SUPERIOR COURT OF JUSTICE

IN BANKRUPTCY and INSOLVENCY

COURT FILE NO.: BK-10-01358067
BK-10-01358068

DATE: 20120330

Ontario

SUPERIOR COURT OF JUSTICE

IN BANKRUPTCY and INSOLVENCY

IN THE MATTER OF THE BANKRUPTCY OF

JEFFEREY BRYAN CYRIL WILSON AND

COLLEEN ELLINORE THOMAS

OF THE CITY OF OTTAWA

IN THE PROVINCE OF ONTARIO

JOHN DEMPSTER,

DEPUTY REGISTRAR IN BANKRUPTCY

HEARD: March 14, 2012

APPEARANCES: Jeffrey Thomas Webb, Trustee

Jefferey Bryan Cyril Wilson, Debtor

REASONS FOR DECISION

[ 1 ] Pursuant to the provisions of s. 49 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c.B-3 (the “BIA”), Jeffery Bryan Cyril Wilson and Colleen Ellinore Thomas (hereinafter referred to collectively as the “Bankrupts” and individually as “Wilson” and “Thomas” respectively) each made an assignment in bankruptcy on May 11, 2010 (the “Bankruptcy”). Jeffrey Thomas Webb was appointed as the Trustee (the “Trustee”) for each of them. Wilson and Thomas are husband and wife. On January 10, 2012, pursuant to the provisions of s. 168.2(1) of the BIA the Trustee provided notice of its opposition to the discharge of both Wilson and Thomas. This matter therefore comes before me in part as an opposed discharge hearing pursuant to the provisions of s. 172 of the BIA.

[ 2 ] The only grounds of opposition listed in the Notice of Opposition for each of the Bankrupts, was alleged arrears of surplus income and that the bankrupts were not current in their monthly income and expense filings.

[ 3 ] The evidence of the Trustee was that in determining the Bankrupts’ obligation to pay surplus income, if any, under s. 68 of the BIA, the Trustee strictly applied only the amount as determined by a strict application of the mathematical formula established by the Office of the Superintendent in Bankruptcy (“OSB”) and which are set out in Directive 11R2-2011 (the “Superintendent’s Standards”). The Trustee indicated that he did not have regard to anything else or any other factor other than the Superintendent’s Standards. The Trustee specifically admitted that he did not have regard to the personal and family situation of the Bankrupts in determining their surplus income obligations if any, and that this was so, in part, based on conversations he had, had in the past with representatives of the OSB that led him to believe that the Superintendent’s Standards were mandatory, that they were to be strictly applied, and that the Trustee had no discretion other than to calculate surplus income in accordance with the mathematical formula set out in the Superintendent’s Standards and enforce this amount.

[ 4 ] The evidence of the Trustee was that if he had any discretion as it relates to surplus income, and if he was allowed to have regard to the personal and family situation of the Bankrupts, then he would have exercised that discretion to fix their surplus income obligations at the amount that they have already paid to the estate. The Trustee indicated that there had been no mediation in this matter and that if there was a mediation, he and the Bankrupts would be in agreement that the Bankrupts’ obligation to pay surplus should be fixed at the amount they have already paid.

[ 5 ] The Trustee indicated to the Court that the Bankrupts had now provided all of their monthly statements of income and expenses, that they had been fully compliant with the Trustee throughout, and that the Trustee was essentially asking the Court to exercise its discretion to fix the Bankrupts’ surplus income obligations at the amount already paid, and to grant them an absolute discharge on the basis that there were no other grounds for opposition.

[ 6 ] Wilson testified that he and his wife had tried their best to pay surplus income based on the Trustee’s strict application of the Superintendent’s Standards, but that it had been difficult. This was consistent with the Trustee’s evidence that the Bankrupts had done their best to try to pay but that it had been difficult for them given their personal and family situation. Wilson further testified that over the summer he and his wife had planned on cutting back on groceries for their family in order to try to catch up on surplus payments, but that Wilson’s mother was hospitalized and that the added expense to the family associated with this had made it impossible to catch up on the surplus payments even with cutting back on groceries for the family.

