ONTARIO

SUPERIOR COURT OF JUSTICE

FILE NO.: CV-10-410911

HEARD: 20140123
RELEASED: 20140926

BETWEEN:

CHRISTOPHER MCGLYNN and 2014556 ONTARIO LTD.

Plaintiffs

• and -

GARY W. TUNE, GARY W. TUNE AS EXECUTOR FOR THE ESTATE OF SHELLEY ANNE TUNE (DECEASED), 2225008 ONTARIO INC., BRADLEY JOHN MANN, 1699384 ONTARIO LIMITED and CANADIAN EXCELL GROUP INC.

Defendants

APPEARANCES:
Jeffrey Levine - for the Plaintiffs Fax: 416-865-7048

Cara Zacks

Simon Valleau - for the Defendant, Tune Fax: 416-365-2189

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

HEARD: January 23, 2014

REASONS FOR DECISION

Preamble

[1] This motion heard on the Civil Motions list at Toronto arises out of a consent order that I made when sitting as both a Master and the Registrar in Bankruptcy with respect to an application to lift the stay pursuant to section 69.3 of the Bankruptcy and Insolvency Act (the “BIA”) relating to an action that had been commenced prior to the bankrupt Gary Tune filing for bankruptcy.

[2] The narrow issue turns on whether or not liability for the costs that were awarded constituted a liability which continued after the bankrupt received his discharge, on an automatic basis, some months later.

[3] While that is a narrow issue, it is resolution requires a broader review of the background circumstances.

I. Background

[4] Gary William Tune made an assignment in bankruptcy on November 7, 2012. BDO Dunwoody Ltd. is the Trustee of Tune's estate.

[5] The Plaintiffs, Christopher McGlynn and his company, 2014556 Ontario Ltd., ("McGlynn") commenced an action in Toronto (the "Action") on September 22, 2010 against the bankrupt/debtor Gary William Tune ("Tune") and his companies and the defendant Bradley Mann ("Mann") and his companies.

[6] The Action arises out of two advances totalling $450,000 by McGlynn to Tune in February and March of 2010. The Plaintiffs allege that such advances were obtained by virtue of fraudulent misrepresentations by Tune and facilitated, in part, by Tune arranging for the deposit of a cheque into the account of the numbered company upon which the defendant Mann had stopped payment, which cheque was drawn on an account that did not have sufficient funds, and which cheque Mann now claims was a forged cheque and contains a forged version of his signature.

[7] Well before Tune's assignment in bankruptcy, the Action also included a claim that the forgoing fraudulent scheme resulted in a debt or liability resulting from obtaining property by false pretences or fraudulent misrepresentation. It is asserted that such claims, if proven, would clearly fall within the meaning of subsection 178(1)(e) of BIA, and thus survive any bankruptcy discharge.

[8] On January 18, 2012, Tune was arrested and charged with theft contrary to section 380(1)(a) of the Criminal Code of Canada in respect of this transaction together with a second count of fraud.

[9] The plaintiffs assert that as part of the fraudulent scheme, Tune claimed, (after the $450,000 cheque used to facilitate the fraud had been returned) that he was working with an individual named Harold Hinn. Harold Hinn was subsequently charged with multiple counts of fraud and ultimately plead guilty to same including the fraud perpetrated against McGlynn which is the subject of the Action.

[10] In the Agreed Statement of Facts executed by the Crown and Hinn, Hinn named Tune as his accomplice in defrauding McGlynn.

II. The Defendant’s Version

[11] The defendant’s factum recognizes that the claim asserts a guarantee by Tune of the loan debt. The claim asserts Tune was part of a fraudulent scheme with the defendant, Bradley Mann, involving a fraudulent or forged repayment cheque. The claim was later amended to assert an equitable mortgage and fraudulent conveyance in respect to Tune’s property.

