2011 QCCA 587, 2011 QCCA 587

Avestor Limited Partnership (Proposition de) 2011 QCCA 587 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No.: 500-09-019356-096 (500-11-030484-071) DATE: March 30, 2011 CORAM: THE HONOURABLE ANDRÉ BROSSARD, J.A. JACQUES A. LÉGER, J.A. JEAN BOUCHARD, J.A. IN THE MATTER OF THE PROPOSAL OF: AVESTOR LIMITED PARTNERSHIP Debtor RSM RICHTER INC. Respondent and SANDJ INC.

APPELLANT – petitioner and COMPAGNIE FRANÇAISE D’ASSURANCE POUR LE COMMERCE EXTÉRIEUR (COFACE) RESPONDENT – impleaded party and QUADRAFAB INC. c/o Litwin Boyadjian Trustee, in its capacity as trustee for the estate of the debtor QuadraFab Inc. NITAI FRIEDMAN STEPHEN KUCER IMPLEADED PARTIES – impleaded parties JUDGMENT [ 1 ] THE COURT: – On appeal from a judgment of the Superior Court, District of Montreal (the Honourable Mr. Justice Paul G.

Chaput) rendered on January 13, 2009, that ordered the respondent RSM Richter Inc., in its capacity as trustee in bankruptcy for the estate of the debtor, to pay the respondent Compagnie française d’assurance pour le commerce extérieur rather than the appellant the amount of a claim against the debtor; [ 2 ] After having examined the file, heard the parties, and on the whole deliberated; [ 3 ] For the reasons of Brossard, J.A., with which Léger and Bouchard, JJ.A. agree: [ 4 ] ALLOWS the appeal; [ 5 ] ORDERS the trustee RSM Richter Inc. to pay in the following manner the dividend to be distributed on the claim filed by QuadraFab Inc. in the proposal of Avestor Limited Partnership: - First and in priority, to the appellant SandJ Inc., as assignee of the hypothecary claims of Business Development Bank of Canada, Nitai Friedman and Stephen Kucer, to a maximum of $682,083.89; and - The balance, if any, to the respondent Compagnie française d’assurance pour le commerce extérieur to a maximum of $548,869.69; [ 6 ] With costs before both courts against Compagnie française d’assurance pour le commerce extérieur.

ANDRÉ BROSSARD, J.A.

JACQUES A. LÉGER, J.A. JEAN BOUCHARD, J.A. Mtre Ronald Auclair Fishman, Flanz, Meland, Paquin For the appellant Mtre Bernard Boucher Blake Cassels & Graydon For the respondent Compagnie française d’assurance pour le commerce extérieur Date of hearing: October 26, 2010 REASONS OF BROSSARD, J.A. [ 7 ] The appellant appeals from a judgment rendered on January 13, 2009, by the Superior Court, District of Montreal (the Honourable Mr. Justice Paul G.

Chaput), which ordered the respondent, in its capacity as the debtor’s trustee in bankruptcy, to pay the amount of a claim against the debtor to the respondent Compagnie française d’assurance pour le commerce extérieur (Coface) rather than to the appellant SandJ Inc.. [ 8 ] The appeal concerns solely the determination of the respective rights of the appellant and the respondent in the claim held by the impleaded party QuadraFab Inc. against the debtor Avestor Limited Partnership (Avestor), filed by QuadraFab Inc. as part of Avestor’s proposal in bankruptcy. [ 9 ] Coface, having indemnified QuadraFab Inc. under a rather unusual insurance policy obliging it to pay QuadraFab Inc. the amount of the claim in the event of default by Avestor, became the holder of the rights of QuadraFab Inc. concerning this claim.

A document that was signed by the parties on January 17, 2007, but whose legal nature is contested, sets out the conveyance of the rights to Coface. [ 10 ] The appellant, for its part, asked the Court to recognize instead the third-person pre-existing hypothecary rights that it subsequently acquired to this claim, which, it argued, would enable it to be paid by Avestor in priority to Coface. THE FACTS [ 11 ] The facts of the matter are extremely complex.

Although the actual questions at issue are less so, it is unfortunately necessary to review all the facts to gain a good understanding of the subject matter of the dispute. [ 12 ] On September 23, 1997, 3413608 Canada Inc. was constituted. It changed its company name for the first time on September 29 of that same year to become Integral. On January 30, 2006, Integral became QuadraFab Inc. [ 13 ] Until December 2005, the only shareholders of QuadraFab Inc. were the impleaded parties Nitai Friedman (Friedman) and Stephen Kucer (Kucer).

It is important to note that QuadraFab Inc. did at least 75% of its business with the debtor Avestor. [ 14 ] Over time, as a result of a series of transactions and contracts, QuadraFab Inc. charged its property, which included the claims, with several universal movable hypothecs in favour of SandJ Inc. as well as the impleaded parties Friedman and Kucer.

It also charged it with three hypothecs in favour of the Business Development Bank of Canada (BDC) for loans in the amounts of $420,000 (April 20, 2001), $150,000 (July 31, 2002) and $140,000 (September 9, 2005). [ 15 ] In April 2006, however, QuadraFab Inc. began to do business with Royal Bank of Canada, to which it also gave rights of the same nature. [ 16 ] On May 5, 2006, the respondent Coface issued in favour of QuadraFab Inc. (exhibit MC-3) an insurance policy titled “policy of credit insurance” covering the risk of losses on the claims that QuadraFab Inc. might hold against debtors that became insolvent.

Rider no. 1 expressly designated the debtor Avestor as a debtor covered to a maximum of $750,000. [ 17 ] On October 31, 2006, Avestor filed a notice of intention to make a proposal in bankruptcy to its creditors. [ 18 ] Even though the details of the proposal were not spelled out, it was generally accepted by Avestor’s creditors; the proposal promised reimbursement of a very substantial portion for all of Avestor’s creditors. [ 19 ] Indeed, according to the report of the trustee RSM Richter Inc. (Richter), the dividend payable to the unsecured creditors was estimated at 87% to 97% of the value of their claims. [ 20 ] On November 13, 2006, as a result of Avestor’s proposal in bankruptcy, QuadraFab Inc. claimed from the insurer Coface the

amount of $668,761.15 and, on December 14, as an ordinary creditor, filed a claim of $1,100,006.07 with Avestor’s trustee. [ 21 ] On January 17, 2007, in consideration of an insurance indemnity of $548,869, QuadraFab Inc. transferred to Coface all its rights in its claim against Avestor. The document, which is titled “Assignment of Account” (exhibit MC-15) and whose

interpretation constitutes the crux of the dispute, stipulates as follows: ASSIGNMENT OF ACCOUNT Agreement made this 17 th day of January 2007 between QuadraFab Inc. of Montreal, PQ Canada (hereinafter called the Insured) and Compagnie Française D’Assurance Pour le Commerce Exterieur – Canada Branch , (hereinafter called the Company) witnesseth: That for value received, the Insured does hereby sell, assign and transfer to the aforesaid Company the claim and demand of the insured against Avestor Limited Partnership of Boucherville, PQ Canada in the sum of five hundred forty-eight thousand eight hundred sixty- nine and 68/100 dollars (548,869.68 CAD) of which a statement of account is hereto annexed, with full power and authority to the said Company as assignee of the said account to take all proceedings that it may deem necessary for the collection of the same, and to give all receipts and acquittances therefor (sic).

