



COURT OF APPEAL FOR ONTARIO

CITATION: Korea Data Systems (USA), Inc. v. Aamazing
    Technologies Inc., 2015 ONCA 465

DATE: 20150624

DOCKET: C55916

Hoy A.C.J.O., Cronk and Watt JJ.A.

BETWEEN

Korea Data Systems (USA), Inc.

Plaintiff (Appellant)

and

A
amazing Technologies
    Inc. carrying on business as Ajay Amazing Technologies Inc.,
Jay Chiang a.k.a.
    Jay Tien Chiang a.k.a. Tienchieh Chiang
, Julius Chiang, Christina Chiang a.k.a.
    Christian Chiang a.k.a. Suh Mei Tasi, a.k.a. Suh Mei Tsai, a.k.a. Christina Suh-Mei
    Tsai, a.k.a. Suh-Mei Tasi Chiang, a.k.a. Christina Suh-Mei Chiang a.k.a. Suh-Mei
    Chiang, and Dong Liang a.k.a.

Tung Liang

Defendants (Respondent)

AND BETWEEN

Mendlowitz
    & Associates Inc.

as Trustee
    of the Estate of Jay Tien Chiang, a Bankrupt,

and
Korea Data Systems (USA), Inc.

Plaintiffs (Appellant)

and

J
ay Tien Chiang
    a.k.a. Jay Chiang a.k.a. Tienchieh Chiang, Christina Chiang a.k.a. Suh Mei Tasi
    a.k.a. Christian Chiang a.k.a. Suh Mei Tsai a.k.a. Christina Suh Mei Tsai a.k.a.
    Suh Mei Tasi Chiang a.k.a. Christina Suh-Mei Chiang a.k.a. Suh-Mei Chiang
, Chun Chun
    Wu, Jie Chu Wu, Chen Cheng-Yueh Tsai, Yu Chang Chiang a.k.a. Y.C. Chiang, En Fu
    Chiang, Brenda Chang, Samson Chang, David Cheng, Everview Inc., 961266 Ontario Inc.,
    1204360 Ontario Inc., 1243723 Ontario Inc., Aamazing Technologies Inc., Wen
    Wang Chiang a.k.a. Wen Chiang a.k.a. Wen Wang, Crystalview Technology Corp., E.C.
    Holdings Ltd., Telepower International (Canada), Inc., Best Buy Electronics Inc.,
    Su Feng Tsai a.k.a. Tsai Su Feng, Tsai Zheng Li, Tsai Zheng Ying, Asia Pacific Gateway
    (H.K.) Ltd., Century Group Holdings Ltd., Albany Investments Ltd., Mei Huang, Winner
    International Group Limited, Huang Chi Lung, Min Huang, Wainwright Ventures Ltd.,

New Global Investment Limited and Floratino Limited

Defendants (Respondents)

Scott C. Hutchison, Matthew R. Gourlay and Sherif M.
    Foda, for the appellant Korea Data Systems (USA), Inc.

J. Thomas Curry and Constanza Pauchulo, for the
    respondent Jay Tien Chiang

Catherine Francis and Mark A. Freake, for Mendlowitz
    & Associates Inc., in its capacity as Trustee of the Estate of Jay Tien
    Chiang, a Bankrupt

No one appearing for the respondent Christina Chiang

Heard: April 15, 2015

On appeal from the judgment of Justice Frank N. Marrocco of
    the Superior Court of Justice, dated July 9, 2012, with reasons reported at
    2012 ONSC 3922.

Cronk J.A.:

[1]

The
Bankruptcy and Insolvency Act
, R.S.C., 1985, c. B-3 (the 
BIA
)
    is a comprehensive code relating to insolvent persons.  It seeks to achieve twin
    goals: the equitable distribution of a bankrupts assets among the bankrupt
    estates creditors and the financial rehabilitation of insolvent individuals:
Husky
    Oil Operations Ltd. v. Minister of National Revenue
, [1995] 3 S.C.R. 453,
    at para. 7;
Canada (Superintendent of Bankruptcy) v. 407 ETR Concession
    Company Ltd.
, 2013 ONCA 769, 118 O.R. (3d) 161, at paras. 27  30, leave
    to appeal to S.C.C. granted, 2014 CanLII 23006, appeal heard and reserved
    January 15, 2015.  In furtherance of these objectives, s. 178(2) of the
BIA
provides that an order of discharge releases the bankrupt from all claims
    provable in bankruptcy.

[2]

However, s. 178(1) of the
BIA
creates limited exceptions to
    this general rule.  These exceptions are designed to ensure that purposeful
    wrongdoers cannot take unjustified advantage of the bankruptcy regimes
    protections.  This appeal concerns the scope of the exception in s. 178(1)(d). 
    It reads:

An order of discharge does not release the bankrupt from

.

any debt or liability arising out of fraud,
    embezzlement, misappropriation or defalcation while acting in a fiduciary
    capacity or, in the Province of Quebec, as a trustee or administrator of the
    property of others.

[3]

In this case, the trial judge held that s. 178(1)(d) applies only if the
    bankrupt owed a fiduciary duty to the creditor who seeks to obtain declaratory
    relief under s. 178(1)(d).  In other words, s. 178(1)(d) requires the fiduciary
    duty in question to have been one that the bankrupt owed directly to the
    claiming creditor.

[4]

The narrow issue on this appeal is whether the trial judge erred in this
    construction of s. 178(1)(d).  The appellant, Korea Data Systems (USA), Inc. (KDS
    USA), argues that a creditor of a bankrupt may rely on s. 178(1)(d) in any
    case in which the debt in question arose out of one of the enumerated activities
    in s. 178(1)(d) while the bankrupt was acting in a fiduciary capacity, even if
    the bankrupt did not owe a fiduciary duty directly to the creditor bringing the
    claim.

[5]

This interpretive issue is a matter of first impression for this court. 
    For the reasons that follow, I agree with the trial judges construction of s.
    178(1)(d).  Accordingly, I would dismiss the appeal.

