Court File and Parties

COURT FILE NO.: CV-14-515654 DATE: 20181026 ONTARIO SUPERIOR COURT OF JUSTICE

RE: WATER MATRIX INC. AND: ANNA MARIA CARNEVALE aka Anna Carnevale-Cordeiro aka Anna M. Cordeiro aka Anna C. Ottorino, STEPHEN M. CORDIERO aka Steve Cordeiro aka Stephen Cordiero and CORDEIRO TRUCKING LIMITED

BEFORE: Sanfilippo J.

COUNSEL: Stewart D. Thom, for the Plaintiff Domenic Saverino, for the Defendants

HEARD: August 22, 2018

Endorsement

SANFILIPPO J.

Overview

[1] The defendant Anna Maria Carnevale was employed as the corporate controller of the plaintiff, Water Matrix Inc. for almost six years: June 2008 to March 2014. In this position, she had access to the company’s banking and finances. Upon her dismissal, Water Matrix discovered a troubling pattern of suspicious financial transactions that included the diversion of the corporation’s money to Ms. Carnevale, her husband Stephen M. Cordeiro and his company Cordeiro Trucking Limited. Water Matrix commissioned an investigative report that identified 492 transactions handled by Ms. Carnevale that were suspected to be fraudulent, representing $1,251,676.50 in funds allegedly paid for no legitimate corporate purpose.

[2] Water Matrix initiated this action on November 18, 2014 to seek compensation for its losses arising from the money that Water Matrix says Ms. Carnevale took from it and either kept or diverted to her husband and his trucking company: co-defendants in this action.

[3] On April 15, 2016, Water Matrix obtained a Judgment that was affirmed on appeal ordering the defendants to pay Water Matrix the sum of $1,302,377.98 plus interest. After the Judgment was rendered, a receiver was appointed for all the assets, undertakings and properties of the defendants. This resulted in recovery of some, but not all of the money owed according to the Judgment. Water Matrix claims that over $700,000 remains outstanding.

[4] On July 31, 2017, Ms. Carnevale filed an assignment into bankruptcy. On May 1, 2018, an Order of discharge was issued in relation to Ms. Carnevale’s bankruptcy.

[5] On June 26, 2018, Water Matrix obtained an Order granting it leave under s. 69.3 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 to seek a declaration that the amounts owed by Ms. Carnevale pursuant to the Judgment have not been discharged by the Order of discharge. On this motion, Water Matrix seeks that declaration under s. 178(1) of the BIA, which contains a catalogue of exemptions to the general principle that a bankrupt is able to receive a general release from his or her debts upon discharge from bankruptcy.

[6] Water Matrix submits that its motion is the precise model for the application of ss. 178(1)(d) and 178(1)(e) of the BIA. These sections provide that an order of discharge does not release a bankrupt from any debt arising out of fraud and other dishonest conduct while acting in a fiduciary capacity or resulting from fraudulent misrepresentations, respectively. They reflect the policy that an Order of discharge from bankruptcy is not intended to reward the bankrupt with the release of a debt or liability that the bankrupt caused by fraudulent, dishonest or deceitful conduct. Water Matrix states that the Judgment is based on Ms. Carnevale’s widespread misappropriation of its money, systematically implemented over the course of six years all while she was in a position of trust and all to the plaintiff’s financial loss. As evidence of this, Water Matrix points to the fact that, on June 20, 2017, Ms. Carnevale pleaded guilty and was convicted of theft of property of Water Matrix having a value in excess of five thousand dollars.

[7] Ms. Carnevale resists the declaration sought by Water Matrix not principally by defending her conduct but rather by re-framing the process and re-focusing the analysis. She relies heavily on the fact that Water Matrix did not obtain the Judgment by adjudication on the merits. Water Matrix obtained the Judgment by successfully establishing on motion that it was entitled to enforce the settlement it reached with Ms. Carnevale where she promised to consent to judgment if she did not re-pay the agreed-upon amount. Ms. Carnevale submits that as the Judgment arises from the enforcement of a settlement, and not from substantive determination, the lens through which the Court must assess the applicability of s. 178(1) is the settlement agreement and her consent to judgment, not the underlying action for civil fraud. I find that these submissions are without merit.

