Anstead (Re), 2017 ABQB 700

Court of Queen’s Bench of Alberta Citation: Anstead (Re), 2017 ABQB 700 Date: 20171117 Docket: 24 1703933 Registry: Edmonton In the Matter of the Bankruptcy of Craig Robert Anstead Between: Bank of Montreal Appellant - and - Craig Robert Anstead Respondent _______________________________________________________ Reasons for Judgment of the Honourable Associate Chief Justice J.D.

Rooke _______________________________________________________ [ 1 ] This appeal is brought by the Bank of Montreal (“BMO”) from the decision of Registrar Smart, wherein he dismissed BMO’s application for leave, on a nunc pro tunc basis, to issue a Statement of Claim against Craig Robert Anstead. Facts [ 2 ] On or about January 28, 2009, Mr. Anstead completed an Application for Credit from BMO.

At the same time, by a Conditional Sales Contract for Consumer Purchase (“the Conditional Sales Contract”), he agreed to purchase from Red Deer RV Country Ltd, operating as Paradise RV (“Paradise RV”), a 2008 Supreme Silver Crown SC-45 recreational vehicle (“the RV”) for the

sum of $434,233.10. Paradise RV assigned its interest in the Conditional Sales Contract to BMO. The sum of $434,233.10 was advanced by BMO to Paradise RV. [ 3 ] At the time of the purchase, Mr. Anstead was the sole shareholder and director of Paradise RV. In essence, therefore, Mr. Anstead borrowed $434,233.10 from BMO, and used that money to purchase the RV from a corporation he owned and controlled. [ 4 ] Pursuant to the Conditional Sales Contract, Mr.

Anstead agreed that he would not part with possession or control of the RV, or sell or transfer any interest in the RV, without BMO’s express written consent, and he was required to inform BMO of all permanent changes in the location of the RV. Title to the RV remained with Paradise RV. [ 5 ] Mr. Anstead took possession of the RV and used it, personally, as well as in connection with his company, Paradise RV. He has acknowledged that he did not intend to use the RV solely for personal reasons, and intended ultimately to sell it through Paradise RV. On or about June 17, 2009, the RV was sold. Mr.

Anstead did not provide notice or obtain the consent of BMO to this sale. Though he was no longer in possession of the RV, Mr. Anstead continued, directly or through Paradise RV, to make payments to BMO pursuant to the Conditional Sales Contract. [ 6 ] Mr. Anstead was deemed to have made an Assignment in Bankruptcy on March 15, 2013. On December 12, 2013, a Proof of Claim on behalf of BMO was provided to the Trustee in Bankruptcy (“the Proof of Claim”). In the Proof of Claim, BMO claimed as a secured creditor in the RV and disclosed a $0 amount as a deficiency claim.

The Trustee in Bankruptcy acknowledged BMO’s Proof of Claim and released the Trustee’s interest in the RV. Even after Mr. Anstead was declared a bankrupt person, and the Trustee in Bankruptcy released its interest in the RV, Mr. Anstead, personally or through Paradise RV, continued to make payments to BMO pursuant to the Conditional Sales Contract. BMO extended the Conditional Sales Agreement by way of a Confirmation Notice on February 4, 2014, and payments continued to be made until June 27, 2015.

It was after the payments ceased, on October 29, 2015, that BMO filed a Statement of Claim for claims including debt and conversion, and seeking a declaration that the claim fell within s.178 of the Bankruptcy and Insolvency Act , RSC 985 c.B-3. [ 7 ] By email dated November 30, 2015, counsel for Mr. Anstead wrote to Counsel for BMO, advising that Mr. Anstead was still in bankruptcy and inquiring as to whether BMO had obtained leave to issue the Statement of Claim. On February 1, 2016, Mr. Anstead obtained his Absolute Order of Discharge from his bankruptcy.

