2011 QCCA 1858, 2011 QCCA 1858

Unofficial English Translation Léger c. Ouellet 2011 QCCA 1858 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No.: 500-09-021557-111 (760-11-004868-101) DATE: October 11, 2011 CORAM: THE HONOURABLE FRANCE THIBAULT, J.A. FRANÇOIS DOYON, J.A. LORNE GIROUX, J.A. HÉLÈNE LÉGER APPELLANT – Applicant v. ANNIE OUELLET RESPONDENT – Debtor-bankrupt and RAYMOND CHABOT INC. IMPLEADED PARTY – Impleaded party JUDGMENT [ 1 ] The appellant appeals from a judgment of the Superior Court, District of Beauharnois (the Honourable Madam Justice Catherine Mandeville), rendered on March 18, 2011, which dismissed her application based on

section 69.4 of the Bankruptcy and Insolvency Act [1] in which she sought authorization to continue a Paulian action where she also claims damages from the respondent. [ 2 ] For the reasons of Thibault, J.A., with which Doyon and Giroux, JJ.A. agree, THE COURT : [ 3 ] ALLOWS the appeal, with costs; [ 4 ] SETS ASIDE the trial judgment; [ 5 ] GRANTS the appellant's application based on

section 69.4 BIA , with costs; [ 6 ] AUTHORIZES the appellant to continue her action in the Court of Quebec file bearing docket number 760-22-005897-080. FRANCE THIBAULT, J.A. FRANÇOIS DOYON, J.A. LORNE GIROUX, J.A. Mtre Sébastien Matte Dufour Mottet, attorneys For the Appellant Mtre Martin Couillard Perras Couillard, attorneys

For the respondent Date of hearing: September 22, 2011 REASONS OF THIBAULT, J.A. [ 7 ] The appellant appeals from a judgment of the Superior Court, District of Beauharnois (the Honourable Madam Justice Catherine Mandeville), rendered on March 18, 2011, which dismissed her application based on

section 69.4 of the Bankruptcy and Insolvency Act [2] in which she seeks authorization to continue a Paulian action where she also claims damages from the respondent. 1 – The facts [ 8 ] On April 10, 2002, following her sister's death, the appellant received $30,000 from the proceeds of a life insurance policy. On May 13, 2002, she loaned this amount to Mr. Bryan Robson, who had been her sister's spouse, by handing him a certified cheque on which he was the payee.

That very day, Robson endorsed the cheque over to the respondent, with whom he has a personal relationship. [3] [ 9 ] On March 14, 2003, the appellant brought a claim against Robson and the respondent for repayment of the loan. In the proceedings, she alleged that the cheque she had given Robson constituted a $30,000 loan.

She also alleged that the very same day, Robson endorsed the cheque over to the respondent, that the respondent was acting as Robson's prête-nom when cashing the cheque, that Robson did this to avoid his obligations to his creditors, and that Robson and the respondent refused to repay the amount claimed: [translation] 3. On or about May 13, 2002, the plaintiff loaned $30,000 to the defendant, as appears from a copy of the certified cheque made out to the defendant and issued to him on May 13, 2002, the whole as appears from a copy of the certified cheque joined in support hereof as exhibit P-1 ; 4.

That same day, the defendant endorsed the said cheque, exhibit P-1, over to his new spouse, the defendant Annie Ouellet, as appears from a copy of the back of the cheque joined in support hereof as exhibit P-2 ; 5. Ouellet is nothing but Robson's prête-nom, and Robson is using her to avoid his obligations to his creditors; 6.

Although duly notified by letter of demand from the undersigned counsel, the defendants have refused and/or neglected to reimburse the amount claimed, as appears from a copy of the demand letter dated February 4, 2003, and its proof of delivery, joined in support hereof as exhibit P-3, in a bundle ; [ 10 ] On June 10, 2003, a Court of Quebec judge granted a motion to dismiss brought by the respondent in which she argued that she had never entered into any agreement with the appellant and that there was no privity between them.

The judge agreed with her and found that there was [translation] "no clear legal relationship" between the parties. He dismissed the action with respect to the respondent. [4] [ 11 ] On March 21, 2005, Claude Montpetit J. maintained the action against Robson and condemned him to repay the $30,000 loan with interest and additional indemnity. The judge harshly criticized Robson’s credibility.

It seems Robson denied having entered into a loan agreement with the appellant, claiming instead that the cheque the appellant had given him was in repayment of a loan that he himself had made to her: [translation] [23] As to the defendant, the Court questions his credibility.

