Lawyers’ Professional Indemnity Company and FCT Insurance Company Ltd. v. Mauricio Rodriguez

CITATION: LPIC v. Rodriguez 2017 ONSC 7742

COURT FILE NO.: 421/17

DATE: 2017-07-20

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: LAWYERS’ PROFESSIONAL INDEMNITY COMPANY and FCT INSURANCE COMPANY LTD., Applicants

AND: MAURICIO RODRIGUEZ, Respondent

BEFORE: Gibson J.

COUNSEL: Kim Ferreira, Counsel for the Applicants LPIC and FCT Ronald Allen, Counsel for the Respondent

HEARD: March 16, 2017

ENDORSEMENT

[1] The Applicants, Lawyers’ Professional Indemnity Corporation (“LawPro”) and FCT Insurance Company Ltd. (“FCT”) seek a declaration pursuant to s.178(1)(d) of the Bankruptcy and Insolvency Act (“BIA”) that their March 27, 2006 judgment against the Respondent Mauricio Rodriguez (“Rodriguez”) survives his bankruptcy.

[2] The Judgment is derived from what the Applicants assert was Rodriguez’s wrongful misappropriation of sale proceeds that his lawyer paid to him in error. The sale proceeds were being held by the lawyer in trust for the benefit of CIBC Mortgages Inc., trading as President’s Choice Financial (“PCF”). The Applicants assert that Rodriguez knew the sale proceeds were not his and that the lawyer was in a fiduciary relationship with PCF. Despite this, they say, Rodriguez lied to the lawyer, failed to account for the money, and spent the money on his house and to purchase a new car. The Applicants assert that Rodriguez was an express trustee of the sale proceeds, and that he was mandated to ensure the money was used for its proper purpose, while at all times protecting the interests of the lawyer and PCF. It is Rodriguez’s disregard for the interests of the lawyer and PCF, the Applicants assert, that establish that the Judgment is deserving of a declaration pursuant to s.178(1)(d) of the BIA.

[3] The Respondent takes the position that the Application brought by the Applicants should fail because the statement of claim used in support of obtaining the Judgment makes no allegations that would support a finding of fraud, embezzlement, misappropriation, defalcation, or any other conduct that would fit within the purview of the acts contemplated in s.178(1)(d) of the BIA; that there was never evidence tendered by the Plaintiffs in the subject proceeding that would infer the type of offending conduct necessary to make a finding under s. 178(1)(d) of the BIA; and, the default judgment signed by the Registrar obtained by the Applicants provides no basis upon which such offending conduct could be inferred.

The Facts

[4] LawPro is an insurance company providing professional liability insurance to lawyers in Ontario.

[5] FCT is an insurance company providing title insurance.

[6] Rodriguez is an individual who resides in the City of Hamilton. He is a discharged bankrupt.

[7] Rodriguez had retained David Bartkiw (“Bartkiw”), a lawyer insured by LawPro, to represent him on the sale and purchase of certain properties in the City of Hamilton. On July 18, 2003, Rodriguez purchased a property at 40 Mapes Avenue, Hamilton, Ontario (“the Mapes Property.”) As part of the purchase, Rodriguez granted PCF a mortgage on the 40 Mapes Property. The mortgage secured the principal amount of $174,352.50. FCT title insured the purchase and the mortgage.

[8] On or about September 9, 2003, Rodriguez retained Bartkiw to represent him with the sale of the 40 Mapes Property. The sale price of the property was $220,000.

[9] On October 3, 2003, the sale was completed and Bartkiw gave an undertaking to the purchasers’ lawyer to discharge the mortgage.

[10] As part of the sale, Rodriguez agreed to pay PCF a portion of the mortgage and PCF would then allow Rodriguez to port the mortgage, which secured the balance of $145,000, to Rodriguez’s purchase of another property, 36 Mapes Avenue, Hamilton, Ontario.

[11] PCF required Bartkiw to hold back the $145,000 from the sale proceeds to guarantee that PCF was paid and the mortgage discharged in the event that the sale of the 36 Mapes Property did not close as contemplated.

[12] At the beginning of October 2003, Rodriguez requested Bartkiw provide Rodriguez with his share of the proceeds from the sale. On October 8, 2003, Bartkiw issued a cheque to Rodriguez for an incorrect amount, $179,600. The payment represented all of the funds realized from the sale, and included the $145,000 that was to be set aside by Bartkiw for the benefit of PCF, to which Rodriguez was not entitled.

[13] Following his receipt of this mistaken payment, Rodriguez did not contact Bartkiw to advise him of the error, but instead misappropriated the money for his own benefit.

