COURT FILE NO.: 31-358415
DATE: 2021 11 19
SUPERIOR COURT OF JUSTICE – ONTARIO
IN BANKRUPTCY
IN THE MATTER OF THE BANKRUPTCY OF
GALINA PSAVKA
OF THE CITY OF TORONTO IN THE PROVINCE OF ONTARIO
(REALTOR)
BEFORE: Associate Justice Ilchenko, Registrar in Bankruptcy
COUNSEL:
Alan Fogul for Trustee, Steve Welker and Company Inc. (the “Trustee”)
Bankrupt not appearing although duly served
Superintendent of Bankruptcy taking no position although duly served
HEARD: November 16, 2021, adjourned for the filing of written argument by the Trustee and provision of communications with Philip J. Gertler Professional Corporation (“PGPC”) and Royal LePage R. E. Services Ltd. (“Royal LePage”)
E N D O R S E M E N T
The Procedural Context:
[1] This Motion by the Trustee (the “Motion”) appeared before me on my short Zoom motions list on November 16th, 2021. The only party appearing on that date was Mr. Fogul on behalf of the Trustee.
[2] Due to the extensive nature of the relief sought by the Trustee on the Motion, I adjourned the Motion to permit for the filing of a factum by the Trustee and provision of communications with PGPC and Royal LePage who are third parties that will be affected by the Order requested.
[3] The Factum and these documents requested were provided expeditiously by Counsel for the Trustee on the afternoon of November 18, 2021 and I will make a ruling based on the Materials submitted and the submissions made by Mr. Fogul before me.
[4] As Mr. Fogul advises that there is a real estate closing pending where the Bankrupt may be paid significant commission income, some of which may be the subject of an obligation to pay surplus income to the Bankrupt, I advised Mr. Fogul that I would provide short reasons as quickly as possible.
[5] The Trustee originally brought this motion for relief under s.68 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 as am. (the “BIA”) returnable on March 30, 2021 (the “Original Motion”) supported by a detailed and comprehensive report of the Trustee dated March 22, 2021 (the “Original Report”). The Bankrupt was represented by Mr. Klotz at the time.
[6] The Bankrupt made an assignment for the general benefit of her creditors on October 5, 2020 (the “Date of Bankruptcy”) and the Trustee was appointed as trustee of the Bankrupt's estate. The Bankrupt is a first-time bankrupt.
[7] The Statement of Affairs at Schedule “B” to the Original Report declares assets with estimated net realizable value of $0.00 and declares unsecured liabilities of $305,404.74.
[8] As noted in the Original Report, the Bankrupt is entitled to receive ongoing child support payments of $1,300 per month from her estranged spouse, Robert Kroll ("Kroll"), who is also the Bankrupt's largest (but not majority) creditor with an unsecured claim declared in the amount of $138,075.
[9] At the date of Bankruptcy, the Bankrupt estimated her average net monthly self- employment income to be $3,691.92 (based on gross income of $8,333.33). This was based on an annual gross income of $100,000 and net income of $44,303 after estimated non-discretionary expenses of $40,000, plus estimated income tax.
[10] As reported in the Original Report the income and expense statement submitted by the Bankrupt to the Trustee at the Date of Bankruptcy indicated that the Bankrupt is entitled to receive $1,300 in child support from Kroll under a support Order (the “Support Order”), and that she anticipated receiving $595 in child tax benefits but that she had not been receiving it. The child support amount was therefore not factored into her income. As noted by the Trustee, the child tax benefit would generally not be included in a surplus income calculation, and the Trustee did not do so.
[11] Based on these figures, the Trustee calculated the Bankrupt's initial monthly surplus income obligation to be $449.46, and the Bankrupt agreed to make monthly payments of $450.00 to her estate.
[12] The Bankrupt works as a realtor, acting through the Royal LePage brokerage, and primarily earns income via commissions from sales and purchases of real property. She therefore has an irregular income.
[13] The reasons for the bringing back this Motion for hearing before me are set out in the very detailed and comprehensive Supplementary Report of the Trustee dated November 8, 2021 (the “Supplementary Report”)(collectively the Original Report and the Supplementary Report being the “Reports”) which sets out in great detail the history of this Motion, and the reasons that the Trustee was required to bring it back on for hearing on November 16, 2021.
[14] Since the date of bankruptcy, the Trustee reports that he is aware of several sources of income that the Bankrupt appears to have had including:
i) real estate commissions via her brokerage Royal LePage;
ii) advance loans taken against the said commissions from Royal LePage while a bankrupt;
iii) COVID Relief payments apparently paid to the Bankrupt during 2020, despite her high income; and
iv) child support payments from Kroll.
[15] In the Supplementary Report the Trustee reports that the Motion was brought because the Bankrupt has comprehensively failed to comply with her duties under the BIA, and specifically under the Surplus Income provisions of the BIA, and failed to respond to the requests of the Trustee to provide income and expense information required under the BIA, or to pay her surplus income, as is her obligation as a bankrupt.
[16] The Trustee reports that, despite the Bankrupt agreeing at the time of assignment in October of 2020 to make monthly payments of Surplus Income of $450.00, the Bankrupt has failed to make any of those payments.
[17] Accordingly the Trustee was forced to bring the Original Motion under s.68 of the BIA to fix the Bankrupt's surplus income based on the best information the Trustee had in respect of surplus income, and to ensure that both the outstanding arrears of surplus income and the Bankrupt's future surplus income were paid to the estate for the general benefit of her creditors.
