ONTARIO SUPERIOR COURT OF JUSTICE IN BANKRUPTCY and INSOLVENCY

COURT FILE NO.: BK-33-1650640

DATE: 2014/10/02

IN THE MATTER OF THE BANKRUPTCY OF

DEREK JOHN SCOTT

OF THE CITY OF KINGSTON

IN THE PROVINCE OF ONTARIO

BEFORE: Mr. Justice Stanley J. Kershman

HEARD IN OTTAWA: July 23, 2014 and September 19, 2014

APPEARANCE:
Derek John Scott, the Bankrupt, Self-represented

Kenneth Robbs, Fontaine & Associates Inc., Trustee in Bankruptcy

Alana Corrine Scott, Self-represented on July 23, 2014, represented by John Siwiec on September 19, 2014

Sarah Sherhols, Attorney General of Canada on behalf of the Department of National Defence

reasons for decision concerning OPPOSITION TO DISCHARGE

INTRODUCTION

[1] Mr. Derek John Scott, the Bankrupt, applies for a discharge from his bankruptcy. The discharge is opposed by two parties: (1) Attorney General of Canada, acting on behalf of the Department of National Defence (“DND”); and, (2) Alana Corrine Scott (“Ms. Scott”), the former spouse of the Bankrupt.

FACTUAL BACKGROUND

[2] The Bankrupt is 50 years of age. He was formerly a soldier in the Canadian Armed Forces, and, since his discharge, he has been transitioning to a career as a real estate agent. The Bankrupt filed for bankruptcy on July 26, 2012, and Fontaine & Associates Inc. was appointed as the Trustee. This is a first time bankruptcy.

[3] In his Statement of Affairs, the Bankrupt indicates that the causes of his bankruptcy are “accumulation of tax debt and inability to make minimum payments.”

[4] The Bankrupt is separated from his former spouse, Ms. Scott. The date of separation is in issue. This issue will be decided in a family law proceeding commenced by Ms. Scott in Oshawa, Ontario.

[5] The Bankrupt’s marriage to Ms. Scott was his second marriage. There are two children of that marriage, who are both over the age of 18.

[6] Mr. Scott currently pays child support at a rate of $410 per month for one child from his first marriage. The duration of that support obligation is expected to end in approximately eight months.

[7] Ms. Scott brought a motion to lift the stay of proceedings to allow her to proceed against the Bankrupt’s exempt assets. An order was made on September 24, 2014, by this Court, to lift the stay of proceedings and allow Ms. Scott to proceed with the equalization of Net Family Property.

[8] Ms. Scott filed a proof of claim with the Trustee which was disallowed. At the discharge hearing, held on July 23, 2014, Ms. Scott orally advised the Court that she would be appealing the Trustee’s notice of disallowance of claim.

[9] On that basis, the Court allowed Ms. Scott to participate in the opposition to discharge hearing based on her proof of claim filed and her Notice of Opposition to Discharge. Ms. Scott has since formalized an Appeal to the Notice of Disallowance. A consent order was signed on September 19, 2014, allowing the appeal.

[10] The Department of National Defence (“DND”) also brought a motion to lift its stay of proceedings. An order was granted on September 24, 2014, to lift the DND stay of proceedings. This allowed DND to pursue its claim against Mr. Scott for $65,000 in relation to two fraud related guilty pleas and two admissions related to the improper use of educational expense monies.

OPPOSITIONS TO DISCHARGE

[11] Two Notices of Opposition to Discharge were filed.

Opposition to Discharge by the Department of National Defence

[12] The DND opposes Mr. Scott’s discharge from his bankruptcy on the following grounds:

(a) the Bankrupt’s assets are not of a value equal to 50 cents on the dollar for the amount of the Bankrupt’s unsecured liabilities, for reasons which the Bankrupt can be justly held responsible (s. 173(1)(a));

(b) the Bankrupt has brought on, or contributed to, his bankruptcy by unjustifiable extravagance in living (s. 173(1)(e)); and

(c) the Bankrupt has been found guilty of fraud by a Standing Court Martial (s. 173(1)(k)).