[8] For the reasons that follow, I have determined that the Judgment, as affirmed on Appeal, is a debt of Ms. Carnevale that falls within the meaning of s. 178(1) and therefore survives the Order of discharge from bankruptcy. The plaintiff’s motion is granted.

I. THE JUDGMENT

A. The Action

[9] On November 18, 2014, Water Matrix initiated this action by Notice of Action. The claims against Ms. Carnevale and the other defendants were based on fraud, fraudulent and/or negligent misrepresentation, misappropriation, breach of trust, conspiracy, breach of contract, unjust enrichment and conversion. The entire focus of the Notice of Action was the intentional conversion and misappropriation of funds by Ms. Carnevale while she was an employee of Water Matrix.

[10] On December 18, 2014, Water Matrix delivered its Statement of Claim. In addition to pleading the causes of action advanced in the Notice of Action, the plaintiff also pleaded that Ms. Carnevale was liable to Water Matrix based on breach of fiduciary duty, breach of loyalty, breach of contract and knowing receipt by reason of having been in a fiduciary capacity in handling Water Matrix’s finances.

[11] Ms. Carnevale’s statement of defence consists of nineteen short paragraphs of bald denial of the claims pleaded against her, with only a single affirmative defence position: that any of the funds transferred to her were for the purpose of employment compensation.

[12] From November 18, 2014 to May 14, 2015, Water Matrix advanced this action against the defendants as a claim in civil fraud.

B. The Settlement Agreement

[13] On May 14, 2015, the parties entered into a settlement agreement under Rule 49 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 whereby the defendants agreed to pay the plaintiff a total of $750,000. The defendants agreed that they would consent to judgment against them for a higher amount should they not comply with their obligation to pay the amount of $750,000 in the time provided. To secure this promise, the defendants signed a Consent to Judgment in the amount of $1,585,515 to be held in escrow and used only in the event the defendants defaulted in payment of the settlement. The defendants were represented by legal counsel in entering into this settlement agreement.

[14] When the defendants did not pay the settlement amount in the time provided, Water Matrix brought a motion to enforce the settlement, seeking judgment on the basis of the defendants’ Consent to Judgment.

C. The Judgment, Obtained on Motion to Enforce the Settlement

[15] On April 14, 2016, Water Matrix brought a motion for judgment in the amount of $1,302,377.98 plus interest, representing the amount stated in the Consent to Judgment less the amounts paid by the defendants to the plaintiff since the conclusion of the settlement. The defendants contended that their ability to finance the payment of the settlement amount was frustrated by Water Matrix’s breaches of the settlement agreement. Morgan J. dismissed this submission as “smoke and mirrors”, finding that the settlement agreement was breached by the defendants through their default in payment: Water Matrix Inc. v. Carnevale, 2016 ONSC 2562 at para. 19.

[16] Judgment was granted in favour of Water Matrix on April 15, 2016 against the defendants on a joint and several basis, in the principal amount of $1,302,377.98 together with costs of $13,914.38 plus applicable interest. This determination was upheld on appeal on November 18, 2016: Water Matrix Inc. v. Carnevale, 2016 ONCA 875.

D. The Receivership and the Bankruptcy

[17] On the application of Water Matrix, on January 25, 2017, Hainey J. granted an Order appointing a receiver of all of the assets, undertakings and properties of the defendants. The receivership was completed, and the receiver discharged, by the Order of Myers J. rendered on October 13, 2017.

[18] Water Matrix received distributions in the receivership which, together with the amounts received from the defendants in partial satisfaction of the settlement agreement, resulted in an outstanding balance on the Judgment, calculated to March 15, 2018, of $708,912.36.

[19] On July 31, 2017, Ms. Carnevale made an assignment in bankruptcy. On May 1, 2018, an Order of discharge was issued in relation to Ms. Carnevale’s bankruptcy.

[20] On June 26, 2018, Water Matrix obtained an Order, nunc pro tunc, that the stay of legal proceedings provided by s. 69.3 of the Bankruptcy and Insolvency Act does not operate in relation to this action for the purpose of Water Matrix seeking a declaration that the amounts owed by Ms. Carnevale pursuant to the Judgment, as affirmed on appeal, are not released by the Order of discharge from bankruptcy in accordance with s. 178(1).

