One of the primary reasons why people declare bankruptcy is that
upon being discharged, the bankrupt person is released from their
obligation to repay most of the debts that had existed at the time
they went bankrupt. I say most because there are certain exceptions
to this rule, debts that the Bankruptcy
and Insolvency Act itemizes as debts not released by an
order of discharge. The exceptions are listed in section 178 of
One of the notable clauses is found at section 178 (1)(d)
whereby a bankrupt is not released from "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"
(the Act is a Federal statute).
Generally speaking, a creditor is required to bring a motion
before a Registrar in Bankruptcy (on notice to the bankrupt and
trustee) seeking a declaration that the creditor's claim meets
this criteria and will not be released by the bankrupt's
discharge. There is a substantial amount of case law that goes into
the test to be met depending on the nature of the
The recent decision of Mr. Justice Pattillo in Abraham v.
McBean deals with a claim for breach of trust
against a bankrupt paralegal and whether it survives bankruptcy.
The paralegal (Ms. Abraham) was sued by Mr. McBean and a Mr.
Griffin to help with a loan transaction. Ms. Abraham allegedly
erroneously released certain funds from her trust account which she
had been supposed to hold in escrow. She was sued for breach of
contract by McBean and was found liable at trial. The trial judge,
in ruling that Ms. Abraham would also have to pay punitive damages
to Mr. McBean, held that she had also committed breach of trust by
virtue of holding the trust funds as trustee and failing to adhere
to her obligations in that regard.
Subsequently, on motion, Master Jean (sitting as a Registrar in
Bankruptcy) found that Mr. McBean's claim survived pursuant to
section 178 (1)(d) given the breach of trust finding of the trial
judge and the evident breach of fiduciary duty to Mr. McBean.
Ms. Abraham appealed. Mr. Justice Pattillo allowed the appeal,
holding that in the absence of any finding of "bad faith or
dishonesty" on the part of Ms. Abraham, the breach of trust
committed by Ms. Abraham does not fall within the definition of
section 178 (1)(d) (such as to amount to
"misappropriation" or "defalcation"). In so
doing, Justice Pattillo cited the well-known 1999 case of Simone
v. Daley from the Ontario Court of Appeal whereby the
Court had ruled that an "innocent breach" on the part of
a fiduciary does not necessarily give rise to a debt that would not
be released by a bankruptcy.
It remains to be seen if this decision will be appealed or how
it may impact future rulings on motions under s.178(1)(d) of
the Bankruptcy and Insolvency Act. This may be a
reminder to frame claims for breach of trust or breach of fiduciary
duty with some aspect of allegations of bad faith or dishonesty to
increase the likelihood of obtaining a finding that will fall
within the Act as one that is not extinguished by the
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Canadian bankruptcy regime was designed with two key purposes in mind – provide options to ‘honest but unfortunate' debtors struggling with an unmanageable financial load and create an orderly means for creditors to recover amounts owed them.
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