Judgments

[1995] 3 F.C. 279

A-100-94

Her Majesty the Queen (Minister of National Revenue) (Appellant)

v.

Bank of Montreal (Respondent)

Indexed as: Bank of Montreal v. Canada (C.A.)

Court of Appeal, Marceau and Desjardins JJ.A. and Chevalier D.J.—Montréal, June 5; Ottawa, July 7, 1995.

Civil Code — Appeal from F.C.T.D. judgment Bank entitled to recover under Civil Code, art. 1140 from Crown amount paid to Revenue Canada pursuant to permanent mandatory injunction — Superior Court of Quebec ordering Bank to pay monies represented by certificate of deposit in satisfaction of named beneficiary’s income tax debt — That order not appealed, but appeal pending in S.C.C. re: declaration of ownership of funds gained illegally by beneficiary, former Bank employee — Art. 1140, providing every payment presupposing debt and that which has been paid where no debt may be recovered — Appeal allowed — Art. 1140 not applicable — Clear obligation to pay — No mistake of law or fact as payment required by Court order — No illegal compulsion as Court order not challenged.

Crown — Creditors and debtors — Appeal from F.C.T.D. judgment Bank entitled to recover from Crown amount paid to Revenue Canada pursuant to Quebec Superior Court permanent mandatory injunction — Court ordering payment of amount represented by certificate of deposit in satisfaction of named beneficiary’s income tax debt — That order not appealed, but appeal to S.C.C. pending re: declaration of ownership of funds gained illegally by beneficiary, former Bank employee — Bank making payment, delivering letter of protest later same day — No right to recover under Civil Code, art. 1140 as obligation to pay pursuant to Court order unequivocal — Minority opinion protest ineffective as untimely; majority holding protest irrelevant as right to payment flowing from unchallenged Court order — S.C.C. decision not affecting validity of injunction — Merely establishing debt owed to Bank by former employee.

This was an appeal from the trial judgment holding that the Bank was entitled to recover from the Crown the amount paid to Revenue Canada pursuant to a permanent mandatory injunction. The Bank’s action had been instituted under the Civil Code of Lower Canada, article 1140, which provides that every payment presupposes a debt and that which has been paid where there is no debt may be recovered.

From 1978 until 1984, a Bank of Montreal employee, Leong, made large personal profits by using Bank funds to speculate in foreign currencies. In 1984 Leong was assessed as owing income tax in the amount of $340,059.90 with interest on the sum of $215,829.07. Revenue Canada seized Leong’s cars and houses and obtained an interim garnishment order for a certificate of deposit at the Bank. The Superior Court of Quebec rejected the Bank’s action against Leong for a declaration that the certificate of deposit belonged to it. The Court of Appeal upheld that decision. The Bank applied to the Supreme Court of Canada for leave to appeal.

In the meantime, on the application of Leong, the Superior Court of Quebec issued a permanent mandatory injunction ordering the Bank to pay the monies represented by the certificate to Revenue Canada in satisfaction of Leong’s income tax debt. That decision was not appealed. Counsel for the Bank and Revenue Canada discussed the possibility of the Bank paying under protest. Subsequently, the Bank gave a cheque to Revenue Canada in the amount of $353,598.52. Later that afternoon, Revenue Canada was served with a letter from the Bank indicating that the payment had been made under protest and that the Bank would seek reimbursement if the appeal to the Supreme Court of Canada was successful. That Court allowed the Bank’s appeal, holding that the Bank was the owner of the funds gained illegally by Leong. The Federal Court Trial Division Judge found that the Bank had paid under protest and intended to keep alive its right to recover the sum paid to Revenue Canada. As the owner of the funds, the Bank was entitled to recovery of the monies. The Bank’s position was that it was entitled to recover under the Civil Code of Lower Canada, article 1140.

Held, the appeal should be allowed.

Per Marceau J.A. (Chevalier D.J. concurring): Nothing turns on the facts surrounding the service of the respondent’s protest. There can be no legal effect to a protest accompanying a payment, when the legal right of the creditor to receive it flows from a Court order which has not been challenged.

