USING A COUNTER LETTER MAY ENTAIL A DEGREE OF RISK

Serge’s friend Luc is in financial difficulty. To help him, Serge transfers to Luc a 1/2 undivided interest in his condo for $1. The same day, they jointly borrow $245,000 from the bank which is secured by a hypothec on the condo. The transfer is published at the land registry office. However, the parties sign a counter letter with a notary confirming that the transfer was a simulation and that Serge is actually the sole owner of the condo. The counter letter was not published at the land registry office. In the counter letter, Luc undertakes to pay all monthly instalments of the bank loan until the complete reimbursement thereof and then transfer his interest in the condo back to Serge for $1. Furthermore, the parties agree to subscribe for life insurance to guaranty the reimbursement of the bank loan in the event of death. With his share of the bank loan in the amount of $120,000, Luc pays off some debts including $90,000 that he owes to Serge. Luc dies and his Estate declares bankruptcy. The life insurance pays off the hypothecary loan and the condo is debt free. Serge has resided in the condo without interruption and paid all of the expenses relating thereto other that the bank loan. The bankruptcy trustee registered a notice of bankruptcy and certificate of assignment of title to one-half of the condo at the land registry office with a view to selling the property and distributing one-half of the proceeds thereof for the benefit of the creditors of the Estate. What then is the legal effect of the counter letter on the bankruptcy trustee and the creditors of the Estate? The Quebec Court of Appeal decided this case on 2026-10-26 in a judgment cited at 2026 QCCA 1414 (DANS L’AFFAIRE DE LA FAILLITE DE LA SUCCESSION DE LUC IMBEAULT : SERGE CARRIÈRE c. NATHALIE BRAULT SYNDIC INC., en sa qualité de Syndic) Generally, the bankruptcy trustee takes possession of the property of the bankrupt for the benefit of the creditors and has has the same property rights as the bankrupt. Arguably, based upon the counter letter, Serge is the sole owner of the condo notwithstanding what appears at the land registry. The bankruptcy trustee, relying upon articles 1451 and 1452 of the Quebec Civil Code, argued that the counter letter could not be set up against the Estate and that she was entitled to rely on registered title to the condo as it appeared in the land register. IV.  — Simulation 1451. Simulation exists where the parties agree to express their true intent, not in an apparent contract, but in a secret contract, also called a counter letter. Between the parties, a counter letter prevails over an apparent contract. 1991, c. 64, a. 1451. 1452. Third persons in good faith may, according to their interest, avail themselves of the apparent contract or the counter letter; however, where conflicts of interest arise between them, preference is given to the person who avails himself of the apparent contract. 1991, c. 64, a. 1452. The Court had to decide whether the trustee was in the same shoes as the deceased and bound by the counter letter or whether she was bound by the counter letter or rather a third party in good faith in her capacity as representative of the creditors and entitled to rely solely on the what was apparent from the land register. The Court (in a 2-1 decision) sided with the trustee in reliance upon articles 1451 and 1452 CCQ. It held that a third party in good faith, the trustee in this case, had the option to ignore the counter letter or rely upon it as it determined to be in the best interests of the Estate/creditors. This robust protection of third parties is justified, according to the Court, due to the fundamental characteristics of simulated acts and the inherent risks that that they carry. Article 1452 CCQ requires the authors of the simulated act i.e. the counter letter, to assume risks instead of third parties acting in good faith. As a result, instead of being the sole owner of the condo, as a result of Luc’s bankruptcy, Serge only owned one-half, the other half belonging to the bankruptcy trustee. The dissenting judge saw things a bit differently. In his view, due to the counter letter, Luc never owned one-half of the condo so the trustee, in vertu of the Bankruptcy and Insolvency Act, simply inherited the rights of the bankrupt: no more, no less. As for article 1452 CCQ, the dissenting judge considered that its purpose is protect third parties who are induced into error by the counter letter and not punish the parties to the counter letter or enrich third parties who were not prejudiced by it. In other words, Article 1452 CCQ should only apply to third parties who acted to their detriment by relying upon the counter letter. Consequently, the dissenting judge found that article 1452 CCQ did not apply to the circumstances of this case. The undersigned finds the reasoning of the dissenting opinion most compelling. The consequences of the majority opinion deprives Serge of one-half of the condo which arguably is inconsistent with the ends of justice. Parties to a counter letter would be well advised to be aware of the risks inherent thereto which the law imposes upon them, whether they know it or not.