DATE: 19990817
DOCKET: C29241
COURT OF APPEAL FOR ONTARIO
CARTHY, ABELLA and GOUDGE JJ.A.
BETWEEN: )
)
THE TORONTO-DOMINION BANK ) Leon J. Melconian,
) for the appellants
Applicant )
(Respondent in Appeal) )
)
- and - ) Michael R. Kestenberg,
) for the respondent
CO-PAC LIMITED, BANK OF )
MONTREAL, JOEL STARKMAN, )
SHARON STARKMAN and RHONDA )
FELDMAN )
) Heard: February 9 and 10, 1999
Respondents )
(Appellants) )
)
On appeal from the decision of Madam Justice Ellen Macdonald
dated February 11, 1998
GOUDGE J.A.:
[1] The appellants in this matter are Joel Starkman, his wife
Sharon Starkman, and his daughter Rhonda Feldman.
[2] The respondent is The Toronto-Dominion Bank ("the Bank").
[3] In the judgment appealed from, Ellen Macdonald J. found that
the tracing rights in ss. 25(1) and 1(1) of the Personal Property
Security Act, R.S.O. 1990, c. P.10 ("the P.P.S.A.") give the Bank
a valid perfected security interest in priority to the appellants
in the sum of $33,000 held in an account at the Bank of Montreal
in the name of Ms. Feldman. As a result, the judge ordered that
this sum is the property of the Bank and fixed costs in favour of
the Bank on a solicitor/client scale in the amount of $5,500.
[4] For the reasons that follow I agree with this result and
would dismiss the appeal.
[5] The relevant facts are as follows.
[6] In June 1995 Co-Pac Limited obtained a small business loan
from the Bank. In return, the company gave the Bank a general
security agreement containing a general assignment of book debts
which provided that any monies received by the company in payment
thereof would be held by the company in trust for the Bank.
[7] The general security agreement was executed on behalf of the
company by Mr. Starkman, its vice-president.
[8] The Bank's security interest was perfected by registration
in accordance with the P.P.S.A. on June 19, 1995.
[9] Co-Pac defaulted on its loan and, commencing in November
1996, the Bank realized upon what it believed to be all of the
assets and undertakings of the company. Mr. Starkman was
involved on a day-to-day basis with the Bank's realization
efforts.
[10] In October 1997, without the knowledge of the Bank, Co-Pac
successfully settled a lawsuit with the result that net proceeds
in the amount of $33,460 were payable to it.
[11] On October 29, 1997 Mr. Starkman obtained from the
solicitors for the company a cheque in the amount of $33,460
payable to the company. Thereafter he had the cheque certified.
[12] On the same day Mr. Starkman deposited the cheque into an
account at Canada Trust in the name of Co-Pac. He had opened
this account when the Bank made clear that Co-Pac's account at
the Bank could not be used anymore. No deposits were made into
this new account from December 1996 to August 1997. Mr. Starkman
refused to indicate whether there were any deposits made between
August 1997 and October 29, 1997.
[13] Mr. Starkman then transferred the sum of $33,000 to his
personal account at Canada Trust thinking incorrectly that he was
entitled to these funds in payment for his services. Immediately
thereafter, on October 30, 1997, he purchased a bank draft in the
amount of $33,000 which he deposited the next day in an account
in his daughter's name at the Bank of Montreal.
[14] Soon thereafter the Bank learned from Richard Lepp that Co-
Pac had received these funds and that Mr. Starkman had taken
them. Mr. Lepp was a principal of Co-Pac and a guarantor of its
obligations to the Bank.
[15] The Bank made inquiries of Canada Trust and the Bank of
Montreal and discovered the location of the $33,000. The Bank
then requested the Bank of Montreal to freeze the account to the
extent of these funds. The Bank of Montreal did so but permitted
Ms. Feldman to withdraw the balance of $7,000 remaining in the
account, leaving only the $33,000.
[16] This account at the Bank of Montreal was in the name of
Ms. Feldman. Her mother, Sharon Starkman, held a power of
attorney for the account.
[17] In September 1995, because her father was having financial
difficulties, Ms. Feldman lent her parents $221,000 by depositing
this sum into this account. For the next two years and three
months her parents withdrew approximately $214,000 for their own
needs by means of the power of attorney.
[18] During that period of time Ms. Feldman made no deposits to
the account and wrote no cheques on the account. The bank
statements on the account were sent to her parents' home.
[19] The $33,000 deposit made to this account was the first
deposit since September 1995. Mr. Starkman told his daughter it
was a partial repayment of the loan. There is no evidence that
Mr. Starkman told Ms. Feldman the source of these funds.
