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T-591-86
Saskatchewan Co-operative Credit Society Lim ited (Plaintiff)
v.
The Honourable Michael Wilson, in his capacity as Minister of Finance of Canada and Canada Deposit Insurance Corporation (Defendants)
INDEXED AS: SASKATCHEWAN CO-OPERATIVE CREDIT SOCIE TY LTD. V. CANADA (MINISTER OF FINANCE) (T.D.)
Trial Division, Collier J.—Toronto, September 9 and 10, 1989; Ottawa, January 24, 1990.
Financial institutions — Definitions of "deposit" in Canada Deposit Insurance Corporation Act and in Financial Institu tions Depositors Compensation Act including all monies received by institution in usual course of business, that obli gated to repay on demand or in accordance with receipt of payment instrument issued for money received — Purpose of legislation to protect small investors, give relief to depositors prejudiced by failure of three financial institutions — Plaintiff agreeing to advance funds to now failed mortgage investment corporation to be loaned — Subsequently assigning interest in agreement to Canadian Commercial Bank for promissory note — Bank in liquidation — Plaintiff not depositor — "Monies" not encompassing plaintiffs rights and interests in Mortgage Loan Participation Agreement — In advancing funds to Bank, plaintiff not lending money to Bank with expectation Bank would "hold" money for it, but to have money loaned out — Second transaction sale of asset — Promissory note not repre senting obligation to repay money, but to pay for assets.
This was an action for a declaration that the plaintiff was a depositor of the Canadian Commercial Bank, and a writ of mandamus directing the Canada Deposit Insurance Corpora tion and the defendants to pay the plaintiff $60,000 and $2,953,271.28 respectively. The plaintiff had entered into a Mortgage Loan Participation agreement with Canadian Com mercial Bank (CCB) Mortgage Investment Corporation, whereby the plaintiff would advance funds to the former, which would in turn be advanced to borrowers. After advancing $2,953,271.28 the plaintiff refused to make any further loan advances, as it was worried about the security of its investment. The plaintiff assigned its interest in the Mortgage Loan Partici pation agreement to the Canadian Commercial Bank in return for a promissory note. Prior to payment, the Bank was liquidat ed. The plaintiff applied for payment of deposit insurance in the amount of $60,000 under the Canada Deposit Insurance Corporation Act and for payment of $2,953,271.28 under the
Financial Institutions Depositors Compensation Act. The applications were rejected. The former Act provides insurance of up to $60,000 for the benefit of persons having deposits with various financial institutions in this country and the latter authorizes compensation of the depositors of the Canadian Commercial Bank, CCB Mortgage Investment Corporation and the Northland Bank who maintained deposits in excess of the $60,000. The statutes define "deposit" as including all monies received by an institution in the usual course of busi ness, that it is obligated to repay either on demand or in accordance with the provisions of any receipt of payment issued by it in exchange for the money received. The issue was whether the plaintiff was a depositor.
Held, the action should be dismissed.
A deposit is a contract by which a customer lends money to a bank. The terms of the loan may vary as agreed upon by the banker and the customer. In the absence of such expressly agreed upon terms, the common law dictates that what is intended is a loan that is repayable on demand.
Applying the statutory definitions of "deposit", the question was whether the Bank received monies from the plaintiff when it acquired the plaintiff's rights and interests in the Mortgage Loan Participation Agreement. The word "monies" does not encompass such rights. The purpose of the two Acts is to protect investors who have deposited money with financial institutions and who are not in a position to determine the financial viability of those institutions. The intent of the Canada Deposit Insurance Corporation Act is to ensure the safety of the deposits of small investors. The Financial Institu tions Depositors Compensation Act was enacted to compensate for the losses of depositors due to the failure of three specific financial institutions. The plaintiff entered into two business transactions—purchase of an investment, namely acquisition of a share in a mortgage loan, and sale of that investment on negotiated terms as to price, time of payment of the purchase price and interest. Neither of these transactions bore any indicia of a deposit. As to the first transaction, the plaintiff did not advance funds to the Bank for safekeeping or with the expectation that the Bank would "hold" money for it; it was merely fulfilling its obligation under the Mortgage Loan Par ticipation Agreement. The plaintiff did not expect to receive interest from the Bank. Any interest earned was to come directly from borrowers. The second transaction was nothing more than sale of an asset.
