ONTARIO SUPERIOR COURT OF JUSTICE IN BANKRUPTCY AND INSOLVENCY

COURT FILE NO.: 33-1391610

RE: IN THE MATTER OF THE BANKRUPTCY OF RAYMOND STEPHEN PAUL LEPAGE OF THE CITY OF OTTAWA - IN THE PROVINCE OF ONTARIO

BEFORE: Beaudoin J.

COUNSEL:
Stephanie Lauriault, for the Attorney General of Canada

Alden Christian, for the Bankrupt, Raymond Stephen Paul Lepage

Keith MacLaren, for the Trustee, Allen MacLeod

HEARD IN OTTAWA: July 8, 2015

ENDORSEMENT

[1] The creditor, Her Majesty the Queen in Right of Canada (Canada Revenue Agency – “CRA”) brings this motion for the following relief:

1. An order varying the Trustees April 24, 2015 decision regarding the Bankrupt’s residential property located at 27 Rochelle Drive.

2. An order declaring that the increase in the value of the Bankrupt’s property before his discharge is divisible among his creditors.

The Facts

[2] The following facts are not in dispute:

1. Raymond Stephen Paul Lepage (“the Bankrupt”) pled guilty to one count of tax evasion on July 22, 2010, he was fined $75,000.
2. He was deemed bankrupt on October 13, 2010, and remains in bankruptcy.
3. Mr. Lepage was a previous bankrupt.
4. D & A MacLeod Company Limited (the “Trustee”) was appointed the Trustee and as such is vested in all of the debtor’s property.
5. Rana Kapoor, collections officer with the CRA, was voted an Inspector of the Estate.
6. This is a tax-driven bankruptcy. The CRA is the sole unsecured creditor for any income tax debt of $646,350.60.
7. An October 31, 2010 appraisal of the Bankrupt’s residence at 27 Rochelle Drive, Richmond Ontario, provided a valuation of $375,000.
8. There was a secured mortgage in the amount of approximately $346,803.78.
9. The Trustee determined that the Bankrupt’s property had negative equity and no value for the Bankrupt’s estate.
10. Although eligible for discharge since October 2013, the Bankrupt remains undischarged to this date.
11. On April 20, 2015, the Trustee filed his report regarding the Bankrupt’s application for discharge. That report indicated that no amounts were realized on the Bankrupt’s property.
12. On April 21, 2015, the Inspector disapproved of the Trustee’s report and informed the Trustee that the Bankrupt’s property appeared to have realizable equity since the first evaluation in October 2010.
13. CRA obtained an appraisal report of the Bankrupt’s property from the real estate appraisal division of the CRA, which evaluates the property at $455,000 as at April 22, 2015. Another appraisal dated June 30, 2015 provides a value of $416,000.
14. The CRA further obtained confirmation from the mortgagee of the Bankrupt’s property that the amount owing on the mortgage as of April 2, 2015 is $305,854.50. As a result of this information, it appears that the Bankrupt’s property may have up to $150,000 in equity.
15. The Trustee has not entered into a formal agreement with the Bankrupt regarding the purchase of the equity in the Bankrupt’s property and the Trustee has not formally divested all or any part of this right, title or interest in the property.

[3] Pursuant to s. 37 of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (“BIA”), the CRA seeks to appeal or vary the Trustee’s decision to not realize on the increase in equity of the Bankrupt’s property since the date of the initial insolvency event. The issue in this motion is whether the increase in equity of the Bankrupt’s property between the date of the initial insolvency event and the date of discharge is divisible among his creditors.

[4] For the purposes of this motion, the relevant sections of the BIA are as follows:

Divesting property by trustee

20. (1) The trustee may, with the permission of the inspectors, divest all or any part of the trustee’s right, title or interest in any real property or immovable of the bankrupt by a notice of quit claim or renunciation by the trustee, and the official in charge of the land titles or registry office, as the case may be, where title to the real property or immovable is registered shall accept and register in the land register the notice when tendered for registration.

Registration of notice

(2) Registration of a notice under subsection (1) operates as a discharge or release of any documents previously registered in the land register by or on behalf of the trustee with respect to the property referred to in the notice.

