Legal Blog

Lose – Lose

We have continually maintained that, in many cases, judgment debtor examinations are of no real use because judgment debtors often lie about their assets during these examinations – assuming that the debtors even deign to attend the examinations. The debtor in Re Brennan, a 2019 Ontario Superior Court of Justice decision, provided one more example of a debtor not cooperating with the notice for a judgment debtor examination and, when finally examined, lying. In this case, however, all did not go well for the debtor.

Lie

The creditor, who at one time was the debtor’s lawyer, obtained a Small Claims Court judgment against the debtor on March 21, 2018. We were not told the judgment amount, but it was somewhere between $13,000 and $25,000.

The creditor scheduled a judgment debtor examination for June 14, 2018, but, surprise, the debtor failed to appear. The creditor scheduled a contempt hearing for June 27, 2018. The debtor appeared at that time and purged his contempt by agreeing to attend a subsequent judgment debtor examination. On July 10, 2018, the debtor attended at his examination and testified that he did not own any seizable assets. When asked whether he owned any RSPs, he stated, under oath, that he did not.

A mere two weeks later, the debtor filed for bankruptcy and, in his statement of affairs, he confirmed that he owned $13,000 in RSPs. He said, seemingly with a straight face, that two weeks earlier he did not know of his RSPs. The judge did not believe him. It was a bald faced lie.

As a consequence of the bankruptcy, all proceedings against the bankrupt were stayed pursuant to s. 69 of the Bankruptcy and Insolvency Act, subject to the provisions of s. 69.4 allowing a creditor to lift the stay if it appeared that the creditor would be materially prejudiced by its continuation or if it were equitable to do so on other grounds.

The creditor brought a motion to the court under s. 69.4 for relief, essentially arguing that, had the debtor not lied during his judgment debtor examination, the creditor would have seized the RSP before the debtor assigned into bankruptcy.

Assets

Pursuant to s. 67.1(b.3) of the BIA, RSP contributions made within the 12 months before bankruptcy form part of the bankrupt’s estate for distribution to the creditors. RSP contributions made before that time are considered exempt assets and cannot be touched. The bankrupt continues to have the benefit of these assets regardless of the bankruptcy.

In our debtor’s situation, all contributions had been made well before the 12-month cut-off date and, accordingly, were exempt assets that the bankrupt’s trustee could not seize. Accordingly, if the creditor were unsuccessful in his motion, the debtor would have been well rewarded for his lie.

However, was the creditor correct in his contention that, without the bankruptcy, he could have seized the RSP and received all of the funds? The answer is yes, subject to one caveat. If there had been an insurance component to the RSP, then the RSP could not have been seized. Accordingly, the judge requested the trustee in bankruptcy to contact the RSP’s trustee to satisfy the judge that there was no life insurance component. As it happened, there was none and the creditor’s contention was correct. Had the creditor, who was the debtor’s only execution creditor, seized the RSP, the sheriff would ultimately have distributed all of the RSP money to the creditor. No other creditors would have received anything and the debtor would have lost all of the RSP money.

Decision

In essence, the judge had two scenarios available to him: (i) allow the motion and allow the creditor to seize the RSP regardless of the bankruptcy or (ii) disallow the motion and allow the debtor the full benefit of the RSP. In neither scenario would the debtor’s other creditors receive any benefit from the RSP.

Once the judge determined that no other creditor would be affected by the lifting of the stay, the decision became relatively easy. Reward the lying debtor or give the funds to the creditor. The judge chose the latter.

To mitigate against any adverse tax consequences, the judge ordered that 30% of the RSP proceeds be deducted at source by the RSP’s trustee and remitted to CRA to the debtor’s credit. The balance was to be remitted to the sheriff.

Change Facts

As in all cases, the decision and remedies depend upon the facts. Change the facts and the decision might not be the same. The decision in this case may well have been different if, for example:

• there were other execution creditors. As soon as the proceeds were paid to the sheriff, these execution creditors would have had a right to a pro rata share of those proceeds, regardless that they did nothing to try to collect their debts before bankruptcy. Should they receive the fruits of the creditor’s motion?
• some of the contributions to the RSP had been made within one year of the date of bankruptcy. In this situation, the trustee in bankruptcy would have had a claim to those contributions and it, and the debtor’s other creditors, would have been prejudiced if the creditor had received all of them.

Win – Lose

The debtor apparently lost. His lie did not help him. However, the judge did not award any costs against him, noting only “In the circumstances, the Court exercises its discretion and makes no Order as to costs.” We assume that these “circumstances” are the circumstances of the debtor’s bankruptcy and impecuniosity. Conversely, we would have said that, in the circumstances of the debtor’s attempt to shield his asset through perjury, he should pay all of the creditor’s costs. Because the debtor represented himself and, therefore, did not incur any legal fees, he had everything to gain from his lie and little, and ultimately nothing, to lose.

The creditor received the grand sum of $9,100 towards his judgment. Fortunately, he was able to act for himself and, therefore, all he lost was his time and some disbursements. However, consider the time and effort he expended in the steps he took to collect that money: sue his client and get judgment; bring a motion for contempt for the debtor’s failure to attend the first judgment debtor examination; attend in court at that motion, at which time the debtor promised to attend a 2^nd examination; attend at the 2^nd examination; bring the motion to lift the stay; attend at the motion to lift the stay; and arrange for the RSP to be seized and the proceeds to be forwarded to the sheriff. In each of these steps, the creditor would have incurred disbursements. Had the creditor not been able to act for himself and been forced to hire another lawyer to bring all of these steps, we suspect that the other lawyer’s account to the creditor would have been far more than $9,100.

Accordingly, even though the creditor won the motion and had the satisfaction of knowing that the debtor would not keep the money, from a purely monetary cost-benefit analysis the lawyer would have been better advised to use his time to earn fees from paying clients and write off the debtor’s account receivable from the start.

Image courtesy of Schwerdhoefer.

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