Date: 20000307
Docket: ITA-1384-97
MONTRÉAL, QUEBEC, MARCH 7, 2000
| Before: RICHARD MORNEAU, PROTHONOTARY |
IN RE THE INCOME TAX ACT
- and -
IN RE ONE OR MORE ASSESSMENTS
MADE BY THE MINISTER OF NATIONAL REVENUE
PURSUANT TO ONE OR MORE OF THE
FOLLOWING STATUTES:
THE INCOME TAX ACT,
THE CANADA PENSION PLAN,
THE UNEMPLOYMENT INSURANCE ACT,
Between:
GILBERT GADBOIS,
Judgment debtor,
AND
TRANSPORT H. CORDEAU INC.,
J.L. MICHON TRANSPORT INC.,
Garnishees,
AND
2951-7539 QUÉBEC INC.
Mis-en-cause.
ORDER
THE COURT:
| 1. Orders the maintenance and lifting of the corporate veil in respect of 2951-7539 Québec Inc.; |
| 2. Allows the judgment creditor's application for a final order of garnishment against Transport H. Cordeau Inc.; |
| 3. Orders Transport H. Cordeau Inc. to pay the judgment creditor: |
| (a) the sum of $100,000, representing the balance on the hypothec owed by Transport H. Cordeau Inc. pursuant to a deed of movable hypothec without delivery concluded between the latter and 2951-7539 Québec Inc. on May 10, 1996 and published on May 13, 1996 in the Register of Personal and Movable Real Rights as No. 96-0056120-0001; |
| (b) plus interest on the said amount of $100,000 at the rate of 1 per cent a month from June 1, 1996, as provided in clause No. 1 of the said deed of hypothec, until the date of payment. |
The whole with costs.
| Richard Morneau Prothonotary |
Certified true translation
Martine Brunet, LL. B.
Date: 20000307
Docket: ITA-1384-97
IN RE THE INCOME TAX ACT
- and -
IN RE ONE OR MORE ASSESSMENTS
MADE BY THE MINISTER OF NATIONAL REVENUE
PURSUANT TO ONE OR MORE OF THE
FOLLOWING STATUTES:
THE INCOME TAX ACT
THE CANADA PENSION PLAN,
THE UNEMPLOYMENT INSURANCE ACT,
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
RICHARD MORNEAU, PROTHONOTARY:
[1] This case concerns an application by the judgment creditor, Her Majesty the Queen, for a final order of garnishment against the garnishee Transport H. Cordeau Inc. (hereinafter "Cordeau").
Facts
[2] By a certificate which has the same value and effect as a judgment of this Court, it was certified that Gilbert Gadbois (hereinafter "Gadbois") is indebted to Her Majesty the Queen in right of Canada in the amount of $1,285,674.06, plus interest compounded daily at the rate specified in the Income Tax Act on the said amount for the period from March 8, 1989 to the date of payment.
[3] This amount of $1,285,674.06 and interests remains due and unpaid.
[4] On April 28, 1997, a provisional order of garnishment was issued in the case at bar.
[5] In view of the evidence submitted by the judgment creditor as to the state of fact and law existing between Gadbois and the company 2951-7539 Québec Inc. (hereinafter "2951"), it was stated in that order that:
| [TRANSLATION] |
| It must be assumed, at least prima facie and in the absence of evidence to the contrary, that 2951 is only the tool, agent or mandatary of Gadbois for the purpose of routing the sizable amounts belonging to him so as to enable him to avoid his obligations; |
| Whereas accordingly it is appropriate to lift the corporate veil in respect of 2951 and make it a party to the instant garnishment proceedings, as well as Gadbois . . . |
[6] The same order directed that all amounts due or to become due by Cordeau to Gadbois or 2951 should be garnished in favour of the judgment creditor to satisfy Gadbois' tax debt.
