SUPERIOR COURT OF JUSTICE

IN BANKRUPTCY AND INSOLVENCY

ESTATE NO.: 32-1179979
RELEASED: 20120307

SUPERIOR COURT OF JUSTICE

IN BANKRUPTCY AND INSOLVENCY

In the Matter of the Bankruptcy of Vincenzo Antonio Ieluzzi, (aka Vince Ieluzzi) of the
Town of Ancaster, in the City of Hamilton, in the
Province of Ontario

ESTATE NO.: 32-1179979

APPEARANCES: Raffaele Sparano -for the Bankrupt

Eric Sherkin - for Automotive Finance Canada Inc.
(moving creditor)

Julie Savage -Trus tee (not attending)

BEFORE : MASTER D. E. SHORT, Registrar in Bankruptcy

HEARD: March 2, 2012

REASONS FOR DECISION

I. Background

[ 1 ] In Re: Ieluzzi , 2010 ONSC 4160 Registrar Nettie dealt with the application for discharge from bankruptcy of Vincenzo Antonio Ieluzzi aka Vince Ieluzzi (the “Bankrupt”), pursuant to the provisions of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“ BIA ”).

[ 2 ] On that application, which was opposed by a judgment creditor, the Registrar granted a discharge , conditional upon payment to the Trustee of $6,252.75 in surplus income, on terms to be arranged with the Trustee.

[ 3 ] I am advised that those terms established over 19 months ago have not yet been performed. As a consequence Mr Ieluzzi remains an undischarged bankrupt.

[ 4 ] The moving party moves for an order removing the stay of proceedings created by under Sect 69 of the BIA .

II. Overview

[ 5 ] The Bankrupt Mr. Ieluzzi was the principal and directing mind of a corporation, Advantage Auto Sales Inc. (“Advantage”) which carried on the business as a used car dealer.

[ 6 ] The opposing credit before Registrar Nettie had apparently applied for and seemingly obtained leave to proceed from a local judge of the Supreme Court.

[ 7 ] In his reasons the Registrar raised a doubt as to the appropriateness of that manner of proceeding:

“[9]....The Opposing Creditor, it would seem, has obtained, not from this Court, leave to proceed with a fraud action against the Bankrupt, which, if successful, will result in its debt surviving any discharge from this bankruptcy. There is no evidence for this Court to conclude fraud. No other creditors appear to be alleging it, and I see no reason for the Bankrupt not to be discharged from the balance of his debt, with the ultimate release, or not, of his obligations to the Opposing Creditor to be determined in the s. 178 BIA proceeding still ongoing.”

[ 8 ] Now a different creditor Automotive Finance Canada Inc. (AFCI), more appropriately having regard to the policy of this Bankruptcy Court, seeks to obtain a similar leave to proceed from this court. In making my determination on this application, I have considered Registrar Nettie’s findings and comments from 2010.

[ 9 ] From his findings it appears that the opposing creditor entered into arrangements to finance the Advantage business, both through a number of short term loans (all of which were paid in full) and specific loans to purchase specific cars for import from the United States of America for re-sale in Ontario.

[ 10 ] When Advantage collapsed, the better part of $400,000.00 was due to the opposing creditor. The Bankrupt had personally guaranteed these amounts.

[ 11 ] The further salient portions of the previous reasons read:

“[6] The Bankrupt testified that his business was managing until the economic collapse of the Fall of 2008. The Canadian dollar fell, which made the imported cars ...more expensive. In addition, the well known and general economic collapse cratered car sales (amongst several other retail lines). As well, the rapid expansion of the business, made possible, ironically, by the financial and other assistance of the Opposing Creditor, led to much larger than anticipated overheads, which became unmanageable when sales slumped, and cashed flow dwindled.

[7] The Bankrupt’s business ... was losing some $20,000.00 to $30,000.00 per month. This was the first business foray of the Bankrupt, although he had been in the car business previously. The Bankrupt testified that cash flow was generally allowing for bills to be paid, but that Advantage’s cheques were being dishonoured more and more frequently. This may explain the belief, which I find from the Bankrupt’s testimony to be honestly held, that Advantage would be given more credit by its bankers, Royal Bank of Canada (“RBC”) when the Bankrupt approached RBC in March, 2009. Instead, before his very eyes, Advantage’s account manager effectively closed Advantage’s account(s) with RBC and called its debt. The Bankrupt had personally guaranteed this debt as well. That led to the Bankrupt’s personal assignment in bankruptcy two days later.

