Manning (Re), 2011 ABQB 566

Court of Queen ’ s Bench of Alberta Citation: Manning (Re), 2011 ABQB 566 Date: 20110919 Docket: BK01 248996 Registry: Calgary In the Matter of the Bankruptcy of David Andrew James Manning _______________________________________________________ Memorandum of Decision of the Honourable Madam Justice B.E. Romaine _______________________________________________________ Appeal from the Decision of J.B. Hanebury, Registrar in Bankruptcy Dated the 26 th day of August, 2010 Introduction [ 1 ] Alger & Associates Inc., the Trustee in bankruptcy of David Manning, appeals the decision of the Registrar granting Mr.

Manning a discharge on the condition that he consent to a judgment in favour of a creditor, Anna Sand. The debt to Ms. Sand was a loan given to assist Mr. Manning in his education. The primary issues are whether that loan should be discharged with Mr. Manning’s discharge from bankruptcy and whether the Registrar erred in directing such a condition for the benefit of one creditor. Standard of Review [ 2 ] An appeal from the decision of a Registrar on an opposed application for a discharge is heard by a bankruptcy judge and is a

true appeal and not a hearing de novo: Section 191(4) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c.B-3; Re Toal (1993), (AB KB), 144 A.R. 269 at para. 3 (Q.B.); Re Goulbourne, 2005 ABQB 945, 392 A.R. 385 at para. 19. The parties agreethat I am to determine whether the Registrar erred in principle or in law in the way she exercised her discretion: Re Bodner, 2008 MBQB33. Background [3] Mr. Manning made an assignment into bankruptcy on August 24, 2009. At that date, his proven debts amounted to$192,193.45. Of that amount, $45,521.07 was owed to Anna Sand; approximately $37,000 was owed to the government for student loansand survives the bankruptcy under Section 148(1)(

g) of the BIA; and $110,000 included debt on bank loans, credit cards, and unpaidrent. At least $60,000 of that $110,000 debt was accumulated as business loans prior to Mr. Manning commencing naturopathic training. [4] Mr. Manning’s application for an absolute order of discharge was heard by Registrar Hanebury on August 17, 2010. TheTrustee recommended that Mr. Manning receive an absolute discharge. The discharge application was opposed by Ms. Sand, who arguedthat her loan to Mr.

Manning should be granted a different status than the other unsecured indebtedness as it was a student loan that hadbeen advanced for the purpose of assisting Mr. Manning with obtaining a degree in naturopathic medicine. [5] Mr. Manning is a 42 year old self-employed naturopath. He attended the Canadian College of Naturopathic Medicine for fiveyears, graduating in 2008. [6] In 2008, Mr. Manning opened up a yoga studio; however, this business venture did not last more than one year. In 2009, hemoved to Alberta and passed the board licencing exams to be certified to practice naturopathic medicine.

He began practising as anassociate naturopathic doctor at a clinic in Calgary. As of the date of his discharge hearing on August 17, 2010, Mr. Manning remainedin this position. He is single with no dependants. [7] Mr. Manning admitted at the discharge hearing that he borrowed $50,000 from Ms. Sand in the form of two loans. Hereceived the first loan of $20,000 at the start of his training, and the second loan of $30,000 approximately two years into his five yearnaturopathic medicine program. However, he characterized Ms. Sand’s loan as a personal loan as opposed to an education loan.

RegistrarHanebury found that the purpose of the loan was for Mr. Manning’s schooling and that the loan was used for this purpose. This findingis not disputed on appeal. [8] Mr. Manning’s post-bankruptcy estate totals $2,430.66 (as found in the Trustee’s supplementary report dated July 16, 2010)and represents less than 1.3 cents on the dollar of his proven unsecured liabilities. [9] The Register found that Mr. Manning was not entitled to an automatic discharge.

