SUPERIOR COURT OF JUSTICE IN BANKRUPTCY AND INSOLVENCY

ESTATE NO.: 31-1200520

HEARD: 20130320

RELEASED: 20130326

IN THE MATTER OF the Bankruptcy of

SHELDON MIADOVNIK, of the City of Toronto,

in the Province of Ontario

APPEARANCES: Harold Brief - for Trustee Fax 416-635-0462

Robert Klotz - for the Bankrupt Fax 416-360-4501

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

HEARD: March 20, 2013

REASONS FOR DECISION

I. Contested Discharge: Section 172.1

[1] Sheldon Miadovnik, (the "Bankrupt"), having filed for bankruptcy on May 1, 2009, makes application for his discharge from bankruptcy pursuant to the provisions of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA").

[2] Originally his former spouse opposed his discharge, but that opposition was withdrawn in April of 2011.

[3] His trustee in bankruptcy however has continued its opposition to his discharge. At the hearing before me, that opposition was based on two factors.

[4] The first was that the bankrupt failed to deliver to the Trustee, the full amount of $9,400, being the balance of funds in a TD Canada Trust bank account at the date of bankruptcy. A portion of that amount had been repaid prior to the hearing before me and there is no dispute from the bankrupt or his counsel that a condition with respect to the payment to the trustee of the outstanding balance of those funds is appropriate at this time.

[5] The remaining dispute relates to the bankrupt's Registered Retirement Savings Plan.

[6] The bankrupt has the distinction of having two written decisions relating to his RRSP. Registrar Nettie addressed claims by the spouse to a portion of the RRSP in a decision made in 2011. I now come to addressing the proper disposition of a portion of the funds still remaining in the Bankrupt's RRSP.

II. RRSP Treatment under BIA

[7] The trustee's supplementary report sets out the grounds of his opposition in these terms:

"On the Bankrupt's Statement of Affairs he disclosed contributing $15,000 to his RRSP within 12 months of the date of bankruptcy. Contributions made to an RRSP within 12 months of filing an assignment are not exempt property pursuant to section 67 (1) (b.3) of the Bankruptcy and Insolvency Act."

[8] Part IV of the BIA deals with "Property of the Bankrupt". The operative provisions in section 67 that I am required to consider today (with my emphasis) read as follows:

67. (1) The property of a bankrupt divisible among his creditors shall not comprise

(a) property held by the bankrupt in trust for any other person;

(b) any property that as against the bankrupt is exempt from execution or seizure under any laws applicable in the province within which the property is situated and within which the bankrupt resides;

... or

(b.3) without restricting the generality of paragraph (b), property in a registered retirement savings plan or a registered retirement income fund, as those expressions are defined in the Income Tax Act, or in any prescribed plan, other than property contributed to any such plan or fund in the 12 months before the date of bankruptcy.

[9] As noted above, the bankrupt filed for bankruptcy on May 1, 2009. His RRSP statements for the period ending May 31, 2009 reflected a market value of $115,896.56 in the account. As described below, an Order was made in the family law proceeding freezing the account and, in the interim, it would appear that the market value of the shares that were in the account has declined.

[10] At the hearing before me the trustee was prepared to consent to an order that, as of that date, the bankrupt could proceed to administer the remaining RRSP account but not withdraw any monies from it, pending a final determination on the issue presently before me.

III. History of Withdrawals

[11] In his May, 2010 reasons in Re Miadovnik, 69 C.B.R. (5th) 31; 2010 ONSC 3076, 85 R.F.L. (6th) 182; 2010 CarswellOnt 3516, Registrar Nettie set out some of the history relating to this RRSP:

4 Both parties agree that the Bankrupt, prior to his assignment, had been withdrawing cash from his RRSP, which asset is a significant part of the Wife's equalization claim against the Bankrupt in Family Court. The Wife ascribes to those withdrawals a characterization of waste, excess and an attempt to deplete assets available to satisfy her equalization claim. The Bankrupt alleges that he has had to dip into the RRSP to survive. While the Wife remains fully employed as a school teacher, the Bankrupt works as a salesman in the automotive industry, and indicates that his income has fallen dramatically in the last couple of years.

5 The Wife learned, in April, 2009, from the disclosure mandated in the Family Court, that the Bankrupt had been making significant withdrawals in 2007 and 2008 from his RRSP. This prompted her, on April 8, 2009, to appear through counsel before Perkins J, at Newmarket, for an emergency Order freezing the Bankrupt's RRSP. The Order was granted, and the motion brought back on for argument, on notice, before Rowsell J on April 22, 2009.

