Harris (Re), 2018 ABQB 1038

Court of Queen’s Bench of Alberta Citation: Harris (Re), 2018 ABQB 1038 Date: 20181218 Docket: B201 285158 Registry: Calgary Between: In the Matter of the Bankruptcy of Jonathan Howard Harris _______________________________________________________ Reasons for Decision of J. Farrington , Registrar in Bankruptcy _______________________________________________________ The Application [ 1 ] This is an application under

section 38 of the Bankruptcy and Insolvency Act , RSC 1985, c. B-3 to compel the bankrupt to attend an examination pursuant to section 163(1) of the Act . I suggested to the parties that I felt that I had jurisdiction to hear this application as an application pertaining to “practice and procedure in the Courts” under s. 192(1) (

k) of the Bankruptcy and Insolvency Act . Nevertheless, I also sought their consent to hearing the application as a matter under s. 192(1)(

j) of the application by consent of the parties, and that consent was provided. The Background [ 2 ] The bankrupt was a real estate developer. Claims in the bankruptcy exceed $19 million and approximately 99% of the proven claims are those of the applicant objecting creditors Erwin Brokop, 866565 Alberta Ltd. and B2B Trust in trust for Erwin Brokop RRSP #8207634. The applicants have significant judgments against the bankrupt in action numbers 1001 – 03295 and 1001 – 03071 which were granted prior to the bankrupt’s assignment. [ 3 ] The applicants filed an affidavit of Erwin Brokop sworn July 11, 2018 in support of their application under

section 38 of the Bankruptcy and Insolvency Act to conduct the section 163(1) examination of the bankrupt. They did not proceed with the application at that time, and as a result some urgency arises in the present context because there is now an application for the bankrupt’s discharge. The same affidavit is relied upon in opposition to the bankrupt's discharge. The affidavit was not actually served upon the bankrupt's counsel until November 2018.

[4] Similarly, the bankrupt swore an affidavit on June 27, 2018 in support of his discharge application.

It was not untilNovember 9, 2018 that the trustee filed an application for the bankrupt's discharge returnable November 27, 2018. [5] As a result, while both affidavits have been in existence for some months, steps in response are only being contemplatednow. [6] The Trustee's Supplementary Report on the discharge application lists under “outstanding duties”: The Trustee confirms the bankrupt has complied with all statutory duties, including: • Filing monthly statements of income and expense, which confirm the bankrupt has no requirement to remit surplus incomepayments; • Attending the first and second counselling session; • Provided 2017 tax information to allow the trustee to prepare the pre-and post bankruptcy returns, resulting in nil assessments; and • Has covered the cost of administration as agreed upon. [7] The Trustee provides no recommendation as to the discharge application, and the report does not indicate that there are anyimpediments to hearing the discharge application.

The Trustee did not appear on this application. [8] The proposed order tendered by counsel for the objecting creditors authorizes the examination, but does not purport to giverights to conduct any specific actions relating to or on behalf of the estate in the way that a typical

section 38 order would assign a chosein action. [9] Counsel indicated that general language giving a general right to conduct actions was removed from the draft order at therequest of the trustee. I indicated that I would not have granted a general unlimited authorization to conduct whatever action theobjecting creditors wished to conduct in any event. In my view, based upon the law that follows, a

section 38 order ought to describeclearly what rights are conveyed to the assignee creditor, and what actions are contemplated. The Relevant Law [10] Sections 163(1) and 163(2) of the Bankruptcy and Insolvency Act provide: Examination of bankrupt and others by trustee 163

(1) The trustee, on ordinary resolution passed by the creditors or on the written request or resolution of a majority of the inspectors,may, without an order, examine under oath before the registrar of the court or other authorized person, the bankrupt, any personreasonably thought to have knowledge of the affairs of the bankrupt or any person who is or has been an agent or a mandatary, or a clerk,a servant, an officer, a director or an employee of the bankrupt, respecting the bankrupt or the bankrupt’s dealings or property and mayorder any person liable to be so examined to produce any books, documents, correspondence or papers in that person’s possession orpower relating in all or in part to the bankrupt or the bankrupt’s dealings or property.

Examination of bankrupt, trustee and others by a creditor

(2) On the application to the court by the Superintendent, any creditor or other interested person and on sufficient cause being shown, anorder may be made for the examination under oath, before the registrar or other authorized person, of the trustee, the bankrupt, aninspector or a creditor, or any other person named in the order, for the purpose of investigating the administration of the estate of anybankrupt, and the court may further order any person liable to be so examined to produce any books, documents, correspondence orpapers in the person’s possession or power relating in all or in part to the bankrupt, the trustee or any creditor, the costs of theexamination and investigation to be in the discretion of the court. [11] A trustee has section 163(1) examination privileges as of right with creditor or inspector approval.

