2016 NSSC 203, 2016 NSSC 203

SUPREME COURT OF Nova Scotia In Bankruptcy and Insolvency Citation: Mullen (Re) , 2016 NSSC 203 Date: August 3, 2016 Docket: Halifax No. 38044 Estate No. 51-1847649 Registry: Halifax In the Matter of the Bankruptcy of Randall Stephen Mullen __________________________________________________________________ Decision on Motion for Stay __________________________________________________________________ Judge: The Honourable Justice Gerald R. P. Moir Heard: May 11, 2016 in Halifax, Nova Scotia Counsel: Sharon L. Cochrane, for Mr. Leonard Dykens Pamela Branton, for Mr. Randall Mullen D.

Bruce Clarke, Q.C., for BDO Canada Limited on trustee in bankruptcy of Randall Mullen Moir, J: Introduction [ 1 ] Mr. Dykens held a judgement for nearly two hundred thousand dollars against Mr. Mullen. Mr. Dykens attempted to execute against Mr. Mullen’s RRSP. Mr. Dykens made an assignment in bankruptcy. [ 2 ] The execution order, and any other enforcement of the judgement, was stayed by operation of law. Mr. Mullen was eventually discharged. Nonetheless, Mr. Dykens seeks to lift the stay in order that he may continue his effort to realize upon the RRSP.

[ 3 ] Mr. Mullen and the trustee of his estate oppose the motion. In a nutshell, they say that

(1) The motion is too late,

(2) Even if it were granted, the RRSP would not become available for execution, and

(3) In any case, this is not the kind of circumstance in which a stay is lifted. [ 4 ] I will begin with some procedural objections made by Mr. Mullen. Then, I will briefly sketch the facts from the extensive evidence that has been put before me. Then, I will deal with each of the three issues: 1. Is it too late to lift the stay? 2. Is the RRSP available for execution? 3. Would the motion have merit in any case? Procedural Objections [ 5 ] Mr. Mullen objects that the motion is brought in the Supreme Court of Nova Scotia, rather than the Supreme Court of Nova Scotia in Bankruptcy and Insolvency.

The notice of motion and supporting documents are styled according to the proceeding brought by Mr. Dykens long before the bankruptcy. [ 6 ] There is no question about which is the right court in which to bring a motion of this kind. I am prepared to treat the motion as if it had been filed with the Registrar and made in the bankruptcy proceeding. [ 7 ] Mr. Mullen objects to the affidavit filed by Mr. Dykens in support of the motion. He does so on two grounds. [ 8 ] Firstly, it is an affidavit of counsel and, according to Mr. Mullen, it contains controversial evidence. On behalf of Mr.

Dykens, his counsel says the affidavit is “confined to procedural matters”. There is no other affidavit, and I fail to see anything that controverts the evidence in counsel’s affidavit. [ 9 ] Secondly, the affidavit contains hearsay. Rules of evidence about hearsay apply in bankruptcy hearings: Canada Evidence Act , s. 40. There are no conflicting laws in the Canada Evidence Act or the Bankruptcy and Insolvency Act . See also Grande Textiles Ltd. V. Drunker (1954), 34 C.B.R. 213 (Q.S.

C) and Re Mercier (1963), 5 C.B.R. (N.S.) 153 (Q.S.C.) . [ 10 ] In Nova Scotia, inclusion of hearsay in affidavits is regulated by the rules of court. As there are no conflicting provisions on this subject in the Bankruptcy and Insolvency General Rules , the provisions in our Civil Procedure Rules apply: General Rules , s.3. Hearsay rules apply on inter partes applications: Rule 5.17. They apply on motions, subject to five exceptions: Rule 22.15(2). [ 11 ] The only exception that could apply in this case is in Rule 22.15(2)(c), “a motion to determine a procedural right”.

