Munro (Re), 2016 ABQB 541

Court of Queen’s Bench of Alberta Citation: Munro (Re), 2016 ABQB 541 Date: 20160928 Docket: B103 1715183 and B103 1715254 Registry: Edmonton In the Matter of the Bankruptcies of Barry Thomas Munro and Soojandra Sally Munro (aka Sally Munro) Between: Cedar II Mortgage Corporation (c/o Caplink Financial Corporation), Supreme Capital Inc., Dan Echino, Corlac Resources Ltd., Dr. Alain Brassard and Daniel Viard Appellants - and - Soojandra Sally Munro and Barry Thomas Munro Respondents _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice B.R.

Burrows _______________________________________________________ [ 1 ] Sally Munro and Barry Munro each filed assignments in bankruptcy on February 14, 2013. Subsequently they applied for discharges. The Appellants, who are six of their creditors, opposed their applications. The Registrar granted conditional discharges. The

Appellants appeal. [ 2 ] At the time of the bankruptcy assignment, Sally Munro was a real estate agent involved in high-end residential property sales. Her husband, Barry Munro, assisted Ms. Munro in her work as a realtor. The materials indicate that at the time of the bankruptcy Ms. Munro’s unsecured debt exceeded $10 million, and Mr. Munro’s exceeded $7 million. A significant portion, if not most, of the debt was jointly owed. Their assets, as they declared them at the time of their assignments in bankruptcy, amounted to about $2.5 million, most of which was encumbered in favour of secured creditors.

The Registrar held that, “Their assets were only a tiny fraction of [their debt]”. The BIA s. 38 Order [ 3 ] On March 6, 2014, the Appellants were granted an order under BIA s. 38. The Order authorized the Appellants to conduct examinations of the nature which BIA s. 163(1) contemplates the trustee conducting.

The order identified the subjects of authorized examination as including: a. any transaction involving the Bankrupts and any member of the Bankrupts’ family (including any corporate body related to the Bankrupts or any member of the Bankrupts’ family); b. any transaction that may constitute a fraudulent conveyance, fraudulent preference, transfer at under value or breach of the Statute of Elizabeth (“Potential Impeachable Transaction”); and c. in relation to the employment or any remuneration, wage or commission that ought to be paid to the Bankrupts. [ 4 ] The Order referred to these subjects as “Potential Claims” and authorized the Appellants “to commence and prosecute, in their own names and at their own expense and risk . . . any Potential Claim”.

The Order further provided that amounts realized through the prosecution of Potential Claims would first cover the costs incurred by the Appellants and second, be distributed among the Appellants on a pro-rata basis. Any surplus would be paid to the Trustee for the benefit of all creditors. [ 5 ] Finally, the Order provided that the Trustee, BDO, would provide to the Appellants an assignment of all its rights title and interest as trustee in respect of any Potential Claim. [ 6 ] Pursuant to the BIA s. 38 Order, the Appellants examined Ms. Munro, Mr. Munro, their daughter, and a business associate.

They take the position that the examinations exposed information justifying the conclusion that the Bankrupts’ conducted themselves before and during these bankruptcy proceedings in a manner unjustly prejudicial to the interests of the creditors. Indeed, they take the position that the Bankrupts were fraudulent. [ 7 ] The Appellants did not commence and prosecute any proceedings against any third party as a result of the information gathered through the examinations.

It is not clear whether this is because the examinations did not uncover any viable cause of action against a third party, or because the Appellants chose not to pursue such cause or causes of action as were revealed. Discharge Application [ 8 ] The Appellants did, however, oppose the discharge of the Bankrupts, which pursuant to BIA s. 168.1(1)(a)(

i) would, in these bankruptcies, have been automatic nine months after the date of the bankruptcy if the Appellants had not objected. But for the objections, the Munros would have been discharged on November 14, 2013.

Or, if they had been required to pay surplus income to the Trustee, they would have been automatically discharged 21 months after the date of the bankruptcy – on November 14, 2014. ( BIA s. 168.1(1)(a)(ii) [ 9 ] After at least two adjournments, the Bankrupts’ applications for discharges came before the Registrar on October 28, 2015. [ 10 ] On May 13, 2016, the Registrar, in a written decision ( 2016 ABQB 274 ), held that a BIA s. 173 fact had been proved and ordered conditional discharges pursuant to BIA s. 172(2)(c). [ 11 ] As to the BIA s. 173 fact, the Registrar held that the assets of each of the Bankrupts were not of a value equal to fifty cents on the dollar on the amount of each of the Bankrupt’s unsecured liabilities.

