Ole Hefner v. Brinkman (Bankruptcy of), 2023 ONSC 5190

In The Matter of the Bankruptcy of Julius Charles Brinkman

Court File No.: BK-23-001-00 Estate No.: 21-2684929 Date: 2023-09-14

Superior Court of Justice – Ontario

Re: Ole Hefner, Applicant v. Julius Brinkman, Respondent

Heard: August 3, 2023, in Kenora, Ontario via Zoom Before: Fregeau J.

Counsel: R. Danter for the Applicant Julius Brinkman Self-Represented

Endorsement on Motion

The Nature of the Motion

1In the Amended Notice of Motion, the creditor/moving party, Ole Hefner (“Ms. Hefner”) requests the following:

1. An Order declaring that the stay of proceedings, imposed by s. 69.3(1) of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (the “BIA”), prohibiting any action by creditors pursuant to the assignment in bankruptcy of Julius Charles Brinkman (the “Bankrupt”) is no longer effective in respect of Ms. Hefner and that Ms. Hefner is authorized to continue the prosecution and enforcement of the Consent Judgment dated January 14, 2019 (the “Judgment”) in an action bearing Alberta Court of Queen’s Bench File No. 1701-16057 (the “Action”) and registered in Ontario pursuant to an Order dated March 19, 2019 in Ontario Court file No. CV-19-518;
2. An Order that any debt relating to the Judgment in favour of Ms. Hefner is a debt which is not discharged by bankruptcy and is a debt that survives the bankruptcy of the Bankrupt as contemplated under Section 178(1)(d) of the BIA as being a debt or liability arising out of fraud, embezzlement, misappropriation, or defalcation while acting in a fiduciary capacity; and
3. Costs of the motion.

2At the hearing of this motion, the Court was advised that the trustee of the Bankrupt was discharged on July 17, 2023. A Bankruptcy and Insolvency Records Search was filed confirming the trustee’s discharge on July 17, 2023. Pursuant to s. 69.3(1.1) of the BIA, the stay of proceedings imposed by s. 69.3(1) of the BIA ceases to apply in respect of a creditor on the day the trustee is discharged.

3As a result of the trustee’s discharge prior to the hearing of this motion, an Order declaring that the stay of proceedings imposed by s. 69.3(1) of the BIA is no longer effective in respect of Ms. Hefner in relation to the Judgment now registered in Ontario is no longer required.

Background

4Ms. Hefner has filed an affidavit dated April 14, 2023, in support of the relief sought. The Bankrupt has not filed a responding affidavit. This factual background is therefore a synopsis of Ms. Hefner’s affidavit and the exhibits attached thereto.

5Ms. Hefner resides in Calgary, Alberta. The Bankrupt, who previously resided in Calgary, now resides in Kenora, Ontario. Ms. Hefner deposes that the Bankrupt was her financial advisor from 2008 to 2014 and that, in or about October 2012, on advice she received from the Bankrupt, she advanced $50,000 to the Bankrupt to obtain debentures or shares on her behalf and for her benefit. The Bankrupt promised Ms. Hefner that he would purchase the securities in his name and subsequently transfer them to her.

6On or about September 8, 2014, the Bankrupt informed Ms. Hefner that he had not purchased the securities for her as he had agreed to do and that he no longer had the $50,000 she had advanced to him for that purpose. The Bankrupt then signed an Acknowledgement of Debt confirming that Ms. Hefner had advanced him the sum of $50,000 as a loan.

7The terms of the Acknowledgement of Debt required the Bankrupt to repay the principal amount together with interest at the rate of 10% per annum, calculated and compounded annually from the commencement date of October 1, 2012.

8On November 28, 2017, Ms. Hefner commenced an action by way of a Statement of Claim in the Court of Queen’s Bench of Alberta against the Bankrupt for repayment of amounts owing under the loan documented in the Acknowledgement of Debt. Ms. Hefner filed an Amended Statement of Claim dated December 7, 2017.

9In the Amended Statement of Claim, Ms. Hefner claimed, among other things, that the Bankrupt, as her financial advisor and by virtue of the funds she advanced to him for the express purpose of purchasing the securities as agreed, owed her a fiduciary duty and that he breached this duty by failing to use the money as directed and instead using it for his own benefit. Ms. Hefner further claimed that the Bankrupt’s indebtedness to her arose, in whole or in part, out of the Bankrupt’s misappropriation and/or defalcation of her money while acting in a fiduciary capacity.

[10] On March 21, 2018, the Bankrupt filed a Statement of Defence in the action. In his Statement of Defence, the Bankrupt: a. Denied that he at any time acted as a financial advisor for Ms. Hefner; b. Denied that he at any time acted in a fiduciary capacity in relation to Ms. Hefner; c. Denied that he misappropriated any funds of Ms. Hefner’s; and d. Denied that he was in any way indebted to Ms. Hefner.