II. THE S. 178(1) ASSESSMENT IN THE CONTEXT OF A CONSENT JUDGMENT

A. General Principles

[21] Water Matrix relies on sections 178(1)(d) and 178(1)(e) of the BIA in submitting that the Judgment ought to survive Ms. Carnevale’s discharge from bankruptcy. The relevant part of section 178(1)(d) provides that 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. Section 178(1)(e) provides that an order of discharge does not release the bankrupt from any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation.

[22] I have jurisdiction to determine whether the plaintiff’s claim has been released by an Order of discharge: Beneficial Finance v. Durward (1961), 2 C.B.R. (N.S.) 173 (Ont. Div. Ct.); Graves v. Hughes, 2001 NSSC 68, 194 N.S.R. (2d) 51. A proceeding under s. 178(1) is properly brought in “ordinary civil courts”: H.Y. Louie Co. v. Bowick, 2015 BCCA 256, 25 C.B.R. (6th) 221 at paras. 21-24; Wilson v. Wilson (2001), 2001 ON SC 28111, 21 C.B.R. (4th) 304 (Ont. S.C.J.). Where a creditor has obtained a judgment prior to the bankruptcy, it can bring a motion for a declaration that the claim is within 178(1), even after the bankrupt has been discharged: Berthold v. McLellan (1994), 1994 ABCA 122, 25 C.B.R. (3d) 45 (Alta. C.A.).

[23] While the plaintiff contends that the Judgment survives the discharge of Ms. Carnevale under both sections 178(1)(d) and 178(1)(e) of the BIA, the plaintiff only has to satisfy the criteria of one of these sections to successfully establish the basis for the declaration that it seeks. The onus is on the plaintiff, as creditor, to prove that the claim underlying the Judgment falls within one of the classes of claims in s. 178(1): Lang v. Lapp, 2017 BCSC 670, 47 C.B.R. (6th) 56 at para. 37; Peterson v. Peterson (1995), 1995 ABCA 439, 178 A.R. 70, 132 D.L.R. (4th) 329 (C.A.); Manolescu v. Manolescu, 2003 BCSC 1094, 47 C.B.R. (4th) 77. The standard of proof required is the civil standard of balance of probabilities: Toro Aluminum v. Sampogna, 2008 ONCA 125, 41 C.B.R. (5th) 5.

B. Framework for Analysis of the Judgment When Obtained on Consent

[24] Ms. Carnevale submits that the assessment of whether the Judgment is a debt within the meaning of s. 178(1) must be restricted to the default in compliance with the settlement agreement, divorced from the underlying action on which the settlement agreement was based. She contends that the Judgment and debt result from the default in payment, which triggered the enforcement of the settlement agreement that, in turn, provided for a Consent to Judgment to be used to obtain judgment in the event of the defendants’ failure to pay the settlement amount. She submits that this default is the basis of the Judgment, and not the underlying action. This submission asks that the s. 178(1) analysis be focused on the motion to enforce the settlement and the Consent to Judgment, unconnected to any assessment of the nature of the exposure that prompted the defendants to settle.

[25] I do not accept this submission. The motion to enforce the settlement and the Consent to Judgment are processes by which Judgment was rendered without substantive adjudication on the merits. This does not mean that the s. 178(1) analysis must be limited to the process by which the Judgment was obtained as opposed to the nature and substance of the Judgment and the underlying action. This is clear from the principles that have emerged from instances where the judgment at the core of a s. 178(1) analysis derives from consent, or default, such that there are no, or limited, reasons or findings to guide the analysis.

[26] In H.Y. Louie Co., the British Columbia Court of Appeal held that to assess whether a consent judgment falls within s. 178(1), the court must characterize the nature of the judgment. Chiasson J.A. stated, at paras. 82 and 87-88, that to do so the court may look to the pleadings and the circumstances that gave rise to the judgment: “It is clear that characterization of a judgment is based on the pleadings available to the court that made the judgment and the proceedings before it.”

[27] In dissent in the result but not on the analytical framework, Newbury J.A. commented at para. 47 that an analysis of whether a consent judgment comes within s. 178(1) requires an assessment of the pleadings and contextual facts: “In summary, the role of a court considering whether a consent or default judgment falls under s. 178 is in my view to examine the pleadings and any other ‘contextual facts’ on the record to determine whether the liability is properly characterized as falling within any of the listed categories.”

