SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: 32-1774278
CV-15-11006-00CL

DATE: 20151013

RE: Global Royalties Limited and Benchmark Conversion International Limited O/A BCI, Plaintiffs

AND:

David Brook, Anna Brook, 2323593 Ontario Inc., Geoffrey Black aka Geoff Black, Griffin & Highbury Inc., Dario Beric aka Dario Beri-Maskarel, Dikran Khatcherian aka Diko Khatcherian aka Danny Matar, Leslie Frohlinger aka Les Frohlinger, Diversity Wealth Management Inc. and Diversity Wealth Management Holdings Inc., Defendants

BEFORE: Penny J.

COUNSEL:
Harvey Stone for the Plaintiffs

Russell Bennett for David Brook

HEARD: October 8, 2015

ENDORSEMENT

[1] In this motion the plaintiff seeks orders in connection with s. 69.4 of the Bankruptcy and Insolvency Act:

(1) declaring that injunctive and declaratory relief claimed against David Brook as well as monetary claims arising from Brook’s conduct post-bankruptcy, are not subject to the stay under s. 69 because these grounds of relief are not claims provable in bankruptcy; and

(2) lifting the stay of proceedings with respect to monetary relief claimed against Brook in connection with Brook’s pre-bankruptcy conduct.

[2] Brook was deemed bankrupt on February 27, 2015. The statement of claim in action C-15-11006-00CL was issued in June 2015. Brook is a defendant in that action.

[3] Brook took the position that the action against him was invalid by reason of his status as an undischarged bankrupt and the stay imposed by s. 69.3 of the BIA. Hence, the plaintiff brings this present motion.

[4] The relevant allegations in the statement of claim are that Brook breached fiduciary duties owed to the plaintiffs, defrauded the plaintiffs and misappropriated sales, revenue and business opportunities from the plaintiffs and that the other defendants knowingly assisted Brook in his dishonest and fraudulent behavior. It is alleged that Brook falsely represented sales and marketing figures to the plaintiffs and that he wrongfully copied and removed client files from the plaintiff's office and fraudulently diverted sales, revenues and clients from the plaintiffs to his new venture.

[5] Under s. 69.3 of the BIA, upon bankruptcy, no creditor has a claim against a debtor or shall commence or continue any action for the “recovery of a claim provable in bankruptcy.”

[6] The term “claim provable in bankruptcy” is defined in s. 121 of the BIA. There are three essential requirements:

(i) there must be a debt, liability or obligation to a creditor;

(ii) the debt, liability or obligation must be incurred before the date of bankruptcy; and

(iii) it must be possible to attach a monetary value to the debt, liability or obligation,

John Briggs Armstrong (Re), 2015 BCSC 1167 at para. 23.

[7] Claims which arise after the date of bankruptcy (and claims which do not involve a monetary value) are not claims provable in bankruptcy and are not, therefore, stayed by s. 69.3

[8] As the Divisional Court said in Edward v. Niagara Neighbourhood Housing Co-operative Inc., 2006 16485, “the effect of a stay under ss. 69.3 should be limited to the words of the provision; the state operates as against the recovery of a claim provable in bankruptcy. There is nothing in the judgment that violates the BIA.” In that case, the Co-op sought only post-bankruptcy arrears from the tenant.

[9] In this case, the plaintiffs allege ongoing conduct pre- and post-bankruptcy by Brook in respect of which they seek declaratory and injunctive relief and ongoing conduct pre- and post-bankruptcy, in respect of which they seek monetary damages. The plaintiffs, therefore, argue that the declaratory and injunctive relief is not a claim provable in bankruptcy because it does not involve a monetary value. Similarly, the plaintiffs argue that the post-bankruptcy monetary damages sought are not a claim provable in bankruptcy because they post-date the bankruptcy. It is only, the plaintiffs concede, the pre-bankruptcy claims for monetary damages that have been stayed by virtue of s. 69.3. They seek an order lifting the stay of those claims.

[10] Brook argues that the plaintiffs are not creditors and that they have no standing to seek relief under s. 69.4.

[11] I do not agree.

[12] First, the defendant’s argument is tautological. If the claims are not claims provable in bankruptcy, they are not stayed in the first place. No order lifting the stay is required.

[13] Second, the definition of creditor includes a contingent creditor. The plaintiffs’ claims are for unliquidated damages and have yet to be proved, to be sure, but to the extent they assert monetary claims arising pre-bankruptcy, they are creditors.

[14] I find the claims for declaratory and injunctive relief are not stayed by s. 69.3. I further find the claims for monetary damages incurred post-bankruptcy are also not stayed.

[15] Because these claims were never stayed by operation of s. 69.3, there is no need for an order lifting the stay under s. 69.4.

[16] With respect to the claims for monetary damages arising pre-bankruptcy, the plaintiffs seek an order of the court lifting the stay under s. 69.4.

[17] Section 69.4 provides that a creditor who is affected by s. 69.3 may apply to the court for a declaration that the stay no longer operates in respect of that creditor and the court may make such a declaration, if it is satisfied that the creditor is likely to be materially prejudiced by the continued operation of the stay or that it is equitable on other grounds to make such a declaration.