[11] On July 12, 2018, Ms. Hefner moved for summary judgment in the Action. In her affidavit sworn July 11, 2018, in support of the summary judgment motion in the Action, Ms. Hefner swore to the truth of the following statements: a. That the Bankrupt had acted as her financial advisor from 2008-2014, both during and after his employment as an investment advisor with BMO Nesbit Burns (“BMO”); b. That she advanced $50,000 to the Bankrupt, on the Bankrupt’s advice, and based on the promise that the Bankrupt would transfer to her 10,000 shares of Karnalyte Resources at $5 a share; c. That these shares were never provided to her by the Bankrupt; d. That the Bankrupt then promised her shares of the Holmes Company as an alternative to the promised Karnalyte shares, and signed a promissory note to that effect; e. That no shares of the Holmes Company were ever provided to her by the Bankrupt; and f. That the Bankrupt later acknowledged his debt to her but that he had made no payments toward this debt.

12On August 29, 2018, Ms. Hefner was cross-examined on her July 11, 2018, affidavit sworn in support of her summary judgment motion in the Alberta action. A transcript of that cross-examination was attached as an exhibit to Ms. Hefner’s April 14, 2023, affidavit filed on this motion.

[13] During that cross-examination, Ms. Hefner made the following statements in support of the contents of her July 11, 2018, affidavit:

1. That, at a point in time when Ms. Hefner was socializing with the Bankrupt’s family as a result of the Bankrupt marrying one of Ms. Hefner’s friends, the Bankrupt offered to look after her investment accounts if she transferred them from CICB Wood Gundy to BMO where the Bankrupt was employed as a financial advisor;
2. That the Bankrupt continued to regularly review her “statements” and continued to as her financial advisor after he left BMO and in 2013 and 2014;
3. That she provided the Bankrupt with $50,000 for the purpose of purchasing shares in Karnalyte Resources, the company the Bankrupt left BMO to work for as a CFO, on the advice of the Bankrupt. The funds were advanced after the Bankrupt had left BMO.
4. That she never received the shares in Karnalyte Resources, as promised to her by the Bankrupt.

14Ms. Hefner deposed, in her April 14, 2023 affidavit filed on this motion, as she stated in her July 11, 2018 affidavit filed in the summary judgment motion in the Action, that she would not have advanced funds to the Bankrupt for the purchase of the Karnalyte Resources shares had it not been for the trust she placed in the Bankrupt’s advice as her “long-standing friend” and investment advisor.

[15] In response to Ms. Hefner’s July 11, 2018, affidavit filed in support of her summary judgment motion, the Bankrupt filed a responding affidavit, sworn Sept 6, 2018. In his responding affidavit, the Bankrupt deposed the following: a) That at all material times, he and Ms. Hefner were family friends and acquaintances; b) That he worked as an investment advisor with BMO from 2009 until March 2010, at which time his employment with them came to an end because he chose to accept a position with Karnalyte Resources in March 2010; c) That as of March 2010, he ceased any involvement in any capacity as an investment advisor of BMO accounts, including Ms. Hefner’s accounts; d) That Ms. Hefner did advance him $50,000 towards the purchase of shares in Karnalyte Resources but that at no time did he give Ms. Hefner any advice with respect to this investment; e) That the funds were in fact used to purchase shares in Karnalyte Resources as he and Ms. Hefner had discussed but that he was unable to transfer the shares to Ms. Hefner because for a period of time he was restricted from doing so given the “blackout” restrictions placed on him; f) That he then departed Karnalyte Resources in May 2012 to pursue a new venture with the Holmes Group; g) That Ms. Hefner then suggested to him that she would like to convert her investment in Karnalyte Resources to some arrangement with the Holmes Group; h) That he told her at that time that upon the cessation of the blackout period, he could transfer to her the shares she had purchased in Karnalyte Resources or she could convert her investment into the Holmes Group, “but the choice was hers. At no time did I render any advice to her”; i) That he was thereafter terminated by the Holmes Group and was therefore unable to deliver any debentures or shares to Ms. Hefner with the Holmes Group due to his termination; j) That in 2015 Ms. Hefner asked him to sign a note converting her investment into a debt; and k) That at no time was the $50,000 which Ms. Hefner provided to him put to his own use or benefit.

16On November 15, 2018, the Bankrupt was cross-examined on his September 6, 2018, affidavit. A transcript of that cross-examination was attached as an exhibit to Ms. Hefner’s April 14, 2023, affidavit filed on this motion.