[18] The Original Motion by the Trustee for the relief sought under s.68 was heard on March 30, 2021 by my colleague Registrar Jean who, after reviewing the Original Report and hearing submissions from both Mr. Fogul for the Trustee and Mr. Klotz on behalf of the Bankrupt made the following endorsement adjourning the Motion on terms (the “March 30 Endorsement”):
“ENDORSEMENT:
In the exercise of my discretion, the trustee's motion is adjourned to May 11, 2021 on terms:
The bankrupt shall provide, by no later than April 12, 2021, income information to the trustee including but not limited to total gross income, business expenses (with back up support), trade net reports, copies of cheque/pay stubs or other documentation evidencing income and evidence of non-discretionary expenses (with back up support);
The bankrupt shall provide documentation and information concerning all anticipated or pending transactions that would generate further income or commissions, including but not limited to 110-75 York Mills Road, Toronto;
To the extent that the said documents disclose the bankrupt's residential address, that information may be redacted, subject to further order of the court; and
The bankrupt shall pay the sum of $25,000 to the trustee or into court by no later than April 12, 2021 to be applied towards any surplus income that may be found owing.
I make this order in anticipation that the mediation in this matter shall proceed prior to May 11, 2021 and request the assistance of the Official Receiver in accommodating this timing”
[19] The Trustee and the Bankrupt proceeded to Mediation under the provisions of s.68 of the BIA.
[20] Following this hearing, rather than have the $25,000 required in paragraph 1 of the March 30 Endorsement paid into Court which would require more steps to be paid out, and to address the Bankrupt's concern that any surplus income overpayment to the Trustee would not be returnable to her, the Trustee and the Bankrupt agreed for the $25,000 to be paid to the Trustee’s then counsel PGPC (the “Estate Solicitor Fund”) to be held in trust for the Trustee on the undertaking that the funds not be paid out other than as agreed by both the Trustee and the Bankrupt, or upon subsequent order by the Court. The funds were subsequently paid by Mr. Klotz to PGPC on April 12, 2021.
[21] As reported by the Trustee in the Supplementary Report, the Bankrupt complied with some but not all of the terms of the adjournment.
[22] At the s.68 mediation, an agreement was reached at the mediation that was held on April 21 and April 29, 2021, in respect of reporting and payment of surplus income. The Mediation Agreement dated May 10, 2021 is appended to the Supplementary Report at Exhibit “E” (the “Mediation Agreement”). At the Mediation the Bankrupt represented herself for the completion of the Mediation on April 29, 2021.
[23] The terms of the Mediation Agreement inter alia were:
the Bankrupt agreed to pay $25,000 directly to the Trustee in addition to the $25,000 to remain held by PGPC. This additional $25,000 was paid to the Trustee on April 29, 2021;
the Bankrupt would produce documentation supporting claimed expenses, income and expense reports with backup documentation being produced on a monthly basis from April 2021 to July 2022;
the Trustee agreed to revise its surplus income calculation each month based on the new documentation provided monthly by the Bankrupt and advise the Bankrupt of any additional surplus income obligation;
the Bankrupt agreed to pay the new outstanding amount by the last day of that month the time of the Mediation Agreement, subject to a final surplus income calculation;
the Bankrupt agreed to provide any documentation relating to her income and expenses up to March 31, 2021 to the Trustee, particularly relating to claim regarding a series of business expenses the Bankrupt sought to credit against her income for which the Trustee sought additional documentation and explanation;
the Bankrupt agreed to provide an explanation by May 14, 2021, with supporting documentation from her brokerage, as to why the sale of #110-75 York Mills Road, Toronto was not included on her trade sheet, what her income was from that sale, and whether any other transactions since October 5, 2020 from which she received income, had been excluded from that document;
the Original Motion was also agreed to be adjourned sine die not to be returned unless the Bankrupt breached the terms of the Mediation Agreement, both with respect to financial disclosure and payment; and
provided that the Bankrupt complied with the terms of the Mediation Agreement, the Trustee would credit the $25,000 Estate Solicitor Fund to the Bankrupt's surplus income obligation, and would not take steps to seek a further Court order requiring PGPC to pay the Estate Solicitor Fund to the Trustee.
[24] On May 11, 2021, as a result of the execution of the Mediation Agreement by the Bankrupt, Registrar Jean made a second endorsement which read:
“May 11, 2021 The parties have resolved the s. 68 motion pursuant to mediation and request the motion to be adjourned sine die. So ordered.”
[25] The Trustee reports in the Supplementary Report a term of the Mediation Agreement contemplated the return of this Motion in case of default by the Bankrupt under the terms of the Mediation Agreement. The Trustee reports in the Supplementary Agreement that the Bankrupt has now breached various terms of the Mediation Agreement as she has not provided income and expense statements to the Trustee since April 2021, as required by the terms of both the Mediation Agreement and the March 30 Endorsement, as well as the BIA, and the only documentation provided has been a monthly Trade Net Report from her brokerage.
[26] The Bankrupt also failed to make her required surplus income payment to the Trustee the first month a payment was required under the Mediation Agreement. The Trustee reports that the Bankrupt has made no further payments under the Mediation Agreement, other than the $25,000 amount.
[27] The Trustee reports that since the mediation, the Bankrupt has continued to be non-responsive and has responded antagonistically to the Trustee rather than complying with the Mediation Agreement, that she requested, negotiated and agreed to.
