



COURT OF APPEAL FOR ONTARIO

CITATION: Gray (Re), 2014 ONCA 236

DATE: 20140328

DOCKET: C57109

Laskin, van Rensburg and Hourigan JJ.A.

In
    the Matter of the
Bankruptcy and Insolvency
Act,

R.S.C. 1985, c. B-3, as amended

In
    the Matter of the Bankruptcy of Evan Peter Gray of the

City of Toronto in the
    Province of Ontario

BETWEEN

Canada Mortgage and Housing Corporation

Creditor (Appellant)

and

Evan Gray

Debtor (Respondent)

Kenneth Kraft and Matthew Diskin, for the appellant

Trung Nguyen, for the respondent

Heard: January 29, 2014.

On appeal from the judgment of Justice Herman J. Wilton-Siegel
    of the Ontario Superior Court of Justice, dated April 30, 2013, with reasons
    reported at 2013 ONSC 1986.

van Rensburg J.A.:

Introduction

[1]

This is an appeal from the decision of Wilton-Siegel J. that determined
    that the respondents debt to Royal Bank of Canada (RBC), which had been
    assigned to the appellant Canada Mortgage and Housing Corporation (CMHC),
    would not survive his discharge from bankruptcy.

[2]

This case engages the proper interpretation and application of s.
    178(1)(e) of the
Bankruptcy and Insolvency Act
, R.S.C. 1985, c. B-3
    (the BIA)

which provides as follows:

178. (1) An order of discharge does not release the
    bankrupt from

(e) 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.

[3]

For the reasons that follow, I would dismiss the appeal.  There was no
    error in the trial judges conclusion that the respondents debt to CMHC would
    not survive his bankruptcy discharge.

Facts

[4]

In 2006, the respondent Evan Gray, an RBC employee, was asked by an
    acquaintance, John Roberts, if he would be willing to co-sign on a mortgage
    application, purportedly to assist a new immigrant who lacked sufficient credit
    history in Canada and was unable to obtain a mortgage.  Roberts told Gray that
    this person would occupy the mortgaged property, would sign a written agreement
    promising to make the payments due under the mortgage, and after a year would
    assume the mortgage and take title to the property.  Roberts told Gray that
    there was no risk because the property could be sold in the event of default,
    and that he would not have agreed to co-sign the mortgage himself if he thought
    there was any risk.

[5]

After Gray agreed to co-sign the mortgage application, Roberts took him
    to meet someone called Mike, who held himself out as a mortgage broker, and
    the two assured him that the type of arrangement they were proposing was common
    and ordinary business practice.  The mortgage application was signed by Gray at
    an RBC branch, where he attended with Mike and met with an RBC mortgage representative. 
    Gray did not receive a copy of anything he signed, nor was he given the
    standard charge terms referred to in the mortgage document (and upon which CMHC
    relied in these proceedings).

[6]

Gray and Roberts signed separate mortgage applications, at different
    times and in different places.  Gray provided accurate information about his
    income and employer, while Roberts misrepresented his income and employment on
    his application.  Roberts also submitted an inflated property valuation with
    his mortgage application.  Gray was unaware of Roberts misrepresentations.

[7]

Gray and Roberts purchased the property as tenants in common and RBC
    extended a mortgage loan of $516,370.13.  The mortgage was insured by CMHC. 
    The transaction closed in April 2006.

[8]

Gray was paid $2,500 for his participation in the transaction.

[9]

Two months later, Gray was contacted by RBC and told a mortgage payment
    was late. He notified Roberts and Mike, and they picked him up and gave him
    funds to make the payment.  The mortgage payments in the next few months were
    made in a similar fashion.

[10]

In
    July 2006, and before any default had occurred, RBC investigated what it
    believed to be a fraud. Gray co-operated in the investigation.  Grays
    employment was not affected and he remains employed by RBC.

[11]

In
    or about June 2007 Mike stopped making mortgage payments and both Roberts and
    Mike stopped returning Grays telephone calls.  The mortgage subsequently went
    into default.

