Wadden (Re), 2018 NSSC 217

IN THE SUPREME COURT OF NOVA SCOTIA IN BANKRUPTCY Citation: Wadden (Re) , 2018 NSSC 217 Date: 20180911 Docket No.: 40690 Estate No.: 51-2040070 Registry: Halifax In the Matter of the Bankruptcy of Arthur James Wadden Judge: The Honourable Justice Glen G. McDougall Heard: May 17 and 18, 2018, in Sydney, Nova Scotia Decision: September 11, 2018 Counsel: Leonard M. Shaw, for the Trustee BDO Canada Limited Vincent A.

Gillis, for Arthur James Wadden By the Court: [ 1 ] An Order setting the Terms for Discharge of Bankrupt, requiring Arthur James Wadden to pay the sum of $12,071.22 by way of 19 monthly instalments of $624.82 and one final payment of $199.64 to the Trustee, was granted by the Registrar, the Honourable A. David MacAdam, Q.C., on the 24 th day of August 2017.

The Order was subsequently issued by the Deputy Registrar in Bankruptcy on the 6 th day of September 2017. [ 2 ] The amount ordered paid to the Trustee represented the balance of the surplus income earned by the Bankrupt after he filed an Assignment in Bankruptcy on the 25 th day of September 2015. [ 3 ] The Trustee, BDO Canada Limited, brought a further motion seeking a variation of Registrar MacAdam’s Conditional Order of Discharge. The motion came before me on May 17, 2018, at the Justice Centre in Sydney, Nova Scotia. In an effort to accommodate a request for a brief adjournment made by Mr.

Wadden’s counsel, Mr. Vincent A. Gillis, Q.C., the matter was put over to the following day. [ 4 ] In addition to the affidavit filed in support of the Trustee’s motion, an affidavit of James Wadden, sworn to on the 14 th day of May 2018, was also provided to the court. [ 5 ] The court also acknowledges the written brief supplied by Mr. Wadden’s counsel prior to the recommencement of the hearing on Friday, May 18, 2018. Counsel’s brief dealt mainly with the doctrine of res judicata and one of its two branches – issue estoppel.

[ 6 ] Before getting into an analysis of the situation, I will provide a somewhat more detailed

summary of the factual scenario. The Factual Scenario [ 7 ] On Friday, September 25, 2015, Mr. Wadden filed an Assignment in Bankruptcy. Mr. Wadden is a first-time bankrupt. BDO Canada Limited was appointed as Trustee by the Official Receiver at Halifax. At that time, Mr. Wadden did not claim any surplus income. He was thus eligible for a discharge after the expiration of a period of nine months. [ 8 ] On Friday, May 13, 2016, the Trustee filed a Notice of Intended Opposition to Discharge of Bankrupt. Afterwards, Mr. Wadden met with the Trustee on two occasions to review the state of his finances.

The second occasion was concluded on Wednesday, October 19, 2016. [ 9 ] Mr. Wadden had a mortgage estimated at approximately $51,000 with Sydney Credit Union. The Trustee calculated, based on an appraisal from Mr. Roy Milley, that there was very little equity in Mr. Wadden’s home. [ 10 ] The total sum of unsecured claims of the creditors of Mr. Wadden is $46,170.94. This sum includes the five per cent interest rate provided at s. 143 of the Bankruptcy and Insolvency Act , R.S.C., 1985, c. B-3 (“BIA”) . [ 11 ] Following the second counselling session, the Trustee calculated that Mr.

Wadden had a surplus income obligation amounting to $13,121. This was to be dealt with over a period of 21 months by remitting payments of $624.82 to the Trustee each month. Mr. Wadden acquiesced. Towards the calculated surplus income obligation, Mr. Wadden remitted the sum of $1,050. Thus, the sum of $12,071 is outstanding. [ 12 ] On Friday May 12, 2017, Mr. Wadden’s home and all its contents were destroyed by fire. Mr. Wadden notified the Trustee of this and the fact that he had a home fire insurance policy with Aviva Canada Inc.