Article 1140 had no application. The injunction ordered the Bank to pay the amount represented by the certificate, an order made at the request of the certificate’s named beneficiary. That there was an obligation to pay in satisfaction of which the payment was made was indisputable. The payment was not made by “mistake of law or fact”, since it was required by an unequivocal Court order; nor was it made under illegal compulsion since the Court order had not been challenged.

Even if the Supreme Court of Canada had agreed that the respondent was the owner of the certificate, the action in recovery would not have had any more basis. The proceedings in the Supreme Court were not directed against the injunction and they could have no effect on its validity. The Supreme Court simply established the existence of a debt owing to the Bank by Leong for the amount of money realized by the latter’s unethical activities.

Per Desjardins J.A. (concurring in the result): The Trial Judge erred on the facts in finding that the Bank had paid under protest. The payment was made unconditionally. The letter of protest was served after the meeting at which Revenue Canada made the peremptory demand and counsel for the Bank handed over the cheque. To be timely, a protest must be made either prior to or at the time of payment.

The recovery of a thing not due must meet two conditions in addition to payment: (1) there should not be any debtor- creditor relations in contract or by law between the solvens and the accipiens with respect to the payment made; and, (2) the payment must have been made in error. The permanent mandatory injunction was based on the proposition that the monies represented by the certificate belonged to Leong and that the Bank had no right over it. Since the Bank made no effort to obtain the provisional suspension of that injunction pending the appeal to the Supreme Court of Canada of its own action as against Leong, the permanent mandatory injunction became res judicata as between the Bank and Revenue Canada. The Bank could not claim that at law it was not debtor of the amount it paid to Revenue Canada when the payment was made.

The Supreme Court of Canada’s decision redressed the matter as between Leong and the Bank, but it had no effect on the permanent mandatory injunction, since the Bank did not protect its interests vis-a-vis that order.

STATUTES AND REGULATIONS JUDICIALLY CONSIDERED

Civil Code of Lower Canada, arts. 411, 1047, 1048, 1140, 1713.

Code of Civil Procedure, R.S.Q., c. C-25, art. 760.

CASES JUDICIALLY CONSIDERED

APPLIED:

Willmor Discount Corp. v. Vaudreuil (City), [1994] 2 S.C.R. 210; (1994), 61 Q.A.C. 141; 167 N.R. 381.

DISTINGUISHED:

The Queen v. Premier Mouton Products Inc., [1961] S.C.R. 361; (1960), 27 D.L.R. (2d) 639; [1961] C.T.C. 160; 61 DTC 1105.

CONSIDERED:

Bank of Montreal v. Kuet Leong Ng, [1989] 2 S.C.R. 429; (1989), 62 D.L.R. (4th) 1; 26 Q.A.C. 20; 28 C.C.E.L. 1; 100 N.R. 203; revg Banque de Montréal c. Leong (1987), 11 Q.A.C. 254; [1987] R.L. 160 (C.A.); confg Kuet Leong Ng c. Banque de Montréal, [1987] R.J.Q. 1799 (Sup. Ct.).

APPEAL from trial judgment ([1994] 1 C.T.C. 377; (1994), 94 DTC 6309; 74 F.T.R. 27 (F.C.T.D.)) holding that the Bank of Montreal was entitled to recover an amount paid to Revenue Canada in respect of an assessment of former employee following a permanent mandatory injunction issued by the Superior Court of Quebec and a Supreme Court of Canada decision that the tax debtor had no legal title to the benefits of his fraud. Appeal allowed.

COUNSEL:

Jacques Ouellet, Q.C. and Richard Corbeil for appellant.

Colin K. Irving and Tina Hobday for respondent.

SOLICITORS:

Deputy Attorney General of Canada for appellant.

McMaster Meighen, Montréal, for respondent.

The following are the reasons for judgment rendered in English by

Marceau J.A.: I have had the advantage of reading in draft the reasons for judgment prepared by Madam Justice Desjardins. My conclusion is the same as hers, but I arrived at it in a somewhat different and shortened route. It may be convenient if I add some brief comments.

