Court File and Parties
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: ROYAL BANK OF CANADA, Plaintiff
AND:
CHUL YUNG KIM and MSI SPERGEL INC., in its capacity as Trustee in Bankruptcy for Chul Yung Kim, Defendants
BEFORE: D.A. Broad
COUNSEL: J. Ross Macfarlane, for the Plaintiff Andrew Ostrom, for the Defendant Chul Yung Kim
HEARD: December 19, 2018
ENDORSEMENT
Background
1The defendant Chul Yung Kim (“Dr. Kim”) was, at all material times, a dentist practicing in the City of Brantford. Dr. Kim executed a personal guarantee on July 7, 2011 (the “guarantee”) in favour of the plaintiff (the “bank”) to secure payment to the bank of the indebtedness of his professional corporation Dr. Kim Dentistry Professional Corporation (the “corporation”).
2The bank made demand for payment on the guarantee on May 15, 2013 and brought an action (the “first action”) against Dr. Kim by Statement of Claim issued May 31, 2013 (the “Original Statement of Claim”) seeking payment of the sums of $1,027,731, $53,077.75 and $36,877.27 plus interest. The Original Statement of Claim made no allegations against Dr. Kim based upon fraud, fraudulent misrepresentation or false pretences. Dr. Kim defended the bank’s action by delivering a Statement of Defence.
3The bank brought a motion for summary judgment against Dr. Kim before Henderson J.. The evidence led by the bank on the motion for summary judgment made no reference to any alleged fraud, fraudulent misrepresentation or false pretences on the part of Dr. Kim.
4Dr. Kim did not appear on the motion for summary judgment and Henderson, J. granted judgment against him in favour of the bank on August 7, 2013 in the sum of $1,138,508.66 plus costs fixed in the sum of $6,000.00. The formal Judgment made no reference to fraud, fraudulent misrepresentation or false pretences on the part of Dr. Kim. Henderson, J. gave no reasons in his Endorsement granting judgment, and accordingly the Endorsement similarly made no reference to fraud, fraudulent misrepresentation or false pretences.
5Pursuant to a petition issued by the bank, Dr. Kim was adjudged bankrupt on December 2, 2013.
6On December 16, 2014 Master Jean ordered that the stay of proceedings by virtue of Dr. Kim’s bankruptcy be lifted and granted leave to the bank, pursuant to s. 69.4 of the Bankruptcy and Insolvency Act (the “BIA”), to commence a new action against Dr. Kim claiming damages for fraud and fraudulent misrepresentation.
7By Statement of Claim issued September 18, 2015 (the “Second Statement of Claim”) the bank commenced an action (the “second action”) against Dr. Kim claiming a declaration that he obtained property and/or services from the bank by false pretences or fraudulent misrepresentation, damages for fraud and fraudulent misrepresentation and punitive damages, as well as a declaration that the bank’s claim and any judgment obtained in the second action would not be released by Dr. Kim’s discharge from bankruptcy. The Second Statement of Claim alleged that Dr. Kim made multiple intentional misrepresentations in Personal Statements of Affairs delivered to the bank dated November, 2009, June 19, 2011 and April 8, 2013 (the “PSOA’s”) upon which the bank relied in granting credit to the corporation on the strength of Dr. Kim’s guarantee.
8Dr. Kim has brought a Motion for Summary Judgment seeking dismissal of the action against him on the basis that there is no genuine issue for trial. The bank opposes the motion.
Dr. Kim’s Position
9Dr. Kim takes the position that any evidence which could be relied upon by the bank in support of its allegations against him in the second action is inadmissible on the basis that the second action seeks to reconstitute the judgment debt obtained in the first action in which no allegations of fraud were advanced. In support of this position Dr. Kim relies upon the recent case of Lawyers’ Professional Indemnity Company v. Rodriguez, 2018 ONCA 17 (C.A.) leave to appeal refused 2018 CarswellOnt 20644 (SCC), which he says is a complete answer to the bank’s claim that his indebtedness may survive his discharge from bankruptcy pursuant to s. 178(1) of the BIA.
10In the alternative Dr. Kim says that there is no genuine issue requiring a trial on the basis that:
(a) the alleged misrepresentations were true;
(b) he reasonably believed the representations to be accurate at the time they were made; or
(c) the alleged misrepresentations were not relied upon by the bank in advancing funds to the corporation.
The Bank’s Position
11The bank submits that the circumstances of the case at bar are distinguishable from those that led to the court’s decision in Rodriguez. It says that in Rodriguez the court expressly found that the plaintiff had the requisite knowledge to plead and prove fraud at the time that it reduced its claim to judgment and it chose not to do so, whereas in the present case the bank had no knowledge of Dr. Kim’s misrepresentations until after the default judgment was obtained against him and it could not have discovered his alleged fraud by the exercise of reasonable diligence prior to that time.
12The bank submits that Dr. Kim did make various misrepresentations in his PSOA’s, knowing them to be false and that it relied upon the false representations to its detriment in granting credit to the corporation supported by Dr. Kim’s guarantee.
