Date: 19971219
Docket: ITA-1384-97
MONTRÉAL, QUEBEC, THE 19th DAY OF DECEMBER 1997
Present: RICHARD MORNEAU, PROTHONOTARY
| In the matter of the Income Tax Act, |
- and -
| In the matter of an assessment or assessments by the Minister of National Revenue under one or more of the Income Tax Act, the Canada Pension Plan and the Unemployment Insurance Act, |
AGAINST:
GILBERT GADBOIS,
Judgment debtor,
AND
TRANSPORT H. CORDEAU INC.,
J.-L. MICHON TRANSPORT INC.,
Garnishees,
AND
2951-7539 QUÉBEC INC.,
Mis-en-cause.
ORDER
In the circumstances of the case at bar, Her Majesty the Queen cannot consider herself a third person in good faith within the meaning of article 1452 C.C.Q. and accordingly cannot rely on the said article to avail herself of the apparent act, that is, the notarial act entered into between the garnishee Cordeau and the judgment debtor Gadbois, without regard for a different agreement the same parties had entered into in the months preceding the apparent agreement.
Unless this order is appealed, counsel for the parties shall if necessary act as quickly as possible to have any objections raised during the examination on affidavits determined.
If there are no objections requiring determination, Her Majesty the Queen and Transport H. Cordeau Inc. shall agree before January 22, 1998 on a date so that Cordeau"s motion under article 2863 C.C.Q. and any other issues raised can be disposed of at a single hearing into the appropriateness of issuing a garnishee order absolute in the case at bar.
In the interim, of course, the garnishee order to show cause shall continue in effect and the parties shall be exempted from serving this order and any new notice of presentation other than on Her Majesty the Queen and Transport H. Cordeau Inc.
Costs in the cause.
Richard Morneau
Prothonotary
Certified true translation
Stephen Balogh
Date: 19971219
Docket: ITA-1384-97
| In the matter of the Income Tax Act, |
- and -
| In the matter of an assessment or assessments by the Minister of National Revenue under one or more of the Income Tax Act, the Canada Pension Plan and the Unemployment Insurance Act, |
AGAINST:
GILBERT GADBOIS,
Judgment debtor,
AND
TRANSPORT H. CORDEAU INC.,
J.-L. MICHON TRANSPORT INC.,
Garnishees,
AND
2951-7539 QUÉBEC INC.,
Mis-en-cause.
REASONS FOR ORDER
RICHARD MORNEAU, PROTHONOTARY
Introduction
[1] The issue in the instant case is whether, in garnishment proceedings under Rule 2300 of the Federal Court Rules, the judgment creditor can rely on article 1452 of the Civil Code of Québec (C.C.Q.) to avail herself of an apparent act, entered into between the garnishee Transport H. Cordeau Inc. (Cordeau) and the judgment debtor, without regard for a different agreement the same parties had entered into in the months preceding the apparent agreement.
[2] It was decided that this issue raised by the judgment creditor (the Crown) would be determined in an interlocutory proceeding, since the remaining proceedings on the application for a garnishee order absolute could be considerably shorter should the Crown succeed on this point.
[3] Article 1452 C.C.Q. and the article preceding it must be borne in mind throughout:
| 1451. Simulation exists where the parties agree to express their true intent, not in an apparent contract, but in a secret contract, also called a counter letter. |
| Between the parties, a counter letter prevails over an apparent contract. |
| 1452. Third persons in good faith may, according to their interest, avail themselves of the apparent contract or the counter letter; however, where conflicts of interest arise between them, preference is given to the person who avails himself of the apparent contract. |
Background
[4] This entire issue of precedence of an apparent act over an undisclosed agreement relates to the following facts, which are worth outlining; while the Crown does not necessarily admit all these facts for all purposes of the case, it agrees to accept them for the purposes of determining the applicability of article 1452 C.C.Q.
[5] At all relevant times, Cordeau was involved in general transportation and snow removal.
[6] In 1995, it was experiencing liquidity problems and was having serious difficulty meeting its obligations, especially to its subcontractors and suppliers.
[7] In this difficult financial situation, the judgment debtor, Gilbert Gadbois, in his capacity as president of 2951-7539 Québec Inc., granted advances totalling some $63,000 to Cordeau between February and May 1996. (It should be noted here that the garnishee order to show cause issued in the instant case on April 28, 1997 temporarily pierced the corporate veil between Gilbert Gadbois and 2951-7539 Québec Inc. It must therefore be assumed that these two persons are one and the same, and this person will hereinafter be referred to as "Gadbois". It should also be noted that it was the certification of Gilbert Gadbois"s personal debt in the record of this Court that enabled the Crown to initiate the process under Rule 2300(1) of the Rules.)
