





CITATION:
Credifinance
Securities Limited v. DSLC Capital
          Corp., 2011 ONCA 160



DATE: 20110302



DOCKET: C51766



COURT OF APPEAL FOR ONTARIO



Goudge, Sharpe and LaForme JJ.A.



In the Matter of the Bankruptcy of Credifinance Securities
          Limited, of the City of
Toronto, in the

Province of
Ontario



BETWEEN



Deloitte &
          Touche Inc., in its
          Capacity as Trustee in Bankruptcy of Credifinance
          Securities Limited




Appellant



and



DSLC Capital Corp.



Respondent



Catherine Francis, for the appellant



Gregory Sidlofsky, for the respondent



Heard: January 7, 2011



On appeal from the order of Justice
          F. N. Marrocco of the Superior Court of Justice, dated February 16, 2010, with
          reasons reported at 63 C.B.R. (5th) 250.



H.S. LaForme
    J.A.:

INTRODUCTION

[1]

Credifinance
Securities Limited
    (Credifinance) made an assignment in bankruptcy.
    DSLC Capital Corp. (DSLC) filed a proof of claim in the amount of $400,000.
     In its proof of claim, DSLC maintained that the sum of $310,500 in the
    possession of Credifinance was its property.  Deloitte & Touche Inc.,
    as Trustee of Credifinance (the Trustee), denied the claim in full.
     DSLC appealed that decision in the Superior Court.

[2]

The appeal
    judge
found that DSLC had been defrauded into loaning
    Credifinance the $400,000.  The appeal judge
    granted DSLC a constructive trust over what remained of the loan  $310,500  and
    determined that it did not form part of the bankrupt estate.  The Trustee appeals this decision.

[3]

DSLC cross-appeals,
seeking leave to appeal the decision of the
    appeal judge not to award costs to DSLC.  If leave is granted, DSLC is seeking an award of costs against the
    Trustee personally.

BACKGROUND

[4]

There
    is a good deal more to the factual background of this case than what I propose
    to set out.  What I intend to do is simply
    provide that background that I believe is necessary to give context to my
    analysis and ultimate conclusions.

The lawsuit

[5]

On
    February 6, 2009, DSLC issued a notice of action against Credifinance, Georges Benarroch
    (who controlled Credifinance) and others and obtained an
ex parte
Mareva injunction.

[6]

On
    March 6, 2009, DSLC filed a statement of claim seeking damages, an Order
    winding up Credifinance, oppression remedy relief, and the appointment of a
    receiver.  DSLC did not assert a
    constructive trust claim; rather, it alleged that Credifinance had failed to
    repay the $400,000 loan.

[7]

On
    April 2, 2009 DSLC amended its claim seeking an Order rescinding the
    Subscription Agreement and the Share Purchase Agreement (the agreements related
    to the loan and the relationship between DSLC and Credifinance) on the basis of
    the alleged dishonest and fraudulent conduct of the defendants.  DSLC repeated its allegation that
    Credifinance had refused to repay the $400,000 loan.

[8]

On
    April 20, 2009, t
he Mareva injunction was dismissed as against the
    defendants other than Credifinance.  However, the motion judge ordered that $310,500 be preserved pursuant to
    r. 45.02 of the
Rules of Civil Procedure
,
    whereupon the injunction would be dissolved against Credifinance.  He found that, of the $460,000 that had been
    frozen in Credifinances bank accounts, $310,500 on deposit with the National
    Bank could be identified as remaining from the $400,000 loan.

[9]

O
n
    July 23, 2009, Credifinances motion for leave to appeal the order of the motion
    judge was dismissed.
On August 24,
    2009 Benarroch assigned Credifinance into bankruptcy.  Credifinance has never paid the $310,500 into
    court.

[10]

The only creditors of Credifinance are DSLC, Benarroch
     directly and through a corporation  and Benarrochs lawyers.  Benarroch and his company Credifinance Capital
    Corp. allege that they are secured creditors owed $127,032.07.  The lawyers who represent the defendants
    including Benarroch claim to be owed a total of $128,546.25.

The trustee proceedings

[11]

Before setting out the basic facts of this part of
    the background, I think it will be useful to set out the provisions of the
Bankruptcy and Insolvency Act
, R.S.C.
    1985, c. B-3

(BIA) that are at the
    core of this appeal.  Section 81 provides
    in part:

81.
(1)
Where
a
    person claims any property or interest therein, in the possession of a bankrupt
    at the time of the bankruptcy, he shall file with the trustee a proof of claim
    verified by affidavit giving the grounds on which the claim is based and
    sufficient particulars to enable the property to be identified.