[14] On October 31, 2003, the purchase of the 36 Mapes Property was aborted and, despite several extensions, the purchase collapsed. This crystallized the amount due under the mortgage and Bartkiw’s obligations to satisfy the undertaking and discharge the mortgage.

[15] On November 11, 2003, Bartkiw’s partner (his father Roman Bartkiw) wrote to and spoke with Rodriguez, seeking the return of the mistaken payment. Rodriguez acknowledged that the payment had been received in error. He then told Bartkiw’s father that he had gambled and lost the mistaken payment on a wager on the Major League Baseball World Series, and no longer had the money. This turned out to be a lie; Rodriguez had instead used the proceeds to remodel his home and purchase a new Cadillac automobile. Bartkiw’s partner reported Rodriguez’s conduct to the fraud department of the Hamilton police department.

[16] On December 10, 2003, Bartkiw reported himself to LawPro. On July 11, 2005, PCF assigned the mortgage to LawPro and FCT, and on July 19, 2005, LawPro and FCT through their legal counsel sent a demand letter to Rodriguez advising him of the assignment and requesting immediate payment of the mistaken payment.

[17] Rodriguez failed or refused to pay, return or account for the missing money.

[18] On October 28, 2005, LawPro and FCT commenced an action against Rodrigeuz to enforce their rights against him under the mortgage and to recover the mistaken payment.

[19] Rodriguez did not defend the action and, on March 27, 2006, LawPro and FCT obtained the Judgment and then filed writs of seizure and sale. The Writs were filed with the Sheriff of the Regional Municipality of Hamilton, and the Sheriff of the County of Halton.

[20] On July 14, 2006, LawPro and FCT wrote to Rodriguez to advise him of the judgment and the Writs and to request Rodriguez to make immediate payment. Rodriguez did not respond to the demands and has never satisfied the judgment.

[21] On November 12, 2009, Rodriguez made an assignment into bankruptcy. He did not list LawPro or FCT as creditors or disclose the judgment on his statement of affairs. Accordingly, LawPro and FCT were given no notice of the bankruptcy and did not have an opportunity to participate in the proceedings.

[22] On April 11, 2012, Rodriguez received an absolute discharge and, on June 28, 2012, the trustee was discharged.

[23] On July 17, 2013, a lawyer acting on behalf of Rodriguez wrote to LawPro and FCT’s legal counsel to advise that Rodriguez was a discharged bankrupt and request that the writ in Hamilton be lifted. This was the first occasion that LawPro and FCT were advised of the bankruptcy or the discharge.

[24] In a telephone conversation with LawPro’s and FCT’s current lawyers on October 7, 2016, Rodriguez confirmed that he knew that he was not entitled to have received or used the mistaken payment; that the mistaken payment should have been used to discharge the mortgage; and he had not listed LawPro and FCT as creditors in the bankruptcy. On November 30, 2016, the lawyers for LawPro and FCT advised Rodriguez that they would be seeking a declaration that the judgment survives the Bankruptcy.

Analysis

[25] Subsection 178(1)(d) of the BIA provides that the Discharge does not release a bankrupt person from any debt or liability that arises out of fraud, embezzlement, misappropriation, or defalcation while acting in a fiduciary capacity.

[26] To establish that the judgment falls within s.178(1)(d), LawPro and FCT must establish that Rodriguez owes them a debt or liability; the debt arises out of misappropriation or defalcation; and the misappropriation or defalcation occurred while Rodriguez was acting in a fiduciary capacity.

[27] The purpose of s.178(1)(d) is to prevent a bankrupt from avoiding his or her just debts and liabilities to a vulnerable creditor where the bankrupt was entrusted, in a fiduciary capacity, with moneys or property belonging to that creditor: Simone v. Daley (1999), 1999 3208 (ON CA), 170 D.L.R. (4th) 215 (Ont. C.A.) para. 29 to 30.

[28] The onus on this application is on LawPro and FCT to prove that the judgment falls within s.178(1)(d). The Court, in determining whether the onus has been discharged, can look behind the face of the judgment to the contextual facts giving rise to the debt to determine whether the debt falls within s.178(1)(d).

[29] The Respondent herein argues that as the default judgment issued by the Registrar was obtained under Rule 19.04 of the Rules of Civil Procedure, and the jurisdiction of the Registrar is limited to specific classes of claims, including a debt or a liquidated claim for money, had the judgment actually reflected allegations or claims of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity, then the judgment could not have been obtained in such a manner.

