Abraham v. McBean et al., 2015 ONSC 157
COURT FILE NO.: BK-13-01647011-0031
DATE: 20150109
ONTARIO
SUPERIOR COURT OF JUSTICE
(IN BANKRUPTCY AND INSOLVENCY)
IN THE MATTER OF THE BANKRUPTCY of
JUDY BERYL ABRAHAM of the City of Oshawa, in the
Regional Municipality of Durham, in the Province of Ontario
BETWEEN:
JUDY BERYL ABRAHAM
Appellant/Bankrupt
– and –
HORACE McBEAN
Respondent/Objecting Creditor
– and –
Risman & Zysman Inc.
Trustee in Bankruptcy for the Estate Judy Beryl Abraham
Victor L. Freidin, Q.C., for the Appellant/Bankrupt
Norman Epstein, for the Respondent/Objecting Creditor
HEARD: December 3, 2014
L. A. PATTILLO J.:
Introduction
[1] The Bankrupt, Judy Beryl Abraham, appeals from the order of Master Jean dated May 27, 2014 (the “Order”) which provided that the judgment of Stinson J. dated September 22, 2011 constituted a debt that was not released by the discharge of the Bankrupt pursuant to s. 178(1)(d) of the Bankruptcy and Insolvency Act (“BIA”). The Order further provided that the Bankrupt pay costs to Horace McBean, the Objecting Creditor, of $3,000.
[2] For the reasons that follow, I would allow the appeal and set aside the order of Master Jean. In awarding judgment against the Bankrupt, Stinson J. made no finding of moral turpitude on the part of the Bankrupt which is required pursuant to s. 178(1)(d) of the BIA.
Background
[3] The Bankrupt carried on business as a paralegal in 2006. In late November, early December 2006, the Bankrupt was retained by Mr. McBean and an individual by the name of Quartus Griffin (“Griffin”) to complete a loan transaction between them. Mr. McBean, through his RRSP B2B Trust, was the lender and Mr. Griffin the borrower. The loan was for $60,000 to be secured by a second mortgage on property owned by Griffin.
[4] The transaction closed on December 18, 2006. On that day, $60,000, which had been advanced from B2B Trust to the Bankrupt on December 8, 2006, was released by the Bankrupt to Griffin but rather than obtaining a mortgage from him, the Bankrupt obtained a second mortgage from a numbered company which had purchased the property from Griffin a few days earlier. The second mortgage contained no personal guarantee by Griffin. It was not until the end of January, 2007 that Mr. McBean was notified that the mortgage the Bankrupt had registered was not in Griffin’s name but in the name of a numbered company.
[5] When Griffin defaulted under the loan agreement in April 2007, Mr. McBean commenced an action against Griffin and the Bankrupt claiming repayment of the loan and other relief.
[6] The action came on for trial before Stinson J. on September 21, 2011. Although the Bankrupt filed a defence in the action, she did not appear at trial. While Griffin’s defence had been struck, he appeared at trial but was not granted leave to participate. For reasons dated September 21, 2011 (2011 ONSC 5581), Justice Stinson granted judgment in favour of Mr. McBean against both Griffin and the Bankrupt for unpaid principle and interest of $90,219.86. In addition, Justice Stinson award $10,000 in punitive damages against the Bankrupt. In subsequent reasons released October 28, 2011 (2011 ONSC 6442), Justice Stinson awarded costs against the Bankrupt fixed at $59,509.93.
[7] In finding liability against the Bankrupt at trial, Justice Stinson stated as follows at paragraphs 17 and 18 of his reasons:
17 As regards Ms. Abraham, the evidence demonstrates that she failed to discharge her contractual obligations to B2B Trust in relation to the mortgage transaction. She had been retained and instructed to obtain a second mortgage from Mr. Griffin as mortgagor. She undertook to hold the funds in escrow until registration of a valid and enforceable second mortgage on the property. The mortgagor was to be Mr. Griffin. Contrary to those commitments, she failed to obtain a mortgage for Mr. Griffin and instead obtained one from the numbered company. In so doing, she clearly breached her contractual duty to B2B Trust.
18 Ms. Abraham had to know that Mr. Griffin was no longer the owner of the property, because the mortgage she ultimately supplied to B2B Trust was in the name of the numbered company, and not Mr. Griffin. Thus, she clearly acted contrary to her instructions. Once she became aware that the property was no longer owned by Mr. Griffin, she should have declined to proceed with the mortgage loan transaction and ought to have returned the mortgage funds back B2B Trust.
[8] In concluding that punitive damages should be awarded against the Bankrupt, Justice Stinson stated at paragraph 21 of his reasons:
21 The plaintiff also seeks an award of punitive damages. Counsel concedes there is likely no basis for such an award as against Mr. Griffin. As regards Ms. Abraham, however, in addition to breaching her contract and contractual undertaking to B2B Trust, Ms. Abraham committed a breach of trust: she received the mortgage funds that had been advanced by B2B Trust on the basis that she was to hold them in escrow until registration of the appropriate mortgage. The funds were deposited into her trust account. She plainly held them as trustee on behalf of B2B Trust, on terms that she would only disburse them once the terms of the trust were satisfied. She failed to do so and, in this respect, committed an independent actionable wrong. She chose to disregard her undertaking regarding the distribution of the funds, and acted in disregard to the interests of the party whose interests she was retained to represent. In my view, such conduct is to be strongly discouraged, especially among members of the legal and paralegal community. I therefore award the plaintiff $10,000 by way of punitive damages payable by Ms. Abraham.
