Durdle (re), 2018 NSSC 206

SUPREME COURT OF Nova Scotia IN BANKRUPTCY AND INSOLVENCY Citation: Durdle (re) , 2018 NSSC 206 Date: 20180831 Docket: No. 39442 Registry: Halifax In the Matter of: The bankruptcy of Michael Joseph Durdle Judge: Raffi A. Balmanoukian, Registrar Heard: August 24, 2018, in Halifax, Nova Scotia Counsel: Kimberley A. Burke, for the Trustee, BDO Canada Limited Balmanoukian, Registrar: [ 1 ] This Court routinely considers situations in which the Bankrupt is indebted to the people of Canada, through tax or other liabilities to the State.

As a matter of general policy, these obligations have a higher moral and sometimes legal priority than to private creditors as they are borne by all of us, as citizens and fellows of Society; and because the public generally must bear the share not paid by someone else. The collective public is an involuntary creditor in the result. [ 2 ] What, then, is the situation when that is reversed – when it is the people of Canada who are indebted to the individual?

Should compensation paid out as a consequence be considered divisible among creditors in an insolvency? [ 3 ] Master Corporal Durdle served his country for over 24 years. He is a career soldier. He is now 49 years old, and was 45 at the time of his military discharge. He joined the forces as a young man. He continues to suffer from severe service-related PTSD. He is under professional care. [ 4 ] Mental health issues from military service have had many names.

During the American Civil War, it was known as “soldier’s heart.” Later, the terms “shell shock,” “combat fatigue,” and “battle neuroses” were in popular use for related, although sometimes medically different, conditions. “Combat stress reaction” has also been used, generally in reference to short-term situations. With advances in understanding and treatment, post-traumatic stress disorder (PTSD) is the current accepted popular term for many different anxiety disorders arising out of traumatic exposure.

Given the nature of military duty, it is tragically inevitable that many patients are or have been in the armed services.

Much has been made of the need for recognition, destigmatization, resources, and treatment. [ 5 ] I, as Registrar, have no medical role and profess no medical expertise; but I do have a function and corresponding duty in finding a just and appropriate disposition of this discharge application, given the income streams I refer to below. [ 6 ] Two days after Remembrance Day 2013, MCpl Durdle made an assignment in bankruptcy, his second (his 1998 assignment resulted in an automatic discharge late the same year).

A 2012 proposal, presumably for most of the same debts at issue at present, was unsuccessful. [ 7 ] There is a significant list of creditors. That is not to be taken lightly, particularly in a second bankruptcy. As of the 2015 report pursuant to

Section 170 of the Bankruptcy and Insolvency Act , RSC 1985, c. B-3, as amended (“BIA”), there are $73,476.76 in proven unsecured creditors against only minor non-exempt assets. [ 8 ] MCpl Durdle also was delinquent in filing financial information, and in attending his second counselling. Ordinarily that, too, calls for the Court’s disapproval.

Based on the evidence provided by MCpl Durdle’s health professional, combined with the automatic discharge in MCpl Durdle’s first bankruptcy and his attempt to make a proposal in 2012, I hasten to add that I fully believe these defaults are medically related and not from of any culpable turpitude or neglect. [ 9 ] In 2014 – that is, during the bankruptcy period – MCpl Durdle received significant taxable receipts. As summarized in the Trustee’s affidavit, these included 1. $16,778 from a wage loss replacement plan;

2. $28,107.04 from a rehiring allowance, including $19,675 in severance pay; 3. $23,594.10 in pension income; 4. $49,289 in disability income; and 5. $3,624 in employment income. [ 10 ] In these circumstances, how much if any of this should be considered “surplus income” for the purposes of

Section 68 of the BIA , and the Superintendent’s Standards on that subject pursuant to Directive 11R2, as it stood in 2014? [ 11 ] I begin with the general principle that

Section 68 is a complete code for determining what is, and is not, payable to the estate for income purposes: Marzetti v. Marzetti , [1994] SCR 765. It is to be given a large and liberal

interpretation: Wallace v. United Grain Growers Ltd ., [1997] SCR 701, and Re Ford , 2009 NSSC 124 . An illustration of the scope of cash flows that can come within

Section 68 is illustrated in Houlden, Morawetz & Sarra’s Annotated Bankruptcy and Insolvency Act at

Section F111(3). [ 12 ] That is as it should be. Notably, these have included certain types of severance pay and disability payments, which I will refer to later in the context of this case. [ 13 ] I therefore have no hesitation in finding the starting or default position.

