COURT OF APPEAL FOR ONTARIO

CITATION: Lepage (Re), 2016 ONCA 403

DATE: 20160527

DOCKET: C60861

Sharpe, Juriansz and Roberts JJ.A.

In the Matter of the Bankruptcy of Raymond Stephen Paul Lepage

Stephanie Lauriault and Pierre-Paul Trottier, for the Attorney General of Canada

J. Alden Christian, for Raymond Lepage

Keith MacLaren, for the Trustee

Heard: April 4, 2016

On appeal from the judgment of Justice Robert N. Beaudoin of the Ontario Superior Court of Justice in Bankruptcy and Insolvency, dated July 13, 2015, with reasons reported at 2015 ONSC 4525.

By the Court:

[1] In this tax-driven bankruptcy, the Trustee in bankruptcy had the value of the residence of the bankrupt, Raymond Lepage, appraised early in the bankruptcy in 2010, and concluded that it had negative equity and no value to the estate. The Canadian Revenue Agency (CRA), the sole unsecured creditor, did not dispute that valuation until 2015 when the Trustee filed its report regarding Mr. Lepage’s application for discharge.

[2] The motion judge found that the Trustee made representations to Mr. Lepage in 2010 that the Trustee would disclaim the property. However, the Trustee took no steps pursuant to the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (BIA) to divest its interest in the residence. The motion judge found that Mr. Lepage relied on the Trustee’s representations by paying the mortgage, property taxes and insurance for several years.

[3] This was Mr. Lepage’s second bankruptcy. As a result, pursuant to s. 172.1(1)(b)(ii) of the BIA, he was not eligible for discharge for thirty-six months from the date of bankruptcy.

[4] On Mr. Lepage’s application for discharge in 2015, the Trustee reported that no amounts were realized on Mr. Lepage’s property. In 2015, the CRA obtained a new appraisal of Mr. Lepage’s house. The appraisal indicated that there had been a significant increase to the equity in the property. As a result, the CRA objected to the Trustee’s report.

[5] The motion judge ruled, pursuant to ss. 67(1)(c) and 71 of the BIA, that the increase in equity in Mr. Lepage’s house was after-acquired property that accrued to the estate and hence to the benefit of the CRA.

[6] However, the motion judge found that the representations made by the Trustee and relied upon by Mr. Lepage gave rise to promissory estoppel and precluded the Trustee from claiming the entire increase in value of the equity.

[7] Although Mr. Lepage sought credit for all interest, principal, taxes and insurance payments, the motion judge declined to grant him credit for all of those amounts, because he found that Mr. Lepage would have incurred living expenses elsewhere. However, he ruled that Mr. Lepage was entitled to credit for the reduction in the principal amount of the mortgage from October 31, 2010, the date the Trustee’s representations were made, to the date of Mr. Lepage’s discharge.

[8] While the motion judge did not explicitly find that the doctrine of promissory estoppel applied in this case, it is common ground that the motion judge must have reached that conclusion.

[9] The CRA argues that he erred in applying the doctrine of promissory estoppel and in giving Mr. Lepage credit for the reduction in the principal amount of the mortgage.

[10] To rely on promissory estoppel, Mr. Lepage must establish that:

(a) the Trustee, by words or conduct, made a promise or assurance which was intended to affect its legal relationship with Mr. Lepage, and intended Mr. Lepage to act upon it; and

(b) Mr. Lepage, relying on the Trustee’s representations, acted on it or in some way changed his position to his detriment.

(See Deloitte & Touche LLP v. Marino (2004), 2004 CanLII 4324 (ON CA), 72 O.R. (3d) 274, at para. 32)

[11] It has been held that, in certain circumstances, a Trustee in bankruptcy can be barred from claiming an asset on the ground of estoppel: see Deloitte & Touche LLP v. Marino; Koenne (Re) 2010 ONCA 524, at para. 13.

[12] In the present case, there does not appear to be any dispute that the Trustee made the representation to Mr. Lepage that it would disclaim any interest in the house. In his affidavit, Mr. Lepage swore that he maintained the house in reliance on the Trustee’s representations. In our view, it was open on the evidence for the motion judge to find that Mr. Lepage relied on that representation by making payments on the mortgage.

[13] The more difficult question is whether Mr. Lepage demonstrated detrimental reliance which is an essential element of promissory estoppel (see Ryan v. Moore, 2005 SCC 38, at para. 68).