Opposition to Discharge by Alana Corrine Scott

[13] Ms. Scott opposes Mr. Scott’s discharge on the following grounds as set out in her Notice of Opposition to Discharge:

(a) the assets of the Bankrupt are of a value less than 50 cents on the dollar of his unsecured liabilities;

(b) the Bankrupt has the means to pay a substantial portion of his debts;

(c) the Bankrupt has concealed his assets, failed to disclose them to the Trustee and concealed his true income;

(d) the Bankrupt has put Ms. Scott through unnecessary expense in unravelling his financial machinations intended to defeat her claims;

(e) the Bankrupt’s income is sufficient to justify substantial monthly payments;

(f) the Bankrupt has failed to account satisfactorily for the loss or deficiency of his assets;

(g) the Creditor is the ex‑spouse of the Bankrupt. The assignment in bankruptcy was filed one day prior to the ex‑wife’s alleged date of separation and primarily for the purpose of frustrating his financial obligation arising from the breakdown of the marriage;

(h) the Bankrupt has put this Creditor through unnecessary expenses for an uncontested trial, which the Bankrupt later disputed; and

(i) the Bankrupt could make a viable proposal.

REQUEST FOR PAYMENT BY THE TRUSTEE FOR THE SEA CAMPER

[14] The Trustee with Bankruptcy did not oppose the Bankrupt’s discharge. However, based on evidence provided by the Bankrupt at the discharge hearing in relation to a 24 foot Sea Camper boat, the Trustee seeks an order from the Court declaring that the Bankrupt will receive a conditional discharge upon paying $7,000 to the Trustee for the boat.

BANKRUPT’S POSITION

[15] The Bankrupt seeks to have an absolute discharge from his bankruptcy. He argues that, while he agreed to repay the monies to DND, he was unable to come to a payment arrangement that was financially sustainable to him. He said that he tried to renegotiate with DND, but that the monthly payments sought by DND were not affordable. This resulted in him having to file for bankruptcy in July 2012.

[16] He asks the Court to recognize his efforts to repay the monies over the last nine years. He argues that he must still deal with both the family court proceedings in Oshawa, Ontario, and the DND claim now that the stays of proceeding have been lifted.

[17] In relation to the relief sought by the Trustee for payment of the Sea Camper, Mr. Scott says that he did not mention the boat to the Trustee in error. He requests that the boat be appraised so that a price can be negotiated.

STANDING COURT MARTIAL

[18] The Bankrupt was charged with four counts of fraud related to false General Allowance Claims for education, which he made while serving as an administrative clerk at the Canadian Forces Support Unit detachment at NATO Headquarters in Brussels, Belgium.

[19] As a result of those charges, the Bankrupt appeared before a Standing Court Martial on January 25, 2000. At the hearing, the Prosecution withdrew two of the charges. The Bankrupt plead guilty to the remaining two charges and was sentenced to 90 days detention.

[20] The Bankrupt’s fraud relating to these two charges totalled approximately $43,932.18. At the Court Martial hearing, Counsel for the Bankrupt made an admission on behalf of the Bankrupt for two additional fraudulent education claims, totaling an additional $50,000. Accordingly, the Bankrupt’s debt to the Department of National Defence totaled approximately $92,000. At the Court Martial hearing, the Bankrupt testified that he intended to repay the full amount to DND.

[21] Approximately three years later, on May 2, 2003, the Bankrupt signed an Acknowledgement of Debt and Promissory Note (“Promissory Note”). In the Promissory Note, the Bankrupt:

(a) acknowledged the $92,000 debt owing to the Crown for submitting false General Allowance Claims for educational allowances;

(b) acknowledged that he had already repaid $4,800 of the $92,000 owed; and

(c) promised to repay the additional $87,200 pursuant to a payment schedule annexed to the Promissory Note, at the rate of $200 a month, which would be reviewed in September 2003.

[22] The evidence of Lieutenant Colonel Nicole McDuff on behalf of DND at the discharge hearing was that the payment schedule of $200 per month was intended to be temporary to accommodate the Bankrupt until his return to Canada. The arrangement was intended to give him time to get his financial affairs in order so he could then make more substantial monthly payments.

