Canada: Ignorance May Not Be Bliss, But It Can Be Beneficial: Evidence Of The Conduct Of A Judgment Creditor Can Be Used In Certain Circumstances To Engage Section 178(1)(D) Of The Bankruptcy And Insolvency Act

Ignorance May Not be Bliss, but it can be Beneficial: Evidence of the Conduct of a Judgment Creditor Can be used in Certain Circumstances to Engage Section 178(1)(d) of the Bankruptcy and Insolvency Act and Protect a Judgment from an Order of Discharge

The Defendant was a dentist who had executed a personal guarantee on July 7, 2011 in favour of the Plaintiff (the "Bank") in order to secure payment of the indebtedness of the Defendant's professional corporation. The Bank made a demand for payment on the guarantee, and subsequently brought an action against the Defendant (the "First Action").The Bank was successful on a motion for summary judgment and judgment was granted against the Defendant.

The First Action, the motion for summary judgment, and the judgment made no reference to fraudulent misrepresentation or false pretences on the Defendant's part, necessary to engage section 178(1)(e) of the BIA.

The Defendant was adjudged bankrupt on December 2, 2013 by petition issued by the Bank.

After lifting the stay of proceeding caused by the Defendant's bankruptcy, the Bank commenced a new action against the Defendant for fraud and fraudulent misrepresentation in relation to the same debt as the First Action (the "Second Action"). The Bank also claimed for declaratory relief pursuant to section 178(1)(e) of the BIA that would allow the judgment to survive an order of discharge. The Bank submitted that after the Court rendered judgment in the First Action, the Bank became aware of fraud and fraudulent misrepresentations on the part of the Defendant, and that was why it brought the Second Action instead of including those claims as part of the First Action.

The Defendant brought a motion for summary judgment of the Second Action, and took the position that there was no genuine issue requiring the trial as the Second Action sought to reconstitute the First Action's judgment debt in a way that would survive the Defendant's bankruptcy, despite not advancing any claims of fraud contemporaneously with the First Action.

Accordingly, there were two issues before the Court:

  1. Whether the Bank could lead evidence in the Second Action that was outside of:
  • the facts pleaded in support of the First Action;
  • the evidence presented at the time to secure the judgment debt in the First Action; and
  • the reasons that were given by the Court in granting judgment in the First Action
  1. If so, whether there was a genuine issue requiring a trial

The Defendant argued that the Bank could not lead evidence outside of the confines of the facts, evidence and reasons provided in the First Action, in accordance with the Ontario Court of Appeal's recent decision in Lawyer's Professional Indemnity Company v. Rodriguez, 2018 ONCA 171 ("Rodriguez"). While the Bank agreed that Rodriguez generally barred the use of outside evidence, when determining if a claim engaged section 178(1) of the BIA, it argued that Rodriguez only dealt with circumstances where the Plaintiff already knew about the fraudulent behavior prior to bringing the original action or obtaining judgment, and elected not to pursue claims in fraud. Accordingly, the Bank submitted that the present circumstances, where the Bank was not aware of the alleged fraudulent behavior during the course of the First Action, and could not have discovered it with reasonable diligence, was distinguishable.

The Court agreed with the Bank. After reviewing Rodriguez, as well as other decisions dealing with this issue, the Court found that prohibiting a Plaintiff from leading evidence that was "extraneous" – or outside of the facts, evidence and reasons for judgment of the prior proceeding may be unfair to judgment creditors who did not know or could have reasonably discovered conduct which would engage section 178(1) of the BIA, and runs contrary to the policy considerations underlying section 178(1).

Accordingly, the Court found that the circumstances of the case were distinguishable from Rodriguez, and that creditors are not barred from using extraneous evidence where they did not know of the conduct engaging section 178(1) of the BIA, and could not have discovered it with reasonable diligence.

After finding that Rodriguez had no application to the present facts, the Court determined that there were genuine issues for trial, including whether the Defendant knew various representation he made to the Bank regarding his finances were false, as well as whether the Bank relied upon those representations in extending credit to the Defendant. As a result, the Court dismissed the motion for summary judgment.

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