



COURT OF APPEAL FOR ONTARIO

CITATION: Lepage (Re), 2016 ONCA 403

DATE: 20160527

DOCKET: C60861

Sharpe, Juriansz and Roberts JJ.A.

In the Matter of the Bankruptcy of Raymond
    Stephen Paul Lepage

Stephanie Lauriault and Pierre-Paul Trottier, for the
    Attorney General of Canada

J. Alden Christian, for Raymond Lepage

Keith MacLaren, for the Trustee

Heard: April 4, 2016

On appeal from the judgment of Justice Robert N. Beaudoin
    of the Ontario Superior Court of Justice in Bankruptcy and Insolvency, dated July
    13, 2015, with reasons reported at 2015 ONSC 4525.

By the Court
:

[1]

In this tax-driven bankruptcy, the Trustee in bankruptcy had the value
    of the residence of the bankrupt, Raymond Lepage, appraised early in the
    bankruptcy in 2010, and concluded that it had negative equity and no value to
    the estate. The Canadian Revenue Agency (CRA), the sole unsecured creditor, did
    not dispute that valuation until 2015 when the Trustee filed its report regarding
    Mr. Lepages application for discharge.

[2]

The motion judge found that the Trustee made representations to Mr.
    Lepage in 2010 that the Trustee would disclaim the property. However, the Trustee
    took no steps pursuant to the
Bankruptcy and Insolvency Act
, R.S.C.
    1985, c. B-3 (
BIA
) to divest its interest in the residence. The motion
    judge found that Mr. Lepage relied on the Trustees representations by paying
    the mortgage, property taxes and insurance for several years.

[3]

This was Mr. Lepages second bankruptcy. As a result, pursuant to s.
    172.1(1)(b)(ii) of the
BIA
, he was not eligible for discharge for thirty-six
    months from the date of bankruptcy.

[4]

On Mr. Lepages application for discharge in 2015, the Trustee reported
    that no amounts were realized on Mr. Lepages property. In 2015, the CRA
    obtained a new appraisal of Mr. Lepages house. The appraisal indicated that
    there had been a significant increase to the equity in the property. As a
    result, the CRA objected to the Trustees report.

[5]

The motion judge ruled, pursuant to ss. 67(1)(c) and 71 of the
BIA
,
    that the increase in equity in Mr. Lepages house was after-acquired property
    that accrued to the estate and hence to the benefit of the CRA.

[6]

However, the motion judge found that the representations made by the Trustee
    and relied upon by Mr. Lepage gave rise to promissory estoppel and precluded
    the Trustee from claiming the entire increase in value of the equity.

[7]

Although Mr. Lepage sought credit for all interest, principal, taxes and
    insurance payments, the motion judge declined to grant him credit for all of
    those amounts, because he found that Mr. Lepage would have incurred living
    expenses elsewhere. However, he ruled that Mr. Lepage was entitled to credit
    for the reduction in the principal amount of the mortgage from October 31,
    2010, the date the Trustees representations were made, to the date of Mr.
    Lepages discharge.

[8]

While the motion judge did not explicitly find that the doctrine of
    promissory estoppel applied in this case, it is common ground that the motion
    judge must have reached that conclusion.

[9]

The CRA argues that he erred in applying the doctrine of promissory estoppel
    and in giving Mr. Lepage credit for the reduction in the principal amount of
    the mortgage.

[10]

To rely on promissory estoppel, Mr. Lepage must establish that:

(a)      the
    Trustee, by words or conduct, made a promise or assurance which was intended to
    affect its legal relationship with Mr. Lepage, and intended Mr. Lepage to act
    upon it; and

(b)      Mr.
    Lepage, relying on the Trustees representations, acted on it or in some way
    changed his position to his detriment.

(See
Deloitte &
    Touche LLP v. Marino
(2004), 72 O.R. (3d) 274, at para. 32)

[11]

It has been held that, in certain circumstances, a Trustee in bankruptcy
    can be barred from claiming an asset on the ground of estoppel:  see
Deloitte
    & Touche LLP v. Marino
;
Koenne (Re)
2010 ONCA 524, at para.
    13.

[12]

In the present case, there does not appear to be any dispute that the
    Trustee made the representation to Mr. Lepage that it would disclaim any
    interest in the house. In his affidavit, Mr. Lepage swore that he maintained
    the house in reliance on the Trustees representations. In our view, it was
    open on the evidence for the motion judge to find that Mr. Lepage relied on
    that representation by making payments on the mortgage.

[13]

The more difficult question is whether Mr. Lepage demonstrated
    detrimental reliance which is an essential element of promissory estoppel (see
Ryan
    v. Moore
, 2005 SCC 38, at para. 68).

