SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: IN THE MATTER OF THE BANKRUPTCY OF Michael Katz

BEFORE: D. M. Brown J.

COUNSEL: F. Tayar, for the Bankrupt, Michael Katz
B. Jaeger, for the Trustee, Sheriff & Sole Inc.
B. Morris, for an opposing creditor, Joe Morra
H. Fulchini, opposing creditor in person

HEARD: July 2, 3 and 4, 2013.

REASONS FOR DECISION

I. Discharge hearing under the Bankruptcy and Insolvency Act

1By receiving order made May 27, 2004, Michael Katz was adjudged bankrupt. Segal & Partners Inc., now Sheriff & Sole Inc., has acted as the trustee in bankruptcy. Katz is 46 years old, married, with three children. This is his first bankruptcy. Prior to his bankruptcy Katz had owned and operated several residential home development companies in the Toronto area.

2The Trustee has admitted approximately $10 million in claims against the estate: $21,570.55 in secured claims and $9,612,144.52 in unsecured claims.

II. Grounds of opposition

3Seven creditors filed notices of opposition to the discharge. As the ground for their opposition each creditor relied on the fact set out in section 173(1)(a) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 – i.e. the assets of the bankrupt were not of a value equal to 50 cents on the dollar on the amount of the bankrupt’s unsecured liabilities.

4The Trustee had initially opposed the bankrupt’s discharge on the ground that he had failed to provide a sworn statement of affairs. By the time of the Trustee’s 2008 report it had withdrawn its opposition given that the bankrupt finally had provided a statement. However, in its subsequent reports the Trustee consistently recommended that the Court impose a conditional discharge on Katz.

5In its final June 25, 2013 Report the Trustee reported that: (i) Katz had failed to fully account for and disclose his income sources, level of expenses incurred and the standard of living he had carried out since the date of his bankruptcy; (ii) Katz had failed to account for and disclose his assets as at the date of bankruptcy; and, (iii) the cause of his bankruptcy in part might have been due to a drug addiction problem and unjustifiable extravagance in living.

6At the hearing the Trustee focused on Katz’s failure to account for and disclose his assets as at the date of bankruptcy: BIA s. 173(1)(d).

III. History of the administration of the Estate

7Nine years elapsed from the date of bankruptcy to the holding of the discharge hearing. The various reports filed by the Trustee disclosed the reasons for the delay.

A. Trustee’s July 21, 2005 Report

8The Trustee’s July 21, 2005 Report disclosed that the bankrupt, Mr. Katz, had not yet provided the Trustee with a sworn Statement of Affairs. As well, Katz’s wife had asserted a property claim to certain monies in a bank account, which the Trustee had disallowed; Mrs. Katz appealed the disallowance. The parties ultimately settled the claim.

9Katz also disputed that he had owned the house at 1850 Mount Pleasant Road, Toronto; his mother, Roslyn Fingold, claimed to be the owner. The Trustee commenced, then settled, litigation against the bankrupt’s mother regarding the ownership of the house under which the estate was recognized as the owner and was to receive $120,000 from the net sale proceeds of the house. Also, the bankrupt was asserting that he held shares in two companies, Edgecastle Holdings Inc. and Portedge Holdings Inc., in trust for two numbered companies and the Trustee was investigating the matter. Finally, a creditor informed the Trustee that Katz was telling people that he was receiving income from a construction company, while Katz was reporting to the Trustee that he was unemployed.

10The bankrupt’s discharge hearing was held on July 22, 2005 and the court issued a “no order” endorsement. Katz then made his own application for a discharge order which was scheduled for April 9, 2008.

B. Trustee’s April 8, 2008 Report

11As disclosed in the Trustee’s April 8, 2008 Report, the bankrupt finally filed a Statement of Affairs on October 26, 2007, more than three years after the date of his bankruptcy. At that time the bankrupt had not responded to questions from the Trustee inquiring into how Katz had spent his time since the date of the bankruptcy order, especially in light of Katz’s disclosure on an October, 2007 statement of income and expense that he had been earning $3,000/month since July, 2007.

12Katz’s monthly expenses had risen from $750 on his June, 2004 statement to $4,413 on his October, 2007 statement. The bankrupt’s income and expense statements for that period initially noted, in June, 2004, “all expenses paid by my mother”, and by October, 2007, when Katz was declaring an income of $4,460/month, he recorded that the expenses beyond the disclosed $4,413/month were paid directly by his “family members”.

