Court File and Parties

COURT FILE NO.: CV-18-00006933-0000 DATE: 2021-03-15 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: M.O.S. MortgageOne Solutions Ltd., Plaintiff AND: William Heidary, Gillian Lisa Heidary, Minister of National Revenue, Walter Heidary, Meta Heidary and Manulife Bank of Canada, Defendants

BEFORE: Kurz J.

COUNSEL: Ian Klaiman, for the Plaintiff Thomas W. Brown, for the Defendant William Heidary Michael Baigel, Licensed Insolvency Trustee for William Heidary

HEARD: February 16, 2021

Endorsement

Introduction

[1] This is a motion by the Plaintiff, M.O.S. MortgageOne Solutions Ltd. (“MOS”) for the following relief:

1. A declaration that the debt of William Walid Heidary (“Heidary”) to MOS, arising from the consent judgment of October 10, 2018, in this action (“the judgment”) is not released on Heidary’s discharge from bankruptcy, pursuant to s. 178(1)(d) and (e) of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (“the BIA”); and
2. A declaration and order that the stay imposed in the bankruptcy of Heidary pursuant to s 69.4 of the BIA no longer operates with respect to the Judgment.

[2] MOS argues that the judgment should survive Heidary’s assignment into bankruptcy. It points out that the amended statement of claim that led to the judgment raised the claim of fraud by Heidary and his co-defendant, Gillian Lisa Heidary (collectively “the Heidary defendants”). The amended statement of claim also contained a pleading under BIA s. 178(1)(d), that any judgment against the Heidary defendants should survive their bankruptcy. Ultimately, the Heidary defendants consented to the judgment. While the judgment makes no reference to them, MOS asserts that its statement of claim’s pleadings of fraud and the application of s. 178(1)(d) to the Heidary defendants merged with the judgment. That makes it a judgment in fraud, invoking the remedy of s. 178(1)(d).

[3] Heidary opposes MOS’s motion, arguing that fraud must be proven. But as Heidary points out, the judgment included no judicial finding of fraud or reference to its survival following bankruptcy. Instead, the judgment was simply a consent order, which should be treated as an agreement. Accordingly, Heidary argues that when he is discharged from his bankruptcy, the stay of the judgment under s 69.4 of the BIA should continue to operate. He adds that the principle of issue estoppel makes it improper to raise the issue of fraud and the survival of the judgment following bankruptcy when the judgment itself made no reference to those issues. He contends that the absence of those issues in the judgment merges with the judgment.

[4] The key issue in this motion then, is whether a consent judgment should survive bankruptcy when its underlying pleadings raise BIA s. 178(1) and its applicable grounds but the judgment itself makes no references to them or its survival following bankruptcy.

[5] For the reasons that follow, I find that in the circumstances of this case, the provisions of s. 178(1)(d) apply to the judgment. Consequently, MOS is entitled to the declarations it seeks.

[6] In this endorsement, I use the terms, “charge” and “mortgage” interchangeably as they reflect the same legal concept: the Mortgages Act s. 1 definition of the term, “mortgage”.

Background

[7] MOS is a licenced mortgage brokerage. The Heidary defendants were the owners of the real property municipally known as 3399 Lakeshore Road, Burlington, Ontario (“the property”). Prior to September 22, 2017, MOS held a third charge against the property. That charge was behind in priority to a first charge held by Manulife Bank of Canada (“the Manulife charge”) and five liens held by the Minister of National Revenue (“the MNR”). Those five liens are collectively described as “the MNR liens”.

[8] MOS and the Heidary defendants agreed to the terms of a new charge, for $782,000, which was registered against the property on September 22, 2017 (“the MOS charge”). MOS contends that it and the Heidary defendants agreed that the MOS charge, for the increased amount, was to be registered as a second charge. All of the MNR liens were to be paid in full, from the funds advanced on the MOS charge. But due to the fraud of the Heidary defendants, the MOS charge remained third in priority, with four of the five MNR liens unpaid.

Allegations in the MOS Statement of Claim

[9] After it discovered the true priority of the MOS charge, MOS sued the defendants, including the Heidary defendants.

[10] In its original statement of claim, MOS pleaded that prior to the registration of the MOS charge, it held a third charge against the property, for $452,950. That charge was behind in priority to the Manulife charge and the MNR liens. But in August 2017, the Heidary Defendants applied to MOS to increase its mortgage to pay off and consolidate debts. MOS agreed to fund the larger mortgage upon the terms set out below.

[11] MOS pleaded that among the terms of this charge agreed upon by MOS and the Heidary defendants (“the Terms”), were:

1. The amount of the mortgage was to be $782,000;
2. The MOS charge would be second in priority to the Manulife charge;
3. All of the liens registered by the Minister of National Revenue (“the MNR”) against the property at the time would be paid and discharged
4. the Heidary Defendants would obtain up-to-date discharge statements of all liens registered by MNR against the property for that purpose.