[17] During that cross-examination, the Bankrupt gave the following evidence: a) That he was employed as a senior vice president investment advisor with BMO from January 2007 to January 2010; b) That he began serving as Ms. Hefner’s financial advisor on October 16, 2009; c) That he ceased being Ms. Hefner’s financial advisor sometime between January and March 2010; d) That during the time he was Ms. Hefner’s financial advisor he was also her close personal friend; e) That he recalled discussing Karnalyte Resources with Ms. Hefner prior to leaving BMO in January 2010; f) That he did not tell Ms. Hefner that he would be happy to look over her BMO statements after he left BMO and that Ms. Hefner did not show him her BMO statements after he left BMO; g) That Ms. Hefner provided him $50,000 on or about April 19, 2010, to purchase 5,000 of his existing shares in Karnalyte Resources but that he was unable to transfer the shares to her at that time because of blackout restrictions; and h) That he did not know “what [he] used that money [the $50,000] for”.

18On January 11, 2019, the Court of Queen’s Bench of Alberta granted a Consent Order for Summary Judgment in the Action. The Judgement against the bankrupt was in the sum of $90,607.73, plus interest from December 31, 2018, to and including the date of Judgment.

[19] The January 11, 2019, Consent Order for Summary Judgment included the following provisions: 2. The Plaintiff’s application for declaratory relief, including, without limitation, a Declaration that her claim arose from defalcation or misappropriation by the Defendant while acting in a fiduciary capacity, is adjourned sine die; and 3. The Plaintiff shall have leave to reapply at any time in the within action or in another action (e.g. an action in bankruptcy) for a Declaration that the Plaintiff’s claim as against the Defendant…arose from defalcation or misappropriation by the Defendant while acting in a fiduciary capacity, such that the Plaintiff’s claim as a and enforcement creditor pursuant to the Judgement granted herein survives bankruptcy.

20On March 19, 2019, the Ontario Superior Court of Justice ordered that the Consent Order for Summary Judgment in the Alberta action be registered as against the Bankrupt in Ontario.

21On October 30, 2020, the Bankrupt made an assignment in bankruptcy in Ontario. Ms. Hefner is listed as an unsecured creditor on the Bankrupt’s Statement of Affairs. On July 25, 2022, Ms. Hefner filed a Notice of Opposition to Discharge in the bankruptcy. By letter from counsel for Ms. Hefner dated January 16, 2023, Ms. Hefner withdrew her Notice of Opposition to Discharge dated July 25, 2022. On January 17, 2023, the Bankrupt was discharged absolutely. On July 17, 2023, the trustee of the Bankrupt was discharged.

The Positions of the Parties

Ms. Hefner

22Ms. Hefner submits that the Bankrupt provided false, misleading and fraudulent statements to her regarding the purpose and result of her advancement of funds to him and that she relied on these false and misleading statements in advancing the $50,000 to him in April 2010.

23Ms. Hefner contends that, because of his personal and professional relationship with her, the Bankrupt owed her a fiduciary duty, and that in the face of that duty, he misappropriated the $50,000 which she advanced to him for his own use.

24Ms. Hefner submits that absent the false representations made to her by the Bankrupt, she would not have advanced funds to the Bankrupt. Ms. Hefner further contends that that Bankrupt breached his fiduciary duty to her and that the debt owing to her by the Bankrupt pursuant to the Judgment registered in Ontario should survive the Bankrupt’s discharge.

25Ms. Hefner submits that her evidence on this motion establishes that the Bankrupt continued to carry out the actions of a financial advisor in relation to her and in relation to this specific transaction after he left BMO in the early part of 2010. Ms. Hefner emphasizes that there is no evidence before the court on this motion to contradict her evidence on this point.

The Bankrupt

26The Bankrupt does not dispute that Ms. Hefner moved her investment portfolio to BMO and that he became her financial advisor in 2009. The Bankrupt submits, however, that he ceased being Ms. Hefner’s financial advisor, and that he gave up his license, sometime in and around January to March 2010, prior to Ms. Hefner advancing the $50,000 to him in April 2010. The Bankrupt further submits that he did not hold himself out as a financial advisor to Ms. Hefner, or at large, after giving up his license.

27The Bankrupt submits that the $50,000 provided to him by Ms. Hefner was for the purchase by Ms. Hefner from him of a portion of his “personal stock” in Karnalyte Resources, that it was a stock transaction between two individuals and that he was not a fiduciary to Ms. Hefner at that point in time.

Discussion

28Section 178(1)(d) of the BIA provides that an order of discharge does not release the bankrupt from any debt or liability arising out of fraud, embezzlement, misappropriation, or defalcation while acting in a fiduciary capacity.

