2003 ABQB 267, 2003 ABQB 267

Re Hupfer (Bankrupt), 2003 ABQB 267 Date: 2003 03 20 Action No. Bk03 94094 IN THE COURT OF QUEEN'S BENCH OF ALBERTA JUDICIAL DISTRICT OF EDMONTON IN THE MATTER OF THE BANKRUPTCY OF RAYMOND DALE HUPFER _______________________________________________________ REASONS FOR DECISION of M. FUNDUK , Registrar in Bankruptcy _______________________________________________________ APPEARANCES: G. D. Reid Witten LLP Counsel for Bank of Montreal D. N. Tkachuk Reynolds Mirth Richards & Farmer Counsel for the Trustee

[ 1 ] This is an application by the Bank of Montreal for an order that: (

a) it has security on the debtor’s “capital account” in a law firm; (

b) it has security on a motor vehicle for the total debts owing to it. [ 2 ] The debtor is a lawyer. He is a partner in a law firm. Capital Account [ 3 ] The debtor is a customer of the Bank. In March 1998 he asked the Bank for a $127,389.49 loan. The Bank agreed to give it. The debtor executed a promissory note dated March 6, 1998 for that amount. In addition, the debtor’s law firm gave a March 13, 1998 letter to the Bank as follows: The purpose of this letter is to advise that the current capital account of Raymond D.

Hupfer (the “Borrower”) in the Felesky Flynn Partnership (the “Firm”) is approximately $140,000. The Firm acknowledges that it will not repay the capital to the Borrower without notice to the Bank of Montreal. The letter is signed by the debtor on behalf of the law firm, but nothing turns on that. [ 4 ] The Bank considered itself to have a charge against the debtor’s capital account and it registered a financing statement at the Personal Property Security Registry. [ 5 ] In January 2002 the debtor made a proposal to his creditors. It was accepted by them. On March 5, 2002 the Court approved the proposal.

The debtor has been living up to his requirements. One [ 6 ] The debtor is not in bankruptcy so s. 20(a)(

i) PPSA is irrelevant. It does not give status to a trustee under a proposal. I also agree with Mr. Reid, for the Bank, that s. 10 PPSA is irrelevant. Nobody suggests that the debtor’s capital account would be available to his unsecured creditors. That would be contrary to the proposal. [ 7 ] In any event, if the Bank is not a secured creditor on the capital account the PPSA is irrelevant. It does not create security agreements. Two [ 8 ] Ms. Vader was the one who dealt with the debtor in March 1998. She says: 3. That Hupfer had been a customer of the Bank for sometime when he approached me in 1998 to discuss a loan from the Bank

which was to be secured against his capital account at the law firm of Felesky Flynn (hereinafter “the capital account”). 4. That I had discussions with Hupfer with the result that the Bank agreed to extend and increase the loan to Hupfer on the basis that it would also be secured against his interest in the capital account. Hupfer agree to this. 5.

That it was normal practice of the Bank that when the Bank and a customer agreed to loan terms whereunder the customer agreed that his or her capital account in his or her partnership would be held as security by the Bank for repayment of a loan, the Bank would register its security interest in the Personal Property Registry and have the customer provide a signed letter on his or her firm’s letterhead, acknowledged by the firm, declaring the amount of the capital account and whereunder the firm would acknowledge that it would not repay the capital to the customer without notice to the Bank. 6.

That Hupfer provided the required letter to the Bank, which letter is dated March 13, 1998. A true copy of the letter is attached hereto and marked Exhibit “A” to this my Affidavit. 7. That the Bank then registered its security interest in the Personal Property Registry. A true copy of the Personal Property Registry search dated October 4, 2002, is attached hereto and marked Exhibit “B” to this my Affidavit. 8. That Hupfer also signed a Promissory Note dated March 6, 1998 in the sum of $127,389.49 in favor of the Bank.

A true copy of the Promissory Note is attached hereto and marked Exhibit “C” to this my affidavit. 9. That the Bank advanced funds to Hupfer pursuant to the March 6, 1998 Promissory Note strictly on the basis that Hupfer agreed that the loan would be secured against the capital account. In my discussions with Hupfer, he clearly agreed that the capital account would be held by the Bank as security. [ 9 ] Vader was cross-examined. The cross-examination fatally undercuts her positive evidence-in-chief. [ 10 ] The debtor already had a loan with the Bank. He approached it in March 1998 to increase it.

Vader handled that, pp. 4-5: Q Was his first contact with the bank, with yourself, relative to a partnership loan? A The partnership loan was already in place. We increased it when he was – when I was looking after his account. Q So is it fair to say that there was a partnership loan already in place when he came to you? A Yes. Q And do you know when he came to you? A March of 1996.