13At that point of time the Trustee could not determine whether the bankrupt was receiving income from a family trust. That was an issue because in the year before his bankruptcy Katz had represented to a financial institution, on a net worth statement, that he was receiving $144,000 per year from a family trust, in addition to employment income of $1 million.

14At the April 9, 2008 discharge hearing, the Registrar adjourned the hearing in order to “allow the Bankrupt time to complete his duties, including satisfying the Trustee as to income and other financial disclosure”.

C. Trustee’s August 28, 2008 Report

15In August, 2008, the bankrupt provided some information in response to the Trustee’s inquiries. The Trustee reported that based on its review of the information, the cause of the bankrupt’s financial difficulties remained unresolved.

16The Trustee noted that Katz had not provided income and expense statements for the period November, 2007 until June, 2008. A July, 2008 statement recorded income of $735/month from social assistance. The Trustee requested that Katz re-submit his income and expense statements for the period of his bankruptcy identifying those expenses which had been paid by family members; Katz refused to do so. That lead the Trustee to report:

The Trustee’s position is that Mr. Katz has not provided the requested information, which is relevant to Katz’s standard of living and his efforts to rehabilitate his spending habits following the date of his bankruptcy.

17The Trustee reported that according to information provided by Katz’s lawyer, from March, 2004 until July, 2007 Katz had “continued with his drug rehabilitation and general therapy” and had “experienced marital difficulties”, although he had since reconciled with his wife.

18The Trustee reported that Katz had worked with Walden Design Build for one year commencing in July, 2007, and subsequently was looking for new work. The Trustee was satisfied with the bankrupt’s response regarding his employment during the bankruptcy.

19However, the Trustee was still not satisfied with information Katz had provided to explain the high level of assets he had disclosed on net worth statements prior to his bankruptcy, while initially taking the position on his bankruptcy that he did not own any assets, save for his house. The Trustee recommended that the bankrupt be discharged on the condition that he provided a meaningful payment to the estate in the minimum amount of $100,000.

20The bankrupt’s scheduled September 3, 2008 discharge hearing did not proceed at that time.

D. Trustee’s July 20, 2010 Report

21The Trustee reported that Katz had provided further information to it. The Trustee possessed conflicting information as to whether the bankrupt had advanced all of his personal funds into his businesses. Notwithstanding the additional information provided by the bankrupt, the Trustee remained unsatisfied in respect of Katz’s assertion that he had used all his personal funds for the businesses.

22Katz ultimately provided income and expense statements for missing periods of time, but continued to refuse to provide statements which identified expenses paid for by his family members. The Trustee also remained unsatisfied about Katz’s explanation of what had happened to his pre-bankruptcy assets.

23The Trustee reported that: (i) Katz had failed to fully account for and disclose his income sources, level of expenses incurred and the standard of living he had carried out since the date of his bankruptcy; (ii) Katz had failed to account for and disclose his assets as at the date of bankruptcy; and, (iii) the cause of his bankruptcy in part might have been due to a drug addiction problem and unjustifiable extravagance in living. The Trustee recommended that the bankrupt be discharged on the condition that he provided a meaningful payment to the estate in the minimum amount of $100,000.

24At the July 28, 2010 hearing Katz withdrew his application for a discharge, and the Registrar ordered the Official Receiver to conduct an examination of the bankrupt under BIA s. 161.

E. Trustee’s June 25, 2013 Report

25The Official Receiver examined the bankrupt on April 8, 2011 and reported that Katz was unemployed and had stopped working prior to 2010. His mother owned the corporation which owned the house in which his family was living, and his mother paid all his household expenses, including childcare expenses. His wife’s $2,000/month income was used to pay incidental expenses; his wife worked for his mother’s real estate company. When asked why his business debts were included in his personal bankruptcy, Katz replied: “I don’t know. These claims are from many years ago. I do not recall particulars without referring to documents.”

26The Trustee reported that the bankrupt had filed income and expense statements for the period July, 2010 until May, 2013. The Trustee stated that the bankrupt did not have surplus income.

27The Trustee repeated the recommendations contained in its previous report, but it did not specify the amount of the “meaningful payment” which should be ordered as a condition of discharge.

