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CAIRP MAY 2011 INSOLVENCY AND
RESTRUCTURING FORUM
Personal Insolvency Technical Update
Arif Chowdhury
Decker v. Canada (Superintendent of
Bankruptcy), 2010 ABCA 189
• Overturned Re Dyrland, 2010 ABQB 356
• After an administrative gap between the discharge and
subsequent reappointment of a trustee, provincial limitations
legislation does not prevent a creditor with proven claims from
sharing in subsequent distributions
• Four proofs of claim were filed in the
bankruptcy and allowed by the trustee
• During the 10 year administrative gap after
the trustee’s discharge only one of the four
creditors commenced an action, eventually
garnishing the Bankrupt’s wages
• The other three creditors took no action
during the administrative gap, allowing
their claims to run afoul of the provincial
limitations period
• After the trustee was reappointed, further
funds were realized in the Bankrupt’s
estate
• The decision of the chamber’s judge was
appealed to the Court of Appeal, which
held Re Dyrland to be in error
• “…a creditor, whose claim has been
accepted by the trustee as a provable
claim, [has] an ongoing entitlement to the
division of property until the bankrupt is
discharged”
• Where there is no appeal taken, the
trustee’s determination as to the validity of
the claims filed is final and conclusive
under s. 135(4) of the BIA
• Claims in bankruptcy are provable under
s. 121 on or before the day on which the
Bankrupt becomes bankrupt
• Lifting of the stay exposes the Bankrupt to
further proceedings, but the Bankrupt and
his or her estate continue in the
bankruptcy and are governed by the BIA
• Property realized after the trustee’s
subsequent reappointment remains
subject to distribution under the BIA, which
is paramount to provincial legislation
• There is no provision under the BIA for a
second validation of claims after the
reappointment of the trustee
• Under the BIA a bankrupt is not released
from the obligation to satisfy provable
claims until his or her discharge
• It should be noted that one creditor had
taken action against the Bankrupt and had
garnished wages during the administrative
gap. However, the Court of Appeal did not
address the scope and effect of the lifting
of the stay pursuant to s. 69(3)(1.1) of the
BIA
Re Nielsen, 2010 ABQB 464
• Registrar Hanebury considered the effect of Alberta’s seize or
sue provisions, now found in the Law of Property Act, R.S.A.
2000, c L-7 (the “LPA”), on the ability of a secured creditor to
maintain its security interest after obtaining a judgment
against the Bankrupt
• Alberta’s sue or seize provisions do not invalidate the
creditor’s security interest where a judgment is obtained and
no seizure occurs; the creditor is still allowed to claim as a
secured creditor in bankruptcy
• The bank is a secured creditor whose
claim may either: (a) be paid out by the
trustee, or (b) be satisfied by release of
the vehicle to the bank for sale. Upon
accepting the vehicle, the bank has no
further claim in bankruptcy for the amount
of its judgment
• As long as the bank remains a secured
party under its financing agreement with
the Bankrupt, it is a secured creditor for
the purposes of the BIA
• Moreover, s. 55(8) of the Personal
Property Security Act, confirms that the
secured creditor’s entitlement to its
security interest continues despite
obtaining judgment
• The Registrar concluded that the bank had
not lost its security interest by obtaining a
judgment for the purchase price, and
allowed the appeal of the trustee’s
disallowance of the bank’s secured claim
Re Brown, 2010 SKQB 426
• Bankrupt applied for a discharge in unique circumstances
where he has two sources of income, of which one provides
good annual income and the other suffers repeated and
heavy losses, ultimately leading to a second bankruptcy
• Imposing a conditional discharge in the face of exemptions
and substantial non-exempt equity does not require moral
turpitude or misconduct
• Registrar Schwann concluded that the integrity of the
bankruptcy system required the imposition of a conditional
order
• The Bankrupt derives income from a large
mining company, from which he earns a
very good annual income
• He also derives income from a mixed
farming operation, where he has sustained
repeated and heavy losses
• The Bankrupt assigned himself into
bankruptcy because the farm losses could
no longer be offset by the mining income
• The Bankrupt did not exert much effort to satisfy
his creditors prior to assignment into bankruptcy
• The Bankrupt chose bankruptcy over a proposal
to creditors, even though it was a viable
alternative given his farm assets
• Only 27% of the Bankrupt’s secured debts would
be repaid from the estate if the condition of
discharge suggested by the trustee was
accepted by the Court
• The Bankrupt had sizable off-farm income and
was not solely reliant on the farm operation to
support himself
• The Registrar concluded that it would be
unjust to prefer the Bankrupt’s
rehabilitation over a return to creditors,
hence, the discharge warranted a sizeable
conditional order
• A conditional discharge upon payment of
$70,000.00 was ordered; however, the
discharge was suspended for a period of
six months
Re Gowans, 2010 ABQB 500
• The trustee acknowledged that it had erroneously advised the
Bankrupt that his student loans would be automatically
discharged through his bankruptcy, which was a critical factor
in the Bankrupt’s decision to assign himself into bankruptcy
• Consequently, the trustee brought an application seeking the
forgiveness of the Bankrupt’s student loans pursuant to s.