13The bank also submits that Dr. Kim is attempting, by his motion for summary judgment, to re-litigate the decision of Master Jean to allow the bank to bring a new claim against him based upon fraudulent misrepresentation. It argues that the doctrine of cause of action estoppel must apply because Dr. Kim failed to argue res judicata, merger or abuse of process in response to the bank’s motion to lift the stay before Master Jean.
Section 178(1) of the BIA
14The applicable provision of the BIA upon which the bank relies in seeking a declaration that its claim will survive discharge from bankruptcy by Dr. Kim is s. 178(1)(e) which provides as follows:
178(1) Debts not released by order of discharge
An order of discharge does not release the bankrupt from
(e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim.
Principles Governing Motions for Summary Judgment
15There is no controversy between the parties on the basic principles governing motions for summary judgment.
16Rule 20.04(2)(a) provides that the Court shall grant summary judgment if it is satisfied that there is no issue requiring a trial. This will be the case where the summary judgment motion process provides the court with the evidence required to fairly and justly adjudicate the dispute and is a timely, affordable and proportional procedure.
17If the court finds that there are genuine issues requiring a trial and the record on the motion is insufficient to permit the determination of the genuine issues requiring a trial, it must consider whether the issues can be decided using the fact-finding resources available under rule 20.04(2.1) and (2.2).
Threshold Issue: - Application of Lawyers’ Professional Indemnity Company v. Rodriguez
18The bank does not disagree that the principle in Rodriguez would constitute a complete defence to the second action unless its effect is confined to cases where the judgment creditor knew or could have known with reasonable diligence of the alleged fraud prior to bringing its original action or obtaining judgment. The decision in Rodriguez bars extraneous evidence from being led in an action or application by a judgment creditor pursuant to s. 178(1). Extraneous evidence for this purpose is evidence that is outside the facts pleaded in support of the action that led to the judgment debt, the evidence presented at the time to secure the judgment debt, and any reasons that might have been given by the court in granting judgment.
19In Rodriquez the debtor sold a property secured by a mortgage in favour of PCF. On closing the debtor’s lawyer undertook to the purchaser’s lawyer to discharge the mortgage. PCF required the debtor’s lawyer to hold back funds from the sale proceeds to guarantee that PCF was paid and that the mortgage would be discharged. The lawyer subsequently and mistakenly issued a cheque to the debtor for the entire proceeds of sale including the amount that should have been held for the benefit of PCF.
20When the mistaken payment came to light, the debtor’s lawyer unsuccessfully attempted to recover the monies from the debtor. The lawyer reported himself to the Lawyers’ Professional Indemnity Company (“LawPro”) which, together with the title insurer FCT, subsequently took an assignment of the mortgage from PCF. LawPro and FCT commenced an action against the debtor seeking payment of the amount alleged to be due under the mortgage. The statement of claim made no mention of any of the facts surrounding the mistaken payment by the lawyer to the debtor. The debtor did not defend the action and LawPro and FCT obtained a default judgment.
21The debtor made an assignment into bankruptcy but failed to disclose LawPro and FCT as creditors or disclose the default judgment on a statement of affairs. LawPro and FCT did not therefore receive timely notice of the bankruptcy. The debtor received an absolute discharge. LawPro and FCT brought an application in reliance on s. 178(1)(d) for a declaration that the default judgment survived the debtor’s discharge from bankruptcy. S. 178(1)(d) 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.
22The application judge granted the application concluding that:
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 falls within 178(1)(d).
23The Court of Appeal allowed the appeal, finding that the default judgment did not fall within s. 178(1)(d) and therefore the judgment did not survive the debtor’s discharge from bankruptcy.
24Nordheimer, J.A., writing for the panel, stated at paras. 5-7:
While I provide detailed reasons below, our decision can be explained in simple terms. The debt or liability the respondent was relying on during the s. 178(1)(d) application was the judgment debt secured by the default judgment. It was therefore the nature of that debt that the application judge should have determined on the application, not whether, in addition to the wrong that led to that judgment debt, the appellant had engaged in other conduct that would qualify under s. 178(1)(d). Properly read, the case law supports this restricted approach.
To be clear, in characterizing a judgment debt under s. 178(1)(d), a judge is not confined just to the cause of action pleaded in the action that produced the judgment debt. The issue under s. 178(1)(d) relates to the substance of the judgment debt. The judge can therefore look at the material filed that led to the obtaining of the judgment debt, including the facts pleaded in support of the action that led to the judgment debt, any evidence that was presented at the time to secure that judgment debt, and any reasons that might have been given. A judge cannot, however, consider extraneous evidence not grounded in the process that produced the judgment debt. Among other reasons, it could extend the reach of the section to statute-barred claims, and violate cause of action estoppel rules.
By going beyond the information linked to the judgment debt and considering extraneous evidence, the application judge therefore erred.
25It is evident from the foregoing that the Court of Appeal’s focus was on the fact that the debt upon which the applicants relied in the s. 178(1) application had been reduced to judgment. It found that the application judge had erred by failing to determine the “nature of the debt,” namely that it was a judgment debt and by instead looking at other conduct of the debtor that would qualify under s. 178(1). The court may look at evidence grounded in the process that produced the judgment debt or that is “linked to the judgment debt,” such as the facts pleaded in the statement of claim, any evidence presented to secure the judgment debt and any reasons that might have been given. However, it may not consider “extraneous evidence” not so linked to the judgment itself.