Section 173 of the BIA lists facts which, ifproven, require the court to either refuse, suspend or grant a conditional discharge under Section 172(2). The Registrar found, pursuant toSection 173(1)(a), that Mr. Manning’s assets were not of a value equal to fifty cents on the dollar of the amount of his unsecuredliabilities and that this state of affairs had not arisen from circumstances for which he could not justly be held responsible. [10] In oral reasons given on August 26, 2010, Registrar Hanebury held that, applying the fundamental principles of thebankruptcy system, Mr.

Manning should not be discharged from bankruptcy without conditions. She then found that Ms. Sand’s loan,like a government student loan, should survive Mr. Manning’s discharge. She discharged Mr. Manning conditionally upon him signing ajudgment in Ms. Sand’s favour for the amount proven in the bankruptcy plus Ms. Sand’s out of pocket costs. [11] The Registrar found that Mr. Manning used the Sand loan to obtain a degree within his chosen field and was currentlypractising in that field.

His education was thus achieved at the cost of his creditors and provided him with an asset that will continue forhis working life. Analysis

A. Should the Sand loan be discharged with Mr. Manning’s discharge from bankruptcy? [12] The Trustee argues that, in order for the Registrar to permit the Sand loan to survive Mr. Manning’s discharge, the Registrarwould have had to find that the loan fell under Section 178(1)(g), which states that student loans that are provided by the federal orprovincial governments are not released upon discharge from bankruptcy for at least seven years after the bankrupt ceases to be astudent. [13] However, the Registrar did not treat the Sand loan as if Section 178(1)(

g) applied to it. While the Registrar found that thepurpose of the loan was to assist Mr. Manning’s education, she discussed the obligations owing to creditors that have advanced non-government student loans, and cited case law on that specific issue. [14] The jurisprudence is unequivocal that non-government student loans do not fall under Section 178(1)(g): Re Korenic, 2005 O.J. No 3377 at para. 10 (S.C.J.) Re Boyle (2005), (ON SC), 14 C.B.R. (5th) 175 at para. 11 (Ont. S.C.J.); Re Lukinchuk, 2004 BCSC 483, 2 C.B.R. (5th) 281 at para. 5; Conexus Credit Union v.

Schneider Estate (Trustee of), 2003 SKQB 335, 45 C.B.R. (4th) 191 at para. 11. [15] However, the Registrar did find that the Sand loan should survive Mr. Manning’s discharge. Section 178(2) of the BIAprovides that an order of discharge releases the bankrupt from all claims provable in bankruptcy, other than claims listed in Section178(1). The Sand loan does not fall within the enumerated exceptions. [16] At first glance, the prohibition in Section 178(2) on the survival of claims other than those listed in Section 178(1) appears tobe in conflict with the power of the court under Section 172(2)(

c) to order that a bankrupt consent to a judgment as a condition ofdischarge. However, a judgment in favour of a trustee as opposed to a specific creditor as was directed by the Registrar is not a claim orliability provable by a creditor, and thus not a “claim provable in bankruptcy.” This analysis thus adds force to the argument discussed inthe next part of the analysis: that the Registrar erred in directing a judgment for the benefit of one creditor. [17] It is therefore clear that, on the face of the legislation, the Registrar erred in finding that the Sand loan should survive thedischarge.

The Registrar appears to have made her decision on a policy basis. Issues of policy with respect to non-government studentloans, and the Court’s jurisdiction to depart from the legislation in that regard, are discussed later in this decision. B. Did the Registrar err in directing a condition for the benefit of one creditor? [18] The Registrar found pursuant to Section 173(1)(

a) of the BIA that Mr. Manning was not entitled to an automatic discharge.The alternatives thus available to her were to refuse or suspend the discharge or to grant a conditional discharge under Section 172(2). [19] While Section 172(2)(

c) of the BIA permits a Registrar or bankruptcy judge to require that a bankrupt consent to a judgmentas a condition of his discharge, the Trustee submits that the Registrar erred by imposing as such a condition that Mr. Manning consent toa judgment in favour of a specific creditor, since this is contrary to Section 176(3) of the BIA. This