One of the criteria of a deposit is that the financial institu tion is obligated to repay the money. The promissory note issued by the Bank did not represent an obligation to repay money. It was representative of the Bank's obligation to make payment for certain assets.
STATUTES AND REGULATIONS JUDICIALLY CONSIDERED
Canada Deposit Insurance Corporation Act, R.S.C. 1970, c. C-30, Sch., s. 2 (as enacted by S.C. 1976-77, c. 27, s. 9).
Financial Institutions Depositors Compensation Act,
S.C. 1985, c. 51, s. 2.
Loan Companies Act, R.S.C. 1970, c. L-12.
CASES JUDICIALLY CONSIDERED
CONSIDERED:
R. v. Davenport, [1954] 1 W.L.R. 569 (C.A.). COUNSEL:
Peter Foley, Q.C. and Ray C. Rutman for plaintiff.
Eric A. Bowie, Q.C. and Barbara A. Mclsaac for defendants.
SOLICITORS:
Gauley & Co., Saskatoon, Saskatchewan, for plaintiff.
Deputy Attorney General of Canada for defendants.
The following are the reasons for judgment rendered in English by
COLLIER J.: The plaintiff is a federally incorpo rated company which carries on its activities pur suant to the federal Loan Companies Act, R.S.C. 1970, c. L-12. It brings action against the defen dants, the Minister of Finance of Canada and the Canada Deposit Insurance Corporation, for a dec laration that it is a depositor of the Canadian Commercial Bank and accordingly, that it is en titled to payment of deposit insurance in the amount of $60,000 and compensation by the defendants in the amount of $2,953,271.28 as evidenced by a promissory note issued to the plain tiff by the Canadian Commercial Bank.
The facts in this case are not in dispute. On December 24, 1981, a federally incorporated mort gage loan company called Canadian Commercial Bank Mortgage Investment Corporation, entered into an agreement whereby it agreed to lend to certain companies (hereinafter referred to as the borrowers) the sum of $15,000,000 for the con struction of an office building in downtown Cal- gary. To that end, a mortgage was granted by CCB Mortgage Investment Corporation on Febru- ary 23, 1982. At all material times, the Canadian
Commercial Bank acted as a financial and invest ment advisor to CCB Mortgage Investment Corporation.
In January 1982, participation interests in the loan were syndicated to various institutional lend ers, including the plaintiff, pursuant to a Mortgage Loan Participation Agreement. A participation syndicate of this nature occurs where the lead bank initially loans the full amount of the mort gage, then farms out participation to other entities. The terms of the agreement provided, inter alia, that the plaintiff would advance to CCB Mortgage Investment Corporation, by way of interim pay ments, the amount of $4,000,000. It would then be advanced by CCB Mortgage Investment Corpora tion to the borrowers pursuant to the loan agree ment. Upon making an advance, the plaintiff would receive a participation certificate.
On January 22, 1982, the plaintiff, along with the other participants in the Mortgage Loan Par ticipation Agreement, entered into a Mortgage Loan Administrative Agreement with the Canadi- an Commercial Bank. Pursuant to that agreement, the Bank was to administer the loan for a fee, payable by the plaintiff and other participants.
Construction of the office building commenced in early 1982. During the course of construction, the plaintiff advanced funds, from time to time, to CCB Mortgage Investment Corporation, pursuant to the Mortgage Loan Participation Agreement. CCB Mortgage Investment Corporation, in turn, made several loan advances to the borrowers. The borrowers became involved in numerous law suits relating to the construction and financing of the building. This caused CCB Mortgage Investment Corporation to cease making further loan advances. In addition, foreclosure relief was sought based on certain defaults by the borrowers under the mortgage. By that time, the plaintiff had advanced a total of $2,953,271.28 and was becom ing increasingly concerned about the viability of the project and the security of the mortgage investment.
