Lenders beware: Control, opposability and priority of security on cash in Quebec

March 4, 2021 | Francis Trifiro

On December 2, 2020, the Quebec Court of Appeal (the “Court”), for reasons drafted by the Honourable Robert M. Mainville, J.A., rendered its first judgment (the “Judgment”) on the application of Article 2713.3 of the Civil Code of Québec (the “CCQ”) in the matter of the bankruptcy of Montréal C’est Électrique (“MCE”)[1]. In this appeal the appellant, City of Montreal (the “City”), demanded that PriceWaterHouseCoopers Inc. (the “Trustee”), in its capacity as trustee-in-bankruptcy of MCE, remit to it certain amounts of money that were credited to the account of MCE opened at the Caisse Desjardins du Complexe Desjardins (the “Caisse”).

Apart from the fact that the Court reiterated the capital importance of adequately describing the property making up a universality in the context of hypothecary security, the Court’s interpretation of article 2713.3 CCQ concerned the creation of a movable hypothec with delivery (or pledge) on monetary claims.

Definition of a monetary claim

On January 1, 1996, the CCQ was amended by the introduction of the concept of “monetary claims” in articles 2713.1 et seq.

Paragraph 2 of article 2713.1 defines a monetary claim as:

[…] any claim requiring the debtor to reimburse, return or restore an amount of money or make any other payment in respect of an amount of money, except:

(1)   a claim represented by a negotiable instrument;

(2)   a claim that is a security or security entitlement within the meaning of the Act respecting the transfer of securities and the establishment of security entitlements (chapter T-11.002);

(3)   a claim resulting from the delivery of certain and determinate currency whose repayment, in accordance with the parties’ manifest intention, must be made by restitution of the same currency.[2]

In other words, a monetary claim is a claim obliging the debtor to reimburse, return or restore an amount of money, or make any other payment in respect of an amount of money.  Thus, an amount of money credited to the account of a client of a financial institution is a claim the client has against the financial institution. The Court points this out in paragraph 41 of the Judgment [TRANSLATION]:

[41] Unless otherwise stipulated, money deposited in such an account becomes the property of the financial institution, which is a debtor towards the client for the credit amount recorded in the book entry for the account. The financial institution can thus use this money as it sees fit, subject to any regulatory or contractual constraints. The client thus has a personal claim against the financial institution for reimbursement of the amounts registered in the account, with agreed interest.

It is important to note that the definition of “monetary claim” in article 2713.1 CCQ is not limited to amounts deposited in bank accounts. Thus, the courts will gradually be called upon to determine whether or not a given claim is a monetary claim within the meaning of article 2713.1.

The origin of articles 2713.1 et seq of the CCQ

The reform of the CCQ in respect of monetary claims was inspired by American law, which provides for a similar type of security, but which is limited to credit balances in bank accounts. The Quebec reform goes beyond the American system, however, as in Quebec most amounts of money due by a creditor to its debtor can be considered a monetary claim that can be secured by a movable hypothec with delivery.  Because of the definition of a monetary claim in the CCQ, situations where a creditor may avail itself of this type of security are much more numerous and varied than under American law.

Before the coming into force of the provisions pertaining to monetary claims, the amounts remitted by a borrower to its lender (whether or not a financial institution) could not simply be held by the lender as security. The only way for the lender to protect itself was to obtain a movable hypothec without delivery on the claim that it owed the client on account of the amounts that had been advanced to it by the client. In other words, the creditor had to obtain a movable hypothec without delivery on the claim that it itself owed its debtor. In all cases, the rank of this movable hypothec without delivery was determined by the date of its publication in the Register of Personal and Movable Real Rights (the “RPMRR”) and consequently was subject to all other movable hypothecs without delivery already granted by the debtor on that same claim. If the creditor wished to obtain a first-ranking hypothec on that claim, it had to obtain an assignment of rank from the other creditors who had already published their security in the RPMRR, which assignment also had to be published in order to be set up against third parties.

It is important to note that a creditor holding a universal movable hypothec on the property of its debtor inherently holds a hypothec charging all the debtor’s monetary claims. It is rather on the level of publication and, above all, the ranking of such universal hypothecs that the amendments to the CCQ have been a game-changer.