With respect, it does not appear to me that anything in this litigation turns on the facts surrounding the service of the respondent’s protest. I simply do not see what legal effect may be attached to a “protest” accompanying a payment, when the legal right of the creditor to receive it flows from a court order which has not been challenged. A protest may be relevant when a payer disputes the validity of the payee’s claim, but is, for some valid reason, unable to make good his objection immediately and feels he has no choice but to comply with the demand for payment. The protest will obviously dispel any inference that the payment constitutes an acknowledgement of liability and it might also, in special circumstances I suppose, serve to establish bad faith on the part of the payee and reinforce an eventual action in recovery based on the civil law quasi-contract “resulting from the reception of a thing not due” (articles 1047 and following, Civil Code of Lower Canada), itself a particular application of the principles of unjust enrichment. This was, to a certain extent, the situation in the case of The Queen v. Premier Mouton Products Inc., [1961] S.C.R. 361, relied on by the learned Trial Judge [[1994] 1 C.T.C. 377 (F.C.T.D.)]. There, the protest was seen as having clearly established that the payer contested its liability to pay excise tax and its submission to the claim had not been motivated by the desire to discharge a legal obligation with the result that an essential requisite to the existence of a payment was lacking so there had been no legal payment. The present case does not lend itself to a similar approach since the respondent never challenged the appellant’s right to be paid pursuant to the injunction. The respondent’s protest, which was only reiterating its defence to the action in injunction, even if it had been open, unconditional and contemporaneous with the payment, could have had, in my view, no legal significance.

It is clear, in my respectful opinion, that, protest or not, the respondent’s action in recovery could not find support in article 1140 of the Civil Code of Lower Canada. The principle confirmed by this article, that every payment presupposes a debt and that which has been paid in the absence of a debt may be recovered, had no application whatsoever. The injunction ordered the respondent to pay to the appellant the amount represented by the certificate, an order made at the request of the certificate’s named beneficiary, Mr. Leong: that there was an obligation to pay in satisfaction of which the payment was made is indisputable. The payment was not made by “mistake of law or fact”, since it was required by an unequivocal court order; nor was it made under illegal compulsion since the well foundedness of the court order was not challenged. I may add that, in my view, even if the Supreme Court, in disposing of the litigation between the respondent and Mr. Leong, had directly or incidentally agreed with the respondent’s contention that it was the owner of the certificate, the action in recovery against the appellant would not have had any more basis. The proceedings in the Supreme Court were not directed against the injunction and they could have no effect whatsoever on its validity; furthermore, the appellant was not a party to those proceedings. But, in any event, the Supreme Court never even implied that the respondent could have had ownership of the certificate, it simply established the existence of a debt owing to the Bank by Mr. Leong for the amount of money realized by the latter’s unethical activities.

One may, at first, be somewhat disturbed by the result: the appellant benefits from a tax assessment levied on profits that are offset by a debt of an equivalent amount, while the respondent has a right to be paid moneys that it will most probably never recover. It remains, however, that, even if it is unethically, Mr. Leong actually earned money on his own behalf that was taxable, and even if it was the victim of its employee’s unethical conduct, the respondent did not suffer any financial loss.

I would dispose of the matter as suggested by my colleague.

Chevalier D.J.: I agree.

* * *

The following are the reasons for judgment rendered in English by

Desjardins J.A.: The respondent (the Bank) sued the appellant (the Crown) under article 1140 of the Civil Code of Lower Canada, (the CCLC) for recovery of an amount of $293,869.58 paid to the Department of National Revenue (Revenue Canada) following a permanent mandatory injunction issued against the Bank by the Superior Court of Quebec on June 30, 1987 [[1987] R.J.Q. 1799].

Judgment in the Trial Division of this Court was rendered in favour of the Bank.[1] The Crown has appealed.

The circumstances of this case are rather unusual.

The Facts

From 1978 until he was fired in October 1984, an employee of the Bank, Philippe Leong, Chief Foreign Currency Trader for its eastern region, made large personal profits by using funds of the Bank to speculate in foreign currency. He operated in two ways: he made transactions for the account of a client without the client’s knowledge, and made in fact for his own account using the Bank’s funds; he also made transactions for two of the Bank’s clients on the secret condition that he receive one half of any trading profits. Shortly after firing him, the Bank instituted an action against Mr. Leong in the Superior Court of Quebec claiming, among other things, the payment to it of $777,650 plus interest and a declaration that a certificate of deposit in the amount of $230,210.98 was its property.