[7] By an interlocutory discussion in the case at bar it was decided by the Federal Court of Appeal that the judgment creditor could rely on art. 1452 of the Civil Code of Quebec (C.C.Q.) so as to take advantage of an apparent contract concluded between Cordeau and Gadbois on May 10, 1996, regardless of a different agreement made between the same parties verbally in the months preceding the apparent agreement.
[8] By that apparent contract, a hypothecary balance of $100,000 remained owing by Cordeau to Gadbois.
[9] The judgment creditor accordingly argued that pursuant to that decision it is entitled to seize from Cordeau the hypothecary balance of $100,000 owing to Gadbois.
[10] However, in opposition to this seizure by the judgment creditor Cordeau argued, in view of the prosecution of the case, that despite the Federal Court of Appeal's judgment the judgment creditor could not seize the said hypothecary balance of $100,000 since the hypothecary debt (from which the $100,000 balance derived) in the total amount of $325,000 was the subject of an assignment of debt to J.L. Michon Transport Inc. on November 5, 1996, and so any amount owing was owed to Michon, not Gadbois.
[11] Additionally, relying on a release by J.L. Michon to Cordeau dated March 25, 1997, Cordeau argued that no other money was owed to Gadbois. It should be noted that this release of March 25, 1997 derived from or was the result of another release between Gadbois and Michon on February 12, 1997.
[12] Alternatively, Cordeau argued that the Court should not lift 2951's corporate veil to allow the judgment creditor to garnish the amounts owed to 2951 for a personal tax debt of Gadbois.
Points at issue
[13] At the request of the judgment creditor, the Court must consider that the points at issue are in principle the following:
| (A) on the debt assignment of November 5, 1996: |
| i. was this a simulated assignment? |
| ii. alternatively, can this assignment be set up against Her Majesty? |
| iii. does the garnishee Cordeau have the necessary legal standing to oppose the application for a ruling that this assignment is simulated or cannot be set up? |
| (B) on the alleged releases of February 12 and March 25, 1997: |
| i. are these valid and capable of being set up against Her Majesty in the absence of payment of the $100,000 balance? |
| (C) on the lifting of the corporate veil which may have existed between Gadbois and 2951: |
| i. does the garnishee Cordeau have the necessary legal standing to oppose the lifting of the veil? |
| ii. if so, is there a basis for lifting the veil? |
Analysis
Debt assignment of November 5, 1996
[14] As to this document, I intend to see first whether this assignment can be set up against the judgment creditor pursuant to arts. 1631 et seq. of the Civil Code of Quebec ("C.C.Q."). The relevant articles read as follows:
| Art. 1631. A creditor who suffers prejudice through a juridical act made by his debtor in fraud of his rights, in particular an act by which he renders or seeks to render himself insolvent, or by which, being insolvent, he grants preference to another creditor may obtain a declaration that the act may not be set up against him. |
| Art. 1632. An onerous contract or a payment made for the performance of such a contract is deemed to be made with fraudulent intent if the contracting party or the creditor knew the debtor to be insolvent or knew that the debtor, by the juridical act, was rendering himself or was seeking to render himself insolvent. |
| Art. 1633. A gratuitous contract or a payment made for the performance of such a contract is deemed to be made with fraudulent intent, even if the contracting party or the creditor was unaware of the facts, where the debtor is or becomes insolvent at the time the contract is formed or the payment is made. |
| Art. 1635. The action is forfeited unless it is brought within one year from the day on which the creditor learned of the injury resulting from the act which is attacked, or, where the action is brought by a trustee in bankruptcy on behalf of all the creditors, from the date of appointment of the trustee. |
[15] It appears from the precedents to date that a creditor may raise against an opposition -- the situation now before the Court -- the Paulian rules of arts. 1631 et seq. (see Québec (Sous-ministre du Revenu) v. Deschênes (Court of Quebec, case 200-02-016759-971, October 17, 1997, Judge Bond) and Her Majesty v. 158377 Canada Inc. and Auberge Bon Conseil (1988) Inc., an unreported judgment of November 16, 1999, case ITA-4127-95, on appeal).