[12] MOS further pleaded that:

1. The Heidary Defendants offered MOS the contact information of what they represented to be an agent of the Canada Revenue Agency (“CRA”), named Dave Erwin.
2. That agent would advise MOS of the amounts outstanding on the MNR liens. MOS relied on this representation as well as those of the purported agent.
3. Unbeknown to MOS, that purported agent was an imposter (“Imposter Erwin”), posing as a real CRA agent of the same name.
4. MOS relied on the representations of Imposter Erwin that: i. he was the CRA agent handling the account of the Heidary defendants, ii. the total amount of their outstanding MNR liens was $296,418.73, and iii. if $296,418.73 were paid, the MNR liens would be discharged.
5. Based on those representations of Imposter Erwin, MOS understood that if $296,418.73 were paid to the MNR from the proceeds of the MOS charge, it would be placed second in priority to the Manulife charge.
6. MOS paid $296,418.73 to the MNR as part of the advancement of funds under the MOS Charge, and requested a release of the outstanding MNR liens.
7. However MOS only received the release of one of the MNR liens. Four further MNR liens remained registered against the property.
8. MOS discovered that the balance of the outstanding MNR liens, totalling $316,566.36, had not been discharged with the $296,418.73 payment.
9. Because of the failure to discharge all of the MNR liens, the MOS charge was placed third rather than second in priority against the property.
10. This was a breach of the Terms.

[13] In the prayer for relief of its statement of claim, MOS did not seek a specific bankruptcy or fraud related remedy. However, the statement of claim included the factual allegations described above. In the last paragraph of its statement of claim, MOS pleaded that any judgment obtained against the Heidary defendants should survive their assignment in bankruptcy. MOS pleaded that the Heidary defendants should not be released by a discharge from bankruptcy “as such liability falls within the provisions of s. 178(1)(d) of the BIA, as arising out of fraud, embezzlement, misappropriation, or defalcation.”

Consent to Judgment

[14] On June 13, 2018, the Heidary defendants served but did not file a notice of intent to defend. They served no statement of defence.

[15] The parties engaged in negotiations to resolve the issues in the action. The Heidary defendants wished to sell the property themselves rather than have it sold through power of sale. MOS agreed to hold off on noting them in default during those negotiations.

[16] On July 4, 2018, MOS served its amended statement of claim. It was identical to the original statement of claim other than in regard to the manner in which the pleading referred to MOS. There was no difference in its claims regarding the alleged fraud of the Heidary defendants or its pleading under BIA s. 178(1)(d).

[17] On June 27, 2018, MOS’s counsel wrote to counsel for the Heidary defendants, proposing that MOS would defer moving forward with its claim if the Heidary defendants accepted the following terms:

(a) The Heidary Defendants shall consent to judgment and agree to provide vacant possession of the Property, and such consent shall be held in escrow, and only released if the sale of the Property does not proceed as per the below; (b) The Heidary Defendants shall secure a firm agreement of purchase and sale of the Property by no later than August 31, 2018, and such transaction will close by no later than November 30, 2018; and (c) The Heidary Defendants shall continue to make payments against the mortgage until either the sale of the Property or entering of the consent to judgment.

[18] Ultimately, the Heidary Defendants consented to the terms of judgment proposed by MOS, which I granted on October 10, 2018 (“the Judgment”). The terms of the Judgment were:

1. The Heidary Defendants shall pay to the Plaintiff the sum of $784,250.00;
2. The judgment shall bear interest at the rate of 11.99% per annum, compounded semi-annually not in advance;
3. The Plaintiff shall be granted a writ of possession for the Property;
4. The Heidary Defendants shall vacate the Property by no later than November 1, 2018; and
5. Costs of the action shall be paid by the Heidary Defendants in the sum of $3,500.

[19] Nothing in the judgment made any reference to MOS’s claims regarding fraud or to any provision of the BIA. Heidary deposes that that is the reason that he agreed to the terms set out by MOS.

[20] Heidary further deposes that he did not engage in fraud against MOS. He refers to a separate lawsuit in negligence brought by MOS against its former real estate lawyer, who acted on its behalf in regard to the MOS mortgage. That lawyer issued a third-party claim against the Heidary defendants, raising the same fraud allegations raised in the MOS’s statement of claim in this action. The Heidary defendants defended that action and denied any fraud in their statement of defence to third-party claim.

[21] On April 23, 2019, Heidary filed an assignment in bankruptcy. He has yet to be discharged from his bankruptcy. The bankruptcy stayed the third-party action brought against the Heidary defendants by MOS’s former lawyer.

[22] As I set out below, Heidary’s denial of fraud in this motion and in the third-party claim are not relevant to the issues before this court. Any evidence that this court must look to must have arisen in the original action between the parties. However as the recitation above sets out, there was no hearing on the merits because of the Heidary defendants’ consent to judgment.

