ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: 31-1265789
DATE: 20120503

IN THE matter of the Bankruptcy of vincENZO FRANCESCO CONFORTI, of the Town of Newmarket, in the Region of York, Province of Ontario, Unemployed

Robert A. Klotz , for the Bankrupt
Howard F. Manis , for the Trustee in Bankruptcy, Pat Robinson Inc.

HEARD: April 2 and 4, 2012

SPENCE J.

REASONS FOR DECISION

[ 1 ] On this motion, the trustee in bankruptcy of Vincenzo Francesco Conforti (“Conforti”) (the “Trustee”) seeks directions as to the entitlement to certain proceeds of settlement of litigation in the amount of $275,000. By his endorsement (the “January Decision”) released January 6, 2011, Wilton-Siegel J. decided that the prospective receipt by Conforti of settlement funds in respect of a motor vehicle accident on account of “loss of future competitive advantage” will constitute income to be dealt with under section 68 of the Bankruptcy and Insolvency Act , R.S.C., 1985, c. B-3 (the “BIA” or the “Act”).

[ 2 ] In light of the January Decision, the Trustee now seeks direction as to the determination of the amount of the income of Conforti pursuant to s. 68 of the BIA and the conditions of discharge which should be imposed pursuant to s. 172(1) (c) and s. 172(2) (c) of the Act . The latter provision is applicable if the Court determines that any facts referred to in s. 173 of the Act are proved.

Background Facts Previously Determined

[ 3 ] The January Decision found the facts set out below.

[ 4 ] Conforti filed an assignment in bankruptcy on September 24, 2009 naming the Trustee as trustee of the bankrupt estate (the “Assignment”).

[ 5 ] Prior to the Assignment, on December 11, 2007, Conforti commenced a legal action in respect of a motor vehicle accident that occurred on January 31, 2007.

[ 6 ] The action was settled for $275,000 pursuant to minutes of settlement dated February 10, 2010. Counsel for the parties to the litigation agreed that, of this amount, $100,000 was allocated in respect of “future loss of competitive advantage”. This amount is herein referred to as the “Award”. It was also expressly agreed that no amount was paid on account of past loss of income.

[ 7 ] Conforti did not advise the Trustee of the litigation at the time of the Assignment. It came to light when his lawyer in the litigation advised the Trustee of the settlement on or about March 3, 2010, because the Trustee’s release was required in respect of the funds to be paid pursuant to the minutes of settlement.

[ 8 ] It is undisputed that Conforti is subject to significant physical limitations that prevent him from continuing in his previous employment as an international truck driver. He is currently working at a significantly diminished income level delivering pizza. There is no evidence on the record of any prospects for a return to his previous income level in any occupation, even taking into consideration his retraining in computer graphics.

Section 68 Issues to be Determined

[ 9 ] The Trustee seeks to include in the income of Conforti for s. 68 of the Act , the entire amount of the settlement proceeds (the “MVA proceeds”) after deducting legal fees and expenses, in the net amount of $195,000. Conforti submits that the amount to be included in income should exclude the portion of the MVA proceeds which the parties allocated to pain and suffering, i.e. $120,000 and that with respect to the $100,000 amount to be received on account of “loss of future competitive advantage” (the “future income” amount), that amount should be prorated over the entire prospective working years of Conforti from the date of bankruptcy to age 65, so that only that portion referable to the years up to discharge would be included in income, i.e. 4 years of a total 15 years.

[ 10 ] The Trustee seeks to include as income, the entire amount, net of legal fees and expenses, of the money Conforti received from the settlement of his claim for Statutory Accident Benefits (“SABs”) in 2009, i.e. $21,892.89. Conforti submits that the amount that should be included as income should be prorated over the 10-year period for which the SABs would have been payable.

[ 11 ] The Trustee seeks to include in income $3,000 per year on account of welfare payments received each year by Conforti. Conforti submits that these amounts should not be included in income because he signed an agreement in 2009 to repay all welfare payments out of the MVA proceeds.

[ 12 ] For the reasons set out below, the submissions of Conforti about the MVA proceeds are to be accepted, but not his submissions about the SABs or the welfare payments.

Additional Facts

[ 13 ] The facts referred to in the above part of this decision are relevant to the determination of the s. 68 issues and are satisfactorily established.

[ 14 ] In the year in which he received the SABs settlement payment, Conforti paid the entire amount to a Mr. Crupi on account of what Conforti said was a debt incurred 33 years ago. There is no written instrument reflecting the debt. The debt was unenforceable as statute-barred, quite apart from other deficiencies. Conforti said he considered he had a moral obligation to make the payment. Conforti did not disclose his receipt and payment of the SABs amounts to the Trustee.

