Court File and Parties

COURT FILE NO.: BK-31-OR703224-0000 DATE: 20241112

SUPERIOR COURT OF JUSTICE – ONTARIO IN INSOLVENCY AND BANKRUPTCY

IN THE MATTER OF THE BANKRUPTCY OF JANE LOUISE LAYTON OF THE CITY OF TORONTO IN THE PROVINCE OF ONTARIO (Summary Administration)

RE: Jane Layton, Debtor

BEFORE: Justice Peter J. Osborne

COUNSEL: Brian Kelly, for the Debtor, Jane Layton Matthew Harris, for the Trustee, Harris & Partners Inc.

HEARD: May 17, 2024

Endorsement

[1] In this Application, the Trustee in Bankruptcy of the Estate of Jane Louis Layton (“Layton” or “the Bankrupt”) seeks an order that the amount of $20,005.37 be paid over to the Trustee by the Bankrupt or her son, Stephen Polanoski (“Polanoski”).

[2] For the reasons that follow, the order is granted.

[3] The Bankrupt filed a voluntary assignment for the general benefit of her creditors on March 19, 2003. The Trustee was appointed by the Office of the Superintendent in Bankruptcy (“OSB”).

[4] The Trustee opposed the discharge of the Bankrupt principally because of her non-payment of surplus income. The Bankrupt did not attend her hearing on March 19, 2004, and on April 7, 2004 a “No Order” was made. The Trustee was discharged on February 13, 2004. The Bankrupt has remained undischarged since the order was made.

[5] On October 7, 2020, the Bankrupt's brother passed away. He apparently left a significant amount of money to be divided between the Bankrupt and her sister in his estate. The Bankrupt's sister contacted the Trustee on July 6, 2022 to advise the Trustee about those considerable funds available for distribution. The sister was a creditor and was aware of the undischarged status of the Bankrupt.

[6] Given the history of this bankruptcy proceeding and prior litigation among family members, an order was made on consent on November 1, 2022 to reappoint the Trustee. The Order further directed that the funds from the brother's estate be paid to the Trustee and also provided for other relief.

[7] The Trustee then drafted a Statement of Receipts and Disbursements to pay out the creditors in full, remit the Tariff to the Office of the Superintendent, remove the Trustee and provide for legal fees. Following completion of these distributions and all other payments and obligations, the Statement of Receipts and Disbursements would see the remaining balance remitted to the Bankrupt.

[8] Polanoski, the Bankrupt’s son, repeatedly requested that the Trustee pay over the funds to the Bankrupt in advance of final taxation. Ultimately, the Trustee agreed to do so, and paid those surplus funds to the Bankrupt in the amount of $114,826.97 before receiving final approval of the Statement of Receipts and Disbursements from the OSB.

[9] The Trustee then submitted the draft Statement to the OSB, which informed the Trustee that it had not calculated the interest property. As such, the Trustee was required to remit a further $20,005.37 to the creditors in accordance with the revised Statement of Receipts and Disbursements.

[10] On July 4, 2023, the Trustee wrote to the Bankrupt, directing the correspondence to her son, Polanoski (who was the point of contact, as confirmed by him) explaining the error and requesting repayment from the Bankrupt of the $20,005.37. A second request was sent on August 8, 2023, a third on October 26, 2023 and a fourth request on November 7, 2023. No response was received. The Trustee was concerned that the Bankrupt, who remains undischarged, may have absconded with the funds.

[11] The Trustee’s office subsequently learned that the Bankrupt had deposited the surplus funds into an account at the Royal Bank of Canada ("RBC") in Kitchener, Ontario. In the circumstances, and particularly given the lack of any response from the Bankrupt, the Trustee initiated this proceeding.

[12] The Trustee sought and obtained interim relief in the form of an order freezing the account and directing RBC to provide bank statements and account information back to the date of the deposit. That account information revealed that funds had been transferred to them from various accounts, including through accounts at Canaccord Genuity Wealth Management (“Canaccord”), where Polanoski is a professional investment advisor and broker.

[13] The Trustee then sought and obtained a further order dated November 27, 2023, directing Canaccord to provide further account information so that the funds could be traced. The Bankrupt was also ordered to provide an affidavit and attend an examination.

[14] There was no response from or on behalf of the Bankrupt until that order was served. On December 4, 2023, the parties appeared before the Court at a case conference. The Bankrupt was represented by counsel who appeared for the first time to request an adjournment of the hearing and fix a timetable. Following two additional case conferences to deal with procedural matters, production issues and dates of examinations, the matter was finally scheduled for hearing on the merits on May 17, 2024.