[8] These advances or loans from Gadbois were apparently granted pursuant to an open-end oral agreement that neither provided for the payment of interest nor set out terms for repayment of the principal.
[9] Because these advances from Gadbois and the financing Cordeau obtained from other sources (including J.-L. Michon Transport Inc. (Michon), the other garnishee in the instant case, in respect of which the Crown does not intend to continue the proceedings) proved to be insufficient, Cordeau, according to paragraph 21 of its affidavit in the file, had no choice but to turn to Gadbois once again for further injections of funds pursuant to their oral agreement.
[10] This was when the apparent act mentioned supra, namely a notarial act between Gadbois and Cordeau dated May 10, 1996 (the notarial act), was executed.
[11] Gadbois, realizing that he had Cordeau financially at his mercy, required Cordeau to agree that the notarial act, in addition to providing for a new loan of $75,000, would indicate past advances in the amount of $250,000 - rather than $63,000 - so that, should Cordeau go bankrupt, Gadbois could use the act to assume a position of control in the bankruptcy proceedings. (This claim and this advantage in bankruptcy proceedings eventually passed to Michon as the result of an assignment of claim from Gadbois to Michon. However, it is not necessary for the purposes of the instant interlocutory proceeding to go into detail on this aspect of the case.)
[12] The relevant passages from the notarial act read as follows:
| [TRANSLATION] |
| 1. LOAN AND ADVANCE |
| The debtor is or shall be in debt to the creditor in respect of the following financial commitments: |
| - An amount of TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000.00), representing advances already made; |
| - An amount of SEVENTY-FIVE THOUSAND DOLLARS ($75,000.00), which shall be paid, before May 14, 1996, to the notary in trust to be delivered to the debtor. |
| This amount shall bear interest at the rate of ONE PERCENT (1%) per month, which interest shall be payable monthly on the first of each month until final repayment of the principal amount. |
| All amounts and obligations owed to the creditor shall be repaid no later than May 1, 1997. |
| The debtor may make repayments in advance without notice or indemnity. |
| Should the property hypothecated under this act be sold, any balance remaining due shall be payable at the creditor"s discretion. |
| Any interest unpaid upon its expiry shall bear interest at the same rate but shall remain payable at all times without notice or putting in default. |
| This act is made without novation and without derogation from any resulting rights in the creditor"s favour pursuant to any other acts establishing claims . |
| 2o. MOVABLE HYPOTHEC WITHOUT DELIVERY |
| [Description of the hypothec on Cordeau"s equipment] |
| (Emphasis added) |
[13] It can accordingly be seen that this act bears a total amount of $325,000. The act further provides that this amount will bear interest and fixes a date for the repayment of all amounts owing. Finally, it implicitly provides that it creates a claim.
[14] Despite the notarial act, it appears in reality that Gadbois ultimately advanced only $160,300 to Cordeau. It must be borne in mind that the parties to the notarial act at no time contemplated that Gadbois would advance $325,000.
[15] It is also clear that following the oral agreement mentioned supra and, it must be understood, at the time of the notarial act, Gadbois fixed the total that Cordeau would have to repay him under the notarial contract at $225,000. Contrary to all expectations, Cordeau did not go bankrupt and Gadbois eventually received $225,000 in repayment.
[16] However, the Crown undertook to attach the difference between the total amount of the notarial act and that of the oral agreement, that is, $100,000, in Cordeau"s hands.
[17] When Cordeau first appeared in the case following the issuance of a garnishee order to show cause dated April 27, 1997 for this amount of $100,000, counsel for Cordeau wished to make a motion that Cordeau and Gadbois, among others, be heard as witnesses. Her intention was in all likelihood to prove the oral agreement between the parties, thereby establishing that despite the notarial act, Cordeau no longer owed Gadbois anything and that it could accordingly not be submitted that there was a debt between it and Gadbois within the meaning of Rule 2300(1) of the Rules.
[18] Given the existence of this written juridical act, it was then agreed that for any testimonial evidence produced by Cordeau - whether by witnesses heard viva voce or by affidavit - to be accepted, it had to be preceded by a commencement of proof, as provided for in article 2863 C.C.Q. Articles 2863 and 2865 C.C.Q. read as follows:
| 2863. The parties to a juridical act set forth in a writing may not contradict or vary the terms of the writing by testimony unless there is a commencement of proof. |
| 2865. A commencement of proof may arise where an admission or writing of the adverse party, his testimony or the production of a material thing gives an indication that the alleged fact may have occurred. |
[19] Thus, for the purposes of the argument on article 2863 C.C.Q., counsel for Cordeau filed detailed affidavits by Cordeau and Gadbois with the Court. Cordeau and Gadbois were examined on their respective affidavits.
