The provinces cannot defeat the federal jurisdiction over bankruptcy by using indirect means

November 2015 was a banner month for Constitution-watchers. While other November decisions will be the subject of a separate post, this one focuses on three good old-fashioned division of powers decisions that were handed down by the Supreme Court of Canada on November 13, 2015. In Alberta (Attorney General) v. Moloney, 2015 SCC 51, 407 ETR Concession Co. v. Canada (Superintendent of Bankruptcy), 2015 SCC 52 and Saskatchewan (Attorney General) v. Lemare Lake Logging Ltd., 2015 SCC 53, the Court reviewed the questions of federal paramountcy and operational conflicts between otherwise validly enacted provincial and federal legislation.

In Moloney, Gascon J for the majority (Abella, Rothstein, Cromwell, Moldaver, Karakatsanis and Wagner JJ concurring)considered whether s. 102 of Alberta’s Traffic Safety Act had an operational conflict with the federal Bankruptcy and Insolvency Act. Section 102 allowed the Province to withhold Mr. Moloney’s driver’s licence until he had paid the Province back for compensation paid by the Province to another as a result of an accident that Mr. Moloney had caused. Section 178(2) of the Bankruptcy and Insolvency Act provided that, upon discharge of bankruptcy, the bankrupt would be released from all provable debts. The debt owed by Mr. Moloney to the Province of Alberta was a provable debt listed by him upon his petition for bankruptcy. After his discharge from bankruptcy, the Province refused to renew his driver’s licence, noting that he had not yet paid back the compensation.

After giving a primer on the concepts of the division of powers, exclusive jurisdiction, and the equality of the two orders of government [paras. 14 and 15], Justice Gascon turned his attention to the concept of paramountcy [para.16]:

For the purposes of this appeal, I need only refer to one: the doctrine of federal paramountcy.  This doctrine “recognizes that where laws of the federal and provincial levels come into conflict, there must be a rule to resolve the impasse”….  When there is a genuine “inconsistency” between federal and provincial legislation, that is, when “the operational effects of provincial legislation are incompatible with federal legislation”, the federal law prevails…

Justice Gascon noted that the first step in the exercise in assessing an alleged conflict was to determine whether the two laws were in pith and substance validly enacted federal and provincial legislation. If one or the other is not, there is no conflict to consider. If they are validly enacted legislation, however, then one turn to the next step in the exercise. He stated that there were two ways that a conflict could be found to exist [para.18]:

A conflict is said to arise in one of two situations, which form the two branches of the paramountcy test: (1) there is an operational conflict because it is impossible to comply with both laws, or (2) although it is possible to comply with both laws, the operation of the provincial law frustrates the purpose of the federal enactment.

He described the first aspect of the test as follows [para. 19]:

What is considered to be the first branch of the test was described as follows in Multiple Access, the seminal decision of the Court on this issue:

In principle, there would seem to be no good reasons to speak of paramountcy and preclusion except where there is actual conflict in operation as where one enactment says “yes” and the other says “no”; “the same citizens are being told to do inconsistent things”; compliance with one is defiance of the other. [Emphasis added; p. 191.]

He disagreed with Madam Justice Côté’s concurring reasons that held that there needs to be “an express conflict”. To him, the word “express” as used by Dickson J in the earlier Multiple Access Ltd. v. McCutcheon, [1982] 2 SCR 161 decision ought not to be construed as requiring an express contradiction between the words of the two competing legislative instruments [para. 22]:

An express contradiction is nothing more than a clear, direct or definite conflict in operation, as opposed to an indirect or imprecise one. It is not an additional condition for a finding of actual conflict in operation

Turning to the second aspect of the test, he explained that, even if there is not  a direct conflict, there may be a conflict in that the provincial legislation may frustrate the purpose or intention of the federal legislation [para. 25]:

If there is no conflict under the first branch of the test, one may still be found under the second branch. In Bank of Montreal v. Hall, [1990] 1 S.C.R. 121, the Court formulated what is now considered to be the second branch of the test. It framed the question as being “whether operation of the provincial Act is compatible with the federal legislative purpose” (p. 155). In other words, the effect of the provincial law may frustrate the purpose of the federal law, even though it does “not entail a direct violation of the federal law’s provisions”: Western Bank, at para. 73.

