Stoddard (re), 2021 NSSC 81

SUPREME COURT OF Nova Scotia IN BANKRUPTCY AND INSOLVENCY Citation: Stoddard (re), 2021 NSSC 81 Date: 20210308 Docket: No. 43483 Registry: Yarmouth-04 Estate Number: 51-2296081 In the Matter of: The bankruptcy of Hayley Dawn Stoddard Judge: Raffi A. Balmanoukian, Registrar Heard: November 9, 2020, in Yarmouth, Nova Scotia Counsel: Kristi Neilsen, for the Trustee, Grant Thornton Limited Hayley Dawn Stoddard, for the herself, personally (by teleconference) Balmanoukian, Registrar: [1] Debts incurred by fraudulent misrepresentation or by false pretenses are not discharged in a bankruptcy.

What the defraudedparty does to pursue that preserved debt will vary. When it is a public debt, it is incumbent upon the guardian of the public purse to doso in a manner that is fair to all stakeholders. [2] Haley Dawn Stoddard, now 50, filed for this, her second bankruptcy on September 22, 2017 (her first, from 2006, ended in anautomatic discharge nine months later). Of her $58,499 in declared total debt (all unsecured), $32,000 was an Employment Insurance(EI) overpayment. Another $3500 (plus a $1.00 notice amount) was to the Canada Revenue Agency for tax.

EI thus made up 55% ofher declared debt, and public debt accounted for over 60%. The remainder of the list was unremarkable – a vehicle deficiency, paydaylenders, utilities, a credit card, a small overdraft. In fairness, much or all of the tax debt was likely thrown up as a result of the EIreceipts. [3] The Trustee originally opposed Ms. Stoddard’s discharge on the basis that she had not filed all required income and expenseinformation (Bankruptcy and Insolvency Act, RSC 1985, c.

B-3 as amended [the “BIA”], ss. 68 and 158) and had not remitted anybalance due as a result of having “surplus income.” By the time of the hearing, she had complied with her statutory obligations. TheTrustee, accordingly, recommended an absolute discharge. [4] Ms. Stoddard appeared by teleconference. She freely admitted that the EI overpayment was the result of knowingly falsefilings.

She implied, without detail, that these were made under some duress but admitted that they were with full knowledge of theirfalsehood and that she knew at the time of filing that she “shouldn’t have done it.” It is therefore unnecessary for me to examine thenuances of what constitutes civil fraud for the purposes of s. 173(1)(

k) or what constitutes fraudulent misrepresentation or false pretenseswhich, if an associated debt or liability is proven, makes that debt or liability not dischargeable pursuant to s. 178(1)(e ). She hasadmitted to the act and to the intent. [5] I begin by noting that the preservation of liability for debts incurred by “fraud, embezzlement, misappropriation or defalcationwhile acting in a fiduciary capacity” in s. 178(1)(

d) is not applicable. Ms. Stoddard was not a fiduciary. Case law is clear that thefiduciary requirement applies to all categories listed in s. 178(1)(

d) including fraud, not solely instances of misappropriation or defalcation: 166404 Canada Inc. v. Coulter (1998), (ON CA), 4 CBR (4th) 1 (Ont. C.A.); see also Re Gushue, 2004NSSC 64 at para. 24.

Fraud, stripped of the fiduciary element, can still constitute a “fact” which I am to consider under s. 173(mandating that I must not grant an absolute discharge), but it does not mean that a non-fiduciary fraudulent debt in itself survivesdischarge pursuant to s. 178(1)(d). [6] 178(1)(e), on the other hand, preserves debts and liabilities resulting “from obtaining property or services by false pretenses orfraudulent misrepresentation.” It does not require the fiduciary relationship contemplated by s. 178(1)(d). In the case of Ms.

Stoddard,the knowing filing of false EI claims, and obtaining money[1] as a consequence, unquestionably comes under paragraph 178(1) (e ). [7] In Economical Mutual Insurance Co. v. Guilbert, 2020 MBQB 179, an owner ‘torched’ his building and submitted a proof ofloss under his insurance policy. The insurer paid two mortgages under the standard mortgage clause (which preserves the right ofpayment to a lender in the face of a wrongful act by the insured), as well as clean up costs. A civil trial resulted in a judgment against theowner, who thereafter promptly declared bankruptcy.

Justice Menzies found that the civil judgment was preserved by virtue of s. 178(1)

(

e) BIA, as being grounded in the intentional or reckless misrepresentations made by the owner to the insurer (para. 17). [8] Here, although there was no trial or adjudication with respect to the EI overpayment, there was a clear admission on the part ofthe bankrupt that she knowingly effected false or misleading filings, in order to obtain payments to which she was not eligible. She was,indeed, not “entitled to her entitlements.” And she knew it. [9] The EI authorities, for some reason, appear over time to have “done a full 180” on their approach to overpayments in abankruptcy.

