COURT FILE NO.: 33-2436666
DATE: 2021/11/10
ONTARIO
SUPERIOR COURT OF JUSTICE
IN BANKRUPTCY AND INSOLVENCY
IN THE MATTER OF THE BANKRUPTCY OF
JAMES ELLIOTT CORNELL
OF THE CITY OF OTTAWA, IN THE PROVINCE OF ONTARIO
(SUMMARY ADMINISTRATION)
BEFORE: Ryan Bell J.
COUNSEL: Karen L. Dawson, for the Bankrupt
Kelli-Anne Day, for the Trustee, BDO Canada Limited
Martin Diegel, for the Opposing Creditor
HEARD: October 19, 2021
REASONS on application under section 187(5)
Overview
[1] The Bankrupt, James Elliott Cornell, applies to review and vary my conditional discharge order dated June 24, 2021 under s. 187(5) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3. He requests that the conditional discharge order be varied to remove the payment condition and to grant an absolute discharge on the basis that the Trustee’s calculation of surplus income was incorrect and information about his family and financial situation was not presented during the discharge hearing or is not reflected in the order.
[2] The Trustee opposes the application on three bases. First, the Trustee argues that the application is premature. Second, the Trustee says that Mr. Cornell has not satisfied the applicable evidentiary threshold. Third, the Trustee says that an absolute order of discharge would be inappropriate in the circumstances. The opposing creditor agrees with the arguments advanced by the Trustee in opposition to the application.
Procedural History
[3] On October 26, 2018, Mr. Cornell made an assignment in bankruptcy. BDO Canada Limited acts as Trustee in Bankruptcy.
[4] On May 20, 2020, the Trustee prepared and filed its first Trustee’s Report. In the first Trustee’s Report, the Trustee estimated the surplus income obligation to be $350 per month for 21 months; at the same time, the Trustee noted that Mr. Cornell had no available monthly income. In the first report, the Trustee also noted that Mr. Cornell had failed to provide monthly income and expense statements from November 2018 to the date of the report, had not attended counselling sessions, did not provide pre- and post-bankruptcy information to prepare the 2018 income tax return, and had failed to pay the estimated surplus income owing except for $240.
[5] On November 11, 2020, the Trustee emailed Mr. Cornell to advise him of his surplus income obligations pursuant to s. 68 of the BIA. The Trustee estimated surplus income to be an average payment of approximately $530 per month for 21 months, less the $240 Mr. Cornell had already paid.
[6] In February 2021, Mr. Cornell gained full custody of his second daughter. Previously, he had had full-time custody of one daughter and joint custody of the other. At no time has Mr. Cornell had an obligation to pay child or spousal support. He does not receive child support from his ex-spouse.
[7] On February 16, 2021, the Trustee prepared its supplementary Trustee’s Report. In the supplementary report, the Trustee estimated $10,856.72 as the amount owed on account of surplus income. The Trustee noted in the supplementary report that Mr. Cornell had attended the required credit counselling sessions and had provided proof of income to December 2019.
[8] On March 25, 2021, Mr. Cornell received the Trustee’s final surplus income calculation: $18,556.68. The Trustee’s calculation is based on a two-person household.
[9] In its updated supplementary Trustee’s Report dated April 26, 2021, the Trustee confirmed that $18,556.68 is owed on account of surplus income. The Trustee recommended that Mr. Cornell’s discharge be made conditional on the payment of the outstanding amount by way of monthly payments of no less than $500, commencing no later than June 15, 2021.
[10] On May 31, 2021, Mr. Cornell retained a lawyer, Mr. Gertler, to represent him at the discharge hearing. On June 4, 2021, Mr. Gertler contacted the Trustee to advise that he had been retained and to request certain documents. The Trustee confirmed that the discharge hearing had been rescheduled for June 24, 2021. Later in the day on June 4, Mr. Gertler contacted the Trustee to confirm that he was no longer representing Mr. Cornell in this matter.
