Insolvency Case Law Digest 2004 — Part 2

Proofs of Claim and Distribution of Proceeds

In the matter of Citifinancial Canada East Corp. v. Morrow (trustee of)

Court of Queen's Bench of New Brunswick
Registrar Bray

Citation:  2004 NBQB 432

Facts:  On April 26, 2002, Mark Wallace Morrow and Crystal Dawn Morrow ("bankrupts") executed two mortgages in favour of Citifinancial ("Applicant") for the sum of $43,485 and $14,747. The first mortgage was not registered but the second one was registered pursuant to the Land Titles Act ("LTA"). On July 29, 2004, the bankrupts filed an assignment in bankruptcy. Due to the failure of the applicant to provide proof of registration of the first mortgage, the trustee issued a Notice of Disallowance of the Applicant's claim to the extent of $44,917.

Issue:  Did the trustee err in not determining the first mortgage to be an equitable mortgage which would be sufficient to grant the status of "secured creditor" for the purpose of the Bankruptcy and Insolvency Act (BIA)?

Decision:  The judge found no error in the Notice of Disallowance issued by the trustee.

Discussion:  The question of correctness of the trustee's decision must be analysed in light of subsection 72(1) of the BIA and subsection 61(1) of the LTA. Following subsection 72(1) of the BIA, it must be determined if any operational conflict between the BIA and the LTA exists. Consideration must be given to the relationship of equitable interests in real property under the LTA to decide the interpretation, in this case, of the principle that the trustee took the property of the bankrupts subject to the same equities as affected the property when it was owned by the bankrupts. The trustee submitted that subsection 61(1) of the LTA applied. A trustee in bankruptcy following an assignment can be considered to be a "person…taking a transfer for or interest in registered land from the owner thereof." The use of the disjunctive preposition "or" does not permit the exclusion of those taking an interest in property due to the operation of law and did not suggest that of this section be limited to purchasers for value.

Subsection 15(1) of the LTA mentions that a mortgage must be registered. This is not in conflict with the definition of "secured creditor" in the BIA nor with the underlying purpose of the legislation.

In the matter of Qualiglass Holdings Inc. v. Zurich Indemnity Co. of Canada

Alberta Court of Queen's Bench
Burrows J.

Citation: 2004 ABQB 577

Facts:  Qualiglass Holdings Inc. ("Qualiglass") made a claim against Mr. Chinnery ("bankrupt"), its accountant, for damages resulting from professional negligence. This claim was made within the time frame of the accountant's professional insurance policy, but the latter did not report the claim to his insurer, Zurich Indemnity Co. ("insurer"), until after the policy had expired. The accountant later made an assignment into bankruptcy. Unaware of the bankruptcy, Qualiglass initiated proceedings against the accountant. The Registrar nevertheless allowed the action to continue in order to establish the amount of damages, on the condition that Qualiglass would not execute upon judgment. The insurer refused to defend the action and to give coverage to the bankrupt because the claim was reported after the policy's expiry date. A judgment was subsequently rendered against the accountant.

To permit Qualiglass to execute upon the judgment, the Registrar granted leave to bring an action against the insurer under section 38 of the Bankruptcy and Insolvency Act (BIA). After the motion against the insurer was filed, the trustee assigned to Qualiglass the accountant's right to receive insurance coverage, pursuant to subsection 38(2) of the BIA. The insurer holds that the Registrar's order under section 38 of the BIA was not valid, nor was it filed within the prescribed time.

Issues:  Pursuant to section 38 of the BIA could Qualiglass proceed with its action against the bankrupt's insurer?

In the affirmative, does the bankrupt's failure to report the claim within the policy period prevent Qualiglass from recovering its judgment debt from the insurer?

Decision: The Court concluded that Qualiglass had the right to initiate proceedings against the bankrupt's insurer under section 38 of the BIA. Furthermore, Qualiglass may recover its judgment debt from the insurer despite the bankrupt's untimely reporting of the claim.

Discussion:  The bankrupt's right to indemnity under the insurance policy normally vests in the trustee. However, from the moment the Registrar granted his order under section 38 of the BIA, that right became vested in Qualiglass. The fact that the trustee did not assign his rights to Qualiglass before this motion was filed had no impact on the validity of this motion because the right to take proceedings against the insurer stems from the section 38 order only. The trustee's assignment was only a consequence of this order. The Court also held that this motion was filed within the prescribed limitation period, which arose when the bankrupt became legally obliged to pay for damages, not when the insurer advised the bankrupt of its refusal to provide coverage.

The judge decided that the making of the claim triggered the insurance coverage despite the fact that the claim had not been reported to the insurer before the expiration of the policy. The untimely reporting of the claim constituted an imperfect compliance with the terms of the policy, as opposed to non-compliance. The Court examined the reasons for this imperfect compliance and whether the untimely reporting caused any prejudice to the insurer. The insurer suffered no prejudice because the relevant evidence in the case at bar is of a documentary nature and had not been lost as a result of the reporting delay. Although the reasons for the imperfect compliance are not clear, the Court noted that there was no proof of fraudulent or wilful misconduct on the part of the bankrupt. It would therefore be inequitable not to order that insurance coverage be provided to Qualiglass.

In the matter of the bankruptcy of Nadia Hama

British Columbia Supreme Court
Baker J.

Citation: 2004 BCSC 463

Facts:  Ms. Hama made an assignment in bankruptcy during a family law dispute. Different law firms having provided counsel during this dispute claim to be secured creditors holding a solicitor's lien. Anderson & Co. agreed to represent Ms. Hama on condition that the trustee in bankruptcy authorize that it be paid from the proceeds obtained from a judgment or settlement in priority over the other creditors. These other creditors included the law firm Stowe Ellis, who had ceased to represent Ms. Hama before her assignment. At one point in the procedures, Stowe Ellis claimed it was a secured creditor and had a solicitor's lien over Ms. Hama's litigation files pursuant s.79 of the Legal Profession Act (the "LPA"). In the alternative, it claimed to have a possessor's lien. Justice Boyd ordered the release of the files in favour of Anderson & Co. and declared Stowe Ellis to be a secured creditor. Eventually, a settlement was reached in the family law dispute and Anderson & Co. held funds on behalf of Ms. Hama. Stowe Ellis submitted that it was entitled to priority over the funds by reason of the declaration made by Justice Boyd. Anderson & Co. submitted that the bankruptcy was irrelevant to the question of priorities and that the Court must apply the common law rule which states that where more than one solicitor has been retained in a proceeding, the solicitor who was acting at the time the property was recovered or preserved has first claim against the fund, followed by the next to last solicitor and so on.

Issues: 

1. Does s.79 of the LPA confer a lien and if so, does it extend to all fees and disbursements?

2. Who has priority to receive payments where more than one lawyer has acted for the client in the recovery of the property and does the assignment in bankruptcy alter the priorities among the claimants?