[12]

In
    November 2007 RBC sued on the mortgage debt and obtained a default judgment
    against Gray and Roberts in the sum of $524,577.34 plus interest.  RBCs
    statement of claim did not allege fraud.  The judgment debt was reduced by the
    net proceeds of sale of the mortgaged property ($331,875.03).  The judgment was
    assigned to CMHC in August 2008.

[13]

CMHC
    enforced the judgment, and Grays wages were garnished to the extent of
    $17,169.39 before he made an assignment in bankruptcy in February 2012.

[14]

In
    April 2012 CMHC moved for a declaration that the outstanding amount of Grays
    debt would not be released by his discharge from bankruptcy under  sections
    178(1)(d) and (e) of the BIA.  (There is no issue on this appeal with respect
    to s. 178(1)(d), and the finding that Gray was not acting in a fiduciary
    capacity when the mortgage funds were obtained.)

[15]

The
    matter came before Wilton-Siegel J. as the trial of an issue.  The evidence
    consisted of the affidavits and oral evidence of the bankrupt Evan Gray and a
    CMHC representative.

Decision in the Court Below

[16]

The
    trial judge concluded that there was no evidence of any misrepresentation by
    Gray that had been relied upon by RBC in advancing the mortgage funds, and
    there was no basis on the evidence for finding that Gray reasonably ought to
    have known of Roberts misrepresentations.  As such, on a strict reading of s. 178(1)(e)
    of the BIA,
[1]
the mortgage was obtained by Roberts fraudulent misrepresentations, in which
    Gray did not participate and about which he neither knew nor reasonably ought
    to have known.

[17]

After
    concluding that this would be sufficient to dispose of the matter, the trial
    judge considered the alternative argument that Gray ought to have known of the
    scheme and ought not to have remained silent on certain matters.  CMHC alleged
    that Gray had fraudulently failed to reveal to RBC that he was not the
    beneficial owner of the property, that he was receiving payment for his
    involvement in the transaction, and that he had no intention to live at the
    property or to personally pay the mortgage.  CMHC argued that if these facts
    had been revealed, RBC would not have advanced the funds and CMHC would not
    have insured the mortgage.

[18]

The
    trial judge rejected these arguments.  Gray and Roberts were the owners of the
    property and were ultimately liable on the mortgage.  Silence about the payment
    Gray received was not a misrepresentation unless it rendered an express or
    implied representation untrue or misleading.  CMHC could not demonstrate any
    such express or implied representation.  With respect to the implied
    representations that Gray intended to occupy the property and personally pay
    the mortgage, the trial judge noted that there was no evidence of any such
    representation either in Grays mortgage application (which was not produced),
    or by reference to RBCs standard charge terms, as there was no evidence that
    Gray had ever received a copy.

[19]

The
    trial judge observed that a fraudulent misrepresentation requires evidence that
    the representor knows that the representation is false or is recklessly
    indifferent to its truth.  There was no evidence that Gray was aware of any
    misrepresentation made before the mortgage was granted.  As for recklessness,
    after considering what Gray knew of the circumstances, the trial judge
    concluded that it was at least as probable that Gray had foolishly trusted
    Roberts and Mike.  Accordingly, CMHC had not established that he was wilfully
    blind or reckless.

ISSUES on Appeal

[20]

The
    principal argument on appeal is that the trial judge did not correctly apply
    the law respecting false pretences, in considering whether the judgment debt
    would survive Grays discharge from bankruptcy under s. 178(1)(e) of the BIA. 
    Instead, he limited his analysis to whether Gray had made a fraudulent
    misrepresentation. The appellant asserts that the false pretences in this case were
    that Gray did not inform RBC that he had been paid to participate in the
    transaction, that he had no intention of living in the property, and that he
    did not intend to make the mortgage payments.  It is acknowledged that the
    trial judge reviewed these circumstances in his analysis of fraudulent
    misrepresentation; the appellant argues that the judge failed to consider the
    separate question of whether Gray had used false pretences in connection with
    the borrowing.  The appellant relies on the Manitoba Court of Appeals decision
    in
Ste. Rose & District Cattle Feeders Co-op v. Geisel
, 2010 MBCA
    52, with respect to the proper interpretation of false pretences in the context
    of s. 178(1)(e) of the BIA.

