SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: IN THE MATTER OF THE BANKRUPTCY of Andrew DeSousa Couto

BEFORE: D. M. Brown J.

COUNSEL:
K. Thatcher, Trustee in Bankruptcy
C. Parkes, for certain creditors
A. Couto, in person

HEARD: May 18, 2012

REASONS FOR DECISION

I. Background facts to this application for a discharge from bankruptcy

[ 1 ] Andrew DeSousa Couto, a first time bankrupt, applies for a discharge. The Trustee, Kevin Thatcher & Associates Ltd., does not oppose. Three unsecured creditors do. At the heart of their opposition lies an incident which occurred on March 1, 2009, a Sunday, at 2:04 a.m. The bare facts of the incident were set out in a Motor Vehicle Accident Report of that date:

V1 S/B on R1 leaves road way collides with stop sign. Crosses R2 rolling into res. of 6412 Newcombe Drive.

The bankrupt was driving the vehicle, “V1”, at the time. The residence his Ford Ranger rolled into was occupied by the three creditors opposing his discharge, Tulia Ferreira, Ray Palmai and Philip Palmai (the “Plaintiff Creditors”).

[ 2 ] According to the Trustee’s May 14, 2012 report update, and as confirmed by Mr. Couto, he pleaded guilty to driving under the influence. Mr. Couto is set to regain his driving privileges in a month.

[ 3 ] On June 5, 2009, the Plaintiff Creditors commenced a civil action in Milton against Mr. Couto and his father, who owned the truck.

[ 4 ] A little over a year later, on July 29, 2010, Mr. Couto made an assignment for the general benefit of his creditors. Section 49(1) of the Bankruptcy and Insolvency Act , R.S.C. 1985, c. B-3, permits an “insolvent person” to make an assignment for the benefit of his creditors. According to Mr. Couto’s Statement of Affairs filed at the time, his assets exceeded his liabilities. The Statement, however, listed the reason for his financial difficulty as follows: “Legal claims as the result of an accident in 2009”. It is clear from the evidence that the reason Mr. Couto made an assignment was to mitigate or eliminate the financial consequences of the damages which he is alleged to have caused as a result of his drunken driving.

[ 5 ] On November 15, 2010, the Registrar granted an order lifting the stay of proceedings to enable the civil action commenced by the Plaintiff Creditors to proceed.

II. Positions of the parties

[ 6 ] As mentioned, the Trustee does not oppose the discharge.

[ 7 ] The Plaintiff Creditors submitted that the discharge should be refused. Alternatively, they submitted that the court should impose two conditions on any discharge:

(i) Until such time as Mr. Couto’s liability is established in the civil action, he should pay any surplus income to the Trustee who should hold it for the benefit of creditors; and,

(ii) Upon the determination of Mr. Couto’s liability in the civil action, Mr. Couto should be required to pay 50 cents on the dollar in respect of the claims made against his estate in this bankruptcy.

III. Analysis

[ 8 ] This is a first time bankruptcy. The Trustee, in its Report on Bankrupt’s Application for Discharge, stated that Mr. Couto could not justly be held accountable for any of the facts referred to in section 173 of the BIA . Section 173(1)(a) of the BIA provides:

173. (1) The facts referred to in section 172 are:

( a ) the assets of the bankrupt are not of a value equal to fifty cents on the dollar on the amount of the bankrupt’s unsecured liabilities, unless the bankrupt satisfies the court that the fact that the assets are not of a value equal to fifty cents on the dollar on the amount of the bankrupt’s unsecured liabilities has arisen from circumstances for which the bankrupt cannot justly be held responsible.

[ 9 ] According to the claims register filed by the Trustee, the reason Mr. Couto’s assets are not of a value equal to fifty cents on the dollar on the amount of his unsecured liabilities is because of the Plaintiff Creditors’ claim in the civil action for $1 million. I do not accept the Trustee’s statement that Mr. Couto could not justly be held accountable for that fact. Mr. Couto, while drunk, drove a truck into the home of the Plaintiff Creditors. His voluntary, albeit intoxicated, conduct was the direct and proximate cause of the claim against him by the Plaintiff Creditors. Consequently, I find that the fact set out in section 173(1)(a) of the BIA has been proven on the evidence.

