|
Insolvency - BIA - Fraud [BIA s.178]. 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.).
....
[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. . Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc.
In Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc. (Ont CA, 2021) the Court of Appeal considered the fraud exception to bankruptcy release, engaging in an extended statutory interpretation process:[1] A discharge from bankruptcy releases the insolvent debtor from pre-bankruptcy debts or liabilities[1], subject to certain exceptions. One exception, under s. 178(1)(e) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”) is “any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation”. That kind of debt or liability is not released, and thus remains enforceable against the debtor post-bankruptcy.
....
[5] At the core of the concept of false pretences is the making of a deceitful statement – that is, a statement that is false to the knowledge of its maker (including through wilful blindness or recklessness). For s. 178(1)(e) to apply, the debt or liability to the creditor must have resulted from the bankrupt having obtained property or services by making such a statement. The nature and substance of the liability of the appellant reflected in the trial judgment is not one that arose from such a statement. Although the liability arose from morally unacceptable conduct of the appellant, that is insufficient to fit it within the exception in s. 178(1)(e) of the BIA.
....
(1) Statutory Provisions
[20] Section 178(1) and (2) of the BIA provide, in relevant part:(1) An order of discharge does not release the bankrupt from
…
(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;
(e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim;
…
(2) Subject to subsection (1), an order of discharge releases the bankrupt from all claims provable in bankruptcy. [21] Section 69(1) of the BIA stays any action or execution proceedings against a debtor in respect of a claim provable in bankruptcy on the filing of a notice of intention to make a proposal. Section 69.3(1) imposes a stay, on the same terms, upon bankruptcy. Section 69.4 permits the court to make an order that the stay no longer operates, subject to any qualifications the court considers proper.
....
(b) Statutory Interpretation
[24] At the heart of this issue is a question of statutory interpretation — what conduct is captured by the phrase “debt or liability resulting from obtaining property or services by false pretences” in s. 178(1)(e) of the BIA?[2]
[25] Legislation is to be interpreted by conducting a “textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole”: Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601, at para. 10. The fundamental principle is that “the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament”: Bell ExpressVu Limited Partnership v. Rex, 2002 SCC 42, [2002] 2 S.C.R. 559, at para. 26, citing Elmer Driedger, Construction of Statutes, 2nd ed. (Toronto, Ont.: Butterworths, 1983), at p. 87.
(i) The Text
[26] Section 178(1)(e) requires that the debt or liability owed to the creditor have resulted from the debtor having obtained property or services by false pretences. “False pretences” is not defined in the BIA. It is, however, defined in the Criminal Code, s. 361(1) as follows:A false pretence is a representation of a matter of fact either present or past, made by words or otherwise, that is known by the person who makes it to be false and that is made with a fraudulent intent to induce the person to whom it is made to act on it. [27] The motion judge rejected use of this definition. He expressed two reasons: first, that Parliament’s intent was not to require criminality in order for s. 178(1)(e) to apply; and second, that to do so would deprive the term “false pretences” of any meaning beyond that conveyed by the term “fraudulent misrepresentation”, which is also used in s. 178(1)(e).
[28] I agree with the motion judge that s. 178(1)(e) does not require the debtor to have been convicted of the offence of false pretences, or that it is necessary to show facts sufficient to prove that the debtor would be criminally convicted if charged. But that does not mean the Criminal Code definition does not assist in determining the sense in which the words were used in s. 178(1)(e) of the BIA. A phrase with legal meaning, chosen by Parliament for use in a statute, may have its meaning illuminated by the way the same phrase is used in other statutes of the same legislative body since interpretations “favouring harmony between the various statutes enacted by the same government should indeed prevail”[3]: Therrien (Re), 2001 SCC 35, [2001] 2 S.C.R. 3, at para. 121.