[11] The discharge hearing proceeded before me on June 24, 2021. Mr. Cornell attended the hearing. He was not represented by counsel.
The Conditional Discharge Order
[12] The conditional discharge order provides that Mr. Cornell’s discharge is subject to the condition that he pay to the Trustee the amount of $18,556.68 as a result of surplus income, payable in monthly instalments of no less than $500 per month, commencing no later than July 15, 2021. Upon the court being satisfied that Mr. Cornell has complied with the condition, an absolute order of discharge shall issue.
Analysis
Section 187(5) and Section 172(3) of the BIA
[13] Section 187(5) of the BIA provides that “[e]very court may review, rescind or vary an order made by it under its bankruptcy jurisdiction.” The onus is on the bankrupt to satisfy the court that the order should be varied or rescinded: Re Strachan, 1980 CarswellOnt 153 (S.C.), at para. 10.
[14] The Trustee submits that Mr. Cornell’s appropriate avenue for recourse is an application under s. 172(3) of the BIA. Section 172(3) provides:
Where at any time after the expiration of one year after the date of any order made under this section the bankrupt satisfies the court that there is no reasonable probability of his being in a position to comply with the terms of the order, the court may modify the terms of the order or of any substituted order, in such manner and on such conditions as it may think fit.
[15] As the Trustee acknowledges, Mr. Cornell would be entitled to avail himself of this avenue under s. 172(3) in June 2022.
[16] The difference between s. 187(5) and s. 172(3) was addressed by Henry J. in Re Strachan at paras. 10-12:
If ... [the bankrupt] wishes to adduce new evidence or to draw the court’s attention to a material argument or point of law that was overlooked in first instance, then s. 157(5) [now s. 187(5)] may be appropriate. The jurisprudence to date, however, is to the effect that substantial new evidence not available at the original hearing must be offered ... Having in mind that the principal object of the Act is to rehabilitate the bankrupt, that requirement should be construed liberally so as to avoid the expense of an appeal if in the particular case the court considers that the hearing upon which the order was made was in some way incomplete by the omission of material evidence or argument.
…In my opinion the bankrupt is not at liberty to apply under s. [187(5)] to vary the order on grounds that he now finds himself unable to comply with the order by reason of financial hardship. It is to be assumed that his ability to comply was determined on the application for discharge subject to the possibility that, as I have said, something was lacking in the way of a full and complete hearing that attracts the discretion of the court to reopen it.
Section [172(3)] makes specific provision for the event that the bankrupt alleges he is unable to comply with the terms of the order, and it is under that provision that the bankrupt should proceed rather than under s. [187(5)]. In this respect I approve of the result in the decision of the registrar in Re James.... The bankrupt, of course, cannot apply until the expiry of one year from the date of the order.... In this case he should be at liberty to adduce evidence of a change in his circumstances since the order has been made and also that he made bona fide efforts to comply within the limits of his means as is fitting in a court of equity.
[17] To summarize: s. 172(3) is to address a change in the bankrupt’s circumstances from the date of the order, while s. 187(5) will be appropriate where the bankrupt wishes to adduce new evidence or advance a material argument that was overlooked at the initial hearing. In Re Strachan, the bankrupt was advancing the argument that, since the making of the order, he had found himself unable to comply because of financial hardship. Accordingly, the court proceeded under s. 172(3) of the BIA because a year had passed since the original conditional order of discharge.
[18] In this case, Mr. Cornell’s position is not that there has been a change in his circumstances from the date of the conditional discharge order, but rather that he has now presented evidence about his family and financial situation relevant to his ability to comply with the order and, with the benefit of counsel, has now advanced arguments that the Trustee’s calculation of surplus income in respect of the 21-month period (November 2018 to July 2020 inclusive) was incorrect.