He cautioned restraint when applying paramountcy, drawing on the principle of cooperative federalism and respect for the two orders of government [para. 27]:

Be it under the first or the second branch, the burden of proof rests on the party alleging the conflict.  Discharging that burden is not an easy task, and the standard is always high.  In keeping with co-operative federalism, the doctrine of paramountcy is applied with restraint.  It is presumed that Parliament intends its laws to co-exist with provincial laws.  Absent a genuine inconsistency, courts will favour an interpretation of the federal legislation that allows the concurrent operation of both laws: Western Bank, at paras. 74-75, citing Attorney General of Canada v. Law Society of British Columbia, [1982] 2 S.C.R. 307 (“Law Society of B.C.”), at p. 356; see also Rothmans, at para. 21; O’Grady v. Sparling, [1960] S.C.R. 804, at pp. 811 and 820.  Conflict must be defined narrowly, so that each level of government may act as freely as possible within its respective sphere of authority: Husky Oil, at para. 162, per Iacobucci J. (dissenting, but not on this particular point), referring to Deloitte Haskins and Sells Ltd. v. Workers’ Compensation Board, [1985] 1 S.C.R. 785, at pp. 807-8, per Wilson J.

He summarized his review of the doctrine of paramountcy as follows [para. 29]:

In sum, if the operation of the provincial law has the effect of making it impossible to comply with the federal law, or if it is technically possible to comply with both laws, but the operation of the provincial law still has the effect of frustrating Parliament’s purpose, there is a conflict. Such a conflict results in the provincial law being inoperative, but only to the extent of the conflict with the federal law: Western Bank, at para. 69; Rothmans, at para. 11; Mangat, at para. 74. In practice, this means that the provincial law remains valid, but will be read down so as to not conflict with the federal law, though only for as long as the conflict exists: Husky Oil, at para. 81; E. Colvin, “Constitutional Law — Paramountcy — Duplication and Express Contradiction — Multiple Access Ltd. v. McCutcheon” (1983), 17 U.B.C.L. Rev. 347, at p. 348.

Applying these principles to the case at bar, he found that the purpose and intent of s. 102 of the Alberta Traffic Safety Act were “to suspend a debtor’s driving privileges until payment of a provable claim” [para. 47]. On the other hand, he found that the intent and purpose of s. 178 of the Bankruptcy and Insolvency Act were the “financial rehabilitation of the debtor” [paras. 36-41]. He rejected Alberta’s argument that s. 102 was not a debt enforcement scheme but rather a regulatory charge scheme, an imposition of a monetary charge for the privilege of driving.

He observed that, the claim that Alberta was seeking to enforce was a provable claim and one that must be discharged upon discharge from bankruptcy [para. 67]:

In this appeal, the payment which the province seeks to recover is a provable claim. In substance, the purpose and effect of s. 102 are to compel payment of that provable claim. That claim was properly released, since neither the province’s judgment debt, nor the resulting regulatory charge, is exempt from discharge under s. 178(1). As a provable claim is subject to s. 178(2), the province is precluded from compelling payment of the judgment debt.

He concluded his analysis on the first aspect of the test as follows [para. 75]:

I therefore conclude that s. 102 of the TSA allows the province, or a third party creditor, to enforce a provable claim that has been released. To that extent, it conflicts with s. 178(2) of the BIA. It is impossible for the province to apply s. 102 without contravening s. 178(2) and, as a result, for the respondent to simultaneously be liable to pay the judgment debt under the provincial scheme and be released from that same claim pursuant to s. 178(2): Lafarge, at para. 82; M & D Farm, at para. 41. Section 178 is a complete code in that it sets out which debts are released on discharge and which debts survive bankruptcy. In effect, s. 102 creates a new class of exempt debts that is not listed in s. 178(1). Hence, in the words used by my colleague in her reasons (paras. 95, 110 and 128), “the provincial law allows the very same thing” — the enforcement of a debt released under s. 178(2) of the BIA — that “the federal law prohibits”. The result is an operational conflict between the provincial and federal provisions.

Justice Gascon went on also to examine the second aspect of the test, even though he had already determined the outcome following the first aspect analysis [paras. 82-83]

In my view, the province is conflating the scope of Parliament’s authority and the consequences of the conflict between the BIA and the TSA. The financial responsibility of drivers is a valid matter of provincial concern and jurisdiction, and the province can set the conditions for driving privileges with this consideration in mind. Nonetheless, when the province denies a person’s driving privileges on the sole basis that he or she refuses to pay a debt that was discharged in bankruptcy, the province’s condition conflicts with s. 178(2) of the BIA and is, to that extent, inoperative. To so conclude does not transfer the power to regulate driving privileges to Parliament. The obligation to grant those privileges flows from the provisions of the provincial law that remain operative.

