ONTARIO SUPERIOR COURT OF JUSTICE
IN BANKRUPTCY and INSOLVENCY
COURT FILE NO.: 35/1765533
DATE: 2014/07/29
Under Section 69.4 of the Bankruptcy and Insolvency Act
IN THE MATTER OF THE BANKRUPTCY OF Mehmet Fatih Karaoglu of the Town of Fergus, in the County of Wellington, in the Province of Ontario
Counsel:
A. Dennis G. Crawford, for the Bankrupt
B. Brian R. Kelly, for the Unsecured Creditor, Aresh Taranom
HEARD: July 22, 2014
Rady j.:
An Appeal from the Reasons for Judgment of
Deputy Registrar R. Stevens on April 9, 2014
Introduction
[1] Mr. Taranom appeals from the decision of Deputy Registrar Stevens refusing to lift the stay of proceedings against the bankrupt debtor, Mr. Karaoglu.
Background
[2] Mr. Taranom sued Mr. Karaoglu for damages of $50,000 “for non-payment of loans, unjust enrichment and/or quantum meruit.” In the alternative, he sought damages “for misrepresentation”. The plaintiff alleged that he advanced money to the defendant and they were partners in two businesses. Following a four-day trial, he recovered judgment for $54,039.14, which was reduced to $50,000 because it was a claim under the simplified rules. He also was awarded prejudgment interest and costs.
[3] In his reasons for judgment, dated September 26, 2012, Justice Sloan made the following observations and findings of fact, which are significant to the disposition of this appeal:
In this case the plaintiff Taranom seeks to recover money he alleges he invested as an equal partner in two partnerships with the defendant Karaoglu, known as Tito’s Pizza and Philly Cheese Steak. As an alternative, Taranom pleads that Karaoglu misrepresented the facts concerning his investment and has been unjustly enriched. Karaoglu submits Taranom did not invest any money in Tito’s pizza and while he admits to receiving money from Taranom for Philly’s he says it was only as an investment and not as partner and therefore Taranom is not entitled to any money.
Despite Karaoglu’s examination for discovery where he stated on page 5 that Taranom did not advance any money to Philly he now admits he lied and that Taranom advanced by his figures $33,694.97 in cash and or purchases of product for Philly.
I find that Karaoglu took an unfair advantage of Taranom and has been unjustly enriched as a result.
[4] An appeal of the decision was dismissed by the Court of Appeal on June 21, 2013 with costs to Mr. Taranom of $10,000.
[5] On July 5, 2013, Mr. Karaoglu filed an assignment in bankruptcy. The judgment was stayed by operation of s. 69.3(1) of the Act. Mr. Taranom sought an order lifting the stay pursuant to s. 69(4) of the Act.
[6] The deputy registrar heard the application on April 2, 2014 and in brief reasons dated April 9, 2014, he dismissed it. The essence of his decision is captured in the following paragraphs:
[1] …In Re: Ma, the Ontario Court of Appeal referred to the decision of Adams J. in Re: Francisco that the function of the Bankruptcy Court is not to inquire into the merits but rather to ensure sound reasons consistent with the scheme of the Bankruptcy and Insolvency Act exist for relieving against the stay. The onus is on the applicant to establish a basis for the order within the meaning of s. 69.4.
[3] It is not for this court to make some finding of false pretenses and/or fraudulent misrepresentation, absent such finding by another court. In my view, there has been no such finding in the judgment against the Bankrupt so that this would be a claim that would survive discharge. As well, I find that the Waxman case is distinguishable and that the creditor’s claim is an equity claim and therefore excluded by s. 178(1)(e) of the Bankruptcy and Insolvency Act.
[4] Finally, I would conclude that lifting the stay would have the effect of giving the creditor a “leg-up” and is not consistent with the scheme of the Bankruptcy and Insolvency Act. The creditor may oppose the Bankrupt’s discharge and seek a remedy at that time.
The Parties’ Positions
[7] Two preliminary points are in order. The parties are agreed that the deputy registrar erred in his interpretation of the Waxman decision. The respondent concedes that the Waxman case can stand for the proposition that an equity claim becomes a claim in debt once judgment is obtained. Neither party suggests that this is a basis on which the deputy registrar’s decision ought to be altered. Further, the so-called fresh evidence was not put before the court and as a result, it was unnecessary to deal with the respondent’s objection to its admissibility.
[8] Mr. Kelly submits that the underlying policy of the Act is to permit “an honest debtor, who has been unfortunate, to secure a discharge so that he or she can make a fresh start and resume his or her place in the business community”: Houlden & Morawetz, The 2010 Annotated Bankruptcy and Insolvency Act, Carswell at p. 2. He submits that the debtor is neither honest nor unfortunate and he is undeserving of the protection of a stay. He contends that the deputy registrar erred in failing to find that the debt resulted from false pretences or fraudulent misrepresentation, given the findings of the trial judge. He suggests that the deputy registrar failed to consider whether there were other sound reasons warranting a lift of the stay.