(2) The trustee with whom a proof of claim is filed
    under subsection (1) shall within 15 days after the filing of the claim or
    within 15 days after the first meeting of creditors, whichever is the later,
    either admit the claim and deliver possession of the property to the claimant
    or send notice in the prescribed manner to the claimant that the claim is
    disputed, with the trustees reasons for disputing it, and, unless the claimant
    appeals the trustee[s] decision to the court within 15 days after the sending
    of the notice of dispute, the claimant is deemed to have abandoned or
    relinquished all his or her right to or interest in the property to the trustee
    who may then sell or dispose of the property free of any right, title or
    interest of the claimant.

[12]

On September 9, 2009, pursuant to this section,
    DSLC filed a property proof of claim with the trustee claiming a property
    interest in the $310,500 that remained on deposit in Credifinances bank
    account.  In the proof of claim, DSLC
    outlined the basic facts relied
upon,
including the
    allegation of fraudulent misrepresentations made by Credifinance, and asserted
    that the $310,500 are trust funds belonging to DSLC.

[13]

In its notice of dispute of this claim dated September
    25, 2009, the Trustee refused to consider the merits of DSLCs fraud
    allegations and denied DSLCs property claim.  In doing so, and among other things, it responded with this: The
    allegations of fraudulent misrepresentation made by DSLC, even if they could be
    established, are incapable at law of elevating DSLCs subordinate unsecured
    claim to the status of a property claim with priority over the Trustee or other
    creditors of the bankrupt.

[14]

DSLC appealed the Trustees decision and by agreement,
    the matter was placed on the Commercial List to be heard by a judge of the
    Superior Court.  The procedure to be
    followed for the hearing was agreed upon by counsel for the parties and
    reflected in a case conference order.  As
    set out in the order, the parties agreed to file and rely on affidavits and
    transcripts from the civil proceeding and DSLC would also call
viva voce
evidence.  Counsel for the Trustee declined to call
    witnesses as she expressly intended to rely only on the affidavit and
    transcript evidence from the civil proceeding.

[15]

The appeal judge conducted what he called a
    hearing
de novo
and, as I noted
    earlier, allowed DSLCs appeal.  He
    awarded DSLC a constructive trust over the $310,500.  He made no order as to costs  he held that,
    given the result of his order on the estate would mean it has virtually no
    assets.

The position of the Trustee

[16]

The
    Trustees position is that the appeal judge erred in determining DSLCs fraud
    allegations in the context of an appeal from a disallowance.  It says that these issues were not properly
    before the court.  Rather, the issue
    before the court was whether DSLC could, at law, establish a property claim to
    the funds in priority to the interests of the Trustee.

[17]

The
    Trustee decided that DSLC could not establish a property claim to the funds and
    that the loan advance was not required to be held in trust.  Accordingly, it disallowed DSLCs proof of
    claim.  This was, it argues, based upon
    well-established legal principles and admissions from DSLCs own
    representatives that DSLCs interest in the funds was subordinate to the
    interests of Credifinances other creditors.

The position of DSLC

[18]

DSLC asserts that the hearing before the appeal judge
    proceeded as a hybrid trial of an issue.  It submits that the procedure adopted for the hearing was agreed to by
    the parties and was the appropriate means to determine the issues.  That is, by agreement of counsel, the Trustee
    and DSLC each filed and relied on various affidavits and transcript evidence
    from a related civil proceeding.  DSLC
    also called
viva voce
evidence at the
    hearing in support of its fraud allegations.

[19]

The issue for the appeal judge, DSLC argues, was
    whether DSLC was defrauded into loaning the $400,000 to Credifinance  the
    appeal judges finding of fraud is a finding of fact supported by the evidence.

[20]

I would dismiss the appeal.  I conclude that both the process followed by
    the appeal judge and the issues he decided were, in the circumstances of this
    case, correct in law.  I also conclude
    that the appeal judge committed no errors in either his decision or his
    analysis.  Finally, I would not grant
    DSLC leave to appeal the issue of costs.  This is not an obvious case where leave should be granted.