I.        Background in Brief

(1)

Litigation History

[6]

The litigation between the parties has a tortured and protracted history
    in the courts of both Ontario and California.  Much of that history is irrelevant
    to this appeal.  The following outline of the pertinent facts will suffice to
    place the appeal in context.

[7]

The major players in this litigation were involved in the computer
    monitor manufacturing and sales business in California in the 1990s.  Korea
    Data Systems Co. Ltd. (KDS Korea) was formed in Korea in about 1983 as a
    manufacturer of computer monitors and accessories.  It was controlled by two
    brothers, Jung Koh and Dae Soo Koh.

[8]

John Hui, a friend of the Koh brothers, began selling KDS Korea computer
    monitors in California in late 1987 or early 1988.  Mr. Hui, together with
    Julius Chiang and a third individual, incorporated a company, Amazing
    Technologies Corp. (ATC), in 1989.  ATC intended to bring computer monitors 
    including ones manufactured by KDS Korea  to market under ATCs own brand
    name.

[9]

That same year, and apparently unbeknownst to Mr. Hui, Julius Chiangs
    brother, the respondent Jay Chiang, formed a separate company known as Aamazing
    Technologies Inc. or Ajay Amazing Technologies Inc. (Aamazing).

[10]

Mr.
    Hui first learned of Aamazings existence within about one year of ATCs
    incorporation.  He discovered that one of ATCs suppliers had shipped computer
    monitors to Aamazing, which had declined to pay for them.  Since the supplier
    believed that Mr. Hui controlled Aamazing, it refused to supply any further monitors
    to ATC.

[11]

Mr.
    Hui subsequently learned that his business partners brother owned Aamazing. 
    This damaged the relationship between the two men.  Soon thereafter, Mr. Hui
    gave up his ownership interest in ATC.  After his departure, Julius Chiang
    owned 50% and the Koh brothers together owned the remaining 50% of the
    company.  Jay Chiang was a director and officer of ATC.

[12]

In
    1992, the Koh brothers and Mr. Hui incorporated KDS USA for the purpose of importing
    KDS Koreas computer monitors and selling them to distributors in North
    America.

[13]

In
    June 1995, Mr. Hui purchased KDS USA from the Koh brothers.

(a)

Litigation in California

[14]

By
    March 1993, the KDS companies and the Koh brothers had sued ATC, Aamazing and the
    Chiang brothers in California for, among other things, amounts allegedly owing
    on unpaid invoices.

[15]

In
    September of that year, the parties entered into a handwritten settlement
    agreement (the Settlement Agreement), ending all outstanding litigation.   Pursuant
    to the Settlement Agreement, ATC apparently paid approximately $4 million USD
    to KDS Korea and KDS USA released a further shipment of computer monitors to
    ATC.

[16]

Unfortunately,
    the settlement fell apart.  Each side accused the other of breaching its terms. 
    In May 1994, the KDS companies and the Koh brothers commenced another action in
    California against ATC, Aamazing and the Chiang brothers, claiming damages for
    breach of the Settlement Agreement and amounts owing on unpaid invoices.

[17]

The
    action was tried on January 26, 1998.  Julius Chiang defended the action and
    testified at trial.  Jay Chiang initially defended the action but later decided
    not to defend the claim.  He did not appear at trial.

[18]

The
    California court found that Jay and Julius Chiang were alter egos of ATC; that
    they had controlled [ATC] and used it for their benefit to the detriment of
    the corporation and its other shareholders; that they had manipulated [ATC]
    to take advantage of their control of it; and that they had used ATC as their personal
    play thing and piggy bank.

[19]

The
    California court further held that the Chiang brothers had acted in bad faith;
    that they had violated their fiduciary duties as officers and directors to
    [ATC] and acted for their self interest rather than the corporate self
    interest; that [they] colluded together to manipulate [ATC] to defraud the K[oh]
    brothers, KDS [Korea] and KDS-USA and that [t]hey wrongfully used their
    control of [ATC] to further this fraudulent scheme.

[20]

The
    Chiang brothers were held personally liable to KDS Korea for the outstanding
    amount owed under the Settlement Agreement because they had signed it in their
    individual capacities  as well as on behalf of ATC and Aamazing  and had
    failed to honour their obligations under it in full.

[21]

They
    were also held personally liable to KDS Korea for the same amount because they
    were found to be alter egos of ATC.  On the same basis, they were held
    personally liable to KDS USA for the amount of unpaid invoices pertaining to
    computer monitors received by ATC and/or Aamazing.

[22]

Notably,
    the California court did not find that either of the Chiang brothers owed a
    fiduciary duty to KDS Korea or KDS USA or that they had breached such a duty. 
    As I will explain, this is a matter of significance to this appeal.

[23]

In
    the result, on April 20, 1998, the KDS companies obtained judgment against ATC,
    Aamazing, and the Chiang brothers personally in the approximate amounts of $6.4
    million USD (KDS Korea) and $3.27 million USD (KDS USA) for sums owing under
    the Settlement Agreement and unpaid invoices (the 1998 California Judgment). 
    Because he did not appear at trial, default judgment was entered against Jay
    Chiang.  He did not appeal.

[24]

That,
    however, was not the end of the matter.  On March 20, 2004, KDS USA obtained a
    second default judgment in California.  This judgment issued against Jay
    Chiangs wife Christina, and others, for the amount of $5 million USD on
    account of fraudulent conveyances and the improper transfer of funds that KDS
    USA said could have been used to satisfy Jay Chiangs debt under the 1998 California
    Judgment (the 2004 California Judgment).
[1]


(b)

Litigation
    in Ontario

[25]

On September 28, 1998, Jay Chiang filed an assignment in bankruptcy in
    Ontario.  He declared the 1998 California Judgment as a liability.  Mendlowitz
    & Associates Inc. (the Trustee) is the appointed trustee in bankruptcy
    for Jay Chiangs estate.  Jay Chiang remains an undischarged bankrupt to date.