The Company is hereby given absolute title to the said account assigned as aforesaid and is entitled to deal therewith as it sees fit. The Insured does represent and warrant that the said account against Avestor Limited Partnership is a valid and existing indebtedness on this date from the said debtor , that no part thereof has been collected except as shown by the annexed statement, that there are no offsets of claims of any kind against the same, and that all securities and guarantees pertaining to the account have been surrendered to the Company .

The Insured does hereby agree that if the said account is hereafter disallowed, in whole or in part, by an Court or Officer having jurisdiction, or if it is decided by any such Court or Officer that such account, or any part of thereof, is not a valid and legally sustainable claim against the debtor and/or its estate, the Insured will immediately refund to the Company the amount paid by the Company to the Insured in respect to such account so disallowed or decided to be not valid or legally sustainable.

The Company shall remit to the insured 0 percent (uncovered portion) of the net proceeds that it may collect on said account, after deducting all expenses and costs of collection.

Provided that if the Company shall realize on the claim assigned herein a net aggregate amount exceeding the sum paid to the Insured under the Policy, the Company shall refund said net excess to the Insured. (Emphasis added.) [ 22 ] On January 22, 2007, on instructions from Steve Belitzky, then CEO of QuadraFab Inc. and SandJ Inc., and also the signatory in January 2007 of the assignment of claim, the amount of $548,869 received from Coface was given to Royal Bank of Canada in payment of all sums owed by QuadraFab Inc.

This repayment involved extinction of the security held by Royal Bank of Canada on the assets of QuadraFab Inc., including the claim against Avestor, but also on those of SandJ Inc. and of the impleaded parties. [ 23 ] In brief, at least to all appearances, there were no longer any hypothecs on the movable property and assets of QuadraFab Inc., except for the following: - BDC, in the amount of $191,000, secured by a first-ranking hypothec and also by the personal guarantees of the impleaded parties Friedman and Kucer; - The impleaded parties Friedman and Kucer for an amount of $450,000, secured by a fourth-ranking hypothec; and - SandJ Inc., secured by second- and third-ranking hypothecs.

SandJ Inc. and the impleaded parties were released from any obligation in respect of Royal Bank of Canada, which also held a first- ranking hypothec on the assets of QuadraFab Inc., for which acquittance was given as a result of payment of the insurance indemnity received from Coface. [ 24 ] On January 25, 2007, Avestor’s proposal was approved by the court. On February 2, QuadraFab Inc. in turn filed a notice of intention to make a proposal. On March 7, however, QuadraFab Inc. made an assignment of its property.

On March 20, 2007, BDC went on record as a secured creditor in the bankruptcy of QuadraFab Inc., under a universal movable hypothec on all its assets, including the claim of $1,100,006 filed by QuadraFab Inc. in the matter of Avestor’s proposal. [ 25 ] On May 30, 2007, the trustee in bankruptcy of QuadraFab Inc., Litwin Boyadjian (Litwin), formally notified the creditors BDC, SandJ Inc., Friedman and Kucer that QuadraFab Inc. had assigned its claim against Avestor to Coface.

In the days that followed, and [ translation ] “to protect their rights”, BDC, SandJ Inc., Friedman and Kucer published in the register of personal and movable real rights (RDPRM) notices of preservation of their hypothecs (art. 2700 C.C.Q. ). In addition, on June 18, 2007, in response to the letter of May 30, 2007, from the trustee Litwin, SandJ Inc. notified Coface and the two trustees that it was withdrawing from QuadraFab Inc. the right to collect its claim against Avestor: FISHMAN FLANZ MELAND PAQUIN Montreal, June 18, 2007 Page 2 COMPAGNIE FRANÇAISE D’ASSURANCE POUR LE

COMMERCE EXTÉRIEUR – CANADA BRANCH LITWIN BOYADJIAN INC. RSM RICHTER INC. ________________________________________________________________ Please be advised that QuadraFab Inc. currently owes to SandJ Inc. the aggregate of: 1. $361,666.67 with interest at RBC Prime plus 4% (currently 10% per annum) as of and from May 31, 2007; and 2. $462,000.00 with interest at 8% per annum as of and from May 31, 2007. Payment of these debts is secured by hypothecs for an amount of $1.5 million, with interest at 25% per annum, against the assets of QuadraFab Inc., including in particular the Claim against Avestor.

You will find herewith copies of the Movable Hypothecs executed by Integral Fabrication Inc. (now known as QuadraFab Inc.) and of the notices of such hypothecs registered at the RDPRM under numbers 05-0703798-0002 and 05-0708594-002. As a result of the sale of the Claim against Avestor, SandJ Inc. registered a Notice of Preservation of its hypothecs. This notice was registered at the RDPRM on June 7, 2007 under number 07-0323258-0001. You will find herewith copies of the certified statement of such registration.

PLEASE BE ADVISED that SandJ Inc. is hereby withdrawing, effective immediately, its authorization to the grantor to collect the Claim against Avestor. Accordingly, any distribution made, or payment received, by you on account of the Claim against Avestor must be paid or remitted, as the case may be, directly to Fishman Flanz Meland Paquin LLP “in trust” for the benefit of SandJ Inc., to the extent of its claim against QuadraFab Inc., subject to the rights, if any, that other secured creditors of QuadraFab Inc. may have on the Claim against Avestor. DO GOVERN YOURSELVES ACCORDINGLY.

FISHMAN FLANZ MELAND PAQUIN LLP [ 26 ] Lastly, on December 20, 2007, on behalf of SandJ Inc., Steve Belitzky acquired the hypothecary claims still held by BDC, Friedman and Kucer against QuadraFab Inc., which still gave them a first-ranking right to recovery of QuadraFab’s claim against Avestor. BDC’s hypothecary claim of $191,000 was acquired for the amount of $100,000. SandJ Inc. also acquired those of Friedman and Kucer for a total of $39,000, which was also given to BDC as discharge of their personal guarantees. [ 27 ] The circle was complete.

Steve Belitzky was both President of QuadraFab Inc. in bankruptcy and CEO of SandJ Inc., which became the only holder of a first-ranking hypothecary claim on the assets of QuadraFab Inc., including the claim against Avestor for which QuadraFab Inc. had already received from Coface the substantial amount of $548,869, which had been used to settle and extinguish the first-ranking claim that the Royal Bank of Canada held at that time on the same property. [ 28 ] On January 22, 2008, the appellant SandJ Inc. wrote to the trustee Richter a letter in which it went on record as the only hypothecary creditor of QuadraFab Inc. and the sole holder of the rights and, in this respect, the holder of all the rights of QuadraFab Inc. against Avestor: Our client, SandJ Inc. ( “ S&J ” ), is the first ranking and only hypothecary creditor against the claim of QuadraFab Inc. in the bankruptcy of Avestor with respect to which the above-captioned Proof of Claim has been filed (the “ Claim Against Avestor ” ). ...

