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News and Views — Houlden & Morawetz Insolvency Newsletter

The Registrar of the Saskatchewan Court of Queen’s Bench reviewed the applicable test to declare a bankruptcy stay inoperable so that the creditor can pursue the bankrupt for an alleged fraud. 


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Bank of Montreal (“BMO”) applied for an order declaring a bankruptcy stay inoperable so that it could pursue Mr. Scott Marasse for alleged fraud.

According to BMO, Mr. Marasse and his wife continued to borrow money under an unsecured line of credit, even though they knew or ought to have known that BMO had intended to close the line of credit when it discharged the interest against their home upon which the loan had been secured. When the Marasses each assigned into bankruptcy, BMO realized that the debt was unsecured and that it might be discharged in the bankruptcy proceeding. BMO took the position that its claim should survive the bankruptcy and accordingly, the Court ought to declare the bankruptcy stay inoperable and allow BMO to proceed with its claim.

Registrar Thompson initially considered the test for determining whether to lift the stay under both pre-section 69.4 cases and section 69.4 cases under the Bankruptcy and Insolvency Act (“BIA”). The second question was whether BMO had established that sound reasons, consistent with the scheme of the BIA, existed to support an order declaring the bankruptcy stay inoperable. Specifically, was BMO a person likely to be materially prejudiced by the continued operation of the bankruptcy stay? If the answer to the foregoing question was yes, it was then necessary to consider whether it was apparent that the action had little prospect for success.

Registrar Thompson noted that to date the case law on point has tended to focus on the categories of claims denoted by subsections 69.4(a) or (b). These provisions provide:

69.4 A creditor who is affected by the operation of sections 69 to 69.31 or any other person affected by the operation of section 69.31 may apply to the court for a declaration that those sections no longer operate in respect of that creditor or person, and the court may make such a declaration, subject to any qualifications that the court considers proper, if it is satisfied

(a) that the creditor or person is likely to be materially prejudiced by the continued operation of those sections; or 
(b) that it is equitable on other grounds to make such a declaration.

Registrar Thompson noted that although Ontario’s courts have considered the present wording of the authority to lift the stay, she was provided with no direct authority from Saskatchewan’s courts on this point. Accordingly, an analysis of jurisprudence from other jurisdictions was required to determine the applicable test.

With regard to pre-section 69.4 cases, Registrar Thompson referenced Re Bookman, (1983) 47 C.B.R. (N.S.) and Re Advocate Mines Ltd. (1984), 52 C.B.R. (N.S.) 277, both decisions of  Registrar Ferron.

In Re Bookman, Registrar Ferron identified the circumstances that trigger the court’s discretion to grant leave to proceed with a claim against the bankrupt:

1. The claim for which leave is sought, if proved, will survive the bankruptcy;

2. The claim’s prosecution will not interfere with the administration of the bankruptcy estate;

3. The claim’s prosecution will not give the creditor an unfair advantage over other creditors of the estate.

In Re Advocate Mines, Registrar Ferron characterized the types of claim that might support an application to lift the bankruptcy stay:

1. Actions against the bankrupt for a debt to which a discharge would not be a defence.

2. Actions in respect of a contingent or unliquidated debt, the proof of which and valuation has that degree of complexity which makes the summary procedure prescribed by section 95(2) of the Bankruptcy Act inappropriate.

3. Actions in which the bankrupt is a necessary party for the complete adjudication of the matters at issue involving other parties.

4. Actions brought to establish judgment against the bankrupt to enable the plaintiff to recover under a contract of insurance or indemnity or under compensatory legislation.

5. Actions in Ontario which, at the date of bankruptcy, have progressed to a point where logic dictates that the action be permitted to continue to judgment.

With regard to section 69.4 cases, Registrar Thompson referenced First Choice Capital Fund Ltd. v. First Canadian Capital Corp., (1999), 10 C.B.R. (4th) 277, where Baynton J. endorsed the Re Advocate Mines categories of claims in the context of an analysis under section 69.4 of the current BIA. Registrar Thompson was of the view that while Baynton J.’s analysis confirmed that a claim for a debt arising out of fraudulent misrepresentation may be sufficient to support an order lifting the bankruptcy stay, the circumstances of First Choice Capital were distinguishable from the present case because they concerned civil litigation of a complexity beyond the scope of the present claim.