Mr. Leong was assessed by Revenue Canada in December 1984 for the taxation years 1980, 1981, 1982 and 1983 for income tax in the amount of $340,059.90 with interest on the sum of $215,829.07 from December 13, 1984. Two houses, a Porsche and an Oldsmobile Cutlass belonging to Mr. Leong were immediately seized under orders issued at the request of Revenue Canada. Revenue Canada also obtained an interim garnishment order to permit the attachment of funds owing to Mr. Leong from Investors Group Trust G. Ltd. which administered an employee share ownership program for the Bank. In addition, it obtained an interim garnishment order to attach the funds in a bank account and the monies allegedly due by the Bank to Mr. Leong in a certificate of deposit in U.S. funds held by the Bank. The Bank claimed it owed nothing to Mr. Leong. The hearing to obtain a final order of garnishment was adjourned sine die.

The action instituted by the Bank against Mr. Leong was rejected both by the Superior Court of Quebec and by the Court of Appeal [(1987), 11 Q.A.C. 254] for Quebec.

Shortly thereafter, Mr. Leong brought an application in the Superior Court of Quebec for an injunction to compel the Bank to pay to Revenue Canada the monies represented by the certificate of deposit in U.S. funds held by the Bank and to his lawyers. On or about June 23, 1987, the Bank served Revenue Canada with an affidavit in the garnishment proceedings informing it of its intention to seek leave to appeal the judgment of the Court of Appeal for Quebec to the Supreme Court of Canada within the appropriate time period. On or about June 26, 1987, the Bank filed in the Supreme Court of Canada an application for leave to appeal. The application by Revenue Canada for a garnishment order was adjourned on June 26, 1987.

On June 30, 1987, the Superior Court of Quebec, presided by Trudeau J. [[1987] R.J.Q. 1799], issued a permanent injunction ordering the Bank to convert the certificate of deposit which was in the name of Mr. Leong into Canadian funds and to pay the monies to Revenue Canada in satisfaction of the income tax debt of Mr. Leong. The order was made subject to the proviso that Mr. Leong be given in return a discharge of the order of seizure held by Revenue Canada on the certificate of deposit. In its reasons for granting the injunction, the Superior Court of Quebec indicated that the decision of the Court of Appeal, as between Mr. Leong and the Bank, had now become final and executory and that the Court of Appeal had confirmed the decision of the Superior Court which had found that no evidence had established that the funds used to buy the certificates belonged to the Bank. It noted, moreover, that the filing of the leave application to the Supreme Court of Canada had been done after the expiry of sixty days from the judgment of the Court of Appeal.

The Bank did not appeal the order of Trudeau J. nor did it seek, in any way, a stay of execution of that order.

In a telephone conversation on July 3, 1987, counsel for the Bank and Revenue Canada discussed the possibility of the Bank paying under protest the monies represented by the certificate of deposit to Revenue Canada on account of the income tax debt of Mr. Leong. They further discussed the possibility of Revenue Canada granting conditional discharges of its orders of seizure. Counsel for Revenue Canada made no commitment to give conditional discharges in the event the Bank would pay the monies under protest.

What then happened is the following. During the course of a meeting in the morning of July 8, 1987, a peremptory demand for payment in the amount of $352,985.28 was given to the Bank by Revenue Canada. This sum represented taxes, penalties and interest owed by Mr. Leong to Revenue Canada as of that date. Counsel for the Bank gave the representative of Revenue Canada a cheque in the amount of $353,598.52 which included legal fees and disbursements payable by Mr. Leong to Revenue Canada. Except for the amount of $59,728.94, the money paid by the Bank came entirely from the profits made by Mr. Leong by speculating in foreign currencies in the course of his employment. Counsel for Revenue Canada provided counsel for the Bank with an abandonment of the interim garnishment order in relation to the certificate and advised counsel for Mr. Leong that he could dispose of the sum of $20,000 in his trust which represented the proceeds of the sale of the Porsche. On his return to his office that morning, counsel for Revenue Canada signed and filed with the Registry of this Court a discharge of the order of seizure of the house which Mr. Leong had previously sold to his wife. On account of a clerical error, an amended discharge was filed the next day.

