



COURT OF APPEAL FOR ONTARIO

CITATION: Lawyers' Professional Indemnity Company v.
    Rodriguez, 2018 ONCA 171

DATE: 20180221

DOCKET: C64200

Doherty, Paciocco and Nordheimer JJ.A.

BETWEEN

Lawyers Professional Indemnity Company and FCT
    Insurance Company Ltd.

Applicants (Respondents)

and

Mauricio Rodriguez

Respondent (Appellant)

Ronald Allan, for the appellant

Kim Ferreira, for the respondents

Heard: February 9, 2018

On appeal from the order of Justice Michael R. Gibson of the
    Superior Court of Justice, dated July 19, 2017.

Nordheimer J.A.:

[1]

The appellant appeals from the application judges order that declared
    that a default judgment against the appellant, a discharged bankrupt, was a
    debt within the meaning of s. 178(1)(d) of the
Bankruptcy and Insolvency
    Act
, R.S.C. 1985, c. B-3 (
BIA
), and therefore survives the
    appellants discharge from bankruptcy.

[2]

Section 178(1)(d) provides that a debt or liability will survive
    bankruptcy if it arose out of misappropriation by the bankrupt, while acting in
    a fiduciary capacity. In this case, the default judgment that established the
    appellants debt was based on the appellants failure to comply with his
    payment obligations under a mortgage. The pleadings relied on to secure that
    default judgment did not allege or disclose that the appellant had
    misappropriated funds in a fiduciary capacity.

[3]

In making its s. 178(1)(d) application, the respondents furnished
    additional and new evidence showing that the appellant had not only breached
    his mortgage obligation to the respondent, but had misappropriated trust funds
    that were paid to the appellant by mistake. It was this extraneous and
    uncontested evidence that the application judge relied on to make the s.
    178(1)(d) declaration.

[4]

In his appeal, the appellant said that it was improper for the
    application judge to receive extraneous evidence on the s. 178(1)(d)
    application. We agreed, and so, at the conclusion of the hearing, we allowed the
    appeal with reasons to follow.

[5]

While I provide detailed reasons below, our decision can be explained in
    simple terms. The debt or liability the respondent was relying on during the s.
    178(1)(d) application was the judgment debt secured by the default judgment. It
    was therefore the nature of that debt that the application judge should have
    determined on the application, not whether, in addition to the wrong that led
    to that judgment debt, the appellant had engaged in other conduct that would qualify
    under s. 178(1)(d). Properly read, the case law supports this restricted
    approach.

[6]

To be clear, in characterizing a judgment debt under s. 178(1)(d), a
    judge is not confined just to the cause of action pleaded in the action that
    produced the judgment debt. The issue under s. 178(1)(d) relates to the
    substance of the judgment debt. The judge can therefore look at the material
    filed that led to the obtaining of the judgment debt, including the facts pleaded
    in support of the action that led to the judgment debt, any evidence that was
    presented at the time to secure that judgment debt, and any reasons that might
    have been given. A judge cannot, however, consider extraneous evidence not
    grounded in the process that produced the judgment debt. Among other reasons,
    it could extend the reach of the section to statute-barred claims, and violate
    cause of action estoppel rules.

[7]

By going beyond the information linked to the judgment debt and
    considering extraneous evidence, the application judge therefore erred.

Background

[8]

The background facts are that, on July 18, 2003, the appellant purchased
    a property, municipally known as 40 Mapes Avenue, Hamilton, Ontario ( 40 Mapes
    Property).

[9]

As part of the purchase, the appellant granted President's Choice
    Financial ("PCF") a mortgage on the 40 Mapes Property. The mortgage
    secured the principal amount of $174,352.50.

[10]

FCT
    Insurance Company Ltd., one of the respondents in this appeal, provided the
    title insurance for the purchase and the mortgage.

[11]

On
    or about September 9, 2003, the appellant retained a lawyer to represent him on
    the sale of the 40 Mapes Property. The sale price of the property was
    $220,000.00.

[12]

On
    October 3, 2003, the sale was completed and the appellants lawyer gave an undertaking
    to the purchaser's lawyer to discharge the mortgage.