26The observation that the Court of Appeal’s focus was on the nature of the debt as a judgment debt is reinforced by Justice Nordheimer’s statement at para. 32 that “the debt the applicant is relying upon in a s. 178(1)(d) application is a judgment debt, it is the nature of that debt that is to be characterized under s. 178(1)(d), not previous unmade allegations against the judgment debtor.”
27In support of its finding the panel relied upon two cases decided by the British Columbia Court of Appeal H.Y. Louie Co. v Bowick (c.o.b. Power Quest Batteries), 2015 BCCA 514 and Cruise Connections Canada v. Szeto, 2015 BCCA 363.
28In Louie the judgment creditor sued the judgment debtor for breach of contract. After discoveries the debtor consented to two judgments totaling approximately $711,000 and subsequently declared bankruptcy. The judgment creditor sought a declaration from the court that the judgments resulted from obtaining property or services by false pretences pursuant to s.178 of the BIA. The application judge granted the application. The Court of Appeal, in a split decision, allowed the appeal, finding that s. 178(1) had no application.
29Chiasson, J.A., for the majority, observed at para. 62 that “relevant to characterizing the judgments is merger, cause of action estoppel and abuse of process….These concepts are not determinative in the context of this case, but they inform the analysis.”
30At para. 64 Justice Chiasson stated that, as a result of the merger doctrine, once a final order or judgment is passed, the cause of action is extinguished.
31At para. 67 he stated:
The facts said to give rise to the respondent’s right to sue the appellant for breach of contract or for obtaining property by false pretences were identical and known to the respondent when it obtained consent judgments based [on] an allegation of breach of contract only. As a matter of law, the respondent’s claims arising out of the appellant’s conduct merged in the judgments it obtained. It conducted itself accordingly. (emphasis added)
32Justice Chiasson noted at para. 74 that the judgment creditor had all of the information on which it based its assertion that the judgment debtor obtained property by false pretences before the consent judgments were obtained. Why it chose not to pursue that claim is irrelevant. The pertinent factor is that the judgment creditor did not do so.
33At para. 88 Justice Chiasson concluded:
When a creditor takes judgment, the cause of action arising from its claims is merged in the judgment. To determine whether s. 178 of the BIA applies, the court characterizes the judgment. It does so based on the pleadings and proceedings that resulted in the judgment. When they include a claim that property was obtained by false pretences, the judgment may be characterized as within s. 178. Where, as in the present case, such a claim was not advanced and is not otherwise supported by the prior proceedings, the judgment is not within s. 178.
34Louie was referred to in the subsequent case of Cruise Connections Canada. Garson, J.A. stated at para. 28 that Louie stands for the proposition that it is an abuse of process for the plaintiff to “trap” a defendant, whether intentionally or not, into consenting to a judgment and then subsequently applying to a court to re-characterize that judgment so that it has more severe consequences than those previously on the table, such as surviving bankruptcy.
35She stated that Louie expressly confirms the court’s ability to characterize the previous judgment in a s. 178 application based on “the pleadings available to the court that made the judgment and the proceedings before it.” The court can therefore look to the entire context of the proceedings in the original action to determine whether the judgment debt can be characterized as one falling within s. 178(1). This was the principle in Cruise Connections Canada that Nordheimer, J.A. emphasized in Rodriguez at para. 33.
36At para. 46 Justice Nordheimer stated that the decisions of the British Columbia Court of Appeal in Louie and Cruise Connections Canada, along with other cases, clearly established that extraneous evidence is not admissible on an application relying upon s. 178(1) of the BIA and that the approach taken in British Columbia should be mirrored in Ontario, both in the interests of comity and for the sake of consistency, especially since the BIA is a federal statute.
37At para. 47 Justice Nordheimer again emphasized that it is the judgment debt that has to be characterized, and therefore the approach represented by the decision is a principled one.
38As Justice Nordheimer observed at para 49 LawPro and FCT knew about the debtor’s improper actions when they commenced their action against him on the mortgage.
39The question for determination in the case at bar is whether the principles enunciated by the Court of Appeal in Rodriguez allow for an exception to the rule prohibiting extraneous evidence being led where a judgment creditor seeks to rely upon s. 178(1) and did not know of the debtor’s conduct that would be caught by the section prior to obtaining judgment and could not have known of it with the exercise of reasonable diligence.
40Rodriguez has only been considered in one subsequent case to date, that of Walter Matrix v. Carnevale, 2018 ONSC 6436 (S.C.J.) a decision of Sanfilippo, J..
41In Walter Matrix the judgment creditor sued the judgment debtor and others for repayment of funds obtained by fraud, fraudulent and/or negligent misrepresentation, misappropriation, breach of trust, conspiracy, breach of contract, unjust enrichment and conversion.