[28] As a result, the Trustee reports that the Trustee has now investigated the income of the Bankrupt directly with her Brokerage and has received from the Brokerage the information regarding the missing York Mills transaction referenced at the March 30, 2021 hearing and the March 30 Endorsement and believes it has resolved that outstanding issue.
[29] It also appears the Trustee now has a complete record of the Bankrupt's income from Royal LePage for the bankruptcy period. These reports indicate that the Bankrupt has received net commissions of $290,766.67 from the Brokerage as of October 27, 2021 (net of brokerage fees/expenses).
[30] The Trustee reports that the Trade Net Report also indicates that the Bankrupt has sold a further property that is scheduled to close on November 16, 2021 (the return date of this Motion) for $768,000 with an anticipated net commission to the Bankrupt of $15,310.00.
[31] The Trustee Reports that the Bankrupt's gross commission income for the entirety of 2020 based on these documents was $113,281.88 and her net commission income was $65,794.11. The net commission income for the post-bankruptcy 2020 period was $35,643.86.
[32] The Bankrupt has also received child support payments from Kroll on a monthly basis since January 2021 via the Family Responsibility Office (the “FRO”).
[33] The Trustee reports that the Bankrupt has also been applying for COVID relief programs throughout the bankruptcy despite apparently having earned gross income of less than $30,000 in each of 2018, less than $50,000 in 2019 (including social assistance), having earned over $100,000 in 2020 (plus social assistance payments of approximately $11,000) and having earned over $300,000 thus far in 2021 (the majority of which was earned in February 2021 and anticipated as early as October 2020).
[34] The Trustee has completed an interim calculation of the Bankrupt's surplus income obligation to date based on the income information that the Trustee has been forced to obtain from Royal LePage and Kroll due to the Bankrupt’s failure to cooperate with the Trustee or comply with the terms of the Mediation Agreement she agreed to. I have reviewed a copy of this calculation attached as Exhibit "N" to the Supplementary Report along with a spreadsheet of the Bankrupt's claimed expenses to April 2021 (the last month reported) (the “Surplus Income Calculation”).
[35] The Trustee calculated the surplus income obligation based on three income values, the Bankrupt's total income (for reference), the Bankrupt's net income after all claimed (including unproven) expenses, and the Bankrupt's net income after allowed expenses (but excluding disputed expenses). The Trustee seeks to fix a surplus income obligation based on the latter amount.
[36] The Trustee has also calculated the surplus income obligation to two dates: October 31, 2021, and November 30, 2021 based on the anticipated November sale and child support income. The Trustee's interim calculation includes and credits a rough estimate of income taxes owing, notwithstanding that the Trustee is not aware of any 2021 income tax payments having been made to date and that the Bankrupt has not provided the Trustee with the documentation required to file her 2020 income tax returns. The calculation also credits both the $25,000 already paid to the Trustee and the $25,000 Estate Solicitor Fund which the Trustee seeks to be paid to the Trustee on this Motion.
[37] Based on this calculation the Trustee reports that the Bankrupt would still have an outstanding unpaid surplus income amount owing to the estate as of October 31, 2021 of $31,572 based on the allowed expenses or $21,862 even crediting all claimed expenses.
[38] If the anticipated sale in November closes and child support is paid, the outstanding unpaid obligation will be $35,386 based on allowed expenses or $25,676 crediting all claimed expenses.
[39] The Trustee seeks an Order fixing the $85,386 as the Bankrupt's interim surplus income obligation, that after crediting the Bankrupt the $25,000 paid to the Trustee under the Mediation Agreement, and assuming the Court permits the payment of the $25,000 Estate Solicitor Fund amount to the Trustee will leave $35,386 outstanding as the unpaid interim Surplus Income Obligation owing as of the date of the Motion.
[40] Given the amount of the outstanding surplus income obligation, and the uncertainty of the Bankrupt’s commission income, the Trustee seeks that the Bankrupt's net commission from the anticipated November 16, 2021 closing ($15,310) be paid in full directly by the Brokerage to the Trustee to partially satisfy the outstanding surplus income obligation.
[41] The Trustee notes that even if the only income the Bankrupt receives for the remainder of the surplus income period is her child support payments at the current rate, the remaining OSB standard months would only reduce the total surplus income payable by $4,379. However, the Trustee anticipates that the Bankrupt will have at least some further earnings for the remaining seven months of the surplus income period based on the history to date.
[42] The Trustee is also seeking that the Bankrupt's Brokerage pay 100% of the Bankrupt's net commissions directly to the Trustee, and that Family Responsibility Office (FRO) pay 100% of the support payments the Bankrupt is entitled to receive until the anticipated outstanding surplus income amount of $35,386 has been paid.
[43] After the payment of the outstanding unpaid surplus income amount of $35,386 out of the 100% of commissions and support payments, the Trustee suggests a different formula of payment of surplus income.
[44] Based on the ratio of surplus income payable to gross income, the Trustee has determined that the Bankrupt's surplus income obligation represents approximately 25% of her gross income. Given the Bankrupt's continued non-cooperation and the Trustee's need to return this motion for two hearing dates to deal with the first instances of non-compliance, and a further hearing date with new materials due to this continued non-compliance, the Trustee seeks an Order that 25% of the Bankrupt's Agent Net Income be payable by her Brokerage (or any other or subsequent brokerage) directly to the Trustee which will at least mitigate the amount of surplus income that will be outstanding at the end of the surplus income period.
