McInnis (Re), 2020 NSSC 64

SUPREME COURT OF Nova Scotia IN BANKRUPTCY AND INSOLVENCY Citation: McInnis (Re) , 2020 NSSC 64 Date: 20200218 Docket: No. 42958, 42959 Registry: Halifax Estate Number : 51-2385826 51-2385849 In the Matter of: The bankruptcies of Cyril Gordon McInnis and Florence Marie McInnis Judge: Raffi A.

Balmanoukian, Registrar Heard: February 11, 2020, in Bridgewater, Nova Scotia Final Written Submissions: February 11, 2020 Counsel: Tim Hill, QC, for the Trustee, Grant Thornton Limited Cyril Gordon McInnis, appearing personally Balmanoukian, Registrar: [ 1 ] This case serves as a warning to Trustees who do not lodge assignments in bankruptcy in the appropriate real property registry in a timely fashion. [ 2 ] Cyril Gordon McInnis and Florence Marie McInnis made assignments in bankruptcy on May 17, 2018. They owned two parcels of real property in Lunenburg County.

Preparatory to those filings, they obtained a very brief valuation opinion from a local real estate agent, estimating what Mr. McInnis confirmed was a “90 day quick sale” price. That opinion of value was $115,000 and is dated March 21, 2018. [ 3 ] The McInnises disagreed with that valuation, believing the value to be lower.

The same estate agent acknowledged what some may consider to be detracting factors (location and a nearby barn), but ultimately stated (on February 12, 2019) that “I stand by my original opinion.” [ 4 ] At that value, and taking into account notional disposition costs, there was some equity in the property – approximately $7700.

Nonetheless, the Trustee took no steps to record the assignments in the relevant judgment roll or parcel registers. [ 5 ] Sometime in the summer of 2019, the McInnises decided that they could no longer afford the home, and listed the property for sale with a different agent at the same brokerage. They listed the property at $185,000 as they were in “no rush to sell.” There is no indication the Trustee took any role in this process, or even knew about it. [ 6 ] It is trite to say that the property was not the McInnises’ to sell, by virtue of it having vested in the Trustee pursuant to

Section 71 of the Bankruptcy and Insolvency Act , RSC 1985, c. B-3 , as amended (the “ BIA ”). However, there was still nothing on the real property records for the district to so indicate. [ 7 ] A full-price offer came quickly, dated August 28, 2019. After an extension in which the McInnises installed a UV light for the well, it appears to have closed on October 15, 2019, although the deed was not immediately registered. [ 8 ] At some point during this process, the Trustee became aware of the pending sale – although it is unclear how, it appears it may have been communicated through the McInnises’ counsel.

Even then, the assignments were not registered until October 21, 2019 with the relevant Land Registration Form 24 dated October 17, 2019 – six and two days, respectively, after the notional closing. [ 9 ] October 15, 2019 was also the date of the receipts and disbursement ledger in evidence. However, the date of payment of the mortgage appears to have been October 28, 2019. It also notes payment of legal fees, although the invoice is dated October 23, 2019.

[ 10 ] There was, until the last moment, every opportunity for this to have been a case of the Trustee’s interests being subsumed to what is commonly known as “equity’s darling” – that is, of a bona fide purchaser for value without notice. The Trustee’s remedy, had that occurred, would have been against the Bankrupts and whatever proceeds may have remained available for seizure. [ 11 ] Indeed, this matter was originally scheduled to come before me on September 23, 2019, with an equity calculation based on the $115,000 valuation.

The Trustee deposed that this was removed from the docket “at the request of the Bankrupts.” [ 12 ] Mr. McInnis stated that he had no particular knowledge of this, and that any such request must have come from his counsel. [ 13 ] Had the matter proceeded, it is quite probable that the Court would have been asked to calculate equity based on a $115,000 valuation that turned out to be incorrect. The resultant opportunity for the McInnises to act contrary to the interests of their estates is self-evident. [ 14 ] All of which is to say, the Trustee dodged a bullet.

