Over the last couple of weeks, a number of companies have sought Bankruptcy Protection in the USA. Today, Sbarro Pizza, a chain which is both in Canada and the USA has filed for protection from their creditors – See Newspaper Article. Quiznos – the expensive and tasty submarine sandwich store located in Canada and the USA (among other countries) is also preparing to do the same – See Newspaper Article…
Unfortunately, in the last number of years, this type of thing has become common-place. Most companies have warning signs before they have to declare bankruptcy. For instance, Quiznos had a massive debt-for equity deal only a couple of years ago which could never have survived.
And while this seems so outside of a regular persons issue it is not. There are lessons that can be learned from this. If you have debt, deal with it early. Don’t wait. If you need to file a proposal, or make a deal with your creditors, do it. If you need to file for bankruptcy, that’s fine.
This article is from 2011, it explains some of the items that can happen if you go bankrupt. Call me if you want to discuss this – I can help and refer you to the right place if I can’t.
In the bankruptcy of Scott Marasse, the registrar in Saskatchewan ruled on an order seeking leave for the Bank of Montreal (‘BMO’) to be able to proceed against a bankrupt. BMO contended that the bankrupt contined to borrow money on an unsecured line of credit, and to keep it in good standing, even though they knew that BMO would closwe it when it discharged the interest against the home which the loan had been secured against. BMO stated that this was an unsecured loan, the bankrupt knew or ought to have known, and that it rose to the level of fraud.
The registrar in her determination reviewed the law on the Stay under both Section 69.5 of the BIA, and pre-69.5.
In Re Bookman, (1983) 47 C.B.R. (N.S.) 144, Registrar Ferron explained that the bankruptcy stay’s purpose is to ensure that the trustee is able to administer a bankruptcy estate in an orderly fashion, without having to concern itself with complications arising from lawsuits against the bankrupt.
Following Bookman, the Ontario Supreme Court provided further guidance in Re Advocate Mines Ltd. (1984), where it categorized the types of claim that might support an application to lift the bankruptcy stay
In First Choice Capital Fund Ltd. v. First Canadian Capital Corp., 178 Sask. R. 100 (Sask. Q.B.), Baynton J. endorsed the Advocate Mines Ltd. categories of claim in the context of an analysis under s. 69.4 of the current BIA.
In Re Ma, 2001 CanLII 24076 (ON CA),the Ontario Court of Appeal revised the test for a declaration rendering the bankruptcy stay inoperable and in the course of doing so, explained that the test requires the establishment of something less than a prima facie case. According to the court, it involves an assessment of whether sound reasons, consistent with the scheme of the BIA exist to lift the stay.
The Superior Court, In 2011 in Mawji , confirmed that consideration of the merits of a proposed action may be appropriate if the merits are relevant to assessing whether “sound reasons” for lifting the stay exist in para. 4. But Mawji SC also confirmed that the onus of the applicant is low at the preliminary stage of the leave application
All these factors must be used to assess whether
(a) BMO a person likely to be materially prejudiced by the continued operation of the bankruptcy stay?
(b) If the answer to (a) is yes, then is it apparent that the action has little prospect for success?
The Registrar granted BMO’s application.
“The practice of sport is a human right. Every individual must have the possibility of practicing sport, without discrimination of any kind and in the Olympic spirit, which requires mutual understanding with a spirit of friendship, solidarity and fair play.” –Olympic Charter
When a person declares bankruptcy, a moratorium (stay) is put in place to preserve the integrity of the process. There are certain provisions of the Bankruptcy and Insolvency Act (BIA) that allow for the court to lift the moratorium, and allow for cases to proceed. There is a similar provision in the United States bankruptcy code, which stops actions from continuing.
Bill Clay Crafton Jr. filed for bankruptcy in the United States in September .He was a financial adviser to many, including NFL player Matt McCoy and Philadelphia Phillies Pitcher Cole Hamels. They were granted leave to pursue an action against Crafton… see thislink or this link more details.
The law suit was brought for breach of fiduciary duty, constructive fraud, fraud, deceit, fraudulent misrepresentation…there were losses for over $7.6 million dollars.
This just serves as a reminder for 2 questions that I get quite often. In Canada, if there is an action against you, or brought against you, and you have recently declared bankruptcy, the court will grant leave for the case to continue more often than not.
In Canada, if you commit fraud, and you have filed for bankruptcy or filed a proposal, the proposal or the bankruptcy may not shield you. If the court decides that whatever you have done falls under the exclusions under Section 178 of the BIA, then the action will continue.
A couple of quick case notes which I thought would be interesting to Trustees and Debtors alike…
Avery’s Trucking Inc. (Re), 2013 NSSC 302
A Trustee in this case acting in its capacity as receiver, sought to enforce its fees in priority to those of not only the unsecured creditors, but also all the creditors including the secured creditors and the crown trusts. The court did a thorough review of when it is acceptable for the Trustee to do so, including citing a couple of Ontario Superior Court actions. However, the court decided that the funds had to be released to the secured creditors, not subject to the trustee’s remuneration. There was no creditor resolution, no direction from the secured creditors to the Trustee to act in a certain manner (such as maintaining heat, collecting rent etc.). It also specifically mentions that the secured creditors property is not considered property of the bankrupt, and therefore would not be subject unless there were specific circumstances.
Witiluk v Gosselin 2013 Canlii 44808 (ON SC)
This is a case in which a person loaned money to another. While the facts aren’t that important, the judge in this case reviewed the requirements for Fraudulent Transactions under the 178(1)(e) of the Bankruptcy and Insolvency Act. The idea behind it being “false pretences” and “fraudulent misrepresentation” are virtually the same, and that each rests, on deceit. There are four required elements 1.) the bankrupt made a representation 2.) the representation was false 3.) the representation was made knowingly, without belief in its truth, or recklessly indifferent to whether it was false 4.) the creditor relied upon the representation in turning over property. It must also be done at the time of the bankruptcy, or before, not after the client had declared bankruptcy. The onus is on the person that was defrauded.
I recently read an article in The Lawyers Weekly related to Employment Law, and the impact that a fiduciary relationship may have when charges are brought. The case that was referenced in the article was Navrab Investments Inc. v. Vaidyan  O.J. No. 5704. The specific facts of the case are not important… a person was sued by his company for theft. He was stealing from the till. He was a manager of some sorts, and the company alleged that this gave rise to a level of fiduciary duty. Meaning that he was in a relationship of trust and confidence, and he had a duty to uphold that. He was stealing from the till, and using his position to right off the money he took as ‘void’ entries. Needless to say he was found guilty.
What’s very interesting is that the lawyer for the company asked that the order specifically refer to this fact, and asked for a declaration that the order survives bankruptcy under a section 178(1)(d) of the Bankruptcy and Insolvency Act. While the company’s lawyers felt that this was pertinent, it’s not clear that this type of declaration is needed. – but rather – its more expedient. If it’s in the order that the judgment would survive bankruptcy on the basis of fraud, then it would be tough to argue that this was not what the judge had intended. The ramifications here are that any person in a position that could be interpreted as instilling “trust and confidence” should be careful in their actions. The bankruptcy process, as all other law, is intended to be beneficial to people who are honest. If you steal, or cheat, then it will catch you.