Q March of 1996 was your first involvement with Mr. Hupfer? A According to my comments. Q Do you have any independent recollection of that? A Of March of 1996? Q Yes. A Not of a specific meeting. We met many times. Q And is it fair to say that he was asking you, on behalf of the Bank of Montreal, for a loan in order to buy into the partnership that he was in? A Part of his request to me was new capital loan funding increase, increase. Q And what does that mean to you, then? A The capital loan? Q Yes. A Would be funding that he would have injected into the firm. Q And so, he was buying in, into the firm?

A Yes, on an increased account. [ 11 ] There is no suggestion, and certainly no evidence, that the loan which already existed in March 1996 was secured by a charge against anything. [ 12 ] Ms. Vader is no long an employee of the Bank. She has recourse to the Bank’s records. It is fair to say that she speculates, pp. 5-7: Q Do you recall what was said in those meetings? A Generally?

Q Yes. A We had a number of discussions about his personal finances. He asked me many different questions and scenarios about money management, debt management, on what basis he could acquire additional financing, that sort of thing, both in the office and on the telephone. Q What was your first contact with Mr. Hupfer? Was it by phone or in-person? A I don’t recall if it was telephone first or in-person first, but we met shortly after he came to private client services. Q And do you have any specific recollection as to the first time you met with him to discuss his capital loan? A Not as to day and week.

Q Do you recall what was discussed? A I recall we talked about the capital loan. Well, a capital loan, it says that there is going to be financing. It is injected into the firm, that take the capital account as security, and that we are expecting some security there. Q When you say you were expecting some security, do you recall stating that to him? A Yes . Q Specifically? A No. Q You have no specific recollection of that? A I’m 90 percent sure that we discussed that and that he understood that. Q And when you say you are 90 percent sure is that because that is your usual practice? A Yes .

Q But you have no specific recollection? A Not of the particular conversation. I would imagine it would have taken– we talked quite a few times, so I would imagine it could have taken place or have been confirmed over a number of different conversations .

. . . . . Q Did you ever ask Mr. Hupfer for a general security agreement? A I don’t recall . Q You do not recall? A I’ll just have a look at this exhibit. (emphasis mine) [ 13 ] There is then this evidence by Ms. Vader, pp. 8-11: Q I take it that Exhibit D-1 was prepared after your meeting with Mr. Hupfer to discuss the loan that he was applying for? A That’s what – yes. Q Is it fair to say that this document accurately reflects what was discussed at your meeting with him? A This is something that I would have submitted to the bank.

The purpose of it, at this time, was just to do an annual review of his file, as well as increase the capital loan and just to make note that we were lending a risk associated with the file. Q I want you to look at the last page. A M’hm. Q To Be Obtained, it is headed, correct? A Yes. Q Does that accurately reflect what you requested from Mr. Hupfer in relation to the loan? A I think so. Q You think so, or you know so?

A On the basis of my request to the bank, we were to get a Promissory Note for $127,389.49 and a Comfort Letter from Felesky Flynn confirming that his, Mr. Hupfer’s capital account, would not reduce below 130,000 without prior advice to the bank and that this was to be registered at the Personal Property Registry for a three-year period. Q So that is what you asked Mr. Hupfer to provide? A Yes. . . . . . Q But as far as you were concerned, though, all that you wanted to obtain from him was the Promissory Note for the increased amount, correct? A Yes . Q As well as what you have described as a Letter of Comfort?

A Yes . Q Do you recall asking for anything else from Mr. Hupfer? A Other than just Promissory Note and the Comfort Letter? Q Yes . A That’s basically it . Q That is it? A As far as paperwork signatures and so on. Q Well, as far as paperwork goes, but did he agree to anything else? A That he would improve his spending habits . Q Now, I am showing you Exhibit C from your Affidavit. Is that the Promissory Note that you wanted from him? A That looks to be it.

Q And he gave it to you? A That looks to be his signature. Q Thank you. An now, as far as the Comfort Letter that you wanted from him, I am showing you Exhibit A from your Affidavit. Is that the Comfort Letter you required? A Yes, I believe that’s what we got. Q And you were satisfied with that? A That was what their firm – yes, that’s what we got. Q And you did not ask for anything else? A I don’t believe so. Q Was there any type of agreement, in you meeting with Mr. Hupfer, that differs in any way with what you have stated was to be obtained from Mr. Hupfer?

A Is that just a general question or are you looking for something more specific? Q Well, do you recall any other type of agreement that was reached with Mr. Hupfer? A Relative to this additional event? Q Yes. A No, I don’t think so. Q And during a couple of your earlier answers, you made reference to security. The security you are talking about, is it what is attached as Exhibit A to the Affidavit? A That’s correct. Q And that is what you felt was the security, in relation to the loan? A That’s right.