[29] A number of courts have followed this interpretive approach, and have referenced the Criminal Code definition to illuminate the meaning of false pretences for the purpose of applying it under the BIA: Celanese Canada Inc. v. Murray Demolition Corp., [2010] O.J. No. 6347 (S.C.), at para. 22; H.Y. Louie Co. Limited v. Bowick, 2015 BCCA 256, 386 D.L.R. (4th) 117, at para. 49, citing Szeto (Re), 2014 BCSC 1563, 15 C.B.R. (6th) 255, at paras. 37-41, rev’d on other grounds, 2015 BCCA 363, 388 D.L.R. (4th) 648, leave to appeal requested but appeal discontinued, [2015] S.C.C.A. No. 444; and Water Matrix Inc. v. Carnevale, 2018 ONSC 6436, 65 C.B.R. (6th) 109, at para. 63, aff’d 2016 ONCA 875.
[30] Reference to the Criminal Code definition underscores that to come within the false pretences branch of s. 178(1)(e), the debt or liability to the creditor must have arisen from the debtor having made, or being responsible for, a representation known to be false, that is, a knowingly false statement, designed to induce another person to act upon it. Because s. 178(1)(e) requires that the debtor obtained property or services by false pretences, it contemplates that a person actually relied upon the false statement.
[31] The respondent argues that false pretences is properly understood without reference to the Code. False pretences in s. 178(1)(e) was held by this court to require the making of a deceitful statement in Buland Empire Development Inc. v. Quinto Shoes Imports Ltd. et al. (1999), 1999 CanLII 1345 (ON CA), 123 O.A.C. 288 (C.A.). The court said, at para. 14:The New Oxford Dictionary of English (1998) defines the verb “misrepresent” as “give a false or misleading account of the nature of”. The noun “pretence” is [defined] as “an attempt to make something that is not the case appear to be true”. It is clear from these definitions that the core content of the phrases “false pretences” and “fraudulent misrepresentation” is deceitful statements. [Emphasis added.] [32] A similar observation appears in the decision of the British Columbia Court of Appeal in Cruise Connections Canada v. Szeto, 2015 BCCA 363, 388 D.L.R. (4th) 648, leave to appeal requested but appeal discontinued, [2015] S.C.C.A. No. 444, at para. 13: “The essential test for both ‘false pretences’ and ‘fraudulent misrepresentation’ under s. 178(1)(e) has been described simply as determining whether the bankrupt was ‘deceitful’ in obtaining the property”.
[33] I do not read the decisions in Buland or Cruise Connections to mean that the Code definition is unhelpful. Although the descriptions of false pretences in those decisions did not expressly reference the Code definition, they are harmonious with it. The description in Buland was adopted in a passage quoted with approval in H.Y. Louie that also referenced the Code definition. The conclusions in Buland and in Cruise Connections on whether the debt or liability there in issue fell within s. 178(1)(e) expressly turned on whether the liability arose from the debtor having obtained property by the making of or participation in deceitful statements: Buland, at paras. 13-15; Cruise Connections, at para. 49. The term “deceitful” has within it the notion of a knowingly false statement[4] that caused a person to act to their prejudice: Bruno Appliance and Furniture, Inc. v. Hryniak, 2014 SCC 8, [2014] 1 S.C.R. 126, at paras. 18-21.
[34] The motion judge’s second reason for rejecting use of the Code definition is that it would merge the concepts of fraudulent misrepresentation and false pretences. I do not accept this proposition.
[35] Most cases, when discussing s. 178(1)(e), treat fraudulent misrepresentation and false pretences as closely connected terms with the same requirements. The core concept of making a deceitful statement applies to both: see Montréal (City) v. Deloitte Restructuring Inc., 2021 SCC 53, at paras. 24-25. To the extent that they are not identical concepts, if any, it may be that fraudulent misrepresentation requires the creditor itself to have relied on a false statement made to it, while false pretences may extend to cases where a false statement was made by the debtor to, and relied on by, a third party, depriving the creditor of property to which it was entitled: Ste. Rose & District Cattle Feeders Co-op v. Geisel, 2010 MBCA 52, [2010] 11 W.W.R. 251, at paras. 104-7[5]. But that distinction does not take away from the requirement that a deceitful statement by the debtor, on the basis of which property or services were obtained by the debtor, must be the source of the debt or liability to the creditor, when the false pretences branch of s. 178(1)(e) is relied upon.