[26]

KDS
    Korea and KDS USA both filed proofs of claim in Jay Chiangs bankruptcy
    pursuant to the 1998 California Judgment.  In addition, on October 5, 1998, they
    commenced proceedings in Ontario against the Chiang brothers and Aamazing,
    seeking to enforce the 1998 California Judgment (the Enforcement Action).  Among
    other relief, they sought a declaration that Jay Chiangs debt under the 1998 California
    Judgment would survive his discharge from bankruptcy under s. 178(1)(d) of the
BIA
.

[27]

By
    court order dated November 1, 1999, the KDS companies obtained leave under the
BIA
to continue the Enforcement Action against Jay Chiang and to enforce any
    judgment obtained, on the basis that Jay Chiangs judgment debt to them was
    grounded in fraud.

[28]

The
    following year, on July 28, 2000, KDS Korea, KDS USA and the Trustee issued a
    notice of action in Ontario against Jay Chiang, Christina Chiang and various
    relatives and associated corporations seeking damages in the amount of $10
    million for alleged conspiracy and fraudulent conveyances (the Fraudulent Conveyances
    Action).

[29]

On
    August 18, 2008, KDS Korea assigned its interest in both Ontario actions to KDS
    USA.

[30]

The
    Ontario litigation involving the KDS companies, the Trustee and the Chiangs has
    persisted for more than a decade.  It has generated an extraordinary number of
    court attendances, related proceedings in California, Hong Kong and elsewhere,
    dozens of witness examinations under the
BIA
, numerous reported
    decisions and, as I will explain, three contempt proceedings against the
    Chiangs.  This appeal is simply the latest foray before the courts of this
    province in the seemingly endless litigation war among the parties.

(2)

Decision Under Appeal

[31]

The
    Enforcement and Fraudulent Conveyances Actions were tried together before
    Marrocco J. (as he then was) of the Superior Court of Justice over
    approximately 51 days in 2011.

[32]

KDS
    USA was partially successful in the Enforcement Action.  The trial judge found
    that it was entitled to enforce the 1998 California Judgment against Jay Chiang
    for the full judgment amount of about $9.7 million USD.  However, as I have
    already said, he declined to issue a declaration that the debt owed to KDS USA survived
    Jay Chiangs eventual discharge from bankruptcy by reason of s. 178(1)(d) of
    the
BIA
.

[33]

The
    trial judge made the following critical findings in the Enforcement Action:

1)

Jay
    Chiang was never a director or officer of KDS Korea or KDS USA, nor was he a
    shareholder of KDS USA (at paras. 89 and 120);

2)

as
    a director of ATC, Jay Chiang owed a fiduciary duty to that company, but he did
    not owe a fiduciary duty to ATCs creditors or to KDS USA (at paras. 88  90, 121
    and 124);

3)

there
    was no relationship between KDS USA and Aamazing, nor did John Hui entrust
    property to Aamazing at any time (at para. 109);

4)

no
    misappropriation or defalcation, as those words are used in s. 178(1)(d) of
    the
BIA
, occurred in respect of the supply of computer monitors to
    ATC, which ATC then shipped to Aamazing, because the monitors were never
    entrusted to Jay Chiang or Aamazing (at paras. 114 - 15); and

5)

on
    his reading of the 1998 California Judgment, the California court made no
    finding of fraud in respect of Jay Chiangs indebtedness to KDS Korea under the
    Settlement Agreement entered into by him; in fact, Jay and Julius Chiang paid
    approximately one-half of the funds owed under that agreement to KDS Korea (at
    para. 110).

[34]

In
    this context, the trial judge held that KDS USA could not avail itself of the
    creditor protection afforded by s. 178(1)(d) of the
BIA
.  In his view,
    s. 178(1)(d) of the
BIA
should be interpreted as requiring that the
    fiduciary duty referred to in that subsection is owed to the creditor who is
    seeking a declaration that its debt survives the bankrupts discharge: at
    para. 123.  Since Jay Chiang owed no fiduciary duty to KDS USA, s. 178(1)(d)
    was not available to that company to obtain a declaration that his debt to it
    under the 1998 California Judgment would survive his discharge from bankruptcy. 
    That determination is the focus of this appeal.

[35]

The
    defendants were successful in the Fraudulent Conveyances Action.  No appeal has
    been taken from that decision.

II.       The Sanction Ruling

[36]

Jay
    and Christina Chiang have been held in contempt of court in Ontario on multiple
    occasions in connection with their conduct concerning the KDS companies
    attempts to collect on the 1998 California Judgment.  Three contempt trials
    involving the Chiangs were held, in 2005, 2007 and 2010.  In at least one
    instance, the Chiangs were sentenced to jail as a result of their continuing
    contempt of court.  On appeal against sentence to this court, their sentences
    were reduced to time served but their ongoing contempt was described as
    shocking and disgraceful, leading to one of the worst cases of civil
    contempt to come before this court:
Chiang (Trustee of) v. Chiang
, 2009
    ONCA 3, 93 O.R. (3d) 483, at paras. 1 and 103.

[37]

The
    trial judge in the present case presided at the third contempt trial.  At the
    conclusion of that trial, he deferred consideration of sanctions pending the outcome
    of the Enforcement and Fraudulent Conveyances Actions.  On January 26, 2015, he
    released his reasons for decision on the sanction hearing:
Mendlowitz &
    Associates Inc. v. Chiang
, 2015 ONSC 571.  His formal order was issued on
    March 30, 2015, shortly before the argument of this appeal.  I will refer to
    his reasons and his order, collectively, as the Sanction Ruling.

[38]

At
    the hearing of this appeal, Jay Chiang sought leave to file the Sanction Ruling
    as fresh evidence.  He argued that the factual findings underpinning the
    Sanction Ruling are directly relevant to the interpretive issue before this
    court and that the Sanction Ruling meets the test for admission of fresh
    evidence on appeal.

