Rocher v. H. & M. Diamond & Associates, 2003 CanLII 29646 (ON CA)

Court of Appeal for Ontario

Date: 2003-03-26 Docket: C38905

Between:

Ronel Rocher Appellant

• and -

H. & M. Diamond & Associates Respondent

Before: DOHERTY, ROSENBERG and FELDMAN JJ.A.

Counsel: Gary M. Caplan for the appellant Fred Tayar for the respondent

Heard: February 13, 2003

On appeal from the judgment of Justice John D. Ground of the Superior Court of Justice dated September 19, 2002.

Reasons for Decision

FELDMAN J.A.:

1The respondent trustee in bankruptcy initially failed to realize on the bankrupts’ interests in two condominium units because the bankrupts’ Statements of Affairs misrepresented the value of the condominiums and the value of the encumbrances on the properties. Following his discharge, the trustee learned the true facts regarding the value of the condominiums and now seeks to realize on the bankrupts’ interests in the two properties for the benefit of the creditors. The appellant, Rocher, is a creditor with a claim in the bankruptcy, and is also a tenant in common of the two properties with the bankrupts. He opposes the action of the trustee because he claims that he is now entitled to full ownership of the two properties. The application judge ruled in favour of the trustee in bankruptcy. I agree with the conclusion of the application judge and, for the reasons that follow, would dismiss the appeal.

FACTS

2The bankrupts, Mr. and Mrs. Ferguson, along with the appellant (who was their accountant) invested in two condominium units on Marbrook Lane in Toronto. On December 28, 1990, they took title as tenants in common, with each owning an undivided one-third interest. The units were purchased from the developer, Cascades Partnership, which took back a mortgage as part of the financing of the purchases.

3This developer and these units were included in a series of lawsuits in the early 1990’s involving the Mastercraft group of companies. In those lawsuits, the condominium unit investors claimed that various misrepresentations and breaches of the Securities Act, R.S.O. 1990 c. S.5 by the developers who sold them the units, allowed them either to rescind the purchases or to obtain judgments for damages against the developers in an amount equal to or greater than the mortgage debts. The investors were successful against the developers. (The investors were not successful against financial institutions in cases where the mortgage debt had been assigned by the developer to a financial institution.)

4The mortgages on the Ferguson/Rocher units were never assigned by Cascades to a financial institution. Consequently, although no one was able to produce the relevant judgments, the application judge concluded from the record that, as a result of the litigation, Cascades owed the investors damages in an amount equal to or greater than the mortgage debts. Cascades never paid those damages, nor were the mortgages discharged. As a result, although the mortgages continued to appear as encumbrances against the properties, effectively, neither the Fergusons nor Mr. Rocher owed Cascades anything in respect of those mortgages.

5Unfortunately, the record before the court regarding the litigation and its effect is very unsatisfactory. The application judge asked the parties, through their counsel, to provide him with copies of the judgments in the Cascades litigation that affected the Ferguson/Rocher properties, but counsel were unable to do so. However, in his cross-examination, Mr. Rocher confirmed his understanding of what had occurred in that litigation. In further confirmation that effectively nothing was owed on the mortgages, when Mr. Rocher asked Cascades for discharges of the mortgages in 2001, the discharges were provided by Cascades’ counsel on the basis that nothing was owed on them.

6On January 22, 1997, the Fergusons made voluntary assignments in bankruptcy and the respondent was appointed as trustee in bankruptcy of their estates. They swore Statements of Affairs which listed the two condominium units at a value of $80,000 each (presumably for their 2/3 interest). They also listed secured debt of $80,000 in favour of the Hong Kong Bank on each of the two condominium units as well as unsecured debt of $17,000 on each property to the same institution. No security was shown in favour of Cascades, although its mortgages were not discharged until 2001. In fact, there were no mortgages in favour of Hong Kong Bank.

7The trustee in bankruptcy did not investigate to confirm the status of the mortgages. Mr. Rocher was also a creditor of the bankrupts who proved in the bankruptcy. As a one-third owner of the properties, he had full knowledge of the status of the mortgages. At no time did he inform the trustee of the true state of affairs in respect of the two properties or of the mortgages.

