COURT FILE NO.: 33-2326968
DATE: 2021/01/19
ONTARIO
SUPERIOR COURT OF JUSTICE
IN BANKRUPTCY and INSOLVENCY
IN THE MATTER OF THE BANKRUPTCY OF
JOSEPH MICHAEL O’LEARY
OF THE CITY OF OTTAWA
IN THE PROVINCE OF ONTARIO
COURT FILE NO.: 4053/18
ONTARIO
SUPERIOR COURT OF JUSTICE
SMALL CLAIMS COURT
RE: 620369 Ontario Inc. cob as Herman’s Building Centres, Plaintiff
Lowrey’s Roofing Limited also known as Lowrey’s Roofing Ltd. and Joseph Michael O’Leary also known as Joseph O’Leary aka Joe O’Leary, Defendants
BEFORE: Justice Stanley J. Kershman
HEARD IN OTTAWA: November 18, 2020 by Zoom in Ottawa
APPEARANCE: C. Critch, for the Plaintiff
J. O’Leary, Self-Represented
reasons for decision
Introduction
[1] The moving party, (“Plaintiff”) seeks an order declaring that the default judgment granted on June 26, 2018 against the Defendants, including the bankrupt, Joseph Michael O’Leary (“Bankrupt”) survives his bankruptcy. The Plaintiff also seeks an order granting leave to enforce the judgment against the Bankrupt.
Factual Background
[2] The Plaintiff carries on business, inter alia, as a supplier of building materials for construction and roofing. The head office is located in St. Catherine’s, Ontario, with branch offices across Ontario.
[3] Lowrey’s Roofing Ltd. (“Lowrey’s Roofing”) was in business as a roofer in Ottawa and purchased building supplies from the Plaintiff.
[4] In 2014, the Bankrupt signed an agreement in favour of the Plaintiff guaranteeing the debts of Lowrey’s Roofing.
[5] In 2017, Lowrey’s Roofing ran into financial difficulties and closed. The Bankrupt went to see Raymond Chabot Inc., Trustee in Bankruptcy. The Bankrupt was advised that, due to the high cost of having Lowrey’s Roofing go bankrupt, Mr. O’Leary should file for bankruptcy personally. At the time, Lowrey’s Roofing owed an outstanding balance to the Plaintiff of $7,865.09 as of January 1, 2018. The interest rate chargeable on overdue accounts was 3% per month (42.57% per annum).
[6] Mr. O’Leary filed for bankruptcy on December 19, 2017. Raymond Chabot Inc. was appointed as the Trustee and the Plaintiff was listed as a creditor in the Statement of Affairs. The Plaintiff was forwarded a copy of the Statement of Affairs and a Proof of Claim, which it filed with the Trustee on May 4, 2018.
[7] The Bankrupt was discharged from bankruptcy on September 19, 2018. The Trustee was discharged on December 11, 2018.
[8] On May 25, 2018, the Plaintiff commenced an action against Lowrey’s Roofing and the Bankrupt claiming, inter alia, breach of trust under the Construction Lien Act, R.S.O. 1990, c. C.30 (“CLA”), in the amount of, as of January 1, 2018, $7,865.09, together with interest and costs. It obtained default judgment on June 26, 2018.
Issues
[9] Before the Court can consider the motion as brought by the Plaintiff, it must analyze the following issues:
Was the default judgment obtained by the Plaintiff against Mr. O’Leary valid?
Should the stay of proceedings be lifted pursuant to section 69.4 of the Bankruptcy and Insolvency Act, R.S.C., 1985, C. B-3 (“BIA”), to allow the Plaintiff to proceed against Mr. O’Leary?
Issue #1: Was the Default Judgment obtained by the Plaintiff against Mr. O’Leary valid?
Plaintiff’s Position
[10] The Plaintiff argues that it commenced a claim in Small Claims Court on May 25, 2018 against Mr. O’Leary and Lowrey’s Roofing, which included a claim that the debt was for a breach of trust pursuant to the CLA. The claim was purportedly served, and default judgment was granted based in part on the breach of trust under the CLA.
[11] The Plaintiff argues that the Bankrupt was a Trustee of the trust funds that were received by Lowrey’s Roofing pursuant to ss. 8(1), 8(2) and13 of the CLA.
[12] It argues that, since the Plaintiff was not paid the funds it was owed, the Bankrupt was in breach of his obligations as Trustee to the Plaintiff, in part because he was responsible for the management and operation of the roofing company and controlled its finances.
