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Insolvency (BIA) - Discharge Exceptions - Fiduciary Fraud [BIA s.178(1)(d)]. Korea Data Systems (USA), Inc. v. Aamazing Technologies Inc.
In Korea Data Systems (USA), Inc. v. Aamazing Technologies Inc. (Ont CA, 2015) 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
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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). . Yanic Dufresne Excavation Inc. v. Saint Joseph Developments Ltd.
In Yanic Dufresne Excavation Inc. v. Saint Joseph Developments Ltd. (Ont CA, 2022) the Court of Appeal considered the BIA 178(1)(d) fraud discharge exemption, and the required element of moral wrong-doing:C. Did the motion judge err in finding that Mr. Plant engaged in morally unacceptable misconduct in his fiduciary breach of trust?
[33] Case law makes it clear that a mere breach of trust, or even a negligent or an incompetent breach of trust, is insufficient to enable an order to be made that the debt survives bankruptcy pursuant to s. 178(1)(d) of the BIA. The judgment debt, whether it arises from “fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity”, must arise from conduct that “display[s] at least some element of wrongdoing or improper conduct” that would be “unacceptable to society” because of its “moral turpitude”, or “dishonesty”: Simone, at pp. 523-526, 529-530; Korea Data Systems (USA), Inc. v. Aamazing Technologies Inc., 2015 ONCA 465, 126 O.R. (3d) 81, at para. 60; Dugas v. Gaudet et al., 2016 NBCA 19, 401 D.L.R. (4th) 253, at para. 130. In the appellant’s factum, Mr. Plant argued that the pleadings do not support the requisite level of wrongdoing. However, in the course of oral submissions, Mr. Plant conceded that if the extrinsic evidence was properly admitted, we should defer to the motion judge’s determination that this level of wrongdoing was met. Given this concession, it is not necessary to examine this ground of appeal further. . Yanic Dufresne Excavation Inc. v. Saint Joseph Developments Ltd.
In Yanic Dufresne Excavation Inc. v. Saint Joseph Developments Ltd. (Ont CA, 2022) the Court of Appeal considered a R59.06(2) variance to a default judgment seeking to add a declaration that the judgment was bankruptcy-exempt for fraud. The variance was grounded in fresh evidence of fraud, and was granted. The court held that the evidence that it could rely on for the BIA 178(1)(d) issue was anything that was properly before the court in the proceeding, including the pleadings:A. Did the motion judge err by admitting and relying upon extrinsic evidence to make Fresh findings of fact?
[18] Where a party brings an application for a declaration that a judgment debt survives bankruptcy pursuant to s. 178(1)(d), the issue is whether, by its nature, that judgment debt qualifies as a debt enumerated under s. 178(1)(d) of the BIA. Section 178(1)(d) provides:s. 178(1) An order of discharge does not release the bankrupt from
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(d) 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. [19] Since the issue on a s. 178(1)(d) application relates to the nature of the judgment debt, an applicant cannot rely on previously unmade allegations against the judgment debtor that they engaged in additional wrongs: Lawyers’ Professional Indemnity Company v. Rodriguez, 2018 ONCA 171, 139 O.R. (3d) 641, at paras. 5, 32; H.Y. Louie Co. Limited v. Bowick, 2015 BCCA 256, 386 D.L.R. (4th) 117, at para. 88. Put simply, before an application judge can make a finding that the judgment debt survives bankruptcy pursuant to s. 178(1)(d), the judge must determine that the judgment debt arose out of fraud, embezzlement, misappropriation or defalcation while the judgment debtor was acting in a fiduciary capacity.
[20] Given that this is the relevant inquiry, the application judge is confined during a s. 178(1)(d) application to evidence “grounded in the process that produced the judgment debt”: Rodriguez, at para. 6. To be clear, the application judge may “look to the entire context of the proceedings in the [action that produced the judgment debt] to determine whether the judgment debt can be characterized as one falling within s. 178(1)”: Cruise Connections Canada v. Szeto, 2015 BCCA 363, 388 D.L.R. (4th) 648, at para. 29. This includes the “material filed that led to the obtaining of the judgment debt, including the facts pleaded in support of the action that led to the judgment debt, any evidence that was presented at the time to secure that judgment debt, and any reasons that might have been given”: Rodriguez, at para. 6. But any other evidence is “extrinsic” and inadmissible, as it is irrelevant in showing the nature of the judgment debt. Indeed, consulting extrinsic evidence could effectively alter the nature of the debt, creating a new or different debt that has never been the subject of a judgment. It could also “extend the reach of [s. 178(1)(d)] to statute-barred claims, and violate cause of action estoppel rules”: Rodriguez, at para. 6. For the purpose of this judgment, it is convenient to refer to this body of law as “the rule in Rodriguez”.
