Canada Mortgage and Housing Corporation v. Gray

[Indexed as: Canada Mortgage and Housing Corp. v. Gray]

Ontario Reports

Court of Appeal for Ontario,

Laskin, van Rensburg and Hourigan JJ.A.

March 28, 2014

119 O.R. (3d) 710 | 2014 ONCA 236

Case Summary

Bankruptcy and insolvency — Discharge — Release of debts — Bankrupt and R co-signing mortgage application — Mortgage obtained through fraudulent misrepresentations by R of which bankrupt was unaware — Bankrupt not revealing that he was paid to co-sign application and that he was not beneficial owner of property — Section 178(1)(e) of Bankruptcy and Insolvency Act not applying — Bankrupt's debt surviving his discharge from bankruptcy — Section 178(1)(e) [page711] requiring causal connection between debt and misrepresentation or false pretences — Money advanced as result of R's misrepresentations and not as result of anything bankrupt said or failed to say — Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 178(1)(e).

The respondent was asked by an acquaintance to co-sign a mortgage application, purportedly to assist a new immigrant who lacked sufficient credit history in Canada and was unable to obtain a mortgage. The respondent agreed to do so. He and R co-signed the application, and he was paid $2,500. The mortgage subsequently went into default. The mortgagee sued on the mortgage debt and obtained a default judgment against the respondent and R. The judgment was assigned to the appellant. The respondent made an assignment in bankruptcy. The appellant moved for a declaration that the debt would not be released by the respondent's discharge from bankruptcy under s. 178(1)(e) of the Bankruptcy and Insolvency Act ("BIA"). The motion was dismissed. The trial judge found that the mortgage was obtained through R's misrepresentations, and that there was no evidence of any misrepresentation by the respondent that had been relied on by the mortgagee in advancing the mortgage funds, and no basis for finding that the respondent reasonably ought to have known of R's misrepresentations. The appellant appealed, arguing that the trial judge had failed to consider the issue of false pretences, and that there were false pretences in this case as the respondent did not inform the mortgagee that he had been paid to participate in the transaction and was a "straw borrower".

Held, the appeal should be dismissed.

Whether one considers fraudulent misrepresentation or false pretences, s. 178(1)(e) of the BIA requires a finding that the bankrupt "obtained property by" such conduct. A causal connection between the bankrupt's wrongdoing and the creation of the debt or liability is required. The trial judge in this case concluded that the mortgage funding was obtained by R's fraudulent misrepresentations, and not as a result of what the respondent represented or failed to disclose to the mortgagee. That was a finding of fact that was determinative of both the "false pretences" and "fraudulent misrepresentation" aspects of s. 178(1)(e) as applied to this case.

Cases referred to

Ste. Rose & District Cattle Feeders Co-op v. Geisel, [2010] M.J. No. 159, 2010 MBCA 52, 255 Man. R. (2d) 45, 319 D.L.R. (4th) 694, [2010] 11 W.W.R. 251, 68 C.BR. (5th) 163, consd

Other cases referred to

Bank of Montreal v. Giannotti (2000), 2000 CanLII 16928 (ON CA), 51 O.R. (3d) 544, [2000] O.J. No. 4272, 197 D.L.R. (4th) 266, 138 O.A.C. 316, 21 C.B.R. (4th) 199, 104 A.C.W.S. (3d) 26 (C.A.); Buland Empire Development Inc. v. Quinto Shoes Imports Ltd., 1999 CanLII 1345 (ON CA), [1999] O.J. No. 2807, 123 O.A.C. 288, 11 C.B.R. (4th) 190, 24 R.P.R. (3d) 169 (C.A.); Simone v. Daley (1999), 1999 CanLII 3208 (ON CA), 43 O.R. (3d) 511, [1999] O.J. No. 571, 170 D.L.R. (4th) 215, 118 O.A.C. 54, 8 C.B.R. (4th) 143, 24 R.P.R. (3d) 1, 86 A.C.W.S. (3d) 271 (C.A.)

Statutes referred to

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 178(1), (d) [as am.], (e)

APPEAL from the judgment of Wilton-Siegel J., [2013] O.J. No. 1969, 2013 ONSC 1986 (S.C.J.) for the dismissal of a motion for a declaration that the debt survived the discharge from bankruptcy. [page712]

Kenneth Kraft and Matthew Diskin, for appellant.

Trung Nguyen, for respondent.