Analysis of whether the Judgment Debt Should Survive Heidary’s Bankruptcy

[23] In effect, opposing counsel argue the opposite sides of the same coin. Counsel for MOS argues that the MOS amended statement of claim pleaded fraud and s. 178(1)(d) of the BIA. Heidary consented to judgment on that claim. Thus, there was no need to make reference to s. 178(1)(d) in the judgment. It was part and parcel of the claim to which the Heidary defendants consented to judgment. If the Heidary defendants wished to avoid the debt surviving bankruptcy, they should have included that term in the settlement documents and judgment.

[24] Heidary takes the opposite approach. He says that no evidence of fraud has been brought forward, let alone proven in this case. In the absence of such evidence, s. 178(1)(d) cannot be invoked. He argues that he was never noted in default in MOS’s action. That means that he is not deemed to have accepted the allegations of fact set out in the statement of claim under r. 19.02(1)(a) of the Rules of Civil Procedure.

[25] Heidary points out that in granting the judgment on consent, I made no findings of fact. I simply granted judgment in accord with minutes of settlement. But, he argues, a judgment, in itself, is not an admission of the allegations in a statement of claim. It is a simply an agreement to a judgment that includes no finding on any aspect of the underlying claim. Rather, if an allegation of fraud is made and not conceded, it must be proven. Here, argues Heidary, if MOS wanted the judgment debt to survive his bankruptcy, it should have explicitly included that term in the judgment.

Applicable Law

Relevant Provisions of the BIA

[26] BIA s. 69.3 sets out the general rule that upon the bankruptcy of any debtor, no creditor has a remedy against the debtor or the debtor’s property. All civil actions against the bankrupt are stayed, with certain exceptions. The applicable portion of the provision states:

Stays of proceedings — bankruptcies

69.3 (1) Subject to subsections (1.1) and (2) and sections 69.4 and 69.5, on the bankruptcy of any 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.

[27] However, under s. 69.4, the stay may be lifted by the court under certain circumstances related to prejudice or equity. It states:

Court may declare that stays, etc., cease

69.4 A creditor who is affected by the operation of sections 69 to 69.31 or any other person affected by the operation of section 69.31 may apply to the court for a declaration that those sections no longer operate in respect of that creditor or person, and the court may make such a declaration, subject to any qualifications that the court considers proper, if it is satisfied

(a) that the creditor or person is likely to be materially prejudiced by the continued operation of those sections; or (b) that it is equitable on other grounds to make such a declaration.

[28] Under BIA s. 178(2), a discharge from bankruptcy releases the bankrupt from all claims provable in bankruptcy. However, exceptions to that rule are found under s. 178(1), which refers to various types of misconduct that are not released by a bankruptcy discharge.

[29] Among the exceptions set out in s. 178(1) are debts or liabilities that arise from “fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity” (s. 178(1)(d)), or “false pretences or fraudulent misrepresentation” (s. 178(1)(e)). The applicable provisions read as follows:

Debts not released by order of discharge

178(1) An order of discharge does not release the bankrupt from

(d) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity or, in the Province of Quebec, as a trustee or administrator of the property of others; (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;

Applicable Authorities

[30] In Beneficial Finance Co. of Canada v. Williamson et al. 1971 CarswellOnt 66, 16 C.B.R. (N.S.) 30 (“Beneficial”), a creditor sued a debtor after the debtor had already been discharged from bankruptcy. The creditor pleaded that the debtor borrowed money from it through false pretenses or fraudulent misrepresentation. The parties resolved the action through minutes of settlement, which called for a reduced payment but made no reference to any form of fraud or the judgment surviving bankruptcy. The debtor then assigned himself into bankruptcy a second time, not having paid the amount set out in the consent judgment. Shea J. of the Ontario County Court found that the judgment debt remained enforceable despite the bankruptcy discharge.

[31] Shea J. found that the consent judgment in an action based on fraudulent misrepresentation raised the doctrine of issue estoppel as clearly as if the finding were made following a trial. He wrote:

13 One of the issues in the action was whether or not the judgment debtor made certain fraudulent misrepresentations which induced the judgment creditor to make the loan constituting the debt in question. The issuance of the consent judgment decided this issue in favour of the judgment creditor just as if that issue had been so decided after a trial of the action. The judgment creditor [sic] is estopped by record from now seeking to contest that issue.

[32] In coming to this conclusion, Shea J. relied on a number of leading cases from both England and Canada. He wrote:

14 In support of my view in this matter I refer to a case relied upon by counsel for the judgment creditor, Re South American and Mexican Co.; Ex parte Bank of England, [1895] 1 Ch. 37, per Vaughan Williams J. — at p. 45 — “It has always been the law that a judgment by consent or by default raises an estoppel just in the same way as a judgment after the Court has exercised a judicial discretion in the matter. The basis of the estoppel is that, when parties have once litigated a matter, it is in the interest of the state that litigation should come to an end; and if they agree upon ... a judgment ... an estoppel is raised as to all the matters in respect of which an estoppel would have been raised by judgment if the case had been fought out to the bitter end.” (The italics are mine.)

