COURT FILE NO.: 31-2840729

DATE: 2024-12-20

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: In the Matter of the Bankruptcy of Philip Joseph Concordio Takaoka

BEFORE: Associate Justice Rappos

COUNSEL: Philip Takaoka, self-represented John Delo, representative of A. Farber & Partners Inc. Chenyang Li, for Janice Maghakian

HEARD: August 13, 2024 (via videoconference)

REASONS FOR DECISION

Overview

[1] Philip Takaoka filed an assignment in bankruptcy on June 21, 2022, and A. Farber & Partners Inc. was appointed as Trustee. This is the only time Mr. Takaoka has been bankrupt.

[2] Mr. Takaoka listed "legal fees/judgment and over-extension of high interest credit" as the reasons for his financial difficulties.

[3] Under the Bankruptcy and Insolvency Act (the "BIA"), a first-time bankrupt is entitled to an automatic discharge nine (9) months after the date of the assignment, unless the trustee determines that the bankrupt is required to make surplus income payments to the trustee. In that case, which is applicable here, the automatic discharge occurs 21 months after the assignment.[^1]

[4] However, the Trustee and a creditor, Janice Maghakian, opposed the automatic discharge. As a result, a hearing of the discharge application was scheduled before me.

[5] The Trustee has recommended that Mr. Takaoka receive his discharge from bankruptcy, conditional on him paying the remaining $1,383 that is outstanding under the surplus income requirement. The Trustee also recommended that his discharge be suspended for three months, as a result of Mr. Takaoka having previously filed an unsuccessful consumer proposal.

[6] Ms. Maghakian requested that the Court require Mr. Takaoka to repay his debt to her in full before he obtains his discharge from bankruptcy.

[7] For the reasons that follow, I have exercised my discretion under the BIA to grant Mr. Takaoka his discharge, conditional on his payment of $1,383 to the Trustee for surplus income, and an additional $10,000. The discharge shall also be suspended for three (3) months, which begins to run as of the date of these reasons and runs concurrently with completion of the condition.

Legal Principles

[8] The BIA furthers two important purposes: the equitable distribution of a bankrupt's assets among her creditors, and the bankrupt's financial rehabilitation. Financial rehabilitation means that a debtor will be afforded a "fresh start" when appropriate. The BIA, with some exceptions, allows "an honest but unfortunate debtor" to be released from outstanding debts at the end of the process and reintegrate into economic life.[^2]

[9] Section 172(1) of the BIA provides that at a discharge hearing, the court may grant or refuse an absolute order of discharge, suspend the operation of an absolute order of discharge for a specific time, or grant an order of discharge subject to any terms or conditions with respect to any earnings or income that may afterwards become due to the bankrupt or with respect to the bankrupt's after-acquired property.

[10] The Court has a broad discretion under this section. In exercising that discretion, the Court considers three factors: the interests of the creditors in obtaining payment of their claims, the interests of the bankrupt in obtaining relief from his or her financial obligations, and the integrity of the bankruptcy process.[^3]

[11] Section 173 of the BIA sets out facts for which discharge may be refused, suspended, or granted conditionally. If any of those facts are proven, section 172(2) provides that the court shall refuse the discharge of a bankrupt, suspend the discharge for such period as the court thinks proper, or require the bankrupt, as a condition of his discharge, to perform such acts, pay such moneys, consent to such judgments, or comply with such other terms as the court may direct.

[12] The onus is on objecting creditors to establish that section 173 facts exist where the trustee does not report the existence of any such facts. If evidence is placed before the court that the bankrupt has committed any of the facts in section 173, the onus is on the bankrupt to rebut the evidence.[^4]

Analysis

[13] The Trustee objected to the automatic discharge as Mr. Takaoka had failed to pay the entire amount owed under the surplus income requirement. Failure to comply with a requirement to pay surplus income is a fact under subsection 173(1)(m) of the BIA.

[14] The Trustee determined that Mr. Takaoka was required to pay $23,835 under the surplus income requirement. By the time of the hearing, he had paid $22,452, leaving $1,383. As a result, the Trustee sought payment of this amount as a condition to Mr. Takaoka's discharge.

[15] Additionally, Mr. Takaoka had filed a consumer proposal dated April 7, 2022, which was objected to by Ms. Maghakian. A bankrupt having previously been bankrupt or having made a proposal to creditors is a fact under subsection 173(1)(j) of the BIA. It is customary that, where a bankrupt has previously filed a consumer proposal a 3-month suspension of the discharge is ordered. This is to ensure that bankrupts are aware that recourse to the BIA is not intended to be utilized on a recurring basis.[^5]

[16] In its report to the Court, the Trustee noted that Mr. Takaoka was compliant with his post-bankruptcy tax obligations, and that Mr. Takaoka had filed an affidavit that confirmed that he had acquired no new assets or liabilities since the time of his bankruptcy filing.