DISCUSSION

[21]

The Trustee essentially disputes the factual and
    jurisdictional basis for the appeal judges remedy under the statutory regime
    of the BIA.  The essence of the Trustees
    appeal to this court, and the answer to it, I believe, is bound up in two
    questions.  First, did the Trustee agree
    to the process and the issue to be decided?  Second, was it within the jurisdiction of the court to proceed in the
    fashion it did and to decide the issue it did?  I find that the answer to both is yes, and I conclude that the appeal
    should be dismissed.

(1)       The process

[22]

By way of brief summary,
    under the BIA the Chief Justice of the Ontario Superior Court of Justice
    designates judicial officers
who sit as part of

Ontarios Bankruptcy Court.  Appeals from a decision made by a Trustee in
    bankruptcy proceedings are most often made to a Registrar of the Ontario
    Bankruptcy Court.  From time to time,
    however, appeals are heard by judges of the Superior Court.

[23]

It seems that in

Ontario the usual course for appeals under
    the BIA may be to proceed by way of
viva voce
evidence.  This includes appeals under s. 81 of the BIA
    of a Notice of Dispute of property claims.  Occasionally the court permits these appeals to proceed by way of
    affidavit evidence or partly by way of affidavit evidence and partly by way of
viva
    voce
evidence:
Katz (Bankruptcy) (Re)
(2005), 14 C.B.R. (5th) 193 (Ont. S.C.)
at paras. 4 and
    5.

[24]

At the very least, the practice seems to be that
    an appeal court, when considering a Notice of Disallowance, will first decide
    the issue of whether the matter proceeds as a true appeal or as a hearing
de novo
.  The test that has evolved seems to be that a hearing
de novo
will occur if the court decides
    that to proceed otherwise would result in an injustice to the creditor:
Charlestown Residential School (Re)
(2010), 70 C.B.R. (5th) 13 (Ont. S.C.) at paras. 1 and 18.

[25]

I note that this practice is not used uniformly across
    the country.  For example, in British
    Columbia an appeal under s. 81 of the BIA is not intended to be a trial
de novo
but rather a true appeal:
Galaxy Sports Inc. (Re)
(2004), 1 C.B.R.
    (5th) 20 (B.C.C.A.) at para. 40.  The
    policy rationale is that trustees in bankruptcy should be regarded as having
    experience and expertise in the area of business financing, restructurings and
    insolvency.

[26]

This BC
    approach makes sense because, if evidence that was not before a Trustee were to
    be presented on an appeal as a matter of course, much of the efficiency in the
    operation of the bankruptcy scheme would be lost.  Creditors who neglected to file a proof of
    claim in compliance with the requirements of the scheme would be at an
    advantage because they could expect to enhance their proof on appeal.  This, it seems to me, would impact on the
    objective implicit in the BIA, which is to enable parties to have their rights
    and claims determined in an expeditious fashion, and add unwanted expense,
    delay and formality:
Galaxy Sports
at
    para. 41.

[27]

However, since counsel before us did not raise the
    issue of the correctness of this practice, I do not intend to comment on it
    further.  This is not the case that
    requires this court to consider the merits of the

Ontario practice.  I would add that the practice appears to have
    been developed mainly through decisions of

Ontarios Bankruptcy Court.

[28]

The procedure adopted for the hearing of the appeal in
    this case was agreed to by the parties and was, in their view, the appropriate
    means to determine the issues.  On that
    there is no dispute.  There is, however,
    a dispute that t
he Trustee
    describes as this: the Trustee did not seek a trial of DSLC's fraud allegations
    against Benarroch, nor was it the Trustee's understanding that such allegations
    were supposed to have been tried before the appeal judge.

[29]

There is no doubt that DSLCs appeal of the Trustees
    Notice of Dispute was focused entirely on its allegation of fraud.  That was the very issue it sought to have
    decided by the appeal judge.  At para. 2
    of his reasons, the appeal judge describes DSLCs position on the appeal this
    way:

[T]hat it is the victim of a fraud at the hands of
    Georges Benarroch and that, as a result of that fraud, it loaned $400,000 to
    Credifinance Securities Limited.  According to DSLC Capital Corp., the
    $310,500 is directly traceable to that $400,000 loan and, therefore, should be
    impressed with a constructive trust in favour of DSLC Capital Corp.

[30]

It was DSLCs appeal.  It framed the issue to be heard by the appeal judge, and all parties
    agreed to the process to be followed.  While the Trustee may have disagreed with what issue was to be decided,
    the appeal judge was required to address the issue put forward by DSLC.  I fail to see where he committed any error in
    doing so.  There is no merit to this
    submission.

