Fanning v Fanning, 2017 ABQB 306

Court of Queen’s Bench of Alberta Citation: Fanning v Fanning, 2017 ABQB 306 Date: 20170502 Docket: 1601 10408 Registry: Calgary Between: Lisa Anne Fanning Plaintiff - and - Kevin Christopher Fanning, Megan P. Zybutz Professional Corporation, and Cameron Okolita Inc., Christopher D Brawn And Kelly Macdonald Defendants _______________________________________________________ Reasons for Decision of the Honourable Mr. Justice K.D. Yamauchi _______________________________________________________ I. Introduction [ 1 ] On October 29, 2001, Lisa Anne Fanning and her then-husband Kevin Christopher Fanning assigned all of their property for the general benefit of their creditors pursuant to

section 49 of the Bankruptcy and Insolvency Act , RSC 1985, c B-3 [ BIA ]. They appointed Cameron Okolita Inc as their bankruptcy trustee (the “Trustee”). The Trustee applies to have this Court declare that it is entitled to proceeds from the sale of the bankrupts’ home representing Ms. Fanning’s non-exempt portion of those proceeds sufficient to satisfy her proven creditors’ claims and the Trustee’s fees and disbursements, along with interest on those amounts. As at the date this Court heard this matter, that amount was $66,570.96.

There will be additional costs for the application that is before this Court. [ 2 ] Ms. Fanning objects to the Trustee’s entitlement to those funds. Mr. Fanning is not part of this application.

II. Background [ 3 ] Ms. Fanning and Mr. Fanning jointly owned a home in Calgary (the "Property"). Ms. Fanning’s statement of affairs shows $174,000 as the value of the Property. It also shows that the Property was encumbered by a mortgage in favour of Bank of Nova Scotia in the amount of $132,000, and property taxes of $3,800. The bankrupts were each entitled to a principal residence exemption under the Civil Enforcement Act , RSA 2000, c C-15, s 88(g), Civil Enforcement Regulation , Alta Reg 276/95, s 37(1)(e).

Inasmuch as the bankrupts owned the Property jointly, they would each receive the first $20,000 of equity, in priority to the Trustee. [ 4 ] On September 7, 2016, Mahoney J ordered that the parties sell the Property, and he adjourned the distribution of the Property’s net proceeds to a special chambers application. Pursuant to that order, the parties sold the Property, and this Court approved the sale by way of an order granted on February 2, 2017.

This Court’s order dealt with an interim distribution of the net sale proceeds based on the parties’ agreement, including payment to the parties of their exempt portions. There is $195,328.27 remaining in court for distribution. [ 5 ] Ms. Fanning’s original discharge application was adjourned sine die on October 2, 2002, as she had failed to comply with her duties during her bankruptcy which, among other things, required her to pay the Trustee’s fees for the administration of her estate.

As a result, the Trustee obtained its discharge and creditors' rights were reinstated on June 5, 2003. [ 6 ] The Trustee registered notice of Ms. Fanning bankruptcy against the Property on August 18, 2005, pursuant to BIA s 74, which provides as follows: 74

(1) Every bankruptcy order, or a true copy certified by the registrar or other officer of the court that made it, and every assignment, or a true copy certified by the official receiver, may be registered by or on behalf of the trustee in respect of the whole or any part of any real property in which the bankrupt has any interest or estate, or in respect of the whole or any part of any immovable in which the bankrupt has any right, in the registry office in which, according to the law of the province in which the real property or immovable is situated, deeds or transfers of title and other documents relating to real property, an immovable or any interest or estate in real property or any right in an immovable may be registered.

(2) If a bankrupt is the registered owner of any real property or immovable or the registered holder of any charge, the trustee, on registration of the documents referred to in subsection (1), is entitled to be registered as owner of the real property or immovable or holder of the charge free of all encumbrances or charges mentioned in subsection 70(1). [ 7 ] BIA s 70(1) is also important, as it provides as follows: 70

(1) Every bankruptcy order and every assignment made under this Act takes precedence over all judicial or other attachments, garnishments, certificates having the effect of judgments, judgments, certificates of judgment, legal hypothecs of judgment creditors, executions or other process against the property of a bankrupt, except those that have been completely executed by payment to the creditor or the creditor’s representative, and except the rights of a secured creditor. [ 8 ] In the Spring of 2006, Ms. Fanning approached the Trustee to advise it that she and Mr.