178(1.1) of the BIA, or alternatively, seeking an order
annulling the bankruptcy pursuant to s. 181(1) of the BIA
• The Registrar denied both aspects of the application
• The Bankrupt’s student loans had only
subsisted for five years since he ceased to
be a full-time or part-time student, which
did not meet the requisite seven years for
automatic discharge under s. 178(1)
• Exception pursuant to s. 178(1.1) requires
(a) good faith conduct regarding the
student loan debt, and (b) continued
financial hardship
• s. 178(1.1) does not consideration
erroneous information
• The Court then considered whether it
should exercise its power to annul the
bankruptcy under s. 181(1)
• Was the Bankrupt’s decision to assign
himself into bankruptcy based on
erroneous information from the trustee
sufficient to establish that the bankruptcy
“ought not to have been filed”
• The Registrar concluded that the
assignment into bankruptcy should not be
annulled: (1) granting an annulment is a
discretionary decision; and (2) the power
to grant an annulment should only be
exercised under very special
circumstances.
• The Bankrupt was eligible to assign
himself into bankruptcy, erroneous belief
was not a sufficiently special
circumstance, and a proposal was
possible under the BIA
Re Berenbaum, 2011 ONSC 72
• “The Bankrupt needs to learn once and for all that he must
pay his taxes”
• Deterrence is a driving factor to ensure that bankruptcy is not
used as a financial planning tool to conveniently evade
income tax liability: Re Ginther, 2003 ABQB 352
• By his own motion the Registrar lifted the stay under s. 69.4
of the BIA to allow the CRA to immediately proceed to enforce
its rights
• The Bankrupt was a former chartered
accountant and licenced trustee in
bankruptcy
• At the peak of his career he was a vicepresident of a trustee firm, from which he
stole $1.1 million, some of which came
from insolvency estates
• In his first bankruptcy the Bankrupt
avoided paying $1 million to Her Majesty
• The Bankrupt was hired as a consultant,
earning both a base salary and a draw
from profits earned
• The Bankrupt invoiced his base salary to
the firm and collected GST, but did not
remit any to Her Majesty
• The Bankrupt did not declare any of his
bonus draws of approximately
$100,000.00 per year, for ten years.
• The duty of a discharge court is “…to balance
the expectation of the honest but unfortunate
debtor for a discharge, relieved of the burden of
her debts, with the right of the creditors to be
repaid, and the need to maintain public
confidence in the integrity of the insolvency
system”
• Despite the fresh start granted by the first
bankruptcy, the Bankrupt continued to live
beyond his means, flouted tax obligations known
to him as a tax accountant, and sought the
protection of the BIA only when caught
• “…it is by now trite law that taxes have a
special status. Not only as to their use,
and the fairness of all paying their share,
but due to the fact that taxing authorities
are involuntary creditors. CRA does not
get to assess creditworthiness and refuse
to extend credit. CRA must rely on the
honesty of each citizen to report income,
and apply the tax law fairly and
reasonably…The Bankrupt has unilaterally
deprived Her Majesty of this.”
Humphrey Estate (Trustee of) v. Canada
(Superintendent of Bankruptcy), 2010 ABQB 502
• In Humphrey the Court considered an application by the
trustee to claim a software licence fee as a disbursement,
which was opposed by the OSB
• The Superintendent’s directives do not bind the Court; rather
the Court must apply the relevant legislation and statutory
instruments
• Justice Horner concluded that the Ascend licence fee is an
allowable disbursement
• The software at issue, Ascend, charges
licence fees on a per-file basis, which the
trustee sought to claim as a disbursement
for ordinary bankruptcies
• The Court considered (1) whether the
Ascend fee could be considered a
disbursement, and (2) whether claiming
the Ascend fee was prohibited by Rule
58(3), “[a] trustee’s disbursements do not
include the indirect costs of the trustee’s
facilities or premises”
• The Ascend fee is in the nature of a
disbursement
• Absent a specific restriction a trustee is
entitled to reimbursement for expenses
reasonably and properly incurred
• Since e-filing is mandatory, the Ascend fee
is property incurred.
• Moreover, the amount of $150.00 is
reasonable.
• Rule 58(3) does not prevent the Ascend
fee from being claimed as a disbursement
• “…the licence fee charged is specific to a
particular estate and therefore stands in
contrast to the cost of software purchased
for general purposes”
Re Dave, 2010 ABQB 358
• A creditor of the Bankrupt sought an order to examine him
under oath pursuant to s. 163(2) of the BIA
• The Registrar dismissed the application, concluding that there
was insufficient evidence to ascertain whether the applicant’s
examination would be directed towards the administration of
the estate
• The reasons given by the Applicant did not justify examination
pursuant to s. 163(2) of the BIA
• Section 163(1) of the BIA provides for the
broad examination of the Bankrupt by the
trustee in relation to “the bankrupt or the
bankrupt’s dealings or property”
• However, s. 163(2) only allows narrow
examination by a creditor “for the
purposes of investigating the
administration of the estate of the
bankrupt”
• The Applicant’s only evidence before the
Court was that neither the Official
Receiver nor the trustee had examined the
Bankrupt pursuant to s. 163(1) of the BIA
• There is no evidence as to the trustee’s
administrative decision not to carry out a
section 163(1) examination of the
Bankrupt, and if so why it did not
• Seeking an explanation cannot justify
authorizing a secured creditor to examine
for its own purposes pursuant to s. 163(2)
of the BIA
Re Carlson, 2010 ABQB 701
• The discharged Bankrupt applied for the reappointment of his
trustee and an order assigning certain proceedings in B.C. to
the Bankrupt in return for his payment to the trustee of the full
amount owing to his creditors
• The proceedings concerned an interest in property in B.C.