[ 7 ] The Trustee’s evidence is that the Bankrupt’s have been wholly compliant with their obligations to the estate and have made every effort to satisfy their surplus income obligations as determined by the Trustee pursuant to the Superintendent’s Standards. However it is clear from his evidence that the Trustee feels that the application of the Superintendent’s Standards in this case works an unfairness to these Bankrupt’s, but that he feels he has no choice but to enforce the Superintendent’s Standards subject to a review by this Court and intervention as this Court sees fit. It is noted that this Court is repeatedly faced with this very situation.

(A) Trustee’s discretion when determining surplus income obligations, if any, under s. 68 of the BIA

[ 8 ] The provisions of the BIA that deal with surplus income are found in sections 68(1) - 68(16) of the BIA. In Re Plamondon 2012 ONSC 1379 I had an opportunity to review and consider these sections of the BIA and the law as it relates to the proper interpretation and application of these sections of the BIA by Trustees in determining the surplus income obligations, if any, of a bankrupt.

[ 9 ] Pursuant to s. 68(3) of the BIA the onus is placed on the Trustee to determine whether or not, having regard to both the Superintendent’s Standards and the personal and family situation of the bankrupt, the bankrupt has surplus income being an amount of total income in excess of what the bankrupt requires to maintain a reasonable standard of living.

[ 10 ] Therefore the Superintendent’s Standards are a guideline to assist the Trustee in performing its discretionary role under s. 68(3) of the BIA. In this Court Trustees have often referred to the Superintendent’s Standards as a “guideline”, and they have often referred to the amount of surplus determined under the Superintendent’s Standards as being a “guideline amount”. It is clear in my view from the wording of s. 68(3) that the Trustee cannot simply use the Superintendent’s Standards as being the surplus income for any particular bankrupt. Instead the Trustee is also required to have regard to the personal and family situation of the particular bankrupt for which the Trustee is making the determination, in order to determine whether or not the particular bankrupt has total income in excess of that necessary for the bankrupt to maintain a reasonable standard of living.

[ 11 ] These sections make it clear that it is the Trustee who determines whether or not there is surplus income. The Trustee is not required to nor should the Trustee blindly follow the mathematical calculation in the Superintendent’s Standards. In fact to the contrary the Trustee is mandated by s. 68(3) of the BIA to have regard to both the Superintendent’s Standards and the personal and family situation of the bankrupt in determining whether or not the bankrupt has surplus income in excess of that required to maintain a reasonable standard of living.

[ 12 ] In Re Missal (1999) 1999 ABQB 732, 14 C.B.R. (4 th ) 123 (A.B.Q.B.) Registrar Laycock held as follows at paragraph 5:

“ Section 68 of the Bankruptcy and Insolvency Act directs the Superintendent of Bankruptcy to establish guideline determining which the bankrupts total income that must be paid to the trustee. Section 68(3) requires the trustee to review the Superintendent’s directives and then having regard to the personal and family situation of the bankrupt , fix the amount that the bankrupt is required to pay into the estate . The trustee must inform the official receiver in writing as to the amount and take reasonable steps to ensure the bankrupt complies with the requirement to pay the funds during the bankruptcy. The trustee may amend the amount of guideline payments by taking into account material changes that have occurred in the personal and family situation of a bankrupt ” (Emphasis added)

[ 13 ] Registrar Laycock also held at paragraph 8 that under special circumstances the Court may relieve against the guideline amount.

[ 14 ] In Re Dore (2001) 2001 SKQB 524, 34 C.B.R. (4 th ) 4 (S.K.Q.B.) Registrar Hereauf, as he then was, presided over the bankrupt’s discharge hearing which was opposed by the trustee on the basis of alleged unpaid surplus income. Registrar Herauf, as he then was, held as follows at paragraphs 4 and 5:

“The submission of the trustee is simple; none of the four items listed are non-discretionary and he has no choice but to calculate surplus income in accordance with Directive #11. I believe that this is an oversimplification of the trustee’s role in the matter of surplus income. Directive #11 specifically refers to sections 68 and 170.1 as the provisions of the legislation that the Directive is concerned with. The Directive then goes on to quote subsection 68(3) of the Act which states:

The trustee shall

(C) having regard to the applicable standards established under

subsection (1), and to the personal and family situation of the bankrupt , fix

the amount that the bankrupt is required to pay to the estate of the

bankrupt;[emphasis added]

I am of the view that the Directive and the statutory provision referred to require the trustee, when the situation calls for it, to do more than simply plug in the numbers without reference to any discretionary items.”

