Legal Blog

Hands Off

Many of the creditor-debtor cases, on which we normally report, result in success for the creditor. However, creditors do not always win. This is demonstrated in the two cases on which we report in this newsletter, the first of which is Mullin v. R-M & E Pharmacy, a 2005 decision of the Ontario Superior Court of Justice.

Garnishment

The bank had a judgment for $138,000 against the debtor. The bank discovered that the debtor was the plaintiff in a personal injury action and garnished all of the defendants in that action.

The debtor and the defendants settled the personal injury action and the question arose whether the defendants in the action were to pay the proceeds of the settlement to the debtor or the bank.

Analysis

The judge first decided that garnishment was a discretionary remedy. He relied on previous decisions and the fact that Rule 60.08(16) of the Rules of Civil Procedure, giving the garnishment remedy, states that the “court may determine the rights and liabilities of the garnishee, the debtor…” He then had to decide how he was going to exercise his discretion.

He analogised the situation to that of a bankruptcy. Under bankruptcy law, damages that a bankrupt receives for non-pecuniary damages, awarded for pain and suffering, are exempt from transfer to the bankrupt’s trustee. The rationale for this was set out in a previous case, which stated: “it is not the policy of the law to convert into money for the creditors the mental or physical anguish of the debtor.”

The judge reasoned that it makes no sense for a debtor to be forced into bankruptcy to protect a payment for general damages. The judge noted further that a plaintiff in a personal injury action cannot assign a cause of action. Accordingly, if all proceeds were to be “scooped up by creditors, plaintiffs would not pursue legitimate claims.”

For those reasons, the judge refused to allow the garnishment and directed that all of the funds for his general damages be paid directly to the debtor.

Questions

We have some questions and some possible answers:

1.   Are special damages subject to the same protection? We suspect that they are not. Special damages are just money compensating a plaintiff for out-of-pocket losses (e.g. lost wages, housekeeping costs, medical expenses etc.). Although there may be some protection for the wage portion under the Wages Act, there would not be the same blanket protection given for general damages.

2.   What happens once the monies are paid to a debtor/plaintiff? Can a creditor seize the bank account in which the debtor deposits the proceeds? This seizure is not a garnishment; it does not depend on the discretionary powers of the court unless the sheriff declines to enforce the writ of seizure and sale [Rule 60.07(13.1)]. The Sheriff will not decline to enforce unless the sheriff “is uncertain whether the writ of seizure and sale has been properly issued or filed.” In our scenario, there is nothing the matter with the writ itself; the issue relates to the property being seized. Therefore, we doubt that the sheriff would decline to enforce the writ.