[19] The Trustee submits that the more specific mechanism found in s. 172(3) should prevail over the more general language of s. 187(5) so as to ensure certainty in the bankruptcy discharge process. In support of its position, the Trustee relies on Re James, 1976 CarswellOnt 49 (S.C.), where the registrar in bankruptcy dismissed the application under what is now s. 187(5) on the basis that the bankrupt had not availed himself of the appropriate remedy under the BIA. In so doing, the registrar observed that “a practice of permitting applications to be made under s. [187] would introduce an element of uncertainty with respect to orders of discharge”: at para. 7. The registrar went on to observe:
If effect were given to such applications [under s. 187(5)], persons dealing with the bankrupt would have no assurance that an absolute order for discharge for instance would not, on the application of some creditor in the estate, be set aside or otherwise varied on an ex parte application under s. [187].
[20] In Re James, the bankrupt filed evidence that since the date of the original order, he had been laid off from his employment and had been unable to obtain other employment. Accordingly, he had become unable to comply with the conditions set out in the order of discharge.
[21] Without diminishing the importance of certainty and finality in the bankruptcy discharge process, I note that in this case, I am dealing with the bankrupt’s application and not that of a creditor. In my view, the position advanced by Mr. Cornell on this application is properly considered under s. 187(5) and not s. 172(3) of the BIA.
The Test Under s. 187(5) of the BIA
[22] The Trustee submits that Mr. Cornell has not met the applicable evidentiary threshold under s. 187(5) of the BIA. In my view, Mr. Cornell has satisfied the test under s. 187(5).
[23] The jurisdiction given by s. 187(5) should be “sparingly exercised. It is a matter of indulgence and must be carefully guarded”: Campoli Electric Ltd. v. Georgian Clairlea Inc., 2017 ONSC 2784, 77 C.L.R. (4th) 70, at para. 181; see also Re HOJ National Leasing Corp., 2008 ONCA 390, 293 D.L.R. (4th) 455, at para. 28.
[24] In Re HOJ, at para. 27, Borins J.A. observed: s. 187(5) is “unique to insolvency” in that it allows the court to review, rescind or vary an order made by a court of co-ordinate jurisdiction; no conditions apply before resort can be had to s. 187(5); and a motion under s. 187(5) cannot be brought as a substitute for an appeal, such as when the time to appeal has expired. Borins J.A. went on to write:
...for the provision to apply, there must be a fundamental change in circumstances, between the original hearing and time of the motion to vary, or evidence must have been discovered that was not known at the time of the original hearing and which could have led to a different result. Or, as the leading Canadian case has put it, the court should not hear a motion under s. 187(5) if its only purpose is to obtain an opportunity to appeal where the time to appeal has elapsed. [Citation omitted.]
[25] At the original hearing, no information concerning Mr. Cornell’s 2021 monthly income was presented. Mr. Cornell has now provided evidence of his net income for the period January 1 to July 22, 2021: $21,093. He has also provided a copy of his July 29, 2021 pay stub. Mr. Cornell’s net monthly income from January to July 2021 is approximately $3,013.29. He was laid off effective July 22, 2021 and is now collecting employment insurance. This information is material to the determination of the conditions of discharge and Mr. Cornell’s ability to comply. While the Trustee submits that Mr. Cornell could simply have totalled his 2021 income to date, Mr. Cornell’s sworn evidence is that, without the benefit of counsel, he did not understand the importance of providing this information.
[26] In addition, Mr. Cornell now advances an argument that the method used by the Trustee to prepare the final surplus income calculation was incorrect. This argument was not presented at the original hearing. In the words of Henry J. in Re Strachan, Mr. Cornell wishes “to draw the court’s attention to a material argument or point of law that was overlooked in first instance.”
[27] Mr. Cornell has filed an appeal of the original conditional discharge order to preserve his right to appeal. However, having regard to the principal object of the BIA — to rehabilitate the bankrupt — the expense of an appeal should be avoided where the original hearing was incomplete by the omission of material evidence or argument. In my view, the issues identified by Mr. Cornell in this case are most appropriately resolved through a review under s. 187(5).