Registrar Thompson observed that in Re Ma, (2001) 24 C.B.R. (4th) 68 (Ont. C. A.), 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. It involves an assessment of whether sound reasons, consistent with the scheme of the BIA, exist to lift the stay. Registrar Thompson observed that in explaining the test, the Ontario Court of Appeal endorsed the position of the bankruptcy court decision in Re Francisco (1995), 32 C.B.R. (3d) 29 (Ont. Ct. J.). The Court of Appeal in Re Ma explained:

In our view there is no requirement to establish a prima facie case and no inconsistency in the case law.… Under section 69.4 the court may make a declaration lifting the stay if it is satisfied (a) that the creditor is “likely to be materially prejudiced by its continued operation” or (b) “that it is equitable on other grounds to make such a declaration.”… As stated in Re Francisco, the role of the court is to ensure that there are “sound reasons, consistent with the scheme of the Bankruptcy and Insolvency Act” to relieve against the automatic stay.

In 2011 and 2012, the Ontario Superior Court of Justice and the Ontario Court of Appeal considered the case of the Toronto Dominion Bank v. Mawji, 94 C.B.R. (5th) 77 (“Mawji SC”) and 94 C.B.R. (5th) 135 (“Mawji CA”), respectively. Mawji SC confirmed that the onus of the applicant is low at the preliminary stage of the leave application:

At this preliminary stage in the proceeding, however, it is not the role of a bankruptcy court to weigh the evidence before it. The court must limit its deliberations to assessing whether there is a total absence of evidence that would justify a conclusion that “sound reasons” do not exist.

Mawji SC acknowledged the standard of proof from Re Ma, supra, and the list from Re Advocate Mines, supra. In Mawji SC, Wilton-Siegel J. concluded that the lender had established sound reasons for lifting the stay. In doing so, Wilton-Siegel J. elaborated on the test to determine whether the court has discretion to lift the stay. An applicant must establish that it has something more than “little prospect” of demonstrating the elements required to establish the cause of action.

The Ontario Court of Appeal upheld Mawji SC, stating at paras. 3, 4, and 5 of Mawji CA:

Although there was no direct evidence on the motion of a misrepresentation or false pretences, the appeal judge held that the background circumstances leading up to the unsecured draws could lead a trier of fact to infer that, to the knowledge of the bankrupts, the Bank would not have been prepared to provide them with an unsecured line of credit. This, in turn, could support an inference that the manner of using the line of credit amounted to a false representation or false pretence.”

In this case, BMO alleged that Mr. Marasse and his wife obtained a line of credit secured on their home in 2008. In 2009, BMO received a letter from a lawyer requesting a payout figure. The money was paid and the mortgage was then discharged and the Marasses sold their home. The supporting material filed by BMO indicated that approximately $204,000 was borrowed on the line of credit after the interest secured on the home was discharged. BMO submitted that Mr. Marasse and/or his wife continued to use the line of credit after the home was sold and that the line of credit was kept in good standing. Mr. and Mrs. Marasse later assigned into bankruptcy.

After considering the facts, reasoning and conclusions in both Mawji SC and Mawji CA, supra, and Toronto Dominion Bank v. Cushing, 37 C.B.R. (5th) 60, Registrar Thompson made findings that:

1. BMO’s claim for false pretence and fraudulent misrepresentation was a claim that, if proved, would survive bankruptcy and that the Court’s discretion to lift the stay under section 69.4(a) had been triggered (Advocate Mines, supra; Choice Capital, supra; Mawji SC, supra, upheld by Mawji CA, supra);

2. BMO had alleged facts that, if proved, had something more than “little prospect” of demonstrating the elements required to establish its claim for fraudulent misrepresentation or false pretences; and

3. Accordingly, BMO had established sound reasons, consistent with the scheme of the BIA to support an order declaring the bankruptcy stay inoperable.

Registrar Thompson issued a declaration that the stay of proceedings against Mr. Scott Marasse was not to apply to BMO in respect of BMO’s claim against Mr. Marasse and BMO was granted leave to issue a Statement of Claim against Mr. Marasse.

See Houlden and Morawetz, Bankruptcy and Insolvency Law of Canada:
F§163 – Lifting the Stay


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