6 Both the Bankrupt and the Wife, and their respective counsel, appeared before Mr. Justice Rowsell who made an Order (the "Rowsell Order") that: "The [Bankrupt] is restrained from depleting his RRSP assets including his RRSP account at [TD Waterhouse], pending further order of this Court." [footnotes omitted throughout]

[12] Subsequently, as a result of a settlement in the matrimonial case a portion of the bankrupt's RRSP was "rolled over" to his spouse.

[13] But now comes before me is the question of the appropriate treatment of the $15,000 that was paid into the RRSP at the end of February 2009. This was just before the contribution deadline for the 2008 taxation year.

[14] At first blush based up on the provisions of section 67 quoted above this would seem to be a simple determination as the language of the section seems to be clear.

[15] Mr. Klotz on behalf of the bankrupt argues otherwise and raises difficult issues having regard to the full factual picture in this case.

IV. The Attempted Annulment

[16] The substantive motion brought on the wife's behalf before Registrar Nettie was for either an annulment of the May 1, 2009 assignment in bankruptcy or in the alternative an order lifting the stay imposed by section 69.3 of the BIA.

[17] Registrar Nettie's reasons continue with a description of the events closely following the April 22 hearing before Justice Rowsell:

7 In the endorsement of even date, His Honour indicates that the Wife has the right to move summarily for judgment on the outstanding issues.

8 Two days later, on April 24, 2009, counsel for the Wife wrote to the Bankrupt's matrimonial counsel and advised that her client would be proceeding summarily.

9 One week after that, on May 1, 2009, the Bankrupt made his assignment in bankruptcy in favour of the Trustee. One of the effects of that assignment was to trigger the stay under s. 69.3 BIA.

10 Another effect of the assignment was to vest in the Trustee all of the Bankrupt's interest in his assets, including his interest in the RRSP.

11 Of note in this regard is that both the Bankrupt's Statement of Affairs ("SOA") and the Trustee's s. 170 BIA report disclose the RRSP as being comprised of two components. That is to say that there is shown the amount of the RRSP which is exempt from division amongst the creditors, and the amount of the RRSP which is not so exempt. This is as pursuant to s. 67(1) (b.3) BIA. The respective values ascribed to those two components of the RRSP are that $102,000.00 is claimed as exempt while $15,000.00 is indicated to not be exempt, as having been the amount of contributions to the RRSP in the 12 months preceding the assignment in bankruptcy. [my emphasis]

[18] Registrar Nettie went on to consider in detail whether or not he had jurisdiction to address the claim for an annulment and concluded as follows:

34 It should go without saying that the remaining ground, whether the assignment itself is an abuse of process by the Bankrupt is a consideration of process and by definition one of procedure.

35 For these reasons, I find that all of the considerations required to be canvassed on a motion to annul under s. 181 BIA are ones of practice and procedure in the Bankruptcy Court, and not ones of substantive rights. I find that a Registrar has originating jurisdiction to hear such a motion under s. 192(1) (k) BIA.

[19] Having determined that he had jurisdiction Registrar Nettie then turned his mind to the question of whether or not to grant an annulment. He opened his consideration with the following assessment of the evidence before him:

36 The test, from Wale, is set out above. On the facts, I find no evidence that the Bankrupt is not insolvent. He declared debts of $259,101.00 to four creditors, including the Wife. The Wife's debt is only 1/3 of his total debts. The Bankrupt's evidence is that he has had to encroach on his RRSP to make ends meet financially, and that when he was faced with the Rowsell Order, effectively4 ending his recourse to this asset to pay his debts, he was hopelessly insolvent. I find that to be the case, and do not find him to have made the assignment, per se, for any fraudulent purposes. In coming to this conclusion, while I have been guided by my finding that he was hopelessly insolvent (and that Wale does concur that assignment to defeat creditors is not necessarily invalid), I have also considered the timeline leading up to the assignment. That said, I still conclude that the Bankrupt was simply overcome by his hopeless insolvency, and made the assignment.

37 Certainly, the Bankruptcy Court would be hard pressed to criticize a hopeless insolvent for making an assignment, and turning over his assets, and surplus income, to a trustee for proper division amongst creditors in accordance with the scheme of the BIA. Far too many debtors wait too long, only to find themselves later criticised by trustees, creditors and the Court for doing so. Continuing to trade when insolvent is a fact under s. 173 BIA precluding an absolute discharge.