[ 15 ] Conforti conceded that his failure to advise the Trustee of the settlement of the MVA claim was “bad judgment” on his part. This concession constitutes an admission that his failure to disclose was deliberate. Counsel to Conforti acknowledged that the conduct of Conforti warranted what he referred to as a “penalty” in the determination of the appropriate condition to be imposed for discharge.

The Interpretation of Section 68

[ 16 ] Section 68 of the Act provides as follows:

68. (1) The Superintendent shall, by directive, establish in respect of the provinces or one or more bankruptcy districts or parts of bankruptcy districts, the standards for determining the surplus income of an individual bankrupt and the amount that a bankrupt who has surplus income is required to pay to the estate of the bankrupt.

Definitions

(2) The following definitions apply in this section.

“surplus income”

“surplus income” means the portion of a bankrupt individual’s total income that exceeds that which is necessary to enable the bankrupt individual to maintain a reasonable standard of living, having regard to the applicable standards established under subsection (1).

“total income”

(a) includes, despite paragraphs 67(1)(b) and (b.3), a bankrupt’s revenues of whatever nature or from whatever source that are earned or received by the bankrupt between the date of the bankruptcy and the date of the bankrupt’s discharge, including those received as damages for wrongful dismissal, received as a pay equity settlement or received under an Act of Parliament, or of the legislature of a province, that relates to workers’ compensation; but

(b) does not include any amounts received by the bankrupt between the date of the bankruptcy and the date of the bankrupt’s discharge, as a gift, a legacy or an inheritance or as any other windfall.

Determination of trustee re surplus income

(3) The trustee shall, having regard to the applicable standards and to the personal and family situation of the bankrupt, determine whether the bankrupt has surplus income. The determination must also be made

(a) whenever the trustee becomes aware of a material change in the bankrupt’s financial situation; and

(b) whenever the trustee is required to prepare a report referred to in subsection 170(1).

[ 17 ] The Trustee submits that, for purposes of determining whether an amount is to be included in determining surplus income, the governing consideration is simply whether the amount is “earned or received” prior to discharge because all such amounts are included in “total income”: under the definition of that term in s. 68(2). On this basis, the determination of “surplus income” is simply a matter of mathematical calculation under the definition of that term in s. 68(2), which is to be effected by subtracting from the amount of the “total income” the amount of the Superintendent’s standards as set by Directive No. 11R2-2012.

[ 18 ] However, both S. 68(2) and s. 68(3) contain elements that suggest that the mathematical calculations are subject to qualitative considerations. The definition of “surplus income” in s. 68(2) does not provide that the applicable standard is the sole determinant to be considered. Section 68(2) instead refers to the amount “which is necessary to enable the bankrupt individual to maintain a reasonable standard of living” and it provides that this amount is to be determined, not by simply applying the standard, but “ having regard to the applicable standards” [Emphasis added]. Similarly, s. 68(3) requires the Trustee to have regard, not only to the applicable standards, but also to “the personal and family situation of the bankrupt” in determining whether the bankrupt has surplus income.

[ 19 ] The inclusion of these qualitative considerations in the determinations to be made under s. 68 is consistent with the fact that one of the purposes to be addressed in the administration of the Act is the rehabilitation of the bankrupt.

[ 20 ] These qualitative considerations are relevant to the treatment of the MVA proceeds and the SABs proceeds.

The MVA Proceeds: The Award for Pain and Suffering

[ 21 ] The Trustee submits that the portion of the MVA proceeds that is awarded for pain and suffering is to be included in total income under s. 68(2) because it is (or when received prior to discharge will be) “revenue” “received by the bankrupt”.

[ 22 ] There is a well-established rule of statutory interpretation that was traditionally referred to by the Latin maxim “ noscitur a sociis ” which can fairly be translated as “a word or phrase takes its meaning from the words and phrases with which it is associated”. This rule bears consideration here. It is also important that provisions of the BIA are to be given a purposive interpretation.

[ 23 ] Section 68(2) specifically provides that “total income” includes “those [revenues] received as damages for wrongful dismissal, received as a pay equity settlement or received under an Act of Parliament, or of the legislature of a province, that relates to workers’ compensation”. These amounts would appear to be of a work-related income replacement type.

[ 24 ] Section 68(2) excludes any amount received “as a gift, a legacy or an inheritance or as any other windfall”. These amounts have no relation to work. They are unearned receipts, like damages for pain and suffering.

[ 25 ] In the decision in Mostajo (Re) , 2006 CarswellOnt 6421 (S.C.J.) , Registrar Nettie said at paragraph 20 that damages for pain and suffering do not devolve on the Trustee. The Registrar referred to a 1926 decision of this Court in which this principle was said to be well-settled in that decision. The Court said that causes of action arising from bodily or mental suffering such as damages for personal injuries remain with the bankrupt.

