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Insolvency - BIA III

. Bilodeau v. Her Majesty The Queen in the Right of Ontario

In Bilodeau v. Her Majesty The Queen in the Right of Ontario (Div Ct, 2022) the Divisional Court considered the nature of a 'provable claim' under the BIA, in the context of an environmental duty:
[71] In Newfoundland and Labrador v. AbitibiBowater Inc., 2012 SCC 67, [2012] 3 S.C.R. 443 the Supreme Court of Canada established a three part test for determining whether a regulatory order is a “provable claim”. Specifically,
(a) First, there must be a debt, a liability or an obligation to a creditor.

(b) Second, the debt or obligation must have been incurred before the debtor becomes bankrupt.

(c) Third, it must be possible to attach a monetary value to the debt, liability or obligation.
[72] In 2019 the Supreme Court expanded upon the above test in Orphan Well Association v. Grant Thornton Ltd., 2019 SCC 5, [2019] 1 S.C.R. 150 (also known as the Redwater case).

....

[74] In Redwater the Supreme Court expanded upon the third part of the AbitibiBowater test by recognizing that there are situations where an environmental duty “will ripen into a financial liability owed to a regulator”. In those situations, if the regulator is found to be a creditor, its claim against the bankrupt may be a “provable claim” even if the order itself does not include a monetary amount. As put by the Supreme Court at para. 140:
What a court must determine is whether there are sufficient facts indicating the existence of an environmental duty that will ripen into a financial liability owed to a regulator. In determining whether a non-monetary regulatory obligation of a bankrupt is too remote or too speculative to be included in the bankruptcy proceeding, the court must apply the general rules that apply to future or contingent claims. It must be sufficiently certain that the contingency will come to pass – in other words, that the regulator will enforce the obligation by performing the environmental work and seeking reimbursement.
. Crown Capital Private Credit Fund v. Mill Street & Co. Inc.

In Crown Capital Private Credit Fund v. Mill Street & Co. Inc. (Ont CA, 2022) the Court of Appeal commented on BIA appeals in the course of a motion to quash:
[5] Section 193 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 sets out the jurisdiction for an appeal of an order made in a bankruptcy proceeding. The appellants submit that this court has jurisdiction under s. 193(a) or, in the alternative, that leave to appeal should be granted under s. 193(e).

[6] Section 193(a) grants jurisdiction where “the point at issue involves future rights”. Caselaw has established that present rights altered by the order are not future rights: Ravelston Corp. (Re) (2005), 2005 CanLII 63802 (ON CA), 24 C.B.R. (5th) 256 (Ont. C.A.), at para. 18. The right to compete is a present right. Therefore, there is no right of appeal under s. 193(a).

[7] The three-part test for granting leave to appeal under s. 193(e) was recently restated in James Henry Ting (Re), 2021 ONCA 622, at para. 5: there must be an issue of general importance, that is prima facie meritorious, and the appeal would not unduly hinder the progress of the insolvency proceeding.
. 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.]
. McEwen (Re)

In McEwen (Re) (Ont CA, 2021) the Court of Appeal considered the rule that a defendant in an assigned lawsuit does not have standing to challenge the assignment:
(1) Traders had no standing to challenge the s. 38 order

[27] In order for Traders to advance its second and third issues, it must establish that the motion judge erred in holding that it had no standing to challenge the s. 38 order.

(a) The general rule is that a proposed defendant has no standing to challenge a s. 38 order

[28] The established and strict rule, subject to “certain limited exceptions”, is that a defendant to an action assigned under s. 38 has no standing to contest the assignment: Shaw Estate v. Nicol Island Development Incorporated, 2009 ONCA 276, 248 O.A.C. 35, at paras. 44-45. But for the exceptions, the proposed defendant to an intended action has no right to notice of the application for a s. 38 order, no right to be heard at the application, and no right to review or appeal the order if it is made: Coroban Plastics Ltd., Re (1994), 1994 CanLII 1135 (BC CA), 10 B.C.L.R. (3d) 52 (C.A.) (sub nom Formula Atlantic Financial Corp. v. Attorney General of Canada), at para. 8. The motion judge in Formula Atlantic, in explaining the defendant’s lack of standing, noted that a proposed defendant’s rights are not adversely affected by the transfer from trustee to creditor of whatever right of action may exist: “[t]he order … imposes no liability on the [proposed defendant] which did not previously exist, and leaves it free to assert in the action every defence it ever had”: at para. 8.

