Blanchette Estate (Re), 2018 BCSC 2085

Does the disallowance of a creditor’s proof of claim negate the creditor’s ability to pursue a claim of fraud against the debtor?

The Debtor is a professional gambler. The Applicants alleged that he fraudulently represented to them that he needed large sums of money for what he described as a “required show of wealth” to enable him to participate in a Las Vegas casino marketing program. From 2011 to 2013, the Applicants advanced US$9,736,358 to the Debtor. The Debtor allegedly represented that the funds advanced by the Applicants would be used merely as a deposit, and would not be used for gambling. The Applicants submitted that, in fact, the Debtor did use the funds for the purpose of gambling and to purchase luxury goods.

In 2013, the Applicants commenced civil proceedings against the Debtor in the State of Texas (the “Texas Action”). In February 2015, the Debtor filed a voluntary assignment in bankruptcy in British Columbia, which stayed the Texas Action. In November 2015, the Applicants filed a proof of claim in relation to the bankruptcy proceedings, which was subsequently amended. On January 6, 2016, the Debtor received an absolute discharge from bankruptcy. In January 2018, the Trustee for the bankrupt estate of the Debtor disallowed the Applicants’ claim because it was unable to determine the basis on which the Applicants advanced the funds to the Debtor. Crucially, the Trustee noted that there was no documentary proof of intention that the fund advances were meant to be repayable.

The Applicants sought an order granting them leave to commence or continue civil proceedings against the Debtor for the purpose of determining whether they had a claim against him that survives his discharge from bankruptcy, pursuant to s. 178 of the Bankruptcy and Insolvency Act (“BIA“). Further, in February 2018, the Applicants filed an appeal of the disallowance (the “Appeal”), but no further steps have been taken on the Appeal pending the outcome of this application.

The Applicants argued that their claims fall squarely within s. 178 of the BIA and therefore survive the Debtor’s discharge from bankruptcy. They submitted that their claims involved complex issues of fact and credibility that could only be resolved in civil proceedings by means of a trial with viva voce evidence. The Debtor argued that, in light of the Trustee disallowing the Applicants’ claim, they had no further right to pursue it unless their Appeal was successful.

An application to lift the stay of proceedings in a bankruptcy will not be granted lightly, and is to be reserved for claims that would not be released on the discharge of the bankrupt or when the issues cannot be efficiently determined in the summary procedure contained in the BIA. An applicant must show that they will suffer material prejudice if the stay is continued, or that the stay is equitable on other grounds. There must also be some evidence that there is a fair issue to be tried. In this case, the Court was persuaded that the Applicants’ claim had a reasonable prospect of success. The claim was based on allegations of fraud, and such a claim is not released by the discharge of the bankrupt.

The Court also confirmed that the disallowance of the Applicants’ proof of claim was neither final nor conclusive against them as it did not fall within the scope of s. 135(4) of the BIA. However, the disallowance was still a relevant consideration to the issue of whether leave should be granted to proceed with an action against the Debtor.

The Applicants’ claim against the Debtor could only be resolved by a trial of the issues raised in the proof of claim and the Texas Action. The credibility of the parties was a critical issue between them, and could only be resolved by hearing the parties’ respective testimony and observing them under cross-examination. The Applicants and the Debtor were the only parties with any real interest in the disposition of the Appeal.

Despite strong practical arguments in favour of granting the application, the Court concluded that it could not make such an order without hearing the Appeal. It held that the objects of the BIA and the interests of justice could be best achieved by ordering that the Applicants’ application to lift the stay be adjourned pending the outcome of the Appeal. It adjourned the application to a date on which it could be heard at the same time as the Appeal.

Counsel: Kalev Anniko of Gehlen Dabbs for the Bankrupt.

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