In a trust claim, it has become commonplace to seek a request
for a declaration that, if there is judgment for breach of trust,
the judgment will survive the subsequent bankruptcy of the judgment
debtor. Will that request for relief ever be granted? This question
was answered, in part, in B2B Bank v. Batson, a 2014 Ontario Superior
Court of Justice decision.
Section 178(1)(d) of the Bankruptcy and Insolvency Act
states that an order of discharge does not release a bankrupt from
a debt arising out of fraud, embezzlement, misappropriation, or
defalcation while acting in a fiduciary capacity. Under the trust
sections of the Construction Lien Act, when a payor receives money,
the payor holds that money in trust for the person with whom it
contracted, one rung below it on the construction ladder. Once the
payor breaches that trust, the payor falls afoul of section
This was not a breach of trust action; it was an action arising
out of a cheque kiting scheme perpetrated by a former employee of
the bank, but it had the same effect. The defendant consented to
judgment being rendered against her; after all, she did the
dastardly deed. The plaintiff tried to obtain the declaration
regarding bankruptcy. The judge refused to grant it. Why?
The judge held, "The question whether certain claims
survive the discharge order does not arise in the context of an
application by the bankrupt for a discharge. Rather, it is more
properly determined when the creditor subsequently seeks to enforce
the pre-existing liability or judgment debt. If the debtor relies
on his or her discharge as a basis for resisting enforcement of the
pre-bankruptcy liability, the issue of the applicability of the
exemptions contained in s. 178(1) should be determined at that
time, based upon the established facts (including any previous
declaration concerning the source of the liability) as well as the
legal regime in force at that time."
In other words, since the defendant had not yet become a
bankrupt, the judge was not going to grant the requested
declaration merely on the off chance that the defendant could, in
future, assign into bankruptcy.
However, the judge did not allow the creditor to leave empty
handed. He stated, he would include a "declaration that the
judgment debt arose by reason of the defendant having committed a
fraudulent act while acting in a fiduciary capacity, a disposition
that is consistent with the scope of available declaratory relief,
based on currently existing facts and circumstances."
In our statements of claim for breach of trust, we include a
request for the type of declaration that the judge granted and a
request for the declaration that the judge refused to grant. We
include a request for a declaration that any judgment survives
bankruptcy just in case the defendant assigns into bankruptcy
between the date of the claim and the date of judgment. In that
situation, the bankruptcy would not be a mere possibility. It would
be real and the declaration request would no longer be
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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