In the Matter of the Bankruptcy of Sergio Grillone

Court File No.: 32-00159382
Date: January 10, 2025
Superior Court of Justice – Ontario
In Bankruptcy and Insolvency

Before: Associate Justice Ilchenko, Registrar in Bankruptcy

Parties:

• Bankrupt appearing in person
• Brandon Jaffe ("Jaffe") for B. Riley Farber Inc. Trustee in Bankruptcy of the Bankrupt (the "Trustee")
• Matthew Moloci, counsel for creditor Scarfone Hawkins LLP ("Moloci")
• Counsel for Bluecore Capital Inc. ("Bluecore"), opposing creditor, not appearing
• Superintendent of Bankruptcy not appearing

ENDORSEMENT

Background

[1] This motion by the Bankrupt is a motion to determine the preliminary legal issues regarding his discharge raised by the Bankrupt referred to this Court by Osborne, J. to be determined as set out in the Osborne, J. Endorsement (the "Issues Referred").

[2] The Bankrupt was adjudicated Bankrupt under the Bankruptcy and Insolvency Act, RSC 1985, B-3 (the "BIA") by the Bankruptcy Order of Kimmel, J. on October 12, 2023 (the "Bankruptcy Order") which had not been set aside at the date of this motion.

[3] The Bankrupt is a first time bankrupt.

[4] The Trustee issued an Opposition to Discharge of the Bankrupt dated July 3, 2024 opposing on the grounds of s.173(1)(a),(b),(d),(e),(f),(l),(m), and (o) for alleged breaches of the duties of a bankrupt under s.158 (a), (a.1),(b),(c),(d),(e),(f),(g),(k). The Trustee prepared a Report under s.170 of the BIA on December 9, 2024. The Bankrupt has challenged the ability of the Trustee to file that Report and Supplementary Reports generally.

[5] The creditor Bluecore issued a Notice of Opposition to Discharge of the Bankrupt dated July 5, 2024 opposing the discharge of the Bankrupt on the grounds of s.173(1)(a),(b),(d),(e),(f),(g),(h),(k) and (o).

Issues Referred

The Bankrupt's preliminary legal issues are:

a. Whether, pursuant to section 168.1 of the BIA, the Bankrupt is automatically entitled to a discharge after the expiry of nine months;

b. Whether section 169(1) of the BIA provides that the making of a bankruptcy order against an individual in respect of whom subsection 168.1(1) applies operates as an application for discharge;

c. Whether the exception in section 169(1) applies such that the bankruptcy order in the Bankrupt's case does not operate as an application for a discharge, and whether there is no application for a discharge at all, occurring automatically unless opposed;

d. Whether section 168.2 applies, and a discharge hearing should follow as provided for in that section;

e. Whether section 170(2), which provides for the filing of the Trustee's report, applies where there is no pending application for discharge;

f. Whether the practical result is a shifting of the onus, such that the Trustee has the onus of proving why the automatic discharge should not be granted.

Statutory Provisions

Section 168.1 – Automatic Discharge

168.1 (1) Subject to subsections (2) and 157.1(3), the following provisions apply in respect of an individual bankrupt other than a bankrupt referred to in subsection 172.1(1):

(a) in the case of a bankrupt who has never before been bankrupt under the laws of Canada or of any prescribed jurisdiction, the bankrupt is automatically discharged

(i) on the expiry of 9 months after the date of bankruptcy unless, in that 9-month period, an opposition to the discharge has been filed or the bankrupt has been required to make payments under section 68 to the estate of the bankrupt, or

(ii) on the expiry of 21 months after the date of bankruptcy unless an opposition to the discharge has been filed before the automatic discharge takes effect

(2) Application not precluded

Nothing in subsection (1) precludes a bankrupt from applying to the court for a discharge before the bankrupt would otherwise be automatically discharged, and that subsection ceases to apply to a bankrupt who makes such an application.

(3) Application of other provisions

The provisions of this Act concerning the discharge of bankrupts apply in respect of an individual bankrupt who has never before been bankrupt under the laws of Canada or of any prescribed jurisdiction, to the extent that those provisions are not inconsistent with this section, whether or not the bankrupt applies to the court for a discharge referred to in subsection (2).