[39]

I
    make two comments.  First, the Sanction Ruling is not evidence.  It is a
    publicly available judicial decision of the Superior Court of Justice rendered
    in related judicial proceedings  namely, contempt proceedings against the
    Chiangs.  As with any other pertinent judicial decision, it may be considered
    by this court to the extent of its relevancy.

[40]

Second,
    in my view, the Sanction Ruling provides additional context to the issue on this
    appeal, that is, whether Jay Chiangs debt to KDS USA survives his eventual
    discharge from bankruptcy under s. 178(1)(d) of the
BIA
.

[41]

It
    is unnecessary to review the Sanction Ruling in detail.  I simply observe at
    this point that, based on information obtained by the Trustee after the date of
    the decision under appeal, the Trustee sought leave of the court to withdraw
    its contempt proceedings against the Chiangs.  The post-judgment information
    includes allegations made by the KDS companies former counsel in California
    that KDS Korea had been running an Enron[-]type accounting fraud and that
    John Hui acquired the shares of KDS USA from the Koh brothers in 1995 in order
    to thwart Korean securities laws.  These allegations were unknown to the
    Trustee at the time of the trial of the Enforcement and Fraudulent Conveyances
    Actions.

[42]

In
    the Sanction Ruling, Marrocco A.C.J.S.C.J. found that KDS Korea and KDS USA,
    together with John Hui, failed to make proper disclosure in the Enforcement and
    Fraudulent Conveyances Actions, thereby permitting them to inaccurately
    portray themselves as victims of [Jay] Chiangs fraud throughout the Ontario
    litigation: at para. 193.  He also found that Jay Chiang, [KDS Korea and KDS
    USA] have each attempted to take advantage of our laws while not complying with
    them: at para. 198.

[43]

At
    the least, these findings, made by the same Superior Court justice who presided
    at the trial of the Enforcement and Fraudulent Conveyances Actions, cast
    serious doubt on the depiction of KDS Korea and KDS USA as innocent creditor-victims
    of Jay Chiangs fraudulent wrongdoing.

[44]

Based
    on his findings, Marrocco A.C.J.S.C.J. rescinded the court order that had
    granted the KDS companies leave under the
BIA
to continue the
    Enforcement Action against Jay Chiang.  He also granted the Trustee leave to
    withdraw its contempt proceedings against the Chiangs, among other relief.

III.      Issues

[45]

The
    sole issue on appeal is whether the trial judge erred in concluding that Jay
    Chiangs debt to KDS USA under the 1998 California Judgment will not survive
    his eventual discharge in bankruptcy under s. 178(1)(d) of the
BIA
.
[2]

IV.     Analysis

[46]

KDS
    USA attacks the trial judges s. 178(1)(d) ruling on two fronts.

[47]

First,
    it argues that the trial judges interpretation of s. 178(1)(d) of the
BIA
undermines,
    rather than advances, the policy objective of s. 178.  It contends that a
    proper reading of s. 178(1)(d), as applied to the facts of this case, compels
    the conclusion that Jay Chiangs debt to KDS USA will survive his eventual
    discharge from bankruptcy.

[48]

Second,
    KDS USA submits that, on the undisputed findings of the California court, Jay
    Chiang breached his fiduciary obligations to ATC and used ATC to further his fraudulent
    scheme, thereby defrauding KDS USA.  KDS USA says that, on these findings, the
    requisite elements of s. 178(1)(d) are satisfied and the declaratory relief
    sought before the trial judge ought to have been inevitable.

(1)

Trial Judges Interpretation of Section 178(1)(d)

[49]

I
    turn, first, to the trial judges impugned interpretation of s. 178(1)(d).  For
    convenience, I repeat his core holding, at paragraph 123 of his reasons:

[Section] 178(1)(d) of the BIA should be interpreted as
    requiring that the fiduciary duty referred to in that subsection is owed to the
    creditor who is seeking a declaration that its debt survives the bankrupts
    discharge.

[50]

KDS
    USA contends that the trial judge erred in law by adopting a narrow
    construction of s. 178(1)(d) that undermines, rather than advances, the policy
    objective of that section  that is, to deny certain wrongdoers the protections
    of the bankruptcy regime.  KDS USA submits that s. 178(1)(d) applies to any
    debt incurred as a consequence of a bankrupts acting fraudulently while in a
    fiduciary capacity; the fiduciary duty at issue need not be owed directly to
    the creditor who claims relief under s. 178(1)(d).

[51]

I
    disagree.  In my view, the trial judge did not err in his construction of s.
    178(1)(d).  I say this for the following reasons.

[52]

First,
    contrary to KDS USAs submission, I regard the trial judges interpretation of
    s. 178(1)(d) as consistent with the purposes of both the
BIA
regime in
    general and of s. 178 in particular.

[53]

The
    purposes of s. 178(1)(d) of the
BIA
must be understood in the context
    of the overall statutory bankruptcy scheme established by the
BIA
.  In
407 ETR Concession Company
, at paras. 27  30, this court explains the
BIA
bankruptcy regime as follows:

Bankruptcy is triggered by insolvency.  It is a procedure that
    is governed by statute. The
BIA
is the comprehensive code that
    addresses bankruptcy.  Rand J. captured the essence of the bankruptcy process
    in
Canadian Bankers Association v. Attorney General of Saskatchewan
,
    [1956] S.C.R. 31, at p. 46:

Bankruptcy is a well understood procedure by which an
    insolvent debtors property is coercively brought under a judicial
    administration in the interests primarily of the creditors.  To this proceeding
    not only a personal stigma may attach but restrictions on freedom in future
    business activity may result.  The relief to the debtor consists in the
    cancellation of debts which, otherwise, might effectively prevent him from
    rehabilitating himself economically and socially.



In
Husky Oil Operations Ltd. v. Minister of National
    Revenue
, [1995] 3 S.C.R. 453, at para. 7, Gonthier J. stated that
the
    bankruptcy system serves two distinct goals: the equitable distribution of a
    bankrupts assets among the estates creditors
inter se
and the
    financial rehabilitation of insolvent individuals
.

