In the Matter of the Bankruptcy of Lee Hanlon

May 12, 2021

Is pre-bankruptcy defamatory conduct a bar to discharge?

The Bankrupt brought an application for an absolute discharge. One of his creditors, who obtained a judgment and costs against him in a defamation action, opposed the discharge. The proven claims in his bankruptcy consisted of the judgement of $27,500 in favour of the Creditor, a costs claim by her in the amount of 67,943.01, and student loans of $59,002.63.

The Creditor claimed that the Bankrupt strategically declared bankruptcy and was intentionally underemployed to avoid paying the judgment and costs in her favour. She argued that he continued to believe and assert the same baseless defamatory allegations against her, as evidenced by certain statements he made on a s. 163(2) examination. Consequently, she submitted that he had not been rehabilitated by the bankruptcy process and had not earned his discharge.

The Bankrupt’s evidence was that despite his education and experience, he had always worked part-time and with minimal income. He had not been able to obtain clients since the defamation judgement due to the publicity generated by the Creditor. He stated that he still believed the statements that he made about the Creditor, despite being unable to prove them to the satisfaction of the trial judge. He also claimed that his answers at the s. 163(2) examination were protected by privilege.

Sections 168 to 192 of the BIA govern the discharge of bankrupts. In particular, if the Court finds that any of the circumstances in s. 173 are proven, then an absolute discharge may not be granted. The Creditor asserted that an automatic discharge was not available as the facts in s. 173(1)(a), (c), (e) and (f) had been proven.

Regarding s. 173(1)(a), there was no question that the Bankrupt’s assets were not equal to fifty cents on the dollar of his unsecured liabilities. The issue was whether this was due to circumstances for which he “cannot justly be held responsible”. The underlying causes of the bankruptcy are relevant to the analysis and a bankrupt’s conduct both before and after the bankruptcy may be considered. Where the situation arises from an unsatisfied judgment debt and the judgment arose from wilful, wanton, or discreditable misconduct of the bankrupt—as was the case here—the bankrupt’s financial predicament cannot be said to have arisen from circumstances for which he cannot justly be held responsible.

As for s. 173(1)(c), (e) and (f), the Creditor argued that these facts were proven because the Bankrupt: (i) defended the defamation action alleging that the published statements were true, and continued in that belief; (ii) defended the action when he knew that he owed student loans that were greater than his ability to pay; (iii) brought on the bankruptcy by rash and hazardous speculation that he could succeed in a defence of justification to the defamation; and (iv) put the creditors to unnecessary expense by a frivolous or vexatious defence to the defamation action.

The Court disagreed and found that the defence of the action was not frivolous or vexatious. The defence failed due to the Bankrupt not being able to provide evidence that convinced the judge that his published statements were true. However, he was entitled to defend against the allegations.

The Court also found that the Bankrupt’s post-bankruptcy conduct indicated that he had been rehabilitated in some respects. He complied with the injunction and stopped making posts about the Creditor. He cooperated in the s. 163(2) examination and was forthcoming with his answers. He cooperated with the Trustee and completed all other required duties under the BIA. While he had not made any contribution to his creditors, this fact was explained by his lack of income. Therefore, the Court was not satisfied that the Bankrupt’s conduct prior to or since the bankruptcy was “particularly reprehensible”.

The Bankrupt’s right to a discharge and his impecuniosity must be balanced with the interests of creditors and the integrity of the bankruptcy system. Although the Bankrupt was of limited means, the Court concluded that a conditional order was appropriate. The Court noted that the payment should be sufficient to acknowledge that his pre-bankruptcy conduct was found deserving of censure, but not so large as to be completely beyond his reach. Therefore, the Court ordered the Bankrupt to pay $7,500 to the Trustee for the benefit of his creditors. Given his financial circumstances, this was a significant condition, being the equivalent of three years of his previous employment income. Once that condition was satisfied, the Bankrupt would be granted an absolute discharge.

Counsel: Cody Reedman of Reedman Law for the Creditor, Jolene Karen Johnson.

Before: Master Muir