Legal Blog: Bankruptcy

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.

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.

Bankruptcy Discharge

Cook (Re) 2021 BCSC

A three-time bankrupt applied for a discharge. The British Columbia Securities Commission was, by far, the largest creditor relating to sanctions assessed against the bankrupt for his breach of the Securities Act, breaches that resulted in losses to a number of investors. The court refused to grant any discharge at all. To do so would be contrary to the aims of the bankruptcy system and would bring the system into disrepute. The bankrupt’s inability to pay was a much less important factor than factors such as denunciation, deterrence, and protection of others.

Declaration for Survival of Bankruptcy

Yanic Dufresne Excavation Inc. v. Saint Joseph Developments Ltd.  2021 Ont SCJ

Sub brought a motion to vary a default judgment that it had obtained against the general contractor and 2 directors. Although there were many allegations regarding breach of trust in the statement of claim, the original judgment was for a monetary award only because none of the defendants had been bankrupt at the time. Because the statement of claim had raised the issue of a breach of trust, the judge allowed further evidence as to that breach and, based on that evidence, granted an order that the judgment survived the defendant’s bankruptcy.

Declaration for Survival of Bankruptcy

Matthews Equipment Limited v. Yalda Contracting Inc. 2021 Ont SCJ

Default judgment, on notice, as against the general contractor and its two directors. Sub requested a declaration that the judgment survive any future bankruptcy. None of the defendants had become bankrupt and the judge held that the allegations in the statement of claim were insufficient to show that the judgment arose, not as the result of simple inadvertence, negligence or incompetence, but out of fraud or misappropriation pursuant to section 178(1)(d) of the Bankruptcy and Insolvency Act. Accordingly, the judge refused to grant the declaration. It would have to be adjudicated on a proper record when and if an issue arose during a bankruptcy proceeding.

Limitations & Bankruptcy

Re John Trevor Eyton 2021 Ont SCJ

A promissory note was statute barred by way of the Limitations Act, 2002. However, when the promisor assigned into bankruptcy, the creditor filed a proof of claim in the bankruptcy. The trustee disallowed the claim because the creditor’s action was statute barred. On appeal, the motion judge upheld the bankruptcy associate judge and held that a debt that was extinguished could not be claimed in a subsequent bankruptcy. The judge specifically referred to reasoning in a previous case, noted that it was obiter and therefore not binding, and refused to follow it.

Bankruptcy Priority

Re Marleau 2021 Ont SCJ

Debtor moved from Alberta to Ontario, took her car, and did not tell the financial institution that she had done so. The financial institution, accordingly, did not immediately register its security interest under the Ontario Personal Property Security Act. The debtor then went bankrupt. As soon as the financial institution was notified, it registered a financing statement under the PPSA. The trustee in bankruptcy denied the financial institution’s claim. The motion judge agreed with the trustee. The security interest was not perfected at the time of the bankruptcy and, accordingly, the financial institution had no security. Even if that were wrong, the PPSA states that, when security is moved, the financing statement has to be registered within the earlier of 60 days after the goods are brought to Ontario or 15 days after the secured party receives notice of the goods been brought to Ontario. In this case, through no fault of the financial institution, the registration was too late.

Debt Survival of Bankruptcy

M.O.S. MortgageOne Solutions Ltd. v. Heidary 2021 Ont SCJ

Mortgagee sued not only for the debt owed; it also raised a claim of fraud and pleaded that any judgment should survive a future bankruptcy. The defendant served a notice of intent to defend but never defended the action. Ultimately, the parties entered into a consent judgment for a monetary payment, but made no reference to the allegations of fraud or bankruptcy. The defendant then went bankrupt. The issue was whether the debt survived bankruptcy pursuant to section 178(1)(d) of the Bankruptcy and Insolvency Act. The judge held that, although one could not raise issues that were not raised in the statement of claim, a consent judgment to an action based on fraud or fraudulent misrepresentation was sufficient to fall within the section. Accordingly, the debt survived the bankruptcy.

False Pretences

Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc. 2020 Ont SCJ

In a prior action, the defendant been held liable for substantial damages for committing a breach of confidence and misappropriating the plaintiff’s trade secrets. The defendant then assigned into bankruptcy. The plaintiff brought a motion seeking a declaration that, upon discharge from bankruptcy, the defendant was not released from the debt owed to the plaintiff because that debt arose from the defendant obtaining property by false pretences as set out in section 178(1)(e) of the Bankruptcy and Insolvency Act (BIA). The plaintiff also requested a declaration that the automatic stay under section 69(1) of the BIA be lifted. The judge gave a complete list of considerations and granted both requests. The judge found that the defendant was a deceitful wrongdoer who should be precluded from benefiting from his dishonesty. He found that, because s. 178(1)(e) applied, the plaintiff would be materially prejudiced if the stay continued to operate.

Bankruptcy Discharge

RBC v. Kim 2020 Ont SCJ

s. 178(1)(e) of the BIA provides that a bankruptcy discharge does not release the bankrupt from debts resulting from obtaining property or services by false pretences or fraudulent misrepresentation. In this case, the bankrupt had provided a personal statement of affairs that set out incorrect facts. The court had to decide whether they were false representations and, if so, whether RBC relied on them. The judge found that the bankrupt, whom the judge disbelieved in every regard, knew that the representations were false and that the whole purpose of a statement of affairs was to be part of the loan approval process. The judge stated that the false representations were intentional and were the type of socially unacceptable conduct at which the section was aimed.