It is that the words “total income” which are defined as including (thus, not restricted to) “revenue 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” prima facie include all revenue-type cash flows for the purposes of calculating surplus income - unless there is something in the legislation, or in the common law that has not been superseded by legislation, that says that it is not. [ 14 ] So what of MCpl Durdle’s various heads of “income,” in 2014? [ 15 ] The law has generally excluded cash flows for non-pecuniary damages, such as damages in tort for pain and suffering, loss of amenities, and the like, including those of a private nature (general damages from a car accident being the most obvious example). [ 16 ] What is true of a private dispute such as injuries from a car accident must – simply must – be true when a person is injured in lawful service of Queen and Country. [ 17 ] Before turning to the specific forms of “income” MCpl Durdle had in 2014, I make the following general observation: the BIA is not a taxation statute.

What is taxable income for one’s T1 return may be a factor in, but is not determinative of, considering what is “income” for purposes of the BIA. As I have said above, s. 68 is a complete code for that purpose. To use an easy example, some non- taxable periodic private disability insurance payments may not be taxable for income tax purposes, but I find it difficult to envisage a situation in which they would not be “income” for the purposes of

Section 68. What I face here is the opposite – payment streams or lump sums which are taxable for Revenue Canada’s purposes, but which for the reasons I will now discuss, I exclude for the purposes of

Section 68 of the BIA. [ 18 ] The starting point is the decision of Registrar Bray in Re Duffney , 2007 NBBR 142 , 2007 NBQB 142. At issue there was risk allowance, also known as “danger pay.” First, the learned Registrar distinguished, as have I, between earnings for tax purposes and “total income” for BIA purposes. The Registrar concluded: Even if wages are not taxable, it is fair that any bankrupt person performing labour or service, even in a difficult work situation, should pay supplementary income….to the general benefit of creditors who have been adversely affected by his or her previous decisions.

The salary, even if not taxable, should be calculated to determine whether surplus income payments will be required. The same consideration , however, will not be applied to risk allowances. Whereas the earning of wages is the expected step for financial rehabilitation, and payments to the estate from such revenue are appropriate, the risk allowance is of a different order. The latter is a recognition by the government of an unusually onerous service being performed by an individual for the benefit of his or her fellow citizens.

Bankrupts who have burdened other citizens by practices such as tax evasion will be given more stringent conditions for their discharge. Those who in the course of their rehabilitation, however, render exemplary service to their nation should be allowed to keep the stipend offered in recognition of such efforts.

This is completely congruent with public expectations of fairness and balance in insolvency practice. [ 19 ] I couldn’t agree more. [ 20 ] I would add the paraphrase, “those who render exemplary service and who suffer service-related illness or injury as a consequence should also be allowed to keep the stipend offered in recognition of such efforts.” [ 21 ] A fortiori , if periodic payments for danger pay in a theatre of service are excluded for the purposes of s. 68 of the BIA , a lump sum paid or payable as a consequence of illness suffered as consequence of service is as well, whether or not it is income for Income Tax purposes . [ 22 ] Re Duffney was followed by my predecessor, Registrar Cregan, in Re Smith , 2009 NSSC 261 .