In
The 2013 Annotated Bankruptcy and Insolvency Act
(Toronto: Carswell, 2013), at p. 2, Lloyd W. Houlden, Geoffrey B. Morawetz and
    Janis P. Sarra describe the purposes of the
BIA
as follows:

It is a fundamental purpose of the Act to provide for
    the financial rehabilitation of insolvent persons.  The Act permits an honest
    debtor, who has been unfortunate, to secure a discharge so that he or she can
    make a fresh start and resume his or her place in the business community.

The Act was passed to provide for the orderly and fair
    distribution of the property of a bankrupt among his or her creditors on a pari
    passu basis
.



The Act provides a regime whereby the creditors of the
    bankrupt will pursue their claims by collective action through the trustee so
    that the assets of the bankrupt can be realized and distributed on an equitable
    basis subject to the priorities of preferred creditors and the rights of
    secured creditors.

[Citations omitted; Emphasis added.]

[54]

As
    appears from this description of the purposes of the statute, the
BIA
seeks to strike a balance between the financial rehabilitation of insolvent
    debtors and the legitimate interests of creditors who have lost money because
    of the bankrupts conduct: see
Bank of Montreal v. Giannotti
(2000),
    51 O.R. (3d) 544 (C.A.), at paras. 11  12.  The interpretation of s. 178 of
    the
BIA
must be informed by these twin objectives.

[55]

In
Simone v. Daley
(1999), 43 O.R. (3d) 511 (C.A.), this court addresses
    the purpose and scheme of s. 178.  In his reasons, at p. 521,  Blair J. (
ad
    hoc
) (as he then was) commences his analysis of s. 178 by placing the
    section in its legislative context under the
BIA
:

An important purpose of bankruptcy legislation is to encourage
    the rehabilitation of an honest but unfortunate debtor, and to permit his or
    her re-integration into society  subject to reasonable conditions  by
    obtaining a discharge from the continued burden of crushing financial
    obligations which cannot be met.

Debts which survive a bankruptcy as a result of the provisions
    of subsection 178(1), therefore, are exceptions to this overriding principle,
    and should be addressed accordingly.  [Citations omitted.]

[56]

Justice
    Blair then adopts, at p. 522, the following analysis of s. 178, set out in
Jerrard
    v. Peacock
(1985), 57 C.B.R. (N.S.) 54 (Alta. Master), at pp. 62  63:

Considering the new start object ingrained in the Act, the
    logical interpretation of the two subsections in question is that subs. (2)
    creates the general principle (being a release of all debts) with subs. (1)
    being an exception to the general principle.  Subsection (2) [sic] establishes
    exceptions, not the principle, and must be viewed in that light
.

It is as if the section literally reads that the order of
    discharge releases the bankrupt from all claims provable in bankruptcy except
    the following and then lists the seven (now six) categories in subs. (1)
.



All of the exceptions in the section are based on what might be
    classed as an overriding social policy.  In other words, they are the kinds of
    claims which society (through the legislators) considers to be of a quality
    which outweighs any possible benefit to society in the bankrupt being released
    of these obligations.

.

Paragraphs (
d
) and (
e
) are morality concepts
    which look at conduct.  Those kinds of conduct are unacceptable to society and
    a bankrupt will not be rewarded for such conduct by a release of liability.

[Emphasis added.]

[57]

As
Simone
makes clear, s. 178 has two related components.  Section 178(2)
    sets out the controlling principle that a bankruptcy discharge releases the
    bankrupt from all claims provable in bankruptcy.  Section 178(1), in turn,
    establishes specific exceptions to this principle, which must be construed in
    the context of the societal aim of encouraging the financial rehabilitation of
    debtors. The exceptions have a limited but important purpose: to ensure that
    certain wrongdoers do not benefit from the protections afforded by the
    bankruptcy regime.

[58]

That
    this is the import of s. 178 is buttressed by the Supreme Court of Canadas
    decision in
Schreyer v. Schreyer
, 2011 SCC 35, [2011] 2 S.C.R. 605. 
    In that case, the court comments, at paras. 19  20, regarding the effect of a
    debtors bankruptcy:

The very design of insolvency legislation raises difficult
    policy issues for Parliament. Legislation that establishes an orderly
    liquidation process for situations in which reorganization is not possible,
    that averts races to execution and that gives debtors a chance for a new start
    is generally viewed as a wise policy choice.  Such legislation has become part
    of the legal and economic landscape in modern societies.  But it entails a
    price, and those who might have to pay that price sometimes strive mightily to
    avoid it.  So creditors seek to obtain security or third-party guarantees.  In
    other cases, statutory exemptions from the application of the
BIA
may
    apply.
However, the more exemptions there are, the less likely it is that
    the basic policy objectives of insolvency legislation can be achieved
.

As a consequence, the interpretation of the BIA requires
    the acceptance of the principle that every claim is swept into the bankruptcy
    and that the bankrupt is released from all of them upon being discharged unless
    the law sets out a clear exclusion or exemption
.  [Emphasis added.]

[59]

Thus,
    the starting point for analysis of s. 178 is that all claims against a bankrupt
    are swept into the bankruptcy and are released upon the bankrupts discharge unless
    this result is clearly excluded or exempted by law.
[3]

[60]

In
Simone
, the central issue was whether, for s. 178(1)(d) to apply, a
    bankrupts misappropriation or defalcation must involve an element of
    dishonesty.  With respect to this question, the court rejects a broad
    interpretation of the terms misappropriation and defalcation under s.
    178(1)(d) and holds instead, at p. 526, that the courts should avoid
    attempting to sweep into [these] concepts  any and all failures by the
    fiduciary to comply with the obligations attending upon that capacity. 
    Justice Blair explains this courts narrower construction of the s. 178(1)(d)
    exception at pp. 529  30:

Consequently, 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 a 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 s. 178(1), in the context of debts or liabilities
    arising from fraud, embezzlement or misappropriation, as well as defalcation. 
    While these notions may have slightly different shades or gradations of
    meaning, I can only conclude that Parliament intended the words misappropriation
    and defalcation to bear their plain and ordinary meaning, as the context in
    which they are used suggests.  [Emphasis added.]