[13] The Plaintiff argues that the trust funds were not remitted to the Plaintiff and, as such, the Bankrupt caused the trust funds to be used for a purpose inconsistent with the CLA.
Defendant’s Position
[14] The Defendant did not file any materials on the motion. He appeared on the motion and made oral representations that the debt should not survive bankruptcy. He argued that he received the Statement of Claim after he filed for bankruptcy, but before he was discharged.
Analysis
[15] The Bankrupt filed for bankruptcy on December 19, 2017, with Raymond Chabot Inc. The Plaintiff was listed as a creditor in the Statement of Affairs. The Plaintiff filed a proof of claim and proxy on May 4, 2018.
[16] On May 25, 2018, the Plaintiff commenced the Small Claims Court Action against Lowrey’s Roofing and Mr. O’Leary. On that date, the Plaintiff knew that Mr. O’Leary was bankrupt and that neither he nor the Trustee had been discharged. The Plaintiff nevertheless proceeded with the action, without bringing a motion to lift the stay of proceedings pursuant to section 69.4 of the BIA.
[17] The Statement of Claim makes no mention that Mr. O’Leary had filed for bankruptcy or that he was an undischarged bankrupt.
[18] The Plaintiff obtained default judgment on June 26, 2018.
[19] The default judgment read in part:
“The Plaintiff shall have judgment against all Defendants for the sum of $7,865.09 and for breach of contract and breach of trust and for damages pursuant to the Construction Lien Act.”
[20] Judgment was granted in the amount of $9,479.55, together with costs of $500. Post-judgment interest accrues at the rate of 42.57%.
[21] While the Statement of Claim does not specifically state that the remedy being sought is one that survives bankruptcy, the Court finds that the wording of the relief claimed and the judgment granted would potentially fall within the provisions of section 178(1)(d) of the BIA, knowing that Mr. O’Leary has previously filed for bankruptcy.
[22] The Court finds that the non-disclosure of Mr. O’Leary’s bankruptcy to the Small Claims Court is a material non-disclosure.
[23] Furthermore, based on the evidence, the Court finds that the Plaintiff, despite knowing that Mr. O’Leary was bankrupt and undischarged, did not bring a motion to lift the stay of proceedings that was in place because of Mr. O’Leary’s bankruptcy. The Court finds this to be a second material non-disclosure.
[24] The issue of a debt surviving bankruptcy under section 178(1)(d) of the BIA was dealt with in the case of L-Jalco Holdings Inc. v. Bell, 2017 ONSC 1035. The Court, in para. 21 states:
[21] It has been held repeatedly that a declaration under s. 178 of the BIA should not be sought on a motion for default judgment. B2B Bank v Batson, 2014 ONSC 6105. Royal Bank of Canada v. Elsioufi, 2016 ONSC 5257. The plaintiff’s counsel seeks to distinguish the latter decision because in that case the defendant was not already bankrupt as he is in this case. But, the point of those cases is that a declaration under s. 178 ought to be made only in conjunction with a fair, full, and proper assessment of the underlying fraud claim on the merits and on notice to the trustee where possible. I fully agree with my colleagues Stinson J. and Dunphy J. that a declaration under s. 178 should not be sought by way of a cursory review on consent, on deemed admissions under Rule 19, or, I would add, without notice to the defendant, in proceedings divorced from the bankruptcy proceeding while it remains extant.
[25] The Court acknowledges that the fact pattern in the L-Jalco case and the present case are different. Yet the principles set out in that case apply here.
[26] By obtaining judgment, using wording consistent to section 178(1)(d) of the BIA, without lifting the stay of proceedings and without notifying the Court of Mr. O’Leary’s bankruptcy, the Plaintiff acted in a totally inappropriate and misleading way. Furthermore, there is no evidence that the Trustee in bankruptcy was served with the Statement of Claim.
[27] Notwithstanding the differences between the present case and the L-Jalco case, the Court finds that, based on the material non-disclosures by the Plaintiff, the default judgment obtained by the Plaintiff against Mr. O’Leary is invalid. These material non-disclosures and failure to comply with the BIA requirements should not reward a party seeking judgment against a then undischarged bankrupt.
Issue #2: Should the Stay of Proceedings be lifted pursuant to section 69.4 of the BIA to allow the Plaintiff to proceed against Mr. O’Leary?
