DSLC Capital Corp. v. Credifinance Securities Ltd. et al., (2011) 277 O.A.C. 377 (CA)

• Judge: Goudge, Sharpe and LaForme, JJ.A.
• Court: Court of Appeal (Ontario)
• Case Date: January 07, 2011
• Jurisdiction: Ontario
• Citations: (2011), 277 O.A.C. 377 (CA);2011 ONCA 160

DSLC Capital v. Credifinance (2011), 277 O.A.C. 377 (CA)

MLB headnote and full text

Temp. Cite: [2011] O.A.C. TBEd. FE.065

In The Matter Of the Bankruptcy of Credifinance Securities Limited, of the City of Toronto, in the Province of Ontario

Deloitte & Touche Inc., in its Capacity as Trustee in Bankruptcy of Credifinance Securities Limited (appellant) v. DSLC Capital Corp. (respondent)

(C51766; 2011 ONCA 160)

Indexed As: DSLC Capital Corp. v. Credifinance Securities Ltd. et al.

Ontario Court of Appeal

Goudge, Sharpe and LaForme, JJ.A.

March 2, 2011.

Summary:

Credifinance Securities Limited (Credifinance) made an assignment in bankruptcy. DSLC Capital Corp. (DSLC) filed a proof of claim in the amount of $400,000 respecting a loan alleging that $310,500 in the possession of Credifinance was its property. DSLC alleged that it had been defrauded into loaning the money. The Trustee denied the claim in full, finding that the allegations of fraudulent misrepresentation made by DSLC, even if they could be established, were incapable at law of elevating DSLC's subordinate unsecured claim to the status of a property claim with priority over the Trustee or other creditors of the bankrupt. DSLC appealed.

The Ontario Superior Court, in a decision reported at [2010] O.T.C. Uned. 984, allowed the appeal, finding that DSLC had been defrauded into loaning Credifinance the $400,000. The court granted DSLC a constructive trust over what remained of the loan ($310,500) in order to prevent the unjust enrichment of Credifinance and determined that the money did not form part of the bankrupt estate. The Trustee appealed. DSLC cross-appealed, seeking leave to appeal the decision not to award it costs.

The Ontario Court of appeal dismissed the appeal and cross-appeal.

Bankruptcy - Topic 2613

Trustees - Duties - Duty to act fairly - A creditor (DSLC) filed a proof of claim in the amount of $400,000 respecting a loan made to a bankrupt alleging that $310,500 in the bankrupt's possession was DSLC's property - DSLC alleged that it had been defrauded by the bankrupt and Benarroch (who controlled the bankrupt) into loaning the money - The Trustee denied the claim, finding that the fraud allegations, even if they could be established, were incapable at law of elevating DSLC's subordinate unsecured claim to the status of a property claim with priority over the Trustee or other creditors of the bankrupt - The only other creditors were Benarroch, his company and his lawyers - DSLC appealed - The appeal judge allowed the appeal, finding that DSLC had been defrauded into loaning the bankrupt the $400,000 - The appeal judge granted DSLC a constructive trust over what remained of the loan ($310,500) in order to prevent the unjust enrichment of the bankrupt and determined that the money did not form part of the bankrupt estate - The Ontario Court of Appeal dismissed the Trustee's appeal - It was within the appeal judge's jurisdiction to grant the remedy he did - A constructive trust was available in bankruptcy proceedings in an extraordinary case to remedy an injustice - A Trustee in bankruptcy was an officer of the court and had to act in an equitable manner - Enriching creditors with a windfall and depriving another of its interest in property could be an offence to natural justice - The constructive trust in this case was just and did not unjustly deprive creditors of their rights - Enriching Benarroch with a windfall and depriving DSLC of its interest in the $310,500 would be fundamentally unjust - See paragraphs 31 to 44.

Bankruptcy - Topic 3658

Creditors - General - Priorities - Equitable claims - [See Bankruptcy - Topic 2613 ].

Restitution - Topic 123

Unjust enrichment - Remedies - Constructive trust - [See Bankruptcy - Topic 2613 ].

Trusts - Topic 2308

Constructive trusts - General principles - Circumstances when imposed - [See Bankruptcy - Topic 2613 ].

Cases Noticed:

Katz (Bankrupt), Re, [2005] O.T.C. Uned. 802; 14 C.B.R.(5th) 193 (Sup. Ct. Bktcy. Registrar), refd to. [para. 23].

Charlestown Residential School (Bankrupt), Re, [2010] O.T.C. Uned. 4099; 70 C.B.R.(5th) 13 (Sup. Ct. Registrar), refd to. [para. 24].

Galaxy Sports Inc. (Bankrupt), Re (2004), 200 B.C.A.C. 184; 327 W.A.C. 184; 1 C.B.R.(5th) 20 (C.A.), refd to. [para. 25].

Ascent Ltd. (Bankrupt), Re, [2006] O.T.C. 17; 18 C.B.R.(5th) 269 (Sup. Ct. Registrar), refd to. [para. 32].

Elez (Bankrupt), Re, [2010] O.T.C. Uned. 1052; 54 E.T.R.(3d) 31 (Sup. Ct.), refd to. [para. 38].

McNaughton Automotive Ltd. v. Co-operators General Insurance Co. (2009), 255 O.A.C. 362; 95 O.R.(3d) 365 (C.A.), refd to. [para. 47].

Farm Mutual Financial Services Inc. (Bankrupt), Re, [2010] O.T.C. Uned. 2184; 66 C.B.R.(5th) 85 (Sup. Ct.), refd to. [para. 48].

Authors and Works Noticed:

Houlden, Lloyd W., and Morawetz, Geoffrey B., Bankruptcy and Insolvency Analysis (2011), paras. F § 5(1), F § 5(8) [para. 33].

Counsel:

Catherine Francis, for the appellant;

Gregory Sidlofsky, for the respondent.

This appeal and cross-appeal were heard on January 7, 2011, before Goudge, Sharpe and LaForme, JJ.A., of the Ontario Court of Appeal. LaForme, J.A., delivered the following decision for the Court of Appeal on March 2, 2011.