A motion to lift the stay of proceedings that applies when one makes an assignment in bankruptcy is usually brought for purely procedural purposes. We will discuss that later. Mr. Dykens argues for a substantive remedy, a lifting of the stay with a determination that the RRSP will thereby become exigible. [ 12 ] Therefore, the hearsay in the affidavit on behalf of Mr. Dykens must be excluded. For the most part, the hearsay is attributable to the Kings County sheriff. Were it important for the determination of this motion, I would adjourn the hearing to give Mr.

Dykens an opportunity to file an affidavit from the sheriff and present the sheriff if cross-examination is required. As will be seen, I am of the view that the sheriff’s information is irrelevant. Synopsis of Facts [ 13 ] The claim by Mr. Dykens against Mr. Mullen was determined by Justice Coady in 2012. He found as a fact that the individuals had made a contract in 2005 under which Mr. Mullen was liable to pay Mr. Dykens money owed under a contract for the development of a business. Justice Coady assessed damages at $162,683.

He awarded interest and costs also. [ 14 ] There is no suggestion in Justice Coady’s decision that Mr. Mullen had done anything wrongful or that the judgment debt was connected to any kind of misconduct. The liability was in simple contract. Justice Coady wrote, “I am satisfied that presently, and for some time, Mr. Mullen is not in a financial position to honour the terms of his agreement.” [ 15 ] Mr. Dykens tried to enforce the judgment. He registered a certificate of judgment, took out an execution order, and forced discovery in aid of execution. At the discovery, Mr. Dykens learned that Mr.

Mullen held RRSPs and RESPs. [ 16 ] The execution order was delivered to the sheriff in February, 2013. It was returned nulla bona. The discovery was held toward the end of the year, and Mr. Dykens asked the sheriff to execute on the RRSPs and RESPs. The sheriff mailed a copy of the execution order to the administrator of the RRSP and RESP plans and demanded funds. [ 17 ] It turned out that the plans were made up of investments in shares. The sheriff asked the administrator of the plans to liquidate some of the shares.

On March 6, 2014 the sheriff gave directions for liquidation of the shares in accordance with paragraph ten of the execution order. Mr. Mullens made an assignment in bankruptcy a week later. [ 18 ] Mr. Dykens opposed Mr. Mullen’s discharge. Registrar Cregan presided at the discharge hearing last March. Mr. Mullen and the trustee supported an absolute discharge, which would have been automatic had Mr. Dykens not objected. Registrar Cregan gave an

oral decision. The Registrar found Mr. Mullen had a modest income, less than the minimum for a surplus income payment under theSuperintendent in Bankruptcy’s guidelines. [19] The Registrar found that Mr. Mullen’s was not what is sometimes called a single creditor bankruptcy. He found there was noelement of turpitude or irresponsibility. [20] The Registrar then turned his attention to the RRSP. Mr. Mullen had cashed in his own RRSP some years before to pay debts.

The plan at issue was an inheritance from his late wife. [21] The Registrar pointed out that the investments in this plan were not protected from execution under Nova Scotia law, butParliament decided “this was unfair”. So the Bankruptcy and Insolvency Act was amended “to say that property of the bankrupt does notinclude his RRSP fund.” The Registrar said a large RRSP may lead to a discharge conditional on making a contribution for distributionto creditors. However, Mr.

Mullen “has a rather humble amount of money for a person his age to have to look after him in his old age.” The Registrar also pointed out that the trustee had realized $40,000 for the estate. [22] Considering these circumstance, Registrar Cregan exercised his discretion to grant an absolute discharge. [23] In the course of his decision, Registrar Cregan made some comments about Mr. Dykens theory that he could realize against theRRSP despite the Bankruptcy and Insolvency Act. However, the Registrar said that someone else would have to decide that issue. Limits on Lifting Stay after Discharge [24] Counsel for Mr.

Mullen refers me to this passage at para. F138 of Houlden, Morawetz and Sarra (2015-16): If a debt is released by a discharge of the bankrupt…, the Court will not grant leave to proceed if the debtor is simply seeking to enforcepayment of its debt, since a judgment obtained against the bankrupt will be released by the discharge… . The learned authors cite Schroeder v. Schroeder, (SK KB), [1993] S.J. No. 257 (Q.B). I agree.