[13]

For
    reasons that I need not get into, PCF required the appellants lawyer to hold
    back $145,000 from the sale proceeds to guarantee that PCF was paid and that the
    mortgage would be discharged.

[14]

At
    the beginning of October 2003, the appellant asked his lawyer to provide him
    with his share of the proceeds from the sale of the 40 Mapes Property.

[15]

On
    or about October 8, 2003, the lawyer mistakenly issued a cheque to the
    appellant for $179,600, which represented all of the funds realized from the sale
    of the 40 Mapes Property, including the $145,000 that should have been held for
    the benefit of PCF.

[16]

Sometime
    later, when the mistaken payment to the appellant was realized, the appellants
    lawyer made various efforts to recover the monies from the appellant. The
    appellant said that he no longer had the funds, which he said he had lost on a
    sports bet. In fact, the appellant had used the funds to renovate his home and
    to purchase a new car.

[17]

On
    December 10, 2003, the lawyer reported himself to the Lawyers Professional
    Indemnity Company (LawPro), the other respondent in this appeal.

[18]

On
    July 11, 2005, PCF assigned the mortgage to LawPro and FCT. On July 19, 2005, the
    respondents lawyers sent a demand letter to the appellant advising him of the
    assignment and requesting the immediate payment of the $145,000. The appellant
    failed to repay the funds.

[19]

On
    October 28, 2005, the respondents commenced an action against the appellant to
    enforce their rights against him under the mortgage. In that claim, the
    respondents sought the amount of $186,000 that was alleged to be due under the
    mortgage. There is no mention in the statement of claim of any of the facts
    surrounding the mistaken payment by the lawyer to the appellant.

[20]

The
    appellant did not defend the action and, on March 27, 2006, the registrar
    signed a default judgment against the appellant for $192,402.78, plus costs.
    The respondents then filed writs of seizure and sale.

[21]

On
    July 14, 2006, the respondents lawyers wrote to the appellant to advise him of
    the default judgment and to request that the appellant make immediate payment. The
    appellant did not respond to the demand and never satisfied the default judgment.

[22]

On
    November 12, 2009, the appellant made an assignment into bankruptcy. The
    appellant failed to list either of the respondents as creditors or disclose the
    default judgment on his statement of affairs. Accordingly, the respondents did
    not receive notice of the bankruptcy and did not have an opportunity to
    participate in those proceedings.

[23]

On
    April 11, 2012, the appellant received an absolute discharge and, on June 28,
    2012, the trustee received its discharge.

[24]

On
    July 17, 2013, a lawyer, acting on behalf of the appellant, wrote to the
    respondents lawyers to advise, among other things, that the appellant was a
    discharged bankrupt. The appellants lawyer asked that a writ of seizure and sale
    relating to the default judgment be lifted. This was the first occasion when the
    respondents became aware of the bankruptcy or of the appellants discharge.

[25]

On
    January 31, 2017, the respondents issued a notice of application, relying on s.
    178(1)(d) and (e) of the
BIA
,
for a declaration that the default
    judgment survives the appellants bankruptcy. On the application, however, it
    appears that only s. 178(1)(d) was relied upon. In support of the application, the
    respondents filed the affidavit of Tiziana Moretti, a law clerk in the
    respondents law firm. The affidavit essentially sets out the above facts
    relating to the mistaken payment made by the real estate lawyer to the
    appellant. While the appellant opposed the relief sought on the application, he
    chose not to file an affidavit in response, or to cross-examine Ms. Moretti.

Analysis

[26]

Section
    178(1)(d) of the
BIA
states:

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

[27]

The
    application judge correctly set out what the respondents had to establish in
    order to obtain the relief that they sought under s. 178(1)(d), namely that:

(i)

the appellant owed the respondents a debt or liability;

(ii)

the
    debt or liability arose out of fraud, embezzlement, misappropriation or
    defalcation; and

(iii) the fraud, embezzlement, misappropriation or
    defalcation occurred while the appellant was acting in a fiduciary capacity.

[28]

In
    reaching his conclusion to grant the declaration that the default judgment fell
    within s. 178(1)(d), the application judge said, at para. 31:

The Court is permitted to look to the judgment, the evidence
    that would have been led had the action been defended, and that which has been
    led in this application, to assess whether the judgment debt falls within s.
    178(1)(d).