[28] The Court of Appeal referred to its previous decision in F. Williams Logging Co. v. Roethel (1995), 1995 BC CA 2606, 32 C.B.R. (3d) 99 (B.C. C.A.) in which the plaintiff obtained a consent judgment on a pleading that was framed primarily in negligence. Fraud was not raised as a cause of action. The Court of Appeal affirmed the motion court judge’s finding that the consent judgment activated s. 178(1) of the BIA because the contextual facts before the court pointed to fraud and defalcation (H.Y. Louie, at paras. 42, 83; F. Williams Logging at para. 6):

I can find no support for the contention that a Court cannot examine the circumstances leading to a consent judgment in an effort to determine whether the consent constitutes an admission of anything mentioned in section 178(1)(d). … [t]o treat the consent in isolation from the contextual facts is to take too rigid an approach and could lead to a result that bears no relation to reality.

[29] In the subsequent decision of Cruise Connections Canada v. Szeto, 2015 BCCA 363, 28 C.B.R. (6th) 1 at para. 29, also in relation to a consent judgment, Garson J.A. stated that in addition to the pleadings, a court conducting a hearing under s. 178(1) can “look to the entire context of the proceedings in the Original Action to determine whether the judgment debt can be characterized as one falling within s. 178(1).”

[30] The Ontario Court of Appeal referred to these British Columbia appellate court decisions in Lawyers’ Professional Indemnity Company v. Rodriguez, 2018 ONCA 171, 139 O.R. (3d) 641, which considered the analysis pertinent to an analogous area: the determination of when a default judgment falls within the meaning of s. 178(1)(d) of the BIA. The Ontario Court of Appeal reversed a declaration that a default judgment survived the appellant’s discharge from bankruptcy on the basis that the application judge’s determination was made on extraneous evidence, which was determined to be inadmissible on a s. 178(1) application. Nordheimer J.A. stated, at para. 6, that the application judge’s task is to determine the nature and substance of the debt by examination of the pleadings, any reasons that might have been given, and the proceedings that were before the court that granted the judgment:

To be clear, in characterizing a judgment debt under s. 178(1)(d), a judge is not confined just to the cause of action pleaded in the action that produced the judgment debt. The issue under s. 178(1)(d) relates to the substance of the judgment debt. The judge can therefore look at the material filed that led to the obtaining of the judgment debt, including the facts pleaded in support of the action that led to the judgment debt, any evidence that was presented at the time to secure the judgment debt, and any reasons that might have been given. A judge cannot, however, consider extraneous evidence not grounded in the process that produced the judgment debt.

[31] What emerges from these cases and others (Lang v. Lapp at para. 37; Valastiak v. Valastiak, 2010 BCCA 71, 63 C.B.R. (5th) 1 at paras. 38-40; Toban v. Nijjer, 2005 BCSC 891, 12 C.B.R. (5th) 316 at paras. 26, 40; Re Demitor (1993), 1993 AB KB 16346, 137 A.R. 381, 17 C.B.R. (3d) 132 (Q.B.); Beneficial Finance co. of Canada v. Williamson (1971), 16 C.B.R. (N.S.) 30 (Ont. Co. Ct.); Morgan v. Demers (1986), 1986 ABCA 100, 71 A.R. 244 (C.A.)) is that in conducting a s. 178(1) hearing to determine whether either a consent judgment or a default judgment ought, by its nature and substance, to survive a bankrupt’s discharge, the court is not limited by the words in the judgment but may look to the underlying pleadings and proceedings and all information that was considered in rendering the judgment, but not extraneous evidence.

III. ANALYSIS – DOES THE JUDGMENT FALL WITHIN S. 178(1)?

[32] The nature of the Judgment determines the applicability of s. 178(1), not the procedural mechanism by which the Judgment was secured. Although a consent judgment is rendered without adjudication on the merits, it nonetheless arises from a factual matrix to which a cause of action or causes of action were applied. The task is to determine the nature of the Judgment through analysis of the pleadings, proceedings and factual context.