[61]

In
Simone
, the court does not
    consider the interpretive question raised in this case  namely, whether a
    creditor may seek a declaration under s. 178(1)(d) only if it was itself in a
    fiduciary relationship with the bankrupt.
[4]
Nonetheless, in my opinion,
Simone
is instructive for the following
    reasons.

[62]

First,
Simone
reinforces the centrality of the rule established by s. 178(2):
    that a discharged bankrupt is released from all claims unless a clear exception
    is engaged.  This recognizes the key purpose of the
BIA
, which is to enable
    insolvent debtors to make a fresh start and resume a productive role in
    society.

[63]

Second,
Simone
emphasizes that surviving debts under s. 178(1) are exceptions
    to this overriding principle and should be addressed accordingly.  I take
    this to mean that the exceptions set out in s. 178(1) are to be construed
    narrowly and applied only in clear cases.

[64]

Third,
    by limiting the scope of s. 178(1)(d) to conduct by the fiduciary that has
    some element of wrongdoing or improper conduct  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,
Simone
instructs
    that a bankrupts wrongdoing or improper conduct is not itself sufficient to
    bring a debt within the ambit of the section.  Rather, the impugned conduct
    must relate to the fiduciary relationship itself.  In other words, it is the
    relationship between the claiming creditor and the bankrupt, as well as the
    nature of the bankrupts conduct, that anchors s. 178(1)(d).  The provision
    protects a creditor that was in a vulnerable position in relation to the
    bankrupt when its claim arose.

[65]

And
    it is here that the flaw in KDS USAs suggested interpretation of s. 178(1)(d)
    becomes clear.  KDS USA argues that s. 178(1)(d) applies to any debt or
    liability arising out of a bankrupts wrongdoing of the type envisaged by the
    section  fraud, embezzlement, misappropriation or defalcation  so long as the
    bankrupt was in a fiduciary relationship with
someone
when the debt
    arose through the bankrupts wrongful activity.  Under this interpretation, the
    relationship between the claiming creditor and the bankrupt is virtually
    irrelevant.

[66]

I
    do not accept this construction of s. 178(1)(d).  In my view, a creditor cannot
    bring its claim within the exception set out in s. 178(1)(d) when that claim
    arose out of the bankrupts breach of a fiduciary duty to a third party.  To
    hold otherwise would expand the reach of s. 178(1)(d) well beyond what it
    exists to protect: the relationship between a vulnerable creditor and a
    fiduciary debtor.  Absent clear statutory language indicating such a
    legislative intention, a broad interpretation of the exception must be
    rejected.  No such language appears in s. 178(1)(d).

[67]

KDS
    USAs urged interpretation of s. 178(1)(d) is also inconsistent with the policy
    objective reflected in s. 178(2) of the
BIA
and with the interpretive
    approach to s. 178(1)(d) that this court adopts in
Simone
.  See also
McAteer
    v. Billes
, 2007 ABCA 137, 34 C.B.R. (5th) 1, at para. 28, leave to appeal
    to S.C.C. refused, [2007] S.C.C.A. No. 342.  In a bankruptcy scheme in which
    the cardinal rule is the release of a bankrupts debts upon discharge, s.
    178(1)(d) provides for an exceptional measure of creditor protection.  That
    exception, therefore, must be construed narrowly.

[68]

Properly
    read, the purpose of s. 178(1)(d) is to prevent a bankrupt from avoiding his or
    her just debts and liabilities to a vulnerable creditor where the bankrupt was
    entrusted, in a fiduciary capacity, with moneys or property belonging to
that
creditor.  Contrary to KDS USAs contention, the trial judges
    interpretation of s. 178(1)(d) accords with this statutory purpose.

[69]

This
    interpretation of s. 178(1)(d) is also consistent with appellate authority.  In
Valastiak v. Valastiak
, 2010 BCCA 71, 63 C.B.R. (5th) 188, a husband
    and wife had sold their matrimonial home and invested the proceeds in a
    restaurant operated by the husbands corporation.  They later divorced.  By the
    time of the divorce trial, the restaurant business had failed due to the
    husbands mismanagement.  The trial judge awarded damages to the wife for the
    loss of value in her share of the business due to the husbands mismanagement.

[70]

When
    the husband later made an assignment in bankruptcy, the wife applied for a
    declaration under s. 178(1)(d) that her former husbands judgment debt survived
    his discharge because it arose out of misappropriation while he was acting in a
    fiduciary capacity.  The application judge held that s. 178(1)(d) did not apply
    because the wife had failed to demonstrate that [her husbands liability] to
    her arose out of a misappropriation while he was acting in a fiduciary capacity
    in relation to her: 2009 BCSC 204, 53 C.B.R. (5th) 181, at para. 26.  The
    application judge thus proceeded on the basis that, for s. 178(1)(d) to apply,
    the bankrupt husband must have owed a fiduciary duty to his wife, the creditor,
    and not to a third party.

[71]

In
    allowing the wifes appeal, the British Columbia Court of Appeal proceeded on
    the same basis.  At the outset of his reasons for the court, at paras. 3  4,
    Finch C.J.B.C. summarizes the matter before him as follows:

The learned [application] judge  held that the facts as found
    by [the trial judge] would support the conclusion that the [husband] had
    misappropriated funds.  However, she held that the [wife] had failed to
    establish that the [husband] misappropriated funds while he was acting in a
    fiduciary capacity in relation
to her
.  As a result, the chambers
    judge dismissed the [wifes] application.

For the reasons that follow, I have concluded that the [husband]
    held 50% of the shares in a family business on a resulting trust for the [wife]
    and that this is one of those exceptional cases where the director of a
    company, the [husband], owed a fiduciary duty to the [wife] as a beneficial
    shareholder of the company
.  As the [husbands] misappropriation of funds
    occurred while he stood in a fiduciary relation to the [wife], her right to
    recover on the compensation order is protected by the provisions of s.
    178(1)(d) of the BIA
.  [Emphasis added.]