15 I refer also to Re Ontario Sugar Co.; McKinnon’s Case (1910), 24 O.L.R. 332 at 337, leave to appeal refused , 44 S.C.R. 659 (which followed the South American & Mexican Co. case) quoting Lord Herschell L. C. as follows: —

The truth is, a judgment by consent is intended to put a stop to litigation between the parties just as much as is a judgment which results from the decision of the Court after the matter has been fought out to the end”. He added: “I think it would be very mischievious if one were not to give a fair and reasonable interpretation to such judgments, and were to allow questions that were really involved in the action to be fought over again in a subsequent action”. (The italics are mine.) Moss said at p. 337: “The rule of estoppel by judgment is simple and plain, viz., the facts actually decided by an issue in one suit and in a competent Court cannot be again litigated between the same parties or their privies and are conclusive between them ... As the learned Chief Justice says, the Court, for the purpose of ascertaining what was actually determined in the former action, may look outside the judgment and the pleadings.

16 In the case of Kennedy v. Suydam (1916), , 36 O.L.R. 512 at 521, Middleton J. stated: “A judgment determines every right, question, or fact distinctly put in issue as a ground of recovery or defence. It also determines all matters which ought to have been brought forward as part of the controversy”.

[33] Re Demitor, 1993 CarswellAlta 415 (Alta. Q.B.), also dealt with the survival of a consent judgment following bankruptcy under BIA s. 178(1)(e). An individual borrowed a sum of money from the Alberta Treasury Branches (“the ATB”). He later assigned himself into bankruptcy, listing the ATB as a secured creditor. The ATB then sued the debtor, alleging fraudulent misrepresentation in his loan application. In the debtor’s statement of defence, he admitted to the debt but not the fraudulent misrepresentation. The parties later agreed to a consent judgment that made no reference to fraudulent misrepresentation or survival of the judgment following bankruptcy discharge.

[34] In resisting the ATB’s subsequent attempt to invoke s. 178(1)(e), the debtor argued that the consent judgment represented only an admission of debt. It was not an admission of the ATB‘s underlying claim of fraudulent misrepresentation. The debtor also argued that neither the statement of claim’s prayer for relief nor the consent judgment referred to a declaration that the judgment was covered by s. 178(1)(e).

[35] In finding that the default judgment remained enforceable under s. 178(1)(e), bankruptcy Registrar Fundak rejected the debtor’s arguments. He first found that treating the judgment as a mere acknowledgement of the debt is “superfluous”, as a judgment is unnecessary to prove a debt in bankruptcy. He wrote:

31 To treat the consent judgment as just an acknowledgment of a debt would make it (and the action itself) superfluous. There is no need for that. The debt was both admitted and proved in the bankruptcy without the necessity of an action, and the action is solely to deal with the issue of s. 178(1)(e). That is what the chambers judge ordered the action to be for.

[36] Turning to the debtor’s other two arguments, Registrar Fundak found that explicitly seeking a declaration of the applicability of s. 178(1)(e) in the prayer for relief of the ATB’s amended statement of claim would have been preferable. So too would have been such a declaration in the judgment itself. But they were unnecessary. As Registrar Fundak wrote:

32 It might have been better if the prayer for relief in the Treasury Branches pleading had asked for a declaratory judgment but that is not critical. A cause of action is determined by the facts pled, not by what is suggested in the prayer for relief: Wagar v. Little, , [1924] 1 W.W.R. 112 (Alta. C.A.); Hoover v. Burrows, , [1945] 3 W.W.R. 683 (Alta. C.A.); 8 Judicature Act [R.S.A. 1980, c. J-1].

33 It might also have been better if the consent judgment had expressly declared that the amount it was for was a debt that survived the discharge by virtue of s. 178(1)(e). But given the factual backdrop to the action that is not critical. The factual backdrop mandates that the issue raised by the Treasury Branches in its pleading was admitted by the Bankrupt when he consented to the judgment. It is necessarily there in this case.

[Emphasis added.]

[37] In Canada (Attorney General) v. Bourassa (Trustee of), 2002 ABCA 205 (“Bourassa”), the Alberta Court of Appeal clearly adopted the principles set out in Beneficial and Re Demitor. The court stated at para. 6:

On the other hand, when a judgment, which pre-dates the bankruptcy, expressly finds fraud, no further court order would be needed before the creditor may pursue collection of its debt: Smith (Re) (1985), , 43 Sask.R. 27 (Q.B.), aff'd (1986), , 45 Sask.R. 240 (C.A.). The same is true of a consent judgment from which an admission of fraud can be inferred: Beneficial Finance v. Williamson (1971), 16 C.B.R. (N.S.) 30 (Ont. Co. Ct.); Demitor (Re) (1993), , 137 A.R. 381 (Master).