[20] At the commencement of the hearing to argue the application of article 2863 C.C.Q., counsel for the Crown stated his intention to raise article 1452 C.C.Q. in support of his right to rely on the notarial act without consideration being given to the testimonial evidence contained in the affidavits of Cordeau and Gadbois, which tended to prove that they had entered into an oral agreement.
[21] It was accordingly agreed to deal with this issue separately, hence these reasons and the accompanying order.
Analyse
[22] Thus, there were two agreements: an oral agreement between Gadbois and Cordeau for $225,000 and the notarial act that, despite a payment of $225,000 by Cordeau, would leave a balance owing of $100,000.
[23] If this situation must be assumed to be true, the Crown then refers to article 1451 C.C.Q., since it considers this situation to be one of simulation. Thus, the oral agreement is a counter letter that expresses the true intent of the parties and the notarial act is an apparent contract.
[24] The Crown submits that article 1452 C.C.Q. accordingly authorizes it to raise the notarial act in its favour, since that is in its interest if it wishes to obtain a garnishee order absolute in these proceedings.
[25] I will repeat that these two articles read as follows:
| 1451. Simulation exists where the parties agree to express their true intent, not in an apparent contract, but in a secret contract, also called a counter letter. |
| Between the parties, a counter letter prevails over an apparent contract. |
| 1452. Third persons in good faith may, according to their interest, avail themselves of the apparent contract or the counter letter; however, where conflicts of interest arise between them, preference is given to the person who avails himself of the apparent contract. |
[26] Jean-Louis Baudoin stated the following on the purposes and varieties of simulation in Les obligations, 4th ed., at pages 282-283:
| [TRANSLATION] |
| 495 - Purposes - Thus, any simulation transaction comprises two distinct acts: an apparent act, which corresponds to what the parties want third persons to believe, and a secret act or counter letter, which reflects their true intent and must have been entered into before or at the same time as the apparent act. Simulation is often used with the intention of committing fraud upon the law, that is, avoiding a legal prohibition or doing indirectly what the law does not permit to be done directly. However, it is not always synonymous with fraud, as the simulated transaction can have a perfectly legitimate purpose. An example of this is a donor who wishes to remain anonymous and makes a gift through an intermediary. |
| II. VARIETIES |
| 496 - Fictitious act - Simulation can take a variety of forms in which the parties intend to do away entirely with the apparent act or simply to alter the effects thereof. The purpose of a fictitious act is to make others believe that there is an agreement between the parties whereas there is in fact none. In this case, the counter letter, which is the true agreement between the parties, renders the apparent act totally null. The parties intended to make others believe that they had entered into a contract, but they had no real intention to do so. The fictitious act technique is often employed to deceive one"s creditors. The debtor appears to divest him or herself of property in favour of a third person, but retains full ownership thereof by means of a counter letter. |
| 497 - Concealed act - With a concealed act, on the other hand, an apparent agreement between the parties that differs from that the one attested to in the act continues to exist. The concealment can be total (the parties conduct a sale, but according to the counter letter it is in reality a gift) or partial (the parties conduct a sale but the actual terms and conditions of the sale differ from those set out in the apparent act). This is the most common form of simulation. |
| (Citations omitted) |
[27] If there is simulation in the case at bar, I would agree with counsel for the Crown that the notarial act conceals in part the oral agreement between the parties.
[28] If I understand correctly, Cordeau raises three main arguments against the Crown"s use of article 1452 C.C.Q. First, it submits that the oral agreement cannot be considered a counter letter. Second, it submits that even were it to be decided that there is simulation, article 1452 is inapplicable in the case at bar because the Crown cannot be considered a third person in good faith within the meaning of that article. Finally, it must be considered that in the context of the instant garnishment proceedings, the Crown is limited to Gadbois"s rights and cannot therefore attach a non-existent debt between the parties.
[29] These arguments must be considered in order.
The oral agreement: counter letter?
[30] Cordeau submits that the oral agreement should not be placed at the same level as the notarial act in an attempt to characterize the oral agreement as a counter letter. According to it, these two contracts are dissimilar in nature: the oral agreement must be considered the principal contract, the one that attests to the claim, whereas the notarial act is merely a deed of hypothec, that is, it is incidental to the principal contract. Hence, the only purpose of this incidental act is to serve as security for the advances.