If he had truly loaned $30,000 to the defendant [sic] in October of 2001, why did he not require the immediate repayment of this amount in March of 2002 when the insurance cheque was received? [24] Moreover, the defendant, who acknowledges that he has a lengthy criminal record (cigarette smuggling, drug possession), testified that he had significant amounts of money "hidden away" when he loaned the plaintiff money in 2001. [25] In light of his hesitancy, selective memory, conduct before the Court, and reluctance to discuss how the $30,000 was used, the Court does not believe his testimony.

In its assessment of Robson's credibility, the Court points out his aggressive attitude imbued with bad faith. Indeed, the defendant admitted to bringing proceedings before the Rental Board claiming rent from the plaintiff. He did this, as the defendant puts it, in retaliation for the proceedings brought by the plaintiff before the Commission des Normes du Travail and this Court.

The defendant knew that the plaintiff did not owe him any rent but nonetheless undertook this remedy before the Rental Board in breach of the good faith rules set out in articles 6 and 7 of the Civil Code of Québec and then discontinued his claim. [5] [ 12 ] On August 18, 2005, pursuant to

article 543 C.C.P. , the appellant summoned Robson to appear on August 26, 2005, to be examined after judgment as to all the property he possesses and his sources of income. He failed to appear. On May 9, 2006, however, he was finally examined. In the course of the examination, it was revealed that he had no property and lived off pension benefits from the

Régie des rentes du Québec. [ 13 ] The appellant then shifted her focus to the respondent to examine her for the same purpose On June 13, 2006, Marie-Andrée Villeneuve J. dismissed the appellant’s motion to examine the respondent after judgment. [6] That judgment was then reversed by a ruling of this Court, rendered on November 28, 2007, which allowed the appellant to examine the respondent as to Robson's income and property. [7] The respondent's examination after judgment was held on February 1, 2008.

The respondent stated that she had never lived with Robson, that he was one of her lovers, and that she did not know about his property or his income. She confirmed that Robson had given her the amount of $30,000 by endorsing the cheque prepared by the appellant. [ 14 ] On March 31, 2008, following that examination, the appellant brought a Paulian action against the respondent in which she also claimed damages. Robson was an impleaded party. The appellant sought to have the $30,000 gift Robson made to the respondent declared unenforceable as against her.

In those proceedings, the appellant alleges that this gift is fraudulent in nature. Specifically, the appellant states that the respondent knew that she was increasing Robson's insolvency by accepting the gift and that this approach was Robson's well-established modus operandi to hide property from any possible seizure by his creditors. The appellant submits that Robson does not own an automobile or snowmobile, but uses one of the respondent's many automobiles and snowmobiles. Also, the respondent takes Robson on trips to Mexico, and so on.

The conclusions of the action are worded as follows: [translation] ESTABLISH the fraudulent nature of the $30,000 gift made on or about May 13, 2002, between the defendant and the impleaded party; DECLARE unenforceable as against the plaintiff the $30,000 gift made on or about May 13, 2002, between the defendant and the impleaded party; CONDEMN the defendant ANNIE OUELLET to pay the plaintiff HÉLÈNE LÉGER the amount of $30,000, with interest at the legal rate and the additional indemnity provided pursuant to

article 1619 C.C.Q. from February 4, 2003; ALTERNATIVELY , CONDEMN the defendant ANNIE OUELLET to pay the plaintiff HÉLÈNE LÉGER the amount of $36,331.25 in damages with interest at the legal rate and the additional indemnity provided in

article 1619 C.C.Q. from February 4, 2003; THE WHOLE with costs. [ 15 ] The hearing was scheduled for September 24, 2009, but the respondent declared bankruptcy some days before that, on September 17, 2009, the same day that the impleaded party was appointed trustee to the respondent's assets. This is the context in which the appellant filed an application for authorization to continue proceedings pursuant to

section 69.4 of the Bankruptcy and Insolvency Act (" BIA "). [ 16 ] On March 18, 2011, the trial judge dismissed the appellant's application. 2.

Trial Judgment [ 17 ] The trial judgment was rendered from the bench and recorded in the minutes of the hearing: [translation] CONSIDERING that pursuant to 69.4 of the Bankruptcy Act , parties need not establish a prima facie case that their remedy could be granted or that a judgment rendered in their favour would be enforceable; CONSIDERING that parties must nevertheless show that the remedy that they intend to continue is one of the remedies for which the courts have generally granted authorization to continue; CONSIDERING that the Paulian action does not correspond to any of the types of cases contemplated in

section 178 of the Bankruptcy Act ; THE COURT: DISMISSES the application to continue the proceedings, with costs. 3 – THE ISSUES [ 18 ] In her factum, the appellant submits the two following issues for consideration: 1. Should the action brought by the appellant have been continued? 2. Is the appellant's debt included under

section 178 BIA ?

