Murphy v. Stefaniak, 2007 ONCA 819

CITATION: Murphy v. Stefaniak, 2007 ONCA 819

DATE: 20071129

DOCKET: C46653

COURT OF APPEAL FOR ONTARIO

WINKLER C.J.O., DOHERTY and SHARPE JJ.A.

BETWEEN:

PERRY MURPHY

Applicant (Respondent in Appeal)

and

PHILIP STEFANIAK, 1178509 ONTARIO LTD., SIL-JACK INVESTMENTS LIMITED and 547994 ONTARIO LTD.

Respondents (Appellants)

G.G. Piccin for the appellants

Alex Gillespie for the respondent

Heard: October 23, 2007

On appeal from the order of Justice C.T. Hackland of the Superior Court of Justice dated January 24, 2007, reported at (2007), 2007 1329 (ON SC), 29 C.B.R. (5th) 196.

BY THE COURT:

I

The Issues

[1] Two issues arise on this appeal. The appellant submits that the motion judge erred in directing the trustee in bankruptcy to convey to Perry Murphy, the respondent, a discharged bankrupt, the trustee’s interest in a joint venture agreement entered into by Murphy prior to his bankruptcy and the trustee’s interest in an action commenced by Murphy to assert his right in the joint venture agreement.

[2] The appellant also submits that if the motion judge did not err in directing the trustee to convey those interests to Murphy, he erred in law in purporting to make the order conveying the interest in the lawsuit to Murphy effective from the date Murphy commenced that claim even though Murphy was an undischarged bankrupt at the time he commenced the action. The appellant submits that the order could not be made retroactive to a date before Murphy’s discharge as prior to his discharge he did not have the legal capacity to sue anyone in his own name.

II

The Facts

[3] The respondent made an assignment in bankruptcy in May 2002. The bankruptcy proceeded by summary administration without the appointment of inspectors. Murphy’s Statement of Affairs made no reference to any joint venture agreement. He indicated that he had an interest in a numbered company, but that his interest had been turned over to his business partner, the appellant, Philip Stefaniak (“Stefaniak”). Stefaniak was also a creditor in the bankruptcy.

[4] Shortly before the first meeting of the creditors, Murphy told the trustee that he had maintained an interest in the joint venture agreement. He provided the trustee with a copy of that agreement.

[5] In May 2003, the respondent received a suspended and conditional discharge from bankruptcy. The discharge was conditional upon Murphy paying the trustee $1,118.00 and the discharge was suspended for five months.

[6] The trustee does not appear to have made any inquiries about the joint venture agreement until the summer of 2003 when he wrote to counsel for Stefaniak. In September, Stefaniak’s lawyer responded indicating that Murphy had no interest in the joint venture or in the corporations referred to in the joint venture agreement.

[7] In November 2003, Murphy wrote to the trustee summarizing his efforts to get the trustee to address the joint venture contract and its potential as an asset in the bankruptcy. Murphy concluded the letter by asking:

Can someone please tell me what is to be the resolve/disposition of this matter.

[8] In early December 2003, the trustee’s solicitor wrote back to Murphy indicating:

We reviewed the matter of the land development contract with the trustee. The trustee does not wish to pursue any potential claims under that agreement. It would appear that litigation with your partners in the project would be required for any recovery. This would not appear to prejudice your rights to pursue claims under this agreement if you wished. [Emphasis added.]

[9] The solicitor’s comments to Murphy indicate that the trustee had determined that any costs associated with the pursuit of litigation in connection with any rights Murphy had under the joint venture agreement were not worth the potential gain to the bankruptcy. In effect, the trustee decided that any claims arising out of the agreement had no realizable value in the bankruptcy.

[10] The meaning of the last sentence in the solicitor’s letter is less clear. Murphy was still an undischarged bankrupt in December 2003 and could not at that time pursue any claims in his own right.[^1]

[11] Murphy made the required payment to the trustee in September 2004. Under the terms of the earlier order, he became entitled to a discharge five months later, that is in January 2005. In April 2005 Murphy contacted the bankruptcy court office to determine the status of his file. He was advised that order for his discharge from bankruptcy had been prepared and that it would be issued shortly as soon as the court staff had time to advert to it. All that remained was for the order to be “stamped and issued”. In his affidavit filed on the motion, Murphy swears that when he commenced the April 5, 2005 action against Stefaniak and numbered companies claiming among other things, fifty percent of the profits earned in the alleged joint venture, “I had every reason to believe I was absolutely discharged…”.

[12] The formal order absolutely discharging Murphy from bankruptcy was issued some ten weeks later on June 17, 2005.

[13] Stefaniak defended the claim by denying that Murphy, as an undischarged bankrupt, had the capacity to institute the application. In correspondence, the trustee confirmed that no property or rights in property had been transferred by the trustee back to Murphy. Stefaniak commenced a motion to dismiss Murphy’s application claiming that he was without legal capacity to commence that action.

