Court File and Parties
Court File No.: 33-1785687 Date: 2018/10/03 Ontario Superior Court of Justice in Bankruptcy and Insolvency
In the Matter of the Bankruptcy of: Raymond Henry Lalonde Of the City of Cornwall, Province of Ontario
Before: Justice Stanley Kershman
Heard at Ottawa: August 22, 2018
Counsel: M. Black, for the Bankrupt B. Elkin, for Jevco Insurance Company S. Loiselle, Trustee in Bankruptcy
Reasons for Decision
Introduction
[1] Jevco Insurance Company (“Jevco”), a creditor, opposes the discharge of Raymond Henry Lalonde (“Bankrupt”).
Factual Background
[2] Mr. Lalonde is 71 years old and is retired.
[3] He is a widower, his wife having died several years ago. Both Mr. Lalonde and his wife filed for bankruptcy on September 6, 2013.
[4] Mr. Lalonde received a Bachelor of Commerce with a major in accounting. During his career, he was the treasurer of several businesses.
[5] In addition, Mr. Lalonde operated R.H. Lalonde, an accounting business, as a sole proprietor for over 20 years.
[6] The Bankrupt owns his home at 616 Champlain Drive, Cornwall, Ontario (“Property”), with his late wife as joint-tenants in Cornwall, Ontario. The Property has equity in it and the trustee has registered its interest on title in both bankruptcies. Once he is discharged, Mr. Lalonde has agreed to purchase both his and his late wife’s equity for a total of $50,000.
[7] Mr. Lalonde’s sources of income are Canada Pension Plan, Old Age Security and sometimes income supplements depending on how much income he earns in a year.
i) Trustee’s Report
[8] The trustee, Surgeson Carson Associates Inc. (“Trustee”), prepared the trustee’s report (“Trustee’s Report”) dated May 7, 2014 which stated that the cause of this bankruptcy was “over extension of credit has created the inability to meet obligations as they generally become due.”
[9] In the section dealing with conduct of the Bankrupt, the question was asked:
Did the bankrupt fail to perform any of the duties imposed on the bankrupt under the Act ?”
The answer was: “Yes. Pursuant to s. 158(o) of the Act, “(The bankrupt shall) generally do all such acts and things in relation to his property and the distribution of proceeds among his creditors as may be reasonably required by the trustee…”
Specifically, the bankrupt did not remit the sum of $395.00 towards voluntary payments for the general benefit of the estate and (2) did not remit the sum of $25,000 towards the re-purchase of equity.
[10] Another question in the Trustee’s Report asked whether the Bankrupt can be justly held responsible for any facts referred to under s. 173 of the Act to which the answer was, “No”.
[11] The Trustee filed a Notice of Opposition to Discharge.
[12] Since the date of the Trustee’s Opposition, the Bankrupt has paid the $395 towards voluntary payments and the $150 court costs registration. The Bankrupt has not paid the $25,000 towards the repurchase of his equity in the Property nor the $25,000 equity for his late wife’s share. He indicated that he could not do so until he received his discharge at which time he would obtain the financing to do so.
ii) Bankrupt’s Debts
[13] When Mr. Lalonde filed for bankruptcy, he declared several debts including two to the Canada Revenue Agency (“CRA”). Subsequent to filing for bankruptcy, the Canada Revenue Agency reassessed its claims at $0. Therefore the only debts that remained were Jevco Insurance Company for approximately $690,000 and the Royal Bank of Canada for $18,620 for a total of approximately $715,000.
Jevco’s Opposition to Discharge
[14] Jevco, an unsecured creditor in the bankruptcy, opposes the discharge on the following grounds:
Per s. 173(1)(a) of the Bankruptcy and Insolvency Act (“BIA” or “Act”), the assets of the Bankrupt will not be of a value equal to $0.50 on the dollar on the amount of the Bankrupt’s unsecured liabilities; and
Per s. 173(1)(f) of the Act, the Bankrupt put Jevco to an unnecessary expense by filing a frivolous and vexatious defence to an action properly brought against him by Jevco.
[15] The action in question was started in 2009 by Jevco against several companies and individuals including Mr. Lalonde in relation to a security bond issued by Jevco for a business called Rose Mechanical. The Bankrupt and 1186993 Ontario Inc. carrying on business as Demo Plus (“Demo Plus”) were two of the indemnifiers for the bond, together with other companies and individuals.