The judgment of the court was delivered by

VAN RENSBURG J.A.: —

Introduction

[1] This is an appeal from the decision of Wilton-Siegel J. that determined that the respondent's debt to Royal Bank of Canada ("RBC"), which had been assigned to the appellant Canada Mortgage and Housing Corporation ("CMHC"), would not survive his discharge from bankruptcy.

[2] This case engages the proper interpretation and application of s. 178(1)(e) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA"), which provides as follows:

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.

[3] For the reasons that follow, I would dismiss the appeal. There was no error in the trial judge's conclusion that the respondent's debt to CMHC would not survive his bankruptcy discharge.

Facts

[4] In 2006, the respondent, Evan Gray, an RBC employee, was asked by an acquaintance, John Roberts, if he would be willing to co-sign on a mortgage application, purportedly to assist a new immigrant who lacked sufficient credit history in Canada and was unable to obtain a mortgage. Roberts told Gray that this person would occupy the mortgaged property, would sign a written agreement promising to make the payments due under the mortgage, and after a year would assume the mortgage and take title to the property. Roberts told Gray that there was no risk because the property could be sold in the event of default, and that he would not have agreed to co-sign the mortgage himself if he thought there was any risk.

[5] After Gray agreed to co-sign the mortgage application, Roberts took him to meet someone called "Mike", who held himself out as a mortgage broker, and the two assured him that the type of arrangement they were proposing was common and [page713] ordinary business practice. The mortgage application was signed by Gray at an RBC branch, where he attended with Mike and met with an RBC mortgage representative. Gray did not receive a copy of anything he signed, nor was he given the standard charge terms referred to in the mortgage document (and upon which CMHC relied in these proceedings).

[6] Gray and Roberts signed separate mortgage applications, at different times and in different places. Gray provided accurate information about his income and employer, while Roberts misrepresented his income and employment on his application. Roberts also submitted an inflated property valuation with his mortgage application. Gray was unaware of Roberts' misrepresentations.

[7] Gray and Roberts purchased the property as tenants in common and RBC extended a mortgage loan of $516,370.13. The mortgage was insured by CMHC. The transaction closed in April 2006.

[8] Gray was paid $2,500 for his participation in the transaction.

[9] Two months later, Gray was contacted by RBC and told a mortgage payment was late. He notified Roberts and Mike, and they picked him up and gave him funds to make the payment. The mortgage payments in the next few months were made in a similar fashion.

[10] In July 2006, and before any default had occurred, RBC investigated what it believed to be a fraud. Gray co-operated in the investigation. Gray's employment was not affected and he remains employed by RBC.

[11] In or about June 2007, Mike stopped making mortgage payments and both Roberts and Mike stopped returning Gray's telephone calls. The mortgage subsequently went into default.

[12] In November 2007, RBC sued on the mortgage debt and obtained a default judgment against Gray and Roberts in the sum of $524,577.34 plus interest. RBC's statement of claim did not allege fraud. The judgment debt was reduced by the net proceeds of sale of the mortgaged property ($331,875.03). The judgment was assigned to CMHC in August 2008.

[13] CMHC enforced the judgment, and Gray's wages were garnished to the extent of $17,169.39 before he made an assignment in bankruptcy in February 2012.

[14] In April 2012, CMHC moved for a declaration that the outstanding amount of Gray's debt would not be released by his discharge from bankruptcy under s. 178(1)(d) and (e) of the BIA. (There is no issue on this appeal with respect to s. 178(1)(d), and the finding that Gray was not acting in a fiduciary capacity when the mortgage funds were obtained.) [page714]

[15] The matter came before Wilton-Siegel J. as the trial of an issue. The evidence consisted of the affidavits and oral evidence of the bankrupt Evan Gray and a CMHC representative.

Decision in the Court Below

[16] The trial judge concluded that there was no evidence of any misrepresentation by Gray that had been relied upon by RBC in advancing the mortgage funds, and there was no basis on the evidence for finding that Gray reasonably ought to have known of Roberts' misrepresentations. As such, on a strict reading of s. 178(1)(e) of the BIA,[^1] the mortgage was obtained by Roberts' fraudulent misrepresentations, in which Gray did not participate and about which he neither knew nor reasonably ought to have known.

[17] After concluding that this would be sufficient to dispose of the matter, the trial judge considered the alternative argument that Gray ought to have known of the scheme and ought not to have remained silent on certain matters. CMHC alleged that Gray had fraudulently failed to reveal to RBC that he was not the beneficial owner of the property, that he was receiving payment for his involvement in the transaction, and that he had no intention to live at the property or to personally pay the mortgage. CMHC argued that if these facts had been revealed, RBC would not have advanced the funds and CMHC would not have insured the mortgage.