[ 15 ] I note that the current version of Directive 11R2-2011 continues to refer to s. 68 of the BIA and in particular s. 68(3) of the BIA and the trustee’s duty to determine surplus in accordance with s. 68(3) of the BIA. There are many references to this section throughout the current version of the Directive. For example at paragraph 3 under the heading “Family Unit” the current version of Directive 11R2-2011 states that in determining the bankrupt’s personal and family situation for the purposes of s. 68(3) the trustee must establish the income and expenses of the bankrupt and the bankrupt’s family unit. In this paragraph the Directive states that in determining surplus income obligations trustees “must use their professional judgement”.

[ 16 ] In Re Dore Registrar Herauf, as he then was, goes on at paragraph 6 to hold that:

“If I am wrong in my view of the flexibility afforded to trustees by Directive #11, I am certain that the court is not fettered by the Directive. I note that subsection 68(9) directs the court to have “regard to the personal and family situation of the bankrupt”

[ 17 ] This is the wording currently found in s. 68(10) of the BIA. I note that in 2007 Registrar Hereauf, as he then was, was appointed as a Judge of the Court of Queen’s Bench of Saskatchewan in Moose Jaw, and that on March 4, 2011 Mr. Justice Herauf was appointed a Judge of the Court of Appeal of Saskatchewan in Regina. According to the Notice of Appointment found on the Department of Justice web site, Mr. Justice Herauf authored several articles that have appeared in the Saskatchewan Law Review, Saskatchewan Advocate and the Canadian Bankruptcy Reports and Western Weekly Reports , and that his decisions have been referred to in various authoritative textbooks on bankruptcy and insolvency law. His views are therefore very persuasive.

[ 18 ] I recently became aware of the decision of Mr. Justice James of this Court who, on October 11, 2011, heard an appeal by the Superintendent in Bankruptcy, of one of my decisions arising out of an application by Marie-Lise France Aumont for discharge from her bankruptcy. The application for discharge was opposed by the Trustee primarily on the basis of alleged arrears of surplus income calculated based on a strict application of the Superintendent’s Standards. I fixed the Bankrupt’s surplus income at the amount already paid into the estate and granted an absolute discharge. On appeal Mr. Justice James noted that there had been no mediation as required by the BIA and he set aside my order and referred the matter to mediation to be brought back to him to have the amount, if any, of surplus income determined if there was no settlement between the Trustee and the Bankrupt. Mr. Justice James did not issue written reasons but he did give oral reasons and endorsed the back of the Motion Record. I have now had an opportunity to review the transcripts. I note that in referring the matter to mediation pursuant to the provisions of the BIA, Mr. Justice James specifically indicated that the Trustee did have discretion as it relates to the determination of surplus income obligations.

[ 19 ] It is clear on the wording of the relevant sections of the BIA as well as the applicable case law, that the Trustee does have discretion in determining surplus income, and that this discretion must be properly exercised and can be reviewed by this Court at the bankrupt’s discharge hearing. As I indicated in Re Plamondon 2012 ONSC 1379, it is a question of fact whether the bankrupt, after being given credit for his or her reasonable living expenses, has excess funds that should be made available for creditors. Re Morrow (1989) 72 C.B.R. (N.S.) 230 (N.S.T.D.); Re Michael (1980), 34 C.B.R. (N.S.) 1 (Ont. S.C.) as cited in The 2012 Annotated Bankruptcy and Insolvency Act, Houlden, Morawetz & Sarra F111(5) p.424. The cases on conditional discharges are of assistance in making the determination McLay Co. v Wylie (1995), 31 C.B.R. (3d) 94 (Ont. Gen. Div.) as cited in The 2012 Annotated Bankruptcy and Insolvency Act, Houlden, Morawetz & Sarra F111(5) p.424. Although these cases deal with how the Court, pursuant to s. 68(10) of the BIA, should approach determining whether or not a bankrupt has surplus income that should be paid to the estate, they would also apply to the Trustee making his determinations under s. 68(3) of the BIA. The considerations which inform the determination should be the same whether it is the Trustee or the Court making the determination. The bankrupt should not have different surplus income obligations imposed by the Trustee than would be imposed by the Court. Therefore in making their determinations under s. 68(3) of the BIA, Trustee’s should consider the many factors applicable to conditional discharges and whether or not payments should be made to the estate as a condition of discharge as these same considerations apply to whether or not a bankrupt has surplus income that should be paid to the estate.