[45] The Trustee reports that this will help avoid putting the estate and the creditors to the additional expense of additional motions to secure the portion of the Bankrupt's earnings that the estate is entitled to.
[46] Given even the minimum outstanding surplus income obligation, the Trustee requests that the Brokerage be directed to pay the full amount of the impending November 16, 2021 commission due to the Bankrupt directly to the Trustee to partially satisfy the outstanding surplus income requirement.
[47] The Trustee notes that even after paying $25,000 to the Trustee and making the Estate Solicitor Fund payment to $25,000 to PGPC, and after the allowed expenses, the Bankrupt has still received income of $276,344 during the course of her bankruptcy up to October 31, 2021 which is significantly more than she earned in the years prior to the bankruptcy.
[48] I agree with this fair and comprehensive approach that the Trustee has been forced to use as the Bankrupt has failed to take any steps to substantiate her claimed expenses, or provide the source income and expense documentation to the Trustee directly, as required by the March 30 Endorsement and the terms of the Mediation Agreement that she negotiated and agreed to. In many ways the calculation methodology is guided by the terms of the Mediation Agreement.
[49] I find the methodology to be appropriate and the determination of the outstanding surplus income amount to be correct and will be fixing on an interim basis the Bankrupt’s Surplus Income obligation at the amount of $85,386, to be credited with the $25,000 already paid to the Trustee by the Bankrupt under the terms of the Mediation Agreement and the possible payment of the additional $25,000 Estate Solicitor Fund, which is requested by this Motion.
[50] The fixing of this interim Surplus Income Obligation at $85,386 is explicitly without prejudice to the Trustee recalculating the total Surplus Income Obligation at the end of the 21 month period to determine a final Surplus Income Obligation.
[51] I will deal with specific relief sought by the Trustee regarding the payment of this amount and future surplus income obligations below in my discussion of the specific legal issues that I requested by dealt with by the Trustee.
Order Requested
[52] The Order requested by the Trustee on this Motion before me, as set out in the Amended Notice of Motion appended to the Supplementary Motion Record of the Trustee served on the Bankrupt on November 8, 2021 as evidenced by the Affidavit of Service of Allan Fogul, sworn November 10, 2021 (the “Affidavit of Service”) was for an Order seeking, inter alia:
that PGPC pay the Estate Solicitor Fund of $25,000 paid to it pursuant to the March 30 Endorsement by Bob Klotz on behalf of the Bankrupt to PGPC to the Trustee to be credited towards to the Bankrupt's surplus income obligation;
that the Bankrupt's total surplus income obligation be fixed on an interim basis in the amount of $85,386, leaving an outstanding balance payable of $35,386 (after credit $25,000 already paid to the Trustee and the $25,000 Estate Solicitor Fund) and that this Order be without prejudice to:
i) the Trustee's review and recalculation of the total Surplus Income owing for the entire bankruptcy at the end of the surplus income period in accordance with the BIA and the Office of the Superintendent of Bankruptcy ("OSB") directives; and
ii) any further motion or further order sought on the Bankrupt's discharge for a further order fixing surplus income;
requiring the Bankrupt to produce monthly income and expense statements for each month of her bankruptcy to date within seven days of the hearing, and on an ongoing basis until the conclusion of the 21st month following the date of bankruptcy, along with all documentation in her possession, control or power to obtain proving her household income from any sources (including, but not limited to, employment or self-employment income from her real estate brokerage or otherwise; advances against her income; any government payments in respect of social assistance or otherwise; any support payments from her estranged spouse, etc.), and any non-discretionary expenses she may claim;
that costs be payable by the Bankrupt for the all hearings required on this Motion, as well as the costs of the mediation, on a substantial indemnity basis, and included in her surplus income obligation
directing that R.E. LePage and FRO as well as any further or other brokerage, employer or other persons from whom the Bankrupt is entitled to receive money shall pay directly to the Trustee:
a. 100% of any funds otherwise payable to the Bankrupt until the outstanding surplus income payable are fully satisfied; and
b. 25% of any funds otherwise payable to the Bankrupt thereafter; including any funds payable or earned by the Bankrupt on or before July 5, 2022 pursuant to section 68(13) of the BIA.;
permitting Kroll, at his option to make any payments owing to the Bankrupt (if applicable) to FRO which shall then pay the funds to the Trustee in accordance with paragraph 5 above; but Robert Kroll shall otherwise make any payments owing to the Bankrupt directly to the Trustee pursuant to paragraph 5 above.
directing the Bankrupt and/or any bank or other financial institution at which the Bankrupt holds any account(s) to produce statements for any account(s) solely or jointly in the name of the Bankrupt from October 2020 to date.
[53] I will deal with these requests by the Trustee for relief in the order of the specific issues that I raised with Mr. Fogul at the hearing, and to which he responded in his extensive and informative Factum and authorities which he has filed, at my request.
A. Can this Court make the order sought on an unopposed basis?
[54] Under the provisions of s.192(1)(e),(1) and (j), and 192(3) of the BIA a Registrar in Bankruptcy has the power and jurisdiction to hear and determine any unopposed or ex parte application, as well as to hear and determine any matter with the consent of all parties.
[55] In this case Associate Justice Jean, sitting as Registrar in Bankruptcy has already heard and adjourned this Motion twice, making Orders on March 30, 2021 and May 11, 2021, including while the Bankrupt was represented by Mr. Klotz. Accordingly, this continuing motion adjourned by both the March 30 Endorsement and the May 11 Endorsement was a motion where the parties consented to having this matter heard by a Registrar in Bankruptcy.