[8] Counsel for the Opposing Creditor tried, on cross and in submissions, to paint a picture of continuing to trade when insolvent, fraud, and other elements set out in his client's Notice of Opposition. I have considered them all, as well as all of the evidence presented. On an application such as this, it is necessary to balance the expectation of an honest but unfortunate debtor to a discharge, freed of his debt for reintegration into commercial society, with the rights of the creditors to be repaid, and the need to maintain public confidence in the insolvency system.”

[ 12 ] On the facts before him the Registrar found the Bankrupt to be “honest but unfortunate” and observed that:

“The trading which continued was that of Advantage, not him. Advantage seems to have been a viable business, beset by a global economic downturn of epic proportions, and entirely not of its, or the Bankrupt’s, doing.” to the Opposing Creditor to be determined in the s. 178 BIA proceeding still ongoing.

III. Documents in Issue

[ 13 ] The bankrupt’s company, Advantage, borrowed money from AFCI to purchase specific cars (the Purchase Money Inventory”). AFCI claims to be owed almost $100,000 as trust funds created as the proceeds arising from the sale of those specific vehicles.

[ 14 ] AFCI relies on a number of contractual documents entered between the two corporations. As well a number of relevant documents were entered by Mr Ieluzzi, at least arguably, in his personal capacity.

[ 15 ] There is no dispute that Mr Ieluzzi signed a detailed “Demand Promissory Note and Security Agreement” with AFCI on behalf of Advantage, in June of 2006.(the “Security Agreement”) The key provision with my emphasis added reads:

4.0 SALES OF PURCHASE MONEY INVENTORY. Unless and until an Event of Default shall have occurred, Dealer may sell the Purchase Money Inventory' to bona fide buyers in the ordinary and regular course of Dealer's business, but nothing herein shall be deemed to waive or release any interest AFC may have under or under any other agreement in any proceeds or replacements of the Purchase Money Inventory. Upon the sale of any item of Purchase Money Inventory, Dealer shall hold the amount received from the disposition of inventory in trust for the benefit of AFC and Dealer shall pay AFC in accordance with Section 2.6, an amount equal to the unpaid balance of the Obligations relating to such Purchase Money Inventory.

[ 16 ] The bankrupt and his wife each signed a document styled “Unconditional and Continuing Guarantee” dated the same date as the Security Agreement. The guarantee, with my emphasis, commences:

FOR VALUE RECEIVED, and in consideration of credit and services given or to be given to ADVANTAGE AUTO SALES INC. “Debtor") by Automotive Finance Canada Inc. ("AFC"), the undersigned hereby severally guaranty the full and prompt payment, when due, whether by accel e ration or otherwise, together with interest and all costs, expenses and legal fees, of any and all obligations of the Debtor to AFC including such indebtedness as may be encompassed by the term "Obligations" as defined in the Demand Promissory Note and Security Agreement executed by and betw e en AFC and Debtor, as amended, supplemented or modified from time to time, whether or not such amounts exceed any advance limit applicable to debtor or communicated to the undersigned (hereinafter collectively referred to as the "Liabilities"). This is an irrevocable, unconditional and continuing guaranty; it shall cover and secure any amount at any time owing on the Liabilities.

[ 17 ] The Security Agreement defines Obligations very broadly as having the following meaning (my emphasis):

1.13 Obligations - all Advances, debts, liabilities, financial obligations , charges, expenses, costs, fees, legal fees, costs of collection, covenants, and duties o wing , arising, due, or payable from Dealer to AFC or from AFC to any third party on behalf of Dealer of any kind or nature , present or future, under any instrument, guaranty, or other document whether arising under this Note or any other agreement, whether direct or indirect (including those acquired by assignment), absolute or contingent, primary or secondary, due or become due, now existing or hereafter arising and however acquired including, without limitation, all Interest, Floorplan Fee(s) and Late Fee(s), and other expenses, costs or fees provided for herein.