There was nothing on the real property record to indicate its interest, even for a period after the pending sale (and substantially higher equity) came to its knowledge. The matter was scheduled to be heard after the August offer (although not necessarily after the Trustee’s knowledge of the pending sale). [ 15 ] Ultimately, the conveyance to the new owner came from the Trustee, following the registration of the assignments noted above, although as noted these post-date the actual stated closing date. [ 16 ] The net proceeds, namely $67,984.37, remain in trust.

The Bankrupts’ proven claims exceed this amount. [ 17 ] The Trustee claims that as the property in law vested in the Trustee and it had not disclaimed its interest, the net proceeds belong to the estate to be distributed according to the scheme set out in the BIA . [ 18 ] The Bankrupts say that they never would have sold the property had they known this, and that the Trustee, having proceeded based on a $115,000 valuation, is effectively fixed with working with this figure.

Thus, say they, at the outside the Trustee is entitled to the approximately $7700 equity originally estimated. [ 19 ] This disturbing fact situation raises several collateral and practice issues: 1. Which value should be used, and is the Trustee estopped on these facts from asserting a value other than $115,000? 2. How should one calculate notional or actual disposition costs? 3. Who is entitled to what portion of the actual equity realized? 4. Should the Court exercise its discretion under s. 172 BIA with respect to the conditions under which the Bankrupts are to be discharged? 5.

Are there cost consequences arising from the above fact situation? Which valuation? [ 20 ] Appraisals are opinions – and only opinions. Even more so, an estate agent’s market analysis (which is not an appraisal); and especially so where, as here, the agent includes the statement in the 2018, three-paragraph analysis that “***Prices are subject to change with market conditions.

This is my opinion only!” [ 21 ] It will also be recalled that this $115,000 valuation was commissioned on a “quick sale” basis; conversely, the McInnises listed the property for $185,000 on an “it sells when it sells” basis – which is much closer to the classic formulation of market value (that is, briefly paraphrased, a willing buyer and a willing seller in an open market, with neither acting under special motivations and with the property exposed for a reasonable period of time). Even the full-price offer came quickly – whether by luck or by a continued underestimate of value is unknown. [ 22 ] Mr.

Hill, for the Trustee, correctly points out that the “last” date for evaluation of assets is the date of the discharge hearing, citing the recent decision of Justice Gabriel in Re Ross , 2020 NSSC 36 . [ 23 ] Ross dealt with a situation in which a bankrupt had received a conditional discharge. Thereafter, upon his death, insurance proceeds paid to a mortgagee increased the net equity in the home. Justice Gabriel decided, among other things, that once there is a discharge order in place, changes in value are for the account of the bankrupt, not the estate.

At paragraph 49 he stated: [49] We have earlier seen that in Wadden , McDougall, J. canvassed the authorities and concluded that the time of the discharge (whether it be absolute, suspended, or conditional) is the last time to raise an issue about surplus equity in the property.

In MacKay (cited in Wadden ), it was specifically pointed out that if the value of the home increases afterward, "nobody can later ride the market up... to revisit that." By characterizing the mortgage (life) insurance payout as an increase in the value of the property, in the circumstances, it appears that the Trustee is seeking to revisit the valuation and claim the benefit of subsequent growth (albeit, in equity, rather than in market value necessarily). [ 24 ] Re Wadden , 2018 NSSC 217 , cited in Ross , dealt with a situation in which a home without appreciable equity was destroyed by an insured event, and was replaced with a new dwelling – resulting in considerable equity.

Justice McDougall reached a similar conclusion – that is, having come subsequent to the discharge order, this appreciation was for the account of the bankrupt, and that issue estoppel applied. [ 25 ] So does it apply here? Are the McInnises entitled to say, “we thought we would be able to work with the $115,000 figure?”

[ 26 ] Put another way, should I follow and probably extend the result in Re Johnson , 2006 NSSC 384 ? [ 27 ] Johnson involved explicit and repeat assertions by the Trustee that it would take no steps to realize on the equity in a bankrupt’s property. Based on that, the Bankrupt continued to service the property’s obligations and increase its equity. Registrar Cregan decided that, on those facts, the Trustee was estopped from changing its mind and recalculating the asset’s net value. [ 28 ] Without deciding the point, I doubted Johnson in Re MacRury , 2019 NSSC 146 .