[17] Ms. Maghakian also objected to Mr. Takaoka's automatic discharge. She is Mr. Takaoka's largest creditor. Her claim represents approximately 68% of the proven unsecured claims filed against Mr. Takaoka. Her claim is with respect to the Judgment of Justice Sanfilippo dated March 31, 2022, which awarded her damages of $65,000 for repayment of a loan. The debt arose in the context of an acrimonious break down of the romantic relationship between the two of them.

[18] In her opposition, Ms. Maghakian argues that the following facts under section 173(1) of the BIA have been proven and must be taken into consideration:

(b) the bankrupt has omitted to keep such books of account as are usual and proper in the business carried on by the bankrupt and as sufficiently disclose the business transactions and financial position of the bankrupt within the period beginning on the day that is three years before the date of the initial bankruptcy event and ending on the date of the bankruptcy, both dates included; ...

(d) the bankrupt has failed to account satisfactorily for any loss of assets or for any deficiency of assets to meet the bankrupt's liabilities; ...

(l) the bankrupt has committed any offence under this Act or any other statute in connection with the bankrupt's property, the bankruptcy or the proceedings thereunder.

Section 173(1)(b)

[19] With respect to section 173(1)(b), Ms. Maghakian argues that Mr. Takaoka provided deficient financial information to the Trustee as compared to the disclosure he had made in a family law proceeding in May 2017. She claims that he failed to disclose bank accounts in his name, that his car and other personal assets were undervalued, and that there was no valuation of the Ontario Teachers' Pension Plan held by Mr. Takaoka. Ms. Maghakian states that no explanation in the differences was provided.

[20] I note that the family law disclosure occurred more than three years prior to the filing of the assignment. Section 173(1)(b) only has a three-year look back period.

[21] With respect to the pension plan, the Trustee's position is that it did not need to be valued, as it is an exempt asset. Subsection 67(1)(b) of the BIA provides that the property of a bankrupt divisible among his creditors shall not comprise any property that as against the bankrupt is exempt from execution or seizure under any laws applicable in the province within which the property is situated and within which the bankrupt resides.

[22] Mr. Takaoka is a resident of Ontario, and a member of the Ontario Teachers' Pension Plan. Subsection 66(1) of the Pension Benefits Act (Ontario) provides that money payable under a pension plan is exempt from execution, seizure, or attachment.

[23] Ms. Maghakian argues that even exempt assets must be disclosed and included in the calculation of assets to determine whether the bankrupt is insolvent and qualified for protection under the BIA. She also notes that the value of Mr. Takaoka's RRSPs was included in his family law disclosure, and they are also exempt assets. She believes that on a balance sheet test, Mr. Takaoka was not insolvent.

[24] Ms. Maghakian relies on Bank of Montreal v Pinder Bueckert & Associates Inc.[^6] and Re Schroeder[^7] in support of her position on the valuation of exempt assets under the BIA.

[25] Ms. Maghakian is correct that exempt assets do vest in a trustee upon an individual becoming bankrupt.[^8] However, such vesting does not mean that a trustee can exercise any rights or powers over such property. Exempt assets are clearly not available to be liquidated and disposed to creditors in a bankruptcy. I accept the Trustee's submission that listing the pension as an asset would have skewed the asset listing and could lead to creditors believing that there were more assets available for creditors. The pension was disclosed on the statement of affairs and valued at $1.00.

[26] Ms. Maghakian's argument is focused on whether the failure to value the pension asset may have been intentional, since if it had been valued, then Mr. Takaoka may have not been insolvent on a balance sheet test.

[27] The balance sheet test is only one of the possible tests for insolvency under the BIA. Mr. Takaoka potentially could have been solvent on a balance sheet test but still insolvent on the cash flow test.

[28] The fact of the matter is that Mr. Takaoka filed an assignment with the Trustee, and the Trustee was satisfied, after completing its assessment as required by the Office of the Superintendent in Bankruptcy and the rules that govern the conduct of licensed insolvency trustees, that Mr. Takaoka was entitled to file an assignment in bankruptcy.

[29] If Ms. Maghakian had concerns whether Mr. Takaoka was insolvent, it was open to her to bring a motion under section 181(1) of the BIA to annul the assignment. If she had concerns about the actions of the Trustee, she could have brought a motion under section 37 of the BIA, which permits creditors aggrieved by any act or decision of a trustee to challenge it in court. Lastly, she could have raised issues with the Office of the Superintendent of Bankruptcy.

[30] She chose not to pursue any of these avenues.

[31] Mr. Takaoka states in his submissions that the family law net family property statement was valued as of August 14, 2016. That is almost 6 years before he filed for bankruptcy. He has explained that he was informed that his pension was exempt from seizure, that he sold music and sports equipment to pay for legal fees, that he used the money that was in his TFSA to purchase a vehicle to get to work and drive his daughter to school, and that any remaining money he had listed on the statement was used to pay for legal fees. He states that he closed all of the bank accounts.

[32] Ms. Maghakian chose not to examine Mr. Takaoka either before or during the discharge hearing.

[33] Based on the evidence before me, Ms. Maghakian has not satisfied me that Mr. Takaoka has failed to keep or disclose sufficient financial records. I accept Mr. Takaoka's rebuttal to the issues raised by Ms. Maghakian.