42The parties entered into a settlement agreement whereby the defendants agreed to pay the plaintiff a total of $750,000 and agreed that they would consent to judgment against them for a higher amount should they not comply with their obligation to pay the agreed amount within the time provided. When the defendants did not pay the settlement amount in the time provided, the plaintiff brought a motion to enforce the settlement, seeking judgment on the basis of the defendants’ consent to judgment. One of the judgment debtors made an assignment in bankruptcy and the judgment creditor obtained an order lifting the stay of proceedings and sought a declaration pursuant to s. 178(1) of the BIA that the amounts owed by the bankrupt were not released by her discharge from bankruptcy.
43Justice Sanfilippo granted the application after making reference to, inter alia, the Court of Appeal’s decision in Rodriguez. At para. 31 he stated that what emerges from the case law is that:
in conducting a s. 178(1) hearing to determine whether either a consent judgment or a default judgment ought, by its nature and substance, to survive a bankrupt’s discharge, the court is not limited by the words in the judgment but may look to the underlying pleadings and proceedings and all information that was considered in rendering the judgment, but not extraneous evidence.
44At para. 32 Sanfilippo, J. stated “the nature of the judgment determines the applicability of s. 178(1), not the procedural mechanism by which the judgment was secured” (emphasis in the original) and “the task is to determine the nature of the judgment through analysis of the pleadings, proceedings and factual context.”
45At para. 51 Sanfilippo, J. noted that all of the elements of fraud were present in the pleadings and proceedings in the action that resulted in the judgment and, at para. 66, he noted further that the judgment debtor consented to judgment in a civil fraud case where she had notice of the precise details of the fraud, misappropriation and conversion alleged against her.
46The Walter Matrix case therefore fell squarely within the requirements laid out by the Court of Appeal in Rodriguez, namely that, on an application relying on s. 178(1) seeking to have a judgment debt survive bankruptcy, the judge can look at the material filed that led to the obtaining of the judgment debt, including the facts pleaded in support of the action. Walter Matrix does not therefore assist with the question of whether extraneous evidence may be considered, notwithstanding Rodriguez, where the judgment creditor did not know, and could not have known prior to the judgment, of the offending conduct under s. 178(1) on the part of the judgment debtor. Counsel did not direct me to any reported case where this issue has been addressed.
47It is noted that Justice Nordheimer concluded his reasons in Rodriguez at para. 49 by stating “while this result may seem unfair to the respondents [the judgment creditors], given the admitted conduct of the appellant [the judgment debtor], the respondents had the right to frame their claim as they chose.” He noted that the respondents “knew all about the improper actions of the appellant when they commenced their action on the mortgage” and could have sued him based upon his mistaken receipt of the funds and his subsequent disposal of them, but chose not to do so. He observed that the judgment creditors “cannot now attempt to recast their claim in order to bring it under an exception in s. 178(1)(d).”
48The implication of Justice Nordheimer’s observations in para. 49 is that, because the judgment creditor knew about the offending conduct of the judgment debtor at the time of the initial action and did not act upon such knowledge by referring to it in its pleadings and leading evidence on it, there was no unfairness to the judgment creditor in barring it from leading that evidence on a subsequent s. 178(1) application.
49The corollary to Justice Nordheimer’s observations is that there may very well be unfairness if a judgment creditor, who did not know of the debtor’s conduct that would engage s. 178(1) and could not have discovered it with the exercise of reasonable diligence prior to taking action, is barred from leading “extraneous evidence” of such conduct on a subsequent application under s. 178.
50In my view the principle in Rodriguez barring a judgment creditor from leading evidence of conduct of the judgment creditor that would qualify under s. 178(1) unless the evidence was grounded in the process that produced the judgment debt is not applicable to a situation where the judgment creditor did not know of the debtor’s offending conduct and had no reasonable means of discovering it prior to commencing action and obtaining judgment.
51I make this finding in part in light of Justice Nordheimer’s particular emphasis on the issue of fairness in para. 49. In my view, the panel could not have intended to bar creditors who had no means of discovering the debtor’s offending conduct from availing themselves of s. 178(1) of the BIA simply by having reduced their claims to judgment.
52The following illustration highlights the unfairness that may result from such a holding. There may be a bankruptcy of a sophisticated fraudster with multiple creditors, none of whom knew or could have known of the fraudulent activity of the bankrupt giving rise to the claims prior to the bankruptcy. One or more of the creditors may have obtained judgment by the date of the bankruptcy and some of the creditors may not have. In my view it would be manifestly unfair in this context to permit the creditors who had not obtained judgment by the date of the bankruptcy to seek to have their claims survive the bankrupt’s discharge by relying on s. 178(1) of the BIA while denying the creditors who had reduced their claims to judgment any right to do so..
53Moreover, such a result would defeat the policy underlying s. 178(1). Sanfilippo, J. summarized this policy at para. 44 as follows:
Section 178(1) contains a "catalogue of exemptions" to the general principle that a bankrupt is able to receive a general release upon discharge from bankruptcy: Skytal Ltd. v. Schiber (1997), 1997 CanLII 12404 (ON SC), 46 C.B.R. (3d) 275 (Ont. Gen. Div.) at para. 12, aff'd (1998), 1998 CanLII 17736 (ON CA), 9 C.B.R. (4th) 129 (Ont. C.A.). These exemptions are designed to protect creditors against fraudulent and deceitful conduct on the part of the bankrupt, providing the creditor with a special status to continue pursuit of the party who has committed fraud, embezzlement, misappropriation, defalcation, or obtained property by false pretences or fraudulent misrepresentation despite a discharge. In Simone v. Daley (1999), 1999 CanLII 3208 (ON CA), 43 O.R. (3d) 511 (Ont. C.A.) at p. 522, Blair J. stated that s. 178(1) is intended to ensure that the BIA is not used to release bankrupts from unacceptable conduct:
Paragraphs (d) and (e) are morality concepts which look at conduct. Those kinds of conduct are unacceptable to society and a bankrupt will not be rewarded for such conduct by a release of liability.
