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CAIRP MAY 2011 INSOLVENCY AND RESTRUCTURING FORUM Personal Insolvency Technical Update Arif Chowdhury.

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Presentation on theme: "CAIRP MAY 2011 INSOLVENCY AND RESTRUCTURING FORUM Personal Insolvency Technical Update Arif Chowdhury."— Presentation transcript:

1 CAIRP MAY 2011 INSOLVENCY AND RESTRUCTURING FORUM Personal Insolvency Technical Update Arif Chowdhury

2 Decker v. Canada (Superintendent of Bankruptcy), 2010 ABCA 189 Overturned Re Dyrland, 2010 ABQB 356 After an administrative gap between the discharge and subsequent reappointment of a trustee, provincial limitations legislation does not prevent a creditor with proven claims from sharing in subsequent distributions

3 Four proofs of claim were filed in the bankruptcy and allowed by the trustee During the 10 year administrative gap after the trustee’s discharge only one of the four creditors commenced an action, eventually garnishing the Bankrupt’s wages The other three creditors took no action during the administrative gap, allowing their claims to run afoul of the provincial limitations period

4 After the trustee was reappointed, further funds were realized in the Bankrupt’s estate The decision of the chamber’s judge was appealed to the Court of Appeal, which held Re Dyrland to be in error “…a creditor, whose claim has been accepted by the trustee as a provable claim, [has] an ongoing entitlement to the division of property until the bankrupt is discharged”

5 Where there is no appeal taken, the trustee’s determination as to the validity of the claims filed is final and conclusive under s. 135(4) of the BIA Claims in bankruptcy are provable under s. 121 on or before the day on which the Bankrupt becomes bankrupt Lifting of the stay exposes the Bankrupt to further proceedings, but the Bankrupt and his or her estate continue in the bankruptcy and are governed by the BIA

6 Property realized after the trustee’s subsequent reappointment remains subject to distribution under the BIA, which is paramount to provincial legislation There is no provision under the BIA for a second validation of claims after the reappointment of the trustee Under the BIA a bankrupt is not released from the obligation to satisfy provable claims until his or her discharge

7 It should be noted that one creditor had taken action against the Bankrupt and had garnished wages during the administrative gap. However, the Court of Appeal did not address the scope and effect of the lifting of the stay pursuant to s. 69(3)(1.1) of the BIA

8 Re Nielsen, 2010 ABQB 464 Registrar Hanebury considered the effect of Alberta’s seize or sue provisions, now found in the Law of Property Act, R.S.A. 2000, c L-7 (the “LPA”), on the ability of a secured creditor to maintain its security interest after obtaining a judgment against the Bankrupt Alberta’s sue or seize provisions do not invalidate the creditor’s security interest where a judgment is obtained and no seizure occurs; the creditor is still allowed to claim as a secured creditor in bankruptcy

9 The bank is a secured creditor whose claim may either: (a) be paid out by the trustee, or (b) be satisfied by release of the vehicle to the bank for sale. Upon accepting the vehicle, the bank has no further claim in bankruptcy for the amount of its judgment As long as the bank remains a secured party under its financing agreement with the Bankrupt, it is a secured creditor for the purposes of the BIA

10 Moreover, s. 55(8) of the Personal Property Security Act, confirms that the secured creditor’s entitlement to its security interest continues despite obtaining judgment The Registrar concluded that the bank had not lost its security interest by obtaining a judgment for the purchase price, and allowed the appeal of the trustee’s disallowance of the bank’s secured claim

11 Re Brown, 2010 SKQB 426 Bankrupt applied for a discharge in unique circumstances where he has two sources of income, of which one provides good annual income and the other suffers repeated and heavy losses, ultimately leading to a second bankruptcy Imposing a conditional discharge in the face of exemptions and substantial non-exempt equity does not require moral turpitude or misconduct Registrar Schwann concluded that the integrity of the bankruptcy system required the imposition of a conditional order

12 The Bankrupt derives income from a large mining company, from which he earns a very good annual income He also derives income from a mixed farming operation, where he has sustained repeated and heavy losses The Bankrupt assigned himself into bankruptcy because the farm losses could no longer be offset by the mining income

13 The Bankrupt did not exert much effort to satisfy his creditors prior to assignment into bankruptcy The Bankrupt chose bankruptcy over a proposal to creditors, even though it was a viable alternative given his farm assets Only 27% of the Bankrupt’s secured debts would be repaid from the estate if the condition of discharge suggested by the trustee was accepted by the Court The Bankrupt had sizable off-farm income and was not solely reliant on the farm operation to support himself

14 The Registrar concluded that it would be unjust to prefer the Bankrupt’s rehabilitation over a return to creditors, hence, the discharge warranted a sizeable conditional order A conditional discharge upon payment of $70,000.00 was ordered; however, the discharge was suspended for a period of six months

