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Legal Blog: Bankruptcy

Nov
20
2023

Limitations and Assigned Action

AssessNet Inc.  v. Taylor Leibow Inc., bankruptcy trustee 2023 Ont CA

Creditor sued debtors’ former bankruptcy trustee. It first needed to obtain a s. 38 order and an order granting leave to do so under s. 215 of the BIA. The trustee claimed that the action was statute barred. Section 12 of the Limitations Act deals with an assigned action (including an action under s. 38 which was assigned from the current trustee in bankruptcy) has to be brought within 2 years from earlier of the dates that the predecessor and the claimant first knew or ought to have known of the matters in issue. In this case, the fact that the creditor’s representative was an inspector of the bankrupt estate was irrelevant because an inspector owes a duty to act in the best interests of the estate, not in its own best interests and suing the then trustee was not in the best interests of the estate. Further, the claimant was not able to sue the trustee until it obtained the s. 38 and s. 215 orders and the action was commenced within two years of obtaining them.

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Feb
15
2023

Bankruptcy Annulment

Tran v. Royal Bank of Canada 2022 Ont SCJ

Creditor with a debt of $488,000 obtained an order of bankruptcy against debtor. One year later, debtor’s father bought the creditor’s debt (at a discount) and debtor applied to have the bankruptcy annulled. After all, the creditor did not care, the trustee did not care, and her father did not care. The judge did. s. 181(1) allows a judge discretion to annul a bankruptcy order if it ought not to have been made. In this case, the order should have been made. Further, the judge held that the there were public considerations. The bankrupt’s conduct is important.

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Oct
26
2022

Debt Surviving Bankruptcy

Royal Bank of Canada v. Bedard 2022 Ont CA

The Court overturned an order stating that the debt survived bankruptcy. Although fraud was involved, there were other issues that would affect a survival order and these should be dealt with by the Bankruptcy Court when and if the debtor became bankrupt.

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Sep
16
2022

Fraudulent Preference

Golden Oaks Enterprises Inc. v. Scott 2022 Ont CA

Trustee in bankruptcy brought an action against people who had received commissions and interest exceeding the criminal rate from a one-person corporation conducting a Ponzi scheme. The Court agreed that the people receiving the commissions had to return these funds because the corporation was insolvent from the start and was using fresh money to pay the commissions. S. 95(1)(b) of the BIA was invoked to justify the return as fraudulent preferences made to non-arm’s length people. For limitations purposes, the Court refused to attribute the individual fraudster’s knowledge to the corporation even though the corporation benefitted from the fraudster’s acts. The Court held that it would be improper to allow people who received criminal rates of interest to shield behind the corporate attribution rule at the expense of others creditors.

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Sep
12
2022

Costs and Bankruptcy Survival

Yanic DuFresne Excavation Inc. v. Saint Joseph Developments Ltd. 2022 Ont SCJ

Debtor went bankrupt and creditor brought a motion, even after the debtor and trustee had been discharged, that the debt survived bankruptcy under s. 178(1)(d) of the BIA. The creditor was successful and costs of the motion were agreed at $50,000. The debtor argued that the costs should not survive bankruptcy because they were incurred after the bankruptcy. The judge held that if a judgment survives bankruptcy, it would be inequitable that costs would not. Costs are an intrinsic aspect and a consequence of the judgment. Debtor appealed (unsuccessfully) the original motion decision, but not the decision as to costs.

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Aug
10
2022

Costs and Bankruptcy Survival

Yanic DuFresne Excavation Inc. v. Saint Joseph Developments Ltd. 2022 Ont SCJ

Debtor went bankrupt and creditor brought a motion, even after the debtor and trustee had been discharged, that the debt survived bankruptcy under s. 178(1)(d) of the BIA. The creditor was successful and costs of the motion were agreed at $50,000. The debtor argued that the costs should not survive bankruptcy because they were incurred after the bankruptcy. The judge held that, if a judgement survives bankruptcy, it would be inequitable that costs would not. Costs are an intrinsic aspect and a consequence of the judgment.