[12] Tune has defended the action. Tune asserts this is an action involving a business venture that failed. It is submitted that the plaintiff, “Christopher McGlynn, a well-experienced and self-styled ‘business entrepreneur’, invested his money in a series of short-term business ventures with Gary W. Tune, in respect to purchasing and reselling overstock, clear-out and close-out inventories. These ventures were conducted by a third party, Harold Hinn. McGlynn profited handsomely from a series of these transactions, realizing an annualized return of between 200 and 870 percent.”

[13] The defendant’s factum alleges:

There was never any written agreement or documentation of a loan or venture agreement respecting the investments made by McGlynn; McGlynn never required any.

[14] Tune assets that on about February 25, 2010, McGlynn invested in a further Hinn inventory venture. The factum summary of the facts relied upon continues in part :

“ McGlynn invested the sum of $250,000.00 in a ‘Schick’ razor transaction.

McGlynn provided his bank account information to facilitate the return directly by Hinn of his investment in the Schick venture. Unfortunately, it appears that Hinn may have defrauded both McGlynn and Tune. The deposit made by Hinn appears to be fraudulent. The deposit cheque was drawn on the account of the defendant, Bradley Mann’s companies, 1699384 Ontario Limited and Canadian Excell Group Inc.”

[15] Tune has denied the allegations made by McGlynn. More particularly, among other allegations he has denied, Tune has denied that:

• he made any fraudulent representations to McGlynn;

• that he attempted to gain his trust and confidence with any intent to defraud him;

• that he ‘enticed’ McGlynn to make any investment in a venture or make any loan advance;

• that he promised a mortgage to secure any debt to McGlynn or that McGlynn is entitled to a mortgage or equitable mortgage to secure any debt;

• that he conspired with anybody, including Mann or Hinn, to defraud McGlynn;

• that he forged or schemed to forge any cheques payable to McGlynn or his companies.

[16] The factum filed on this motion further asserts, as of the time the motion was argued, that:

“15. McGlynn alleges in his pleadings that Tune conspired with the defendant, Bradley Mann, to defraud McGlynn. However, on his examination for discovery, Mann, testified that he did not know of Tune and had had no dealings with Tune. Mann has undertaken on his examination to provide an amended pleading. Mann’s lawyer has provided draft amended pleadings however Mr. Grenier has not consented to the amended pleading.

16. Tune is actively defending the related criminal charge. The criminal charge has not yet proceeded to preliminary inquiry. There has been no finding against Tune in the criminal proceeding.

17. McGlynn alleges Tune guaranteed a debt to McGlynn, however the plaintiff has produced no document that might comply with section 4 of the Statute of Frauds in respect to a guarantee, “in writing and signed by the party to be charged”.”

[17] Clearly a number of factual issues remain to be resolved between the parties.

III. The Motions

[18] The present motion was brought for a number of items. By the time it was argued the only remaining component sought to strike the defence of Gary Tune, on the basis of non-payment of a $12,500 costs award against him. The costs award was granted at the conclusion of a motion brought to facilitate the sale of the Tunes previous residence. That motion was heard and decided over one year prior to the argument of this motion, but the costs award still remained unpaid.

[19] Since Mr. Tune made a voluntary assignment in bankruptcy on November 7, 2012, by statute there was an automatic stay of any pending civil proceedings against him.

[20] The plaintiffs moved to lift the stay on the basis of the alleged fraud and I granted the order lifting the stay (the "Order").

[21] The pre-amble to the Order sets out which parties were represented at the hearing. In particular, the pre-amble provides that:

“UPON READING the affidavit of Jeffrey Levine sworn December 7, 2012, the Supplementary Affidavit of Jeffrey Levine sworn

December 12, 2012 and the Factum of the Moving Parties, filed, and upon reading the Consents of Home Trust Company, BDO Canada Limited as Trustee in Bankruptcy of the Estate of Gary William Tune and the defendants Bradley John Mann, 1699384 Ontario Limited and Canadian Excell Group Inc., filed, and upon bearing submissions from counsel for the Moving Parties and the Debtor/Defendant Gary William Tune, and upon being advised by counsel for the Moving Parties that Canada Revenue Agency does not oppose the requested relief,”

[22] In other words, the only party that had an interest in the motion to lift the stay who opposed was Mr. Tune. Indeed, the evidence from Mr. Tune's lawyers is that they appeared at the lift stay motion to make submissions in respect of certain terms of the order sought that appeared to them to be prejudicial to Mr. Tune.

