Munro (Re), 2016 ABQB 274

Court of Queen ’ s Bench of Alberta Citation: Munro (Re), 2016 ABQB 274 Date: 20160513 Docket: B103 1715183, B103 1715254 Registry: Edmonton In the Matter of the Bankruptcy of Barry Thomas Munro and Soojandra Sally Munro Between: Barry Thomas Munro and Soojandra Sally Munro (aka Sally Munro) Applicants - and - Cedar II Mortgage Corporation (c/o Caplink Financial Corporation), Supreme Capital Inc., Dan Echino, Corlac Resources Ltd., Dr. Alain Brassard and Daniel Viard Respondents _______________________________________________________ Reasons for Judgment of W.S.

Schlosser , Registrar in Bankruptcy _______________________________________________________ [ 1 ] This is a contested application for a discharge. The creditors oppose the discharge on the basis that at least one fact has been proved under

section 173 of the Bankruptcy and Insolvency Act , RSA 1985 c. B-3, as amended. But they go much further. They argue that the bankrupts hid assets and suppressed income in order to harm the creditors. They argue that the bankrupts have abused the system and they should not be permitted a ‘fresh start’ without a substantial penalty.

They seek a suspension and a condition; that being imputed net income with a significant payment into the estate. [ 2 ] The bankrupts counter that as “first-timers”, who have performed all their duties under the Act , they are now entitled to an absolute discharge. [ 3 ] The bankrupts are husband and wife. Ms. Munro is a licensed real estate agent in Alberta, dealing with high-end properties. Mr. and Ms. Munro work as a team. [ 4 ] The causes of bankruptcy are detailed in two affidavits of Ms. Munro. The triggering factor seems to have been a failed condominium project in Kelowna, BC.

That and personal guarantees. [ 5 ] The Munros made an assignment into bankruptcy February 14, 2013. A

section 38 order was granted March 6, 2014. A discharge application was originally scheduled for September 10, 2015. A great deal of evidence was generated over that interval; comprising six bound volumes filed shortly before the hearing. The Munros tendered Supplementary Affidavits in response to some of the evidence. The evidence grew like a wildfire.

Section 173 [6] Section 173 (1)(

a) of the Bankruptcy and Insolvency Act provides, as one of the grounds for refusing, suspending, or grantinga conditional discharge: (

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, . .. [7] The Act does not specify when the valuation is to occur. There are three possibilities: the time of assignment, taking thesworn statement of the bankrupt (section 49(2)) into account; the Trustee’s

section 170 report, and a simple comparison of the bankrupts’assets with the value of the proved unsecured claims; or, finally, the realized value of the property of the bankrupt compared with thestated, or proved, unsecured claims in accordance with the deeming provision in

section 174. [8] (Re) Pehlke (1939), (ON SC), 20 CBR 415, tells us that the time for valuation is the time of the dischargeapplication. That is likely to be the time when the court has the best picture of assets and proved (or admitted) claims. However, giventhe several options available, it is my view that in doubtful or borderline cases the comparative value most favourable to the bankruptshould be used. At least this would be consistent with presumed innocence until the latter part of 173(1)(

a) is considered. [9] This is not a doubtful or borderline case. Ms. Munro’s proved or admitted unsecured claims exceed $10 million. Thoughthere is significant overlap, Mr. Munro’s exceed $7.0 million. Their assets were only a tiny fraction of that. The Onus Shifts to the Bankrupts [10] Once the first part of section 173(1)(

a) has been proved, the onus shifts to the bankrupts to show that the disparity wasn’t their fault: Samson v Alliance Nationale, (1935) 17 CBR 304, Re Lougheed (1939), 29 CBR 180, Re George (2008), 49 CBR 5th (193),Houlden, Morawetz and Sarra, The 2015-16 Annotated Bankruptcy and Insolvency Act, para 44(1). (‘H M & S’) [11] A determination of whether the onus is satisfied is done on a case-by-case basis: Re Rabkin (1926), 7 CBR 683, Re Lawless(1987), 65 CBR (NS) 117. It goes without saying that the onus is to be satisfied on the ordinary civil standard.

