Clarification on fiduciary claims that survive bankruptcy

Wild Rose Meats Inc v Andres, 2025 ABKB 487
What does defalcation mean for purposes of BIA s. 178(1)(d)?

Summary: In this case, the court considered the meaning of the term “defalcation” in s. 178(1)(d) of the BIA in the context of an application by a judgment creditor to determine whether a $3.6 million default judgment obtained against an individual who personally guaranteed his corporation’s breach of a non-competition covenant survived his 2025 discharge from bankruptcy. The court emphasized that bankruptcy exceptions must be narrowly construed, and that “defalcation” requires wrongful use of money or property received by a fiduciary. Reviewing the underlying pleadings and agreements, the court found that the individual provided services only through his corporation, was not shown to be a fiduciary of the creditor, and had not diverted money or property. The debt arose from a contractual breach by his company, for which he was liable only due to his guarantee, not from fraud or fiduciary defalcation. Accordingly, the judgment debt was discharged in bankruptcy and the creditor’s application was dismissed.

Dean Andres, the Respondent, performed important roles for the Applicant, Wild Rose Meats Inc (“Wild Rose”), through his corporation, Andres Incorporated, pursuant to a consulting agreement. The Consulting Agreement contained a non-competition covenant wherein Andres Incorporated acknowledged that it would obtain knowledge of Wild Rose’s business and that competition against Wild Rose would harm Wild Rose. Wild Rose sued Andres Incorporated for breach of contract and Mr. Andres, in his personal capacity, for breach of fiduciary obligation. Andres Incorporated and Mr. Andres were found in contempt of court for failing to answer undertakings, and their Statement of Defence was struck.

In November 2013, Wild Rose obtained a default judgment against Mr. Andres and Andres Incorporated for $3,602,475. On July 14, 2022, Mr. Andres filed an assignment into bankruptcy, and was subsequently granted an absolute discharge on April 10, 2025.

Bankruptcy gives debtors a fresh start except where the debt was the result of certain kinds of bad conduct. The fresh start principle “must yield to certain overriding social policy objectives that require that certain claims be protected against the discharge”. Section 178(1)(d) of the Bankruptcy and Insolvency Act provides that a debt “arising out of ... defalcation while acting in a fiduciary capacity” is not released by a discharge from bankruptcy. At issue was whether the $3.6 million judgment debt owed by Mr. Andres to Wild Rose arose out of defalcation while acting in a fiduciary capacity. Alternatively, Wild Rose argued that Mr. Andres’ judgment debt survived his discharge from bankruptcy pursuant to s. 178(1)(e) of the BIA because it was the result of Mr. Andres obtaining property or services through fraudulent misrepresentations.

The exceptions in s. 178(1)(a) through (h) must be interpreted narrowly and applied only in clear cases. The more claims that survive bankruptcy, the more difficult it becomes for a debtor to rehabilitate. As a result, ‘[w]here there is doubt as to whether a creditor falls within an exemption, the benefit should go to the bankrupt.’

The law is unclear on whether a creditor must establish that the debt resulted from dishonest or immoral conduct in order to have recourse under s. 178(1)(d). The root cause of the confusion is the BIA’s use of the word “defalcation, which is categorized by most dictionaries as “archaic.” Such a meaning is so loose as to potentially encompass all manner of breaches by a fiduciary, including negligence, which would undermine what is supposed to be a narrow exception to the fresh start principle. Defalcation as used in s. 178(1)(d) means wrongful conduct by a fiduciary in relation to money or property that is akin to money under the fiduciary’s management or control.

Where s. 178(1)(d) is in issue, the Court must look to the substance of the debt in question. In the context of a debt arising from a default judgment, a judge may consider material on the court file to ascertain the substance or nature of the debt. Wild Rose alleged that Andres Incorporated competed with Wild Rose contrary to non-competition covenants and that Mr. Andres breached his fiduciary obligations to Wild Rose by competing with Wild Rose. Looking to the material on the court file, including the Consulting Agreement and the Shareholders’ Agreement, the Court held that it was not clear that Mr. Andres was a fiduciary.

Mr. Andres was not an employee of Wild Rose because he supplied consulting services through Andres Incorporated. Wild Rose did not plead that Mr. Andres acted in a personal capacity distinct from Andres Incorporated nor was there any evidence to that effect in the court file. The allegation that he used an officer title was not sufficient because it was consistent with the duties assigned to him pursuant to the Consulting Agreement. Wild Rose knew that it was contracting with Andres Incorporated, not Mr. Andres, and it protected itself by requiring a personal guarantee from Mr. Andres. The Court was not satisfied that the deemed admission of the facts in the Wild Rose pleading meant that the default judgment amounted to an implicit finding that Mr. Andres breached fiduciary obligations to Wild Rose.

There was no allegation that Mr. Andres diverted or dissipated money or other property, which is the essence of defalcation. The facts asserted by Wild Rose against Mr. Andres did not meet the test for defalcation:

1. the money taken by the debtor to create the debt must have belonged to someone other than the debtor;

2. the taking must involve a wrongful use of the money; and

3. the debtor must have received the money as a fiduciary.

Mr. Andres did not engage in defalcation; instead, Andres Incorporated wronged Wild Rose by competing against them when it had contracted not to do so. Mr. Andres was accountable for Andres Incorporated’s breach of contract because of his personal guarantee, but that was the extent of his responsibility to Wild Rose. The Court dismissed Wild Rose’s application.

Judge: The Honourable Justice Colin C.J. Feasby

Professionals involved:

• Paul Olfert and Carly Toronchuk of MLT Aikins for the Respondents, Dean Andres and Andres Incorporated

• Angelo Merani of Nicol Law for the Applicant, Wild Rose Meats Inc.