In prior years, I understand, they took the position in most if not all cases that the overpayments survived the bankrupt’sdischarge under one or more provisions of s. 178(1). I don’t know what they did after discharge to realize on collection as a result of thatposition. Now, they appear to take the position for whatever reason that they will never, or almost never, resume collection effortsfollowing the bankrupt’s discharge. [10] Why is that? I don’t know. There may be a cost-benefit analysis at play. There may be a policy decision to consider this a“cost of doing business” under a statutory insurance regime.

They may be reluctant to admit the scope of improper claims or the“leakage” or “shrink” that results. They may consider collection to be too onerous in sorting out what is and isn’t a s. 178(1) debt post-bankruptcy, notwithstanding the substantial – one may say “draconian” - collection modalities at the disposal of the Crown. Their viewmay vary from region to region or from office to office.

There may be factors or considerations of which I am completely oblivious. [11] What I do know is that over the last considerable period, whenever I have asked Trustees about EI overpayments, the answerwhen there has been a proof of claim has been universal – that the authorities will not resume collection efforts. By implication at least,it seems they accept that the debt will as a matter of course be discharged; at the very least, they are ambivalent about whether they haverights that remain in force. [12] I do not accept the proposition that this debt is discharged, always and as a matter of course.

Where it is clear that a debtcomes within s. 178(1)(e), the debt is not discharged as a matter of law, whatever the view or even level of interest of the debtor orcreditor. It can, should the creditor so seek, be pursued post-bankruptcy in the ordinary Courts and using ordinary collection methods (See Wilson v. Wilson (2001) (ON SC), 21 CBR (4th) 304 (Ont. SC); Holmes v. Mayer (2000), 17 CBR (4th) 77, aff’d (ON CA), 151 OAC 223 (C.A.)).

Even if an EI debt does not come under s. 178(1)(e), it still remains open for EI tocontest the discharge if it considers it appropriate, such as circumstances in which one or more facts under s. 173 have been proven or canbe established on admissible evidence. [13] I can’t make the EI authorities pursue this. What I can do is make it crystal clear that my Order does not release this debt byMs. Stoddard. Indeed, as a matter of law I cannot order that it is released.

What EI collection officers do about that as a means ofprotecting the integrity of its programs and the interests of the millions of employers and employees who pay into it, and of the statewhich is ultimately responsible for its fair administration, is something I cannot order. It is only something I can behold with some senseof astonishment and bewilderment. [14] I do have the authority to order, pursuant to s. 172(2), that the bankrupt perform certain acts, which I consider to includeauthority to order payment of funds. That is distinct from ordering a creditor to take steps to collect on it.

In the context of s. 178, it is achicken-and-egg with which I will not complicate this case: by ordering payment as a condition of discharge, it by definition means thatMs. Stoddard would not be discharged. S. 178, in contrast, addresses debts that are not released by an order of discharge. This is adistinction with a very real difference. [15] This is also not to say that every EI overpayment is preserved by s. 178.

The “honest but unfortunate debtor” can exist with anEI obligation; certainly not every overpayment was generated in circumstances which constitute a s. 173 “fact” or which results in a debtpreserved by s. 178. But it appears that the “all or nothing” pendulum of the EI authorities’ view of whether the obligation isdischargeable or not appears to have swung to its apogee. [16] I add that contemporaneous with writing this decision, a committee of the Nova Scotia Association of Insolvency andRestructuring Professionals (NSAIRP) has been working diligently with respect to certain types of standard forms.

I am grateful to havebeen consulted for input. I have expressed the view that the discharge language in absolute or conditional orders should contain areference to the effect that the debtor “….shall be discharged from all claims with the exception of those listed in s. 178(1) of theBankruptcy and Insolvency Act” rather than simply saying that the debtor “is discharged.” Certain Trustees already use variations of thislanguage, to my approval.

Although as I have stated those debts are preserved as a matter of law, I think it is useful to avoid anyambiguity on the part of the debtor, and enables the Trustee to have an exit discussion of what the order does and does not cover. [17] In cases such as this, I go a step further. When an order’s scope may be ambiguous to a future reader, I am prepared to add a“for greater certainty” clarifier.

In this instance, I direct the Trustee to add to its draft order, “and for greater certainty, but withoutlimiting the foregoing, it is declared that the Employment Insurance overpayment resulting from false pretenses or fraudulentmisrepresentation is not discharged by this Order.” [18] As I have noted, not only does the EI overpayment at issue survive the bankruptcy, but it is a s. 173(1) fact that precludes mefrom issuing an absolute order. That would also preclude an absolute discharge order that is envisaged by s. 178(2), which in turn‘carves out’ s. 178(1) surviving debts. In addition, Ms.

Stoddard’s is a second bankruptcy which is a ‘fact’ under s. 173(1)(j), leading tothe same jurisdictional limitation. [19] I don’t think additional significant sanctions serve any useful purpose here. The preservation of well over half of the filed debtwill be quite enough, come what may the response of the public creditor. It will be front-and-centre in the order when Ms. Stoddard iscalled upon to produce it for her future financial needs. It is a debt that remains with her, and owing by her.

I add a one-day suspensionto constitute technical compliance with s. 172(2). [20] The Trustee shall prepare the revised order. Balmanoukian, R.