4 – ANALYSIS Continuing the proceedings [ 19 ] Pursuant to 69.3 BIA , the creditor of an insolvent person may not continue any proceeding for the recovery of a claim until the trustee has been discharged. In some circumstances, however, creditors may be authorized to continue their proceedings against a bankrupt : 69.4 A creditor who is affected by the operation of sections 69 to 69.31 or any other person affected by the operation of

section 69.31 may apply to the court for a declaration that those sections no longer operate in respect of that creditor or person, and the court may make such a declaration, subject to any qualifications that the court considers proper, if it is satisfied: (

a) that the creditor or person is likely to be materially prejudiced by the continued operation of those sections; or (

b) that it is equitable on other grounds to make such a declaration. [Emphasis added] [ 20 ] The principles governing the

interpretation and application of sections 69.3 and 69.4 are known. First,

section 69.3 BIA imposes a stay of the legal proceedings against a debtor from the date of his or her bankruptcy, without any involvement by the court. The stay of proceedings is consistent with one of the objectives of the BIA : favouring an orderly and equitable distribution of the debtor's property. In this vein, the stay of proceedings purposes to prevent one creditor from having an undue advantage over the others. [ 21 ] According to

section 69.4 BIA , the court may authorize creditors to continue their proceedings in one of two situations: when they are convinced that the stay of proceedings will in all likelihood prejudice the creditor or when, for other reasons, it would be equitable to do so. The case law tells us that the decision of whether or not to allow proceedings to continue is discretionary in nature.

This discretion must be exercised in a judicial manner, that is, it must be based on proper legal grounds. [ 22 ] Case law acknowledges that, when an action seeks a condemnation from which the bankrupt will not be discharged and which will therefore survive the bankruptcy, the proceedings will be authorized to continue if the creditor shows that the allegations of his or her proceeding fall under one of the categories of

section 178 BIA and that the proceeding in question has a reasonable chance of success. [8] [ 23 ] In the present case, the appellant seeks authorization to continue her action against the respondent as it corresponds to one of the situations intended by

section 178 BIA . She alleges that her debt will survive the respondent's discharge pursuant to

section 178 BIA , which sets out the categories of debts which will not be released by an order of discharge. [ 24 ] In her amended motion for authorization to continue the proceedings, the appellant submits that the respondent, through her fraudulent conduct, took $30,000 that she refuses to repay and that this debt will survive the bankruptcy since it meets the requirements of

section 178 BIA . The trial judge erred when she refused to grant the appellant authorization to continue her action. This situation was not unfair to the body of creditors since, in the circumstances, the debtor would not be discharged. Conversely, the judge's decision to refuse the authorization sought was likely to prejudice the appellant since, to prevent the bankrupt's discharge, she would have to establish first the existence of her debt and second that this debt met the requirements of

section 178 BIA . [ 25 ] Let us now consider whether the respondent's debt is included under

section 178 BIA . Application of

section 178 BIA [ 26 ] The trial judge declared that a Paulian action [translation] "does not correspond to the types of cases contemplated in

section 178 of the Bankruptcy Act ". [ 27 ] The appellant maintains that the judge erred by refusing to grant her authorization to continue her action against the respondent because her action seeks to reclaim a sum of money that the respondent took by participating in a fraud. It is her view that the remedy instituted against the respondent seeks to recover a debt that meets the conditions of

section 178 BIA and that will not be released by the order of discharge. [ 28 ] The respondent, for her part, deems the trial judgment well founded. The $30,000 loan was made without Robson or herself making any fraudulent misrepresentations of fact. In the respondent's view, the appellant's debt is not one contemplated in

section 178 BIA and the judge was right not to allow the appellant's action to continue. [ 29 ]

Section 178 BIA sets out that: 178.

(1) An order of discharge does not release the bankrupt from ... (

e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim;

...

(2) Subject to subsection (1), an order of discharge releases the bankrupt from all claims provable in bankruptcy. [ 30 ] According to this provision, to avoid the debtor's discharge from his or her debt, the creditor must establish: 1) that the debtor made a representation; 2) that it was false; 3) that the debtor knew that his or her representation was false; 4) that the misrepresentation was made to obtain property or services. [ 31 ] According to

article 1631 C.C.Q. , the purpose of a Paulian action brought by a creditor against his debtor and a third party is to obtain a declaration that the juridical act made by his debtor in fraud of his rights and which causes him to suffer prejudice may not be set up against him: 1631. A creditor who suffers prejudice through a juridical act made by his debtor in fraud of his rights, in particular

an act by which he renders or seeks to render himself insolvent, or by which, being insolvent, he grants preference to another creditor may obtain a declaration that the act may not be set up against him. [ 32 ] According to the terms of this article, prejudicial juridical acts include those that render the debtor insolvent. These acts must have been made in fraud of the creditor's rights.