[23] Ultimately I held that the plaintiffs were entitled to their costs of the motion. With respect to costs, the relevant portion of the Order (drafted by the plaintiffs’ counsel) provided as follows:

“9. THIS COURT FURTHER ORDERS that the Moving Parties shall be entitled to their costs of this Motion which are hereby fixed in the amount of $12,500.00 and may be paid from the Remaining Proceeds of Sale in accordance with the procedure set out in paragraph 8 above. “ [my emphasis]

[24] No part of the Order was appealed. The above wording in my view does not explicitly impose liability upon Mr. Tune; but clearly he was the only party opposing the lift of the stay on that earlier motion.

IV. Sidebar

[25] An understanding of the background to the subject sale is useful in appreciating the subtlety of the issue confronting this court on this motion.

[26] Originally, the plaintiffs brought their action seeking directions and orders to facilitate the sale of the debtor/bankrupt's abandoned house by the first mortgagee, Home Trust Company and in particular sought the court’s assistance in:

“(a) dealing with the second ranking Certificate of Pending Litigation registered against the property by the Plaintiffs pursuant to the within action; and

(b) an order requiring the first mortgagee to pay any excess proceeds of the property to the credit of this action to conserve same, subject to future court direction as to distribution ....”

[27] Thus, the plaintiffs originally sought “a declaration of an equitable mortgage in favour of McGlynn as against Tune's abandoned house at 245 Maple Grove Drive, Oakville, Ontario (the "Property") as promised and confirmed in writing by Tune in the summer of 2010.”

[28] A Certificate of Pending Litigation ("CPL") was granted by Master Graham on September 20, 2011 and was registered on title on September 21, 2011.

[29] Of relevance to this motion is the fact that in addition to the above relief, the Action seeks to set aside, as a fraudulent conveyance, a transfer of the house by Tune and his wife which was registered in August, 2011 by the Tunes after having been served with the CPL motion in accordance with a court ordered timetable for same.

[30] The plaintiffs allege that the Tunes initially resisted the motion, sought an extended return date to prepare responding materials based upon claims of illness of both Tune and Shelley Tune, had a different lawyer register the conveyance during the extended time sought, then subsequently abandoned opposition to the motion after registering the conveyance.

[31] Obviously, the determination of whether or not the transfer was a fraudulent conveyance will have a direct affect upon the disposition of the proceeds of the sale of the Property.

[32] The facts would appear to be that Tune and Shelly Tune originally purchased the Property as joint tenants in 2009.

[33] In 2010, the Tunes mortgaged the Property in favour of Home Trust Company (the "Home Trust Mortgage") as the first mortgagee (the CPL ranking second behind said mortgage).

[34] The plaintiff alleges that the fraudulent conveyance referenced above was registered in August, 2011 for the express purpose of severing the joint tenancy.

[35] Shelley Tune died on March 6, 2012;

[36] On April 27, 2012, Canada Revenue Agency registered a tax lien against the Property based upon the tax indebtedness of Shelley Tune for over $3.0 million.

[37] In September, 2012, Home Trust Company served a Notice of Sale under Charge further to the Home Trust Mortgage. The indebtedness claimed in the Notice is approximately $1.3 million. The Property was listed for sale for $1.649 million and thus, a surplus was expected. As Tune had abandoned the Property and a surplus was expected, there is no expectation that Home Trust Corporation would need to commence any proceedings for, inter alia, possession or a deficiency (and thus no Home Trust action in which to interplead the anticipated excess proceeds).

[38] To facilitate a future sale, Home Trust Company asked McGlynn to remove his second ranking CPL from title. McGlynn was willing to do so upon closing, provided Home Trust was directed to pay any excess proceeds into court to the credit of this Action, to be disbursed as further directed by the court.