[29] In Shaw, at paras. 43-45, Cronk J.A. reviewed the jurisprudence that establishes the general rule against standing and the limited exceptions. Cronk J.A. explained that the reason for the limited exceptions is “to ensure that the administration of justice and the integrity of the bankruptcy process had not been undermined”: at para. 48. Thus, the defendant will be granted standing to contest a s. 38 order when there are allegations of “abuse of process, non-disclosure, procedural irregularities, fraud and misrepresentation to the court”: at para. 48. As well, where the s. 38 order imposes obligations on the defendant to the assigned action, directs it to take specific steps in the litigation, or subjects it to costs, it will have standing to move to vary the order: Shaw, at para. 45.

[30] The appropriate practice for a defendant claiming standing under the exceptions is to challenge the s. 38 order by bringing an application for review under s. 187(5) of the Act: Shaw, at para. 46. Section 187(5), however, does not give the defendant standing it does not otherwise have: Formula Atlantic, at para. 11. Unless an exception applies, the defendant to an action assigned under s. 38 cannot resort to s. 187(5) to attempt to review and rescind a s. 38 order authorizing a creditor to proceed with an action against it.

[31] As noted already, in this court Traders does not contest the motion judge’s finding that there was no misrepresentation or lack of disclosure that would allow Traders standing. In this court Traders submits that the Shaw exceptions are not exhaustive. It submits the New Brunswick Court of Appeal recognized a different exception in Isabelle v. Royal Bank of Canada, 2008 NBCA 69, 336 N.B.R. (2d) 332. Traders submits that Isabelle stands for the proposition that a defendant has standing to challenge a s. 38 order on the basis of a “discrete and genuine issue of law that if decided in favour of the potential defendant would avoid the need to defend a lawsuit that never should have been commenced in the first place”: Isabelle, at para. 39.

(b) Isabelle does not change the law

[32] In my view Traders misconstrues what was said in Isabelle. On my reading, the New Brunswick Court of Appeal did not intend to create a new exception to the general rule that a proposed defendant has no standing to challenge a s. 38 order. Isabelle had nothing to do with standing to challenge a s. 38 order that has been issued. Isabelle addressed standing at the s. 38 motion itself. Isabelle established that where a proposed defendant is also a creditor, and thus has notice of another creditor’s s. 38 motion, a motion judge has a narrow discretion to grant that proposed defendant standing on the s. 38 motion if it “raises a discrete and genuine issue of law that if decided in favour of the potential defendant might well avoid the need to defend a lawsuit that should never have been commenced in the first place”: at para. 39 The circumstances of this case are different.

[33] The issue in Isabelle was whether a bank, which was both the proposed defendant to the s. 38 assigned action and a creditor, should have been granted intervener status to oppose another creditor’s s. 38 motion. The proposed defendant had received the notice of motion because it was also a creditor. The court said a proposed defendant that is also a creditor was entitled to participate in the s. 38 proceedings “for the limited purpose of preserving his or her right to share rateably in the spoils of the action”: at para. 33. The court also recognized that a motion judge, when hearing a s. 38 motion, retained a narrow discretion to grant a proposed defendant who is also a creditor standing to raise a determinative discrete and genuine of law: at paras. 5, 39.

[34] In my view, it is a mistake to divorce the court's comments from the context of the case and understand them as generally applicable. The court’s comment in Isabelle applies only to a proposed defendant who happens to be at the s. 38 hearing because it is also a creditor. The court was not suggesting that a party named as a defendant in a s. 38 order could be granted standing to move to set aside the order after it had been made.

[35] It may well be more efficient to allow a defendant, who is participating in the s. 38 motion as a creditor, to raise a decisive discrete and genuine issue of law in opposing the motion, but there is no economy in allowing a defendant to commence a s. 187(5) process to review and rescind the s. 38 order after it has been made rather than raising the alleged decisive issues on a summary judgment motion in the assigned lawsuit itself. Isabelle alluded to the situation in which the proposed defendant had not been given notice of the s. 38 motion and suggested, “then presumably the potential defendant has the right to raise the issue on a preliminary motion once the lawsuit is filed”: at para. 38.

[36] In my view, Isabelle provides no support for the contention that a defendant has the right to standing to review an issued s. 38 order, under s. 187(5), on the basis of a determinative discrete and genuine issue of law.

[37] I conclude that Traders, having abandoned its allegations of misrepresentation and lack of disclosure, does not have standing to challenge the motion judge’s grant of the s. 38 order.




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