As authors Didier Lluelles and Benoît Moore have stated, [translation] "the purpose of a Paulian action is to eliminate any fraudulent schemes to which debtors may resort to circumvent their obligations". [9] According to these same authors, for this action to succeed, creditors must prove [translation] "that the debtor was aware of the prejudice that his actions were causing the creditor". [10] Malicious intent may be proved by any means including by presumption of fact. In this respect, the Civil Code created various presumptions. When

an act is performed without consideration, for instance, that act is deemed to have been performed with fraudulent intent. I point out that the legislature's use of the word "deemed" signals that the presumption is absolute, that is, that it may not be rebutted by evidence tending to show the absence of dishonest design: 1633.

A gratuitous contract or a payment made for the performance of such a contract is deemed to be made with fraudulent intent, even if the contracting party or the creditor was unaware of the facts, where the debtor is or becomes insolvent at the time the contract is formed or the payment is made. [ 33 ] As previously stated, the purpose of the Paulian action is to render the juridical act between the debtor and a third party unenforceable as against the creditor.

This means that in cases where property has been disposed of – by gift, sham sale, fire sale, or other means – the creditor may seize the property in the hands of that third party, even if the third party in question has become the owner and acted in good faith. In that case, the third party must return the seized property or satisfy the creditor. [ 34 ] Like the trial judge, I find that a Paulian action brought by a creditor against a third party to a juridical act entered into with the creditor's debtor is not necessarily one contemplated

section 178 BIA . A Paulian action does not transform this third party into a debtor of the creditor who was harmed by the unconscionable juridical act, but aims only to deprive the juridical act of any effect as against the creditor. [ 35 ] In the present case, the allegations of the Paulian action, in which damages are also claimed, and its conclusions show that the scope of the remedy is much larger than that of a mere Paulian action.

In addition to the usual conclusions found in such proceedings, the appellant seeks a personal condemnation against the respondent, arguing her complicity with Robson's fraudulent actions. [ 36 ] The respondent submits that the debt, if indeed there is one, does not meet the requirements of

section 178 BIA because it is not the result of false pretences or fraudulent misrepresentations. [ 37 ] I do not agree. [ 38 ] According to the allegations of the action, Robson obtained $30,000 from the appellant by acknowledging that it was in fact a loan and by stating, at least implicitly, that the appellant would be reimbursed. These were the conditions on which the loan was granted to Robson. But the explicit and implicit representations made by Robson to the appellant were false.

First, Robson refused to acknowledge the loan, going so far as to argue that the $30,000 given to him by the appellant constituted repayment for amounts that he had loaned her. Second, Robson, who was insolvent when the loan was granted, divested himself of the amount, making any recovery impossible. I thus have no qualms in finding that Robson's debt is the result of misrepresentations. [ 39 ] The appellant faults the respondent for participating in Robson's wrongful conduct by accepting the $30,000 that the appellant had loaned him and for knowingly and deliberately contributing to his insolvency.

She concludes that, ultimately, it was the respondent who received the $30,000 extracted from the appellant by fraudulent misrepresentations. [ 40 ] In my opinion, the allegations of the action justify the conclusions sought. The respondent and Robson are the appellant's debtors as a result of their fraudulent conduct. Consequently, the respondent will not be discharged if the appellant establishes the facts that she has alleged. [ 41 ] One of the objectives of the BIA is to give an unlucky or incompetent debtor a second chance by discharging his or her debts.

The BIA does not, however, allow debtors to avoid their obligations to their creditors when their debts are the result of a fraudulent situation within the meaning of

section 178 BIA . [ 42 ] Before concluding, and to avoid any ambiguity, I would add that there is no res judicata between the judgment rendered on

June 10, 2003 (dismissing the action brought by the appellant against the respondent) and the present action. Both proceedings have distinct causes of action. The action brought in 2003 alleged that the respondent was Robson's prête-nom. The present action alleges that Robson committed fraud and that the respondent knowingly participated therein in addition to acting as Robson’s prête-nom. There is no res judicata as to the portion based on obtaining property through fraudulent misrepresentations. [ 43 ] For these reasons, I would allow the appeal with costs, set aside the trial judgment, and grant the appellant's application based on

section 69.4 BIA , with costs. FRANCE THIBAULT, J.A.