54In my view, to bar a judgment creditor who had no reasonable means of discovering the fraudulent conduct prior to commencing action or obtaining judgment from continuing pursuit of the fraudulent bankrupt after discharge would have the effect of rewarding the bankrupt for successfully concealing his or her fraud from the creditor.
55As indicated, the Court of Appeal in Rodriguez focused specifically on the fact that, in that case, the judgment creditor had full knowledge of the conduct of the debtor that may qualify under s. 178(1) of the BIA but chose not to plead that conduct or lead evidence on it in the proceeding which resulted in judgment. Similarly in Louie the British Columbia Court of Appeal emphasized as pertinent the fact that the judgment creditor chose not to pursue its claim based on the fraudulent conduct despite knowing of it prior to commencing an action. There was therefore no unfairness in either Rodriguez or Louie in barring the judgment creditor from subsequently raising the offending conduct after judgment in the context of a s. 178(1) application.
56I find that the principle in Rodriguez and Louie has no application where a judgment creditor had no prior knowledge of the conduct engaging s. 178(1), and could not have discovered it with reasonable diligence, as such application could result in unfairness.
Test for Fraudulent Misrepresentation and False Pretences
57Sanfilippo, J. confirmed in Walter Matrix at para. 64 that the concepts of fraudulent misrepresentation and false pretences, as used in s. 178(1)(e) of the BIA, are virtually interchangeable in that each rests on deceit.
58The elements of fraudulent misrepresentation for the purposes of s. 178(1) were summarized in the case of Re Berger, 2010 ONSC 4376, 2010 CarswellOnt 5774 (Registrar in Bankruptcy) at para. 28 as follows:
a) the existence of a representation,
b) that the representation was false,
c) that the bankrupt knew the representation was false and intended the creditor to act upon it so as to enable the bankrupt to obtain the credit sought, and
d) that the creditor did rely upon the false representation and extend credit.
Representations relied upon by the Plaintiff
59Dr. Kim completed and submitted three PSOA’s to the bank in connection with separate applications for credit.
60The first PSOA was submitted in 2009 in connection with an application for financing for the corporation for a proposed purchase of a dental practice in Hamilton, Ontario. The purchase by the corporation of the Hamilton practice ultimately fell through and no funds were advanced under the financing agreement offered by the bank.
61In 2011 Dr. Kim approached the bank with regard to extending financial services and credit to the corporation. Dr. Kim indicated to the bank that the financing would be used to eliminate his personal debt to another bank, pay tax arrears and to pursue a business venture with his brother in Thornhill, Ontario. On June 19, 2011 Dr. Kim provided the bank with another PSOA. The bank’s account manager Scott Urquhart used the information set forth in Dr. Kim’s 2011 PSOA to provide information to the Bank’s credit department. The bank approved Dr. Kim’s application for credit for his corporation and advanced funds to pay off his existing bank debt and tax arrears and to inject into the investment in his brother’s business venture.
62In March 2013 Dr. Kim approached the bank to request a short-term loan. After discussion with Mr. Urquhart, Dr. Kim decided to apply for $35,000. In connection with this application Dr. Kim completed and submitted an updated PSOA. The bank approved the corporation’s application for a short-term loan in the sum of $35,000.
63In its Factum the bank relies upon alleged misrepresentations by Dr. Kim in his PSOA’s relating to his ownership of a condominium in Hamilton and a Cessna aircraft.
64Dr. Kim claimed ownership of the condominium in Hamilton, Ontario on each of the three PSOAs which he provided to the bank. In 2011 he represented its value as $175,000 and in 2013 he represented its value as $150,000. Mr. Urquhart deposed in his affidavit that when he asked Dr. Kim what he used the second residential dwelling for Dr. Kim replied that he stayed there himself during the week to shorten his commute to work. He did not mention that his parents resided at that address.
65Dr. Kim also represented in all three PS0As that he was the owner of a Cessna aircraft. In his 2011 PSOA he represented the value of the aircraft at $750,000 and in the 2013 PSOA he ascribed a value to it of $500,000.
Were the representations false?
66The bank submits that Dr. Kim’s representations concerning the Hamilton condo were false. Each PSOA contained a certification, above Dr. Kim’s signature, that all information provided was true and complete and that he had no other undisclosed financial obligations and acknowledged that the statement will be used to determine his credit worthiness.
67Each PSOA listed the Hamilton condo under the heading “Real Estate Owned” and stated that title was in the name of Dr. Kim, it was purchased in 2000 at a cost of $110,000 and it had a present value as set forth above.
