Creditor Seeks Fraud Ruling to Head off Bankruptcy Filing

In a recent Ontario civil case, the court was asked to determine if various damages came within those defined in Section 178 of the Bankruptcy and Insolvency Act. The plaintiff had sought damages for negligence, breach of contract, negligent/fraudulent misrepresentation, assault, and for punitive and exemplary damages – in other words the whole nine yards.

The defendant had been hired to do some renovation work on the plaintiff’s cottage. The work was apparently not done satisfactorily and the defendant was removed from the job and sued by the plaintiff. Prior to the law suit being launched, the defendant told the plaintiff that if the court awarded any damages he would simply file for bankruptcy.

Bankruptcy as a Negotiating Ploy

While threatening bankruptcy may have been an interesting negotiating ploy, it really only works when you have nothing to lose in a bankruptcy, which may have in fact been the case here. As a counter tactic, the plaintiff may have raised the stakes by suing for all kinds of damages, including those which are not discharged by bankruptcy, including:

  • Any debt or liability arising out of fraud, embezzlement, misrepresentation or defalcation while acting in a fiduciary capacity (Section 178(1)(d);
  • Any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation (Section 178(1)(e); and,
  • Any award for damages by a court in civil proceedings in respect of bodily harm intentionally inflicted (Section 178(1)(a.1)(I). (Apparently the builder and owner had had some heated exchanges but physical harm had never occurred).

After hearing the evidence and also being fully advised that the plaintiff was seeking these awards in order to circumvent a subsequent bankruptcy filing by the defendant, the court granted a judgement for a lesser amount than asked for but also awarded some costs. It specifically addressed claims related to Section 178 debts and found that none of the damages fell within these classes off debts. While the court sympathized with the plaintiff, it could not ignore the law.

There were obviously very hard feelings involved in this case, as there often is in any civil litigation. Although it is common for the party with the loss to feel like they have been defrauded, or at least severely taken advantage of, it is actually a fairly high threshold for a debt to proven as being fraudulent.

If you are involved in civil litigation and would like more information regarding these issues, call us today for a consultation on your situation.