15 Re Gowans, 2010 ABQB 500 The trustee acknowledged that it had erroneously advised the Bankrupt that his student loans would be automatically discharged through his bankruptcy, which was a critical factor in the Bankrupt’s decision to assign himself into bankruptcy Consequently, the trustee brought an application seeking the forgiveness of the Bankrupt’s student loans pursuant to s. 178(1.1) of the BIA, or alternatively, seeking an order annulling the bankruptcy pursuant to s. 181(1) of the BIA The Registrar denied both aspects of the application

16 The Bankrupt’s student loans had only subsisted for five years since he ceased to be a full-time or part-time student, which did not meet the requisite seven years for automatic discharge under s. 178(1) Exception pursuant to s. 178(1.1) requires (a) good faith conduct regarding the student loan debt, and (b) continued financial hardship s. 178(1.1) does not consideration erroneous information

17 The Court then considered whether it should exercise its power to annul the bankruptcy under s. 181(1) Was the Bankrupt’s decision to assign himself into bankruptcy based on erroneous information from the trustee sufficient to establish that the bankruptcy “ought not to have been filed”

18 The Registrar concluded that the assignment into bankruptcy should not be annulled: (1) granting an annulment is a discretionary decision; and (2) the power to grant an annulment should only be exercised under very special circumstances. The Bankrupt was eligible to assign himself into bankruptcy, erroneous belief was not a sufficiently special circumstance, and a proposal was possible under the BIA

19 Re Berenbaum, 2011 ONSC 72 “The Bankrupt needs to learn once and for all that he must pay his taxes” Deterrence is a driving factor to ensure that bankruptcy is not used as a financial planning tool to conveniently evade income tax liability: Re Ginther, 2003 ABQB 352 By his own motion the Registrar lifted the stay under s. 69.4 of the BIA to allow the CRA to immediately proceed to enforce its rights

20 The Bankrupt was a former chartered accountant and licenced trustee in bankruptcy At the peak of his career he was a vice- president of a trustee firm, from which he stole $1.1 million, some of which came from insolvency estates In his first bankruptcy the Bankrupt avoided paying $1 million to Her Majesty

21 The Bankrupt was hired as a consultant, earning both a base salary and a draw from profits earned The Bankrupt invoiced his base salary to the firm and collected GST, but did not remit any to Her Majesty The Bankrupt did not declare any of his bonus draws of approximately $100,000.00 per year, for ten years.

22 The duty of a discharge court is “…to balance the expectation of the honest but unfortunate debtor for a discharge, relieved of the burden of her debts, with the right of the creditors to be repaid, and the need to maintain public confidence in the integrity of the insolvency system” Despite the fresh start granted by the first bankruptcy, the Bankrupt continued to live beyond his means, flouted tax obligations known to him as a tax accountant, and sought the protection of the BIA only when caught

23 “…it is by now trite law that taxes have a special status. Not only as to their use, and the fairness of all paying their share, but due to the fact that taxing authorities are involuntary creditors. CRA does not get to assess creditworthiness and refuse to extend credit. CRA must rely on the honesty of each citizen to report income, and apply the tax law fairly and reasonably…The Bankrupt has unilaterally deprived Her Majesty of this.”

24 Humphrey Estate (Trustee of) v. Canada (Superintendent of Bankruptcy), 2010 ABQB 502 In Humphrey the Court considered an application by the trustee to claim a software licence fee as a disbursement, which was opposed by the OSB The Superintendent’s directives do not bind the Court; rather the Court must apply the relevant legislation and statutory instruments Justice Horner concluded that the Ascend licence fee is an allowable disbursement

25 The software at issue, Ascend, charges licence fees on a per-file basis, which the trustee sought to claim as a disbursement for ordinary bankruptcies The Court considered (1) whether the Ascend fee could be considered a disbursement, and (2) whether claiming the Ascend fee was prohibited by Rule 58(3), “[a] trustee’s disbursements do not include the indirect costs of the trustee’s facilities or premises”

26 The Ascend fee is in the nature of a disbursement Absent a specific restriction a trustee is entitled to reimbursement for expenses reasonably and properly incurred Since e-filing is mandatory, the Ascend fee is property incurred. Moreover, the amount of $150.00 is reasonable.

