Legal Blog

Garnishment

In many cases, obtaining a judgment against a debtor is the easy part; collecting on the judgment is the hard part. Even when the debtor has assets available to satisfy a debt, there may be insufficient assets to satisfy all of its debts and the creditors must then fight amongst each other to establish priority. This was the situation in Elmford Construction Company Limited v. South Winston Properties Inc., a 2001 decision of the Ontario Superior Court of Justice.

Beneficiary 

A contractor obtained a judgment against a developer for approximately $383,000 relating to monies owed on a development. Another creditor had also obtained a judgment against the developer for approximately $88,000. The contractor and the other creditor had each filed a writ of seizure and sale. The creditor garnished someone who owed money to the developer and that person paid $193,000 to the Sheriff. There was insufficient money to pay each creditor in full. Who got the money?

The Creditors’ Relief Act sets out a procedure by which money is divvied up amongst execution creditors. Under section 2(1) of the Act, there is no priority among creditors by execution or garnishment. Accordingly, the money in the hands of a sheriff is to be divided rateably among the execution creditors. There is a procedure whereby any creditor can challenge the claim of another creditor, on the basis that the judgment debt is not really due, and can challenge a sheriff’s proposed distribution.

The contractor informed the Sheriff that it was a beneficiary of a trust under the provisions of the Construction Lien Act and that, accordingly, the Creditors’ Relief Act did not apply. The contractor, however, did not commence an application to enforce that assertion. The Sheriff therefore distributed the proceeds rateably and gave the other creditor $44,600 of the garnished money. The contractor sued the other creditor for the return of the money.

Equality 

The judge did not give detailed reasons. He simply referred to the section of the Creditors’ Relief Act that referred to equality amongst execution creditors and held that the other creditor was able to receive its rateable share. Accordingly, he did not need to deal with the allegation that the contractor did not bring its application under the Creditors’ Relief Act and, therefore, disentitled itself to claim priority under the distribution.

Reservations 

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 monies 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.

We also have some difficulties with the contractor’s decision not to contest the distribution. We would have made the stand for the creditor at that stage, not after the Sheriff had already distributed the money.