Fanning had separated and were attempting to sell the Property. She wished to obtain her discharge so that she could qualify for financing on a new property. Apparently, she had found property in Nanton, Alberta, and that her discharge was the only impediment to her finalizing the purchase. [ 9 ] The Trustee agreed to be reappointed as her bankruptcy trustee and brought her discharge application before the court on June 14, 2006. The supplementary BIA s 170 report that the Trustee prepared to support Ms. Fanning’s application for discharge is of some importance.

It values the proven unsecured claims at $12,951.20, and references the fact that the unsecured claimants are entitled to 5 percent interest per annum. It also values the Property at $217,000 (based on the City Tax Assessment) and indicates that there is a mortgage on the Property securing $136,927.36.

It goes on to say, “[i]f as suspected the fair market value of the home exceeds its assessed property tax value, the funds realized from the sale of the home may be sufficient to pay the creditors ...” Finally, it says the following: Notwithstanding that the property will be sold subsequently to the Bankrupt’s discharge date, the Trustee recommends that the Bankrupt receive her Absolute Discharge on the condition that the Trustee’s registered interest in the property not be dischargeable until such time as the property is liquidated and the Trustee receives the non-exempt equity. [ 10 ] The order that arose from that hearing provides in the

preamble as follows: AND WHEREAS the Trustee’s registered interest in the property will not be dischargeable until such time as the property is liquidated and the Trustee receives the non-exempt equity, which the Trustee anticipates will be received within the next few months; [ 11 ] Ultimately, Ms. Fanning did not purchase the Nanton property, as contemplated, and she did not list the Property for sale or move out of it. The Trustee advised Ms. Fanning’s family law counsel in 2008, that the Trustee maintained its interest in the Property and that Ms.

Fanning’s entitlement to the sale proceeds would be limited to her $20,000 exemption, until her estate was paid out in full. [ 12 ] As part of the family law litigation, on November 16, 2007, Hawco J ordered the parties to sell the Property “as soon as possible.” This was not done. Because of the costs that the Trustee would incur to force Mr. and Ms. Fanning to sell the Property, it did not proceed in that manner. Thus, it took no steps to sell the Property. [ 13 ] Given the circumstances, the Trustee proceeded to obtain its discharge in April of 2016. In September of 2016 it was reappointed as Ms.

Fanning’s bankruptcy trustee to deal with the Property once it sold pursuant to Mahoney J’s order. The Property sold in February of 2017. [ 14 ] No creditor sought any proceedings to sell the Property pursuant to BIA s 38.

[15] Ms. Fanning argues that she believed that her debts were cleared as a result of her absolute discharge, and that she onlybecame aware that the Trustee was seeking to recover her non-exempt portion from the sale of the Property in the Fall of 2015. [16] On August 8, 2016, Ms. Fanning commenced proceedings by way of an originating application for partition and sale of theProperty. This resulted in Mahoney J’s order. [17] Once Mr. and Ms. Fanning sold the Property, Ms.

Fanning brought an application for an order directing that the Registrarremove the non-permitted encumbrances on the Property and for certain distributions to be made. The Trustee objected to thatapplication. This Court granted the order that was referred to earlier. III. Discussion [18] Certain provisions of the BIA will assist this Court in resolving the issue of the Trustee’s entitlement to the non-exemptportion of the Property’s net sale proceeds.

They are as follows: 71 On a bankruptcy order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity todispose of or otherwise deal with their property, which shall, subject to this Act and to the rights of secured creditors, immediately pass toand vest in the trustee named in the bankruptcy order or assignment, and in any case of change of trustee the property shall pass fromtrustee to trustee without any assignment or transfer. 20

(1) The trustee may, with the permission of the inspectors, divest all or any part of the trustee’s right, title or interest in any realproperty or immovable of the bankrupt by a notice of quit claim or renunciation by the trustee, and the official in charge of the land titlesor registry office, as the case may be, where title to the real property or immovable is registered shall accept and register in the landregister the notice when tendered for registration.

