Sadden, 2017 ABQB 789

Court of Queen’s Bench of Alberta Citation: Sadden, 2017 ABQB 789 Date: 20171219 Docket: BK01 089558 Registry: Calgary Between: In the Matter of the Bankruptcy of Garry Lee Sadden Date: 20171219 Docket: BK01 089559 Registry: Calgary In the Matter of the Bankruptcy of Lisa Marie Sadden Corrected judgment: A corrigendum was issued on February 27, 2018; the corrections have been made to the text and the corrigendum is appended to this judgment. _______________________________________________________ Reasons for Decision of J. Farrington , Registrar in Bankruptcy _______________________________________________________ Background

[ 1 ] The bankrupts Lisa Marie Sadden and Garry Lee Sadden were husband and wife at the time that they made their assignments. Much has transpired in their lives since making the assignments, and little has transpired in terms of the administration of their estates. They certainly played some

part in that inactivity. These are applications for their discharges. The applications are supported by reasonably fulsome affidavits explaining their current and past financial situations and providing explanations as to the outstanding issues from their perspectives. [ 2 ] They made their assignments on June 4, 2004. Their individual Statements of Affairs indicated a value for their co-owned matrimonial home of $245,000 with a secured mortgage encumbrance in the amount of $209,000 registered against the home.

The “exempt” box was ticked on the Statements of Affairs and that characterization does not appear to have been challenged by the trustee Cameron Okolita Inc. at that time, but it was challenged later. [ 3 ] More than thirteen years later the bankrupts apply for their discharges. They separated as a couple in in May of 2008. Lisa Sadden spent from 2009 to 2016 living abroad in South Africa, only recently returning to Canada. Garry Sadden has lived in the former matrimonial home with their children. They have three children that they have raised while living apart.

The children are now 14, 19 and 21, and they effectively grew up during the bankruptcies. [ 4 ] The trustee says that the home is now worth $465,000, and with the mortgage being paid down during the bankruptcies, there is over $300,000 in excess equity available for the creditors. The trustee further argues that Re Piraux (Bankrupt) , 2006 ABQB 409 is dispositive of this application, and that it stands for the principle that the home is always valued for exemption purposes when it is dealt with by the trustee.

Analysis [ 5 ] I agree that Re Piraux applies here, but with respect, I do not agree that it mandates the result argued by the trustee. [ 6 ] At the time that Re Piraux was argued there was an escalating real estate market in Calgary. Important questions arose as to the timing of exemptions, and the calculation of surplus equity. The stakes in individual cases were often relatively high. The trustee in Re Piraux was the same trustee as here, and the trustee advised the Court on these applications that the legal fees were significant in contesting the applicable date in Re Piraux .

The issue was an important one in that case and in many others. It settled a significant legal principle moving forward. That principle did not need to be reargued here. [ 7 ] The date of the bankruptcy in Re Piraux was January 31, 2003, and the date of Mr. Justice LoVecchio’s decision was June 5, 2006. The interval was approximately three years, and the issue appears to have been diligently pursued on both sides. [ 8 ] While Mr.

Justice LoVecchio held in Re Piraux that a bankrupt’s home was to be valued as at the date that the property was dealt with by the trustee, in my view that does not grant to a trustee the ability to indefinitely postpone realization. That is the principle for determination here. [ 9 ] Many issues are best considered by returning to basic principles and this one is no exception. [ 10 ] At paragraph 14 in Re Piraux Mr. Justice LoVecchio held: When an insolvent person becomes bankrupt, all of their property is vested in a trustee.

The trustee then administers the estate, which includes the realization and distribution of proceeds of the bankrupt’s property to creditors. [ 11 ] At paragraphs 20 to 22 he further held: There are several distinct phases of a bankruptcy; the first two are of import in this analysis. The first is the vesting phase triggered by the assignment. The second is the administration phase, during which a trustee determines which property will be realized and divided among creditors.

It is during this second phase when exemptions and property values become important as they will ultimately dictate the source and the value of the fund from which a bankrupt’s creditors will be paid. During this phase, a trustee must examine the value of the principal residence and determine whether or not the proceeds from a sale of the residence will exceed the aggregate of any amounts payable to any creditors secured by the property, the $40,000 exemption and any expenses of the sale.

If it is clear the proceeds will exceed such amounts, then it is very likely a sale will occur; if it is clear they will not, then it is unlikely a sale will occur and in such a case the property would simply be returned to the bankrupt. [ 12 ] Further, at paragraph 24 he held: What we cannot lose sight of at this point are two things: first, the trustee is vested with the property; and second, the decision whether or not to proceed with a sale, return the property entirely to the bankrupt or negotiate with the bankrupt about a return of the property will depend upon a trustee’s assessment of its potential sale value.