Q The Comfort Letter? A That’s right. . . . . . Q MR. TKACHUK: You reviewed this letter when you received it? A Yes. Q And you were satisfied with it? A Yes. (emphasis mine) [ 14 ] This is from pp. 12-13: Q MR. TKACHUK: But this is the document that you are relying upon as the security for the bank’s loan? A Yes. Q There is no other document you are aware of? A I don’t think so. Q Was there a verbal agreement, other than what is disclosed in this letter? A Well, Mr. Hupfer, I believe, understood why he was having it signed.

Q But what I am getting at is what was discussed verbally is what is now in written form, by way of the Comfort Letter? A I don’t believe there’s any additional security documents surrounding the capital account, other than that. Q So what you asked for, as far as security, is as stated in this letter? A The letter is all we have, relative to a Comfort Letter from Felesky Flynn .

Q But that is the security that you wanted from Mr. Hupfer? A That’s correct. (emphasis mine) [ 15 ] Finally, there is this evidence by Ms. Vader, pp. 14-16: Q I do not want to belabor the point, but I just want to make sure I understand. Your agreement with Mr. Hupfer was to provide this Letter of Comfort, correct? A Yes. Q And as far as you are concerned, that is the security that was provided by Mr. Hupfer? A Yes. Q And there was no other agreement, other than the provision of this Comfort Letter as security? A Written agreement, no. Q Verbal agreement?

A Well, we discussed terms of the loan and what he wanted to happen and ... Q But as far as security goes? A That’s it. Q That is it? A M’hm. Q That is what was discussed, that is what was provided? A Yes.

Q Could you review paragraph 4 of your Affidavit, please? A Okay. Q And Paragraph 9 of the Affidavit, please. A Okay. Q You will agree with me that both paragraphs make reference that Mr. Hupfer agreed that the loan would be secured by the capital account? A Yes. Q And his agreement, relative to the security, is the provision of this Comfort Letter, correct? A Yes. Q And that is what you are referring to in paragraphs 4 and 9 as to what Mr. Hupfer agree to? A Yes, where the capital account was agreed to be held as security, that’s what we got, took as security.

Q But what he agreed to do was to provide that Letter of Comfort? A Yes. Q And that is what you believe is the security that he agreed to? A Yes. [ 16 ] Ms. Vader tries to put a positive spin on the comfort letter, but it is futile. [ 17 ] I agree with Mr. Tkachuk that the March 13, 1998 letter does not give the Bank a charge on the debtor’s capital account. It is not an assignment of the capital account as security. [ 18 ] What the Bank “understood” is not relevant. It is what is said in the document that matters. Ms.

Vader might have “understood” the Bank to have gotten more than what the letter gives but if that is so it is a misunderstanding by her. That misunderstanding is about the legal effect of the letter. That misunderstanding cannot create a contract, that is, a charge or an assignment. [ 19 ] As the late comedian Flip Wilson used to say - what you see is what you get.

[ 20 ] Ms. Vader’s evidence is highly unconvincing. Part of the problem is that the word “security” can have different meanings. For example - a person’s word is his security. The law does not recognize that as security. A lender might consider a borrower’s steady salary as “security”, but that alone is not security in law. Security is sometimes just a risk factor assessment for a lender. The debtor will repay the loan because he has a steady income.

Without more, that income is not security in law. [ 21 ] I would say that the Bank concluded that the debtor was a good risk because he is a practicing lawyer, a partner in a law firm and had a positive capital account in the law firm. That is not unusual, but it is not sufficient to create a charge against the capital account. [ 22 ] I turn now to Lee’s evidence. He says: 2.

That I was employed by the Bank in 2000 in its Private Banking Office in Edmonton and as part of my duties one of my customers was Raymond Dale Hupfer (hereafter “Huptfer”). 3 That as part of a normal customer review process, I would review with the customer the customer’s various loans and the security held by the Bank.

With respect to Hupfer, in 2000 I confirmed with Hupfer that the Bank held his capital account at the law firm of Felesky Flynn (hereafter “the capital account”) to ensure repayment of a Promissory Note dated March 6, 1998 for $127,389.49, a true copy of such Promissory Note being attached hereto and marked Exhibit ‘A’ to this my Affidavit, and Hupfer agreed that this was the case. I then had Hupfer obtain and provide two further letters from the law firm of Felesky Flynn, one being dated March 29, 2000 and the other being dated March 30, 2000.