[56] In addition, from the Affidavit of Service, it is clear that the materials of this motion were served on the Bankrupt by email on November 8, 2021. The materials on the Original Motion were served on the Bankrupt on March 30, 2021.
[57] In the Supplemental Report of the Trustee dated November 15, 2021 filed by the Trustee the Trustee personally spoke with the Bankrupt on November 15, 2021 by telephone where the Trustee explained to the Bankrupt the relief being requested and the implications of her absence. The Bankrupt did not appear or provide any position on the motion indicating opposition. I find that the Bankrupt was duly served and aware of the proceeding.
[58] The Bankrupt is an experienced personal litigant and I take notice that she conducted her own 14 day Family Law trial against Kroll before C. Gilmour, J. which is reported as Psavka v. Kroll at 2019 ONSC 2009 and 2019 ONSC 3120 (Costs). The Bankrupt also represented herself at the second day of the mediation in this matter and negotiated and agreed to the terms of the Mediation Agreement.
[59] Accordingly, I also find this motion as having proceeded unopposed.
[60] The answer to the first issue is – Yes, the Court may make this Order in these factual circumstances.
B. Should the Estate Solicitor Fund be paid to the Trustee?
[61] As noted above, in the March 30 Endorsement Registrar Jean required the Bankrupt to pay $25,000 to the Trustee or into Court. This Order was made on request of the Trustee to at least partially secure certain surplus income from the Old Colony Road sale.
[62] The only reason that the Estate Solicitor Fund was not initially paid to the Trustee, but rather paid into Court, or paid to PGPC, was the Bankrupt was not prepared to agree at the time she made the payment for the funds to be paid directly to the Trustee, for fear that would overpay the Surplus Income Obligation at the time prior to the Mediation occurring,
[63] Given that the Mediation has occurred, and that a Mediation Agreement was agreed to by the Bankrupt, the terms of which were then breached by the Bankrupt, and that I have found that the Bankrupt's total surplus income obligation as calculated by the Trustee, and fixed by me on an interim basis above to be $85,386 which appears to well-exceed $50,000 ($25,000 having already been paid to the Trustee under the Mediation Agreement), I order that the Estate Solicitor Fund be paid to the Trustee at this time to be credited towards the Bankrupt's Surplus Income Obligation.
[64] I note that the Order requested is an interim fixing of the amount of the Surplus Income Obligation pending a final fixing of that amount by the Trustee. Accordingly, in the unlikely event that there is ultimately determined to be a surplus of payments made by the Bankrupt in excess of a possible final Surplus Income Calculation, then that surplus would be repayable by the Trustee.
[65] Mr. Fogul has provided me with confirmation that his former firm PGPC does not object to the making of this Order to pay the Estate Solicitor Fund to the Trustee, as I requested.
[66] Accordingly, the answer to this issue is Yes – exercising my discretion, I will Order the Estate Solicitor Fund to be paid to the Trustee, in the form requested by the Trustee with respect to this issue.
C. What is the Bankrupt's surplus income obligation to date?
AND
D. Can the Court fix surplus income on an interim basis?
[67] Under the provisions of s BIA ss.68(3) and (4), 158(a.1), and Superintendent Directive 11R2 ss.3, 5(1) it is the Bankrupt's obligation to report her income and expenses to the Trustee with supporting documentation.
[68] It is the Trustee's responsibility to review what is submitted, and if necessary, verify or investigate the Bankrupt's income. The Trustee also has a duty to determine if surplus income is owing, and if so, to fix the amount the Bankrupt is required to pay to her estate.
[69] As set out in the Reports, the Bankrupt has utterly failed to assist the Trustee in this calculation. The Trustee has been forced to seek information from third parties to perform this calculation.
[70] The Bankrupt requested Mediation, negotiated the terms of a Mediation Agreement, and then defaulted on the terms of the Mediation Agreement that she agreed to.
[71] The Trustee may apply to the court to fix, by order, in accordance with the applicable standards, and having regard to the personal and family situation of the bankrupt, the amount that the bankrupt is required to pay to the estate of the bankrupt, inter alia, if the matter has been submitted to mediation and has not been resolved by mediation; or if the Bankrupt has failed to comply with the requirement to pay surplus income under s.68. BIA s.68(10)(b) and (c).
[72] In this case, as a result of the Bankrupt’s conduct, I find that each of the tests in s.68(10)(b) and (c) have been met, and that the Court has the jurisdiction to fix the Bankrupt’s surplus income obligation.
[73] In this regard the reasons of Newbould, J. in Re Kovarcsik, 2012 ONSC 3338 (Ont. S.C.J. - Commercial List) (“Kovarcsik”) are of great assistance in confirming that this Court has the necessary jurisdiction to grant such an Order.
[74] I agree with Mr. Fogul’s submissions in his Factum that no specific provision of s.68 of the BIA prescribes any timeline for the bringing of a motion to fix a surplus income amount or precludes a motion prior to the conclusion of the surplus income period.
[75] In fact, s.68(12) permits an application to amend a s.68 order on the basis of material changes in the financial situation of the bankrupt. Whereas financial changes after the conclusion of the surplus income period would not appear to impact the calculation of surplus income, this subsection clearly appears to indicate that Parliament contemplated that motions to fix surplus income could be brought prior to the conclusion of the surplus income period.