[18] The trial judge rejected these arguments. Gray and Roberts were the owners of the property and were ultimately liable on the mortgage. Silence about the payment Gray received was not a misrepresentation unless it rendered an express or implied representation untrue or misleading. CMHC could not demonstrate any such express or implied representation. With respect to the implied representations that Gray intended to occupy the property and personally pay the mortgage, the trial judge noted that there was no evidence of any such representation either in Gray's mortgage application (which was not produced), or by reference to RBC's standard charge terms, as there was no evidence that Gray had ever received a copy.

[19] The trial judge observed that a fraudulent misrepresentation requires evidence that the representor knows that the representation is false or is recklessly indifferent to its truth. There was no evidence that Gray was aware of any misrepresentation [page715] made before the mortgage was granted. As for recklessness, after considering what Gray knew of the circumstances, the trial judge concluded that it was at least as probable that Gray had foolishly trusted Roberts and Mike. Accordingly, CMHC had not established that he was wilfully blind or reckless.

Issues on Appeal

[20] The principal argument on appeal is that the trial judge did not correctly apply the law respecting false pretences, in considering whether the judgment debt would survive Gray's discharge from bankruptcy under s. 178(1)(e) of the BIA. Instead, he limited his analysis to whether Gray had made a fraudulent misrepresentation. The appellant asserts that the false pretences in this case were that Gray did not inform RBC that he had been paid to participate in the transaction, that he had no intention of living in the property, and that he did not intend to make the mortgage payments. It is acknowledged that the trial judge reviewed these circumstances in his analysis of fraudulent misrepresentation; the appellant argues that the judge failed to consider the separate question of whether Gray had used false pretences in connection with the borrowing. The appellant relies on the Manitoba Court of Appeal's decision in Ste. Rose & District Cattle Feeders Co-op v. Geisel, [2010] M.J. No. 159, 2010 MBCA 52, with respect to the proper interpretation of false pretences in the context of s. 178(1)(e) of the BIA.

[21] The appellant also asserts that the trial judge ignored the "straw borrower" scheme in his analysis. As a "straw borrower", Gray was not entitled to be treated as an "honest but unfortunate debtor", such that the debt incurred as a result of the fraudulent mortgage would be released upon his discharge from bankruptcy.

[22] There are other arguments on appeal -- that the trial judge erred in his articulation and application of the tests for wilful blindness and recklessness in considering whether Gray was party to Roberts' fraudulent misrepresentations, and that the trial judge erred in failing to conclude that certain provisions of the standard charge terms were false representations made by Gray.

[23] The respondent asserts that there was no error in the trial judge's analysis, which was based on findings of fact that were supported by the evidence and not challenged on appeal. The evidence supported the conclusion that the mortgage was granted in reliance on Roberts' misrepresentations, and not as a result of anything Gray represented in his mortgage application. There was no evidence of any reliance on any representation by [page716] Gray that led to the mortgage advance. The crux of the matter was Gray's knowledge or ignorance of the fraudulent scheme. Gray was unaware that he was being used by Roberts as an unwitting "straw buyer" in a mortgage fraud, and the trial judge on the evidence concluded that he was not wilfully blind or reckless. As such, CMHC did not establish that the judgment debt was "a debt or liability resulting from obtaining property by false pretences or fraudulent misrepresentation", as required by s. 178(1)(e) of the BIA.

Analysis

[24] Section 178(1) of the BIA preserves certain types of claims from a bankrupt's order of discharge. They are exceptions to the general rule of discharge and should be addressed accordingly: Simone v. Daley (1999), 1999 CanLII 3208 (ON CA), 43 O.R. (3d) 511, [1999] O.J. No. 571 (C.A.), at para. 28. The onus is on the creditor who seeks to have the debt or liability survive the discharge of the bankrupt to bring it within one of the provisions of s. 178(1).

[25] It is instructive to examine more closely subsections 178(1)(d) and (e), the two provisions dealing with a bankrupt's fraud. They provide as follows:

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;

(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[.]

[26] Section 178(1)(d) preserves from discharge a debt or liability "arising out of" fraud, embezzlement, misappropriation or defalcation of the bankrupt while acting in a fiduciary capacity. Its application is restricted to bankrupts acting in a fiduciary capacity. As such, a debt or liability "arising out of" the fraud of a debtor who was not acting in a fiduciary capacity would fall outside the scope of this section and would need to be considered under s. 178(1) (e).