A. The Pleadings, Proceedings and Factual Context

The Motion for a Mareva Injunction

[33] The first step taken in this action was a motion brought on November 17, 2014 by the plaintiff for the issuance of a Mareva injunction. The affidavit of service filed establishes that this motion was brought on notice to the defendants, who were served with a Motion Record that included the investigative report of the investigators retained by Water Matrix, Integra Investigation Services. This investigative report identified almost five hundred suspicious transactions that resulted in funds totaling more than one million dollars being removed from Water Matrix.

[34] The investigative report was annexed to a detailed affidavit sworn November 11, 2014 by William Joynt, a director of and an investigator with Integra. Mr. Joynt deposed that for the period from August 2008 to February 2014, Integra identified 492 withdrawals from Water Matrix’s bank accounts that it believed were fraudulent. These transactions ranged in value from $3.11 to $80,000 and totaled $1,251,676.50. Mr. Joynt swore that there was strong evidence connecting Ms. Carnevale to this widespread fraud, particularly as many of the suspicious transactions involved monetary transfers from Water Matrix to accounts belonging to Ms. Carnevale, her husband and her husband’s trucking company.

[35] The Motion Record also included the affidavit evidence of Water Matrix’s President and Chief Operating Officer, and Water Matrix’s Assistant Controller detailing Ms. Carnevale’s role in the fraudulent transactions that they discovered.

[36] The Mareva Injunction Order was granted by Matlow J. on November 17, 2014, in the defendants’ presence. By endorsement, Matlow J. stated: “I am persuaded that the plaintiff has made out a strong prima facie case that the defendants have defrauded the plaintiff of a sum in excess of one million dollars and that the assets of the defendants in Ontario are in jeopardy of being removed from Ontario and dissipated by them”.

[37] Subject to modest variation to allow for some funds to be available to the defendants, the Mareva Injunction Order was extended to trial by the Order of Myers J. dated November 26, 2014.

The Statement of Claim

[38] The Statement of Claim pleads the factual details that were identified in the Integra investigative report, including as follows:

10. Through an investigation that commenced after the termination of Ms. Carnevale’s employment, the company identified hundreds of transactions that did not have any identifiable company purpose or supporting documentation and that it believed to be fraudulent. These transactions included duplicate payment of Visa bills, online banking payments, Interac e-Transfers and wire transfers.

11. All of the funds improperly withdrawn from the company’s account by Ms. Carnevale were delivered to accounts held or controlled by the Defendants or were otherwise for their benefit.

[39] The pleadings in the Statement of Claim were not bald allegations by the plaintiff. Rather, by the time the Statement of Claim was served, Ms. Carnevale had the Integra investigative report, its annexed documents and schedules, and affidavit evidence detailing the bank account numbers, cheque numbers, transfer dates, general ledger entries, wire transfer references, etransfer references, journal entries, credit card payments and email account references that were said to have been used in the fraud. The plaintiff’s pleadings incorporated these details in pleading a scheme of misappropriation of corporate funds for personal use that had been methodically implemented and systematically covered-up for a period of six years.

The Statement of Defence

[40] In contrast to the significant detail in the plaintiff’s pleadings and motion materials concerning the scope of fraud and misappropriation alleged to have been perpetrated by Ms. Carnevale, Ms. Carnevale’s materials lack any evidence supporting a defence or explanation of the conduct alleged against her. The only affirmative defence position stated by Ms. Carnevale in the entirety of the record before me is a single paragraph in her four-year old Statement of Defence, where she pleads that any or all of the $1,251,676.50 transferred to her was for the purpose of employee compensation. The voluminous record does not contain any sworn statement or testimony by Ms. Carnevale of the truthfulness of her single defence position or in denial of the allegations of intentional fraudulent conduct advanced by the plaintiff.

The Criminal Conviction

[41] On August 28, 2015, Ms. Carnevale was charged with one count of fraud exceeding five thousand dollars, contrary to s. 380(1)(a) of the Criminal Code; one count of theft exceeding five thousand dollars, contrary to s. 334(a) of the Criminal Code; and one count of use of a forged document, namely a certificate stating that she was a chartered accountant, contrary to s. 368(1)(a) of the Criminal Code. These charges all related to her conduct while an employee of Water Matrix.

[42] On June 20, 2017, Ms. Carnevale pleaded guilty, and was convicted of theft of property of Water Matrix having a value in excess of five thousand dollars. She received a conditional sentence of incarceration, in the form of house arrest for a period of four months. Section 606(1.1) of the Criminal Code requires that the court could only have accepted Ms. Carnevale’s guilty plea if satisfied that she understood that the plea was an admission of the essential elements of theft.

