Case information

Bankruptcy and insolvency – Evidence – What evidence is required to preserve a debt beyond bankruptcy – Should creditors anticipate the prospective bankruptcy of a debtor in their pleadings – Will the purpose of s. 178 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, be thwarted if Canadian bankruptcy laws allow debtors to profit from their own misdeeds and then escape debts through non-participation in default judgment proceedings – Are creditors obligated to participate in summary bankruptcy proceedings instead of seeking to obtain a declaration under s. 178(1)(d) that the debt survives bankruptcy.

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The Lawyers’ Professional Indemnity Corporation and FCT Insurance Company Ltd. sought a declaration pursuant to s. 178(1)(d) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, that the default judgment obtained in 2006 against Mauricio Rodriguez survived his bankruptcy, because it arose out of misappropriation while acting in a fiduciary capacity. The default judgment that established Mr. Rodriguez’s debt was based on his failure to comply with his payment obligations under a mortgage. The applicants’ pleadings relied on to secure that default judgment had not alleged or disclosed that Mr. Rodriguez had misappropriated funds. On the s. 178(1)(d) application, the applicants furnished new evidence showing that Mr. Rodriguez had not only breached his mortgage obligations, but had misappropriated trust funds from sale proceeds that were paid to him by his lawyer in error, and which were being held by the lawyer in trust for the benefit of the mortgagee.

Allowing the introduction of extraneous evidence that was not before the court in the summary judgment proceedings, the Ontario Superior Court of Justice application judge made an order declaring that the default judgment against Mauricio Rodriguez, a discharged bankrupt, was a debt within the meaning of s. 178(1)(d) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, and therefore survived his discharge from bankruptcy. The Ontario Court of Appeal allowed Mr. Rodriguez’s appeal, finding that the application judge erred by going beyond the information linked to the judgment debt and considering the extraneous evidence.