ONTARIO SUPERIOR COURT OF JUSTICE
B E T W E E N:
CONVOY SUPPLY LTD./ DISTRUBUTION CONVOY LTEE.
E. Durst, on behalf of the Plaintiff
- and -
ELITE CONSTRUCTION (WINDSOR) CORP., KOSTAS MICHOS AND DAN MICHOS
C. Bondy, for the Defendants
HEARD: August 23, 2022
ENDORSEMENT
1The plaintiff, Convoy Supply Ltd. (“Convoy”), bring a motion for a determination that the debt owing by the defendant, Kostas Michos (“Kostas”) - otherwise known as Dan Michos, to Convoy, survives his bankruptcy, pursuant to s. 178(1)(d) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, (the “BIA”).
2The defendants’ cross-motion to vary or set aside the default judgment made against them by Gordon J. on March 3, 2021 was dismissed with brief, oral reasons provided to the parties.
3For the following reasons, the determination sought by the plaintiff under s. 178(1)(d) of the BIA is granted.
Background:
4At all material times, Kostas was an officer, director, guarantor and directing mind of the defendant corporation.
5The underlying action pertains to construction materials supplied by Convoy to the defendants, for which payment was deficient.
6On July 28, 2020, Convoy commenced a claim against the defendants seeking, inter alia, the payment of the sum of $92,412.15 as damages for breach of trust; in the alternative, general damages in the amount of $92,412.15; if required, an order providing leave to continue the action pursuant to the s. 69.4 of the BIA as against any defendant that has made or makes an assignment in bankruptcy under the BIA; and an order pursuant to s. 178(1) of the BIA that the damages award in this action will not be discharged in the event that any defendant has made or makes an assignment in bankruptcy under the BIA.
7The Statement of Claim pleads and relies upon the Construction Lien Act, R.S.O. 1990, c. C-30 (the “CLA”) and the Construction Act, 1990, c. C-30 (the “CA”) and alleges that the defendants are liable pursuant to the statutory trust provisions and that Kostas was an officer, director, guarantor, and directing mind of Elite. Specifically, it pleads that the defendants have failed to pay the plaintiff for construction materials supplied to the construction projects in the amount of $92,412.15 plus additional interest, all amounts owing to or received by Elite for the improvements constitute a trust for the benefit of Convoy, and the defendants have been unjustly enriched. At para. 18, it states that the defendants appropriated or converted all or part of the trust funds to their own use or to a use inconsistent with the trust and trust obligations prior to paying the plaintiff all amounts related to each improvement, as owed by the defendants to the plaintiff. At para. 29, it states that the defendants, in failing to preserve and properly distribute statutory funds, warrants an award of punitive damages as it constitutes misconduct that markedly departs from ordinary standards (the “Breach of Trust Facts”).
8The Defendants were noted in default and judgment was granted.
9Since obtaining the judgment, Convoy has commenced enforcement proceedings, including by registering a Writ of Seizure and Sale against Kostas’ property and through an examination in aid of execution that was scheduled for April 29, 2021, which the defendants failed to attend.
10On June 8, 2021, the defendants were ordered to attend an examination in aid of execution (“examination”) and were further ordered to produce to Convoy various information and documents in advance of the examination. On July 21, 2021, Kostas attended an examination on behalf of the defendants. He failed to produce the information and documents in advance of the examination as required by the order. Furthermore, Kostas refused to answer proper questions and terminated the examination.
11Convoy brought a motion seeking an order that the defendants were in contempt of the June 2021 Order.
12On October 18, 2021, Mr. Colin Bondy was appointed counsel on behalf of the defendants and sought an adjournment of the hearing of the contempt motion. The motion was adjourned on consent to December 15, 2021.
13On December 14, 2021, Kostas made an assignment into bankruptcy. He deposed that he chose to make an assignment into bankruptcy rather than bring a motion to set aside the judgment because he had no reason to believe the judgment would survive his bankruptcy. He claims that there would be no practical purpose to moving to set aside the judgment and file for bankruptcy as it would have been redundant to do both.
14Kostas was ordered to personally appear on March 2, 2022, to show cause why he should not be found in contempt of the June 2021 Order. In order to purge the defendants’ contempt, the parties consented to an order that the defendants produce bank statements, accounting records and bookkeeping files as required by the June 2021 order and provide detailed, third-party documentation particularizing the nature of Kostas’ illness and limitations and that Stephanie Michos attend an examination on behalf of the corporate defendant until such time that Kostas was able to attend such an examination.