[76] In practical terms, I do not see how this estate or this Bankrupt could be prejudiced by a Court making an interim surplus income orders so that surplus income may be collected as the income is earned by the Bankrupt, particularly where income varies from month to month.
[77] In fact, in this case, this Motion was now necessitated by the breach of the terms of the Mediation Agreement, which Mediation is predicated on occurring prior to the end of the surplus income period.
[78] Also, in the Kovarcsik case Newbould J. dismissed an appeal from a s.68 Order fixing surplus income that had been made during the surplus income period.
[79] The circumstances of this case where the Bankrupt to date has been non-compliant with her obligations to cooperate with the Trustee in calculating the proper surplus income amount, while also earning varying income, required the Trustee and Mr. Fogul to come up with a creative and practical solution that:
a) protects the interests of the creditors of the Bankruptcy Estate to ensure that a proper recovery of Surplus Income as mandated by the BIA can be made by the Trustee and not dissipated; while at the same time
b) being fair to the Bankrupt, notwithstanding her lack of cooperation, due to her fluctuating commission and other income, where an Order requiring fixed monthly payments could be onerous.
[80] In my view they have done so. I find that that in these factual circumstances and in my discretion, an interim Order fixing an amount payable for Surplus Income under s.68(10) may be made.
[81] What should the terms of this Order be? Under the provisions of s.68(11) of the BIA:
“(11) The court may fix an amount that is fair and reasonable:
(a) as salary, wages or other remuneration for the services being performed by a bankrupt for a person employing the bankrupt, or
(b) as payment for or commission in respect of any services being performed by a bankrupt for a person,
where the person is related to the bankrupt, and the court may, by order, determine the part of the salary, wages or other remuneration, or the part of the payment or commission, that shall be paid to the trustee on the basis of the amount so fixed by the court, unless it appears to the court that the services have been performed for the benefit of the bankrupt and are not of any substantial benefit to the person for whom they were performed.) may be granted by this Court.”
[82] I find that the solution proposed by the Trustee in the Supplemental Report to this difficult and expensively litigated situation, namely that the Bankrupt the Bankrupt's total surplus income obligation be fixed on an interim basis in the amount of $85,386, leaving an outstanding balance payable of $35,386 (after credit $25,000 already paid to the Trustee and payment of the $25,000 Estate Solicitor Fund as has been ordered by me) and that this Order be without prejudice to:
i) the Trustee's review and recalculation of the total Surplus Income owing for the entire bankruptcy at the end of the surplus income period in accordance with the BIA and the Office of the Superintendent of Bankruptcy ("OSB") directives; and
ii) any further motion or further order sought on the Bankrupt's discharge for a further order fixing surplus income
to be “fair and reasonable” as required by s.68(11).
[83] This elegant solution in the specific factual circumstances of this case both:
a) protects the estate by dealing with the varying income of this Bankrupt and failure to comply with her obligations, by allowing payments to be made now by the Bankrupt, with the final amount to be recalculated by the Trustee to determine if further surplus income is owing due to increased income; while also
b) protecting the Bankrupt by allowing a readjustment should she choose to begin complying with her duties and obligations under the BIA, provides the documentation and information required by the Trustee, and proves that her surplus income obligation is lower, either due to lower income or proven increased allowable expenses.
[84] As regards the calculation of the quantum of the interim Surplus Income Obligation of $85,386 with the outstanding surplus obligation of $35,386 accounting for the payment of the amount of $25,000 by the Bankrupt, as noted above and in the Reports, the Trustee has done the best it can with third party information due entirely to the non-cooperation of the Bankrupt in providing the documentation required to be produced to the Trustee by:
a) the BIA;
b) the March 30 Endorsement; and
c) the terms of the Mediation Agreement that the Bankrupt agreed to.
[85] If the Bankrupt has an issue with the calculation that is entirely her fault. The mechanism proposed by the Trustee, and approved by me, protects the Bankrupt in this regard in that if she complies with her obligations to produce documentation to the Trustee, and it is determined that there was an overpayment, there is mechanism for readjustment. If find that to be “fair and reasonable”.
[86] With respect the obligations to produce documents, I will Order that the Bankrupt produce the documentation required in the Amended Notice of Motion of the Trustee, in order that the documentary production requirements are made abundantly clear to the Bankrupt.
[87] Accordingly, the answer to this issue is Yes – exercising my discretion, I find that that in these factual circumstances and in my discretion, an interim Order fixing an amount payable for Surplus Income under s.68(10) in the form requested by the Trustee and described above should be granted.
E. Can this Court order that the other parties be required to pay?
[88] The Trustee requests that the Court grant an order that specifically states:
- THIS COURT ORDERS that Royal LePage R. E. Services Ltd. (the "Brokerage"); the Family Responsibility Office ("FRO"); any further or other brokerage, employer or other persons from whom the Bankrupt is entitled to receive money shall pay directly to the Trustee:
a. 100% of any funds otherwise payable to the Bankrupt until the outstanding surplus income payable set out in paragraphs 2 and 3 are fully satisfied; and
b. 25% of any funds otherwise payable to the Bankrupt thereafter;
including any funds payable or earned by the Bankrupt on or before July 5, 2022 pursuant to section 68(13) of the BIA.