[27] Section 178(1)(e) preserves from discharge a debt or liability "resulting from obtaining property or services by" false pretences or fraudulent misrepresentation.

[28] The reasons of the trial judge demonstrate that he was alive to the specific wording of this section when he concluded, at para. 44 of his decision: [page717]

On a strict reading of [s. 178(1)(e)], this conclusion is sufficient to determine the issue on this application. The Mortgage was obtained by Roberts' fraudulent misrepresentations that constitute the Misrepresentations. Gray did not participate in the making of the Misrepresentations and neither knew, nor reasonably ought to have known, of them.

[29] The appellant acknowledges that in order for there to be a fraudulent misrepresentation there must be reliance by the party to whom the representation is made, and that in the present case the trial judge noted that it was not disputed that the mortgage was obtained in reliance on Roberts' misrepresentations. The trial judge concluded that Gray did not know, nor ought he reasonably to have known, of the misrepresentations made by Roberts, that led to the mortgage funds being advanced.

[30] The appellant contends however that the trial judge failed to consider the false pretences branch of s. 178(1)(e). It is asserted that the false pretences consisted of Gray's participation in the straw borrower scheme, knowing that he was not going to live in the house, and failing to reveal this fact, as well as the payment he was receiving for his involvement when the mortgage was advanced.

[31] There is a fatal flaw in the appellant's argument. Irrespective of whether one considers fraudulent misrepresentation or false pretences, s. 178(1)(e) requires a finding that the bankrupt "obtained property by" such conduct. A causal connection between the bankrupt's wrongdoing and the creation of the debt or liability is required. It is not sufficient that the bankrupt engaged in fraud, or that the debt or liability "arose out of" a fraudulent scheme. The trial judge in this case concluded that the mortgage funding was obtained by Roberts' fraudulent misrepresentations, and not as a result of what Gray represented or failed to disclose to RBC.

[32] Since the appellant relies heavily on the decision of the Manitoba Court of Appeal in Ste. Rose & District Cattle Feeders Co-op v. Geisel, an examination of that case is warranted.

[33] In Geisel, there were two debtors, a father and a son, against whom the plaintiff Co-op had obtained a default judgment before both went bankrupt. The father had borrowed money from the Co-op, and agreed to use the funds to purchase cattle, and to brand the cattle with the Co-op's brand. The father was to notify the Co-op when the cattle were taken to auction, and to repay the borrowing from the proceeds of sale. Ultimately, the cattle, which had not been branded with the Co-op's name, were transported and sold at auction in the name of the son. The proceeds were deposited into the son's bank account, where they were seized by one of his creditors. There was no intention to [page718] defraud the Co-op; rather, the scheme was put in place by the two men for tax reasons, and with the expectation that the proceeds would be used to repay the father's borrowing.

[34] There was no fraud on the part of the father and no involvement by the son in connection with the original borrowing, factors that led the trial judge to refuse relief under s. 178(1)(e) on the basis that the debt was not "property obtained by" fraudulent misrepresentation or false pretences.

[35] This decision was overturned on appeal, with the Manitoba Court of Appeal holding that the judgment debt survived the bankruptcy discharges of both father and son.

[36] The appeal court noted that, while there was no apparent fraud in the original borrowing, at the later stage where both debtors knowingly diverted the proceeds of sale of the cattle to the wrong bank account, there was fraud on the part of the father and false pretences on the part of the son. The father knowingly withheld relevant information from the Co-op when he advised that the cattle would be sold, but not that they would be sold in his son's name with the proceeds deposited into the son's account. This was a fraudulent misrepresentation relied on by the Co-op to its detriment. The false pretences were on the part of the son when he falsely held out to the transport driver and auctioneer that the cattle were his to sell. He obtained the property of the Co-op (the proceeds of sale of the cattle) by pretences which he knew to be false.

[37] The Geisel case does not stand for the general proposition urged upon us by the appellant -- that a debtor's false pretences are sufficient to exempt a debt from discharge, even where there is no causal link between the debt or liability sought to be preserved and the false pretences of the bankrupt. In Geisel, there could be no misrepresentation by the son to the Co-op, because the son had no dealings or relationship with the Co-op. What was key was that the son had obtained from the auctioneer the Co-op's property (the proceeds of the sale of the cattle at auction) by pretences he knew to be false. He had represented that he was the owner of the cattle.