Initially, Aviva paid him the sum of $10,000 to cover additional living expenses and the cost to replace some of the home’s contents. [ 13 ] On Thursday, August 24, 2017, the Trustee made a motion to the Supreme Court of Nova Scotia for an Order Setting Terms for Discharge of Bankrupt. No provision was made for any potential insurance payment for the losses sustained by the Bankrupt. Pursuant to the Trustee’s motion, Registrar MacAdam issued a Conditional Order of Discharge of Bankrupt on Wednesday, September 6, 2017.

The terms of Registrar MacAdam’s Order are that the Bankrupt must pay the sum of $12,071.22 by way of 19 monthly payments of $624.82 and one final payment of $199.64. Payments were to commence on the 1 st day of September 2017 and were to continue on the 1 st day of each month thereafter until fully paid. Upon service of Registrar MacAdam’s Order Setting Terms for Discharge of Bankrupt, the Bankrupt’s employer, as well as any subsequent employer, were to deduct the required payments from the Bankrupt’s remuneration and to remit the required payments to the Trustee.

Upon satisfaction of the terms, an Absolute Order of Discharge would follow. However, Mr. Wadden did not make any additional payments as per the terms of the Conditional Order of Discharge issued by Registrar MacAdam. [ 14 ] On or about Thursday May 1, 2018, Mr. Wadden’s lawyer received in trust two payments from Aviva, one representing payment for building loss amounting to $128,021.11 and another for loss of contents amounting to $68,804.57. Also, Aviva paid the outstanding mortgage on the house to Sydney Credit Union in the amount of $43,728.34. The total sum disbursed by Aviva was $240,554.02.

This includes the initial disbursement of $10,000 for living expenses and some of the home’s contents. Mr. Wadden’s lawyer has commenced legal proceedings against Aviva to secure receipt of the full replacement cost of the home. [ 15 ] The Trustee was notified that the Bankrupt’s lawyer received an insurance payment for a house fire that destroyed the Bankrupt’s home in May of 2017. On Thursday, May 17, 2018, the Trustee submitted to the Nova Scotia Supreme Court an Application for an Order Varying the Conditional Order of Discharge of Bankrupt that was issued by Registrar MacAdam on Wednesday, September 6, 2017.

Also on May 17, 2018, Mr. Wadden submitted his objection to the Trustee’s motion. [ 16 ] The Trustee seeks to vary the terms of Registrar MacAdam’s Order for Discharge of Bankrupt to require a total payment of $58,073.80, including the applicable Trustee’s fees pursuant to Rule 128(2) of the BIA , as well as a levy payable to the Superintendent. [ 17 ] Mr. Wadden seeks to deny the Trustee’s application, arguing res judicata and issue estoppel. The Bankrupt requests that the court reaffirm the September 6, 2017 Conditional Order of Discharge without variation. Furthermore, Mr.

Wadden submits that it will cost more than $200,000 to replace his home, and if the initial Conditional Order of Discharge is varied, the amount that he would receive would not be enough to cover the entire cost to rebuild. And, if he is not able to rebuild, the insurer would not have to pay full replacement cost. He would receive a considerably lower amount based on the actual value rather than replacement cost. [ 18 ] I will now turn my attention to the provisions of the Bankruptcy and Insolvency Act and the BIA General Rules, C.R.C., c. 368 , that are relevant to the matter before the court. [ 19 ]

Section 172 of the Act sets out the power of the court to grant or refuse a discharge. It reads: 172

(1) On the hearing of an application of a bankrupt for a discharge, other than a bankrupt referred to in

section 172.1, the court may (

a) grant or refuse an absolute order of discharge; (

b) suspend the operation of an absolute order of discharge for a specified time; or

(

c) grant an order of discharge subject to any terms or conditions with respect to any earnings or income that may afterwards become due to the bankrupt or with respect to the bankrupt’s after-acquired property. [ 20 ] Subsection (2) of

Section 172 goes on to state:

(2) The court shall, on proof of any of the facts referred to in

section 173, which proof may be given orally under oath, by affidavit or otherwise, (

a) refuse the discharge of a bankrupt; (

b) suspend the discharge for such period as the court thinks proper; or (

c) require the bankrupt, as a condition of his discharge, to perform such acts, pay such moneys, consent to such judgments or comply with such other terms as the court may direct. [ 21 ] It was for reasons set out in s. 173 that the Trustee first opposed the discharge of the Bankrupt until such time as he complied with the requirement to attend a second counselling session and also to supply financial information sufficient to enable the Trustee to determine if he had surplus income which would then have to be paid to the estate for distribution amongst the unsecured creditors. [ 22 ] It was only after the Bankrupt satisfied these conditions that the Trustee then brought the motion for a Conditional Order of Discharge on August 24, 2017.