Thereafter, the Canadian Commercial Bank, acting in its capacity as administrator of the Mort gage Loan Participation Agreement and as adviser to CCB Mortgage Investment Corporation, attempted to propose and negotiate various settle ments in an effort to allow completion of the building project. In June of 1984, the plaintiff refused to make any further loan advances pursu ant to the Mortgage Loan Participation Agree ment. In addition, the plaintiff refused to partici pate in a settlement proposed by the Canadian Commercial Bank whereby the mortgagee would realize on the security on behalf of the participants and then attempt to sell the property.
In an effort to salvage the investment and effect a settlement, the Canadian Commercial Bank agreed to purchase the interest of the plaintiff and the other participants in the Mortgage Loan Par ticipation Agreement. Pursuant to the terms of an Assignment Agreement dated June 8, 1984, the plaintiff assigned and transferred its interest in the Mortgage Loan Participation Agreement and the mortgage, including its right to receive repayment of funds previously advanced. In consideration, the Canadian Commercial Bank agreed to pay to the plaintiff the sum of $2,953,271.28, being repay ment in full of the plaintiff's advance under the Mortgage Loan Participation Agreement. Pay ment was to be made on July 8, 1986. As evidence of this obligation, the Canadian Commercial Bank gave a promissory note to the plaintiff.
On September 3, 1985, Price Waterhouse Lim ited was appointed as provisional liquidator of the Canadian Commercial Bank for the purpose of proceeding with the liquidation and winding up of the Bank. The Bank has since remained in liquida tion under court order. It is insolvent and is unable to pay the plaintiff the amount due to it under the terms of the promissory note.
Following the Canadian Commercial Bank's liquidation, the plaintiff made application for the payment of deposit insurance in the sum of $60,000 as provided for under the terms of the Canada Deposit Insurance Corporation Act,
R.S.C. 1970, c. C-3, as amended, ("CDICA") and for payment of the sum of $2,953,271.28 as pro vided for under the terms of the Financial Institu tions Depositors Compensation Act, S.C. 1985, c. 51 ("FIDCA"). The plaintiff's applications were rejected on March 11, 1986, on the grounds it was not a depositor of the Canadian Commercial Bank as required by the legislation.
The Canada Deposit Insurance Corporation Act provides insurance of up to $60,000 for the benefit of persons having deposits with various financial institutions in this country. The Financial Institu tions Depositors Compensation Act authorizes the Government of Canada to compensate the deposi tors of the Canadian Commercial Bank, CCB Mortgage Investment Corporation and the North- land Bank, who maintained deposits in excess of the $60,000 amount protected by the Canada Deposit Insurance Corporation Act.
The plaintiff pleads that the defendants have wrongfully rejected its application under the CDICA and the FIDCA. It seeks from this Court a declaration that it is a depositor of the Canadian Commercial Bank as that term is defined in the legislation, and a writ of mandamus directing the Canada Deposit Insurance Corporation and the defendants, or either of them, to pay to the plain tiff $60,000 and $2,953,271.28 respectively.
The sole issue before this Court is whether the plaintiff is a depositor of the Canadian Commer cial Bank with the promissory note being evidence of such a deposit.
The word "deposit" is defined in section 2 of the Financial Institutions Depositors Compensation Act as follows:
2....
"deposit" means the unpaid balance of the aggregate of moneys received or held by a financial institution, from or on behalf of a person in the usual course of business, including any interest accrued or payable to the person, for which the financial institution
(a) has given or is obligated to give credit to that person's account or has issued or is obligated to issue a receipt, certificate, debenture (other than a debenture issued by a chartered bank), transferable instrument, draft, certified draft or cheque, traveller's cheque, prepaid letter of credit,
money order or other instrument in respect of which the financial institution is primarily liable, and
(b) is obligated to repay the moneys on a fixed day, on demand or within a specified period of time following demand;
A virtually identical definition is given the word in subsection 2(1) of the Schedule to the Canada Deposit Insurance Corporation Act, [as enacted by S.C. 1976-77, c. 27, s. 9] :
2. (1) For the purposes of this Act and the by-laws of the Canada Deposit Insurance Corporation, "deposit" means the unpaid balance of the aggregate of moneys received or held by a federal or provincial institution within the meaning of this Act, from or on behalf of a person in the usual course of business, for which the institution
(a) has given or is obligated to give credit to that person's account or has issued or is obligated to issue a receipt, certificate, debenture (other than a debenture issued by a chartered bank), transferable instrument, draft, certified draft or cheque, traveller's cheque, prepaid letter of credit, money order or other instrument in respect of which the institution is primarily liable, and
(b) is obligated to repay the moneys on a fixed day, on demand by the depositor or within a specified period of time following demand by the depositor,
It is the plaintiff's position it meets the criteria of a depositor as set out in these definitions. That is, there was an unpaid balance of monies, received and held by the Canadian Commercial Bank, from the plaintiff, in the usual course of the Bank's business, for which the Bank issued a transferable instrument upon which it was primarily liable and for which it was obligated to pay on a fixed day.