[ 18 ] Significantly there is also a separate 2 page document entitled “Dealer Acknowledgement”. The full acknowledgement reads:

According to your Promissory Note and Floorplan Agreement ("Note"), executed with AFC, once a vehicle financed by AFC is sold to a customer you are required to remit AFC's portion of the proceeds within 48 hours. During the time between the sale and paying AFC, you hold AFC: s portion of the proceeds in trust for our benefit. Using this money for any other purpose is commonly known US selling a vehicle out of trust. AFC also holds all registrations/ permits/ownerships ("permits") on vehicles that it finances until that vehicle is paid for. APC dealers do not have the authority nor the permission from AFC to get a replacement or loss permit from the Ministry of Transportation of Ontario (MTO) or the Driver and Vehicle License Issuing Office,

Selling vehicles out of trust and getting replacement permits without permission constitutes a default under the Note and AFC will pursue all legal remedies against those dealers who commit such actions. This includes reporting those dealers to the Ontario Motor Vehicle Industry Council ("OMVIC") which may take appropriate action under the law or Standards of Business Practice. Furthermore AFC believes that selling a vehicle out of trust constitutes the crime of "Disposal of property to defraud creditors" (see attached statute) and will report this crime to the local authorities for prosecution.

[ 19 ] Mr. Ieluzzi then appears to have signed the Dealer Acknowledgement as an officer of Advantage, immediately below the Criminal Code statute extract referred to (“Disposal of property to Defraud Creditors”) , which read in part:

392. Everyone who.

(a) with intent to defraud his creditors

(i) makes or causes to be made any gift, conveyance, assignment, sale, transfer or delivery of his property, or

(ii) removes. conceals or disposes of any of his property, or

(b) with intent that anyone should defraud his creditors, receives any property by means of or in relation to which an offence has been committed under paragraph (a).

is guilty of an indictable offence and liable to imprisonment for a term not exceeding two years.

[ 20 ] Thus, it seems clear Mr. Ieluzzi was made specifically aware of the trust provision relied upon by AFCI.

IV. Statement of Claim

[ 21 ] The statement of claim of the moving party, was issued March 4, 2011, apparently within two years of AFCI first learning of the default of Advantage. The pleading asserts that advantage failed to hold the proceeds from the sale of vehicles financed by AFCI in trust. At paragraph 17 the pleading specifically asserts:

“Ieluzzi, as the sole director in directing mind of advantage, was aware that the proceeds were to be held in trust for AFCI's benefit and willingly and knowingly elected to allocate those funds for other uses, to AFCI’s, detriment.”

[ 22 ] Amongst the assertions contained in the pleading include the following:

“...(b) Ieluzzi, as Advantage ' s d i rector and officer and the guiding mind behind the corporation , directed Advantage to improperly utilize AFCI's funds;

(c) Advantage and Ieluzzi received the sale proceeds on AFCI's behalf while acting in a fiduciary capacity;

(d) Ieluzzi , as Advantage's guiding mind, knew or ought to have known that Advantage was obligated to hold the sale proceeds in trust for AFCI;

(e) Advantage and Ieluzzi misappropriated and / or converted AFCI's funds to their own use;

(f) Ieluzzi completely dominated and controlled Advantage such that Advantage is being used as a shield for Ieluzzi's improper conduct. As a result, Ieluzzi is personally liable for the wrongful acts of Advantage; and

(g) AFCI states that the sale proceeds were impressed with the trust in fa v our o f AFCI. By failing to hold the proceeds in trust for AFCI, Ad v antage a nd Ieluzzi have breached their fiduciary duties to AFCI.”

V. Applicable BIA Provisions

[ 23 ] Against that background I must consider the appropriate application of Section 69 of the BIA in this case.