[20] For the purposes of these reasons, I have omitted portions of the analysis made by my predecessor. However, because of certain apparent holding made by him in the course of coming to his conclusion that the bankruptcy ought not to be annulled, I have set out the following paragraphs (my emphasis):

41 However, I am mindful that the Rowsell Order was made pursuant to the Family Law Act, R.S.O. 1990, c. F.3 ("FLA") and the Family Rules. Thus, I find myself agreeing with Mr. Klotz that Neustaedter and Ali are informative. Those cases indicate that a bankruptcy assignment is not a disposition of a matrimonial property such as to require spousal consent under our present FLA. If such an assignment is not a disposition for the purposes of the FLA, then I am hard pressed to conclude that it is a disposition (and by extension a depletion) for the purposes of an Order made under that Act and the rules of the Family Court charged with interpreting and applying that Act.

42 In coming to this conclusion, I have also considered the issue in Blaxland as to whether or not the bankruptcy assignment causes the Wife to be any worse off.

43 At first blush, it would appear that if a $117,000.00 RRSP is ordered to be not depleted so that it stands available for the Family Court to attach any equalization claim of the Wife's to, then an act which effects a transfer of interest such that $15,000.00 becomes available for not only the Wife but the approximately $160,000.00 in other creditors as well, would cause the Wife to be worse off by approximately 2/3 of the $15,000.00.

44 That conclusion would be wrong. In fact, the Wife's position is bettered by the assignment.

45 As the law in Ontario now stands, while the assignment under the BIA operates to make $15,000.00 available to the unsecured creditors, it exempts $102,000.00 from those creditors. Without the assignment, the RRSP could have been seized by any judgment creditor, and distributed under the provincial Executions Act, in its entirety. The Bankrupt had been ordered not to deplete it. It had not been frozen, or ordered paid in to the credit of the proceedings. Since case law under s. 69.4 BIA allows for an Order lifting the stay, and declaring that the Wife's claim against the exempt assets in the bankruptcy may continue, without regard to any subsequent discharge of the Bankrupt, in the circumstances, the Wife's position is bettered as she can claim against the exempt $102,000.00 portion of the RRSP, while the other creditors cannot.

[21] Registrar Nettie, however, did determine to lift the stay that would otherwise impact upon the matrimonial matter and that ultimately led to the resolution of the wife's claim to part of the RRSP funds.

V. The Missing Withdrawal Evidence before Registrar Nettie

[22] Against this background I come to the evidence that was presented before me. I am satisfied that evidence of the specific payment timing information with respect to the $15,000 contribution made regarding the 2008 tax year at the end of February 2009 and the subsequent withdrawals do not appear to have been presented before Registrar Nettie.

[23] Clearly the highlighted comments in the extract from his reasons are directed to the "usual" situation. I find the additional evidence makes this rather, an unusual situation.

[24] The evidence before me is clear that, that in the 12 months prior to declaring bankruptcy the bankrupt had been taking out about $5000 per month from his RRSP, as described by Registrar Nettie above, in paragraph 36 of his reasons.

[25] The most common amount of withdrawal was $4476.38 together with approximately 10% on account of required tax payable on the total withdrawal, which amounted to $497.37.

[26] All those withdrawals were subject to taxation. Many of those withdrawals were subject to taxation as part of the filing of the 2008 income tax return. The key issue before me flows from the sum of $15,000 contributed on February 24, 2009.

[27] By making that contribution the bankrupt was entitled to a $15,000 credit on his income tax return for 2008. However on March 10, 2009 he withdrew $4500 plus applicable tax. On both March 26 and April 2, he again withdrew $4476.38, together with the applicable withholding amounts being remitted to the taxing authorities.

[28] As a consequence, prior to his May 1, 2009 filing for bankruptcy, Mr Miadovnik contributed $15,000 to his RRSP and then withdrew approximately $15,000, in three tranches, within the next month or so.

[29] The Bankrupt's counsel therefore argues that it is inappropriate for the trustee to claim that $15,000 of the RRSP is available to the other creditors as the money was not in the RRSP as at the date of bankruptcy.

[30] A related problem that I have to face is whether or not the concept of "First In, First Out" or "Last In, First Out" is more appropriate in determining how to address the flow of these funds.

[31] Put another way, were the funds withdrawn shortly before the bankruptcy, to be treated as funds deposited outside the statutory twelve month period, or within it?

[32] As well I am mindful that the trustee is seeking to recover $9800 which was the amount apparently in the bankrupt bank account as of the date of bankruptcy.

[33] I have based my decision on a less complex theoretical example. Assume a lump sum of $15,000 is put into a new RRSP and then $15,000 is withdrawn from the RRSP the next week with the effect of postponing the taxation of the sum of $15,000 for a further year. The $15000 remains in the individual's bank account at the date he subsequently files for bankruptcy. Is it fair or appropriate that the sum of $15,000 ought to be paid to the trustee over and above the cash that was in the bank account?