- THIS COURT ORDERS for the purposes of paragraph 3, Robert Kroll, the Bankrupt's estranged spouse, may at his option make any payments owing to the Bankrupt (if applicable) to FRO which shall then pay the funds to the Trustee in accordance with paragraph 3; but Robert Kroll shall otherwise make any payments owing to the Bankrupt directly to the Trustee pursuant to paragraph 3.
[89] Under s.68(13) of the BIA:
“Default by other person
(13) An order of the court made under this section may be served on a person from whom the bankrupt is entitled to receive money and, in such case,
(a) the order binds the person to pay to the estate of the bankrupt the amount fixed by the order; and
(b) if the person fails to comply with the terms of the order, the court may, on the application of the trustee, order the person to pay the trustee the amount of money that the estate of the bankrupt would have received had the person complied with the terms of the order.”
[90] With respect to “…Royal LePage R. E. Services Ltd. (the "Brokerage"); …any further or other brokerage, employer or other persons from whom the Bankrupt is entitled to receive money…” these parties are clearly within the types of persons who are within the contemplation of the provisions of s.68(13).
[91] In addition, the Trustee has provided email correspondence from November 9th, 2021 substantiating the Royal LePage is not opposing this Motion and will be holding the commissions earned by the Bankrupt on a recent transaction involving the 1 Maison Parc Court #420 property pending the outcome of this Motion. The preservation of this income to pay down the outstanding Surplus Income Obligation owing by the Bankrupt is the basis for the urgent request for my determination by the Trustee of this Motion.
[92] Accordingly with respect to all payees, other than FRO, and specifically including Royal LePage, I will grant an Order substantially in the form of the wording of the order above, with the addition of the words “…until advised by the Trustee that…” to 4(a) of the Order to provide a mechanism to advise the payors that the arrears of surplus income have been paid in full and to switch to the 25% deduction amount. The revised wording would read:
- THIS COURT ORDERS that Royal LePage R. E. Services Ltd. (the "Brokerage") and any further or other brokerage, employer or other persons from whom the Bankrupt is entitled to receive money shall pay directly to the Trustee:
a. 100% of any funds otherwise payable to the Bankrupt until advised by the Trustee that the outstanding surplus income payable as set out in paragraphs 2 and 3 is fully satisfied; and
b. 25% of any funds otherwise payable to the Bankrupt thereafter;
including any funds payable or earned by the Bankrupt on or before July 5, 2022 pursuant to section 68(13) of the BIA.
[93] With respect to the request to also bind the FRO, I note from the Affidavit of Service that the FRO has not been served with this Motion and has not been given an opportunity to provide its position on the relief sought against it.
[94] As noted in the Kovarcsik decision cited for this issue by the Trustee in its Factum:
“[13] In light of section 68(13)(a). it should not have been necessary for the Registrar to initially make the order that the WSIB pay the amount of the surplus income to the trustee unless and until the WSIB refused to pay the amount after being served with the order of the Registrar. It appears however that it is the practice for trustees to apply at first instance for such an order and for the Registrar to grant it. I see no harm in this process.”
[95] I also see no harm in the process, as in Kovarcsik WSIB, after learning of the motion actually put forward its position at the hearing through correspondence that WSIB payments were not earnings, despite the specific wording of s.68(2)(a) definition of “total income” which specifically includes “workers compensation” as “total income” Newbould, J. determined that that the position of WSIB was incorrect and ordered the payments to be made on that basis, but Newbould, J. did have notice of the WSIB’s position.
[96] Generally speaking, the jurisprudence historically has determined that child support, such as being paid by Kroll to the FRO under a support Order, to be paid to the Bankrupt by FRO, is not to be included in the calculation of surplus income in a fractured household with a custodial parent, being not property of the bankrupt but a right of the child: e.g. Richardson v. Richardson 1987 CanLII 58 (SCC), [1987] 1 S.C.R. 857, Re Francis 2018 BCSC 363, S.(D.B.) v. G (S.R.) 2006 SCC 37, [2006] 2 S.C.R. 231.
[97] From review of the Family Responsibility and Support Arrears Enforcement Act, 1996, SO 1996, c 31 there is no specific provision that appears to govern claims against payments made to “recipients” as defined under that Act, as opposed to a “Payor” like Kroll, where there are many provisions.
[98] This Act sets up a comprehensive statutory mechanism for the enforcement of support orders, such as the Support Order in this case. The Act specifically states:
Duty of Director
5 (1) It is the duty of the Director to enforce support orders where the support order and the related support deduction order, if any, are filed in the Director’s office and to pay the amounts collected to the person to whom they are owed. 1996, c. 31, s. 5 (1).
Contents of support order
9 (1) Every support order made by an Ontario court, other than a provisional order, shall state in its operative part that unless the order is withdrawn from the Director’s office, it shall be enforced by the Director and that amounts owing under the order shall be paid to the Director, who shall pay them to the person to whom they are owed.
[99] Mr. Fogul has not provided any jurisprudence that clearly permits enforcement under s.68(13) of the BIA against the FRO as “…a person from whom the bankrupt is entitled to receive money…”.
[100] Other than Kovarcsik, in the Dugas v. PricewaterhouseCoopers Inc. 2004 NBCA 15 case cited by the Trustee the payments sought to be obtained under s.68(13) were payments to be received by the Bankrupt under a crab license. Other Orders cited were for CPP and wage payments by Canada Post. Not child support payments.