[16] It is well established that under art. 1631, for the Court to find that a contract cannot be set up against it, a party must present evidence of:
| -- his status as a creditor prior to the disputed contract; |
| -- the injury caused by the disputed contract; |
| -- the fact that the contract was made to defraud it of its rights. |
[17] On the first point, the evidence showed that the judgment creditor was a creditor prior to the debt assignment. In fact, the taxation years in question include the period from 1984 to 1995. As of November 5, 1996, therefore, the judgment creditor's debt was liquid and exigible (art. 1634 C.C.Q.).
[18] On the question of injury, there is no doubt on the evidence before the Court that this assignment is causing injury to the judgment creditor since it is the only asset known to the latter against which she can execute her debt.
[19] Finally, as to the question of fraud, it must be concluded inter alia from extracts from Gadbois's examination on affidavit, reproduced by the judgment creditor in her memorandum filed on February 8, 2000, that the evidence in the record clearly shows that Gadbois rendered or sought to render himself insolvent at the time he assigned his debt: he admitted that he acted in this way so as to avoid any possible seizure by National Revenue (see Gadbois's examination on affidavit dated October 24, 1997, pp. 44, 45 and 46).
[20] The tests contained in art. 1631 are thus all met and there is no need to consider the situation from the standpoint of arts. 1632 and 1633 before ruling that the assignment cannot be set up against the judgment creditor pursuant to art. 1631 of the C.C.Q.
[21] Further, when the Federal Court of Appeal had occasion to consider the case at bar (Transport H. Cordeau Inc. v. Her Majesty the Queen, unreported judgment of October 27, 1999, case A-139-98), it appears that the same view of the matter was in its mind. Although the following passage (at p. 4) must be regarded as obiter, what it says is nevertheless very relevant:
| Mr. Gadbois, the owner of Cie Québec Inc., was subject to pressure by Revenue Canada, which was seeking to obtain payment of its tax debt.2 Further, on October 30, 1996 the respondent seized the sum of $3,337 in Mr. Gadbois' bank account.3 Also on November 5, 1996, to avoid a new seizure by Taxation,4 he made an assignment of his $325,000 debt to J.L. Michon Transport Inc. for the sum of $225,000 and received payment by cheque dated the following day. |
| 2 See testimony of H. Cordeau, appeal case, vol. 2, pp. 380-381. |
| 3 Appeal Case, vol. 4, pp. 577 and 585. |
| 4 See Mr. Gadbois's admission, appeal case, vol. 3, pp. 467 to 469. |
[22] Further, contrary to Cordeau's arguments, the one-year deadline mentioned in art. 1635 C.C.Q. has been observed here since the administrative seizure proceedings began as early as December 19, 1996 for Michon and January 9, 1997 for Cordeau. As mentioned earlier, the provisional order of garnishment in the case at bar was issued on April 28, 1997. This order refers to the motion record containing the evidence submitted at the time by the judgment creditor to obtain the order.
[23] In view of the Court's conclusion under art. 1631, it is also not necessary to rule on the possibility that the judgment creditor could rely pursuant to art. 1452 C.C.Q. on the counter-letter existing between Gadbois and Michon to the effect that the latter undertook to repay Gadbois any amount it received from Cordeau under the hypothecary loan of May 10, 1996 over and above the amount of $225,000. It also becomes academic to rule on Cordeau's legal standing to oppose the application for a Paulian ruling against the assignment.
Releases of February 12 and March 25, 1997
[24] It should be noted from the outset that once the debt assignment is overturned pursuant to art. 1631 C.C.Q., these releases -- which follow the assignment in time and seek to counter the future effects of a counter-letter to this assignment -- must be seen as incidental to the said assignment. As the main action, the assignment, is invalid, the incidental one must be as well.