To lift the staysimply to enforce a discharged debt would undermine our bankruptcy law. [25] Some years ago I wrote: So, we could summarize the scheme for treating debts and other liabilities under the Bankruptcy and Insolvency Act as involving, in thebeginning, an eradication of judgments and stay of proceedings respecting claims provable in bankruptcy; through the course of thebankruptcy until discharge of the trustee, a continuation of the stay subject to any order the Bankruptcy Court might make relieving thestay; and at or near the end of the administration, a release of all claims provable in bankruptcy except those described in s.178 (1).

Hughes v. Graves 2001 NSSC 68 at para 8. [26] The motion to lift the stay is inconsistent with the basic scheme of the Bankruptcy and Insolvency Act for bankruptcies ofindividuals. Mr. Dykens’ judgment was eradicated in 2014 and the debt owed to him was released last March. There is no point inlifting the stay because Mr. Dykens has nothing left to enforce.

His judgment is gone and the debt underlying it is discharged. [27] This does not suggest that the stay can never be lifted after the trustee is discharged. “The discharge of the trustee and thebankrupt does not affect the power of the court to grant leave to proceed…”: Houlden, Morawetz and Sarra (2015-16) para. F120, andsee F121 also. The cases cited by the learned authors all involved causes that, in one way or another, could be pursued after bankruptcywithout offending the collective process which is at the core of our bankruptcy law. [28] Re.

Harding, [1976] O.J. 1623 (H.C.) involved a claim after a motor vehicle accident and possible recovery from an insurancefund. In OK Builders Supplies v. Wessinger, [1983] B.C.J. (S.C.) the plaintiff sought to set aside a fraudulent conveyance and madeother claims in fraud. Re. Handleman, (ON SC), [1997] O.J. 3599 (C.

J) was premised on the survival of a debtowed to a creditor who was not notified of the bankruptcy. The premise is doubtful in light of s. 178(1)(f), but the point is that there wasa cause seen to be independent of the other creditors. [29] At the beginning of the bankruptcy scheme is s. 69.3: “on the bankruptcy of any debtor, no creditor has any remedy against thedebtor or the debtor’s property”. There are exceptions, but this is otherwise the first impact of bankruptcy upon creditors. A creditorlooses autonomous remedies for recovery on a debt, or on other causes.

The stay assists this starting point. [30] The calumniation of the scheme for insolvent individuals under the Bankruptcy and Insolvency Act is in s. 178(2): “an order ofdischarge releases the bankrupt from all claims provable in bankruptcy”. This is subject to the categories of debts that survivebankruptcy. Mr. Dykens’ claim against Mr. Mullen is not one of those. [31] Alberta (Attorney General) v.

Maloney 2015 SCC 1 concerned provincial legislation authorizing the province to refuse adriving licence to a person who owed money to the province after it paid compensation for an accident caused by the person as onuninsured motorist.

When the uninsured driver makes an assignment in bankruptcy, the province proves its claim, and the bankrupt isdischarged, does the provincial legislation become “constitutionally inoperative by reason of the doctrine of federal paramountcy?”:para. 12. [32] I mention the Maloney case because Justice Gascon, who wrote for the majority, provided a helpful synopsis of the scheme andpurposes of the bankruptcy law as they relate to bankruptcies of individuals.

On the basis of his reasoning, the majority found that theprovincial legislation was constitutionally inoperative. [33] Justice Gascon began his discussion of the legislative scheme by referring to the well-known dual purposes of bankruptcy of

individuals, “the equitable distribution of the bankrupt’s assets among his or her creditors and the bankrupt’s financial rehabilitation”: para. 32. He made the point that the first purpose “is achieved through a single proceeding model”: para. 33. Requiring each unsecured creditor to participate in a collective proceeding “ensures that the assets of the bankrupt are distributed fairing amongst the creditors.”: also para. 33. [ 34 ] “For this model to be viable, creditors must not be allowed to enforce their provable claims individually, that is, outside the collective proceeding.”: para. 34.

