a claim for reimbursement from its bank, pursuant to the terms of the Master Services Agreement and specifically paragraph 7 of the Banking Agreement (Schedule 6), in my view, the claim was a remedy against Peopledge under the Master Services Agreement and was accordingly stayed pursuant to Paragraph 7 of the Receivership Order.
[48] Paragraph 7 of the Banking Agreement, reproduced earlier, provides that Durham College may dispute a pre-authorized debit on the ground that the pre-authorized debit was not issued in accordance with the Master Services Agreement. The dispute must be filed with Durham College’s bank within 10 business days of the disputed debit. Further, such dispute is to be settled solely between Durham College and Peopledge.
[49] The fact that Durham College’s bank reimbursed it for the amount of the First Payroll Deposit as provided by the CPA Rules does not alter the fact that in imitating such a claim, Durham College was also making a claim against Peopledge under paragraph 7 of the Banking Agreement. It was not permitted to do that given the stay provision in the Receivership Order.
[50] Durham College also takes issue with the lack of notice it received in respect of the receivership application. Receivership applications generally require swift response and are accordingly brought on short and limited notice. In Peopledge’s case, given its business, notice to all interested parties would have been problematic. In recognition of the lack of initial notice, the Receivership Order provided for both a comeback motion within 30 days and the ability for any interested party to move to vary or amend the Receivership Order. Durham College did neither. It cannot now complain it was somehow disadvantaged by no notice.
[51] The Receiver recommends that if I order Durham College reimburse the $256,536.38, it should be deemed to have a proven Canadian Customer Deposit Claim as defined in the Claim Determination and Interim Distribution Order for that amount and further it should receive a dividend from the Canadian Customer Account Funds in accordance with paragraph 10 of the Order. I agree with the Receiver’s recommendation.
Conclusion
[52] Accordingly, the Receiver’s motion is allowed and the Receiver is entitled to an order:
Declaring that Durham College is in breach of the Receivership Order;
Requiring Durham College to pay the Receiver the sum of $256,536.38 plus interest from October 29, 2012 calculated in accordance with the Courts of Justice Act, R.S.O.,1990, C, c-43;
The above monies paid by Durham College to the Receiver shall be credited to the Canadian Customer Account Funds;
Upon payment to the Receiver of the above monies, Durham College shall be deemed to have a Proven Canadian Customer Deposit Claim as defined in the Claim Determination and Interim Distribution Order in the amount of $256,536.38; and
Directing and authorizing the Receiver to distribute to Durham College from the Canadian Customer Account Funds a dividend in accordance with paragraph 10 of the Claim Determination and Interim Distribution Order.
[53] The Receiver is entitled to its costs of the motion which the parties have agreed are $40,000 in total.
L. A. Pattillo J.
Released: July 3, 2015
COURT FILE NO.: CV-12-9896-00CL
DATE: 20150703
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST)
BETWEEN:
BONNIE CUMMINGS IN HER CAPACITY AS ESTATE EXECUTRIX OF THE ESTATE OF THE LATE JOHN CUMMINGS
Applicant
– and –
PEOPLEDGE HR SERVICES INC., WINSTON PARK FINANCIAL SERVICES LTD., CMC FRASER LTD., 1624452 ONTARIO LIMITED
Respondents
REASONS FOR JUDGMENT
L. A. PATTILLO J.
Released: July 3, 2015