[36] Reading the text of s. 178(1)(e) with the benefit of the definition of false pretences in the Code illuminates its core concept: it only applies to a debt or liability that has arisen from one or more deceitful statements, by the debtor or for which the debtor is responsible, on the basis of which the debtor obtained services or property. It does not apply to other kinds of lying or wrongdoing, no matter how morally objectionable, that do not have these basic characteristics.
(ii) Context
[37] Reading s. 178(1) as a whole reinforces the view that s. 178(1)(e) refers to specific types of wrongdoing, within specific parameters.
[38] Section 178(1)(a.1) provides that a debt reflected in a judgment for sexual assault or intentional infliction of bodily harm is not released. Section 178(1)(d) provides that a debt is not released if it arose from fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity. Similarly, s. 178(1)(e) provides that debts are not released if they arose from the obtaining of property or services by fraudulent misrepresentation or false pretences.
[39] In other words, rather than legislating a catchall of debts arising from morally objectionable conduct, the BIA identifies categories of specific wrongful conduct that give rise to debts that are not released, and specifies the criteria to be applied. In doing so, Parliament must be taken to have intended that only these specific categories, on the specific terms identified, will be given this effect, even though other forms of morally objectionable conduct giving rise to debts can easily be imagined.
(iii) Purpose
[40] As has been observed, one of the purposes of bankruptcy legislation is to encourage the rehabilitation of an honest but unfortunate debtor by providing, subject to reasonable conditions, a discharge of their debts. Section 178(1) provides for certain debts to survive bankruptcy as exceptions to the general principle, stemming from different policy considerations. For example, the provisions of s. 178(1)(b) and (c), which provide that debts for support obligations are not released by bankruptcy, are rooted in an overriding social policy to protect spouses and children. Others, like ss. 178(1)(a.1), (d), and (e), are based on considerations of morality. Section 178(1)(e) is a moral sanction against the bankrupt for obtaining property through deceitful means, and prevents a bankrupt being rewarded for such conduct by a release of liability: Simone v. Daley (1999), 1999 CanLII 3208 (ON CA), 43 O.R. (3d) 511, at pp. 521-22; Cruise Connections, at para. 15.
[41] The purpose of s. 178(1) and the legislation as a whole supports reading s. 178(1)(e) as applying to debts or liabilities that result from the obtaining of property by the deceitful means of false statements. It does not support reading the subsection as applying to any conduct without those attributes that a court might characterize as morally objectionable or that prevents a debtor being described as honest but unfortunate.
[42] In other words, for the purposes of s. 178(1)(e), it does not follow that all morally objectionable behaviour involves false statements – the core of the concept of false pretences. As Buland makes clear, at paras. 13 and 15, wrongful conduct that does not involve false statements by which property was obtained is not covered by s. 178(1)(e):In his judgment, Lederman, J., equated fraudulent removal by a tenant of his own property with false pretences or fraudulent misrepresentation. The appellant asserts that this conclusion is wrong because the removal of goods is an entirely different activity than the making of statements. We agree with this submission.
…
There is nothing in the record before either Marchand, J., or Lederman, J., to establish that the appellant ever said anything about the removal of goods from the store. Indeed, the statement of claim prepared by the landlord asserts that the tenants engaged in unlawful conduct, namely, failing to pay rent, vacating the premises and removing stock. One can sympathize with Lederman, J.’s, desire to give s. 178(1)(e) “a broad interpretation as it is remedial legislation”. However, such an interpretation must be anchored in the conduct proscribed by the provision. That conduct is false statements which the landlord did not claim, and Marchand, J., did not find, had been made by the tenants. [Emphasis in original.] . 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
....
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). . Gray (Re)
In Gray (Re) (Ont CA, 2014) the Court of Appeal considered the elements required to invoke the fraud exceptions to debt discharge located in s.175(1)(e) of the Bankruptcy and Insolvency Act:Analysis
[24] Section 178(1) of the BIA preserves certain types of claims from a bankrupt’s order of discharge. They are exceptions to the general rule of discharge and should be addressed accordingly: Simone v. Daley, 1999 CanLII 3208 (ON CA), [1999] O.J. No. 571 (C.A.), at para. 28. The onus is on the creditor who seeks to have the debt or liability survive the discharge of the bankrupt to bring it within one of the provisions of s. 178(1).