[29] In determining whether a debt or liability arises from fraud or misappropriation within the meaning of s. 178(1)(d) of the BIA, a court must determine:

1. That the money taken to create the debt belonged to someone other than the taker;
2. The taker must have received the money as a fiduciary; and
3. The taker must have wrongfully used the money. See Ross & Associates v. Palmer, 2001 MBCA 17 at para. 24.

30Based on the record before the court on this motion, it is not in dispute that Ms. Hefner advanced $50,000, being the funds underlying the judgment debt in the Action, to the Bankrupt on or about April 19, 2010. Therefore, the first element of the Ross & Associates test set out above has been met.

[31] Pursuant to Alberta v. Elder Advocates of Alberta Society, 2011 SCC 24, at para. 36, the test to establish an ad hoc fiduciary duty is as follows:

1. An inherent vulnerability of the plaintiff to the defendant based on the nature and purpose of the relationship;
2. An undertaking by the defendant to act in the best interests of the plaintiff; and
3. A legal or substantial real interest of the plaintiff that could be adversely affected by the defendant’s exercise of discretion or control by virtue of their position in the relationship.

32There must also be a reasonable expectation by the beneficiary that the alleged fiduciary was acting in the beneficiary’s best interest. See Ronec v. Michalik, [2007] O.J. No. 3529 (S.C.) at para. 9.

[33] The Ontario Court of Appeal, in Stirrett v. Cheema, 2020 ONCA 288 at paras. 55-56, recognized the following factors as relevant to the determination of whether a plaintiff was “inherently vulnerable” to a defendant:

1. Specialized knowledge in the possession of the defendant which provided the defendant with power or influence over the plaintiff’s actions; and
2. The importance and complexity of the information and the reliance of the plaintiff on the defendant’s knowledge to make an informed decision.

34I accept the submission of Ms. Hefner that the facts satisfy the Alberta v. Elder Advocates test such that an ad hoc fiduciary duty was owed by the Bankrupt to her in relation to the $50,000 Ms. Hefner advanced the Bankrupt on or about April 19, 2010. I come to this conclusion for the following reasons.

35The Bankrupt was employed as a senior vice president investment advisor with BMO from January 2007 to January-March 2010 and served as Ms. Hefner’s financial advisor for the period October 2009 until sometime between January and March 2010. The Bankrupt was also, at the same time, a longstanding family friend of Ms. Hefner.

36The Bankrupt had specialized knowledge of stock trading in general, which Ms. Hefner did not have. The Bankrupt also had specialized knowledge regarding the Karnalyte Resources stock which he had promised to purchase for Ms. Hefner. Ms. Hefner relied on the Bankrupt’s specialized knowledge and their close personal friendship and entrusted $50,000 investment funds to the Bankrupt.

37The Bankrupt accepted the $50,000 from Ms. Hefner and undertook to invest the $50,000 in her best interests. In all these circumstances, the Bankrupt should reasonably have been aware of the level of Ms. Hefner’s reliance on him.

38The Bankrupt did not apply the $50,000 Ms. Hefner advanced to him as intended and instead used the money for personal uses. Ms. Hefner’s substantial interests were obviously and seriously detrimentally affected.

39I conclude that the Bankrupt owed an ad hoc fiduciary duty to Ms. Hefner at the relevant time.

40I further accept the submission that the Bankrupt wrongfully used the $50,000 advanced to him by Ms. Hefner such that the judgment debt in the Action arose out of misappropriation or defalcation within the meaning of s. 178(1)(d) of the BIA.

41It is not in dispute that the $50,000 was advanced to the Bankrupt by Ms. Hefner for the express purpose of purchasing shares in Karnalyte Resources. It is also not in dispute that the $50,000 was not used for this purpose. The shares were never purchased and by the Bankrupt’s own admission, he did not know what he did with the $50,000. The Bankrupt obviously used the $50,000 for a purpose other than that for which the use of the money was intended.

42In summary, I am persuaded that the judgment debt in the Action, now registered in Ontario, is a debt or liability which is not discharged by bankruptcy and is a debt or liability that survives the bankruptcy of the Bankrupt and his discharge, as contemplated under s. 178(1)(d) of the BIA as being a debt or liability arising out of misappropriation or defalcation while acting in a fiduciary capacity in relation to Ms. Hefner.

43Ms. Hefner’s counsel has filed a Bill of Costs in support partial indemnity costs of $8,085.06, inclusive of HST and disbursements. I find this excessive given the lack of complexity involved in this motion, particularly as the Bankrupt did not file any affidavit evidence.

44I order that the Bankrupt pay costs of this motion on a partial indemnity basis to Ms. Hefner in the all-inclusive amount of $4,500.00. These costs shall be paid within 60 days.

45An order shall issue accordingly.