[31] I cannot agree with this view.
[32] I agree with the Crown that the oral agreement and the notarial act are similar in nature. In fact, the notarial act must be regarded as a mixed act. While it clearly does secure a hypothec, its first part also attests to advances, both past and future.
[33] By referring to advances in the amount of $250,000 in lieu of the amounts actually advanced, namely an amount of $63,000 on May 10, 1996, it re-creates and attests to a claim for purposes of the anticipated bankruptcy of Cordeau.
[34] It should be noted here that in this respect, the notarial act can be considered to have been constituted in fraud of the law, namely the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3. However, no one submits that this act was constituted for the purpose of defrauding the Crown in the short or medium term.
[35] It is clear that the notarial act attests to a claim in respect of the new loan of $75,000. It should also be borne in mind that, as set out in paragraph [12], supra, the following appears in the act: "This act is made without novation and without derogation from any resulting rights in the creditor"s favour pursuant to any other acts establishing claims."
[36] It is accordingly my view that the oral agreement in the case at bar should be considered a counter letter to the apparent act, namely the notarial act, within the meaning of article 1452 C.C.Q.
Is the Crown a third person in good faith?
[37] In terms of contractual relations, a debtor"s creditor is of course a third person in respect of any contracts entered into by the debtor.
[38] However, it should be borne in mind that article 1452 C.C.Q. refers not to all third persons, but reserves the possibility of choosing between two contracts to third persons in good faith.
[39] To understand the meaning of this reservation, it is in my view necessary to determine its purpose.
[40] Once again, Jean-Louis Baudoin, supra, at pages 284-285, in my view presents the two main situations in which a third party may rely on article 1452 C.C.Q.:
| 502 - Fraud - A simulated act whose purpose is to evade the law is null and entails cancellation of the entire transaction. This is true of parties that use a simulation technique to circumvent a prohibitive provision of the law or a provision of public order: they are barred from doing indirectly what they are prohibited from doing directly. In such a case, the entire transaction, that is, the apparent act and the counter letter, is null. |
| B. Effects vis-à-vis third persons |
| 503 - Principle of inopposability - Article 1452 C.C.Q. restates the principle awkwardly stated in the former article 1212 C.C.L.C. Thus, third persons in good faith (those who did not know about the counter letter when they entered into the contract) are entitled to trust appearances and treat the apparent act as representing the actual agreement between the parties. "Third person" includes successors by particular title and chirographic creditors, but does not include universal legatees or legatees by general title, since they continue the legal personality of their predecessors. |
| (Citations omitted) (Emphasis added) |
[41] Thus, if the simulation in the case at bar had been constituted to defraud the Crown, it would have been open to the Crown to avail itself of the apparent contract or the counter letter. As has been seen, however, both the notarial contract and the oral agreement appear not to have been entered into to defraud the Crown in its efforts to collect the tax liability accumulated by Gadbois.
[42] Aside from this circumstance of fraud upon the law, third persons in good faith within the meaning of article 1452 C.C.Q. are, according to Baudoin, those who did not know about the counter letter when they entered into the contract.
[43] Thus, the purpose of article 1452 is to protect third persons who have had to deal with one of the parties to the simulation and have relied on that party"s apparent rights. To ensure that such third persons are not injured, article 1452 gives them a choice. In my view, that is the dynamic ultimately faced by the courts in the following cases cited by the Crown: Gestion Cogemar Ltée (Syndic de) , [1989] R.J.Q. 2266 (Que. C.A.); Linval Acceptance Corp. Ltée v. Branchaud, [1972] C.A. 552 (Que. C.A.); and L'Ami du consommateur M.L. Inc. (Syndic de), J.E. 90-611 (Que. C.A.).
[44] The authors appear to share this understanding of the purpose of article 1452 C.C.Q. Thus, Professor Angers Larouche stated the following in Les obligations, Tome 1, 1982, at page 253:
| [TRANSLATION] If the law strips the counter letter of any harmful effect for third persons and if it is the apparent agreement that governs their rights, this is to spare them surprises from which they could not have protected themselves. |
(See also Jean Pineau et al., Théorie des obligations, 3rd ed., at pages 475-476.)