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Jul
01
2022

Fraud Attribution

Assume that shareholders concoct a scheme by which they defraud their corporation and take out money that otherwise would have belonged to it. If the corporation subsequently becomes bankrupt, can its trustee in bankruptcy collect the proceeds of the fraud from the fraudulent shareholders? This issue was decided in Ernest & Young Inc. v. Aquino, a 2022 decision of the Ontario Court of Appeal.

A stack of wood blocks.

Fraud

The corporation is Bondfield Construction Company Limited (and its affiliate, Forma-Con Construction). We will refer to each under the banner of Bondfield. The fraudster shareholder was John Aquino.

Aquino, who was the directing mind of Bondfield, arranged for a false invoicing scheme by which various suppliers rendered invoices to, and were paid by, Bondfield, but provided no actual services. In doing so, Aquino siphoned off tens of millions of dollars from Bondfield.

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May
02
2022

BIA Undervalue Transactions

Ernst & Young v. Aquino 2022 Ont CA

Shareholders siphoned tens of millions of dollars from two construction corporations, corporations that subsequently went into receivership or bankruptcy. The money was taken by way of false invoicing schemes. The trustee/monitor moved under section 96 of the BIA to have the shareholders repay the money. The shareholders had two major defences. First, they claimed that, at the time they stole the money, the corporations were financially stable and therefore the purpose was not to defeat creditors, just to fraudulently strip assets from the corporations. The court disagreed that the corporations were financially stable at the time. Second, the shareholders argued that s. 96 only applies if the corporations were fraudulent and, in this case, the corporations did nothing wrong, just the shareholders. The court upheld the motion judge’s decision to apply the shareholders’ fraudulent intent to the corporations. It recognised that you cannot do this in a criminal or civil setting (e.g. a fraudulent shareholder cannot bring criminal or civil liability on a corporation unless the corporation benefitted from the action). In a bankruptcy scenario, however, the corporation is just a bundle of assets and the trade-off is between protecting the shareholders or the creditors. The court chose to protect the creditors.

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Apr
26
2022

Declarations Under BIA – Fraud

784773 Ontario Limited v. Larkin 2021 Ont SCJ

The judge granted a partial summary judgment for the amount that the defendant had admitted he had taken improperly. The judge also issued a declaration that the judgment debt arose out of fraud, embezzlement, misappropriation, or defalcation occurring while the defendant was acting in a fiduciary capacity [for use to fall within BIA s. 178(1)(d)]. The judge acknowledged that some judges had held it was improper to issue such a declaration when there had been no bankruptcy and that other judges had allowed the declaration.

Bank of Montreal v. Mathivannan 2021 Ont SCJ

Motion for default judgment for a debt due. The judge issued the judgment for the debt, but refused to make a declaration that the debt arose out of fraudulent misrepresentation and false pretences [for use to fall within BIA s. 178(1)(e)]. The judge refused the declaration because (i) the plaintiff had not adduced sufficient facts to prove that allegation; and (ii) in any case, because the defendant had not yet become bankrupt, the request was premature.

 

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Mar
02
2022

Bankruptcy Discharge Exceptions

Alberta Securities Commission v. Hennig 2021 Alta (CA)

A bankruptcy discharge normally discharges all debts, but there are exceptions under section 178(1) of the BIA. The Alberta Securities Commission concluded that the bankrupt had contravened Alberta securities laws, but never indicated that the bankrupt was fraudulent. It required payment of an administrative penalty and costs of the hearing. The court held that this order was not a penalty (for punishment) imposed by a court in respect of an offence; it was merely an administrative penalty to protect the public. Therefore ss. 1(a) did not apply. The court held that the bankrupt was not held to have obtained property or services by false pretences or fraudulent misrepresentation pursuant to ss.1(e) for 3 reasons: he was never held to have been fraudulent, there was no link between the debt and the alleged improper actions, and only the victim of fraudulent behaviour can claim the benefit of the subsection.

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