Kim (Re), 2022 ONSC 2731

May 25, 2022

Can rising real estate prices impact a bankrupt’s discharge?

The Debtor filed an assignment in bankruptcy in October 2019. He was the sole registered owner of a residential property that he valued at $635,000. His secured debt totaled over $590,551.75. Based upon these assessments, as of the date of bankruptcy, the property effectively had no realizable value (accounting for costs of disposition). Accordingly, at the time of bankruptcy, the Trustee’s internal documents indicated the property to be “exempt” from realization (having no disclosed realizable value).

In July 2021, in anticipation of the Debtor’s potential eligibility for automatic discharge from bankruptcy in October 2021, the Trustee wrote to the Debtor seeking information about the current value of the property. The Debtor obtained three valuations of the property, but only provided the Trustee with the lowest one dated September 17, 2021, which indicated a value of $604,500. The Trustee insisted on a formal appraisal, which valued the property at $830,000 as of September 14, 2021. This value was approximately $200,000 more than the value that the Debtor had ascribed to the property at the date of his bankruptcy two years earlier in October 2019.

Attempts to negotiate an agreement acceptable to both the Debtor and the Trustee regarding the value to be paid by the Debtor to the Trustee for the increase in the net realizable value of the property since the date of bankruptcy were unsuccessful. The Debtor made two offers to value the Trustee’s interest at $50,000 and $85,000 respectively, both of which were rejected by the Trustee. Accordingly, the Trustee opposed the Debtor’s automatic discharge from bankruptcy and brought this motion for vacant possession of the property and for leave to issue a writ of possession.

During the period that a debtor is an undischarged bankrupt, they are not entitled to build up and keep any assets acquired after their bankruptcy. Prior to a bankrupt’s discharge from bankruptcy, the increase in equity in property is after-acquired property that vests in the trustee for the benefit of the bankrupt’s creditors under ss. 67, 68, and 71 of the Bankruptcy and Insolvency Act. Sections 16(3) – 17 of the BIA provide for the powers of the trustee to take possession of the property. In the absence of an agreement with the bankrupt for a negotiated payment to the trustee on account of the value ascribed for the post-bankruptcy increase in the net realizable equity in the property, a trustee is entitled to an order for possession of the property and to take possession of the property for the benefit of the bankrupt’s creditors. However, as in any situation where the court has a discretion to grant leave, there might be a residual discretion in the court to refuse to grant leave for the issuance of a writ of possession to a trustee in bankruptcy if the equities of a case are such that it is not in the interest of justice to do so.

The Debtor argued that there were representations made to him that his property would not be affected by any assignment into bankruptcy, and the Trustee breached its duties or failed to adhere to its code of conduct. However, the Court found that immediately prior to his assignment in bankruptcy, the Debtor signed an acknowledgment that he had been advised that any assets he acquired prior to his discharge from bankruptcy (including appreciation in the value of any real estate he may own) were after acquired assets and may be realized upon by the Trustee. This acknowledgment not only undermined the Debtor’s assertion that he was under any misapprehension about this, it also stacked the equities strongly in favour of the Trustee.

The property was initially considered “exempt” from seizure because of the value that the Debtor attributed to it, which after accounting for secured mortgage debt and the costs of realization, would have left insufficient equity in the property to make it worth seizing. As the discharge date approached, the Trustee asked the Debtor for updated information as to value. The Court noted that a couple of months before potential automatic discharge was exactly the right time to revisit the value of real property, obtain appraisals, and attempt to negotiate a resolution of any claim that the Trustee had to the increase in realizable value of such property since the date of bankruptcy.

The Debtor also argued that but for this alleged misrepresentation, he would have considered an alternative to an assignment in bankruptcy and filed a proposal instead. However, the Court accepted that the Debtor was ineligible to make either a Consumer or Division I Proposal because his declared assets at the date of bankruptcy exceeded the $250,000 statutory threshold, and he had no declared income at or during the bankruptcy.

Accordingly, there were no equities raised in this case that would compel the Court to deny granting leave for the issuance of a writ of possession. The Trustee was entirely successful on this motion and the Court fixed costs at $25,000

Judge: Kimmel J.

Counsel: Brandon Jaffe of Jaffe & Peritz LLP for the Trustee, A. Farber and Partners; Tara Vasdani of Remote Law Canada for the Debtor

By Matilda Lici