Powers exercisable by trustee with permission of inspectors

30. (1) The trustee may, with the permission of the inspectors, do all or any of the following things:

sell or otherwise dispose of for such price or other consideration as the inspectors may approve all or any part of the property of the bankrupt, including the goodwill of the business, if any, and the book debts due or growing due to the bankrupt, by tender, public auction or private contract, with power to transfer the whole thereof to any person or company, or to sell the same in parcels;

Appeal to court against trustee

37. Where the bankrupt or any of the creditors or any other person is aggrieved by any act or decision of the trustee, he may apply to the court and the court may confirm, reverse or modify the act or decision complained of and make such order in the premises as it thinks just.

Disposal of unrealizable property

40. (1) Any property of a bankrupt that is listed in the statement of affairs referred to in paragraph 158(d) or otherwise disclosed to the trustee before the bankrupt’s discharge and that is found incapable of realization must be returned to the bankrupt before the trustee’s application for discharge, but if inspectors have been appointed, the trustee may do so only with their permission.

Final disposition of property

(2) Where a trustee is unable to dispose of any property as provided in this section, the court may make such order as it may consider necessary.

Property of bankrupt

67. (1) The property of a bankrupt divisible among his creditors shall not comprise

but it shall comprise

(c) all property wherever situated of the bankrupt at the date of the bankruptcy or that may be acquired by or devolve on the bankrupt before their discharge, including any refund owing to the bankrupt under the Income Tax Act in respect of the calendar year — or the fiscal year of the bankrupt if it is different from the calendar year — in which the bankrupt became a bankrupt, except the portion that

(i) is not subject to the operation of this Act, or

(ii) in the case of a bankrupt who is the judgment debtor named in a garnishee summons served on Her Majesty under the Family Orders and Agreements Enforcement Assistance Act, is garnishable money that is payable to the bankrupt and is to be paid under the garnishee summons, and

(d) such powers in or over or in respect of the property as might have been exercised by the bankrupt for his own benefit.

Vesting of property in trustee

71. On a bankruptcy order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with their property, which shall, subject to this Act and to the rights of secured creditors, immediately pass to and vest in the trustee named in the bankruptcy order or assignment, and in any case of change of trustee the property shall pass from trustee to trustee without any assignment or transfer.

Exception — personal income tax debtors

172.1 (1) In the case of a bankrupt who has $200,000 or more of personal income tax debt and whose personal income tax debt represents 75% or more of the bankrupt’s total unsecured proven claims, the hearing of an application for a discharge may not be held before the expiry of

(a) if the bankrupt has never before been bankrupt under the laws of Canada or of any prescribed jurisdiction,

(i) 9 months after the date of bankruptcy if the bankrupt has not been required to make payments under section 68 to the estate of the bankrupt at any time during those 9 months, or

(ii) 21 months after the date of bankruptcy, in any other case;

(b) if the bankrupt has been a bankrupt one time before under the laws of Canada or of any prescribed jurisdiction,

(i) 24 months after the date of bankruptcy if the bankrupt has not been required to make payments under section 68 to the estate of the bankrupt at any time during those 24 months, or

(ii) 36 months after the date of bankruptcy, in any other case; and

(c) in the case of any other bankrupt, 36 months after the date of the bankruptcy.

Position of CRA

[5] CRA submits that the Bankrupt’s property remains vested in the Trustee to this date. As such, any increase in the value of the Bankrupt’s property between the date of the initial insolvency event and the date of the Bankrupt’s discharge vests with the Trustee and is divisible among the Bankrupt’s creditors. CRA maintains that the Bankrupt is not entitled to retain any increase in the equity.

[6] CRA relies on s. 71 and in particular s. 67(1) (c) of the BIA which states that the property of the Bankrupt shall comprise of all property at the date of the bankruptcy or that may be acquired by or devolve on the Bankrupt before their discharge. They argue that the increase in equity is “after acquired property”.

