ONTARIO

SUPERIOR COURT OF JUSTICE

IN BANKRUPTCY AND INSOLVENCY

ESTATE NO.: 32-1493347
HEARD: 20131112
RELEASED: 20140317

In the Matter of the Bankruptcy of

Victor Osztrovics of the Town of Burford,
Province of Ontario

B E T W E E N:

PRICEWATERHOUSECOOPERS INC. in its capacity as Trustee in THE BANKRUPTCY OF VICTOR OSZTROVICS

Moving Party

and

VICTOR OSZTROVICS

Responding Party

APPEARANCES:

Larry Ellis & - for the Trustee fax (416) 640-3004
Christopher Horkins fax (416) 642-7129
John H. McNair - for the Bankrupt fax (519) 672-2674
Brian Haley - Office of Superintendent fax (416) 973-7440

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

HEARD: November 12, 2013

REASONS FOR DECISION

Tobacco Troubles [2]

I. Issue

[1] If a trustee in bankruptcy, through inadvertence, fails to oppose the discharge of a second-time bankrupt, is it appropriate or possible to reopen the bankruptcy to permit the creditors to oppose the Bankrupt’s discharge?

[2] The bankrupt in this case, Victor Osztrovics was involved in the tobacco growing and marketing business. His partner in a business known as True Blend, Brian Kevin Poreba also went into bankruptcy. In my reasons released earlier this year in Re Poreba, 2014 ONSC 277, (Tobacco Troubles [1]), I set out in detail many of the issues surrounding these bankruptcies.

[3] These reasons will not repeat all of that background but will include a degree of extra detail as a second motion is also under reserve with respect to this estate and will rely upon both these cases as a foundation.

II. Motion to Set Aside Automatic Discharge

[4] Thus this motion, brought by PricewaterhouseCoopers Inc. ("PwC"), in its capacity as trustee in bankruptcy of the estate of Victor Osztrovics ("Victor" or the "Bankrupt"), seeks an Order setting aside the automatic discharge of the Bankrupt and extending the time required to issue the prescribed notice advising creditors of the Bankrupt's impending automatic discharge.

[5] Counsel for the Bankrupt submits that the discharge ought not to be set aside and argues that as a second time bankrupt, Victor was eligible for an automatic discharge twenty-four months after the date of bankruptcy unless an opposition to the discharge has been filed or the bankrupt has been required to make a surplus income payment under section 68 of the BIA. It is argued that since the Trustee had not determined that Victor was required to make any payments under section 68, Victor was entitled to an automatic discharge in these circumstances.

III. Overview

[6] In its First Report to the Court the Trustee reported that it had been engaged for over two years in an on-going struggle to obtain necessary information for the proper administration of the Bankrupt estate from Victor. The Trustee’s factum asserts that “Victor's dishonesty and failure to comply with his obligations under the Bankruptcy and Insolvency Act… has increased the cost of the administration of the estate and resulted in on-going delays in realizing a return for Victor's creditors.”

[7] This motion is one of several related matters pending before this court arising out of a plan by Victor and his co-venturers to purchase and process tobacco and to sell tobacco in one form or another by way of a company True Blend Tobacco Company Inc. (“True Blend”).

[8] Essentially several farmers sold their tobacco crops to True Blend and were not paid. They endeavoured to obtain payment and to take a variety of steps to protect their positions. Ultimately Victor and his co-owner Brian Poreba made unsuccessful proposals to their creditors which lead to their individual bankruptcies. Many of the farmer creditors are inspectors in those bankruptcies.

IV. Background

[9] Because the corporate structure is relevant to other pending matters I set out below my understanding of the pre-bankruptcy situation of the bankrupt.

[10] In Poreba I outlined my understanding of the unique situation in the Ontario tobacco industry in the years prior to these bankruptcies, briefly put:

On August 1, 2008, federal Agriculture Minister announced an exit package of $1.05 per pound of tobacco quota for Ontario’s tobacco quota holders. This paved the way for the demise of the supply management of tobacco farming, at a total cost to the government of $286 million.

All but 18 of the province’s tobacco quota holders participated in the Tobacco Transition Program, but there were 118 tobacco growers in Ontario in 2009. This means that 100 tobacco producers found a way to circumvent the program, and the province ended up producing the same size crop in 2009 as it did in 2008.

[11] The bankrupts were involved in an enterprise which would acquire and re-sell tobacco that could not be sold under the previous quota system by farmers who (apparently in exchange for substantial payments under the exit package) had personally undertaken not to grow tobacco on their own behalf. These individuals, although they had sold their personally held quotas, apparently were not prevented from assisting others from growing tobacco on the same farms and selling it outside the quota system. This was the somewhat unique environment in which the bankrupt had been doing business.