At approximately 1:24 p.m. that afternoon on July 8, 1987, a bailiff served counsel for Revenue Canada with a letter from counsel for the Bank. The letter had been given to the bailiff for service on counsel for Revenue Canada prior to the meeting held that morning. The letter delivered in the afternoon stated in part:

Pursuant to the judgment of June 30, 1987 of the Honourable Mr. Justice Paul Trudeau of the Quebec Superior Court we have today provided you with a Bank of Montreal official cheque dated July 8, 1987 and payable to Ministère du revenu fédéral in the amount of $353,598.52.

Please be advised that while the Bank is respecting the judgment it makes this payment to the Department under protest. [Emphasis added.]

It was further indicated that the Bank would seek reimbursement of the monies paid in the event the Bank would be successful in its appeal before the Supreme Court of Canada.

Revenue Canada wrote back the following answer which was sent by ordinary mail and was received by the Bank on July 10, 1987:

In the afternoon of July 8, 1987, we were served with your letter to my attention, in which the Bank claims that it paid the above-mentioned amounts of $353,598.52 under protest, even though it did not appeal Mr. Justice Trudeau’s judgment of June 30, 1987, and that it will claim reimbursement from Her Majesty in the event that the Supreme Court declares that the Bank was the owner of a certain certificate of deposit.

Be informed that any claim by the Bank will be vigorously contested. Even if the Supreme Court eventually grants the appeal of the Bank, we deny that there is any basis for any claim to be reimbursed. Not only your letter of protest has been served after payment, but also, in deciding not to appeal Mr. Trudeau’s judgment, it is absolutely clear that the Bank has waived and renounced to any claim for reimbursement that it could possibly have against the Federal Crown.

Counsel for Revenue Canada then proceeded to give release without informing the Bank of all of the securities it held on Mr. Leong’s assets.

On September 28, 1989, the Supreme Court of Canada allowed the appeal by the Bank.[2] It held that, with respect to the first group of transactions, namely those made by Mr. Leong for the account of a client without the client’s knowledge and made in fact for his own account using the Bank’s money, Mr. Leong was in the position of a possessor in bad faith (article 411 of the CCLC) and was obligated to remit to the Bank not only the capital of the funds which he used, but also any increase in value and fruits thereof. Mr. Leong, it said, appropriated to himself funds of the appellant fraudulently and without colour of right and had no legal title to the benefits of his fraud. With respect to the second type of transactions, namely those made under private arrangements with two of the Bank’s clients, the Supreme Court of Canada held that Mr. Leong had acted in a representative capacity for the Bank carrying on its business. It applied the principle set forth in article 1713 of the CCLC whereby the mandatary is bound to render an account of his administration and to deliver and pay over all that he has received under the authority of the mandate, even if it were not due. This obligation, it added, gave effect to a much broader policy of the civil law aiming at the protection of honesty and good faith in the execution of contracts.

The Bank then kept to its word. As stated in its letter of July 8, 1987, it sued Revenue Canada for recovery of the monies it paid pursuant to the permanent mandatory injunction pronounced by the Superior Court of Quebec at the request of Mr. Leong whose assets had been completely frozen by Revenue Canada.

The judgment under appeal

The Trial Judge found as a fact that the Bank had paid under protest the monies resulting from the certificate of deposit so as to pay the income tax debt of Mr. Leong and that counsel for Revenue Canada knew or ought to have known this prior to the meeting of July 8, 1987. “In any event”, she said, “it is clear beyond any question that counsel for the Department knew at 1:24 p.m. on July 8, 1987, the date and time of the service of the letter from counsel for the bank, that the payment was made under protest and nevertheless chose to release the security held by the Department”.[3] She applied principles enunciated in The Queen v. Premier Mouton Products Inc.[4] and concluded that the Bank had intended to keep alive its right to recover the sum paid to Revenue Canada. Since the Supreme Court of Canada in the Kuet Leong Ng case had determined that the Bank was the owner of the funds gained illegally by Mr. Leong, the Bank was entitled to recovery of the monies. She held alternatively that the Bank never paid the monies voluntarily or with a view to relinquishing its right to dispute its ownership of the funds before the Supreme Court of Canada and was, for these reasons also, entitled to recovery. She concluded that no error of fact or law had been committed by the Bank in making the payment to Revenue Canada. Hence, under the reasoning of the Supreme Court of Canada in Premier Mouton Products Inc., articles 1047 and 1048 of the CCLC did not apply.