The bankrupt is obliged toprovide ‘some reasonable explanation for why [the disparity] should be excused’; Re Montalban, 2013 BCSC 683 at para 39, perFitzpatrick J. [12] In this case, Ms. Munro swore two affidavits that endeavoured to address the causes of bankruptcy by detailing how each ofthe creditors’ claims arose and the circumstances leading up to the bankruptcy. I acknowledge that circumstances leading up to thebankruptcy are usually relevant to discharging the onus under the latter part of section 173(1)(a). However, what is relevant is anexplanation of the disparity between assets and liabilities.

It might be a fortuitous event outside the bankrupt’s control or expectations.One the other hand, it might be a deliberate and systematic increase in exposing the creditors to risk. [13] In this case, the evidence shows a gradual overextension of credit, thinning margins between debt and assets, a real estatepractice in an area of the business that often requires high input costs and long market exposure, changes in the marketplace: including afalling market in Kelowna, health issues, and a condominium development by the bankrupts’ company that failed.

Many of these eventswere largely outside the bankrupts’ control. [14] However, the exposure to risk was well within their control. What the Act requires is an excuse or a justification for thedisparity not just an explanation that demonstrates a voluntarily increase of risk and creditor exposure. The bankrupts are highlyexperienced in the real estate market and could not have been oblivious to the risks involved. In a manner of speaking, they chose thisplaying field, went long and lost.

In my view, the bankrupts have not satisfied the onus of showing that the disparity arose ‘fromcircumstances for which the bankrupts cannot justly be held responsible’ imposed upon them by section 173(1)(a). Consequently, thisfact is proved. Other

Section 173 Facts: [15] The objecting creditors point to other section 173(1) facts, namely: 173(1)(

b) failing to keep books and records, 173(1)(c);failing to account for loss of assets; as well as, 173(1)(d); fraud or fraudulent breach of trust, 173(1)(e); failure to comply with arequirement to pay under

section 68 and, 173(1)(o), failure to perform duties. 173(1)(

b) and (c): Books and Records, Loss of Assets [16] The bankrupts argue that the section 173(1)(

b) and (

c) issues involve their numbered company and that the section 173(1)(b)matter is adequately accounted for because the books and records had been kept but were lost over the course of the bankruptcy. [17] The bankrupts also argue that the rule in Foss v Harbottle, (1843) 2 Hare 461-506, requires that the Court maintain a sharpdividing line between the bankrupts and their company, at least insofar as section 173(1)(

b) and (

c) facts are concerned. [18] However, there are many examples of when the Court will look behind the corporate veil in this context: eg. Re Bureta(1981), 40 CBR (NS) 162, Re Tanner (1993), (BC SC), 21 CBR (3D) 244, Re Pratcher (2001), 2001 SKQB 302 , 26 CBR (4th) 293, Re Alton (2003), (ON SC), 45 CBR (4th) 25, and H M & S, para 36(1). For a usefultheory of when the Court will look behind the corporate veil, generally, see Prest v Petrodell Resources Ltd., [2013] 2 AC 415 (UKSC)and see National Leasing Group Inc. v Acme Enterprise Ltd., 2015 ABQB 631 at para. 18 et seq.

[19] The requirement to keep books and records is essential to the integrity of the system: Re Montalban (above). However, in myview, the bankrupts have discharged their onus of showing that there were books and records but that they were inadvertently lost ordestroyed. This objection does not relate to the books and records of Ms. Munro’s daughter’s company who employed Ms. Munro for atime after the Assignment, and which are not within her control. Accordingly, this

section 173 fact is not proved.

Section 68, Requirement to Pay [20] There is no requirement to pay under

section 68 of the Act, in this case. Failure to Perform Duties, Failure to Account for Loss of Assets [21] Evidence that goes to proof of a section 173(1)(

o) fact (failure to perform duties); such as a failure to disclose assets, can alsogo to the Court’s exercise of discretion under

section 172. The attitude and actions of a bankrupt, both before and after assignment arealways relevant to deciding whether a discharge is in order: Re Taskey [1995] OJ no. 2337 at para 43 and following, per Platana J., evenif they do not constitute a

section 173 fact. [22] The objecting creditors pull no punches when they address the conduct of the bankrupts and their company both before andduring this bankruptcy. They complain that the bankrupts’ numbered company paid out a lease on one Mercedes automobile andassigned the lease for another just prior to the bankruptcy. They showed that this same closely-held numbered company paid for, andthen sublet, Oilers Season Tickets to an apparently unrelated company for a discount.