The Trustee’s Calculation of Surplus Income
[28] There is no dispute that the Trustee’s discretion in determining surplus income may be reviewed at a discharge hearing: Re Wilson, 2012 ONSC 2034, 89 C.B.R. (5th) 67, at para. 19; Re Schnare, 2015 NSSC 219, 56 C.B.R. (6th) 276.
[29] As the deputy registrar summarized in Re Wilson, at paras. 20-21, in deciding whether to make a conditional discharge order,
...the court should balance the rehabilitation of the bankrupt, supported by sufficient income to provide the requirements of living for the bankrupt and his or her dependents in an appropriate manner, against the right of creditors to receive an additional dividend from the bankrupt.
...it is truly a case by case analysis on the merits of each case in order to achieve fairness and a proper balance between the rights of the bankrupt and the rights of the creditors. These same considerations apply to the surplus income requirements that must be determined by the Trustee under s. 68(3) of the BIA, or by the Court under s. 68(10). The Trustee has discretion when determining surplus income obligations and must use their professional judgement.
[30] Mr. Cornell submits that the Trustee’s surplus income calculation is too high because the Trustee calculated surplus income based on a two-person rather than a three-person household and, instead of using Mr. Cornell’s actual net monthly income for January to July 2020, the Trustee divided Mr. Cornell’s total income by 12 to arrive at a monthly average income.
[31] Section 68(1) of the BIA provides that the Superintendent shall, by directive, establish the standards for determining the surplus income of an individual bankrupt and the amount that a bankrupt who has surplus income is required to pay to the estate of the bankrupt. Surplus income is defined as the portion of a bankrupt’s total income that exceeds that which is necessary to enable the bankrupt to maintain a reasonable standard of living, having regard to the applicable standards: BIA, s. 68(2).
[32] The trustee is required to determine surplus income having regard to the applicable standards and to the personal and family situation of the bankrupt: BIA, s. 68(3).
[33] Directive No. 11R-2020, s. 7(2) (in the case of a bankrupt who is eligible for an automatic discharge) and s. 8(2) (in the case of a bankrupt who is not eligible for an automatic discharge) provide that when reviewing the bankrupt’s financial circumstances to determine whether the bankrupt is required to make payments under s. 68 of the BIA, the trustee,
...shall calculate the bankrupt’s average monthly income based on the income and expense statements. The average monthly income is to be used to determine the amount the bankrupt is required to pay to the bankrupt’s estate.
[34] Mr. Cornell argues that the Trustee calculated his average monthly income for the months of January to July 2020 based on his total annual income for 2020 divided by 12. This resulted in an average monthly income of $4,463.53. In fact, Mr. Cornell’s average monthly net income for January to July 2020 was $3,442.10.
[35] I agree with Mr. Cornell that for the period January to July 2020, only those months are relevant for purposes of calculating the surplus income amount and that the method used by the Trustee served to inflate the surplus income calculated as owing for this period. Mr. Cornell has explained his delay in providing his 2020 income information: as a result of the CRA locking him — and thousands of others — out of his CRA online account in February 2021 due to a security breach, Mr. Cornell was unable able to access his income tax information until his account was released by the CRA. I accept Mr. Cornell’s explanation and I agree with him that his actual net monthly income from January to July 2020 of $3,442.10 should be used in calculating surplus income.
[36] Mr. Cornell also submits that because he had full custody of one of his children and joint custody of the other during the 21-month period, the determination of surplus income should be based on a three-person household. The Trustee applied the standard for a two-person household. The creditor submits that joint custody does not mean equal time-sharing and suggests that Mr. Cornell is being less than forthright on this issue by not putting the family court order, separation agreement, or minutes of settlement before the court.
