Considerations If You Want A Claim Grounded In Fraud To Survive A Debtor's Bankruptcy

• Published date: 16 July 2021
• Subject Matter: Litigation, Mediation & Arbitration, Criminal Law, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Trials & Appeals & Compensation, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Siskinds LLP
• Author: Ms Barbara VanBunderen

Two recent cases, Bank of Montreal v. Mathivannan, 2021 ONSC 2538 (CanLII) and Johansen v Wallgren, 2021 ABCA 234 (CanLII), highlight some procedural pitfalls to avoid when trying to have a claim survive a debtor's discharge.

When a debtor files for bankruptcy, on their discharge they will be released from all provable claims in bankruptcy except those that fall within section 178(1) of the Bankruptcy and Insolvency Act. The onus is on the creditor to prove, on a balance of probabilities, that its claim falls within one of the provisions of section 178(1).

Where fraud is involved, creditors rely on the provisions found in subsections 178(1)(d) and/or (e) which provide as follows:

(d) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity or, in the Province of Quebec, as a trustee or administrator of the property of others.

(e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim.

The following are some things to keep in mind for creditors who want to see their claim survive a debtor's bankruptcy:

1. Make sure that your pleadings and other court material contain all of the required elements

The Ontario Superior Court of Justice in Mathivannan refused to grant a creditor a declaration that its debt fell within section 178(1). The declaratory relief sought was part of a motion for default judgment under Rule 19.05 of the Rules of Civil Procedure. Judgment on the claim as liquidated damages was granted; however, the court found that the facts deemed to have been admitted in the statement of claim, along with the evidence in the supporting affidavit filed on the motion, were not sufficient to support a finding that the debt arose from either "fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity" or by "false pretences or fraudulent misrepresentation". Had the evidence allowed for a finding of fraud, that finding could have been used to get the section 178(1) declarations if the debtor ever ended up bankrupt.

The Alberta Court of Appeal in Wallgren discussed what a court considers when deciding if an existing judgment obtained prior to bankruptcy comes within section 178(1) and therefore survives a debtor's discharge from bankruptcy. Included are the preamble to the judgment, the materials filed that led to the obtaining of...