[43] I do not need to decide whether a guilty plea by itself is sufficient to activate s. 178(1), as Ms. Carnevale’s guilty plea flows incrementally and consistently from the pleadings and proceedings in an action that is undoubtedly framed and developed in civil fraud. I will analyse the policy underlying s. 178(1) and the requirements of s. 178(1)(d) and 178(1)(e) to determine whether the Judgment is of a nature that ought to survive Ms. Carnevale’s discharge from bankruptcy.

B. The Policy Underlying s. 178

[44] Section 178(1) contains a “catalogue of exemptions” to the general principle that a bankrupt is able to receive a general release upon discharge from bankruptcy: Skytal Ltd. v. Schiber (1997), 1997 ON SC 12404, 46 C.B.R. (3d) 275 (Ont. C.J.) at para. 12, aff’d 1998 ON CA 17736, 9 C.B.R. (4th) 129 (Ont. C.A.). These exemptions are designed to protect creditors against fraudulent and deceitful conduct on the part of the bankrupt, providing the creditor with a special status to continue pursuit of the party who has committed fraud, embezzlement, misappropriation, defalcation, or obtained property by false pretences or fraudulent misrepresentation despite a discharge. In Simone v. Daley (1999), 1999 ON CA 3208, 43 O.R. (3d) 511 (C.A.) at p. 522, Blair J. stated that s. 178(1) is intended to ensure that the BIA is not used to release bankrupts from unacceptable conduct:

Paragraphs (d) and (e) are morality concepts which look at conduct. Those kinds of conduct are unacceptable to society and a bankrupt will not be rewarded for such conduct by a release of liability.

[45] The question then becomes whether the Judgment can, by its nature, be characterized as a debt under s. 178(1)(d) or s. 178(1)(e).

C. Can the Judgment be Characterized as a Debt Within s. 178(1)(d)?

[46] Section 178(1)(d) states:

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;

[47] For a debt or liability to survive a discharge from bankruptcy under s. 178(1)(d), the plaintiff must establish that:

(i) The plaintiff is owed a debt or liability;

(ii) The debt or liability arose out of fraud, embezzlement, misappropriation or defalcation; and

(iii) The fraud, embezzlement, misappropriation or defalcation occurred while the bankrupt was acting in a fiduciary capacity.

[48] The purpose of s. 178(1)(d) is to prevent a debtor from avoiding liabilities where the party was entrusted with the money or property of a creditor and, in breach of a fiduciary duty, misappropriated or converted the funds: Simone v. Daley, at p. 522.

Is the Judgment a “Debt or Liability”?

[49] The first requirement for the Judgment to fall within the meaning of s. 178(1)(d) is that it must be a “debt or liability” of Ms. Carnevale to Water Matrix. There can be no doubt that it is.

Does the Debt or Liability Arise Out of One of the Listed Wrongs?

[50] Put most generally, fraud occurs when a person is deprived dishonestly of something that he owns or would be entitled to but for the perpetration of the fraud: Midwest Amusement Park, LLC v. Cameron Motorsports Inc., 2018 ONSC 4549, citing Scott v. Commissioner of Police for the Metropolis, [1974] 3 All E.R. 1032 at 1038 (H.L.).

[51] All of the elements of fraud are present in the pleadings and proceedings of this action, including: incorrectly coding fraudulent transactions to prevent their detection; misrepresenting the company’s accounts receivable to conceal the use of the corporate line of credit to fund fraudulent transactions; restricting the access by others to the corporate records to maintain control and to conceal; misrepresenting accounting transactions on the corporate general ledgers and miscoding the purpose of the transactions. Ms. Carnevale’s failure to account for the missing funds constitutes a wrong sufficient to trigger s. 178(1)(d): Commdoor Aluminum v. Solar Sunrooms Inc. (2003), 2003 ON SC 32149, 43 C.B.R. (4th) 118 (Ont S.C.) at paras. 19, 20, 26; Toro Aluminum Ltd. v. Revah (1999), 1999 ON SC 14847, 18 C.B.R. (4th) 134 (Ont. S.C.) at para. 43; Simone v. Daley, at p. 529.

