COURT OF APPEAL FOR ONTARIO
Laskin, Blair and Pepall JJ.A.
In the Matter of the Bankruptcy of Vincenzo Francesco Conforti
Robert A. Klotz, for the appellant, Vincenzo Francesco Conforti
Howard F. Manis and Debora Miller-Lichtenstein, for the respondent Trustee in Bankruptcy, Pat Robinson Inc.
Heard: December 3, 2014
On appeal from the order of Justice James M. Spence of the Superior Court of Justice, dated May 3, 2012, with reasons reported at 2012 ONSC 2656, and the supplemental order dated March 6, 2013.
Pepall J.A.
Introduction
1This appeal involves the impact of bankruptcy on a victim of a motor vehicle accident.
2The appellant, Vincenzo Francesco Conforti, was permanently disabled as a result of a motor vehicle accident and is unable to continue to work in his previous employment as a truck driver. He claimed statutory accident benefits (“SABs”) and also commenced an action for damages. Two and a half years after the accident, he filed an assignment in bankruptcy. While bankrupt, he received financial assistance from the Ontario Ministry of Community and Social Services (the “Government”). He also received proceeds from the settlements of his SABs claim and his action. The appellant failed to disclose either of the settlements to his Trustee in Bankruptcy.
3As part of the bankruptcy proceedings, the Trustee was required to calculate the appellant’s total and surplus income under s. 68 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”) to ascertain if any amount was available for distribution to the appellant’s creditors. The Trustee sought directions from the court on the appropriate treatment to be accorded the financial assistance and the settlement payments received by the appellant. At the same time, the appellant asked the court for a discharge from bankruptcy.
4The motion judge provided directions and included all of the financial assistance, all of the SABs settlement, and a pro-rated portion of the settlement of the action proceeds in the appellant’s total income calculation. This resulted in surplus income of $27,986.28 available for creditors. He also imposed a $15,000 penalty on the appellant due to his non-disclosure. The appellant was granted a discharge upon payment of these two sums.
5The appellant appeals certain parts of the motion judge’s order. He submits that the motion judge erred in his treatment of the financial assistance and settlement payments and in his pro-rating methodology. He argues that no surplus income was owed to the Trustee for distribution to creditors. He accepts that he should be admonished for his conduct, but submits that a penalty of $15,000 was only appropriate if no surplus income was payable.
6For the reasons that follow, I would allow the appeal.
Background Facts
(a) Motor Vehicle Accident
7The appellant was a truck driver who earned annual income of approximately $45,000 to $50,000 before tax. He was seriously injured in a motor vehicle accident on January 31, 2007. He was 48 years old, having been born on July 7, 1958. As a result of the accident, he was subject to significant physical limitations that prevented him from continuing in his employment as a truck driver. On December 11, 2007, he commenced an action for damages for personal injuries arising out of the motor vehicle accident.
8Following the accident, he received SABs at the rate of $1,600 per month after tax until December 31, 2008. He then claimed additional SABs payments and also applied for financial assistance from the Government. The Government agreed to pay the fees for his assignment into bankruptcy and to provide him with monthly financial assistance. In return, the appellant agreed to reimburse the Government from the proceeds of his personal injury action. The repayment obligation was secured by an assignment of those proceeds. The agreement and the assignment are signed and dated February 2009. Thereafter, the appellant received financial assistance payments monthly.
(b) Assignment into Bankruptcy
9On September 24, 2009, the appellant filed an assignment in bankruptcy and named Pat Robinson Inc. as his Trustee in Bankruptcy. The appellant disclosed assets of $1,000 and liabilities of $116,683.35. He did not disclose or advise the Trustee of his personal injury action or his outstanding claim for additional SABs payments. Nor did he include them as assets in his sworn statement of affairs filed in his bankruptcy proceedings. He acknowledged that his failure to disclose the action and the SABs claim reflected very bad judgment. While he also did not list his indebtedness to the Government as a liability in his statement of affairs, the Trustee was aware of this obligation. The Trustee never challenged the assignment in favour of the Government.
(c) Settlement of SABs Claim and Personal Injury Action
10On November 16, 2009, the appellant settled his SABs claim for a payment of approximately $21,000 after deduction of legal fees and disbursements. The appellant did not disclose the receipt of the SABs settlement payment to the Trustee. He paid this amount to an old friend, Gino Crupi. Mr. Crupi had allegedly lent him money in 1976 although this debt obligation was not disclosed on the appellant’s sworn statement of affairs. No documentation existed regarding the alleged loan.