[7] Having regard to s. 40, CRA maintains that the property of the Bankrupt did not revert back to the bankrupt absent an assignment by the trustee or a court order. The Court of Appeal has held that a positive act is required in order to return property that is vested in a Trustee to the Bankrupt.[^1]

[8] CRA emphasizes that the Bankrupt’s property remains in the hands of the Trustee. There has been no agreement between the Trustee and the Bankrupt to repurchase the asset nor has the Trustee divested his interest in the Bankrupt’s property as required by s. 20 of the BIA.

[9] CRA argues that the Trustee must realize on the value of the equity in the asset of the benefit of the creditor of the estate in this case.

[10] CRA acknowledges that there was no equity in the property in the Bankrupt’s property when it was assessed in October 2010 but relies on the more recent appraisal that places the property at $455,000, and that the mortgage now stands at $305,000. It claims that all of the increase in equity should accrue to it as the sole creditor.

[11] CRA relies on case law from other Canadian provinces where statutory exemptions on real estate exist. In Hazin (Re), 2011 ABQB 197 at para 27, the Court rejected the proposition that a bankrupt is entitled to the statutory exemption plus any increase in equity in the property from the date of bankruptcy until the date of the bankrupt’s discharge:

[27] Firstly, the issue of when is the time to address the issue of non-exempt equity. The comments of Master Funduk in the Re MacKay case are applicable here. At paragraphs 100 and 101 he stated:

100 Regardless whether a bankrupt has gotten an absolute, suspended or conditional discharge nobody can later raise an issue about surplus equity in a house. The discharge is the latest time that issue is to be dealt with, if anyone wants to make that an issue.

101 If a conditional order is given requiring the bankrupt to pay for the surplus equity nobody can later ride the market, up or down, to revisit that. If the house value later goes up the trustee and creditors cannot ask that the bankrupt now pay more. If the house value later goes down the bankrupt cannot ask that he now pay less.

[12] While Ontario does not provide an exemption for equity held in real estate, CRA argues that reasoning remains the same; increase in equity of non-exempt property of the Bankrupt between the date of the initial insolvency event and that of the discharge is divisible among his creditors

[13] CRA submits that the integrity of the bankruptcy system would be offended if the Bankrupt would be permitted to retain any non- exempt equity in property when he or she has not fully paid its creditors.[^2]

Position of the Bankrupt

[14] Mr Lepage filed an affidavit in response to this motion. He relies on the appraisal of the property at the date of bankruptcy and the estimated negative equity of $2827.87 before taking into account any of the Trustee’s fees in relation to the subject asset.

[15] Due to that negative equity in the property, and in order not to incur undue costs on the estate, he was advised by Kate Cayetano, an administrator in the Trustee’s office that the Trustee had made the decision to disclaim an interest in the property. He was further advised by Ms. Cayetano that this decision to disclaim the property was communicated to CRA and that no response was received. As a result of that information, he continued to make all payments associated with the mortgage, property taxes, hydro, gas, heat, insurance, repairs and improvements. He states that he made these payments based on representations made by the Trustee.

[16] The Bankrupt claims that the valuation date for the property is the date when the Trustee could have reasonably dealt with the property; namely when that first appraisal was received on October 31, 2010. This appraisal was done less than a month after the Bankrupt’s assignment into bankruptcy.

[17] The Bankrupt agrees that a Trustee should act quickly and submits that the Trustee cannot delay the valuation of the property for the purpose of allowing its value to increase and thus increase the amounts the Bankrupt is required to pay to the Trustee and enhance recovery for the creditors.

[18] He argues that the case is similar to that of Deloitte v. Marino also relied upon by CRA. There, the Bankrupt acted on the representations made by the Trustee and continued to reside in the house and satisfy the outstanding mortgage arrears on the property and proceeded to make upgrades of the property. But for the assurances made by the Trustee, the Bankrupt would have made an earlier fresh start as contemplated by the BIA, abandon the premises to the Trustee, and begin the process of building equity somewhere else.