The rehabilitative purpose of s. 178(2) is not meant to give debtors a fresh start in all aspects of their lives. Bankruptcy does not purport to erase all the consequences of a bankrupt’s past conduct. However, by ensuring that all provable claims are treated as part of the bankruptcy regime, the BIA gives debtors an opportunity to rehabilitate themselves financially. While this does not amount to erasing all regulatory consequences of their past conduct, it is certainly meant to free them from the financial burden of past indebtedness.

He concluded his judgment by holding s. 102 inoperative to the extent that it conflicts with s. 178(2) of the Bankruptcy and Insolvency Act [para. 90]:

In my view, the doctrine of paramountcy dictates that s. 102 of the TSA is inoperative to the extent that it conflicts with the BIA, and in particular s. 178(2).  Therefore, the province cannot withhold the respondent’s driving privileges on the basis of an unsatisfied but discharged judgment debt.

The judgment in Moloney and in the two other cases provide an excellent review of the doctrine of paramountcy and will be certainly one of my go-to authorities the next time I am faced with a potential conflict between provincial and federal legislation.

 

I remain

 

Constitutionally yours,

 

Arthur Grant

 

PS  I write this post while vacationing in Belgium, another federation with a central government and provincial government and no doubt some constitutional principles that exist to regulate any conflicts that may occur between the two orders of government. I wonder what they might be?

PPS. December 10, 2015. I couldn’t resist. So I have reviewed some Belgian legal writing and apparently, the rule there is very similar to the rule here. To the extent that Belgian provincial laws conflict with the national or federal laws, the latter prevail and the former are of no force or effect – but only to the extent of their incompatibility. See André Alen’s article, “Contrôle de constitutionnalité des lois et d’autres actes après leur adoption” from 2007 in Fédéralisme Régionalisme where he reviews these principles in more detail:

3.3. Les conflits de compétences entre l’État et les provinces

411. La répartition des compétences entre l’État et les provinces fait l’objet d’une réglementation détaillée dans les articles 202 à 205 de la Constitution.

42L’article 202 énumère 35 matières et la législation en 15 matières qui sont de la compétence exclusive du pouvoir central.

43L’article 204 énumère 29 matières qui sont de la compétence exclusive des provinces. Plusieurs de ces compétences doivent être exercées «dans le respect de», «conformément à», ou «en conformité avec» la législation nationale. Le respect de cette condition est une question de compétence à juger par la Cour constitutionnelle. Il semble qu’il en va de même pour les dispositions de cet article d’après lesquelles les provinces sont compétentes «pour l’application de la législation nationale»26.

44Enfin, l’article 203 énumère 25 matières qui sont de la compétence concurrente du pouvoir central et des provinces.

45Dans ces matières, toute loi provinciale incompatible avec les lois et règlements d’exécution nationaux est nulle ou abrogée de plein droit, «dans la mesure où il y a incompatibilité» (l’article 205, avant-dernier alinéa, de la Constitution). Bien qu’il s’agisse d’une sanction de plein droit, elle ne vaut que dans la mesure où il y a incompatibilité de la norme provinciale avec la norme nationale. D’après nous, cette incompatibilité doit être constatée par la Cour constitutionnelle, en tout cas lorsqu’il y a discussion à cet égard.

462. Contrairement à d’autres Constitutions (fédérales ou régionales), la Constitution ne se prononce pas sur le pouvoir résiduaire27. Puisqu’il est peu probable que les trois listes de compétences comprennent toutes les matières, la question devra être résolue par la Cour constitutionnelle laquelle tiendra compte du fait que «les prérogatives des provinces» ne peuvent en aucun cas être réduites28.

473. Enfin, il convient encore de remarquer que :

  • (i) la notion «conflits de compétences» à l’article 161 de la Constitution semble viser tant les conflits actuels que les conflits virtuels. En cas de conflits actuels, il s’agit d’un conflit entre deux normes existantes, par ex. une loi nationale et une loi provinciale ; dans ce cas, une norme est contraire à l’autre. En cas de conflits virtuels, un seul législateur est intervenu, mais il est prétendu que cette norme viole les compétences attribuées à un autre législateur.

  • (ii) la loi d’exécution doit aussi régler les conséquences d’un arrêt annulant une norme nationale ou provinciale pour excès de compétence. Tant les raisons de sécurité juridique – déjà mentionnées plusieurs fois – que les dispositions de l’article 205 de la Constitution «nulle ou abrogée» plaident pour une annulation sans effet rétroactif.

 

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