[39] It is interesting to note that the moving party at the time of the previous motion described its position that quite apart from McGlynn's claim to an equitable second mortgage against the Property then protected by the CPL, any future disposition of excess proceeds of the Property will be directly affected by a determination of whether or not the August 2011 transaction by the Tunes to sever the joint tenancy should be set aside as claimed in the Action.

[40] More particularly, if the transaction is set aside, then it is possible that the Tunes owned the Property as joint tenants at the time of Shelley Tune's death in March, 2012. Thus, the entire remaining equitable interest in the Property work vest in the surviving joint owner, Tune and Shelley Tune's estate had no interest in the Property when the Canada Revenue Agency's lien was registered against same in April 2012.

[41] Clearly the court’s ultimate determination of that issue will affect the entitlement to excess proceeds of disposition of the Property and was yet another reason necessitating a lifting of the stay.

V. The Collection Mechanism

[42] The Order I signed did provide in paragraph 9 (supra) for a possible collection mechanism. Paragraph 8 in the Order contemplated that:

“(a) if proceeds remained from the sale of Mr. Tune's residence after amounts owing to secured creditors were satisfied; then,

(b) such proceeds would be paid into court; and

(c) such proceeds might be paid out of court by order made on notice to the Trustee in Bankruptcy, the Canada Revenue Agency, and any representative of the Estate of Shelley Tune.

[43] Notably, payment pursuant to paragraph 8 could be made without notice to Mr. Tune.

[44] It appears the ultimate sale resulted in a short fall such that no funds may be available to pay the cost award.

[45] The plaintiffs’ factum asserts:

11. In any event, the collection mechanism made available to the plaintiffs has no bearing on which party is liable for the costs award. Mr. Tune is liable for the costs award, and since the collection mechanism provided for in the costs award has not resulted in payment, it remains for Mr. Tune to pay.

[46] The plaintiff therefore relies upon Rule 57.03(2) which gives discretion to the court to strike a defence in the event of non-payment of an order for costs granted on a motion.

[47] They assert:

“Courts have done so in circumstances such as those present in this case where an award of costs has gone unpaid for a number of months and the defendant has not filed any evidence of his financial circumstances which might provide a reason for why the costs award has not been satisfied. Alterna Savings and Credit Union Limited v. Downtown Fine Cars Inc., 2008 3213 (ON SC).”

VI. The Defendant’s Position on Costs award

[48] The responding position asserted in the factum filed on behalf of Mr. Tune is that he declared bankruptcy on November 7, 2012, some five weeks before the costs order was made. His counsel argues that costs order asserted as grounds by the plaintiffs for the striking of his defence, does not oblige Mr. Tune to pay from his post bankruptcy assets but rather the costs relate to a pre-bankruptcy action and thus ought to treated as unsecured claims and potentially payable from the assets in the estate in bankruptcy.

[49] Simply they assert Tune is not personally liable for the cost order as he was bankrupt when the order was made and the costs order is instead provable in bankruptcy.

[50] In the alternative it is alleged that striking the pleading in this case would be excessive and inappropriate in the circumstances.

[51] Rule 57.03 provides in part:

(1) On the hearing of a contested motion, unless the court is satisfied that a different order would be more just, the court shall,

(a) fix the costs of the motion and order them to be paid within 30 days; or

(b) in an exceptional case, refer the costs of the motion for assessment under Rule 58 and order them to be paid within 30 days after assessment.

(2) Where a party fails to pay the costs of a motion as required under subrule (1), the court may dismiss or stay the party's proceeding, strike out the party's defence or make such other order as is just.

[52] The following are amongst the considerations counsel for the Bankrupt raised with respect to the issues before me:

“• The order itself is ambiguous as to the liability for and method or recourse for payment;

• There has been to date no determination that Tune was personally liable;

• There has been to date no determination the order was not released by his discharge from bankruptcy or that the costs survive the discharge;

• The order does not provide a time-limit for payment;

• This is the sole breach relied upon by the plaintiff in seeking to strike the defence;

• Other alleged ‘breaches’ have been cured or rendered redundant or moot.”

