Servus Credit Union Ltd v Sulyok, 2017 ABQB 611

Court of Queen’s Bench of Alberta Citation: Servus Credit Union Ltd v Sulyok, 2017 ABQB 611 Date: 20171012 Docket: 1703 09026 Registry: Edmonton Between: Servus Credit Union Ltd Plaintiff - and - Daniel Ernest Sulyok and Chelsey Rae Tomlinson Defendants _______________________________________________________ Reasons for Decision of S.L.

Schulz , Master, Court of Queen's Bench of Alberta _______________________________________________________ [ 1 ] This is an application for a deficiency judgment against a discharged Bankrupt and his estranged spouse where the discharged Bankrupt made payments for condominium fees and mortgage installment arrears after the Absolute Discharge was granted. For the reasons that follow, I find the claim against the Defendant Daniel Ernest Sulyok was extinguished by virtue of section 178(2) of the Bankruptcy and Insolvency Act and dismiss the application for a deficiency judgment against him.

I grant a deficiency judgment against the Defendant Chelsey Rae Tomlinson. Background [ 2 ] The Defendant husband and wife both entered into a high ratio mortgage (“Mortgage”) in 2007. Unhappy differences lead to their separation in 2015. [ 3 ] On separation, the wife (“Ms. Tomlinson”) remained resident in the condominium until August of 2015, at which time the property was rented to a third party. [ 4 ] On February 5, 2016, the husband (“Mr. Sulyok”) filed an assignment in bankruptcy. The Plaintiff, Servus Credit Union Ltd. (“Servus”) filed a claim in the bankruptcy. [ 5 ] Ms.

Tomlinson managed the condominium as a rental property during Mr. Sulyok’s bankruptcy and made the Mortgage

payments from the rental payments she received. Servus Credit Union Ltd. (“Servus”) dealt almost exclusively with Ms. Tomlinson afterMr. Sulyok was assigned into bankruptcy. [6] On November 30, 2016, Mr. Sulyok was granted an Absolute Discharge in his bankruptcy. The last payment from the rentalincome was made on the Mortgage by Ms. Tomlinson on December 9, 2016. [7] In January of 2017, Mr. Sulyok advised a representative of Servus that he was moving back into the condominium, which hedid in February of 2017.

He also inquired whether the mortgage could be renewed on “better terms”, but Servus refused because themortgage was in arrears and had matured. [8] At approximately this time, Servus became aware that the Defendants also owed condominium arrears and legal fees ofapproximately $2,189.23. Servus asked Mr. Sulyok to pay the condominium fee arrears and he did so. [9] On March 22, 2017, Mr. Sulyok made a $1,500 payment to Servus to be applied to the installment arrears on the Mortgage.On May 4, 2017, Mr.

Sulyok advised Servus that he was vacating the condominium and would not make any further installmentpayments. [10] On May 10, 2017, Servus commenced foreclosure proceedings against both Ms. Tomlinson and Mr. Sulyok with respect tothe now vacant condominium. An Order Sale to Plaintiff was granted on the Mortgaged Property and title issued in the name of thePlaintiff. The application for Deficiency Judgment in the amount of approximately $73,199.92 came before the Court and was adjournedfor briefs and written reasons.

Issue [11] After an Absolute Discharge has been granted, can a secured creditor enforce the discharged bankrupt’s personal promise topay? Review of the Case Law [12] There are two lines of cases that consider this issue: First Line of Cases: Continued payments on a contract allow the personal promise topay to survive the bankruptcy. [13] In Seaboard Acceptance Corporation v Moen, (BC CA), [1986] BCJ No 87 (BC CA) (“Seaboard”) thebankrupt continued to make payments on a car lease during the course of the bankruptcy and after discharge.

The leasing company didnot find out about the bankruptcy until after the discharge and accordingly had not made a claim in the bankruptcy.

The lease was foundto be a claim provable in bankruptcy and the Court held that the payments made after the assignment into Bankruptcy amounted to acontinuation of the contract: 17 ... the proper view is that the contract continued throughout the bankruptcy and continued after the discharge from bankruptcy; it wasnever terminated in accordance with its provisions for termination, and the fact that there might have been a claim provable inbankruptcy, or that a claim provable in bankruptcy might have been made, does not affect the fact that the contract itself continued andcontinued to regulate the relationship of the parties after the discharge from bankruptcy. 18.