[21]

The
    appellant also asserts that the trial judge ignored the straw borrower scheme
    in his analysis.  As a straw borrower, Gray was not entitled to be treated as
    an honest but unfortunate debtor, such that the debt incurred as a result of
    the fraudulent mortgage would be released upon his discharge from bankruptcy.

[22]

There
    are other arguments on appeal  that the trial judge erred in his articulation
    and application of the tests for wilful blindness and recklessness in
    considering whether Gray was party to Roberts fraudulent misrepresentations,
    and that the trial judge erred in failing to conclude that certain provisions
    of the standard charge terms were false representations made by Gray.

[23]

The
    respondent asserts that there was no error in the trial judges analysis, which
    was based on findings of fact that were supported by the evidence and not
    challenged on appeal.  The evidence supported the conclusion that the mortgage
    was granted in reliance on Roberts misrepresentations, and not as a result of
    anything Gray represented in his mortgage application.  There was no evidence
    of any reliance on any representation by Gray that led to the mortgage
    advance.  The crux of the matter was Grays knowledge or ignorance of the
    fraudulent scheme.  Gray was unaware that he was being used by Roberts as an
    unwitting straw buyer in a mortgage fraud, and the trial judge on the
    evidence concluded that he was not wilfully blind or reckless.  As such, CMHC did
    not establish that the judgment debt was a debt or liability resulting from
    obtaining property by false pretences or fraudulent misrepresentation, as
    required by s. 178(1)(e) of the BIA.

Analysis

[24]

Section
    178(1) of the BIA preserves certain types of claims from a bankrupts order of discharge.
    They are exceptions to the general rule of discharge and should be addressed
    accordingly:
Simone v. Daley
, [1999] O.J. No. 571 (C.A.), at para. 28. 
    The onus is on the creditor who seeks to have the debt or liability survive the
    discharge of the bankrupt to bring it within one of the provisions of s. 178(1).

[25]

It
    is instructive to examine more closely subsections 178(1)(d) and (e), the two
    provisions dealing with a bankrupts fraud.  They provide as follows:

178.
(1) An order of discharge does not
    release the bankrupt from

(d) 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;

(e) 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;

[26]

Section
    178(1)(d) preserves from discharge a debt or liability 
arising
    out of fraud, embezzlement, misappropriation or defalcation of the bankrupt
    while acting in a fiduciary capacity.  Its application is restricted to
    bankrupts acting in a fiduciary capacity.  As such, a debt or liability
    arising out of the fraud of a debtor who was not acting in a fiduciary
    capacity would fall outside the scope of this section and would need to be
    considered under s. 178(1)(e).

[27]

Section 178(1)(e) preserves from discharge a debt or liability resulting
    from obtaining property or services by false pretences or fraudulent
    misrepresentation.

[28]

The reasons of the trial judge demonstrate that he was alive to the
    specific wording of this section when he concluded at para. 44 of his decision:

On a strict reading of [section 178(1)(e)], this
    conclusion is sufficient to determine the issue on this application.  The
    Mortgage was obtained by Roberts fraudulent misrepresentations that constitute
    the Misrepresentations.  Gray did not participate in the making of the
    Misrepresentations and neither knew, nor reasonably ought to have known, of
    them.

[29]

The appellant acknowledges that in order for there to be a fraudulent
    misrepresentation there must be reliance by the party to whom the
    representation is made, and that in the present case the trial judge noted that
    it was not disputed that the mortgage was obtained in reliance on Roberts
    misrepresentations.  The trial judge concluded that Gray did not know, nor ought
    he reasonably to have known, of the misrepresentations made by Roberts, that led
    to the mortgage funds being advanced.

[30]

The appellant contends however that the trial judge failed to consider
    the false pretences branch of s. 178(1)(e).  It is asserted that the false
    pretences consisted of Grays participation in the straw borrower scheme,
    knowing that he was not going to live in the house, and failing to reveal this
    fact, as well as the payment he was receiving for his involvement when the
    mortgage was advanced.