True copies of the letters are attached hereto and marked Exhibit ‘B’ to this my Affidavit. Hupfer provided to the Bank copies of Felesky Flynn’s Financial Statements for the years 1998, 1999 and 2000. [ 23 ] The March 29 and 30, 2000 letters say this, respectively: March 29 The purpose of this letter is to advise that Mr. Hupfer’s budgeted net income for 2000 is $350,000. March 30 The purpose of this letter is to advise that the capital contributions of Raymond D. Hupfer (the “Borrower”) in Felesky Flynn (the “Firm”) are approximately $159,000.

The Firm acknowledges that it will not repay the capital to the Borrower without prior notice to the Bank of Montreal. [ 24 ] Neither letter evidences a charge of some kind against the debtor’s capital account. [ 25 ] Lee was cross-examined. He took over the handling of the debtor’s account in late 1999 when Vader went elsewhere. [ 26 ] Lee has no personal knowledge about what was agree to between Vader and the debtor and he readily admits that, pp. 11-12. When he inherited the file the documents are those identified in Vader’s evidence. He says, p. 12. Q So you do not know what verbal agreements were reached?

A No, I have no idea what verbal agreements, only what was part of the credit application at the time.

Q Did you have any verbal agreements with Mr. Hupfer? A Ongoing, we would have had discussions on the overall banking that Mr. Hupfer would have had. And also, a part of our annual review procedure, we would have requested an updated comfort letter when we do annual reviews. Q Were there any agreements that you reached with Mr. Hupfer that differ in any way from what is stated in the

Schedule of Security? A Not that I’m aware of, that I can recall, no. Q So your understanding of Mr. Hupfer’s loan and the security that he granted is accurately disclosed in that schedule? A Yes, I believe so. [ 27 ] This is from pp. 13-14: Q Did you ever ask Mr Hupfer to grant a general security interest in relation to his capital account? A No, I did not. Q Did you ever -- A Sorry, go ahead. Q Did you ever ask him to pledge it as a security?

A Not specifically, no. . [ 28 ] Lee confirms that the March 30, 2002 letter was satisfactory to the Bank: p. 16. [ 29 ] Lee later says that the purpose of “our comfort letter” is so that the Bank can “react and make other arrangements” if the debtor was to leave the firm: p. 16-17. Lee also says that the loan was not increased during his “tenure” so the March 2000 letters are “just part of our annual review procedure”: p. 18. [ 30 ] Finally there is this evidence by Lee, pp. 24-25: Q Sir, could you read the second sentence of paragraph 3 from your Affidavit? A Where it says With respect to?

Q Yes. A With respect to Hupfer in 2000, I confirmed with Hupfer the bank held his capital account of the law firm of Felesky Flynn, hereafter the capital account, to ensure repayment of a Promissory Note dated March 6, 1998, of $127,389.49, a true copy of such Promissory Note being attached hereto and marked Exhibit A to this, my Affidavit. And Hupfer agreed that this was the case. Q How did Hupfer agree that this was the case? A Part of our annual review discussion was that, you know, this is the loans we have outstanding now and this is what we have to secure or to support that loan.

That’s something that we did on every review. Q And Mr. Hupfer agreed that in order to ensure payment on the Promissory Note, he would obtain that comfort letter? A That was my understanding, yes. Q And he did obtain the comfort letter? A Between either Ray, myself, or Felesky Flynn, yes, that was the case, as evidence by the comfort letter. Q And on the basis of that comfort letter is why you make the statement in the second sentence in paragraph 3 of your Affidavit?

A Yes. [ 31 ] Lee’s evidence, like Vader’s, does not reasonably establish that the debtor had charged or assigned his capital account. [ 32 ] The debtor says that he did not give the Bank security on his capital account. [ 33 ] He says: 3. At no time did I ever advise Ms. Vader or Mr. Lee that my loans from the Bank of Montreal would be secured by my capital account at the law firm of Felesky Flynn. I specifically recall advising Mr. Lee that the Felesky Flynn Partnership Agreement provides that a Partner’s capital account could not be pledged or given as security for any type of loan.

As a result, The Bank of Montreal requested and obtained comfort letters from Felesky Flynn, copies of which are attached hereto and collectively marked as Exhibit “A” to this my Affidavit. These comfort letters were prepared and signed on behalf of Felesky Flynn in accordance with the Partnership Agreement which prevents any security being given by any Partner on his/her capital account.

These letters clearly disclose that a security interest was not given in relation to my capital account with the law firm of Felesky Flynn. [ 34 ] To the extent that the debtor relies on the partnership agreement I ignore his evidence. First, the agreement is not in evidence. If a litigant relies on a written contract as part of his case the existence of that document is proved by putting it in evidence. Courts of law do not accept a - “take my word for it, there is a written contract” approach. Second, the

interpretation of a written contract is a matter of law and so not a subject for evidence: Côté, an Introduction to the Law of Contract, pp. 147-48. It is a question of law to be decided by the Court.