[12] In particular, Victor and his family have been tobacco farmers in Burford, Ontario since the late 1930s. He had been farming with the family business since 1984. The bankrupt and his wife, Elysia Osztrovics ("Elysia") have three children. As at the date of argument they had a 20 year-old daughter; and two sons, aged 18 and 15.

[13] Since the late 1990s, the Osztrovics farm and tobacco operation has been managed through a corporation named Osztrovics Farms Ltd. ("OFL") that, amongst other things, had produced tobacco and raised chickens for sale in Ontario. Prior to his bankruptcy, Victor was an officer, director and shareholder in OFL.

[14] Victor is presently a former director and was a minority shareholder in OFL. Upon his bankruptcy, his 51 common shares and 886,530 Class "A" Special (or voting) shares, vested in the Trustee.

[15] Osztrovics' mother, Violet Osztrovics ("Violet") has a controlling interest in OFL as a result of her ownership of 948,572 Class "A" Special shares. Violet is also a director of OFL. Elysia is the other director of OFL and she currently holds 49 common shares.

[16] There are many unclear issues relating to the changing regulatory environment concerning the growing of tobacco in Ontario. I am unclear as to when, if ever, Victor personally held a license by virtue of which he was entitled to grow tobacco. However, I am informed that prior to Victor’s 2011 bankruptcy, Elysia was a licensed grower of tobacco. Victor was not a licensed grower at the date of his bankruptcy.

[17] In addition to his interest in OFL, the Bankrupt was also a shareholder, director and President of True Blend Tobacco Company Inc. ('True Blend"), which operated as a purchaser, processor and reseller of flue-cured tobacco.

[18] The Bankrupt’s factum asserts:

“In or around 2006, Osztrovics, along with his colleague, Brian Poreba ("Poreba") formed a partnership for the purpose of purchasing tobacco from licensed Ontario tobacco farmers, processing it and re-selling it to third parties. In or about 2009, Osztrovics and Poreba incorporated True Blend Tobacco Company ("True Blend"), for the same purpose. True Blend did not have a license to grow tobacco.

In or around 2010, third party purchasers failed to pay for tobacco purchased from True Blend, with the result that True Blend was unable to pay the tobacco farmers for all the tobacco True Blend had supplied. Ultimately, this led to Osztrovics' bankruptcy. It also led to the bankruptcies of Poreba and True Blend. Additionally, the event resulted in the issuance of the Mareva Order referenced in the Moving Party's materials.”

[19] Prior to his bankruptcy Victor was registered with the Ontario Flue-Cured Tobacco Growers' Marketing Board (the "Tobacco Board") as a licensed purchaser of Tobacco. As True Blend was not a licensed purchaser of Tobacco, Victor and Poreba another True Blend shareholder, officer and director, purchased Tobacco from various farmers (the "Farmers"), on behalf of True Blend (the 'Tobacco Contracts"). As such, in the event True Blend failed to perform its obligations under the Tobacco Contracts, Victor (and Poreba) would be personally liable for fulfilling the payment terms of the Tobacco Contracts.

[20] As noted above True Blend failed to pay the Farmers the full amounts owed to them for Tobacco delivered to True Blend, primarily during the autumn of 2010, pursuant to the Tobacco Contracts.

[21] The reasons why they were unable to pay for the tobacco supplied are complex and unclear. Whether the bankrupts were victims of a series of unfortunate circumstances clearly is a question that awaits resolution at a later stage or elsewhere. For my purposes at this stage suffice it to say I feel additional investigations may help bring clarity to these matters.

[22] Where the tobacco went and what happened to the substantial contracted proceeds of sale was clearly still a very live issue at the 24 month point. Whether any amount of surplus income was generated on some basis was still very uncertain.

V. Mareva Injunction

[23] On April 1, 2011, and as a result of concerns that True Blend's assets were being dissipated, certain of the Farmers obtained from Justice McDermid in London, an ex parte order for a Mareva injunction against True Blend, Victor and Poreba (collectively the "Debtors") prohibiting the Debtors from dealing with or disposing of any of their respective properties, assets and undertakings.

[24] Shortly after being made aware of the issuance of the Mareva injunction, Victor apparently took steps to try to ship a quantity of processed tobacco from the premises of True Blend on May 4, 2011.

[25] Apparently there was a shipment of tobacco about to be shipped at that time by True Blend. Victor sought advice as to whether, in the face of the injunction, there was still a way to allow the crop to be sold.