They say the bankrupts failed to account for realestate commissions and other funds paid to their numbered company (roughly $140,000.00) in the two months immediately precedingthe bankruptcy. Mr. Munro’s response to this last point on questioning was that the trustee ‘didn’t ask’. [23] At about the time of the assignment (it is not clear whether it was the month before or the month after), Ms. Munro went towork for her daughter, Natasha’s, real estate company, selling real estate for a gross monthly salary of $2,000.00.

Nine listings closedafter bankruptcy resulting in commissions of $341,783.38 being paid into Natasha’s company. The objecting creditors also say that theMunros enjoyed personal benefits from credit cards, debit cards and trips over the course of this relationship. Although this Court canunderstand the motivation for moving to an employment relation when the bankruptcy intervened, a gross income $2,000.00 a monthrepresents a breathtaking change of circumstances. It is what was then close to minimum wage.

It is not surprising that the creditors, whoare out over $10 Million should look up on this employment change with distain and scepticism. Section 68(11) of the Act leaves nodoubt that the Court can fix an appropriate and proper income during that time despite the actual amount paid: Re Neustaeter, 2014ABQB 521, per Smart, R. [24] The objecting creditors put the (gross) estimate of listings obtained by Ms.

Munro during this period at $404,650.05. [25] The bankrupts have in a sense accounted for a ‘loss of assets’ but more in a way that might invite Trustee action undersections 95 or 96 (for example) than to bring credit on the bankrupts’ conduct. To put it another way, it is not enough of an accounting tosay: ‘I spent it’ or I sold it at a discount’, or, ‘I transferred it to my daughter’s company’. It is similarly, not enough to say that ‘it wasn’tme, it was my closely held company’. Even if there has been no

section 95 or 96 steps taken by the Trustee, it is not necessary tomaintain too fine a distinction between 173(1)(

c) and 173(1)(0). There is a significant overlap and all of it can be taken into account at adischarge application. [26] Natasha Monro was initially amenable to examination but then she moved to Dubai and became disinclined to cooperate. Wedo not know the net amount of income generated by Ms. Munro over the period that she worked for her daughter’s company but there islittle doubt that it exceeded $2,000.00 per month. [27] There is at least one

section 173 fact proved. If a

section 173 fact is proved the Court must make one of the following orders(section 172(2)): i. refuse the discharge; ii. suspend the discharge, or; iii. impose conditions. The choice is discretionary: Re Heard (1989), 71 CBR (NS). 92. [28] The remedies are not mutually exclusive.

The Court can suspend and make a conditional order: (H M & S, para 36 (4), andthe cases cited there). [29] Among the factors to be balanced are: rehabilitation or reform of the bankrupts’ habits, deterrence and punishment,preservation of the integrity of the system and the confidence of those who participate in it in good faith, and, obtaining the highestpossible dividend for creditors. [30] The system is intended to be self-contained: Re Kurtz, 2015 SKQB 290, per Thompson, (Registrar) and the Court should look outside it only when circumstances dictate (eg Re Rahman (2010) 70 CBR (5th) 290 reference to the A-G for a perjury investigation of abankrupt’s statement of assets.) [31] Typically, a conditional order requiring payment of money into the estate is linked to the bankrupts’ circumstances and her ability to pay: Re Martino (2004) (ON SC), 50 CBR (4th) 132.

In terms of the length of time for payment into theestate, some cases suggest three years as an acceptable outside limit: Re Thompson (1991), (BC SC), 8 CBR (3d) 1,Re Sevensma (1991), (BC CA), 9 CBR (3d) 62. However, there are other cases that emphasise a punitive or deterrent

aspect that justifies longer periods or larger amounts. As the learned authors of H M & S indicate at para 40(2), the cases are divided and there is justification for both approaches. [ 32 ] I note there is no guideline for what constitutes an appropriate length for a suspension, though 12 to 18 months is common in the decided cases. What is an Appropriate Monetary Condition in this Case? [ 33 ] At the end of the summer of 2014, differences developed between Ms. Munro and her daughter, causing that employment relationship to be severed. Ms. Munro went on her own again, and hired Mr. Munro as her assistant.