[16] A pre-trial was held in the matter on May 11, 2012.
[17] One month after the pre-trial on June 11, 2012, Mr. Lalonde personally filed Articles of Dissolution for Demo Plus. The Articles of Dissolution which were signed by the Bankrupt as a Treasurer of Demo Plus stated in part:
“There are no proceedings pending in any court against the corporation.”
[18] The trial of the action was scheduled to commence on September 9, 2013.
[19] On September 6, 2013, Mr. Lalonde filed for bankruptcy and a Notice of Stay of Proceedings was issued. The stay prevented Jevco from obtaining a judgment against the Bankrupt and put Jevco to the unnecessary expense of preparing for trial, while Mr. Lalonde waited until the eve of trial to file for bankruptcy.
Jevco’s Position: Section 173(1)(a) of the BIA
[20] Jevco argues that the Bankrupt’s assets have a value of approximately 22% of his unsecured liabilities and that this is far less than the 50 % required by s. 173(1)(a) of the BIA. It argues that on this basis the s. 173(1)(a) ground is made out.
Section 173(1)(f) of the BIA
[21] Jevco argues that the Court ought to regard it as in the same position as the judgment creditor and that the Bankrupt used the bankruptcy process to defeat or hinder Jevco’s ability to realize on its claim against him much earlier.
The Bankrupt’s Position: Section 173(1)(a) of the BIA
[22] Mr. Black argues that the onus is on the opposing creditor to show that one of the s. 173(1) grounds are made out and that since neither ground is made out, Mr. Lalonde should receive an absolute discharge.
[23] Mr. Black also argues that Jevco knew that Mr. Lalonde’s assets were limited and that the $690,000 indemnity would never cover what he would owe on the indemnity if he was called upon, which is why Jevco obtained joint and several obligations from various parties.
[24] He also argued that there was no loss of assets from the time that Mr. Lalonde signed the Jevco indemnity to the date of the bankruptcy and that the only asset that he had was his house.
Section 173(1)(f) of the BIA
[25] As to the claim that Mr. Lalonde launched a frivolous and vexatious defence, Mr. Black argues that the defence was neither frivolous nor vexatious because Mr. Lalonde filed a Statement of Defence in the matter and was hoping that he would not have to go bankrupt based on the potential reassessment of the tax debt by the CRA. The CRA subsequently reassessed the debts to $0. Mr. Black argues that had Jevco waited 6 months longer, the CRA debt would have been eliminated and a potential settlement could have been arranged.
Analysis:
Section 173(1)(a) of the BIA
[26] Section 173(1)(a) of the BIA reads as follows:
173 (1) The facts referred to in section 172 are:
(a) the assets of the bankrupt are not of a value equal to fifty cents on the dollar on the amount of the bankrupt’s unsecured liabilities, unless the bankrupt satisfies the court that the fact that the assets are not of a value equal to fifty cents on the dollar on the amount of the bankrupt’s unsecured liabilities has arisen from circumstances for which the bankrupt cannot justly be held responsible
[27] A review of the Trustee’s report shows that Mr. Lalonde’s assets are $26,500, inclusive of the $25,000 that he will pay for the equity in his principal residence.
[28] The total liabilities are $708,620. Based on these numbers, the assets are less than $0.50 on the dollar.
[29] The Court finds that the assets are less than $0.50 on the dollar and that this has arisen from circumstances for which the Bankrupt can justly be held responsible. Mr. Lalonde chose to sign the indemnity to Jevco. The Court is satisfied that Jevco has satisfied the onus required under s. 173(1)(a).
[30] Therefore, there will be a finding under s. 173(1)(a).
s. 173(1)(f) of the BIA
[31] s. 173(1)(f) reads as follows:
(f) the bankrupt has put any of the bankrupt’s creditors to unnecessary expense by a frivolous or vexatious defence to any action properly brought against the bankrupt
[32] The Statement of Defence filed by Mr. Lalonde was not put into evidence at this discharge hearing and so the Court does not know what was pleaded in the Statement of Defence. The Court notes that the Plaintiff knew about the pre-trial which was held on May 11, 2012. He also knew that the matter was going to trial in September 2013.