[26] I understand that True Blend had arranged this pending sale to another licensed tobacco buyer, M-One Tobacco. Osztrovics arranged to meet the principal of M-One Tobacco, at True Blend's plant and warehouse on May 4th at 10:00 a.m.

[27] Osztrovics did so, based on the legal position taken by a solicitor acting for the contemplated administrator under a possible True Blend proposal. The Bankrupt’s factum asserts he was acting on professional advice and not in an attempt to circumvent the intent of the relief granted in the Mareva Order that had been in place.

[28] Counsel at the time took the position that the stay of proceedings imposed by virtue of s. 69 of the Bankruptcy and Insolvency Act would have the effect of staying the order of Justice McDermid made on April 1, 2011.

[29] It seems that as a consequence, on April 20, 2011, True Blend filed a Notice of Intention to Make a Proposal (the "True Blend NOI"), pursuant to section 50.4 of the BIA and Schwartz Levitsky Feldman Inc. ("SLF") agreed to act as the trustee under the True Blend NOI.

[30] On May 2, 2011, Victor filed a Notice of Intention to Make a Proposal ("Victor's NOI"), pursuant to section 50.4 of the BIA, and SLF agreed to act as trustee under Victor's NOI.

[31] His counsel submits that Victor made no attempts to remove tobacco illegally, nor did he attempt to enter True Blend's business premises except with the consent and participation of the landlord's representative.

[32] True Blend's solicitor, likewise took the position that the corporation was permitted to carry on the business of selling tobacco during the proposal period, and that the creditors' counsel had acted improperly by contacting True Blend's landlord and telling him to refuse Victor access to the premises.

[33] The factum filed on behalf of the bankrupt observes:

17. “Four lawyers involved in the dispute with respect to the issue of True Blend's right to sell tobacco inventory in an effort to settle accounts with some of its outstanding creditors. The lawyers were evenly divided the matter. Osztrovics' actions were entirely consistent with the position taken by the solicitors for True Blend and its proposal Trustee.”

VI. Was the Mareva stayed?

[34] On May 10, 2011 counsel for the creditors moved for the appointment of PwC as a court appointed receiver of each of True Blend, Mr. Poreba and Mr. Osztrovics. Justice Morawetz handwritten endorsement addresses the priority issue and reads in part:

“The filing of the Notice of Intention, absent further order of the court, does not, in my view, have the effect of vacating or staying the effect of the order of April 1, 2011 as extended on April 8, 2011. To hold otherwise would potentially harm the interests of creditors which would result in an outcome that runs counter to the relief granted on April 1, 2011. However, in the event that I am in error, I am satisfied that the Record supports the requested relief in the form of an Interim Receivership Order under section 47.1 of the BIA. Such an order is necessary for protection of the debtor’s estate;

[35] Justice Morawetz further directed that any motion to extend the existing injunction ought to be heard in London.

[36] Justice Rady by Order dated May 27, 2011 granted a further extension of the Interim Receivership Order “until further order of this court”. The order contained two other directions with regard to priority of the various orders then extant;

“2. THIS COURT DECLARES that to the extent there is a conflict between the Interim Receivership Order and the Order of Justice McDermid dated April 1, 2011 (the “Mareva Injunction”) the Interim Receivership Order shall prevail.

3. THIS COURT DECLARES that, subject to paragraphs 1 and 2 of this order, both the Mareva Injunction and the Interim Receivership Order shall remain in full force and effect until further order of this Court.”

VII. Rejected Proposal

[37] Victor Osztrovics went into bankruptcy on June 21, 2011 by virtue of a deemed assignment which resulted from a creditors' rejection of the proposal outlined above. PwC was appointed his Trustee in Bankruptcy that same day.

[38] But for his voluntarily making a proposal to his creditors, Victor might well have been able to rely upon the protection in Section 48 of the BIA accorded to individuals whose principal means of livelihood is farming.

[39] At this stage I simply observe that having elected to follow a path that lead to a deemed bankruptcy Mr Osztrovics became subject to the obligations to provide information to his trustee with respect to his affairs. In particular Section 158 (k) obliges him to aid “to the utmost of his power in the realization of his property and the distribution of the proceeds among his creditors”.

[40] I am not satisfied on the record before me that he has demonstrated that he has to date done his utmost to assist in such realization.