[9] In holding that the debt created by Justice Stinson’s judgment was not released by the Bankrupt’s discharge pursuant to s. 178(1)(d) of the BIA, Master Jean stated:
It is clear that Stinson J. found the bankrupt liable for breach of trust. She undertook to hold funds in escrow pending registration of a valid & enforceable mortgage by Griffin. She failed to do so and advanced funds to Mr. Griffin. This misconduct occurred while acting as a paralegal – a fiduciary relationship with McBean (and B2B Trust). I have no hesitation in finding misappropriation within the meaning of s. 178(1)(d) (See p. 876 of Holden, Morawetz & Sara, 2013 – 2014 Annotated BIA)
Analysis
[10] Section 178(1)(d) of the BIA provides:
178 (1) An order of discharge does not release the bankrupt from
(d) any debt or liability arising out of a fraud, embezzelement, 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;
[11] In Simone v. Dailey (1999), 1999 CanLII 3208 (ON CA), 43 O.R. (3d) 511, 8 C.B.R. (4th) 143 (Ont. C.A.), the Court considered the issue of whether a judgment arising from a breach of fiduciary duty survived discharge pursuant to s. 178(1) of the BIA. In giving the decision for the Court, Blair J. (ad hoc), as he then was, stated at paragraph 52:
52 Consequently, I am not persuaded that the exception to a release of liability upon a bankruptcy discharge which is provided for in paragraph 178(1)(d) of the BIA should be extended to conduct which does not display at least some element of wrongdoing or improper conduct on the part of the fiduciary in question in the sense of a failure to account properly for monies or property entrusted to the fiduciary in that capacity or inappropriate dealing with such trust property. Had Parliament intended that any innocent breach of an obligation on the part of fiduciary would give rise to a debt that would not be released by a discharge from bankruptcy it could very easily have said so, by providing that an order of discharge does not release the bankrupt from any debt or liability arising from a breach of fiduciary obligation. It did not do so. It chose to couch the types of debts or liabilities "while acting in a fiduciary capacity" which would attract the exceptions of subsection 178(1), in the context of debts or liabilities arising from fraud, embezzlement or misappropriation, as well as defalcation. While these notions may have slightly different shades or gradations of meaning, I can only conclude that Parliament intended the words "misappropriation" and "defalcation" to bear their plain and ordinary meaning, as the context in which they are used suggests.
See too: Superior Crane (Canada) Inc. v. Justan Consulting Ltd., [2005]¸O.J. No. 149, 2005 CanLII 796 (ON CA), 7 C.B.R. (5th) 111 (Ont. C.A.) at para. 4.
[12] It is clear, in my view, from a review of the reasons of Justice Stinson that his findings concerning the actions of the Bankrupt which gave rise to the breach of trust amounted to breach of contract on her part as opposed to fraud, misappropriation or defalcation. There was no finding by the learned judge of bad faith or dishonesty by the Bankrupt.
[13] Accordingly, while the learned Master was correct in stating that Stinson J. found the Bankrupt liable for breach of trust, she erred in law in concluding that the breach of trust was a misappropriation within the meaning of s. 178(1)(d) of the BIA. Justice Stinson made no such finding and there was no evidence before the Master upon which she could make such a finding. Nor is such a conclusion supported at p. 876 of Holden, Morawetz & Sara as referred to by the Master in her reasons.
[14] The appeal is therefore allowed. The order of Master Jean dated May 27, 2014 is set aside.
[15] The Bankrupt is entitled to her costs of the appeal. Counsel for the Bankrupt has submitted a bill of costs claiming $9,935.25 excluding a counsel fee for the appeal. It is clear from the bill, however, that it includes time in respect of the Bankrupt`s motion to admit fresh evidence on appeal which was never argued.
[16] Mr. McBean’s counsel has submitted a Costs Outline totaling $4,215.00.
[17] I fix the Bankrupt`s costs at $6,500 inclusive of disbursements and taxes. I consider such an amount to be fair and reasonable having regard to the factors in Rule 57.01 (1) and particularly the complexity of the appeal.
L. A. Pattillo J.
Released: January 9, 2015
CITATION: Abraham v. McBean et al., 2015 ONSC 157
COURT FILE NO.: BK-13-01647011-0031
DATE: 20150109
ONTARIO
SUPERIOR COURT OF JUSTICE
(IN BANKRUPTCY AND INSOLVENCY)
IN THE MATTER OF THE BANKRUPTCY of
JUDY BERYL ABRAHAM of the City of Oshawa, in the Regional Municipality of Durham, in the Province of Ontario
BETWEEN:
JUDY BERYL ABRAHAM
Applicant/Bankrupt
– and –
HORACE McBEAN
Respondent/Objecting Creditor
– and –
Risman & Zysman Inc.
Trustee in Bankruptcy for the Estate Judy Beryl Abraham
REASONS FOR JUDGMENT
L. A. PATTILLO J.
Released: January 9, 2015