This was more than three months after fire destroyed the Bankrupt’s heavily mortgaged home. Despite having been notified of this occurrence, the Trustee did not seek to have the discharge motion further adjourned to see if the Bankrupt received payment in compensation for his and his family’s losses arising from the fire. [ 23 ] Initially, Mr. Wadden only received compensation for the cost of temporary accommodations and a fraction of what he and his common-law spouse and their children lost by way of personal effects, clothing and other household contents. [ 24 ] It was only after Mr.

Wadden retained the services of a lawyer that the insurers were persuaded to offer additional amounts to pay out the mortgage lender and to help defray some of the depreciated costs of lost or destroyed household contents and clothing of the destroyed dwelling’s six occupants. [ 25 ] Earlier I referred to the Trustee’s obligation to ascertain if a bankrupt has surplus income that might be available to distribute to unsecured creditors. [ 26 ] Section 68(1) of the BIA mandates the Superintendent of Bankruptcy to “… establish in respect of the provinces or one or more bankruptcy districts or parts of bankruptcy districts, the standards for determining the surplus income of an individual bankrupt and the amount that a bankrupt who has surplus income is required to pay to the estate …” [ 27 ] Subsection (2) of

Section 68 provides a definition of “surplus income.” It states: surplus income means the portion of a bankrupt individual’s total income that exceeds that which is necessary to enable the bankrupt individual to maintain a reasonable standard of living, having regard to the applicable standards established under subsection (1). ( revenu excédentaire ) total income (

a) includes, despite paragraphs 67(1)(

b) and (b.3), a bankrupt’s revenues of whatever nature or from whatever source that are earned or received by the bankrupt between the date of the bankruptcy and the date of the bankrupt’s discharge, including those received as damages for wrongful dismissal, received as a pay equity settlement or received under

an Act of Parliament, or of the legislature of a province, that relates to workers’ compensation; but (

b) does not include any amounts received by the bankrupt between the date of the bankruptcy and the date of the bankrupt’s discharge, as a gift, a legacy or an inheritance or as any other windfall. ( revenu total ) [ 28 ] The definition in part (

b) makes it clear what is not included in the determination of surplus income. It rules out “a gift, a legacy or an inheritance or … any other windfall.” While there is no definition of “windfall” in the BIA , I do not think proceeds of insurance for an asset that was deemed by the Trustee to have little, if any, equity is a windfall.

Nor, do I think it is an asset of the Bankrupt that should now be made available to pay the unsecured creditors 100 cents on the dollar plus five per cent, and capped Trustee’s fees in the amount sought by the Trustee plus the levy to the Office of the Superintendent of Bankruptcy as per the Tariff. This along with the initial requirement to pay $13,121.22 (of which $12,071.22 remains outstanding), would total $58,073.80. [ 29 ] And, while this court has authority under

Section 187, s-s (5) of the Act to “review, rescind or vary any order” previously made, I do not see this as occasioning such an outcome.

In the British Columbia Supreme Court case of Gwizd (Re), [2017] B.C.J. No. 2209, Master Taylor wrote at paras. 23 and 24, thefollowing: [23] As per the Supreme Court of Canada in Alberta (Attorney General) v. Moloney, 2015 SCC 51, the purpose of bankruptcy istwofold; first, the equitable and efficient distribution of a bankrupt’s assets to the bankrupt’s creditors; and second, the financialrehabilitation of the debtor through a discharge of debts. [24] It is well established, as per Nelson (Re), [1995] S.J.