Section 168.2 – Oppositions to Automatic Discharge

168.2 (1) The following provisions apply in respect of oppositions to the automatic discharge of an individual bankrupt:

(a) if the Superintendent opposes the discharge, the Superintendent must give notice of the opposition, together with the grounds for it, to the trustee and to the bankrupt before the automatic discharge would otherwise take effect;

(b) if a creditor opposes the discharge, the creditor must give notice of the opposition, together with the grounds for it, to the Superintendent, to the trustee and to the bankrupt before the automatic discharge would otherwise take effect; and

(c) if the trustee opposes the discharge, the trustee must give notice of the opposition in the prescribed form and manner, together with the grounds for the opposition, to the bankrupt and the Superintendent before the automatic discharge would otherwise take effect.

(2) Application for hearing

If the Superintendent, a creditor or the trustee opposes the automatic discharge of an individual bankrupt, the trustee shall, unless the matter is to be dealt with by mediation under section 170.1, apply without delay to the court for an appointment for the hearing of the opposition in the manner referred to in sections 169 to 176, and the hearing must be held

(a) within 30 days after the day on which the appointment is made; or

(b) at any later time that may be fixed by the court at the bankrupt's or trustee's request.

Section 169 – Bankruptcy to Operate as Application for Discharge

169 (1) The making of a bankruptcy order against, or an assignment by, a person other than a corporation or an individual in respect of whom subsection 168.1(1) applies operates as an application for discharge.

Section 170 – Trustee to Prepare Report

170 (1) The trustee shall, in the prescribed circumstances and at the prescribed times, prepare a report, in the prescribed form, with respect to

(a) the affairs of the bankrupt,

(b) the causes of his bankruptcy,

(c) the manner in which the bankrupt has performed the duties imposed on him under this Act or obeyed the orders of the court,

(d) the conduct of the bankrupt both before and after the date of the initial bankruptcy event,

(e) whether the bankrupt has been convicted of any offence under this Act, and

(f) any other fact, matter or circumstance that would justify the court in refusing an unconditional order of discharge.

(2) Filing and service of report

Where an application of a bankrupt for a discharge is pending, the trustee shall file the report prepared under subsection (1) in the court not less than two days, and forward a copy thereof to the Superintendent, to the bankrupt and to each creditor who requested a copy not less than ten days, before the day appointed for hearing the application, and in all other cases the trustee, before proceeding to the discharge, shall file the report in the court and forward a copy to the Superintendent.

(5) Evidence at hearing

For the purposes of the application referred to in subsection (2), the report of the trustee is evidence of the statements therein contained.

(6) Right of bankrupt to oppose statements in report

Where a bankrupt intends to dispute any statement contained in the trustee's report prepared under subsection (1), the bankrupt shall at or before the time appointed for hearing the application for discharge give notice in writing to the trustee specifying the statements in the report that he proposes at the hearing to dispute.

Analysis

Issue 1: Does Section 169(1) Operate as an Application for Discharge for First-Time Bankrupts?

The plain wording of section 169(1) states:

"The making of a bankruptcy order against, or an assignment by, a person other than a corporation or an individual in respect of whom subsection 168.1(1) applies operates as an application for discharge."

This provision explicitly carves out first-time bankrupts eligible for automatic discharge under section 168.1(1). However, this does not mean there is no "application for discharge" in the legal sense when the discharge is opposed.

Legislative History:

The 1992 amendments to the BIA introduced the concept of automatic discharge to reduce court congestion by eliminating unopposed discharges from the court system. As noted in Re Pettigrew, the amendments had two substantive effects:

1. Registrars were given jurisdiction to hear opposed applications for discharge;
2. First-time bankrupts received an automatic discharge unless someone objected within nine months.

The purpose was to eliminate unopposed discharges from court hearings while preserving creditors' rights to oppose.

Jurisprudence:

The jurisprudence consistently interprets section 168.2(2) to mean that when an automatic discharge is opposed, the procedure in sections 169-176 applies. In Re Bishop, Registrar Funduk stated:

"The end result is that it does not matter whether there is a waiver by the bankrupt. S. 169(6) applies whether there is a waiver by the bankrupt or an objection by the Superintendent, the Trustee or a creditor who has proved his claim."

In Re Keep (2024), Justice Elson stated:

"The hearing is conducted in the same way as would be the case for an application for discharge where there is no entitlement to automatic discharge."

In Re Béliveau, Justice Fournier held:

"An objection to a discharge of a bankrupt is always made in the context of an application for discharge; the hearing of an objection can only be a function of a hearing of an application for discharge."

