SUPERIOR COURT OF JUSTICE – ONTARIO

(COMMERCIAL LIST)

COURT FILE NO.: 31-1362430

DATE: 20130626

IN THE MATER OF THE BANKRUPTCY AND INSOLVENCY ACT, R.S.C. 1985, c. B-3, AS AMENDED

AND

IN THE MATTER OF THE BANKRUPTCY OF IBRAHIM ASLAN OF THE TOWN OF RICHMOND HILL, IN THE PROVINCE OF ONTARIO, SELF EMPLOYED

BEFORE: C.L. CAMPBELL J.

COUNSEL:
Sean N. Zeitz, for the Trustee

Alfred S. Schorr, for Nezahat Aslan

HEARD: June 3, 2013

ENDORSEMENT

[1] The issue raised on this motion by Ms Aslan, the divorced spouse of the bankrupt, is whether and to what extent she is entitled to pursue a claim in the bankruptcy of her former husband.

[2] The claim of Ms Aslan is in essence that in order to set aside a default judgment obtained by the Royal Bank as against her, as guarantor of a loan obtained by her former husband and his company Sky Wall Systems Inc., she entered into a settlement with the bank by application of her part of insurance proceeds from a fire at the matrimonial home.

[3] The sum accepted by RBC from her totaled $172,000 of which $145,000 was in respect of the claim. Ms Aslan claims the amount of $145,000.00 in her husband’s bankruptcy by way of indemnity.

[4] Ms Aslan takes the position in the affidavit filed and in court cross examination that her signature on the RBC’s guarantee was directed by her husband at his insistence for the purpose of his business.

[5] In essence, her position is that her husband made her sign on the basis that she had to do so for his business and that the nature of the guarantee was not explained to her by anyone nor did she sign willingly beyond being told that it was for the business and that she did not know or understand that it involved personal liability.

[6] The position of the Trustee is that to allow Ms Aslan’s proof of claim for indemnity to proceed in the bankruptcy would amount to double proof.

[7] The trustee urges that Ms Aslan was put in a position of personal vulnerability but willingly signed the documents and in effect not caring whether she understood and agreed to sign the guarantee.

[8] It is not necessary for a finding to be made on the level of understanding and the degree of agreement of Ms Aslan to being a guarantor.

[9] I go no further than to note that she had during her marriage signed those kinds of documents for her husband’s business, when it had been profitable, as directed by her husband or as lawyers told her to do on his direction.

[10] The legal issue is whether Ms Aslan is entitled to advance a proof of claim in her husband’s bankruptcy for the amount that is in effect her payment to RBC on behalf of the guarantee.

[11] Even assuming Ms Aslan had some understanding of the documents which she signed I would be reluctant, given her lack of understanding of the English language, to conclude that she had full understanding.

[12] Having heard from her son Cansel Aslan who is completely fluent in the English language I accept that the signing was with considerable reluctance and led to heated argument between then spouses.

[13] The problem for Ms Aslan’s position is that RBC has not recovered in the bankruptcy on its judgment beyond what it received from Ms Aslan’s share of the insurance proceeds.

[14] RBC is only entitled to recover on its debt of approximately $400,000 once; but it is entitled to recover in the bankruptcy ahead of any claim of Ms Aslan.

[15] There is a long-standing Rule against Double Proof in bankruptcy. The reason for this is that there is to be only one dividend in respect of one is in substance the same debt even though there may be two separate contacts in order to actually permit pari passu distribution of assets on a pro rata basis among unsecured creditors.

[16] In Olympia & York Developments (Re) [1998] O. J. No. 4903 Blair J. when he was of this Court and dealing with what was said to be related corporate creditor claims, summarized the Rule Against Double Proof:

23 The rule against double proof in bankruptcy matters prohibits two proofs of claims in the same estate for the same debt. That the two claims may be based on separate contracts is of no matter, provided they are in respect of the same debt. Sir G. Mellish L.J. put the concept very succinctly in Re Oriental Commercial Bank; Ex parte European Ban (1871), 7 L.R. Ch. App.99, where he stated (at pp. 103-104):

[T]he true principle is, that there is only to be one dividend in respect of what is in substance the same debt, although there may be two separate contracts. (Emphasis added)

24 See also, Barclays Bank Ltd. v. TOSG Trust Fund Ltd., [1984] 1 All E.R. 628 (C.A.), at pp. 636-637, affirmed on different grounds [1984] 1 All E.R. 1060 (H.L.); Houlden & Morawetz, Bankruptcy and Insolvency Law of Canada 3rd ed., at paragraph G-40; Re Melton; Milk v. Towers [1918] 1 Ch 37, at p.47.

25 There is a reason for this rule. It was developed to ensure the pari passu distribution of the assets of the bankrupt on a pro rata basis amongst the unsecured creditors -- the central tenet of bankruptcy legislation. In the words of Oliver L.J. in Barclays Bank, supra, at p. 653:

653 …The purpose of the rule is, of course, to ensure pari passu distribution of the assets comprised in the estate of an insolvent in pro rata discharge of his liabilities. The payment of more than one dividend in respect of what is in substance the same debt would give the relevant proving creditors a share of the available assets larger than the share properly attributable to the debt in question.

26 The Parties do not disagree as to the foregoing statement of the rule against double proof, or as to the rationale underlying it. They simply disagree as to its application in the circumstances of this case.

• Whether or not a “double proof” has been lodged with respect to what is in substance the same debt is a matter to be determined on the facts of each individual case.

• At the same time, however, the courts should strive to give effect to the ethic of pari passu distribution and to the fundamental underlying principle of justice as between all creditors. Balancing these sometimes competing principles calls for a consideration of the true nature of the transaction, and the relationship between, and the presumed common intention of the parties.