D. Issue as to the admissibility of paragraph 12 of the Trustee’s June 25, 2013 Report

28Paragraph 12 of the Trustee’s June 25, 2013 Report described the events leading up to Katz signing a letter agreement regarding the terms upon which his discharge would be granted. Mr. Tayar, the bankrupt’s counsel, submitted that the Court should not take that letter agreement into account because Katz had dealt directly with the Trustee in reaching that agreement at a time when the Trustee, or at least Trustee’s counsel, knew that Katz was represented by counsel.

29I ruled at the hearing that I would not take the contents of paragraph 12 into account.

IV. Positions of the parties

30Katz submitted that he should be granted an absolute discharge. The Trustee and opposing creditors submitted that his discharge should be made conditional upon the payment of an amount of money to the estate – the Trustee recommended a payment in the range of $150,000 to $300,000; one opposing creditor, Joe Morra, submitted that the payment should be $2 million.

31The differences between the parties turned on three main issues:

(i) Did the evidence establish the fact described in BIA s. 173(1)(a)? There is no dispute that the assets of the bankrupt are not equal in value to 50 cents on the dollar of the amount of the unsecured liabilities. The issue was whether the bankrupt had satisfied the court that that state of affairs “has arisen from circumstances for which the bankrupt cannot justly be held responsible”;

(ii) Had the bankrupt failed to account satisfactorily for any loss of assets or for any deficiency in assets to meet the bankrupt’s liabilities (BIA s. 173(1)(d))?

(iii) Should an unconditional discharge be granted where the bankrupt had elected not to pursue employment which would result in a higher personal income but, instead, was content to allow a wealthy family member to underwrite his on-going personal living expenses?

32In paragraph 15 of its June 25, 2013 Report the Trustee set out several conclusions it had reached as a result of its investigation into the bankrupt’s affairs and which, in the circumstances, had led it to recommend a conditional discharge: (i) Katz’s failure of account for and disclose income sources and level of expenses incurred; (ii) his failure to account for and disclose assets as at the date of bankruptcy; (iii) those failures had prevented the Trustee from fully determining the causes of the bankruptcy; and (iv) the cause of bankruptcy in part may have been due to the bankrupt’s personal problems (i.e. drug addiction) and unjustifiable extravagance in living.

33The bankrupt submitted that the Trustee could not rely on those conclusions to recommend a conditional discharge because earlier in the administration of the estate the Trustee had withdrawn its notice of opposition to discharge. I disagree. BIA s. 170(1) requires a trustee to prepare a report which includes a number of items, one of which is “any other fact, matter or circumstance that would justify the court in refusing an unconditional order of discharge”.¹ That statutory duty remains unchanged regardless of whether a trustee has filed a notice of opposition, and a trustee is entitled at the discharge hearing to put those facts before the court for its consideration.

V. First issue: From what circumstances did the bankruptcy arise? (BIA s. 173(1)(a))?

A. The issued framed: Trustee’s Reports and the bankrupt’s BIA s. 170 responses

34In his counsel’s letter of August 1, 2008, the bankrupt stated that the failure of his business had caused his insolvency, and the failure of his business had resulted from too much overhead and poor cost estimates, particularly in 2002 and 2003. Capital raised from lenders during that period of time carried high interest rates which exacerbated cash flow problems. Katz contended that he had invested almost all of his personal resources – cash, RRSP, stocks and bonds – into his businesses and had lost his capital, and he suggested that evidence of those advances was contained in the 60 to 70 bankers’ boxes of documents he had delivered to the Trustee. The letter concluded:

As it turned out, 2002 was a horrible year for Mr. Katz’ real estate development companies due to, amongst other factors, poor sales and lower than anticipated sale prices, high cost of funds and delay in project completion, thereby delaying closings.

Mr. Katz’ business ventures were funded by arm’s-length creditors and his mother, Roslyn Fingold, a residential real estate company owner. Katz did not appreciate that he was insolvent until his mother informed him that she would no longer fund his business operations and all other historical sources of financing were no longer willing to lend further funds.