11On February 10, 2010, the appellant settled his personal injury action for the sum of $275,000 inclusive of costs and disbursements. Pursuant to executed minutes of settlement, the appellant was to deliver a release from the Trustee to the defendant in the action.
12The Trustee learned of the settlement proceeds when the appellant’s lawyer requested the release around March 3, 2010.
13The settlement allocated the $275,000 as follows:
General damages (pain and suffering)
$120,000
Future loss of competitive advantage
$100,000
Future care
$7,000
Housekeeping
$15,000
Costs, disbursements, and HST
$33,000
In addition to the $33,000 allocated towards legal costs, disbursements and taxes, the appellant had to pay legal fees of $80,000. The settlement provided that no amount was being paid on account of past loss of income.1
14At the time of the February 10, 2010 settlement, the appellant was 51 years old, and the balance of his working life was estimated to be approximately 15 years.
(d) Discharge Application
15The appellant applied to court for a discharge from bankruptcy. The appellant’s unsecured claims amounted to approximately $105,000 and the appellant’s debt to the Government was approximately $38,000. Both the Trustee and the appellant’s principal creditor, Central Mortgage and Housing Corporation, opposed the request for a discharge. At the same time, the Trustee also sought directions from the court on the issues of property and income inclusions.
16The Trustee took the position that both the SABs and the personal injury settlement proceeds constituted capital assets, not income, and accordingly, they should be paid to the Trustee for distribution to the appellant’s creditors pursuant to s. 67 of the BIA. In the alternative, the Trustee argued that the settlement proceeds, along with the financial assistance payments, formed part of the appellant’s total income in the years of receipt, pursuant to s. 68. If so, this would result in surplus income available for the benefit of his creditors. The Trustee also sought a penalty as a condition of the appellant’s discharge from bankruptcy.
17The appellant differed. He argued that the settlement proceeds were not capital assets and that while some elements of the settlement proceeds constituted income, they should be pro-rated over time. As a result, he argued that there was no surplus income available for distribution to his creditors. He acknowledged that some penalty was justified.
Applicable Legal Principles
18To understand the parties’ dispute, it is helpful to describe the scheme reflected in ss. 67 and 68 of the BIA. As a general proposition, s. 67 of the BIA deals with property of the bankrupt and s. 68 deals with the bankrupt’s income.
19One of the purposes of the BIA is to ensure that all property owned by a bankrupt at the date of bankruptcy will, with certain exceptions, vest in the trustee for realization and distribution to the bankrupt’s creditors: Husky Oil Operations Ltd. v. Minister of National Revenue, [1995] 3 S.C.R. 453, at pp. 470-471.
20Section 67(1)(c) states that subject to certain exceptions, the property of a bankrupt divisible among his creditors shall comprise: “all property wherever situated of the bankrupt at the date of the bankruptcy or that may be acquired by or devolve on the bankrupt before their discharge.”
21Historically, subject to any amount exempted from seizure by provincial law, the salary of a bankrupt vested in the trustee: see e.g. Industrial Acceptance Corp. v. Lalonde, [1952] 2 S.C.R. 109. This changed in 1966, when the predecessor to s. 68 was added to the legislation, creating a bifurcated regime under which property and income were treated separately. Section 68 creates a scheme designed to determine which portion of a bankrupt’s “total income” is “surplus income” available in part for distribution to creditors. In Marzetti v. Marzetti, [1994] 2 S.C.R. 765, at p. 794, the Supreme Court described s. 68 as a complete code governing the income of a bankrupt, and held that any proceedings to claim a share of the earnings of a bankrupt had to be brought under s. 68. A trustee therefore looks to s. 68 to determine what portion, if any, of the bankrupt’s revenues forms part of the bankrupt’s estate available for distribution to creditors: Re Landry (2000), 50 O.R. (3d) 1 (C.A.), at para. 26, and Watt v. Beallor Beallor Burns Inc. (2004), 1 C.B.R. (5th) 141, aff’d (2004), 1 C.B.R. (5th) 149 (Ont. C.A.).
22Total income is defined in s. 68(2) of the BIA as including:
(a) a bankrupt’s revenues of whatever nature or from whatever source that are earned or received by the bankrupt between the date of the bankruptcy and the date of the bankrupt’s discharge, including those received as damages for wrongful dismissal, received as a pay equity settlement or received under an Act of Parliament, or of the legislature of a province, that relates to workers’ compensation; but
(b) does not include any amounts received by the bankrupt between the date of the bankruptcy and the date of the bankrupt’s discharge, as a gift, a legacy or an inheritance or as any other windfall.
