M.O.S. MortgageOne Solutions Ltd. v. Heidary, 2022 ONCA 561

August 10, 2022

Does a consent judgment fall within section 178 of the BIA and survive a discharge?

The appellant Heidary granted a mortgage to the respondent M.O.S. MortgageOne Solutions, which ranked third in priority, behind the first mortgage held by Manulife Financial and various Minister of National Revenue (“MNR”) liens that were registered on title to the appellant’s property. At the request of the appellant, the respondent advanced further funds to the appellant to assist in the payment and consolidation of his debts on the agreement that the appellant would use the funds to discharge the MNR liens so that the respondent’s mortgage would rank second in priority.

Prior to the respondent making any advances under the priority agreement, the appellant directed the respondent to an individual, “Dave Erwin”, whom the appellant represented was his Canada Revenue Agency agent. The respondent spoke and corresponded in writing with the appellant’s “CRA agent” who advised that $296,418.73 would discharge the outstanding liens. Both the identity of the so-called “CRA agent” and the discharge information turned out to be false. After the respondent advanced the $296,418.73, it discovered that the “CRA agent” was an imposter and an additional $316,566.36 was required to discharge all the MNR liens. As a result, contrary to the priority agreement, the respondent’s mortgage remained in third position.

The respondent subsequently issued a statement of claim against the appellant, alleging that he had breached the priority agreement. The respondent requested, among other things, that any judgment against the appellant for breach of trust survive any subsequent assignment in bankruptcy and not be released by a discharge of the appellant, as the liability arose out of fraud, embezzlement, misappropriation, or defalcation, and fell within the provisions of s. 178(1)(d) of the Bankruptcy and Insolvency Act.

The appellant never delivered a statement of defence because the parties—both represented by counsel—ultimately agreed to a consent judgment. The consent judgment required the appellant to pay $784,250 to the respondent and vacate the property. The respondent was also granted a writ of possession. The judgment did not contain a declaration that the judgment would not be released if the appellant was discharged on bankruptcy.

About six months later, the appellant filed an assignment into bankruptcy and the respondent’s judgment was automatically stayed pursuant to s. 69.3(1) of the BIA. The respondent brought a motion seeking a declaration that the appellant’s debt to the consent judgment would survive his discharge from bankruptcy pursuant to ss. 178(1)(d) and (e) of the BIA. The motion judge (who had also granted the consent judgment) found that the respondent’s pleadings raised the issue of fraud, and allowed the respondent’s motion.

On appeal, the appellant argued that the motion judge erred in declaring that the appellant’s judgment debt was not released pursuant to s. 178(1)(e) of the BIA, because the respondent had only pleaded relief under s. 178(1)(d) of the BIA and it was unfair to the appellant to grant relief not contained in the respondent’s amended statement of claim. The Court of Appeal held that the motion judge made no error in granting relief under s. 178(1)(e) of the BIA.

The motion judge’s decision was amply supported by the pleadings and consent judgment. To obtain a declaration under s. 178(1) of the BIA, it is unnecessary for the claimant to specifically refer to s. 178 in its pleadings on which the judgment is based. A court’s task is to determine the nature and substance of the debt by examining the pleadings, any reasons that might have been given, and the proceedings that were before the court. In determining whether a consent judgment falls within the scope of s. 178(1), the court is concerned whether the evidence, facts and findings in the underlying proceeding are sufficient to make the required finding of fraud or false pretences in the application under section 178(1)(e) of the BIA.

The motion judge carried out the requisite analysis of the nature and substance of the pleadings and consent judgment and determined that they supported the criteria under s. 178(1)(e) of a debt resulting from obtaining property by “false pretences or fraudulent misrepresentation”. The respondent’s amended statement of claim clearly raised the issue of fraud. The amended statement of claim also contained an explicit plea that any judgment in the action survive bankruptcy under s. 178(1)(d). The judgment issued on consent was based on a pleading that made those claims. There was no ambiguity about the appellant’s alleged conduct. Providing a false CRA contact in order to pass on false information was done to fraudulently induce the respondent to make the requested advances for the sole benefit of the appellant and contrary to his express obligations under the priority agreement.

Accordingly, the Court of Appeal dismissed the appeal.

Judges: Strathy, C.J.O., Roberts and Sossin JJ.A.

Counsel: Angela Assuras for the appellant Heidary and Ian Klaiman of Lipman Zener & Waxman for the respondent M.O.S. MortgageOne Solutions

By Matilda Lici