[ 10 ] Given the proof of a fact referred to in section 173, on an application for a discharge the court may refuse or suspend the discharge, or grant a conditional discharge: BIA , s. 172(2). Professor Roderick Wood, in Bankruptcy & Insolvency Law , observed that “the bankruptcy discharge is one of the primary mechanisms through which bankruptcy law attempts to provide for the economic rehabilitation of the debtor.” [1] In describing the policy underlying bankruptcy discharges, Professor Wood wrote:

In the case of the individual, the purpose of the bankruptcy discharge is to permit the honest but unfortunate debtor to reintegrate into the business life of the country as a useful citizen free from the crushing burden of his or her debts…

The Supreme Court of Canada in several of its decisions has expressly recognized that the economic rehabilitation of the debtor is one of the central objectives of bankruptcy law. This objective proceeds from the idea that a debtor who has acquired an unserviceable debt load is in a hopeless situation. Lacking any real prospect that the debts can ever be repaid, a debtor will become discouraged and will cease to participate in the economic life of society. The concern is not only with the well-being of the individual. There is recognition that unserviceable debt imposes hardship on the debtor’s family and also on society at large. A debtor who is given a fresh start through the release of past debts can once more become a productive member of society. [2]

The notion of the honest but unfortunate debtor encompasses not only losses resulting from misfortune, but also individuals whose financial distress is attributable to poor, but not dishonest, financial management. [3]

[ 11 ] Mr. Couto is young (24 years old), single and not supporting any dependent. In the past he has worked in construction, including landscaping; at present he is employed by a warehouse agency as a fork-lift operator. When he regains his driving privileges he hopes to pursue employment in home renovation. He currently earns about $400/week.

[ 12 ] Mr. Couto described the incident as an “accident” and stated that he understood judgments based on “accidents” do not survive bankruptcy. Although Mr. Couto told me that following the incident he has tried to become a better person and has stopped drinking, in his statement to the Court Mr. Couto made reference to his own “mental anguish from the whole ordeal” and thought that the Plaintiff Creditors “basically took advantage” of the incident to upgrade their home and “lavish themselves in all these luxuries” when they repaired their home. The extent of any damages suffered by the Plaintiff Creditors will be determined in their civil action, not this proceeding. It is unfortunate, however, that Mr. Couto now paints himself as standing in the position of a victim of the incident, rather than as the cause of the incident. Such an attitude does not augur well for his economic rehabilitation.

[ 13 ] Against that factual background, I think it worth recalling, in some detail, the approach taken by the Supreme Court of Canada in Kozack v. Richter , [4] a case involving an automobile accident in which the passenger in the car driven by the bankrupt suffered serious injuries. The facts of that case were summarized by the Court:

[The passenger] suffered serious head injuries in a collision with a train at a grade crossing in the City of Regina. Red lights were flashing and a warning bell was ringing and respondent was found fully responsible by reason of “wilful and wanton misconduct”. Damages were assessed by MacPherson J. at $12,909.03 plus costs taxed at $1,194. Respondent’s appeal from this judgment was unanimously dismissed. Thereupon, he made an assignment under the Bankruptcy Act and, in due course, applied for discharge.

At the discharge hearing the judge had suspended the discharge for a period of three months only. The Court of Appeal of Saskatchewan varied that order requiring the bankrupt driver to consent to judgment in the sum of $1,800 payable without interest by monthly payments of $50.

[ 14 ] In writing for the majority (4-1) reversing the appellate decision, Pigeon J. stated:

The net result of the order appealed from is obviously that the appellant will recover nothing. With respect, I cannot agree that this is in conformity with the proper principles to be applied in the exercise of the discretion vested in the courts by the provisions of the Bankruptcy Act (R.S.C. c. B-3) respecting discharge.

In the present case, respondent’s bankruptcy was precipitated by his condemnation to pay damages to the appellant. This being due to a finding of “wilful and wanton misconduct” on his part, certainly his financial predicament cannot be said to have arisen “from circumstances for which he cannot justly be held responsible”. The courts below did not ignore this provision. However, the sanction meted out in the first instance was purely nominal. In the Court of Appeal, respondent was in effect ordered to make payments that would hardly cover more than appellant’s costs in the trial court and in the Court of Appeal. Although respondent is a wage earner with a large family in very modest circumstances, I cannot agree that the proper application of the provisions above quoted should result in a plaintiff making no recovery for personal injuries caused by gross negligence. It would mean that motorists in respondent’s situation would be able to tell such a claimant: “There is no use suing me, if you lose you will have to pay the costs, if you win I will make an assignment in bankruptcy and you will get nothing”.

Counsel for the appellant has referred us to a number of cases dealing with analogous situations on applications for discharge. Among recent cases, the following may be noted: Rice v. Copeland in which the bankruptcy was similarly precipitated by a claim for damages arising out of a car accident which was said to be due to driving in an intoxicated condition. Dickson J. (as he then was) ordered the bankrupts to pay as a condition of their discharge 25% of their unsecured liabilities. He said (at p. 232):

In Re McIntosh, supra, Williams, C.J.Q.B. agreed with the judgment of Smily J. In re Buell ( 1954 342 (ON SC) , 35 C.B.R. 53, [1955] O.W.N. 421), that although the Bankruptcy Act is available to an insolvent not engaged in business, the Act was never intended to enable a judgment debtor to get rid of a judgment for damages and with no other purpose to serve than the convenience and comfort of the debtor.