section provides that, where aconditional order of discharge of a bankrupt is made providing for payment of a further dividend or sum of money by the bankrupt, allpayments on account thereof shall be made to the trustee for distribution to the creditors. [20] Ms. Sand submits that since Section 172(2)(

c) does not specify that a requirement that a bankrupt consent to a judgment mustbe a judgment payable to the trustee, I should not interfere with the Registrar’s exercise of discretion. [21] The Ontario Court of Appeal in Re Milad (1984) (ON CA), 50 CBR (NS) 113 at para. 5 noted that thepowers conferred by Section 172(2)(

c) are not sufficiently wide to enable a bankruptcy judge to make an order that is inconsistent withthe fundamental principle of bankruptcy law that creditors of the same rank should be entitled to equal distribution. While Section 176(3), which embodies this fundamental principle, does not refer to the requirement of a consent judgment specifically, such a direction wouldbe inconsistent with the principle of pari passu distribution in the same way as directing the payment of a sum of money to a specificcreditor.

[22] The decision in Re Milad has been followed in numerous subsequent cases. In a Quebec case, In Houle v. Roy (QC CA), [1989] R.J.Q. 2347 at 2353, Chevalier, J. noted that, while there are cases where a court has ordered payment directly toa creditor rather than to a trustee, the requirements of Section 176(3) do not appear to have been put in issue before the court. [23] The principle expressed in Re Milad has been applied specifically in cases involving the discharge of student loans.

In ReTarter, 2005 MBQB 228 at para. 12, the Registrar refused to accede to the argument of the opposing creditor (an assignee of a USstudent loan provider) that the discharge only be granted on the condition that the bankrupt pay its claim. In reaching his decision, theRegistrar recognized that there were creditors other than the opposing creditor and that preferring the opposing creditor was notpermitted under the BIA. [24] I find that the Registrar erred in granting the discharge on condition that the bankrupt consent to judgment in favour of onecreditor in preference to other creditors of the same class. C.

Are there policy issues that would justify the differential treatment of non-government student loans? [25] This case raises policy issues with respect to the status of non-government student loans. Ms. Sand argues that because studentloans involve higher moral obligations than other unsecured loans, the court has the discretion to consider them on a different basis.

Shesubmits that this discretion includes permitting creditors who invest in a student’s future to be paid back by permitting judgments infavour of student loan creditors that survive the discharge. [26] The Trustee does not dispute that the case law supports the idea that non-government student loans give rise to higher moralobligations.

However, the Trustee correctly points out that the current state of the legislation does not allow a Registrar or bankruptcyjudge the flexibility of recognizing this special status. [27] Jurisprudence after the 1997 amendment to Section 178(1) of the BIA, preventing the release of government student loans ondischarge, recognizes that non-government student loans have a higher moral obligation given that the debtor obtains a lifelong assetgained through education.

Although this higher moral obligation has not resulted in non-government student loans being treated the sameway as government student loans, non-government student loans have been recognized as having an enhanced status relative to otherunsecured debts. As a result of this enhanced status, courts have in many cases ordered discharge of the bankrupt conditional upon thebankrupt either paying all or part of the student loan to a trustee or consenting to a judgment for some or all of the value of the non- government student loan in favour of the trustee; Stoski Estate (Trustee of) v.

Royal Bank, 2009 MBQB 17, 51 C.B.R. (5th) 40 at paras.24, 26; Re Watkins, 2009 NSSC 35, 274 N.S.R. (2d) 358 at para. 27; Re Mance, 2009 QCCS 5818 at para. 79; Re Foster, 2009 NBQB244, 347 N.B.R. (2d) 398 at para. 16; Re Dolgatta at para. 49; Re Dussault, 2008 NBBR 189 at para. 23; Mainstreet Hair Salon 1992Ltd. V.