that the Bankrupt had not disclosed in his statement of affairs
• Justice Kent declined to grant the Bankrupt’s application,
since to do so would be contrary to the proper administration
of justice.
• Prior to bankruptcy, the Bankrupt had
transferred the B.C. property to his brother and
sister-in-law, for which the Bankrupt eventually
received a promissory note in favour of the
Bankrupt, secured by the B.C. property
• After the Bankrupt’s brother passed away, the
Bankrupt commenced an action claiming a
beneficial interest in the B.C. property
• While the Respondent, sister-in-law, sought a
declaration that she was the beneficial owner of
the B.C. property
• The Respondent brought an application for
summary trial on the basis that any
interest in the B.C. property was that of the
trustee rather than the Bankrupt, therefore,
he had no claim
• Only then did the Bankrupt disclosed the
B.C. property to his former trustee
• The trustee agreed that the Bankrupt
could continue the B.C. litigation subject to
the trustee receiving the proceeds
• Did the Bankrupt’s failure to disclose the
B.C. property in his statement of affair
prevented him from obtaining the right to
continue the B.C. claim from the trustee?
• The principle of judicial estoppel is
available in appropriate circumstances;
this was not an appropriate case
• Since any interest to the B.C. property
vested in the trustee at the moment of the
assignment into bankruptcy, the
Bankrupt’s conflicting positions as to the
B.C. property were irrelevant
• The trustee was the holder of the asset
and had never taken an inconsistent
position with respect to the B.C. property.
• Estoppel was inapplicable against the
trustee
• The position of the trustee was that upon
payment of the creditors’ claims in full, the
B.C. action should be assigned to the
Bankrupt to litigate
• While the trustee is an officer of the Court
and is normally accorded great deference,
courts must maintain their supervisory role
and ensure the property administration of
justice and prevent an abuse of process
• Justice Kent reappointed the Bankrupt’s
trustee and ordered that in exchange for
payment equal to the amount owed to the
Bankrupt’s creditors, the trustee was to
provide a release to the Respondent from
any claim to the B.C. property
• The Bankrupt did not benefit from his
intentional choice to not disclose the B.C.
property within his statement of affairs
Re James, 2011 ONSC 493
• The Respondent appealed the decision of the trustee not to
allow a reduction in the value of the Bankrupt’s interest, which
she was to purchase
• The Respondent claimed the value should be reduced: (1) in
an amount equal to payments made solely by her against the
first mortgage; and (2) in the entire amount of the second
mortgage by the application of the doctrine of equitable
exoneration because she had entered into the second
mortgage under duress
The First Mortgage
• A legal claim of debt by the Respondent
against the Bankrupt cannot be converted
into an equitable claim against title
• Payments were made on account of her
joint and several obligations under the first
mortgage
• The mortgage payments cannot attach to
the Bankrupt’s title, in law or in equity, so
as to bind the trustee and other creditors
The Second Mortgage
• The doctrine of equitable exoneration
exists for equity to presume evidence of
an interest, “the failure of which would
result in a harsh legal outcome, where the
failure to evidence the interest is the result
of some legal or societal, and in any event
demonstrated, disability.”
• The Registrar found no evidence that the
Respondent’s failure to evidence an
interest in the Bankrupt’s share of the
property securing her portion of the line of
credit, was due to some legal or societal
disability
• The Respondent claimed that she had
signed documents necessary to apply for
a line of credit, secured by the property at
issue, under duress and without the
benefit of legal advice
• Respondent could have insisted that the
Bankrupt charge his share of the property on a
first dollar basis
• Moreover, several years passed after the line of
credit was obtained and the money therein was
loaned to the Bankrupt’s corporation, during
which time the Respondent could have obtained
security from the Bankrupt
• The Registrar found that in choosing to sign for
the line of credit to avoid the displeasure of the
Bankrupt and a possible breakdown of their
marriage, the Respondent demonstrated herself
to be competent and a rational economic actor
• “Specifically, married women are no longer
chattel of their husbands, and no longer disabled
statutorily or otherwise from dealings with their
property. They ought and must be accorded the
respect of the fully independent and competent
adults that they are to make decisions and to
both have those decisions be protected by
Courts as well as to be held to those decisions
by those same Courts.”
• It is not in the interests of other creditors to allow
the Respondent and the Bankrupt to use equity
to wrestle away an amount from innocent
creditors