[Emphasis added.]

[38] But in Royal Bank of Canada v. Futurecom Inc., 2009 ONCA 590 (“Futurecom”), the Court of Appeal for Ontario refused to enforce, post-bankruptcy, a judgment that, in unusual circumstances, was expressly based on fraud.

[39] The plaintiff originally sued and obtained a default judgment against the debtor based only on his personal guarantee of a corporate debt. The statement of claim did not raise the issue of fraud or the survival of a judgment following bankruptcy. However, after a judgment debtor examination, the plaintiff moved under r. 59.06(2)(a) of the Rules of Civil Procedure to vary the default judgment "on the ground of fraud or of facts arising or discovered after it was made". The plaintiff alleged that it had discovered the alleged fraud after the default judgment had been granted. The plaintiff sought to vary the judgment by including a finding that the judgment was one based on fraud misrepresentation under s. 178(1)(d).

[40] The debtor, Korman, originally consented to the s. 178(1)(d) order. But he later moved to set it aside. He claimed that he did not understand the terms to which he agreed because his lawyer misinformed him about their contents. In a motion brought in the appeal, the plaintiff/respondent requested security for costs from Korman, arguing in part that the appeal was frivolous and vexatious.

[41] In that motion, Weiler J.A., in chambers, refused to grant that relief. She wrote at para. 15 that:

A consent judgment is not a judicial determination on the merits of the case, but an agreement elevated to the status of an order on consent. The basis of the order is the parties' agreement and not a judicial determination of what is fair and reasonable in the circumstances.

[42] In the argument of the appeal on the merits (2010 ONCA 63), a full panel of the Court of Appeal for Ontario did not rely on Weiler J.A.‘s rationale. It set aside the order varying the judgment on the ground that the motion judge had improperly relied upon r. 59.06(2)(a) to make the finding of fraud after judgment. The issue had not been raised in the original statement of claim. Rule 59.06(2)(a) was an improper vehicle to change the nature of the judgment, which had no basis in fraud.

[43] While the panel did not take issue with Weiler J.A.’s comment on the chambers motion, it did not rely on her rationale. In fact, it looked to and relied upon the original pleadings As Rouleau J.A. wrote for the court:

24 The rule does not contemplate altering a judgment or order to provide for relief never sought in the moving party's pleading. In order to come within the rule, the motion must be one brought "in the proceeding". As a general rule, pleadings lay out the four corners of the dispute and parties are bound by their pleadings: See Kalkinis (Litigation Guardian of) v. Allstate Insurance Co. of Canada (1998), , 41 O.R. (3d) 528 (C.A.); leave to appeal refused, [1999] SCCA No. 253 (S.C.C.). The proceeding continues to be defined by the pleadings even after judgment is obtained.

[Emphasis added.]

[44] The fact that the debtor consented to the amendment of the default judgment did not prevent him from moving to set it aside. Rouleau J.A. stated that “[g]iven the seriousness of the allegation, fraud must normally be pleaded and proved with particularity and the defendant ought generally to be entitled to defend.”

[45] In setting aside the order to vary the default judgment, the court found that there was sufficient evidence that the debtor and his lawyer did not fully understand the terms of the consent order. Based on the evidence before the court, there was a serious issue as to whether fraud was involved in the obtaining of funds from the bank. Therefore the consent order varying the original judgment and its finding under s. 178(1)(d) was set aside.

[46] As a result, the Plaintiff was held to the four corners of its original statement of claim. It was not allowed to expand those boundaries because of a clear unilateral mistake of Korman, caused by his lawyer’s error. I note that the court says nothing about how it would have treated this case if the Plaintiff had pleaded fraud and/or s.178(1)(d) or (e). I will have more to say below about the application of the Futurecom appeal decision to this case.

[47] In Lawyers' Professional Indemnity Co. v. Rodriguez, 2018 ONCA 171 (“Rodriguez”), the amended statement of claim issued against the bankrupt did not plead allegations of fraud against the debtor or raise s. 178(1). The Court of Appeal for Ontario found that the creditor could not lead evidence of fraud for the first time in the bankruptcy proceedings. However a court considering an application under s. 178(1)(d) can consider the materials that led to the judgment. Those materials include the facts pleaded in support of the claim as well any supporting evidence that led to the judgment. As Nordheimer J.A. wrote for the court:

6 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.

[Emphasis added]

[48] At para. 31 of Rodriguez, the court adopted a statement by the majority of the British Columbia Court of Appeal (“BCCA”) in H.Y. Louie Co. v. Bowick (c.o.b. Power Quest Batteries), 2015 BCCA 256. At para. 82 of that decision, Chiasson J.A. wrote that in an application under s. 178(1)(d):

It is clear that characterization of a judgment is based on the pleadings available to the court that made the judgment and the proceedings before it.