35As reported in its August 28, 2008 Report, the Trustee learned from the former CFO of the bankrupt’s companies, Helen Fulchini, that Katz had not advanced to his companies personal funds from his RRSP, stocks or bonds. Fulchini informed that Trustee that (i) prior to July, 2001 the companies had suffered a large loss “due to huge management fees” taken by Katz and the other owner, Mr. Silverberg, and both had put the construction of their personal homes through the business; (ii) although she regarded Katz as “brilliant with his projects” and future estimated profits were expected to cover past losses, starting in January, 2003 Katz rarely came to the office, which had concerned staff and contractors, and “the rumors at this time was that he had a drug problem”; (iii) in the spring of 2003 Katz was taking large management fees out of the sale of each house; (iv) at which point Katz’s mother intervened, took over the running of the businesses and sold the three on-going development projects. Fulchini told the Trustee: “If Michael did not have his addiction, and if his family did not feel that they had to shut down Edgeport, Michael would not of (sic) been bankrupt now”.

36Katz, in his September 2, 2008 response to the Trustee under BIA s. 170(6), repeated that he had injected all of his personal assets into his companies and stated:

The statements made by Ms. Fulchini that Mr. Katz’ bankruptcy is caused by his drug addiction is without merit. Mr. Katz shall lead evidence on point during his evidence in chief during the discharge hearing…Mr. Katz vehemently denies Ms. Fulchini’s bald face assertion that his drug use caused, or even contributed to his insolvency…

He also contended that:

The cause of [his] insolvency was the issuance of the petition for a receiving order against him by Ms. Fulchini…in a misguided attempt to coerce…Fingold to pay them each monies alleged to be due and owing to them by Mr. Katz. Mr. Katz was active in his business and attempting to keep it running against considerable odds. The issuance of the petition was the death knell of Mr. Katz ability to raise funds.

37Nevertheless, in the August 1, 2008 letter from Katz’s lawyer to the Trustee, he had advised that from the date of the bankruptcy order until July, 2007 “Katz continued with his drug rehabilitation and general therapy”.

B. Evidence at the hearing

38In the years prior to his bankruptcy Katz had worked in the house building business, first with a partner, Jeffrey Silverberg, and then with his own companies. Katz testified that in the 2001 to 2004 time period his business plan was “to go big or go home”. He aggressively acquired five housing projects for small deposits and then tried to rely on pre-sales to keep the projects going. Ultimately his strategy failed. When asked on chief what caused his bankruptcy, Katz testified that he had to keep all the balls in the air and find the next fix to keep going, but his failure to keep lenders current started the ball rolling downhill. An injection of money by his mother failed to stop the decline and his mother began to power of sale properties over which she held security.

39Katz could not recall precisely what had happened on two of the last projects, Jefferson Forest and Edgecastle Holdings. On the latter project he testified that he was not doing that well physically.

40During his testimony Katz disputed some of the claims advanced by creditors which he previously had acknowledged in his signed statement of affairs.

41Katz testified that at the time of his bankruptcy he went into treatment for his cocaine addiction. He stated that the problem had started in 2002 or 2003. Initially in his evidence in chief Katz stated his drug use did have an impact on his business: although initially the drugs had given him confidence not to be pushed around, after a year he got to the point of heavy use and it was affecting his health. Later in his evidence in chief Katz contended that his addiction did not affect his ability to run the business prior to the bankruptcy. A February 10, 2004 separation agreement signed by Katz and his wife, Skye, recited that both of them were undergoing addiction rehabilitation.

42Helen Fulchini, the former CFO for Katz’s companies, testified that at the time Silverberg parted company with Katz the companies had a significant loss. Katz did not want to bankrupt the companies, so his step-father, David Fingold, was brought in to help out. Katz’s mother injected some funds to cover the costs of completing some projects and she became more involved in the businesses. Fulchini stated that Katz did not want to power of sale the various projects as his mother proposed; he wanted to build out the subdivisions so that the projects would pay-off everyone.

43Fulchini testified that someone had told her about Katz’s drug problem, but she had never seen it herself – “he was always antsy”. She did say that after Katz’s mother had stepped into the businesses, Katz had disappeared for about three months.

