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Bankruptcy and Insolvency Act

The only thing I've ever been interested in bankruptcy law are the exemptions from discharge, meaning that if you sue someone for a particular thing, then they can't bankrupt out of it. But I'll expand from that gradually now.

. Johnson v. Fisher

In Johnson v. Fisher (Ont CA, 2020) the Court of Appeal makes a straightforward point regarding an undischarged bankrupt:
[1] The appellant filed an assignment into bankruptcy on June 14, 2017. He subsequently commenced an action against the respondent for damages for solicitor’s negligence. At the time, he was an undischarged bankrupt.

[2] The motion judge properly struck out his claim on the basis of lack of legal capacity.

[3] Under s. 71 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, on bankruptcy, a bankrupt ceases to have any capacity to dispose of or otherwise deal with their property, which shall, subject to the Act and to the rights of secured creditors, pass to and vest in the trustee in bankruptcy. Property includes a cause of action.

[4] In this case, the appellant had no power to initiate the action against the respondent while still an undischarged bankrupt as the cause of action vested in the trustee.
. Dal Bianco v. Deem Management Services Limited

In Dal Bianco v. Deem Management Services Limited (Ont CA, 2020) the Court of Appeal considered the appeal route from orders which involve both a BIA receiver and various provincial statutes (here, the Construction Act - formerly, the Construction Lien Act):
[5] The question of how to determine the appeal route when a receiver has been appointed under a combination of s. 243(1) of the Bankruptcy and Insolvency Act and provincial legislation was recently addressed by Zarnett J.A. in Business Development Bank of Canada v. Astoria Organic Matters Ltd., 2019 ONCA 269, 69 C.B.R. (6th) 13. At paras. 29-31 of Astoria, Zarnett J.A. agreed with the reasoning of Groberman J.A. in Industrial Alliance Insurance and Financial Services Inc. v. Wedgemount Power Limited Partnership, 2018 BCCA 283, 61 C.B.R. (6th) 196, at para. 21, that the operative question to determine the appeal route is “whether the order under appeal is one granted in reliance on jurisdiction under the Bankruptcy and Insolvency Act. Where it is, the appeal provisions of that statute are applicable.”

[6] Zarnett J.A. explained that if the Bankruptcy and Insolvency Act is one of the sources of jurisdiction for the order under appeal, “an appeal from an order made under it necessarily implicates a provision sourced in the [Bankruptcy and Insolvency Act]”: at para. 66. The appeal route is then to this court. Even if provincial law is also a source of jurisdiction for the order under appeal and provides for a different appeal route, the principle of federal paramountcy resolves any conflict in favour of the appeal route under the Bankruptcy and Insolvency Act: at para. 67. See also Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc., 2019 ONCA 508, 435 D.L.R. (4th) 416, at paras. 128-131; Buduchnist Credit Union Limited v. 2321197 Ontario Inc., 2019 ONCA 588, 72 C.B.R. (6th)245, at paras. 10-11; and Comfort Capital Inc. v. Yeretsian, 2019 ONCA 1017, 75 C.B.R. (6th) 217, at para. 12.

[7] Here, the order of Gilmore J. under appeal was granted at least partly in reliance on jurisdiction under the Bankruptcy and Insolvency Act

[8] The receiver had authority to seek the court’s directions under s. 249 of the Bankruptcy and Insolvency Act and paragraph 34 of the receivership order. Section 249 of the Bankruptcy and Insolvency Act provides as follows:
249 A receiver may apply to the court for directions in relation to any provision of this Part, and the court shall give, in writing, such directions, if any, as it considers proper in the circumstances.
Paragraph 34 of the receivership order provides as follows:
34. THIS COURT ORDERS that the Receiver may from time to time apply to this Court for advice and directions in the discharge of its powers and duties hereunder.
[9] Acting under these sources of authority, the receiver moved before Gilmore J. for directions regarding the discharge of its powers and duties as receiver under the Bankruptcy and Insolvency Act. The agreed statement of facts on the motion stated that the receiver had made certain distributions but “has not been able to distribute [the] remaining funds” from the proceeds of sale of the debtor’s property “as a result of the competing priority claims” between the construction lien claimants and the mortgagee.

[10] Gilmore J. provided the court’s directions on the priority dispute. The order under appeal confirms that the motion was brought partly under the Bankruptcy and Insolvency Act — “to determine competing priorities under … the Construction Act … between certain construction liens and a registered real property mortgage”, in an “APPLICATION UNDER Section 243(1) of the Bankruptcy and Insolvency Act and Section 101 of the Courts of Justice Act”.

[11] We agree that the mere act of styling the motion in the receivership does not give “automatic access to the appeal routes under the [Bankruptcy and Insolvency Act]”, because “[t]he jurisdiction of the court is governed by the substance of the order made”: RREF II BHB IV Portofino, LLC v. Portofino Corporation, 2015 ONCA 906, 33 C.B.R. (6th) 9, at para. 12. Here, however, the order under appeal was not just styled in the receivership. The substance of the order was in proceedings authorized by the Bankruptcy and Insolvency Act — it responded to a motion for the court’s directions brought under s. 249 of the Bankruptcy and Insolvency Act to help the receiver distribute the remaining funds in the receivership.