The plaintiff submits that when the Canadian Commercial Bank received the plaintiffs interest in the syndicated mortgage loan, pursuant to the terms of the Assignment Agreement, the Bank received monies. This assertion is based upon a liberal interpretation of the word monies as includ ing the right to receive money. Accordingly, the plaintiff maintains that when the Canadian Com mercial Bank received the plaintiff's interest in the syndicated mortgage loan, it received a chose in action, in particular, a right to receive money.
Further, the plaintiff relies on the established principle that a bank "holds" money for its cus tomers as a debtor, in the sense that it must be
acknowledged and eventually repaid. The bank's indebtedness to its customers may be evidenced by way of a deposit receipt which, the plaintiff sub mits, has all the qualities of a promissory note. By issuing a promissory note, the Canadian Commer cial Bank acknowledged that a debt was owed by the Bank for the eventual repayment of money. The Bank's obligations under the promissory note were unconditional. The plaintiff maintains that having issued an unconditional promissory note as evidence of a deposit, it was incumbent upon the Canadian Commercial Bank to "hold" monies for eventual repayment of the note.
The plaintiff further alleges the money was received by the Canadian Commercial Bank in its usual course of business. For the purpose of com pensating those who suffered losses as a result of the Bank's insolvency, the plaintiff urges this Court to give the phrase "usual course of business" a liberal interpretation so as to achieve the purpose of the legislation. The term banking, according to the plaintiff, is not a technical term and is not capable of precise definition. The "business" of banking, therefore, is wide enough to include every transaction coming within the legitimate business of banking. A bank's "usual course of business" refers to the commercial and financial activities that a bank engages in with its customers, whereby debtor and creditor relationships are established for financial consideration.
In the plaintiff's view, therefore, the definition of "deposit" is broadly enough stated in the Financial Institutions Depositors Compensation Act and the Canada Deposit Insurance Corpora tion Act to include the dealings which occurred between itself and the Canadian Commercial Bank. If significant limitations were intended, such intention would have been clearly expressed by Parliament.
The defendants' position, simply stated, is that the plaintiff is not a depositor of the Canadian Commercial Bank and is, accordingly, not entitled to compensation under either statute.
The defendants maintain the Canadian Com mercial Bank did not receive money from the plaintiff when it purchased the plaintiff's interest in the Mortgage Loan Participation Agreement and issued the promissory note to the plaintiff. The correct approach, according to the defendant, is not to consider and define the word monies in vacuo, but rather to consider the word in its context and ascertain what Parliament intended the word to mean in context. The appropriate meaning of the word "monies", as it appears in the definition of "deposit", is cash and such equiva lents of cash as are generally used as a medium of exchange or are immediately convertible to cash at their face value. This would include cheques, Canada Savings Bonds, travellers cheques and bond coupons due and payable. It would not include real property, mortgages nor, as in the present case, an interest in a mortgage.
Further, the defendants assert the Canadian Commercial Bank did not hold monies on behalf of the plaintiff in the usual course of business. In its context, the expression "usual course of business" refers to the deposit-taking business of the Canadi- an Commercial Bank. The plaintiff's sale of their interest in the mortgage loan to the Canadian Commercial Bank does not, in the defendants' submission, bear any indicia of a deposit.