C. Analysis and conclusion

44The jurisprudence under BIA s. 173(1)(a) generally holds that for a bankrupt to be held responsible for his assets being less than 50 cents on the dollar of his unsecured debt there must be some element of culpability or blameworthiness, some recklessness or blind disregard by the bankrupt for his own financial well-being. Financial imprudence or incompetence usually do not rise to that level.²

45I conclude that the bankrupt has established that the reason his assets are less than 50 cents on the dollar of the amount of his unsecured liabilities arose from circumstances for which the bankrupt could not justly be held responsible. Katz engaged in an aggressive residential home development strategy, but the evidence suggested that he had some reasonable basis for thinking that strategy would work out. Katz obviously worked to keep the companies going, resisting his mother’s initial suggestion to power of sale the properties involved. Ultimately, her business judgment prevailed.

46Although the evidence certainly indicated that Katz had developed a heavy cocaine addiction in the year or two prior to his bankruptcy, Fulchini, his CFO, testified at the hearing that she had not seen any impact of the addiction on his operation of the company. Moreover, towards the end of the projects’ lives Katz’s mother and step-father had intervened to manage the situation, so this was not a circumstance where a bankrupt’s business folded because a drug addiction had prevented him from dealing with on-going business issues.

VI. Second Issue: Has the bankrupt failed to account satisfactorily for any loss of assets or for any deficiency in assets to meet the bankrupt’s liabilities (BIA s. 173(1)(d))?

A. The issue framed: The Trustee’s Reports and the bankrupt’s BIA s. 170 responses

The net worth statements

47In its April 8, 2008 report the Trustee attached several net worth statements which the bankrupt had provided to financial institutions in the two or three years prior to his bankruptcy, including one dated January 9, 2003 to Firm Capital, just a little over one year prior to the date of bankruptcy.

48In that net worth statement Katz had reported the following personal assets:

Assets
Values listed by Katz

Cash
$100,000

RRSP
$17,000

Stocks and bonds
$200,000

House: 1850 Mount Pleasant (net)
$1,250,000

Condo: Lake Joseph (net)
$425,000

Car and boat
$250,000

On an April 15, 2000 statement of net worth given to another financial institution, Katz had identified two additional assets:

(i) A life insurance policy with a cash surrender value of $10,000;

(ii) His interests in the businesses which he valued at $1.228 million.

49On his Statement of Affairs Katz had stated that he had not disposed of or sold any property within five years of the initial bankruptcy event (i.e. since March 30, 1999), although in his lawyer’s letter of October 5, 2004 Katz had informed the Trustee he had sold shares in Port Edge Holding for a credit of $200,000. On two net worth statements Katz had recorded that he was receiving $12,000 per month from a “Family Trust”.

Trustee’s requests for information about the bankrupt’s assets

50By letter dated July 2, 2008 the Trustee asked Katz a number of questions concerning the assets listed on his net worth statements, including whether he still owned the asset and, if he did not, to whom the asset was sold, the amount realized on the sale and what had happened with the sale proceeds. The Trustee also asked to see a copy of the Family Trust agreement.

51Katz’s counsel responded by letter of August 1, 2008 by stating:

(i) All of Katz’s cash, RRSPs, stocks and bonds had been advanced by him to the companies he had controlled. Counsel did not offer any documentary evidence to support that assertion. He wrote that the numerous bankers boxes delivered to the Trustee “likely contained” evidence of those advances;

(ii) All the assets listed on the Firm Capital net worth statement “were the source of shareholder advances made by Mr. Katz to companies he was a shareholder of”;

(iii) There was no formal family trust agreement, nor was there any family trust.

The letter did not address the Lake Joseph condo, the car, boat or life insurance policy.

52Katz then provided a September 2, 2008 BIA s. 170(6) response in which he stated:

(i) He had owned the Lake Joseph property indirectly as the sole shareholder of MHK III Inc. He asserted that his mother subsequently bought the property from him and paid off encumbrances which exceeded the value of the property;

(ii) There was no family trust. The references on his net worth statements to monthly receipts of $12,000 referred to “gratuitous payments from his mother…for the express purpose of maintaining the Mt. Pleasant Road property and the Lake Joseph Condominium”; and,

(iii) The boats were repossessed by secured lenders upon Katz’s bankruptcy.

53In its July 20, 2010 Report the Trustee stated that it was not satisfied that Katz had accounted for pre-bankruptcy liquid assets of $317,000, Katz had not accounted for advances which he contended he had made to his companies, full disclosure had not been made about the equity in the Lake Joseph property and the flow of funds from its sale to the bankrupt’s mother, and full disclosure had not been made of the net equity in the boat and in the automobile. Katz had not addressed the latter asset in his September 2, 2008 statement.