[53] It is clear to me that the ultimate remedy of striking pleadings is severe and ought not to be used except as a last resort. The court should be mindful of its interest in having claims and defences dealt with on the merits. [see Mining Technologies International Inc. v. Krako Inc., 2013 ONSC 7280, at paras. 195-197]

[54] At the conclusion of the oral submissions I advised counsel that I was not satisfied in the circumstances that the defence ought to be struck in these circumstances regardless of whether there was an ongoing personal liability for the $12,500 cost award. While the previous motion was in my view contested to a degree; nevertheless contra proferendum would seem to have an application with respect to the alleged immediate liability issue.

[55] I now turn to whether any continuing potential liability on the part of Mr. Tune for these costs exists in this case.

VII. Is British Goldfields Still the Law in Ontario?

[56] Section 121 of the BIA deals with “Claims Provable” in these terms:

121. (1) All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt or to which the bankrupt may become subject before the bankrupt’s discharge by reason of any obligation incurred before the day on which the bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act.

(2) The determination whether a contingent or unliquidated claim is a provable claim and the valuation of such a claim shall be made in accordance with section 135.

[57] It is however to be noted that in determining whether or not there is a provable claim for costs, the caselaw identifies a distinction between the treatment of plaintiff's costs and defendant's costs.

[58] The summary of the law in this area that appears in Houlden, Morawetz and Sarra, 2013-2014 Annotated Bankruptcy and Insolvency Act at, G§36-Provable Claims, at sub-section (21), (with my emphasis added) reads :

(a) - Plaintiff's Costs

If an action is brought against the debtor before bankruptcy and the debtor goes into bankruptcy before judgment is given against him or her, the costs are regarded as an addition to the sum recovered and are provable, provided the claim is provable: Re British Gold Fields of West Africa Ltd., [1899] 2 Ch. 7; 68 L.J Ch. 412, 6 Mans. 234 (C.A.).

The Yukon Territory Supreme Court determined that costs, awarded in a proceeding determined after court approval of a proposal, were not provable claims and would be payable by the debtor outside the proposal. Justice Veale held that the definition of "claim" in the proposal did not capture costs that were discretionary and were awarded after the filing date; the costs were not an obligation or liability until well after the filing date of the proposal, and were thus not provable claims pursuant to s. 121 (1) of the BIA or on the actual terms of the proposal:

Ross v. Ross Mining Ltd., 2012 CarswellYukon 128; 97 C.B.R. (5th) 241; 2012 YKSC 102, [2012] Y.J. No. 162 (Y.T.S.C.)

(b) - Defendant's Costs

If an unsuccessful action is brought by a debtor and he or she is ordered to pay costs or if a judgment is given against him or her before he or she becomes bankrupt, the costs are a provable claim. On the other hand, if no judgment is given against him or her and no order is made for payment of costs until after he or she becomes bankrupt, costs are not a provable debt. In such a case, there is no provable debt and no liability to pay by reason of any obligation incurred by the bankrupt before bankruptcy, nor are the costs a contingent liability to which the debtor can be said to be subject at the date of his or her bankruptcy:

Re British Gold Fields of West Africa Ltd., supra.

VIII. Arguments on behalf of Bankrupt

[59] A number of arguments were put forward to support the position that Mr. Tune has no current obligation to pay a post-bankruptcy cost award in the circumstances of this case.

[60] Two of those arguments are based on the factual circumstances of this case:

34. The order does not specify that Tune is liable for the plaintiff’s costs on the motion. It merely orders that the plaintiff is entitled to costs of the motion. The Trustee in Bankruptcy consented to a costs order and consented to an order that the costs may be payable from assets otherwise available to the bankrupt estate. On a motion to lift a stay, it is the Trustee who has standing to consent or object to the order requested, not the bankrupt. The Trustee is the respondent to the motion. Properly, costs should be paid from the bankrupt estate unless the court makes a specific finding the costs are payable by the trustee or bankrupt personally. Certainly, the implication of the order taken as a whole, is that the costs are payable from the bankruptcy estate in the normal course.

