



COURT OF APPEAL FOR ONTARIO

CITATION: Conforti (Re), 2015 ONCA 268

DATE: 20150420

DOCKET: C57476

Laskin, Blair and Pepall JJ.A.

In the Matter of the Bankruptcy of Vincenzo
    Francesco Conforti

Robert A. Klotz, for the appellant, Vincenzo Francesco
    Conforti

Howard F. Manis and Debora Miller-Lichtenstein, for the
    respondent Trustee in Bankruptcy, Pat Robinson Inc.

Heard: December 3, 2014

On appeal from the order of Justice James M. Spence of
    the Superior Court of Justice, dated May 3, 2012, with reasons reported at 2012
    ONSC 2656, and the supplemental order dated March 6, 2013.

Pepall J.A.

Introduction

[1]

This appeal involves the impact of bankruptcy on a victim of a motor
    vehicle accident.

[2]

The appellant, Vincenzo Francesco Conforti, was permanently disabled as
    a result of a motor vehicle accident and is unable to continue to work in his
    previous employment as a truck driver. He claimed statutory accident benefits
    (SABs) and also commenced an action for damages. Two and a half years after
    the accident, he filed an assignment in bankruptcy. While bankrupt, he received
    financial assistance from the Ontario Ministry of Community and Social Services
    (the Government). He also received proceeds from the settlements of his SABs
    claim and his action. The appellant failed to disclose either of the settlements
    to his Trustee in Bankruptcy.

[3]

As part of the bankruptcy proceedings, the Trustee was required to
    calculate the appellants total and surplus income under s. 68 of the
Bankruptcy
    and Insolvency Act
, R.S.C. 1985, c. B-3 (
BIA
) to ascertain if
    any amount was available for distribution to the appellants creditors. The
    Trustee sought directions from the court on the appropriate treatment to be accorded
    the financial assistance and the settlement payments received by the appellant.
    At the same time, the appellant asked the court for a discharge from
    bankruptcy.

[4]

The motion judge provided directions and included all of the financial
    assistance, all of the SABs settlement, and a pro-rated portion of the
    settlement of the action proceeds in the appellants total income calculation. This
    resulted in surplus income of $27,986.28 available for creditors. He also
    imposed a $15,000 penalty on the appellant due to his non-disclosure. The
    appellant was granted a discharge upon payment of these two sums.

[5]

The appellant appeals certain parts of the motion judges order. He
    submits that the motion judge erred in his treatment of the financial
    assistance and settlement payments and in his pro-rating methodology. He argues
    that no surplus income was owed to the Trustee for distribution to creditors. He
    accepts that he should be admonished for his conduct, but submits that a
    penalty of $15,000 was only appropriate if no surplus income was payable.

[6]

For the reasons that follow, I would allow the appeal.

Background Facts

(a)

Motor Vehicle Accident

[7]

The appellant was a truck driver who earned annual income of
    approximately $45,000 to $50,000 before tax. He was seriously injured in a
    motor vehicle accident on January 31, 2007. He was 48 years old, having been
    born on July 7, 1958. As a result of the accident, he was subject to
    significant physical limitations that prevented him from continuing in his
    employment as a truck driver. On December 11, 2007, he commenced an action for
    damages for personal injuries arising out of the motor vehicle accident.

[8]

Following the accident, he received SABs at the rate of $1,600 per month
    after tax until December 31, 2008. He then claimed additional SABs payments and
    also applied for financial assistance from the Government. The Government agreed
    to pay the fees for his assignment into bankruptcy and to provide him with monthly
    financial assistance.  In return, the appellant agreed to reimburse the
    Government from the proceeds of his personal injury action. The repayment
    obligation was secured by an assignment of those proceeds. The agreement and
    the assignment are signed and dated February 2009. Thereafter, the appellant
    received financial assistance payments monthly.

(b)

Assignment into Bankruptcy

[9]

On September 24, 2009, the appellant filed an assignment in bankruptcy
    and named Pat Robinson Inc. as his Trustee in Bankruptcy. The appellant
    disclosed assets of $1,000 and liabilities of $116,683.35. He did not disclose
    or advise the Trustee of his personal injury action or his outstanding claim
    for additional SABs payments. Nor did he include them as assets in his sworn
    statement of affairs filed in his bankruptcy proceedings. He acknowledged that
    his failure to disclose the action and the SABs claim reflected very bad
    judgment. While he also did not list his indebtedness to the Government as a
    liability in his statement of affairs, the Trustee was aware of this obligation.
    The Trustee never challenged the assignment in favour of the Government.