Decision:  The liens attach only to property recovered or preserved as a result of the lawyer's efforts. Priority of claims codified under s.79 of the LPA are unaffected by the intervening bankruptcy, the filing of proofs of claim and the authorization letter from the trustee. The solicitor who conducted the action to a conclusion has first claim on the fund, then the previous solicitor is entitled to his or her lien, and so on. The judge must determine what portion of the accounts for fees and disbursements of each claimant relate to work done to recover or preserve property.

Discussion:  Two types of liens are recognized in order to secure a lawyer's right to be paid. The first is a possessor's lien over the documents and papers in the lawyer's possession, which ends when possession of the files is given up. This is the situation that most resembles that of Stowe Ellis when it was ordered to release the files with the condition of being a secured creditor. However, that order does not affect its rights created by the second type of lien, codified under s.79 of the LPA. However it must be noted that this lien will be recognized only when the solicitor can show that his or her work has resulted in the recovery or preservation of the property.

In the matter of the bankruptcy of Shawn Ashley Joseph Harvey

Alberta Court of Queen's Bench
Registrar Smart

Citation: 2004 ABQB 773

Facts:  Mr. Harvey applied for employment insurance benefits in 1999 and when doing so did not disclose $10,239 in self employment business income, which was reported on his Income Tax return with CCRA. Mr. Harvey did not respond to a request seeking clarification as to when this income was earned. Mr. Harvey filed an assignment in bankruptcy on January 6, 2002. In August 2003, the Canada Employment Insurance Commission (the "Commission") advised Mr. Harvey of its decision that he had knowingly made false representations about his self employment activities to Human Resources and Development Canada ("HRDC"). In September 2003, HRDC forwarded a Notice of Debt for EI overpayments. The trustee sought a declaration that the indebtedness of Mr. Harvey to HRDC represented a pre-bankruptcy debt and was a claim provable in bankruptcy under s. 121 of the Bankruptcy and Insolvency Act (BIA). HRDC took the position that its claim for recovery became a debt due only when the Commission made the decision under s. 52 of the Employment Insurance Act (the "EIA") that Mr. Harvey had received money to which he was not entitled.

Issue:  Although the events giving rise to HRDC's claim happened before the date of bankruptcy, was the claim provable in the bankruptcy, given that liability under paragraph 52(3(b) of the EIA was recognized after the bankruptcy?

Decision:  The Registrar concluded that the claim was a claim provable under s. 121 of the BIA. As a result, the stay provisions prescribed by s. 69.3 of the BIA were in effect.

Discussion:  If the claim was provable in bankruptcy, then its recovery was governed by the BIA and stayed, unless the trustee was discharged or the Bankruptcy Court allowed it to proceed pursuant to s. 69.4 of the BIA. In the case at bar, no such permission was granted. Rather, the Commission took the position that, since the notice of debt came after the date of the bankruptcy, the claim was not provable in the bankruptcy. Therefore, the recovery efforts were not stayed by s. 69.3 of the BIA. The Registrar did not agree. Nonetheless, he stated that if s. 52 of the EIA had the affect suggested by HRDC and the Commission, the claim was still provable following subsections 121(1) and (2) of the BIA, which clearly provide that a contingent or unliquidated claim is a claim provable in bankruptcy. Even if s. 52 of the EIA creates a true condition precedent to the claim, it is still a provable claim so long as it is not too remote or speculative in nature.¹ Hence, the obligation arose prior to the bankruptcy and was provable even though it may be interpreted that the liability to repay crystallized under s. 52 subsequent to the date of the bankruptcy.

---

¹ Re Confederation Treasury Services Ltd. (1997), 43 C.B.R (3d) 4 ONCA.

---

In the matter of KKBL No. 297 Ventures Ltd. v. IKON Office Solutions Inc.

British Columbia Court of Appeal
Rowles, Hall, Smith JJ.A.

Citation:  2004 BCCA 468

Facts:  IKON Office Solutions Inc. ("IKON") sought release from a commercial leasing agreement. In order to do so, it retained the services of an agent to market the building. KKBL No 297 Ventures Ltd. ("KKBL") purchased the building and subsequently leased the premises to Gun-for-Hire (Vancouver) Co. ("Gun"), thus discharging IKON from its obligations under the lease. Before finalizing the lease, KKBL concluded an indemnity agreement under which IKON agreed to guarantee Gun's monthly lease payments. A few months later, Gun became insolvent. After defaulting on its payments, Gun eventually vacated the building. IKON filed a petition for a receiving order against Gun.

Accordingly, Gun was declared bankrupt. During the first creditors meeting, the trustee disclaimed the lease entered into by Gun. As a result, IKON refused to make payments to KKBL pursuant to the indemnity agreement. Proceedings were initiated by KKBL in order to force IKON to fulfill its obligations under the agreement. The trial judge dismissed the motion, concluding that IKON was no longer required to discharge Gun's obligations under the lease because this lease had been terminated as a result of the trustee's disclaimer. KKBL launched an appeal from the dismissal of its action against IKON seeking damages for breach of the indemnity agreement. It argued that the applicable law had changed following the Supreme Court of Canada's ruling in Crystalline Investments Ltd v. Domgroup Ltd. ("Crystalline"), a decision that was rendered after the trial judge's decision.

Issues:  Did the trustee's repudiation of the lease affect the indemnity agreement entered into by IKON and KKBL? In other words, were the conclusions of the Supreme Court in the Crystalline case applicable to the matter at issue?

Decision:  Based on the ruling by the Supreme Court in Crystalline, the indemnity agreement was held to be effective. IKON, as guarantor under this agreement, was not discharged of its obligations.

Discussion:  Before the Supreme Court's ruling in Crystalline, Canadian case law made a distinction between guarantors and assignors of a repudiated lease. Assignors of a lease were held liable to the landlord because they were considered to have primary obligations that survived a disclaimer of the lease. By contrast, when a lease was not assigned but merely guaranteed, the guarantors had secondary obligations that disappeared when the lease ended.

Therefore, the authorities relied upon by the trial judge are not valid anymore since the Crystalline ruling. In that case, it was held that the main purpose of repudiating leases was to relieve insolvent individuals from their obligations under a commercial lease. The legislator did not intend to protect third parties, such as guarantors or assignors. Therefore, post-disclaimer assignors and guarantors are to be treated equally and neither are to be exempt from liability.

In the matter of the bankruptcy of Meco Ltd v. Henry Sztern & Associates Inc.

Québec Court of Appeal
Nuss, Pelletier, Dalphond J.C.A.