[25] It is instructive to examine more closely subsections 178(1)(d) and (e), the two provisions dealing with a bankrupt’s fraud. They provide as follows:178(1) An order of discharge does not release the bankrupt from
....
(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;
(e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim; [26] Section 178(1)(d) preserves from discharge a debt or liability “arising out of” fraud, embezzlement, misappropriation or defalcation of the bankrupt while acting in a fiduciary capacity. Its application is restricted to bankrupts acting in a fiduciary capacity. As such, a debt or liability “arising out of” the fraud of a debtor who was not acting in a fiduciary capacity would fall outside the scope of this section and would need to be considered under s. 178(1)(e).
[27] Section 178(1)(e) preserves from discharge a debt or liability “resulting from obtaining property or services by” false pretences or fraudulent misrepresentation.
[28] The reasons of the trial judge demonstrate that he was alive to the specific wording of this section when he concluded at para. 44 of his decision:On a strict reading of [section 178(1)(e)], this conclusion is sufficient to determine the issue on this application. The Mortgage was obtained by Roberts’ fraudulent misrepresentations that constitute the Misrepresentations. Gray did not participate in the making of the Misrepresentations and neither knew, nor reasonably ought to have known, of them. [29] The appellant acknowledges that in order for there to be a fraudulent misrepresentation there must be reliance by the party to whom the representation is made, and that in the present case the trial judge noted that it was not disputed that the mortgage was obtained in reliance on Roberts’ misrepresentations. The trial judge concluded that Gray did not know, nor ought he reasonably to have known, of the misrepresentations made by Roberts, that led to the mortgage funds being advanced.
[30] The appellant contends however that the trial judge failed to consider the false pretences branch of s. 178(1)(e). It is asserted that the false pretences consisted of Gray’s participation in the straw borrower scheme, knowing that he was not going to live in the house, and failing to reveal this fact, as well as the payment he was receiving for his involvement when the mortgage was advanced.
[31] There is a fatal flaw in the appellant’s argument. Irrespective of whether one considers fraudulent misrepresentation or false pretences, s. 178(1)(e) requires a finding that the bankrupt “obtained property by” such conduct. A causal connection between the bankrupt’s wrongdoing and the creation of the debt or liability is required. It is not sufficient that the bankrupt engaged in fraud, or that the debt or liability “arose out of” a fraudulent scheme. The trial judge in this case concluded that the mortgage funding was obtained by Roberts’ fraudulent misrepresentations, and not as a result of what Gray represented or failed to disclose to RBC.
[32] Since the appellant relies heavily on the decision of the Manitoba Court of Appeal in Ste. Rose & District Cattle Feeders Co-op v. Geisel, an examination of that case is warranted.
[33] In Geisel there were two debtors, a father and a son, against whom the plaintiff Co-op had obtained a default judgment before both went bankrupt. The father had borrowed money from the Co-op, and agreed to use the funds to purchase cattle, and to brand the cattle with the Co-op’s brand. The father was to notify the Co-op when the cattle were taken to auction, and to repay the borrowing from the proceeds of sale. Ultimately, the cattle, which had not been branded with the Co-op’s name, were transported and sold at auction in the name of the son. The proceeds were deposited into the son’s bank account, where they were seized by one of his creditors. There was no intention to defraud the Co-op; rather the scheme was put in place by the two men for tax reasons, and with the expectation that the proceeds would be used to repay the father’s borrowing.
[34] There was no fraud on the part of the father and no involvement by the son in connection with the original borrowing, factors that led the trial judge to refuse relief under s. 178(1)(e) on the basis that the debt was not “property obtained by” fraudulent misrepresentation or false pretences.
[35] This decision was overturned on appeal, with the Manitoba Court of Appeal holding that the judgment debt survived the bankruptcy discharges of both father and son.