54On his 2011 examination by the Official Receiver Katz stated that the Lake Joseph condo had been sold, he did not know if the life insurance policy was up-to-date, he had transferred title in a sea-doo to his wife prior to his bankruptcy, and a dirt bike which he owned had been stolen.

B. Evidence at the hearing

The Mount Pleasant house

55The Trustee reached a settlement on the house and received some of the proceeds of sale.

Cash and RRSPs

56At the hearing Katz testified that he had used his RRSP funds in his business, but he disputed the contention of his former CFO, Ms. Fulchini, that he had not. Fulchini testified that in the year prior to his bankruptcy Katz had not put any personal money into his companies, although he did remortgage the Lake Joseph property to generate some funds.

57The only other evidence filed regarding the RRSP was a February, 2000 ScotiaMcLeod statement for an account held in Katz’s name which recorded an RRSP worth at that time about $32,000. No statement closer to the date of bankruptcy was filed.

58Katz also testified that he all his cash went into his business.

Stocks and bonds

59On cross-examination Katz testified that his stocks and bonds probably were used up by his business.

Family trust

60Katz testified that he had never been the beneficiary of a family trust. When asked why he had recorded income from a family trust on his net worth statements, Katz stated that he had used the word “trust” incorrectly; in fact he had been the recipient of a monthly family allowance of $12,000 to pay for expenses related to the Mount Pleasant house. Under cross-examination Katz contended that he only learned recently what a family trust was and he did not know what the term meant when he had used it on his pre-bankruptcy net worth statements.

61I do not accept that explanation for a moment. Katz was an experienced businessman. The evidence showed that he used the term “Family Trust” on the net worth statements given to the financial institutions in order to inflate his worth and thereby qualify for higher levels of funding.

62Katz testified that the allowance stopped when he became bankrupt because it was dangerous to give cocaine addicts, such as himself, large amounts of cash. Since 2004 his mother has given a couple of thousand dollars a month, for some bills, groceries, children’s recreational expenses.

63Katz’s sister, Catherine Himelfarb, testified that she was not aware of any family trust of which Katz was a beneficiary. David Fingold, Katz’s step-father, testified that to his knowledge no family trust had existed. Sandy Morris had acted as Katz’s lawyer on his early 2004 separation agreement from his wife.³ Morris did not learn of any family trust under which Katz received money.

64At the hearing Sandy Morris testified that during a February 2, 2004 meeting Katz had told her he would be drawing $60,000 a month until June, 2004; her note to file suggested that this draw had something to do with the Edgecastle project, but she had not sought clarification from the bankrupt. Although in his final submissions the Trustee contended that this was evidence of previously undisclosed income earned by Katz, this part of Ms. Morris’s evidence at the hearing received insufficient questioning to enable me to reach such a conclusion. Also, the evidence came out after Katz had testified and it had not been put to Katz while he was on the stand. That evidence plays no role in the analysis which follows.

Lake Joseph condo

65In his evidence at the hearing Katz did not provide details about his disposition of the Lake Joseph condominium as the Trustee had requested.

C. Analysis and conclusion

66A bankrupt must account satisfactorily for the loss of assets or for the deficiency of assets to meet the bankrupt’s liabilities: BIA, s. 173(1)(d). In addition, BIA s. 158(a) requires a bankrupt to make discovery of all of his property that is under his possession or control to the trustee; subsection 158(e) requires a bankrupt to make or give all assistance within his power to the trustee in making an inventory of his assets; and subsection 158(f) requires a bankrupt to make disclosure to the trustee of all property disposed of within a year before the initial bankruptcy event, including “how and to whom and for what consideration any part thereof was disposed of”.

67Katz failed to account for what happened to the cash, RRSPs, stocks and bonds which he had identified on the First Capital net worth statement which was made only 14 months prior to the date of the initial bankruptcy event. In his BIA s. 170(6) statements, his lawyer’s letters and in his evidence at the hearing, Katz simply stated that he thought all those assets had gone into his companies. His CFO, Ms. Fulchini, gave evidence to the contrary.