8The Fergusons were automatically discharged from bankruptcy on October 22, 1997, and the trustee was discharged on January 7, 1999. In response to a request from Mr. Rocher, the respondent provided him with a letter dated April 5, 2001, addressed “to whom it may concern”, stating that the trustee had no interest in the condominium units. Relying on that letter, on the trustee’s discharge and on the statement in the trustee’s final accounts that “condos-retourner au creancier” (condos returned to creditor), Mr. Rocher arranged to obtain discharges of the mortgages from Cascades on payment of some administration fees. Mr. Rocher operated the properties both during and after the Fergusons’ bankruptcy, collecting rents and making all applicable payments.

9Following their discharge from bankruptcy, Mr. Rocher asked the Fergusons to transfer their interests in the condominium properties to him. Although there is a dispute on the record as to whether they agreed to make those transfers, it is common ground that as a result of Mr. Rocher’s request, Mrs. Ferguson contacted the trustee, who then learned about the discharges of the mortgages and that the condominiums were realizable assets for the benefit of the bankrupt estate. The trustee then moved under s. 41(11) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 for an order reappointing the trustee, and amended the registers to show the trustee as owner of a two-thirds interest in the properties.

10In response to these actions by the trustee, Mr. Rocher applied for an order declaring that the trustee had no interest in the properties and for an order under s. 40(1) or (2) of the BIA, returning the properties to the bankrupts. The trustee brought a counter-application for partition and sale of the properties and for a reference to take accounts as between the tenants in common. The application judge granted the counter-application and ordered partition and sale.

GROUNDS OF APPEAL

11The appellant raises three main grounds of appeal:

(1) The trial judge had no basis on which to make his finding of fact that the Cascades mortgages were not valid encumbrances on the properties during the currency of the bankruptcies. Therefore the value of the properties increased only when the mortgages were discharged after the discharge of the bankrupts from bankruptcy. Consequently the increase in value coming post-bankruptcy, does not form part of the bankrupt estate.

(2) The trustee having been negligent in his investigations and having disclaimed any interest in the properties, cannot now go back and claim them when Mr. Rocher has taken financial steps based on the trustee’s disclaimer.

(3) The appellant is entitled to apply under s. 40(1) of the BIA for an order transferring the properties to him and therefore has status on this application.

ANALYSIS

(1) Is the trustee entitled to reopen the bankruptcy to realize on unrealized value in properties of the bankrupt? Does it matter if the value arose before or after the discharge of the bankrupts from bankruptcy?

12As noted, the record on this application and appeal with respect to the investor litigation regarding these properties is most unsatisfactory. Neither counsel was able to provide the court with copies of any court orders or other documentation respecting that litigation, as it affects the subject properties. The application judge, who was also the judge with primary carriage of the Mastercraft/Cascades litigation, stated that the result of the investor litigation against Cascades directly was either that the mortgages were declared null and void or the condominium purchasers were awarded damages greater than the mortgage debts. In his concluding reasons, the application judge stated that the bankrupts knew that the mortgages had been declared invalid as a result of the litigation against Cascades.

13The cross-examination of Mr. Rocher suggests that he believed that although the investors had been successful in the litigation against Mastercraft (Cascades), they could not collect from Mastercraft because it had no money. He had decided to wait ten years from the time when Cascades first sent him a demand letter with respect to the arrears on the mortgages before seeking a discharge. Had Cascades sought to enforce the mortgages, he would have resisted. His cross-examination also suggests that he believed there was a judgment which offset what was owed on the mortgages and which would provide a defence to an action on the mortgages. An April 23, 2001 letter from counsel for Cascades to Mr. Rocher’s former counsel states that “the two mortgages no longer appear to be outstanding” and offers to execute discharges. No payment of any principal or interest was requested.

14Although the record seems more consistent with the conclusion that the mortgages were unenforceable because there was an offsetting judgment against Cascades, rather than that the mortgages had been declared null and void, for the purposes of this matter it makes no difference. The important finding is that during the currency of the bankruptcies, the mortgages did not diminish the value of the bankrupts’ interests in the properties. There is no basis on the record to overturn the finding made by the application judge.

