In Re Richards, 2022 ONCA 216, the Court of Appeal dismissed an appeal by an undischarged bankrupt appellant who argued that their interest in a property was suspended during bankruptcy pursuant to the provisions of a Trust.[1] Although the appeal involved the interpretation of the terms of the Trust, the Court of Appeal also cited the “anti-depravation rule” and the public policy underlying the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”) of not allowing persons to place assets out of the reach of their creditors.[2]

Background

The appellant had an outstanding judgment against them by the Royal Bank of Canada (“RBC”).[3] The appellant was the beneficiary of a property pursuant to a Trust settled by their father.[4] The Trust was set up to hold the property during the lives of the appellant’s parents and to distribute the property to the appellant on the passing of both parents (which was described as the “Time of Division”).[5] The property was sold and the proceeds of sale were held in trust.[6]

Standard of Review

With respect to the standard of review, the Court of Appeal noted that the bankruptcy judge’s decision involved an interpretation of a Trust document and was entitled to deference on review pursuant to Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53.[7] The Court of Appeal held that the appellant had failed to demonstrate any error in the bankruptcy judge’s decision.[8]

Applicable Sections of the Bankruptcy and Insolvency Act

The appellant’s Bankruptcy Trustee did not want to pursue a claim due to lack of funding so RBC stood in their shoes with respect to the sale of proceeds of the property pursuant to an order under s. 38 of the BIA which states:

38 (1) Where a creditor requests the trustee to take any proceeding that in his opinion would be for the benefit of the estate of a bankrupt and the trustee refuses or neglects to take the proceeding, the creditor may obtain from the court an order authorizing him to take the proceeding in his own name and at his own expense and risk, on notice being given the other creditors of the contemplated proceeding, and on such other terms and conditions as the court may direct. [9]

RBC brought a motion to recover the sale proceeds up to the amount owing to it and sought a declaration that the “appellant was the beneficiary of the Trust and had an interest in the Property under the terms of the Trust”.[10] RBC argued that the sale proceeds constituted property of the bankrupt which vested in the Bankruptcy Trustee and formed part of their estate, pursuant to the broad definition in s. 67(1)(c) of the BIA which states:

67 (1) The property of a bankrupt divisible among his creditors shall not comprise

[….]

but it shall comprise

(c) 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, including any refund owing to the bankrupt under the Income Tax Act in respect of the calendar year — or the fiscal year of the bankrupt if it is different from the calendar year — in which the bankrupt became a bankrupt, except the portion that

(i) is not subject to the operation of this Act, or

(ii) in the case of a bankrupt who is the judgment debtor named in a garnishee summons served on Her Majesty under the Family Orders and Agreements Enforcement Assistance Act, is garnishable money that is payable to the bankrupt and is to be paid under the garnishee summons, and

(d) such powers in or over or in respect of the property as might have been exercised by the bankrupt for his own benefit.[11]

The Position of the Appellant

The appellant argued that their interest in the property was suspended while they were a bankrupt pursuant to a “somewhat unusual” provision in the Trust (s. 4.2) which read:

Any right of a Beneficiary to receive any income or capital of the Trust Fund as a result of a mandatory direction to the Trustees to make such a distribution, including, for greater certainty, a mandatory entitlement of a Beneficiary to the exclusive use, occupation and enjoyment of the Real Property and the Chattels …. shall be enforceable only until such Beneficiary shall become bankrupt … whereupon and so long as the effect or operation thereof shall continue, the Beneficiary’s Interest shall cease until the cause of the Beneficiary’s Interest becoming vested in or belonging to or being payable to a person other than such Beneficiary shall have ceased to exist … and then the Beneficiary’s Interest shall again be allocated to such Beneficiary as aforesaid unless and until a like or similar event shall happen whereupon the Beneficiary’s Interest of such Beneficiary shall again cease and so on from time to time.[12]

Pursuant to this provision, the appellant submitted that interest in the property could not vest to the Bankruptcy Trustee.[13] The appellant contended that any rights they had in the Trust were suspended during bankruptcy, and the property would only vest in the appellant on discharge from bankruptcy.[14]

Interpretation of the Terms and Public Policy

The Court of Appeal and the bankruptcy judge, Justice Conway, rejected the appellant’s argument.[15] Justice Conway held that the “somewhat unusual” provision (s. 4.2) applied to the property during the lifetimes of the appellant’s parents and the provisions that contained the mandatory division of the property (s. 5.2.2) applied after the death of the parents.[16] As such, s. 5.2.2 was not made subject to s. 4.2 nor did it otherwise reference that provision.[17] Had the intent been as the appellant contended it to be, Justice Conway “would have expected there to have been express language in the mandatory distribution provision to that effect”.[18] Justice Conway held: “I simply cannot conclude that the Settlor intended to override the mandatory mechanism of s. 5.2.2 by an oblique reference to capital in s. 4.2”.[19]

As a result, the Court of Appeal held that the property vested in the appellant at the “Time of Division” and as such vested in their Trustee in Bankruptcy.[20] Since “the Trustee in Bankruptcy had transferred its rights in the appellant’s Property to RBC, RBC was entitled to receive the proceeds of sale up to the amount that the appellant” owed to RBC.[21]

The Court of Appeal further noted that the appellant’s argument with respect to the interpretation of the Trust “would offend the public policy that underlies the BIA by allowing persons to place assets out of the reach of their creditors”.[22] The Court of Appeal cited Justice Rowe in Chandos Construction Ltd. v. Deloitte Restructuring Inc., 2020 SCC 25, at para. 31, and noted:

“the anti-deprivation rule renders void contractual provisions that, upon insolvency, remove value that would otherwise have been available to an insolvent person’s creditors from their reach.”[23]

The appeal was dismissed and costs were awarded in the amount of $17,500.[24]

—

[1] Re Richards, 2022 ONCA 216 at paras 1, 2, and 8 (“Re Richards”).

[2] Re Richards at paras 1 and 13.

[3] Re Richards at para 2.

[4] Re Richards at para 3.

[5] Re Richards at paras 3 and 4.

[6] Re Richards at para 5.

[7] Re Richards at para 12.

[8] Re Richards at para 12.

[9] Re Richards at para 6.

[10] Re Richards at para 7.

[11] Re Richards at para 7.

[12] Re Richards at para 8.

[13] Re Richards at para 9.

[14] Re Richards at para 9.

[15] Re Richards at para 10.

[16] Re Richards at para 10.

[17] Re Richards at para 10.

[18] Re Richards at para 10.

[19] Re Richards at para 10.

[20] Re Richards at para 11.

[21] Re Richards at para 11.

[22] Re Richards at para 13.

[23] Re Richards at para 13.

[24] Re Richards at para 14.