Further, the Registrar held that the Bankrupts had not satisfied him that the fact that the assets were not of a value of fifty cents on the dollar on the amount of the unsecured liabilities, had arisen from circumstances for which the Bankrupts could not justly be held responsible. Therefore the BIA s. 173(1)(

a) fact was established. [ 12 ] Consequently, the Registrar was obliged under BIA s. 172(2) not to grant an absolute discharge but to either: a. refuse the discharge of the Bankrupts, b. suspend the discharge of such period as he thought proper, or c. require the Bankrupts, as a condition of their discharges, to perform such acts, pay such moneys, consent to such judgments or comply with such other terms as the court might direct. [ 13 ] He ordered conditional discharges under s. 172(2)(c).

[ 14 ] Though the presence of only one of the 15 facts listed in s. 172(2) is sufficient to limit the Registrar to those dispositions and to remove the possibility of an absolute discharge, the Registrar also discussed some of the other facts listed in the

section which had been raised by the Appellants in their objection to the discharges. [ 15 ] He held that the BIA s. 173(1)(

b) fact, omission to keep usual and proper books of account for the three years preceding the bankruptcy, was not established. The Bankrupts had showed that there were books and records but that they were inadvertently lost or destroyed. [ 16 ] He also held that the BIA s. 173(1)(

m) fact, failure to comply with a requirement to pay imposed under s. 68, was not established. There had been no requirement to pay under BIA s. 68 imposed on the Bankrupts. Bankrupts’ Misrepresentation of True Income [ 17 ] The Registrar also discussed the BIA s. 173(

o) fact: “the bankrupt has failed to perform duties imposed on the bankrupt under this Act or to comply with any order of the court”. In this context, he observed: (para. 21) The attitude and actions of a bankrupt, both before and after assignment are always relevant to deciding whether a discharge is in order . . . even if they do not constitute a

section 173 fact. [ 18 ] The Registrar particularly examined the evidence concerning Ms. Munro’s income after the bankruptcy. At about the time of the bankruptcy, she started to carry on her real estate agent practice as an employee of a company owned by her daughter. The company paid her a salary of $2000 per month. [ 19 ] The Registrar noted that nine listings closed after the bankruptcy, resulting in $341,783.38 in commissions being paid to the daughter’s company. He noted there was evidence that during this time, the Bankrupts received significant personal benefits directly from their daughter’s company.

It appears Ms. Munro’s true income from her work as a real estate agent was considerably greater than the $2000 per month salary she received from her daughter’s company. [ 20 ] The Registrar also noted that at the end of the summer of 2014, Ms. Munro stopped working for her daughter and went “on her own again”. Mr. Munro worked as her assistant. The Registrar noted that the financial records relating to her work between October 2014 and September 2015 showed a significant loss. Income was $735,090.88 and expenses were $756,248.00.

The Register did not accept that these financial statements accurately stated the true net income realized by the Bankrupts. He imputed income to the Bankrupts. [ 21 ] The Registrar observed that financial statements relating to Ms. Munro’s work prior to the bankruptcy indicated that net income was about 50% of gross income.

He observed, “the extraordinarily high current monthly expenses are . . . not consistent with a business that a few years earlier had expenses that were 50% of gross income.” (para 39) [ 22 ] The Registrar concluded: (para. 40) In the absence of a cogent explanation for the great gulf between Ms.

Munro’s listing 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 [for the purposes of a conditional discharge] that balances the bankrupt’s abilities, the interest of creditors and the integrity of the system. [ 23 ] The Registrar granted the Bankrupts conditional discharges.

The condition was that for 21 months, the Bankrupts pay an amount which in the Registrar’s view was a reasonable estimate of the surplus income they ought to have paid to the Trustee if they had been required to pay the Trustee surplus income under BIA s. 68. [ 24 ] The requirement that the payments be made for 21 months appears to have come from BIA s. 168.1(1)(a)(ii) by which a bankrupt who is required to pay the trustee surplus income under BIA s. 68 is to be automatically discharged 21 months after the date of bankruptcy. [ 25 ] After the Registrar’s Reasons for Judgment were filed, counsel appeared before the Registrar for clarification of the calculations he had used in his Reasons for Judgment.

