Can a Creditor Seize in Québec Monies Held in a Foreign Bank Account by a Third Party Domiciled in Québec on Behalf of The Debtor
In Instrubel v Republic of Iraq, the Québec Court of Appeal ruled that the fact that funds were held in a foreign bank account by an agent domiciled in Québec on behalf of a foreign debtor did not give rise to a proprietary interest in the funds in absence of a trust, but, rather, to a debt which can be seized in Québec by a foreign creditor.
In 2013, Instrubel, believing that the recovery of a $32 million arbitration award against the Iraqi Civil Aviation Authority (“Iraq”) was at risk, requested the issuance of a writ of seizure before judgment by garnishment of air navigation fees collected by the International Air Transport Association (the “IATA”) from airlines as agent for Iraq and which were to be paid to the latter, less administrative fees, in New York. While the head office of IATA is located in Montréal, Québec, the monies it collected were deposited in a bank account it held in Switzerland, where it also deposited similar fees collected on behalf of other countries.
The trial judge considered that the Superior Court did not have jurisdiction to authorize the seizure because the funds in question were located outside of Québec.
Ownership of monies held by an agent
To determine the jurisdiction of the Québec courts, the Court of Appeal had to first decide whether the agency agreement between IATA and Iraq gave rise to a proprietary interest in the funds. The agreement, which provided that IATA acted as the agent of Iraq, collected the fees on its behalf, and had to remit them to Iraq less administrative fees, was held to be a mandate under Québec law, which was deemed to apply as no proof of the governing Swiss law had been made. Justice Schrager, writing for the Court, determined that the mere fact that the funds were in a bank account held by a mandatary (IATA) for the mandator (Iraq) did not per se give rise to a proprietary interest in those funds: “[IATA’s] obligation is to pay a sum of money not to give the dollar bills received from third parties.”
Furthermore, as there was no evidence that sums received by IATA for Iraq were ever segregated, other than by accounting calculation, the Court of Appeal ruled that there can be no claim to ownership of funds once they are comingled, applying cases on tracing of funds. Absent a trust or a patrimony by appropriation, a party, such as Iraq, having no contract with a bank nor title or authority to a bank account, does not have a proprietary interest in the funds or part of the funds in such account.
Therefore, the Court of Appeal held that what Instrubel sought to seize was the debt of IATA towards Iraq.
Jurisdiction of the Québec Courts to seize a debt
For the Court of Appeal, the finding that IATA’s obligation was to pay a sum of money to Iraq, rather than to give Iraq some tangible asset owned by Iraq, was determinative of whether the writ of seizure before judgment by garnishment was valid. Indeed, as the case concerned the enforcement of a judgment or arbitration award, the location of the asset seized was paramount, as an order enforcing a foreign judgment applies only to assets located within the province.
The asset seized was a debt owed by IATA to Iraq and a debt is located at the place where it is collectible, which is ordinarily the domicile of the debtor (IATA). Since IATA’s headquarters are located in Montreal, the Court of Appeal concluded that Instrubel could petition the Québec court to issue an order seizing the debt owed by IATA. As a result, it does not matter where IATA deposited the collected funds which gave rise to its indebtedness towards Iraq.
To determine the location of the debt, the Court of Appeal relied on Article 1566 of the Civil Code of Québec which states that a debt is collectible at the place expressly or impliedly indicated by the parties or, if no place is indicated by the parties, at the domicile of the debtor. The Court of Appeal disregarded the fact that the agency agreement between IATA and Iraq expressly stipulated that the sums owed by IATA to Iraq were payable in New York, on the basis of the res inter alios acta doctrine, which provides that a contract cannot adversely affect the rights of third parties. The use of this doctrine is surprising as it seems to contradict Article 1566 of the Civil Code of Québec.
Conclusion and Implications
The judgment clarifies how a seizure before judgment by garnishment can be used to recover a judgment or arbitration award against a foreign debtor in holding that, when monies are collected on behalf of a debtor by its mandatary, the resulting debt owed to the debtor by its mandatory can be seized in Québec by the creditor when the mandatary is domiciled in Québec. Therefore, the characterization of the mutual obligations between the garnishee and the debtor is important.
As well, the judgment clearly reiterates that a party having no contract with a bank nor title or authority to a bank account does not have a proprietary interest in the funds or part of the funds in such account, absent a trust or a patrimony by appropriation.
Instrubel v Republic of Iraq, 2019 QCCA 78
Date of Decision: January 22, 2019