



COURT OF APPEAL FOR ONTARIO

CITATION: Richter LLP v. Big Truck TV Productions Inc., 2015
    ONCA 567

DATE: 20150731

DOCKET: C59686

Feldman, van Rensburg and Huscroft JJ.A.

BETWEEN

Richter LLP

Creditor (Respondent)

and

Big Truck TV Productions Inc.

Debtor

and

Inch Hammond Professional Corporation

Garnishee (Appellant)

Brian D. Duxbury and Andrew D. Pelletier, for the
    appellant

Jonathan Charland, for the respondent

Heard: May 5, 2015

On appeal from the judgment of Justice Robert F. Goldstein
    of the Superior Court of Justice, dated November 5, 2014, with reasons reported
    at 2014 ONSC 6379.

Feldman J.A.:

Introduction

[1]

The appellant Inch Hammond is a law firm that was owed money by its
    client, Big Truck TV Productions Inc. Big Truck had a tax refund coming from
    the Canada Revenue Agency (CRA). Big Truck executed an Irrevocable Direction
    to Inch Hammond in respect of the anticipated tax refund, directing it to
    disburse the refund amount to pay three creditors in full, including itself for
    legal fees, with the balance to be paid to Big Truck. The respondent Richter,
    the third of these designated creditors, obtained default judgment against Big
    Truck and served a Notice of Garnishment on Inch Hammond in respect of the
    anticipated tax refund. Its intent was to obtain payment of its judgment debt
    from that refund.

[2]

Inch Hammond disbursed the refund from the CRA to the listed creditors
    in priority sequence in accordance with the Irrevocable Direction rather than
    seek a garnishment hearing. As the funds were insufficient to pay all three
    creditors, little was left over to pay Richter after the first two listed
    creditors were paid in full.

[3]

The matter reached the court in a garnishment hearing initiated by
    Richter under rule 60.08(16) of the
Rules of Civil Procedure
, R.R.O.
    1990, Reg. 194. The issue before the court was whether Inch Hammond was
    permitted to pay itself for its legal fees from the funds from the CRA in the
    face of the Notice of Garnishment.

Facts

[4]

As a digital media company, Big Truck was eligible for a tax credit
    under the Ontario Interactive Digital Media Tax Credit Program, governed by ss.
    93-93.2 of the
Taxation Act, 2007
, S.O. 2007, c. 11, Sch. A, and s.
    43.11 of the
Corporations Tax Act
, R.S.O. 1990, c. C.40. CTAP Inc.
    prepared the tax credit application for Big Truck for 2010, but when Big Truck
    was unable to pay CTAPs fees, CTAP sued. Inch Hammond acted for Big Truck and
    negotiated a settlement of the litigation, but neither the settlement amount
    nor Inch Hammonds legal fees were paid.

[5]

R&D Funding Management Inc. prepared Big Trucks 2011 tax refund
    application. In anticipation of Big Truck receiving a tax refund cheque in the
    amount of $265,000, a new settlement agreement with Big Truck was negotiated
    with CTAP, whereby the tax refund cheque would be directed to be paid to Inch
    Hammond to pay the three creditors  CTAP, Inch Hammond and R&D  with the
    balance to be paid to Big Truck. The anticipated tax refund was believed to be
    sufficient to pay all three creditors with some left over for Big Truck.

[6]

Inch Hammond prepared an Irrevocable Direction to reflect those terms.
    Big Truck executed the Irrevocable Direction after making an amendment that
    replaced the third creditor, R&D Funding, with Richter. In his
    affidavit, Mr. Hammond deposed that when he later saw Richters statement of
    claim, he inferred that at some point R&Ds contract with Big Truck had
    been assigned to Richter.

[7]

The following is the entire Irrevocable Direction as executed:

IRREVOCABLE
    DIRECTION

TO:    INCH HAMMOND
    PROFESSIONAL CORPORATION

Re:
Big
    Truck TV Productions Inc. et al ats. CTAP Inc.


