Court File and Parties

COURT OF APPEAL FOR ONTARIO DATE: 20220728 DOCKET: C69276

Strathy, C.J.O., Roberts and Sossin JJ.A.

BETWEEN

M.O.S. MortgageOne Solutions Ltd. Plaintiff (Respondent)

and

William Heidary, Gillian Lis Heidary, Minister of National Revenue, Walter Heidary, Meta Heidary and Manulife Bank of Canada Defendants (Appellant)

Counsel: Angela Assuras, for the appellant Ian Klaiman, for the respondent

Heard: February 18, 2022 by videoconference

On appeal from the judgment of Justice Marvin Kurz of the Superior Court of Justice, dated May 22, 2021, with reasons reported at 2021 ONSC 1937.

Roberts J.A.:

[1] The appellant debtor appeals from the motion judge’s declaration that his debt to the respondent mortgagee was not released by his discharge from bankruptcy because of his fraud, pursuant to s. 178(1)(e) of the Bankruptcy and Insolvency Act (“BIA”), R.S.C., 1985, c. B-3.

[2] For the purposes of this appeal, the relevant provisions of section 178(1) of the BIA are 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 …

(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.

Background

[3] The mortgage that the respondent granted to the appellant was third in priority, ranking behind the first mortgage held by Manulife Financial and various Minister of National Revenue (“MNR”) liens that were registered on title to the appellant’s property. At the request of the appellant, the respondent advanced further funds to the appellant to assist in the payment and consolidation of his debts on the agreement that the appellant would use the funds to discharge the MNR liens so that the respondent’s mortgage would rank second in priority (“the priority agreement”).

[4] Prior to the respondent making any advances under the priority agreement, the appellant directed the respondent to an individual, “Dave Erwin”, whom the appellant represented was his Canada Revenue Agency (“CRA”) agent, so that the respondent could ascertain the exact amount of the MNR liens and arrange for their payment. The respondent spoke and corresponded in writing with the appellant’s “CRA agent” who advised that the amount of $296,418.73 would discharge the outstanding liens. Both the identity of the so-called “CRA agent” and the discharge information turned out to be false.

[5] The respondent advanced the amount of $296,418.73 to the MNR. After the respondent advanced these funds, it discovered that the “CRA agent” was an imposter and that an additional amount of $316,566.36 was required to discharge all the MNR liens. As a result, contrary to the priority agreement, the respondent’s mortgage remained in third position.

[6] The respondent subsequently issued a statement of claim against the appellant [1], alleging that he had breached the priority agreement. The respondent claimed payment of the amounts due under the mortgage, and alternatively damages for unjust enrichment and a declaration that the appellant was a constructive trustee of the funds received and liable to the respondent as a beneficiary of those funds. The respondent also sought possession of the property secured by the mortgage. Finally, the respondent requested that any judgment against the appellant for breach of trust “should survive any subsequent assignment in bankruptcy and shall not be released by a discharge of [the appellant] as such liability falls within the provisions of s. 178(1)(d) of the [BIA], as arising out of fraud, embezzlement, misappropriation, or defalcation”.

[7] The respondent pleaded particulars of the priority agreement and of the conduct that the application judge subsequently found to be fraudulent (“the appellant’s conduct”), including:

i. The appellant was to obtain updated discharge statements from the MNR so that the outstanding liens could be paid and discharged, and the respondent’s charge would have second priority on the property.

ii. To that end, on September 11, 2017, the appellant “provided to the solicitor for [the respondent] the name and contact information of the purported agent at the [CRA] for [the appellant], being Dave Erwin”.

iii. The contact information provided by the appellant “was not for the Dave Erwin employed by [the CRA] and was in fact an individual representing himself to be such person”. The respondent in its pleadings referred to this individual as the “Imposter Erwin”.

iv. On September 20, 2017, the Imposter Erwin sent the respondent a letter that “purported to represent the amount of the [MNR liens]. The Imposter Erwin represented that the amount of $296,418.73 would be sufficient to discharge the [MNR liens]”.

v. The respondent relied and advanced the amount of $296,418.73 to the MNR “upon the representation by [the appellant] that the Imposter Erwin was the agent on their account with the [CRA]” and “upon the representation by [the appellant] that the amount of the [MNR liens] reported by the Imposter Erwin was true and accurate, such amounts which [the appellant was] obligated to obtain and verify” pursuant to the terms of the priority agreement.