[ 26 ] Based on the above considerations, the award to Conforti for pain and suffering is not to be included in the determination of the total income of Conforti under s. 68 of the BIA .

The MVA Proceeds: Prorating the Future Income Award

[ 27 ] The Trustee submits that the entire amount of the future income award should be included in total income under s. 68(2) because it is (or will be, when received) “revenues” “earned or received”. Conforti submits that only the portion of the award referable on a prorated basis to the period up to discharge should be regarded as “revenues” “received”.

[ 28 ] In paragraph 16 of the January Decision, Wilton-Siegel J. referred to and relied on the decision of Mesbur J. in Re Snow (March 11, 2011 (S.C.J.), unreported) which was an appeal from the decision of Registrar Nettie ( Re Snow , 2010 ONSC 5062 (S.C.J.) ) and wherein she stated at paragraph 26 that the essential nature of the payment should determine whether it is income or not, rather than its source ─ it is what the payments replace that is critical.

[ 29 ] That decision was addressed to the determination as to whether an amount was to be treated as income or property, but unless there is a reason to the contrary, it would seem equally applicable to the issue whether the payment of the award for future income to Conforti should be regarded as income in the year of payment or as income for the years for which it provides income replacement.

[ 30 ] In Re Berridge , [2002] A.J. No. 1189 (Alta. Q.B.) the Registrar calculated the portion of lost income award that would apply to the bankruptcy period and ordered only this amount to be paid to the Trustee. Mr. Conforti submits that this is the appropriate treatment of a loss of future income award.

[ 31 ] The Trustee submits that Conforti is not disabled, but is malingering to keep his income down for purposes of s. 68 . There may well be an element of malingering in the conduct of Conforti, but from the size of the award he received for loss of future income, together with the evidence as to the seriousness of the accident and as to his continuing condition, it would not be reasonable to conclude that malingering is a major factor in accounting for the very limited nature of his present work and income. And it cannot be concluded that there is a significant prospect of material improvement in his work prospects. His efforts to seek more gainful employment than his present job have not been vigorous, but in the circumstances this should not disentitle him from receiving the benefit of prorating. Rather it should be regarded as a factor, but only a subsidiary one in determining the amount he should pay as a condition of discharge.

The SABs Proceeds

[ 32 ] In the analysis set out above, there would be grounds to prorate the SABs proceeds as requested. However, the gratuitous payment which Conforti made of those proceeds to Mr. Crupi introduces a different, and adverse, consideration. The inescapable inference from his making of that payment is that he concluded he did not need it to meet the needs of his family, i.e. himself and his wife, in circumstances where their family income is well below the Superintendent’s standard. If Conforti did not care to find a way to use the payment for the continuing benefit of his family over the period to which it was to apply, there is no reason for the Court to prorate the amount of the payment over those years.

[ 33 ] Accordingly, the net amount of the SABs proceeds received in 2009, i.e. $21,842.89, is properly included in the income of Conforti for that year.

The Welfare Payments

[ 34 ] Conforti receives monthly welfare payments, which are a principal contribution to his monthly income. He also borrowed a sum of money from the welfare office to assist him in 2009 in paying the fee to initiate his bankruptcy application. He was required to sign an agreement that he would repay the amount paid to him by the welfare office which apparently includes not only the regular monthly payments, but also the special advance in 2009. This situation seems unusual.

[ 35 ] In any event, the issue that it gives rise to is the contention advanced by Conforti that all of the welfare payments constitute loans by reason of the agreement for repayment and, as such, should be excluded from the determination of total income under s. 68(2) of the Act . No case authority is cited in support of this submission. Prima facie it appears that the amounts do constitute loans.

[ 36 ] Since the amounts are loans, they are offset by debts which are a provable claim in the bankruptcy under s. 121 of the BIA . Accordingly, if the claims are proved they will be paid to the extent that the estate has the resources. The debts will be discharged by the discharge from bankruptcy. On this basis it seems both reasonable and fair to regard the amounts as income. If that is done the creditor may potentially receive repayment of the part of the loan amount which is effectively equal to the balance remaining after the application of the 50% rule in s. 5(7) of Directive No. 11R2-2012. If the loan amounts were not included in the income, the corresponding debt would simply be discharged in full on the discharge from bankruptcy without any such possibility of a payment.

[ 37 ] Accordingly, the amounts of the welfare payments received in each year of the bankruptcy are to be included in the income of Conforti for the years in which they were received.