In Sederoff v. Vigneault ( 23 C.B.R. 228, [1942] Que K.B. 44 ), the debtor had gone into bankruptcy to escape payment of a judgment in damages arising out of an automobile collision. The bankruptcy judge, in the exercise of his discretion, suspended the discharge until the debtor had paid 50 cents in the dollar on the amount of his unsecured liabilities. The court of appeal refused to interfere.

In the present case, I would not increase the amount of the monthly payments fixed by the Court of Appeal, but I would increase the sum to be paid to approximate 50 per cent of the total debt to the appellant without interest. [5]

[ 15 ] This Court has consistently applied the principles set out in the Kozack v. Richter case. For example, i n Webber (Re) [6] Steele J. stated:

I have considered the decision in Kozack v. Richter … I accept the principle in that decision as being applicable to the present case. That principle is that a person is not entitled to declare bankruptcy merely to avoid the payment of a debt arising out of a negligence…

[ 16 ] More recently my colleague, McDermid J., followed this approach in Re Hernandez , [7] a case in which those injured in an automobile accident caused by the bankrupt’s impaired driving obtained a judgment of approximately $485,000, together with about $30,000 in costs. McDermid J. granted a conditional discharge to the bankrupt, requiring him to pay the Trustee, over time, $50,000 for the benefit of his creditors.

[ 17 ] The difficulty in the present case is that the civil action commenced by the Plaintiff Creditors in June, 2009, some three years ago, has not yet proceeded to judgment. Although the Plaintiff Creditors are asserting a claim of $1 million, actually liability and damages have not yet been determined. Consequently, no real basis exists to consider what amount of payments might be appropriate to impose on Mr. Couto as a condition of any discharge.

[ 18 ] In these circumstances I find guidance in the decision of Saunders J. in Argue (Re) [8] . There the court also was faced with an application for a discharge where the bankrupt had been sued for damages in negligence. The trial had not taken place by the time the bankrupt applied for a discharge. Applying the principle in Kozack v. Richter , Saunders J. offered two options to counsel:

Mr. Meyer, with his usual candour, states that this is a situation where, because of the financial situation of the bankrupt, some financial obligation should be imposed as a condition of discharge. The difficulty is in quantifying that condition in light of what I have said up to this point. In the view that I take of the matter, I do not think that I should make any further comment. It seems to me I have two alternatives; the first is to adjourn the application until such time as the lawsuit has been determined; or second, to dismiss the application with the order that it be brought on again following the completion of the other legal proceedings. In the circumstances a dismissal would not, in my view, impose an unnecessary hardship on the bankrupt. Although he may have acted on advice, he is in a sense the author of the situation in which he now finds himself. [9]

In the result, Saunders J. adjourned the application to a fixed date to be spoken to.

[ 19 ] In the circumstances of this application I consider it appropriate to follow the approach taken in Argue (Re) . Here it is clear that Mr. Couto made an assignment in bankruptcy solely to avoid a debt arising out of a negligence claim. The law does not permit him to do so. I therefore will adjourn this application for a discharge until such time as the civil action brought by the Plaintiff Creditors is settled or adjudicated at a trial.

[ 20 ] That said, I was disappointed to learn from counsel for the Plaintiff Creditors that their action, which was commenced in June, 2009, has not even proceeded to examinations for discovery. The Plaintiff Creditors are claiming damages for injury to their property and personal injury. I do not know the nature of any personal injuries the plaintiffs allege they suffered as a result of the incident, but I saw no reference in the Motor Vehicle Accident Report to any person in the house suffering a physical injury. It would not be fair to Mr. Couto to adjourn this application without, at the same time, imposing an obligation on the Plaintiff Creditors to move their civil action along to trial in an expeditious fashion.

[ 21 ] Accordingly, I adjourn this application for a discharge until December 1, 2013, at which time Mr. Couto may bring this application back on for hearing before the Registrar or a judge. If the Plaintiff Creditors have not moved their action through to judgment by that time, they may encounter some difficulty in persuading the Registrar or judge to adjourn the application any further.

D. M. Brown J.

Date : May 22, 2012

[1] (Toronto: Irwin Law, 2009), p. 273.

[2] Ibid ., pp. 274-5.

[3] Ibid ., p. 275.

[4] 1973 166 (SCC) , [1974] S.C.R. 832.

[5] Ibid ., pp. 835-837.

[6] (1980), 35 C.B.R. (N.S.) 299 (H.C.J.), para. 5 .

[7] 2009 18223 (ON SC) .

[8] (1988), 70 C.B.R. (N.S.) 273 (H.C.J.) .

[9] Ibid ., pp. 275-6, para. 9.