Position of the Trustee

[19] The Trustee took the position that the correct date to evaluate the Bankrupt’s property is as of the date of the filing of the proposal but now seeks direction from the Court. In his affidavit filed in response to the motion, Mr. MacLeod confirms that he discussed the notional equity in the residence in October 2010 with the Bankrupt who indicated that he intended to keep his residence. After the first appraisal was conducted, the Trustee concluded there was no equity.

[20] He states that the practice in Ottawa, and elsewhere, is for Trustees in Bankruptcy to appraise the property at the date of the bankruptcy, to determine if there is any realizable value to the estate. It is at that time that Trustees determine whether or not the property is capable of realization and not on some future date between the date of bankruptcy and the date of discharge. He says that there is an interest in the trustee community in receiving some guidance as to the procedure to be followed in these circumstances and, in particular, what information should be given to the Bankrupt concerning his potential liability for the increased value of an asset which remains in the Trustee’s possession following the date of bankruptcy, specifically where payments made by the Bankrupt after bankruptcy increase the value of that asset.

Analysis and Conclusion

[21] The decision of the Court of Appeal in Deloitte & Touche LLP v. Marino gives guidance in this case. At paras 15 and 16, the Court held:

The Statutory Scheme

[15] Upon their bankruptcies, when the Marinos' interests vested and remained vested in the trustee, the Marinos were not entitled to the property unless it was released to them by the trustee, or if it was re-vested by court order under either s. 40 or s. 37 of the Act. In other words, some positive act was required to return the property. If that positive act was not forced by the bankrupt, the trustee was required to consider it at the time of application for its discharge.

[16] The requirement to consider the property is set out in s. 40(1); where property is "incapable of realization", the trustee is required to return it to the bankrupt before the trustee applies for discharge: Thompson v. Coulombe, [1984] Q.J. No. 11, 54 C.B.R. (N.S.) 254 (C.A.); Zemlak v. Deloitte, Haskins & Sells Ltd. (1987), 1987 4662 (SK CA), 42 D.L.R. (4th) 395, 66 C.B.R. (N.S.) 1 (Sask. C.A.). Alternatively, under s. 40(2), where the trustee is unable to dispose of property, the court "may make such order as it may consider necessary". If the trustee takes no action, an "aggrieved" bankrupt has the option of applying to a court” and "the court may confirm, reverse or modify the act or decision complained of and make such order in the premises as it thinks just" (s.37).

[22] In considering the issue of estoppel the court said this;

[32] To rely on promissory estoppel Mr. Marino must establish:

(a) Deloitte & Touche, by words or conduct, made a promise or assurance which was intended to affect its legal relationship with Mr. Marino and intended Mr. Marino to act upon it; and

(b) Mr. Marino, relying on the representation, acted on it or in some way changed his position.

See Maracle v. Travellers Indemnity Co. of Canada, 1991 SCC 58, [1991] 2 S.C.R. 50, 80 D.L.R. (4th) 652, at p. 57 S.C.R.

[33] Where appropriate, the principles of promissory estoppel have been considered both for and against a trustee in bankruptcy: Rocher v. H. & M. Diamond & Associates, 2003 ONCA 29646, [2003] O.J. No. 1049, 43 C.B.R. (4th) 134 (C.A.); Re Country Kitchen Donuts Ltd., [1980] O.J. No. 171, 34 C.B.R. (N.S.) 252 (H.C.J.) at para. 21.

[34] In this case, the motions judge found that the trustee had, through its representatives, until at least 2000, given assurances to the Marinos that it would make no claim against the equity in the property. The trustee did not tell them of its 1999 registration on title. Even though the trustee did raise the possibility in 2000 of requiring further information about the property's equity, it took no further action until 2002.

[35] Not only did the trustee give assurances to the Marinos, but the Marinos also did not engage in any conduct that would have misled the trustee. The trial judge found as a fact that the Marinos acted honestly.

[23] The facts in this case are distinguishable from those in Marino. In that case, the Bankrupts were told by the Trustee that he would not make any claim to their home. The Trustee went further and represented to them that a quit claim deed would be registered. The Bankrupts were then discharged from bankruptcy. The Trustee was then discharged as Trustee for Mrs. Marino but not for her husband. The Trustee then registered against the home pursuant to section 74(2) of the BIA. In short, the Trustee had always known there was equity in the home and sought to make a claim against it after the discharge. The estoppel argument was very strong in that case.