Analysis

The Trial Judge manifestly erred on the facts when she made the finding “that the income taxes owed to the Department by Mr. Leong were paid by the bank under protest and that counsel for the Department knew or ought to have known this prior to the meeting on July 8, 1987”.[5] Counsel for Revenue Canada was aware, on or about June 23, 1987, of the Bank’s intention to appeal the Court of Appeal for Quebec’s decision to the Supreme Court of Canada. Also, counsel for Revenue Canada had been informed in a telephone conversation on July 3, 1987 of the “possibility” of the Bank paying under protest. However, during the course of the meeting on the morning of July 8, 1987, no protest was made by the Bank when it handed the cheque of $353,598.52 to Revenue Canada. The payment was made unconditionally. The letter of protest of the Bank was served on Revenue Canada after the meeting of July 8 and referred in the past tense to the Bank having provided Revenue Canada that day with a cheque of $353,598.52. When the Bank, in that letter, stated it “makes this payment … under protest”, it was around 1:24 p.m. that afternoon of July 8. To be timely, a protest should have been made either prior to or at the time of payment.

The respondent argues that since the Supreme Court of Canada has finally determined that it is the owner of the funds represented by the certificate of deposit, it is entitled to recovery under article 1140 of the CCLC and that Revenue Canada incorrectly granted unconditional discharges of the properties owned by Mr. Leong after July 8, 1987. It submits that any appeal from the order of Trudeau J. would have been futile considering the two judgments of the Superior Court and the Court of Appeal on the merits and the severe criticism of Trudeau J. vis-à-vis the Bank. An appeal to the Court of Appeal, it says, would not have suspended the effect of an injunction.[6]

Suspension of an injunction pending appeal may be ordered by a judge of the Court of Appeal, but this is a discretionary remedy. Considering the recent decision of the Court of Appeal, the prospect that a judge of that Court would have overturned the finding that the money was the property of Mr. Leong was, in the Bank’s estimates, unlikely. The Bank says it had no duty to launch a futile appeal. It chose to follow the course of pursuing the appeal on the merits to the Supreme Court of Canada. Having won, Revenue Canada is under an obligation to return the monies the Supreme Court of Canada said belonged to the Bank.

In a recent decision, that of Willmor Discount Corp. v. Vaudreuil (City),[7] the Supreme Court of Canada refers to French and Quebec writers who agree that the recovery of a thing not due must meet two conditions in addition to payment. The first is that no debtor-creditor relations in contract or by law should exist between the solvens and the accipiens with respect to the payment made. The second is that payment must have been made in error.[8]

Article 1140, on which this action is based, establishes a presumption and a principle.[9] It must now be read in conjunction with articles 1047 and 1048 of the CCLC[10] which set out the rules governing recovery.

The mandatory injunction issued by the Superior Court of Quebec was clearly based on the proposition that the monies represented by the certificate of deposit belonged to Mr. Leong and that the Bank had no right over it. Since the Bank made no effort to obtain the provisional suspension of the injunction pronounced against it, pending the appeal to the Supreme Court of Canada of its own action as against Mr. Leong, the order of the Superior Court of Quebec became res judicata as between the Bank and Revenue Canada. In those particular circumstances, the Bank cannot claim that at law it was not debtor of the amount it paid to Revenue Canada when the payment was made. The protest came after the unconditional payment made by the Bank and it is more than doubtful that a payment made by virtue of a court order, which was not appealed and provisionally suspended, could have been made conditional. At this point, Revenue Canada had no choice but to release all the frozen assets of Mr. Leong. Had it not done so, it would have risked an action in damages by Mr. Leong in whose favour the final injunction had been pronounced.

The decision of the Supreme Court of Canada redressed the matter as between Mr. Leong and the Bank. But it had no effect on the order given to the Bank by the Superior Court of Quebec, since the Bank did not protect its interests vis-à-vis that order. This is not a case of an appearance of a debt overturned by a successful appeal to a higher court. The Bank’s recourse against Revenue Canada must, therefore, fail.

I would allow this appeal, I would set aside the judgment of the Trial Division and I would dismiss the action of the respondent, the whole with costs on appeal and at trial.

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