Did the Wrongful Conduct Occur While Ms. Carnevale was Acting in a Fiduciary Capacity?

[52] The determination that Ms. Carnevale’s debt arises out of fraud, embezzlement, misappropriation or defalcation will bring the debt within s. 178(1)(d) only if this conduct occurred while she was acting in a fiduciary capacity. The elements of s. 178(1)(d) are conjunctive: 166404 Canada Inc. v. Coulter (1998), 1998 ON CA 2010, 4 C.B.R. (4th) 1 (Ont. C.A.) at paras. 4-6.

[53] There are two elements necessary to establish liability for breach of fiduciary duty: (i) proof of the existence of a fiduciary relationship; (ii) conduct by the fiduciary that betrays the fiduciary obligation: Atlas Copco Canada Inc. v. Hillier, 2018 ONSC 1588, 58 C.B.R. (6th) 305 at para. 59, citing Varcoe v. Sterling (1992), 1992 ON SC 7478, 7 O.R. (3d) 204 (S.C.), affirmed 1992 ON CA 7730, 10 O.R. (3d) 574 (C.A.), leave to appeal refused [1992] SCCA No. 440.

[54] Whether a contractual relationship gives rise to fiduciary duties depends on the nature of the relationship between the parties. The criteria for a fiduciary relationship are: (i) the fiduciary has scope for the exercise of some discretion or power; (ii) the fiduciary has discretion for the unilateral exercise of that power; (ii) the beneficiary has a vulnerability to the fiduciary’s discretion or power; (iv) there is an understanding, an express or implied term, that the fiduciary will act in accordance with a duty of loyalty: Frame v. Smith, 1987 SCC 74, [1987] 2 S.C.R. 99; Korea Data Systems (USA), Inc. v. AamazingTechnologies Inc., 2015 ONCA 465, 126 O.R. (3d) 81 at para. 74; DBDC Spadina Ltd. v. Walton, 2018 ONCA 60, 56 C.B.R. (6th) 174 at para. 48.

[55] An employee who has authority to handle her employer’s finances occupies a position of trust: Re McNabb (1995), 1996 AB KB 10329, 167 A.R. 209 at para. 17 (Q.B.). Ms. Carnevale had power over Water Matrix’s finances which she was able to exercise unilaterally. She was one of the three corporate representatives of Water Matrix with login credentials to access the company’s online banking systems. The plaintiff was vulnerable to the exercise of discretion and power that it had delegated to Ms. Carnevale. The fact that there were others with oversight responsibilities does not derogate from Ms. Carnevale being constituted as a fiduciary of Water Matrix.

[56] In South Nahanni Trading Co. v. Gravel (2007), 2007 ON SC 30668, 36 C.B.R. (5th) 115 (Ont. S.C.) at paras. 11-13, Stinson J. found that the plaintiff’s bookkeeper was acting in a fiduciary capacity because she had the discretion and power over corporate finances to affect the plaintiff’s interests by taking funds without authority. I make a similar determination in this case. I am satisfied that Ms. Carnevale was acting in a fiduciary capacity when she engaged in the fraud, embezzlement, misappropriation or defalcation that gave rise to the loss sustained by Water Matrix and the resultant Judgment.

Summary – The Judgment Comes Within s. 178(1)(d)

[57] I conclude that the character and nature of the Judgment is as a debt or liability of Ms. Carnevale that falls within the meaning of s. 178(1)(d) of the BIA and is thereby not released by her discharge from bankruptcy.

D. Can the Judgment be Characterized as a Debt Within s. 178(1)(e)?

[58] In light of my finding that the Judgment falls within s. 178(1)(d), it is not necessary that the Judgment also fall within s. 178(1)(e) in order to survive Ms. Carnevale’s discharge from bankruptcy. However, for completeness of analysis, I will succinctly address the basis on which I would find that the character and nature of the Judgment is as a debt or liability of Ms. Carnevale that falls within the meaning of s. 178(1)(e).

[59] Section 178(1)(e) states:

178(1) An order of discharge does not release the bankrupt from

(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;

[60] For a debt or liability to survive a discharge from bankruptcy under s. 178(1)(e), the plaintiff must establish that:

(i) The plaintiff is owed a debt or liability;

(ii) The debt or liability results from bankrupt obtaining property or services by false pretences or fraudulent misrepresentation; and

(iii) The debt or liability does not arise from an equity claim.