[49] At para. 33 of Rodriguez, the court adopted a further statement from the BCCA, in Cruise Connections Canada v. Szeto, 2015 BCCA 363. There, at para. 29, Garson J.A. summarized the ratio in H.Y. Louie as follows:

H.Y. Louie v. Bowick expressly confirms a court's ability to characterize a previous judgment in a s. 178 application based on "the pleadings available to the court that made the judgment and the proceedings before it": at para. 82 [original emphasis]. A 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).

[50] While Rodriguez, like this case, dealt with s. 178(1)(d) and Beneficial and Re Demitor dealt with s. 178(1)(e), the principles on which they are based are equally applicable to both provisions.

[51] In Dhillon v. Jaffer, 2015 BCSC 1456, the plaintiff sued for negligence, breach of fiduciary duty, and/or breach of contract. While he lost at trial, the plaintiff succeeded on appeal, based only on a finding of negligence. The BCCA did not accept the other grounds of liability. The plaintiff later attempted to sue the same defendant on the basis of breach of fiduciary duty despite its rejection by the appellate court. In refusing to allow that second action to proceed, Wedge J. of the British Columbia Supreme Court found that when a party obtains a judgment, the doctrine of merger applies. In doing so, Wedge J. adopted at para. 60 the following statement from the Supreme Court of Canada in Canada (Attorney General) v. Hislop, 2007 SCC 10, [2007] 1 S.C.R. 429 at para. 75:

When a judgment is obtained, the cause of action upon which the judgment is based is merged in the judgment.

[52] To clarify, Wedge J. offered this definition of the term “merger”, taken from a 1914 Ontario Court of Appeal decision:

63 In McIntosh v. Parent, , [1924] 4 D.L.R. 420 (Ont. S.C. (A.D.)), the Ontario Court of Appeal described the doctrine of merger of judgment as requiring:

...a plaintiff asserting a cause of action to claim all his relief in respect thereto, and prevents any second attempt to invoke the aid of the courts for the same cause, for on his first recovery his entire cause of action has become merged in his judgment and is gone for ever.

[53] In Perciasepe v. Smith, , [2003] O.J. No. 6043 (S.C.J.), Eberhard J. of this court found that in an application under s. 178(1) following a default judgment, it is open to the court to look behind the face of the judgment to determine whether the underlying cause of action arose in fraud.

[54] Eberhard J. relied in large measure on the fact that the judgment before her was a default judgment. That meant that the defendant was deemed, under r. 19.02(1(a) to have admitted the truth of all allegations of fact made in the statement of claim. That is not the case here. But Eberhard J. also considered a different issue: the fact that the amended statement of claim raised more than one cause of action, including fraud.

[55] In going behind the face of the judgment, Eberhard J. found that fraud allegations were not necessary to obtaining the default judgment. Even so, she found no reason to prefer the priority of one claim to the other. More than one cause of action can co-exist in an action, or as Eberhard J. put it at para. 38: “[i]n law, they are not mutually exclusive”. The decision and findings of Eberhard J. were affirmed on appeal: , [2004] O.J. No. 3110 (Ont.C.A.).

[56] In Toban v. Nijjer, 2005 BCSC 891, the defendant passed a cheque to the plaintiff that was later dishonoured. The defendant subsequently assigned herself into bankruptcy. The plaintiff sought a finding that the debt would survive the bankruptcy. The bankruptcy registrar granted him the right to prosecute the claim for the limited purpose of establishing the amount which the plaintiff is entitled to prove, as an unsecured claim, in the defendant’s bankruptcy.

[57] The plaintiff then commenced an action against the defendant based on fraudulent misrepresentation. The defendant filed a statement of defence. After the matter was set down for trial, the plaintiff delivered an offer to settle for a monetary payment, with no mention of fraudulent misrepresentation. After the defendant accepted the offer, the plaintiff moved for judgment based on both the accepted offer and a finding that the judgment would survive the bankruptcy under s. 178(1)(e). The defendant argued that his acceptance of the offer did not constitute an admission of fraud and that the judgment to which he consented cannot survive his discharge from bankruptcy.

[58] Relying on a number of the cases cited above, including Beneficial, Re Demitor, Bourassa, and Perciasepe v. Smith, C. Lynn Smith J. of the British Columbia Supreme Court found that it was open to her to look behind the judgment to find that it was based on fraudulent misrepresentation. As she wrote:

40 The burden is on the party who asserts that a debt or liability survives discharge from bankruptcy to show that the debt or liability falls within one of the categories listed in s. 178(1) of the BIA. A conclusion that the debt or liability is "for obtaining property by false pretences or fraudulent misrepresentation" should not be reached without a proper foundation. The weight of the authorities in circumstances similar to those before me supports the conclusion that courts, in deciding whether a debt or liability falls within s. 178(1) of the BIA, should consider all relevant information regarding the nature of the claim and its disposition.