Court
    File No: CV-11-439081 (the Action)


Payment
    of Settlement Funds


IN CONSIDERATION
of CTAP INC. (the Plaintiff) forbearing to obtain an issued and entered
    judgment in the Action or from taking any other enforcement steps against the
    Undersigned and for other good and valuable consideration:

THE
    UNDERSIGNED HEREBY IRREVOCABLY DIRECTORS [
SIC
] ITS LAWYERS, INCH HAMMOND
    PROFESSIONAL CORPORATION
, upon receipt of funds from the Canada
    Revenue Agency in accordance with the Undersigneds irrevocable direction dated
    (date), to pay out said funds as follows:

1.   Payment of all amounts owing to CTAP Inc. to Jack Copelovici,
    in trust.

2.   Payment to Inch Hammond Professional Corporation of all amounts
    owing, including fees and disbursements.

3.   Payment
    to Richter of all amounts owing.

4.   Balance of funds to be paid to Big Truck TV Productions Inc. or
    as otherwise directed by the Undersigned.

and doing this shall be its good
    and sufficient authority.

DATED
    this 13
th
day of April, 2013.

BIG TRUCK TV
    PRODUCTIONS INC.

Per: Michael
    Carpentier

Title: CEO


I HAVE AUTHORITY TO BIND THE CORPORATION

[8]

Big Truck also sent an Irrevocable Direction to the CRA, which was
    referred to in the above Irrevocable Direction, directing the CRA to make the
    refund cheque payable to Inch Hammond in Trust.

[9]

In July 2013, Richter obtained default judgment against Big Truck, and
    in October, issued a Notice of Garnishment to Inch Hammond in respect of the
    anticipated refund cheque from the CRA. It was only at that point that Inch
    Hammond reviewed the signed Irrevocable Direction it had received in April and
    found that Richter was named as the #3 payee.

[10]

Inch
    Hammond responded in November to the Notice of Garnishment with a Garnishees
    Statement, and corresponded with counsel for Richter. In the Garnishees
    Statement, Inch Hammond asserted that it did not owe a debt to Big Truck, but
    rather it was a trustee and a creditor of Big Truck. It also asserted that
    because Inch Hammond had been directed to pay other creditors before paying
    Richter, Inch Hammond required clarification and possibly a court order to
    determine whether it was required to pay Richter pursuant to the Notice of
    Garnishment.

[11]

The
    refund cheque was not issued by the CRA until December. While it was sent to
    Inch Hammond as directed, contrary to Big Trucks direction it was made out to
    Big Truck and not to Inch Hammond in Trust. Also, it was not for the
    anticipated amount of $265,000 but instead only for $150,074.70, an amount that
    was not sufficient to pay all three creditors in full.

[12]

Big
    Truck endorsed the cheque to Inch Hammond in February 2014. At that point, Inch
    Hammond paid CTAP in full in the amount of $52,716.08, it paid itself in full
    including interest in the amount of $94,824.88, and because it had received a
    Notice of Garnishment, it paid the balance ($2,533.74 less $10) not directly to
    Richter but to the Sheriff.

[13]

Richter
    then initiated a garnishment hearing motion, seeking payment from Inch Hammond
    of the amount it was owed as set out in the Notice of Garnishment. The motion
    judge found that the Notice of Garnishment put Inch Hammond on notice that
    there was a dispute about the funds, and that a court would have to decide the
    rights and liabilities of each party. He referred to the decision of this
    court in
International Union of Painters and Allied Trades, Local 200 v.
    S&S Glass and Aluminum (1993) Ltd.
(2004),
185
    O.A.C. 38
(C.A.), at para. 23, for the proposition that garnishment
    proceedings put the garnishee on notice that debts owing to the debtor are to
    be paid to the creditor. He found that Inch Hammond should have followed the
    garnishment procedure or paid the money into court, but should not have used
    self-help and should not have paid itself.

[14]

The
    motion judge decided the issue on that legal basis but also went on to address
    and reject other issues raised by Inch Hammond as defences, including legal and
    equitable set-off, the effect of registration under the
Personal Property
    Security Act
, R.S.O. 1990, c. P.10 (
PPSA
), and whether there
    was an absolute assignment. He found that Inch Hammond had not come to the
    court with clean hands. He ordered Inch Hammond to pay $89,608.19 to the
    Sheriff, being the amount owing as set out in the Notice of Garnishment, plus
    costs to Richter.

Issue on Appeal

[15]

Although
    all the issues addressed by the motion judge were argued on the appeal, it is
    only necessary to decide one issue to resolve the appeal: whether Inch Hammond
    was obliged to treat the refund cheque from the CRA to Big Truck as a
    garnishable debt it owed to Big Truck.