[ 24 ] When a person determines to go make a proposal or to go bankrupt, the trustee is given an opportunity to investigate and evaluate the situation without normal creditors gaining an unfair tactical litigation advantage. Section 69.1 provides:

69.1(1) Subject to subsections (2) to (6) and sections 69.4, 69.5 and 69.6, on the filing of a proposal under subsection 62(1) in respect of an insolvent person,

( a ) no creditor has any remedy against the insolvent person or the insolvent person’s property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy, until the trustee has been discharged or the insolvent person becomes bankrupt;

[ 25 ] Section 69.4 provides the method whereby a creditor can seek to move forward an action involving the bankrupt:

69.4. A c re ditor who i s a f fected b y th e ope r ation of s ection s 6 9 to 69.31 or an y other per s on af f ected by the op e r a tion of sec t i on 69 .3 1 ma y appl y t o the c ourt for a d ec l ara ti o n th a t t ho s e sect ion s no lon ger operate in re s pe c t of th a t c red i to r o r p e rson , and the court ma y m a k e s uch a de c l a ration , subject to any quali f ications that the court con s id er s prope r , i f it i s s a t i s fied

(a) that the creditor or person is likely to be materially prejudiced by the continued operation of those sections; or,

(b) that it is equitable on other grounds to make such a declaration

[ 26 ] Generally there is no advantage to proceeding to prove an unsecured debt against a bankrupt (particularly one who has been granted a discharge) as the debt is effectively erased by the discharge. However section 178 of the act outlines a number of categories of debts which are not released by an order of discharge.

[ 27 ] The relevant subsection in this case is 178(1)(d):

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;

[ 28 ] The Civil Code does not incorporate the common law concept of “fiduciary duties” per se . Thus the need for the phrase at the end of this provision to clarify its application in Quebec. I do not accept the suggestion that the final phrases are intended to limit the application of section 178(1)(d) only to “trustees” within the province of Quebec.

[ 29 ] Thus, if the bankrupt is found to be a trustee, he may fall under this section. Misa ppro p ri a ti o n " i n s. 17 8(1)(d) i s qu a li f i ed b y th e phr ase "w hile a cti ng in a fi duciar y c a pac it y " : Berth o l d v. M c L e ll an ( 1994 ), 1994 ABCA 122 () , 2 5 C.B . R . ( 3d ) 4 5 (A l ta. C.A.) . If he does it will be necessary to address two key areas of concern. Was he acting in a “fiduciary capacity” and if so, what constitutes “misappropriation”?

VI. “While Acting in a Fiduciary Capacity”

[ 30 ] T he wor d s i n s . 178(1)( d) "while act ing i n a fid u ciary capa c it y " re f e r to th e w h o l e of th e clause a n d not only to " misappropriation or defalcation”. In order fo r a c r e d i t or to bring i t s c l a im wit h i n s. 17 8 ( l )( d ) , it i s ne c e s sa r y f o r the c r ed itor to pro ve th a t t he debtor was acting in a fiduciary capacity : R e Br an t (198 4 ), 5 2C .B.R. ( N . S . ) 317 ( Ont. S : C ) , The b r e a ch of a fiduciary dut y d oes n o t , h owe v er, of itself l e a d t o t he su rv i va l o f a d eb t or l ia b i l i t y f o ll ow i ng a d i sc h a rge; there mu s t , i n a d dition , b e fra ud , emb e zzlem e n t, m i sapp r o p ria ti o n or defa l cation w h i l e a cti ng in a fi du c i a r y cap a c i t y: Turner v. Midland Doherty Lid. (1992 ) : 1992 2304 (BC SC) , 13 C .B . R . (3d ) 16 , 7 0 B. C .L.R. ( 2d) 268 (S.C.)

[ 31 ] F or s . 178 ( 1 )( d ) of t h e BIA to be eng a ge d , th e re a r e t hree e l ements that m u s t be p ro ve d :

• the money taken to create the debt must have belonged to someone other than the taker;

• the taking must involve a wrongful use of the money; and

• the taker must have received the money as a fiduciary .