On September 27, 2016, BMO brought an application seeking leave to continue with its claim against Mr. Anstead. The evidence in support of BMO’s application was the pleadings and proceeding in this action, and the Affidavit of Queenie Tang, an Account Manager with BMO. [ 8 ] BMO’s application, which is the subject of this Appeal, was heard on October 20, 2016. It was brought pursuant to s.69.4 of the BIA, which provides: 69.4 A creditor who is affected by the operation of sections 69 to 69.31 or any other person affected by the operation of

section 69.31 may apply to the court for a declaration that those sections no longer operate in respect of that creditor or person, and the court may make such a declaration, subject to any qualifications that the court considers proper, if it is satisfied (

a) that the creditor or person is likely to be materially prejudiced by the continued operation of those sections; or (

b) that it is equitable on other grounds to make such a declaration. [ 9 ] Before the Registrar, BMO argued that it would be materially prejudiced by the stay because, Mr. Anstead having given up possession of the RV, the only way for BMO to recover on its contract with Mr. Anstead would be to continue to pursue its action against him. In this regard, BMO argued that the action against Mr. Anstead is one that would survive the bankruptcy pursuant to s.178(1) of the BIA, the relevant portions of which provide: 178

(1) An order of discharge does not release the bankrupt from (

d) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity...; (

e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim; [ 10 ] BMO further argued that the stay should be lifted on equitable grounds, pursuant to s.69.4(

b) of the BIA. Decision of the Registrar [ 11 ] The Registrar’s decision was that (

a) BMO’s claim did not set out allegations that would indicate that the claim against Anstead would survive the bankruptcy pursuant to s.178 of the BIA; (

b) BMO could not sue Anstead for debt after the bankruptcy; and therefore (

c) the Application for leave nunc pro tunc was denied. Standard of Review [ 12 ] The parties are agreed that an appeal from the decision of a Master acting in the capacity of a Registrar in Bankruptcy is a true appeal on the record and not a hearing de novo . The decision of the Registrar should not be interfered with unless he has made an error in principle or in law, or failed to consider a proper factor or considered an improper factor resulting in the wrong conclusion: Re Dykes , 2014 ABQB 323 at para 21 ; Re Munro , 2016 ABQB 541 at para 27 .

“New Evidence” on the Appeal [13] On the appeal, counsel for Mr. Anstead argued that BMO was introducing and relying upon new material and evidence thatwas not put before the Registrar. This “new evidence”, contained at paragraphs 4, 7-11, 12-17 and 23 of BMO’s written submission onthe appeal comes from the transcript of questioning of Mr. Anstead (“the Anstead transcript”), and an Affidavit made by Gary Mason,who appears to have purchased the RV from Paradise RV in 2009 (“the Mason Affidavit”). The Anstead transcript and the MasonAffidavit were both made in the course of a related proceeding, Court of Queen’s Bench Action No. 1503-16712. [14] To summarize, the “new evidence” is that: (

a) At all material times, Mr. Anstead was the sole shareholder and director of Paradise RV; (

b) Mr. Anstead took possession of the RV and used it personally in 2009; (

c) Mr. Anstead did not intend to use the RV solely for personal reasons, and intended to sell it to an outside third party through ParadiseRV; (

d) the RV was sold to Gary Mason, a third party purchaser, on or about June 17, 2009; (

e) Mr. Anstead was aware by May 2012, if not sooner, that RV was no longer in his possession, or in the possession of Paradise RV. [15] I have reviewed the transcript of the proceedings before the Registrar. In the course of that proceeding, Counsel for Mr.Anstead referred repeatedly to the Affidavit of Mr. Anstead that had been filed in Action No. 1503-16712, and to the Anstead Transcript.He refers to Mr. Anstead’s personal use of the RV, its use in connection with Paradise RV, and its sale. Having brought parts of thatevidence before the Registrar, I do not believe that Counsel for Mr.

Anstead can now object to the introduction of other portions of theAnstead Transcript on this Appeal. The Mason Affidavit was not brought before the Registrar, but BMO relies upon it on this Appealonly to show the identity of the purchaser of the RV (which is not relevant), and the timing of the purchase (which is available throughother evidence and is not disputed). Analysis Effect of the Proof of Claim [16] Counsel for Mr. Anstead contends that BMO has no claim surviving the bankruptcy of Mr.