15The contempt motion was adjourned sine die. The defendants have not produced any financial records and Kostas has not agreed to attend a further examination. The defendants remain in breach of the various court orders.
16Convoy is now seeking to vary the judgment pursuant to Rule 59.06 (2)(a) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 on the basis of "facts arising or discovered after it was made" to include a declaration that the judgment survive the defendant’s bankruptcy pursuant to s. 178(1)(d) of the BIA. The newly arisen "fact" and Convoy’s evidence on this motion relates to Kostas’ assignment into bankruptcy.
17Kostas has filed responding evidence on this motion to demonstrate that his deemed admission to a breach of trust under the CA is not inherently immoral or dishonest conduct sufficient to trigger s. 178(1)(d) of the BIA.
Issues:
18Is the defendant’s extrinsic evidence admissible on a Rule 59.06(2) motion?
19Did the judgment debt owing to the plaintiff arise out of misappropriation or defalcation while acting in a fiduciary to trigger s. 178(1)(d) of the BIA?
Positions of the Parties:
Extrinsic Evidence on a Rule 59.06(2) Motion:
20Convoy submits that this motion was appropriately commenced after Convoy learned of Kostas’ assignment into bankruptcy. Convoy says that courts have held that a declaration that a debt survives bankruptcy cannot be made by a court prior to any bankruptcy; courts ought not to make declarations based on events that have not occurred. Kostas does not dispute this.
21While Convoy presents evidence on this motion relating to Kostas’ assignment into bankruptcy after default judgment was rendered, Convoy submits that any evidence led by Kostas to explain or justify his actions as it relates to his breach of trust is “extrinsic evidence” which is inadmissible by virtue of the rule in Lawyers’ Professional Indemnity Company v. Rodriguez, 2018 ONCA 171, 139 O.R. (3d) 641 (the “Rodriguez Rule”). In Rodriguez, the Ontario Court of Appeal held that a court cannot look at extrinsic evidence on an application for a post-judgment declaration under s. 178 of the BIA.
22Kostas says that Convoy has re-opened the case and is now asking this court to determine whether Kostas’ breach of trust involved fraudulent "misappropriation or defalcation" for the purposes of s. 178(1)(d) of the BIA. His evidence goes to this new issue only and seeks to elucidate the particulars of his deemed admission. The evidence does not contradict his deemed admissions, including an admission that trust funds were used for purposes inconsistent with trust obligations.
23In particular, Kostas submits that his health issues are the reason that certain steps were not taken. Further, the company failed to meet its obligations as they became due and funds were not diverted for his own personal or any improper use. Since Kostas did not maliciously commit a breach of trust, and in the alternative, that he breached his trust obligations as a result of his illness, his conduct does not constitute “misappropriation or defalcation” under s. 178(1)(d) of the BIA, and the plaintiff’s motion should be denied.
24Kostas submits that the Rodriguez Rule does not apply during a Rule 59.06(2) motion. It is distinguishable from a simple s. 178(1) application and different evidentiary rules apply: Yanic Dufrescne Excavation Inc. v. Saint Joseph Developments Ltd., 2022 ONCA 556. Kostas points to cases wherein courts have considered extrinsic evidence filed by defendants when determining whether to grant a declaration that a judgment survives bankruptcy pursuant to s. 178(1)(d) of the BIA: see e.g. Yanic Dufrescne Excavation Inc. v. Saint Joseph Developments Ltd. et al., 2021 ONSC 663 and CBM Ready Mix Division, a Division of St. Mary's Cement Inc. v 8377278, Canada Inc., 2020 ONSC 1079, at para. 5.
Section 178(1)(d)
25Kostas argues that in order for Convoy to rely upon s. 178(1)(d), some evidence that he used the trust funds for clearly inappropriate expenses is required. Convoy refutes this assertion on the basis that it relied upon the information that it had available when the Statement of Claim was prepared and served. The information that Convoy had available was tendered as evidence on its motion for default judgment.
26Convoy further submits that sufficient facts were pleaded and therefore admitted to bring the judgment within s. 178(1)(d) of the BIA. The deemed admissions meet the criteria set out in Re: Ieluzzi (#2), 2021 ONSC 1474 for a finding that Kostas’ conduct constitutes misappropriation under s. 178(1)(d) of the BIA.
27Specifically, Convoy asserts that the facts pleaded mirror those in Bibico Electric Inc. v. Battlefield Electrical Services Inc., 2011 CarswellOnt 16003, [2011] O.J. No. 6567 which Ramsay J. found were sufficient to trigger s. 178(1)(d) of the BIA.