(2)       The
    fraud issue

[31]

Before the appeal judge, counsel for the Trustee  who
    is also counsel on this appeal  took two positions that demonstrate that the
    Trustee was fully engaged in the issue of fraud that she now asserts the appeal
    judge had no jurisdiction to decide.  First, she argued that, even if there was a fraudulent
    misrepresentation, it would not allow DSLC to bypass the BIA.  Her view was  as it
    continues to be  that in bankruptcy proceedings, there is no special status
    accorded to a victim of a fraud.

[32]

Second, she fairly conceded

again as she does here

that constructive trust
    principles can be applied in bankruptcy proceedings, however, those principles
    are applied only in the most extraordinary cases.  She relies on
Ascent
    Ltd. (Re)

(2006)
,
18 C.B.R. (5th) 269 (Ont. S.C.)
    as illustrating such a case.  Indeed, in
    her oral submissions, counsel conceded that a trustee could, albeit in
    extraordinary circumstances, find a
de
    facto
constructive trust by allowing the property claim, or otherwise refer
    the issue for a hearing before a Bankruptcy Registrar or judge of the Superior
    Court.

[33]

There is no question that the remedy of constructive
    trust is expressly recognized in bankruptcy proceedings.  Both the case law and authors of texts make
    this clear, although the test for proving the existence of a constructive trust
    in a bankruptcy setting is high: L.W. Houlden & Geoffrey Morawetz,
Houlden and Morawetz Bankruptcy and
    Insolvency Analysis
(Toronto: WL Can, 2011) at F§5(1).  The authors add this at F§5(8): A
    constructive trust will ordinarily be imposed on property in the hands of a
    wrongdoer to prevent him or her from being unjustly enriched by profiting from
    his or her wrongful conduct (citations omitted).

[34]

Ascent,
a case decided by an Ontario Registrar
    in Bankruptcy, is a case that demonstrates
    the type of circumstances that can make a case extraordinary.  I found this case to be very
    instructive.

[35]

The Registrar in
Ascent
held that i
n
its
role as the arbiter of commercial morality, the
    Bankruptcy Court can rely on equitable principles, even at the expense of the
    formulaic aspects of the BIA scheme of distribution: para. 17.

[36]

An example of commercial immorality is
    described in
Ascent
as being where a
    bankrupt and its creditors benefit from misconduct by the bankrupt which was
    the basis upon which the property was obtained.  The Registrar held that to permit an estate to retain the property in
    such circumstances amounts to an unjust enrichment, and the court can impose a
    constructive trust on an estates assets to remedy the injustice.  Furthermore, it matters not which assets are
    consumed to remedy this: para. 18.


[37]

Thus,
a constructive trust in bankruptcy proceedings can be ordered to remedy an injustice; for example, where permitting the creditors access to the bankrupt’s property would result in them being unjustly enriched.  The prerequisite is that the bankrupt obtained the property through misconduct.  The added necessary feature is that it would be unjust to permit the bankrupt and creditors to benefit from the misconduct.

[38]

A Trustee in bankruptcy is an officer of the court and
    must act in an equitable manner.  Enriching creditors with a windfall and depriving another of its
    interest in property, has been held to be an offence to natural justice.  As Karakatsanis J. (as she then was) held at
    para. 14 in
Elez (Re)
(2010), 54
    E.T.R. (3d) 31 (Ont. S.C.), The court will not allow the trustee, as an
    officer of the court, to stand on his legal rights if to do so would offend
    natural justice (citations omitted).

[39]

Some of the relevant findings of the appeal judge,
    which demonstrate why this case is somewhat exceptional, bear repeating:

[23]                 I
    am also satisfied, on a balance of probabilities, that, but for the deceit, Mr.
    Lorenzo [the director of DSLC who negotiated with Benarroch] would not have
    entered into any agreement concerning Credifinance Securities Limited, would
    not have lent Credifinance Securities Limited $400,000, and Credifinance would
    not have $310,500 in its bank account.

[24]                 At
    present, it appears that Georges Benarroch and a company he controls,
    Credifinance Capital Corp., have filed secured claims in the bankruptcy of
    Credifinance Securities Limited.  It appears that the other creditors are
    lawyers who acted for Credifinance Securities Limited in the litigation against
    DSLC Capital Corp and its attempts to recover the $400,000 and in the IDA [Investment
    Dealers Association] investigations.  In this regard, it is also a fact
    that Georges Benarroch, through his company, Donabo Inc., has guaranteed the
    fees of the Trustee.