[28] In the event that the Court is incorrect in this analysis and the judgment is not invalid, the Court must consider whether to lift the stay of proceedings to allow the matter to proceed, in these circumstances.
Lifting the Stay of Proceedings
[29] Section 69.4 of the BIA reads as follows:
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.
1992, c. 27, s. 36; 1997, c. 12, s. 65.
[30] The lifting of a stay under section 69.4 is at the discretion of the Court.
[31] The concept of judicial discretion was dealt with in the case of Brown v. Sparrow, [1982] 3 All E.R. 739 (C.A.). In that case, at page 745, the Court of Appeal said that judicial discretion must be exercised in accordance with the rules of reason or justice, not according to private opinion, benevolence or sympathy. It should be based on reasons that relate to the particular facts of the case.
[32] The concept of judicial discretion was also dealt with in the case of Conexus Credit Union 2006 v. B. Bergen Holdings Ltd., 2011 SKCA 132, 377 Sask.R. 115. The Court, at paragraphs 24 and 25, reviews the case of Simpson v. Saskatchewan Government Insurance Office (1967), 1967 CanLII 436 (SK CA), 65 D.L.R. (2d) 324 (Sask. C.A) and, in para. 25, cites Simpson for the proposition that “each case should be considered in the light of its own peculiar circumstances and, the court in the exercise of its judicial discretion, should be determined to see that justice is done.”
[33] As stated previously, the lifting the stay of proceedings is discretionary. There must be sound legal reasons to lift the stay of proceedings.
[34] The Court finds that the Plaintiff did not provide any reason for any of the following concerns:
Why it started a Small Claims Court Action after Mr. O’Leary filed for bankruptcy and before he was discharged;
Why it did not apply to lift the stay of proceedings prior to commencing the Small Claims Court Action and obtaining judgment;
Why it did not advise the Court in its Small Claims Court pleadings that Mr. O’Leary had filed for bankruptcy even though the Plaintiff was aware of the bankruptcy and had filed a proof of claim and proxy in the bankruptcy; and
Why it delayed for 28 months before applying to seek the relief set out in the Notice of Motion.
[35] The Plaintiff relies on the case of Re Mikzaid Rohimian, (20 October 2015), Toronto, 32/1856419(Ont. Sup. Ct.). The Court notes that the Plaintiff in that case is the same plaintiff as in this case.
[36] In Rohimian, Master Jean made a declaration that the judgment granted by a judge of the Superior Court of Ontario against the bankrupt was not discharged pursuant to section 178(1)(d) of the BIA, and granted leave, if necessary, to enforce the judgment.
[37] In Rohimian, the plaintiff provided roofing materials to the defendant who used them in the operation of his roofing business. He failed to pay for the materials. The plaintiff issued a statement of claim seeking damages of $68,548.82 for breach of trust under the provisions of the CLA and for breach of contract, plus interest and costs. It obtained default judgment and sought leave to continue, which Master Wiebe granted nunc pro tunc. The Court finds that the leave to continue was really a lifting of the stay of proceedings pursuant to section 69.4 of the BIA.
[38] The Court has reviewed the Rohimian case and notes four differences between that case and the present case.
[39] Firstly, in the Rohimian case, the plaintiff did not know that Mr. Rohimian had filed for bankruptcy before it commenced its action.
[40] In the present case, the Plaintiff knew that Mr. O’Leary had filed for bankruptcy, and started the action knowing full well that it had not obtained an order to lift the stay of proceedings pursuant to section 69.4 of the BIA. No mention of Mr. O’Leary’s bankruptcy was made in the Statement of Claim, even though the Plaintiff was aware of it and had filed a proof of claim prior to starting the Small Claims Court action.
[41] Secondly, in the Rohimian case, the Plaintiff moved to lift the stay of proceedings on October 28, 2014 nunc pro tunc, approximately 6 months after the bankrupt in that case filed his assignment in bankruptcy.
[42] In the present case, the Plaintiff has never moved to lift the stay of proceedings. It is now proceeding 28 months after the default judgment was obtained. There was no explanation for the delay.
[43] Thirdly, Mr. Rohimian was noted in default, after the stay of proceedings was lifted.
[44] In the present case, the Plaintiff started the action and obtained judgment without seeking to lift the stay of proceedings. To this date, the stay of proceedings has not been lifted.