Here, one can surmise thatif the Trustee wished to examine the bankrupt, creditor approval would have been easily obtained.

A creditor, however, requires a Courtorder under section 163(2) of the Bankruptcy and Insolvency Act in order to examine the bankrupt, and the scope of examination ismore limited. [12] While some law was cited to me for the purposes of this application, I do not believe that the cases that were cited outline theapplicable considerations on an application of this nature to the extent necessary. [13] In a bankruptcy matter which I heard (Re McCaughan (unreported- B101-762330 and B101-762329- October 3, 2016))similar issues arose, albeit in a slightly different context. [14] At the time, I did not publish reasons as the parties required prompt directions on a fact specific matter and I delivered reasonsorally.

Given that the issue has risen again, I thought that it would be helpful that I include in these reasons an extract from the reasonswhich I delivered in Re McCaughan dealing with some of the relevant case law on applications such as this one: ...In terms of the general nature of the

section 38 order, in due course the parties may wish to have regard to Jaston & Co. Ltd. v.McCarthy, (BC CA), a decision of the British Columbia Court of Appeal, which suggests that it may eventually benecessary to hone in on particular causes of action prior to trial. That issue is not before me and there is (sic) been no challenge to theorder of Registrar Robertson in any way. I simply refer to Jaston & Co. to illustrate some of the difficulties that can be caused when thes. 38 order does not in due course identify a specific cause of action. Mr. Justice Burrows dealt with some of the complications of a broad s. 38 Order just last week in Re Munro, 2016 ABQB 541.

Nevertheless, 371890 Alberta Ltd. v. Gray Beverage Inc., 1991 ABCA 124 is Court of Appeal of Alberta authority for the propositionthat

section 38 proceedings can include

section 163 examinations in appropriate circumstances. The inevitable tension in these types of matters is the scope of disclosure and the appropriate forum for disclosure.

Houlden, Morawetz and Sarra in The 2015 Annotated Bankruptcy and Insolvency Act describes at page 800: While, ordinarily, a trustee will not be permitted to examine after it has commenced an action against a party: see Re Frank; ex parteGrittins, [1892] 1 QB 646, if the trustee has been forced to commence an action, e.g. to obtain an injunction to prevent the dissipation ofassets, the court may permit a section 163(1) examination of the defendants: Re Aarons (1914), 111 LT 411 (KB).

In other words, if the trustee was forced to commence to an action without sufficient information in place as a result of time limitations, asubsequent s. 163 examination may be permitted. SHS Services (Re), 2015 ONSC 2674 is helpful in describing some of the tension inherent in parallel proceedings. At paragraphs 14 and 15 the Court held: The purpose of the trustee’s examination power is to collect information to assist the trustee in carrying out its duties in administering thebankrupt estate. See: Re Rieger Printing Ink Co, (ON SC), [2009] O.J. No. 755 (S.C.J.) at para. 10; Re 303687Ontario Ltd.

(1986) CarswellOnt 166 (S.C.) at para. 6. While s. 163(1) confers wide powers on the trustee and restrictions on the powers should be avoided, the court must remain vigilant toensure the powers are not abused. See: Holden and Morawetz, Bankruptcy and Insolvency Analysis, H§9 (1) - Generally.

Further, at paragraph 17 the Court held: In directing that the bankruptcy examination be postponed, Vaughan Williams J. noted that the trustee’s powers of examination cannotbe treated as a “mere step in the action” while at the same time the trustee is entitled to “reasonable information.” In the end, the learnedjudge directed that the trustee provide a written statement of the admissions required and if reasonable and fairly answered that wouldend the matter. If not, he would then decide if the examination should proceed.

Re Frank notes the competing interests that arise between the trustee’s right to examine to facilitate the administration of the estate andavoiding the power being used to promote litigation. The distinction that emerges from the cases is that the

section 163 examination generally must relate to administration of the estate. Questions pertaining to the discovery process and the action are generally dealt with in the context of the normal discovery andproduction rules in the action. The advantage of the latter situation is that there are pleadings to define issues and relevance, and theimplied undertaking rule with respect to use of information in other proceedings is more well-defined.