Not only is S&J the first and only hypothecary creditor of the Claim Against Avestor, S&J also served you on June 18, 2007 with the withdrawal of the authorization to collect the Claim Against Avestor.

As a result of the foregoing, S&J is the sole holder of the Claim Against Avestor and negotiations of the Claim Against Avestor accordingly should be carried out directly and exclusively with S&J, through the undersigned attorneys. [ 29 ] Richter dismissed in part the claim by SandJ Inc., which appealed the decision to the Superior Court of February 26, 2008.

On April 29, 2008, Coface intervened in the file and contested the motion to appeal by SandJ Inc. on the grounds that, against payment of the insurance indemnity to QuadraFab Inc., it had obtained from QuadraFab Inc. assignment of its claim against Avestor and that, accordingly, it alone was entitled to the dividend payable at the time of the final distribution of the payments to Avestor’s creditors. [ 30 ] On April 30, 2008, Richter also contested the motion to appeal by SandJ Inc. [ 31 ] An agreement was made before the Superior Court concerning the value of the claim of QuadraFab Inc. against Avestor, which was set at $635,607.28.

THE JUDGMENT A QUO [ 32 ] The trial judge agreed with Coface and ordered Richter to pay the dividend to be distributed because of the claim filed by QuadraFab Inc. [ translation ] “First and in priority to Compagnie française d’assurance pour le commerce extérieur, to a maximum of $548,869.68, without interest” and the balance, [ translation ] “if any, according to the ranking of the hypothecs, including those assigned to SandJ Inc.” by BDC, Friedman and Kucer”. [ 33 ] The appellant brought an appeal. [ 34 ] The trial judge began with an even more exhaustive analysis than the foregoing of all the facts and the evidence in the file.

Then, after setting out the context, he stated the various questions in issue in the following manner: - Are there genuine loans underlying the hypothecs held by SandJ Inc.? - Were the rights assigned by BDC to SandJ Inc. litigious rights? - What are the scope and effect of the assignment of claim by QuadraFab Inc. to Coface? - Was this assignment of claim made in the ordinary course of the business of QuadraFab Inc. within the meaning of articles 2674 and 2700 C.C.Q. ? - Lastly, were the hypothecs held by SandJ Inc., BDC, Friedman and Kucer preserved by a notice filed within the time limit provided in

article 2700 C.C.Q. ? [ 35 ] After listing the questions in issue concerning the rights and titles of the parties, he then considered more personal questions: - Is it appropriate to lift the corporate veil and consider whether Steve Belitzky, acting for QuadraFab Inc., defrauded Coface by assigning the claim to it in order to obtain consideration enabling him to discharge his obligations and those of his other directors to Royal Bank of Canada and in this way raise the rank of SandJ Inc. as a hypothecary creditor? - In such a case, may a fin de non-recevoir be invoked?

That is what the trustee Richter seems to have done.

Lastly, and in a subsidiary way, concerning the amount of the claim, the judge asked the following question: - If the rights of SandJ Inc. as hypothecary creditor or assignee of the hypothecary claims of BDC, Friedman and Kucer are recognized, should they be limited to the amounts paid to legitimately acquire the first-ranking rights rather than the full value of their claims against QuadraFab Inc.? - On the other hand, if the rights of Coface must take precedence, what amount is it entitled to? [ 36 ] The judge ruled first on the validity of the movable hypothecs that QuadraFab Inc. could have granted to SandJ Inc., Friedman and Kucer, even in the absence of perfect correspondence between the amount of the loans and the deeds of hypothecary loan.

The secured obligations were defined as “all present and future debts and liabilities”, and he considered the definition broad enough to cover the loans of $450,000 and $800,000, especially as advances of funds did take place.

He also recognized the validity of BDC’s movable hypothecs. [ 37 ] Chaput J. then noted that, when movable property charged with a hypothec is not alienated in the ordinary course of business of an enterprise, the hypothec is preserved if a notice of preservation is filed with the RDPRM within 15 days after the creditor is informed in writing of the transfer of the property or after he consents to the transfer (art. 2700 C.C.Q .). In this case, he believed that QuadraFab Inc. had not assigned its claim against Avestor to Coface in the ordinary course of its business of its enterprise, with the result

that

article 2700 C.C.Q . applied. [ 38 ] The assignment of claim was signed by Steve Belitzky since January 17, 2007. At the time, he was not only a director and President of QuadraFab Inc., but also majority shareholder and director of SandJ Inc. On January 17, 2007, SandJ Inc. therefore knew of the assignment of claim. Accordingly, the notice of preservation of the hypothecs of SandJ Inc., published on June 7, 2007, was tardy. [ 39 ] According to Chaput J., it was a different matter for the hypothecs of Friedman and of Kucer, whose notices of preservation were published in a timely fashion.

He believed that Steve Belitzky had no mandate to act for them, and consequently their time limit did not begin to run until May 30, 2007, which was, the date the trustee Litwin sent them a letter informing them of the assignment of claim. Finally, BDC’s hypothec was preserved because it was not informed in writing of the assignment of claim until May 28, 2007. [ 40 ] In short, Chaput J. decided that the hypothecs of Friedman, Kucer and BDC were preserved after the assignment by QuadraFab Inc. of its claim against Avestor in favour of Coface.

The movable hypothecs of SandJ Inc. were extinguished, however, because a notice of preservation was not filed in time. [ 41 ] That being so, Chaput J. decided that there was no simple subrogation of Coface in the rights of its insured QuadraFab Inc., but rather a genuine assignment of claim by onerous title under

article 1639 C.C.Q . In his opinion, subrogation takes place only if the insured’s loss is caused by the fault or the action of a third party and, according to him, that was not the case here, because the loss of QuadraFab Inc. was due to non-payment of its account receivable by Avestor. [ 42 ] Chaput J. then noted that an assignment of claim by onerous title is similar to a sale, so the provisions of the Civil Code of Québec concerning sales apply in a suppletive manner. Under

article 1723 C.C.Q ., QuadraFab Inc. was therefore obliged to discharge the claim of the hypothecs affecting it at the time of assignment. [ 43 ] Given the close connection between SandJ Inc. and QuadraFab Inc., Chaput J. decided that SandJ Inc. could not argue that it had exercised in good faith the hypothecary rights that were to be discharged by QuadraFab Inc. when it assigned its claim to Coface. On this matter, Chaput J. wrote, among other things: [ translation ] [132] Belitzky was Quadrafab’s majority and controlling shareholder.

He could not, on the one hand, negotiate for Quadrafab payment of the insurance indemnity resulting from non-payment of its account receivable against Avestor and, for such payment, agree to assign the claim against Avestor to Coface and, on the other hand, negotiate SandJ’s acquisition of hypothecary rights, which Quadrafab was to discharge, in order to obtain payment in preference to Coface of the dividend to be paid for Quadrafab’s claim against Avestor. [133] If Quadrafab had not breached its obligation to discharge the hypothecs, Coface would not be in the situation of losing its right to payment of the dividend because of hypothecs that were to be discharged. [134] Given the close connection between Quadrafab and SandJ as a result of Belitzky’s control over both, SandJ could not plead good faith.