41 In this case the Offer to Settle did not specify the nature of the claim and did not require the defendant to consent to judgment. However, the Offer to Settle does not exist in a vacuum: it was an offer to settle a specific action, namely the action by Stephen Toban for damages for fraudulent misrepresentation against Marc Nijjer.

42 I am not persuaded that the wording of s. 178(1) of the BIA, the authorities, Rule 37(12), or any policy considerations require the Offer to Settle to be treated differently than would a consent judgment in the context of this case. As with the consent judgment in Demitor, in considering whether the "debt or liability" is "for obtaining property by false pretences or fraudulent misrepresentation", I can have regard not only to the bare wording of the Offer to Settle but also to what claim it was that the acceptance settled.

[Emphasis added.]

[59] In Water Matrix Inc. v. Carnevale, 2018 ONSC 6436 (“Water Matrix”), the plaintiff had sued its former employee for over a million dollars that it said she took herself or diverted to a company controlled by her husband. The amended statement of claim contained allegations setting out the conduct in which the plaintiff alleged the defendant had engaged. The pleading described the funds taken by the defendant as “improperly withdrawn from the company's account…and delivered to accounts held or controlled by the Defendants or were otherwise for their benefit.” The statement of defence contained a broad and unparticularized denial of impropriety.

[60] The parties reached an agreement to judgment that made no reference to fraud or s. 178(1). When the defendant attempted to resile from the agreement, the plaintiff successfully moved for judgment based on the agreement. After the defendant made an assignment in bankruptcy, Sanfilippo J. found that the defendant’s debt met the test of BIA s. 178(1)(e). Therefore it survived the order of discharge from bankruptcy.

[61] Sanfilippo J. framed the defendant’s argument and his response to it as follows at para. 7:

Ms. Carnevale submits that as the Judgment arises from the enforcement of a settlement, and not from substantive determination, the lens through which the Court must assess the applicability of s. 178(1) is the settlement agreement and her consent to judgment, not the underlying action for civil fraud. I find that these submissions are without merit.

[62] In coming to this finding, Sanfilippo J. reviewed a number of authorities on what is needed to meet the test of s. 178(1). He wrote at para. 31:

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.

Analysis

Summary of Principles

[63] From my review of authorities set out above and my consideration of the arguments raised by the parties, I conclude that the following principles apply to the issue of whether a consent judgment survives bankruptcy when the underlying statement of claim cites a ground raised in s. 178(1)(d) or (e) and/or the provision itself:

1. a consent judgment may survive bankruptcy, even if that judgment does not cite a ground raised in s. 178(1)(d) or (e) or the provision itself.
2. A court may look behind the consent judgment, to determine the underlying cause(s) of action.
3. In doing so, the court must look at all of the circumstances in the original proceeding, including the contents of the pleadings and any evidence provided to the court that granted the judgment.
4. A court may find that a consent judgment is based on a ground caught by s. 178(1)(d) and (e), based only on the pleadings, if the plaintiff expressly pleads one of those grounds and the issue is not otherwise determined.
5. The fact that fraud or a related cause of action was not the only cause of action pleaded does not prevent a finding under s. 178(1)(d) or (e).
6. The doctrines of issue estoppel and merger apply when there is a consent to a judgment in any action in which s. 178(1)(d) and/or (e) is raised in the statement of claim, and there is no finding to the contrary.
7. However, when considering the application of s. 178(1)(d) or (e) after a judgment has been granted, court cannot look to evidence extraneous to the proceeding in which the judgment was granted.
8. Thus, if a plaintiff failed to raise any issues caught by s. 178(1)(d) or (e) before obtaining a consent judgment, they cannot raise them for the first time in the bankruptcy. That was the result in Futurecom.
9. On the other hand, the same is true if a defendant fails in the original proceeding to prove their defence to the s. 178(1) claim. That defendant cannot do so for the first time in the bankruptcy proceedings.

[64] In each of Beneficial, Re Demitor, and Water Matrix, there was a consent judgment with no hearing and no judicial finding. But the court considering s. 178(1) found that consenting to a judgment in an action based on fraud or fraudulent misrepresentation was sufficient. On the other hand, I have seen no cases that hold the contrary view.

Argument that Consent Judgment as an Agreement

[65] Citing the motion decision of Weiler J.A. in Futurecom, Heidary argues that a consent to judgment is not a finding, it is an agreement. But as set out above, that comment by Weiler J.A. has narrower application than Heidary submits, as the full panel’s decision in the same case shows. In any event, the question remains: if a consent judgment is an agreement, what, exactly, was agreed to.? As the full panel of the Court of Appeal for Ontario found in the Futurecom decision on the merits: “[t]he proceeding continues to be defined by the pleadings even after judgment is obtained.”