[37] In my view, there was no need for Mr. Cornell to do so. While the creditor is correct that joint custody does not necessarily mean equal parenting time, it is reasonable to infer that the child resided with her father (and sister) for some periods of time during the 21-month period, resulting in something more than a two-person household. I also note that at no time has Mr. Cornell had an obligation to pay child support; at the same time, he does not receive child support from his former spouse. As of February 2021, Mr. Cornell’s household became a three-person household. Section 68(3) of the BIA directs that both the applicable standards and the personal and family situation of the bankrupt are to be taken into account in determining if the bankrupt has surplus income. In my view, in exercising his discretion under s. 68(3), the Trustee ought to have calculated surplus income based on a three-person household.
[38] These observations yield the following calculations of surplus income: a) $0 for November to December 2018; b) $8,398.32 for 2019; and c) $0 for January to July 2020.
[39] However, in my view, requiring Mr. Cornell to make further payments to the estate will not afford him and his two children a reasonable standard of living and would be inconsistent with the policy of the BIA. I have considered the following:
• Mr. Cornell’s 2021 monthly income from January to July 2021 is approximately $3,013; this amount is below both the 2020 and 2021 standards for surplus income;
• Mr. Cornell’s employment situation as a carpenter is irregular and precarious; he is hired on a seasonal basis to work on specific projects and he is then laid off when the project or the construction season ends;
• Mr. Cornell is currently unemployed and is receiving employment insurance;
• Mr. Cornell now has full custody of two teenaged children (15 and 17 years of age) who will soon attend university;
• Mr. Cornell receives no child support for his two children; and
• Mr. Cornell’s evidence that any payment condition will make it impossible for him to contribute to his daughters’ university expenses.
[40] The principal object of the BIA is to rehabilitate the bankrupt, supported by sufficient income to provide the requirements of living for, not only the bankrupt, but also his dependents in an appropriate manner. As Henry J. wrote in Re McCamley (1982), 43 C.B.R. (N.S.) 66, cited by the British Columbia Court of Appeal in Sevensma v. Federal Business Development Bank, 1991 CarswellBC 504, at para. 20,
It is not the policy of the Act to return a bankrupt to society continuing to bear a burden of future payments as a term of his discharge that will, in effect, perpetuate the burden, or part of it, that he bore prior to his bankruptcy except in those circumstances where the bankrupt is abusing the facilities of the Act or is in receipt of continuing assured income that would enable him to make significant continuing payments to the trustee for distribution to the creditors in circumstances in which failure to do so would be viewed by reasonable people as an affront to the integrity of the Act.
[41] Mr. Cornell is not abusing the facilities of the BIA, nor is he in receipt of continued assured income. At the same time, he is solely responsible for two dependents. I conclude that, in the circumstances of this case, it would be inconsistent with the rehabilitative object of the BIA to require Mr. Cornell to make any payments as a term of this discharge. An absolute discharge shall be granted.
Disposition
[42] Mr. Cornell’s application is granted. The conditional discharge order is varied to remove the payment condition and to grant an absolute discharge.
[43] Mr. Cornell requests his costs of this review hearing and the appeal he has commenced. In the event the parties are unable to agree on costs, they may make brief written submissions limited to a maximum of three pages. All parties are to deliver their costs submissions on or before November 24, 2021. If no costs submissions are received within this time frame, the parties will be deemed to have agreed on costs as amongst themselves.
Ryan Bell J.
Madam Justice Robyn M. Ryan Bell
Released: November 10, 2021
COURT FILE NO.: 33-2436666
DATE: 2021/11/10
ONTARIO
SUPERIOR COURT OF JUSTICE
IN BANKRUPTCY AND INSOLVENCY
IN THE MATTER OF THE BANKRUPTCY OF
JAMES ELLIOTT CORNELL
OF THE CITY OF OTTAWA, IN THE PROVINCE OF ONTARIO
(SUMMARY ADMINISTRATION)
REASONS on application under
section 187(5)
Ryan Bell J.
Released: November 10, 2021