Legal Blog

Garnishment Revisited

In our January 2002 newsletter, we reported on the case of Elmford Construction Co. v. South Winston Properties Inc., a decision of the Ontario Superior Court of Justice. That case dealt with a dispute between two creditors as to who would get a debtor’s available money. The money had been paid to the Sheriff under a garnishment and the sheriff had distributed the money rateably to the creditors. One creditor, however, insisted that it should receive all of the available money because it was a beneficiary of the debtor under the trust fund provisions of the Construction Lien Act. The motions judge held that under the Creditors’ Relief Act, all creditors were to be dealt with equally and, therefore, denied the trust claimant’s request to be dealt with more equally than others. The trust claimant appealed to the Ontario Divisional Court.

Our Take 

This is what we said about the judge’s decision: 

“We have some difficulties with the decision. The money garnished from the third party debtor was the third party’s share of the costs that the developer had incurred to the contractor. Trust funds are normally dealt with differently from ordinary funds. If the garnished money were trust funds in the hands of the developer, and the judge found that they were, they should have been treated the same as any other trust funds. They should not have been available to other execution creditors.”

Appeal Take 

This is what the Divisional Court said in its 2002 decision:

“We are of the view that the underpinning of that legislation (i.e. the Creditors’ Relief Act) is that execution or garnishment creditors share pro rata but that sharing is as to the property of the debtor held by the Sheriff. Trust funds under the Construction Lien Act can no longer be the property of the debtor. Therefore Elmford, as beneficiary of the trust funds … is not and cannot be affected by any scheme of distribution of the property of the debtor …”

Accordingly, the ordinary creditor had to repay the trust claimant the balance of the money that was owed to the trust claimant. The secondary result of this case, and the one that tickled our fancy, was that our criticism of the original decision was vindicated.