Schumaker, 2008 ABQB 363, 452 A.R. 390 at paras. 20-21; Re Bodner at para. 12; Re Insley at para. 49; Re Galloway at para. 38; Re Ament at para. 18; Re Beauchesne, 2005 ABQB 655, 14 C.B.R. (5th) 170 at para. 19; Re Weihs, 2005 MBQB 108, 12 C.B.R. (5th)118 at para. 7; Re Korenic at para. 16; Re Snedden at paras. 52-53; Re Coffey at para. 44; Conexus at para. 25. [28] One of the key themes running through student loan bankruptcy cases is the idea that, where education results in the bankruptacquiring an asset that will continue to generate income, the integrity of the bankruptcy and insolvency system would be undermined ifthe bankrupt were to retain the entire benefit of the asset without the creditors having a share: Re Dolgetta at para. 45; Re Dussault atpara. 16; Re Insley at para. 45, Re Ament at para. 16; Re Snedden at para. 32; Re Coffey at para. 36; Re Watkins at para. 26.

As Registrar Funduk stated in Re Saunders, 2001 ABQB 538, 26 C.B.R. (4th) 298 at para. 16 “[i]t is not the purpose of the Business and InsolvencyAct to let people get something for nothing.” [29] This was recognized by Deputy Registrar Nettie in Re Korenic at para. 14: It would be inappropriate to allow a bankrupt to keep such an asset without any realization on it for the benefit of creditors. To findotherwise would undermine public confidence in the insolvency system.

It is trite law to point out that a discharge Court is charged withthe balancing not only of the rights of a bankrupt to a fresh start, and the right of creditors to be repaid, but also maintaining the integrityof the insolvency system, and public confidence in it, as an integral part of our country’s system of commerce.

[ 30 ] However, in cases where a bankrupt was required to consent to a judgment as a condition of discharge, the judgment is in favour of the trustee, and as a result all creditors are able to share in the benefit of the condition: Re Dolgatta at para. 49; Re Dussault at para. 23; Re Bodner at para. 12 ; Re Insley at para. 49; Re Ament at para. 18; Re Beauchesne at para. 19 ; Re Snedden at paras. 52-53; Re Coffey at para. 44. It is the debtor’s obligation to pay off the student loan that is recognized as having a higher moral status and not the creditor’s right to be repaid.

This is consistent with the scheme of the BIA . A creditor must fall under Section 178(2) to be given priority for payment of its unsecured student loan. [ 31 ] I recognize that the actual benefit that a student loan creditor will receive where a discharge is granted conditional on the bankrupt paying the student loan debt or consenting to a judgment for the student loan debt in favour of the trustee will vary depending on the number of creditors and the proportion of the student loan debts compared to the total debts.

While a court may be more sympathetic to a student loan creditor in a multiple-creditor bankruptcy, the present state of the legislation does not allow a student loan creditor priority per se . Remedy [ 32 ] The Trustee suggested numerous alternatives to the Registrar’s order including: - adjourning the application for a year to see whether Mr. Manning’s position improved; - requiring Mr. Manning to consent to a judgment in favour of the trustee as a condition of discharge; -​ ordering a conditional discharge upon Mr.

Manning paying an amount to the Trustee over a period of time; - returning the matter to the Registrar with the direction that judgment as a condition of discharge must be in favour of the Trustee and not a particular creditor. [ 33 ] The Trustee stated as a ground of appeal that the Registrar erred by not granting Mr. Manning an absolute discharge. During the appeal, the Trustee argued that Mr. Manning should pay something and that it was preferable that he earn his discharge before it is granted. The Trustee thus submits that a discharge conditional on Mr.

Manning paying a certain sum of money to the Trustee over a period of time is preferable to requiring him to consent to a judgment in favour of the Trustee as a condition of discharge. The Trustee speculated on what a fair condition for discharge might be, given Mr. Manning’s circumstances and suggested that there was some evidence to suggest that in the next three years, he could be earning on average $50,000 per year. This is equal to $2,800 per month, leaving approximately $1,000 surplus, $500 of which could be paid to the Trustee over 3 to 5 years.