We have financial records from this business for the period August 2014 to September 2015. [ 34 ] The financial statements between October 2014 and September 2015 show a total income of $735,090.88 for that 11 month period as against total expenses of $756,248.00. The Munros current enterprise only operated in the black if the legal fees, which have been included in the spreadsheets, are taken out. [ 35 ] There are two ways that this evidence can be approached. The objecting creditors say that it is simply further evidence of a deliberate and systematic attempt by the bankrupts to avoid paying into the estate.

They ask the Court to impute income as a condition of discharge. So far the bankrupts have each only paid $1,800.00. [ 36 ] The bankrupts argue that these financial statements records reflect the nature and reality of a high-end real estate practice. The Court was presented with some anecdotal evidence from realtors indicating that market exposure at this end of the market tends to be long and expenses high, with no guarantee of reward.

However, the other side is that referrals tend to attract a split of commission and, of course, there is income generated from acting as a purchasers realtor that does not require anywhere near the same expenditure. [ 37 ] The difficulty is that there is very little concrete evidence to show exactly what net income should normally be, or where the relationship of net to gross should fall.

Unfortunately, we do not enjoy the benefit of the type of expert evidence found in Re Neustaeter (above). [ 38 ] The last financial statements of the bankrupts numbered company prior to the bankruptcy showed a ratio of expenses to income of about 50%. I acknowledge that this is somewhat dated information and also that it may be representative of a more mixed business endeavour than a pure real estate practice, but it hardly suggests the sort of bleak or non-existent margins presented by the bankrupts that would discourage anyone with any financial sense from entering this type of business.

Though it is not strictly expert evidence, one experienced realtor gave evidence by affidavit that he might expect to invest up to 25% of the expected compensation in order to sell a luxury home (not 100% or more). He also indicated that a referral commission might well be in the range of 10 to 15%. Another realtor put this figure at 25%. [ 39 ] The evidence of the bankrupts’ income and expenses could be consistent with the nature of a high-end real estate sales but it hardly proves the value of that type of enterprise. It is equally consistent with favouring current creditors over past ones.

The extraordinarily high current monthly expenses are also not consistent with a business that a few years earlier had expenses that were 50% of gross income. I acknowledge that the nature of the business in 2011 might have been somewhat different but all of this demands an explanation. There is none, at least none that is consistent with an absolute discharge, in all the many volumes of evidence. [ 40 ] A discharge is not right. In the absence of a cogent explanation for the great gulf between Ms.

Munro’s listings and commissions, and her minimum-wage employment over the period of time she worked for her daughter’s company, and in the absence of an explanation about why business expenses doubled after bankruptcy, the Court is obliged to pick a number that balances the bankrupt’s abilities, the interest of creditors and the integrity of the system. [ 41 ] Accordingly, the bankrupts are entitled to a discharge on a monetary condition to be determined in accordance with the following formula: Average gross income as evidenced by the 11 month statements is $66,825.00 per month.

Proper monthly expenses are to be treated as 65% of that amount for an imputed monthly income of 35% of total gross income. Monthly net income, therefore, is to be treated as $23,388.75 for Ms. Munro. The trustee is to take this monthly amount over a 21 month period and apply Directive 11 R2- 2015 and the Superintendents Standards to determine the figure payable into the estate as the monetary condition of discharge. Mr.

Munro’s income of $2,000.00 a month should be added into the calculation of family income for the purposes of this calculation. [ 42 ] I appreciate that the circumstances of the individual bankrupts are different but they have asked that I treat them alike. Accordingly, the final figure is to be treated as a joint condition of discharge. Alternately, Mr. Munro’s discharge is suspended until the monetary condition is satisfied. We are just over three years into the bankruptcy and I do not see any justification for a further suspension. Dated at the City of Edmonton, Alberta this 13 th day of May, 2016.

W.S. Schlosser Registrar in Bankruptcy Appearances: Michael J. McCabe Q.C. Reynolds Mirth Richard & Farmer LLP for the bankrupts Brian W. Summers Dentons Canada LLP for the

Section 38 Creditors Melanie Leigh - Trustee BDO Canada