[ 35 ] I do not say that I reject the debtor’s evidence in total. I just disregard his evidence that there is a written partnership contract and what it says. [ 36 ] On the debtor’s cross-examination Mr. Reid was shown a page 8: p. 24. I do not know what it says because I was not given it. [ 37 ] I also disregard the last sentence of paragraph 3 of the debtor’s evidence. The letters are documents in evidence. Their meaning is also a question of law for the Court. Conclusions are for the Court alone to make: Alberta Human Rights Commission v.

Alberta Blue Cross Plan , (1984) 1983 ABCA 207 (CanLII) , 48 A.R. 192 (C.A.) , paragraph 8 . [ 38 ] I need not quote from the debtor’s cross examination. In the statement of affairs accompanying the proposal he shows the capital account as an asset followed by “(encumb)”. On his cross-examination he explains how and why that happened: pp. 40-45.

That evidence adds nothing to the Bank’s case, or detracts from the debtor’s position that the Bank is not a secured creditor on his capital account. [ 39 ] It is beyond any reasonable debate that the documents the Bank has, the promissory note and the comfort letters, are not assignments within the context of s. 20 Judicature Act. The history of assignments at common law is discussed in Snell’s Equity (30 th ed.), pp. 81 on, and Gaumont v. Luz (1981) 1980 ABCA 155 (CanLII) , 24 A.R. 609 (C.A.) . [ 40 ]

Section 20 does not destroy equitable assignments: Gaumont ; William Brandt’s Sons & Co. , referred to in Gaumont . [ 41 ] Factually, William Brandt’s Sons & Co. is far removed from the facts before me. There, there was a course of dealings between lender and borrower which clearly created an equitable assignment of money owed by third parties to the borrower. Lord MacNaghten identifies the facts in the second paragraph of his decision, p. 455: The appellants, William Brandt’s Sons & Co., who I will call Brandts, are bankers in London. Kramrisch & Co., who are now bankrupt, were rubber merchants in Liverpool.

Their business was “financed,” as it is called, by Brandts, and also by another firm of bankers trading as Kleinwort & Co. The arrangement was precisely the same in both cases. When Kramrisch & Co., made a purchase at home or abroad approved by the bankers, it became the duty of the bankers to provide the necessary funds, and by way of security they took delivery of the goods to themselves.

Then when Kramrisch & Co. found a purchaser approved by the bankers they released the goods and gave Kramrisch & Co. a delivery order, relying on a written undertaking in each case that the price should be paid direct to them, and receiving an engagement in writing that in the meantime Kramrisch & Co. would hold the goods and the proceeds in trust on their behalf, and grant them “the sole and absolute lien on said goods and their proceeds” until they obtained full payment of the advance, together with their charges .

Every transaction was to be dealt with separately and kept distinct. (emphasis mine) [ 42 ] What happened is that there was a cock-up by the purchaser and it paid the purchase price to someone other than the lender. The borrower went into bankruptcy and the lender successfully sued the borrower on the written agreement. [ 43 ] William Brandt’s Sons & Co. establishes two points of law. First, s. 20 does not destroy equitable assignments.

Second, is this, p. 462: But, says the Lord Chief Justice, “the document does not, on the face of it, purport to be an assignment nor use the language of an assignment.” An equitable assignment does not always take that form. It may be addressed to the debtor. It may be couched in the language of command. It may be a courteous request. It may assume the form of mere permission. The language is immaterial if the

meaning is plain. All that is necessary is that the debtor should be given to understand that the debt has been made over by the creditor to some third person . . . . (emphasis mine) [ 44 ] The documents that the Bank relies on do not meet that test. [ 45 ] Shell says that, barring legislation requiring equitable assignments to be in writing, equitable assignments “may be made in any way, even by word of “mouth”: p. 90. He refers to two hoary chancery decisions in support: Tibbets v. George , 111 E.R. 1107 , and Gurnell v. Gardner , (1863) 9 L.T.R. 367.

Both cases do enforce a “verbal assignment” of a chose in action. [ 46 ] Lawson Graphics Pacific Ltd. v. Simpson , 1987 CanLII 2726 (BC SC) , 12 B.C.L.R. (2d) 126 (S.C.) supports a view that there can be a “verbal equitable assignment”. [ 47 ] Mr. Reid says that I should direct a trial of an issue, the issue being whether there is a verbal assignment of the capital account. He says that a trial judge would then decide based on credibility. [ 48 ] I do not agree. There is no air of reality to the Bank’s position. [ 49 ] First, the documents do not support a view of a verbal assignment.