Finding:

When an automatic discharge is opposed, the bankruptcy order operates as an application for discharge for purposes of the discharge hearing procedure. The distinction between "automatic discharge" and "application for discharge" is relevant only to determine whether the discharge occurs without court involvement (unopposed) or requires a hearing (opposed).

Issue 2: What Procedure Applies When an Automatic Discharge is Opposed?

Plain Language Analysis:

Section 168.2(2) states:

"the trustee shall, unless the matter is to be dealt with by mediation under section 170.1, apply without delay to the court for an appointment for the hearing of the opposition in the manner referred to in sections 169 to 176"

The phrase "in the manner referred to in sections 169 to 176" cannot be ignored. It explicitly directs that the procedure in those sections applies.

Regulatory Support:

Bankruptcy and Insolvency General Rule 121.1(1) and (2) state:

"For the purposes of subsection 170(1) of the Act, the circumstances in which the trustee shall prepare a report are the following:

(b) an opposition to the discharge of the bankrupt has been made"

And:

"(2) The report shall be prepared

(a) in the case of an individual who is eligible for an automatic discharge and who has never before been bankrupt under the laws of Canada or any prescribed jurisdiction..."

This regulation specifically contemplates that a section 170 report must be prepared when an opposition to an automatic discharge has been filed.

Harmonization with Section 170.1:

Section 170.1(3) provides that if mediation fails or the bankrupt defaults, "the provisions of this Part relating to applications to the court in relation to the discharge of a bankrupt apply, with any modifications that the circumstances require."

This language mirrors section 168.2(2), indicating that the same discharge procedure applies in both contexts.

Purposive Analysis:

The purposes of the BIA, as articulated in Re Moloney and Re Poonian, are:

1. Equitable distribution of the bankrupt's assets among creditors;
2. Financial rehabilitation of the bankrupt.

These purposes are best served by a consistent, predictable discharge procedure applicable to all opposed discharges. Creating a separate, unspecified procedure for first-time bankrupts would:

• Eliminate guidance to courts on what discharge orders are available (section 172);
• Eliminate guidance to trustees on report requirements (section 170);
• Eliminate guidance on facts that prevent absolute discharge (section 173);
• Create uncertainty and inconsistency across the country;
• Disadvantage unrepresented bankrupts without legal training.

Finding:

When an automatic discharge is opposed, the regular discharge procedure in sections 169-176 applies. There is no separate "opposition hearing" procedure distinct from the discharge application procedure.

Issue 3: Does Section 170 Apply to Opposed Automatic Discharges?

Statutory Language:

Section 170(2) states:

"Where an application of a bankrupt for a discharge is pending, the trustee shall file the report..."

The Bankrupt argues this language excludes section 170 from applying to opposed automatic discharges because there is no "application" in the traditional sense.

However, section 168.1(3) provides:

"The provisions of this Act concerning the discharge of bankrupts apply in respect of an individual bankrupt who has never before been bankrupt under the laws of Canada or of any prescribed jurisdiction, to the extent that those provisions are not inconsistent with this section."

This language indicates that discharge provisions apply to first-time bankrupts unless inconsistent with section 168.1. Section 170 is not inconsistent with section 168.1; rather, it is complementary.

Jurisprudence:

In Re Chang, Justice Kershman stated:

"The bankrupt can contest the statements contained in the trustee's report and must, under s. 170(6) of the BIA, at or before the time appointed for the hearing of the application of discharge, give notice in writing to the trustee specifying the statements in the report that he proposes at the hearing to dispute."

This language was applied to a second-time bankrupt eligible for automatic discharge under section 168.1(b), confirming that section 170 applies.

Finding:

Section 170 applies to opposed automatic discharges. The trustee must prepare and file a section 170 report in accordance with the prescribed circumstances and times set out in Rule 121.1.

Issue 4: Does Section 170(5) Apply – Is the Trustee Report Evidence?

Statutory Language:

Section 170(5) states:

"For the purposes of the application referred to in subsection (2), the report of the trustee is evidence of the statements therein contained."

Jurisprudence:

In Re Crowley, Justice Hallett stated:

"Unless contradicted by the evidence, the court must accept the statements contained in the report. The onus is on the party opposing the application for discharge to adduce sufficient evidence to justify the court disregarding a trustee's report that is favourable to the bankrupt."