68In his statements prior to the hearing Katz took the position that the answer to the Trustee’s questions likely could be found somewhere in the 60 or 70 boxes of documents which he had delivered to the Trustee. The latter reported that the index to those boxes did not identify any documents which would provide the answers. As a bankrupt, Katz laboured under a positive obligation to account for his assets. Providing voluminous records to a trustee and then telling the trustee to go find the information itself does not fulfill that duty.

69Accordingly, based on the evidence before me, I find that Katz has failed to account for the loss of the following assets which 14 months prior to the date of bankruptcy he had identified as owning: (i) cash, (ii) RRSPs, (iii) stocks and bonds, and (iv) the Lake Joseph condominium.

VII. Third issue: the nature of the discharge order

A. The issue framed

70Since the fact referred to in BIA s. 173(1)(d) has been proved, the powers of this Court on the application to discharge are those set out in BIA s. 172(2). No person asked the Court to refuse or suspend the discharge. The issue at the hearing was whether the bankrupt should be required, as a condition of his discharge, to pay an amount of money.

71The Trustee recommended that as a condition of discharge the Court order Katz to make a payment in the range of $150,000 to $300,000; one opposing creditor, Joe Morra, submitted that the payment should be $2 million. Katz testified that at present he has no employment income and would not have the ability to make a conditional payment of $100,000. He did not anticipate that changing in the near future. David Fingold testified that neither he nor his wife had any intention of providing Katz with any funds to make a conditional discharge payment.

B. The evidence

72The evidence concerning Katz’s present means and lifestyle showed that he and his family live in a house at 6 Esgor Drive, Toronto which is worth about $1.9 million; they do not own it. Although during his cross-examination Katz was shown some City of Toronto building permit documents which showed that he owned the house, the title register recorded that 2133838 Ontario Inc., apparently his mother’s company, owns the property.

73The assertion in his lawyer’s letter of August 1, 2008 that Katz “was diligently looking for further work” was not accurate. At the hearing Katz testified that the only real job he had held since the date of bankruptcy was the one for about a year with Walden, a house builder, although he had done very occasional work for his mother negotiating the odd mortgage or setting up one of her business offices. Katz’s wife provides the sole source of family earned income by working for his mother’s real estate company. Her net salary of about $1,600 per month falls far below their monthly expenses of at least $4,000. They receive some financial support from his wife’s father and from his own mother.

74Katz drives a BMW, which his mother owns. He testified that “nothing is mine”. Katz testified that although he still undergoes rehabilitation counselling for his previous cocaine addiction, he has been clean for most of the period of his bankruptcy.

75From the evidence I make the following findings of fact:

(i) Katz is 46 years old, an experienced residential real estate developer, who does not have any health problems which would prevent him from working;

(ii) Apart from the work which he performed during the year his present residence was built, Katz has not sought any full-time employment. As a result, he has not generated any surplus income for his creditors during the period of his bankruptcy;

(iii) Katz is able to maintain a very comfortable lifestyle because most of his needs are met by gifts he receives from his mother; his wife’s modest income only covers part of the expenses of Katz’s family; and,

(iv) In light of the gifts he continues to receive from his mother, Katz does not intend to look for future employment.

C. Analysis and conclusion

76Professor 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.” 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.⁴

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. As to how to identify the honest but unfortunate debtor, the attitude and actions of the bankrupt both before and after bankruptcy are relevant considerations.⁵

77When on discharge hearings courts say that “it is time the bankrupt was able to put his past financial difficulties behind him and get on with his life”,⁶ the evidence usually discloses that the bankrupt wishes to return back into the work force or to engage in a new business thereby resuming his role as a productive member of society. That is not this case. Katz is a bankrupt who has done little gainful work since his bankruptcy and does not intend to do any because his mother has provided him with a steady stream of gifts over the past nine years which have allowed him and his family to live quite comfortably. In these circumstances, I adopt the comments made by Registrar Nettie in Re Kaufman:

I find that the Bankrupt has chosen to remain unemployed and has the ability to resume earning an income virtually whenever he chooses. I find that his decision to behave in this manner is also something which cannot be condoned by the Bankruptcy Court.⁷

