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Bankruptcy - Exceptions to Discharge

Korea Data Systems (USA), Inc. v. Aamazing Technologies Inc. (Ont CA, 2015)

In this case the Court of Appeal considered the interpretation of the fiduciary exceptions to bankruptcy discharge, which read:
s. 178(1)(d)
An order of discharge does not release the bankrupt from

....

any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity or, in the Province of Quebec, as a trustee or administrator of the property of others.
The issue was whether the fiduciary relationship involved had to be owed to the creditor claiming the exception, or with respect to anyone. The court supported the former position:
[64] Third, by limiting the scope of s. 178(1)(d) to conduct by the fiduciary that has “some element of wrongdoing or improper conduct … in the sense of a failure to account properly for monies or property entrusted to the fiduciary in that capacity or inappropriate dealing with such trust property”, Simone instructs that a bankrupt’s wrongdoing or improper conduct is not itself sufficient to bring a debt within the ambit of the section. Rather, the impugned conduct must relate to the fiduciary relationship itself. In other words, it is the relationship between the claiming creditor and the bankrupt, as well as the nature of the bankrupt’s conduct, that anchors s. 178(1)(d). The provision protects a creditor that was in a vulnerable position in relation to the bankrupt when its claim arose.

[65] And it is here that the flaw in KDS USA’s suggested interpretation of s. 178(1)(d) becomes clear. KDS USA argues that s. 178(1)(d) applies to any debt or liability arising out of a bankrupt’s wrongdoing of the type envisaged by the section – fraud, embezzlement, misappropriation or defalcation – so long as the bankrupt was in a fiduciary relationship with someone when the debt arose through the bankrupt’s wrongful activity. Under this interpretation, the relationship between the claiming creditor and the bankrupt is virtually irrelevant.

[66] I do not accept this construction of s. 178(1)(d). In my view, a creditor cannot bring its claim within the exception set out in s. 178(1)(d) when that claim arose out of the bankrupt’s breach of a fiduciary duty to a third party. To hold otherwise would expand the reach of s. 178(1)(d) well beyond what it exists to protect: the relationship between a vulnerable creditor and a fiduciary debtor. Absent clear statutory language indicating such a legislative intention, a broad interpretation of the exception must be rejected. No such language appears in s. 178(1)(d).


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