68Contrary to what was set forth in the PSOAs, Dr. Kim deposed under oath on his examination under section 163 of the BIA following his bankruptcy that it was his father’s condo and that, although it was registered in his name, “technically it’s my father’s.” He stated that his father contributed much more than he did to the purchase of the condo. Dr. Kim stated that the funds that he contributed to the purchase of the condo was a gift to his father. In his affidavit in support of the motion Dr. Kim deposed that he executed a trust agreement with his father whereby he confirmed that he was holding the Hamilton condo in trust for him, that he never resided at the Hamilton condo and that his parents bore all expenses associated with the property.
69The Bank submits that Dr. Kim’s representations respecting the Cessna aircraft were also false. It points to Dr. Kim’s sworn statement of affairs in his bankruptcy drafted on December 19, 2013 in which there was no mention of ownership of any aircraft. In the course of his s. 163 examination Dr. Kim deposed that the aircraft had always been owned by a numbered Ontario corporation 1473912 Ontario Limited (the “aircraft corporation”), of which he was the sole director and sole shareholder until he transferred the aircraft corporation to his mother on April 1, 2011, prior to completion and submission of his 2011 PSOA.
70In his reply affidavit Dr. Kim admitted that that he and his mother agreed to the transfer to her of ownership of the aircraft corporation for an agreed sale price of $60,000, which was far below what he considered the true market value of the aircraft to have been. He stated that he was dealing with many stressful situations at the time, including the breakup of his marriage, and he feared for the security of his assets against which to his estranged spouse might assert a claim.
71Dr. Kim denies that the representations respecting the Hamilton condo and the Cessna aircraft were false at the time he made them.
72Dr. Kim deposed in his affidavit in support of the motion as follows in relation to the Hamilton condo:
“When completing the PSOA’s I included the Hamilton condo among my assets since I believed that this was appropriate given that I was its legal owner. At the time I submitted the PSOA’s I never contemplated that I would fall into financial difficulties and that RBC would seek to enforce against the Hamilton condo.”
73In his reply affidavit Dr. Kim deposed that when he listed the aircraft on his 2011 PSOA he did not turn his mind to the “legal technicalities” of the facts that the aircraft was owned by the aircraft corporation, rather than himself, and that his mother, rather than himself, could be considered the owner of the aircraft corporation. He stated that the transaction with his mother had not been completed and no money had changed hands and that his mother’s involvement was intended to assist him in relieving him of some of his burdens. He still thought of the aircraft as his own and never anticipated any of the legal issues which have since arisen and had no expectation that any of his creditors would ever consider enforcement against the aircraft.
74In my view Dr. Kim has not satisfied the burden on him of showing that there is no issue requiring a trial with respect to the falsity of the representations he made on the PSOAs respecting the Hamilton condo and the Cessna aircraft. Indeed, based upon the admissions made by Dr. Kim in his sworn testimony on his s. 163 examination and in his affidavits filed on this motion I find that his representations in the PSOAs respecting the Hamilton condo in the aircraft were false. In making this finding there was no need to exercise any of the powers set forth in rule 20.04(2.1).
75Dr. Kim certified on the PSOAs that all of the information set out therein was true and complete. Based upon the information disclosed by Dr. Kim after his bankruptcy, in particular in the course of his s. 163 examination and in his affidavits filed on the present motion, the information in the PSOAs respecting the Hamilton condo and the aircraft was demonstrably not true and complete. He did not disclose that he held the Hamilton condo in trust for his father pursuant to a written agreement and had no beneficial interest in it and in his 2011 and 2013 PSOAs he did not disclose that the aircraft was owned by a corporation in which his mother was the sole and therefore controlling director and that he had either agreed to or had sold all of the shares in the aircraft corporation to her.
Knowledge that the representation was false and intention that the creditor to act upon it so as to obtain the credit sought
76As indicated, Dr. Kim has offered explanations as to why he represented in his PSOAs, without qualification, that he owned the Hamilton condo and the Cessna aircraft.
77Dr. Kim’s counsel argued that his inclusion of the Hamilton condo in his PSOA was an innocent mistake or at most negligence and was not made with fraudulent intent to induce the advance of funds by the bank.
78Similarly, Dr. Kim’s counsel argued that inclusion of the aircraft as a personal asset in all three PSOAs with no mention of the aircraft corporation, and his failure to disclose his transaction with his mother respecting the aircraft corporation in the 2011 and 2013 PSOAs were similarly innocent mistakes and at worst negligent, but were not fraudulent.
79Dr. Kim knew, in relation to the proposed loan advances in 2011 and 2013, that the bank was requiring him to provide a personal guarantee of the amounts to be advanced to the corporation and that his PSOAs were required by the bank to assess his application for credit for the corporation which would be supported by his personal guarantee. Dr. Kim is a highly educated and sophisticated professional. He must be taken to have read and understood the PSOAs and intended the bank to act upon the information that he set forth in them respecting his personal assets in order to obtain to the credit sought.
80I find, despite the fact that cross-examinations have been conducted on the various affidavits filed on the motion, that there is a genuine issue requiring a trial respecting whether Dr. Kim knew that his representations regarding his ownership of the Hamilton condo and the Cessna aircraft were false.