[14] At Stefaniak’s request, the trustee called a meeting of the creditors in December 2006. Only Stefaniak attended. He attended in his personal capacity as a creditor and as proxy for a second creditor. He asked the trustee to tender Murphy’s interest in the joint venture and the lawsuit for sale to the creditors subject to court approval. Had the trustee tendered the asset for sale, Stefaniak, the defendant in the action commenced by Murphy, would no doubt have attempted to purchase Murphy’s interest in the joint venture and the lawsuit, thereby placing himself in control of a lawsuit in which he was a defendant.

[15] The trustee sought the direction of the court. Murphy brought a cross-motion asking the court to direct the trustee to return Murphy’s interest in the joint venture to Murphy. Murphy also asked the court to rectify retroactively his commencement of the action at a time when he was an undischarged bankrupt.

III

Analysis

[16] The motion judge made the impugned order under s. 40(2) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”). That section must be read with s. 40(1). Together they provide:

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.

(2) Where a trustee is unable to dispose of any property as provided in this section, the court may make such order as it may consider necessary.

[17] Section 40 is designed to permit a trustee to complete the administration of the bankrupt’s estate. The trustee may do so by returning property to the bankrupt where that property is of little or no realizable value to the estate. If the trustee fails to act under s. 40(1), the court may, on motion, order the property returned to the bankrupt pursuant to s. 40(2): Petro Canada Inc. v. 490300 Ontario Inc. (1989), 74 C.B.R. (N.S.) 33 (Ont. Sup. Ct.).

[18] The return of property to the bankrupt pursuant to s. 40(1) turns on whether the property is “incapable of realization”. Where the asset in issue is a cause of action, realization will require the commencement of a lawsuit. Lawsuits cost money and their outcome is almost always a matter of speculation. If a trustee determines that it is inappropriate to commence a lawsuit given the potential cost and the potential benefits, the cause of action is an asset that is “incapable of realization”: see Office of the Superintendent of Bankruptcy Canada: Directive Number 22 (Pre-1992) Guidelines at para. 2(d).

[19] In this case, the trustee determined in 2003 that any claims under the joint venture would be realized only through litigation and that it was not commercially sensible to pursue that litigation. Nothing occurred between 2003 and the creditors meeting in December 2006 which called for any reassessment of the decision not to pursue litigation.

[20] At the December meeting, Stefaniak took the position that the cause of action commenced by Murphy could generate some funds for the estate if it was put up for auction. There were two potential bidders, Stefaniak, the defendant in the action, and Murphy, the plaintiff in the action. There was nothing in the material before the motion judge to indicate what, if anything, Stefaniak was prepared to bid to secure control of the plaintiff’s side of a lawsuit. There was also nothing to indicate whether Murphy had the means to make a bid.

[21] As the motion judge recognized at para. 26, s. 40(1) of the BIA gave him a discretion to direct that the asset be returned to Murphy: see Re Shelson (2004), 2004 19412 (ON CA), 4 C.B.R. (5th) 76 at paras. 29-30 (Ont. C.A.). In exercising his discretion in favour of returning the asset to Murphy, the motion judge relied on the following:

• the representation made to Murphy by the solicitor for the trustee in 2003 that Murphy’s personal rights to pursue any claims under the joint venture agreement would not be prejudiced by the trustee’s decision not to pursue those claims in the bankruptcy;
• the absence of any evidence that any cause of action arising out of the agreement had any significant monetary and realizable value in the bankruptcy. The only evidence available to the trustee came from Stefaniak who insisted that Murphy had no interest in the agreement; and
• the finding that Stefaniak’s request that the asset be sold at auction was designed to assist Stefaniak in his capacity as a defendant in that action rather than to further the interests of the unsecured creditors, including Stefaniak, in the bankruptcy.

[22] The factors identified and considered by the motion judge were all relevant to the exercise of his discretion under s. 40(2). Discretion-driven decisions are not reviewable on a correctness standard. Indeed, it is implicit in the recognition of a decision as discretionary one that, in most cases, one decision cannot be characterized as correct to the exclusion of all other decisions. A discretionary order will stand on appeal unless it is predicated on a misapprehension of material evidence, represents a failure to apply the applicable principles guiding the exercise of the discretion, or is unreasonable in all of the circumstances.

[23] The motion judge had to consider competing interests. Murphy, as a discharged bankrupt, reasonably expected, based on earlier correspondence with the trustee, that any claim he had against Stefaniak would be returned to him post-bankruptcy so that he might pursue that claim. Certainly, prior to his discharge, none of the creditors, including Stefaniak, suggested that the trustee should pursue any rights under the joint venture agreement.