[33] Mr. Lalonde waited until the last minute to file for bankruptcy thereby putting Jevco to the unnecessary expense of preparing for trial against Mr. Lalonde.
[34] While the Court finds that Jevco was put to an unnecessary expense of preparing for trial, the Court does not find that this conduct constitutes a frivolous and/or vexatious defence. In the case of Re Paskauskas (1995), 36 C.B.R. (3d) 288 (Ont. Gen. Div.) the Court found that an “abuse of process” is another way to describe a proceeding that is “vexatious” (at para. 6). In the present case, the Statement of Defence was not put into evidence. Since the Court could not determine what the defence was, the Court finds that Mr. Lalonde’s conduct in the Jevco action was not frivolous or vexatious.
[35] Therefore, there will be no finding under s. 173(1)(f).
Filing of Notice of Dissolution for Demo Plus
[36] The evidence at the discharge hearing was that Mr. Lalonde obtained advice from the accounting firm BDO about filing the Articles of Dissolution for Demo Plus prior to them being filed. After reviewing the advice, Mr. Lalonde prepared and filed the Articles of Dissolution himself.
[37] The Court finds the statement in the Notice of Dissolution made by Mr. Lalonde as treasurer of the company, that there were no proceedings pending in any court against the corporation, to be false.
[38] The Court finds that Mr. Lalonde knew that one month before the Notice of Dissolution was filed that the pre-trial was held in that action and notwithstanding that fact, he, whether under his own direction or whether under the direction of someone else, filed the Articles of Dissolution for Demo Plus that contained false information and that he knew it to be false.
[39] Mr. Black argues that the Articles of Dissolution were related to a corporation and not to Mr. Lalonde personally and therefore, Mr. Lalonde should not be held personally responsible for something that he did as treasurer of the corporation.
[40] The Court rejects Mr. Black’s argument on this point.
[41] The Court is aware that Mr. Lalonde signed the Article of Dissolution as treasurer of the corporation and not in his personal capacity. Notwithstanding this fact, the Court finds that whether doing so in a personal capacity or in his capacity as treasurer of the corporation, Mr. Lalonde knew that the aforesaid statement about court proceedings pending against the corporation was false.
[42] The Court finds that Mr. Lalonde’s conduct in filing the Articles of Dissolution was dishonest and wrong. The Court finds that dishonesty should not be rewarded because to do so would send a message to the public that being honest in one capacity is acceptable and being dishonest in another capacity is also acceptable. It is not acceptable to this Court and the Court will not condone this line of logic or ideology.
Type of Discharge to be Granted
[43] Once a ground under s. 173(1) is found, the Court has discretion as to the type of discharge to be granted under s. 172(1) of the BIA.
[44] In exercising its discretion, the Court must look carefully at the causes of bankruptcy (Re Crowley (1984), 54 C.B.R. (N.S.) 303 (T.D.) at para. 6).
[45] In this case, the Trustee says that the cause of bankruptcy was an overextension of credit which resulted in Mr. Lalonde’s inability to meet his obligations as they became due. The Court does not agree that this is the case. As the Court noted in Re Tanner, [1993] B.C.J. No. 1611 at pp. 19-20:
The statements contained in the Trustee's Report are evidence thereof. Where, as here, the statements are positive, there is a transfer of onus, to the opposing creditors, to provide evidence to prove the facts referred to in Section 173. I have read the authorities urged upon me by Mr. Rosenberg on this issue. I, however, have been guided by Re Heinonen (1990), 3 C.B.R. (3d) 1 (B.C. C.A.) where, at page 5, Locke, J.A., wrote:
The next point of law raised was the weight to be given to the Trustee's report. The authorities of this province in Re Markel (1986), 63 C.B.R. (N.S.) 7, 7 B.C.L.R. (2d) 228 (C.A.), say that the report of the trustee is entitled to considerable weight but in the last resort it is a judicial decision and the Court must come to its own decision. It is not bound by the report. ...
[46] The Court has come to its own conclusion and disagrees with the Trustee’s opinion as to the cause of Mr. Lalonde’s bankruptcy. The Court finds that the true cause of bankruptcy was not related to an over-extension of credit. Rather, it was related to Mr. Lalonde’s inability to pay the monies owing to Jevco even after his assessments by the CRA were reduced to zero. Even before the CRA assessments were reduced to zero, the Court does not find that this was an over-extension of credit.