VIII. Requests for Information

[41] In particular, Section 158 of the BIA sets out in detail the duties of bankrupts. The obligations are broad and far ranging. Amongst other things the section provides in part:

“A bankrupt shall

(a) make discovery of and deliver all his property that is under his possession or control to the trustee or to any person authorized by the trustee to take possession of it or any part thereof;

(b) deliver to the trustee all books, records, documents, writings and papers including, without restricting the generality of the foregoing, title papers, insurance policies and tax records and returns and copies thereof in any way relating to his property or affairs;

(c) at such time and place as may be fixed by the official receiver, attend before the official receiver or before any other official receiver delegated by the official receiver for examination under oath with respect to his conduct, the causes of his bankruptcy and the disposition of his property;

(e) make or give all the assistance within his power to the trustee in making an inventory of his assets;

(f) make disclosure to the trustee of all property disposed of within the period beginning on the day that is one year before the date of the initial bankruptcy event or beginning on such other antecedent date as the court may direct, and ending on the date of the bankruptcy, both dates included, and how and to whom and for what consideration any part thereof was disposed of except such part as had been disposed of in the ordinary manner of trade or used for reasonable personal expenses;

(g) make disclosure to the trustee of all property disposed of by gift or settlement without adequate valuable consideration within the period beginning on the day that is five years before the date of the initial bankruptcy event and ending on the date of the bankruptcy, both dates included;

(o) generally do all such acts and things in relation to his property and the distribution of the proceeds among his creditors as may be reasonably required by the trustee, or may be prescribed by the General Rules, or may be directed by the court by any special order made with reference to any particular case or made on the occasion of any special application by the trustee, or any creditor or person interested;

IX. Alleged Bias

[42] The bankrupt’s counsel asserts that Osztrovics' creditors have been vindictive throughout his bankruptcy. In particular it is alleged that they have taken numerous steps in the hopes of destroying Osztrovics business and his livelihood.

[43] Victor alleges that PwC has been influenced and guided by Osztrovics' creditors' mala fides. Among the difficulties said to have been experienced by the Osztrovics family throughout his bankruptcy and actions taken by his creditors are:

• The Tobacco Board denying OFL and related parties licenses to produce tobacco in 2011 and 2012;

• A meritless motion for contempt against Osztrovics personally;

• A lawsuit seeking $36 million in damages;

• Other steps, outside of court, including harassment of Osztrovics and his family members.

[44] I am not satisfied that these complaints are relevant to the issue of setting aside the discharge. Regardless of the veracity of these claims, in my view the Bankrupt’s obligations under Section 158 are not reduced or negated in any way notwithstanding any bias that has been perceived by the bankrupt.

X. Surplus Income?

[45] The Trustee has had ongoing difficulties calculating the surplus income payments the Bankrupt is required to make to the estate due to the Bankrupt's failure to meet his disclosure obligations.

[46] Section 68 of the BIA deals with the surplus income concept and its consequences. I have set out below selected and highlighted portions of that section which have some relevance to the matters before me:

(2) The following definitions apply in this section.

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

“total income”

(a) includes, despite paragraphs 67(1)(b) and (b.3), a bankrupt’s revenues of whatever nature or from whatever source that are earned or received by the bankrupt between the date of the bankruptcy and the date of the bankrupt’s discharge,….

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

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

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

(4) Whenever the trustee is required to determine whether the bankrupt has surplus income, the trustee shall

(a) if the trustee determines that there is surplus income,

(i) fix, having regard to the standards, the amount that the bankrupt is required to pay to the estate of the bankrupt,

(ii) inform, in the prescribed manner, the official receiver, and every creditor who has requested such information, of the amount fixed under subparagraph (i), and

(iii) take reasonable measures to ensure that the bankrupt complies with the requirement to pay; and

(b) if the trustee determines that there is no surplus income, inform, in the prescribed manner, the official receiver, and every creditor who has requested such information, of that determination.

(10) The trustee may, in any of the following circumstances - and shall apply if requested to do so by the official receiver in the circumstances referred to in paragraph (a) -apply to the court to fix, by order, in accordance with the applicable standards, and having regard to the personal and family situation of the bankrupt, the amount that the bankrupt is required to pay to the estate of the bankrupt:

(a) if the trustee has not implemented a recommendation made by the official receiver under subsection (5);

(b) if the matter submitted to mediation has not been resolved by the mediation; or

(c) if the bankrupt has failed to comply with the requirement to pay as determined under this section.

[47] Of particular relevance is section 68 (11) which gives discretion to this court to determine a fair and reasonable sum to be paid taking into account all the factors in a case:

(11) The court may fix an amount that is fair and reasonable

(a) as salary, wages or other remuneration for the services being performed by a bankrupt for a person employing the bankrupt, or

(b) as payment for or commission in respect of any services being performed by a bankrupt for a person, where the person is related to the bankrupt, and the court may, by order, determine the part of the salary, wages or other remuneration, or the part of the payment or commission, that shall be paid to the trustee on the basis of the amount so fixed by the court, unless it appears to the court that the services have been performed for the benefit of the bankrupt and are not of any substantial benefit to the person for whom they were performed.

