ONTARIO
SUPERIOR COURT OF JUSTICE
IN BANKRUPTCY and INSOLVENCY
COURT FILE NO.: BK-33-1650640
DATE: 2014/09/24
RE: IN THE MATTER OF THE BANKRUPTCY OF DEREK JOHN SCOTT, OF THE CITY OF KINGSTON, IN THE PROVINCE OF ONTARIO
BEFORE: KERSHMAN J.
COUNSEL:
Derek John Scott, Self-represented, the Bankrupt
Kenneth Robbs, for the Trustee in Bankruptcy
Sarah Sherhols, for the Attorney General of Canada for the Department of National Defence
HEARD IN OTTAWA: September 19, 2014
REASONS: September 24, 2014
reasons for decision TO lift stay of proceedings under the BANKRUPTCY AND INSOLVENCY ACT BY THE DEPARTMENT OF NATIONAL DEFENCE
[1] This Motion is brought by the Department of National Defence (“DND”) to lift the stay of proceedings under section 69.3 of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (“BIA”) in relation to Mr. Scott (“Bankrupt”) having been convicted of two counts of fraud and his admissions in relation to two false education expenses, before a Standing Court Martial on January 25, 2000.
Factual Background
[2] Mr. Scott is a former member of the Canadian Armed Forces (“CAF”).
[3] The DND is a department of the Government of Canada within the National Defence Act, R.S.C. 1985 c. N-5, and is responsible for the CAF and its members. DND administers claims for CAF members including General Allowance claims for education allowances (“Education Expense Claims”) for the children of CAF members who are posted abroad.
[4] Between 1998 and 1999, while deployed in Brussels, Belgium, Mr. Scott made four false Education Expense Claims for his children and as a result of the claims, he received in excess of $90,000 in Canadian funds.
[5] The purpose of the education expense allowance is to allow CAF members who are posted abroad to send their children to school that meet Canadian standards without incurring out of pocket expenses. Between 1998 and 1999 Mr. Scott submitted four false Education Allowance Claims so that his children could attend private schools in Belgium. The claims were approved, however Mr. Scott’s children never attended private schools, as indicated in his claims. Mr. Scott admitted that he used the funds for his own purposes.
[6] On November 29, 1999, Mr. Scott was charged with four offences pursuant to s. 130 of the National Defence Act, that is to say, fraud, contrary to s. 380(1) of the Criminal Code of Canada R.S.C. 1985, c. C-46.
[7] On January 25, 2000, the Defendant pleaded guilty to and was convicted of the following two offences at the Standing Court Martial Hearing.
AN ACT PUNISHABLE UNDER SECTION 130 OF THE NATIONAL DEFENCE ACT, THAT IS TO SAY, FRAUD CONTRARY TO SECTION 380(1) OF THE CRIMINAL CODE OF CANADA
Particulars: In that he, on 14 April 1999 at or near CFSU(E) Brussels, Belgium did by deceit, falsehood or other fraudulent means defraud the Department of National Defence of money, the sum of $23,182 US Dollars, by submitting a false General Allowance claim.
AN ACT PUNISHABLE UNDER SECTION 130 OF THE NATIONAL DEFENCE ACT, THAT IS TO SAY, FRAUD CONTRARY TO SECTION 380(1) OF THE CRIMINAL CODE OF CANADA
Particulars: In that he, on 22 July 1999 at or near CFSU(E) Brussels, Belgium did by deceit, falsehood or other fraudulent means defraud the Department of National Defence of money, the sum of $6,032 US Dollars, by submitting a false General Allowance claim.
[8] On January 25, 2000, a military judge found Mr. Scott guilty of two charges of fraud and sentenced him to 90 days in detention.
[9] The total dollar amount of these two guilty pleas equaled $43,932.18.
[10] In addition to the aforesaid guilty pleas, at the Standing Court Martial Hearing, counsel for Mr. Scott made an admission on his behalf related to two other claims for educational expenses not incurred for an additional $50,000. Accordingly, the Bankrupt’s total debt to Crown was approximately $92,000.
[11] On May 2, 2003, the Bankrupt signed an acknowledgement of debt and promissory note acknowledging his $92,000 debt to the Crown for submitting the false General Allowance Claims for educational expense allowances and promised to repay the full amount. The payment schedule required Mr. Scott to make payments of $200.00 per month. The low amount was agreed to in order to assist him with his transition back to Canada. The payment schedule was to be reviewed and renegotiated in September 2003. These payments continued until 2010. Between 2003 and 2010 DND underwent significant staffing changes and efforts to renegotiate the Bankrupt’s payment scheme were not resumed by DND until 2010.