Conclusion as to the Determination of the Surplus Income

[ 38 ] The Trustee provided her surplus income calculation at Exhibit “4” of her Fourth Supplementary Report dated March 21, 2012. The Trustee provided an amended calculation on April 4, 2012. The two calculations differ only in respect of the calculation of the surplus income for 2012, as indicated in note 3 to each calculation. The calculations that depend on that amount are correspondingly different.

[ 39 ] Except for the above amounts, the calculations in the two statements are the same. Based on the evidence and the above reasons, they are acceptable.

[ 40 ] With respect to the calculation of 2012 surplus income, the following amounts are the potential components that require consideration:

• $2,795.04: Income other than from the MVA proceeds ‑ this amount is an acceptable inclusion.

• $120,000: The award for pain and suffering in the MVA settlement ‑ this amount is excluded for the reasons set out above.

• $100,000: This award for future loss of income is to be included only with respect to the portion that is referable to the period up to discharge, i.e. 4/15ths, for the reasons set out above, or: $26,667.00.

• $55,000: This is the balance of the $278,000 amount of the MVA; it is to be included.

• But, the MVA proceeds amounts must be adjusted for the $80,000 in legal fees which must be deducted from the gross proceeds, as set out below.

[ 41 ] The adjustment for the $80,000 amount is determined as follows:

• The $80,000 is to be prorated over the three components in the total proceeds of $275,000. Thus the amount allocable to the $120,000 is $34,800.

• The amount to be deducted from the $100,000 amount is $29,000. The amount to be deducted from the $26,666 portion is $7,300. Thus the net inclusion of total income for award for future loss of income is $19,366.

• The amount to be deducted from the $55,000 is $16,000. Accordingly, the net inclusion in total income in respect of this amount is $39,000.

• Accordingly, the aggregate amount to be included in total income in respect of the MVA proceeds is $58,366.

[ 42 ] On this basis the total of the bankrupt’s income for 2012 is $61,161.04 and not the amount of $102,795.04 shown in Exhibit “4” and not the amount of $197,795.04 shown in the revised calculation of April 4, 2012.

[ 43 ] Subject to correcting any mathematical errors in the above computations, the calculation of the surplus income is to be done using this amount as the bankrupt’s income for 2012. On a rough estimate, the bankrupt’s percentage share of the total household income for the years 2009 to 2012 will be about $124,000, his portion of the surplus income will be about $55,000 and the amount payable at 50% would be about $27,500. The payment of the amount so calculated is a condition of discharge.

Determination of the Condition for Discharge

[ 44 ] The amount to be determined as above as 50% of the bankrupt’s portion of the surplus income should be adopted as the amount to be paid as surplus income in respect of the bankrupt’s income for the bankruptcy period. There is no reason to adjust this amount downward. While the bankrupt has very little other income, the payment to him of the net MVA proceeds will provide him with $195,000. He will have an obligation to make payment to the estate of about $27,500. Assuming he pays this amount out of the MVA proceeds, he will still receive a balance of more than $150,000.

[ 45 ] This leaves the matter of determining an additional amount to be paid on account of what counsel referred to as a “penalty” to be dealt with. Section 172(2) of the BIA provides that the court shall, on proof of any of the facts referred to in section 173 , either refuse the discharge or suspend it or require the bankrupt, as a condition of discharge, to pay such amounts as the court may direct. The bankrupt failed to disclose the receipt of the SABs proceeds and the prospective receipt of the MVA proceeds to the Trustee as he was required to do. The bankrupt stated falsely on his section 17 filing that he had never been involved in civil litigation from which he might receive money or property.

[ 46 ] The concession and admission made by the bankrupt are noted above. At the very least, this is conduct referred to in s. 173 (o). In view of this admission, apart from the other s. 173 facts referred to in paragraph 25 of the Fourth Report as requiring consideration, it is necessary for the integrity of the bankruptcy system that there should be a condition on discharge that the bankrupt is to pay a further amount to the estate. Counsel for the bankrupt submitted that such a condition would be in order.

[ 47 ] Accordingly, the bankrupt is required, as a further condition of discharge, to pay the amount of $15,000 to the estate. This amount is in addition to the amount to be determined to be payable as surplus income.

[ 48 ] Counsel may make written submissions as to costs within 21 days. Responding submissions are due 7 days after receipt of the first submissions. Reply submissions are due within 7 days of the responses.

Spence J.

Released: May 3, 2012

COURT FILE NO.: 31-1265789
DATE: 20120503

ONTARIO SUPERIOR COURT OF JUSTICE

IN THE matter of the Bankruptcy of vincENZO FRANCESCO CONFORTI, of the Town of Newmarkeet, in the Region of York, Province of Ontario, Unemployed

REASONS FOR DECISION Spence J.

Released: May 3, 2012