Obligations of a Financial Institution Upon Receipt of a Notice of Garnishment

Under the Ontario Rules of Civil procedure, a judgment creditor may send a notice to anyone with a debt payable to its debtor stating that the money payable must be forwarded to the creditor in satisfaction of its judgment. Financial institutions will often receive Notices of Garnishment requesting that funds in a customer's bank account be forwarded to the creditor, especially where the customer is on the verge of insolvency. A Notice of Garnishment only applies to funds payable to the customer. Therefore, the relevant question is: when is a debt payable by a bank to its customer.

It is well established that funds on deposit in an account at a bank constitute a debt owing by the bank to the customer. Therefore, the bank is required, absent special circumstances, to forward funds on deposit to a creditor who has served a Notice of Garnishment. The more interesting question is whether a bank is indebted to a customer who;

1. has a Guaranteed Investment Certificate deposited with the bank;

2. has an RRSP with the bank;

3. is entitled to a line of credit or other future advances from the bank; or

4. is also indebted to the bank.

Guaranteed Investment Certificates
Whether Guaranteed Investment Certificates, or GICs, are attachable to a Notice of Garnishment depends on the specific facts. For example, where the owner of a GIC is entitled to withdraw the GIC before maturity, subject to the bank's right to require a specified period of prior notice of withdrawal, the GIC is subject to garnishment. This is due to the fact that all of the conditions attaching to the term deposit are procedural only and can be satisfied by service of the Notice of Garnishment. However, if the investment contract specifically states that the GIC may not be withdrawn prior to maturity, then there is no debt due or accruing due from the bank to its customer. However, in Ontario a Notice of Garnishment is effective for six (6) years. Therefore, if the GIC matures within six (6) years from receipt of the notice, a bank holding the GIC will then be required to forward the proceeds of the GIC to the creditor issuing the notice.

Often, a bank will hold a GIC as security for the customer's debts owed to the bank. If that is the case, the GIC is not subject to garnishment.

Registered Retirement Savings Plans
The courts have held that where funds are deposited in an RRSP, a trust relationship, and not a debtor-creditor relationship, is created between the bank and its customer. Consequently, the courts have generally held that an RRSP is not subject to garnishment. There is a case of the Federal Court of Canada Trial Division which has come to the opposite conclusion, but it would appear that the weight of authority provides that RRSPs are not attachable until he owner of the RRSP actually collapses it.

Lines of Credit and Other Facilities
If a customer has a line of credit or other facility where he or she is entitled to request further advances, are these future advances debts payable from the bank to the customer? There does not appear to be a significant amount of case law on this issue. However, there is a very interesting decision of the British Columbia Supreme Court involving CIBC (Yakir v. March Films Ltd; Canadian Imperial Bank of Commerce, Garnishee (1980), 109 D.L.R. (3d) 218 B.C.S.C.)

In that case, CIBC required the customer to forward a number of demand promissory notes. CIBC was authorized to fill in the dates of the notes as and when funds were loaned to the customer under the line of credit. The agreement with the customer also stated that no obligation on the part of CIBC to lend money to the customer could be implied from the agreement between them. In other words, the line of credit was at the pleasure of CIBC.

The line of credit was in the amount of $1,435,000.00 of which a total of $975,000.00 had already been advanced. The judgement creditor argued that CIBC was in debt to the customer because CIBC had contracted to advance a line of credit in the amount of $1,435,000.00. Consequently, it was argued that the balance of the line of credit not yet advanced in the amount of $400,000.00 was due and owing by CIBC to its customer. Obviously, if the court had ruled that CIBC was in fact indebted to the customer for the balance of the line of credit there would have been severe ramifications for CIBC. It would have been required to advance $400,000.00 to the creditor, who was probably not even a secured creditor, while at the same time not likely to be able to collect the $400,000.00 from its customer who was experiencing financial difficulties.

The court states that the terms of the agreement between CIBC and the customer made it clear that the line of credit was available at the pleasure of the bank. Therefore, there was no contract to pay a further sum of $400,000.00. Although the result of this case is reasonable, it seems to suggest that if the agreement with the customer appears to require the bank to advance funds in a specified amount, that the funds will be subject to attachment by garnishment. That would not be a sensible result. Therefore, terms letters and commitments should clearly state that CIBC reserves the right to refrain from advancing further funds at any time. A commitment should clearly not imply that the customer is unconditionally entitled to the full amount of the facility.

Set-off
However, it also appears that based on the above noted case, that a bank will also be entitled to set-off funds owing to it by the customer against its debts to the customer. The court in the above noted case stated that even if it accepted the argument that there was a contract between CIBC and its customer to advance a further sum of money, CIBC could set-off the further amount to be advanced, $400,000.00, by the amount already advanced, $975,000.00.

In addition, the court also held that the demand promissory notes held by CIBC could also be set-off against anything owing by CIBC to the customer.

In another case, the customer had hypothecated the bank account to the bank as collateral security for the payment of the present and future liability of a third party corporation [Galiopeau Musique Inc. v. Heckbert and Canadian Imperial Bank of Commerce (Garnishee) (1979) 28 N.B.R. (2d) 163 N.B. Co. Ct.]. Consequently, the court held that the bank account was not attachable. In addition, the bank was entitled to deduct from the debt owed by it to the customer the outstanding amounts owing by the customer under certain promissory notes for which demand had already been made.

Other Obligations of a Bank in Garnishment Proceedings
If a bank receives a garnishment request against a customer and the customer holds an account in his or her name in trust for someone else, the bank is not required to pay the funds to the garnishor. However, there is very old case law to the effect that where the customer later requests payment to him or her of the funds in the trust account, the bank is required to ensure that the funds are actually trust funds before paying them to the customer instead of the garnishor.

Therefore, a bank must be diligent when it receives a Notice of Garnishment to ensure that it investigates whether there are any debts due or accruing from it to the customer. If it is later discovered that a debt was actually owed but that the funds were not forwarded to the creditor and the debtor disposed of its assets so that the creditor can no longer collect its judgement, the bank will be liable to the creditor for the funds it should have forwarded but did not.

Prepared May 10, 1999 by Danielle Iampietro, Associate
Commentary is of a general nature and is not intended as legal advice. Specific advice should be sought with respect to each specific case.

© Scarfone Hawkins LLP, 1999
Obligations of a Financial Institution upon Receipt of Notice of Garnishment