MacRury , too, was an insurance proceeds case; I decided that Johnson did not apply to the fact situation at bar in MacRury , namely life insurance payable to the deceased bankrupt’s estate before the bankrupt’s discharge but actually paid after (and not renounced or disclaimed by the Trustee). [ 29 ] To complete the circle, MacRury was cited, and distinguished without disapproval, in Ross. [ 30 ] I continue to doubt Johnson , at least absent evidence of active representations or misrepresentations by the Trustee that are relied upon by the Bankrupt to her or his detriment.

Respectfully, this considers only half of the equation – that of the debtor. It does not consider the rights of creditors. However, I do not need to decide today whether Johnson is incorrect. It is distinguishable from the facts at bar. [ 31 ] Here, there is no evidence that the Trustee, by act or omission, led the McInnises astray. It is true that it calculated equity based on a $115,000 valuation, but that valuation was obtained by the McInnises prior to their assignment; then, they disputed it as being too high.

They do not appear to have consulted with the Trustee prior to listing the property for sale, or agreeing to sell it (despite, in law if not on Land Registration records, it not being theirs to sell). There is no indication that the Trustee would not seek to realize on the net equity, whatever that may be. Indeed, all indications are to the contrary.

It simply turned out to be woefully underestimated. [ 32 ] While an actual arm’s length sale will always be the best indicator of value as opposed to an opinion (even an expert opinion) of value, it will also be recalled here that we have two different benchmarks – a very abbreviated “quick sale” opinion, and a market-driven listing and sale (which also turned out in fact to be a full-value sale and a quick sale at that). There is no indication the Trustee did anything to influence either of these figures, and no indication that there was the kind of active assertions at play in Johnson .

Nor are there the type of intervening events and third-party proceeds that were at issue in Ross, Wadden , or MacRury . It was the same real property throughout – the only difference (aside from the UV light) is that the McInnises thought it was worth less than it really was. That thought process was of their own genesis. [ 33 ] I therefore conclude that the proper valuation is $185,000 before disposition costs, and that the Trustee is not estopped from so maintaining. Costs of disposition [ 34 ] In this case, there are actual costs of disposition known to the Court.

I believe, however, that it is appropriate to set out some guidance as I have done in open Court on several occasions, on what are appropriate and normal disposition costs in calculating notional or actual equity in residential real property, for bankruptcy purposes. [ 35 ] This Court has been told on other occasions that it should effectively take the calculations by the Trustee at face value, and defer to them. I disagree. While Trustees have undoubted expertise, their practices and assumptions vary widely.

It is only just to all participants in the process that the Court apply a principled set of standards, consistently. [ 36 ] I am often asked to grant conditional orders based on the repurchase of a non-exempt asset, such as equity in real property. Unlike some jurisdictions, Nova Scotia does not have a “homesteader’s exemption” which protects a given level of net equity.

However, in calculating equity when there is no actual disposition, it is appropriate to put the estate in the position it would be in had the asset been surrendered to the Trustee, and the Trustee disposed of it in the ordinary course. [ 37 ] I start with gross value. This case illustrates in stark relief the danger of using liquidation or forced-sale values. Certainly if a Trustee actually disposes of an asset, it would be known to be a non-market sale and on an “as is, where is” basis, with the associated impact on the transaction price.

However, in a notional disposition, it is appropriate in most instances to attempt to value the asset on a fair market basis. [ 38 ] From this, I generally allow the following deductions: - Mortgage balance as of the date of assignment, including any penalty in evidence (or, failing such evidence, three months’ interest at then-prevailing rates, again if the rate on the actual loan is not before me). - Outstanding real property taxes. - Real Estate commission at 5% plus HST, with a floor of $1500 plus HST (I note that the commission to the McInnises is a somewhat unusual 6.16%, which was unable to be explained to me).