That decision is even more on point to MCpl Durdle as the “income” stream in that case was a pension arising from illnesses arising from her military service. Registrar Cregan wrote: It is well established law that any cause of action arising from bodily injury, mental suffering, or injury to reputation or character or the proceeds thereof is personal and does not vest in the trustee. I quote Houlden and Morawetz : Bankruptcy and Insolvency Law of Canada, Fourth Edition, F§241, Page 4-176:

Where a cause of action arises from bodily injury or mental suffering or from injury to reputation or character, the cause of actionbelongs to the bankrupt and does not vest in the trustee. It is not the policy of the law to convert into money for creditors the mental or physical anguish of the bankrupt. Put another way the creditors are not entitled to benefit from that which a bankrupt receives to make whole her injured body, mind orreputation. [41] In Duffney, Re (2007), 2007 NBBR 142 , 32 C.B.R. (5th) 72 (N.B. Q. B.).

Registrar Bray extended this principal todanger pay received by members of the Canadian Armed Forces serving in Afghanistan, which incidentally also is not taxable. I quote from paragraph 7: Those who in the course of their rehabilitation, however, render exemplary service to their nation should be allowed to keep the stipendoffered in recognition of such efforts. [42] I would put it this way. Risk allowance or danger pay is that paid to soldiers in addition to their regular stipend for taking onserious risks to their person. These risks are personal to the soldiers and their families.

The creditors do not take the risks and thereforeshould not be allowed to share in benefits given for taking the risks. The law does not require bankrupts to take risks to their person forthe benefit of their creditors. [43] Ms. Smith is paid this pension because Veterans Affairs Canada recognizes that in the service of Canada she has been adverselyaffected in body and mind. It gives this pension to do what money can do to make her whole.

I think it morally offensive that hercreditors could take a portion of this pension away from her and in effect take something of her person. [44] I think that the policy lying behind a cause of action for personal injury being personal to the bankrupt and soldiers being able tokeep their danger pay, extends to pensions such as Ms. Smith has. She has the pension not because she earned it, rather she has itbecause she was injured in the service of Canada and it helps in a limited way to make her whole. Creditors cannot be allowed to benefitfrom her misfortune. [45] Counsel for the Trustee quotes from Roderick J.

Wood: Bankruptcy and Insolvency Law (2009), Irwin Law at page 112: Surplus income is defined as the portion of the total income of an individual bankrupt that exceeds the amount that is necessary to enablethe bankrupt to maintain a reasonable standard of living. Total income is defined as all of a bankrupt’s revenues from whatever nature orsource that are received between the date of the bankruptcy and the discharge. [46] This is followed by several examples of what has been considered as income or not as income but as property. As well the authornotes that provincial exemptions do not apply to income.

This may well be so, but is not relevant. What we have is a pension whichessentially is a form of income and not property. Just as for matters of public policy an award of damages for bodily injury or mentalsuffering is not considered property of the bankrupt distributable to the creditors, so a pension like Ms. Smith’s should not be consideredas income for the purposes of calculating surplus income. [47] As to Duffney I note the following commentary in Wood at page 115: Military-danger pay is not considered income for the purposes of the surplus income calculation or after-acquired income.

The debtormay retain these amounts, and in this respect the payments are akin to amounts received for personal injuries. (underlining added) [48] In Ford (Re), 2009 NSSC 124 , I reviewed in some length what is meant by “income” and “revenue” for the purposes ofS.68, in the context of determining whether a care giver amount under the Income Tax Act is income. I said the following: [44] It follows that a wide and generous meaning should be given to what constitutes revenue and thus the income subject to thissection.

It clearly covers what one might call the bankrupt’s pay, the bankrupt’s wages, commission, benefits in lieu thereof and whatother modest periodic receipts they have and are expected to use for the expenses of daily life. [49] I urged an overall comprehensive construction of “income” and “revenue” which could well help in making a case for inclusion ofMs. Smith’s pension as income.

But I think the policy issue mentioned above overrides this definition or makes an exception in the caseof this pension, much as this policy issue overrides the definition of property when dealing with damages for bodily injury or mentalsuffering. It should make no difference whether the compensation is a one time damage award or periodic payments like Ms. Smith’spension. [23] In Re Rose, 2014 NSSC 202, the same learned Registrar Cregan considered a lump sum award (consisting of three componentsfor different service-related matters) of $87,992.53.

