Does a consent judgment on a fraud action with no mention of fraud on its face survive bankruptcy?
MOS is a licenced mortgage brokerage. It held a third charge against a property owned by Heidary. MOS and Heidary agreed to the terms of a new charge, for $782,000, which was registered against the property in 2017 (the “New Charge”). According to MOS, the parties agreed that the New Charge was to be registered as a second charge after the original second charge was paid in full, from a portion of the $728,000 advanced by MOS. MOS alleged that due to Heidary’s fraud, the New Charge remained third in priority.
After discovering the true priority of the New Charge, MOS sued Heidary and others. In the prayer for relief of its statement of claim, MOS pleaded that Heidary should not be released by a discharge from bankruptcy “as such liability falls within the provisions of s. 178(1)(d) of the [BIA], as arising out of fraud, embezzlement, misappropriation, or defalcation.”
MOS subsequently proposed certain terms of judgment and Heidary consented to them. Pursuant to the judgment, Heidary was indebted to MOS for $784,250.00. Nothing in the judgment made any reference to MOS’s claims regarding fraud or to any provision of the BIA.
In 2019, Heidary filed an assignment in bankruptcy. MOS sought a declaration that Heidary’s debt was not released on Heidary’s discharge from bankruptcy, pursuant to s. 178(1)(d) and (e) of the BIA, because the underlying pleadings that led to the judgment raised allegations of fraud. MOS argued that, since Heidary consented to judgment on a claim that involved pleadings of fraud, there was no need to make specific reference to s. 178(1)(d) in the consent judgment.
Heidary argued that no evidence of fraud had been brought forward, let alone proven. In the absence of such evidence, s. 178(1)(d) cannot be invoked. He suggested that in granting the judgment on consent, the Court made no findings of fact, and the judgment itself was not an admission of the allegations in the statement of claim. If MOS wanted the judgment debt to survive his bankruptcy, it should have explicitly included that term in the judgment.
The Court held that a consent judgment may survive bankruptcy, even if that judgment does not cite a ground raised in s. 178(1)(d) or (e) or the provision itself. In that case, a court may look behind the consent judgment, to determine the underlying cause(s) of action. In doing so, the court must look at all of the circumstances in the original proceeding, including the contents of the pleadings and any evidence provided to the court that granted the judgment.
A court may find that a consent judgment is based on a ground caught by s. 178(1)(d) and (e) based only on the pleadings, if the plaintiff expressly pleads one of those grounds and the issue is not otherwise determined. The fact that fraud or a related cause of action was not the only cause of action pleaded does not prevent a finding under s. 178(1)(d) or (e).
The doctrines of issue estoppel and merger apply when there is a consent to a judgment in any action in which s. 178(1)(d) and/or (e) is raised in the statement of claim, and there is no finding to the contrary. However, when considering the application of s. 178(1) (d) or (e) after a judgment has been granted, a court cannot look to evidence extraneous to the proceeding in which the judgment was granted.
If a plaintiff failed to raise any issues caught by s. 178(1)(d) or (e) before obtaining a consent judgment, the plaintiff cannot raise them for the first time in the bankruptcy. The same is true if a defendant fails in the original proceeding to prove its defence to the s. 178(1) claim. That defendant cannot do so for the first time in the bankruptcy proceedings.
MOS clearly placed the issues of fraud and the application of s. 178(1)(d) in issue in its statement of claim. It pleaded facts and a legal theory that could lead to a judgment based on fraud. Heidary consented to a judgment in the full amount in that claim. That was the factual matrix within which the judgment was granted on consent. It was not necessary to set out in the judgment that the claim survives bankruptcy or include reference to s. 178(1)(d). The Court granted the declaration sought by MOS.
Counsel: Ian Klaiman of Lipman Zener Waxman for the Plaintiff MOS and Thomas W. Brown of the Brown Law Firm for the Defendant William Heidary
Judge: Kurz J.