In the result, the Registrar ordered that the monthly amount payable on the Bankrupts to the Trustee for the 21 months would be $17,660.45 less whatever adjustment was required by application of Directive 11 R2-2015. Before me, Counsel for the Appellants estimated that the surplus income payable monthly would be about half of the $17,660.45, or about $8800.00. The total recovery over the 21 months would be about $185,000.00. [ 26 ] The Registrar also ordered that the costs of the Appellants in the discharge application, assessed or agreed on the basis of

Schedule C, Column 2, would have priority in the bankruptcy distribution. Standard of Review [ 27 ] An appeal from a registrar’s decision in an opposed application for a discharge is to be dismissed unless the registrar made an error in a principle of law, or unless in exercising his discretion he failed to consider a factor he ought to have considered or considered a factor he ought not to have considered. Re Dykes , 2014 ABQB 323 , at para.21. Grounds of Appeal [ 28 ] Here the Appellants submit that the Registrar made five errors: (Appellants’ Written Submissions, para. 3) a.

Failing to give any consideration to the [Appellants’] allegations of fraud on the part of the Bankrupts and the very significant evidence provided in support of those allegations;

b. By only requiring the Bankrupts to pay surplus income for 21 months, which the Bankrupts would have had to pay in any event if they had properly reported their income, the learned Registrar failed to provide any deterrent factor for parties fraudulently concealing their income; c. By failing to provide a measure to deter fraudulent concealment of income, the learned Registrar failed to properly consider the need to protect the integrity of the bankruptcy system; and d.

By directing payments to the Trustee rather than to the [Appellants], a significant windfall was given to “Non-Participating Creditor’s” (i.e. those other than the [Appellants]); rather the payments or a Consent Judgment should have been made in favour of the [Appellants]; and e. A large costs award should have been made in favour of the [Appellants].

Failure to Consider Allegations and Evidence of Fraud [ 29 ] One of the BIA s. 173 facts is: “the bankrupt has been guilty of any fraud or fraudulent breach of trust.” ( BIA s. 173(1)(k)) This was one of the grounds of opposition to the Bankrupts’ discharge raised by the Appellants in their BIA s. 170(7) notice. [ 30 ] The Registrar did not mention fraud or BIA s. 173(1)(

k) in his decision. The Appellants submit that this was a reviewable error. They accept that a finding that the BIA s. 173(1)(

k) fact had been established was unnecessary in order to make BIA s. 172(2) applicable, given that the Registrar found that the BIA s. 173(1)(

a) fact had been established. However, they submit the determination of whether or not fraud was shown was required because, if it was, the discharge order under BIA s. 172(2) should, amongst other things, promote deterrence of fraud by these and other bankrupts and respect for and confidence in the bankruptcy system by all involved in it. [ 31 ] The Registrar observed that deterrence and punishment were among the goals to be considered in determining what discharge order to make.

In the context of considering the order to be made he said: (para. 29) Among the factors to be balanced are: rehabilitation or reform of the bankrupts’ habits, deterrence and punishment, preservation of integrity of the system and the confidence of those who participate in it in good faith, and obtaining the highest possible dividend for creditors. [ 32 ] I agree that it was important to that end that the Registrar determine what the evidence established concerning the conduct of the Bankrupts. In my view, the Registrar did so.

That he assessed the evidence in the context of whether or not the Bankrupts had performed the duties imposed on them under the BIA ( BIA s. 173(1)(o)) rather than whether their conduct amounted to fraud under BIA s. 173(1)(

k) is, in my view, inconsequential. [ 33 ] The primary focus of the evidence was how commissions for real estate sales brokered by Ms. Munro were directed and how the Bankrupts received benefits significantly in excess of the income they reported.

The Registrar’s decision shows clearly that he concluded that the Bankrupts had provided inaccurate information concerning their actual income and had engaged in conduct which had the effect of depriving the estate of income that ought to have been paid to the Trustee. [ 34 ] The Registrar’s conclusions about the nature of the Bankrupts’ conduct informed the disposition he made. The conduct he considered is the conduct which the Appellants label “fraud.” In my view, it does not constitute error that the Registrar did not himself invoke the word “fraud” in stating his conclusions concerning the impugned conduct.