Obviously, in a fluctuating marketplace, the point in time at which the property is valued – bankruptcy or a later point before discharge – will be of principal importance in deciding which avenue to follow. [ 13 ] The facts here are significantly distinguishable from those in Re Piraux . In Re Piraux the delay between the assignment and the determination of the issue in Court was approximately three years. Here, the delay is thirteen years. Further, in Re Piraux , the issue was how to deal with value uncertainty in a rising market.

Here, the issue is about how to deal with inactivity on the part of all of the parties. [ 14 ] While the trustee casts blame upon the bankrupts for allegedly not providing an updated appraisal on their property early in the bankruptcy process, there is a factual issue as to whether the bankrupts did so in a timely fashion or not. The bankrupts say in their materials that they did provided an appraisal with a value of $255,000 dated May 18, 2005, with a valuation date of May 13, 2005. That

is nearly one year post assignment. That seems reasonable in a Re Piraux context. The evidence appears to be that the trustee received that appraisal in late 2005 after it had been discharged for the first time. It was the trustee that sought its discharge knowing that the equity issue was outstanding. [ 15 ] The trustee puts forward no appraisal evidence as to rising values over time, and it provides no alternative dates for consideration by the Court as to value.

The trustee’s position is that the value in 2017 governs determination of the issue, because that is when the property is being dealt with as in Re Piraux . The trustee refers to a market evaluation in February 2007, between $445,000 and $465,000, but the actual evaluation does not appear to be in evidence and it does not appear to be based upon an appraisal in any event. The trustee’s affidavit goes on to refer to two October 2017 comparable sales at approximately $485,000. [ 16 ] The trustee was discharged on its own application on two separate occasions on November 15, 2005, and on February 8, 2016.

On at least the first occasion, the trustee certified in its Certificate of Compliance: All of the property of the bankrupt that came into our hands has been realized or disposed of in a proper manner. [ 17 ] That is certainly not the case in relation to the alleged surplus equity in the home.

While the trustee was no doubt anxious to get off the file given what it felt were uncooperative bankrupts, the certification to the effect that all of the property that vested in the trustee pursuant to the Act has been realized or disposed of in a proper manner appears to have been incorrect if the trustee felt that there was a surplus equity claim. [ 18 ]

Section 71 of the Bankruptcy and Insolvency Act , RSC 1985, c.

B-3 provides: 71 On a bankruptcy order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with their property, which shall, subject to this Act and to the rights of secured creditors, immediately pass to and vest in the trustee named in the bankruptcy order or assignment, and in any case of change of trustee the property shall pass from trustee to trustee without any assignment or transfer. [ 19 ] The Order reappointing the trustee made by Registrar Alberstat on March 20, 2007 specifically spoke to the issue of dealing with surplus equity in the home.

While it was no doubt easier to simply wait for the discharge application, that application might never come in some cases, and it is not a substitute for active enforcement of rights and claims. The trustee’s obligation is to administer the property of the bankrupt in the ordinary course.

The trustee brought an application with the assistance of counsel for advice and directions returnable November 7, 2007, but that application was adjourned sine die and it was never heard. [ 20 ] Prior to that, counsel for the trustee had written assertively to counsel for the bankrupts on September 20, 2007: As far as the prospect of your clients making a proposal, they will need the approval of the estate inspector before the proposal may be proceeded with.

Since the estate inspector (a representative of CRA) has instructed the trustee to obtain an appraisal of the Saddens’ property and to proceed with its sale, it would appear that a proposal is not something that would currently be entertained. As the trustee has received the inspector’s resolution to proceed with sale of the property, the trustee does not need authorization of the Court to do so, but may in fact proceed under

section 30 of the Bankruptcy and Insolvency Act . Notwithstanding that the trustee has authority to sell, I recommend to the trustee in circumstances such as these to seek the approval of the Court… [ 21 ] Paragraph 64 of the Affidavit of Mr. Cameron on behalf of the trustee sworn October 12, 2007 says: On September 18, 2007, the Trustee requisitioned an appraisal of the residence. [ 22 ] That appraisal, if it was received, does not seem to have made its way into evidence. In any event, the trustee had clearly decided by 2007 that it had a surplus equity claim that it needed to pursue.