[72]

Chief
    Justice Finch first determines that, while [the husband] held the whole legal
    interest in the shares [of the corporation that operated the restaurant], he
    was the resulting trustee of one-half of the beneficial interest of the shares
    for his former wife: at para. 43.  He then carefully distinguishes between the
    fiduciary duties the husband owed to the corporation as a director and officer
    and those he owed in the circumstances to his then-wife, as a fellow
    shareholder: at paras. 46  51.  He concludes, at paras. 52  53:

[The husband] substantially depleted the restaurant business of
    its assets, and thereby diminished the value of [the wifes] share of equity in
    the company.  [The husband] was able to do that because he was the sole
    director and shareholder of the business.  In the circumstances of this case,
his
    liability  may be said to arise from his misappropriation of the companys
    assets while he was in a fiduciary relationship with the [wife]
. 
    [Emphasis added.]

[73]

The
    courts focus in
Valastiak
is on the nature of the relationship
    between the bankrupt (the husband) and the claiming creditor (the wife).  If s.
    178(1)(d) applied so long as the bankrupt breached a fiduciary duty, regardless
    of the beneficiary of that duty, then Finch C.J.B.C.s analysis of the
    fiduciary duty owed by the husband to his former wife is superfluous.  I therefore
    read
Valastiak
as supporting the proposition that, for s. 178(1)(d) to
    apply, the bankrupt must have owed a fiduciary duty to the claiming creditor 
    and not merely to a third party.

[74]

The
    trial judges construction of s. 178(1)(d) is also consistent with the Supreme
    Court of Canadas jurisprudence on the law of fiduciaries.  In
Frame v.
    Smith
, [1987] 2 S.C.R. 99, at p. 136, Wilson J. (in dissent but not on
    this point) states that fiduciary relationships possess three general
    characteristics: i) [t]he fiduciary has scope for the exercise of some
    discretion or power; ii) [t]he fiduciary can unilaterally exercise that power
    or discretion so as to affect the beneficiarys legal or practical interests;
    and iii) [t]he beneficiary is peculiarly vulnerable to or at the mercy of the
    fiduciary holding the discretion or power.  See also
Hodgkinson v. Simms
,
    [1994] 3 S.C.R. 377, at p. 408.  Moreover, what is required in all cases is an
    undertaking by the fiduciary, express or implied, to act in accordance with the
    duty of loyalty reposed on him or her:
Galambos v. Perez
, 2009 SCC
    48, [2009] 3 S.C.R. 247, at para. 75.

[75]

Both
    the fiduciarys duty of loyalty and a beneficiarys peculiar vulnerability to
    the fiduciary are acutely beneficiary-specific.  The trial judges
    interpretation of s. 178(1)(d) of the
BIA
thus places the same
    emphasis on the relationship between fiduciary and beneficiary that fiduciary
    law itself does.  The law imposes obligations on fiduciaries for the purpose of
    protecting
only
those beneficiaries to whom fiduciary obligations are
    owed.  The trial judges interpretation of s. 178(1)(d) reads the same purpose
    into that section.

[76]

Finally,
    the trial judges interpretation of s. 178(1)(d) respects the scheme of the
BIA
as a whole.  The trial judge held, at para. 123, that his construction of s.
    178(1)(d) is consistent with ss. 172(2) and 173 of the
BIA
, which
    require the court to refuse a discharge, suspend a discharge or order a
    conditional discharge when it is of the view that the bankrupt has been guilty
    of any fraud.

[77]

I
    agree.  Sections 172(2) and 173 of the
BIA
[5]

seek to ensure that dishonest debtors do not benefit from their dishonesty
    by requiring the court to refuse or suspend a bankrupts discharge in
    bankruptcy, or to grant a discharge on terms (s. 172(2)), on proof that the
    bankrupt has been guilty of 
any
fraud or fraudulent breach of trust
    (emphasis added) (s. 173(1)(k)).  The existence or breach of a fiduciary duty is
    not a prerequisite to the application of these sections.

[78]

Accordingly,
    it is unnecessary to expand the scope of the term fiduciary capacity in s.
    178(1)(d) in order to prevent a bankrupt from profiting under the
BIA
from his or her own fraud or fraudulent breach of trust.  As Jay Chiang put it
    in his factum:

[T]he mischief that [KDS USA] seeks to resolve by urging [its]
    interpretation [of s. 178(1)(d)] is already addressed in sections 172(2) and
    173(1)(k) of the
BIA
.



By

removing

the

requirement

that the fraud be committed while the
    bankrupt was acting in a fiduciary capacity, these provisions provide a
    complete answer to [KDS USAs] concern that [the trial judges] interpretation
    of s[.] 178(1)(d) would result in some bankrupts[] being able to benefit from
    their wrongdoing.

[79]

For
    all these reasons, I agree with the trial judges interpretation of s.
    178(1)(d).  Section 178(1)(d) is available to a creditor of a bankrupt if the
    bankrupt has abused his or her fiduciary position with the claiming creditor by
    incurring a debt to the creditor through fraud, embezzlement, misappropriation
    or defalcation, in violation of the bankrupts fiduciary duty to the claiming
    creditor.

(2)

Failure to Satisfy Requisite Elements of Section 178(1)(d)

[80]

KDS
    USA also argues that, on the findings of the California court, the requisite
    elements of s. 178(1)(d) are met.  Consequently, the trial judge erred by
    declining to grant the requested declaratory relief under s. 178(1)(d).

[81]

I
    disagree.

[82]

In
McAteer
, at para. 22, the Alberta Court of Appeal described the two
    required elements of a claim under s. 178(1)(d): i) the debt at issue must be
    linked to the bankrupts fraud, embezzlement, misappropriation or defalcation;
    and ii) the fraud, embezzlement, misappropriation or defalcation must occur in
    the context of a fiduciary relationship.