[12] On November 30, 2011, DND requested that Mr. Scott propose a new payment plan by the end of January 2012.
[13] Various negotiations took place between DND and Mr. Scott in relation to a proposed new payment plan. The parties were unable to come to an agreement as to the new plan.
[14] On July 31, 2012, Mr. Scott declared bankruptcy before a new payment schedule could be finalized.
[15] Mr. Scott made monthly payments of $200 per month from January 25, 2002 to July 31, 2012. No interest was charged on the debt. The principal amount outstanding is $65,000.
Issues
- Should the stay of proceedings under section 69.3 of the Bankruptcy and Insolvency Act be lifted, and, if so, whether DND should be granted leave to pursue its claim under section 178(1)(e) of the BIA in the ordinary courts?
[16] Sections 69.3(1), 69.4 and 178(1)(e) of the BIA read:
Stays of proceedings — bankruptcies
69.3 (1) Subject to subsections (1.1) and (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.
Court may declare that stays, etc., cease
69.4 A creditor who is affected by the operation 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.
1992, c. 27, s. 36;
1997, c. 12, s. 65.
- (1) An order of discharge does not release the bankrupt from
(e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim;
Position of DND:
[17] DND argues that its claim for fraudulent misrepresentation is a claim that, if proven, would survive bankruptcy under s. 178(1)(e). As such, it argues that the Court has the discretion to lift the stay under s. 69.4. If the stay is not lifted and DND cannot pursue its claim under s. 178(1)(e), DND will be unable to recover public monies and will be materially prejudiced.
Mr. Scott’s Position:
[18] Mr. Scott argues that the stay of the proceedings should not be lifted because he pleaded guilty to the two charges totaling $43,932.18. He said that he did not plead guilty to the two charges that relate to the admissions for $50,000 and the stay of proceedings should not be lifted with respect to the $50,000 admissions.
[19] He argues that having to deal with a civil action by DND and a matrimonial action by his former wife would be too onerous on him financially.
Analysis
[20] Section 69.4 of the BIA provides that the stay of proceedings can be lifted in one of two cases: (1) where a creditor or other person is likely to be materially prejudiced by the continuous operation of s. 69.3; or (2) that it is equitable on other grounds to make such a declaration.
[21] From the evidence it is clear that on January 25, 2000, Mr. Scott pleaded guilty and was convicted of two counts of fraud, contrary to s. 380(1) of the Criminal Code of Canada in the amount of $43,932.18. Mr. Scott was sentenced to 90 days in detention. In addition, Mr. Scott admitted that two other Educational Expenses Claims, totalling $50,000 were not used by the Bankrupt for their intended purposes.
[22] The total amount involved in the fraudulent convictions and the two admissions is approximately $92,000.
[23] The evidence is clear that Mr. Scott agreed to repay these monies and executed an acknowledgement and a promissory note to that effect. As of the date of the bankruptcy he had repaid over $27,000, the last payment being in July 2012.
[24] The Court agrees with DND that fraud under s. 380(1) of the Criminal Code is a broad offence that encompasses most fraud related offences, including false pretences. The phrase, “whether or not it is a false pretence” in s. 380(1) of the Criminal Code means that an accused who commits a false pretence to defraud a victim may be charged with either fraud or false pretences. See T.D. Bank v. Cushing 2007 BCSC 1581 para. 41.
[25] The elements of fraud under s. 380(1) of the Criminal Code are analogous to those under s. 178(1)(e) of the BIA. See Deposit Insurance Corp. of Ontario v. Mallette, 2014 ONSC 2845 at para. 24.
[26] As such, the Court finds that a conviction under s. 380(1) of the Criminal Code satisfies a finding of either fraudulent misrepresentation or false pretences under s. 178(1)(e) of the BIA. The debt to DND consists of public monies that Mr. Scott improperly received by virtue of his fraud. As public monies, both DND and the public have an interest in ensuring that they are recovered. If the stay of proceedings is not lifted and DND cannot pursue its claim under s. 178(1)(e) of the BIA, DND will be materially prejudiced and public monies will not be recovered.
[27] In the case of Re: Ma (2001), 2001 24076 (ON CA), 24 C.B.R. (4th) 68, the Court of Appeal dealt with the issue of lifting the stay of proceedings under s. 69.4 of the BIA. At paragraph 3 the Court states:
[3] As this passage makes clear, 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.