No. 384 (Q.B.), subject to the constraints of s.172 of the BIA, that the ordercreated by the court at a discharge hearing is a matter of discretion. In exercising that discretion, the court must look at the whole matterbefore it in “the light of reason, common sense and humanity” and must seek to balance three things:

a) The interest of the rehabilitation of the bankrupt;

b) The interest of the creditors in being paid; and

c) The integrity of the bankruptcy process and the public’s perception of it. [30] In exercising my discretion, I am guided by the decision of Mr. Justice John J. Gill of the Court of Queen’s Bench of Albertawhere, at paras. 27 to 30, of Hazin (Re), 2011 ABQB 197, he stated: [27] Firstly, the issue of when is the time to address the issue of non-exempt equity. The comments of Master Funduk in the ReMacKay case are applicable here.

At paragraphs 100 and 100 he stated: 100 Regardless whether a bankrupt has gotten an absolute, suspended or conditional discharge nobody can later raise an issue aboutsurplus equity in a house. The discharge is the latest time that issue is to be dealt with, if anyone wants to make that an issue. 101 If a conditional order is given requiring the bankrupt to pay for the surplus equity nobody can later ride the market, up or down,to revisit that. If the house value later goes up the trustee and creditors cannot ask that the bankrupt now pay more.

If the house valuelater goes down the bankrupt cannot ask that he now pay less. [28] The latest time to raise an issue about surplus equity in a house is at the time of discharge. In this case it was in September, 2002at the time of the discharge pursuant to the order of Registrar Breickreuz. [29] Secondly, the issue of doctrine of issue estoppel. The Court of Appeal in Ernst & Young Inc., supra, outlined the doctrine atparagraphs 29 and 30: 29 The doctrine of res judicata has two branches: issue estoppel and cause of action estoppel.

Issue estoppel precludes the litigationof an issue previously decided in another court proceeding, and cause of action estoppel precludes the litigation of a cause of actionwhich was adjudged in a previous court proceeding: Donald J. Lange, The Doctrine of Res Judicata in Canada, 2d ed. (Ontario:LexisNexis Canada Inc. 2004) at 1 [Res Judicata].

We need not consider the applicability of cause of action estoppel because issueestoppel precludes Central Guaranty from attacking the validity of the trusts in this litigation. 30 For issue estoppel to be successfully invoked, the issue must be the same as the one decided in the prior judicial decision, the priorjudicial decision must have been final, and the parties to both proceedings must be the same, or their privies: Toronto (City) v.

CanadianUnion of Public Employees, Local 79, 2003 SCC 63 , [2003] 3 S.C.R. 77 at para. 23 [Toronto]. [30] I find that the three requisite elements of issue estoppel are present in this case. [31] Like Justice Gill and as skillfully and persuasively argued by Mr. Gillis, I, too, conclude that the requisite elements of issueestoppel are present in the case that is now before me. [32] The Trustee, rightfully I might add, made the proper determination that there was no appreciable equity in the Bankrupt’shouse and property at the time the assignment in bankruptcy was made.

The intervening event resulting in the complete destruction of

the home did nothing to change that. [ 33 ] The fact that the house and contents were covered against loss by fire is to the benefit of the owner and the mortgage lender. [ 34 ] The owner simply seeks to be put back in the position he was in prior to the fire. He has the right under the policy of insurance to be provided with funds to rebuild a house comparable to the one he lost. The insurers are also obliged to pay for contents destroyed in the fire, if not at replacement cost then at least in a reduced amount reflecting actual value.

The coverage extends to not only the Bankrupt but also to his common-law spouse and the four children that make up their blended value. [ 35 ] The Bankrupt shall pay, out of the proceeds of insurance, the balance of $12,071.22 ordered paid to the Trustee pursuant to Registrar MacAdam’s Conditional Discharge Order. [ 36 ] As for the additional amount sought by the Trustee, the Bankrupt, Arthur James Wadden, is not liable for its payment. [ 37 ] As soon as the $12,071.22 is paid to the Trustee, the Bankrupt will be in a position to apply for an Absolute Order of Discharge. McDougall, J.