(c)

Settlement of SABs Claim and Personal Injury Action

[10]

On
    November 16, 2009, the appellant settled his SABs claim for a payment of approximately
    $21,000 after deduction of legal fees and disbursements. The appellant did not
    disclose the receipt of the SABs settlement payment to the Trustee. He paid
    this amount to an old friend, Gino Crupi. Mr. Crupi had allegedly lent him
    money in 1976 although this debt obligation was not disclosed on the appellants
    sworn statement of affairs. No documentation existed regarding the alleged loan.

[11]

On
    February 10, 2010, the appellant settled his personal injury action for the sum
    of $275,000 inclusive of costs and disbursements. Pursuant to executed minutes
    of settlement, the appellant was to deliver a release from the Trustee to the
    defendant in the action.

[12]

The
    Trustee learned of the settlement proceeds when the appellants lawyer requested
    the release around March 3, 2010.

[13]

The
    settlement allocated the $275,000 as follows:



General damages (pain and
          suffering)

-

$120,000



Future loss of competitive
          advantage

-

$100,000



Future care

-

$7,000



Housekeeping

-

$15,000



Costs, disbursements, and HST

-

$33,000



In addition to the $33,000 allocated towards legal
    costs, disbursements and taxes, the appellant had to pay legal fees of $80,000.
    The settlement provided that no amount was being paid on account of past loss
    of income.
[1]


[14]

At
    the time of the February 10, 2010 settlement, the appellant was 51 years old,
    and the balance of his working life was estimated to be approximately 15 years.

(d)

Discharge Application

[15]

The
    appellant applied to court for a discharge from bankruptcy. The appellants
    unsecured claims amounted to approximately $105,000 and the appellants debt to
    the Government was approximately $38,000. Both the Trustee and the appellants
    principal creditor, Central Mortgage and Housing Corporation, opposed the
    request for a discharge. At the same time, the Trustee also sought directions
    from the court on the issues of property and income inclusions.

[16]

The
    Trustee took the position that both the SABs and the personal injury settlement
    proceeds constituted capital assets, not income, and accordingly, they should
    be paid to the Trustee for distribution to the appellants creditors pursuant
    to s. 67 of the
BIA
. In the alternative, the Trustee argued that the settlement
    proceeds, along with the financial assistance payments, formed part of the
    appellants total income in the years of receipt, pursuant to s. 68.  If so,
    this would result in surplus income available for the benefit of his creditors.
    The Trustee also sought a penalty as a condition of the appellants discharge
    from bankruptcy.

[17]

The
    appellant differed. He argued that the settlement proceeds were not capital
    assets and that while some elements of the settlement proceeds constituted
    income, they should be pro-rated over time. As a result, he argued that there
    was no surplus income available for distribution to his creditors. He
    acknowledged that some penalty was justified.

Applicable Legal Principles

[18]

To
    understand the parties dispute, it is helpful to describe the scheme reflected
    in ss. 67 and 68 of the
BIA
. As a general proposition, s. 67 of the
BIA
deals with property of the bankrupt and s. 68 deals with the bankrupts income.

[19]

One
    of the purposes of the
BIA
is to ensure that all property owned by a
    bankrupt at the date of bankruptcy will, with certain exceptions, vest in the
    trustee for realization and distribution to the bankrupts creditors:

Husky Oil Operations Ltd. v. Minister of
    National Revenue
, [1995] 3 S.C.R. 453, at pp. 470-471.

[20]

Section
    67(1)(c) states that subject to certain exceptions, the property of a bankrupt divisible
    among his creditors shall comprise: all property wherever situated of the
    bankrupt at the date of the bankruptcy or that may be acquired by or devolve on
    the bankrupt before their discharge.