While it has always been possible to hypothecate a claim by means of a movable hypothec with delivery, before January 1, 2016, claims that could be so hypothecated were attested by a title whose physical delivery to the creditor was sufficient to constitute a pledge of the claim[3]. The creation of a pledge by physical delivery of the title avoids the need for a deed of hypothec, for the creditor to publish its hypothecary rights in the RPMRR, and for the physical holding of the title as an equivalent to the publication requirements of the CCQ. That said, the pledge of a claim on the credit balance in a “financial account” attested by a title delivered to the creditor was not an established practice before the coming into force of article 2713.1 et seq of the CCQ.

The concept of control

The 2016 amendments substituted the requirement of “physical” delivery and of the “holding of the property” required by article 2702 CCQ for the creation of a movable hypothec with delivery (pledge) by the notion of “control” of the claim[4].

As the Court indicates in the Judgment [TRANSLATION]:

[49]      The fictitious dispossession of the [monetary] claim and the fictitious continuous holding thereof are thus achieved by control over the credit balance in the financial account, which ipso facto and ipso jure also constitutes publication to third parties. [5]

a) Obtaining control by a financial institution over a financial account opened with it by one of its clients

In order for a financial institution to gain control of the credit balance (i.e. the monetary claim) of a financial account opened with it by one of its clients, the condition under article 2713.3 CCQ must be met:

2713.3 A creditor obtains control of a monetary claim that the grantor of the hypothec has against him if the grantor has consented to the claim’s securing the performance of an obligation towards the creditor. (emphasis added)

Once consent is obtained as contemplated in article 2713.3, the movable hypothec with delivery (or pledge) on the monetary claim is effected by the financial institution’s control, which gives it a first-ranking hypothec on that monetary claim[6], provided of course that no other creditor of the client has already obtained control over the same claim in virtue of article 2713.4 CCQ or another relevant provision of the CCQ.

Thus, publication in the RPMRR is not required in order for a hypothec effected by control on  a financial account to be set up against third parties (including other creditors of the client).

It should be noted that Quebec is the first (and so far only) Canadian jurisdiction to have adopted such a mechanism for taking security in respect of financial accounts.

The Judgment

The City, which was subrogated to the rights of the Caisse, tried in vain to convince the Court that the authorization given by MCE to the Caisse to debit the account in order to recover any amount exigible from MCE constituted the consent contemplated by article 2713.3 CCQ. Sections 5 (a) and (b) of the General Conditions applicable to all financings by the Caisse read as follows [TRANSLATION]:

  1. OTHER CONDITIONS

a) Debit authorization

Any amount exigible from the Borrower may be debited from one or more accounts it holds at the Caisse, or from the Credit, as the case may be.

b) Allocation

Any amounts received from the Borrower or any other person or from the proceeds of realization of a security or any other source may be used by the Caisse to repay and/or reduce any indebtedness owed it by the Borrower, at the discretion and election of the Caisse. Such amounts will first be allocated to accrued Interest and the cost of life insurance and disability insurance taken out pursuant to one or more financings provided for herein, as the case may be, and then to repayment of principal.

However, the Court concluded that [TRANSLATION]:

[71] […] paragraphs 5 (a) and (b) of the General Conditions contain no provision allowing the Court to reasonably conclude that they concern contractual offsetting intended to compensate for inobservance of the conditions for legal offsetting requiring the certitude, exigibility or liquidity of the debts. Nor do these paragraphs otherwise grant control over MCE’s financial account as contemplated by art. 2713.3 CCQ.

In addition, the Court indicated that [TRANSLATION]:

[73] Even if a contractual offsetting clause had been included in the Credit Agreement or an account-opening agreement – which is not the case in this instance – that would not necessarily lead to the conclusion that a movable hypothec without delivery was created on the credit balance in the account.

Since MCE did not clearly “consent to this claim guaranteeing performance of the obligation towards [the financial institution]”[7]

The Court concluded that [TRANSLATION] “in order to constitute a movable hypothec without delivery on the credit balance of a financial account, control over the account must be obtained in order for such claim to guarantee the performance of an obligation. Without the consent of the grantor-client to that effect, there is no movable hypothec without delivery.”[8]

b) Obtaining control by a financial institution over a financial account opened by one of its clients with another financial institution

While article 2713.3 CCQ allows a financial institution to obtain control over a financial account opened with it by the debtor, how can that financial institution obtain control over a financial account opened by the debtor with another financial institution?

By way of example, a corporation may have opened a number of financial accounts at various financial institutions for the purposes of collecting amounts owed it by its customers. How then does the principal lender to the corporation (which requires the corporation to grant it first-ranking security on all its assets) gain control over all of those other accounts?