[28] In the case of Ieluzzi (Re), 2012 ONSC 3447, Morawetz J. in an appeal from the decision of a bankruptcy registrar quotes from the Ma case and at paragraph 10 states:
[10] The moving creditor need only plead specific facts which show that there are sound reasons to lift the stay, such as a set of facts which, if believed, would fall within the ambit of subsection 178 (1) (d).
[29] The Court realizes that in this case, DND is relying upon s. 178(1)(e), as opposed to (d). Notwithstanding that fact, the Court is satisfied that the principle laid out by Morawetz J. in Ieluzzi (Re) applies with respect to s. 178(1)(e), as well.
[30] In the case before the Court it is clear that Mr. Scott was convicted of two counts of fraud based on his guilty pleas. In addition, he voluntarily admitted that he had falsely obtained public monies which were not used for the intended purpose of educational allowances.
[31] This Court is satisfied that the two guilty pleas and the two admissions made by Mr. Scott have been specifically pleaded by DND and are sound reasons to lift the stay of proceedings.
[32] Mr. Scott argues that he will be incurring legal fees to deal with the DND claim, as well as his matrimonial litigation in Oshawa, Ontario, which will place a heavy financial burden on him. That argument was dealt in the case of Re: Kandasamy (2009) 174 A.C.W.S. (3d) 616. In that case, Deputy Registrar Diamond at page 4 states:
Lastly, I want to address the arguments made by the Bankrupt’s counsel that it is inappropriate to lift the stay because his client will not be able to afford to defend the action or pay any amount on any judgment. With respect to the ability to defend the action, I would note in Re Catahan 2003 64266 (ON SC), (2003), 40 CBR (4th) 3, the Ontario Superior Court held that “the financial ability of the bankrupt to defend the action while in bankruptcy is not a factor to be considered by the court in deciding whether to grant leave.” I agree.
[33] This Court agrees with reasoning of Deputy Registrar Diamond in the Re: Kandasamy case. This Court is not prepared to take into account the Bankrupt’s financial ability to defend the DND action, and the matrimonial action as a factor in deciding whether or not to grant leave.
[34] Mr. Scott argues that he only pleaded guilty to two fraud related claims amounting to approximately $43,000 and the two admissions in relation to the additional $50,000 should not be included in the lifting of the stay of proceedings.
[35] The Court dismisses this argument. This Court follows the Court of Appeal’s reasoning at para. 3 of Re: Ma, which say in part, that:
While the test is not whether or not there is a prima facie case, that does not in our view, preclude any consideration of the merits of the proposed action were relevant to the issue of whether there are ‘sound reasons’ for lifting the stay.
[36] In this case, the Court is not precluded from considering the merits of the proposed action by DND. The Court finds that there are sound reasons for lifting the stay in relation to both the guilty pleas and to the two admissions, in part, because they relate to the misuse of public funds.
[37] As such, the stay of proceedings will be lifted to allow DND to pursue its action against Mr. Scott in relation to the two guilty pleas and the two admissions for which $65,000 of principal monies remains outstanding.
[38] There will be an order to go lifting the stay of proceedings and allowing DND to pursue its claim under s. 178(1)(e) of the BIA to recover the monies taken by Mr. Scott.
Costs
[39] The parties are encouraged to settle the issue of costs. If they are unable to do so within 14 days of the release of this decision, the Parties shall contact the Bankruptcy Trial Coordinator and arrange for a date at 9:30 a.m. to argue the issue of costs. The Parties will provide Costs Outlines at the hearing and will each have 10 minutes to argue their position as to the issue of costs.
[40] Order accordingly.
Mr. Justice Stanley J. Kershman
Date: September 24, 2014
COURT FILE NO.: BK-33-1650640
DATE: 2014/09/24
ONTARIO
SUPERIOR COURT OF JUSTICE
IN BANKRUPTCY and INSOLVENCY
IN THE MATTER OF THE BANKRUPTCY OF
DEREK JOHN SCOTT
OF THE CITY OF KINGSTON
IN THE PROVINCE OF ONTARIO
Derek John Scott
Debtor
– and –
Kenneth Robbs
Trustee in Bankruptcy
– and –
Sarah Sherolds
Attorney General of Canada
REASONS FOR DECISION TO LIFT STAY OF PROCEEDINGS UNDER THE BANKRUPTCY AND INSOLVENCY ACT BY THE DEPARTMENT OF NATIONAL DEFENCE
Kershman J.
Released: September 24, 2014