By August 24 2012
Litigation

Government as a Preferred Creditor

The recent decision in Liberty Mortgage Services Ltd. v. Canada (National Revenue), 2012 ABCA 225 (“Liberty Mortgage”), changes the Civil Enforcement landscape in Alberta by allowing the Crown to assert priority over other unsecured creditors. 

Any debt holder trying to collect against a debtor should now consider whether any debts are also owed to the Crown.

Liberty Mortgage considered whether the federal Crown is entitled under the Civil Enforcement Act, RSA 2000, C c-15 (“CEA”) to priority of payment under its writ for unpaid taxes.  At issue was the distribution between writ holders of funds paid into court from the sale of lands subject to a foreclosure action.  There were multiple writs registered against the title of the lands, including those of the Crown/CRA, and a mortgage company.  The funds held in court were not sufficient to satisfy all the writs.

Ordinarily, per s. 99(3)(g) of CEA, writ holders will share funds pro rata with the other writ holders, so long as there are no other creditors with a higher priority.  However, here the Crown argued that its ancient prerogative to priority of payment among claims of equal degree made the entirety of the funds at issue payable to the Crown.

Both a Master and a Judge agreed in this case that the pro rata distribution was proper, and denied the Crown priority.  Their decisions were based on an exception to the doctrine of statutory immunity.  

Because the federal Crown had taken the benefit of the CEA when it filed its writ of execution thereunder, reasoned the courts, it must also take the burden thereof, including the s. 99(3)(e)(g)’s pro rata sharing with other writ holders.  Liberty Mutual, at para. 7.   

The Court of Appeal disagreed, and concluded that the Crown had priority as to the other writ holders.  

The Court pointed to the Crown’s common law prerogative to be paid before other creditors of equal degree, as recognized in R v. Bank of Nova Scotia (1885), 11 SCR 1 and confirmed in Household Realty Corp. v. Canada (Attorney General) (1979), [1980] 1 SCR 423. 

The Court then analyzed the language of the CEA and its legislative history.  Section 99(3)(e) of the CEA  grants fourth priority “to eligible claims that by virtue of any other enactment or law in force in Alberta are entitled to priority over the eligible claims of enforcement creditors generally.”  The Court concluded the phrase “by virtue of any other . . . law,” was drafted broadly enough to include the common law construct of the Crown’s priority.  The Court also considered statements in a 1991 Alberta Law Reform Institute report on creditors’ rights, which indicated that the drafters of the CEA were alive to the Crown’s common law priority.  As such, the Court concluded that the Legislature intended for the Crown to maintain its traditional priority over claims of equal degree.

Generally, Alberta courts have acted to reduce the scope of the Crown’s prerogative to priority. 

In Royal Bank v. Black & White Developments Ltd. (1988), 88 AR 340 (CA) (“Black & White Developments”), for example, the Alberta Court of Appeal considered the provincial Crown’s status as execution creditor with respect to other execution creditors.  In that case, the provincial Crown had sued the debtor in Queen’s Bench, obtained judgment, and filed a writ of execution with the sheriff.  The Black & White Developments court held that, because it chose to sue in the courts, the Crown had waived any common law prerogative it may have had. 

It is significant to note that the Execution Creditors Act, which governed civil enforcement in the Black & White Developments case but was replaced by the CEA, contained relevant statutory language similar to s. 99(3) of the CEA.  Claims of execution creditors were given lower priority to claims of any “person who is entitled to be paid in preference to any other creditor . . . .”  Execution Creditors Act, s. 12.  

Unlike the court in Liberty Mortgage, the Black & White Developments court concluded that this statutory language did not preserve the Crown’s priority.

Liberty Mortgage expressly overturns Black & White Developments, stating that it “has been superceded by Supreme Court of Canada jurisprudence and amendments to the legislation.”  Liberty Mortgage at para. 15.

Liberty Mortgage brings Alberta in line with other provinces, where courts have also determined that the Crown has priority over other writ holders, including Re Marten (1981), 34 OR (2d) 399 (Ont Div Ct) and Farley v. Badley (1991), 87 DLR (4th) 178 (Sask CA). 

Invitation for Discussion:

If you have questions about a writ or your ability to collect against a debtor, please do not hesitate to contact one of the lawyers in either the Business Law or Business Litigation group at Shea Nerland LLP.

Disclaimer:

Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.

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