[40]

Thus, as the appeal judge found, DSLC was the victim of
    a fraud perpetrated by Credifinance and Benarroch.  Importantly, the only creditors of
    Credifinance impacted by the appeal judges order are Benarroch and his
    lawyers.  Enriching Benarroch, therefore,
    with a windfall and depriving DSLC of its interest in the $310,500 would be fundamentally
    unjust.

[41]

The constructive trust granted by the appeal judge was
    just in the circumstances of this case and did not unjustly deprive creditors
    of their rights under the BIA.  In the
    words of the appeal judge at para. 34, those funds should be the subject of a
    constructive trust in favor of DSLC Capital Corp. in order to prevent the
    unjust enrichment of Credifinance Securities Limited.

[42]

It was within the appeal judges jurisdiction to grant
    the remedy he did.  Furthermore, there
    was ample evidence upon which the appeal judge could rely to make the findings
    he did, and they are reasonable and entitled to deference from this court.  I would, therefore, reject this argument.

[43]

Before leaving this issue, I believe it is important to make
    a final observation.  The appeal judges
    reasons should not be interpreted to suggest that once a civil fraud by the
    bankrupt on the claimant, whose claim was disallowed by the trustee, is proven,
    and that is coupled with a loss and an ability to trace the consequences of the
    fraud, then a constructive trust will always be imposed.  That, in my view, is too broad.

[44]

Constructive trust is a discretionary remedy.  In a bankruptcy there are other interests to
    consider besides those of the defrauder and the defraudee: there are other
    creditors.  Thus, the exercise of
    remedial discretion must be informed by additional considerations than in a
    civil fraud trial.  The appeal judge in
    our case clearly understood this, considered the claims of the creditors, found
    them to be tainted by
Benarrochs
misconduct, and concluded
    that a rigid formulaic approach, relying strictly on the letter of the BIA
    would produce an unjust result.

THE CROSS-APPEAL

[45]

The appeal judges decision on costs is
    explained in full in his reasons at para. 35: Having regard to the fact that
    the effect of my ruling means that the Estate of Credifinance Securities
    Limited has virtually no assets, there will be no order concerning costs.
DSLC in its cross-appeal asserts that this was an error and the appeal
    judges decision is not entitled to deference.  I disagree.

[46]

The
    general rule in these types of proceedings is found in the provisions of the
    BIA.  Section 197(1) provides that the
    costs of and incidental to any proceedings in court under the BIA are in the
    discretion of the court.  Section 197(3)
    provides that where an action or proceeding is brought by or against a trustee,
    or where a trustee is made a party to any action or proceeding, he is not
    personally liable for costs unless the court otherwise directs.

[47]

As
    this court held in
McNaughton Automotive Ltd.
v.
Co-operators General
    Insurance Co.
(2008), 95 O.R. (3d) 365 (C.A.) at paras. 23-26, leave to
    appeal a costs decision is granted sparingly and only in obvious cases.  This is because decisions as to costs are
    highly discretionary and are accorded a very high degree of deference.  Generally, they will only be interfered with
    where it can be demonstrated that the decision maker is plainly wrong or has
    made an error in principle.

[48]

While trustees in bankruptcy are not exempt from
    liability for costs, the jurisprudence in the field suggests that they will
    only be liable in limited circumstances: see
Farm Mutual Financial Services
    Inc. (Re)
(2010), 66 C.B.R. (5th) 85 (

Ont.
S.C.).  I fail to see any such limited circumstances
    in this case.  DSLC has not met its heavy
    burden and has not satisfied me that this is an obvious case.

[49]

Accordingly, I would deny DSLC leave to appeal the
    award of costs.

DISPOSITION

[50]

For the reasons herein I would dismiss the Trustees
    appeal.  I would deny DSLC leave to
    appeal the costs order of the appeal judge.

[51]

Although DSLC was unsuccessful on its cross-appeal, it
    was wholly successful in the main appeal.  After factoring this into my analysis, I would award DSLC its costs in
    this court fixed in the amount of $20,000, inclusive of disbursements and
    taxes, paid from the estate.

RELEASED:


MAR -2 2011                                           H.S.
    LaForme J.A.

STG                                                            I
    agree S.T. Goudge J.A.

I
    agree Robert Sharpe J.A.