[30] As the Court of Appeal for Ontario has recently confirmed in Ken Jackson Construction Limited v. Macklin, 2017 ONCA 324, where a statement of claim does not contain the particulars required to sign default judgment for a debt or liquidated demand of money, the default judgment is granted without jurisdiction and an appellant is entitled to have the judgment set aside as of right in the interests of justice.

[31] However, the present case is distinguishable on its facts and engages a different issue. The issue on the present application is not whether the judgment was properly issued by the Registrar, but rather whether the judgment survives the discharge. The Court is permitted to look to the judgment, the evidence that would have been led had the action been defended, and that which has been led in this application, to assess whether the judgment debt falls within s.178(1)(d).

[32] In the present case, the Applicants says that the judgment and the pleadings in the action are silent in regards to Rodriguez’s asserted fraud and misappropriation because, at the time of the action , LawPro and FCT did not have any reason to contemplate the possibility of Rodriguez filing for bankruptcy. They commenced a mortgage enforcement action that Rodriguez did not defend and obtained the judgment.

[33] In Re Philips, 156 A.R. (QB Master) 123, paras. 34 to 36, the Master held that a plaintiff is not required to plead a case in order to have it fall within s.178(1)(d) of the BIA, particularly where there is no indication that the defendant will file for bankruptcy. The Master noted that it would be ludicrous for a plaintiff to plead a case assuming that, at some future time, the defendant might make an assignment in bankruptcy.

[34] In H.Y. Louie Co. Limted v. Bowick, 2015 BCCA 256 (BCCA), the British Columbia Court of Appeal disagreed with the proposition that a court could characterize a consent judgment as one of fraud if fraud were not pleaded and the creditor had not filed any material supporting fraud before the court making the order.

[35] I agree with the Applicants in this case that the Louie decision is distinguishable from the present application. The defendant in Louie had consented to judgment for breach of contract. Nothing in that consent made mention of anything referenced in s.178(1)(d). Accordingly, the majority was not prepared to allow the plaintiff to go outside the consent and obtain more than it had bargained for from the defendant.

[36] In the present case, there was not a consent judgment, but rather a default judgment.

[37] In Toth v. Lehman, 2016 BCCA 514, the British Columbia Court of Appeal confirmed that the failure to plead a case in fraud is not fatal to an application for a declaration that a debt survives bankruptcy. It determined that it was acceptable for a court to look at the evidentiary proceedings at the trial, which would indicate fraud although there had been no allegation of fraud in the pleadings, to determine whether a court could characterize the judgment as one falling within s. 178(1)(d).

[38] I would agree with the argument advanced by the Applicants in the present case that LawPro and FCT did not bargain for a consent judgment with Rodriguez. Rodriguez chose not to defend the action, which was his choice to make. They obtained their judgment based on their pleadings and in accordance with the requirements of the Rules of Civil Procedure. They were not required to make prospective pleadings. As the Applicants note, they did not attempt to entice Rodriguez with a consent judgment, then try to substitute a more onerous bargain.

[39] I am satisfied on the evidence in the present case that the Applicants have demonstrated the requisite elements that Rodriguez owed them a debt or liability, that the debt arises out of a misappropriation, and that this occurred while Rodriguez was acting in a fiduciary capacity.

[40] I agree with the submission of the Applicants that Rodriguez was in a fiduciary relationship with Bartkiw and PCF. PCF required Bartkiw to hold back the money, for the benefit of PCF, and to guarantee the mortgage was discharged. An express trust was therefore created between Bartkiw and PCF. Bartkiw was acting on Rodriguez’s behalf and Rodriguez was privy to the express trust. When Rodriguez received the mistaken payment in error, he assumed the role of trustee of the mistaken payment. Rodriguez failed to discharge the onus on him to ensure the money was used for its proper purpose to discharge the mortgage, and misappropriated the money for his own benefit. He compounded this by lying about the uses to which he had put the money.

[41] Rodriguez’s conduct establishes that he misappropriated the money, that his conduct was dishonest and improper, and that he acted with intentional disregard for the interests of both Bartkiw and FCT. It would not accord with the ends of justice to allow him to continue to profit from this. The judgment should survive the discharge.

[42] The Application of the Applicants is granted. The Court Declares that:

a. The Judgment is a debt within the meaning of s.178(1)(d) of the BIA; and,

b. The Judgment survives the discharge.

[43] The Respondent Mauricio Rodriguez shall pay costs to the Applicants. If the Parties are not able to agree on costs, they may make written submissions to me (maximum three pages plus a bill of costs). The Applicants may have two weeks to serve and file their submissions; the Respondent a further two weeks for any response; and the Applicants a further week for any reply.

Gibson J.

Date: July 20, 2017