[9] The debtor submits that the deputy registrar committed no error of law and there is no palpable and overriding error in his reasons for refusing the application.
The Standard of Review
[10] The standard of review is correctness for questions of law and palpable and overriding error for questions of fact: see Housen v. Nikolarsen, 2002 SCC 33, [2002] 2 S.C.R. 235.
[11] An appeal from a decision of the deputy registrar will be allowed if the deputy registrar erred in principle or law or failed to consider a proper principle or took into consideration an improper factor: Impact Tool & Mould Inc. (Estate Trustee of) (2006), 2006 7498 (ON CA), 79 O.R. (3d) 241 (C.A.).
The Law
[12] The relevant statutory provisions are reproduced below:
69.3(1) Subject to subsection (2) and sections 69.4 and 69.5, on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor’s property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy, until the trustee has been discharged.
69.4 A creditor who is affected by the operations of sections 69 to 69.31 or any other person affected by the operation of section 69.31 may apply to the court for a declaration that those sections no longer operate in respect of that creditor or person, and the court may make such a declaration, subject to any qualifications that the court considers proper, if it is satisfied
(a) that the creditor or person is likely to be materially prejudiced by the continued operation of those sections; or
(b) that it is equitable on other grounds to make such a declaration.
178.(1) An order of discharge does not release the bankrupt from
(d) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity or, in the Province of Quebec, as a trustee or administrator of the property of others;
(e) any debt or liability for obtaining property by false pretenses or fraudulent misrepresentation.
[13] In Re Advocate Mines Ltd. (1984), 52 C.B.R. (N.S.) 277 (Ont. S.C.) Registrar Ferron observed that a stay of proceedings has been removed in the following circumstances:
Actions against the bankrupt for a debt to which a discharge would not be a defence.
Actions in respect of a contingent or unliquidated debt, the proof of which and valuation has that degree of complexity which makes the summary procedure prescribed by s. 95(2) of the Bankruptcy Act inappropriate.
Actions in which the bankrupt is a necessary party for the complete adjudication of the matters at issue involving other parties.
Actions brought to establish judgment against the bankrupt to enable the plaintiff to recover under a contract of insurance or indemnity or under compensatory legislation.
Actions in Ontario which, at the date of bankruptcy, have progressed to a point where logic dictates that the action be permitted to continue to judgment.
[14] The test for lifting the stay of proceedings has been articulated in a number of decisions. In Re Maple Homes Canada Ltd., 2000 BCSC 1443 (S.C.) Smith J. set out the governing principles:
- The principles that emerge from the jurisprudence may be summarized:
(1) The general scheme of bankruptcy proceedings is that civil actions are stayed against the insolvent person; exemptions are to be made only where there are “compelling reasons.” This flows from one of the major purposes of the Bankruptcy and Insolvency Act, which is to permit the rehabilitation of the bankrupt unfettered by past debts.
(2) An applicant for exemption from the stay must show that there will be material prejudice to the applicant if the stay is continued or that it is equitable on other grounds to allow the exemption.
(3) The existence of one or more of the factors listed in Re Advocate Mines will be an important consideration, but is not determinative.
(4) The court is not to attempt to determine the proposed claim on its merits.
(5) Rather, it must assess whether it is a claim of the nature that would survive discharge, whether it is a claim that could not succeed, and whether if it did succeed it could not result in recovery against the defendants.
[15] In Re Osprey Energy Inc. (2006), 2006 BCSC 216, 20 C.B.R. (5th) 187 (B.C.S.C. Master), the master quoted from the Maple Homes and Advocate Mines decisions and concluded:
It is clear that the burden is on the applicant to satisfy the court that at least one of the Advocate Mines criteria is present and that the applicant will be materially prejudiced or that it is equitable to make a declaration lifting the stay of proceedings. According to the authorities, there must be “compelling reasons” to set aside the stay even if only for a limited purpose.
[16] Similarly, in Royal Bank v. Robert Mason Lobster Inc., 2010 NBBR 334, 2010 NBQB 334 the test was stated as follows:
Identify one of the factors from the Re Advocate Mines Ltd. case as being present; and
If one of the factors is present, the Court will then consider the question of whether there are equitable grounds for lifting the stay, or whether the creditor would be materially prejudiced by the stay.