[21]

Historically,
    subject to any amount exempted from seizure by provincial law, the salary of a
    bankrupt vested in the trustee: see e.g.
Industrial Acceptance Corp. v.
    Lalonde
, [1952] 2 S.C.R. 109. This changed in 1966, when the predecessor
    to s. 68 was added to the legislation, creating a bifurcated regime under which
    property and income were treated separately. Section 68 creates a scheme
    designed to determine which portion of a bankrupts total income is surplus
    income available in part for distribution to creditors. In
Marzetti v.
    Marzetti
, [1994] 2 S.C.R. 765, at p. 794, the Supreme Court described s.
    68 as a complete code governing the income of a bankrupt, and held that any
    proceedings to claim a share of the earnings of a bankrupt had to be brought
    under s. 68. A trustee therefore looks to s. 68 to determine what portion, if
    any, of the bankrupts revenues forms part of the bankrupts estate available for
    distribution to creditors:
Re
Landry
(2000), 50 O.R. (3d) 1
    (C.A.), at para. 26, and
Watt v. Beallor Beallor Burns Inc.
(2004), 1 C.B.R. (5th) 141, affd (2004),
1 C.B.R. (5th) 149 (Ont. C.A.).

[22]

Total
    income is defined in s. 68(2) of the
BIA
as including:

(a) a bankrupts revenues of whatever nature or from whatever
    source that are earned or received by the bankrupt between the date of the
    bankruptcy and the date of the bankrupts discharge, including those received
    as damages for wrongful dismissal, received as a pay equity settlement or received
    under an Act of Parliament, or of the legislature of a province, that relates
    to workers compensation; but

(b) does not include any amounts received by the bankrupt
    between the date of the bankruptcy and the date of the bankrupts discharge, as
    a gift, a legacy or an inheritance or as any other windfall.

[23]

Re

Millin
(2005), 13 C.B.R. (5th) 91 (B.C.S.C.), at para. 34, held that
    the revenues described in s. 68(2)(a) should be a substitution for income,
    akin to income, in the nature of income or to have retained its (previous)
    character of income. Examples of payments that have been held to be
    encompassed by the s. 68(2)(a) definition of total income include lost
    wages, disability payments, severance payments, and income tax refunds:
Marzetti
;

Wallace v. United Grain Growers Ltd.
,
[1997] 3 S.C.R. 701;
Re Ali
(1987), 57 O.R. (2d)
    685 (S.C.);
Re Cole
(1995), 32 C.B.R. (3d) 213 (B.C.S.C.);
Re
    Doucet
(1992), 19 C.B.R. (3d) 249 (N.B.Q.B.);
Re Giroux
(1983), 41
    O.R. (2d) 351 (H.C.J.);
Re Greening
(1989), 73 C.B.R. (N.S.) 24
    (N.B.Q.B.) and
Re Rogers
(1993), 18 C.B.R. (3d) 239 (N.S.S.C. (Reg.)).

[24]

Surplus
    income is defined in s. 68(2) as the portion of a bankrupt individuals total
    income that exceeds that which is necessary to enable the bankrupt individual
    to maintain a reasonable standard of living, having regard to the applicable
    standards. Under s. 68(1), the Superintendent must establish, by Directive,
    the standards for determining the surplus income of an individual bankrupt, and
    the amount that a bankrupt who has surplus income is required to pay to the
    estate of the bankrupt. As stated in Directive 11R-2014, the Directive is
    intended to assist the trustee in determining equitably and consistently the
    portion of the bankrupts income that should be paid into the bankrupts
    estate: Industry Canada, Office of the Superintendent of Bankruptcy Canada,
    Directive No. 11R2-2014 (March 18, 2014), at p. 2. The Directive is updated
    annually so as to reflect current standards based on information produced by
    Statistics Canada. Superintendents Directive No. 11R2-2012 was applicable to
    the matters in issue in this appeal.

[25]

Under
    ss. 68(3) and (4) of the
BIA
, the Trustee is required to determine
    whether the bankrupt has surplus income and, if so, fix the amount the bankrupt
    is required to pay to the estate. In making that determination, the trustee is
    to have regard to the applicable standards and to the personal and family
    situation of the bankrupt. Under the statutory scheme, the trustee obtains
    proof of income and expense information for the bankrupts family unit (which
    includes the bankrupt), determines the total monthly income of the bankrupts
    family unit, deducts certain non-discretionary expenses such as spousal and
    child support payments and expenses associated with a medical condition, and
    then uses the standards in the applicable Superintendents Directive to ascertain
    whether there is any surplus income. Subject to certain adjustments, if the
    bankrupt has monthly surplus income equal to or greater than $200, the bankrupt
    is required to pay 50 per cent to the estate for the benefit of creditors. Other
    provisions in the Superintendents Directive address the duration of the
    payments of surplus income.