Anstead by virtue of the fact that itfiled its Proof of Claim, showing the value of its security, and claiming zero for its unsecured claim. He relies upon an excerpt fromHolden & Morawetz, Annotated Bankruptcy & Insolvency Act, at p.927: If a secured creditor has surrendered its security to the trustee or has filed a proof of security assessing the value of the security, theunsecured claim of the creditor is released by the discharge of the bankruptcy. [17] He further relies upon the decision of Master Funduk in Scotia Mortgage Corp. v Winchester, (AB KB),51 Alta. L.R. (3d) 322.

In that case, the Defendant, Winchester, gave a mortgage to the Plaintiff Scotia Mortgage Corp., then sold theland before assigning herself into bankruptcy. When the Purchaser failed to make the mortgage payments, the Plaintiff brought an actionagainst both the Defendant and the Purchaser. Master Funduk concluded that the claim was barred by virtue of the discharge frombankruptcy, holding, at paras.8 – 9: Because the in personal liability of Winchester was a claim provable in the bankruptcy s.178 of the Bankruptcy and Insolvency Actapplies.

It says: 178(1) An order of discharge does not release the bankrupt from: (a) – (

e) not applicable (

f) liability for the dividend that a creditor would have been entitled to receive on any provable claim not disclosed to the trustee, unlessthe creditor had knowledge of the bankruptcy and failed to take reasonable action to prove his claim

(2) Subject to subsection (1), an order of discharge releases the bankrupt from all claims provable in bankruptcy. So without more Winchester’s liability in debt to the Plaintiff was released by her discharge. [18] It seems clear from the foregoing excerpt that Master Funduk was not considering a situation where, as here, allegationsfalling within s.178(1)(

d) and (

e) have been made. Moreover, I am not satisfied that the proposition set out in the excerpt from TheAnnotated Bankruptcy and Insolvency Act goes as far as Counsel for Mr. Anstead suggests. If this were the case, any secured creditorwho, having filed a proof of claim, comes later to the knowledge that the bankrupt committed fraud, would be unable to rely upon theprovisions of s.178(1). I do not believe that this is consistent with the purpose of that

section or the scheme of the BIA. Consequently, itis necessary to consider the merits of BMO’s claim under s.178(1) of the BIA.

Failure to Consider the Material Prejudice to BMO [19] It is well established that the prospect of delay in the prosecution of an action, to which a discharge in bankruptcy would notbe a defence, constitutes reason for lifting the stay of proceedings: Echino v Munro, 2014 ABQB 636, aff’d: 2014 ABCA 422; Gaastrav Tri-Link Consultants Inc., 2012 ABQB 271; aff’d: 2012 ABCA 262. [20] The test for determining whether the stay should be lifted, where a party alleges facts that would support the proposition thatthe claim would survive the bankruptcy, lies somewhere between simply pleading the required facts and establishing a prima facie case.

In Re Ma, (ON CA), [2001] OJ No 1189 (CA) the Ontario Court of Appeal held, at para.3: ...lifting the automatic stay is far from a routine matter. There is an onus on the Applicant to establish a basis for the order within themeaning of

section 69.4. As stated in Re Francisco, the rule of the court is to ensure that there are sound reasons, consistent with thescheme of the Bankruptcy & Insolvency Act to relieve against the automatic stay. While the test is not whether there is a prima faciecase, that does not, in our view, preclude any consideration of the merits of the proposed action where relevant to the issue of whetherthere are “sound reasons” for lifting the stay. [21] In Gaastra, the Alberta Court of Appeal held, at para.2, ...some evidence must be produced to demonstrate that there is some substance to the allegations of fraud.

The threshold of evidencerequired to prove fraud at this stage of the proceedings is low. [22] Claims for which a discharge in bankruptcy are not a defence are set out in s.178 of the BIA.

