Does a judgment on a guarantee survive bankruptcy where the underlying claim is for fraud?
The appellant, Johansen, filed a statement of claim against the respondent, Wallgren, alleging breach of contract, fraudulent misrepresentation and fraudulent preference. Johansen then severed his claim and sought partial summary judgment for liquidated damages on the basis of contract, namely on a personal guarantee of a corporate debt and a promissory note from Wallgren. Wallgren subsequently made assignment into bankruptcy, and Johansen applied for a declaration that his partial summary judgment survived Wallgren’s bankruptcy.
The application judge found that the judgment would not survive any eventual discharge from bankruptcy. As the judgment had been obtained on the basis of contract, Johansen could not later rely on additional information about fraud in support of his application for exemption or to recharacterize that judgment. The application judge further found that a summary judgment creates res judicata. Johansen appealed from the application judge’s decision, arguing that the application judge had failed to apply the relevant principles and policies of the Bankruptcy and Insolvency Act.
The Alberta Court of Appeal began its analysis by explaining that, pursuant to section 178(1)(e), a judgment obtained prior to the debtor’s bankruptcy survives the debtor’s discharge if the debt or liability is grounded in fraud. In appropriate circumstances, pleadings can inform the interpretation of what has been determined or admitted to create the debt or liability, but they are not necessarily sufficient or determinative. Where a judgment has been produced by “litigation in slices”, it is important to look at the “slice” that was determined, not at every allegation that could have been determined but was not.
The Court of Appeal found that, in this case, evidence of the alleged fraudulent misrepresentations was not before the summary judgment judge, nor was such evidence required to prove the debt. Accordingly, the partial summary judgment was not granted on the basis of fraudulent misrepresentation. The judge found liability for debt based in contract, which was consistent with the grounds raised in the summary judgment application.
The judgment could not be recharacterized after the fact. This was not a situation where the judgment was granted with the consent of the debtor or in default of defence by the debtor, such that admissions of fault consistent with the pleadings might be inferred. The judgment was granted after both parties filed affidavit evidence and made submissions. The judge did not find any version of fraud and did not make factual findings that could form the basis for a conclusion that any fraud had occurred.
Johansen could have sought judgment based on fraudulent misrepresentation and/or fraudulent preference. At the time of the partial summary judgment application, nothing prohibited Johansen from pursuing his fraudulent misrepresentation and fraudulent preference claims. However, he deliberately chose to sever his action and to obtain summary judgment based on the promissory notes and guarantee. Consequently, he was now estopped from relitigating the debt claim.
Once a final order or judgment is granted, the cause of action is extinguished such that even if there were two possible claims emanating from the same cause of action, and even if proceeding with the other claim may have been more fruitful, once judgment is rendered in one claim, the other is extinguished. The summary trial judge did not prevent Johansen from pursuing his additional claims or from arguing whether any resulting judgment would be exempt from discharge under s. 178(1)(e). However, those remaining claims and the determination of whether they were exempt from discharge under s. 178(1)(e), must be determined at a trial.
Accordingly, the Court dismissed Johansen’s appeal.
Judges: Martin, Veldhuis and Antonio JJA
Counsel: Tyler Nightingale and Matthew James of Chapman Riebeek for the Appellant; Catherine Crang and Zubair Hussain of Carscallen for the Respondent.