CITATION: Re Wilson, 2016 ONSC 7740

COURT FILE NO.: BK-09-0117245-0031

DATE: 20161209

SUPERIOR COURT OF JUSTICE - ONTARIO

IN BANKRUPTCY

RE: THE BANKRUPTCY OF ROBERT WILLIAM WILSON (FORMERLY OF THE CITY OF TORONTO), OF THE CITY OF BURLINGTON, IN THE REGIONAL MUNICIPALITY OF HALTON, IN THE PROVINCE OF ONTARIO

BEFORE: MESBUR J.

COUNSEL: Jonathan H. Marler, for the bankrupt

Ali Mian, for the Estate Trustee of the Estate of Olive North Harman, deceased

HEARD: December 8, 2016

E N D O R S E M E N T

The motion:

[1] These motions requires the court to decide first, if a claim which resulted in a judgment of this court in August of 2014 was a claim provable in Mr. Wilson’s bankruptcy. Second, if it is a claim provable, the court must determine if it survives the bankruptcy under s. 178 of the Bankruptcy and Insolvency Act (BIA). If it does not, the court is invited to lift the stay pursuant to s.69.4 of the BIA.

The facts:

[2] The bankrupt made a voluntary assignment in bankruptcy on October 7, 2008. The bankrupt is a lawyer, and from 2000 until August of 2004 had had acted as counsel to Wayne Campbell and Heather Campbell who had been appointed guardians for a Mrs. Olive North Harmon, an incapable person.

[3] In November of 2004 Mrs. Harmon died. Mr. David J. Moll, a lawyer, was named Estate Trustee under the will. Mr. Moll applied for and a received a certificate of appointment as Estate Trustee. In June of 2006 Moll commenced an application for an accounting from the Campbells and the bankrupt. Although Mr. Wilson was not yet bankrupt in 2006, for ease of reference I will refer to him as the bankrupt throughout these reasons. I will refer to Mr. Moll as the Estate Trustee.

[4] The bankrupt made his assignment in bankruptcy in October of 2008. He did not list the Harmon estate as a creditor, nor did he list any obligation to it as a contingent liability. He did not disclose any potential liability to the estate to his Trustee in Bankruptcy. The bankrupt also did not disclose his bankruptcy to the Estate Trustee. He gave no notice to the Estate Trustee as either a creditor or contingent creditor. He did not tell the Estate Trustee he was bankrupt at any time until August of 2015.

[5] Once he was appointed, the Estate Trustee sought an accounting from the Campbells. Although some information was provided, it was insufficient. In June of 2006, the Estate Trustee commenced an application for an accounting. In 2010, the court ultimately ordered an accounting. Once documents were finally produced for the period from August of 2000 to April 2006, the Estate Trustee Moll retained an accountant to review the material which was ultimately produced.

[6] The bankrupt was examined under oath in the context of the application for an accounting. The examination took place on October 30, 2008. At that time, the bankrupt had just made an assignment into bankruptcy. He made no mention of this fact on his examination.

[7] The accountant prepared a report for the Estate Trustee, and delivered it in October of 2011. On the basis of the findings in that report, the Estate Trustee sued the bankrupt, the Campbells and others. The claim asserted, among other things, that the bankrupt had acted as de facto guardian for Mrs. Harmon and breached both fiduciary and statutory duties to her. The claim states the bankrupt was unjustly enriched at the expense of the estate, without any juristic reason for the enrichment. The claim goes on to assert particulars of breach of fiduciary duty against the bankrupt, including overcharging for fees, mismanaging the assets of the estate, and failing to account for trust funds.

[8] No one defended, including the bankrupt. The Estate Trustee repeatedly requested a defence, threatening if none were delivered, he would move for judgment. Notwithstanding the demands for a defence, the bankrupt ignored them. As a result, the Estate Trustee moved for judgment before Perell J in August of 2014. The court granted judgment, relying on the material in the motion record for default judgment. The motion record contained a history of the matter, the claim, the accountant’s report, and an affidavit from the Estate Trustee setting out the particulars of the claim.

[9] Judgment was granted against the bankrupt for $76,129.81 plus costs of $18,000.