[48] An amount so determined maybe amended if the court is satisfied that material changes that have occurred in the financial situation of the bankrupt.

[49] Here the trustee reports that it is not in a position to determine the appropriate level of surplus income (if any) due to the failure of the bankrupt and his relatives to provide full disclosure. Those issues are the subject of separate reasons to be found at 2014 ONSC 1691.

[50] In this regard it was argued on his behalf that Mr. Osztrovics only submitted income and expense statements to PwC for the months of June 2011 through November 2011.

[51] The factum filed on his behalf asserts that:

21. Osztrovics was advised by Randall Smith ("Smith"), a representative of PwC that because his income statements remained unchanged during those times, he did not need to provide any further statements to PwC, until and when his monthly information changed.

[52] The trustee disputes this assertion. It seems to me that to base any determination of surplus income on such a length of time would be inadequate. This particular case where the income of the family was cyclical having regard to the timing of the sale of various crops during the year.

[53] I’m not satisfied that there could be a valid automatic discharge in this case without a determination as to whether or not surplus income was payable at any time during the initial 24 months. If there was any surplus income in that period of it would have triggered a 36 month payment period. I come to this conclusion notwithstanding the assertion in the Bankrupt’s factum that:

22. At no time following the submission of his income and expense forms did PwC seek further information from Osztrovics, nor was he at any time required to make surplus income payments pursuant to section 68 of the BIA.

XI. Applicable Case Law

[54] Twenty years ago the issue of whether it was possible to set aside an automatic discharge was reviewed by a number of courts in Re Baker.

[55] At first instance Registrar Ferron (at 28 C.B.R. (3d) 107) held that he lacked jurisdiction in such a situation. On appeal Justice Farley reversed and took the position that the court clearly had authority. Mr. Justice Osborne then granted leave to appeal to the Court of Appeal however there appears to be no indication that the appeal ever actually proceeded in that case.

[56] I agree with the holdings of Justice Farley found at 1994 10568 (ON CA), [1994] O.J. No. 3016; 21 O.R. (3d) 501, and in the circumstances regard them as binding upon me. His analysis, with my emphasis throughout, includes the following: observations:

6. Dr. Morawetz also noted the difficulty of s. 187(5) being limited to dealing with "any order made by [the court]" when the automatic discharge of s. 168.1(1)(f) is not an order made by the court.

7. However, based on the situation in this case in my view for the reasons and criteria discussed by Lane J. in Re Tong, it would be a miscarriage of the bankruptcy regime (including the salutary benefits to the bankrupt) if an automatic discharge were to slip between the cracks through an error of the trustee. I am satisfied here that there was a bona fide error by the trustee. Had notice been given, at least one creditor would have objected; if the trustee had understood that the bankrupt was eligible for an automatic discharge, the trustee himself would also have objected given that he appreciated that further investigation was required for the benefit of the estate (including all creditors, when one looks at the essence of the situation). The bankrupt is a lawyer; prior to his bankruptcy he was a high-earning professional. Thus, an absolute discharge would be a very debatable proposition. There does not appear to have been any undue delay in the trustee moving. While a period of time has elapsed, a considerable part of that has been taken up with motions and appeals. The bankrupt has fought hard to protect his automatic discharge; he has not indicated any desire to have his discharge reviewed with any possible opposition from the Superintendent, the trustee or any creditor. He has not shown any prejudice which he may suffer if the automatic discharge were set aside with an "immediate" hearing on a (possible) contested basis. Under the circumstances, it would appear to me inappropriate to allow the automatic discharge to stand but rather it should be set aside if I have the power to do so. See also Re Pascual (1990), 1 C.B.R. (3d) 209 (Ont. Reg.). This case does not meet all criteria set out for non-intervention in Re Merrick (1989), 73 C.B.R. (N.S.) 85 (Ont. S.C.).

8. I think it helpful to observe that no creditor of the bankrupt has had any opportunity to consider whether or not to oppose the bankrupt's discharge because the creditors were not afforded that opportunity. Section 168.1 is set up in such a way that the creditors of the bankrupt are to be given notice. The same observation holds for the Superintendent. While the trustee made an administrative error, can it be said that the B.I.A. regime was designed so as to as well disenfranchise the (representative capacity) trustee in such circumstances? If s. 187(5) were able to come into play if the automatic discharge were in law an order of the court, would there be any doubt that it would not be utilized in these circumstances?

9. However, it seems to me that counsel may not have focused on the right provision of the B.I.A. I would draw their attention to s. 187(9):

187(9) No proceeding in bankruptcy shall be invalidated by any formal defect or by any irregularity, unless the court before which an objection is made to the proceeding is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by any order of that court.