[15] There is no dispute that the funds paid over to the Bankrupt by the Trustee were deposited into the RBC account in Kitchener. That account was a joint account owned by the Bankrupt and Polanoski. Funds from that account have been traced through other accounts belonging to either or both of the Bankrupt and Polanoski.

[16] Ultimately, the funds originally deposited into the joint RBC account on May 15, 2023 were transferred six times (three times within the following few weeks), between and among accounts controlled by either or both of the Bankrupt and Polanoski at Canaccord and/or RBC. The records produced in accordance with the orders referred to above disclose that the funds are currently in an account owned by 2055425 Ontario Limited. Polanoski asserted that the account was an investment account controlled by him and used to pay expenses for the condominium in which the Bankrupt resides. 2055425 Ontario Limited owns that condominium unit.

[17] Accordingly, the Trustee now seeks an order that the funds remitted to the Bankrupt in error in the amount of $20,005.37 be paid over to the Trustee for the benefit of creditors of the Bankrupt on the basis that the money was paid under mistake of fact (i.e., the erroneous calculation of interest as reflected in the draft Statement of Receipts and Disbursements).

[18] The Bankrupt and Polanoski, represented by the same counsel, oppose the relief sought. In short, they do not deny or contest any of the material facts. They simply take the position that the Trustee made the error, and they have no obligation to repay the funds to rectify that error resulting from the Trustee “acting in haste.” Polanoski put it as follows on his cross-examination at Q. 123):

I believe the Trustee’s made grievous errors in his day-to-day duties and why should it be not only my bankrupt mother’s responsibility, why should be mine to make up for their errors?

[19] The Trustee has the power to bring this motion as there are no inspectors involved in the administration of the estate: Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3, s. 30(3) ("BIA"). A claim such as this should be brought to the bankruptcy court, which has jurisdiction over all matters relating to Estates and bankruptcy, and not as a separate claim or other proceeding: McLennan v. Carter, [1927] 1 D.L.R. 475 (N.S. S.C.), at p. 477. The appropriate course of action for the Trustee is to bring a motion to the bankruptcy court for an order that the property be delivered over to it, on proper materials: Re Waterbed King Ltd. (Trustee of), (1986), 62 C.B.R. (N.S.) 227 (Ont. S.C.); and Re Taylor Ventures Inc., 2000 BCCA 647, 21 CBR (4th) 136, at paras. 4-5.

[20] The Bankrupt is entitled to any surplus remaining after full payment of the Bankrupt’s creditors with interest as applicable, and of the costs, charges and expenses of the bankruptcy proceedings: BIA, s. 144.

[21] There is no dispute over the following three facts. First, the funds at issue were paid to the credit of the Bankrupt and the cheque was deposited in the RBC account in Kitchener. Second, that account is in fact a joint account owned by the Bankrupt and Polanoski. Third, the funds were subsequently transferred out and are now in an account controlled by Polanoski at Canaccord, where he is employed as an investment advisor and broker.

[22] Section 17(1) of the BIA provides that where a person has in his possession or power, any property of the bankrupt that he is not by law entitled to retain as against the bankrupt or the trustee, that person shall deliver the property to the trustee. The duty (which is that of any person, not just a bankrupt) to turn over the property is mandatory.

[23] Where a third party has such property of the bankrupt and refuses to turn it over to the party entitled to that property, that third party is liable to turn over the property and is liable for any deterioration or depletion of the value of the property before the party entitled to it can take possession: Kostiuk (Trustee of), 2001 BCSC 1134, 27 CBR (4th) 249 at paras. 45-55. While in Kostiuk, the party entitled to the property was a judgment creditor rather than a trustee, and the tort of conversion was alleged (unlike in the present case), in my view the same principles generally apply where a third-party refuses to turn over property to a trustee for the benefit of creditors.

[24] It is unfortunate that the Trustee made the error and the quantum of surplus funds paid to the Bankrupt - following the requests from Polanoski, her son, that the funds be paid as soon as possible, and prior to a final accounting - represented an overpayment to the extent of the funds now claimed.

[25] However, there is no basis in law or in equity for the Bankrupt, or Polanoski, to retain those funds. The funds were paid over pursuant to a straightforward mistake of fact: BMP Global v. Bank of Nova Scotia, 2009 SCC 15, [2009] 1 SCR 504, (“BMP”) at para. 19. In that case, the Supreme Court stated that: “In sum, this case is about the restitution of amounts paid by [the Trustee] and the right to trace the proceeds”.