Citation: [2004] J.Q. No. 5699

Facts:  Until 1989, Steinberg — 9007-7876 QUÉBEC INC. — (the "Appellant") had retained Meco's services for the production of imaging products used for publicity purposes. During that time, the Canada Revenue Agency was of the opinion that the provision of such products was subject to federal sales tax (FST). After complying with the apparent statutory provisions, Steinberg learned that no FST was due on the sale of the aforementioned products. On January 3, 1992, Meco made an assignment into bankruptcy. On July 3, 1998, the Canada Revenue Agency ("CRA") reimbursed Meco for the amount of unduly paid FST. The trustee refused to hand over any amount of the FST to the Appellant, arguing that the FST was paid by the bankrupt and that the refunds belonged to it. The Appellant filed a proof of claim under subsection 81 (1) of the Bankruptcy and Insolvency Act (BIA) alleging that, since it was the maker of the payments to CRA through Meco, the reimbursement belonged to it. The trial judge upheld the trustee's submissions; hence, the appeal.

Issue:  Did the Appellant have the right to a reimbursement of FST payments issued by CRA to Meco's trustee in bankruptcy?

Decision:  The Court of Appeal confirmed the trial judge's decision by rejecting the Appellant's proof of claim for recovery of part of the refund. The Court recognised its position as an unsecured creditor.

Discussion:  Under the provisions of the Excise Tax Act, Meco was at all times the taxpayer subject to FST payments and not the Appellant. From a legal standpoint, it was Meco that paid the tax. Steinberg argued that in the event of a reimbursement, Meco had agreed that the part corresponding to the Appellant's FST payments would be remitted to it. Thus, Meco recognised the receipt of an undue payment. The Appellant held that it was the owner of the FST reimbursements, that Meco acted as its agent and that, consequently, the amounts received did not form part of the bankrupt's estate. The Court ruled that this was not an assignment of a claim, nor a mandate as the Appellant suggested because this was Meco's claim against the CRA as opposed to Steinberg's claim.

In the matter of Mirant Canada Energy Marketing Ltd. (Re)

Alberta Court of Queen's Bench
Kent J.

Citation: 2004 ABQB 218

Facts:  Robert Schaefer had a retention agreement with his employer, Mirant Services LLC of Atlanta, Georgia, in which it was stipulated that he would receive an "award amount" of USD $72,800 on September 30, 2004, and 2005, provided that he was still then employed by the company and that he had been performing in a satisfactory manner. He was transferred to Mirant Canada but the agreement was not assigned to the latter. On July 15, 2003, Mirant Canada applied for protection under the Companies' Creditors Arrangement Act (CCAA). Mr. Schaefer's employment was terminated on September 2, 2003. PricewaterhouseCoopers ("Monitor") accepted his severance pay claim of CAD $827,755 plus an award amount of USD $73,000, which Mr. Schaefer and Mirant Canada agreed upon. Two other employees were granted their full severance. However, the only amount that the Monitor approved for payment to Mr. Schaefer was the statutory severance of $18,184, the equivalent of four weeks' pay.

Issue:  Was Mr. Schaefer entitled to immediate payment of the severance amount and of the award amount, or did he have an unsecured claim that would be dealt with in the course of the CCAA proceedings?

Decision:  Mr. Schaefer's application for immediate payment of the severance pay was dismissed. The application for the award amount was dismissed, because there was no assignment to Mirant Canada.

Discussion:  Mr. Schaefer argued that:

1. His job was crucial to the continued operation of the company post-CCAA. The court relied upon Smoky River Coal Ltd., (re) and did not find that the obligation to pay severance falls within a commercially reasonable contractual obligation essential for the continued supply of services.

2. Rod Pozca, President of Mirant Canada, had told him that the CCAA protection of the company would in no way affect his employment or compensation including the severance pay. The court concluded that this promise was irrelevant. The provisions found within the initial order excluded severance pay from categorisation as a post petition creditor. Rather, it fell within the discretionary payments that the Monitor may pay.

3. He is a post-petition creditor who is entitled to be paid in full, since his continued employment is equivalent to his having being re-hired after July 15, 2003. Furthermore, Mirant Canada took on the obligation to pay the severance in full by terminating him. The court concluded that the Monitor correctly exercised its discretion in regards to paying severance amounts in accordance with the purpose of the CCAA which is to provide protection to a company while it attempts to reorganize.

4. There was no basis for treating him differently from the two employees who were granted their severance other than the difference in amounts. The Court found that the Monitor applied the right test in determining whether or not payment of the full amount of the contractual obligation was appropriate. It had to balance the effect of non-payment on the continued operation of business and more specifically, the morale of the other employees against the economic effect on the company if payment was made.

In the matter of the arrangement plan of: Pangeo Pharma Inc., Pangeo Pharma (Canada) Inc., Lioh Inc., Medro Products (2001) Inc., 1375092 Ontario Inc., Institute of Applied Medicine Inc. and 9046-7093 Quebec Inc. (the debtor companies)

Quebec Superior Court
Journet J.C.S.

Citation: [2004] J.Q. no 706

Facts:  On July 10, 2003, the Court appointed Ernst & Young as monitor for the debtor companies, which had filed an arrangement plan requiring that the creditors present all of their claims to the monitor before October 17, 2003. This deadline had been established by a court order. Livingston International prepared its proof of claim and filed it with the monitor on October 22 as an unsecured creditor, while the other creditors had already approved the plan brought forth at a meeting on October 21. On November 5, 2003, the Court approved the plan. The monitor then rejected Livingston International's proof of claim on December 18, 2003.

Issue:  Was the monitor required to accept the proof of claim submitted by Livingston International, despite the fact that it was filed after the October 17, 2003, time limit?

Decision:  The monitor was required to accept the proof of claim.

Discussion:  No specific legislative provision requires a creditor to seek authorisation to file a proof of claim beyond the fixed deadline. Each case is different, and the Court uses its discretionary power to facilitate a party's ability to exercise its rights, as long as no prejudice is caused to the creditors in the process. In this case, the Court analysed four factors established by the Alberta Court of Appeal in order to resolve the issue of the creditor's proof of claim:

1. Was the delay in producing the claim attributable to an error? The court found that the applicant's behaviour was negligent because the mandate to prepare the proof of claim was given on the deadline date. Hence, a verification of whether the creditor acted in good faith was needed. Good faith is presumed and considering that no evidence of bad faith was provided, the Court concluded that the applicant acted in good faith.
2. The second criteria dealt with the possible consequences and prejudices deriving from an authorisation to produce a late claim. In the Court's opinion, the amount represented by the delayed claim was so minimal in comparison to the overall total of claims that no prejudice could result from its admission. Furthermore, there was no request for a new vote.

The third and fourth factors outlined by the Court did not apply in the case at bar because they relate to incidents in which the creditor would suffer a prejudice.

In the matter of the bankruptcy of Thomas Blair Drummie

Court of Queen's Bench of New-Brunswick
Registrar Bray

Citation: 2004 NBQB 35

Facts:  On March 23, 1994, Thomas Blair Drummie (the "debtor") concluded an agreement in which he hypothecated 2501 shares from the Ground Floor Holding Company Ltd. in favour of the Royal Bank of Canada (the "Applicant"). On March 29, 2000, the debtor made an assignment in bankruptcy in which the Applicant was a creditor. In May 2001, the Applicant filed a proof of claim for the amount of $310,801 with the hypothecation agreement as security for the claim. In July 2001, the trustee declared in writing that the documentation supporting the Applicant's claim to the security was reviewed and seemed to be in order. Afterward, in January 2002, the trustee rejected the Applicant's security claim under subsection 135 (2) of the Bankruptcy and Insolvency Act (BIA). He contended that the security was relative to a specific loan for the amount of $150,000 and that this loan was entirely reimbursed before the bankruptcy. The Applicant requested that the trustee's decision to reject the security be annulled.

