BANKRUPTCY AND SUMS HELD IN TRUST AS SECURITY FOR COSTS: THE COURT OF APPEAL RULES IN FAVOR OF THE TRUSTEE IN BANKRUPTCY
Are the sums held in trust by a bankrupt’s attorney as security for costs, pursuant to Section 492 of the Code of Civil Procedure, the property of the bankrupt?
On August 31, 2018, in PricewaterhouseCoopers Inc. vs. Proteau [1], the Court of Appeal ruled in favor of the trustee in bankruptcy.
In this case, the plaintiff, a corporation not domiciled in Québec, initiated legal proceedings against the defendants on February 16, 2015. On February 26, 2015, the defendants filed an application for security for costs and, on May 7, 2015, a judgment ordered the plaintiff to deposit $12,000 as security for costs in the trust account of its attorney.
However, on September 7, 2016, during the course of the proceedings, the plaintiff made an assignment in bankruptcy, and a notice of stay of proceedings was filed into the court record on October 14, 2016. The trustee in bankruptcy and the defendants did not agree on the ownership of the amount deposited in the attorney’s trust account, each claiming to be entitled to the sum. The Superior Court decided that the defendants could withdraw the entire amount held in trust.
The trustee in bankruptcy appealed the judgment.
The Québec Court of Appeal, in granting the appeal, reiterated the principle that the legal costs contemplated by the security for costs are owed to the party that is successful at the end of the proceedings. As stated by the Court, no judgment had been rendered on the merits of this case nor had there been any interlocutory judgment awarding costs, thus giving no basis for the defendants to receive the amount deposited in the attorney’s trust account. On the contrary, the right to withdraw the sums belonged to the trustee for the benefit of the bankrupt’s creditors.
In this decision, the Court of Appeal relied on the bankruptcy rule that all property owned by the bankrupt at the time of the bankruptcy assignment shall pass to and vest in the trustee [2]. The Court of Appeal had to determine whether the sum of $12,000 remained in the patrimony of the plaintiff until the bankruptcy assignment, or if it had definitively left the patrimony by being deposited in the hands of a third party. In this case, the Court of Appeal concluded that the plaintiff had never permanently disposed of the sums deposited as security for costs;the plaintiff simply complied with a judgment ordering it to provide a security to guarantee the payment of legal costs, and only in the event that it would lose its case.
The Court of Appeal stressed the fact that there is no absolute rule in this matter and that when sums are deposited in trust for a specific purpose into the hands of a third party, the circumstances of each case must be examined in order to determine whether the depositor has definitively disposed of the amounts or whether said amounts must be remitted to the trustee in bankruptcy. It will be determined by the nature of the payment.
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[2] Section 71 of the Bankruptcy and Insolvency Act, R.C.S., 1985, c. B-3.
By Mathieu Tremblay