35. This costs order does not comply with Rule 57.03 in that it does not provide a time-limit for payment of costs. The court has been presented with no evidence as to the status or availability of the payment of costs by the method specified therein; from excess proceeds of the sale of Tune’s property paid into court for that purpose. It may yet come to pass that this method of payment of the costs will be fruitful. It is premature to determine that Tune is liable for the costs.

[61] With respect to the applicable legal considerations I found these portions of the Bankrupt’s factum helpful:

38. Equitable debts such as debts based on breach of trust, fraud and fraudulent misrepresentation are provable in bankruptcy.

39. There is good reason to make the distinction between plaintiff’s costs and defendant’s costs in bankruptcy. The rule makes a sensible distinction between debts that are provable and those that are not. It accords with the definition of claims provable in s. 121(1) of the BIA, which specifically refers to all debts and liabilities, present or future. Such costs are released by the discharge and do not survive the bankruptcy.

McCrum v. Leonhardt, 2007 28746 (ON SC), 2007 CarswellOnt 4715, 35 C.B.R. (5th) 294, (OSCJ), par. 16, 17.

41. Subject to specified exceptions, an order of discharge releases the bankrupt from all claims provable in bankruptcy. The exceptions include a debt or liability for obtaining property by false pretences or fraudulent misrepresentation.

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 178.

42. The bankruptcy court does not determine if a debt will survive bankruptcy because the debtor has been guilty of fraudulent misrepresentation. If a creditor does not have such a judgment against the debtor at the time of bankruptcy but has pleaded fraud in a claim before the bankruptcy, the creditor should proceed in the regular court for such a determination.

F. Bennett; Bennett on Bankruptcy; 15th Ed., 2013, p. 582; © CCH Canada Limited.

[62] Tune’s counsel summarizes his position in this way:

43. The claims made by the plaintiff in this action are provable in bankruptcy. Costs corollary to those claims are also provable in bankruptcy; they are ‘plaintiff’s costs’. The discharge of the bankrupt defendant, Tune, has the effect of releasing the bankrupt from the debt for the costs ordered in the action. Notably, the discharge was unopposed and unconditional in respect to the costs.

44. Arguably, the costs may survive the bankruptcy if there is a determination that the costs are corollary to a judgment for debt based on a fraudulent misrepresentation, if and when a determination of fraud is made. However, that determination has not been made in the present action.

IX. Analysis

[63] Ultimately I have found these arguments persuasive :

• The order itself is ambiguous as to the liability for and method or recourse for payment;

• There has been to date no express determination that Tune was personally liable;

• There has been to date no determination the order was not released by his discharge from bankruptcy or that the costs survive the discharge;

• The order does not provide a time-limit for payment;

[64] The decision in Ross Mining related to a proposal situation and at least turned in part on the definition of “claim” within the specific proposal made to the creditors in that case.

[65] I distinguish that situation from the long established view of the extent of potential liability and obligations of a party involved in civil litigation commenced prior to the date of bankruptcy.

[66] The involvement of claims sounding in “fraud” may well give rise to a continuing liability that would survive the discharge of the bankrupt. However, unless and until such liabilities established, I fail to see how the court could or should order payment of the costs which at the time my order was made the parties expected, at least in part, would be paid from a defined fund.

X. Disposition

[67] In the result, I am dismissing the application to strike the defendants statement of defence and I am making a finding that in accord with the jurisprudence flowing from British Goldfields of West Africa the sum of $12,500 shall be a claim provable in the bankruptcy of Gary Tune and that unless an order is made in the future which exposes him to an ongoing obligation under section 178 of the BIA, Mr Tune has no post-bankruptcy obligation for these costs.

[68] The motion was originally brought for a number of items of relief. I understand that the parties have worked out those items. With respect to this costs item, it seems to me that the problem flowed from what was at least, a quasi-consent order, and that the parties therefore share some of the responsibility for this motion having to be brought.

[69] Thus, in all the circumstances, I am making no order as to costs with respect to this motion.

Master D. E. Short

September 26, 2014

DS/ R.61