Bank of Montreal v. Giannotti
51 O.R. (3d) 544
[2000] O.J. No. 4272
Docket No. C32401
Court of Appeal for Ontario
Charron, MacPherson and Sharpe JJ.A.
November 10, 2000
Bankruptcy -- Discharge -- Grounds for refusing discharge of bankrupt -- Dishonesty -- Failure to disclose information -- Failure to co-operate with trustee and court -- Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 172.
The policy of the Bankruptcy and Insolvency Act to rehabilitate unfortunate debtors must be balanced with the interests of creditors who have lost money because of the debtor's conduct and with maintaining the integrity of the administration of the Act. A debtor who is dishonest or who is evasive, untruthful and unforthcoming in providing full disclosure, or who is unco-operative with the trustee in bankruptcy or the court is not entitled to a discharge on any terms.
APPEAL from an order granting a combined suspended and conditional discharge from bankruptcy.
Cases referred to Adelman (Re) (1945), 26 C.B.R. 152 (Ont. S.C.); Gestetner (Re) (November 25, 1996), Sharpe J. (Ont. Gen. Div.); Goodman (Re), [1995] O.J. No. 72 (Gen. Div.); Mancini (Trustees of) v. Mancini (1987), 63 C.B.R. (N.S.) 254 (Ont. S.C.); Rahall (Re) (1997), 1997 14970 (AB KB), 49 C.B.R. (3d) 268 (Alta. Q.B.) Statutes referred to Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 [as am.], ss. 163, 170, 172 Authorities referred to Houlden and Morawetz, Bankruptcy Law of Canada, 3d ed., rev., Vol. 1, looseleaf (Toronto: Carswell, 1992- ), p. 1-5
Joshua Siegel, for appellant. Respondent in person.
The judgment of the court was delivered by
MACPHERSON J.A.:
Introduction
[1] Most first-time bankrupts apply for a discharge approximately one year after they have been adjudged to be bankrupt. Pursuant to s. 172 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, a judge sitting in bankruptcy court has a wide array of remedies at his or her disposal. Positive remedies which will provide some measure of relief to the bankrupt include an absolute discharge, a conditional discharge and a suspended discharge.
[2] A judge is entitled, under s. 172, to refuse to make any type of discharge order. This appeal raises the issue of what type of circumstances and conduct would justify such an order.
A. Factual Background
[3] Peter Giannotti was a major real estate development player in the booming economy of the late 1980s. As a senior officer and directing mind of the Carlyle group of companies, he was involved in scores of construction projects. Some of the projects were of quite grand proportions; one, for example, was a condominium development project in Mississauga consisting of four phases and approximately 2,000 separate units. In Mr. Giannotti's words "those were the good old days."
[4] As the calendar turned from the 1980s to the 1990s, the good old days disappeared. Many of Mr. Giannotti's projects turned sour as purchasers declined to close transactions and as lenders withdrew their support.
[5] Mr. Giannotti had provided personal guarantees to several institutional lenders. On May 7, 1998, one of those lenders, the Bank of Montreal, and the Ontario New Home Warranty Program, petitioned Mr. Giannotti into bankruptcy. At that juncture, he owed almost 30 creditors somewhere between $25,000,000 and $29,000,000, including $892,000 to the Bank of Montreal, $335,000 to the Ontario New Home Warranty Program and almost $19,000,000 to Montreal Trust.
[6] Just over a year later, Mr. Giannotti applied for a discharge. The Bank of Montreal opposed the discharge. The trustee in bankruptcy filed a report in which he was highly critical of Mr. Giannotti. Two other creditors, through counsel, appeared at the discharge and were given standing to cross-examine Mr. Giannotti.
[7] The discharge hearing took place before Cameron J. on June 22, 1999. At the conclusion of the hearing, Cameron J. granted a combined suspended and conditional discharge. His endorsement was:
Discharge granted but operation of this order is suspended until 1 Jan. 2000. Discharge is conditional on bankrupt entering into an agreement with the Trustee to pay to the Trustee for the creditors one third of the amounts received by or for the Bankrupt prior to 1 Jan. 03 as evidenced by income tax returns of the Bankrupt together with a summary of the Bankrupt's business activities as sworn by him, by 30 Apr. of the year following that to which the return and summary relate.
The Trustee may continue his rights to examine under the Bankruptcy Act, including the trustees of the Giannotti Family Trust who this court thinks have knowledge of the affairs of the Bankrupt, including the funding of the trust and placing of assets with it and the rights of the Bankrupt and members of his household under the Trust.
[8] The Bank of Montreal appeals Cameron J.'s decision. In its Notice of Appeal, the bank sought relief as follows:
THE APPELLANT ASKS that the order be set aside and varied as follows:
That the application for discharge be refused.
In the alternative, that the terms of the Order of Mr. Justice Cameron remain intact save for the discharge granted on the condition that he pay the sum of $250,000 to the benefit of the estate.