[ 32 ] In o rd e r for a breac h of fidu c iar y dut y b y a b a n kru p t t o co nst i tute " m isa pp ro pr iat i o n o r d efa lc a t io n " wi thin th e m e an i ng o f s . 1 78 (l )( d) so as t o give r ise to a jud g m e n t d eb t tha t s u rvive s t he b ankr u p t ' s d i sch a rg e, there m ust b e so m e impro per de a lin g wi t h pr o p e rt y e n tru s ted t o th e f i duc iary an d so me element of mor al t u rp itud e in the sense of dish ones ty , wrong d o ing or m i sc ond uct : R e D i Paola (2006 ), 2006 23935 (ON SC) , 200 6 C a r swel lOn t 42 72 , 24 C.B.R . (5th) 3 0 ( O n t. S . C.J.) ; af firm e d ( 2 00 7 ) , 2006 37117 (ON CA) , 2007 CarswellOnt 150 , 217 O.A.C.. 95 (Ont. C.A.) .

[ 33 ] Whe re fra ud was evident, the court mu s t d e t e r m ine whether it arose "w h ile act in g i n a f idu c i ar y c ap ac i t y " for the debt to surv i ve d isc harg e a nd there are three g e ner a l c h a r a ct e r ist ics a t tr i b u t ed to a fi d u c ia ry relationship:

• the fi d u c iary h as scope for the e xer c is e of som e d i s cr e tion or p owe r ;

• th e fid u c iar y can un i lat e r all y exe r c i s e t h a t power o r di scre t i o n so a s t o af f e c t t h e bene f i c iary ' s lega l o r practic a l int e r ests; and

• the b e n e f i ciar y i s pecul iar l y v u l n e r a bl e t o or at the m er cy of th e fiducia ry h o ldin g th e di sc r etion o r p ow er.

[ 34 ] An import a nt ele m e n t of t h e d e finition of a fiduciary relationship is the existence of an y undertaking or a re a s o n able be l i ef that the fiduciary was acting in the fir s t party's interest. The test is whether one - part y c o uld rea s onably have expected that the other part y would in the former’s best interests with respect to the subject matter in issue . In Rone c v . Mi c hali k , 2007 38400 (ON SC) , 2007 Car s wellOnt 5878 , 36 C.B . R . ( 5 t h) 159 (Ont. S.C.J. ) the plaintiff had lent money to the d ef endant, with a promise that property would be held t o s ecure the loan and no t so ld with o ut the pl a inti f f ' s permission, hence a fiduciary relationship was found.

[ 35 ] T h e B rit i s h Colum b ia Co urt o f A ppe a l in Valastiak: v. Valastiak (2010), 2010 CarswellBC 307 ; 2010 BCCA 71 () , 63 C.B.R. (5th) 188 hel d t h at " m isapp r op ri ation" u nde r s . 17 8 ( 1 ) ( d ) of t h e B IA m u st b e co n st ru e d in i ts ord in ar y se n s e to con n o t e so me e lem e n t of w r ongdoing , improper conduct or improper accounting. In a corporation with only two shareholders, formed husband and wife, were in a special relationship of trust and dependency, the debtor/shareholder/husband as the sole director was acting in a fiduciary capacity in relation to the wife as the other shareholder in respect of the corporation and its assets. Although the general rule is that directors owe their fiduciary duties to the corporation only, and not to the shareholders, there are exceptions to the general rule. His liability arose from his misappropriation of the company's assets while he was in a fiduciary relationship with the plaintiff. There, the Court of Appeal made an order under s, 178(1)(d) declaring that the defendant's discharge did not release him from liability.

VII. “Misappropriation”

[ 36 ] Mi s appropriation is the a ct o f mi sa pp ro pri a t i n g or t u r n i n g t o a wrong purp os e : Jan co ( H uppe ) v . Ve r eecke n ( 19 82), 1982 487 (BC CA) , 44 C. B . R . ( N.S .) 211 , 40 B.C.L.R . 10 6 ( C.A. ) . T a kin g m o n ey th at th e co m mo n l aw w if e o f t h e b a nkrup t h a d turn ed over to h i m to m a n a ge f o r her - b e nefi t a n d his benef i t a nd fai lin g t o r et urn it , wh e n r equ es ted to d o so, c onst itu tes tu rning t he mo n ey t o a w r o n g purpose a nd i s a m isa ppropr i a t i o n un der s. 1 7 8 ( l )( d).