[18] In Re Ma the Court of Appeal for Ontario upheld the decision of the registrar lifting the stay to permit the TD Bank to continue an action against the bankrupt. The bankrupt argued that the creditor had to establish a prima facie case on the merits by providing evidence of the facts giving rise to the proposed claim. The registrar held that the test to be applied is whether the type of claim which the creditor seeks to advance against the bankrupt is the type of claim that should be allowed to proceed. She held that it was not the function of the court on a motion to lift the stay to embark upon a scrutiny of the merits of the proposed action.

[19] The Court of Appeal pointed out that lifting the statutory stay is far from a routine matter. The Court of Appeal affirmed, however, that there was no obligation on the part of the moving party to establish a prima facie case on the basis of evidence. The gloss on the previous law provided by the Court of Appeal in Re Ma is that the court is not precluded from any consideration of the merits where relevant to the issue of whether there are “sound reasons” for lifting the stay. The court used the example that, if the proposed action had little prospect of success, it would be difficult to find that there were sound reasons for lifting the stay.

[20] It is well-established in the authorities that “sound reasons” constituting material priejudice or other equitable grounds includes:

(i) actions against the bankrupt for a debt for which a discharge would not be a defence (s. 178(1));

(ii) actions involving sufficient complexity to make the summary procedure under s. 135 of the BIA inappropriate; and

(iii) actions in which the bankrupt is a necessary party for the complete adjudication of matters at issue involving other parties.

[21] The plaintiffs argue that all three categories apply in this case.

[22] First, the plaintiffs argue that the judgment they seek, or at least a portion thereof, would not be compromised by a discharge by virtue of s. 178.

[23] Section 178 of the BIA provides that an order of discharge does not release the bankrupt from any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity or any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation.

[24] Morawetz J. noted, in connection with the decision in Re Ma, that, “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 s. 178(1)(d).” See Ieluzzi (Re), 2012 O.J. No. 2763.

[25] Here, the plaintiffs have alleged that Brook committed fraud, misappropriated money and assets and obtained property by fraudulent misrepresentation. The plaintiff complains that none of these allegations have been proved. That, however, is clearly not the test.

[26] While the pleading lacks a certain amount of particularity, this is not a pleadings motion. The bottom line of the pleading is that allegations are made of fraudulent conduct which, if proved, could result in an award of monetary damages which would not be released on discharge.

[27] Having to wait until discharge, when a release may well not be available to the defendant anyway, represents material prejudice to the plaintiffs.

[28] The plaintiffs also allege that Brook, as a former employee, owed fiduciary duties and conspired with other former employees to breach those duties, divert customers and assets and misappropriate property of the plaintiffs. There are multiple parties (none of the other defendants are in bankruptcy proceedings) and multiple causes of action. There are few if any written agreements. It is clear that the issues in this action are complex and will require documentary and oral discovery and are likely to involve numerous procedural steps. Is also clear that credibility issues will be paramount on many important material facts. In this circumstance, the issues pleaded against Mr. Brook are unlikely to be amenable to resolution through a summary claims procedure under s. 135 of the BIA. Depriving the plaintiffs of fundamental procedural tools under the Rules and trial practice would constitute a form of material prejudice, Sher (Re), 1999 15015 (Ont. S.C.) at para. 59.

[29] Based on the allegations in the statement of claim, Brooks is a central figure in the events giving rise to the causes of action pleaded against all defendants. It would make little sense to have one procedure to deal with the other eight defendants and another, entirely different procedure, to deal with Brooks. The conclusion of Ground J. in Royal Bank of Canada v. Societe Generale (Canada), [2003] O.J. No. 5139 is equally applicable here:

the evidence of the Bankrupts will be crucial in the action to establish the factual framework surrounding the various transactions which are alleged to be part and parcel of the fraudulent scheme and, accordingly, there cannot be a completed adjudication of the issues in the action among the other parties without the production of documents in the possession of, and the discovery of, [an, I would note, the evidence of] the Bankrupts.”

[30] Finally, Brook argues that lifting the stay will interfere with the proper administration of his bankrupt estate.

[31] Apart from the potentially negative effect on his income-earning capacity of an interlocutory injunction (assuming one were sought and that the plaintiffs were able to meet the stringent test for the grant of an interlocutory injunction) Brook has not raised any concrete consequences for the administration of his estate resulting from his continued participation as a defendant in this action.

[32] The trustee does not oppose the relief sought on this motion. That is some indication, at least, from an independent player actually charged with the administration of the bankrupt’s estate, that lifting the stay would not interfere with the proper administration of that estate.

[33] In conclusion, I find that:

(1) The claims for injunctive and declaratory relief sought in the action, as well as claims for monetary damages arising post-bankruptcy, are not stayed by the operation of s. 69.3; and

(2) the test for lifting the stay under s. 69.4 regarding the claim for pre-bankruptcy monetary damages has been met.

This conclusion is subject to one proviso. The enforcement (recovery) of any monetary damages arising out of pre-bankruptcy conduct, if any such damages are ever found owing and awarded, is stayed subject to further order of the court.

[34] Both parties filed bills of costs. They are roughly equivalent in amount. This is a case where costs on a partial indemnity scale should follow the event. As the plaintiffs were successful, costs are fixed in the amount of $13,500 payable by Brook.

Penny J.

Date: October 13, 2015