[26]

Broadly
    speaking therefore, s. 68 reflects a balance between the interests of a
    bankrupts unsecured creditors to share in the bankrupts estate and a
    bankrupts ability to maintain a reasonable standard of living. The Supreme
    Court has held that s. 68 is to be interpreted broadly having regard to the  family
    responsibilities and personal situation of the bankrupt:
Wallace
, at
    paras. 67-68.  As stated in
Marzetti
, this approach reflects an
    overriding concern for the support of families.  Moreover, s. 68(2)(a) is to
    be interpreted in a manner that is consistent with the fresh start principle
    that underlies the bankruptcy regime.

[27]

As
    is evident from the language of the
BIA
, revenue earned or received
    after a bankrupts discharge does not fall within s. 68.

Trustees Motion for Directions

[28]

The
    Trustees motion for directions proceeded in two stages.

[29]

The
    first stage addressed whether the settlement payment allocation of $100,000 for
    future loss of competitive advantage constituted a capital asset and therefore
    was property of the bankrupt appellant available for distribution to creditors
    pursuant to s. 67 of the
BIA

or, alternatively, fell within the
    purview of s. 68.

[30]

On
    January 6, 2011, Wilton-Siegel J. determined that this sum was not property of
    the bankrupt under s. 67 of the BIA:
Re Conforti
, 2012 ONSC 199, 84
    C.B.R. (5th) 239. Applying the purposive approach described in
Wallace
,
    he determined that the essential nature of the $100,000 payment was income and it
    therefore fell within s. 68 of the
BIA
.

[31]

No
    one sought to appeal this order.

[32]

The
    second stage of the motion proceeded before Spence J. (the motion judge) and
    resulted in the decision under appeal. The Trustee sought directions on what
    was to be included in the appellants total income calculation and whether
    conditions should be imposed on the appellants proposed discharge from
    bankruptcy.

[33]

The
    motion judge addressed numerous proposed inclusions in the total income
    calculation. First, he determined that the motor vehicle accident settlement
    payment of $120,000 that was allocated to pain and suffering was not to be
    included in the s. 68 total income calculation. No appeal is taken from that
    determination.

[34]

Secondly,
    the motion judge considered whether the motor vehicle settlement payment of $100,000
    that was allocated to future loss of competitive advantage should be included
    in full as income in the year it was received or pro-rated over the years the
    replaced loss would have been earned. Relying on
Re Berridge
, 2002 ABQB 884, 38 C.B.R. (4th) 172, he
concluded
    that the $100,000 was to be pro-rated over the appellants prospective 15
    working years and then an amount representing his four years of bankruptcy was
    to be included in the appellants total income calculation. This sum amounted
    to $26,667. The appellant appeals that determination insofar as it relates to
    the four year calculation.

[35]

Thirdly,
    applying a similar principle, the trial judge concluded that in theory, the 2009
    SABs settlement payment of approximately $21,000 could be prorated. However, as
    the appellant had immediately paid the money to Mr. Crupi, the inescapable
    inference was that these funds were not needed for his family. As such, rather
    than prorating the $21,000 over a number of years, it was properly included in the
    appellants total income calculation for 2009, the year of receipt. The
    appellant appeals this portion of the motion judges order.

[36]

Fourthly,
    the motion judge did not accept the appellants argument that the financial assistance
    payments should be excluded from the total income calculation. While he did
    accept that
prima facie
the payments constituted a loan, he reasoned
    that they were offset by a debt which was a provable claim in the bankruptcy
    proceedings and which would either be paid or discharged. In these
    circumstances, he considered it reasonable and fair to treat the financial assistance
    payments as income received in each of the years of bankruptcy. As such, the
    motion judge ordered that those amounts be included in the appellants total income
    calculation. The appellant appeals this portion of the motion judges order.

