2017 ONSC 7265, 2017 ONSC 7265

CITATION : In re: Boock , 2017 ONSC 7265 COURT FILE NO.: 31-2159298 COURT FILE NO.: 31-2159331 MOTION HEARD: 20171110 SUPERIOR COURT OF JUSTICE – ONTARIO (IN BANKRUPTCY AND INSOLVENCY) RE: Irwin Boock, Bankrupt Birte Boock, Debtor BEFORE: Master J. E. Mills COUNSEL: Y. Pejman and P. Bakos, Counsel for the Bankrupt and the Debtor M. Ruby and C. Ho, Counsel for the Moving Party United States Securities & Exchange Commission HEARD: November 10, 2017 REASONS FOR DECISION [ 1 ] This is a motion to lift the stay of proceedings pursuant to s. 69.4 of the Bankruptcy and Insolvency Act (the “ BIA ”).

The moving party, United States Securities and Exchange Commission (”USSEC”) has commenced proceedings in Ontario bearing court file numbers CV-09-384576 and CV-14-509566 (the “Actions”) seeking to enforce three judgments rendered by the courts of New York and Colorado (the “Judgments”) against various defendants, including the bankrupt and the debtor, respectively Irwin Boock and his wife Birte Boock (collectively, the “Boocks”). [ 2 ] For the reasons that follow, the motion is hereby granted and the stay of proceedings is lifted with respect to Irwin Boock and Birte Boock to permit the Actions to proceed to judgment.

There shall be no steps of enforcement taken without further leave of this court. [ 3 ] S. 69.4 of the BIA provides that in order for a creditor to be successful in having the stay of proceedings lifted, the court must be satisfied the creditor is likely to be materially prejudiced by the continued operation of the stay or that it is equitable on other grounds that the stay be lifted. The onus is on the applicant to establish there are sound reasons consistent with the scheme of the BIA to relieve against the automatic stay.

While it is not necessary to establish a prima facie case, the court may consider the merits of the action and if there is little prospect of success, there is no sound reason to lift the stay. [1] [ 4 ] It is accepted the court is not to attempt to determine the proposed claim on its merits.

Rather, it must assess whether there is a claim of the nature that would survive a discharge, whether it is a claim that could not succeed, and whether it if it did succeed it could not result in recovery against the defendants. [2] [ 5 ] The standard of review for the lifting of a stay of proceedings requires that there be more than simply pleadings or proposed pleadings disclosing a cause of action.

There must also be some evidence to support a conclusion there is a fair issue to be tried. [3] [ 6 ] Master Ferron, in Re Advocate Mines Limited , [4] identified a number of cases where it would be appropriate to lift the stay of proceedings to permit civil actions to continue. Included were actions against the bankrupt for a debt to which a discharge would not be a defence. [ 7 ] USSEC seeks to lift the stay of proceedings on the grounds that it would be materially prejudiced if not permitted to continue the Actions and seek a judgment that would survive discharge pursuant to s. 178(1)(

d) and/or (

e) of the BIA , being any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity; or a 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. It is the intention of USSEC to amend its pleadings in the Actions to specifically plead the provisions of s. 178(1) (

d) and (

e) of the BIA. [ 8 ] Canadian courts have held that foreign judgments based on misappropriation or defalcation can fall within s. 178(1) and survive the discharge of a bankrupt. [5] The court may look to the original pleadings and the foreign court record to characterize and assess the nature of the judgment. [ 9 ] The Boocks resist this motion on the basis the Actions seek to recognize and enforce the Judgments obtained in the United States that may no longer be enforceable as a result of a recent decision of the United States Supreme Court which held the requirement of SEC disgorgement to be penal in nature as opposed to being compensatory or for restitution purposes. [6] There is a pending motion by the Boocks to vacate the Judgments before the District Court for the Southern District of New York.

As at the hearing of this motion, the USSEC has proven unsecured claims accepted by the Trustee for the full amount of the Judgments. [ 10 ] There was no expert evidence filed on this motion to address the issues of U.S. law raised by the Kokesh decision and whether the purported change in the law would be applied retrospectively to cases before the U.S. courts which have already proceeded to judgment. In the circumstances, the mere existence of the Kokesh decision is not sufficient to establish, at this juncture, that there is little

prospect of success for the USSEC in its enforcement action and in obtaining a s. 178(1) finding before this court. [ 11 ] The Boocks also raise Limitations Act defences to the Actions as a rationale for refusing to lift the stay of proceedings. It is asserted the actions have little prospect of success and therefore, consistent with the principles of the BIA , the stay of proceedings ought to remain so as to permit the Boocks an opportunity to financially rehabilitate themselves, unfettered by their past debts. These defences were raised for the first time on this motion.

The Boocks did not plead a Limitations Act defence in their Statements of Defence to the Actions. [ 12 ] The question as to the proper limitation period for enforcement of the Judgments gives rise to a reasonable prospect of prejudice for the USSEC so as to warrant lifting the stay of proceedings. One judgment predates the two-year limitation period established by the Limitations Act, 2002 , and may be subject to the former six-year limitation period. Discoverability of certain claims is a live issue. On this basis, the stay of proceedings should be lifted to permit an adjudication of the Limitations Act issues.

There is a fair issue to be tried in the Actions. [ 13 ] Moreover, even if the USSEC is unsuccessful in obtaining s. 178(1) relief, establishing the appropriate quantum of its claims is a compelling reason to have a final resolution of the Limitations Act defences now asserted by the Boocks. There are sound reasons consistent with the provisions of the BIA to lift the stay of proceedings. [ 14 ] The stay of proceedings shall be lifted pursuant to s. 69.4 of the BIA and the USSEC is granted leave to continue the Actions to judgment.

The Boocks are entitled to continue their efforts at financial rehabilitation and Mrs. Boock’s proposal to her creditors should not be compromised. Therefore, in the event the USSEC is successful in the Actions, there shall be no enforcement efforts undertaken by the USSEC without further leave of this court. [ 15 ] Having been successful on the motion, the USSEC is entitled to its costs. If the parties are unable to agree as to the quantum, a Costs Outline and written submissions not exceeding three pages, may be made by December 20, 2017. Master J. E. Mills Date: December 4, 2017