Issues: 

1. Was section 37 of the BIA appropriate to allow a revision of the trustee's decision to reject the security claim produced?

2. After having previously approved the security claim under section 135 of the BIA, could the trustee reverse his decision?

Decision:  Nothing in the BIA prevents the trustee from reversing the decision he had previously rendered regarding the Applicant's security claim. If the Applicant considered the trustee's decision incorrect, it had a remedy under subsection 135 (4) of the BIA. Having not abided by the conditions prescribed in this provision, the Applicant could not seek a more general remedy under s.37 of the BIA in order to bypass the preliminary conditions of subsection 135 (4).

Discussion:  The Applicant argued that even though the statute was silent concerning the ultimate purpose of the trustee's decision to approve the security claim, the Court should consider this decision as final by analogy to subsection 135 (1.1) and 135(4) of the BIA. The Court held that referring to s.37 of the BIA to avoid the time period prescribed in s.135 would be contrary to the BIA, which does not specify that a decision to approve or reject a security claim is final and conclusive. The Court had discretion to act under s.37 in order to avoid any injustice to the parties regarding the administration of assets. In doing so, the Court had to be sure that the trustee acted in accordance with his obligations under the BIA. Nothing in the present case indicated that the trustee acted improperly. A remedy under s.37 of the BIA is inappropriate in the present circumstances.

Property of the Bankrupt

In the matter of Amherst Crane Rentals Ltd. v. Perring

Ontario Court of Appeal
Laskin, Goudge, Feldman JJ.A.

Citation: 2004 O.J. No. 2558

Facts:  Ashley James Perring died in 1998, naming his wife ("Respondent") executrix and sole beneficiary of his estate. Pursuant to the will and two separate designations filed with the administrators of the Registered Retirement Savings Plans ("RRSP"), the Respondent was the designated beneficiary of her deceased husband's two RRSPs. Following the Respondent's collection of the RRSP proceeds, the estate filed an assignment into bankruptcy in 1999. At the time of his death, the deceased owed $53,679 to the appealing creditor for breach of trust. The latter filed a proof of claim and initiated proceedings under section 38 of the Bankruptcy and Insolvency Act (BIA) in order to obtain payment of the debt from the beneficiary of the proceeds of the RRSP. This case deals with an appeal of the trial judge's decision that the creditor has no right to obtain payment of his debt from the RRSP proceeds.

Issues: 

1. Do RRSP proceeds devolve directly to the designated beneficiary, or do they form part of the deceased's estate?

2. If they devolve directly to the beneficiary, can creditors to the estate lay claim to the RRSP proceeds?

Decision:  The court decided that the RRSP proceeds devolved directly to the designated beneficiary and that the creditors had no right to these proceeds.

Discussion:  The Court referred to Canadian case law rulings that section 53 of the Succession Law Reform Act had the legal effect of making RRSPs an exception to the general rule, despite the fact that the wording of this provision did not specifically exempt RRSP proceeds. The Court did not follow Clark Estate v. Clark (1997), where the Manitoba Court of Appeal decided that unpaid creditors of the deceased can claim RRSP proceeds collected by the designated beneficiary. There is no legal principle or statutory authority that enables creditors to justify such a claim. Therefore, RRSP proceeds devolve to the designated beneficiary upon death of their owner and the creditors lose their right to exercise any claim or security interest on these proceeds. Contrary to the appellant's allegations that equity gives precedence to claims of creditors, the Court asserted that the claims of a beneficiary were equally as important, since the latter had supported her spouse during his lifetime and is therefore justified in receiving RRSP proceeds.

In the matter of Bank of Nova Scotia v. Thibault

Supreme Court of Canada
McLachlin CJ and Bastarache, Arbour, Lebel and Deschamps JJ

Citation: 2004 SCC 29

Facts:  The owner-annuitant, Thibault, had set up a self-directed Registered Retirement Savings Plan (the "Plan") with ScotiaMcLeod Inc. (the "trustee"), the terms of which were set out in a document described as a "declaration of trust". The provisions of the Plan included a stipulation that the funds were to be exempt from seizure. At the date of maturity, the assets of the Plan were to be used to purchase an annuity. Before the Plan's maturity, the trustee's sole obligation was to execute directives from the owner-annuitant and maintain the investments.

Before the Plan matured, the Bank of Nova Scotia (the "Bank"), one of the owner-annuitant's creditors, had a writ of seizure issued against the funds held by the trustee. Thibault applied to have the seizure annulled.

Issues:

1. Did the Plan qualify as a seizure exempt annuity?

2. Did the Plan qualify as a seizure exempt trust?

3. Had the Quebec legislature demonstrated a desire to extend exemption from seizure to all RRSPs?

4. What was the application, if any, of the provisions of the Act to amend the Act respecting insurance and other legislative provisions?

Decision: 

1. The Court concluded that, before the date of maturity, the Plan did not provide for the constitution of an annuity. Its analysis of the parties' rights under the Plan, from the time when the funds were given to the trustee to the time when they were to be liquidated, indicated that there was no alienation of the funds.

2. The Court found that the holder of the assets of the Plan was a trustee in name only. Despite the use of terms such as "trust" or "trustee", the RRSPs of the type contemplated by the Plan could not constitute a genuine trust since the assets had not been transferred (via a patrimony by appropriation) before the maturity date of the Plan.

3. The declaration made by the Quebec legislature in 2002 did not change the rules governing exemption from seizure in general, nor did it suggest that the legislature wanted to change the protection given to RRSPs. There is no statutory provision that operates to cover all RRSPs. Whether a particular investment vehicle is subject to seizure is ultimately governed by the rules of contract law that apply to the vehicle used.

4. The amendment instituted by the Act to amend the Act respecting insurance and other legislative provisions did not change the rule requiring that capital be alienated, which is the central element of an annuity contract and which is missing in this case.

Discussion:  This is an important case respecting annuities, trusts and the contractual provisions necessary to legally effect an exemption from seizure. To that end, the Supreme Court of Canada named an amicus curiae (i.e., a friend of the court) to argue in support of Thibault's position. In addition to the ratio decidendi (i.e., the principal rules of law upon which the decision was based), the Court took the opportunity to state in obiter dicta (i.e., in passing) several other declarations with respect to the applicability of Quebec law.