[57] Justice Farley considered in-depth whether or not an automatic discharge could be considered to fall within the definition of a “proceeding” for the purposes of the BIA:

10. I noted that the term "proceeding" should not be restricted to those necessarily of a court or a court official: Meridian Developments Inc. v. Nu-West Group Ltd. (1984), 1984 1176 (AB KB), 52 C.B.R. (N.S.) 109, 11 D.L.R. (4th) 576 (Alta. Q.B.); Re Northland Properties Ltd. (1988), 1988 2924 (BC SC), 69 C.B.R. (N.S.) 266, 29 B.C.L.R. 257 (B.C.S.C.); Re Northland Properties Ltd. (1988), 1988 3247 (BC SC), 73 C.B.R. (N.S.) 141 (B.C.S.C.); Houlden and Morawetz, The Annotated Bankruptcy and Insolvency Act, 1995, p. 456, in their comments on the "Proceedings" sections of the Bankruptcy Rules, C.R.C. 1978, c. 368 (ss. 7-11).

11. Therefore, it seems to me that the automatic discharge provisions of s. 168.1 could rightly be characterized as a proceeding within the meaning of s. 187(9). It would also appear that the failure of the trustee to give notice to those entitled to it pursuant to s. 168.1 is an irregularity in that proceeding. I take this objection by the trustee acting in his own capacity and on behalf of the creditors as a whole is in essence making an objection to that automatic discharge proceeding. I am further of the opinion that substantial injustice would be caused by this irregularity if the bankrupt were able to slip into an apparent crack and deprive those other interested persons the opportunity to participate in a discharge hearing as envisaged by s. 168.1. Since I cannot remedy that injustice by s. 187(5) or it would appear any other provision of the B.I.A., I therefore find it appropriate to invalidate the automatic discharge proceeding….

[58] Thus I am of the view that it would be a prejudice to the public at large if bankrupts who would ordinarily be opposed in their discharge were able to slip through and receive an automatic discharge only through the inadvertence or administrative slip-up of the trustee in circumstances where these bankrupts were not able to demonstrate any prejudice to themselves except their being deprived of an unexpected windfall of an automatic discharge.

[59] This opinion is somewhat tempered by the holding of Justice Blair in Re Cameron, 1995 7251 (ON SC), [1995] O.J. No. 3820; 26 O.R. (3d) 794; 36 C.B.R. (3d) 272. In that case he refused to set aside the discharge noting that there must be some admissible evidence on the set-aside motion, to find a basis for concluding there is some likelihood of the discharge hearing, if ordered, leading to an appreciably different result than an absolute discharge.

[60] Justice Blair examines the case law and indicates:

11 In both Re Tong and Re Baker the court relied upon essentially the following criteria in setting aside the automatic discharge:

(a) whether there was a bona fide error in the trustee failing to send out the notices required by s. 168.1(1)(a.1) of the B.I.A.;

(b) whether, if notices had been sent, creditors would have opposed the dis-charge;

(c) the likelihood of an absolute discharge being granted in the circumstances of the case; and,

(d) whether the bankrupt will be prejudiced by setting aside the discharge.

12 I agree with the criteria expressed in (a), (b) and (d) above, but I take a slightly broader approach to that articulated in (c). It is fairness to the creditors -- who say that but for the want of notice they would have had the opportunity to oppose -- and maintenance of the integrity of the bankruptcy system which underlie the notion that discharges may be set aside: see Re Kornis (1984), 54 C.B.R. (N.S.) 160 (Ont. H.C.J.); Re Tong, supra; and Re Baker, supra. That being the case, and while I recognize the argument that all the bankrupt will lose is the automatic absolute discharge that he or she may not have had in any event, I am of the view that something more must be shown than simply the likelihood of an absolute discharge itself not being granted. In my opinion it is incumbent upon the trustee and/or the creditors on a motion such as this to show, with proper evidence, that a discharge hearing is likely to lead to a result that is appreciably different than an absolute discharge from either the perspective of the integrity of the bankruptcy system or of recovery by the creditors. By "appreciably different" I mean something more than the likelihood that a discharge might be granted subject to a brief suspension or made conditional upon a recovery payment that can have no practical or meaningful significance to the creditors in terms of their recovery….”

[61] Based on the evidence before me, and the foregoing analysis of it, I am persuaded that a discharge hearing, if one were to occur, would lead to a result "appreciably different" from an absolute discharge in the sense that Justice Blair has used that phrase above.