[34] In my view, such a conclusion is clearly unfair. I do not feel constrained by Registrar Nettie's reasons wherein he referred to the $15,000 funds being "available to the creditors".

[35] On my reading of his reasons I do not conclude that he has already decided this issue as between these two parties. The right to the $15,000 was not before him specifically and as a consequence I regard any apparent conclusions by him on this issue as obiter dicta.

VI. Conclusion

[36] In coming to my conclusion, I have considered the argument of Mr. Klotz that the terms of subsection 67 (1) (b.3) ought to be interpreted as meaning that the property of a bankrupt divisible among his creditors should be interpreted as meaning property that was still in the bankrupt's possession as of the date of bankruptcy and still in his RRSP.

[37] In my view it makes no sense for property that is no longer in the RRSP to be considered "property of the bankrupt" and that the only reasonable interpretation of subsection (b.3) is that the phrase "property in a registered retirement savings plan" must relate to property that still has to be in that registered retirement savings plan so as to give meaning to the word "in".

[38] Is the phrase "other than property contributed to any such plan or fund in the 12 months prior to before the date of bankruptcy" sufficient to permit tracing of funds removed after they were deposited in the 12 months prior to the date of bankruptcy after the funds have subsequently been withdrawn?

[39] Taking a somewhat easier case, assume $15,000 was put into a brand-new RRSP on February 28 and then withdrawn on March 7 so as to obtain a one-year deferral on the taxation on $15,000 of otherwise taxable income. If the bankrupt were then to file for bankruptcy on May 1, when he had an "empty" RRSP, would the monies that were no longer in the RRSP still constitute "property in a registered savings plan"?

[40] Is the protection granted to older contributions to an RRSP only to be extended to any monies still in the RRSP?

[41] I conclude that only monies deposited in the twelve month period and still in it at the date of bankruptcy lose the protection granted generally to RRSPs.

[42] Considering the policy reasons for this protection as discussed by Registrar Nettie provide a receipt useful reflection. It seems to me that we want to encourage people to put money into savings accounts for their retirement. To the extent the provincial legislation protects such monies, creditors ought to be taken as recognizing that RRSP funds will be perhaps inaccessible in the event of a default on other loans.

[43] Conversely, we ought not to allow a debtor who is about to go into bankruptcy to use up large amounts of RRSP eligibility in order to deprive creditors of assets that would otherwise be available to satisfy their claims rather than allowing those funds to be protected within the RRSP ring-fence.

[44] Moreover, it seems unfair in the above scenario for the bankrupt to be liable for the $15,000 removed prior to bankruptcy and, as well, as argued by the trustee in this case, for the monies held outside the RRSP in a bank account.

[45] If the bankrupt had simply removed the money from the RRSP and put it in his bank account, the result of the trustee's position before me would be that the Bankrupt would be required to make a payment of $30,000 which surely is not the intent of this provision of the BIA.

[46] Once again examining the applicable BIA provision I conclude that the section establishes a precondition of an availability of recent RRSP contributions. That is that the funds still be in the registered plan. My reading of the intent of the provision is thus:

The property of a bankrupt divisible among his creditors shall not comprise

(b.3) without restricting the generality of paragraph (b), property in a registered retirement savings plan or a registered retirement income fund, as those expressions are defined in the Income Tax Act, or in any prescribed plan, other than property [still in the plan] contributed to any such plan or fund in the 12 months before the date of bankruptcy,

[47] However, this does not resolve all the issues before me. Were the funds withdrawn "old" or "new" money?

[48] No cases were cited to be on the appropriate resolution of this issue.

[49] Given the history of withdrawals and the obvious tax planning element involved, it is my view that LIFO should apply and the funds removed, thus be regarded as withdrawals of the most recent contributions.

[50] Otherwise, I was tempted to reflect the proportion of the total RRSP funds on deposit that the $15,000 constituted and to then require that portion to be paid to the trustee. Upon reflection, even that alternative, did not seem to be justified in this case.

VII. Disposition

[51] In accordance with his consent, the bankrupt is granted a discharge from bankruptcy, conditional upon the balance of the $9,400 sum, still outstanding being paid to the trustee.

[52] Upon that payment being made, the Trustee shall release and return control of the RRSP account to Mr. Miadovnik.

VIII. Costs.

[53] This is a case where the issue appears not to have been addressed in earlier cases involving other parties. Here the comments in the decision of Registrar Nettie with respect to this specific RRSP would almost require the trustee to assert the argument made before me.

[54] My determination on the source of the funds withdrawn gives a benefit to the bankrupt on what I regarded as a "close call". Given that finding, and the apparent novelty of this issue, I make no order as to costs.

Master D. E. Short

Registrar in Bankruptcy

March 26, 2012

DS/ B12