[31]

There is a fatal flaw in the appellants argument.  Irrespective of
    whether one considers fraudulent misrepresentation or false pretences, s.
    178(1)(e) requires a finding that the bankrupt obtained property by such
    conduct.  A causal connection between the bankrupts wrongdoing and the
    creation of the debt or liability is required.  It is not sufficient that the bankrupt
    engaged in fraud, or that the debt or liability arose out of a fraudulent
    scheme.  The trial judge in this case concluded that the mortgage funding was
    obtained by Roberts fraudulent misrepresentations, and not as a result of what
    Gray represented or failed to disclose to RBC.

[32]

Since
    the appellant relies heavily on the decision of the Manitoba Court of Appeal in
Ste. Rose & District Cattle Feeders Co-op v. Geisel
,

an
    examination of that case is warranted.

[33]

In
Geisel
there were two debtors, a father and a son, against whom the
    plaintiff Co-op had obtained a default judgment before both went bankrupt.  The
    father had borrowed money from the Co-op, and agreed to use the funds to
    purchase cattle, and to brand the cattle with the Co-ops brand.  The father
    was to notify the Co-op when the cattle were taken to auction, and to repay the
    borrowing from the proceeds of sale.  Ultimately, the cattle, which had not
    been branded with the Co-ops name, were transported and sold at auction in the
    name of the son.  The proceeds were deposited into the sons bank account,
    where they were seized by one of his creditors.  There was no intention to
    defraud the Co-op; rather the scheme was put in place by the two men for tax
    reasons, and with the expectation that the proceeds would be used to repay the
    fathers borrowing.

[34]

There
    was no fraud on the part of the father and no involvement by the son  in
    connection with the original borrowing, factors that led the trial judge to
    refuse relief under s. 178(1)(e) on the basis that the debt was not property
    obtained by fraudulent misrepresentation or false pretences.

[35]

This
    decision was overturned on appeal, with the Manitoba Court of Appeal holding
    that the judgment debt survived the bankruptcy discharges of both father and
    son.

[36]

The
    appeal court noted that, while there was no apparent fraud in the original
    borrowing, at the later stage where both debtors knowingly diverted the
    proceeds of sale of the cattle to the wrong bank account, there was fraud on
    the part of the father and false pretences on the part of the son.  The father
    knowingly withheld relevant information from the Co-op when he advised that the
    cattle would be sold, but not that they would be sold in his sons name with
    the proceeds deposited into the sons account.  This was a fraudulent
    misrepresentation relied on by the Co-op to its detriment.  The false pretences
    were on the part of the son when he falsely held out to the transport driver
    and auctioneer that the cattle were his to sell.  He obtained the property of
    the Co-op (the proceeds of sale of the cattle) by pretences which he knew to be
    false.

[37]

The
Geisel
case does not stand for the general proposition urged upon us
    by the appellant  that a debtors false pretences are sufficient to exempt a
    debt from discharge, even where there is no causal link between the debt or
    liability sought to be preserved and the false pretences of the bankrupt.  In
Geisel
there could be no misrepresentation by the son to the Co-op, because the
    son had no dealings or relationship with the Co-op.  What was key was that the
    son had obtained from the auctioneer the Co-ops property (the proceeds of the
    sale of the cattle at auction) by pretences he knew to be false.  He had
    represented that he was the owner of the cattle.

[38]

In the present case, the trial judge referred to the
Geisel
decision
    and he cited that courts approval of the observation in
Buland
    Empire Development Inc. v. Quinto Shoes Imports Ltd.
, [1999]
    O.J. No. 2807 (C.A.), at para. 14, that the core content of both false
    pretences and fraudulent misrepresentation is deceitful statements.  He
recognized that both false pretences and fraudulent misrepresentation involved
    the question of whether Gray had made a deceitful statement that led RBC to
    advance the mortgage funds.  The trial judge considered the very circumstances that
    the appellant contends were false pretences and he concluded that they did not
    amount to a fraudulent misrepresentation on the part of Gray.