81Rule 20.04(2.1) provides that, in determining whether there is a genuine issue requiring a trial, the judge may weigh the evidence, evaluate the credibility of a deponent and draw any reasonable inference from the evidence, unless it is in the interest of justice for such powers to be exercised only at a trial. I find that in the circumstances of this case it is in the interest of justice for the powers set forth in the sub-rule to be exercised at a trial. It would be important for the trier of fact to observe Dr. Kim giving viva voce evidence and being exposed to cross-examination to assist in making a finding as to whether he indeed had a genuine and honest belief in the representations set forth in his PS0As.
Reliance on the false representation to extend credit
82Dr. Kim argues that the bank did not rely upon his representations regarding the Hamilton condo and Cessna aircraft in his PSOAs in advancing credit.
83Dr. Kim’s Factum correctly points out that there was no reliance by the bank on his 2009 PSOA as the proposed purchase of the Hamilton practice did not proceed and the bank made no advance of funds at that time.
84Dr. Kim’s Factum asserts that in assessing his 2011 loan application the bank calculated that he had a net worth of approximately $800,000 and an adjusted net worth of $494,000, being significantly lower than the net worth reported by Dr. Kim on his 2011 PSOA of $1,341,000.
85The Factum also points out that the 2013 PSOA could only have been relied upon by the bank to a minimal extent in that only $35,000 was advanced to Dr. Kim subsequent to submission of that PSOA.
86Dr. Kim takes the further position in his Factum that, given that the amount of the loan advance by the bank was specifically calculated as 60% of the value of his practice, as determined by an appraisal, the bank relied solely upon the appraisal in deciding to advance funds to Dr. Kim and not on his PSOAs.
87Moreover, Dr. Kim points out that the bank never requested any documentation to verify the assets that he reported in the PSOAs, never made any inquiries of him about the values that he ascribed to the assets, and made no efforts to verify the accuracy of his PSOAs.
88Finally, Dr. Kim submits that the function of his personal guarantees was simply to bind him to his practice and to preclude him from walking away should the practice run into financial difficulties, and as such the PSOAs were not relied upon by the bank in making its decisions to advance the loans.
89The bank points out in its Factum that a prospective creditor is entitled to rely on statements made by an applicant for a loan as true, without further verification, citing the cases of Re Mariyanayagam, (1998) 10 C.B.R. (4th) 105 (Ont. Ct. Gen. Div.) at para. 7 and Garofoli v. Kohm, (1989) 77 C.B.R. (N.S.) 84 (Man. Q.B.) at para. 61. I agree with this proposition. There is no stand-alone obligation on a lender to make inquiries or otherwise verify the information provided by an applicant for credit as a pre-condition to being able to show reliance on that information, absent special or unusual circumstances that are not present in this case. The reliance must only be reasonable. This principle is all the more applicable when the statement is accompanied by certification by the applicant that the information is true and complete.
90Scott Urquhart deposed in his affidavit in response to the motion that, in making its determination to extend and continue credit facilities to the corporation, the bank did not just rely on one element of the application, for instance the appraised value of Dr. Kim’s practice, but rather a variety of factors were weighed in making the ultimate determination. He stated that key among the factors were the valuation of the business, the current cash flow of the business and the personal guarantee of Dr. Kim. He stated that he relied significantly on Dr. Kim’s personal guarantee in his recommendation to the bank’s credit department regarding the decision to extend financing to him. In his proposal to the credit department Mr. Urquhart stated “Dr. Kim has significant net worth of approximately $800,000 and a very clean credit bureau that shows little reliance on consumer debt.”
91In my view Dr. Kim has failed to show that there is no genuine issue requiring a trial with respect to the bank’s reliance on the representations that he made in his 2011 and 2013 PSOAs concerning his ownership of the Hamilton condo and the Cessna aircraft. I find, despite the fact that cross-examinations have been conducted, that there is a genuine issue requiring a trial on this issue and that it is in the interest of justice for the powers set forth in sub-rule 20.04(2.1) to be exercised at a trial for the reasons set forth above in relation to the issue of Dr. Kim’s belief in the truth of his representations.
Was the bank aware of the misrepresentations prior to commencing action and obtaining judgment, or could it have become aware of them with the exercise of reasonable diligence?
92Royce G. Charles-Dunne, president of Security Recovery Group Inc., the agent for the bank, deposed in his affidavit in response to the motion that it was only upon reviewing Dr. Kim’s sworn statement of affairs after his bankruptcy that it became apparent that some of the information he had provided to the bank in his PSOA’s may have been false. He stated that further information was discovered when Dr. Kim was examined under oath on behalf of the Trustee in Bankruptcy pursuant to s. 163 of the BIA and subsequently when he swore an affidavit in support of an application by his father to have the property owned by Dr, Kim declared to be held in trust for his father.
93Mr. Charles-Dunne deposed further that the full particulars of the fraudulent misrepresentations made by Dr. Kim, as pleaded in the statement of claim in the second action, were not known to the bank until further examinations by the Trustee in Bankruptcy of Dr. Kim’s mother and Travelers Insurance Company were conducted in 2014 and 2015. He deposed that at the time the bank sued Dr. Kim and obtained judgment on August 7, 2013 the bank knew none of the information necessary to allege, let alone prove, fraud on the part of Dr. Kim.
