When will the Court not lift a stay of proceedings to allow the enforcement of a previously issued judgment?
In 2017, the Applicants obtained an order for the repayment of $102,500 that they had advanced to the Respondents to finance a business, as well as costs of $6,250. The Respondents were also ordered to provide an accounting of how the advanced funds had been spent. When making the order, the judge refused to issue a certificate of pending litigation against the Respondents’ home, but he did grant a writ of execution. The Respondents filed a consumer proposal the next day.
The Applicants sought to enforce the 2017 order and have the Court find the Respondents in contempt. The Respondents argued that they were not required to comply with the 2017 order because the filing of the consumer proposal stayed all proceedings against them.
Pursuant to s. 69.2 of the Bankruptcy and Insolvency Act (the “BIA“), the Respondents’ filing of a consumer proposal automatically stayed execution of the 2017 order. The stay remains in place until the consumer proposal has been withdrawn, refused, annulled or deemed annulled, or the administrator has been discharged. Section 69.4 of the BIA provides that a court may, in certain circumstances, lift the stay to permit a creditor to pursue its rights against a party who has filed consumer proposal. The creditor must persuade the court that it is likely to be materially prejudiced by its continued operation, or that lifting the stay is equitable on other grounds. The court must have proof of objective prejudice if the applicant is not permitted to proceed, and it must consider the possible impact of lifting the stay on other creditors and the administration of the bankruptcy.
Canadian courts have held that the criteria in s. 69.4 of the BIA may be met where the creditor’s debt will not be discharged as a result of the insolvency process, as is the case with debt or liability “arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity” and debt or liability “resulting from obtaining property or services by false pretenses or fraudulent misrepresentation” (s. 178(1) of the BIA).
In a typical motion under s. 69.4, the applicant seeking to lift the stay argues that it should have the opportunity to prove allegations underlying a cause of action listed in s. 178(1) so that it may obtain judgment against a debtor. The court reviews the creditor’s allegations to determine if the claim, if proved, would be discharged as a result of the bankruptcy or proposal. In some cases, the court may also consider evidence submitted by the creditor. This case was unusual because the Applicants had already obtained judgment on their claim. The Court had to consider whether the 2017 order was made pursuant to a cause of action listed in s. 178(1).
The Applicants alleged that half of the $100,000 advanced to the Respondents in October 2014 was a loan repayable over five years at 4% interest, and half was an investment in return for which the Applicants would receive a portion of the profits of the business. Although a partnership agreement was drafted, it was never signed. In August 2015, after the business had ceased operations, the Applicants provided the Respondents with a further $2,500 to terminate the lease on the premises used for the business.
By seeking the return of the amount loaned, the Applicants essentially sought to be put in the position they would have been in but for the Respondents’ breach of the parties’ agreement. The Applicants’ allegations did not support a finding that the Respondents obtained property from the Applicants by false pretenses or fraudulent misrepresentation. The Applicants did not allege that they were induced to invest in the Respondents’ business as a result of any fraudulent misrepresentation or act. The exemption from discharge contained in s. 178(1)(e) of the BIA did not, therefore, apply to the Applicants’ claim.
Likewise, the allegations could not support a finding that the Respondents engaged in “fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity”. To meet the criteria under s. 178(1)(d), it is not enough for a debt to have been caused by fraud, embezzlement, misappropriation or defalcation. Rather, the fraud, embezzlement, misappropriation or defalcation must have occurred in the context of a fiduciary relationship. Fiduciary relationships are rare in arms’ length commercial transactions. Such relationships are characterized by the power imbalance between the parties, and the fiduciary’s undertaking to act in the best interests of the party relying on them. There was no evidence that the relationship between the parties herein was a fiduciary one.
The judge who granted the 2017 order made no finding of any intentional wrongdoing by the Respondents. Similarly, this Court found no evidence of a scheme to defraud the Applicants—merely a failed business venture. There was no evidence that the Respondents used the funds for their personal use as opposed to the business. The Applicants’ claim did not fall under the category of debts that are not discharged under s. 178(1) of the BIA.
The Court dismissed the Applicants’ motion to lift the stay on the basis that they had not shown that they were likely to be materially prejudiced by the continued operation of the stay, or that there were other equitable reasons to lift it.
Counsel: Glen Schruder for the Applicants/Moving parties and Chantal Beaupré of Lister-Beaupré for the Respondents