What effect does the bankrupt’s pre- and post-filing conduct have on his or her discharge?
The Bankrupt applied for a discharge from bankruptcy, suspended for 1 day, or alternatively, a conditional order, on such terms and conditions as the court deemed appropriate. Her application was opposed by the Trustee and her primary creditor, the British Columbia Securities Commission (the “Commission”), both of whom asked that her application be dismissed.
The Bankrupt’s debt to the Commission arose out of her involvement in a Ponzi scheme. On January 14, 2016, the Commission found her liable for certain contraventions of British Columbia’s Securities Act, namely, illegal distributions to 22 investors and 31 investments with a value of $1,171,003. The mastermind of the fraud, Williams, used associates, including the Bankrupt, to find investors. The Bankrupt received a commission for bringing in new investors. Funds advanced by investors were used to make payments to earlier investors and pay commissions to Williams and associates, rather than be invested. The Bankrupt was not a central player in the Ponzi scheme and there was no finding of fraud on her part. She later joined a committee of associates who gathered documents and information, which were provided to the Commission.
On August 17, 2016, the Commission issued a sanctions decision, ordering the Bankrupt to pay about $207,000. The Bankrupt made a single payment of $75 towards the balance owing, which she declared she was paying “under duress, threat & coercion”. She also resisted all enforcement and collection attempts by the Commission by engaging in ‘Organized Pseudolegal Commercial Argument’ (“OPCA”) tactics in an effort to frustrate collection efforts. OPCA litigants employ a collection of techniques and arguments promoted and sold by ‘gurus’ to disrupt court operations and to attempt to frustrate the legal rights of governments, corporations, and individuals.
The Supreme Court of Canada has confirmed that the purpose of bankruptcy is twofold; first, the equitable and efficient distribution of a bankrupt’s assets to the bankrupt’s creditors; and second, the financial rehabilitation of the debtor through a discharge of debts. Subject to the constraints of s. 172 of the Bankruptcy and Insolvency Act, the order crafted by the court at a discharge hearing is a matter of discretion. In exercising that discretion, the court must look at the whole matter in “the light of reason, common sense and humanity” and must seek to balance three things:
- The interest of the rehabilitation of the bankrupt;
- The interest of the creditors in being paid; and
- The integrity of the bankruptcy process and the public’s perception of it.
If any facts set out in s. 173 are found to be present, the court will not grant an absolute discharge. Section 173 facts were present in this case. This was the Bankrupt’s second bankruptcy. Her assets were also not of a value equal to fifty cents on the dollar on the amount of her unsecured liabilities. The trustee’s report put the value of her assets at $27,961 and proven unsecured liabilities at $288,185.
An absolute discharge was, accordingly, not an option for the Bankrupt. She was an active participant in the sales activities which contravened the Securities Act. She was found to have been involved in illegal distributions to 22 investors, involving 31 investments with a value of $1,171,003. She received a 13% commission for her efforts. Ignorance of securities laws is not an excuse. This was a circumstance for which Ms. Penko could be (and was) held responsible.
A conditional order was likewise not appropriate in the circumstances. The Bankrupt was a second-time bankrupt and had been in bankruptcy for nearly 3.5 years. She reported having no excess income and there was no indication that her prospects were likely to improve in the foreseeable future. She had no ability to pay a significant amount for the benefit of her unsecured creditors if a conditional order were to be imposed.
The Bankrupt stubbornly refused to make voluntary payments towards the debt she owed to the Commission. She compounded this by engaging in OPCA-style tactics to resist and frustrate collection proceedings. While she did join a committee to gather documents which were sent to the Commission and expressed remorse during Commission proceedings, that did not extend to her making a genuine effort to make payments towards her debt to the Commission. According to the Court, her new-found desire to disavow her past conduct appeared to coincide with her application for discharge.
The bankruptcy court is not a clearing-house for the liquidation of debts, irrespective of the circumstances under which they were created. The Court was not persuaded that the Bankrupt had been rehabilitated by this bankruptcy. A conditional order was not a realistic option given her lack of surplus income and her inability to make a meaningful payment for the benefit of her unsecured creditors. A suspended order was not appropriate either. Accordingly, the Court held that the Bankrupt’s conduct was sufficiently reprehensible to warrant dismissal of her application for discharge at this time, while granting her leave to re-apply after 2 years.
Judge: Master Bilawich (As Registrar)
Counsel: Cody Reedman and Finn Merritt-Neill of Reedman Law for the Bankrupt; Laura Bevan and Kate Coady of Lawson Lundell for the British Columbia Securities Commission
By Matilda Lici