Can a declaration under s. 178 of the Bankruptcy and Insolvency Act be made on a motion for default judgment?
In May 2018, Yalda entered into a written credit agreement with Hertz to rent construction equipment for several construction projects in Ontario. Hertz delivered the equipment to at least six construction sites and invoiced Yalda in accordance with the credit agreement. Yalda acknowledged receipt of the equipment in good working order pursuant to the credit agreement, but failed to pay Hertz $72,669.83 for the equipment rentals.
On March 25, 2019, Hertz issued a statement of claim against Yalda and its principals seeking $72,669.83 for breach of contract plus pre- and post-judgment interest. Hertz also sought a declaration that the judgment will survive any claim for bankruptcy that might be made by the defendants. Hertz subsequently brought a motion for default judgment.
The Court was satisfied that Yalda breached its credit agreement with Hertz and that Hertz was owed $72,669.83. It found that Yalda was a contractor as defined in the Construction Act in relation to the improvements being done at the addresses to which Hertz delivered the equipment. Hertz supplied equipment to Yalda for the purpose of those projects. Therefore, Yalda received $72,699.83 in trust for the benefit of Hertz, and it failed to satisfy its obligations to refrain from taking, using or converting the money it received in trust for Hertz until Hertz was paid in full. The Court concluded that Yalda breached its trust obligations under s. 8 of the Construction Act.
Section 178(1)(d) of the Bankruptcy and Insolvency Act provides that an order discharging a bankruptcy does not release the bankrupt from any debt arising out of fraud or misappropriation while acting in a fiduciary capacity. A finding of liability for breach of trust under the Construction Act can fit within s. 178(1)(d) of the BIA, but only if the breach of trust was not the result of “simple inadvertence, negligence or incompetence”.
Notwithstanding that Yalda and its directors breached their trust obligations under the Construction Act, the evidence was not sufficient to conclude that the breach of trust constituted fraud or misappropriate for the purpose of s. 178(1)(d), or that the breach of trust was the result of something other than inadvertence, negligence or incompetence. The Court left the issue to be decided on a proper record if and when any of the defendants make an assignment into bankruptcy.
A declaration under s. 178 should not be made pre-emptively on a motion for default judgment. While a declaratory order can be made to define the future rights of a party if some contingency arises, that power should be exercised carefully and sparingly. This was not an appropriate case to make a declaratory order about how the judgment should be treated if any of the defendants declare bankruptcy.
The Court granted the plaintiff’s motion for default judgment. The defendants were in breach of the trust provisions of the Construction Act and were jointly and severally liable to the plaintiff for $72,669.83 plus pre- and plus post-judgment interest.
Counsel: Kenneth P. Eccleston of Miller Thomson for the Plaintiff
Judge: Davies J.