BMO argues that the Registrarwas in error in failing to determine that it produced “some evidence” of a fraud or misappropriation by Anstead while acting in afiduciary capacity pursuant to s.178(1)(d), and in failing to determine BMO produced some evidence of fraudulent misrepresentation byAnstead to obtain property pursuant to s.178(1)(e). [23] BMO points to the three characteristics that describe a fiduciary relationship, as set out in Frame v Smith, (SCC), [1987] 2 SCR 99. They are: (

a) that the fiduciary has scope for the exercise of some discretion or power; (

b) that the fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests, and; (

c) the beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power. [24] BMO cites the decision of the Ontario Superior Court of Justice in Ronec v Michalik, [2007] OJ No.3529 (SC). In that case,the Plaintiff brought an action alleging fraud that survived a bankruptcy. The Plaintiff had loaned money to the Defendant and had beenpromised property in Florida as security.

The Defendant, in breach of his agreement with the Plaintiff, sold the Florida property.Eberhard J. concluded that the Defendant’s conduct in selling the property was fraudulent, and went on to consider whether the nature ofthe relationship between the Plaintiff and Defendant gave rise to a fiduciary duty.

After noting that the Defendant was managing thePlaintiff’s properties in Collingwood, Ontario, that there was a “personal relationship between the parties that generated a factual trustbetween them”, and pointing to particular language in the contract between the parties that suggested that the Defendant intended to putthe interests of the Plaintiff before his own, Eberhard J. concluded that a fiduciary duty existed.

Similarly, in Re Ieluzzi 2012 ONSC1474, the Registrar concluded that a fiduciary duty existed in respect of moneys advanced to purchase vehicles for a used car dealership,where the Defendant had agreed to hold amounts received for the sale of the cars in trust for the lender. [25] In my view, both Ronec and Ieluzzi are distinguishable; the former, because of the very specific factual circumstances uponwhich the fiduciary relationship was established, and the latter because of the contractual obligation to hold moneys in trust.

There is notrust established in the case at bar; while the Conditional Sales Agreement provides that Mr. Anstead would hold any proceeds from saleof the RV in trust, there is no evidence that Mr. Anstead himself actually sold the RV and received the proceeds; the evidence is, instead,that title remained with Paradise RV and that it was Paradise RV that sold the vehicle. Consequently, no trust arose between Mr. Ansteadand BMO is respect of the proceeds of the sale. Nor are there any other factors unique to the relationship between Mr. Anstead and BMOthat would suggest that Mr. Anstead owed to BMO a fiduciary duty.

There is an entire statutory regime surrounding personal propertysecurity interests that governs the relationship between lenders and borrowers in circumstances such as these. It is not helpful ornecessary to import the doctrine of fiduciary duties into what is a very common type of commercial relationship.

In my view, therefore,the Registrar did not err in concluding that there was insufficient evidence for a claim of “fraud, embezzlement, misappropriation ordefalcation while acting in a fiduciary capacity” that would survive the bankruptcy under s.178(1)(d). [26] BMO further argues that the Registrar erred in failing to determine that BMO produced some evidence of a fraudulentmisrepresentation by Mr. Anstead to obtain property, such that its claim would survive the bankruptcy under s.178(1)(e). BMO claims: 1.

Anstead misrepresented that the RV was for personal use only, when his true intention was to sell it to a third party purchaser throughthe Vendor; 2. Anstead knew his intention was to use the RV as inventory to be sold to a third party purchaser, or was reckless by agreeing in theConditional Sale that he would not allow the RV to be sold without the written consent of BMO; 3. The representations in the Application for Credit and Conditional Sale induced BMO to extend credit to Anstead personally; and 4.

BMO has suffered a loss. [27] The problem with this argument is that there is no provision in either the Application for Credit or the Conditional SaleAgreement under which Mr. Anstead represented that the RV would be for his personal use only. It appears, in fact, that Mr. Anstead diduse the RV personally, in connection with his hobby of racing cars, for some period of time. He also appears to have used it formarketing purposes. Thereafter, it was kept on the Paradise RV lot, from where it was ultimately sold by Paradise RV, which by theterms of the Conditional Sales Agreement had retained title.