[36] The appeal court noted that, while there was no apparent fraud in the original borrowing, at the later stage where both debtors knowingly diverted the proceeds of sale of the cattle to the wrong bank account, there was fraud on the part of the father and false pretences on the part of the son. The father knowingly withheld relevant information from the Co-op when he advised that the cattle would be sold, but not that they would be sold in his son’s name with the proceeds deposited into the son’s account. This was a fraudulent misrepresentation relied on by the Co-op to its detriment. The false pretences were on the part of the son when he falsely held out to the transport driver and auctioneer that the cattle were his to sell. He obtained the property of the Co-op (the proceeds of sale of the cattle) by pretences which he knew to be false.
[37] The Geisel case does not stand for the general proposition urged upon us by the appellant – that a debtor’s false pretences are sufficient to exempt a debt from discharge, even where there is no causal link between the debt or liability sought to be preserved and the false pretences of the bankrupt. In Geisel there could be no misrepresentation by the son to the Co-op, because the son had no dealings or relationship with the Co-op. What was key was that the son had obtained from the auctioneer the Co-op’s property (the proceeds of the sale of the cattle at auction) by pretences he knew to be false. He had represented that he was the owner of the cattle.
[38] In the present case, the trial judge referred to the Geisel decision and he cited that court’s approval of the observation in Buland Empire Development Inc. v. Quinto Shoes Imports Ltd., [1999] O.J. No. 2807 (C.A.), at para. 14, that “the core content of both false pretences and fraudulent misrepresentation is deceitful statements”. He recognized that both false pretences and fraudulent misrepresentation involved the question of whether Gray had made a deceitful statement that led RBC to advance the mortgage funds. The trial judge considered the very circumstances that the appellant contends were false pretences and he concluded that they did not amount to a fraudulent misrepresentation on the part of Gray.
[39] The wording of section 178(1)(e) makes it clear that the debt or liability must result from obtaining property or services by false pretences or fraudulent misrepresentation. The trial judge concluded that the money was advanced by RBC as a result of Roberts’ misrepresentations, and not as a result of anything Gray said or failed to say or do. This was a finding of fact that is determinative of both the “false pretences” and “fraudulent misrepresentation” aspects of s. 178(1)(e) as applied to this case.
[40] Finally, while it is correct to say that “the bankruptcy scheme is intended to benefit honest, but unfortunate, debtors” (see Re Giannotti (2000), 2000 CanLII 16928 (ON CA), 138 O.A.C. 316, at para. 11, cited with approval in Geisel), it is not sufficient to show that there was a false pretence or fraudulent misrepresentation unless it is also shown that the property (in this case the mortgage funding) was obtained thereby. While the Geisel case referred to this interpretive principle, in concluding that the debtors’ motives and intentions to repay the Co-op were not relevant, the court nevertheless found in that case that property had been obtained by each of the debtors by their fraudulent misrepresentation or false pretences. . M.O.S. MortgageOne Solutions Ltd. v. Heidary
In M.O.S. MortgageOne Solutions Ltd. v. Heidary (Ont CA, 2022) the Court of Appeal considered the evidence and pleadings required for a court to grant a declaration that a debt was exempt for bankruptcy for fraud [BIA 178(1)(e)], when only 178(1)(d) had been pled:[1] The appellant debtor appeals from the motion judge’s declaration that his debt to the respondent mortgagee was not released by his discharge from bankruptcy because of his fraud, pursuant to s. 178(1)(e) of the Bankruptcy and Insolvency Act (“BIA”), R.S.C., 1985, c. B-3.
[2] For the purposes of this appeal, the relevant provisions of section 178(1) of the BIA are as follows:178(1) An order of discharge does not release the bankrupt from
…
(d) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity …
(e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim. ....