[ 20 ] One of the prime purposes of the BIA is to enable an honest but unfortunate debtor to obtain a discharge from his or her debts, subject to such reasonable conditions, if any, as the court may see fit to impose, so that the debtor can make a fresh start. Re Posner (1960) 1960 626 (MB QB), 3 C.B.R. (N.S.) 49 (Ont. S.C.) as cited in The 2012 Annotated Bankruptcy and Insolvency Act, Houlden, Morawetz & Sarra H25(1) p.779-80. The BIA is designed to permit a bankrupt to eventually receive a complete discharge of all his or her debts in order to re-integrate themselves free and clear of the burden of past debt. See cases cited in The 2012 Annotated Bankruptcy and Insolvency Act, Houlden, Morawetz & Sarra H25(1) p.779-80. In deciding whether or not to make a conditional order, the court should balance the rehabilitation of the bankrupt, supported by sufficient income to provide the requirements of living for the bankrupt and his or her dependents in an appropriate manner, against the right of creditors to receive an additional dividend from the bankrupt. Marshall v Bank of Nova Scotia (1986) 1986 1132 (BC CA), 62 C.B.R. (N.S.) 118 (B.C.C.A.) as cited in The 2012 Annotated Bankruptcy and Insolvency Act, Houlden, Morawetz & Sarra H40(2) p.799.

[ 21 ] The factors and considerations that must be taken into consideration in any particular case in order to properly balance the rights of the bankrupt against the rights of the creditors when deciding whether or not the bankrupt should make any additional payments to the estate as a condition of discharge, are too numerous to comprehensively list. As well set out in the many cases decided on the issue, it is truly a case by case analysis on the merits of each case in order to achieve fairness and a proper balance between the rights of the bankrupt and the rights of the creditors. These same considerations apply to the surplus income requirements that must be determined by the Trustee under s. 68(3) of the BIA, or by the Court under s. 68(10). The Trustee has discretion when determining surplus income obligations and must use their professional judgement.

(B) Mandatory mediation provisions in the event of any dispute over surplus income

[ 22 ] Pursuant to s. 68(6) of the BIA if the trustee and the bankrupt do not agree on the amount, if any, that the bankrupt should pay to the estate as surplus income, then the trustee shall make a request for mediation to the official receiver at the OSB. This provision is mandatory and places the onus on the Trustee to arrange for mediation with the OSB as soon as there is any disagreement between the trustee and the bankrupt over surplus income. In my view this mandatory provision should be broadly interpreted to include any disagreement including a failure by the bankrupt to pay. If a bankrupt is not paying then this is a disagreement which triggers s. 68(6) and the trustee’s mandatory requirement to arrange for mediation with the OSB.

[ 23 ] S. 170.1(1) of the BIA also makes mediation mandatory if the only grounds for opposing the bankrupt’s discharge are a failure to pay surplus income and/or an allegation that the bankrupt could have made a viable proposal. If the mediation is successful and the bankrupt complies with the mediation agreement, then the trustee issues a Certificate of Discharge. Some trustees have indicated that they and/or the OSB have taken the position that there can be no resort to mediation if there are grounds for opposition other than a failure to pay surplus and/or that the bankrupt could have made a viable proposal. In my view this is not a proper interpretation of S. 170.1(1). It does not say there cannot be a mediation if there are other grounds for opposition, it only says there has to be a mediation if the only grounds are a failure to pay surplus and/or the bankrupt could have made a viable proposal.

[ 24 ] In Re Dabeka 2012 ONSC 1629 Mr. Justice Roy of this Court followed the decision of Mr. Justice James reviewed above, and set aside one of my decisions as it related to surplus income because there had been no mediation. Mr. Justice Roy referred the matter to mediation to be brought back to Court for a determination of the surplus income obligations if the mediation did not result in a settlement of this issue between the Trustee and the Bankrupts. I take the decisions of Mr. Justice James and Mr. Justice Roy to mean that this Court should not exercise its discretion to resolve any disagreements over surplus income, or to review the Trustees determination pursuant to s. 68(3) of the bankrupt’s surplus income obligation, unless there has been mediation with the OSB.