Though the Conditional Sales Agreement provides that the Buyer shall notpart with possession or control of the RV, or sell or transfer any interest in it without the Merchant’s express consent, there is noevidence that supports the proposition that Mr. Anstead did not intend to comply with this provision when he entered into the agreement.There is nothing in the Application for Credit or in the Conditional Sales Contract that requires Mr. Anstead to disclose his futureintentions with regard to the sale of the vehicle. Nor is there any evidence that Mr.

Anstead breached this representation by subsequentconduct, because title at all times remained with Paradise RV, and it was Paradise RV that sold the RV. I am therefore unable toconclude that there was a misrepresentation, upon which BMO relied, such that its claim would survive bankruptcy by virtue to s.178(1)

(

e) of the BIA.

Failure to Consider Equitable Grounds [ 28 ] BMO further argues that the Registrar failed to consider other equitable grounds in favour of lifting the stay and points to the decision of Bielby J. (as she then was) in Re Tirecraft Group Inc. , 2009 ABQB 217 , at paras.21-22: One of the objects of the BIA which I must consider in determining whether there are "sound reasons, consistent with the scheme of the Bankruptcy and Insolvency Act " for the lifting of the stay is that all creditors of the same class are to be treated equally, and that an "orderly distribution" is made, with creditors ranking pari passu.

The statutory stay of proceedings is designed to achieve that by preventing one creditor from taking proceedings or steps which may give it an unfair advantage relative to other creditors; see Stone Sapphire Ltd. v. Transglobal Communications Group Inc., 2008 CarswellAlta 896 at para. 40 . In Stone Sapphire the Court went on to state at para. 46: Generally, Courts will consider lifting a stay when the action is one that would survive the BIA proceedings, that the matter is an unliquidated debt that is so complex that the

summary process under the BIA is inappropriate, if the insolvent person's involvement is necessary in respect of other parties, if the action is necessary to recover under an available policy of insurance, or that the action has progressed to a point where logic dictates that the action continue to judgment. [ 29 ] BMO argues that, in seeking to lift the stay, it is asking only to be treated equally with other unsecured creditors, and allowing it to proceed with its action will facilitate an orderly distribution, with creditors ranking pari passu .

BMO further argues that the action has progressed to a point where logic dictates that it should be allowed to continue to judgment. [ 30 ] I disagree. An absolute discharge has been issued, though the Distribution Letter has not yet been sent to the creditors of Mr. Anstead. The parties in this action have exchanged Affidavits of Records. They have not yet completed Questioning. It could be many months before Questioning is completed and the parties are ready for trial. It will be many months beyond that before a trial may commence. On the other hand, BMO continues to have a secured interest in the RV.

In the circumstances, I find that the equitable course is to preserve the stay for the benefit of Mr. Anstead’s unsecured creditors, and for BMO to continue to take the steps necessary to enforce its secured interest in the RV. In my view the Registrar did not err in failing to take other equitable grounds into account and to lift the stay. Conclusion [ 31 ] Therefore, in conclusion, I make three findings: [ 32 ] First, No fiduciary duty arose between Mr. Anstead and BMO.

The Registrar therefore did not err in concluding that there was no evidence of fraud or misappropriation while acting in a fiduciary capacity under s.178(1)(

d) of the BIA. [ 33 ] Second, there is no evidence that Mr. Anstead obtained property by a misrepresentation upon which BMO relied, and the Registrar therefore did not err in concluding that there is a claim that would survive bankruptcy pursuant to s.178(1)(

e) of the BIA; [ 34 ] Third, the Registrar did not err in concluding that there were no other equitable grounds that would justify lifting the stay. Heard on the 15 th day of December 2016. Dated at Edmonton, Alberta this 17th day of November 2017. J.D. Rooke A.C.J.C.Q.B.A. Appearances: Brian W. Summers Nicholas C. Williams for the Appellant Douglas N. Tkachuk, QC

for the Respondent