In my opinion, what occurred in this case was not, strictly speaking, a novation, as that term is properly understood, but was merely acontinuation of the contract, and a continued abiding by the terms of the contract that had been made between the parties. In effect, thecontract was endorsed by the defendant after the discharge.

Seaboard, para 17-19; Emphasis Added [14] There is no policy basis given for the decision in Seaboard, but this finding can perhaps be explained by the fact that thelessor did not know about the bankruptcy until after the discharge was granted and therefore did not prove its claim in the bankruptcy. [15] Seaboard was followed by the Court of Queen’s Bench of Alberta in CIBC Mortgage Corp v Stenerson, [1998] ABQB 482(“Stenerson”). In Stenerson, the husband and wife continued to make payments on a mortgage until they defaulted sometime after thewife’s discharge from bankruptcy.

It is not clear from the decision whether the mortgagee proved its claim in the bankruptcy. JusticeHart held that the mortgage payments made throughout the bankruptcy affirmed the contractual relationship and therefore the mortgageeretained the right to claim a deficiency against the discharged bankrupt.

There is no discussion of the principles on which this decisionwas made, and in particular, no reference to the Fresh Start Principle which forms the basis of the Bankruptcy and Insolvency Act(“BIA”). [16] Seaboard and Stenerson appear to stand for the proposition that the mere making of payments during bankruptcy or afterdischarge are sufficient to affirm the debt and allow the personal promise to pay to survive the bankruptcy.

Second Line of Cases: For a debt to survive s 178(2) of the BIA, there must be fresh,mutual consideration and the debtor must direct his/her mind to the continuation of apersonal obligation to pay.

[17] In Scotia Mortgage Corp v Winchester, (AB QB) (“Winchester”). Master Funduk confirmed that theamount owing under a mortgage at the date of bankruptcy was a claim provable in bankruptcy and was therefore discharged through theoperation of section 178(2) of the BIA.

He distinguished Seaboard by concluding a new contract was entered into after the discharge inSeaboard, citing in support the comment at paragraph 18 of Seaboard that the “contract was endorsed by the defendant after discharge”.Master Funduk found there was no conduct in the case before him that created a new contract and he dismissed the application by thecreditor bank. The deciding factor for Master Funduk was the lack of conduct to support the creation of a new contract.

Winchester wasnot referenced in Stenerson even though it was decided before Stenerson. [18] The requirement of mutual consideration was further clarified in CIBC Mortgage Corporation v Coleski, [1999] CanLII 3116(NS SC) (“Coleski”) and Bridgewater Bank v Simms, [2011] BCSC 1453 (M) (“Bridgewater”). Both Bridgewater and Coleski clarifythat a mere payment by the bankrupt during the bankruptcy is not sufficient to create an affirmation of the mortgage debt and the liabilityfor any deficiency.

For a reaffirmation to occur, there must be new and valuable mutual consideration for the promise to pay in order fora discharged bankrupt to become liable on a provable claim caught by s 178(2). [19] A more recent analysis of this issue is found in Scotia Mortgage Corp v Berkers, [2016] NSSC 12 (“Berkers”). Berkers stands for the proposition that a discharge from bankruptcy relieves the bankrupt from personal liability, notwithstanding payments madeon a mortgage after bankruptcy: [19] Rejection of Seaboard. In my opinion there are two fundamental flaws in the Seaboard line of thinking.

It fails to disclose aprinciple of law to support the conclusion that liability under a continuing contract is treated differently in bankruptcy from other kinds ofliability.

It also fails to give effect to the plain meaning of s. 178(2). [20] Liability after bankruptcy under a pre-bankruptcy contract could be established under known principles, such as novation orestoppel, on proof of facts additional to those in Seaboard, Planting, Scalisi or Coleski, but the scant facts of continued payments under amortgage or lease and continued possession do not establish any principle for continuing liability of which I am aware.

One is remindedof the notion that acknowledgement of a debt after a prescription period starts the period running again, but outside that field continuingbenefit and continuing performance do not of themselves, found continuing liability. [21] The adoption of such a broad approach to what is, in fact, a revival of liability serves no interest, especially in the field of residentialmortgages. The mortgagee, who usually gets notice of the bankruptcy, is usually pleased to take monthly payments. The mortgagor maybe content to make the payments in order to stay in a home, at least for the time being.