[8] The respondent pleaded that the appellant was “unjustly enriched” by and continues to benefit from the respondent’s advance of the funds as a result of the appellant’s conduct. The respondent also pleaded that he “assented to or acquiesced” in conduct “which [he] knew or ought to have reasonably known amounted to a breach of trust and [is] liable for such breach”.

[9] The appellant served a notice of intent to defend but never filed it nor delivered a statement of defence, because the parties ultimately agreed to a consent judgment. Both parties were represented by counsel. The October 10, 2018 judgment required the appellant to pay $784,250 to the respondent and vacate the property. The respondent was also granted a writ of possession. The judgment did not contain a declaration that the judgment would not be released if the appellant was discharged on bankruptcy.

[10] On April 23, 2019, the appellant filed an assignment into bankruptcy and the respondent’s judgment was automatically stayed pursuant to s. 69.3(1) of the BIA. The respondent brought a motion seeking a declaration that the appellant’s debt to the consent judgment would survive his discharge from bankruptcy pursuant to ss. 178(1)(d) and (e) and that the stay under s. 69.3(1) [2] no longer operated with respect to the judgment. The motion judge (who had also granted the consent judgment) found that the respondent’s pleadings raised the issue of fraud. He allowed the respondent’s motion and ordered the appellant to pay $10,000 in costs.

Analysis

Appellant’s Position

[11] The appellant submits that the motion judge erred in declaring that the appellant’s judgment debt was not released pursuant to s. 178(1)(e) of the BIA. The respondent had only pleaded relief under s. 178(1)(d) of the BIA and it was unfair to the appellant to grant relief not contained in the respondent’s amended statement of claim. Moreover, the appellant argues, the motion judge erred in determining that in consenting to judgment, the appellant had admitted to fraud, especially as the judgment did not contain any reference to fraud or to the survival of the judgment following the appellant’s discharge from bankruptcy. The appellant maintains that unless fraud is pleaded with the particularity required under rule 25.06(8) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, it cannot support a finding that a debt was not released by the debtor’s bankruptcy under s. 178(1) of the BIA. In any event, according to the appellant, fraud is not a reasonable inference arising from the pleadings.

[12] As I shall explain, I am not persuaded by these submissions and would dismiss the appeal.

The Standard of Review

[13] The core of the motion judge’s decision is a characterization of the nature and substance of the debt. The motion judge was entitled to examine the circumstances leading to the consent judgment to determine whether the consent constituted an admission of anything mentioned in s. 178(1)(e): F. Williams Logging Co. v. Roethel (1995), 58 B.C.A.C. 84, at para. 6. The motion judge was uniquely positioned to do so, given that he had also granted the consent judgment. In concluding that the scope of the consent judgment was broad enough to encompass fraud, the motion judge was required to examine the allegations in the statement of claim. Whether or not the actions of the appellant as alleged in the statement of claim constituted fraudulent misrepresentation is a question of mixed fact and law and therefore is entitled to deference absent palpable and overriding error: Garlicki (Bankrupt), Re, 2010 MBCA 73, 258 Man R (2d) 35, at paras. 24-29; McAteer v. Billes, 2007 ABCA 137, 34 C.B.R. (5th) 1, at paras. 14-15, leave to appeal to S.C.C. refused, [2007] S.C.C.A. No. 342.

The Debt Survives Bankruptcy

[14] In my view, the motion judge made no error in granting relief under s. 178(1)(e) of the BIA. His decision was amply supported by the pleadings and consent judgment. I see no procedural unfairness to the appellant.