78In reaching that conclusion I am not taking into account the income of the person who, as a matter of fact, supports Katz, that is to say his mother, Roslyn Fingold. I agree with the approach taken by Ground J. in the case of Re Ledrew where the court was required to consider whether the income of the bankrupt’s wife should be taken into account as a factor in determining the amount of payments a bankrupt should make to the estate as a condition of discharge. In that case the wife was not under a legal obligation to support her husband because of the terms of their marriage contract. Ground J. concluded that he should not take the wife’s income into account stating:

To adopt the statement of Saunders J. in Re Baum, Greey is under no obligation, either legally or morally, to continue to shoulder LeDrew’s half of the household expenses and there is no guarantee that she will continue to do so. Accordingly, I am of the view that, in the case at bar, Greey’s income is not a factor to be considered in determining the quantum of any payments which LeDrew may be required to make to the estate nor is Greey under any obligation to disclose her income or to provide documents disclosing her income to the Trustee or to any creditor of the estate.⁸

79In the present case I have no idea what income Roslyn Fingold earns. What the evidence does show, however, is that the gifts Katz has received from his mother over the past nine years have instilled in him an attitude that he need not look for gainful employment notwithstanding his ability to do so. It would undermine the integrity of our bankruptcy system, and creditors’ perceptions of the fairness of that system, if a bankrupt who showed no willingness to resume his role as a productive member of society, but instead chose to lead a very comfortable life off the largesse of his well-to-do family, nevertheless was granted an absolute discharge by this Court.

80Bankrupt’s counsel submitted that the court should grant an absolute discharge because of the length of time since the date of bankruptcy. I do not agree. As shown by the history of the administration of this bankruptcy set out above, most of the delay resulted from the bankrupt’s refusal to explain, to the satisfaction of the Trustee, what had happened with his assets. Better co-operation by the bankrupt would have resulted in an earlier discharge hearing date.

81As to the amount of a payment, I adopt the principle stated by Lane J. in Re Martino that a condition imposed by the court should be sufficiently burdensome to make the point that the bankrupt’s conduct cannot be tolerated, but should not be unduly hard to the bankrupt to bear once he decides to return to employment.⁹

82Proven claims in the estate total approximately $10 million. The claims of the creditors who have filed notices of opposition total just over $2.031 million. The August 28, 2008 Report of the Trustee stated that Katz’s reported total income for 1999, 2000 and 2001 was $140,000, $375,000 and $284,000, respectively, or an average of about $266,000 per year. Although the Trustee did not have Katz’s tax returns for the two years immediately prior to the bankruptcy, the earlier returns provide some indication of the income level Katz was able to generate from his employment before his companies took a turn for the worse.

83One creditor, Mr. Morra, submitted that the court should fix a payment at $2 million. I think that amount is completely unrealistic. A more reasonable suggestion, which balanced the rights of the bankrupt, the creditors and the integrity of the bankruptcy system, was that made by the Trustee which proposed a payment in the range of $150,000 to $300,000. On balance, I conclude that a payment in the amount of $250,000 would be fair. Katz is only 46 years old. If he so chooses, he has the prospect of at least two decades of gainful employment ahead of him. Imposing a payment of $250,000 would be burdensome, but not unduly so.

84Consequently, I order that Michael Katz shall be discharged from bankruptcy upon the condition that he pay to the Trustee the sum of $250,000, on such terms as may be agreed to by the Trustee.

D. M. Brown J.

Footnotes

1. 1BIA s. 170(1)(f).
2. 2Re Gill (1988), 1988 3259 (BC SC), 69 C.B.R. (N.S.) 132 (B.C.S.C.), paras. 14 and 15.
3. 3See July 3, 2013 voir dire ruling on the admissibility of the evidence of Sandy Morris: 2013 ONSC 4543.
4. 4As quoted in Re Couto, 2012 ONSC 2977, para. 10.
5. 5Re Cohen, [1994] O.J. No. 3147 (Ont. Bktcy.), para. 11.
6. 6Re Van Bork (1990), 80 C.B.R. (N.S.) 96 (Ont. Reg. Bktcy.), para. 7.
7. 7[2005] O.J. No. 3315 (S.C.J.), para. 11.
8. 8(2005), 2005 23101 (ON SC), 13 C.B.R. (5th) 63 (Ont. S.C.J.), para. 25.
9. 9Re Martino (2004), 2004 17978 (ON SC), 50 C.B.R. (4th) 132 (Ont. S.C.J.), para. 40.