Legal Blog

Fiduciary (Bankruptcy)

A debt does not survive bankruptcy, subject to some exceptions. One exception arises out of section 178(1)(d) of the Bankruptcy and Insolvency Act. There is no discharge from a debt or liability arising out of fraud while acting in a fiduciary capacity. Fraud is relatively easy to understand, but what is “fiduciary”? This concept was discussed in Ronee v. Machalik, a 2007 decision of the Ontario Superior Court of Justice.

Round & Round 

The debtor was playing the system before the system caught up with him. The creditor had sued him for repayment of a $48,000 loan. Four days before trial, the debtor assigned into bankruptcy and the action was stayed.

The creditor subsequently commenced an action claiming civil fraud. That action came on for trial four years later. At the start of trial, the debtor requested an adjournment. It was granted, but the debtor was ordered to pay costs thrown away of $5,100. The debtor did not pay the costs and, accordingly, the debtor’s defence was struck. The creditor still had to prove his case and the matter again came on for trial, but without the debtor attending.

Findings 

The facts set out in the case are sketchy, but, we gather, the debtor and creditor had a personal relationship. The debtor looked after an Ontario property for the creditor, which engendered some trust between the parties. In addition, as a condition for the creditor lending money to the debtor, the debtor agreed, in writing, that he would not sell his property in Florida without the creditor’s permission and would allow the creditor to sell the Florida property if the debtor did not repay the money when due.

Of course, the debtor subsequently sold the Florida property without the creditor’s consent and did not repay the loan.

The judge had no problem finding that the debtor’s course of conduct was fraudulent. The real question was whether it was fraud in a fiduciary capacity.

Criteria 

There are three requirements for a fiduciary relationship:

1.   The fiduciary has scope for exercise of some discretion or power.

2.   The fiduciary can unilaterally exercise that power to affect the beneficiary’s interests.

3.   The beneficiary is particularly vulnerable or at the mercy of the fiduciary holding the power.

Put another way, would one party have reasonably expected that the other party would act in the former’s best interests regarding the subject matter in issue?    

As far as the judge was concerned, the general relationship between the parties, coupled with the debtor’s promise not to sell the Florida property, was enough to comprise a fiduciary duty.

We feel that the evidence may have been a little light to substantiate a fiduciary duty. However, judges wish to do justice and justice dictated that the debtor, who had led the creditor on a merry chase, be called to account for his rather unscrupulous behaviour.