The promissory note is simply a promissory note as defined in the Bills of Exchange Act. The comfort letters are just that, comfort letters. [ 50 ] Second, the Bank is a professional money lender. It has been in business a very long time. It knows about security for loans. It is very experienced. [ 51 ] Third, there was already an existing liability by the debtor to the Bank in March 1998. There is no evidence of security for that liability. The March 1998 transaction increased the loan for the debtor. [ 52 ] Fourth, the promissory note is payable on demand. The comfort letters go to a change in risk.

If there is a negative change in risk the Bank wants to know so it can assess its situation. The comfort letters do not say that the Bank’s consent is needed, merely that it will be first told. Lee is partly correct in his cross-examination when he says that the comfort letter will let the Bank “react and make other arrangements ... to secure or cover a loan that we have outstanding.”: p.17. [ 53 ] Fifth, the burden lies on the Bank to make out a case on a balance of probabilities. It is not an answer to say that the debtor might not be believed, and so the Bank wins. It does not work that way, Smith v.

Royal Insurance Company Limited , 1983 ABCA 58 (CanLII) , 25 Alta. L.R. (2d) 48 (C.A.) , p. 56 : The learned trial judge relied in part on the fact that he chose not to believe Smith when he testified. He is, of course, free to do so. But this disbelief merely removes an obstacle to the acceptance of the case put by the party with the onus, here the respondent. It cannot, however, be used to bootstrap that case if it does not meet the onus set by law. In other words, disbelief of a defendant does not aid a plaintiff who cannot make out a prima facie case.

That is the situation here. [ 54 ] Leave to appeal dismissed: 31 Alta. L.R. (2d) x1. [ 55 ] Sixth, the relevant time is when the debtor applied for and got the loan. Lee had nothing to do with that so the best he can

offer is speculation, which is irrelevant. Vader’s evidence on cross-examination shows that there was no meeting of the minds between her and the debtor about the debtor verbally assigning the capital account to the Bank as security. This is not even a case of credibility. Her evidence simply does not make out a case for the Bank. This is simply a case of the Bank now attempting to salvage its unsecured position because of the proposal. If Ms. Vader thought that the comfort letter was security in a legal sense, either a charge on the capital account or an assignment of the capital account, she is wrong.

Her understanding of the effect of the comfort letter is irrelevant. It is short, plain and to the point. [ 56 ] Seventh, the error by the bankrupt in his statement of affairs cannot create a charge or assignment. The debtor has explained why the error was made. It is my experience of almost 30 years as a Registrar in bankruptcy (1969 to the present with a four year hiatus 1976 to 1980) that statements of affairs by debtors utilizing the BIA are often just the opening shots in a process, bankruptcy or a proposal, that are not necessarily totally on target.

That is why trustees have an obligation to verify what the debtor says. [ 57 ] There is no point in greatly debating the law on equitable assignments without evidence to reasonably support an argument that there was a verbal agreement for that. Law without facts is meaningless. [ 58 ] There must be evidence and law. That point is made in Roscois Construction Inc. v. Dominion Ready Mix Inc., 1990 CanLII 74 (SCC) , [1990] 2 S.C.R. 440 , p. 455 : First, it is clear that a body of facts cannot in itself constitute a cause of action.

It is the legal characterization given to it which makes it, in certain cases, a source of obligations. A fact taken by itself apart from any notice of legal obligations has no meaning in itself and cannot be a cause; it only becomes a legal fact when it is characterized in accordance with some rule of law. ... . . . . . It is equally clear that a rule of law removed from the factual situation cannot be a cause of action in itself.

The rule of law gives rise to a cause of action when it is applied to a given factual situation; it is by the intellectual exercise of characterization, of the linking of the fact and the law, that the cause is revealed. It would certainly be an error to view a cause as a rule of law regardless of its application to the facts considered. [ 59 ] There cannot be a linking of the facts and the law when there is insufficient evidence. [ 60 ] There is no air of reality to the Bank’s claim to the debtor’s capital fund. [ 61 ] I need not discuss all the cases referred to by Mr. Reid.

Three [ 62 ] I turn now to the security claim on the motor vehicle. [ 63 ] In September, 1997 the debtor gave a chattel mortgage on the vehicle. It secures: “. . . all indebtedness and interest thereon now owed by the Mortgagor to the Bank and also all other present and future indebtedness, interest and other liabilities, direct or indirect or contingent, and whether now existing or hereafter created, ....”

[ 64 ] The chattel mortgage goes on to say: “PROVIDED that if the Mortgagor shall pay to the Bank all indebtedness and interest thereon now owed by the Mortgagor to the Bank and also all other present and future indebtedness, interest and other liabilities, direct or indirect or contingent, and whether now existing or hereafter created, then this mortgage shall be void.” . . . . . 6.