[37]

Using
    the Trustees calculations but adjusting them to incorporate his conclusions,
    the motion judge ordered the appellant to pay $27,986.28 on account of surplus
    income.

[38]

Lastly,
    the motion judge considered the appellants conduct. He noted the appellants
    failure to disclose the settlement payments and his false statement in his
    Statement of Affairs that he had never been involved in civil litigation from
    which he might receive property or money. The motion judge observed that
    counsel for the bankrupt had conceded that a penalty would be in order. As a
    condition of his discharge from bankruptcy, the appellant was ordered to pay a
    penalty of $15,000 to the estate.

[39]

The
    bankrupt was therefore ordered to pay $27,986.28 on account of surplus income
    plus the penalty of $15,000 for a total of $42,986.28. On payment of the sum of
    $42,986.28, the appellant would be discharged from bankruptcy.

Analysis

(a)     Financial Assistance

[40]

As
    mentioned, the appellant submits that the motion judge erred in including the financial
    assistance payments in the appellants total income calculation. I agree.

[41]

The
    motion judge found that the financial assistance payments constituted a loan. This
    was consistent with the holding in
Re Perry
,
2012 NSSC 446, 3 C.B.R. (6th) 293 (Reg.), which dealt
    with a similar financial assistance agreement.

[42]

The
    appellant was not bankrupt in February 2009 when he signed the agreement and gave
    the assignment to the Government. The assignment was security to ensure
    repayment of the loan made by the Government to the appellant. At the time, it
    was open to him to give an assignment of the fruits of his personal injury
    action. As noted in
Royal Bank of Canada v. Woodhouse
(1997), 33 O.R.
    (3d) 47 (Ont. C.A.) and
Frederickson v. Insurance Corp. of British Columbia
(1986),
    28 D.L.R. (4th) 414 (C.A.), affd [1988] 1 S.C.R. 1089, such an assignment is
    valid.

[43]

The
    Trustee never challenged the assignment, or put the Government on notice. The Government
    did not file a proof of claim in the bankruptcy and there was no evidence
    before the court on the issue of perfection. The Government loan cannot be
    described as a substitution for income, akin to income, in the nature of income
    or to have retained its (previous) character of income.  Subject to the issue
    of perfection, it would appear to be a secured debt.  The motion judges
    decision left the appellant exposed to an obligation to repay 100 per cent of
    the debt to the Government, while the inclusion of this amount in the
    appellants total income calculation effectively imposed an additional payment
    obligation on him.

[44]

In
    my view, the motion judge erred in including approximately $38,000 on account
    of the financial assistance payments in the appellants total income
    calculation. I would allow the appeal in this regard.

(b)     Future Care, Housekeeping and Costs

[45]

The
    appellant also submits that the motion judge erred in including the settlement
    allocations totalling $55,000 for future care ($7,000), housekeeping ($15,000)
    and costs, disbursements and HST ($33,000) less an additional amount in legal
    fees for a net inclusion of $39,000 in the total income calculation.

[46]

I
    agree.

[47]

All
    $33,000 of the $55,000 was paid in legal costs, disbursements and HST. The motion
    judge erred in treating any part of this amount as income received by the
    appellant.

[48]

The
    appellant submits that the remaining $22,000 allocated to future care and
    housekeeping constituted expenses associated with a medical condition under s.
    5(3)(d) of the Superintendents Directive. As such, he argues that these sums ought
    to have been deducted from the income of the appellants family unit and ought
    not to have formed part of the total income calculation. Alternatively, he
    argues that the payments are akin to damages for pain and suffering and ought
    not to be included in income.

[49]

Section
    5(3) deductions from income are non-discretionary in nature. Indeed, s. 5(3)
    expressly refers to them as such. As mentioned, the deductions include such
    things as child and spousal support payments. The damages allocated for the
    cost of care and housekeeping services cannot be so characterized. They are
    amounts paid to the appellant to be used as he chooses and hence are
    discretionary. As such, they do not constitute deductions from total income
    under s. 5(3) of the Superintendents Directive.