(2) Registration of a notice under subsection (1) operates as a discharge or release of any documents previously registered in the landregister by or on behalf of the trustee with respect to the property referred to in the notice. 40

(1) Any property of a bankrupt that is listed in the statement of affairs referred to in paragraph 158(

d) or otherwise disclosed to thetrustee before the bankrupt’s discharge and that is found incapable of realization must be returned to the bankrupt before the trustee’sapplication for discharge, but if inspectors have been appointed, the trustee may do so only with their permission.

(2) Where a trustee is unable to dispose of any property as provided in this section, the court may make such order as it may considernecessary. 37 Where the bankrupt or any of the creditors or any other person is aggrieved by any act or decision of the trustee, he may apply to thecourt and the court may confirm, reverse or modify the act or decision complained of and make such order in the premises as it thinksjust. [19] When Ms. Fanning assigned all of her property for the general benefit of creditors, she lost any capacity to deal with herproperty, including the Property.

All her property passed to and vested in the Trustee: BIA s 71. The Trustee has not provided a notice ofquit claim or renunciation of its right, title or interest in the Property: BIA s 20(1); see also Fehr Estate (Trustee of) v Fehr, 2008NWTSC 70, [2009] 2 WWR 722 [Fehr] at para 46. [20] There is no question that Ms. Fanning listed the Property in her statement of affairs. The question for this Court boils down towhether the Property was “incapable of realization” such that it had to be returned to her “before the trustee’s application for discharge”: BIA s 40.

In Marino, Re (2004), (ON CA), 2 CBR (5th) 290, 72 OR (3d) 274 (CA) [Marino, cited to CBR], Lang JA,for the court said the following: Upon their bankruptcies, when the Marinos' interests vested and remained vested in the trustee, the Marinos were not entitled to theproperty unless it was released to them by the trustee, or if it was re-vested by court order under either s. 40 or s. 37 of the Act. In otherwords, some positive act was required to return the property. If that positive act was not forced by the bankrupt, the trustee was requiredto consider it at the time of application for its discharge.

The requirement to consider the property is set out in s. 40(1); where property is "incapable of realization", the trustee is required toreturn it to the bankrupt before the trustee applies for discharge: Thompson v. Coulombe, [1984] Q.J. No. 11 (Que. C.A.), Zemlak(Trustee of) v. Zemlak (1987), (SK CA), 42 D.L.R. (4th) 395 (Sask. C.A.). Alternatively, under s. 40(2), where thetrustee is unable to dispose of property the court "may make such order as it may consider necessary".

If the trustee takes no action, an"aggrieved" bankrupt has the option of applying to a court and "the court may confirm, reverse or modify the act or decision complainedof and make such order in the premises as it thinks just" (s. 37). Marino at paras 15-16. [21] In the case at bar, Ms. Fanning argues that the Trustee has done essentially nothing before or after its discharge, and, in fact, ithas done nothing since it obtained its original discharge on June 5, 2003. However, while Ms.

Fanning was still an undischargedbankrupt, the Trustee registered notice of her bankruptcy against the Property on August 18, 2015, which has remained on title since thatdate.

[22] The court in Marino places the onus on the bankrupt to make an application pursuant to BIA s 37. The Trustee, especially inthe case at bar, need not do anything, as it has registered notice of the bankruptcy against the Property, which will encumber the Propertyuntil it is sold. [23] It is worthwhile noting that the court in Marino outlined the procedure involved where the trustee seeks to make a claimagainst unrealized property of a bankrupt. It said the following: After discharge as Mrs.