Ratio Decidendi:  The central issue in this case was the characterization of the annuity contract, within the meaning of the Civil Code of Québec. To form an annuity contract, there had to be: (a) a debtor; (b) an annuitant; (c) an alienation of capital; (d) an obligation to pay; and (e) a specification of a periodic amount for a fixed time. The parties directed their argument mainly to the requirement concerning the alienation of the capital. In civil law, the act of alienation has a precise meaning. That act involves the idea of permanence. When property is alienated, the transfer of patrimony (i.e., property that can be properly estimated and executed for the benefit of a creditor) to another is final; it is permanent.

According to the Plan, before maturity, under section 3, "the trustee's sole obligation... will be confined to executing the directions of the [owner-annuitant]... and maintaining... the investments". During that first stage, the rights of the owner-annuitant were almost absolute. Nowhere in the Plan did it provide that the owner-annuitant alienated the property or the value of the funds to the trustee before the maturity date. Given the lack of an alienation of the funds (one of the central elements of an annuity contract), no annuity contract was formed.

A secondary issue was whether the Plan constituted a genuine trust. Three requirements must have been met in order for a trust to have been constituted: (a) property must have been transferred from an individual's patrimony to another patrimony by appropriation; (b) the property must have been appropriated to a particular purpose; and (c) the trustee must have accepted the property.

The property was not transferred to a patrimony by appropriation before the maturity date of the Plan. Since the assets could have been withdrawn in whole or in part before the maturity date of the Plan, the Court concluded that, during the initial stage of the Plan, the owner-annuitant had not divested himself of his assets in favour of a patrimony by appropriation. Thus, no trust was created.

Obiter Dicta: The following declarations of law by the Court were not crucial to the outcome of the case but may be of some interest to restructuring professionals:

• Exemption from seizure is an exception created by law and does not result from the mere intent of the parties. Thus, the exemption from seizure stipulated in the Plan was effective only with respect to the trustee (ScotiaMcLeod Inc.) and the owner-annuitant (Thibault);

• In the Act to amend the Act respecting insurance and other legislative provisions, the Québec legislature declared that the ability to make a partial or total withdrawal of capital did not prevent an annuity contract from being considered as such. It should be pointed out, however, that it did not change the rule requiring that capital be alienated. Surrender stipulations are therefore valid in insurance contracts, for example, since the insurer retains ownership of the capital, subject to termination or a reduction of obligations. In this case, however, ownership of the assets of the Plan was never properly transferred (i.e., alienated) to the alleged trustee. Thus, an annuity contract was never formed in the first place.

In the matter of Beaudoin v. Canada

Canadian Tax Court
Angers J.C.I.

Citation: [2004] A.C.I. No. 110

Facts:  In 1992, Mr. Beaudoin adhered to a registered retirement savings plan ("RRSP") offered by Société Nationale de Fiducie, now called Trust La Laurentienne ("La Laurentienne"). The RRSP was registered and admissible under the terms of the Income Tax Act (the "ITA") and the Taxation Act of the province of Quebec. In 1993, the Appellant's tax liability totalled $203,907. This caused the Minister of National Revenue (the "Minister") to send a letter to La Laurentienne requiring payment, which the latter did not act upon. In 1994, Mr. Beaudoin assigned his property to a trustee in bankruptcy except for the funds invested in his RRSP. In 1998, the Superior Court issued a certificate of absolute discharge to Mr. Beaudoin. Following the issuance of the Statement of income arising from RRSP-T4RSP form for the 2001 taxation year, La Laurentienne paid the amount of $84,761 to the Minister. On his tax accountant's advice, the Appellant claimed this amount as part of his RRSP. The Appellant then objected to the Minister's inclusion of this amount in his revenues and filed an appeal with the Tax Court.

Issues: 

1. Was the amount remitted to the Minister by La Laurentienne, a trust company acting for the Appellant, exempt from seizure?

2. If not, did the forwarded amount correspond to a benefit as defined in the Income Tax Act?

3. Did the amount received by the Appellant give him an advantage, assuming that this money was used to pay a debt extinguished since his absolute discharge?

Decision: The appeal was granted and the contribution was referred to the Minister for reassessment. The amount remitted to the Minister was exempt from seizure; however, the order allowing the bankrupt's discharge released his fiscal liability. Therefore, the money remitted by La Laurentienne did not constitute a benefit received by the Appellant under subsection 146(8) of the ITA. Following the transmission of the moneys, the appellant did not receive any amount nor did he benefit from any advantage.

Discussion:  The Minister referred to paragraph 56(1(h) and to subsections 146(1) and (8) of the ITA to support his claim that the appellant was obliged to include the $84,761 benefit in his revenues. According to the Appellant, this amount was not exempt from seizure because it resulted from an annuity contract administered by a trust company. He argued that the rules relative to the retirement plan prevent the issuance of an annuity before the age of sixty. The Minister alleged that the Appellant could withdraw the money invested in his fixed term deposits at maturity. The Court stated that, in order to determine if an RRSP was not exempt from seizure in a bankruptcy case, the RRSP annuity contract must be analysed along with the laws relative to bankruptcy, the nature of the investment and the conditions allowing the appellant to claim the funds in his RRSP. In the case at bar, the proof was insufficient to lead to the conclusion that the amount of $84,761 was exempt from seizure. However, subsection 178(1) of the Bankruptcy and Insolvency Act (BIA) did not include fiscal liability in its list of debts that survive the discharge. The debt that the Respondent claimed was therefore extinguished, but the Court did not have the jurisdiction to order the Minster to refund La Laurentienne for the amount that was handed over, which was why the case was referred to the Minister for reassessment.

In the matter of Cochard v. Cochard

Alberta Court of Queen's Bench
Veit, J.

Citation: 2004 A.J. No. 669

Facts:  In January 2001, Pierre Cochard issued a statement of claim for divorce and division of the matrimonial property. In February 2001, Darlene Agatha Cochard ("bankrupt") submitted a statement of defence and counterclaim. In July 2002, their matrimonial home was sold for $240,000 to Mr. Berry, the bankrupt's common-law partner, because of foreclosure proceedings initiated by their bank. The bankrupt underestimated the market value of the home in her statutory declaration since Mr. Berry resold it the same month and made a profit of $135,000.

The bankrupt requested that the trustee remit to her $20,000, the value of her half interest in the principal residence. She claimed that this amount is exempted from any division among creditors under subsection 67(1)(b) of the Bankruptcy and Insolvency Act (BIA) and subsection 88(g) of the Alberta Civil Enforcement Act. The bankrupt consented to the Court's order to particularize the nature of her claim. She nevertheless failed to abide by this order, stating she had filed an assignment in bankruptcy a few days prior to her consent and from that moment the trustee controlled all her financial affairs. Ms. Cochard had omitted to disclose her real estate transactions to the trustee. In addition, she requested that the trustee provide her with information regarding the legal fees incurred, including the name of the individual to whom these fees were paid.

Issues: 

1. Should the court order the immediate remittance to the bankrupt of $20,000, as her exemption in the matrimonial property?