[38] In the present case, the trial judge referred to the Geisel decision and he cited that court's approval of the observation in Buland Empire Development Inc. v. Quinto Shoes Imports Ltd., 1999 CanLII 1345 (ON CA), [1999] O.J. No. 2807, 123 O.A.C. 288 (C.A.), at para. 14, that "the core content of the phrases false pretences and fraudulent misrepresentation is deceitful statements". He recognized that both false pretences and fraudulent misrepresentation involved the question of whether Gray had made a deceitful statement that led RBC to advance the mortgage funds. The trial judge [page719] considered the very circumstances that the appellant contends were false pretences and he concluded that they did not amount to a fraudulent misrepresentation on the part of Gray.

[39] The wording of s. 178(1)(e) makes it clear that the debt or liability must result from obtaining property or services by false pretences or fraudulent misrepresentation. The trial judge concluded that the money was advanced by RBC as a result of Roberts' misrepresentations, and not as a result of anything Gray said or failed to say or do. This was a finding of fact that is determinative of both the "false pretences" and "fraudulent misrepresentation" aspects of s. 178(1)(e) as applied to this case.

[40] Finally, while it is correct to say that "the bankruptcy scheme is intended to benefit honest, but unfortunate, debtors" (see Bank of Montreal v. Giannotti (2000), 2000 CanLII 16928 (ON CA), 51 O.R. (3d) 544, 138 O.A.C. 316 (C.A.), at para. 11, cited with approval in Geisel), it is not sufficient to show that there was a false pretence or fraudulent misrepresentation unless it is also shown that the property (in this case the mortgage funding) was obtained thereby. While the Geisel case referred to this interpretive principle, in concluding that the debtors' motives and intentions to repay the Co-op were not relevant, the court nevertheless found in that case that property had been obtained by each of the debtors by their fraudulent misrepresentation or false pretences.

[41] Having dealt with the principal arguments on appeal, I will address briefly the appellant's other submissions.

[42] The appellant argues that the trial judge erred in his articulation and application of the tests for wilful blindness and recklessness, and that he had ignored obvious "red flags" that should have alerted Gray to the deception perpetrated by Roberts. I disagree. The trial judge correctly set out the test and he made findings of fact, at paras. 65- 69 of his reasons. He concluded that Gray did not know about Roberts' misrepresentations or the mortgage fraud in which he was engaged. He considered and determined the weight to be given to the bankrupt's reasons for not making further inquiries when confronted by "red flags". The question was whether Gray was wilfully blind to (and therefore participated in) the fraud that led to the advance of the mortgage funds. There was no error in the trial judge's analysis and conclusion that, with respect to whether the bankrupt was wilfully blind, it was at least as probable that Gray foolishly trusted Roberts and Mike beyond a point that was reasonable, based on his lack of experience and vulnerability to manipulation. [page720]

[43] The appellant also submits that the trial judge erred in failing to find that the standard charge terms incorporated by reference into the mortgage agreement constituted representations by Gray that he knew to be false (that the borrowers would be living in the house and that no one else had an interest in the property). While I would not necessarily agree with the trial judge's characterization of such terms as covenants and not representations, I would not interfere with his conclusion that, in the absence of evidence that the standard charge terms were provided to Gray, he could not be said to have made the representations fraudulently. This is not to say that the standard charge terms did not apply to the borrowing, if they were incorporated by reference into the mortgage documents signed by Gray, even if he did not receive them; only that the necessary intentional requirement for fraudulent misrepresentation could not be established in the absence of showing that Gray had knowingly made the representation. Accordingly, this argument on appeal cannot succeed.

[44] Finally, I disagree with the appellant's submission that the trial judge's decision condones the "straw man" debtor scenario. It was necessary for the trial judge to examine all of the circumstances to determine whether in this case, the debtor who was a "straw man" in the borrowing, had obtained funds from RBC by false pretences or fraudulent misrepresentation. The trial judge correctly identified the relevant legal principles and he applied them to the facts as he found them. For the purposes of s. 178(1)(e), it was not sufficient to find that the debtor made some type of misrepresentation or engaged in some type of false pretence without also finding that the conduct in question led to the judgment debt.

Conclusion

[45] For these reasons, the appeal is dismissed. Costs of the respondent are payable by the appellant and fixed at $10,000, inclusive of disbursements and applicable taxes.

Appeal dismissed.

Notes

[^1] Although the formal reasons refer (at para. 44) to s. 178(1)(d), it is apparent from the context that the trial judge intended to refer to s. 178(1)(e).

End of Document