That if the Mortgagor fails to pay any indebtedness, interest or liability owed to the Bank when due or fails to perform any other obligation of the Mortgagor to the Bank ... then all the moneys secured hereby shall, at the option of the Bank, forthwith become due and payable ... . . . . . 8. This Mortgage shall be a continuing security to the Bank for the repayment of all present and future indebtedness, interest and liability owed to the Bank. Notwithstanding at any time or from time to time there is (

i) any change in the nature, state or form of any account between the Mortgagor and the Bank, (ii) any new advance by the Bank to the Mortgagor ... no such event or act shall constitute or be deemed to be a repayment on account of any indebtedness or any part thereof or call for or require any application, appropriation or payment on account of any indebtedness or any part thereof, unless such application, appropriation or payment shall have been expressly agreed to in writing by the Bank and have been certified on a copy of this Mortgage by the signature of some official of the Bank or until this mortgage shall have been fully released and discharged by the unconditional delivery of a Discharge of Mortgage expressly discharging this Mortgage ; and this Mortgage shall be deemed to be taken as security for the ultimate balance of the said indebtedness, interest and liability owed to the Bank. . . . 10.

The Mortgagor acknowledges receipt of a copy of this Chattel Mortgage. (emphasis mine) [ 65 ] The issue is the scope of the obligation. The debtor raises the issue this way. 5. In or about September, 1997, I approached Ms. Vader for additional financing. My additional financing request was declined, but Ms. Vader offered to refinance the existing loan on the 1995 Jeep Cherokee. This was done, with a chattel mortgage being ranted in favour of the Bank of Montreal to secure the re-financing. 6. I acknowledge executing a chattel mortgage in favour of the Bank of Montreal.

Notwithstanding the wording of the chattel mortgage, it was intended and understood that the said Jeep would be given as security for the loan that was obtained from the Bank of Montreal to purchase the Jeep. It was never intended that the said Jeep would be given as security to the Bank of Montreal for any of my other loans with the Bank of Montreal.

The loan relating to the Jeep obtained from the Bank of Montreal has been paid in full, and as a result the registration by the Bank of Montreal at the Personal Property Registry against the said Jeep should be discharged. [ 66 ] There is no evidence by Lee on this issue and he cannot give any because he has no personal knowledge of this transaction. [ 67 ] The debtor and Vader were also cross-examined on this issue.

[ 68 ] Without more, parol evidence by the debtor about his intention and understanding is not admissible because it conflicts with the terms of the contract: Anderson v. Chaba , (1978) 1977 ALTASCAD 294 (CanLII) , 7 A.R. 469 (C.A.) , para. 23 ; W.C. Fast Enterprises Ltd. v. All-Power Sports

(1973) Ltd.; 1981 ABCA 178 (CanLII) , 16 Alta. L.R. (2d) 47 (C.A.) , p. 51 ; ABC Color & Sound Ltd. v. Royal Bank of Canada , (1992) 1991 ABCA 196 (CanLII) , 117 A.R. 271 (C.A.) , paras. 7 and 8 . [ 69 ] However, parol evidence is admissible on a claim for rectification of a document (sometimes wrongly referred to as rectification of a contract), otherwise it would not be possible to ever rectify a document. The limits on what evidence is admissible is a separate matter. [ 70 ] This is Vader’s evidence on cross-examination, pp. 16-19: Q MR. TKACHUK: Ms. Vader, were you personally involved with refinancing Mr.

Hupfer’s Jeep? A Yes. Q And what is your recollection? A Just that we were paying out a lease on the Jeep. Q He had a Jeep that he was on a lease to purchase, correct? A Lease. Q And it was agreed that you would finance the actual buy-out or purchase of that Jeep and take security on the Jeep? A That’s correct. Q Isn’t true that the purpose and intention of the Chattel Mortgage that you took was to secure the payment that the bank made on that Jeep? A Yes, and in all honesty, to take whatever security was available to take. We were carrying quite a lending value deficit on his balances overall.

Q But in relation to the Chattel Mortgage, the bank took a Chattel Mortgage, correct? A Yes. Q What was your understanding as to what that was securing? A We were taking it as security for the lease pay-out loan .

Q And would you agree with me that this is somewhat confirmed in Exhibit D-2, in that the Chattel Mortgage is referred to as security in relation to just the one loan? A Well, this one is dated 2002, that’s quite after my time. It does note that the loan for the Cherokee or the Jeep is secured by that Chattel Mortgage. Q Yes A Yeah, yes. Q Thank you. Was it your understanding that once he paid out that loan, the Chattel Mortgage would be discharged? A No. Q Why is that? A In 1998, the bank had a lending value deficit for Mr. Hupfer’s borrowings of almost $200,000.