28The Court of Appeal confirmed in Bibico Electric Inc. v. Battlefield Electrical Services Inc., 2012 ONCA 676 that since those alleged facts grounded default judgment, the judgment was underpinned by the type of “wrongdoing, improper conduct or improper accounting” contemplated by s. 178(1)(d) of the BIA. With similar deemed admissions that Kostas failed to account for trust funds, s. 178(1)(d) is triggered in this case.
29Kostas submits that he is only deemed to admit a breach of trust, and a breach of trust is insufficient to trigger s. 178(1)(d) of the BIA. Convoy must additionally show that the debt arose from some element of “moral turpitude or dishonesty.” The deemed admission that trust funds were appropriated or converted contrary to trust obligations does not necessarily imply “misappropriation and defalcation” under s. 178(1)(d). In the absence of moral turpitude or dishonesty, the court cannot vary the judgment to include a declaration under s. 178(1)(d) of the BIA.
Analysis:
The Defendant’s Extrinsic Evidence is Not Admissible
30Courts have discretion to consider extrinsic evidence regarding the alleged misappropriation of trust funds on a Rule 59.06(2) motion. This discretion is more often exercised in cases where the pleaded facts in the statement of claim do not reflect a finding that brings the default judgment within s. 178 of the BIA: see e.g. Batista v. Mason’s Masonry Supply Limited, 2014 ONSC 3955, at paras. 33-37; CBM, at para. 5, citing Batista, at paras. 26-47. As such, most of these cases involve admissibility of evidence brought by the plaintiff or moving party to support their allegations which trigger s. 178 of the BIA—not the defendant.
31In the present case, I find that the pleaded facts do reflect a finding that brings the default judgment within s. 178(1)(d) of the BIA, and this factor weighs against admitting the defendant’s extrinsic evidence.
32Furthermore, I distinguish the cases relied upon by the defendant wherein courts admitted and considered extrinsic evidence on the merits of the defendant’s conduct.
33In CBM Ready Mix Division, a Division of St. Mary's Cement Inc. v 8377278, Canada Inc., 2020 ONSC 1079, aff’d 2019 ONCA 886, the motion judge considered extrinsic evidence filed by the defendant and found that the breach of trust was due to his “unfortunate financial situation” and unwise decision-making and did not involve misappropriation or defalcation required under s. 178(1)(d): at para. 8. However, the plaintiff in CBM obtained default judgment from the Registrar under rule 19.02(1)(a), and the Registrar could not have made the findings necessary to engage s. 178(1)(d) of the BIA. In light of this, the motion judge—relying on Batista—decided to consider extrinsic evidence.
34In the present case, the plaintiff proceeded under rule 19.05 and obtained default judgment from Gordon J. I am less inclined to consider extrinsic evidence and look behind the statement of claim and deemed admissions arising from the default pursuant to rule 19.05 compared to a default pursuant to rule 19.02(1)(a) as in CBM.
35The defendant also relies on Yanic Dufresne Excavation Inc. v. Saint Joseph Developments Ltd. et al., 2021 ONSC 6633, aff’d 2022 ONCA 556, wherein the Ontario Court of Appeal held that the Rodriguez Rule does not apply during a Rule 59.06(2) motion, at para. 22:
It is obvious that fresh evidence is admissible at a Rule 59.06(2) hearing. In order to secure a variation under Rule 59.06(2), the moving party must prove, with evidence, either that the order was obtained by fraud, or that material facts supporting the variation arose or were discovered after the order was obtained: Royal Bank of Canada v. Korman, 2010 ONCA 63, 81 C.P.C. (6th) 1, at paras. 20‑21. Plainly, the rule in Rodriguez does not apply during a Rule 59.06(2) motion to vary.
36However, Yanic involved a plaintiff who obtained additional evidence during the defendant’s motion to set aside default judgment in support of its allegation that the defendant’s conduct engaged s. 178(1)(d) of the BIA. The defendant argued that the Rodriguez Rule prohibited the court from considering the plaintiff’s evidence which arose after default judgment. Rejecting this argument, the motion found that the plaintiff had pleaded all the information it had available to it at the time and excluding the plaintiff’s evidence would be “inequitable and unfair” given the defendant’s inaction in failing to request particulars and failing to defend the action: at paras. 67-71. Finding that the pleadings were similar to those in Bibico, which were sufficient for a declaration under s. 178(1)(d), the motion judge allowed the plaintiff to tender additional evidence that supported its allegations: at para. 89.