23Re Millin (2005), 2005 BCSC 1082, 13 C.B.R. (5th) 91 (B.C.S.C.), at para. 34, held that the revenues described in s. 68(2)(a) should be “a substitution for income, akin to income, in the nature of income or to have retained its (previous) character of income.” Examples of payments that have been held to be encompassed by the s. 68(2)(a) definition of total income include lost wages, disability payments, severance payments, and income tax refunds: Marzetti; Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701; Re Ali (1987), 57 O.R. (2d) 685 (S.C.); Re Cole (1995), 32 C.B.R. (3d) 213 (B.C.S.C.); Re Doucet (1992), 19 C.B.R. (3d) 249 (N.B.Q.B.); Re Giroux (1983), 41 O.R. (2d) 351 (H.C.J.); Re Greening (1989), 73 C.B.R. (N.S.) 24 (N.B.Q.B.) and Re Rogers (1993), 18 C.B.R. (3d) 239 (N.S.S.C. (Reg.)).
24Surplus income is defined in s. 68(2) as “the portion of a bankrupt individual’s total income that exceeds that which is necessary to enable the bankrupt individual to maintain a reasonable standard of living, having regard to the applicable standards”. Under s. 68(1), the Superintendent must establish, by Directive, the standards for determining the surplus income of an individual bankrupt, and the amount that a bankrupt who has surplus income is required to pay to the estate of the bankrupt. As stated in Directive 11R-2014, the Directive is intended to assist the trustee in “determining equitably and consistently the portion of the bankrupt’s income that should be paid into the bankrupt’s estate”: Industry Canada, Office of the Superintendent of Bankruptcy Canada, “Directive No. 11R2-2014” (March 18, 2014), at p. 2. The Directive is updated annually so as to reflect current standards based on information produced by Statistics Canada. Superintendent’s Directive No. 11R2-2012 was applicable to the matters in issue in this appeal.
25Under ss. 68(3) and (4) of the BIA, the Trustee is required to determine whether the bankrupt has surplus income and, if so, fix the amount the bankrupt is required to pay to the estate. In making that determination, the trustee is to have regard to the applicable standards and to the personal and family situation of the bankrupt. Under the statutory scheme, the trustee obtains proof of income and expense information for the bankrupt’s family unit (which includes the bankrupt), determines the total monthly income of the bankrupt’s family unit, deducts certain non-discretionary expenses such as spousal and child support payments and “expenses associated with a medical condition,” and then uses the standards in the applicable Superintendent’s Directive to ascertain whether there is any surplus income. Subject to certain adjustments, if the bankrupt has monthly surplus income equal to or greater than $200, the bankrupt is required to pay 50 per cent to the estate for the benefit of creditors. Other provisions in the Superintendent’s Directive address the duration of the payments of surplus income.
26Broadly speaking therefore, s. 68 reflects a balance between the interests of a bankrupt’s unsecured creditors to share in the bankrupt’s estate and a bankrupt’s ability to maintain a reasonable standard of living. The Supreme Court has held that s. 68 is to be interpreted broadly having regard “to the family responsibilities and personal situation of the bankrupt”: Wallace, at paras. 67-68. As stated in Marzetti, this approach reflects an “overriding concern for the support of families”. Moreover, s. 68(2)(a) is to be interpreted in a manner that is consistent with the fresh start principle that underlies the bankruptcy regime.
27As is evident from the language of the BIA, revenue earned or received after a bankrupt’s discharge does not fall within s. 68.
Trustee’s Motion for Directions
28The Trustee’s motion for directions proceeded in two stages.
29The first stage addressed whether the settlement payment allocation of $100,000 for future loss of competitive advantage constituted a capital asset and therefore was property of the bankrupt appellant available for distribution to creditors pursuant to s. 67 of the BIA or, alternatively, fell within the purview of s. 68.
30On January 6, 2011, Wilton-Siegel J. determined that this sum was not property of the bankrupt under s. 67 of the BIA: Re Conforti, 2012 ONSC 199, 84 C.B.R. (5th) 239. Applying the purposive approach described in Wallace, he determined that the essential nature of the $100,000 payment was income and it therefore fell within s. 68 of the BIA.
31No one sought to appeal this order.
32The second stage of the motion proceeded before Spence J. (the “motion judge”) and resulted in the decision under appeal. The Trustee sought directions on what was to be included in the appellant’s total income calculation and whether conditions should be imposed on the appellant’s proposed discharge from bankruptcy.
33The motion judge addressed numerous proposed inclusions in the total income calculation. First, he determined that the motor vehicle accident settlement payment of $120,000 that was allocated to pain and suffering was not to be included in the s. 68 total income calculation. No appeal is taken from that determination.