[10] The bankrupt then moved in December of 2014 to set aside the default judgment. Although he had been an undischarged bankrupt for some 6 years at this point, he did not disclose his bankruptcy or assert any stay of proceedings as a result of the bankruptcy. Instead, he argued that the judgment against him “would have the potential to cause him serious financial hardship. Wilson has submitted no evidence to support this assertion.”[^1] The motion to set aside the default judgment was dismissed with costs of $5,000. Those costs remain unpaid.

[11] Three months later, the Estate Trustee finally learned of the bankruptcy. The bankrupt did not, however, assert any stay of proceedings against him under the BIA at that time.

[12] The Estate Trustee then examined the bankrupt in aid of execution and served various notices of garnishment. The bankrupt did not raise any issue of a stay on his examination in aid of execution. Instead, the bankrupt answered questions and gave various undertakings, but did not fulfil them.

[13] The Estate Trustee moved for an order the bankrupt be found in contempt. The contempt motion came on before the court on December 17, 2015, but it was adjourned to February 25, 2016. The adjournment was on terms, peremptory to the bankrupt. These included a requirement the bankrupt fulfill all his undertakings and pay all outstanding costs orders against him before the matter was argued. Stewart J ordered the bankrupt to pay an additional $5,500 in costs. At the hearing where he requested the adjournment, the bankrupt made no mention of relying on a stay under the BIA.

[14] Before the motion was argued, the bankrupt’s trustee in bankruptcy issued a notice of stay of proceedings in relation to this the claim issued in court file No. CV-13-490986[^2] (the Action).

[15] The contempt motion came on before Mew J in February of 2016. Although the bankrupt had been ordered to pay all outstanding costs orders before that date, he did not. The court found the bankrupt in contempt. He was ordered to pay an additional $8,500 in costs of the motion. To date, the bankrupt has paid none of the costs orders against him.

[16] The bankrupt now takes the position (years after judgment was granted) the Action is automatically stayed. The Estate Trustee takes the position the claim giving rise to the default judgment in the Action was not a claim provable in bankruptcy, and therefore no stay can apply. Even if that is not the case, the Estate Trustee says this is case where the claim would survive the bankruptcy, or alternatively, the court should exercise its discretion and make an order to that effect.

The law and discussion:

[17] Sections 69.3(1), 69(4) and 178(1) are the relevant provisions of the BIA for these motions.

[18] Section 69.3(1) provides that “… on the bankruptcy of a debtor, no creditor has any remedy against the debtor or the debtor’s property or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy.”

[19] Section 69.4, however, permits a creditor affected by s. 69.3(1) to apply to the court for a declaration that the section does not apply in relation to that creditor. The court may make a declaration that the sections no longer apply if the court is satisfied either that the creditor is likely to materially prejudiced by the continued stay, or, that it is equitable on other grounds to make the declaration.

[20] Section 178 provides that certain debts are not released by an order for discharge of the bankrupt. Specifically, s. 178(1)(d) provides the following debts are not discharged:

Any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity …

[21] First, I must answer the question of whether the claim/debt in question here, namely the claim and default judgment in the Action, was a claim provable in the bankrupt’s bankruptcy.

[22] Section 121(1) of the BIA defines provable claims as:

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.

[23] Section 121(2) goes on to provide:

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.

[24] Section 135 says the Trustee in Bankruptcy is to determine whether a contingent or unliquidated claim is provable, and if it is a provable claim, to value it.

[25] As the Estate Trustee says at paragraph 34 of his factum, “to be a provable claim, the claim must be known and capable of valuation at the time of the assignment in bankruptcy.” The Court of Appeal in Nortel Networks Corp.(Re)[^3] described the usual test the court uses to decide if a contingent claim will be included in insolvency proceedings as whether it is “too remote or speculative” to value. If the claim is too remote or speculative to value, it cannot be included as a contingent claim, provable in bankruptcy.

[26] In my view, the claim giving rise to the default judgment in the Action cannot be a claim provable in bankruptcy. I say this first, because the bankrupt did not report the claim to his Trustee in Bankruptcy when he made the assignment in bankruptcy, even as a potential or contingent liability.

[27] Second, there is no evidence anyone was aware of the claims forming the subject matter of the Action until the accountant delivered its report to the Estate Trustee. That did not occur until after October 17, 2011, some three years after the bankruptcy. It was only then the claim and the facts underlying it were discovered. There would have been no way for the Trustee in Bankruptcy to value the claim, even as a contingent claim, when no one was aware of it until long after “the day on which the bankrupt becomes bankrupt.”