Q Yes, but you just indicated under oath that the Chattel Mortgage was taken as security for the loan? A That’s how it originated, yes. Had we not taken out the lease financing, there would have been no reason to negotiate the Chattel Mortgage. Q And so the bank took security as against the Jeep, in relation to the buy-out of the lease? A Yes. Q And that is what you understood. A Yes. Q And so, if Mr. Hupfer paid that loan out, you would discharge the Chattel Mortgage? A I don’t know that that was a given. Q You do not know? A No.

Q Did you ever state to Mr. Hupfer that that Chattel Mortgage was a security for all of his loans? A I don’t specifically recall . Q What was your understanding? A That if we financed buy-out of the lease, that we would take the Jeep as security . Q In relation to that buy-out ? A That’s right. (emphasis mine) [ 71 ] Exhibit D-2 is an internal Bank memo dated May 14, 2002. It is a memo by someone else in the Bank. It indicates that the vehicle loan is secured by the chattel mortgage. It indicates that another loan is secured by “Letter of Comfort” and a third loan is unsecured.

Notwithstanding the language of the chattel mortgage the author of that memo thought that the chattel mortgage secured only the vehicle loan. The reason why he thought that is not known to me. [ 72 ] This is the debtor’s evidence on cross-examination, pp. 46-47: Q Now, on the Jeep Cherokee, that is your signature on the chattel mortgage that is attached as Exhibit D to the Affidavit of Dawn Vader, correct? A That’s my signature. Q Do you remember reading the document before you signed it? A I don’t specifically recall reading it in any real detail. Q Did you have the opportunity to read it? A Oh, sure, yes.

Q Now, in paragraph 6 of your Affidavit, you talk about intention, relating to the Jeep. Where does that come from? You had your own intention and perhaps you did, but I am wondering do you know what the intention of the bank was? A Can we go off the record?

Q Sure. (DISCUSSION OFF THE RECORD) Q MR. REID: Dealing with paragraph 6 of your Affidavit, you refer to an intention about the chattel mortgage and the Jeep? A M’hm. Q Now, I am not talking about your intention, as to what you intend to do by signing the chattel mortgage. I am wondering, do you have any knowledge about the intention of the Bank of Montreal in taking the chattel mortgage? A The circumstance surrounding the chattel mortgage were the Jeep was leased from, I’d got it from Great West Jeep. It was leased. The payments were approximately $170 a month.

And I had wanted, at that time, we were looking at an addition to our resident. And I had approached Dawn about financing for the residence, a second mortgage or whatever could be worked out, and it was declined. And then she said but we can help you on – we’ll refinance the Jeep to reduce your monthly payments to give you some more cash, free up some cash. So in 1997, it was in the summer and fall of 1987 – it was in the fall of 1997, the Jeep was refinanced.

It was about 27,000 odd thousand dollars paid out to Great West Jeep and the payments were $462 a month for 60 months, which the last payment was made October – November of 2002. Q So the chattel mortgage was executed when you took out that specific loan, correct? A Yes, it was. And that it was required to get that specific loan. Q And that is all you know about the bank’s intention? Do you know anything else? Was anything else said about the bank’s intentions on the chattel mortgage? A Not that I recall. [ 73 ] Rectification of documents is not a daily meal in Masters or Judges chambers.

It would not be pedantry for counsel to refer to authorities on this subject-matter, but they did not so I too shall not. [ 74 ] Although Vader tries to hedge her evidence she does say that the chattel mortgage was taken to be security for the loan to pay the dealer, the “lease pay-out loan”. She says that twice. [ 75 ] On the evidence I conclude that the parties were in complete agreement that the chattel mortgage was to be security only for the vehicle loan and in error they wrote that down wrongly. In other words, there was a common mistake in wrongly expressing their agreement in the chattel mortgage.

A grossly inappropriate form of document was used by the Bank.

Decision 1. The Bank does not have a charge on or an assignment of the debtor’s capital account in his law firm. 2. The chattel mortgage wrongly expresses the complete agreement between the parties that a security charge was to be given against the vehicle to secure only the vehicle loan. It is rectified accordingly. 3. The trustee will have costs of $1,200 plus all reasonable disbursements.. [ 76 ] Whether the adversaries be the Bank and the trustee or the Bank and the debtor is irrelevant. The results are the same. HEARD on the 25 th day of February, 2003. DATED at Edmonton, Alberta this 20 th day of March, 2003. __________________________ M. FUNDUK REGISTRAR IN BANKRUPTCY