Appellant’s Position
[11] The appellant submits that the motion judge erred in declaring that the appellant’s judgment debt was not released pursuant to s. 178(1)(e) of the BIA. The respondent had only pleaded relief under s. 178(1)(d) of the BIA and it was unfair to the appellant to grant relief not contained in the respondent’s amended statement of claim. Moreover, the appellant argues, the motion judge erred in determining that in consenting to judgment, the appellant had admitted to fraud, especially as the judgment did not contain any reference to fraud or to the survival of the judgment following the appellant’s discharge from bankruptcy. The appellant maintains that unless fraud is pleaded with the particularity required under rule 25.06(8) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, it cannot support a finding that a debt was not released by the debtor’s bankruptcy under s. 178(1) of the BIA. In any event, according to the appellant, fraud is not a reasonable inference arising from the pleadings.
[12] As I shall explain, I am not persuaded by these submissions and would dismiss the appeal.
....
The Debt Survives Bankruptcy
[14] In my view, the motion judge made no error in granting relief under s. 178(1)(e) of the BIA. His decision was amply supported by the pleadings and consent judgment. I see no procedural unfairness to the appellant.
[15] To obtain a declaration under s. 178(1) of the BIA that a judgment survives a bankrupt’s discharge, it is unnecessary for the claimant to specifically refer to s. 178 in its pleadings on which the judgment is based: Lawyers’ Professional Indemnity Company v. Rodriguez, 2018 ONCA 178, 419 D.L.R. (4th) 520, at para. 6. Nor is there any requirement that fraud be specifically pleaded or particularized. As stated, the judge’s task is to determine the nature and substance of the debt by examining the pleadings, any reasons that might have been given, and the proceedings that were before the court that granted the judgment. In determining whether a consent judgment falls within the scope of s. 178(1), the court “is concerned not so much with the cause of action that was pleaded but with whether the pleadings as a whole suggest fraudulent or otherwise “unacceptable” conduct”: H.Y. Louie Co. Limited v. Bowick, 2015 BCCA 256, 386 D.L.R. (4th) 117, at para. 41, per Newbury J.A. (dissenting, but not on this point) (emphasis added). In other words, as stated by Beard J.A. of the Manitoba Court of Appeal in Bannerman Lumber Ltd. v. Goodman, 2021 MBCA 13, at para. 48, referencing Rodriguez, at para. 6, “The issue, at the end of the day, is whether the evidence, facts and findings in the underlying proceeding are sufficient to make the required finding of fraud or false pretences in the application under section 178(1)(e) [of the BIA].”
[16] In this case, the motion judge carried out the requisite analysis of the nature and substance of the pleadings and consent judgment and determined that they supported the criteria under s. 178(1)(e) of a debt resulting from obtaining property by “false pretences or fraudulent misrepresentation”. As the motion judge stated at para. 66 of his reasons:Here, [the respondent’s] amended statement of claim clearly raised the issue of fraud. It did so in its factual recitation of the alleged conduct of the [appellant], [the respondent’s] reliance on their representations regarding Imposter Erwin, as well as its reliance on the allegedly false representations of that imposter. The amended statement of claim also contained an explicit plea that any judgment in the action survive bankruptcy under s. 178(1)(d). The judgment issued on consent was based, at least in part, on a pleading that made those claims. [17] I see no error in the motion judge’s analysis or findings. It was open to him based on the pleaded factual allegations to conclude that the appellant’s impugned conduct fell within s. 178(1) of the BIA. As I earlier stated, it was unnecessary for the respondent’s pleadings to contain any further particulars of the appellant’s conduct. In my view, there is no ambiguity about the appellant’s alleged conduct. How, other than that the appellant was engaged in a fraudulent scheme, could his alleged conduct be reasonably characterized? This is the only reasonable inference to be drawn from the appellant’s conduct of providing a false CRA contact in order to pass on false information. On the pleaded facts, it is apparent that this was done with the view of fraudulently inducing the respondent to make the requested advances for the sole benefit of the appellant and contrary to his express obligations under the priority agreement.
