Do funds held by a bankruptcy trustee revert back to a debtor if a consumer proposal is subsequently filed?
The Debtor was assigned into bankruptcy in April 2012. She had unsecured indebtedness of approximately $73,000. At the time of the bankruptcy, her only material asset was her residence. In June 2012, the Debtor received $46,000 from her mother, along with a direction that some of those funds be used for children and grandchildren. $6,000 was used as directed, and the remaining $40,000 was paid to the Trustee.
The residence was sold in October 2012. Eventually, the Debtor received an equivalent of her full exemption of $40,000 with a balance of $3,916.21 being paid to the estate. The Trustee later sought, and obtained, approval for the conversion of the estate from a summary to ordinary administration. On May 12, 2013, the Debtor informed the Trustee that she had received $15,000 from her mother’s estate.
On May 26, 2013, the Debtor filed a proposal out of bankruptcy, and the Trustee acted as the administrator. The Proposal stated, “[t]here will be a significant dividend paid from the bankruptcy administration” (the “NOTE”). No creditor objected to the Proposal and it was deemed approved on July 26, 2013. The Debtor paid the amount required and received a Certificate of Full Performance. The funds under the Proposal were distributed on January 12, 2015, and the administrator was discharged on February 13, 2015.
On December 30, 2017, the Trustee presented its final Statement of Receipts and Disbursements for the Bankruptcy to the Office of the Superintendent of Bankruptcy. There remained approximately $48,000 in the bankruptcy estate. The Trustee sought compensation of about $20,000 over and above the fee received as administrator of the Proposal, with the remaining funds to be distributed to proven creditors in the bankruptcy. The OSB submitted an unfavourable comment letter in relation to the funds held in the bankruptcy estate at the time that the Proposal was filed.
Notwithstanding s. 66.4(2)(d) of the Bankruptcy and Insolvency Act (the “BIA“), courts have recognized that certain assets will not revest in the consumer debtor, including funds that have already been distributed in the bankruptcy or transferred to another under a s. 38 Order. The Court had to assess whether the NOTE contained in the Proposal constituted a term that provided that the funds in the bankruptcy estate did not revest with the Debtor.
The Proposal clearly involved payment of $10,000. Despite the inclusion of the NOTE regarding the expectation of a dividend from the bankruptcy, the Proposal did not state that it was for $10,000 plus that dividend. In her Form 45, the Debtor disclosed that she had sold her principal residence and wanted to offer a one-time payment. The Trustee correctly noted that her bankruptcy would be annulled and expressed the opinion that the Proposal would provide for a greater return to the creditors as compared to proceeding via bankruptcy. Based on the information known to the Trustee at the time, the opinion was incorrect. The creditors were given no particulars as to what funds might be available in the bankruptcy and were left to rely on the opinion expressed.
Regardless of the administrator’s intended effect, the language used in a proposal must clearly satisfy the legal requirements of s. 66.4(2)(d) of the BIA. On deemed approval of the proposal, a bankruptcy is annulled and all rights, title and interests of the trustee in the debtor’s property revest in the consumer debtor, unless the terms of the proposal provide otherwise. Given that the legal consequence of such terms is the forfeiture of property, the language used must be clear and unambiguous.
The Court concluded that the language reflected in the NOTE was insufficient to satisfy s. 66.4(2)(d). Consequently, subject to any entitlement to fees by the Trustee, the funds held in the Bankruptcy Estate were held to be the property of the Debtor.
Counsel: Brian Maruyama of Parlee McLaws LLP for the Trustee in Bankruptcy and Stephanie Wanke of Miller Thomson LLP for Shelly Corriveau.