37I am not persuaded that Yanic—which dealt with admissibility of the plaintiff’s evidence—sustains the defendant’s position in the present case. In Yanic, the plaintiff’s evidence supported the basis of the judgment debt, and was admissible after finding the statement of claim sufficiently particularized an allegation of misappropriation while acting in a fiduciary capacity under s. 178(1)(d) of the BIA. In the present case, Yanic is being turned on its head as the defendant is attempting to tender evidence that is directly at odds with the Breach of Trust Facts that he is deemed to admit. Stated differently, he is attempting to lead evidence that, if accepted, would alter the basis of the judgment debt.
38Instead, I find that the facts in the present case mirror those in Bibico wherein Ramsay J. declined to consider the defendant’s extrinsic evidence. As the evidence went to the merits of whether the defendant engaged in misconduct under s. 178(1)(d) of the BIA, Ramsay J. noted that this would be tantamount to setting aside the default judgment that had already been rendered: at para. 14. Since construction claims are supposed to proceed expeditiously and the defendants already delayed the action by failing to comply with a previous order for productions, allowing the defendants to “reopen the case” after they had “ample opportunity to defend if they had chosen to” would be unjust: at paras. 14-16.
39In the present case, the pleaded facts which Kostas was deemed to admit were similar to those pleaded in Bibico. Kostas has also failed to comply with court orders and required productions. He now seeks to introduce evidence on the merits of whether he engaged in conduct that triggers s. 178(1)(d) of the BIA. I am therefore inclined to follow and rely on Ramsay J.’s decision in Bibico and find that any evidence led by Kostas on this specific motion to explain or justify his actions as it relates to his breach of trust and the effect on s. 178(1)(d) of the BIA is not admissible.
The Judgment Debt Falls Within s. 178(1)(d) of the BIA
40The trust provisions of the CA provide additional protection for trades and suppliers on construction projects beyond the right to file liens against the property. Essentially, a contractor who receives money on account of its contract, holds that money in trust for those who provided services or materials on the project.
41The trustee must, subject to certain exemptions, use those monies first to pay those who provided services and materials. Failure to do so constitutes a breach of trust. Where the contractor receiving the money is a corporation, a director, officer or person effectively controlling the corporation who assents to or acquiesces in conduct, knowing it amounts to breach of trust by the corporation, will also be personally liable for breach of trust.
42As mentioned, the defendants did not defend the action. Kostas is deemed to admit the facts as pleaded at paras. 17 to 21 of the Statement of Claim, and in particular, para. 18. However, the question becomes whether a breach of trust as well as the pleadings in the Statement of Claim engage s. 178(1)(d) of the BIA.
43In order to trigger s. 178(1)(d), the judgment debt, whether it arises from “fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity”, must arise from conduct that displays at least some element of wrongdoing or improper conduct that would be unacceptable to society because of its “moral turpitude, or dishonesty’: Simone v. Daley, 1999 CanLII 3208 (ON CA), 1999 43 O.R. (3d) 511 (C.A.); Korea Data Systems (USA) Inc. v. Amazing Technologies Inc., 2015 ONCA 465.
44Convoy did not allege that Kostas acted negligently or incompetently when he breached the trust provisions of the CA. Rather, Convoy alleged, and Kostas is deemed to admit, that he “converted” and “appropriated” the trust funds for his own use or a use inconsistent with the trust. These are intentional acts and not grounded in negligence or incompetence. Significantly, the judgment includes an award of punitive damages in light of the deemed admissions set out in the Statement of Claim.
45The court in Re: Ieluzzi (#2), at para. 37, set out the criteria for a finding of misappropriation under s. 178(1)(d), which I accept have been met in this case:
(a) The money taken by the debtor to create the debt must have belonged to someone other than the debtor. In this case, the money taken from the defendants’ customers belonged to Convoy as the supplier of goods to the Improvements.
(b) The taking must involve a wrongful use of the money. In this case, Kostas is deemed to admit that he used trust funds for his own use or for a use inconsistent with the trust. Although Convoy does not have knowledge of any specific use, the fact that he used the trust funds for his own use or an inconsistent use is a wrongful use of the trust funds.
(c) The debtor must have received the money as a fiduciary. There is no dispute that Kostas was the sole officer and director of the corporate defendant with effective control over the business, and is therefore a fiduciary.