[101] With respect to the relief sought to permit Kroll at his option to make any support payments owing to the Bankrupt to FRO which shall then pay the funds to the Trustee, or to otherwise make any support payments owing to the Bankrupt directly to the Trustee, the Trustee has provided no legal basis in their materials to permit this to be done, or granting jurisdiction to this Court to do so, which may functionally be an amendment to the terms of the Superior Court Support Order in the Bankrupt’s Family law proceedings, currently being enforced by FRO.
[102] Accordingly given these serious issues, and given the lack of service on FRO of the motion prior to the Motion being heard by me, I decline to exercise my discretion with respect to the relief sought against FRO at this time, and I specifically exercise my discretion to adjourn the relief sought on the Motion against FRO sine die.
[103] If the Trustee wishes to proceed against FRO, then FRO must be properly served and their position obtained on the relief that the Trustee is seeking against FRO prior to the Motion being brought back on.
[104] I will remain seized of this motion, and the Motion with respect to FRO can be brought back before me.
[105] Accordingly the answer to the answer to this issue is Yes – exercising my discretion, I find that that in these factual circumstances and in my discretion, an Order under s.68(13) in the form requested by the Trustee should issue with respect to the persons other than FRO, and described above should be granted.
[106] With respect to the relief requested against FRO and with respect to Kroll in relation to his obligations under the Support Order, this motion is adjourned sine die pending service of the Motion Materials on FRO.
F. Can this Court order bank statements to be produced?
[107] The Trustee seeks production of bank statements from both the Bankrupt and from any financial institution at which the Bankrupt holds or held accounts.
[108] As stated in the Trustee’s Factum, under s158(b) and (e) of the BIA the Bankrupt has a duty to deliver to the Trustee all books, records, documents, writings and papers in any way relating to her property or affairs to make or give all the assistance within her power to the Trustee in making an inventory of her assets.
[109] I agree. I will grant an Order requested by the Trustee against the Bankrupt to produce bank statements, as well as the other documentation requested in the Trustee’s Amended Notice of Motion.
[110] However, I will not do so with respect to the similar relief sought by the Trustee against:
“…and/or any bank or other financial institution at which the Bankrupt holds any account(s) deliver to the Trustee statements for any account(s) solely or jointly in the name of the Bankrupt from October 2020 to date.”
[111] The Trustee cites the provisions of s.164 of the BIA as the basis of the Trustee’s legal entitlement for this Court to grant the Order requested. Section 164 sets out a specific procedure for the Trustee to demand production of documentation such as bank statements and grants the Trustee the ability to enforce the production of such documentation and examination of witnesses on such documentation by Court Order.
[112] Accordingly, as there is an existing procedure in the BIA for obtaining such documentation, the Trustee should utilize that procedure rather than requesting an alternative Order from the Court. I therefore decline to exercise my discretion to grant an open ended Order to present and future financial institutions of the Bankrupt to produce financial information.
[113] The answer to this issue is Yes, from the Bankrupt.
G. Is the Trustee entitled to costs on a substantial indemnity basis payable as surplus income?
[114] The Trustee argues in its Factum, and in the Bill of Costs submitted by counsel for the Trustee, that the Bankrupt's conduct in dealing with her surplus income and this motion has put the estate to significant and unnecessary expense. The Trustee submits that:
a) the Bankrupt was non-cooperative with the Trustee;
b) mislead the Trustee regarding her counsel’s retainer;
c) failed to provide repeatedly requested documentation to the Trustee or the OSB which resulted in the surplus income mediation being cancelled and the Trustee bringing the within motion;
d) objected to both the Motion and the Mediation;
e) threatened the OSB with litigation, forcing it to reinstate the mediation;
f) engaged in a two-day mediation resulting in the Trustee drafting a Mediation Agreement,
g) then failed to comply with the agreement requiring the motion to be returned.
[115] I agree. From my review of the Motion Materials filed by the Trustee on this twice adjourned motion including 3 Motion Records, 4 Reports and Supplementary Reports, a Factum, and the Bill of Costs submitted by the Trustee, the Trustee has been forced, as a result of:
a) the failure of the Bankrupt to fulfill her duties under the BIA,
b) her conduct of this litigation; and
c) her default in fulfilling the terms of the Mediation Agreement that she requested, negotiated and approved;
to make at least 3 Court appearances, attend a two day Mediation and to file in excess of 700 pages of the Court Materials that were before me on this motion.
[116] None of this effort and expense would have been necessary had the Bankrupt simply fulfilled her duties under the BIA.
[117] Accordingly, I find that as a result of this conduct, and the conduct I have described throughout these reasons, the Trustee is properly entitled to be paid costs by the Bankrupt on a Substantial Indemnity scale.
[118] After having reviewed the Bill of Costs of the Trustee filed, I find that the legal fees and disbursements charged are fair and reasonable in the circumstances, given the effort required and the gravity of the Bankrupt’s conduct issues.
[119] I therefore award the Trustee costs in the amount of $24,695.30 on a substantial indemnity scale. In accordance with the costs reasons of Newbould, J. in Re Kovarcsik, 2012 ONSC 4045 the Trustee is entitled to have the costs of the motion be added to the amount of surplus income payable to the estate, and I so Order.
[120] I have revised the form of Draft Order presented by the Trustee in accordance with these reasons, and signed the Order, due to the urgency of this matter. I would ask that the Bankruptcy Court Office provide this document to Mr. Fogul on behalf of the Trustee as soon as possible.
Associate Justice Ilchenko
Registrar in Bankruptcy
Superior Court of Justice
Released: November 19, 2021