[29]

The
    application judge referred to a number of authorities on the issue of what
    information the court is entitled to consider in reaching its conclusion on the
    scope of s. 178. He distinguished the decision in
H.Y. Louie Co. v. Bowick
    (c.o.b. Power Quest Batteries)
,
2015 BCCA 256, which had refused to
    allow additional information to be led on an application, on the basis that the
    judgment at issue in that case was a consent judgment. Instead, the application
    judge preferred the decision in
Toth v. Lehman
,
2016 BCCA 514
    which, he said, stood for the proposition that it was acceptable for the court
    to look at the evidentiary proceedings at trial in order to determine if fraud
    was demonstrated.

[30]

I
    take no issue with the proposition that the application judge drew from the
    decision in
Toth
. That proposition, however, does not provide a proper
    foundation for what the application judge did in this case. The application
    judge did not look at the evidentiary proceedings at trial. Rather, he looked
    at evidence which has been led in this application in determining whether the
    default judgment could fall within s. 178(1)(d). In so doing, the application
    judge expanded the proposition that can be drawn from
Toth
. At the
    same time, he erred in distinguishing
H.Y. Louie
.

[31]

The
    majority in
H.Y. Louie

reviewed a number of cases that
    addressed the evidence that a court could reference in considering the
    application of s. 178(1)(d). The majority concluded, per Chiasson J.A., at
    para. 82:

It is clear that characterization of a judgment is based on the
    pleadings available to the court that made the judgment and the proceedings
    before it.

[32]

In
    my view, the reference made to the proceedings before it is a reference to
    the proceedings that were before the court that granted the default judgment,
    not the court that is considering the application of s. 178(1)(d). This
    conclusion is a principled one. The debt the applicant is relying upon in a s. 178(1)(d)
    application is a judgment debt, and it is the nature of that debt that is to be
    characterized under s. 178(1)(d), not previous unmade allegations against the
    judgment debtor.

[33]

In
    my view, the law supports this sensible restriction. The respondent submits
    that the decision in
H.Y. Louie
has been confined to the situation where
    a consent judgment is involved. I do not agree. In the subsequent decision in
Cruise
    Connections Canada v. Szet
o
, 2015 BCCA 363, Garson J.A. said, at
    para. 29:

H.Y. Louie v. Bowick
expressly confirms a court's
    ability to characterize a previous judgment in a s. 178 application based on
    "the pleadings available to the court that made the judgment
and the
    proceedings before it
": at para. 82 [original emphasis]. A court can
    therefore look to the entire context of the proceedings in the Original Action
    to determine whether the judgment debt can be characterized as one falling
    within s. 178(1).

[34]

This
    conclusion is consistent with other authorities. For example, in L.W. Houlden
    & Geoffrey B. Morawetz,
The 2016-2017 Annotated Bankruptcy and
    Insolvency Act
, 2016-2017 ed. (Toronto: Thomson Reuters), the authors say
    at
§
63(5)(i):

In deciding whether the claim comes within s. 178(1)(d), the
    court can consider the reasons for judgment and the pleadings in the action
    [citation omitted].

[35]

With
    respect, the application judge erred in his reading of
Toth
. One has
    to go to the underlying decision of first instance, which the British Columbia
    Court of Appeal upheld, to understand the evidence that was relied upon. While
    it is true that the court in that case said that it could look to the evidence
    at trial, it was referring to a trial that occurred in Ontario which ended in a
    family law judgment against the defendant. The plaintiff then sought to enforce
    that Ontario judgment in British Columbia, which ultimately led to the
    defendants bankruptcy. It was in this context that the application to
    determine whether the judgment debt fell within s. 178(1)(d) of the
BIA

arose before the British Columbia courts in
Toth
. This is clear
    from the reasons in
Lehman (Re)
,

2016 BCSC 126, where Cole J.,
    after referring to earlier decisions of the British Columbia Court of Appeal, said,
    at para. 54:

Given the above authorities, the fact that the creditor did not
    plead misappropriation or a fiduciary relationship in the Judgment is not fatal
    to his application pursuant to s. 178(1)(d) of the
BIA
. At the same
    time, it is not my role to make new findings of fact.

[36]

In
    this case, of course, there was no evidence at trial to which reference could
    be had because no trial occurred.