[14] The CRA argues that the motion judge erred in finding that promissory estoppel applied because there was no detrimental reliance by Mr. Lepage on the Trustee’s representations.

[15] Mr. Lepage submits that but for the representations made by the Trustee, he would have made different choices, allowing him to benefit from the money he was entitled to spend on reasonable living expenses. Mr. Lepage contends further that the CRA unfairly benefitted from the increase in equity in his home because the increase in equity was available to the estate and the CRA only as a result of Mr. Lepage maintaining the home by paying taxes, insurance, mortgage interest and principal, and other charges on the basis of the Trustee’s representations.

[16] We do not accept those submissions.

[17] In our view, the motion judge erred by failing to apply the provisions of ss. 67, 68 and 71 of the BIA to Mr. Lepage’s surplus income and thereby allowed Mr. Lepage to retain the after-acquired equity that was created in his house.

[18] During the period that he was an undischarged bankrupt, Mr. Lepage was not entitled to build up and keep any assets acquired after his bankruptcy. As the motion judge correctly recognized, all after acquired assets were vested in the Trustee for the benefit of Mr. Lepage’s creditors.

[19] The only money that Mr. Lepage was entitled to keep as an undischarged bankrupt under the BIA was the portion of his income that he used as reasonable living expenses. In accordance with s. 68 of the BIA, money not used as reasonable living expenses was surplus income that vested in the Trustee for the benefit of Mr. Lepage’s creditors. The motion judge erred in failing to recognize that Mr. Lepage’s surplus income formed part of his estate that vested in the Trustee for the benefit of his creditors and in reasoning that Mr. Lepage could use his surplus income to “walk away and build equity elsewhere”.

[20] Mr. Lepage was required to submit monthly income and expense statements to the Trustee. The Trustee was obliged to monitor Mr. Lepage’s income and expenses to determine whether there was any surplus income for the benefit of his creditors. In his statements, Mr. Lepage listed his monthly mortgage payments and other household expenses as part of his reasonable living expenses. As the motion judge found, Mr. Lepage was not entitled to credit for his reasonable living expenses because, if Mr. Lepage had not continued to live at his residence, he would have incurred living expenses elsewhere.

[21] There was no basis for the motion judge to distinguish between the mortgage principal payments and the other payments related to mortgage interest and maintaining the house, because, as stated by Mr. Lepage in his monthly statements to the Trustee, they were all reasonable living expenses. Mr. Lepage was not entitled to be effectively reimbursed for his reasonable living expenses from the increased equity in his house.

[22] In our view, Deloitte & Touche LLP v. Marino is distinguishable. In that case, the bankrupt made mortgage and other payments after discharge relying on the trustee’s representations that no claim would be made against her home. As a discharged bankrupt, she was entitled to dispose of her property as she wished in accordance with the “fresh start” principle.

[23] Mr. Lepage’s situation was different. As an undischarged bankrupt, he remained subject to the rule that after-acquired property vested in the trustee. Mr. Lepage was not entitled to retain any surplus income that exceeded his reasonable living expenses. Having claimed the mortgage payments as reasonable living expenses, he was not entitled to be credited or reimbursed for those payments or to have them treated as other than after-acquired property that vested in the trustee.

[24] The Trustee asks us to comment on the guidance offered by the motion judge on how Trustees should deal with a property such as that at issue in this appeal. Obviously, the overarching duty of the Trustee to maximize the value of the estate governs. How that is best accomplished will depend upon the circumstances of the particular case.

[25] If the Trustee decides to hold on to the property in the hope that its market value will rise, a practical way to cover ongoing costs of interest, insurance, taxes and maintenance must be found. In many if not most cases, that will not be possible and the Trustee will conclude that it is best to dispose of the property quickly or disclaim any interest in it. We agree with the motion judge that if the bankrupt remains in the property or acquires it from the Trustee before discharge, subject to any order to the contrary, any increase in equity is after-acquired property that accrues to the benefit of the estate.

[26] To ensure an orderly process, any arrangements between the Trustee and the bankrupt regarding the property should be reported to the inspectors at the time they are made so that timely objections can be made.

[27] For these reasons, the appeal is allowed. The CRA is not seeking any costs in relation to this appeal or the motion. Accordingly, there will be no order as to costs.

Released: May 27, 2016

“Robert J. Sharpe J.A.”

“R.G. Juriansz J.A.”

“L.B. Roberts J.A.”