[45] Fourth and finally, in the Rohimian case, the bankrupt did not defend the action despite having notice of Master Wiebe’s order lifting the stay of proceedings.
[46] In the present case, the Bankrupt was served, noted in default and judgment was obtained prior to the Bankrupt and the Trustee being discharged. As stated previously, no motion to lift the stay of proceedings was brought.
[47] The Court finds that the fact pattern in the Rohimian case is distinguishable from the fact pattern in the present case. The Court finds that, based on the differences between the two cases, Rohimian does not apply to this case and therefore the Court is not required to follow that decision.
[48] The Court is aware of case law which says a proceedings commenced or continued by a creditor without obtaining leave does not make the proceedings a nullity, but merely an irregularity and in, appropriate circumstances, leave can be granted nunc pro tunc: Trusts and Guarantee Co. v. Brenner; Re Simon and Simon (1984), 45 O.R. (2d) 5347 D.L.R. (4th) 128; Re Keeling (1976), 22 C.B.R. (N.S.) 192 (Ont. S.C.).
[49] The Court has reviewed those cases and finds that they are not similar to the fact pattern of this case. The Court finds those cases to be distinguishable from the present case.
[50] On the other hand, in the case of Bank of British Columbia v. Alden (1981), 38 C.B.R. (N.S.) 320 (B.C.S.C.), the Court held that the delay on the part of the applicant for leave to proceed against the Bankrupt is a factor that could be considered by the Court in exercising its discretion. In that case, the Court was not satisfied with the explanation provided by the bank for the delay and dismissed the application for leave.
[51] In the present case, the Court does not find that the Plaintiff’s actions result in mere irregularity but rather invalidity. The Plaintiff’s Small Claim Court Action was taken deliberately at a time when both Mr. O’Leary and the Trustee were undischarged. Further, the Plaintiff knowingly chose not to seek to lift the stay of proceedings.
[52] The Court applies the decision in the Bank of British Columbia v. Alden to the present case.
[53] Based on the specific facts of this case, the Court will not use its discretion to lift the stay of proceedings. This discretion is not being applied arbitrarily, but rather is being applied based on the facts of this case.
[54] The Court finds that the Plaintiff should not be rewarded with a lifting of the stay of proceedings, based on its non-compliance with the BIA.
[55] The Court also finds that the Plaintiff is not materially prejudiced by the continued operation of the stay of proceedings.
[56] Furthermore, based on the previous analysis, the Court does not believe that it would be equitable on other grounds to make a declaration lifting the stay of proceedings.
[57] The onus is on the Plaintiff to show a good reason why the stay of proceedings should be lifted. The Court is not satisfied that the Plaintiff has met this onus.
[58] Based on the facts of this case, the Court does not find that this would be an appropriate circumstance to grant leave to proceed nunc pro tunc.
[59] Therefore, the Court finds that the relief sought in the Plaintiff’s motion cannot be granted.
Conclusion
[60] For the aforesaid reasons, the Plaintiffs motion fails.
Costs
[61] The Plaintiff was not successful on its motion. Costs are at the discretion of the Court. While the Defendant was successful, he did not file any materials on the motion. The Court exercises its discretion, and orders that each party shall bear their own costs.
[62] Order accordingly.
Justice Stanley J. Kershman
Released: January 19, 2021
COURT FILE NO.: 33-2326968
DATE: 2021/01/19
ONTARIO
SUPERIOR COURT OF JUSTICE
IN BANKRUPTCY and INSOLVENCY
IN THE MATTER OF THE BANKRUPTCY OF
JOSEPH MICHAEL O’LEARY
OF THE CITY OF OTTAWA
IN THE PROVINCE OF ONTARIO
COURT FILE NO.: 4053/18
ONTARIO
SUPERIOR COURT OF JUSTICE
SMALL CLAIMS COURT
RE: 620369 Ontario Inc. cob as Herman’s Building Centres, Plaintiff
Lowrey’s Roofing Limited also known as Lowrey’s Roofing Ltd. and Joseph Michael O’Leary also known as Joseph O’Leary aka Joe O’Leary, Defendants
BEFORE: Justice Stanley J. Kershman
HEARD IN OTTAWA: November 18, 2020 by Zoom in Ottawa
APPEARANCE: C. Critch, for the Plaintiff
J. O’Leary, Self-Represented
reasons for decision
Kershman J.
Released: January 19, 2021