The defendants' contention is that the liability in respect of the promissory note in favour of the plaintiff was not recorded in the account records and financial statements of the Canadian Com mercial Bank along with other deposits. It was, instead, shown as an offsetting entry against the Bank's interest in the loan itself. The actual repay ment of the promissory note was intended to take place in July of 1986 and no monies were set aside or were being held by the Canadian Commercial Bank on behalf of the plaintiff. The liability attached to the note, it was said, was an unfunded contingent liability.
The task now before me is to make a determina tion as to whether the plaintiff was a depositor of the Canadian Commercial Bank. If so, then the plaintiff is entitled to compensation in the amount
of $60,000 under the Canada Deposit Insurance Corporation Act and to $2,953,271.28 under the Financial Institutions Depositors Compensation Act.
It became obvious, during the course of this hearing, that a precise definition of the word "deposit" is a difficult, if not impossible task. To properly define the term in the context of banking business, it is necessary to consider the contractual nature of the banking relationship, which has been characterized in the jurisprudence as one of debtor and creditor. In R. v. Davenport, [1954] 1 W.L.R. 569 (C.A.), Lord Goddard C.J. described the rela tionship in the following terms, at page 571:
But although one talks about people having money in a bank, it should be understood that the only person who has money in a bank is a banker. If I pay money into my bank either by paying cash or a cheque, that money at once becomes the money of the banker. The relationship between banker and customer is that of debtor and creditor. He does not hold my money as an agent or trustee; the leading case of Foley v. Hill [(1844), 1 P.H. 399] exploded that idea. Directly the money is paid into the bank it becomes the banker's money, and the contract between the banker and the customer is that the banker receives a loan of money from the customer against his promise to honour the customer's cheques on demand. When the banker is paying out, whether he pays in cash over the counter or whether he is crediting the bank account of somebody else, he is paying out his own money, not the customer's money; he is debiting the customer's account. The customer has a chose in action, that is to say, a right to expect that the banker will honour his cheque. Therefore, in the present case, the money paid on these cheques was the banker's money, but it led to the customer's account being debited.
As I see it, a deposit is a contract by which a customer lends money to a bank. The terms of the loan may vary as agreed upon by the banker and the customer. In the absence of such expressly agreed upon terms, the common law dictates that what is intended is a loan that is repayable on demand.
The meaning of the word continues to multiply as one turns from the common law to consider its meaning in statutes of general application. As the plaintiff suggests, it is given a very broad meaning in the Canada Deposit Insurance Corporation Act and the Financial Institutions Depositors Com pensation Act. It includes all monies received by an institution in the usual course of business, that it is obligated to repay either on demand or in accordance with the provisions of any receipt of
payment instrument issued by it in exchange for the money received.
Applying that definition to the facts of this case, the question which must be answered is whether the Canadian Commercial Bank received monies from the plaintiff when it acquired the plaintiffs rights and interests in the Mortgage Loan Partici pation Agreement.
The word "monies", as it appears in the defini tion of "deposit" in the legislation, does not, in my view, encompass such rights. In coming to that conclusion, I have applied the widely accepted principle of statutory interpretation that the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoni ously with the scheme and object of the Act and the intention of Parliament.
It is clear, upon reading the Financial Institu tions Depositors Compensation Act and the Canada Deposit Insurance Corporation Act, that the purpose of the enactments are to protect inves tors who have deposited money with financial institutions in this country and who are not in a position to determine the financial viability of those institutions. The intent of the Canada Deposit Insurance Corporation Act is to ensure the safety of the deposits of small investors up to $60,000. The Financial Institutions Depositors Compensation Act is legislation specifically aimed to remedy the losses suffered by depositors as a result of the failure of the Canadian Commercial Bank, the CCB Mortgage Investment Corporation and the Northland Bank. The legislation is designed to compensate those depositors who elect ed to show faith in these financial institutions.