Belitzky, as the majority and controlling shareholder of Quadrafab, knew that the claim assigned to Coface was charged.

SandJ cannot now argue that it exercised in good faith hypothecary rights that were to be discharged. ... [137] As SandJ learned from its mandatary that Quadrafab had assigned its claim to Coface and was obliged to discharge the hypothecs affecting it, the application by SandJ, as assignee of the hypothecs that should have been discharged, to receive payment from the trustee, in priority to Coface of the dividend resulting from the claim against Avestor is not admissible against Coface. [ 44 ] Moreover, on several occasions the trial judge seemed to cast doubt on Steve Belitzky’s statements where they appeared to contradict the terms of the documents exchanged between the parties.

In other words, to the extent that it is necessary to use Steve Belitzky’s testimony, putting aside such doubts is a sensitive matter. Deference is owed to the trial judge. [ 45 ] For those reasons, the trial judge concluded that any payment of a dividend on the claim filed by QuadraFab Inc. on December 14, 2006, had to be made in priority to Coface. Any balance was to be paid according to the rank of the hypothecs, including those assigned to SandJ Inc. by BDC, Friedman and Kucer.

QUESTIONS IN ISSUE [ 46 ] In its submission, the appellant SandJ Inc. raised the two following questions: - When Coface indemnified QuadraFab Inc. for its account receivable against Avestor and thus acquired the rights of QuadraFab Inc. in this claim, was QuadraFab Inc. required, first by law and then upon consideration of the facts of the case, to discharge the claim of the hypothecs affecting it? - Did the appellant breach its obligation of good faith set out in articles 7 and 1375 C.C.Q. by exercising the rights resulting from the hypothecary claims that it had acquired? [ 47 ] The respondent, for its part, added a third question:

- Did the trial judge commit an error by not concluding that payment of the insurance indemnity by Coface constituted payment in full discharge of the real rights in the claim? [ 48 ] I personally would formulate the questions in issue in the following way, which I believe corresponds better to the representations made orally before us: - Did the insurance contract between the parties and the document setting out the assignment of claim impose on QuadraFab Inc. a legal obligation to discharge the claim that was the object of the contract of the movable real rights that might charge it, either explicitly or by a logical

interpretation of the terms used in the two documents? - Did the very terms used in the assignment of claim constitute, in and of themselves as well as under the provisions of the Civil Code of Québec , an obligation for QuadraFab Inc., in consideration for the amounts paid by the insurers, to assign to Coface absolute title free of any other charge or legal limitation on the claim against Avestor?

In other words, did QuadraFab Inc. guarantee or assume the obligation of guaranteeing the absence of any legal obstacle whatsoever to Coface’s recovery of the claim of QuadraFab Inc. against Avestor? - Moreover, taking into account the confusion of Steve Beltizky’s titles and functions at QuadraFab Inc. and at the various companies in the group, and without needing to raise the corporate veil, did he, solely in his capacity as President of SandJ Inc. and QuadraFab Inc., engage QuadraFab’s liability to the point where both QuadraFab and SandJ Inc., through their authorized officer and spokesman, waived the right to potentially set up in a personal capacity a title attesting a prior claim against Coface?

THE ARGUMENTS OF THE PARTIES AND THE ANALYSIS [ 49 ] To place the various arguments of the parties in context, I should point out, at the outset, the apparent unfairness of the situation in which the parties – that is, Coface on the one hand, and SandJ Inc. acting in right of QuadraFab Inc. on the other – ultimately found themselves in. [ 50 ] QuadraFab Inc. received an insurance indemnity but, rather than benefiting directly, saw its President Steve Belitzky use the funds to discharge only one of the many debts affecting the property of QuadraFab Inc., namely, the most recent one, that of Royal Bank of Canada, which also charged the proprietary assets of SandJ Inc.

Two birds were killed with one stone. Thus freed of its obligations to Royal Bank of Canada, SandJ Inc., again through Steve Belitzky, purchased at rock-bottom prices the other hypothecs charging the assets of QuadraFab Inc., namely those of BDC, Friedman and Kucer.

Put simply, Steve Belitzky centralized everything in the hands of SandJ Inc., which he controlled, just as he controlled QuadraFab Inc., all the first-ranking titles charging the property of QuadraFab Inc., and, in particular, the claim against Avestor that he himself had just assigned to Coface. [ 51 ] Subsequently, after having put to good but purely personal use at SandJ Inc. the proceeds of the insurance indemnity plus an additional $139,000 to purchase the other hypothecs, he turned around and tried to recover, in favour of SandJ Inc. and after having placed QuadraFab Inc. in bankruptcy, the full amount of the same claim from Avestor’s trustee in bankruptcy.

In brief, SandJ Inc. apparently made a substantial profit, first by benefiting indirectly from the insurance indemnity and second by recovering an equivalent amount from Avestor. [ 52 ] During this time, Coface apparently covered the costs of the entire operation by being deprived of any recovery whatsoever, either on the basis of the assignment of claim that Steve Belitzky had granted it or on any other basis whatsoever.

To a certain extent, Coface was the butt of the joke, its money being used to indemnify not only QuadraFab Inc. but also SandJ Inc., while releasing SandJ Inc. from all its obligations apart from payment of $139,000 to BDC, Friedman, and Kucer. [ 53 ] To be fair to the appellant and the impleaded parties, it also should be pointed out that no one contested the validity of the hypothecary claims it acquired from BDC, Friedman, and Kucer.

The hypothecs were granted by QuadraFab Inc. and published in the RPMRR before the loss that gave rise to the claim by QuadraFab Inc. against Coface and even before the insurance policy was entered into. [ 54 ] Nor did anyone contest the validity of the amount of the investments and loans previously granted by the appellant and the impleaded parties to QuadraFab Inc. and secured by second-, third- and fourth-ranking movable hypothecs.

In other words, SandJ Inc. held a movable hypothec charging the claims of QuadraFab Inc. even before the transactions concluded with the respondent. - Scope and nature of the insurance contract and the document titled “Assignment of Account” [ 55 ] According to the appellant, Chaput J. erred in law by overlooking or considering inapplicable

article 2474 C.C.Q. , concerning the insurer’s right to the indemnified claim, on the ground that this provision may be applied only if the indemnified prejudice is due to the fault of a third party.

Article 2474 C.C.Q. concerns the person responsible for the loss, and not a responsible third party, as did

article 2576 C.C.L.C. and in addition appears to cover any prejudice, regardless of type. In this case, the person responsible for the loss is precisely Avestor and, because of its default, QuadraFab Inc. filed a claim with Coface. In this context, the appellant argues that all the legislative provisions concerning subrogation must apply, including that providing that the insurer may not derive any more rights therefrom than QuadraFab Inc. in respect of the person responsible for the loss. [ 56 ] In addition, even if the insurer may obtain a conventional assignment of claim from its insured, the appellant argues that such an assignment would be subject to

article 2402 C.C.Q. and that it cannot grant Coface more rights than those it is granted under the rules of subrogation, or in other words, more rights than QuadraFab Inc. itself held.