Analysis

(1)

Did Inch Hammond owe a garnishable debt to Big Truck?

[16]

The
    fundamental premise of the garnishment process is that a creditor who obtains
    an order for a debtor to pay money may enforce that order by garnishing debts
    payable by other persons to the debtor. That premise is articulated in rule
    60.08(1) which provides:

A creditor under an order for the payment or recovery of money
    may enforce it by garnishment of debts payable to the debtor by other persons.

[17]

In
    this case, the process was available to Richter as a creditor with a default
    judgment against the debtor, Big Truck, to use against Inch Hammond, if Inch
    Hammond was an other person with a debt payable to Big Truck.

[18]

Before
    the motion judge, Inch Hammond argued that it was not a debtor of Big Truck,
    but rather, it was a creditor. While acknowledging that fact, the motion judge
    focused on the status of the cheque from the CRA payable to Big Truck. He found
    that Inch Hammond was holding that cheque on behalf of Big Truck, and that it
    owed Big Truck a fiduciary duty to carry out its direction regarding the
    cheque.

[19]

I
    agree with the motion judge that Inch Hammond obviously did not owe money to
    Big Truck. However, with respect to the motion judge, I do not agree that
    Richter could nevertheless garnish monies to be paid pursuant to a direction
    to Inch Hammond for Big Trucks benefit. Rule 60.08(11) provides that [t]he
    garnishee is liable to pay to the sheriff any
debt of the garnishee to the
    debtor
, up to the amount shown in the Notice of Garnishment (emphasis
    added). If the garnishee owes no debt to the debtor, then this rule is
    inapplicable.

[20]

Since
    the CRA tax refund cheque was not a debt owed by Inch Hammond to Big Truck, the
    Notice of Garnishment had no effect in respect of that cheque.

[21]

The
    tax refund represented monies owed by the CRA to Big Truck, which Big Truck
    directed to be paid first to its legal counsel in trust and then to three of
    its creditors for the amounts owed to them (except to the extent of any
    available excess) in accordance with the Irrevocable Directions to the CRA and
    to Inch Hammond.

[22]

Had
    there been any balance available to pay to Big Truck, it may be that the amount
    of the balance that was directed to be paid to Big Truck would have represented
    a garnishable debt in the same way that upon termination of a legal retainer,
    the balance of trust funds owing to a client may be subject to garnishment:
Toronto-Dominion
    Bank v. Cooper, Sandler, West & Skurka
(1998), 37 O.R. (3d) 729 (Div.
    Ct.)(leave to appeal dismissed May 21, 1998). However, in the absence of any
    balance, Inch Hammond owed no debt to Big Truck.

[23]

After
    Big Truck executed the Irrevocable Direction, the only duty Inch Hammond owed
    to Big Truck was to carry out its terms. Once the amount of the cheque was
    known, it was clear that no balance of funds would remain and therefore no debt
    to Big Truck would arise.

Conclusion

[24]

Richters
    position on the appeal is solely that by serving a Notice of Garnishment it
    obtained priority to the extent of the amount claimed in the Notice. The motion
    judge accepted that Inch Hammond acted wrongfully by carrying out the terms of
    the Irrevocable Direction once it received the Notice of Garnishment and was
    therefore aware of a claim by Richter in priority to its own claim for payment
    by its client. However, because Inch Hammond owed no debt to Big Truck and
    there was no debt to garnish, Inch Hammond made no error by failing to treat
    the cheque from the CRA as garnishable. The rights of the parties in the
    garnishment hearing depended on whether there was a garnishable debt owed by
    Inch Hammond to Big Truck. In the absence of such a debt, Richter had no claim
    under rule 60.08 to the funds that had been disbursed by Inch Hammond.

[25]

I
    would allow the appeal and set aside the order made by the motion judge. I
    would specifically note that I am satisfied that Inch Hammond did not act in an
    improper manner or with unclean hands in all the circumstances.

[26]

I
    would allow the appeal with costs fixed in the agreed amount of $10,000
    inclusive of disbursements and HST.

Released: KF July 31, 2015

K. Feldman J.A.

I agree. K. van
    Rensburg J.A.

I agree. Grant
    Huscroft J.A.