[17] In another case from the same year, Browne J. of this court in Maple City Ford Sales (1986) Ltd. (Re-) 1998 14833 (ON SC), [1998] 39 OR 3rd 702 at p. 708 concluded in the case before him that the debts in question were separate from each other and therefore the rule against double proof did not apply:

In Re Coughlin & Co. (1923), 1923 383 (MB CA), 4 C.B.R. 294, [1923] 4 D.L.R. 971 (Man. C.A.), the headnote includes the following:

A surety for the whole debt with a limit on his liability is a creditor under sec. 44 of the Bankruptcy Act after he has paid the amount of the limited liability; but he may nevertheless be postponed in ranking on the assets by reason of the rule against double proofs so that his claim shall not rank in opposition to the claim of the creditor whose debt was the subject of the guarantee but who was not paid in full because of the stipulated limit to the surety’s liability.

At p. 299 the court provides as follows:

It is to be noted that it is the “debt” which is provable. There may be several claimants in respect of the “debt,” but there is only one debt, and double proof in respect to it is not permitted.

The respondent bank’s position is that where there is a guarantee for a whole debt even if limited in amount the guarantor cannot prove a claim in bankruptcy until the time that the principal creditor is paid in full.

The principles involved for the above position were considered by Urquhart J. in McCrie v. Gray (1940), 22 C.B.R. 390 (Ont.S.C.). On the facts of this case the creditor took the position that he was liable as a surety to a bank. The bank had not filed a proof in the bankruptcy estate nor had it made a claim against the surety but a claim against the surety was anticipated. Urquhart J. comments at p. 394 as follows:

…if the Bank of Montreal makes a claim upon the estate and receives its dividend, it is obvious that the creditor, even though he must pay the balance, cannot succeed in a claim against the estate. For example, assuming that twenty cents on the dollar be paid, if the Bank of Montreal makes its claim and receives twenty per cent, and then claims against the creditor for the remaining eighty per cent, the creditor could not rank against the estate for the remainder and get twenty per cent of the eighty per cent because that would have the effect of this debt bearing a dividend of close to forty per cent at any rate considerably more than other creditors’ claims would bear. There cannot be two claims for the one debt. In re Coughlin & Co., 1923 383 (MB CA), 4 C.B.R. 294, [1923] 3 W.W.R. 1177, 33 Man. R. 499, 3 Can. Abr. 779:

If, however, the Bank of Montreal does not see fit to claim for its debt but compels payment of the debt from the surety the applicant creditor is subrogated to the rights of the Bank of Montreal and can make a claim therefor.

[18] Here there is only one debt that to RBC, not two as urged by Mr. Schorr even though the guarantee was a separate contract.

[19] For the above reason I conclude that Ms Aslan is not entitled to claim in the bankruptcy of her husband. This does not extinguish her claim to indemnity from her husband however since in some circumstances it will survive bankruptcy. Ms Aslan can pursue her former husband following discharge should she choose.

[20] The Mercantile Law Amendment Act, RSO 1990, c M. 10 provides in part as follows:

2(1) Right of sureties paying the principal debt

Every person who, being surety for the debt or duty of another or being liable with another for any debt or duty, pays the debt or performs the duty is entitled to have assigned to the person or to a trustee for the person every judgment, specialty or other security that is held by the creditor in respect of the debt or duty, whether the judgment, specialty or other security is or is not deemed at law to have been satisfied by the payment of the debt or the performance of the duty.

2(3) No co-surety is entitled to recover from any other co-surety more than the just properties to which as between themselves, the last-mentioned person is justly liable.

[21] In the Draft Endorsement in this matter dated June 13, 2013 I overlooked one aspect of the appeal of Ms Aslan dealing with a guarantee of debt due and fully recovered by BDC.

[22] Mrs. Aslan paid the sum of $45,350.22 in respect of the judgment obtained against her relating to her joint and several guarantee of the Bankrupts’ Corporation’s obligation to BDC.

[23] The submission of the Trustee is that only one half of the amount paid by Mrs. Aslan as a joint and several guarantor is recoverable in the bankruptcy of Mr. Aslan.

[24] Unlike the situation with RBC, here BDC has received its debt. The same issue of double proof does not arise.

[25] In my view Mrs. Aslan should be entitled to claim in the bankruptcy for the entire amount of what she paid.

[26] The second issue on the motion dealt with allocation of the household assets which were destroyed in the fire. The position of Ms Aslan is that when she and her husband separated he agreed as part of the matrimonial settlement to take his own personal belongings and live in the basement of the matrimonial home until he could find you accommodation and the remaining assets would become her property. The fire that destroyed the matrimonial home occurred before his move could take place.

[27] The Trustee takes the position that in the insurance litigation, evaluation of the household contents claim of Mr. and Ms Aslan was put forward on any 50/50 basis by them. While that is one piece of evidence I preferred the evidence of Ms Aslan and her son that the husband had agreed that she would stay in the house with the contents which she did until the fire destroyed it all.

[28] In the circumstances, I conclude that the Trustee is not entitled to recover from Ms Aslan in respect of the contents nor should this Court give any leave that would permit the Trustee to review open the matrimonial proceedings as between Mr. and Ms Aslan. The Trustee’s claim for relief on this ground will be dismissed.

[29] In light of the conclusion I have reached I would not think costs are appropriate unless there are offers to settle of which I have not been made aware or any other considerations that counsel conclude are appropriate to be taken into account, in which case Counsel may make written submissions within the next two weeks.

C.L. CAMPBELL J.

Date: June 25, 2013