I appreciate that some transactions may attract a higher commission; others may be private sales. I believe on a notional calculation, this strikes a fair balance to all. - Cost of conversion (commonly called “migration”) to the Land Registration system, if not already done, at $1500. If there is more than one lot, how much extra would generally depend on whether there appears to be a wholly or partially common chain of title. Two simultaneous migrations are more work than one, but usually not twice as much. - Legal fees of $1000 all-inclusive.

This exceeds the norm in many parts of the Province, but I bear in mind that a Trustee would generally be involved whose participation (by disclaimer or deed) would generally be required. - Costs necessary to effect the sale, such as minor repairs or improvements that arise from a property inspection. Here, the McInnises installed a UV light at a cost of some $400, and it was properly conceded that this amount should be reimbursed to them.

- I generally will not allow carrying costs on a notional disposition calculation, as the bankrupt has use and benefit of the asset, and by definition is seeking to keep it. [ 39 ] I wish to add a comment with respect to the legal fees charged in this case. The McInnises’ counsel charged $3000 plus HST (no migration), and a $75 “file administration and technology fee.” It does not include any recording fees, which are accounted for separately on the statement of trust. [ 40 ] On its face, this appears to be excessive.

It is not noted as including any extraneous services (and indeed the McInnises were unrepresented at the hearing). The transaction appears not to have been complicated by the fact there are two parcels of land. Counsel for the Trustee, the Court, and Mr. McInnis (who said he was “shocked”) all expressed concern as to this account. Should the Trustee wish to contest the matter, I have jurisdiction to tax it as part of the insolvency process and pursuant to Rule 18; it may be set down before me accordingly. Entitlement to the Proceeds [ 41 ] In my view, the Court should keep distinct three separate questions: 1.

To whom, in first instance, entitlement to a particular asset or proceeds should accrue; 2. Whether the Court should exercise its discretion under s. 172 of the BIA to change this in any way; and 3.

Whether there are any considerations which should affect the Court’s disposition as to Costs. [ 42 ] Having decided that the proper date of valuation is up to the date of discharge, and that there is no evidence to estop the Trustee from using this valuation as opposed to the $115,000 obtained by the bankrupt, this aspect of the case may be disposed of comparatively summarily. [ 43 ] Subject to reimbursement to the McInnises of the UV light, the net proceeds in trust are the property of the Trustee for the benefit of the estate.

The same applies to any costs or credit that may result from a taxation of the solicitor’s sale account, noted above. The Court’s s. 172 Discretion [ 44 ] Sections 172(1) and 172(2) of the BIA give me a wide discretion on a discharge hearing. Those subsections read: 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.

(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. [ 45 ]

Section 173 sets out a series of facts, acts and omissions which, if one or more are proven, trigger 172(2), quoted above. Some are more serious than others. [ 46 ] As with most

summary estates, the McInnises come (or at least before the sale, came) under the “50 cents on the dollar” factor in 173(1)(a). [ 47 ] More seriously, and of greater concern to the Court, are their failures to abide by their voluntary fee agreement (173(1)(o), with the agreement provided for under s. 156.1). They paid nothing. [ 48 ] They paid only minimal amounts - $620 apiece – towards their home equity. [ 49 ] To be fair to them, they overpaid for a jointly owned horse trailer, valued at $3,520.

The Trustee allowed the $1,000 ‘tools of the trade’ exemption in place at the time of filing (now, but not retroactively, $7500: Value of Chattels Exempt from Seizure Regulations, NS. Reg. 162/2019, s. 2 ) - for a balance of $2,520 paid equally by them.

In my view, each bankrupt was entitled to this exemption, for a total of $2,000; not the $1,000 they received. $500 shall accordingly be credited in each estate towards the bankrupt’s respective fees. [ 50 ] They did complete their mandatory counselling and they apparently submitted their required income and expense forms. [ 51 ] Their list of debts is unremarkable, consisting of bank and consumer credit. [ 52 ] They list as a cause of bankruptcy an uninsured loss (with knock-on business losses), as well as unspecified health problems. They are seniors, and this is their first bankruptcy.

[ 53 ] As I have noted, it is not clear how the pending sale came to the knowledge of the Trustee. The Court has the distinct impression that it came through the McInnises’ counsel. It does not appear to have come directly from the McInnises. [ 54 ] I share Mr. Hill’s comment that the Trustee is “not without sympathy” to the McInnises, arising from this set of circumstances. No doubt they did not intend to sell to effect a greater distribution to creditors.