[21] Mr. Plant contends that the motion judge violated the rule in Rodriguez by admitting and relying upon the extrinsic evidence produced during Mr. Plant’s motion to set aside the Default Judgment, months after the Default Judgment was secured. I would reject this submission. In the motion before the motion judge, Yanic Inc. did not simply seek a declaration pursuant to s. 178(1)(d). Instead, having discovered previously unavailable evidence of what it believed to be fraud or defalcation by Mr. Plant while acting in a fiduciary capacity, Yanic Inc. brought a motion pursuant to Rule 59.06(2)(a) to vary the Default Judgment. Rule 59.06(2)(a) provides:59.06 (2) A party who seeks to,
(a) have an order set aside or varied on the ground of fraud or of facts arising or discovered after it was made
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may make a motion in the proceeding for the relief claimed. [22] It is obvious that fresh evidence is admissible at a Rule 59.06(2) hearing. In order to secure a variation under Rule 59.06(2), the moving party must prove, with evidence, either that the order was obtained by fraud, or that material facts supporting the variation arose or were discovered after the order was obtained: Royal Bank of Canada v. Korman, 2010 ONCA 63, 81 C.P.C. (6th) 1, at paras. 20‑21. Plainly, the rule in Rodriguez does not apply during a Rule 59.06(2) motion to vary.
[23] Moreover, given the implicit finding by the motion judge that the new evidence could not have been discovered with reasonable diligence, no question of res judicata concepts, such as cause of action estoppel or merger in the judgment, arises: H.Y. Louie Co., at paras. 62-65. Nor are there any abuse of process considerations arising out of the Motion to Vary: Cruise Connections, at para. 28.
[24] In my view, the motion judge did not err in these proceedings by admitting and considering the evidence that he did. I would dismiss this ground of appeal. . Convoy Supply Ltd. v. Elite Construction (Windsor) Corp.
In Convoy Supply Ltd. v. Elite Construction (Windsor) Corp. (Ont CA, 2023) the Court of Appeal considers the BIA 'fraud in a fiduciary capacity' bankruptcy discharge exception [BIA s.178(1)(d)], here where the facts were 'deemed admissions' resulting from a default judgment and the court below granted a declaration that the debt was BIA s.178-eligible:[15] The appellants acknowledge that the motion judge correctly stated the law in relation to the nature of the factual findings required to engage s. 178(1)(d) of the BIA. We agree. In particular, the motion judge recognized that, as a result of the default judgment, the appellants were deemed to admit the facts pleaded in the Statement of Claim. He recognized that he was required to make a factual assessment of whether the breach of trust, in the context of the deemed admissions from the pleading, engaged s. 178(1)(d) of the BIA. He also recognized that, in order for a judgment debt to trigger s. 178(1)(d) as arising from “fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity”, the debt must arise from conduct that displays at least some element of wrongdoing or improper conduct that would be unacceptable to society because of its “moral turpitude or dishonesty”: Simone v. Daley (1999), 1999 CanLII 3208 (ON CA), 43 O.R. (3d) 511 (C.A.).
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[21] The motion judge also considered relevant authorities of this court and the Superior Court in order to assess the types of conduct that have been found to be sufficient to meet the threshold of wrongdoing or improper conduct necessary to constitute misappropriation or defalcation under s. 178(1)(d) of the BIA: Bibico Electric Inc v. Battlefield Electrical Services Inc., 2012 ONCA 676, aff’g, [2011] O.J. No. 6557 (S.C.); Yanic Dufresne Excavation Inc. v. Saint Joseph Developments Ltd., 2022 ONCA 556, 22 C.L.R. (5th) 185; Re: Ieluzzi (#2), 2012 ONSC 1474, 88 C.B.R. (5th) 215. This aspect of the motion judge’s reasons underlines the fact-specific analysis he engaged in.
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