If the mortgagee wants something more, such as arevival of personal liability, it can propose a new contract based on forbearance. There is no need for revival by operation of law.” Berkers at para 19-21, Emphasis Added. Academic Comment on the Two Lines of Cases [20] Several learned authors have commented on these authorities. [21] Tamara Buckwold, in her

article Post Bankruptcy Remedies of Secured Creditors: As Good as it Gets (1999), 31 CBLJ 436opines that the Seaboard is “doctrinally insupportable” (p 449) and “effectively imposed a contractual novation on the debtors wherethey have been given no opportunity to consider and decide [whether] the collateral in question is so important to [the bankrupt] that itsretention justifies payment of a debt from which [the bankrupt] would otherwise be released” (p 450). [22] The

article by Anthony Duggan, Jacob S Ziegel and Jassmin Girgis comments on the analysis made by Professor Buckwold(Post-Bankruptcy Remedies of Secured Creditors: Some Comments on Professor Buckwold’s Article (1999), 32 CBLJ 142) (the “DugganArticle”). [23] The Duggan

Article accepts the

interpretation of section 178(2) of the BIA to mean an extinguishment of the debts upondischarge (as opposed to the debts becoming merely unenforceable). It finds this

interpretation to be consistent with the Fresh StartPrinciple underlying the BIA (Duggan Article, at p 143). As an aside, I note it is also consistent with the analysis of Master Funduk inWinchester. [24] The authors of the Duggan

Article also agree that “a debtor’s promise to a creditor will not be binding unless it is supportedby new consideration” however the Duggan

Article authors express a preference for the word “reaffirmation” rather than “novation” asused by Professor Buckwold (Duggan Article, p 143-144). [25] The main disagreement between Professor Buckwold and the Duggan

Article authors appears to center on the legal inferenceto be drawn from the facts in Seaboard and the application of estoppel, however the authors of both articles agree that: ... a debtor’s remaining in possession after bankruptcy with the secured creditor’s consent should not be treated as an implicitreaffirmation. The secured creditor is not being deceived and it can easily resolve any ambiguity about the debtor’s intention byrequiring the debtor to sign a reaffirmation agreement. Duggan Article, at p 147 [26] Professor Buckwold opines again in a second

article Holding the High Ground: The Position of Secured Creditors inConsumer Bankruptcies and Proposals, (1999) 37 Osgoode Hall LJ No.1&2 277 (“Holding the High Ground”): The BIA does not contemplate the preservation or revival of pre-discharge debt obligations by agreement between the parties orotherwise. However, that result may be achieved in the context of a secured credit relationship under the general contract law principlesof compromise or forbearance.

If the debtor’s default entitles the secured creditor to seize collateral that the debtor does not want to lose,the debtor may well be prepared to agree to repay debt that would otherwise be discharged, in return for the creditor’s agreement to

refrain from exercising his or her rights of realization. The creditor’s forbearance to exercise an existing legal right is consideration for the debtor’s agreement to pay a sum of money. (Footnote 33)... Footnote 33... In the context of bankruptcy, a creditor’s promise to forbear from suing on a pre-discharge debt cannot be consideration since the bankrupt is released by the discharge from the obligation to pay that debt. However, because a secured creditor’s rights of realization survive the discharge, the forbearance to exercise on those rights can be consideration.

Holding the High Ground , at p 287-288, Emphasis Added. [ 27 ] Professor Buckwold elaborates on her concern over the decision in Seaboard : The reasoning in Seaboard effectively imposes a reaffirmation upon the debtor without clear evidence that such a choice has been made or even contemplated. Surely, the maintenance of payments and the retention of the collateral cannot in themselves be regarded as conduct demonstrating a decision to forgo the benefits of discharge with respect to the credit transaction in question.

Such a course of conduct is more likely indicative of the debtor’s pragmatic attempt to retain legal possession of the collateral, without any appreciation of the legal alternatives. ... ... There is no doubt that any security interest attached to a property of the bankrupt extant at the date of discharge survives the discharge, and is enforceable by the secured creditor at a subsequent date, notwithstanding the release of the underlying debt. Holding the High Ground , at p 291, Citations Omitted. [ 28 ] I conclude that academic comment favours the second line of cases.

