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Will a Court order a Declaration that a Judgment will Survive Bankruptcy?

Posted on January 12, 2015 | Posted in Construction

In a trust claim, it has become commonplace to seek a request for a declaration that, if there is judgment for breach of trust, the judgment will survive the subsequent bankruptcy of the judgment debtor. Will that request for relief ever be granted? This question was answered, in part, in B2B Bank v. Batson, a 2014 Ontario Superior Court of Justice decision.



Section 178(1)(d) of the Bankruptcy and Insolvency Act  states that an order of discharge does not release a bankrupt from a debt arising out of fraud, embezzlement, misappropriation, or defalcation while acting in a fiduciary capacity. Under the trust sections of the Construction Lien Act, when a payor receives money, the payor holds that money in trust for the person with whom it contracted, one rung below it on the construction ladder. Once the payor breaches that trust, the payor falls afoul of section 178(1)(d).


This was not a breach of trust action; it was an action arising out of a cheque kiting scheme perpetrated by a former employee of the bank, but it had the same effect. The defendant consented to judgment being rendered against her; after all, she did the dastardly deed. The plaintiff tried to obtain the declaration regarding bankruptcy. The judge refused to grant it. Why?


The judge held, “The question whether certain claims survive the discharge order does not arise in the context of an application by the bankrupt for a discharge. Rather, it is more properly determined when the creditor subsequently seeks to enforce the pre-existing liability or judgment debt. If the debtor relies on his or her discharge as a basis for resisting enforcement of the pre-bankruptcy liability, the issue of the applicability of the exemptions contained in s. 178(1) should be determined at that time, based upon the established facts (including any previous declaration concerning the source of the liability) as well as the legal regime in force at that time.”


In other words, since the defendant had not yet become a bankrupt, the judge was not going to grant the requested declaration merely on the off chance that the defendant could, in future, assign into bankruptcy.


However, the judge did not allow the creditor to leave empty handed. He stated, he would include a “declaration that the judgment debt arose by reason of the defendant having committed a fraudulent act while acting in a fiduciary capacity, a disposition that is consistent with the scope of available declaratory relief, based on currently existing facts and circumstances.”



In our statements of claim for breach of trust, we include a request for the type of declaration that the judge granted and a request for the declaration that the judge refused to grant. We include a request for a declaration that any judgment survives bankruptcy just in case the defendant assigns into bankruptcy between the date of the claim and the date of judgment. In that situation, the bankruptcy would not be a mere possibility. It would be real and the declaration request would no longer be premature.



Image courtesy of Flikr, Creative Commons.
Jonathan Speigel


Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.



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