[26] The Bankrupt had confirmed to the Trustee that her son, Polanoski, was to be the point of contact. As he stated, his mother was “far too elderly to be spearheading these moves on her own. I will be the principal contact.” However, he ignored each of the repeated notices from the Trustee attempting to advance this matter on July 4, August 8, October 26 and November 7, 2023. Polanoski gave an undertaking, through counsel, that the funds would remain in the account pending a determination on the merits, only when his counsel appeared to seek an adjournment and the imposition of a case management timetable.

[27] The Bankrupt closed her Canaccord account on November 10, 2023. As the Trustee was trying to contact Polanoski and recover the funds, Polanoski transferred the funds repeatedly, and ultimately to the account of the numbered company.

[28] There is a prima facie right to recover funds paid by mistake of fact: BMP, at paras. 21, 24. None of the recognized exceptions to that right apply here: a) principles of finality and the intention of the payor that the payee shall have the money without recourse in any event; b) payment for good consideration; or c) circumstances where the payee has changed his position in good faith or is deemed to have done so: BMP, at para. 21.

[29] With respect to the first factor, in my view, the Trustee did not intend with finality that the Bankrupt, and certainly not Polanoski, would be entitled to keep the funds in any event. The objective fact is that the quantum of the payment was subject to the OSB's approval of the Statement of Receipts and Disbursements. Polanoski has no legal right to keep the funds. It is no answer for him to submit, as he does, that the Trustee overpaid his mother, “recklessly and negligently in advance of taxation” with the result that they cannot recover the funds from him. While the overpayment was clearly unfortunate, it does not grant Polanoski the legal right to the funds in preference to the creditors of the Bankrupt.

[30] Similarly, with respect to the second exception, I am not satisfied that the payment from the Bankrupt to Polanoski was made for good consideration.

[31] The evidence of the Bankrupt was to the effect that she had nothing to do with the funds once they were transferred to Canaccord and that if her son, who “was in a professional capacity as a broker” asked her to provide instructions, she would have done whatever he asked that she could not recall.

[32] The evidence of the Bankrupt and of Polanoski is that the funds in the corporate account were owned by Polanoski as they were paid to him by the Bankrupt (originally being sourced from the Trustee’s cheque) as compensation paid to him to make up for the years of support that he had given to his mother. Polanoski stated (at Q. 53) that as of the date the funds were received from the Trustee, May 15, 2023, those funds “were for my use, my movements, my decisions, stemming back to 20 years of essentially family support of my mother”.

[33] The evidence of both was also to the effect, however, that there was no agreement between the two as to any such obligation or the payment therefor. The evidence of the Bankrupt was also to the effect that while the funds were deposited into the joint account, there was no agreement or anything in writing to confirm who had control of the funds in that account.

[34] I agree with the submission of the Trustee that even if there had been such an agreement, the Bankrupt would, given her capacity as such, have lacked the legal capacity to have entered into it. All assets of the Bankrupt vest in the Trustee (including any after-acquired property) and any security agreement, or agreement providing a preference to one creditor, would be a preference in law and invalid: BIA, ss. 67(1), and 71.

[35] A bankrupt is not entitled to build up or keep any assets acquired after her bankruptcy, and all after-acquired assets vest in the trustee for the benefit of the creditors of the bankrupt: Lepage (Re), 2016 ONCA 403, 36 CBR (6th) 207, at paras. 17-18.

[36] With respect to the third exception, there is no evidence that Polanoski has changed his position in good faith or otherwise. Rather, the funds remain in the account into which they were transferred by him. Polanoski submits that the Trustee attempted to demonstrate an intentional effort to conceal and obfuscate a tracing of the funds and that the Trustee “attempted to prove chicanery” but that no such allegations can succeed.

[37] In my view, the Trustee does not need to show intentional misconduct or conduct amounting to fraud in order to succeed.

[38] For all of these reasons, I find that the relief sought by the Trustee for the benefit of the creditors of the Bankrupt should be granted.

[39] Order to go in accordance with these reasons directing the Bankrupt and Polanoski to pay over to the Trustee the amount of $20,005.37. Once those funds are paid over, any orders freezing the accounts can be vacated.

[40] With respect to costs of this motion, the parties advised at the conclusion of oral argument of the existence of (undisclosed) offers to settle with the result that they submitted that the issue of costs should be addressed in writing following the disposition of the motion.

[41] I encourage the parties to agree on costs. If they are unable to do so, both parties should exchange and file brief costs submissions with the Court within 10 days of this order. Such submissions should not exceed two pages in length, double spaced. The parties may append any relevant offer(s) to settle, together with a Costs Outline. Such submissions should be filed to the attention of my judicial assistant, Ms. Mary Sibenik at mary.sibenik@ontario.ca.

Osborne J. Date: November 12, 2024