[18] The appellant was not taken by surprise. As the motion judge noted, the respondent made specific reference to s. 178(1)(d) in its claim. In contrast to the statement of claim in issue in Rodriguez which advanced a claim based solely on a mortgage default, the respondent’s claim pleaded facts that clearly supported s. 178(1)(e). The respondent pleaded that the appellant had fraudulently obtained monetary advances under false pretences from the respondent. This was done through the false representations of the amount of the MNR liens through an imposter to whom the appellant had expressly directed the respondent for the purpose of inducing the advances. The respondent also pleaded general reliance on the BIA. Further, in its motion, the respondent requested relief under ss. 178(1)(d) and (e) of the BIA. Significantly, the appellant admits that he did not argue the technical objection that the respondent did not plead s. 178(1)(e) before the motion judge that he raises for the first time on appeal.
[19] I see no basis for appellate intervention in this case. Having applied the correct test, the motion judge’s conclusion that the respondent’s pleadings adequately raised the issue of fraud was reasonably open to him on the record and is entitled to deference on appellate review. . 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
...
(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
...
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. . Gray (Re)
In Gray (Re) (Ont CA, 2014) the Court of Appeal considered the elements required to invoke the fraud exceptions to debt discharge located in s.175(1)(e) of the Bankruptcy and Insolvency Act:[24] Section 178(1) of the BIA preserves certain types of claims from a bankrupt’s order of discharge. They are exceptions to the general rule of discharge and should be addressed accordingly: Simone v. Daley, 1999 CanLII 3208 (ON CA), [1999] O.J. No. 571 (C.A.), at para. 28. The onus is on the creditor who seeks to have the debt or liability survive the discharge of the bankrupt to bring it within one of the provisions of s. 178(1).
[25] It is instructive to examine more closely subsections 178(1)(d) and (e), the two provisions dealing with a bankrupt’s fraud. They provide as follows:178.(1) An order of discharge does not release the bankrupt from
(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;
(e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim; [26] Section 178(1)(d) preserves from discharge a debt or liability “arising out of” fraud, embezzlement, misappropriation or defalcation of the bankrupt while acting in a fiduciary capacity. Its application is restricted to bankrupts acting in a fiduciary capacity. As such, a debt or liability “arising out of” the fraud of a debtor who was not acting in a fiduciary capacity would fall outside the scope of this section and would need to be considered under s. 178(1)(e).
[27] Section 178(1)(e) preserves from discharge a debt or liability “resulting from obtaining property or services by” false pretences or fraudulent misrepresentation.
[28] The reasons of the trial judge demonstrate that he was alive to the specific wording of this section when he concluded at para. 44 of his decision:On a strict reading of [section 178(1)(e)], this conclusion is sufficient to determine the issue on this application. The Mortgage was obtained by Roberts’ fraudulent misrepresentations that constitute the Misrepresentations. Gray did not participate in the making of the Misrepresentations and neither knew, nor reasonably ought to have known, of them. [29] The appellant acknowledges that in order for there to be a fraudulent misrepresentation there must be reliance by the party to whom the representation is made, and that in the present case the trial judge noted that it was not disputed that the mortgage was obtained in reliance on Roberts’ misrepresentations. The trial judge concluded that Gray did not know, nor ought he reasonably to have known, of the misrepresentations made by Roberts, that led to the mortgage funds being advanced.
[30] The appellant contends however that the trial judge failed to consider the false pretences branch of s. 178(1)(e). It is asserted that the false pretences consisted of Gray’s participation in the straw borrower scheme, knowing that he was not going to live in the house, and failing to reveal this fact, as well as the payment he was receiving for his involvement when the mortgage was advanced.
[31] There is a fatal flaw in the appellant’s argument. Irrespective of whether one considers fraudulent misrepresentation or false pretences, s. 178(1)(e) requires a finding that the bankrupt “obtained property by” such conduct. A causal connection between the bankrupt’s wrongdoing and the creation of the debt or liability is required. It is not sufficient that the bankrupt engaged in fraud, or that the debt or liability “arose out of” a fraudulent scheme. The trial judge in this case concluded that the mortgage funding was obtained by Roberts’ fraudulent misrepresentations, and not as a result of what Gray represented or failed to disclose to RBC.
[32] Since the appellant relies heavily on the decision of the Manitoba Court of Appeal in Ste. Rose & District Cattle Feeders Co-op v. Geisel, an examination of that case is warranted.
