When is a connection between the deceitful conduct and the loss too remote to grant an exclusion under section 178(1)(e) of the BIA?
Goodman was the president and sole shareholder of RNG, while Bannerman was the owner and principal of BLL. In 2005, RNG entered into an agreement with BLL, whereby RNG would sell Coleman spas and related products to BLL for retail sale, and BLL would have the exclusive right to market those products in Manitoba. RNG received its spa products from Maax, a U.S. spa manufacturer, pursuant to an agreement that provided that Maax would wholesale spa products to RNG. Under the Maax agreement, RNG agreed that it would sell the products to retail customers only.
BLL opened a retail store in Brandon, Manitoba in 2005 to sell the hot tubs and related products that were supplied to it by RNG. It was unsuccessful and went out of business in less than a year. BLL and Bannerman commenced an action against RNG and Goodman in 2008. When Maax found out about the agreement between BLL and RNG, it terminated its contracts with RNG.
BLL’s action against RNG was converted into an arbitration. The arbitrator found both RNG and Goodman liable and awarded over $400,000 in damages to Bannerman. Goodman made an assignment in bankruptcy in July 2014, which was discharged in 2017. Bannerman filed an application pursuant to section 178(1)(e) of the Bankruptcy and Insolvency Act to have the debt survive the discharge of the bankruptcy.
The application judge concluded that Goodman lacked an honest belief in the truth of his statements regarding RNG’s authority to sell Coleman spa products. Therefore, his conduct was deceitful and Bannerman was entitled to relief under s. 178(1)(e).
Goodman appealed the application judge’s decision on two grounds: (i) there was no clear and conclusive evidence of false pretences; and (ii) the losses awarded did not result from the false pretences. Goodman argued that to succeed on the s. 178(1)(e) application, Bannerman was “required to demonstrate the necessary clear link that the entirety of the arbitrator’s award was a debt or liability ‘because of’ or ‘as a result of’ false pretences.” He suggested that, even if Bannerman stated that it would never have entered into the agreement had it known that Maax did not consent, that does not mean that the losses were the result of a misrepresentation of authority. Bannerman, on the other hand, argued that its reliance on the agreement, which it would not have entered into but for Goodman’s misrepresentation of authority, resulted in the losses that were awarded.
Section 178(1)(e) of the BIA is a morality provision which looks at conduct that is unacceptable to society. A bankrupt will not be rewarded for such conduct by a release of liability because the bankruptcy scheme is intended to benefit honest, but unfortunate, debtors. Dishonest debtors do not benefit from their dishonesty.
The question is whether the false pretences led or induced the applicant to enter into the agreement or contract. Here, Bannerman said that if he had known the true situation when he entered into the contract with Goodman, he would not have done so. Bannerman did not know that Goodman did not have the right to sell the tubs to him, and he would never have risked the venture in those circumstances.
Goodman argued that it was not sufficient that the contract was entered into under false pretences; rather, Bannerman also had to show that the losses from the business, which constituted the judgment debt, were the direct result of the false pretences. He argued that the arbitrator could not determine why the business failed, so there was no finding that the debt from the business failure was the result of the false pretences. The Court of Appeal noted that this was a very narrow interpretation of section 178(1)(e) that did not fit with either the principle that legislation is to be interpreted broadly or the objective of the legislation.
It was clear that, “[b]ut for” the false pretences, Bannerman would not have caused BLL to enter into the contract with RNG, and those false pretences were “materially connected to the actions of the plaintiff [Bannerman] that resulted in damage”. The contract was obtained by false pretences, and Goodman’s “conduct . . . led to the judgment debt”. The Court of Appeal was satisfied that there was no arguable case to support this ground of appeal.
Counsel: Peter Halamandaris and Lauren Gergely of Marr Finlayson Pollock LLP for the Applicant; Jason D. Kendall and Brian E. Roach for the Respondents
Judge: Beard JA