[45] In the case at bar, the Crown did not have to deal with Cordeau or Gadbois on the basis of the apparent contract, that is, the notarial contract. In my view, the fact that Gadbois"s tax liability dated back to the years 1984 to 1995 pursuant to recognized judge-made principles does not alter the fact that the Crown did not in the circumstances rely on the apparent contract either to assess Gadbois or to commit itself in any other way.
[46] Likewise, simulation cannot be relied on by a third person who was informed in due time that there was a counter letter between the parties. On this point, Vincent Karim stated the following in Commentaires sur les obligations, Volume 1, Les Éditions Yvon Blais Inc., at page 242:
| [TRANSLATION] However, it should be noted that a person, even one who is not a party to the contract, cannot rely on simulation if he or she knew about the counter letter entered into by the parties. This third party to the contract cannot rely on the existence of a counter letter, since the parties have not sought to conceal or disguise it. |
| (Citation omitted) |
[47] The Supreme Court recognized this principle of knowledge of the true situation in 1980 in Victuni Aktiengesellschaft v. Minister of Revenue, [1980] 1 S.C.R. 580, at page 583:
| It can thus be seen that the question that must be asked is not whether Victuni was the owner of the subject property, but whether it had an "indebtedness" in an amount equal to the value of this asset. It was conclusively proved that Victuni, although it bought the land in its own name, did so only as mandatary of two other companies, which are the real owners and for which it holds the land. This fact was not disclosed by the deed filed in the registry office, but it was known to the Department of Revenue when it made the assessment. In response to a request for information, Victuni had provided copies of the deeds executed between it and the two other companies. |
[48] In the case at bar, it has not been established, at least not clearly, that the Crown knew about the oral agreement when the affidavit in support of the garnishee order to show cause was drafted. However, it is hard to believe in light of the evidence in the record that the employee responsible for the file did not learn about the agreement in the discussions held by the Crown in the course of its investigation. In my view, since it was the Crown that raised the application of article 1452, the burden was on it to clearly establish the conditions under which the article would be applicable.
[49] For these reasons, it is my view that the Crown cannot in the circumstances of the case at bar consider itself a third person in good faith within the meaning of article 1452 C.C.Q. and accordingly cannot rely on the said article to avail itself of the apparent act, that is, the notarial act entered into between Cordeau and Gadbois, without regard for a different agreement the same parties had entered into in the months preceding the apparent agreement.
[50] In light of the above conclusion, I need not rule formally on Cordeau"s third argument, namely that in the context of the instant garnishment proceedings, the Crown is limited to Gadbois"s rights and cannot therefore attach a non-existent debt between the parties.
Further action to be taken
[51] Unless this order is appealed, counsel for the parties shall if necessary act as quickly as possible to have any objections raised during the examination on affidavits determined.
[52] If there are no objections requiring determination, the parties shall agree before January 22, 1998 on a date so that Cordeau"s motion under article 2863 C.C.Q. and any other issues raised can be disposed of at a single hearing into the appropriateness of issuing a garnishee order absolute in the case at bar.
[53] Costs in the cause.
Richard Morneau
Prothonotary
MONTRÉAL, QUEBEC
December 19, 1997
Certified true translation
Stephen Balogh
Federal Court of Canada
Court No. ITA-1384-97
BETWEEN
GILBERT GADBOIS,
Judgment debtor,
- and -
TRANSPORT H. CORDEAU INC.,
J.-L. MICHON TRANSPORT INC.,
Garnishees,
- and -
2951-7539 QUÉBEC INC.,
Mis-en-cause.
REASONS FOR ORDER
FEDERAL COURT OF CANADA
NAMES OF COUNSEL AND SOLICITORS OF RECORD
COURT FILE NO.:
STYLE OF CAUSE:
ITA-1384-97
GILBERT GADBOIS,
Judgment debtor,
AND
TRANSPORT H. CORDEAU INC.,
J.-L. MICHON TRANSPORT INC.,
Garnishees,
AND
2951-7539 QUÉBEC INC.,
Mis-en-cause
PLACE OF HEARING:Montréal, Quebec
DATE OF HEARING:December 8, 1997
REASONS FOR ORDER BY RICHARD MORNEAU, PROTHONOTARY
DATE OF REASONS FOR ORDER:December 19, 1997
APPEARANCES:
Richard Corbeil for the judgment creditor
Marie-Claude Jarry for the garnishee Transport H.
Cordeau Inc.
SOLICITORS OF RECORD:
George Thomson for the judgment creditor
Deputy Attorney General of Canada
Ottawa, Ontario
Marie-Claude Jarry for the garnishee Transport H.
Dunton Rainville Cordeau Inc.
Montréal, Quebec