For whatever reason, it took no steps to pursue the claim after the filing of its November 7, 2007 application. If funding was a problem,

section 38 proceedings under the Bankruptcy and Insolvency Act for the major creditor (CRA) were always an option. [ 23 ] While Mr.

Justice Lo Vecchio’s decision in Re Piraux provides latitude to a trustee to take a reasonable amount of time to deal with surplus equity assertions in a bankruptcy, and it strikes a collaborative spirit regarding negotiation, it does not extend to taking thirteen years from the assignment dates to finalize surplus equity claims. [ 24 ] The bankrupts provided an appraisal dated effective approximately one year after their assignments which showed no significant surplus equity in the property and none at all, if an allowance is made for notional disposal costs.

While the appraisal was provided some six months after its effective date, the trustee provides no appraisal evidence to the contrary. I find on the facts of this case that if the surplus equity claim was going to be pursued by the trustee, it ought to have been pursued and completed much earlier if the trustee intended to apply the Re Piraux principles. In addition, from a policy point of view, it would be unfortunate if the law supported and rewarded leaving surplus equity claims unresolved indefinitely.

That approach is not fair to either a bankrupt or the creditors. [ 25 ] This Court frequently hears applications by trustees to move forward on sales of property where there is surplus equity. From time to time there are disputes between a bankrupt and the trustee regarding responsibility for providing appraisals, but in the end the obligation to realize upon surplus equity is that of the trustee pursuant to the duties imposed upon the trustee under the Bankruptcy and Insolvency Act because the property has vested in the trustee.

The non-cooperation of bankrupts, and a refusal to provide an appraisal, are both certainly factors that can be considered in a discharge application, but ultimately if a trustee intends to seriously assert that there is surplus equity available for distribution among creditors, there is some obligation to prosecute that claim with reasonable dispatch. In this case, the trustee simply walked away from the administration of surplus equity by obtaining its own discharge on two separate occasions.

The trustee no doubt felt that position was supported by Re Piraux and that its caveat against title was sufficient to one day resolve the issue.

[ 26 ] I make a few final observations. First, passage of time was an issue in this fact situation. I make no comments or findings on whether there are other legal issues arising from the passage of time because none were argued. Second, there is sometimes a tendency to treat a discharge application as a “catch all” for all outstanding issues. While that can sometimes be done as a convenient way of dealing with the conduct of bankrupts in a limited way, it is not a substitute or shortcut for enforcement of in rem property claims, or preference and under value transaction claims against third parties.

Finally, I observe that Re Piraux itself did not arise on a discharge application. The bankrupt took the initiative to apply for resolution of the issue. Dispositions [ 27 ] The bankrupts had other noncompliance issues that created difficulties for the trustee during the administration process. They have addressed them for the most

part including attending final counselling sessions. Given the time that has elapsed in this matter, I do not see those as further impediments to their discharge. The objections were largely argued on the basis of the surplus equity issue. I observe that neither of the bankrupts had significant financial good fortune during their intervals between the first trustee discharge and the hearing of this matter. I grant the bankrupts their absolute discharges and direct that the trustee’s caveat be removed from title to the home by the Registrar of Land Titles. Mr.

Sadden’s discharge will be suspended for a period of thirty days given that he is a second time bankrupt. [ 28 ] Costs were not spoken to during the submissions before me. I do not award any costs against the trustee, although it did actively and forcefully assert that Re Piraux mandated that this case be decided on the basis that there is now over $300,000 in surplus equity in the home. There are presumably no remaining distributable assets in the bankruptcy given the trustee’s second discharge, and as such any costs award against the trustee would be personal.

I am not prepared to award costs on that basis as the trustee no doubt made its assertions on the basis of its

interpretation of Re Piraux , and what it perceived to be the correct position in law. The bankrupts have likely expended a considerable sum in retaining counsel for their discharge applications, and I find that to be an appropriate sanction for their noncooperation earlier in the proceedings. Accordingly, each party shall bear their own costs. [ 29 ] Thank you very much to counsel and to the trustee for their eloquent and able arguments in the matter. Heard on the 05 th day of December, 2017. Dated at the City of Calgary, Alberta this 20 th day of December, 2017. J.

Farrington Registrar in Bankruptcy Appearances: Ashley Hahn Miles Davison LLP for the bankrupt Garry Lee Sadden and Lisa Marie Sadden John I.P. (Jack) Cameron Cameron Okolita Inc. for the Trustee _______________________________________________________

Corrigendum of the Reasons for Decision of J. Farrington, Registrar in Bankruptcy _______________________________________________________ Court file numbers have been changed and citation has been corrected.