[37]

In
    support of their position, the respondents also point to the decision in
Batista
    v. Mason's Masonry Supply Ltd
.
,

2014 ONSC 3955 where
    Matheson J. said, at para. 37:

I conclude that there is some authority, in different
    circumstances, suggesting that I may look behind the default judgment and the
    pleading, and consider extrinsic evidence.

[38]

It
    is not clear what the some authority was for that conclusion. Only two cases
    are mentioned on this point in
Batista
. One is
Metric Contracting
    Services Corp. v. Kepic
, 2013 ONSC 7036 where a trial, albeit an
    uncontested one, had occurred. The application judge considered evidence that
    was led at that trial, not new evidence introduced for the first time during
    the s. 178(1)(d) application. I have already pointed out that evidence from the
    trial, upon which the judgment is based, can properly be considered when deciding
    the application of s. 178(1)(d). That is not extraneous evidence.

[39]

The
    other case is
Perciasepe v. Smith
, [2003] O.J. No. 6043 (S.C.J.), affirmed
    [2004] O.J. No. 3110 (C.A.). That case also involved a default judgment but it was
    an unusual case in terms of the procedure that was followed. Indeed, the motion
    judge in that case described it as an uncommon procedural circumstance:
Perciasepe
,
    at para. 9. In essence, what happened was that a plaintiff had a default
    judgment against the defendant that it maintained was covered by s. 178 and
    thus survived the discharge of the defendants bankruptcy. Importantly, as
    noted by Eberhard J., at para. 14:

The statement of claim supporting the Plaintiff's default
    judgment did contain allegations which the Defendant concedes, if they were
    proven, would constitute fraud.

[40]

The
    defendant/bankrupt brought a motion to lift the
BIA
stay of
    proceedings to permit her to attempt to re-open the pleadings in that action to
    challenge the fraud allegations. That motion was granted and a trial of certain
    issues was ordered. Before those issues could be tried, however, the plaintiff
    brought a motion for summary judgment seeking, among other things, that the
    default judgment survived the bankruptcy because it fell within s. 178. It is
    not clear to me how summary judgment could be sought where a default judgment
    existed, but that appears to be what happened.

[41]

I
    make two observations regarding the decision in
Perciasepe
. The first
    is that, given the unusual circumstances of that proceeding, the decision in
    that case ought to be confined to its particular facts. The second is that it
    is not clear, notwithstanding the unusual procedure, that the motion judge
    considered any extraneous evidence of the type that was put forward in this
    case. Rather, it appears that she concluded that the default judgment was
    covered by s. 178 on the basis of the fraud allegations made in the statement
    of claim upon which the default judgment was granted. Based on the authorities
    which I have already referenced above, the motion judge was entitled to look at
    the contents of the original pleading. It does not appear, therefore, that the
    decision in
Perciasepe
assists the respondents here.

[42]

The
    respondents also rely on the decision in
Korea Data Systems Co. v. Aamazing
    Technologies Inc. (c.o.b. Ajay Amazing Technologies Inc.)
, 2012 ONSC 3922
    where Marrocco J. said, at para. 106:

Typically, when a court has to make a determination, it is able
    to consider any evidence that is helpful and not otherwise inadmissible. I see no
    reason why the same principle should not apply when the court is being asked to
    make a declaration concerning the applicability of s. 178(1)(d).

[43]

That
    observation has to be read in the context of what the trial judge was
    addressing in that case. When it came to the s. 178 issue, the trial judge was
    dealing with whether a California judgment survived the bankruptcy of one of
    the defendants to the action. The trial judge concluded that it did not. In
    deciding that issue, however, it does not appear that the trial judge
    considered anything other than the California judgment itself and the reasons
    for judgment (referred to as a Statement of Decision). Neither of those
    constitute extraneous evidence.

[44]

I
    would also note that extraneous evidence, which the above authorities say a court
    cannot look at on a motion for a declaration under s. 178, would be considered
    inadmissible evidence. The above quotation from
Korea
is therefore
    consistent with the prevailing authorities.

