Court File and Parties

COURT OF APPEAL FOR ONTARIO DATE: 20220314 DOCKET: C69537

van Rensburg, Nordheimer and Harvison Young JJ.A.

In the Matter of the Bankruptcy of Michael Paul Richards, of the City of Toronto, in the Province of Ontario

Counsel: Ian J. Klaiman, for the appellant, Michael Paul Richards Catherine Francis, for the respondent, Royal Bank of Canada

Heard: March 11, 2022 by video conference

On appeal from the order of Justice Barbara A. Conway of the Superior Court of Justice, dated June 3, 2021.

Reasons for Decision

[1] Michael Richards appeals from the order of the bankruptcy judge that involved the interpretation of a trust of which he is the beneficiary (the “Trust”). At the conclusion of the hearing, we dismissed the appeal with reasons to follow. We now provide our reasons.

[2] The appellant is an undischarged bankrupt. Royal Bank of Canada (“RBC”) has an outstanding judgment against him for $987,613 plus costs and interest. On September 16, 2019, RBC filed a bankruptcy application against the appellant, which was issued the same day.

[3] The appellant is the beneficiary of a property at 61 St. Clair Avenue West (the “Property”) pursuant to a Trust that was settled by his father in 2001. The Trust was set up to hold the Property during the lives of the appellant’s parents, with a life interest permitting them to live in the Property. The appellant’s father, George, died in 2010. His mother, Patricia, continued to live in the Property. She died in July 2020. According to the terms of the Trust, the date of death of the second of the appellant’s parents is called the “Time of Division”.

[4] At the Time of Division, the trustees are required to distribute the Trust Fund (including the Property and any Chattels) to the appellant, if he is then alive. Section 5.2.2 of the Trust reads:

On the Time of Division the Trustees shall:

if George Richards is not then alive, the Trust Fund, including, for greater certainty, the Real Property and the Chattels … shall be paid and transferred to Michael Paul Richards, if he is then alive…

[5] Prior to Patricia’s death, the trustees of the Trust sold the Property. The proceeds of sale ($1,172,120.90) are being held in trust.

[6] In October 2020, RBC obtained an order under s. 38 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”), taking an assignment of rights of the appellant’s Trustee in Bankruptcy to make a claim against the sale proceeds of the Property. The Bankruptcy Trustee had not wanted to pursue the claim due to lack of funding. RBC now stands in the shoes of the Bankruptcy Trustee with respect to the sale proceeds of the Property.

[7] RBC brought a motion to recover the sale proceeds up to the amount owing to RBC. It sought a declaration that the appellant was the beneficiary of the Trust and had an interest in the Property under the terms of the Trust. RBC argued that the sale proceeds constituted property of the bankrupt, pursuant to the broad definition in s. 67(1)(c) of the BIA, which vested in his Bankruptcy Trustee and formed part of his estate.

[8] The appellant responded that his interest in the Property was suspended while he is a bankrupt, pursuant to the provisions of s. 4.2 of the Trust. That provision is somewhat unusual. It reads:

Any right of a Beneficiary to receive any income or capital of the Trust Fund as a result of a mandatory direction to the Trustees to make such a distribution, including, for greater certainty, a mandatory entitlement of a Beneficiary to the exclusive use, occupation and enjoyment of the Real Property and the Chattels …. shall be enforceable only until such Beneficiary shall become bankrupt … whereupon and so long as the effect or operation thereof shall continue, the Beneficiary’s Interest shall cease until the cause of the Beneficiary’s Interest becoming vested in or belonging to or being payable to a person other than such Beneficiary shall have ceased to exist … and then the Beneficiary’s Interest shall again be allocated to such Beneficiary as aforesaid unless and until a like or similar event shall happen whereupon the Beneficiary’s Interest of such Beneficiary shall again cease and so on from time to time.

[9] The appellant submitted that his interest in the Property could not vest in his Bankruptcy Trustee as he had no rights to the Property, pursuant to s. 4.2, until such time as he was discharged from bankruptcy. The appellant contended that, during his bankruptcy, any rights he had were suspended. It is only on his discharge from bankruptcy that the Property will vest in him pursuant to s. 5.2.2 and he will own it outright.

[10] The bankruptcy judge rejected that contention, as do we. She found that the mandatory distribution provision contained in s. 5.2.2 of the Trust overrode s. 4.2. In particular, the bankruptcy judge held that the provisions of the Trust (Part IV), which contained s. 4.2, applied to the Property during the lifetimes of the appellant’s parents, but the provisions of the Trust (Part V) that contained s. 5.2.2 applied to the Property after the death of his parents. The bankruptcy judge noted that the mandatory division of the Property contained in Part V was not made subject to s. 4.2 nor did it otherwise reference that provision. She further found that, had the intent been as the appellant contends it to be, she would have expected there to have been express language in the mandatory distribution provision to that effect. As she said, at para. 18: “I simply cannot conclude that the Settlor intended to override the mandatory mechanism of s. 5.2.2 by an oblique reference to capital in s. 4.2.”

[11] As a result, the bankruptcy judge concluded that the Property vested in the appellant at the Time of Division. The Property thus constituted property of the appellant and vested in his Trustee in Bankruptcy. Since the Trustee in Bankruptcy had transferred its rights in the appellant’s Property to RBC, RBC was entitled to receive the proceeds of sale up to the amount that the appellant owes to RBC.

[12] The appellant has failed to demonstrate any error in the bankruptcy judge’s decision. Her decision involves an interpretation of the Trust document and is entitled to deference on review: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 50-52. The fact is that we agree with her interpretation. It is consistent with the plain wording of the relevant section and is also consistent with the stated purpose of the Trust.

[13] We would also observe that, if the interpretation of the Trust is as contended by the appellant, it would offend the public policy that underlies the BIA by allowing persons to place assets out of the reach of their creditors. As Rowe J. said in Chandos Construction Ltd. v. Deloitte Restructuring Inc., 2020 SCC 25, 449 D.L.R. (4th) 293, at para. 31, “the anti-deprivation rule renders void contractual provisions that, upon insolvency, remove value that would otherwise have been available to an insolvent person’s creditors from their reach.”

[14] The appeal is dismissed. The respondent is entitled to its costs of the appeal in the amount of $17,500, inclusive of disbursements and H.S.T.

“K. van Rensburg J.A.”

“I.V.B. Nordheimer J.A.”

“Harvison Young J.A.”