However, the McInnises took the position that they had little realizable value in the property, and in fact disputed that it was worth even $115,000. [ 55 ] In other words, they filed for bankruptcy with the view that they would come out with no non-exempt assets, and probably have to pay in some $7700 if they were to keep the property. Instead, as a result of the sale they pay nothing for the real property, and have nothing (aside from the UV reimbursement noted) from its disposition. So, they are where they should be and perhaps, given their motive in selling, even ahead of where they would have been.

It goes without saying that the additional distribution to creditors is laudable. [ 56 ] I have considered carefully whether to exercise my s. 172 discretion in formulating an order under which the McInnises would pay a lower amount into their estate than currently in trust. [ 57 ] I believe to do so would be an error in principle, and would have the net effect of re-ordering the scheme of distribution in the BIA , and creating a type of exemption where one does not exist.

In my opinion, a non-exempt asset is just that and does not change character when it is converted from realty to cash. [ 58 ] It is also a primary and principal reason I insist that conditional orders which provide for repurchase of assets and payment of surplus income state that payments are allocated first to the repurchase of assets. Not only does the debtor have the use and benefit of the asset (and any increase in value), but I have a discretion under s. 68 to deviate from the Directive 11R2 amount with respect to surplus income.

I do not consider such a deviation generally appropriate with respect to assets. So, if there is to be a variation of a conditional order, it is appropriate that the assets be paid first, and then the Court can look at how much is an appropriate payment into the estate for surplus income. [ 59 ] I also note, in deciding how and whether to exercise any s. 172 discretion, the McInnis’ compliance with their BIA duties was far from perfect. [ 60 ] This is not to say that I believe that everything from the Trustee’s administration was “just fine.” It was not. I repeat that the Trustee dodged a bullet.

However, I think that is a separate question from who, in first instance, is entitled to these proceeds and whether that is affected by the scope of my discretion under s. 172. [ 61 ] In principle, I think the appropriate place to treat the disconcerting elements of this file is when dealing with costs. To that, I now turn. Costs [ 62 ] The Trustee should have registered or recorded the Assignments in Bankruptcy in the relevant real property registry as soon as it was aware that there was potential equity in the real property.

This was the case even with the $115,000 valuation. [ 63 ] Its failure to do so endangered the estate. The Trustee’s in rem claim was subject to defeat by equity’s darling. [ 64 ] I have been flummoxed by the number of occasions in which this issue has arisen (indeed, Ross , supra , appears to be another such instance). I appreciate that in

summary administration estates, time and monetary resources are often limited. The fee agreement (as here) may cap compensation at modest levels. Nevertheless, the work is not time-consuming or arduous. The recording cost is $100 per instrument and is recoverable under Rule 128 (in the case of

summary administration estates as a “necessary [disbursement] relating directly to the realization of the property of the bankrupt”) or as a regular taxable disbursement (in ordinary administrations). [ 65 ] The Trustee who fails to protect potential equity in real property by registering or recording the assignment puts itself at risk of a claim by an aggrieved creditor, and when passing its accounts. [ 66 ] I am advised that the McInnis estates have been, or are in the process of being, converted to ordinary administration estates.

That, given this Court’s ruling on the proceeds held in trust, is appropriate (Rule 130). [ 67 ] I direct that, at the time of passing accounts, the Trustee’s fees are to be brought before me for taxation. At that time I will consider all relevant factors in setting just and appropriate compensation. Conclusion [ 68 ] The cost of the UV light is to be reimbursed to the McInnises. $500 each, from overpayment of the horse trailer, is to be credited to their respective fees, as will the $620 they each paid towards the home equity.

The balance of the proceeds are to be distributed according to the scheme of distribution in the BIA . The Trustee is at liberty to have me tax the account for legal services associated with the sale of the real property. The Trustee’s ordinary administration fees are to be brought before me for taxation prior to the final distribution of the estate. Balmanoukian, R.