Legal Blog

Non-Disclosure

Bankruptcy is a means by which our society allows unfortunate debtors to throw off their shackles of debt and start afresh. However, it should not be a means to allow fraudulent debtors to cheat their creditors. The case of Communication Technology Credit Union v. Schell, a 2006 decision of the Ontario Superior Court of Justice, was a case in which a judge had to determine whether the bankrupt was a fraud or just unfortunate.

Default 

The bankrupt obtained a $20,000 line of credit from a credit union in January 2000. In July 2001, after fully drawing on the line, she filed an assignment into bankruptcy. After the bankrupt was discharged, the credit union brought an action for a declaration that the bankruptcy did not discharge the bankrupt’s debt to it.

The credit union relied on section 178(1)(e) of the Bankruptcy and Insolvency Act, which states that that there is no discharge from “any debt or liability for obtaining property by false pretences or fraudulent misrepresentations.”

The credit union claimed that the bankrupt was fraudulent in two instances. First, at the time she applied for the line, she failed to disclose that she would soon be obliged to repay $18,000 for an overpayment on CPP disability payments that she had  received in 1992-1993. Second, when the bankrupt received the formal notice in September 2000 to repay the overpayments, she failed to disclose the “change of circumstance”, as the credit agreement had required.

Law 

The judge agreed that fraudulent misrepresentation does not require an affirmative statement. Non-disclosure, concealment, or strategic silence can also amount to fraudulent misrepresentation.

The real question for the judge, as is usually the case, was whether, on the facts, the bankrupt was strategically and, therefore, fraudulently silent about the CPP indebtedness.

First Issue 

On the first issue, the credit union acknowledged that the bankrupt did not receive the formal letter alleging and demanding repayment of the CPP debt until September 2000. However, it argued that the bankrupt must have known in January 2000 of the looming indebtedness when she applied for the line. The credit union relied on several letters from the government to the bankrupt asking for information regarding her 1992 claim.

The bankrupt maintained that the letters only asked for additional medical and other documents and said nothing about a possible overpayment. She testified that when she called the government officials to discuss the requests, she was only told that they would get back to her and that years went by before she received the September 2000 notification.

The judge held that the bankrupt might have suspected that she would be liable for a CPP overpayment, but the credit union had not proven that she knew it was likely or probable. Since a finding of fraud depends on the state of mind of the bankrupt, the judge found for the bankrupt on this issue.

Second Issue 

The credit union claimed that the bankrupt ought to have notified it of the CPP debt in September 2000, presumably because the bankrupt had not fully drawn on the line at that time. The bankrupt stated that when she received the notice, she called her contact at the credit union. The contact, a financial advisor, allegedly told the bankrupt not to worry about the CPP debt because they both expected her income flow to stabilize so that she would be able to pay, or at least carry, all of her debts. Unfortunately, although the contact then worked at the credit union, she no longer worked there at the time of trial and neither of the parties could find her.

The credit union stated argued that, since there were no notes in the contact’s file to indicate that the bankrupt had called her, therefore the call did not take place. The bankrupt countered that she normally met with her contact over lunch or dinner. Although we find this statement suspect, the judge held that “no notes” was insufficient to show that the bankrupt did not call.

Note that this situation is different from the usual situations in which debtors state that they received advice or representations from someone at a financial institution, but are unable to name the actual representative. In these situations, the representative could be anyone and the financial institution has no possibility to gainsay whatever the debtor is spouting. Accordingly, the debtor’s assertion carries little weight. In this case, however, the bankrupt named the contact.

Upshot 

The credit union’s case led to a decision in which the judge provided a great statement of the law, but which was unsuccessful on the facts. The credit union simply did not have enough to go on.