2018 NLSC 202, 2018 NLSC 202

court crest IN THE SUPREME COURT OF NEWFOUNDLAND AND LABRADOR GENERAL DIVISION Citation : The Bank of Nova Scotia v. Kelsey Estate, 2018 NLSC 202 Date : October 18, 2018 Docket : 201801G0933 BETWEEN: THE BANK OF NOVA SCOTIA APPLICANT AND: D. & A. MACLEOD COMPANY, in its capacity as Trustee in Bankruptcy for Janice Kelsey FIRST RESPONDENT AND: BENSON BUFFETT PLC, INC. SECOND RESPONDENT AND: KENT GREEN THIRD RESPONDENT AND: JOHN KENDALL FOURTH RESPONDENT AND: KEN AUCHINLECK FIFTH RESPONDENT AND: LEARMONTH, DUNNE & BOULOS SIXTH RESPONDENT AND: HER MAJESTY THE QUEEN SEVENTH RESPONDENT Before: Justice David B. Orsborn Place of Hearing: St. John's, Newfoundland and Labrador

Date(

s) of Hearing: October 15, 2018

Summary: On an Interpleador Application the court ordered that, notwithstanding an outstanding civil claim by the bankrupt’s ex-partner asserting a trust interest in the property, surplus funds from the sale of property owned by the bankrupt mortgagor be paid to the bankrupt’s Trustee in Bankruptcy and not into the court. The Bankruptcy and Insolvency Act contains provisions pursuant to which the ex-partner could make his claim to the property and could seek to continue the civil litigation. Appearances: Yusha S. Pirzada Counsel for Applicant J. Alden Christian Counsel for First Respondent Kenneth J.

Byrne Counsel for Second Respondent Andrew C. White Counsel for Fourth Respondent Jeremy D. Loeb Counsel for Fifth Respondent Authorities Cited: STATUTES CONSIDERED: Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 REASONS FOR JUDGMENT ORSBORN, J.: INTRODUCTION [ 1 ] Should funds currently held by the Bank of Nova Scotia be paid into court or to the Trustee in Bankruptcy of Janice Kelsey? [ 2 ] The Bank of Nova Scotia has applied to pay into court the funds remaining after the December 2017 sale of mortgaged property – a log home. The bank claims no interest in the funds.

The property was held in the name of Janice Kelsey who declared bankruptcy in July 2017. Her Trustee in Bankruptcy, supported by some unsecured creditors, wants the funds paid to the Trustee. Both Kelsey and the Trustee reside in Ontario. [ 3 ] Ken Auchinleck, Kelsey’s ex-partner, wishes the funds to be paid into court pending determination of his civil action against Kelsey - 201401G7947 - in which he seeks a declaration of a beneficial interest in the property, either by way of resulting trust or constructive trust.

No steps have been taken in this litigation since a limited access issue was dealt with in February 2015 (the merits of this civil claim-or whether it falls within exclusive jurisdiction of the Family Division of the Supreme Court - are not before me). [ 4 ] Auchinleck says that the funds are his property by virtue of a resulting trust arising when he conveyed the property in 2012 to Kelsey for $2,500 in order to enable Kelsey to obtain mortgage financing. He says that the property was eventually to be developed as a joint family venture between him and Kelsey.

Auchinleck says that he also contributed time and money to the construction of the log home thus giving rise to a constructive trust based on unjust enrichment. Accordingly, he says that the funds, now traceable to the property as sale proceeds, are not and never were the property of the bankrupt and there is no basis on which to transfer them to the

Trustee or to engage the stay provisions in

Section 69.3 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3. [ 5 ] The Trustee says that as registered owner of the property and as the sole mortgagor, Kelsey - her Trustee - is entitled to the funds.

The Trustee points out that by virtue of the Bankruptcy and Insolvency Act , Auchinleck may submit a claim to the Trustee asserting ownership of the property; the Trustee further takes the position that in any event leave of the Bankruptcy court is required in order to continue the civil proceeding. [ 6 ] For his part, Auchinleck says that the costs of having to make a claim to the Trustee and then pursue proceedings in the Bankruptcy court in Ontario may mean that the claim cannot be practically pursued. [ 7 ] Other than to point out that, at least as far as the resulting trust is concerned, it appears that Auchinleck is pursuing a claim as owner and not as creditor, I make no comment on whether or not the stay provisions are applicable or, if applicable, whether the automatic stay should be lifted.

I also express no view under what circumstances, if any, the stay application could be brought into the Newfoundland and Labrador court sitting in Bankruptcy. [ 8 ] Whether or not Auchinleck has a beneficial interest in the property has yet to be determined. It will be determined in a civil proceeding in this province. Until that determination is made, Auchinleck does not have an interest in the property or in the surplus funds.

I recognize the possibility that, if it is determined that a resulting trust arose by virtue of Auchinleck’s 2012 transfer of the property to Kelsey, the civil court could conceivably determine that the property interest arose at the time and thus, in essence, be ‘back- dated’. Again, I express no view. But at present, Auchinleck’s claim is no more than that – an asserted and untested claim awaiting adjudication. [ 9 ] There is no legal reason why the surplus proceeds from the property should not be paid to the Trustee. The property and mortgage were in the name of Janice Kelsey alone.

Had there been no bankruptcy, the proceeds would presumably have been paid to Kelsey, subject to Auchinleck pursuing his claim and exercising any ability he may have to seek pre-judgment relief. The Trustee stands in Kelsey’s shoes, and has no better claim to the funds than Kelsey herself would have. Other than perhaps logistically, Auchinkleck’s substantive claim is not prejudiced by the funds being paid to the Trustee. [ 10 ] Kelsey is bankrupt.

The Bankruptcy and Insolvency Act contains provisions covering claims by third parties that property in the hands of the Trustee belongs not to the bankrupt but to the third party. Those are the provisions that set out the process by which Auchinleck can pursue his claim against the bankrupt. Whether or not his civil claim is stayed by

section 69.3 and, if so, whether the stay should be lifted, is a matter for adjudication by the Bankruptcy court.

Further, any direction to the Trustee to delay distribution of some or all of the surplus funds pending the adjudication of Auchinleck’s claim is a matter for the Bankruptcy court. [ 11 ] However, in the circumstances, and recognizing the need for Auchinleck to have some time to consider what if any steps he may wish to take pursuant to the Bankruptcy and Insolvency Act , or otherwise, I will provide that any payment by the bank to the Trustee not be effected any earlier than Thursday, November 1, 2018. [ 12 ] Accordingly, it is ordered as follows: 1.

The Bank of Nova Scotia may pay the surplus funds from the sale of 1075 Bauline Line, to D. & A. Macleod Company, in its capacity as Trustee in Bankruptcy for Janice Kelsey, in full satisfaction of the Bank’s obligation with respect to the surplus funds, provided that such payment may not be made any earlier than Thursday, November 1, 2018. 2. Upon payment of the surplus funds to the Trustee in Bankruptcy, the Bank is excused from any further liability with respect to the surplus funds. 3.

The Banks solicitor-client costs of this Application shall be paid out of the surplus funds prior to the payment of the surplus funds to the Trustee in Bankruptcy. _____________________________ DAVID B. ORSBORN Justice