Marino's trustee, Deloitte & Touche continued in its position only for "such duties as may be incidental to the fulladministration of the estate" (s. 41(10)). If realization of the property was more than "incidental" to the administration of this estate, or ifa court was satisfied that assets of the bankrupt remained unrealized or undistributed, the trustee could seek re-appointment as a trustee tocomplete the estate's administration (s. 41(11)). No such relief was or has been requested.

Absent any application for re-appointment, and even though the property vested in the trustee, the trustee had no authority to deal with itunless such dealing was "incidental" to the administration of Mrs. Marino's estate. Marino at paras 20-21. [24] In the case at bar, the Trustee sought and obtained its reappointment on 2 occasions. First, when Ms. Fanning wanted topurchase the Nanton property, and, second, after Mahoney J ordered the sale of the Property. In other words, it did exactly what theMarino court required. [25] In fact, the Trustee went further in the case at bar. It advised the court on Ms.

Fanning’s discharge application that it wasgoing to maintain its interest in the Property until the Fannings liquidated the Property. Although Ms. Fanning argues that the words inthe order which say that the Trustee expected that it would receive the non-exempt portion of the net sale proceeds of sale from theProperty “within the next few months,” those words, this Court finds, are not the crucial aspect of the ruling. The crucial aspect is thatthe Trustee maintained its interest in the Property.

Besides, the fact that the Property was not sold was through the collapse of Ms.Fanning’s purchase of the Nanton property. The Trustee, especially in the view of the notice it had registered against the Property, wasunder no obligation to expend funds to have Ms. Fanning removed from the Property so it could sell the Property. [26] Ms. Fanning also argues that the Trustee is estopped from claiming the non-exempt net sale proceeds. To rely on thisargument, Ms. Fanning must establish that the Trustee, by words or conduct, made a promise or assurance which was intended to affectits legal relationship with Ms.

Fanning and intended Ms. Fanning to act on it, and that Ms. Fanning, relying on the representation, actedon it or in some way changed her position: Marino at para 32. This Court finds that Ms. Fanning fails on the first requirement. TheTrustee made no promises or assurances to her which it intended would affect her legal relationship with the Trustee. Quite the contrary,the Trustee has always maintained that it was going to claim the non-exempt portion of the Property’s net sale proceeds.

Unlike thesituation in Marino, the Trustee in the case at bar never provided her with assurances that it would make no claim against the equity inthe Property. Because the Trustee made no such assurances, how can Ms. Fanning argue that she relied on such assurances? [27] The facts in Fehr are different from those before this Court. In that case, the bankruptcy trustee did not register any interestagainst the bankrupt’s home until after they obtained their absolute discharges. The caveat that the trustee had registered was dischargedafter the trustee’s counsel was served with a notice to take proceedings.

Three years after the trustee had registered its caveat, it soughtan order for directions for the sale of the home. Schuler J said the following: ... It was never clarified in the evidence why the Trustee did not obtain an appraisal on the home prior to the absolute discharge, whichalso leads me to conclude that the Trustee did not have any firm intention of realizing on the non-exempt equity prior to the Fehrs'discharge.

Fehr at para 62. [28] In the case at bar, the Trustee made it clear through its registration of the bankruptcy notice against the Property and its BIA s170 report that it intended on realizing the non-exempt portion of the net sale proceeds of the Property. These were done before Ms.Fanning’s absolute discharge from bankruptcy. [29] Schuler J went on to say the following: ... I find that the Trustee did not make it clear to Mr. and Mrs. Fehr that it had a realizable claim to the non-exempt equity in their homeor that it intended to realize on that claim.

The Trustee allowed the Fehrs to believe that so long as they made the mortgage paymentsthey would not lose the home. The Trustee did not move expeditiously to deal with the non-exempt equity and did not alert the Fehrs, orthe Registrar in Bankruptcy, at the time of either the conditional or the absolute discharge, that it intended to realize on its claim. All ofthis led the Fehrs to reasonably believe prior to their discharge that their equity in the home would not be taken by the Trustee and thatafter discharge the equity would remain theirs.