[ 57 ] But the rights of QuadraFab Inc. against Avestor were subject to the hypothecary rights that the appellant now seeks to exercise. [ 58 ] The appellant argues that neither the insurance policy, nor the claim form, nor the deed of January 17, 2007, supports the conclusion that Coface could legally require from QuadraFab Inc. that the claim for which Coface indemnified it be free of any charge. In this context, therefore, QuadraFab Inc. in no way breached its obligations by assigning to Coface its claim against Avestor without it being free of any hypothec.

The appellant argues that the Coface representative admitted, under both examination for discovery and cross-examination at trial, that Coface could not refuse to pay an insurance indemnity because of security that an insured might have granted to third parties on the accounts receivable covered by the insurance policy because, in any event, this fact does not have the effect of depriving the insured of the right to collect its claim, so long as this power has not been withdrawn from it by the hypothecary creditor. [ 59 ] The respondent, whose argument was accepted by the trial judge, asserted that, on the contrary, the deed of assignment made in this case constitutes a genuine assignment of claim by onerous title within the meaning of

article 1639 C.C.Q. Accordingly,

article 1723 C.C.Q. , which provides that the seller is bound to discharge the property of all hypothecs, applies. Moreover, QuadraFab Inc. undertook to give “absolute title” to the assigned claim, which it did not do. [ 60 ] Therefore, the assignment of claim must not be interpreted in light of

article 2402 C.C.Q. , which applies only to conventional subrogation. Lastly, it is important to note that the deed of January 17, 2007, explicitly provides in any case that recovery by Coface is limited to the amount paid to QuadraFab Inc. and that any excess in the recovery of the claim must be refunded to QuadraFab Inc., which strictly complies with the limitations imposed by

article 2402 C.C.Q. [ 61 ] Let us say from the outset that the terms of the credit insurance policy, which are as clear as any insurance contract clauses usually are, in no way help to determine the nature of the contract. One can only conclude from the text that the object of the insurance, namely the insured risk, is essentially limited to the solvency of the debtor of the account, and that the policy does not apply to any claim that is contested either in whole or in part, so long as there has not been a final determination of the amount by a judgment of a court “or [by any] other agreement acceptable to us”.

The policy covers only indisputable claims, the non-payment of which is, consequently, due only to the debtor’s insolvency or legal incapacity to pay its debt. [ 62 ] The conditions for indemnification are worded as follows: 6 – Claim Settlement ... At that time, such claim, so far as covered, and as calculated herein will be paid. You will: (

a) assign to us all claims allowed in settlement together with all securities and guarantees relating thereto and will execute the documents provided to you by us for that purpose; (

b) warrant the legal validity of the indebtedness, for the amount of such claims; and (

c) upon demand reimburse us for any amount paid by us to you on any indebtedness which has not been allowed against the debtor or the debtor’s estate, together with the expense of any action thereon. 7 – Disposal of Assigned Claims On any claim assigned to us in Claim Settlement, we will promptly remit to you, after deduction of recovery charges and expenses, your pro rata share, as calculated in Condition 6 of any amount realized. On each claim assigned to us, you will: (

a) remit to us each payment received; and (

b) remit our share of any credit allowed together with the charges applicable to your share of the credit. In the event we deem it necessary to enforce recovery from a debtor, guarantor, surety or endorser on a claim assigned under the Claim Settlement, we and you shall share the expenses required as their interests appear. If, after deduction of recovery charges and expenses, we realize a net amount in excess of the total amount paid to you in Claim Settlement, we will promptly remit the net excess to you as well as all net amounts realized thereafter less any amount owing to us .

Upon your written request, we will reassign all claims assigned to us in Claim Settlement. (Emphasis added.) [ 63 ] This text, apart from the term “assignment” that it contains, scarcely helps to determine whether it is truly a matter of damage insurance subject to the provisions of the Civil Code of Québec cited above, with the counterparty to the indemnification necessarily subject to the rules of subrogation, or whether it is a sui generis contract with respect to both the nature of the insurance and the nature of the suretyship for the uncontested obligation of a third party, justifying application of the provisions on assignment of claims. [ 64 ] At first sight, the provisions on subrogation in articles 1651, 1653 and 1654 C.C.Q. appear to correspond best to the text of the contract. [ 65 ] Authors have recognized that it is sometimes very difficult to distinguish between assignment of claim and subrogation. [ 66 ] Baudouin and Jobin write the following: [ translation ] 970 – Subrogation and assignment of claim – As one writer points out, conceptually speaking, comparing subrogation and assignment of claim is equivalent to comparing a part with a whole, namely, a means of discharging an obligation with a contract.

From a practical

standpoint, however, assignment of claim and subrogation present certain similarities, while having specific characteristics that distinguish them. Thus, from the standpoint of the objective sought, the difference that separates them is clear. Assignment of claim is a mechanism for the transfer of things in action, often used for a speculative purpose . A person purchases a claim at a discount, hoping to be able to recover the full amount from the debtor and in that way make a profit. In principle, therefore, the assignee may claim the entire debt, even if it was acquired for a lesser amount.

Subrogation, on the other hand, is a repayment mechanism and is merely incidental to payment . It is not speculative in nature, and the person subrogated may claim from the debtor only what he paid on his behalf, but nothing more (article 1651, paragraph 2). Certain differences also are apparent in the case of assignment or partial subrogation .

When subrogation is only partial, the subrogating creditor maintains his rights against the debtor concerning what is still owed, and if the debtor does not have the required solvency for performance in full, he benefits from a preference unless there is a guarantee that gives priority to the person subrogated (article 1658).

In the assignment of a claim, however, the principle is that the two creditors are placed in competition, unless there is a guarantee allowing the assignee to be paid in preference to the assignor (article 1646, paragraph 1). [1] (Emphasis added.) [ 67 ] Karim, for his part, writes as follows: [ translation ] B. Subrogation and assignment of claim Personal subrogation is sometimes confused with assignment of claim . This confusion is due to the fact that, on the one hand, both institutions aim for conveyance of a claim with its accessories and, on the other hand, they both effect a change of creditor.

It is important, however, to properly distinguish the two institutions, each one having its own mechanisms and producing its own legal effects . Subrogation is a repayment mechanism and is merely incidental to payment, whereas an assignment of claim constitutes a contract whose purpose is the sale of a claim, which necessarily implies a speculative nature (negotiation), which is not found in subrogation. Indeed, subrogation being devoid of any profit, the subrogated third party therefore may not require that the debtor pay more than what was disbursed to the subrogating creditor to acquire the claim.

An assignment of claim is therefore commercial in nature whereas subrogation constitutes a civil transaction . [2] (Emphasis added.) [ 68 ] Apart from its title, the text of the document of January 17, 2007 (exhibit MC-15), entitled “Assignment of Account” scarcely helps us more. It can be used up to a certain point, however, to qualify the obligations assumed by QuadraFab Inc. in consideration for the indemnity. In fact, in the excerpts already underlined in paragraph [21] of these reasons, the terms used can apply just as well to conventional subrogation as to assignment of a claim.