[23] Requests were made in 2003 by DND staff to negotiate a new payment schedule; however, no new payment schedule was negotiated.

[24] Lieutenant Colonel McDuff testified that the file was transferred from the Claims Section to Accounts Processing for financial administration. Due to staff retirements, a lack of timely replacement of key staff, and the conflict in Afghanistan, the negotiation action was overlooked until 2010 when staff began to review the file and resumed efforts to re‑negotiate the Bankrupt’s payment schedule.

[25] On November 30, 2011, DND contacted the Bankrupt requesting that he propose a new payment schedule by the end of January 2012. On January 20, 2012, the Bankrupt sent an e-mail to DND requesting an extension of time until February 17, 2012, to file his proposed payment schedule, which was granted.

[26] Negotiations took place but the parties failed to reach an agreement. DND e-mailed a new Promissory Note and payment schedule to the Bankrupt. On June 22, 2012, the Bankrupt provided a counter‑proposal that was rejected by DND. No Promissory Note was executed. The Bankrupt’s evidence was that the monthly payments to DND were too high and were not affordable.

[27] Mr. Scott declared bankruptcy on July 26, 2012. DND filed a proof of claim for $65,000, bring the principal only, as the Bankrupt was never charged interest on the debt.

INCOME TAX DEBT

[28] According to his Statement of Affairs, the Bankrupt had income tax debt with the Canada Revenue Agency (“CRA”). The CRA filed a proof of claim for the sum of $174,240.72.

[29] No evidence was given as to how the CRA debt was incurred. The Court notes that this debt accounts for approximately 68% of the proven claims. In his Statement of Affairs the Bankrupt stated under oath that the cause of his bankruptcy was an “accumulation of tax debt and inability to make minimum payments.” There was no mention of the debt to DND as a contributing factor.

INCOME AND EXPENSES OF THE BANKRUPT

[30] As of the date of bankruptcy the Bankrupt was a member of the Canadian Armed Forces. His income was $6,576.33 per month and his compulsory deductions were $1,952.48 per month, leaving a net balance of $4,623.85 per month.

[31] At the present time, the Bankrupt receives a Manulife payment (due to his disability pension) of $3,648 per month; a Canadian Forces pension of $2,824.00 per month, and has self‑employment income, which fluctuates. He pays child support at a rate of $410.00 per month on account of a child from his first marriage, which is set to end in approximately eight months.

[32] On cross‑examination by Ms. Scott, the Bankrupt acknowledged that he was working for a firm called RMP Construction and Development (“RMP”), which is a real estate development company. Mr. Scott has entered into an arrangement with RMP that entitles him to two percent of any commission based on his sales.

[33] According to the Bankrupt, some of these units should be closing in the next 18-24 months, while others will be closing up to five years in the future.

[34] In relation to the Gananoque units, at an average price of $340,000 per unit, the Court calculates that he will be entitled to a commission of $20,400.

[35] In relation to the St. Lucia properties, at an average price of $320,000 per unit, the Court calculates that he will be entitled to a commission of $115,200.

[36] In relation to the Bell Tower project in Cornwall, Ontario, at an average price of $323,000.000 per unit, the Court calculates that he will be entitled to a commission of $116,280.

[37] The Bankrupt testified that he is in the process of obtaining his real estate license.

STATEMENT OF AFFAIRS – SEA CAMPER

[38] In his Statement of Affairs, at para. 10, the Bankrupt was asked whether within the five years prior to the date of the initial bankruptcy event, had he, either in Canada or elsewhere: (a) sold or disposed of any property; or, (b) made any gifts to relatives or others in excess of $500. The answer to both questions was “no.”

[39] In his evidence, the Bankrupt acknowledged that he had owned a Sea Camper (a 24‑foot long boat with a 150 horse power motor) which slept four. He bought the boat in 2010 for $7,500 and gave it to his children as a gift on December 25, 2010.

[40] The Court finds that the Bankrupt did not properly disclose the disposition of the Sea Camper on his Statement of Affairs.

