Bankruptcy Relief for Breach of Trust

Bankruptcy relief for breach of trust is possible. A debt owed due to a breach of trust is extinguished by a discharge from bankruptcy (or completion of a consumer proposal) if it is shown that there has been no element of fraud. A recent appeal of an earlier Ontario decision was successful in overturning a finding that a breach of trust by a paralegal who later filed for bankruptcy fell within those debts that survive a bankruptcy.

Initial Court Ruled the breach of Trust Survived Discharge

In 2006 a paralegal received $60,000 from an investor to be advanced as a second mortgage on a property in a borrowers name. It appears that without any further instructions from the lender, the mortgage was signed and registered in the name of a numbered company instead of as a personal debt of the individual borrower. The mortgage was later defaulted on and the lender could not recover from the individual borrower. The court initially ruled that this breach of trust by the paralegal survived the bankruptcy discharge by virtue of Section 178(1)(d) of the Bankruptcy and Insolvency Act (BIA) which states that an order of discharge does not release the bankrupt from “…any debt or liability arising out of a fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity…”.

Appeal Court ruled no element of fraud

However, the appeal court relied on a 1999 case of Simone v. Daley wherein the judge in the court ruling stated the following:

“I am not persuaded that the exception to a release of liability upon a bankruptcy discharge which is provided for in paragraph 178(1)(d) of the BIA should be extended to conduct which does not display at least some element of wrongdoing or improper conduct on the part of the fiduciary in question in the sense of a failure to account properly for monies or property entrusted to the fiduciary in that capacity or inappropriate dealing with such trust property. Had Parliament intended that any innocent breach of an obligation on the part of fiduciary would give rise to a debt that would not be released by a discharge from bankruptcy it could very easily have said so, by providing that an order of discharge does not release the bankrupt from any debt or liability arising from a breach of fiduciary obligation. It did not do so. It chose to couch the types of debts or liabilities “while acting in a fiduciary capacity” which would attract the exceptions of subsection 178(1), in the context of debts or liabilities arising from fraud, embezzlement or misappropriation, as well as defalcation.”

At G. Slocombe & Associates Inc. we have encountered numerous bankruptcy filings where a creditor, or their lawyer, makes the suggestion that a debt survives the bankruptcy because of this section. In most cases, there is no real element of fraud or intention to defraud. More often than not, the debt arose through inadvertence, sloppiness or a desperation to stay afloat during the final days of a business (eg. using deposit funds from new purchasers to pay bills related to previous projects). It is often a matter of degree and in the end it is up to the court to decide. It might have been a different story for the paralegal in this case if for example there had been a series of similar transactions.

Call us today if you wish to discuss your financial situation and options that may be available to you.