In Re Lefebvre (1932), the court held:

"It would seem, therefore, in view of the statements of fact contained in the trustee's report that the burden rests upon the contestants to prove the allegations of their contestation, and in default of making such proof, the report of the trustee must be accepted."

In Re Goldfinger, Justice Mesbur held that trustee reports are admissible as evidence because trustees are officers of the court with statutory duties and are subject to the supervision of the Superintendent of Bankruptcy. The report constitutes an exception to the hearsay rule as an official statement.

Finding:

Section 170(5) applies to opposed automatic discharges. The trustee's report is evidence of the statements contained therein. The Bankrupt must comply with section 170(6) by providing written notice of disputed statements before the hearing, or the court will accept the facts as stated in the report.

Issue 5: Onus of Proof

Statutory Framework:

The BIA does not reverse the onus for first-time bankrupts. Section 172 provides that the court "may" grant, refuse, suspend, or conditionally discharge a bankrupt. The court exercises discretion based on the facts and circumstances.

Jurisprudence:

In Re Ash, Justice Jean stated:

"The fact that the bankrupt may be entitled to an automatic discharge after waiting the passage of 9 months is not relevant on an application for discharge to the court. The usual considerations on applications for discharge apply."

In Re Dykes, the court held:

"A discharge from bankruptcy is not a right; rather every application is decided on the basis of its own set of facts."

Natural Justice:

The discharge procedure in sections 169-176 provides adequate natural justice protections:

1. Oral hearing where the bankrupt may make submissions;
2. Disclosure of opposition grounds through notices and the trustee report;
3. Right to dispute statements in the trustee report (section 170(6));
4. Right to present evidence;
5. Written reasons;
6. Public hearing;
7. Appeal mechanism.

Finding:

The onus does not shift to the trustee and creditors. The court exercises discretion based on the facts presented. However, where the trustee files a favourable report, the onus is on opposing creditors to establish facts justifying refusal of discharge. Where the trustee files an unfavourable report, the bankrupt may dispute it and present evidence to the contrary.

Issue 6: Supplementary Reports

Jurisprudence:

In Re Giannotti, the Court of Appeal accepted supplementary trustee reports filed before the discharge hearing, indicating such reports are permissible.

Practice:

In the Toronto Bankruptcy Court (Commercial List), supplementary reports are standard practice to update the court on developments between the initial report and the hearing, such as the bankrupt's compliance with obligations or withdrawal of oppositions.

Finding:

Supplementary section 170 reports may be filed by the trustee to assist the court in exercising its discretion and to provide current information regarding the bankrupt's compliance with statutory obligations.

DISPOSITION

On all of the evidence before me, after reviewing the jurisprudence cited, after weighing all interpretative principles, historical amendments to the BIA, and practical considerations for promoting the efficacy of the bankruptcy discharge process, I find with respect to the Issues Referred:

1. For individual bankrupts to whom section 168.1 applies, when the discharge is opposed, the regular discharge procedure in sections 169-176 applies.

2. The plain meaning of section 168.2(2) – "apply without delay to the court for an appointment for the hearing of the opposition in the manner referred to in sections 169 to 176" – requires that the procedure in sections 169-176 be followed.

3. Section 170 applies in full. Trustees must comply with the provisions for preparation, service, and filing of section 170 reports for opposed automatic discharges.

4. Section 170(5) applies. Trustee reports are evidence of the statements contained therein.

5. The bankrupt must comply with section 170(6) by providing written notice of disputed statements before the hearing, or the court will accept the facts as stated in the report.

6. Supplementary section 170 reports may be filed by the trustee to update the court on developments since the initial report.

7. There is no separate "opposition hearing" procedure distinct from the discharge application procedure. The terms "hearing of the opposition" and "hearing of the application for discharge" are functionally equivalent in the context of opposed automatic discharges.

8. The onus does not shift to the trustee and creditors. The court exercises discretion based on the facts presented, applying the principles set out in sections 172 and 173 of the BIA.

The motion is dismissed.

Costs

Subject to further guidance from Osborne, J., or other courts after disposition of any subsequent appeals, costs of this motion will be assessed together with the disposition of the bankrupt's discharge hearing.

Released: January 10, 2025

Associate Justice Ilchenko
Registrar in Bankruptcy
Superior Court of Justice