46The court in Re: Ieluzzi (#2) then followed Commdoor Aluminum v. Solar Sunrooms Inc., 2004 CanLII 465 (ON CA), 2004 CarswellOnt 2387 (ONCA), and reiterated that when the bankrupt, prior to bankruptcy, has breached the trust provisions of the CLA, and the bankrupt has received a discharge, a creditor who supplied material to a particular project constructed by the bankrupt and whose amount was not paid can maintain an action against the discharged bankrupt on the ground that the bankrupt has been guilty of misappropriation while acting in a fiduciary capacity under s. 178(1)(d), and the court will grant judgment to the creditor for the unpaid account.
47Relying on Commdoor Aluminum, Ramsay J. found in Bibico that failing to account for trust funds is sufficient to trigger s. 178(1)(d): at paras. 10 and 11. In its brief endorsement upholding Ramsay J.’s decision, the Court of Appeal found, at para. 1:
We are satisfied that sufficient facts were pleaded — and, therefore, admitted because of the default — to bring the judgment of Whitten J. within the provisions of s. 178(1)(d) of the Bankruptcy and Insolvency Act. These facts included that the appellants caused and assented to and acquiesced in the diversion of trust funds established under the Construction Lien Act for purposes inconsistent with the trust, and that the appellants had failed to account for the trust funds. The judgment was therefore underpinned by the type of "wrongdoing, improper conduct or improper accounting" contemplated by s. 178(1)(d): See Simone v. Daley (1999), 1999 CanLII 3208 (ON CA), 170 D.L.R. (4th) 215 (Ont. C.A.); Commdoor Aluminum v. Solar Sunrooms Inc., 2004 CanLII 465 (ON CA), 2004 CarswellOnt 2387 (Ont. C.A.).
48Relying on Bibico, the motion judge in Yanic found that the statement of claim itself was sufficiently particularized to ground the claim for breach of trust or misappropriation while acting in a fiduciary: at para. 182. The motion judge found that the defendant’s conduct constituted misappropriation under Re: Ieluzzi (#2), and as an officer and director with fiduciary obligations, the defendant’s failure to ensure that funds were spent on paying the trades constituted “an element of misconduct”: at paras. 157-158.
49Even on the assumption that Kostas would have defended the action, an affidavit of documents would have been required and examinations could have been held. The opportunity to obtain relevant documents or discovery related to the Breach of Trust Facts prior to obtaining the judgment was not available to Convoy because the defendants did not defend the action. I agree with Convoy that Kostas’ failure to defend the action should not place the plaintiff in a worse position just because it was unable to obtain any type of disclosure at the relevant time. As the court determined in Yanic, that would be inequitable and unfair: at para. 71.
50Notwithstanding the affidavits and evidence filed by Kostas for this motion, (and the companion Rule 59.06 motion- dismissed with prejudice), on the specific issue for this ruling, I find that Kostas is deemed to admit that he used the trust funds for a use inconsistent with the statutory trust.
Conclusion:
51I accept that the facts of Bibico can be applied here. In this case, Kostas is deemed to admit the Breach of Trust Facts, which include that he assented to and acquiesced in the diversion of trust funds established under the CA for purposes inconsistent with the trust. Similarly, directing trust funds for a purpose inconsistent with the trust is also sufficient to trigger s. 178(1)(d) and such diversion is considered “dishonest: See Bibico, at para.12. Kostas was acting in a fiduciary capacity. As sole officer and director of Elite, Kostas failed to adequately discharge his onus as a trustee to account for the relevant trust funds pursuant to the CA. I find that Kostas’ deemed admissions establish the type of “wrongdoing, improper conduct or improper accounting” contemplated by s. 178(1)(d).
52The plaintiff’s motion is granted. I determine that s. 178(1)(d) of the BIA applies, in that an order of discharge does not release Kostas from his debt to Convoy. An Order that the judgment debt in favour of the plaintiff in the amount of $92,412.15, punitive damages in the amount of $7,000, together with the costs of $4,790.11 and prejudgment and post-judgment interest survives the bankruptcy.
Costs:
53If the parties cannot agree on the issue of costs, I will consider brief written submissions. These cost materials shall not exceed three pages in length, (not including any Bill of Costs or Offers to Settle). The plaintiff shall file its costs submissions within 15 days of today’s date. The defendants shall file their costs submissions within 15 days of the receipt of the plaintiff’s materials. The plaintiff may file a brief reply within five days thereafter. If submissions are not received by October 31, 2022, the file will be closed and the issue of costs considered settled.
A.J. Goodman J.
Released: September 22, 2022