Section 173(1)(d)

[34] With respect to section 173(1)(d), Ms. Maghakian argued that Mr. Takaoka has failed to account satisfactorily for his loss of assets and income. The comparison again is between the net family property statement as of August 2016 and the statement of affairs as of June 20, 2022.

[35] When the two statements are compared, most of the differences are due to the inclusion of a valuation of Mr. Takaoka's pension in the net family property statement. I am satisfied with the explanations provided by Mr. Takaoka as to what transpired with his other assets following the family law proceeding and the following 6-year period of time.

[36] Based on the evidence before me, Ms. Maghakian has not satisfied me that Mr. Takaoka has failed to account satisfactorily for his assets.

[37] Ms. Maghakian also takes issue with expenses listed by Mr. Takaoka in statements filed with the Trustee. Ms. Maghakian notes that Mr. Takaoka claimed to be paying living expenses while staying with his parents.

[38] In the Monthly Income and Expense Statement dated June 20, 2022, Mr. Takaoka listed rent of $1,200. In his Income and Expense Statement for June 2024, no rent is listed. Mr. Takaoka's position is that he previously paid rent to his father and no longer does so.

[39] I have reviewed the statement. It lists almost $6,000 in net monthly salary. For the expenses, I agree with Ms. Maghakian that certain of the expenses appear to be excessive. Mr. Takaoka lists $1,056.12 for monthly food and meals, $1,979,67 for monthly clothing and total shopping, and $1,158.43 for 407 fees, travel, and monthly payments made to the Trustee. Mr. Takaoka is paying $1,024.21 in monthly child support.

[40] Mr. Takaoka's explanation for the expenses is that he is required to drive extensively for volunteer and work responsibilities, and for caring for his daughter. Given the amount of time he spends attending to these matters, he must eat most of his meals outside of his home.

[41] In my view, Mr. Takaoka can reduce these monthly expenses by $1,500 a month by exercising prudent fiscal planning and responsibility.

Section 173(1)(l)

[42] With respect to section 173(1)(l), Ms. Maghakian alleges that Mr. Takaoka deliberately made misrepresentations as to his financial position when he completed the required documentation when he filed for bankruptcy.

[43] Section 198(1) of the BIA provides that it is an offence for a bankrupt to make a false entry or knowingly make a material omission in a statement or accounting.

[44] Ms. Maghakian's only evidence in support of this argument is the difference between the net family property statement and the statement of affairs.

[45] Based on the evidence before me, and the answers provided by Mr. Takaoka, I am not satisfied that there was any false entry or material omission made by Mr. Takaoka. The issue with the valuation of the pension was dealt with above. There is a six (6) year gap between the two statements, and all of Mr. Takaoka's rebuttals provide adequate explanations for the differences.

[46] Notwithstanding the able submissions of counsel to Ms. Maghakian, I am not convinced that Mr. Takaoka's conduct in filing for bankruptcy and the disclosure he provided in any way shows contempt or derision for the BIA.

Disposition

[47] For the foregoing reasons, the Trustee has proven facts under subsections 173(1)(m) (outstanding surplus income) and (j) (prior proposal having been filed). I accept the Trustee's recommendation that Mr. Takaoka must pay the outstanding surplus income amount of $1,383. As well, a 3-month concurrent suspension is appropriate given the prior failed consumer proposal.

[48] Lastly, given the excessive expenses listed by Mr. Takaoka, in my view, it is in the best interests of creditors, the integrity of the bankruptcy system, and Mr. Takaoka's financial rehabilitation that he be required to minimize his expenses by $1,500 per month, and pay a total of $10,000 to the Trustee on account of these reduced expenses.

[49] As a result, Mr. Takaoka's discharge from bankruptcy is granted, conditional on payment of $1,383 to the Trustee for surplus income and payment of $10,000 to the Trustee, along with a 3-month concurrent suspension.

[50] With respect to costs, given the divided success, I strongly urge the parties to come to an agreement.

Associate Justice Rappos

DATE: December 20, 2024

[^1]: ss. 168.1.(1)(a)(ii) of the BIA. [^2]: Poonian v. British Columbia (Securities Commission), 2024 SCC 28 ["Poonian"], para. 1. [^3]: Ibid., para. 24. [^4]: The Honourable Mr. Justice Lloyd W. Houlden, The Honourable Mr. Chief Justice Geoffrey B. Morawetz, and Dr. Janis P. Sarra, Bankruptcy and Insolvency Law of Canada, 4th Edition, §7:148 (Thomson Reuters, Westlaw Edge Canada). [^5]: See Lebel, Re, 31 C.B.R. (N.S.) 320, 1978 CarswellOnt 242. [^6]: 2021 SKQB 276. [^7]: 2000 CarswellMan 92 (Q.B.). [^8]: Ramgotra (Trustee of) v. North American Life Assurance Co. (1996), 37 C.B.R. (3d) 141 (S.C.C.).