That is not to say that alldisclosure must come in the context of the action, but generally the travels are smoother when there are clear rules in place for relevanceand use of information such as those dealing with the action. There is another not so subtle difference here. While the

section 163 examinations must relate to the administration of the estate, in thiscase the trustee has assigned the right to the

section 163 and 164 procedure to the

section 38 creditors. The trustee is not effectivelyadministering the estate any further, and it is fair to say that the

section 38 creditors are more interested in litigation and recovery thanthey are in estate administration. They are not trustees licensed to administer an estate. [15] The

section 38 process is about pursuit of an action on behalf of an estate. In my view, in most circumstances, a

section 163examination is not, by itself, an “action”. There is no recovery to be dealt with under

section 38. If there is an eventual recovery to begained, it is in the eventual pursuit of a chose in action. It is difficult to conceive as to how a creditor could make an informed decisionabout participation in an “action” without identification of the nature of the action. [16] In 371890 Alberta Ltd. v. Gray Beverage Inc., 1991 ABCA 124 the issue arose in the context of a broader issue that includeda

section 38 order with specific authority to pursue specific actions. In that case, the

section 38 order was permitted to include a section163 examination, but in that case the order also included pursuit of a particular chose in action. That is not the case here. Analysis [17] The allegations made by the objecting creditors are well known to them. The affidavit in support is voluminous and itdescribes alleged impugned conveyances and payments and a potential challenge to a family trust. Further, some of the judgements of theobjecting creditors already relate to impugned conveyances.

It has always been available to the objecting creditors to seek leave toproceed with their actions notwithstanding the stay provisions under the Bankruptcy and Insolvency Act if they felt that fraud wasinvolved, and to conduct examinations in aid of collecting on their judgements if successful in obtaining leave. [18] The law as summarized emphasizes that a section 163(1) examination is to “collect information to assist the trustee incarrying out its duties in administering the bankrupt estate” (see SHS Services).

In SHS Services the Court reminded that the trustee'spowers of examination should not be treated as a mere “step in the action”. The Bankruptcy and Insolvency Act is not a collection tool.It is a statute for the rehabilitation of debtors and fair and equitable distribution of their estates. The Court must balance the interests ofthe creditors and the bankrupt.

Here, the Trustee has not indicated that it has any gaps in its ability to administer the estate and theobjecting creditors have no interest in administering the estate. [19] While the objecting creditors objected to the standing of the bankrupt to make submissions on this application, I find thatthere is limited standing. On a

section 38 application the bankrupt is not entitled to speak to the merits of the proposed action, but there isno proposed action here, at least insofar as a chose in action is concerned. The application here relates to a determination of the type of

examination which the bankrupt may have to endure, and that question has direct ramifications for the bankrupt, and on that limited basis I find that the bankrupt has standing to argue those issues. [ 20 ] Substantial information has already been available to the objecting creditors through their litigation processes. They pursued their actions in a case managed proceeding. They have further avenues for obtaining information for use in the bankruptcy proceedings.

The bankrupt has filed an affidavit in support of his discharge application, and the objecting creditors are fully entitled to cross-examine on that affidavit as part of the discharge application process, and I grant leave to do so pursuant to Rule 14 of the Bankruptcy and Insolvency Rules . [ 21 ] Proceeding under section 163(1) would run afoul of the rule against using a section 163(1) examination as a form of discovery process for contemplated litigation.

Here, the objecting creditors are much more interested in the litigation process than they are in the estate administration process. [ 22 ] Parliament has carefully prescribed the circumstances under s. 163(1) of the Bankruptcy and Insolvency Act as to when a trustee can examine the bankrupt and under s. 163(2) as to when a creditor can examine the bankrupt. Using

section 38 as a means to avoid those prescribed circumstances and the balance that they strike would not be appropriate in this case on these facts. Result [ 23 ] For these reasons, I find that cross examination on the affidavit of the bankrupt by the objecting creditors in the context of the discharge application is sufficient for the purposes of the matters presently before the Court and I dismiss the application for an order directing a section 163(1) examination of the bankrupt under

section 38 of the Bankruptcy and Insolvency Act . [ 24 ] If the parties cannot agree on costs they may be spoken to by appointment. Heard on the 4 th day of December, 2018. Dated at the City of Calgary, Alberta this 18 th day of December, 2018. J. Farrington Registrar in Bankruptcy Appearances: Jason Irwin Miles Davison LLP for Erwin Brokop; 866565 Alberta Ltd. and B2B Trust in Trust for Erwin Brokop RSP # 8207634 Clive Llewellyn Llewellyn Law for Jonathan Howard Harris, the Bankrupt