[61] I have found that the Judgment is a “debt or liability”. The debt does not arise from an equity claim, which by s. 2 of the BIA is a “claim that is in respect of an equity interest”. In order for the Judgment to be of a character or nature to fall within s. 178(1)(e), it must “result from” Ms. Carnevale obtaining property by false pretences or fraudulent misrepresentation, in that there is a causal connection between Ms. Carnevale’s wrongdoing and the creation of the debt: Canada Mortgage and Housing Corp. v. Gray, 2014 ONCA 236, 119 O.R. (3d) 710.

Does the Debt or Liability Result from One of the Listed Wrongs?

[62] A fraudulent misrepresentation requires proof of the following: (i) the defendant made a representation; (ii) the representation was false; (iii) the representation was made knowingly, without belief in, or with indifference to its truth; (iv) the representation was relied on by the plaintiff in making property available, and; (v) damages resulted: Parna v. G. & S. Properties Ltd., 1970 SCC 25, [1971] S.C.R. 306 at p. 316; Bruno Appliance and Furniture Inc. v. Hryniak, 2014 SCC 8, [2014] 1 S.C.R. 126, at para. 21 (S.C.C.); Re Berger, 2010 ONSC 4376, 70 C.B.R. (5th) 225 at para. 28; Toronto-Dominion Bank v. Merenick, 2007 BCSC 1261, at para. 30.

[63] The Criminal Code, R.S.C. 1995, c. C-46, defines a false pretence as “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.” The Criminal Code definition of false pretence has been applied for the purposes of s. 178(1)(e): Celanese Canada Inc. v. Murray Demolition Corp., 2010 ON SC 29089, [2010] O.J. No. 6347 at para. 22 (S.C.).

[64] Courts have held that the concepts of fraudulent misrepresentation and false pretences as used in s. 178(1)(e) are “virtually interchangeable” in that “each rests on deceit”: Merenick, at para. 29; Re Szeto, at para. 46. The requirements of each are satisfied where the deceit of the bankrupt causes loss of property to the creditor. Property is defined broadly in s. 2 of the BIA and includes money.

[65] I am satisfied that all the elements of fraudulent misrepresentation and obtaining property through false pretences are present in this case. The nature and substance of the Judgment consented to by Ms. Carnevale falls within s. 178(1)(e).

Summary – The Judgment Falls Within s. 178(1)

[66] Ms. Carnevale consented to judgment in a civil fraud case where she had notice of the precise details of the fraud, misappropriation and conversion alleged against her. She had been provided with detailed pleading in the Statement of Claim and extensive disclosure of the investigative report and supporting documentary evidence, including in the materials served to obtain injunctive relief.

[67] From the earliest assessment of this action by Matlow J. on November 17, 2014, throughout the development of the pleading and motion practice, this action has been a case of civil fraud, misappropriation, embezzlement and conversion. This is the nature and substance of the resultant Judgment.

[68] The nature and character of the Judgment falls within the policy underlying s. 178(1), wherein conduct that is unacceptable to society ought not to be released through an Order of discharge from bankruptcy. The Judgment results from pleadings, proceedings and factual context that are entirely consistent with constituent elements of ss. 178(1)(d) and 178(1)(e).

IV. DISPOSITION

[69] The plaintiff’s motion is granted. The plaintiff has established entitlement to a declaration that the amounts owing to Water Matrix by Anna Maria Carnevale pursuant to the Judgment of Morgan J. dated April 14, 2016, as affirmed by the endorsement of the Court of Appeal dated November 18, 2016, are debts not released by the Order of discharge of bankruptcy in accordance with s. 178 of the BIA. An order shall issue accordingly.

V. COSTS

[70] I encourage the Water Matrix and Ms. Carnevale to discuss and agree on the issue of costs. If they are not able to agree on the issue of costs, the plaintiff may deliver to me written submissions on costs, of no more than three pages in length (plus its cost outline and any offer to settle) within 15 days of the date of this Endorsement. Ms. Carnevale may then deliver to me her written submissions on costs, of a similar length, within 30 days of the date of this Endorsement. I will consider the written submissions and release my decision on the issue of costs.

Sanfilippo J. Released: October 26, 2018