[24] Stefaniak, as an unsecured creditor in the bankruptcy, also had a legitimate interest. If the cause of action was tendered for sale, there was a possibility that both Stefaniak and Murphy would bid on securing the right to pursue that claim. These competing bids could generate some money for distribution among the unsecured creditors. There is no evidence as to what amount, if any, could reasonably have been expected to have been generated through this process.

[25] Although the motion judge was obliged to consider Stefaniak’s interests as an unsecured creditor, he correctly observed that Stefaniak’s interest as a defendant in the outstanding action brought by Murphy could play no role in the exercise of his discretion under s. 40(2) of the BIA. It was no part of the motion judge’s exercise of his discretion to seek to advantage either Murphy or Stefaniak in the litigation commenced by Murphy.

[26] The motion judge made no reversible error in the exercise of his discretion. Another judge may have exercised his or her discretion differently and ordered that the action be tendered for sale among the creditors. The mere fact that the discretion could properly have been exercised differently is no basis upon which to find that it was exercised improperly.

[27] We now turn to the second issue: did the motion judge err by making the order conveying the interest in the lawsuit to Murphy effective from the date Murphy commenced that claim even though Murphy was an undischarged bankrupt at the time he commenced the action?

[28] We agree with the appellant that this aspect of the order is not supported by the authority cited by the motion judge, Thompson v. Coulombe (1984), 54 C.B.R. (N.S.) 254 (Qc. C.A.). That case did not involve an action brought by a discharged bankrupt who had failed to obtain an assignment of interest prior to commencing the action. Indeed, Thompson and several other cases stand for the proposition that an action commenced by an undischarged bankrupt is a nullity: see e.g. Long v. Brisson (1992), 1992 ABCA 184, 3 Alta. L.R.(3d) 79 (C.A.); Wallace v. United Grain Growers Ltd., 1997 332 (SCC), [1997] 3 S.C.R. 701 at para. 58; McNamara v. Pagecorp Inc. (1989), 38 C.P.C.(2d) 117 (Ont. C.A.).

[29] In our view, however, the result reached by the motion judge can, in the particular circumstances of this case, be justified by varying the order of discharge by dating it April 4, 2005, pursuant to s. 187(5) of the BIA: “Every court may review, rescind or vary any order made by it under its bankruptcy jurisdiction.”

[30] It is undisputed that before he commenced the application on April 5, Murphy had satisfied all the conditions of the conditional order. We do not accept the submission that a conditionally-discharged bankrupt is absolutely discharged as soon as he or she fulfills the conditions of the discharge. However, the conditional order provided that “upon the Registrar being satisfied [that the conditions have been met] an Absolute Order of Discharge shall issue.” [Emphasis added]. It follows that from the point at which he had satisfied the conditions in January 2005, Murphy was legally entitled to an absolute discharge within a reasonable period of time. On Murphy’s uncontradicted evidence, in early April, 2005, the only thing that stood between him and an absolute discharge was administrative delay and backlog in the bankruptcy court office. The order had been prepared, indicating that the Registrar was satisfied that the conditions for the absolute discharge had been met, and all that remained was for the order to be “stamped and issued”. In good faith, Murphy had commenced the application having “every reason to believe” that he had been discharged from bankruptcy.

[31] An undischarged bankrupt should, of course, wait until he or she obtains an order of absolute discharge before commencing proceedings and failure to do so will ordinarily be fatal. However, in the unusual circumstances of the present case, it is our view that varying the absolute order of discharge to show the date of April 4, 2005 is consistent with the interests of justice and does not undermine the general principle that an undischarged bankrupt lacks capacity to commence legal proceedings with respect to property vested in the trustee.

[32] Accordingly, we would vary paragraph 2 of the order of the motion judge as follows:

2. THIS COURT FURTHER ORDERS that the Absolute Order of Discharge of Bankrupt dated June 17, 2005, be varied pursuant to s. 187(5) of the Bankruptcy and Insolvency Act to be dated April 4, 2005 and that the Transfer of the Trustee’s interest pursuant to paragraph 1 of this Order operate nunc pro tunc to April 4, 2005.

IV

Conclusion

[33] For these reasons, the order of the motion judge is varied in accordance with paragraph 32 of these reasons and the appeal is dismissed with costs to the respondent fixed at $7,500 inclusive of disbursements and GST.

RELEASED: “WW” “NOV 29 2007”

“Winkler C.J.O.”

“Doherty J.A.”

“Robert J. Sharpe J.A.”

[^1]: Before the motion judge, Murphy argued that the letter amounted to an assignment of the interest to him by the trustee. The motion judge correctly held that as an undischarged bankrupt, Murphy did not have the capacity to take an assignment and that in any event the letter did not constitute an assignment.