[9] At the appeal hearing, the bank withdrew its request for alternative relief in the form of a conditional order requiring Mr. Giannotti to pay $250,000 to the benefit of the estate. The bank submits that Mr. Giannotti's post-bankruptcy conduct has been so egregious as to disentitle him to any relief.
B. Issue
[10] The sole issue in this appeal is whether the bankruptcy judge erred by not refusing the bankrupt's application for discharge.
C. Analysis
[11] There is no question that a principal purpose of the Bankruptcy and Insolvency Act ("BIA") is the rehabilitation of unfortunate debtors. As expressed by L.W. Houlden and C.H. Morawetz in their treatise, Bankruptcy Law of Canada, 3rd ed., rev., Vol. 1, looseleaf (Toronto: Carswell, 1992) at p. 1-5:
The Act permits an honest debtor, who has been unfortunate in business, to secure a discharge so that he or she can make a fresh start and resume his or her place in the business community.
[12] However, the rehabilitation of the debtor must be balanced with the interests of creditors who have lost money because of the bankrupt's conduct. This requirement of a balanced approach in discharge hearings was well articulated by Adams J. in Re Goodman, [1995] O.J. No. 72 (Gen. Div.), at para. 1:
The rehabilitative purpose of bankruptcy legislation is well understood. See Re Willey (1981), 38 C.B.R. (N.S.) 24 (B.C.S.C.). Individuals and society generally benefit from a process by which the crushing burden of financial debt can be lifted, thereby permitting a bankrupt to resume the life of a useful and productive citizen. See Re Shakell . . . (1988), 70 C.B.R. (N.S.) 270 (Ont. S.C.). Equally important, however, is the integrity of the bankruptcy process itself. While the central purpose of the statute is to enable the honest but unfortunate debtor to make a fresh start, parity of treatment between debtors and fairness to creditors need to be kept in mind.
[13] Both Adams J. and Houlden and Morawetz use two adjectives to describe a debtor who should be entitled to the relief of a discharge -- "unfortunate" and "honest". I have no doubt that Mr. Giannotti has been unfortunate. The downturn in the real estate market in the late 1980s and early 1990s ruined many developers. Mr. Giannotti, with millions of dollars in personal guarantees behind his companies, was one of them.
[14] However, I do not think that the adjective "honest" applies to the manner in which Mr. Giannotti conducted himself in this proceeding. My review of his testimony at the discharge hearing leads to the inevitable and overwhelming conclusion that Mr. Giannotti has not told the truth to his creditors, his trustee in bankruptcy, or the court at the discharge hearing. In Re Gestetner (November 25, 1996), (Ont. Gen. Div.), Sharpe J. said, at para. 7:
An honest but unfortunate debtor is entitled by the law to have a fresh financial start. The applicants may have been unfortunate, but I find that they have not been honest. In my view, they are not entitled to have the fresh start the law allows them unless they are prepared to be honest with their creditors and with the court. The court has an obligation to ensure that the integrity of the bankruptcy law is maintained. The applicants have refused to provide the court with the information required to make an appropriate judgment. In light of the evidence the applicants have offered and the level of disclosure they have made as to the true state of their financial affairs, I find that they are not entitled to discharges on any terms.
[15] I agree entirely with the philosophy manifest in this passage -- a dishonest debtor, and a debtor unwilling to make full disclosure of his financial affairs, is entitled to no relief under the BIA. For several reasons, I find that every word of the above passage applies to Mr. Giannotti and, therefore, like the bankrupts in Re Gestetner, he was entitled to no relief at his discharge hearing.
[16] First, Mr. Giannotti did not co-operate with his trustee in bankruptcy as the trustee sought to administer his estate. Pursuant to s. 170 of the BIA, the trustee filed a report on February 19, 1999 in which he criticized Mr. Giannotti in a number of aspects, including his refusal to provide information about a family trust, his inability to explain why he disclosed different years of birth on his statement of affairs and during his examination by the official receiver, and his failure to co-operate in appearing for an examination pursuant to s. 163 of the BIA.
[17] In a supplementary report dated June 1, 1999, filed three weeks before the discharge hearing, the trustee expanded on his criticism of Mr. Giannotti. According to the trustee, Mr. Giannotti was continuing in his refusal to provide information about a family trust, he had put the trustee to unnecessary expense by frivolous and vexatious actions regarding his s. 163 examination, he had refused to comply with undertakings after the s. 163 examination, and he refused or was unable to answer questions about how rent and office expenses were being paid for a business in which Mr. Giannotti appeared to be involved after he became bankrupt.
[18] In my view, the integrity of the bankruptcy system requires a bankrupt to co-operate with the trustee. See Mancini (Trustees of) v. Mancini (1987), 63 C.B.R. (N.S.) 254 (Ont. S.C.), Re Adelman (1945), 26 C.B.R. 152 (Ont. S.C.), and Re Rahall (1997), 1997 14970 (AB KB), 49 C.B.R. (3d) 268 (Alta. Q.B.). The trustee is appointed by order of the court. After a receiving order is made by the court, the trustee administers the bankrupt's estate on behalf of the court. Accordingly, a bankrupt who seeks relief, by way of discharge, from the court must co- operate fully with the trustee before seeking that relief. Mr. Giannotti did not comply with this obligation.