[ 37 ] F o r mi s a p pr o pri a t io n , t h e fo ll ow ing e le me nt s mu s t be p rove n :

(a) t h e mone y t ak en by t h e d e bt o r t o c rea te th e debt mu s t h ave b e long e d to s o me o n e o t h e r th a n th e d e bt o r ;

(b) the tak i n g mu s t in vo l ve a w r o ngful u se o f t h e mon e y ; a nd

(c) th e de bto r mu s t h a ve r e c e i v ed t he m o ne y a s a fi du c i a r y.

[ 38 ] I n S i mo n e v. D a le y ( 1 9 9 9), 1999 3208 (ON CA) , 1 7 0 D . L.R. ( 4th ) 21 5 , th e On ta rio Cou r t o f Appe a l held that " m is appro p r i ation o r de f al c ati o n while act i ng in a f idu ciary c apa c it y " requir es s ome elem e nt o f dis h o n es t y, wron g d o in g o r mi s condu c t, and br ea ch o f a f idu c iar y obligati on a lo n e i s n ot s uffi c i e nt. In a d v erten c e , n eg lig e nc e or incompet e n ce d oes no t c on s ti t ut e mi sa ppr o p r i a ti o n or de fa l ca tion. See als o Sup er i o r Cra ne ( C an ad a) I nc . v. Ju s t a n Con s ul t ing Lt d . (2 003 ) , 2003 27731 (ON SC) , 2 003 Carswe llOnt 4591 , 49 C.B.R . ( 4th ) 29 5 ( Ont. S . C.J. ) ; R e Di c roc e (2 004 ) , 2004 15274 (ON SC) , 2 004 Car s wellOnt 167 3 , 49 C.B.R. ( 4th ) 196 ( Ont. S . C.J . ) ;

[ 39 ] Three cases examining the statutory trust provisions under Ontario’s Construction Lien Act are also instructive: C o mmd oo r Alumi n um v . S o l a r Sun ro om s In c. ( 2 0 0 4 ) , 2004 465 (ON CA) , 20 04 Car s wellOn t 2 3 87 , 2 C.B.R . ( 5th ) 131 ( Ont. C.A. ) . Vicor Mechanical Ltd. V. Pegah Construction Ltd. , 61 C.B.R. (5 th ) 300 and Plancha v. Limotta , (2011) 6 C.L.R. (4 th ) 169 (Ont S.C.) .

[ 40 ] In Commd oo r A lu m i n u m it was held that where t he b a nk r up t, pr i o r to bankrupt cy, ha s b re ac hed th e t r u s t pro v i si on s of the Co ns tru c ti o n L i e n A c t, and th e b a nkrupt ha s r e c e i v ed a di s ch a r g e , a cred i tor who supplied material t o a p ar ticular pr o ject co n s tru c ted b y the b a nkrupt a nd whose a mount w as not p ai d c an ma i n ta in a n ac t i on aga in s t t he dis c h arg e d bank r upt o n the g r o und th a t the b an krupt h as b e e n guilty of mis a ppropriati o n while a ctin g in a f idu c iary capac i t y und e r s . 178 ( 1 )( d ), a nd the c ourt w i ll g r a nt j udgment to th e c red i t or fo r the unpaid acco unt .

VIII. Disposition

[ 41 ] The situation in the case before me, while not involving a statutory trust, nevertheless sufficiently parallels these Lien Trust cases such that I am satisfied leave ought to be granted for AFCI to proceed with its action.

[ 42 ] Having weighed the equities, the documentary evidence and the findings of Registrar Nettie at an earlier point in this case, and notwithstanding that Mr Ieluzzi remains an undischarged bankrupt, I am ordering that the stay imposed by section 69 of the BIA no longer applies to action CV-11-421565, commenced in the Ontario Superior Court of Justice.

IX. Costs.

[ 43 ] This is a case where the ultimate issue will turn on whether the plaintiff can make out its case at trial in such a manner that liability will attach to Mr. Ieluzzi and not be affected by his discharge. In such circumstances I think it is appropriate that costs of this motion should be in the cause of action CV-11-421565 and in the discretion of the trial judge.

Master D. E. Short
Registrar in Bankruptcy

March 7, 2012

DS/ B1 (Revised)