[25] Further, even if we consider these releases, we find that the release which is the subject of discussion is the one of February 12, 1997 by which Gadbois and 2951 gave a release to Michon and authorized Michon to give a release to Cordeau, which it did by the release of March 25, 1997. What is applicable in terms of the Paulian action to the release of February 12 is necessarily applicable to that of March 25.
[26] It is also beyond question here that this release of February 12, 1997 is for Gadbois a gratuitous act (as the balance of $100,000 was never paid) rendering or seeking to render Gadbois insolvent. There is no question that this release was made contrary to the rights of the judgment creditor. This release of February 12 and that of March 25, therefore, were made contrary to the rights of the judgment creditor and thus may not be set up against her pursuant to art. 1631 C.C.Q. Finally, we should note that the art. 1635 C.C.Q. deadline was certainly observed, in view of the dates of these releases and that of the order of April 28, 1997.
Lifting of corporate veil between Gadbois and 2951
[27] The instant reasons have been so far written on the basis that the conclusions in the provisional order of garnishment of April 28, 1997 regarding lifting the said veil were valid. It seems quite clear that this conclusion should be upheld and reaffirmed. There is uncontradicted and abundant evidence in the record indicating that 2951 was only used by Gadbois to conceal his fraudulent acts. The rules of art. 317 C.C.Q. are fully applicable here.
Conclusion
[28] In view of the foregoing reasons, the Court must:
| 1. order the maintenance and lifting of the corporate veil in respect of 2951; |
| 2. allow the judgment creditor's application for a final order of garnishment against Transport H. Cordeau Inc.; |
| 3. order Transport H. Cordeau Inc. to pay the judgment creditor: |
| (a) the sum of $100,000, representing the balance on the hypothec owed by Transport H. Cordeau Inc. pursuant to a deed of movable hypothec without delivery concluded between the latter and 2951-7539 Québec Inc. on May 10, 1996 and published on May 13, 1996 in the Register of Personal and Movable Real Rights as No. 96-0056120-0001; |
| (b) plus interest on the said amount of $100,000 at the rate of 1 per cent a month from June 1, 1996, as provided in clause No. 1 of the said deed of hypothec, until the date of payment. |
The whole with costs.
| Richard Morneau Prothonotary |
MONTRÉAL, QUEBEC
March 7, 2000
Certified true translation
Martine Brunet, LL. B.
| Federal Court of Canada Trial Division Date: 20000307 Docket: ITA-1384-97 IN RE THE INCOME TAX ACT - and - IN RE ONE OR MORE ASSESSMENTS MADE BY THE MINISTER OF NATIONAL REVENUE PURSUANT TO ONE OR MORE OF THE FOLLOWING STATUTES: THE INCOME TAX ACT, THE CANADA PENSION PLAN, THE UNEMPLOYMENT INSURANCE ACT, 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.: ITA-1384-94 |
| STYLE OF CAUSE: IN RE THE INCOME TAX ACT |
- and -
| IN RE ONE OR MORE ASSESSMENTS MADE BY THE MINISTER OF NATIONAL REVENUE PURSUANT TO ONE OR MORE OF THE FOLLOWING STATUTES: |
| THE INCOME TAX ACT, THE CANADA PENSION PLAN, THE UNEMPLOYMENT INSURANCE ACT, |
BETWEEN:
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: February 15, 2000 |
REASONS FOR ORDER BY: RICHARD MORNEAU, PROTHONOTARY
| DATE OF REASONS FOR ORDER: March 7, 2000 |
APPEARANCES:
| Chantale Comtois for the judgment creditor |
| Patrick Ouellet for the garnishee Transport H. Cordeau Inc. |
SOLICITORS OF RECORD:
| Morris Rosenberg for the judgment creditor |
Deputy Attorney General of Canada
| Dunton, Rainville, Toupin for the garnishee Transport H. Cordeau Inc. |
Montréal, Quebec