[ 25 ] Although I released my decision in Re Plamondon without having seen or been referred to the decisions of Mr. Justice James or Mr. Justice Roy, I see no conflict between their decisions and my decision or reasoning in Re Plamondon. In both of the matters considered by Mr. Justice James and Mr. Justice Roy, there was a disagreement between the Trustee and the Bankrupt over payment of surplus income, and there had not been a mediation of that disagreement. My error in those two cases was in exercising my discretion without having first required the parties to attend mediation. Mr. Justice Roy and Mr. Justice James both indicated that the process set out in the BIA should be properly followed and they both referred the dispute to mediation to be returned to Court only after there had been a mediation and if no settlement between the Trustee and the Bankrupt had been reached at mediation. Therefore, subject to the provisions of s. 68(10) which govern applications to Court to determine and fix surplus income, where there is a disagreement between the Trustee and the Bankrupt over surplus income, then the Court should not intervene unless the provisions for mandatory mediation have been properly followed.

[ 26 ] However in Re Plamondon, as in this case, there was no disagreement between the Trustee and the Bankrupt. Rather the Trustee had strictly applied the Superintendents Standards under the mistaken belief that she had no discretion, and she was asking the Court to intervene and exercise its discretion. There was no disagreement between the Bankrupts and the Trustee over the amount to be paid; they were in agreement with each other that the amounts determined by a strict application of the Superintendent’s Standards, given the personal and family situation of the Bankrupts, was unreasonable and was creating a financial hardship for the Bankrupts. However because the Trustee was under the mistaken belief that she had no discretion and was required to strictly apply the Superintendents Standards and seek relief for the Bankrupt’s from this Court, the matter came before me as an opposed discharge and application under s. 68(10) of the BIA when really there was no actual opposition by the Trustee or any disagreement between the Trustee and the Bankrupts to be mediated. In the end, the result in Re Plamondon was agreed to by both the Trustee and the Bankrupts who were in complete agreement with each other and with the Court.

[ 27 ] That is the same situation that is before me in this case. The Trustee and the Bankrupts do not have a disagreement. The Trustee is operating under the mistaken belief that he has no discretion. He is asking the Court to set the surplus income obligations at the amounts already paid by the Bankrupts and to grant them an absolute discharge. There is no disagreement to be mediated, there is simply a misunderstanding by the Trustee as to whether or not he has discretion as it relates to his determination of the surplus income obligations. The Trustee’s evidence was that if this matter were to proceed to mediation, he and the Bankrupt’s would be in agreement with each other that the surplus income obligation should be fixed at the amounts already paid to the estate and that the Bankrupts should be granted an absolute discharge. If that were to occur then pursuant to s. 170.1(4) of the BIA the Bankrupts would receive a Certificate of Discharge.

C. Conclusion

[ 28 ] The Bankrupts and the Trustee are in agreement with each other that the surplus income should be fixed at the amounts already paid and that the Bankrupts should be given an absolute discharge. I am in agreement with that as well. The evidence before me is that the Bankrupts have done their best to pay surplus but that it has been hard for them. Indeed they had tried over the summer to cut back on groceries for the family in order to pay more surplus but that this plan did not work due to extra expenses associated with the illness and hospitalization of Wilson’s mother.

[ 29 ] I therefore fix the Bankrupts surplus obligations at the amounts already paid to the Trustee. There being no other opposition to the discharge and no other findings of fact under s. 173(1) of the BIA, I hereby grant the Bankrupts an Absolute Discharge from their respective bankruptcies.

March 30, 2012

John D. Dempster
Deputy Registrar

File No. BK-10-01358067
BK-10-01358068

SUPERIOR COURT OF JUSTICE

IN BANKRUPTCY AND INSOLVENCY

IN THE MATTER OF THE BANKRUPTCY OF

JEFFEREY BRYAN CYRIL WILSON AND

COLLEEN ELLINORE THOMAS

OF THE CITY OF OTTAWA

IN THE PROVINCE OF ONTARIO

REASONS FOR DECISION

Released: March 30, 2012