Failure of Disposition to Properly Address Deterrence and Protection of the Integrity of the Bankruptcy System [ 35 ] The Appellant’s submit that the condition imposed in the conditional discharge, that the Bankrupt’s pay surplus income amounting to about $8800 a month to the Trustee for 21 months, for a total of about $185,000, does not appropriately address deterrence of the conduct in which the Bankrupts engaged and the protection of the integrity of the bankruptcy system. [ 36 ] As noted, that Registrar expressly recognized that these elements, deterrence and the integrity of the system, were among the elements that it was necessary for him to balance with rehabilitation or reform of the Bankrupts’ habits and obtaining the highest possible dividend for creditors. [ 37 ] The Appellants submit that there is little, if any, deterrence in a condition that obliges the Bankrupts to pay no more than they would have had to pay had they properly reported their true income to the Trustee.

In my view, this is not necessarily so. Being required to pay surplus income for a further 21 months starting more than three years after the date of bankruptcy, with the result that they will have been in bankruptcy for more than five years by the time they are discharged, has a deterrent effect. Until the discharge condition is satisfied, in addition to making the ordered payments, the Bankrupts will be obliged to comply with BIA s. 176(1). [ 38 ] In designing a properly balanced condition of discharge, the Registrar exercises a high degree of subjective discretion.

How each of the factors to be considered contributes to the determination is not susceptible of precise articulation. For me to interfere with the Registrar’s determination I must be satisfied that he erred in the principles he applied, or that there is a palpable error in his application of the correct principles. I am not satisfied of either. In my view, no reviewable error has been shown in relation to the Registrar’s determination of an appropriate condition for the conditional discharge he ordered.

Failure to Order that the Surplus Income be Paid to the Appellants rather than the Trustee [ 39 ] The Appellants submit that, as it was through their initiative that the facts justifying the condition that the Bankrupts pay surplus income were discovered, the benefit of the ordered payments should go to them. They submit that the BIA s. 38 Order contemplated that they would be entitled to any recovery flowing from the examinations they were authorized to conduct. Indeed, they submit that the BIA s. 38 Order should be interpreted as giving them something in the nature of a charge on the funds recovered.

[ 40 ] The BIA s. 38 Order in this case was unconventional. It did not identify a specific cause of action against a third party in the Bankrupts’ favour which the Trustee declined to pursue. It authorized the Appellants to conduct examinations of the Bankrupts and others for the purpose of determining whether any cause of action to pursue existed. It authorized the Appellants to pursue any cause of action they concluded was worth pursuing in their own name, at their own risk and expense, and for their own benefit. [ 41 ] The Appellants undertook the examinations which the Order authorized.

They did not, however, commence any proceeding against a third party. [ 42 ] Further, though the information revealed through the examinations indicated that there was surplus income, the Appellants did not, it appears, take the steps which BIA s. 68 contemplates a creditor can take, to cause the Trustee to require a bankrupt to pay surplus income to the Trustee. [ 43 ] If the BIA s. 68 procedures available to creditors had been pursued they might have resulted in a requirement that the Bankrupts pay surplus income to the Trustee. The Trustee might have required surplus income to be paid ( BIA s. 68(4)).

The official receiver might have ordered surplus income be paid ( BIA s. 68(5)). Mediation might have resulted in surplus income being paid, ( BIA s. 68(6) and (7)). The court might have ordered surplus income be paid, ( BIA s. 68(10)). Only in the narrow circumstances described in BIA s. 68(10) and BIA s. 68(14), which could not be invoked until the other BIA s. 68 processes had been attempted and failed, could an order requiring payment of surplus income have been for the benefit of creditors who had obtained a BIA s. 38 order. [ 44 ] The Appellants did not invoke any of the BIA s. 68 processes.