34Secondly, the motion judge considered whether the motor vehicle settlement payment of $100,000 that was allocated to future loss of competitive advantage should be included in full as income in the year it was received or pro-rated over the years the replaced loss would have been earned. Relying on Re Berridge, 2002 ABQB 884, 38 C.B.R. (4th) 172, he concluded that the $100,000 was to be pro-rated over the appellant’s prospective 15 working years and then an amount representing his four years of bankruptcy was to be included in the appellant’s total income calculation. This sum amounted to $26,667. The appellant appeals that determination insofar as it relates to the four year calculation.
35Thirdly, applying a similar principle, the trial judge concluded that in theory, the 2009 SABs settlement payment of approximately $21,000 could be prorated. However, as the appellant had immediately paid the money to Mr. Crupi, the inescapable inference was that these funds were not needed for his family. As such, rather than prorating the $21,000 over a number of years, it was properly included in the appellant’s total income calculation for 2009, the year of receipt. The appellant appeals this portion of the motion judge’s order.
36Fourthly, the motion judge did not accept the appellant’s argument that the financial assistance payments should be excluded from the total income calculation. While he did accept that prima facie the payments constituted a loan, he reasoned that they were offset by a debt which was a provable claim in the bankruptcy proceedings and which would either be paid or discharged. In these circumstances, he considered it reasonable and fair to treat the financial assistance payments as income received in each of the years of bankruptcy. As such, the motion judge ordered that those amounts be included in the appellant’s total income calculation. The appellant appeals this portion of the motion judge’s order.
37Using the Trustee’s calculations but adjusting them to incorporate his conclusions, the motion judge ordered the appellant to pay $27,986.28 on account of surplus income.
38Lastly, the motion judge considered the appellant’s conduct. He noted the appellant’s failure to disclose the settlement payments and his false statement in his Statement of Affairs that he had never been involved in civil litigation from which he might receive property or money. The motion judge observed that counsel for the bankrupt had conceded that a penalty would be in order. As a condition of his discharge from bankruptcy, the appellant was ordered to pay a penalty of $15,000 to the estate.
39The bankrupt was therefore ordered to pay $27,986.28 on account of surplus income plus the penalty of $15,000 for a total of $42,986.28. On payment of the sum of $42,986.28, the appellant would be discharged from bankruptcy.
Analysis
(a) Financial Assistance
40As mentioned, the appellant submits that the motion judge erred in including the financial assistance payments in the appellant’s total income calculation. I agree.
41The motion judge found that the financial assistance payments constituted a loan. This was consistent with the holding in Re Perry, 2012 NSSC 446, 3 C.B.R. (6th) 293 (Reg.), which dealt with a similar financial assistance agreement.
42The appellant was not bankrupt in February 2009 when he signed the agreement and gave the assignment to the Government. The assignment was security to ensure repayment of the loan made by the Government to the appellant. At the time, it was open to him to give an assignment of the fruits of his personal injury action. As noted in Royal Bank of Canada v. Woodhouse (1997), 33 O.R. (3d) 47 (Ont. C.A.) and Frederickson v. Insurance Corp. of British Columbia (1986), 28 D.L.R. (4th) 414 (C.A.), aff’d [1988] 1 S.C.R. 1089, such an assignment is valid.
43The Trustee never challenged the assignment, or put the Government on notice. The Government did not file a proof of claim in the bankruptcy and there was no evidence before the court on the issue of perfection. The Government loan cannot be described as a substitution for income, akin to income, in the nature of income or to have retained its (previous) character of income. Subject to the issue of perfection, it would appear to be a secured debt. The motion judge’s decision left the appellant exposed to an obligation to repay 100 per cent of the debt to the Government, while the inclusion of this amount in the appellant’s total income calculation effectively imposed an additional payment obligation on him.
44In my view, the motion judge erred in including approximately $38,000 on account of the financial assistance payments in the appellant’s total income calculation. I would allow the appeal in this regard.
(b) Future Care, Housekeeping and Costs
45The appellant also submits that the motion judge erred in including the settlement allocations totalling $55,000 for future care ($7,000), housekeeping ($15,000) and costs, disbursements and HST ($33,000) less an additional amount in legal fees for a net inclusion of $39,000 in the total income calculation.
46I agree.
47All $33,000 of the $55,000 was paid in legal costs, disbursements and HST. The motion judge erred in treating any part of this amount as income received by the appellant.
48The appellant submits that the remaining $22,000 allocated to future care and housekeeping constituted “expenses associated with a medical condition” under s. 5(3)(d) of the Superintendent’s Directive. As such, he argues that these sums ought to have been deducted from the income of the appellant’s family unit and ought not to have formed part of the total income calculation. Alternatively, he argues that the payments are akin to damages for pain and suffering and ought not to be included in income.