[45]

Finally,
    the respondents also relied on the decision of the Registrar in
Re Phillips
,
    [1994] A.J. No. 499 that appears to suggest that the failure to plead the facts
    necessary to bring a claim within s. 178 is not a bar to subsequently doing so.
    That decision runs contrary to all of the decisions to which I have referred
    above. In response to it, I adopt the approach taken in
H.Y. Louie
,

where Chiasson J.A. said, at para. 86:

I am aware of the Masters decision in
Re Phillips
,
    [1994] A.J. No. 499 (Alta. Q.B.) I consider it to be an anomaly based on
    the particular circumstances examined by the Master in that case. In my view,
    it is not compelling authority supporting the proposition that a court may
    characterize a consent judgment as one of fraud where fraud was not pleaded and
    no material supporting fraud was before the court making the order. In my view,
    the great weight of authority is to the contrary.

[46]

In
    my view, the decisions of the British Columbia Court of Appeal in
H.Y.
    Louie

and in
Cruise Connections
, along with others,
    clearly establish that extraneous evidence is not admissible on an application
    to declare that a judgment debt falls within s. 178 of the
BIA
. The
    approach taken in British Columbia should be mirrored in this province, both in
    the interests of comity and for the sake of consistency, especially since the
BIA
is a federal statute.

[47]

As
    I have mentioned, this approach is a principled one, given that it is the judgment debt that has to be characterized. There are also sound policy reasons for preventing s. 178(1)(d) applicants from seeking to change the foundation for a judgment debt they are seeking to enforce in the bankruptcy. First, it may well be that the claim based on the new foundation for the judgment debt would be statute-barred if advanced on its own. Limitations exist for sound policy reasons. A respondent in a s. 178(1)(d) application should not have to respond to time-barred claims. Moreover, when a lawsuit has been successfully prosecuted based on one cause of action, cause of action estoppel applies to prevent a subsequent lawsuit relating to the same loss being advanced on a different cause of action:
Doering v. Grandview (Town)
, [1976] 2 S.C.R. 621. Permitting a different cause of action, not raised during the proceedings leading to the judgment debt, to be proved in a s. 178(1)(d) application arguably violates this rule.

[48]

I
    conclude, therefore, that the application judge was not entitled to look at the
    affidavit of Tiziana Moretti that the respondents filed in support of their
    January 31, 2017 application. Rather, the application judge was restricted to
    looking at the default judgment and the pleadings, in this case the statement
    of claim, to determine whether the default judgment fell within s. 178(1)(d). Clearly
    it did not, as the statement of claim advanced a claim based solely on a
    mortgage default.

[49]

While
    this result may seem unfair to the respondents, given the admitted conduct of
    the appellant, the respondents had the right to frame their claim as they chose.
    In particular, the respondents knew all about the improper actions of the
    appellant when they commenced their action in 2005 on the mortgage. They could
    have sued the appellant based on his mistaken receipt of the funds, and his
    subsequent disposal of those funds. That is a claim that likely would have been
    declared to be within the purview of s. 178(1)(d). However, that is not what
    the respondents chose to do. They cannot now attempt to recast their claim in
    order to bring it under the exception in s. 178(1)(d). I also note in passing
    that the respondents had other remedies available to them when they became
    aware of bankruptcy. The respondents could have sought to have the discharge of
    the bankrupt annulled under s. 180 or they could have claimed against the
    appellant, under s. 178(1)(f), for the dividend that the respondents would have
    received in the bankruptcy.

[50]

Before
    concluding, I wish to make it clear that this decision should not be taken as agreeing
    with the application judges reasoning that led him to conclude that the
    appellant was in a fiduciary relationship, which is necessary to satisfy one of
    the other requirements of s. 178(1)(d). However, since this matter was not
    argued by the parties, I do not need to engage with it any further.

DISPOSITION

[51]

Neither
    the contents of the statement of claim, nor anything set out in the default
    judgment, could establish that the default judgment was one that fell within s.
    178(1)(d). It is for these reasons that we allowed the appeal. The order below is
    set aside and the application is dismissed. In accordance with the agreement of
    the parties, the respondents will pay to the appellant costs in the amount of
    $23,500, all inclusive, for both the appeal and the application below.

Released: DD FEB 21 2018

I.V.B. Nordheimer J.A.

I agree. Doherty J.A.

I agree. David M. Paciocco J.A.