[28] I therefore conclude the claim forming the subject matter of the Action resulting in the default judgment was too remote and speculative to be provable.

[29] That finding alone is sufficient to dispose of the motions. For the sake of completeness, I will deal with the other issues raised.

[30] Even if I had determined the claim supporting the default judgment were a claim provable in bankruptcy, and thus automatically stayed, I would have either declared the debt one that is not released by the bankrupt’s ultimate discharge under the provisions of s. 178 or exercised my discretion under s. 69.4.

[31] I see the claim and the default judgment against the bankrupt as being firmly rooted in breach of fiduciary duty, misappropriation and the bankrupt’s being unjustly enriched as a result of the breaches. The statement of claim and the supporting affidavit (including the accountant’s report following his investigation of the accounting the bankrupt provided) on the default judgment motion set out particulars of both the bankrupt’s failure to account properly for trust monies and failure to properly account for funds. They set out clearly a basis to find the bankrupt overcharged for the services he provided. A lawyer or trustee who improperly charges fees and receives payment from funds entrusted to him or her will be liable for misappropriation.[^4]

[32] On a motion for default judgment, the facts pleaded in the statement of claim are deemed to be true. The claim, taken together with the uncontradicted evidence in the affidavit supporting the motion for default judgment are sufficient to characterize the debts as arising from misappropriation or defalcation while acting in a fiduciary capacity. I would have held the claim supporting the judgment would not be released by the bankrupt’s discharge, when and if that ever occurs.

[33] Even if I am in error about the application of s. 178, I would still have exercised my discretion under section 69.4, on the basis that is equitable to make such a declaration.

[34] Here, the bankrupt’s conduct has been egregious in the extreme. He actively concealed his bankruptcy for years. He permitted the claim to proceed against him, without raising the issue of his bankruptcy. He even moved to set aside the default judgment, but failed to disclose he had already filed an assignment in bankruptcy. He participated in examinations in aid of execution, gave undertakings, and then failed to fulfil them, all the while being an undischarged (and undisclosed) bankrupt.

[35] The bankrupt failed to advise his Trustee in Bankruptcy of the claim – either as a potential claim before the bankruptcy, or as an actual claim after the bankruptcy. The bankrupt has permitted the Estate Trustee to continue to pursue him, obtaining unsatisfied costs orders, and lulling him into the false belief that the claim, and the subsequent enforcement efforts were continuing in the ordinary course.

[36] While I recognize bankruptcy legislation is broadly remedial, I do not see this bankrupt as the kind of “honest, unfortunate debtor” the legislation is designed to protect. To permit this debtor the protection of the BIA to avoid this particular judgment and the costs orders that have flowed from it would be to collaterally attack earlier judgments of this court, and bring the administration of justice into disrepute. It would therefore be equitable to declare the stay does not apply to the Action.

[37] For all these reasons, the bankrupt’s motion is dismissed. The Estate Trustee’s motion is granted, and an order will issue declaring that the claim, judgment and subsequent costs orders arising against the bankrupt in the Action are not claims provable in the bankruptcy of the bankrupt, Robert William Wilson, and may therefore continue, notwithstanding the bankruptcy.

[38] The Estate Trustee is entitled to his costs of the motion. I have reviewed his costs outline, and find the amount claimed of $18,000 for this motion excessive. I therefore exercise my discretion and award the Estate Trustee his costs of this motion which I fix at $12,000 all inclusive.

MESBUR J.

Released: 20161209

[^1]: Reasons for decision of Faeta J in Moll v Campbell 2015 ONSC 3868, 2015ONSC3868 [^2]: Jack David Moll in his capacity as Estate Trustee of the Estate of Olive North Harman, Deceased, Plaintiff v. Wayne Campbell, Heather Campbell, Robert William Wilson, the Public Guardian and Trustee (Ontario), and Travelers Insurance Company of Canada as successor for the London Guarantee Insurance Company [^3]: 2013 ONCA 599, [2013] O.J. No. 4458 (OCA) [^4]: Shust Estate v Urbanoski [2001] M.J. No. 212