[83]

For
    the foregoing reasons, it is clear that the second element  the fiduciary
    relationship requirement  is not satisfied in this case.  Accordingly, it is
    unnecessary for the disposition of this appeal to determine whether the first
    element  proof of a nexus between the debt at issue and fraud, embezzlement,
    misappropriation or defalcation by Jay Chiang  is established on the record
    before this court.
[6]


[84]

KDS
    USA relies on the California courts findings that Jay Chiang breached his
    fiduciary duty to ATC and participated, together with his brother Julius
    Chiang, in using ATC to advance a fraudulent scheme.  At trial, the trial judge
    in the present case accepted these findings.  However, as I have already
    emphasized, the decision of the California court contains no finding that Jay
    Chiang owed or breached any fiduciary duty in respect of either KDS company.  Nor
    did the trial judge in the present case make such findings.  Indeed, his
    findings, detailed above, are to the contrary.

[85]

KDS
    USA concedes that Jay Chiang did not owe it a fiduciary duty.  This was a
    proper concession.  Nothing on the record before this court suggests that Jay
    Chiangs relationship with KDS USA bore any of the indicia of a fiduciary
    relationship.  In particular, the record does not reveal any special
    relationship between KDS USA and Jay Chiang, any exercise of discretion or
    power by Jay Chiang in relation to KDS USA, any reliance by KDS USA on Jay
    Chiang or Aamazing or any position of vulnerability by KDS USA in its dealings
    with Jay Chiang.

[86]

In
    the absence of a fiduciary relationship between KDS USA and Jay Chiang, and
    wrongdoing by Jay Chiang in the context of such a relationship, Jay Chiangs judgment
    debt to KDS USA does not fit within s. 178(1)(d).

[87]

Finally,
    there is the matter of the Sanction Ruling.  The trial judge found in his
    Sanction Ruling that the KDS companies failed to make full and candid
    disclosure in the Enforcement and Fraudulent Conveyance Actions, including in
    Anton Pillar and Mareva injunction proceedings in those actions.  Further, the Trustee
    argues that the post-judgment information discussed in the Sanction Ruling, as
    well as the trial judges findings in that ruling, call into question the
    foundation for a personal judgment against Jay Chiang for the alleged debts of
    ATC and Aamazing to the KDS companies.  As a result, Jay Chiang and the Trustee
    argue that Jay Chiang should be given an opportunity to seek his discharge from
    bankruptcy, free of his judgment debt to KDS USA.

[88]

Of
    course, the Sanction Ruling does not affect the trial judges ruling on KDS
    USAs s. 178(1)(d) claim.  The evidence at the sanction hearing was not put
    before the trial judge at trial and was then unknown to the Trustee.  That
    said, the Sanction Ruling casts new and unfavourable light on the
bona fides
of the conduct of the KDS companies and John Hui and their respective roles in
    the disputes among the parties.  As one additional contextual factor, it lends
    some further support to the dismissal of the s. 178(1)(d) claim.

V.      Disposition

[89]

I
    would dismiss the appeal.

[90]

The
    respondent Jay Chiang is entitled to his costs of the appeal, fixed in the
    amount of $25,000 as agreed by counsel, inclusive of disbursements and all
    applicable taxes.

[91]

Since
    there is no agreement among counsel on the Trustees entitlement to costs, the
    parties may deliver written submissions on this issue to the Registrar of this
    court, limited to a maximum of five pages each, within 21 days from the date of
    the release of these reasons.

Released:

AH                                                   E.A.
    Cronk J.A.

JUN 24 2015                                    I agree
    Alexandra Hoy A.C.J.O.

I
    agree David Watt J.A.


SCHEDULE A

Bankruptcy and Insolvency
    Act
, R.S.C., 1985, c. B-3, ss. 172(2) and 173(1)

172(2)      The court shall, on proof of any
    of the facts referred to in section 173, which proof may be given orally under
    oath, by affidavit or otherwise,

(
a
)   refuse
    the discharge of a bankrupt;

(
b
)   suspend
    the discharge for such period as the court thinks proper; or

(
c
)   require
    the bankrupt, as a condition of his discharge, to perform such acts, pay such
    moneys, consent to such judgments or comply with such other terms as the court
    may direct.

173(1)      The facts referred to in section
    172 are:

.

(
k
)   the bankrupt has been guilty of any fraud or fraudulent
    breach of trust[.]





[1]
On November 28, 2006, KDS USA obtained a default judgment in the Superior Court
    of Justice in the approximate amount of $6.1 million USD for the enforcement in
    Ontario of the 2004 California Judgment against Christina Chiang.




[2]
As initially framed, KDS USAs appeal to this court concerned both the trial
    judges s. 178(1)(d) ruling in the Enforcement Action and his costs award in
    the Fraudulent Conveyances Action.  However, shortly before the appeal hearing,
    the parties resolved the costs issues in the Fraudulent Conveyances Action.



[3]
As the Supreme Court observes in
Schreyer
, at para. 25, this may
    sometimes produce harsh results.
Schreyer
itself is a case in point. 
    In
Schreyer
, a wifes equalization claim under provincial family law
    legislation  a debt owed to her by her spouse  was held to be released by her
    spouses discharge from bankruptcy.  Since no clear exception applied, the
    bankrupt husband was released from his debt by operation of s. 178(2).



[4]
Most recently, in
Canada Mortgage and Housing Corp. v. Gray
, 2014 ONCA
    236, 119 O.R. (3d) 710, this court considers the proper interpretation and
    application of s. 178(1)(e) of the
BIA
.  The
Gray
court was
    not required to address the interpretation and application of s. 178(1)(d).



[5]
The full text of ss. 172(2) and 173(1)(k) of the
BIA
is set out in
    Schedule A to these reasons.



[6]
I note that the trial judge held, at para. 115, that no misappropriation or
    defalcation occurred in respect of the supply of computer monitors to ATC. 
    There is no suggestion that Jay Chiangs conduct constituted embezzlement. 
    The relevant issue at trial, therefore, was whether Jay Chiangs conduct
    amounted to fraud as that term is used in s. 178(1)(d).