The sentence “The Company is hereby given absolute title to the said account assigned as aforesaid…” is the only one that can be interpreted as a guarantee that the claim is free of any charge or hypothec, although without stating this explicitly. [ 69 ] In my opinion, the sentence in the second paragraph which reads “The Insured does represent and warrant that the said account against Avestor Limited Partnership is a valid and existing indebtedness on this date from the said debtor” covers only a guarantee of the very existence of Avestor’s debt and its non-litigious and uncontested nature.

This sentence does not cover and excludes even less the possibility of the existence of a hypothec charging the claim in favour of a third party. [ 70 ] Lastly, interpreted in its context, there is no doubt that the sentence “and that all securities and guarantees pertaining to the account have been surrendered to the Company” refers not to charges that might affect the claim but only to additional security that QuadraFab Inc. might hold concerning the performance of its claim against Avestor. [ 71 ] In this case, the difficulty lies in the fact that the document seems to be a hybrid, in that it presents some characteristics specific to an assignment of claim and others that stem more from subrogation.

The expression “that for value received, the Insured does hereby sell, assign and transfer…” may at first glance give the impression of a genuine assignment of claim by onerous title.

But the fact that the document was executed in a context of damage insurance, that it was required by an insurer as consideration for payment of an insurance indemnity, and that the transfer of the claim was not in any way speculative seems to argue in favour of subrogation. [ 72 ] In this case, to conclude that the document of January 17, 2007, constitutes an assignment of claim by onerous title would be to state that QuadraFab Inc. had assumed the obligation to pay all its hypothecary creditors in full before being entitled to payment of an insurance indemnity because all the hypothecs in question charging the universality of its movable property also charged the claim

against Avestor. In this way, QuadraFab Inc. would have to repay $800,000 to the appellant, $710,000 to BDC, $1,900,000 to Royal Bank of Canada, and $450,000 to Friedman and Kucer before being able to touch the consideration of about $600,000. Such an

interpretation leads to absurdity. [ 73 ] In the circumstances, the only possible rational conclusion is that Coface was indeed subrogated to the rights of QuadraFab Inc. relative to its claim against Avestor, subject at the time to the priority of the movable hypothecs charging the claim. [ 74 ] Moreover, the Coface representative expressly recognized that Coface had never raised any questions or taken an interest in knowing whether the claim was charged with one or more hypothecs before SandJ Inc. acquired the hypothecary rights of BDC, Friedman, and Kucer. Michael Harasek was categorical in this regard: Q.

When COFACE proceeded to issue the insurance policy, MC-2? A. They issued the policy on May 5, 2006. Q. Okay, and at that time did you proceed to make any kind of specific verification with respect to either the charge or the hypothecary liens that would have existed and that could have affected the Quadrafab assets? A. No, we did not. Q. Why didn’t COFACE proceed to such verification? A. It is not our practice to investigate the existence of liens; we rely on the representations and warranties of our insureds (sic) when they complete the application. [3] ... Q.

Okay, and if we go to the second paragraph of this assignment of account, what happened then with the title of Quadrafab to the Avestor’s account receivable? A. The insured assigned its rights to the receivable of Quadrafab to COFACE. Q. Okay, and I understand that this document makes reference to an absolute title? A. Correct. That is correct. Q. And what was the nature of the undertaking that was made by Quadrafab towards COFACE in paragraph 3 of said assignment of account? A.

The undertaking was that if the claim were not allowed, or considered not valid and legally sustainable at any point of time, that the insured would refund to the company the amount that was disallowed. ... Q. Other than what appears on this document, which is the insurance application from Quadrafab, right? A. Yes. Q. So other than what appears on this document, what information was requested by COFACE from Quadrafab? A. There was a request for a listing of accounts receivable that they wished to insure. Q. And I understand that is the only additional information that you requested from Quadrafab, right? A.

I believe so, yes. Q. And you have testified before that you did not make any verification at the time of this application for insurance regarding the security on the assets of Quadrafab, including its accounts receivable, right? A. That is correct. Q. You also indicated, when you were examined in chief by your attorney, that the reason why you did not do it was because you relied on the representations and warranties which are made by the insured. I am asking you, where in the application do we see representations and warranties from the insured regarding security, or the absence of security on its assets? A.

Without even looking I can tell you; there is no question in there about security on assets. Q. Okay, so you agree with me that nowhere in the insurance application is there any question asked, or any representations to be made by the insured, regarding security on its assets, including on its accounts receivable? A. Correct. Q. And you have also said that you never verified whether or not there is security on the assets, including on the accounts receivable on your insured; that is not part of how you proceed? A. That is not part of the underwriting process.

What we do have in a number of situations where banks are involved, and they are

secured creditors of the applicant, is that the insured or the bank will request that the bank be named as an additional insured on the policy, and we have an endorsement that we would put on such a policy stating that the bank is a collateral beneficiary of the policy. Q. And that, Mr. Harasek, would be in situations where the credit insurance is applied for at the request of a secured creditor for instance, right? A. That is one of the situations, yes. Q. And other situations where you are asked to file that type of – to provide that type of endorsement, there is no such verification as to the security held? A.

Correct. [4] ... Q. And I will ask you an even more precise question, Mr. Harasek: leaving aside the contents of MC-6 for the time being, am I right to assume that there was no communication, no representations made regarding the existence of, or non-existence of security on the assets of Quadrafab any time subsequent to the application of Quadrafab for insurance up to the time you paid the amount? A. That is correct. Q. And so that we are absolutely certain, that no question whatsoever was asked by COFACE to Quadrafab as to the existence or non-existence of security on its assets? A.

That is correct. [5] … Lastly, Michael Harasek also admitted that Coface could not have refused to pay the insurance indemnity to Quadrafab on the ground that its claim was hypothecated: Q. Isn’t it a fact, Mr. Harasek, that nowhere in the insurance policy we see any provision to the effect that COFACE could refuse to indemnify a claim on the basis that there would be security on the account receivable, subject to the claim? A. I would say that is correct.

THE COURT: No provision that – Me ALAIN DAIGLE: No provision whatsoever on the insurance policy based on which the insurance company could refuse to indemnify a claim on the basis that there is security on this account receivable. Q. Isn’t it a fact that it was only subsequent to the filing of this motion to appeal the decision of the trustee on its partial disallowance of the proof of claim in Avestor’s proposal that there was the first reaction from COFACE regarding its possible rights into Quadrafab’s claim? A.

Yes. [6] [ 75 ] In these circumstances, it seems to me that the insured must benefit from the doubt surrounding the legal nature of the document of January 17, 2007, and that it does indeed involve subrogation and not an assignment of claim by onerous title. [ 76 ] Subrogation being involved, QuadraFab Inc. was not obliged to discharge the claim of the hypothecs affecting it. As provided by the second paragraph of

article 1651 C.C.Q ., Coface had no more rights than QuadraFab Inc., in this case rights subject to the hypothecary rights that the appellant is now trying to exercise, which were held at that time by BDC, Friedman and Kucer, and which would subsequently be acquired by the appellant for the amount of $139,000. - Did the appellant nevertheless breach its obligation of good faith set out in articles 7 and 1375 C.C.Q. , giving rise to a fin de non-recevoir or to the inability to set up against Coface its rights as the first-ranking hypothecary creditor? [ 77 ] The alternative reasons given by Chaput J. constitute the second issue raised by the appellant.