[66] Here, MOS’s amended statement of claim clearly raised the issue of fraud. It did so in its factual recitation of the alleged conduct of the Heidary defendants, MOS’s reliance on their representations regarding Imposter Erwin, as well as its reliance on the allegedly false representations of that imposter. The amended statement of claim also contained an explicit plea that any judgment in the action survive bankruptcy under s. 178(1)(d). The judgment issued on consent was based, at least in part, on a pleading that made those claims.

[67] It was not necessary to set out in the judgment that the claim survives bankruptcy in the statement of claim’s prayer for relief. Nor was it necessary to include reference to s. 178(1)(d) in the consent judgment.

Argument of Unilateral Mistake of Law

[68] Heidary seems to argue that he made a unilateral mistake as to the legal effect of the judgment, to which he consented. He does not say that MOS shared in the mistake or is responsible for it in any way. He does not deny that he had independent legal advice throughout the negotiations.

[69] Heidary asserts that before he consented to the judgment, his lawyer stated to counsel for MOS that if the parties were unable to settle, he would file a defence. But he provides no evidence that, during negotiations with MOS’s counsel, his counsel even raised the issue of the survival or non-survival of the consent judgment following bankruptcy.

[70] Further, unlike the debtor, Korman, in Futurecom, Heidary does not argue that he and his lawyer misunderstood the nature of what he agreed to, that is a consent judgment based on an action commenced and encapsulated by a statement of claim. In Futurecom, Korman and his lawyer were in error as to the very nature of the order to which Korman had agreed. They thought that he had agreed to only amend the title of proceedings in the judgment, not change its nature after was judgment granted.

[71] Here, Heidary knew that he was consenting to judgment on the claim brought by MOS; one which raised the issues of fraud and s. 178(1)(d). He did not think that he was merely consenting to a change in the action’s title of proceedings. Further unlike Korman, Heidary did not move to set aside the consent judgment based on his alleged unilateral mistake.

Argument that Fraud must be Proven

[72] Heidary argues that fraud must be proven. Here, there was no hearing, no finding of fraudulent misrepresentation or even default judgment with its deemed admission of the factual claims in the statement of claim. But as Heidary himself points out in relying on Dhillon v. Jaffer, “[w]hen a judgment is obtained, the cause of action upon which the judgment is based is merged in the judgment.”

[73] MOS clearly placed the issues of fraud and the application of s. 178(1)(d) in issue in its statement of claim. It pleaded facts and a legal theory that could lead to a judgment based on fraud. Heidary consented to a judgment in the full amount in that claim. That was the factual matrix within which the judgment was granted on consent. In these circumstances, if Heidary wished to exempt himself from the operation of s. 178(1)(d), it was incumbent on him to include such a term in the agreement or judgment.

[74] I add that if Heidary’s submission were to be accepted, even when a party consents to judgment in a claim of fraud, the plaintiff must take the action to trial to avoid the application of BIA s. 178(2). Under that provision, a discharge from bankruptcy releases the bankrupt from all claims provable in bankruptcy. Such a process is contrary to the authorities cited above and to the following interpretive and proportionality principles set out in the Rules of Civil Proceeding:

INTERPRETATION

General Principle

1.04 (1) These rules shall be liberally construed to secure the just, most expeditious and least expensive determination of every civil proceeding on its merits.

Proportionality

(1.1) In applying these rules, the court shall make orders and give directions that are proportionate to the importance and complexity of the issues, and to the amount involved, in the proceeding.

Argument that Beneficial and Re Demitor cases can be distinguished

[75] One further argument raised by Heidary is that the Beneficial and Re Demitor cases can be distinguished because they involved two bankruptcies each. In those cases, the s. 178(1) claim was made after the debtor first entered bankruptcy and then was discharged. My review of those decisions shows that nothing arose from those particular facts. There was no principle that applied to a second bankruptcy that would not apply in the case of a first or only one.

Conclusion

[76] For the reasons cited above, I grant a declaration as follows:

1. The debt of William Walid Heidary (“Heidary”) to MOS, arising from the consent judgment of October 10, 2018, in this action (“the judgment”) is not released on Heidary’s discharge from bankruptcy pursuant to s. 178(1)(e) of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3; and
2. The stay imposed in the bankruptcy of Heidary pursuant to s 69.4 of the BIA no longer operates with respect to the Judgment.

Costs

[77] The parties should attempt to resolve the issue of costs on their own. If they are unable to do so, MOS may submit its costs submissions of up to three pages, double-spaced, one-inch margins, plus a bill of costs/costs outline and offers to settle within 14 days of release of this endorsement. It need not include the authorities upon which they rely so long as they are found in the commonly referenced reporting services (i.e., LexisNexis Quicklaw, or WestlawNext) and the relevant paragraph references are included. Heidary may respond in kind within a further 14 days. No reply submission will be accepted unless I request it. If I have not received any submissions within the time frames set out above, I will assume that the parties have resolved the issue and make no costs order.

“Marvin Kurz J.” Electronic signature of Justice Marvin Kurz, Original will be placed in court file Dated: March 15, 2021