[19] Second, Mr. Giannotti's conduct and evidence with respect to the Giannotti Family Trust was, and continues to be, completely unacceptable. The family trust was established in the late 1980s with professional assistance from a major Toronto law firm and a sophisticated international accounting firm. In his testimony at the discharge hearing, Mr. Giannotti was extremely vague and unforthcoming about the origins, funding and beneficiaries of the trust. He tried to portray the trust as the brainchild of his father, a man of humble background and no business experience, and his wife, a part- time school teacher. Eventually, the bankruptcy judge intervened and asked a series of probing questions about the trust. Mr. Giannotti continued to be highly evasive, which ultimately provoked this observation from the bankruptcy judge:
All right, now, I'm having trouble accepting that you didn't know who the beneficiaries were, you didn't know who funded this trust, only that you told Arthur Anderson and Borden Elliot you wanted to minimize your tax exposure, draft the trust agreement and that that was the extent of your understanding of the trust arrangement. As they say down in Georgia, I'm from Missouri.
[20] In my view, Mr. Giannotti's failure to co-operate with the trustee and his testimony at the discharge hearing concerning the family trust constitute serious barriers to a discharge. When the trust was established, Mr. Giannotti was a very successful property developer operating, by his own count, 48 companies in a boom economy. It is difficult to imagine that the family trust is not a substantial asset about which the court is entitled to know a good deal more. It is also discreditable that Mr. Giannotti would try to hide his own detailed knowledge about the trust behind his father and wife.
[21] Third, Mr. Giannotti was evasive and inconsistent with respect to funding for an office he used after he became bankrupt. The office consisted of approximately 6,000 square feet and had a rent of over $5,000 a month. Mr. Giannotti testified that Carlyle Management Services paid for the office rent, telephone expenses, and the salary of his sister who answered the telephone. He admitted that his sister answered the telephone "Ameriplex", yet he insisted that there was no relationship between Ameriplex and the Carlyle group of companies. After exploring this matter in some detail through questions, the bankruptcy judge observed: "I find this is an unusual relationship, something's missing, but maybe we'll find out later."
[22] Fourth, in an income and expense statement dated May 31, 1999, just three weeks before his discharge hearing, Mr. Giannotti declared his monthly income as $186, all of it coming from family members. Not only does this strain belief in light of the fact that he admitted going to work at the Ameriplex/ Carlyle office almost every day; it is also inconsistent with his testimony that various family members had loaned him at least $130,000 in the year after he became bankrupt.
[23] Fifth, it is clear that Mr. Giannotti engaged in at least one development venture after he was petitioned into bankruptcy. He admitted to the bankruptcy judge that the trustee had told him that he could not engage in business deals while he was an undischarged bankrupt. After several pointed questions from the bankruptcy judge, Mr. Giannotti finally conceded, referring to the business deal, that "I ought not to have signed it."
[24] Sixth, I return to Adams J.'s observation in Re Goodman that there should be "parity of treatment between debtors and fairness to creditors" in the bankruptcy process. Mr. Giannotti owes more that $25,000,000 to almost 30 creditors. He has not paid one cent to the trustee for the benefit of those creditors. Yet, to cite but one example, after he became bankrupt he continued to be a member at the exclusive King Valley Golf Club, where the annual membership is approximately $4,500. This is hardly parity and fairness.
[25] The factors and conduct that I have summarized clearly placed Mr. Giannotti within s. 173 of the BIA. The bankruptcy judge could not have granted him an absolute discharge; his options were to grant either a suspended discharge or a conditional discharge, or to refuse to order any kind of discharge. The bankruptcy judge chose a combination of a suspended discharge and a conditional discharge.
[26] The case law establishes that a complete refusal of any type of discharge is an unusual order, given the BIA's emphasis on rehabilitation of the debtor. In Re Adelman, Urquhart J. said that a refusal of discharge "is a harsh step . . . which should be resorted to only in extraordinary cases" (supra, at p. 153). However, in this case, given Mr. Giannotti's conduct and testimony, a refusal of any kind of discharge was, in my view, required. Mr. Giannotti was simply too unco-operative, evasive and untruthful with both the trustee and the bankruptcy judge.
[27] The BIA seeks to provide relief to honest and unfortunate debtors. The word "honest" introduces a strong element of integrity into the administration of the Act. In my view, a reasonable member of the public would seriously question the integrity of the BIA if Mr. Giannotti was given any form of relief at this juncture. He has not been honest with the trustee or the bankruptcy court. He is free to re- apply for a discharge, but he must co-operate with the trustee and make full disclosure of the relevant facts.
Disposition
[28] I would allow the appeal. The applicant is entitled to its costs of the appeal and the discharge hearing.
Order accordingly.