15In Zemlak v. Deloitte Haskins & Sells Limited (1987), 66 C.B.R. 1 (Sask. C.A.), the trustee in bankruptcy was precluded from asserting a right to property which had increased in value following the discharges of the debtor and the trustee. That is not the situation in this case. I agree with the application judge that the trustee was entitled to seek reappointment in order to complete his duties by realizing on the value of property which existed in the bankrupt estates during the currency of the bankruptcies, but had not been disclosed to him: Carriere v. P.J. Kelleher Ltd. (1994), 26 C.B.R. (3d) 297 (Man. C.A.).

(2) Is the trustee effectively estopped from reclaiming the property?

16The appellant’s position is that during the bankruptcy, the respondent trustee took no steps to verify the status of the mortgages. The trustee was discharged and turned the properties back to what he thought was the secured creditor, the Hong Kong Bank, then specifically disclaimed any interest in the properties in the April 5, 2001 “to whom it may concern” letter. The appellant says that in reliance on the words and acts of the trustee, he took steps to take over the entire properties and is now entitled to keep them. Consequently, the trustee is not entitled to reinstate himself as trustee and retake the properties. I agree with the application judge that there is no merit in this position.

17The application judge noted that because this was a summary administration bankruptcy, the trustee did little to investigate the affairs of the bankrupts and took their information at face value. That information turned out to be inaccurate and misleading. The application judge concluded that the bankrupts knew this to be the case. Whether or not they knew (they were not parties to this litigation), the trustee relied on their Statements of Affairs and was thereby misled as to both the value of the condominiums and as to the identity of the secured creditor. He acted to the detriment of the estate as a result, by not seeking to realize on the properties.

18The application judge also noted that Mr. Rocher had been acting as the owner of both properties from the time of the bankruptcies so that he in fact had not relied on the actions of the trustee in assuming that role. On the other hand, he presumably would not have obtained the mortgage discharges and sought a transfer of the bankrupts’ interests had he not believed that the trustee was making no claim to the properties. Be that as it may, any expenditures made by Mr. Rocher can be compensated in the accounting procedure on the reference in respect of the partition and sale proceedings. Furthermore, Mr. Rocher knew the true facts regarding the value of the properties and did not advise the trustee. The equities are not with him. They are with the trustee on behalf of the creditors.

19I agree with the application judge that s. 41(11) of the BIA was properly invoked in this case to allow the trustee to realize on the properties. The section provides:

s. 41 (11) The court, on being satisfied that there are assets that have not been realized or distributed, may, on the application of any interested person, appoint a trustee to complete the administration of the estate of the bankrupt, and the trustee shall be governed by the provisions of this Act, in so far as they are applicable.

(3) Does the appellant have status on this application and is he entitled to apply to have the properties transferred to him under s. 40(1) of the BIA?

20Section 40(1) of the BIA provides:

s. 40 (1) With the permission of the inspectors, any property of a bankrupt found incapable of realization shall be returned to the bankrupt prior to the trustee’s application for discharge.

21The trustee submits that the properties, which vested in him upon bankruptcy (s. 71(2)), but were not realized, did not revest in the bankrupts upon discharge: R. v. Lifshen (1977), 25 C.B.R. (NS) 12 aff’d (1977), 25 C.B.R. (NS) 232 (Sask. C.A.). Under s. 40(1), the properties had to be specifically returned to them, and that was not done.

22The application judge held that only the bankrupt could apply for such return and not a third party. There is authority to support that conclusion: Petro Canada Inc. v. 490300 Ont. Inc. (1989), 74 C.B.R. 33 (Registrar Ferron). However, the appellant relies on his status as a creditor of the bankrupts and as manager of the properties to make him a “person aggrieved” within the meaning of s. 37 of the BIA which provides:

37. Where the bankrupt or any of the creditors or any other person is aggrieved by any act or decision of the trustee, he may apply to the court and the court may confirm, reverse or modify the act or decision complained of an make such order in the premises as it thinks fit.

23It is not necessary to decide the status issue and the interaction of ss. 37 and 40(1), as I have found that the appellant’s application was properly dismissed on the merits and that the actions of the trustee in taking steps after his discharge to realize on the assets that formed part of the bankrupt estate were properly taken.

24I would therefore dismiss the appeal with costs to the trustee of $10,000.

Signed: “K. Feldman J.A.”