Fehr at para 63. [30] This quotation deals with the first branch of the promissory estoppel argument to which this Court has earlier referred. [31] Schuler J expresses concern over the lack of expeditious movement on the trustee’s part. Ms. Fanning argues the same in thecase at bar. However, the difference in the Fehr case is that the trustee had not made known to the bankrupts that it would be claimingan interest in their home. Here, the Trustee made its intentions known to Ms. Fanning all along. If she felt aggrieved by that decision, shecould have made an application to the Court pursuant to BIA s 37.

She did not. [32] Ms. Fanning also provided this Court with a decision of the Saskatchewan Court of Appeal in Zemlak (Trustee of) v Zemlak (1987), (SK CA), 42 DLR (4th) 395; 66 CBR(NS) 1, [1987] 6 WWR 114 (Sask CA) [Zemlack, cited to CBR]. In that

case, Tallis JA articulated the issue as follows: The question for decision on this appeal ... is whether a discharged trustee in

summary administration proceedings in bankruptcy is entitled to maintain a caveat under s. 52(3) of the Bankruptcy Act, against the appellant's "homestead" after she has received an absolute discharge and in circumstances where the trustee has taken no

part in the administration, control or management of the property and did not raise the issue of maintaining such caveat in the application for discharge of the bankrupt and trustee before the Registrar in Bankruptcy . Zemlak at 2-3 [emphasis added]. [ 33 ] The emphasized portion distinguishes Zemlak from the case at bar, as the Trustee did raise that issue before the Registrar during Ms. Fanning’s application for discharge.

Tallis JA went on to say that allowing the estate to benefit from the bankrupt’s paying off their mortgage and the increased value of the homestead through the effluxion of time “does not comport with the philosophy of the [ BIA ]”: Zelmak at 403. While this Court agrees with that statement in the context of the facts of that case, Tallis JA could not be taken to have made a general statement such that in all cases the trustee cannot realize on any after-acquired property.

He goes on to say “Speaking generally, in the case of an absolute discharge, post-discharge earnings and acquisitions are immune from attachment”: Zelmak at 405. Again, this Court agrees with that statement, but the property to which Tallis JA was referring was indeed after-acquired property. The Property in the case at bar is not after-acquired property. [ 34 ] As mentioned earlier, Ms.

Fanning argues that she believed that her debts were cleared as a result of her absolute discharge, and that she only became aware that the Trustee was seeking to recover her non-exempt portion from the sale of the Property in the Fall of 2015. This Court does not accept this argument, and flatly rejects it. Ms.

Fanning was aware that the Trustee would be seeking to realize on the non-exempt portion of the net sale proceeds from the sale of the Property from the Trustee’s supplementary BIA s 170 report, the order that resulted from her discharge application, and the notice the Trustee registered against the Property. [ 35 ] Ms. Fanning also provided this Court with Master Funduk’s decision in MacKay, Re , 2002 ABQB 598 , 35 CBR (4 th ) 275 (Master) [ MacKay ].

In that case, Master Funduk provides a lengthy discussion concerning the date of valuation of “limited exemptions property,” which includes a bankrupt’s primary residence. He concluded by saying the following: The message to trustees and creditors is - advance claims for surplus equity in limited exemptions property by no later than the bankrupt's application for discharge, or forget it. MacKay at para 110 . [ 36 ] In the case at bar, that is what the Trustee did.

And Registrar Laycock made his order with specific reference to the Trustee’s registered interest in the Property not being “dischargeable until such time as the property is liquidated.” [ 37 ] The question then becomes at what point should this Court value the Property? The Trustee argues that it should be the date on which the Fannings sold the Property, which would result in the Trustee being able to access the non-exempt portion to pay the estate’s creditors and the administration fees fully. Ms.

Fanning argues that because the Trustee showed little interest in the Property until it sold, the Trustee should be estopped from making a claim to any of the net proceeds. [ 38 ] This Court agrees with neither approach. It has already discussed the issue concerning estoppel. As for the Trustee’s claim, this Court agrees with the comments that Master Funduk made in MacKay , but will adjust them slightly in the interests of fairness.

