Court of Appeal for Ontario

Citation: Household Realty v. Davis, 2007 ONCA 283

Date: 2007-04-18

Docket: C45831 (M34683/M34847)

Before: ROSENBERG, ARMSTRONG and JURIANSZ JJ.A.

Between:

HOUSEHOLD REALTY CORPORATION LIMITED (Respondent)

And

BRADEN GRANT DAVIS, GWENYTH JANE DAVIS also known as GWEN DAVIS (Appellants)

Counsel: L. Leslie Dizgun, for the respondent Household Realty Corporation Limited, the moving party Ronald B. Moldaver, Q.C., for the appellants (respondents), Braden Grant Davis and Gwenyth Davis

Heard: March 19, 2007

ENDORSEMENT

[1] The appellants, Braden Grant Davis and Gwenyth Davis, are husband and wife and are the registered owners of two contiguous parcels of land in the Township of Smith – Ennismore – Lakefield near Peterborough.

[2] Mr. and Mrs. Davis mortgaged the two properties to the respondent, Household Realty Corporation Limited. The mortgages were registered on title on March 6, 2003. On December 19, 2005 Household Realty commenced an application in the Superior Court for a declaration that the two mortgages were valid and enforceable pursuant to s. 50(15) of the Planning Act, R.S.O. 1990, c.P. 13.

[3] On January 26, 2006 Mr. and Mrs. Davis filed assignments in bankruptcy. On the following day, January 27, 2006, counsel for Mr. and Mrs. Davis advised counsel for Household Realty that the application was stayed as a result of the assignment in bankruptcy and that the trustee in bankruptcy should determine how the application was to proceed. Counsel for Household Realty disagreed with that position.

[4] Counsel for Mr. and Mrs. Davis was advised by the trustee in bankruptcy that it was taking no position on the application. The trustee also advised counsel for Mr. and Mrs. Davis that he was authorized to proceed with the application provided that the trustee in bankruptcy was not exposed to any costs order.

[5] On July 14, 2006 the trustee in bankruptcy wrote to counsel for Household Realty and advised that he did not oppose the application of Household Realty. The trustee further stated:

Should you be successful in your Motion, it will confirm our understanding that your client’s mortgages are properly secured against the bankrupt’s property as disclosed on their Statement of Affairs. However, in the event that you are unsuccessful in your endeavors and your client’s secured claim is deemed to be invalid and thus unsecured, we will take all appropriate steps to realize upon the resulting equity in the subject property for the benefit of the unsecured creditors.

[6] The application proceeded before Justice H. R. McLean of the Superior Court of Justice on July 20, 2006 in Peterborough. The trustee in bankruptcy did not participate although a representative was present in court. Justice McLean made the declaration of validity sought by Household Realty. His reasons made no mention of the bankrupt status of Mr. and Mrs. Davis.

[7] On July 31, 2006 Mr. and Mrs. Davis served a notice of appeal to this court.

[8] On September 6, 2006 Mr. and Mrs. Davis were discharged from bankruptcy.

[9] On October 3, 2006 the trustee in bankruptcy wrote to counsel for Household Realty and confirmed that the trustee was taking no position in respect of this matter and asked to be advised of the outcome of the appeal.

[10] On October 17, 2006 the trustee in bankruptcy signed a consent in favour of Mr. and Mrs. Davis which read:

Mandelbaum Spergel Inc., the Trustee in Bankruptcy of Braden Grant Davis and Gwenyth Jane Davis, hereby consents to the Appellants proceeding with the within appeal and takes no position with respect to same, provided that the Trustee in Bankruptcy is not responsible for any costs regarding the appeal.

[11] Counsel for Household Realty now brings a motion to quash the appeal to this court on the ground that Mr. and Mrs. Davis have no standing to prosecute the appeal.

[12] On the return of the motion before us counsel for Household Realty conceded that the application in the Superior Court ought not to have proceeded against Mr. and Mrs. Davis and that appropriate steps should have been taken to add the trustee in bankruptcy in place of Mr. and Mrs. Davis. Although counsel did not specifically cite s. 69.3(1) of the Bankruptcy and Insolvency, R.S.C. 1985, c. B-3 (the “Act”), we assume that such concession was made in reliance on that section and on the assumption that leave is required pursuant to s. 69.4 of the Act. We note that counsel for Household Realty in this court did not rely upon s. 69.3(2) of the Act which enables a secured creditor to realize on its security without leave of the court, although that appears to have been its position prior to proceeding before the application judge.