2. Should the trustee be compelled to disclose information regarding his legal fees?

Decision:  The Court ruled against the immediate remittance of the $20,000 exemption in the matrimonial home and refused to order the trustee to disclose information regarding his legal costs.

Discussion:  The bankrupt was unable to prove that the trustee would fail in his objection to her claim for an exemption of $20,000. Consequently, her request for immediate distribution of this amount was denied. Also, despite her failure to comply with the consent order, the matrimonial property defence was admissible. In fact, the petition in bankruptcy gave the trustee control over her legal proceedings. The trustee would decide whether to let Ms. Cochard undertake the proceedings, undertake them himself or abandon them altogether.

Furthermore, section 26 of the BIA does not allow the Court to order the trustee to disclose information regarding his other legal costs to the bankrupt. This information is not pertinent, and the proceedings are adversary, the bankrupt's claims being subject to the trustee's investigation.

The Court concluded that a trial was needed to solve the issues surrounding the property claims. Issues of fact regarding the sale of the home by Mr. Berry must be investigated, namely the purchasers' amount of interest in the property and the high profit received from its quick resale. Issues of law regarding matrimonial property exemptions and the validity of the bankruptcy assignment must also be considered.

In the matter of DaimlerChrysler Financial Services (Debis) Canada Inc., Appellant, and trustee in Bankruptcy, Respondent

Ontario Court of Appeal
Laskin, Feldman, and Armstrong JJ.A

Citation:  [2004] O.J. No. 1924

Facts:  James Allen Fields (the "bankrupt") filed an assignment in bankruptcy on June 12, 2001 while DaimlerChrysler (the "Creditor") held a conditional sale contract against him on a 1998 vehicle. Even though the Creditor did not perfect its security interest on the car under the Personal Property Security Act, it filed a proof of claim in the bankruptcy for the remaining amount the bankrupt owed. The parties agreed that the residual value of the car was $11,000. The trustee rejected the Creditor's claim as a secured claim, but allowed it as an unsecured claim. The Creditor disagreed with the Court's decision to validate the trustee's decision and appealed on the basis that it has the right to its security interest and a priority over the trustee in the car because of an exemption from execution and from the bankruptcy estate for vehicles worth up to $5,000 given to the bankrupt under the Execution Act (EA).

Issue:  Does the exemption from seizure apply only when the total value of the car is $5,000 or less, or does it apply to exempt the first $5,000 of the value of the bankrupt's equity in the car under section 2.6 of the EA?

Decision:  The appeal was dismissed. The value of the vehicle was more than $5,000. Therefore, no exemption existed in this case.

Discussion:  The Creditor argued that the exemption applied only to the first $5,000 of the car. The new amended section 2.6 of the EA states that motor vehicles that do not exceed $5,000 are exempt from seizure. In addition, subsection 3 of section 2.6 of the EA states that the chattel can be sold and any value exceeding the exemption limit can be given to the bankrupt. Furthermore, section 4 protects the sum that is paid to the bankrupt against seizure. Therefore, the Court could not rule in favour of an exemption. When amendments were made to the EA in 2001, section 4 was not amended to make it applicable to motor vehicles that became exempt. The Court reluctantly agreed with the trustee that section 2.6 of the EA is clear. As a result, an exemption can be applied only if a motor vehicle has a value of $5,000 or less.

In the matter of Grand River Conservation Authority v. Hargreaves

Ontario Superior Court of Justice
Fragomeni J.

Citation: 2004 O.J. No. 2163

Facts:  Kirk Charles Hargreaves ("defendant") rented from the Grand River Conservation Authority (GRCA) a piece of land on which he owned a cottage. He filed for bankruptcy in 1998 and did not disclose his ownership of the cottage to the trustee. Since October 2000, the defendant wilfully and continually refused to pay rent because he submitted that the rent increases, service fees and taxes were improper. In April 2001, after having requested rent payments on numerous occasions, GRCA sent a letter to inform the defendant that the lease was terminated and that GRCA would proceed with the sale of the cottage located on the land in compliance with the terms of the lease. The lease stipulated that the landlord may cancel the lease and take possession of the tenant's personal property located on the rented land in order to sell it.

Issues: 

1. Did Hargreaves breach the lease?

2. Had the lease been properly and validly terminated?

3. Should the court exercise its equitable discretion and grant Hargreaves relief from forfeiture?

Decision: The defendant violated his lease. Therefore, the lease was cancelled. The GRCA could remove or dispose of the defendant's property or sell it. The defendant was not relieved from forfeiture.

Discussion:  The defendant admitted owing rent arrears and taxes in addition to costs with respect to the failure of a previous motion before the court. The judge was of the opinion that the defendant violated the lease and that the lease was validly terminated.

The defendant alleged not being able to relocate the cottage situated on the rented land but requested that the cottage not be seized because of the lease cancellation. The court maintained that, despite the defendant's complaints in regards to the cost of rent, services and taxes, he did not take any measures to solve the problem.

The power to grant relief from forfeiture is a recourse in equity that is completely discretionary. The factors to be considered in such situations were set out in Saskatchewan River Bungalows Ltd v. Maritime Life Assurance Co. They are the reasonableness of the defendant's conduct, the gravity of the breach and the disparity between the value of the defendant's property and the damages caused by his failure to respect the lease. In addition, F.P.J. Properties Ltd. V. Parkway Finch Food Services Ltd. set out criteria for granting relief from forfeiture for non-payment of rent. These criteria are: the tenant must come to court with clean hands, there must be no outright refusal by the tenant to pay rent, rent arrears must be short termed and the landlord must not have suffered serious losses because of payment delays. The Court was of the opinion that the defendant did not satisfy these criteria and should not be granted relief from forfeiture.

In the matter of Graphicshoppe Ltd. (Re)

Ontario Superior Court of Justice
Lax J.

Citation: 2004 O.J. No. 5169

Facts:  On November 20, 2003, Graphicshoppe Limited made an assignment in bankruptcy. The terminated employees of the company filed a proof of claim with the trustee to recover pension contributions deducted from their wages, but not remitted to the employees' pension fund. The employees' pension plan with London Life was funded by regular payroll deduction of 4% and employer contributions of 1%. The trustee disallowed the employees' claim. The employees appealed the trustee's decision to the Registrar who ruled in the employees' favour. The trustee appealed the Registrar's decision.

The Registrar rendered his decision based on paragraph 67(1)(a) of the Bankruptcy and Insolvency Act (BIA). He relied upon the decisions in Neal v. Toronto Dominion Bank and Edmonton Pipe Industry Pension Plan Trust Fund (trustee of) v. 350914 Alberta Ltd. and stated: "I have considered the Neal and Edmonton Pipe decisions and the cases cited by counsel for the trustee and arrive at the conclusion that the position of the employees must prevail, notwithstanding that the identical funds were not in the bankrupt's bank account at the date of bankruptcy. I am bound by the decision of Macpherson J. in Neal and the decision in Edmonton Pipe provides for a reasoned basis for reaching my conclusion as to the "identifiable" aspect of the trust claim. There is also, in my view, something to be said of the fact that the trust funds in question are those that were deducted from the employees' paycheques, similar in nature to the deemed trust in favour of Her Majesty for CPP and EI payments."