XII. Trustee Report as Evidence

[62] The reliance that this court may place on a trustee’s report was addressed more recently by Justice Mesbur in Montor Business Corp. (Trustee of) v. Goldfinger, 2011 ONSC 2044; 75 C.B.R. (5th) 170; 2011 CarswellOnt 2214 (“Montor”). There, in a hotly contested motion to remove a trustee, she noted:

8. The real question is whether this case (that is the motion to remove the Trustee) is one of the circumstances where the court can and should accept the Trustee's report as admissible evidence. This is only a threshold issue. I need only determine whether the report should be struck, or whether it should constitute admissible evidence. My role is not to determine what weight, if any, should be given to it. That is the task of the judge who hears the removal motion itself.

[63] In her analysis she observes:

10. Trustees and Receivers are officers of the court with particular duties of impartiality and fair dealing. When someone acts as a Trustee of a bankrupt estate, additional obligations are imposed by the terms of the Bankruptcy and Insolvency Act and the overriding supervisory status of the Superintendent of Bankruptcy.

11. Those who act as Trustees or Receivers, in bankruptcy proceedings, receiverships or re-structuring under the CCAA, routinely report to the court and set out recommendations and responses to questions by way of reports. The courts routinely accept the reports as evidence. Courts do so not only in the situations specifically enumerated under the Bankruptcy and Insolvency Act.

12. For example, in a case related to this one, … on a motion under s. 43(13) of the Bankruptcy and Insolvency Act the court relied on the Trustee's reports in coming to its conclusion that various parties, including the Trustee itself, should be added as creditors. There, the Trustee was seeking to be added as a creditor. It filed two reports as the evidence to support its position. The respondents were permitted to cross-examine. The court accepted and relied on the reports, even though s. 43(13) does not make specific reference to a Trustee's delivering a report in those circumstances….

[64] Justice Mesbur goes on to point out that Trustees' or Receivers' reports have been accepted as admissible evidence on motions relating to a number of circumstances including:

• An application by an interim receiver for a finding of contempt against a shareholder of the debtor;

• in opposed motions by a Chief Restructuring Officer to file a CCAA plan;

• opposed motions seeking approval to make payments or to sell property; and

• responding to opposed motions for leave to take proceedings against a receiver

[65] Based upon her findings I conclude it is entirely proper for the Trustee to submit its evidence on this motion in the form of a Report.

[66] Such acceptance is not unqualified. As Mesbur J. notes:

“25. It seems to me that a Trustee's report, by both custom and law, is in no more diminished a position as far as its reliability is concerned as is an affidavit based on information and belief. In fact, given that it is prepared by an officer of the court, with both statutory and common law duties, it is in many ways more reliable than an affidavit that is based entirely on information and belief, but is nevertheless under the Rules of Civil Procedure, prima facie admissible.

[67] She holds in Montor that this is the case notwithstanding that such reports often are based, at least in part, on hearsay. I have inserted the content of the applicable footnotes into the following extracts:

30 At the heart of the moving parties position is their submission the report is hearsay. They say the report does not meet any of the exceptions to the hearsay rule, and therefore it is inadmissible.

31 Farley J dealt with this in Bell Canada International Inc. Re [2003 22640 (ON SC), [2003] O.J. No. 4738, 2003 CarswellOnt 4537 (S.C.J.)], the only case that squarely deals with this issue. When faced with the argument that a Monitor's report was "not evidence", he stated first, it was not "necessary to delve deeply into this question but ... to observe that such a report by a court appointed officer is recognized by the common law as being admissible evidence in a proceeding."

32. In support of this proposition, Farley J quoted approvingly from Wigmore which stated that a report, if made under due authority, stands upon no less favourable footing than other official statements. It is admissible under the general principle. [Wigmore, John Henry, Evidence in Trials at Common Law, Little Brown & Company, Toronto & Boston: 1974, at pages 791-6.] The general principle referred to is the hearsay exception that permits public documents (or as Wigmore calls them, "official statements") to be admitted into evidence. Reports by the court's officers meet the general criteria for the public document exception:

a) they are made by a public official - trustees are licensed by a government official, the Superintendent in Bankruptcy, and have public duties imposed both by the court and by the Bankruptcy and Insolvency Act;

b) the Trustee makes the report in the discharge of a public duty or function - the trustee functions in the context of its duties to the court and to the creditors, and its reports communicate the necessary information to discharge those duties;

c) the reports are made with the intention they serve as a permanent record - as part of the court record, reports are permanent; and

d) the report is available for public inspection - as part of the court record, the report, like the court file, is open to public viewing.