In essence, Master Funduk said that the date for establishing, or, more accurately, crystallizing the value of the surplus equity is the date on which the bankrupt’s discharge application is made. He recommends 3 approaches, which are as follows: There are advantages to surplus equity being realized that way. First, the trustee must do a s. 170 report and he makes recommendations about what order is appropriate. If he recommends a conditional order of discharge for the surplus equity proved creditors (who are given a copy of the report) might not be as opposed to the bankrupt’s discharge.

Second, a conditional order is a cost effective method of realizing on the surplus equity. Third, a bankrupt who wants to keep the property and pay a reasonable price for the surplus equity may not presently have the money to do it. Instead of adjourning the application for discharge until the bankrupt is able to pay and has paid the conditional order gives a present finality, which is necessary at some point. In effect, the bankrupt buys now on time. The conditional order can even be ordered to be a charge against the property and be registered as such.

MacKay at para 85 . [ 39 ] In the case at bar, no creditors appeared at Ms. Fanning’s discharge hearing. [ 40 ] Why did Master Funduk suggest this way of proceeding? He said the following: Regardless whether a bankrupt has gotten an absolute, suspended or conditional discharge nobody can later raise an issue about surplus equity in a house. The discharge is the latest time that that issue is to be dealt with, if anyone wants to make that an issue. If a conditional order is given requiring the bankrupt to pay for the surplus equity nobody can later ride the market, up or down, to revisit that.

If the house value later goes up the trustee and creditors cannot ask that the bankrupt now pay more. If the house value later goes down the bankrupt cannot ask that he now pay less. MacKay at paras 100-01 . [ 41 ] In the case at bar, Ms. Fanning’s absolute discharge did not deal with her surplus equity in the way that Master Funduk suggested, such that there was finality to it. The absolute discharge did not establish a quantum of her surplus equity. Thus, it allowed the

parties to “ride the market.” It might be argued that the amounts the Trustee set forth in its supplementary report could established that amount, viz , $217,000 less $136,927.36 for a total of $80,072.64. After deducting the Fannings’ exemption, the non-exempt portion would be $40,072.64, for which Ms. Fanning would be entitled to one-half. [ 42 ] Property values continued to rise in Calgary until the summer of 2007, when they started to drop. Obviously, they have recovered since that time, as the parties listed the Property for $340,000 pursuant to Mahoney J’s order, and the Property sold in 2017.

The parties could not provide this Court with valuations of the Property for any time beyond the date of Ms. Fanning’s absolute discharge. [ 43 ] The Trustee’s supplementary report and Ms. Fanning’s absolute discharge made it clear that the surplus equity amount would be established once the Fannings sold the Property. This should have been done when Ms. Fanning obtained her discharge. [ 44 ] Neither the Trustee, nor Ms. Fanning should benefit from their inaction in having the Property sold. Ms.

Fanning bore the risk of having a court determine that the Trustee is allowed the whole of the non-exempt portion of the net sale proceeds no matter when the Property was sold. The Trustee, on the other hand, bore the risk that a court might rule that its inaction resulted in it not being entitled to any of the surplus proceeds. [ 45 ] Given the finality of Ms. Fanning’s absolute discharge and her knowledge that the surplus proceeds, no matter what the amount, would be attachable by the Trustee when the Property sold, this Court finds that the value of the Property when it should have been sold was $275,000.

From that will be deducted the amount of the mortgage, as it should have been at the time of sale, in the amount of $135,000, leaving a balance of $140,000. After deducting the Fannings’ exempt portion, there is a remainder of $100,000, of which Ms. Fanning is entitled to one-half, or $50,000. That is the amount of her surplus equity to which the Trustee is entitled. [ 46 ] As there was mixed success, the parties will bear their own costs. Heard on the 11 th day of April, 2017. Dated at the City of Calgary, Alberta this 2 nd day of May, 2017. K.D. Yamauchi J.C.Q.B.A.

Appearances: Daniel Jukes Miles Davison LLP for the Applicant Cameron Okolita Inc Andrew J Rykes Warren Benson Amantea LLP for the Respondent Lisa Anne Fanning