The discretion to lift the stay under s. 69.4 is one of the exceptions, but “These exceptions reflect the policy choices made by Parliament in furthering this purpose of bankruptcy.”: para. 35. As I see it, the discretion under s. 69.4 must be controlled by the first of the dual purposes because of the close connection between the stay and equal distribution. [ 35 ] Justice Gascon then discussed the second purpose by referring to s.178(2). “Discharge is the main rehabilitative tool continued in the BIA …”. Para 38. He referred to Professor Wood’s statement about other rehabilitative tools in Roderick J.

Wood, Bankruptcy and Insolvency Law, Toronto: Irwin Law, 2009. “The exclusion of exempt property from distribution to creditors, the surplus income provisions, and mandatory credit counselling also are directed towards this goal.”: p. 273. [ 36 ] The stay itself is one of the rehabilitative tools. Another means of rehabilitation is the automatic stay of proceedings contained in s. 69.3 of the BIA .

The stay not only ensures that creditors are redirected into the collective proceeding described above, it also ensures that creditors are redirected into the collective proceeding described above, it also ensures that creditors are precluded from seizing property that is exempt from distribution to creditors.

This is an important part of the bankrupt’s financial rehabilitation… . [ Maloney , para. 39] As I see it, the discretion under s. 69.4 must be controlled by the second of the dual purposes because of the close connection between the stay and rehabilitation. [ 37 ] The present motion is contrary to the fundamentals of our bankruptcy law. It seeks to break free of the equalizing collective proceeding, and of the rehabilitating discharge without reference to any exceptional ground in the statute.

As I see it, the power to lift the automatic stay is constrained by the fundamental purposes of our bankruptcy law. [ 38 ] In conclusion, the grounds asserted by Mr. Dykens are too late because Mr. Mullen is discharged. The provision for lifting the stay cannot be used to get around the fundamentals of the bankruptcy law. The RRSP Remains Exempt [ 39 ] Subsection 67(1) begins “The property of a bankrupt divisible among his creditors shall not comprise…”.

Then follows five categories of property, the last of which is in s. 67(1)(b.3): “property in a registered saving plan… other than the property contributed to any such plan… in the 12 months before the date of bankruptcy”. [ 40 ] This provision came into effect in 2008. In some provinces RRSPs are exempt from execution. In others, they are not. Nova Scotia is in the latter category, except RRSPs with a designated life beneficiary are exempt: Insurance Act, s. 198(2). The new provision creates uniformity across the country for exemption of RRSPs in bankruptcy. [ 41 ] Mr.

Dykens’ purpose in requesting the stay be lifted is to revive his execution order and go after Mr. Mullen’s RRSP. [ 42 ] (As discussed, the Registrar refused to order a conditional discharge. He was not prepared to order a discharge on the condition Mr. Mullen pay some of his “rather humble” RRSP.) [ 43 ] The stay must not be lifted to override the exemptions in the Bankruptcy and Insolvency Act . Provincial law does not revive at discharge. The federal statute continues to have paramountcy over conflicting provincial law after discharge: Maloney . The Motion Has No Merit [ 44 ]

Section 69.4 permits the court to grant a declaration lifting automatic stays only if the judge 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. [ 45 ] I cannot be satisfied on material prejudice, equitable grounds, or other grounds because the only prejudice is that which Parliament enacted. The judgment and underlying debt are discharged by operation of law and, if that were not enough, the object of the motion for a stay is to undermine one of Parliament’s exemptions. [ 46 ] Mr. Dykens argues that the exemption is unfair. That was for Parliament to decide, not this court. Also, there are strong statements of public policy against letting creditors get at pension funds.

See for just one example, our Pension Benefits Act, s. 89. Conclusion [ 47 ] Mr. Dykens’ motion to lift the Bankruptcy and Insolvency Act stay is dismissed. The parties may address costs in writing, if they wish.

J.