[14]

The CRA argues that the motion judge erred in finding that promissory
    estoppel applied because there was no detrimental reliance by Mr. Lepage on the
    Trustees representations.

[15]

Mr. Lepage submits that but for the representations made by the Trustee,
    he would have made different choices, allowing him to benefit from the money he
    was entitled to spend on reasonable living expenses. Mr. Lepage contends
    further that the CRA unfairly benefitted from the increase in equity in his
    home because the increase in equity was available to the estate and the CRA
    only as a result of Mr. Lepage maintaining the home by paying taxes, insurance,
    mortgage interest and principal, and other charges on the basis of the
    Trustees representations.

[16]

We do not accept those submissions.

[17]

In our view, the motion judge erred by failing to apply the provisions
    of ss. 67, 68 and 71 of the
BIA
to Mr. Lepages surplus income and thereby
    allowed Mr. Lepage to retain the after-acquired equity that was created in his
    house.

[18]

During the period that he was an undischarged bankrupt, Mr. Lepage was
    not entitled to build up and keep any assets acquired after his bankruptcy. As
    the motion judge correctly recognized, all after acquired assets were vested in
    the Trustee for the benefit of Mr. Lepages creditors.

[19]

The only money that Mr. Lepage was entitled to keep as an undischarged
    bankrupt under the
BIA
was the portion of his income that he used as
    reasonable living expenses. In accordance with s. 68 of the
BIA
, money
    not used as reasonable living expenses was surplus income that vested in the
    Trustee for the benefit of Mr. Lepages creditors. The motion judge erred in
    failing to recognize that Mr. Lepages surplus income formed part of his estate
    that vested in the Trustee for the benefit of his creditors and in reasoning
    that Mr. Lepage could use his surplus income to walk away and build equity
    elsewhere.

[20]

Mr. Lepage was required to submit monthly income and expense statements
    to the Trustee. The Trustee was obliged to monitor Mr. Lepages income and
    expenses to determine whether there was any surplus income for the benefit of
    his creditors. In his statements, Mr. Lepage listed his monthly mortgage
    payments and other household expenses as part of his reasonable living
    expenses.  As the motion judge found, Mr. Lepage was not entitled to credit for
    his reasonable living expenses because, if Mr. Lepage had not continued to live
    at his residence, he would have incurred living expenses elsewhere.

[21]

There was no basis for the motion judge to distinguish between the
    mortgage principal payments and the other payments related to mortgage interest
    and maintaining the house, because, as stated by Mr. Lepage in his monthly
    statements to the Trustee, they were all reasonable living expenses. Mr. Lepage
    was not entitled to be effectively reimbursed for his reasonable living
    expenses from the increased equity in his house.

[22]

In our view,
Deloitte & Touche LLP v. Marino
is distinguishable. In that case, the bankrupt made
    mortgage and other payments after discharge relying on the trustees
    representations that no claim would be made against her home. As a discharged
    bankrupt, she was entitled to dispose of her property as she wished in
    accordance with the fresh start principle.

[23]

Mr. Lepages situation was
    different. As an undischarged bankrupt, he remained subject to the rule that
    after-acquired property vested in the trustee. Mr
. Lepage was not
    entitled to retain any surplus income that exceeded his reasonable living
    expenses. Having claimed the mortgage payments as reasonable living expenses,
    he was not entitled to be credited or reimbursed for those payments or to have
    them treated as other than after-acquired property that vested in the trustee.

[24]

The Trustee asks us to comment on the guidance offered by the motion
    judge on how Trustees should deal with a property such as that at issue in this
    appeal. Obviously, the overarching duty of the Trustee to maximize the value of
    the estate governs. How that is best accomplished will depend upon the
    circumstances of the particular case.

[25]

If the Trustee decides to hold on to the property in the hope that its
    market value will rise, a practical way to cover ongoing costs of interest,
    insurance, taxes and maintenance must be found. In many if not most cases, that
    will not be possible and the Trustee will conclude that it is best to dispose
    of the property quickly or disclaim any interest in it. We agree with the
    motion judge that if the bankrupt remains in the property or acquires it from
    the Trustee before discharge, subject to any order to the contrary, any
    increase in equity is after-acquired property that accrues to the benefit of the
    estate.

[26]

To ensure an orderly process, any arrangements between the Trustee and
    the bankrupt regarding the property should be reported to the inspectors at the
    time they are made so that timely objections can be made.

[27]

For these reasons, the appeal is allowed. The CRA is not seeking any
    costs in relation to this appeal or the motion. Accordingly, there will be no
    order as to costs.

Released: May 27, 2016

Robert J. Sharpe J.A.

R.G. Juriansz J.A.

L.B. Roberts J.A.


