178 Debts Not Released By Order Of Discharge

PRACTICE

Effect of a Discharge on Subsisting Judgments

Where there is a subsisting judgment registered against the land of a former bankrupt, the registrar may discharge the registration on the basis of s. 178(2) of the Act.

Submissions

On the Form 17 Cancellation of Charge, Notation or Filing, select Nature of Interest, Judgment (By Court Order or Certificate), and attach an image of the following:

1. a copy of the order of discharge certified by the Official Receiver;
2. a court certified copy of the assignment or bankruptcy order; and
3. a statutory declaration stating that the judgment is not an exception set out under s. 178(1) of the Act.

Land Title Act Notice

As the statutory declaration by a former bankrupt may be of limited evidentiary value, the registrar sends a notice under s. 294.6(e) or s. 303(e) of the Land Title Act before registering the discharge to the judgment creditor who registered the judgment. If the order of discharge was suspended for a specified time, or made conditional under s. 172 of the Act, the registrar must consider the effect of the suspension or condition.

CASE LAW

A judgment creditor sought an order for a declaration that her judgment survived the discharge of a bankrupt under s. 178(1)(d) and (e) of the Act. The creditor had entered into a contract with the bankrupt which contemplated the bankrupt building a house for the creditor. The creditor secured mortgage funding and made a down payment on the lot. Draws from time to time were made against the mortgage. However, the project was never completed. The bank foreclosed and the creditor lost her deposit and down payment. In a previous action where the sole issue was whether or not the bankrupt and his brother were liable in damages in their individual capacity to the creditor or whether liability attached solely to their corporation, the court concluded that the bankrupt’s intention was to deflect the mortgage draws, deposit, and down payment for the project away from their contracted and proper usage, and had misrepresented to the financiers of the project their true intention. In this action, the court found that the previous judgment fell clearly within the definition of a “debt or liability arising out of . . . misappropriation or defalcation while acting in a fiduciary capacity” within the meaning of s. 178(1)(d). Accordingly, the creditor’s application was successful, and it was unnecessary for the court to decide the application based on “false pretences or fraudulent misrepresentation” within the meaning of s. 178(1)(e) (Re Hottman, 2003 BCSC 98 (Chambers)).

A husband and wife invested the proceeds from their family home in a restaurant operated by a corporation in which the husband was the sole director, officer, and shareholder. In divorce proceedings, the wife obtained a compensation order under the Family Relations Act, R.S.B.C. 1996, c. 128. The husband did not pay the compensation as ordered and eventually made a voluntary assignment into bankruptcy. In this appeal, the court was asked to determine whether the wife’s right to recover under the compensation order survived her former husband’s bankruptcy. In order to fall within s. 178(1)(d) of the Bankruptcy and Insolvency Act, a plaintiff must establish that (1) the defendant owed the plaintiff a debt or liability; (2) the debt arose from a misappropriation or defalcation; and (3) the misappropriation or defalcation occurred while the defendant was acting in a fiduciary capacity. The court confirmed that the compensation order was a debt owing to the plaintiff. It found that the defendant’s mismanagement of monies belonging to the company constituted a misappropriation that it defined as conduct with some element of wrongdoing or improper accounting. The court also found that the defendant held half of the shares in the corporation on a resulting trust for the plaintiff. In the circumstances of this case where the two shareholders were in a special relationship of trust and dependency, the court held that the defendant owed the plaintiff fiduciary obligations. In the result, the court ordered that, under s. 178(1)(d), the defendant’s discharge from bankruptcy did not release him from his liability to pay the amount owning under the compensation order to his former wife (Valastiak v. Valastiak, 2010 BCCA 71).

The defendant was receiving disability benefits from her employer’s health trust. The defendant also applied for and received a lump sum payment from the Workers’ Compensation Board. Under the terms of the health trust, the defendant was obliged to pay any money received from WCB to the health trust. When the defendant refused to repay the money, the plan administrator sued and took default judgment. The defendant then made an assignment in bankruptcy and was later discharged. In this action, the health trust sought an order that the amount owed survived the defendant’s bankruptcy under s. 178(1)(d). Following Valastiak, the court held that the defendant knew she was not entitled to keep the money from the WCB and as a consequence her actions involved some element of wrongdoing, improper conduct or improper accounting and thus constituted a misappropriation. The court also found that the defendant was acting in a fiduciary capacity in relation to the health trust when she applied for and received compensation from the WCB (Armstrong v. Lang, 2011 BCCA 205).