In the recent decision of Compagnie d’assurance d’hypothèques Sagen Canada c. Cyr 2023 QCCS 4763, the Superior Court of Québec rendered an important judgment clarifying the circumstances in which a false declaration can prevent a claim from being discharged from bankruptcy.
In principle, the bankruptcy process will conclude with the debtor’s discharge from the totality of his debts, but in its section 178(1), the Bankruptcy and Insolvency Act enumerates a series of exceptions, including the case of “any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim” (subsection 178(1)(e)).
Despite a widespread belief to the contrary, it is not sufficient for a creditor to simply allege fraude or misreprensentation on the part of the debtor.
The circumstances that give rise to this exception are the following :
This type of debate is usually in issue when a creditor presents before the court a motion under section 69.4 BIA, in order to seek the lift of the stay of proceedings.
When the creditor’s claim is based on a preexisting judgment issued by a civil court that contains no explicit reference to subsection 178(1)(e), the bankruptcy court will generally limit itself to review the judgment’s reasoning, without holding a new trial or hearing additional evidence. However, in the case of Montréal (Ville) c. Restructuration Deloitte inc. 2021 CSC 53, the Supreme Court of Canada established that « …a court must generally make its own findings of fact […]. This is true, for example, even where findings possibly linked to fraud have been made in a previous trial or where a default judgment or a consent to judgment might have contained such findings. It can be inferred by analogy from the case law on s. 178(1)(e) of the BIA that the courts have been particularly consistent and rigorous in assessing the evidence presented to them in this…”. For example, the simple signature of an acquiescence to judgment regarding a monetary claim does not necessarily imply that there has been an admission regarding any allegations of fraudulent misrepresentation.
However, if no previous judgment exists, then a real hearing may be held in the case of a motion based on 69.4 BIA, with testimony and documentary evidence, since the court will be called upon to determine whether or not the creditor’s claim fits in one of the exceptions of section 178(1) BIA.
Finally, it should be remembered that even if the stay of proceedings is granted, it should only take effect upon the trustee’s discharge, rather than the debtor’s.
Reference : Compagnie d’assurance d’hypothèques Sagen Canada c. Cyr 2023 QCCS 4763 https://canlii.ca/t/k1txd
Attorney involved : Me Jean-Philippe Gervais
An important judgment in the field of private international law was issued by the Superior Court of Québec on November 14, 2023, in the matter of TCA Global Credit Master Fund c. Apelian 2023 QCCS 4924.
This is a rare case involving the interpretation of subsections 3155(3) and (5) of the Civil Code of Québec, which state that a foreign judgment will generally be recognized by the courts of Québec, unless : « (3) the decision was rendered in contravention of the fundamental principles of procedure; (5) the outcome of a foreign decision is manifestly inconsistent with public order as understood in international relations. ».
In this case, the plaintiff sought the recognition of a judgment issued by the courts of Florida, in the United States. However, the financing contracts on which were based the legal proceedings contained the following provisions :
The contracts were subject to the laws of Nevada, but granted jurisdiction to the courts of Florida, which ruled that pursuant to Nevada law, such provisions were valid. Consequently, the grounds of defence raised by the defendant in Florida, in particular those based on false representations and fraud, were dismissed at the preliminary stage and summary judgment was issued in favour of plaintiff.
Before the Superior Court of Québec, the defendant argued that :
In her reasons for judgment, Justice Gabrielle Brochu ruled in favour of defendant and determined that waiving in advance one’s grounds of defence, essentially all claims of any nature along with applicable procedural guarantees, conflicted with Québec public order.
From a private international law perspective, Justice Brochu then stated that the issues went further than simply dealing with a commercial claim against a guarantor, and that a recognition of the Florida judgment would countenance and validate the advance waiver by a party of any and all rights it might enjoy under the law, including those related to fraud and false representation which may even have affected its consent to enter into the contractual relationship in the first place.
As a result, the Court concluded that the Florida judgment illustrated such a profound divergence with the norms of public order applicable under Québec law that it could not be recognized and thus conflicted with the norms of international public order.
The importance of this ruling resides in the fact that the Court clearly established that there are limits not to cross, regarding the elimination of both procedural and substantive rights, at the risk otherwise of conflicting so severely with norms of public order that a recognition of the foreign judgment will be refused.
Reference : TCA Global Credit Master Fund c. Apelian 2023 QCCS 4924 https://canlii.ca/t/k243w
Attorney involved: Me Jean-Philippe Gervais
In the case of Freire (Syndic de) 2023 QCCA 1065, the Court of Appeal of Québec finally resolved a thorny issue that had been troubling trustees and lawyers in the bankruptcy field for some time: is an agreement of undivided co-ownership opposable to a bankruptcy trustee? The Court of Appeal answered in the affirmative in the case of a statutorily defined “family residence” (as well as in a few other limited instances), but in the negative for all other cases.
In this file, the debtor and his companion Falardeau had acquired a property together, each holding a 50% undivided co-ownership interest. Falardeau claimed a priority status in the bankruptcy, alleging that she had contributed the totality of the funds at the time of purchase.
The contractual provisions in issue stated that: (i) each co-owner could at any time put an end to the undivided co-ownership agreement and force the sale of the property (s. 14.9) and (ii) in the event of the sale of the property, Falardeau would be paid in priority for the refund of her initial disbursement of funds along with its accruance in value (s. 14.3).