[33] In Geisel there were two debtors, a father and a son, against whom the plaintiff Co-op had obtained a default judgment before both went bankrupt. The father had borrowed money from the Co-op, and agreed to use the funds to purchase cattle, and to brand the cattle with the Co-op’s brand. The father was to notify the Co-op when the cattle were taken to auction, and to repay the borrowing from the proceeds of sale. Ultimately, the cattle, which had not been branded with the Co-op’s name, were transported and sold at auction in the name of the son. The proceeds were deposited into the son’s bank account, where they were seized by one of his creditors. There was no intention to defraud the Co-op; rather the scheme was put in place by the two men for tax reasons, and with the expectation that the proceeds would be used to repay the father’s borrowing.
[34] There was no fraud on the part of the father and no involvement by the son in connection with the original borrowing, factors that led the trial judge to refuse relief under s. 178(1)(e) on the basis that the debt was not “property obtained by” fraudulent misrepresentation or false pretences.
[35] This decision was overturned on appeal, with the Manitoba Court of Appeal holding that the judgment debt survived the bankruptcy discharges of both father and son.
[36] The appeal court noted that, while there was no apparent fraud in the original borrowing, at the later stage where both debtors knowingly diverted the proceeds of sale of the cattle to the wrong bank account, there was fraud on the part of the father and false pretences on the part of the son. The father knowingly withheld relevant information from the Co-op when he advised that the cattle would be sold, but not that they would be sold in his son’s name with the proceeds deposited into the son’s account. This was a fraudulent misrepresentation relied on by the Co-op to its detriment. The false pretences were on the part of the son when he falsely held out to the transport driver and auctioneer that the cattle were his to sell. He obtained the property of the Co-op (the proceeds of sale of the cattle) by pretences which he knew to be false.
[37] The Geisel case does not stand for the general proposition urged upon us by the appellant – that a debtor’s false pretences are sufficient to exempt a debt from discharge, even where there is no causal link between the debt or liability sought to be preserved and the false pretences of the bankrupt. In Geisel there could be no misrepresentation by the son to the Co-op, because the son had no dealings or relationship with the Co-op. What was key was that the son had obtained from the auctioneer the Co-op’s property (the proceeds of the sale of the cattle at auction) by pretences he knew to be false. He had represented that he was the owner of the cattle.
[38] In the present case, the trial judge referred to the Geisel decision and he cited that court’s approval of the observation in Buland Empire Development Inc. v. Quinto Shoes Imports Ltd., [1999] O.J. No. 2807 (C.A.), at para. 14, that “the core content of both false pretences and fraudulent misrepresentation is deceitful statements”. He recognized that both false pretences and fraudulent misrepresentation involved the question of whether Gray had made a deceitful statement that led RBC to advance the mortgage funds. The trial judge considered the very circumstances that the appellant contends were false pretences and he concluded that they did not amount to a fraudulent misrepresentation on the part of Gray.
[39] The wording of section 178(1)(e) makes it clear that the debt or liability must result from obtaining property or services by false pretences or fraudulent misrepresentation. The trial judge concluded that the money was advanced by RBC as a result of Roberts’ misrepresentations, and not as a result of anything Gray said or failed to say or do. This was a finding of fact that is determinative of both the “false pretences” and “fraudulent misrepresentation” aspects of s. 178(1)(e) as applied to this case.
[40] Finally, while it is correct to say that “the bankruptcy scheme is intended to benefit honest, but unfortunate, debtors” (see Re Giannotti (2000), 2000 CanLII 16928 (ON CA), 138 O.A.C. 316, at para. 11, cited with approval in Geisel), it is not sufficient to show that there was a false pretence or fraudulent misrepresentation unless it is also shown that the property (in this case the mortgage funding) was obtained thereby. While the Geisel case referred to this interpretive principle, in concluding that the debtors’ motives and intentions to repay the Co-op were not relevant, the court nevertheless found in that case that property had been obtained by each of the debtors by their fraudulent misrepresentation or false pretences.
|