Rather, they exercised their right to object to the Bankrupts’ discharge. Their right to do so did not flow from the BIA s. 38 Order they had obtained. All creditors have the right to object to discharge. [ 45 ] It seems to me extremely doubtful that a BIA s. 38 order would ever be granted to authorize a creditor to object to a discharge for his own benefit and to the exclusion of all other creditors. The BIA s. 38 Order granted in this case certainly did not purport to do that. Indeed, such an order would conflict directly with BIA s. 176(3):

(3) 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. [ 46 ] The BIA s. 38 Order was clear that the Appellants undertook the examinations they were authorized to conduct at their own risk and expense. The expectation was that they might recover for their efforts to the exclusion of other creditors through proceedings brought in their own names on causes of action assigned to them by the Trustee as required in the BIA s. 38 Order.

The use of the evidence they obtained in the discharge application was a collateral (though unobjectionable) use of that evidence. The situation in which the evidence produced a recovery is simply not one in which the Appellants have or can be given an interest in the recovery exclusive of the other creditors. Failure to Give the Appellants a Large Costs Award [ 47 ] The Appellants submit that the Registrar erred in awarding them only party and party costs in respect of the discharge application.

They submit that they ought to have been awarded full indemnity costs or at least solicitor and client costs. [ 48 ] BIA s. 197 (6.1) authorizes the court to award costs to a creditor who opposes the discharge of a bankrupt out of the estate in an amount not more than the amount realized by the estate under the conditional order. Here, the Registrar ordered that the Appellants have priority for their taxable costs in the bankruptcy distribution. I assume that means the priority contemplated by BIA s. 197(6)(d). [ 49 ] The Registrar’s determination as to costs was not made in his written Reasons for Judgment.

It was made at a subsequent hearing, on June 9, 2016. At that hearing, the Appellants sought first to be given priority to the other creditors in relation to the proceeds of the surplus income payments to be made by the Bankrupts, or failing that, full indemnity costs which, it was anticipated, would be approximately equal to the total amount to be paid by the Bankrupts, about $185,000. [ 50 ] The Bankrupts’ counsel took the position that costs should be against the Appellants since they had alleged and argued fraud but no finding of fraud had been made. The Registrar did not accept that submission.

The Bankrupts have not appealed. [ 51 ] The transcript indicates that the June 9 session involved a free flowing discussion between the Registrar and Counsel on a number of interrelated subjects including costs.

Counsel for the Appellants, in the end, appears to have accepted the order that was made over other possible dispositions which were discussed. [ 52 ] The Registrar concluded the discussion by ordering an adjustment to the figures he had used in his written decision and then, as to costs, he said: (Transcript page 64, line 37) And then what I’m going to do is in the circumstances and with respect to that amount, I’m going to give priority to the

section 38 creditors [the Appellants] for their legal costs, either to be assessed or agreed on the basis of

Schedule C, Column II. [ 53 ] Costs awards in bankruptcy proceedings are in the discretion of the Court (BIA s. 197(1)).

The Appellants submit that the costs award made by the Registrar is insufficient compensation for the expense they incurred in uncovering the evidence which resulted in the conditional order, and therefore, is in error. [ 54 ] I do not accept this submission. [ 55 ] The Appellants incurred the costs they did at their own risk with the expectation that they would have an opportunity to recover them in proceedings which, in the end, they never commenced. [ 56 ] There was no suggestion that any aspect of the Bankrupts’ conduct in the discharge proceeding itself would justify an award

of solicitor and client costs or full indemnity costs. [ 57 ] In some situations indemnity costs have been awarded in response to reprehensible conduct in the circumstances giving rise to the proceedings. However, in this case that is not appropriate.

The costs award will not affect the Bankrupts since costs awarded are to be paid out of the estate in priority to distribution to creditors. [ 58 ] The effect of the Registrar’s ruling is that the Appellants will recover party and party costs for their participation in the objection proceedings, but not of the processes by which they gathered the evidence used in the objection proceedings, which, as noted, they undertook expressly at their own cost. [ 59 ] The Appellants have not shown any reviewable error in the Registrar’s exercise of his discretion concerning the disposition as to costs.

Appeal Dismissed [ 60 ] The appeal is dismissed. Heard on the 22 nd day of September, 2016. Dated at the City of Edmonton, Alberta this 28 th day of September, 2016. B.R. Burrows J.C.Q.B.A. Appearances: Brian W. Summers for the Appellants Michael J. McCabe, Q.C. for the Respondent