[12] Section 249 of the Bankruptcy and Insolvency Act was thus a source of jurisdiction for the court’s order. To use the language of Astoria, at para. 29, the order under appeal was “granted in reliance on jurisdiction under the Bankruptcy and Insolvency Act”. This establishes that the appeal route is to this court.
. Hutchingame Growth Capital Corporation v. Independent Electricity System Operator

In Hutchingame Growth Capital Corporation v. Independent Electricity System Operator (Ont CA, 2020) the Court of Appeal considered contractual and bankruptcy disputes between an intended electricity generator and the Independent Electricity System Operator (“IESO”), which is the successor to the Ontario Power Authority. One issue was whether the standard contract between the generator and the IESO terminated on the generator's bankruptcy (as the contract held), in light of s.69.3 of the BIA as the appellant argued:
[32] Section 69.3 of the Bankruptcy and Insolvency Act provides:69.3(1) Subject to subsections (1.1) and (2) and sections 69.4 and 69.5, on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor’s property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy.

[33] The trial judge rejected HGC’s argument that the automatic termination in the RESOP Contract violated the automatic stay imposed by s. 69.3 of the Bankruptcy and Insolvency Act. He noted that the stay only prevents creditors from pursuing claims against the insolvent person: at para. 105.

[34] HGC argues that because the IESO was a creditor of Greenview Power, s. 69.3(1) stayed “any remedial action by [the] IESO to terminate the RESOP Contract.” On this argument, once the stay was in place, the IESO was required to move in bankruptcy court to lift the stay and to provide the written notice to commence the 30-day cure period “that it was required to provide” under the Waiver and Amendment Agreement; or, alternatively, to move in bankruptcy court to appeal or amend the vesting order. But the true reason for HGC’s approach to the stay issue is found in its assertion: “Had [the] IESO taken any of these steps, the matter could have been put before a bankruptcy court and the anti-deprivation rule considered.”

[35] Professor Roderick J. Wood explains: “the automatic stay of proceedings in bankruptcy has never been interpreted as preventing the exercise of [the] right” of “a contracting party [to] terminat[e] an agreement between it and the debtor”: Bankruptcy and Insolvency Law, 2nd ed. (Toronto: Irwin Law Inc., 2015) at p. 167. He notes that the presence of express provisions having that effect in proceedings under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 and in the restructuring provisions of the Bankruptcy and Insolvency Act “supports the view that the automatic stay of proceedings was not intended to extend to the termination of executory contracts, since the provision would not be needed otherwise”: at p. 167.

[36] Professor Wood’s logic is persuasive, especially in the absence of any contrary authority. I agree with the trial judge that s. 69.3 of the Bankruptcy and Insolvency Act did not invalidate the termination provision in the RESOP Contract. ...
. Hutchingame Growth Capital Corporation v. Independent Electricity System Operator

In Hutchingame Growth Capital Corporation v. Independent Electricity System Operator (Ont CA, 2020) the Court of Appeal considered contractual and bankruptcy disputes between an intended electricity generator and the Independent Electricity System Operator (“IESO”), which is the successor to the Ontario Power Authority. One issue was whether the standard contract between the generator and the IESO terminated on the generator's bankruptcy (as the contract held), or whether that was prevented by the common law bankruptcy 'anti-deprivation' rule:
(c) The termination provision in the RESOP Contract did not violate the common law “anti-deprivation rule”

[40] HGC submits that contractual provisions, like ss. 7.2(2) and 7.1(20), which terminated the RESOP Contract automatically on the bankruptcy of Greenview Power, are void as being contrary to public policy under the common law doctrine of “fraud on the bankruptcy law,” particularly the component of the doctrine known as the “anti-deprivation rule”. HGC argues that the automatic termination had the effect of removing value from Greenview Power’s insolvent estate and prevented secured creditors from exercising their rights over the secured assets.

[41] Professor Wood explains that the anti-deprivation rule invalidates contractual provisions that remove assets otherwise available to creditors in the event of insolvency. He discusses the fraud on the bankruptcy law doctrine in Bankruptcy and Insolvency Law at p. 88:
Canadian courts have recognized that a contractual provision that is designed to remove value from the reach of an insolvent person’s creditors is void on the basis that it violates the public policy of equitable and fair distribution on bankruptcy. This is referred to as the “fraud on the bankruptcy law principle.” The principle can be usefully broken down into two distinct components: the anti-deprivation rule and the pari passu rule. The anti-deprivation rule operates by invalidating provisions that withdraw an asset that would otherwise be available to satisfy the claims of creditors upon the insolvency of the party or the commencement of insolvency proceedings. [Internal citations omitted.]
[42] The common law anti-deprivation rule applies in commercial bankruptcies, including Greenview Power’s bankruptcy: Aircell Communications Inc. (Trustee of) v. Bell Mobility Cellular Inc., 2013 ONCA 95, at para. 12, citing Canadian Imperial Bank of Commerce v. Bramalea Inc. (1995), 33 O.R. (3d) 692, 1995 CanLII 7420 (C.J.); Capital Steel Inc. v. Chandos Construction Ltd., 2019 ABCA 32, 438 D.L.R. (4th) 195, at paras. 21 and 32, leave to appeal granted, [2019] S.C.C.A. No. 109.

