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The decision of the Supreme Court of Canada in Caisse populaire Desjardins de l'Est de Drummond v. Canada1 is unquestionably result-driven. But the result itself - a seemingly minor victory for the taxman - is not what's making many commercial lawye wince. Rather, it's the fact that Rothstein J., in writing for the majority of the court, runs roughshod over a number of well-established principles of Canadian personal property security law. In doing so, he calls into question the effectiveness of many existing commercial arrangements that rely on rights of compensation or set-off, and has created quite justifiable concerns about a long tail of problematic decisions in future PPSA cases.
The purpose of this case comment is to assist the reader in untangling the legal and logical structure of the majority decision in Drummond, to consider some of its short and longer-term fallout, and to suggest, as strongly as a practitioner may, that many aspects of the majority decision should be approached by other courts with great caution.2
1. THE FACTS
The available facts in Drummond are straightforward.3 On September 18, 2000, the Caisse populaire Desjardins de l'Est de Drummond (the "Caisse") established a $277,000 credit facility for its customer, Camvrac Enterprises Inc. ("Camvrac"). On September 25, 2000, Camvrac deposited $200,000 with the Caisse under a 'Term Savings Agreement". Pursuant to this agreement, the term deposit acquired many attributes of what is commonly referred to as a "flawed asset" - it did not mature for five years, it was not redeemable, negotiable or assignable by Camvrac, and Camvrac was not permitted to encumber it in favour of any other creditor. The Caisse and Camvrac also entered into a "Security Given Through Savings Agreement" which, amongst other remedies, permitted the Caisse to effect contractual compensation (set-off) between the debt owing by Camvrac to the Caisse under the $277,000 credit facility and the principal and accrued interest amounts owing by the Caisse to Camvrac on the term deposit.
The decisions of the Supreme Court and of the lower courts in Drummond do not disclose if the Caisse made inquiries as to whether Camvrac was properly remitting source deductions for employee income tax and employment insurance premiums. In any event, it was subsequently determined that Camvrac had...