27 Rule 58(3) does not prevent the Ascend fee from being claimed as a disbursement “…the licence fee charged is specific to a particular estate and therefore stands in contrast to the cost of software purchased for general purposes”

28 Re Dave, 2010 ABQB 358 A creditor of the Bankrupt sought an order to examine him under oath pursuant to s. 163(2) of the BIA The Registrar dismissed the application, concluding that there was insufficient evidence to ascertain whether the applicant’s examination would be directed towards the administration of the estate The reasons given by the Applicant did not justify examination pursuant to s. 163(2) of the BIA

29 Section 163(1) of the BIA provides for the broad examination of the Bankrupt by the trustee in relation to “the bankrupt or the bankrupt’s dealings or property” However, s. 163(2) only allows narrow examination by a creditor “for the purposes of investigating the administration of the estate of the bankrupt”

30 The Applicant’s only evidence before the Court was that neither the Official Receiver nor the trustee had examined the Bankrupt pursuant to s. 163(1) of the BIA There is no evidence as to the trustee’s administrative decision not to carry out a section 163(1) examination of the Bankrupt, and if so why it did not Seeking an explanation cannot justify authorizing a secured creditor to examine for its own purposes pursuant to s. 163(2) of the BIA

31 Re Carlson, 2010 ABQB 701 The discharged Bankrupt applied for the reappointment of his trustee and an order assigning certain proceedings in B.C. to the Bankrupt in return for his payment to the trustee of the full amount owing to his creditors The proceedings concerned an interest in property in B.C. that the Bankrupt had not disclosed in his statement of affairs Justice Kent declined to grant the Bankrupt’s application, since to do so would be contrary to the proper administration of justice.

32 Prior to bankruptcy, the Bankrupt had transferred the B.C. property to his brother and sister-in-law, for which the Bankrupt eventually received a promissory note in favour of the Bankrupt, secured by the B.C. property After the Bankrupt’s brother passed away, the Bankrupt commenced an action claiming a beneficial interest in the B.C. property While the Respondent, sister-in-law, sought a declaration that she was the beneficial owner of the B.C. property

33 The Respondent brought an application for summary trial on the basis that any interest in the B.C. property was that of the trustee rather than the Bankrupt, therefore, he had no claim Only then did the Bankrupt disclosed the B.C. property to his former trustee The trustee agreed that the Bankrupt could continue the B.C. litigation subject to the trustee receiving the proceeds

34 Did the Bankrupt’s failure to disclose the B.C. property in his statement of affair prevented him from obtaining the right to continue the B.C. claim from the trustee? The principle of judicial estoppel is available in appropriate circumstances; this was not an appropriate case

35 Since any interest to the B.C. property vested in the trustee at the moment of the assignment into bankruptcy, the Bankrupt’s conflicting positions as to the B.C. property were irrelevant The trustee was the holder of the asset and had never taken an inconsistent position with respect to the B.C. property. Estoppel was inapplicable against the trustee

36 The position of the trustee was that upon payment of the creditors’ claims in full, the B.C. action should be assigned to the Bankrupt to litigate While the trustee is an officer of the Court and is normally accorded great deference, courts must maintain their supervisory role and ensure the property administration of justice and prevent an abuse of process

37 Justice Kent reappointed the Bankrupt’s trustee and ordered that in exchange for payment equal to the amount owed to the Bankrupt’s creditors, the trustee was to provide a release to the Respondent from any claim to the B.C. property The Bankrupt did not benefit from his intentional choice to not disclose the B.C. property within his statement of affairs

38 Re James, 2011 ONSC 493 The Respondent appealed the decision of the trustee not to allow a reduction in the value of the Bankrupt’s interest, which she was to purchase The Respondent claimed the value should be reduced: (1) in an amount equal to payments made solely by her against the first mortgage; and (2) in the entire amount of the second mortgage by the application of the doctrine of equitable exoneration because she had entered into the second mortgage under duress

39 The First Mortgage A legal claim of debt by the Respondent against the Bankrupt cannot be converted into an equitable claim against title Payments were made on account of her joint and several obligations under the first mortgage The mortgage payments cannot attach to the Bankrupt’s title, in law or in equity, so as to bind the trustee and other creditors

40 The Second Mortgage The doctrine of equitable exoneration exists for equity to presume evidence of an interest, “the failure of which would result in a harsh legal outcome, where the failure to evidence the interest is the result of some legal or societal, and in any event demonstrated, disability.”

41 The Registrar found no evidence that the Respondent’s failure to evidence an interest in the Bankrupt’s share of the property securing her portion of the line of credit, was due to some legal or societal disability The Respondent claimed that she had signed documents necessary to apply for a line of credit, secured by the property at issue, under duress and without the benefit of legal advice

42 Respondent could have insisted that the Bankrupt charge his share of the property on a first dollar basis Moreover, several years passed after the line of credit was obtained and the money therein was loaned to the Bankrupt’s corporation, during which time the Respondent could have obtained security from the Bankrupt The Registrar found that in choosing to sign for the line of credit to avoid the displeasure of the Bankrupt and a possible breakdown of their marriage, the Respondent demonstrated herself to be competent and a rational economic actor

43 “Specifically, married women are no longer chattel of their husbands, and no longer disabled statutorily or otherwise from dealings with their property. They ought and must be accorded the respect of the fully independent and competent adults that they are to make decisions and to both have those decisions be protected by Courts as well as to be held to those decisions by those same Courts.” It is not in the interests of other creditors to allow the Respondent and the Bankrupt to use equity to wrestle away an amount from innocent creditors


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