[47] Houlden & Morawetz, Bankruptcy and Insolvency Law of Canada, vol. 3, 3rd ed. (Carswell, 2018), discusses the BIA’s position when dealing with the concept of granting a discharge and says the following at p. 6-92.1:
In considering an application for discharge, the court must consider the interests of both the bankrupt and the creditors. For the bankrupt, bankruptcy is a process designed to relieve him or her of the burden of past debts. For creditors, bankruptcy is a process designed to permit them to achieve the maximum possible realization on their claims. In deciding an application for discharge, the court must strive to strike a balance between these interests that preserves the integrity of the bankruptcy system: Re Atkin (1987), 65 C.B.R. (N.S.) 296 (Ont. S.C.).
The success or failure of the bankruptcy system depends on the administration of the discharge provisions of the Act: Re Wensley, supra; Re Green (1925), 5 C.B.R. 580 (N.B. K.B.); Re Young, supra; Re Posner (1960), 3 C.B.R. (N.S.) 49 (Ont. S.C.). If a debtor can go into bankruptcy as a convenient means of evading payment of just obligations that he or she has incurred and obtain a discharge without difficulty, bankruptcy becomes an abuse: Re Posner, supra. Bankruptcy is not a process to be used by a debtor to avoid his or her responsibilities to the maximum extent that he or she is able to do so: Re Junger, supra.
One of the prime objects of the Bankruptcy and Insolvency Act is to enable an honest but unfortunate debtor to obtain a discharge from his or her debts, subject to such reasonable conditions, if any, as the court may see fit to impose, so that the debtor can make a fresh start: Re Posner, supra. The Act is designed to permit a bankrupt to receive eventually a complete discharge of all his or her debts in order that he or she may be able to integrate himself or herself into the business life of the country as a useful citizen free from the crushing burden of past debts: Re Newsome (1927), 8 C.B.R. 279 (Ont. S.C.); Re Willey (1981), 38 C.B.R. (N.S.) 24 (Ont. S.C.); Re Gaklis (1984), 49 C.B.R. (N.S.) 303, 62 N.S.R. (2d) 52, 136 A.P.R. 52 (T.D.); Re Crowley (1984), 54 C.B.R. (N.S.) 303, 66 N.S.R. (2d) 390, 152 A.P.R. 390 (T.D.); Re Irwin (1994), 24 C.B.R. (3d) 211, 1994 CarswellBC 605.
[48] In all cases, the Court seeks to ensure that an honest but unfortunate debtor can obtain a discharge from his or her debts. In this case Mr. Lalonde was not honest. While the dishonesty was not directly related to his personal bankruptcy, it certainly was indirectly related.
[49] Mr. Lalonde’s plan to file the Articles of Dissolution was well thought out, even to the point of obtaining professional advice from BDO and having that firm prepare the Articles of Dissolution. It appears odd to the Court that notwithstanding that BDO had prepared the Articles of Dissolution, Mr. Lalonde prepared his own Articles of Dissolution by hand and filed them.
[50] Since there has been a finding under s. 173(1)(a), the Court orders that in addition to the $25,000 that Mr. Lalonde has to pay for his share of the equity in the Property, there will be a condition that he pay a further sum of $6,000 to the Trustee for the benefit of his creditors.
[51] A review of the Bankrupt’s budget shows that he has no surplus income without taking into account the monies required by the Trustee to pay his $25,000 equity and his wife’s $25,000 equity in the Property. Notwithstanding this fact, Mr. Lalonde is prepared to purchase the equity in the Property. Mr. Lalonde is on a limited income but can find the monies to pay the $50,000 of equity. Based on this, the Court finds that Mr. Lalonde has the ability to pay the additional $6,000 to the Trustee for the benefit of creditors as a condition of his discharge.
[52] In these circumstances, the Court orders that this is to be a conditional discharge and not a consent to judgment.
Costs
[53] Jevco was successful in terms of this opposition to discharge. The Court finds that Jevco should be allowed its costs fixed at $1,000 payable out of the bankrupt estate, before paying dividends to any creditors.
[54] Order to issue accordingly.
Mr. Justice Stanley J. Kershman