[15] To obtain a declaration under s. 178(1) of the BIA that a judgment survives a bankrupt’s discharge, it is unnecessary for the claimant to specifically refer to s. 178 in its pleadings on which the judgment is based: Lawyers’ Professional Indemnity Company v. Rodriguez, 2018 ONCA 178, 419 D.L.R. (4th) 520, at para. 6. Nor is there any requirement that fraud be specifically pleaded or particularized. As stated, the judge’s task is to determine the nature and substance of the debt by examining the pleadings, any reasons that might have been given, and the proceedings that were before the court that granted the judgment. In determining whether a consent judgment falls within the scope of s. 178(1), the court “is concerned not so much with the cause of action that was pleaded but with whether the pleadings as a whole suggest fraudulent or otherwise “unacceptable” conduct”: H.Y. Louie Co. Limited v. Bowick, 2015 BCCA 256, 386 D.L.R. (4th) 117, at para. 41, per Newbury J.A. (dissenting, but not on this point) (emphasis added). In other words, as stated by Beard J.A. of the Manitoba Court of Appeal in Bannerman Lumber Ltd. v. Goodman, 2021 MBCA 13, at para. 48, referencing Rodriguez, at para. 6, “The issue, at the end of the day, is whether the evidence, facts and findings in the underlying proceeding are sufficient to make the required finding of fraud or false pretences in the application under section 178(1)(e) [of the BIA].”

[16] In this case, the motion judge carried out the requisite analysis of the nature and substance of the pleadings and consent judgment and determined that they supported the criteria under s. 178(1)(e) of a debt resulting from obtaining property by “false pretences or fraudulent misrepresentation”. As the motion judge stated at para. 66 of his reasons:

Here, [the respondent’s] amended statement of claim clearly raised the issue of fraud. It did so in its factual recitation of the alleged conduct of the [appellant], [the respondent’s] reliance on their representations regarding Imposter Erwin, as well as its reliance on the allegedly false representations of that imposter. The amended statement of claim also contained an explicit plea that any judgment in the action survive bankruptcy under s. 178(1)(d). The judgment issued on consent was based, at least in part, on a pleading that made those claims.

[17] I see no error in the motion judge’s analysis or findings. It was open to him based on the pleaded factual allegations to conclude that the appellant’s impugned conduct fell within s. 178(1) of the BIA. As I earlier stated, it was unnecessary for the respondent’s pleadings to contain any further particulars of the appellant’s conduct. In my view, there is no ambiguity about the appellant’s alleged conduct. How, other than that the appellant was engaged in a fraudulent scheme, could his alleged conduct be reasonably characterized? This is the only reasonable inference to be drawn from the appellant’s conduct of providing a false CRA contact in order to pass on false information. On the pleaded facts, it is apparent that this was done with the view of fraudulently inducing the respondent to make the requested advances for the sole benefit of the appellant and contrary to his express obligations under the priority agreement.

[18] The appellant was not taken by surprise. As the motion judge noted, the respondent made specific reference to s. 178(1)(d) in its claim. In contrast to the statement of claim in issue in Rodriguez which advanced a claim based solely on a mortgage default, the respondent’s claim pleaded facts that clearly supported s. 178(1)(e). The respondent pleaded that the appellant had fraudulently obtained monetary advances under false pretences from the respondent. This was done through the false representations of the amount of the MNR liens through an imposter to whom the appellant had expressly directed the respondent for the purpose of inducing the advances. The respondent also pleaded general reliance on the BIA. Further, in its motion, the respondent requested relief under ss. 178(1)(d) and (e) of the BIA. Significantly, the appellant admits that he did not argue the technical objection that the respondent did not plead s. 178(1)(e) before the motion judge that he raises for the first time on appeal.

[19] I see no basis for appellate intervention in this case. Having applied the correct test, the motion judge’s conclusion that the respondent’s pleadings adequately raised the issue of fraud was reasonably open to him on the record and is entitled to deference on appellate review.

Disposition

[20] For these reasons, I would dismiss the appeal.

[21] I would grant the respondent its costs from the appellant in the amount of $10,000, inclusive of disbursements and any applicable taxes.

Released: July 28, 2022 “G.R.S.” “L.B. Roberts J.A.” “I agree. G.R. Strathy C.J.O.” “I agree. Sossin J.A.”

Footnotes:

[1] The statement of claim contains allegations against the other defendants, however, for ease of reference, I refer simply to the appellant, the only defendant that has appealed.

[2] The motion judge mistakenly referred to s. 69.4, but the mistake is of no moment.