Toronto-Dominion Bank v. Co-Pac Limited

Toronto-Dominion Bank v. Co-Pac Limited Collection Decisions of the Court of Appeal Date 1999-08-17 Docket numbers C29241 Judges Carthy, James Joseph; Abella, Rosalie Silberman; Goudge, Stephen Thomas Subject Civil Decision Content 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