[20] The fundamental issue in this appeal is whether in these
circumstances the tracing provisions of the P.P.S.A. entitle the
Bank to these funds.
[21] These provisions are as follows:
1. – (1) In this Act,
. . .
"proceeds" means identifiable or
traceable personal property in any form
derived directly or indirectly from any
dealing with collateral or the proceeds
therefrom, and includes any payment
representing indemnity or compensation for
loss of or damage to the collateral or
proceeds therefrom;
. . .
25. – (1) Where collateral gives rise to
proceeds, the security interest therein,
. . .
(b) extends to the proceeds.
[22] The settlement funds, when received by Co-Pac, were clearly
encompassed within the Bank's registered security interest. They
were funds received by the company in payment of a claim owing to
the company. These funds were therefore to be held by the
company in trust for the Bank, pursuant to the assignment of book
debts contained in the general security agreement.
[23] The appellants argue that the settlement funds cannot be
traced by the Bank into the account at the Bank of Montreal
because at that stage the funds were not, in the language of
s. 1(1) of the P.P.S.A., "identifiable or traceable".
[24] In my view, this argument fails. The P.P.S.A. gives the
Bank a statutory right to trace funds which are proceeds arising
from collateral, provided those funds remain identifiable or
traceable.
[25] In General Motors Acceptance Corp. of Canada Ltd. v. Bank of
Nova Scotia (1986), 55 O.R. (2d) 438, this court decided that
under the prior iteration of the P.P.S.A. a fiduciary
relationship was required between the creditor and debtor before
the creditor could invoke the aid of equitable principles in the
tracing exercise. In the subsequent amendment of the P.P.S.A.
the words "identifiable" and "traceable" were removed from the
substantive section on proceeds (then s. 27) and inserted in the
definition section. It may well be, as suggested by Professor R.
H. McLaren in Secured Transactions in Personal Property in
Canada, 2nd ed., at p. 4-11, that this change signals a
legislative attempt to ensure that full tracing rights including
those based on equitable principles are not preconditioned on the
existence of a fiduciary relationship between creditor and
debtor. On the facts of this case it is unnecessary to decide
this since such a relationship exists and the Bank can therefore
assert the full statutory right to trace informed by both common
law and equitable concepts of tracing.
[26] The G.M.A.C. case, supra provides the following elaboration
of the notions of "identifiable" and "traceable" at p. 442:
Proceeds are identifiable when they continue to exist
in their original form. They are traceable if they are converted
into a substituted form which can be located and determined to be
the substitution for the original proceeds.
[27] This definition is sufficient on the facts of this case to
conclude that the settlement funds can be traced into the account
at the Bank of Montreal and hence are proceeds subject to the
security interest of the Bank.
[28] The settlement funds were received by Co-Pac on October 29,
1997. The funds were transferred by Mr. Starkman through his own
account to the Bank of Montreal account within two days. These
funds remain in that account and in the end are not commingled
with any other funds. They are properly proceeds to which the
Bank's security interest attaches.
[29] The appellants' second argument is that even if the Bank has
the right to trace the settlement funds into the account at the
Bank of Montreal, that right is negated because Ms. Feldman must
be considered a bona fide purchaser for value without notice of
the Bank's interest.
[30] In my view, this argument also fails. Assuming this can be
a defence to the tracing rights provided by the P.P.S.A., the
appellants cannot successfully raise it in the circumstances of
this case. While the Bank of Montreal account is in the name of
Ms. Feldman, Mr. Starkman exercised effective control over it for
more than two years through the power of attorney held by his
wife. He has had full knowledge throughout of the Bank's
security interest and its efforts to realize on that interest.
Although the account is that of Ms. Feldman, the fact that
Mr. Starkman retained practical control over the account into
which he deposited the funds leaves me unable to conclude that
the funds are truly in the hands of a bona fide purchaser for
value without notice. In these circumstances it would be
inequitable to give effect to this defence.
[31] Thirdly, the appellants argue that under the "unclean hands"
doctrine, the Bank disentitled itself to relief because it
obtained confidential banking information about the appellants
from Canada Trust and the Bank of Montreal.
[32] Again, I disagree. While I do not condone the Bank's
conduct in requesting information from these two financial
institutions, any breach by them of their duty of confidentiality
to the appellants in providing that information cannot be laid at
the feet of the requester so as to deprive the Bank of tracing
relief.
[33] Finally, the appellants appeal the award of costs against
them on a solicitor/client scale. In my view, the judge appealed
from exercised her discretion in this regard and committed no
error in principle in doing so. I would not interfere with her
award of costs.
[34] In the result, the appeal must be dismissed with costs.
RELEASED: August 17, 1999 |