FINDINGS UNDER SECTION 173 OF THE BIA

[41] Section 173 (1) of the Bankruptcy and Insolvency Act read as follows:

173. (1) The facts referred to in Section 172 are:

(a) the assets of the bankrupt are not of a value equal to fifty cents on the dollar on the amount of the bankrupt’s unsecured liabilities...

(e) the bankrupt has brought on, or contributed to, the bankruptcy by rash and hazardous speculations, by unjustifiable extravagance in living, by gambling or by culpable neglect of the bankrupt’s business affairs;

(k) the bankrupt has been guilty of any fraud or fraudulent breach of trust;

Section 173(1)(a)

[42] Section 173(1)(a) deals with the assets of the Bankrupt not being equal to 50 cents on the dollar of the unsecured liabilities.

[43] The Bankrupt did not provide any evidence to show that this fact arose from circumstances for which he could not be justly held responsible. Therefore, the Court finds that Mr. Scott did not rebut the evidence of this fact.

Section 173(1)(e)

[44] Section 173(1)(e) relates to whether the Bankrupt has contributed to his bankruptcy by an unjustifiable extravagance of living.

[45] Evidence from the Standing Court Martial transcript was reviewed.

[46] DND argues that Mr. Scott took out loans to try to make ends meet.

[47] Based on this evidence, there will be a finding in relation to s. 173(1)(e).

Section 173(1)(k)

[48] Section 173(1)(k) deals with fraud and breach of trust. In this case, the fraud was admitted by the Bankrupt under oath at his Standing Court Martial. He pleaded guilty and was convicted of fraud contrary to s. 380(1) of the Criminal Code of Canada.

[49] In addition to the fraud, counsel made admissions relating to two further fraudulent claims.

[50] In the May 2003 promissory note the Bankrupt acknowledged the debt totaling approximately $92,000.

[51] Therefore, the Court finds that the fact under s. 173(1)(k) has also been proven.

ANALYSIS

[52] The law in relation to discharges is well established. A discharge is a matter of right (Re Junger (1986), 60 C.B.R. (N.S.) 86 (Ont. S.C.)). Every application for discharge must be determined on its own particular facts and by the due exercise of judicial discretion (Rice v. Copeland (1965), 7 C.B.R. (N.S.) 288). The Court must refuse an absolute discharge if a s. 173 fact is proven against the debtor (s. 172(2) of the BIA and Re Crowley (1984)). One of the prime objects of the BIA is to enable an honest but unfortunate debtor to obtain a discharge from his or her debts, subject to such reasonable conditions as the Court may impose (Re Posner (1960), 1960 626 (MB KB)).

[53] In this case, as facts have been found under s. 173(1) BIA, an absolute discharge cannot be granted.

[54] Based on the evidence, the Court finds that the Bankrupt has an ability to repay his Creditors based on the amount of his pension and the amount that he will be earning working in real estate.

[55] The Trustee in Bankruptcy is requesting that the Bankrupt pay $7,000 for the Sea Camper.

[56] DND seeks a conditional discharge requiring $12,000 to be paid.

[57] The Court orders that in relation to the DND opposition, Mr. Scott should pay the Trustee in Bankruptcy the sum of $2,000.

[58] The Court is satisfied that Mr. Scott should also pay the Trustee the value of the Sea Camper. The Court sets the value at $6,500.

[59] Counsel for Ms. Scott asked the Court to delay the discharge pending the family court determination.

[60] The Court will not grant the relief sought by Ms. Scott.

[61] The Trustee seeks assurance that if the conditions are not satisfied, it can obtain its discharge.

[62] A conditional discharge is granted. The Bankrupt is to pay $8,500 to the Trustee in Bankruptcy at the rate of $650.00 per month.

[63] If payments are not made, the Trustee may take legal action to obtain the funds.

[64] The Trustee shall keep its file open for a period of 18 months.

[65] If DND obtains judgment, its collection shall be stayed until the earlier of the bankrupt’s discharge or the trustee’s discharge.

COSTS

[66] 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 arrange for a hearing to argue costs.

[67] Order accordingly.

Mr. Justice Stanley J. Kershman

Released: October 2, 2014