94Dr. Kim makes the assertion that the bank could have discovered the misrepresentations had it dug deeper, however, he could point to no specific steps or investigations that the bank could have reasonably undertaken which would have led to disclosure of the misrepresentations prior to bringing action and obtaining judgment, or indeed prior to his bankruptcy. A search of the title to the Hamilton condo property would not have disclosed the existence of the trust agreement between Dr. Kim and his father as it was unregistered. Because Dr. Kim did not disclose the existence of the aircraft corporation to the bank, it had no knowledge that any corporation was involved and therefore it was not in a position to conduct a corporate file search to ascertain the identities of its officers and directors, even if it might be argued that such a corporate file search would necessarily have alerted the bank to the misrepresentation respecting ownership of the aircraft.
95I find that the bank had no knowledge of the misrepresentations prior to commencing its action against Dr. Kim on May 31, 2013 or prior to the judgment of Justice Henderson dated August 7, 2013, nor could it have discovered the misrepresentations prior to those dates with reasonable diligence.
96Based upon my finding respecting the application of the case of Lawyers’ Professional Indemnity Company v. Rodriguez I therefore find that the bank is not barred or precluded from leading evidence respecting the alleged fraudulent misrepresentation or false pretences of Dr. Kim in this action.
Disposition
97For the foregoing reasons I find that the following are genuine issues for trial with this action:
Whether the defendant Dr. Kim knew that his representations regarding his ownership of a condominium at 22 Jackson Street, Hamilton, Ontario and regarding his ownership of a Cessna aircraft in Personal Statements of Affairs submitted by the defendant to the plaintiff bank dated June 19, 2011 and April 8, 2013 were false;
Whether the plaintiff bank relied upon the said false representations in extending credit to the defendant Dr. Kim.
98For the reasons set forth above the motion of the defendant for summary judgment seeking dismissal of the action is dismissed.
99In light of this disposition it is not necessary to consider the bank’s submission that Dr. Kim’s motion for summary judgment should be dismissed as an abuse of process in light of the order of Master Jean lifting the stay of proceedings to permit the bank to bring the within action.
Directions for Trial
100Rule 20.05(1) provides that where summary judgment is refused the court may make an order specifying what material facts are not in dispute and defining the issues to be tried, and order that the action pursuant proceed to trial expeditiously.
101I make the following order in reliance upon rule 20.05(1):
(a) The following material facts are not in dispute:
(i) the representations that the defendant Dr. Kim made regarding his ownership of a condominium at 22 Jackson Street, Hamilton, Ontario and regarding his ownership of a Cessna aircraft in Personal Statements of Affairs submitted by the defendant Dr. Kim to the plaintiff bank dated June 19, 2011 and April 8, 2013 were false at the time he made them;
(ii) the defendant Dr. Kim intended the plaintiff bank to act upon the said Personal Statements of Affairs so as to enable the defendant to obtain the credit sought by him from the plaintiff in June 2011 and April, 2013; and
(iii) the plaintiff had no knowledge of the misrepresentations prior to commencing its action against the defendant in file 7247/13 on May 31, 2013 or prior to the judgment of Justice Henderson in that action dated August 7, 2013, and could not have discovered the misrepresentations prior to those dates with reasonable diligence.
(b) The following are the issues to be tried in this action:
(i) Whether the defendant Dr. Kim knew that his representations regarding his ownership of a condominium at 22 Jackson Street, Hamilton, Ontario and regarding his ownership of a Cessna aircraft in Personal Statements of Affairs submitted by the defendant Dr. Kim to the plaintiff bank dated June 19, 2011 and April 8, 2013 were false;
(ii) Whether the plaintiff bank relied upon the said false representations in extending credit to the defendant Dr. Kim.
102In accordance with rule 20.05(2) I give the following directions and impose the following terms:
(a) The affidavits or any other evidence filed on the motion for summary judgment and any cross-examinations on them may be used at trial in the same manner as an examination for discovery;
(b) The scope of any examinations for discovery shall be limited to matters not covered by the affidavits or any other evidence filed on the motion for summary judgment and any cross-examinations on them;
(c) Each of the parties shall deliver and file a concise summary of his or her opening statement at least 10 days prior to the commencement of trial.
Costs
103The parties are strongly urged to agree upon costs. If they are unable to do so, the plaintiff may make written submissions as to costs within 21 days of the release of this Endorsement. The defendant Dr. Kim has 14 days after receipt of the plaintiff’s submissions to respond and the plaintiff has a further 5 days to reply. Each party’s initial written submissions shall not exceed 5 double-spaced pages, exclusive of Offers to Settle, Bills of Costs or Costs Outlines and authorities, while the plaintiff’s reply submissions, if any, shall not exceed 2 double-spaced pages. All submissions shall be forwarded to me at my chambers at 85 Frederick Street, 7th Floor, Kitchener, Ontario N2H 0A7. If no submissions are received within this timeframe, the parties will be deemed to have settled the issue of costs as between themselves.
D.A. Broad, J.
Date: February 7, 2019