Analysis [ 29 ] I am mindful of the legal principle of stare decisis , however I am also mindful of the need to try to reconcile apparently conflicting cases in order to ascertain the trends developing over time since some of the earlier decisions. Further, I am mindful of the policies upon which the BIA is based and which do not appear to have formed a basis for some of the earlier decisions.

In particular, I am mindful that litigants need some direction from the Court as to how to approach these matters when the cases appear to represent two lines of judicial reasoning. [ 30 ] I adopt the reasoning set out by the second line of cases: Before a debt can survive section 178(2) of the BIA , there must be mutual consideration and a directing of the minds of the parties, particularly the debtor, to the continuation of personal liability. I base this decision on the following analysis: [ 31 ] Section 178(2) embodies one of the overarching purposes of the BIA , known as the Fresh Start Principle.

The Fresh Start Principle permits the rehabilitation of the honest but unfortunate debtor, relatively free of pre-bankruptcy debts. [ 32 ] Section 178(2) of the Bankruptcy and Insolvency Act (“ BIA ”) provides that “... an order of discharge releases the bankrupt from all claims provable in the bankruptcy” (emphasis added). The release is subject to the exceptions listed in section 178(1), none of which are relevant to this application. [ 33 ] There is no statutory definition of the word “release” in section 178(2) . The

interpretation of the word “release” that is most consistent with the clear wording of section 178(2), the ordinary meaning of the word “release”, and with the Fresh Start Principle, is that claims provable in bankruptcy are “extinguished” upon discharge ( See Winchester and Berkers ). [ 34 ] Claims provable in bankruptcy are defined in s 121(1) of the BIA , and it is clear that a mortgage and a personal obligation to pay can be debts provable in bankruptcy ( Winchester ). [ 35 ] With respect to the survival of the promise to pay: 1.

Mere affirmation of the contract is not sufficient to override section 178(2) of the BIA . Neither is mere possession of the secured property without something further. 2. For the debt and the promise to pay to survive section 178(2) of the BIA , the discharged bankrupt and the creditor must enter into a new agreement. This can take the form of a novation or re-negotiation or reaffirmation of the original contract with fresh mutual consideration plus evidence of the deliberate choice by the debtor to assume a debt for which he/she would otherwise not be obliged to satisfy by operation of section 178(2). 3.

Fresh mutual consideration can include the creditor’s agreement to waive its present right of seizure. Consideration does not include the forbearance to sue because that right is extinguished by section 178(2) . 4. If the creditor has not been notified of the bankruptcy and afforded the opportunity to claim in the bankruptcy, the claim may survive section 178(2) . Application of the Principles to this Case [ 36 ] Here, there was possession of the property but there is no evidence of a new contract. In particular, there is no evidence of a

conscious decision being made by the discharged bankrupt to be bound by the personal obligation to pay. Accordingly, there is no novation, reaffirmation or re-negotiation of the contract in evidence before me, and there can be no deficiency judgment against Mr. Sulyok, the discharged bankrupt. [ 37 ] The application before me is for a deficiency judgment “against the defendants” although argument centered around whether there could be a deficiency judgment against the discharged bankrupt. There has been no argument that precludes the granting of a deficiency judgment against Ms.

Tomlinson, and I grant deficiency judgment against her. Costs [ 38 ] Mr. Sulyok is entitled to party and party taxable fees and disbursements under column 2 of

Schedule C from the Plaintiff Servus Credit Union Ltd, to be agreed upon failing which to be assessed. These costs are not to be passed on to Ms. Tomlinson. [ 39 ] Given that this application dealt mainly with the claim against Mr. Sulyok, Servus Credit Union Ltd and Ms. Tomlinson shall each bear their own costs of this application. [ 40 ] I would like to express my appreciation to counsel for their thoughtful and measured submissions to this matter. Dated at the City of Edmonton, Alberta this 12 th day of October, 2017. S.L. Schulz M.C.Q.B.A.

Appearances: Dusten Stewart Minsos Stewart Masson for the Plaintiff, Servus Credit Union Ltd Tarryn Klapper Main Street Law for the Defendant, Daniel Ernest Sulyok No one appearing for the Defendant, Chelsea Rae Tomlinson