[17] In Re Francisco (1995), 1995 7371 (ON SC), 32 C.B.R. (3d) 29 (Ont. Gen. Div.), the court allowed an appeal from the decision of a registrar refusing to permit an action to be continued against a bankrupt. The court made these observations:
Without intending to usurp the role of the trial judge to decide otherwise on the facts established before him, I am satisfied BPCO has pleaded sufficient allegations to bring its claim, at least arguably, within s. 178(1)(d). Francisco is alleged to have been a director or officer of a corporation who assented to or acquiesced in conduct he knew or should have known amounted to breach of trust by the corporation. Section 13(1) of the Construction Lien Act makes such a person “liable or the breach of trust.” Thus, it is reasonably arguable that a director acts in a fiduciary capacity with respect to the beneficiaries of this trust relationship. For very similar fact situations see, for example, J.B. Allen & Co. v. D.E. Witmer Plumbing & Heating Ltd. (1992), 12 C.B.R. (3d) 272 (Ont. Bktcy.), and Smith v. Henderson (1992), 1992 680 (BC CA), 10 C.B.R. (3d) 153 (B.C.C.A.).
It should be understood that Re Advocate Mines Ltd., supra, is not an exhaustive codification of the policy underlying the Bankruptcy and Insolvency Act. It is but one thoughtful decision attempting to articulate the type of grounds which may provoke the exercise of a judicial discretion. To view Advocate Mines as a limiting or exhaustive instrument is an error in principle. Moreover, I am satisfied the action in question is one in respect of which a discharge may not be a defence and, further, that the action had progressed to a point where logic dictated the action be permitted to continue to judgment.
[18] An appeal of this decision was dismissed by the Court of Appeal at (1996), 1996 10233 (ON CA), 40 C.B.R. (3d) 77 (Ont. C.A.).
[20] Finally in Re Ma, 2001 24076 (Ont. C.A.), the court offered this guidance:
…lifting the automatic stay is far from a routine matter. There is an onus on the applicant to establish a basis for the order within the meaning of s. 69.4. As stated in Re Francisco, the role of the court is to ensure that there are “sound reasons, consistent with the scheme of the Bankruptcy and Insolvency Act” to relieve against the automatic stay. While the test is not whether there is a prima facie case, that does not, in our view, preclude any consideration of the merits of the proposed action where relevant to the issue of whether there are “sound reasons” for lifting the stay. For example, if it were apparent that the proposed action had little prospect of success, it would be difficult to find that there were sound reasons for lifting the stay.
Analysis
[19] To the extent that Osprey Energy and Robert Mason Lobster suggest that one of the criteria set out in Advocate Mines must be present before an order can be made, that is inconsistent with the Francisco and Ma decisions, both of which are Ontario appellate authority. Clearly, the categories identified in Advocate Mines are not exhaustive and there may be other circumstances in which such an order might be justified.
[20] Nevertheless and notwithstanding Mr. Kelly’s persuasive argument, I have concluded that the appeal must be dismissed. I do not read the deputy registrar’s reasons as suggesting that he was obliged to find one of the criteria enumerated in Advocate Mines before he could grant relief. Rather he correctly identified the overarching governing principle, namely that sound reasons consistent with the scheme of the Act must be proved by the applicant. Although not expressly stated, one reason he clearly considered was whether the claim fell under s. 178(1)(e).
[21] He refused to make a finding of fraudulent misrepresentation or false pretenses. He noted that it was not for him to make such findings absent a finding by the trial judge. This is consistent with the decisions in Re: Jenkins, 2005 NSSC 234 and Re: Schnare (1991), 1991 3966 (NS SC), 15 C.B.R. (3d) 255 (N.S.S.C.).
[22] It is noteworthy that the trial judge did not make a finding of fraud against Mr. Karaoglu. Indeed, fraud was not pleaded. He did conclude that Mr. Karaoglu was untruthful during his examination for discovery but clearly, the plaintiff did not show that the defendant acted fraudulently or on false pretenses. If he had done so, the trial judge would most assuredly have said so, given the tenor of the last paragraph of the judgment.
[23] The deputy registrar continued and concluded that lifting the stay would give the creditor an advantage that would not be consistent with the scheme of the Act.
[24] There is no error in principle, no palpable and overriding error of fact and no failure to consider a proper principle. The appeal is therefore dismissed. In the circumstances, I am not inclined to award costs. However, if the respondent wishes to make submissions, I will receive brief written submissions from him by August 8, 2014 and from the appellant seven days later.
“Justice H. A. Rady”
Justice H. A. Rady
Released: July 29, 2014
COURT FILE NO.: 35/1765533
DATE: 2014/07/29
ONTARIO
SUPERIOR COURT OF JUSTICE IN BANKRUPTCY and INSOLVENCY
IN THE MATTER OF THE BANKRUPTCY OF
Under Section 69.3(1) of the Bankruptcy and Insolvency Act
BETWEEN:
IN THE MATTER OF THE BANKRUPTCY OF Mehmet Fatih Karaoglu of the Town of Fergus, in the County of Wellington, in the Province of Ontario
REASONS FOR JUDGMENT
Rady J.
Released: July 29, 2014