[43] In each of these cases, the bankruptcy had the effect of depriving creditors of a valuable asset. In Aircell, a dealer of telecommunications products deprived the estate of earned commissions on sales: at paras. 1-2. In Bramalea, a clause in a partnership agreement permitted a partner to acquire an insolvent partner’s interest in a shopping mall venture at book value rather than at the substantially higher fair market value: at paras. 3, 10. In Capital Steel, the contract reduced the amount owing to the bankrupt by ten percent: at paras. 1, 16 and 32.

[44] By contrast, in this case, the IESO received no financial benefit from the automatic termination of the RESOP Contract and removed no value from the reach of Greenview Power’s creditors to its benefit. As Mr. Fogul testified at trial, his client had no “skin in the game” or an economic interest in the project; its interest as a regulator was ensuring “the rules, regulations and the contracts are covered.”

[45] The trial judge rejected HGC’s argument that the termination clause in the RESOP Contract violated the “anti-deprivation rule,” noting that the termination clause in this case “does not offend the public policy expressed in [Bramalea and Aircell],” because the contractual provision did not cause an inequity among creditors: at para. 109.

[46] I would reject HGC’s argument that its rights as a secured creditor under the Bankruptcy and Insolvency Act were prejudiced by the automatic termination of the RESOP Contract on bankruptcy. The trial judge noted that the Contract as a whole preserves the rights of secured creditors, like HGC: at paras. 119, 124. Section 9.2(3) of the RESOP Contract was designed to protect a secured creditor, such as HGC, against automatic termination resulting from the generator’s bankruptcy; HGC had the right to revive the terminated agreement within 90 days of the bankruptcy if it paid outstanding amounts owing to the IESO and cured existing defaults. Had HGC availed itself of the revival right, it could have exercised its rights as a secured creditor against the Greenview assets.

[47] I see no legal error in the trial judge’s determination. I also note that the RESOP Contract is an executory contract. As the IESO points out, “[the] IESO’s obligation to buy electricity [did] not arise until Greenview began supplying electricity in accordance with the contract’s terms.” In Capital Steel, the majority noted that clauses that “operate to terminate executory agreements … [and therefore] eliminat[e] a debtor’s opportunity to perform a contract [do] not necessarily result in a deprivation of value that would prejudice creditors” (citations omitted): at para. 34; see also Belmont Park Investments Pty Ltd. v. BNY Corporate Trustee Services Ltd. & Anor, [2011] UKSC 38, [2012] 1 A.C. 383.
. 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.
. The Guarantee Company of Canada v. Royal Bank of Canada

In The Guarantee Company of Canada v. Royal Bank of Canada (Ont CA, 2019) the court notes that a statutory trust, if it meets the basics of trust formation, is exempt from the bankrupt estate:
[13] She noted that the constitutional issue of the validity of provincial statutory trusts in bankruptcy had been resolved by the Supreme Court of Canada in British Columbia v. Henfrey Samson Belair Ltd. That case held that trusts established by provincial law that meet the general principles of the law of trusts will be excluded from the bankrupt’s estate pursuant to s. 67(1)(a) of the BIA. It is common ground that those principles are certainty of intention, object and subject matter.
And makes the following comments on statutory trusts:
Statutory Trusts

[18] As a preliminary matter, it will be helpful to define the terminology involving statutory trusts. In Henfrey, McLachlin J. referred to a “deemed statutory trust”: p. 34. A “deemed statutory trust” is a trust that legislation brings into existence by constituting certain property as trust property and a certain person as the trustee of that property. The legislation purports to deem the trust into existence independently of the subjective intentions of or actions taken by the trustee. For example, the legislation at issue in Henfrey, s. 18 of the Social Service Tax Act, R.S.B.C. 1979, c. 388, established that a merchant who collected sales tax was “deemed to hold it in trust” for the provincial Crown. Deemed statutory trusts may be in favour of either the Crown or private parties: GMAC, para. 14. The subject matter of deemed statutory trusts also varies. Some statutes establish a trust over specific sums of property owing to or received by the trustee. In contrast, other statutes purport to establish a general floating charge over the assets of the trustee for the sum of the trust moneys.

[19] Even if a statute does not deem a trust into existence, it may impose a “statutory trust obligation,” namely an obligation on a person to hold in trust certain property: GMAC, paras. 13, 17, 21-22. Statutes that create deemed statutory trusts often also impose statutory trust obligations, such as an obligation to segregate the trust property or hold it in a trust account: GMAC, at para. 17.


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