In the first instance, the Court of Appeal underlined that the bankruptcy trustee has the statutory right to put an end to a co-ownership agreement in all cases, except where the property could be defined as a “family residence” under the Civil Code of Québec (which requires the existence of a marriage) or where the debtor has waived such right, or by an express statutory provision. In the present case, the property in issue could not be qualified as a “family residence” since the debtor had stated in his bankruptcy statement of affairs that he did not reside there and was separated from Falardeau and since the parties had stipulated in s. 14.9 of their agreement that either one could at any time put an end to the undivided co-ownership agreement. In addition, the debtor and Falardeau were not married, although regarding this particular argument, the Court of Appeal declined to rule and left the door open, since a factual conclusion might be reached that “the property has been appropriated to a lasting purpose.” (s. 1030 C.c.Q.)
Secondly, the Court of Appeal ruled that section 14.3 of the undivided co-ownership agreement did not create any real (or property) right in favour of Falardeau, who only held a personal right against the debtor. By claiming a priority interest pursuant to this clause, Falardeau sought to contravene the priority order established by section 136 of the Bankruptcy and Insolvency Act and consequently was unopposable to the trustee. The publication of the undivided co-ownership agreement at the land registry office was irrelevant despite section 1014 C.c.Q. since the Bankruptcy and Insolvency Act had priority over provincial law. Finally, there was no unjust enrichment of the mass of creditors of the debtor, since Falardeau could have easily secured a priority status for her claim at the time of purchase, by publishing a hypothec over the debtor’s undivided half-interest or acquiring more than simply 50% of the property at the outset.
This ruling by the Court of Appeal confirms a principle already established in two previous rulings pleaded by the same attorney from our law firm : Malka (Syndic de), J.E. 97-385 (C.A.) and Poulin de Courval c. Société d’investissement Sidi ltée, [1997] R.D.I. 167 (Qué.C.A.).
Reference : Freire (Syndic de) 2023 QCCA 1065 https://canlii.ca/t/jzw6l
Attorney involved : Me Jean-Philippe Gervais
In TCA Global Credit Master Fund c. Apelian 2022 QCCS 2444, the Superior Court of Québec confirmed that pursuant to paragraph 3155(2) C.c.Q., a foreign judgment will not be recognized in Québec if it can still be appealed in its original jurisdiction, even if it is otherwise executory. The adoption of section 508 of the Code of civil procedure did not impact this interpretation of paragraph 3155(2) C.c.Q.
Reference: TCA Global Credit Master Fund c. Apelian 2022 QCCS 2444 https://canlii.ca/t/jq3kk
Attorney involved: Me Jean-Philippe Gervais
On October 23, 2023, the Superior Court of Québec confirmed in Propositon de consommateur de Gauthier 2023 QCCS 3997 that the court of competent jurisdiction in the judicial district where a bankruptcy or proposal was filed under the Bankruptcy and Insolvency Act has exclusive jurisdiction to hear a request to be authorized to initiate a legal claim against a bankruptcy trustee, pursuant to section 215 BIA. Pursuant to the Bankruptcy and Insolvency Act, the courts exercise a national jurisdiction, unconstrained by provincial boundaries, as established by the Supreme Court of Canada in Azco Mining Co. c. Sam Lévy & associés inc. 2001 CSC 92, which was pleaded by the same attorney from our law firm.
Reference : Proposition de consommateur de Gauthier 2023 QCCS 3997 https://canlii.ca/t/k0s03
Attorney involved : Me Jean-Philippe Gervais
In the case of Girard (Syndic de) 2014 QCCA 1922, the Court of Appeal of Québec established that the stay of proceedings that ensues from the filing of a bankruptcy or a proposal under the Bankruptcy and Insolvency Act applies to the Canada Revenue Agency and the Agence du revenu du Québec, in the same manner as it does to all other creditors. Consequently, the process which culminates in the issuance of a notice of assessment is stayed, and such notice may not be issued by the tax authorities, once the tax debtor is under the protection of the BIA. However, in practice, a “notice of assessment” may be issued to quantify the tax debt claimed by the authorities, but such “notice” will only be considered a simple statement of account and the delay to file an opposition will not begin. By analogy, it would be similar to a creditor who attaches to its proof of claim a draft Originating Demand.
To the extent that the tax authorities wish to officially engage the assessment process (which could lead to the filing of oppositions to the assessment), they will then need to present before the bankruptcy court a motion to lift the stay the proceedings, pursuant to Section 69.4 BIA.
In the subsequent case of M. Diamond & associés inc. c. Agence du revenu du Québec 2023 QCCA 250, the Court of Appeal of Québec relied on Girard to establish that the debtor remains in the position of being a “defendant” throughout the assessment process, even if his opposition is dismissed and he has to appeal the decision before the Cour du Québec, where he is technically designated as “plaintiff” according to the rules of civil procedure. The purpose of issuing a tax assessment is to quantify the amount owed to the tax authorities and allow for its enforcement, so that any oppositions or appeals by the debtor represent a contestation of such claim.
It therefore follows that when a debtor had instituted a judicial claim before the Cour du Québec prior to his bankruptcy, the proceedings are stayed automatically once the debtor avails himself of the provisions of the Bankruptcy and Insolvency Act, and the tax authorities cannot compel the bankruptcy Trustee to file an appearance or otherwise face the dismissal of the proceedings. A motion will need to be filed in order to lift the stay of proceedings pursuant to Section 69.4 BIA, although in practice, such order will rarely issue as the tax authorities have the burden of demonstrating the importance of continuing the proceedings despite the bankruptcy.
The decision in Diamond should apply without any reserve to matters pending before the Canada Tax Court, even though in practice and despite having no jurisdiction or expertise in bankruptcy matters, federal courts have often demonstrated their reticence at following the jurisprudence of the provincial superior courts when dealing with arguments put forward by the Canadian tax authorities.
Reference : Girard (Syndic de) 2014 QCCA 1922 https://canlii.ca/t/gf19h
M. Diamond & associés inc. c. Agence du revenu du Québec 2023 QCCA 250 https://canlii.ca/t/jmjpw
Attorney involved : Me Jean-Philippe Gervais