Given the conclusion which I came to above, it now becomes an essential question. [ 78 ] Up to a certain point, this question takes us out of the texts of the insurance contract and of the “assignment of account” and takes us back primarily to questions of fact. [ 79 ] Given the close relationship between the appellant and QuadraFab Inc., resulting from Steve Belitzky’s control over both companies, Chaput J. wrote: [ translation ] [118] As discussed above, SandJ may not act under its two hypothecs, because, after Quadrafab’s claim was assigned to Coface, the hypothecs were not preserved in a timely fashion.

[119] As for the hypothecary rights acquired from BDC and from F. and K., the Court is of the opinion that SandJ is not allowed to set them up against Coface, for the following reasons. [120] It was established that SandJ was the principal shareholder of Quadrafab; it held 1,000 shares with voting rights, whereas the two other shareholders, F. and K., held only 50 each. [121] Belitzky confirmed that he was Chief Executive Officer of Quadrafab.

And F. and K. testified that control over Quadrafab had been assigned to Belitzky, who was entitled to a casting vote. [122] Belitzky was the controlling shareholder of SandJ. [123] In the circumstances, one can conclude that an alter ego relationship was established between the two companies. [124] As the Supreme Court established in Buanderie Centrale de Montréal v. Montreal (City) , one corporation may be the alter ego of another.

Gonthier J. wrote: In light of the foregoing cases, a corporation may be regarded as the alter ego of another corporation when there is such a close relationship between them that what apparently concerns one actually pertains to the activities of the other.

Undoubtedly a large number of factors can be identified to determine the existence of such a relationship: in my opinion, however, the one that is most explicit and most likely to cover all aspects of the concept is control . [125] In such a context of an alter ego relationship, there is a presumption that the one corporation knows the contractual obligations of the other. [126] As Martel writes: [ translation ] Certainly the fact that one company is the alter ego of the shareholder or of another company will prevent such company from arguing that it is unaware of the financial position or the contractual obligations of its shareholder or of the other company, and vice versa, because knowledge of the one involves the other.

An alter ego cannot argue in good faith that it is a third party. [127] Belitzky was the controlling shareholder of SandJ, which was the majority shareholder of Quadrafab and he was the controlling shareholder of Quadrafab. [128] Given Belitzky’s double function, SandJ could not, because of the knowledge of its mandatary, have been unaware of the deed of assignment of claim and the obligations arising therefrom for Quadrafab, as well as those resulting from the Civil Code provisions applicable to assignment of claims. [129] Through its mandatary, SandJ could not have been unaware that the claim assigned to Coface was no longer part of Quadrafab’s patrimony.

Moreover, the assignment was spelled out in the deeds of assignment of hypothecary rights to SandJ by BDC and F. and K. [130] What would the situation have been if the claim had not been assigned to Coface? The trustee would have paid Quadrafab’s claim against Avestor according to the rank of the hypothecary creditors: Royal Bank, BDC, SandJ, and F. and K. [131] But the assignment changed the scenario.

Quadrafab assigned its claim against Avestor to Coface by onerous title and, in doing so, it had to discharge all the hypothecs to fulfill its obligation to deliver absolute title to Coface. [132] Belitzky was Quadrafab’s majority and controlling shareholder.

He could not, on the one hand, negotiate for Quadrafab payment of the insurance indemnity resulting from non-payment of its account receivable against Avestor and, for such payment, agree to assign the claim against Avestor to Coface and, on the other hand, negotiate SandJ’s acquisition of hypothecary rights, which Quadrafab was to discharge, in order to obtain payment in preference to Coface of the dividend to be paid for Quadrafab’s claim against Avestor. [133] If Quadrafab had not breached its obligation to discharge the hypothecs, Coface would not be in the situation of losing its right to payment of the dividend because of hypothecs that were to be discharged. [134] Given the close connection between Quadrafab and SandJ as a result of Belitzky’s control over both, SandJ could not plead good faith.

Belitzky, as the majority and controlling shareholder of Quadrafab, knew that the claim assigned to Coface was charged. SandJ cannot now argue that it exercised in good faith hypothecary rights that were to be discharged. [135] To act in that way would be contrary to the requirements of articles 7 and 1375 C.C.Q. : 7 . No right may be exercised with the intent of injuring another or in an excessive and unreasonable manner which is contrary to the requirements of good faith. 1375 .

The parties shall conduct themselves in good faith both at the time the obligation is created and at the time it is performed or extinguished. ... [137] As SandJ learned from its mandatary that, Quadrafab had assigned its claim to Coface and was obliged to discharge the hypothecs affecting it, the application by SandJ, as assignee of the hypothecs that should have been discharged, to receive payment from the trustee, in priority to Coface, of the dividend resulting from the claim against Avestor is not admissible against Coface. [ 80 ] Thus he had to find in the alternative that, in any event, the appellant could not exercise its hypothecary rights against

Coface’s claim. [ 81 ] It should be noted that the appellant did not demonstrate any overriding error concerning the facts on which Chaput J. insisted in the paragraphs cited above. The only question is to determine whether the inferences he drew therefrom are correct and whether they justify his final conclusion. [ 82 ] I believe it is useful, however, to emphasize that two facts are certain and undeniable.

First, even if it could be concluded that QuadraFab Inc. was obliged, under the insurance contract or the terms of the document of January 17, 2007, to discharge the prior movable hypothecs affecting its claim against Avestor, which as we have seen it did not do, the fact would remain that the claim was charged in favour of BDC, as well as Friedman and Kucer, and the undertaking by QuadraFab Inc. could in no way be set up against them by Coface.

In brief, whatever the validity of the assignment of claim may have been, it obviously did not cause the loss of any rights for the hypothecary creditors, against whom the proceeding contesting the claim in the bankruptcy file instituted by Coface would have been prima facie inadmissible. [ 83 ] Second, in such a case, the only possible remedy for Coface would, in theory, have been annulment for false representation of the payment paid to QuadraFab Inc. or its repayment for failure to perform corollary obligations by the insured QuadraFab Inc.

Such a remedy would have obviously been a futile exercise given the insolvency of QuadraFab Inc. after payment to Royal Bank of Canada of the amount of the indemnity received in payment of the bank’s first-ranking hypothecary claim. [ 84 ] Finally, it is hardly necessary to refer again to the above-quoted excerpt from the testimony of the Coface representative whereby it could not have refused to indemnify QuadraFab Inc. at the time of Avestor’s proposal on the grounds that the account receivable was charged in its entirety to the benefit of a third party. [ 85 ] Does the fact that SandJ Inc. subsequently acquired the prior claims of BDC, Friedman and Kucer at rock-bottom prices change the rights of the parties in any way?