I cannot agree with the plaintiff that either enactment was designed to provide compensation for the type of loss it has incurred. The fact is the plaintiff entered into two separate business trans actions. The first was the purchase of an invest ment in January of 1982; namely, the acquisition of a share in a mortgage loan. This transaction is evidenced by the Mortgage Loan Participation Agreement, paragraph 2.1 of which provides as follows:
2.1 The Lender grants to each of the Participants and each of the Participants hereby accepts, subject to the terms of this Agreement and the Mortgage Commitment, a participation in the Mortgage Loan. Each of the Participants covenants and agrees with the Lender to provide that portion of the Mortgage Loan set out opposite its name below:
PARTICIPANT PORTION OF
LOAN
REIT
$3,000,000
Saskatchewan $4,000,000
Nova Scotia $3,000,000
The Lender covenants and agrees with the Participants to provide that portion of the Mortgage Loan set out below:
LENDER PORTION OF
LOAN
MIC $5,000,000
The second transaction was the sale of that investment in 1984 to the Canadian Commercial Bank on negotiated terms as to price, time of payment of the purchase price, and interest. Evi dence of this transaction is found in the Assign ment Agreement which provides, in part, as follows:
1. Nova Scotia and Saskatchewan hereby assign and transfer to the Bank all of their interest in the Mortgage and the Mortgage Loan Participation Agreement to the Bank.
2. The effective date for the within transfer of interest shall be June 8, 1984.
3. In consideration of Nova Scotia and Saskatchewan assign ing their interest in the said Mortgage and the said Mortgage Loan Participation Agreement, the Bank covenants and agrees to pay the following:
(a) To Saskatchewan Co-operative Credit Society Limited the sum of TWO MILLION, NINE HUNDRED FIFTY THREE THOUSAND, TWO HUNDRED SEVENTY ONE & 28/100 ($2,953,271.28) DOLLARS, payable on July 8, 1986, without interest.
(b) To Nova Scotia Savings & Loan Company the sum of
TWO MILLION, TWO HUNDRED FOURTEEN THOUSAND, SIX HUNDRED SEVENTY SEVEN & 54/100 ($2,214,677.54) DOLLARS, payable on July 8, 1986, without interest.
I agree with the defendants that neither of these transactions bear any indicia of a deposit as that word has come to mean at common law or as it is defined in the legislation.
As for the first transaction, when the plaintiff advanced money to the Canadian Commercial Bank pursuant to the terms of the Mortgage Loan Participation Agreement, it was not lending money to the Bank as a customer does upon making a deposit. Rather, it was advancing funds for the
express purpose of having the money forwarded to the borrowers. The only reason it was given to the Canadian Commercial Bank was because of the Bank's role as administrator of the mortgage loan pursuant to the Administration Agreement entered into between the Bank and the plaintiff. The plain tiff did not, in my opinion, advance funds to the Bank for safekeeping or with the expectation that the Bank would "hold" money for it; it was merely fulfilling its obligation under the Mortgage Loan Participation Agreement. Furthermore, the plain tiff did not expect to receive interest from the Canadian Commercial Bank. Any interest earned was to come directly from the borrowers.
As for the second transaction, I conclude it represents nothing more than the sale of an asset by the plaintiff. In an effort to protect its invest ment, the plaintiff made a decision to assign its rights and interests in the Mortgage Loan Partici pation Agreement to the Canadian Commercial Bank in return for a promissory note.
It must also be noted that one of the criteria of a deposit, as defined in the legislation, is that the financial institution is obligated to repay the money. In this case, it would be inappropriate to refer to the Canadian Commercial Bank's obliga tion to the plaintiff as being an obligation to pay back money. The promissory note issued to the plaintiff by the Bank does not represent an obliga tion to pay back money. Rather, it is representa tive of the Bank's obligation to make payment for certain assets, namely, the plaintiffs rights and interests in the Mortgage Loan Participation Agreement, purchased by the Bank in June of 1984.
Accordingly, I am unable to find that the Canadian Commercial Bank received money from the plaintiff when it purchased the plaintiff's rights and interests in the Mortgage Loan Partici pation Agreement. The promissory note held by the plaintiff is not evidence of a deposit but rather evidence of an unpaid debt as a result of the plaintiff's sale of an asset to the Canadian Com mercial Bank.
For the foregoing reasons, the plaintiff's action is dismissed. The defendants are entitled to their costs.
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