This would result in an $18,000 to $30,000 payment to the Trustee to satisfy the condition for discharge. [ 34 ] Although a discharge conditional on Mr. Manning paying a sum of money may be preferable to the Trustee, a discharge conditional on consenting to a judgment in favour of the Trustee has some benefits to Mr. Manning. In the case of student loan debts, courts have recognized that education is a life-long asset, and that debtors can expect to make long-term payments for such an asset: Dolgatta at para. 45; Beauchesne at paras. 14, 21; Coffey at para. 46, Snedden at para. 48.

This is particularly the case when there has been no change from what was reasonably expected and understood when a party obtains financing for his education. In the Alberta case of Re Beauchesne , the bankrupt had obtained a $71,000 foreign student loan in order to support his studies to become a chiropractor. The bankrupt obtained his doctor of chiropractic and was earning a net monthly income of $1,300 from his practice. Registrar Brietkreuz found that the loan had matured into an income-bearing asset as the bankrupt had his degree and was practicing in his profession.

As a result, the Registrar granted a discharge conditional upon the bankrupt consenting to a judgment of the entire value of the student loan to be paid to the trustee over thirteen years. [ 35 ] A condition that requires payments to be made over a protracted period of time will not offend the principle that a state of bankruptcy should not be unduly prolonged if the bankrupt is given the option of choosing to consent to a judgment as a condition of discharge: Snedden at para. 52.

In such case the bankrupt may choose to be discharged, and although he will be subject to the judgment his bankruptcy will not continue. Conclusion

[ 36 ] While the current discharge order cannot stand, I am wary of merely substituting a similar order in favour of the Trustee in this case. It is possible that the Registrar took into consideration the identity of the Sand loan creditor when making this order and would not have granted the same order in favour of the Trustee. Moreover, given the time that has passed since the original hearing, current financial information about Mr.

Manning is required to assist the Registrar in crafting an appropriate condition for discharge. [ 37 ] This bankruptcy is to be returned to the Registrar for the limited purpose of redrafting the conditions of discharge for Mr. Manning, with the instructions that any condition of discharge must be in favour of the Trustee. Mr. Manning is to adduce evidence of his earnings over the past year at the new hearing. Costs [ 38 ] If the parties are unable to agree on the issue of costs, further submissions may be made. Dated at the City of Calgary, Alberta this 19th day of September, 2011 B.E. Romaine J.C.Q.B.A.

Appearances: S.L. Robinson Burns for the Trustee in Bankruptcy S.T. MacIsaac for the opposing creditor Anna Sand APPENDIX A Bankruptcy and Insolvency Act 172.

(1) Court may grant or refuse discharge -On the hearing of an application of a bankrupt for a discharge, other than a bankrupt referred to in

section 172.1, the court may

(

a) grant or refuse an absolute order of discharge; (

b) suspend the operation of an absolute order of discharge for a specified time; or (

c) grant an order of discharge subject to any terms or conditions with respect to any earnings or income that may afterwards become due

(2) Powers of court to refuse or suspend discharge or grant conditional discharge -The court shall, on proof of any of the facts referred to in

section 173, which proof may be given orally under oath, by affidavit or otherwise, (

a) refuse the discharge of a bankrupt; (

b) suspend the discharge for such period as the court thinks proper; or (

c) 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. 173.

(1) Facts for which discharge may be refused, suspended or granted conditionally - The facts referred to in

section 172 are: (

a) the assets of the bankrupt are not of a value equal to fifty cents on the dollar on the amount of the bankrupt's unsecured liabilities, unless the bankrupt satisfies the court that the fact that the assets are not of a value equal to fifty cents on the dollar on the amount of the bankrupt's unsecured liabilities has arisen from circumstances for which the bankrupt cannot justly be held responsible; . . . 176.

(3) Trustee to distribute funds payable under conditional discharge - Where a conditional order of discharge of a bankrupt is made providing for payment of a further dividend or sum of money by the bankrupt, all payments on account thereof shall be made to the trustee for distribution to the creditors. 178.

(2) Claims Release - Subject to subsection (1), an order of discharge releases the bankrupt from all claims provable in bankruptcy.