[50]

They
    are, however, damages that are personal to the appellant and bear a close
    relationship to damages on account of pain and suffering. There is extensive
    support for the proposition that damages for pain and suffering do not fall
    under s. 67 or s. 68 of the
BIA
:
Re Holley
(1986), 54 O.R.
    (2d) 225 (C.A.) and
Re Hollister
, [1926] 3 D.L.R. 707 (Ont. H.C.J.). As
    stated by Goodman J.A. in
Re Holley
: it is not the policy of the law
    to convert into money for the creditors the mental or physical anguish of the
    debtor. The damages allocated to future care and housekeeping are intended to
    alleviate the appellants injured state. It is therefore appropriate to treat
    them in the same manner as damages for pain and suffering.

[51]

I
    would therefore allow the appeal so as to exclude the amount of $39,000
    (representing the $55,000 less $16,000 in additional costs) from the total
    income calculation.

(c)     SABs Settlement Proceeds

[52]

The
    appellant argues that the motion judge erred in including all of the SABs
    settlement proceeds of approximately $21,000 in the appellants total income
    calculation in 2009.

[53]

I
    disagree.

[54]

The
    appellant paid all of the proceeds to Mr. Crupi.  He did not disclose any debt
    owed to Mr. Crupi in his statement of affairs; he did not disclose the debt to
    his Trustee; and he did not disclose to the Trustee that he had paid the full
    sum of $21,892.59 to Mr. Crupi.  In these circumstances and based on the record
    before him, it was open to the motion judge to treat this lump sum payment as
    income in the year of receipt.  I would not give effect to this ground of
    appeal.

(d)     Pro-Rating Calculation for Loss of
    Future Competitive Advantage Allocation

[55]

Before
    the motion judge, the Trustee argued that all of the funds allocated to future loss
    of competitive advantage should be included in the appellants total income
    calculation in the year of receipt whereas the appellant argued that the
    allocation should be pro-rated over the appellants years in bankruptcy
    relative to his estimated remaining work life of 15 years. The motion judge
    acceded to the appellants submissions but applied a fraction of 4/15.

[56]

The
    appellant submits that the motion judge erred in using the 4/15 fraction in
    pro-rating the allocation for loss of future competitive advantage. No issue is
    taken with the denominator, which, while not exact, is a reasonable estimate of
    the appellants remaining working life of 15 years calculated from the date of
    the settlement.  Rather, the appellant argues that the numerator is in error
    and that the pro-rating fraction should have been 2/15 reflecting the two years
    between the settlement of the personal injury action on February 10, 2010 and
    the appellants discharge in May 2012 and not the 4/15 applied by the motion judge.

[57]

The
    allocation on account of future loss of competitive advantage is in the nature
    of a general damages payment and, as such, the date of the settlement is the
    proper commencement date for the calculation. The motion judge correctly pro-rated
    the settlement payment of $100,000 over 15 years but used the September 24,
    2009 date of the assignment into bankruptcy and the May 2012 date of discharge
    as the relevant dates for the purpose of calculating the appellants total
    income. Instead, the relevant dates were February 10, 2010 and May 2012.  These
    dates result in a fraction of 2/15.

[58]

As
    a result of this and the other adjustments relating to the financial assistance
    payments and the settlement payments on account of future care, housekeeping
    and costs, there is no surplus income to be paid by the appellant.  Accordingly,
    the appeal relating to surplus income is allowed. In the circumstances, it is
    unnecessary to address the remaining submissions on surplus income that were
    advanced by the appellant including the motion judges alleged methodological
    errors and the applicability of the
Charter of Rights and Freedoms
.

(e)

Penalty

[59]

This
    leaves the issue of the penalty. In the event that the appeal on surplus income
    were allowed, the appellant had no objection to the penalty of $15,000. Indeed,
    before this court, the appellants counsel properly acknowledged that the
    appellant deserved to be sanctioned for his conduct. I agree. The penalty of
    $15,000 is therefore affirmed.

Disposition

[60]

For
    these reasons, I would allow the appeal in part.  I would vary the order under
    appeal by removing the requirement to pay surplus income and by reducing the
    payment of $42,986.28 payable by the appellant to $15,000.

[61]

The
    parties are to make brief written submissions on costs.

Released:

APR 20 2015                                    S.E.
    Pepall J.A.

JL                                                    I
    agree John Laskin J.A.

I
    agree R.A. Blair J.A.





[1]
The Trustee did not take issue with the settlement allocation.