Issue:  Did the employees meet the common law requirement of "certainty of subject matter" to establish a classic trust to bring themselves within subsection 67(1)(a) of the BIA?

If so, can they assert a proprietary interest over the mixed funds?

Decision:  The Registrar did not err in concluding that the trust was identifiable and met the test of certainty of subject matter. The judge concluded that he is not bound to apply the lowest intermediate balance rule ("LIBR"). It would have been unjust and inequitable to deprive the employees of their claims.

Discussion:  Edmonton Pipe is the authority in determining if the employees met the common law requirements of certainty of subject matter. In this case, the moneys deducted from the employees paycheques were held in a trust and as in Edmonton Pipe, it was not segregated from the company's general funds. The Registrar's conclusion that the trust property was identifiable was consistent with the facts and reasoning in Edmonton Pipe and met the test of certainty of subject matter. The amount of the trust money was identifiable by using the formula set out in the collective agreement to calculate the amount of money to be deducted from each employee and held in trust. This amount was a defined percentage from each paycheque, which was known and deducted.

Furthermore, the court analyzed the rationale underlying the LIBR rule in Law Society of Upper Canada v. Toronto-Dominion Bank, and stated that the LIBR principle is a doctrine of "proprietary tracing", which is based on fictitious presumptions about the intentions of the wrongdoer. It was rejected by the court in Toronto-Dominion Bank except for the limited purpose of serving as "the equitable vehicle which enables a claimant to have recourse to a mixed trust fund in the first place, but equity can move beyond the structures of the doctrine to provide a remedy to the claimant once the connection to the fund has been made." The judge ruled that he was not bound by the LIBR but he was bound to search for the method of allocating the loss which is the more just, convenient and equitable in the circumstances. Therefore, he allowed the proofs of claim of the employees and ordered to pay them the amount of $92,899.

Appealed

In the matter of Kugler v. Kugler

Saskatchewan Court of Queen' Bench
Baynton J.

Citation: 2004 SKQB 484

Facts:  On September 23, 2002, Tracy Kugler made an assignment into bankruptcy. During a meeting of inspectors, the trustee agreed to assign the $50,000 judgment debt that her ex-husband owed to her (the "Applicant") to one of her creditors, but only to the extent of her indebtedness to the latter. The Registrar then allowed the assignee to enforce the debt the Applicant owed, and a writ of execution demanding payment of $10,000 was filed in August 2004. The Applicant therefore sought to set aside the writ of execution by claiming that he was not liable for instalments that were not yet payable at the date of the bankruptcy. He maintained that such instalments did not constitute property of the bankrupt under s.67 of the Bankruptcy and Insolvency Act (BIA). In addition, he alleged that his obligations toward the bankrupt were set-off by her indebtedness to him pursuant to an agreement for monthly child support payments of $200.

Issues: 

1. Were the instalments not yet due at the time of the bankruptcy considered as part of the bankrupt's property that vests in the trustee pursuant to s. 67 of the BIA?

2. Had the bankrupt entered into an agreement for child support payments which could be set-off against the $10,000 amounts stated in the assignee's writ of execution?

Decision: 

1. Money payable to the bankrupt at a future date was considered to vest in the trustee under s. 67 of the BIA.

2. No evidence supported the existence of a child support agreement that could be set-off against the writ of execution.

Discussion:  The Court broadly interpreted the notion of property as defined in s.2 of the BIA in order to encompass money owed to the bankrupt that is payable at a future date. In accordance with s. 67 of the BIA, the trustee acquired all rights held by the bankrupt, including her right to demand payment for future instalments. These rights could be assigned. Therefore, the trustee's decision to assign these rights to the bankrupt's creditor was valid. As for the alleged child support agreement entered into with the bankrupt, the Applicant failed to prove its existence. Furthermore, he had omitted to file a proof of claim declaring his rights pursuant to such an agreement at the time of the bankruptcy.

In the matter of Lecerf v. Lecerf

Alberta Court of Queen's Bench
Topolniski J.

Citation: 2004 ABQB 501

Facts:  Mr. Lecerf and Mrs. Lecerf — now Ms.Requier — (the "parties") had been married since 1983. Mr. Lecerf had contributed $35,000 from insurance and gift proceeds to the down payment of the couple's first home, which was registered in joint title before their marriage. That home was sold and the proceeds were used in the successive purchase of two other jointly titled homes, the last of which was the matrimonial home. During the marriage, Mr. Lecerf ventured into an auto painting and sandblasting business, which failed and left the family with debts in excess of $100,000. On May 15, 2001, the spouses separated. Ms. Requier then moved from Alberta to British Columbia, along with the parties' two children, where she has since earned a living from her new barbershop business. On January 28, 2004, Mr. Lecerf made an assignment into bankruptcy. Not fully understanding the legal consequences of the bankruptcy, the parties entered into a written agreement outlining the terms for settlement of all property differences. This agreement stated, among other things, that Mr. Lecerf would receive the proceeds from the sale of the matrimonial home. The trustee argued that this agreement was not a settlement under the Bankruptcy and Insolvency Act (BIA). Regardless, he was prepared to adopt this agreement on the condition that he received one half of the net proceeds from the sale of the matrimonial home over $20,000, which was Mr. Lecerf's pro-rated exemption under the Civil Enforcement Act.

Note: Several issues pertaining to matrimonial law and division of property arise in this case. For the purpose of this summary, only issues regarding bankruptcy and the BIA will be considered.

Issues: 

1. Did Mr. Lecerf have a valid claim that the $35,000 down payment that he made on the parties' first home be excluded from distribution under section 7 of the Matrimonial Property Act (the "MPA")?

2. In the affirmative, what was the effect of the bankruptcy on that exemption?

3. Was an unequal distribution warranted, thus justifying upholding the January 28, 2004, agreement?

Decision: 

1. Mr. Lecerf's claim that the $35,000 down payment be excluded from distribution was valid, in part.

2. The right to seek the MPA exemption in the present case was property within the meaning of the BIA, thus vested in the trustee as being part of Mr. Lecerf's estate.

3. The Court concluded that it would be unjust to uphold the agreement.

Discussion: The $35,000 gift and insurance proceeds that Mr. Lecerf contributed towards the down payment of the parties' first home was presumed to have been treated as joint matrimonial property since the aforementioned home and subsequent others were registered in joint titles. Accordingly, $17,500 was excluded from distribution — by virtue of the exemption — and $17,500 was subject to distribution under the MPA.