This is really the only question that needs to be answered, given the previous conclusions I have reached. [ 86 ] The appellant noted that Chaput J. faulted it for a lack of good faith in the acquisition of the hypothecary rights held by third parties when it was well aware, given the relationship between it and QuadraFab Inc., that QuadraFab had to assign to Coface in full ownership an enforceable claim against Avestor.

The appellant argued that it was not advisable for our Court to decide the matter of good or bad faith to the extent that we decided that QuadraFab Inc. did not have such an obligation. [ 87 ] Moreover, the appellant argued that nothing in the evidence made it possible to conclude that it had breached its obligation of good faith, to the extent that the Coface representative admitted that the existence of security had no impact on the insurance underwriting procedure and that Coface therefore could not have refused to pay the insurance indemnity for that reason alone. [ 88 ] It added that it was only exercising rights that third parties would have otherwise exercised, and that bad faith could not be attributed to it because its acquisition of the hypothecary rights of BDC, Friedman and Kucer caused no new prejudice to Coface. [ 89 ] Lastly, it argued that the concept of fin de non-recevoir set out in Soucisse [7] could not be invoked against it in the absence of wrongful conduct on its part.

On the contrary, it would be unfair that it lose the amount of $139,000 paid to acquire the hypothecary claims of a third party, in addition to the loss of its overall investment of $800,000 in QuadraFab Inc. [ 90 ] The respondent counters that, even if this Court concludes that QuadraFab Inc. could assign its claim against Avestor without discharging the hypothecs affecting it, it could nevertheless decide that the appellant had acted in bad faith and that its first and only objective was to obtain double indemnity, to the detriment of QuadraFab Inc., to try to recover its investment in that company as much as possible. [ 91 ] The respondent emphasizes four elements of Steve Belitzky’s conduct with which it finds fault and which, in its opinion, incurs the liability of both the appellant and QuadraFab Inc.: - The indemnity paid by Coface was used directly to pay Quadrafab’s first-ranking hypothecary creditor, namely RBC, thus making it possible both to release Friedman and Kucer from the personal guarantees they had given to the bank and to raise the ranking of the hypothecs held by SandJ, Friedman and Kucer; - The appellant, Friedman and Kucer were direct beneficiaries of this double payment: not only were they released from their guarantees by payment of the indemnity to RBC, but they tried to exercise their hypothecs to obtain double indemnity; - As for BDC, it also benefited from the repayment of RBC.

If it had not been for this repayment, its hypothec, which was subordinate to that of RBC, would have been worthless. - The assignment of claim in favour of Coface stated that Quadrafab had to provide absolute title to the claim, whereas, to the knowledge of Quadrafab and Belitzky, not only was the claim charged well beyond its value but also, given that at the time of the assignment Quadrafab fully intended to declare bankruptcy imminently, Coface could no longer benefit from any proceeding against Quadrafab whereas MC-6 provided for Coface an automatic right to be repaid by Quadrafab for any shortfall in similar circumstances . - Failure by Quadrafab and Belitzky to inform Coface of the existence of the hypothecs deprived it of its right to pay the indemnity directly to the hypothecary creditors of such hypothecs, as provided in

article 2497 C.C.Q ., and thus to obtain acquittance for the hypothecary claims in consideration of such payment. [ 92 ] The respondent argued that Chaput J. was justified in deciding that the appellant SandJ Inc. was the alter ego of Steve Belitzky and QuadraFab Inc., that abuse of rights may justify raising the corporate veil, and that the fact that the appellant was allowed to exercise its hypothecary rights in order to cause the respondent to lose its rights under the deed of assignment constituted such an abuse of rights.

[ 93 ] Although it is easy to view the thesis defended by the respondent Coface with sympathy, I am nevertheless of the opinion that its argument must be dismissed.

The evidence is not of a nature to support a conclusion of fraud, abuse of rights or a breach of public order to allow raising the corporate veil or to apply the principle of fin de non-recevoir or good faith in contracts. [ 94 ] If the trial judge concluded that the appellant breached its obligation of good faith, it was only because he decided that the appellant, as the alter ego of QuadraFab Inc., could not be unaware of QuadraFab’s obligation to discharge the claim of the hypothecary rights affecting it at the time of assignment.

But, in light of the answer already given above regarding the real obligation assumed by QuadraFab Inc., both in the application to purchase the insurance contract and in the deed of assignment of subrogation, the trial judge’s conclusion can no longer be justified. [ 95 ] There is no double indemnity in the present case to the extent that, even though both QuadraFab Inc. and SandJ Inc. were controlled mainly by Steve Belitzky, they are separate entities.

It could have been otherwise if the evidence had shown that SandJ Inc. was constituted for the sole purpose of acquiring the hypothecary claims in question, but that was not the case. On the contrary, Avestor’s bankruptcy, which then gave rise to the bankruptcy of QuadraFab Inc., caused SandJ Inc. to lose its own investment of $800,000 and the impleaded parties Friedman and Kucer to lose $250,000 each.

In such a context, one cannot conclude that double indemnity took place. [ 96 ] The fact that the insurance indemnity was paid in its entirety to Royal Bank of Canada and that the payment, at the same time, released SandJ Inc. from its own obligations to the bank did not change the situation in any way because, in any event, Royal Bank of Canada, like BDC, held a first-ranking hypothec on the universality of the movable property of QuadraFab Inc. [ 97 ] Finally, one cannot disregard the fact that the hypothecary rights of BDC, Friedman and Kucer were entirely valid and legal.

In any event, they had priority over Coface before assigning their hypothecary claim to SandJ Inc. Coface’s loss is due exclusively to the fact that the hypothecs charging the Avestor claim were substantially greater than the amount of it, given that QuadraFab Inc., even indemnified for this claim in jeopardy, was in a situation of bankruptcy. [ 98 ] Lastly, it obviously cannot be a matter of collusion between BDC and SandJ Inc. to the detriment of Coface, and there is no evidence of any kind whatsoever that supports a different conclusion concerning the impleaded parties Friedman and Kucer.

In both cases, the contracts under which these hypothecary creditors assigned their rights to the claim against Avestor to SandJ Inc. constituted genuine assignments of claim, within the meaning given to these terms by the provisions of the Civil Code of Québec , and they are not subject to the rules of legal subrogation in

article 1651 C.C.Q.

In other words, the amounts paid by SandJ Inc. to acquire the claims cannot be taken into consideration to limit the prior right of SandJ Inc. to the claim against Avestor. [ 99 ] In the circumstances, and for all the foregoing reasons, I am of the opinion that the appeal is well founded and should be allowed , and that the trustee Richter Inc. should be ordered to pay the dividend to be distributed on the claim filed by QuadraFab Inc. in the proposal of Avestor in the following manner: - First and in priority, to the appellant SandJ Inc., as assignee of the hypothecary claims of Business Development Bank of Canada, Friedman and Kucer, to a maximum of $682,083.89; and - The balance, if any, to the respondent Coface to a maximum of $548,869.69; with costs before both courts against Coface.

ANDRÉ BROSSARD, J.A.