49Section 5(3) deductions from income are non-discretionary in nature. Indeed, s. 5(3) expressly refers to them as such. As mentioned, the deductions include such things as child and spousal support payments. The damages allocated for the cost of care and housekeeping services cannot be so characterized. They are amounts paid to the appellant to be used as he chooses and hence are discretionary. As such, they do not constitute deductions from total income under s. 5(3) of the Superintendent’s Directive.
50They are, however, damages that are personal to the appellant and bear a close relationship to damages on account of pain and suffering. There is extensive support for the proposition that damages for pain and suffering do not fall under s. 67 or s. 68 of the BIA: Re Holley (1986), 54 O.R. (2d) 225 (C.A.) and Re Hollister, [1926] 3 D.L.R. 707 (Ont. H.C.J.). As stated by Goodman J.A. in Re Holley: “it is not the policy of the law to convert into money for the creditors the mental or physical anguish of the debtor.” The damages allocated to future care and housekeeping are intended to alleviate the appellant’s injured state. It is therefore appropriate to treat them in the same manner as damages for pain and suffering.
51I would therefore allow the appeal so as to exclude the amount of $39,000 (representing the $55,000 less $16,000 in additional costs) from the total income calculation.
(c) SABs Settlement Proceeds
52The appellant argues that the motion judge erred in including all of the SABs settlement proceeds of approximately $21,000 in the appellant’s total income calculation in 2009.
53I disagree.
54The appellant paid all of the proceeds to Mr. Crupi. He did not disclose any debt owed to Mr. Crupi in his statement of affairs; he did not disclose the debt to his Trustee; and he did not disclose to the Trustee that he had paid the full sum of $21,892.59 to Mr. Crupi. In these circumstances and based on the record before him, it was open to the motion judge to treat this lump sum payment as income in the year of receipt. I would not give effect to this ground of appeal.
(d) Pro-Rating Calculation for Loss of Future Competitive Advantage Allocation
55Before the motion judge, the Trustee argued that all of the funds allocated to future loss of competitive advantage should be included in the appellant’s total income calculation in the year of receipt whereas the appellant argued that the allocation should be pro-rated over the appellant’s years in bankruptcy relative to his estimated remaining work life of 15 years. The motion judge acceded to the appellant’s submissions but applied a fraction of 4/15.
56The appellant submits that the motion judge erred in using the 4/15 fraction in pro-rating the allocation for loss of future competitive advantage. No issue is taken with the denominator, which, while not exact, is a reasonable estimate of the appellant’s remaining working life of 15 years calculated from the date of the settlement. Rather, the appellant argues that the numerator is in error and that the pro-rating fraction should have been 2/15 reflecting the two years between the settlement of the personal injury action on February 10, 2010 and the appellant’s discharge in May 2012 and not the 4/15 applied by the motion judge.
57The allocation on account of future loss of competitive advantage is in the nature of a general damages payment and, as such, the date of the settlement is the proper commencement date for the calculation. The motion judge correctly pro-rated the settlement payment of $100,000 over 15 years but used the September 24, 2009 date of the assignment into bankruptcy and the May 2012 date of discharge as the relevant dates for the purpose of calculating the appellant’s total income. Instead, the relevant dates were February 10, 2010 and May 2012. These dates result in a fraction of 2/15.
58As a result of this and the other adjustments relating to the financial assistance payments and the settlement payments on account of future care, housekeeping and costs, there is no surplus income to be paid by the appellant. Accordingly, the appeal relating to surplus income is allowed. In the circumstances, it is unnecessary to address the remaining submissions on surplus income that were advanced by the appellant including the motion judge’s alleged methodological errors and the applicability of the Charter of Rights and Freedoms.
(e) Penalty
59This leaves the issue of the penalty. In the event that the appeal on surplus income were allowed, the appellant had no objection to the penalty of $15,000. Indeed, before this court, the appellant’s counsel properly acknowledged that the appellant deserved to be sanctioned for his conduct. I agree. The penalty of $15,000 is therefore affirmed.
Disposition
60For these reasons, I would allow the appeal in part. I would vary the order under appeal by removing the requirement to pay surplus income and by reducing the payment of $42,986.28 payable by the appellant to $15,000.
61The parties are to make brief written submissions on costs.
Released:
“APR 20 2015” “S.E. Pepall J.A.”
“JL” “I agree John Laskin J.A.”
“I agree R.A. Blair J.A.”