[13] Although it is not necessary to decide the point on this motion, we are of the view that s. 69.3(2) governs the circumstances here and that Household Realty was entitled to proceed as it did against Mr. and Mrs. Davis without adding the trustee and without seeking leave to continue the proceedings.

[14] In any event, it is clear that upon the bankruptcy of Mr. and Mrs. Davis their interest in the properties immediately vested in the trustee in bankruptcy: see s. 71 of the Act. The fact that they are no longer in bankruptcy does not change their position in regard to the properties in issue here.

[15] Counsel for Mr. and Mrs. Davis submits that his clients’ interest in the two properties is now governed by s. 40(1) of the Act which provides:

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.

[16] It is the submission of counsel that the trustee’s failure to take a position on the application of Household Realty and the trustee’s consent to Mr. and Mrs. Davis proceeding with the appeal engages s. 40(1) of the Act. In support of this argument counsel relies on the judgment of this court in Shelson v. Gowling Lafleur Henderson LLP et al. (2004), 2004 19412 (ON CA), 70 O.R. (3d) 171 (C.A.). We disagree.

[17] In that case the trustee in bankruptcy represented to the bankrupt, Dr. Shelson, prior to his assignment in bankruptcy that his interest in a civil action would revest in him upon his discharge. During the course of the bankruptcy the trustee took no steps in respect of the civil action. After his discharge, the bankrupt pursued the action for five years when the trustee, who had some years earlier been discharged, asserted an interest in the action and purported to offer it for sale.

[18] The Deputy Registrar in Bankruptcy made an order requiring the trustee to return the interest in the civil action to Dr. Shelson in reliance on s. 40(1) of the Act. In doing so, he also relied upon a judgment of the Saskatchewan Court of Appeal in Zemlak v. Deloitte Haskins and Sells Ltd. (1987), 1987 4662 (SK CA), 66 C.B.R. (N.S.) 1. The Deputy Registrar asserted that the court in Zemlak had concluded that the trustee on the facts in that case “was obliged to either return the non-realizable property under what is now s. 40(1) of [the Act] or carry on with the administration of the estate …”. See Shelson at para. 23.

[19] In restoring the Deputy Registrar’s decision, which had been reversed by Ground J. of the Superior Court, Catzman J.A., writing for this court, said at paras. 29 and 30:

I do not quarrel with the result in Zemlak or with the Deputy Registrar’s reliance on that case. But, with deference, I am concerned with the breadth of the proposition stated by the Deputy Registrar: that when a trustee applies for its discharge, it must elect, or be considered to have elected, to return to the bankrupt its interest in non-realizable property under s. 40(1) of the BIA and, if it fails to do so, it holds that interest as trustee for the bankrupt and must return that interest to him.

In my view, the proposition cannot be framed as a “bright-line” rule that admits of no exceptions. Even the court in Zemlak qualified its statement of the proposition by the introductory phrase “[I]n the circumstances of this case”.

[20] Nevertheless, this court found that the Deputy Registrar’s proposition did apply to the facts in Shelson. Catzman J.A. referred in particular to the knowledge of the trustee of Dr. Shelson’s civil action before his assignment in bankruptcy and the trustee’s failure to take any steps with respect to the action until several years after the trustee was discharged. Catzman J.A. concluded at para. 31: “[I]t was by then far too late for the trustee to come forward and seek to realize on the value of its professed interest in the action.”

[21] The Shelson case is distinguishable from the case at bar. In Shelson the trustee abandoned, from the outset, any interest in the civil action. In this case the trustee has not abandoned any interest in the Davis properties. It has simply taken the position that it believes Household Realty holds valid mortgages on the properties and does not wish to expose the estate to costs by participating in the litigation. However, the trustee has reserved its right to realize on the value of the properties for the benefit of the unsecured creditors should Household Realty’s application be unsuccessful. Further, in our view, the consent given by the trustee to allow Mr. and Mrs. Davis to proceed with the appeal is of no consequence and does not constitute an abandonment of whatever interest the trustee may have in the properties.

[22] Since the properties remain vested in the trustee, Mr. and Mrs. Davis lack status to institute and proceed with the appeal. In the result, we have no alternative but to allow the motion to quash the appeal.

[23] Household Realty shall have its costs of the motion on a partial indemnity basis fixed at $1,500 including disbursements and G.S.T.

Signed: “Marc Rosenberg J.A.” “Robert P. Armstrong J.A.” “R. G. Juriansz J.A.”