[39]

The
    wording of section 178(1)(e) makes it clear that the debt or liability must
    result from obtaining property or services by false pretences or fraudulent
    misrepresentation.  The trial judge concluded that the money was advanced by
    RBC as a result of Roberts misrepresentations, and not as a result of anything
    Gray said or failed to say or do.  This was a finding of fact that is
    determinative of both the false pretences and fraudulent misrepresentation
    aspects of s. 178(1)(e) as applied to this case.

[40]

Finally,
    while it is correct to say that the bankruptcy scheme is intended to benefit
    honest, but unfortunate, debtors (see
Re Giannotti
(2000), 138 O.A.C.
    316, at para. 11, cited with approval in
Geisel
), it is not sufficient
    to show that there was a false pretence or fraudulent misrepresentation unless
    it is also shown that the property (in this case the mortgage funding) was
    obtained thereby. While the
Geisel
case referred to this interpretive
    principle, in concluding that the debtors motives and intentions to repay the
    Co-op were not relevant, the court nevertheless found in that case that
    property had been obtained by each of the debtors by their fraudulent
    misrepresentation or false pretences.

[41]

Having
    dealt with the principal arguments on appeal, I will address briefly the
    appellants other submissions.

[42]

The
    appellant argues that the trial judge erred in his articulation and application
    of the tests for wilful blindness and recklessness, and that he had ignored
    obvious red flags that should have alerted Gray to the deception perpetrated
    by Roberts.  I disagree.  The trial judge correctly set out the test and he
    made findings of fact at paras. 65 to 69 of his reasons.  He concluded that
    Gray did not know about Roberts misrepresentations or the mortgage fraud in
    which he was engaged.  He considered and determined the weight to be given to
    the bankrupts reasons for not making further inquiries when confronted by red
    flags.  The question was whether Gray was wilfully blind to (and therefore
    participated in) the fraud that led to the advance of the mortgage funds.  There
    was no error in the trial judges analysis and conclusion that, with respect to
    whether the bankrupt was wilfully blind, it was at least as probable that Gray
    foolishly trusted Roberts and Mike beyond a point that was reasonable, based on
    his lack of experience and vulnerability to manipulation.

[43]

The
    appellant also submits that the trial judge erred in failing to find that the
    standard charge terms incorporated by reference into the mortgage agreement
    constituted representations by Gray that he knew to be false (that the
    borrowers would be living in the house and that no one else had an interest in
    the property).  While I would not necessarily agree with the trial judges
    characterization of such terms as covenants and not representations, I would
    not interfere with his conclusion that, in the absence of evidence that the
    standard charge terms were provided to Gray, he could not be said to have made
    the representations fraudulently.  This is not to say that the standard charge
    terms did not apply to the borrowing, if they were incorporated by reference
    into the mortgage documents signed by Gray, even if he did not receive them;
    only that the necessary intentional requirement for fraudulent
    misrepresentation could not be established in the absence of showing that Gray
    had knowingly made the representation.  Accordingly, this argument on appeal
    cannot succeed.

[44]

Finally,
    I disagree with the appellants submission that the trial judges decision
    condones the straw man debtor scenario.  It was necessary for the trial judge
    to examine all of the circumstances to determine whether in this case, the
    debtor who was a straw man in the borrowing, had obtained funds from RBC by
    false pretences or fraudulent misrepresentation.  The trial judge correctly
    identified the relevant legal principles and he applied them to the facts as he
    found them.  For the purposes of s. 178(1)(e), it was not sufficient to find
    that the debtor made some type of misrepresentation or engaged in some type of
    false pretence without also finding that the conduct in question led to the
    judgment debt.

Conclusion

[45]

For
    these reasons, the appeal is dismissed.  Costs of the respondent are payable by
    the appellant and fixed at $10,000, inclusive of disbursements and applicable
    taxes.

Released: March 28, 2014

(JL)                                                                         
    K. van Rensburg J.A.

I agree John Laskin J.A.

I agree C.W. Hourigan J.A.





[1]
Although the formal reasons refer (at para. 44) to s. 178(1)(d), it is apparent
    from the context that the trial judge intended to refer to s. 178(1)(e).