Article 2713.4 CCQ lists the conditions to be met for a financial institution to gain control over a financial account opened by its debtor with another financial institution:

2713.4. A creditor obtains control of a monetary claim that the grantor of the hypothec has against a third person if:

(1)   the claim relates to the credit balance of a financial account maintained by the third person for the grantor, or the claim relates to an amount of money transferred by the grantor to the third person to secure the performance of an obligation towards the creditor; and

(2)   the creditor has entered into an agreement, called a control agreement, with the third person and the grantor, under which the third person agrees to comply with the creditor’s instructions, without the additional consent of the grantor, as regards the credit balance or the amount of money.

A creditor also obtains control of a monetary claim relating to the credit balance of a financial account if the creditor becomes the account holder.

Thus a tripartite agreement must be concluded among the principal lender (the creditor), the third person (the other financial institution) and the grantor (the debtor of the principal lender) providing that the third person must comply with the instructions of the creditor without any additional consent on the part of the grantor being required. However, the third person has no obligation to conclude such an agreement[9].  Consenting to entering into any such tripartite agreement would no doubt cause this third person to lose the prior ranking it would have by virtue of article 2713.3 CCQ as explained earlier. Furthermore, the third person does not have the obligation to confirm the existence of such a control agreement, unless the grantor requires it[10].

When several movable hypothecs with delivery obtained by control are granted to creditors, they rank, as among each other, according to the time when the third person agreed to comply with the instructions of the creditor[11].

Conclusion

Because of the relative ease with which a hypothec by control can be created and the absence of any requirement to publish it, every financial institution would be well advised to obtain valid consent from each of its clients to the effect that any monetary claim the client has against it guarantees the performance of an obligation towards the financial institution, as per article 2713.3 CCQ. Such consent can easily be created in the deed of hypothec itself or in any other agreement entered into between the parties (such as an offer of financing or credit agreement).

For the same reasons, other creditors should be wary of the existence of any such hypothecs with delivery obtained by control, as there is no obligation to register same in the public registers. Extensive due diligence should be made to ensure that no other such hypothecs have been granted, as same would jeopardize the ranking of their security.   This may have dire consequences, especially if the debtor’s cash on hand is substantial at any point in time.


[1]  2020 QCCA 1609, confirming the judgment of the Superior Court (2019 QCCS 455).

[2] Art. 2713.1 CCQ.

[3] Supra no. 1, par. 43; Arts. 2702 and 2709 CCQ.

[4] Art. 2713.1(1) CCQ.

[5] Article 2713.6 CCQ defines a “financial account” as “an account, other than a securities account within the meaning of the Act respecting the transfer of securities and the establishment of security entitlements (chapter T-11.002), to which amounts of money are or may be credited and for which the person maintaining the account, being the debtor of the credit balance, undertakes to consider the account holder as being authorized to exercise the rights relating to that balance. Banks and financial services cooperatives, as well as brokers, trust companies authorized under the Trust Companies and Savings Companies Act (chapter S-29.02), deposit institutions authorized under the Deposit Institutions and Deposit Protection Act (chapter I-13.2.2) and persons who, in the ordinary course of their business, maintain financial accounts for others are persons maintaining a financial account.”  In our view, there can be no doubt that a bank account is a “financial account” within the meaning of Article 2713.6 CCQ, and the mechanism provided for in Article 2713.3 CCQ allowing a creditor to obtain control of the credit balance in the account, applies.

[6] Article 2713.8 CCQ. : A movable hypothec with delivery effected by control of a monetary claim obtained by a creditor ranks ahead of any other movable hypothec encumbering that claim, from the time that control is obtained, regardless of when that other hypothec is published.

[7] Supra no. 1, par. 76

[8] Supra no. 1, par. 77

[9] Article 2713.5 CCQ.

[10] Idem.

[11] Art. 2713.8 (2) CCQ.

Disclaimer

This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice.

Miller Thomson LLP uses your contact information to send you information electronically on legal topics, seminars, and firm events that may be of interest to you. If you have any questions about our information practices or obligations under Canada's anti-spam laws, please contact us at privacy@millerthomson.com.

© 2021 Miller Thomson LLP. This publication may be reproduced and distributed in its entirety provided no alterations are made to the form or content. Any other form of reproduction or distribution requires the prior written consent of Miller Thomson LLP which may be requested by contacting newsletters@millerthomson.com.