33. In addressing the issue of whether a report is made under "due authority", Farley J also referred approvingly to The Law of Receivers and Administrators of Companies [Sir Gavin Lightman and Gabriel Moss, (3rd ed., 2000; Sweet & Maxwell, London) at p 115.] which states that officers of the court (which would include Trustees) are "appointed by the Court and are subject to its general supervisory jurisdiction. In accordance with the rule in ex. p James [(1874) 2 Ch. App 609] officers of the Court are obliged not only to act lawfully, but fairly and honourably."

34. Trustees, as the court's officers, operate under these obligations. In addition, they are subject to the provisions of the Bankruptcy and Insolvency Act, including following the prescribed Code of Ethics referred to in s. 13.5 of the Act. In looking at a Trustee's obligations, it is important to look at the entire scheme of the BIA in relation to a Trustee's duties and continued representation of an estate. For example, section 14 gives the creditors the right to substitute one Trustee for another. Most importantly, the Superintendent has broad powers to deal with a Trustee who has acted improperly. These include revoking the Trustee's licence, requiring the Trustee to make restitution, limiting the Trustee's ability to practice, or doing anything else the Superintendent considers appropriate and the Trustee agrees to. Thus, unlike a Receiver, whose role derives solely from the court order appointing it, the Trustee is subject to the additional duties imposed by the Bankruptcy and Insolvency Act itself, and the additional supervision of the Office of the Superintendent.

35. On the issue of hearsay, the Rules of Civil Procedure also set out what may be included in affidavits that are admissible on motions. On an interlocutory motion, an affidavit may be made "on information and belief". What this means is that hearsay evidence is admissible on a motion if the deponent sets out the source of the hearsay evidence and expresses a belief in its truth. It is always up to the court to determine the weight to be given to such evidence. Believing something to be true, however "reliable" the source, and however fervently one believes in the truth does not, of course, make it true. While the Trustee's report may contain hearsay, or indeed be hearsay, given the safeguards imposed by the Trustee's being the court's officer, I conclude the hearsay contained in a Trustee's report is no less admissible on this interlocutory motion than if it had been contained in an affidavit stated to be "on information and belief."

36. As a result, I conclude a Trustee's report constitutes an exception to the hearsay rule, in the same way as an official statement is excepted. I also conclude the report, insofar as it contains in-formation from others is admissible in the same way as an affidavit containing similar information.

[68] Of relevance as well are the observations of Justice Mesbur with respect to allegations in the case before her that the report not balanced or neutral. It was argued by two parties that the report was not balanced and neutral, but rather it advocated a position on behalf of the estate of Montor. As a result, it was submitted that the report should be expunged on the basis that it was not a neutral and impartial statement of facts. Justice Mesbur held:

38. It seems to me the question of whether the report is neutral or balanced goes to the weight the court should give the report, if it is admitted. That is not the threshold issue before me; rather, it is a question for the motions judge to decide on the removal motion. I do not see it as a basis to expunge all or part of the report on this motion, although the moving parties will no doubt quite appropriately renew that argument on the removal motion.

[69] I am satisfied in this case that I am entitled to rely upon the report in support of my determination that the trustee has satisfied the onus to show, with proper evidence, that a discharge hearing is likely to lead to a result that is appreciably different than the existing automatic absolute discharge from both the perspective of the integrity of the bankruptcy system or of possible recovery by the creditors.

[70] If the bankrupt had one dollar of surplus income over the first 24 months from the date of bankruptcy, Directive No.11R2-2013 provides, in paragraph 7(3), that the bankrupt’s obligation would continue for an additional 12 months such that he would not have been eligible for a discharge prior to June 21, 2014.

XIII. Disposition

[71] Through inadvertence the Trustee failed to send out the required Notices of Impending Automatic Discharge to the creditors of the Bankrupt and did not file its Notice of Intended Opposition to Discharge of Bankrupt and the Report of Trustee on Bankrupt's Application for Discharge until July 19, 2013. I have no doubt that had notices been sent, creditors would have opposed the discharge.

[72] As a result of the foregoing analysis the Trustee’s application to set aside the automatic discharge of Victor Osztrovics is granted. The trustee shall issue the necessary notices and reports as contemplated by section 168.1 of the BIA prior to April 30, 2014. If the trustee takes no steps towards issuing such notices then the bankrupt shall receive an automatic discharge as of June 21, 2014.

[73] To the extent that further information is obtained prior to any discharge hearing being scheduled I anticipate that the trustee will deliver further reports as appropriate.

[74] This application was necessitated due to inadvertence on the part of the trustee. In the circumstances, as an indulgence is being granted, I think this is an appropriate case for no order as to costs being made.

Registrar D. E. Short

March 17, 2013

DS/ B. 25