In distinguishing between workers’ compensation awards (which are specificallyincluded in s. 68’s definition of “total income”) and the disability award under the Canadian Forces Members and Veteran Re-establishment and Compensation Act, S.C. 2005, c. 21 he wrote as follows: The Forces Act on the other hand, serves a different constituency, namely those who are serving or have served in the Canadian Forces. Although many of the issues covered by it are similar to those covered by workers’ compensation statutes, it addresses several issuespeculiar to service in the Canadian Forces.

There are different social and political concerns. One relates to injuries in the workplace. The other relates to injuries in the course of military service, not just in Canada, but in interventions throughout the world.

[ 24 ] I have found no decision in conflict with these authorities. If I had, I would not follow it unless binding upon me. Against that, I turn to the specific 2014 items summarized in Ms.

Burke’s affidavit (to which MCpl Durdle’s relevant tax return was attached). [ 25 ] The wage loss replacement plan – Although, as noted above, wrongful dismissal awards (at least for pecuniary loss) would generally be included in “total income,” as would continued salary during a period of pay in lieu of notice, I believe for the same policy reasons as noted above that in the service illness context this stands on a different footing. It is in pith and substance compensation for the fact that he is unable to continue to serve, not for wrongful termination or the like.

Its direct nexus is to his service-related illness. It is not part of s. 68 BIA total income. [ 26 ] The rehiring allowance – I apply the same logic. The compensation directly arises from MCpl. Durdle’s inability to continue in service. It is only fit and proper that he be provided with all appropriate assistance in moving forward in remunerative civilian employment. He is still a comparatively young man. [ 27 ] The pension income of $23,594.10 less $3,268 in income tax deductions – it is unclear to me whether this is or is not related to service disability issues. It appears it may not be.

In the event it is not, it would still fall below the Superintendent’s Standards applicable, once other “income” items are excluded. I will return to this below [ 28 ] $49,289 in disability income – for the reasons set out in the above cases, this is not caught by s. 68 BIA . [ 29 ] $3,624 in employment income, less $936.78 for taxes – this is within the ambit of s. 68. [ 30 ] It would thus appear that MCpl Durdle’s 2014 income, for s. 68 BIA purposes, is no more than around $23,000, if I include for the sake of argument the $23,594 in pension and $3,624 in employment income, less statutory deductions.

That is below the Superintendent’s Standards for 2014, applicable to MCpl Durdle. [ 31 ] In the event I am wrong about any of the particular line items I have discussed, and there should have been income amounts paid to the estate but were not, and as a result a s. 172 “fact” pursuant to s. 173(1)(m), I would be required to effect one of the remedies under s. 172(2). The fact of a second bankruptcy would require me to do so as well. To that end, I would exercise my discretion and suspend MCpl Durdle’s discharge for one day, effective as of my oral decision on August 24, 2018.

He is therefore now absolutely discharged. [ 32 ] In delivering these reasons, I wish to be clear that nothing should be taken as putting military debtors on a different footing than a civilian. The rule of law, including that of civil contract, is one of the core values we hold as Canadians, and which is protected by our men and women in uniform. What is, however, on a different footing is the debt we owe those men and women when they are injured or ill in the discharge of those duties.

Conclusion [ 33 ] It is popularly, though likely inaccurately, attributed to George Orwell that we “sleep peaceably in our beds at night only because rough men stand ready to do violence on our behalf.” [ 34 ] When a soldier in lawful and honourable service suffers as a consequence, those of us who have never had to take to arms in anger can only offer treatment, compensation, and gratitude. That is a charge upon us all. [ 35 ] None of these are within the scope of

Section 68 of the BIA . [ 36 ] MCpl Durdle is absolutely discharged; or, if I am required by a s. 173 “fact” to exercise a remedy under s. 172(2), I suspend MCpl Durdle’s discharge for one day, effective as of my oral decision on August 24, 2018. He is therefore now absolutely discharged. Balmanoukian, R.