The issue was whether the definition of the word "property" under the BIA included a claim under the MPA. The answer would determine whether or not the trustee was entitled to pursue or defend a bankrupt's matrimonial property action for the benefit of the creditors. The Court proceeded to a historical analysis of case law from the Courts of Appeal of different provinces dealing with this issue, as well as the legislature's intentions regarding the MPA. The Court also made a point of quoting one of these case law by stating that "there are good reasons to avoid giving matrimonial property a different status from other property in bankruptcy [...] the potential for abuse by one spouse commencing a MPA action and agreeing to a generous order to defeat creditors". Other potential forms of abuse were also mentioned. In the end, the Court found that the right to seek the MPA exemption in the present case was property within the meaning of the BIA that was vested in the trustee. Furthermore, the trustee should not be deprived of any of the excluded property because he did not intervene or make submissions on this point at the trial. In regards to the agreement between the parties after the bankruptcy — and the consequential vesting of Mr. Lecerf's property in the trustee — given its timing, the Court agreed with the trustee in concluding that this agreement did not fit the definition of a "settlement" under section 91 of the BIA. After considering that the parties did not understand the consequences of the bankruptcy on their legal entitlements, the Court concluded that it would be unjust to uphold the agreement.

In the matter of Lintott v. Bank of Montreal

Manitoba Court of Queen's Bench
Menzies J.

Citation: 2004 MBQB 214

Facts:  Lloyd and Nancy Lintott (the "bankrupts") made an assignment in bankruptcy on October 2, 2003. As of October 14, 2003, the Lintotts were indebted to the Bank of Montreal ("BMO") in an amount over $34,000. Mr. Lintott's collective agreement with his employer provided that he would be required to travel in the course of his employment and incur certain expenses, which were to be reimbursed. Following the assignment, moneys including Mr. Lintott's reimbursement for expenses before the assignment as well as a child tax benefit cheque were deposited in the bankrupts' account. BMO then seized the above moneys to apply against their debt, relying on the authority of security agreements. The bankrupts then brought an action for repayment of all the moneys on the basis that the moneys were exempt from distribution among creditors under the Bankruptcy and Insolvency Act (BIA).

Issue:  Did the terms "total income" in section 68 of the BIA include moneys owing for services rendered prior to bankruptcy?

Decision:  Section 68 is a complete code for determining what if any of a bankrupt's "total income" will be made available for distribution among creditors whether secured or not. The moneys in question fell in this category, and BMO was ordered to reimburse the amount taken from the Lintotts' account.

Discussion:  BMO argued that s. 68 of the BIA had no application to money owed to Mr. Lintott for services rendered prior to the date of bankruptcy. The Court relied on Wallace v. United Grain Growers Limited (1997) 152 D.L.R. (4^th) and other case law to conclude that the phrase "salary, wages and other remuneration" should be interpreted broadly. In the case at bar, the Court acknowledged that the reimbursement of expenses incurred in employment did not normally fall into the category of income. However, Mr. Lintott's collective agreement did require him to incur these costs under a promise of reimbursement from the employer. "Keeping in mind the public policy considerations behind s.68 and the need to interpret the section broadly, [the Court] was satisfied that the reimbursement of the expenses claimed by Lintott constituted part of his 'total income' within the meaning of s. 68 of the BIA."

"[Total] income is defined for the purpose of s.68 as including, notwithstanding s. 67(1)(b) and (b.1), all revenues of a bankrupt of whatever nature or source… [The Court] therefore concluded that s. 67 is superseded by the provisions of the current s. 68 in so far a the 'total income' of the bankrupt is concerned…" Hence, the moneys could only be made available for distribution to creditors pursuant to the provisions of s. 68 of the BIA. The fact that the expenses were incurred prior to the filing of the assignment in bankruptcy did not aid BMO in its position.

In the matter of R. v. Kalenuik

Ontario Superior Court of Justice
Dambrot J.

Citation: 186 C.C.C. (3d) 408

Facts:  On June 9, 2002, Rosanne Kalenuik ("Applicant") was arrested and charged for possession of a narcotic for the purpose of trafficking. At the moment of the arrest, the Royal Canadian Mounted Police ("RCMP") seized $2,120 located in drawers in her bedroom and $64,020 found in the clothing area of the same room. On January 27, 2003, the charge against the Applicant was stayed by counsel for the Attorney General of Canada. On March 10, 2003, Ms. Kalenuik filed an assignment in bankruptcy, disclosing assets of a total value of $500 and creditors claims totalling $91,200 including a $64,000 claim from Canada Customs and Revenue Agency ("CCRA"). She did not list the funds seized by the RCMP in her statement of affairs. On December 11, 2003, the Applicant was discharged from bankruptcy.

On January 26, 2004, Ms. Kalenuik surrendered herself to the police on various charges related to the funds seized by the RCMP. On February 9, 2004, she commenced an application pursuant to subparagraph 462.34(4)(c)(ii) of the Criminal Code for an order for the release of the seized funds for the purpose of meeting her reasonable legal expenses.

Crown counsel notified the trustee in bankruptcy of this application and CCRA filed a proof of claim for $64,487. On March 3, 2004, the trustee advised the Applicant's creditors that it did not have the funds to initiate legal proceedings in order to lay claim to the seized funds. Therefore, on March 29, 2004, CCRA obtained an order pursuant to section 38 of the Bankruptcy and Insolvency Act (BIA) authorizing it to take proceedings in lieu of the trustee in order to preserve and receive the seized funds. Furthermore, the Applicant had refused to apply for legal aid to fund her defence.

Issues: 

1. Should the seized moneys be returned to the Applicant for the purpose of meeting her legal expenses pursuant to the subparagraph 462.34(4)(c)(ii) of the Criminal Code?

2. If so does paragraph 67(1)(c) of the BIA find application, giving the creditors the right to recover the funds?

Decision: The Applicant did not satisfy the court that no other person appeared to be the lawful owner nor that she had no other means available to meet her expenses. Accordingly, the application was refused.

Discussion:  In order to allow funds to be released to Ms. Kalenuik for the purpose of meeting her legal expenses, three pre-requisites must be met:

1. The Applicant must have an interest in the property (subsection 462.34(1) of the Criminal Code);

2. The Applicant must satisfy the court that she has no assets or means available to meet her legal expenses (subsection 462.34(4) of the Criminal Code);

3. The Applicant must satisfy the court that no other person appeared to be the lawful owner or lawfully entitled to possession of the property (subsection 462.34(4) of the Criminal Code).

Having refused her request, the court did not address the issue as to whether paragraph 67(1)(c) of the BIA was applicable. However, the court did comment on the fact that if Ms. Kalenuik would have gained access to the funds in question, CCRA would have a superior claim defeating the Applicant's claim based on paragraph 67(1)(c) of the BIA. The latter paragraph provides that all property of the bankrupt at the date of the bankruptcy is divisible among creditors. Seized funds are not exempt from distribution. An order of discharge does not confer property that falls within the scope of paragraph 67(1)(c) of the BIA back to the bankrupt. Therefore, if the seized funds were found to be property of the bankrupt, then the trustee or in this case CCRA would have retained the right to recover them.