[24] The Bankrupt relies in a number of decision: Re Pelkey (Bankrupts), 2006 ABQB 814, Re Krause (Bankrupt), 2007 ABQB 500; Re Piraux (Bankrupt), 2006 ABQB 409, Re Fehr (Bankruptcy), 2008 NWTSC 70, to argue that the date of the valuation should be the date when the property can be first reasonably be effectively dealt with by the trustee. The Alberta cases must be applied with some caution since there is a specific exemption for up to $40,000 of the value of a principal residence pursuant to the Civil Enforcement Act.

[25] This is an income tax related bankruptcy and it is the second bankruptcy for Mr. Lepage. As a result, the Trustee could not realize on the property for a period of 36 months pursuant to the provisions of s. 172.1 of the BIA. There was no opportunity to act quickly on the part of the Trustee. While it may be the practice amongst trustees in this area, it is not always reasonable to fix the date of the valuation early in the process having regard to the length of time that might elapse and the nature of the asset.

[26] The BIA makes it clear that after acquired property of the Bankrupt remains available for the benefit of all creditors up until the day of discharge. There is no reason to treat an increase in the equity in real property any differently. In some areas of this country, dramatic increases in property values can occur between the date of assignment in bankruptcy and the date of discharge. It would be unfair to the creditors of Bankrupt if the debtor were allowed to escape from bankruptcy and retain any increase in the equity while the creditors remain unpaid.

[27] In my view, the Trustee should assess the nature of the assets of the Bankrupt as soon as practicable after the date of the assignment in the bankruptcy. Where it appears to the Trustee that the discharge will be prolonged for any reason and the Trustee concludes that the property has no value to the estate, the Trustee should take a positive step to effectively deal with the property and formally divest himself of any interest in the property by executing a quit claim deed or a renunciation pursuant to s. 20 of the BIA and register this on title. In this way, the Trustee will avoid any allegations of estoppel or misrepresentation.

[28] In a case like this, where it is apparent that the Bankrupt may have surplus income, the Trustee should then put the Bankrupt on notice in writing that if the Bankrupt repurchases the property from the Trustee, any increase in equity before discharge may accrue to the benefit of the creditors as a result of the application of s. 67 of the BIA. The Bankrupt can then decide to walk away and build equity elsewhere. In the same way, any creditor who believes that the property might increase in value can seek to purchase it from the Trustee.

[29] Section 37 of the BIA allows me to vary or rescind any decision of the Trustee and make any order “as is just”. In this case, I find that representations were made by the Trustee and that the Bankrupt relied on those representations and continued to make payments to maintain the property thereby creating a benefit to the creditors. While the Bankrupt seeks credit for all interest, principal, taxes and insurance payments, I note that he would have incurred living expenses elsewhere.

[30] In this case, I find that it is just to give the credit to the Bankrupt for any reduction in the principal amount of the mortgage from October 31, 2010 up to the date of discharge and the applicant creditor CRA will be entitled to any increase in the equity beyond the original appraisal amount.

[31] By agreement of the parties, there is no order as to costs.

Mr. Justice Robert N. Beaudoin

Date: July 13, 2015

Released: July 13, 2015

[^1]: Deloitte and Touche LLP v. Marino, https://www.canlii.org/en/on/onca/doc/2004/2004canlii4324/2004canlii4324.html

[^2]: Niekamp, (Re), https://www.canlii.org/en/sk/skqb/doc/2013/2013skqb288/2013skqb288.html at para https://www.canlii.org/en/sk/skqb/doc/2013/2013skqb288/2013skqb288.html#par47; ICI Paints, A Business Unit of ICI Canada Inc. v. Gazelle (Bankrupt), https://www.canlii.org/en/ab/abqb/doc/2001/2001abqb233/2001abqb233.html at para https://www.canlii.org/en/ab/abqb/doc/2001/2001abqb233/2001abqb233.html#par18.