Garlicki (Bankrupt), Re, 2010 MBCA 73

• Judge: Steel, Freedman and Chartier, JJ.A.
• Court: Court of Appeal (Manitoba)
• Case Date: April 01, 2010
• Jurisdiction: Manitoba
• Citations: 2010 MBCA 73;(2010), 258 Man.R.(2d) 35 (CA)

Garlicki (Bankrupt), Re (2010), 258 Man.R.(2d) 35 (CA);

      499 W.A.C. 35

MLB headnote and full text

Temp. Cite: [2010] Man.R.(2d) TBEd. JL.015

Guiseppe Bruni (applicant/appellant) v. Lucy Maria Garlicki, also known as Lucy Maria Ferguson (respondent/respondent)

(AI 09-30-07262; 2010 MBCA 73)

Indexed As: Garlicki (Bankrupt), Re

Manitoba Court of Appeal

Steel, Freedman and Chartier, JJ.A.

July 16, 2010.

Summary:

A corporate shareholder (Garlicki) and the corporation (Expressions) sued Bruni for various relief. Bruni cross-claimed for, inter alia, a declaration that Garlicki held half of Expressions' shares in trust for him, damages equal to their fair market value as of March 31, 1999, and punitive and aggravated damages. Garlicki's and Expressions' action was dismissed for failure to pay a costs order. The trial of Bruni's claim was split, the issue of liability proceeding first.

The Manitoba Court of Queen's Bench, in a decision reported at (2005), 197 Man.R.(2d) 308, awarded Bruni judgment against Garlicki for the fair market value of half of Expressions' shares as at March 31, 1999 and the amount that she had misappropriated from Expressions. Quantification of the damages was left to a subsequent trial. When Garlicki failed to attend an examination in aid of execution, Bruni brought a contempt motion. Garlicki assigned herself into bankruptcy. Bruni filed a claim in the bankruptcy proceeding for the costs awarded in both the mistrial and the contempt motion. Bruni sought leave to continue his action, including the pending contempt motion.

A Registrar of the Manitoba Court of Queen's Bench, in a decision reported at (2008), 226 Man.R.(2d) 81, granted the motion. Bruni applied for a declaration that the judgment granted in his favour in 2005 survived Garlicki's bankruptcy.

The Manitoba Court of Queen's Bench, in a decision reported at (2009), 246 Man.R.(2d) 245, held that Garlicki's liability to Bruni for half of the value of the shares of Expressions did not survive bankruptcy, but that her liability for damages flowing from the misappropriations did survive. If Bruni proved more misappropriations of the same character at the trial on damages, liability for damages flowing from those would also survive bankruptcy, as would the costs that had been ordered payable to Bruni regarding a 2004 mistrial and the costs that might be assessed regarding the 2005 trial. Bruni appealed from the finding that Garlicki's liability for half of the value of the shares of Expressions did not survive bankruptcy.

The Manitoba Court of Appeal allowed the appeal.

Bankruptcy - Topic 8983

Discharge of debtor - Liabilities not released by discharge - Act of defalcation or misappropriation in fiduciary capacity - The Manitoba Court of Appeal discussed the meaning of the word "misappropriation" in s. 178(1)(d) of the Bankruptcy and Insolvency Act, concluding that misappropriation "refers to a fiduciary dishonestly taking something for his or her use and clearly implies wrongdoing or improper conduct on the part of the fiduciary. While one might expect that misappropriation will most often occur where money is wrongly or dishonestly applied by the fiduciary for a different purpose than intended (as in this case, with company funds used by the respondent for her own purposes), the concept has equal application when property other than money is wrongly or dishonestly appropriated by the fiduciary for purposes other than intended." - See paragraphs 38 to 48.

Bankruptcy - Topic 8983

Discharge of debtor - Liabilities not released by discharge - Act of defalcation or misappropriation in fiduciary capacity - The Manitoba Court of Appeal discussed the meaning of the word "defalcation" in s. 178(1)(d) of the Bankruptcy and Insolvency Act, concluding that defalcation by a fiduciary for the purposes of s. 178(1)(d) "refers to the failure by the fiduciary to meet his or her obligation. As has been shown, at least regarding 'defalcation', the courts of British Columbia and Alberta have said that a defalcation by a fiduciary arising through negligence, inadvertence or incompetence will survive discharge, even though there has been no deliberate, 'wrongful' conduct by the fiduciary. The courts of Ontario and Manitoba require some element of 'wrongful' conduct by a fiduciary before the liability created by the defalcation will survive discharge." - See paragraphs 49 to 61.

Bankruptcy - Topic 8983

Discharge of debtor - Liabilities not released by discharge - Act of defalcation or misappropriation in fiduciary capacity - Bruni and Garlicki were in a business together - A dispute arose - Bruni was found to be the beneficial owner of half of the company's shares - Garlicki was in breach of trust when she failed to deliver the shares - Bruni was awarded judgment for the fair market value of half of the business's shares - Garlicki assigned herself into bankruptcy - Bruni applied for a declaration that the judgment survived Garlicki's bankruptcy under s. 178(1)(d) of the Bankruptcy and Insolvency Act - The trial court held that the judgment did not survive bankruptcy discharge - While the money taken to create the debt belonged to someone other than the taker and the taker received the money as a fiduciary, the taking was not "wrongful" as required under s. 178(1)(d) - Garlicki had done virtually all of the work to make the company grow and had taken all the risks - The circumstances resembled a business deal gone bad, rather than conduct that should result in a debt surviving bankruptcy - Bruni appealed - The Manitoba Court of Appeal agreed with the trial judge that "wrongful" conduct was required for a debt or liability to survive bankruptcy discharge under s. 178(1)(d) - Whether the conduct in question was a defalcation or a misappropriation (and it could be both), there had to be some element of wrongdoing, improper conduct or failure to account beyond an innocent breach (which would include a breach caused by negligence, incompetence or inadvertence) - Each descriptor of an act in s. 178(1)(d), namely, the acts of fraud, embezzlement, misappropriation and defalcation, was in its ordinary sense infused with an element of moral blameworthiness, even if in varying degrees - Had Parliament intended otherwise, it would have used different words, such as "any breach of duty or failure to meet an obligation" by a fiduciary would not be released by discharge - The language chosen suggested that an interpretation requiring a degree of moral blameworthiness was consistent with Parliament's presumed intention - See paragraphs 62 to 71.

Bankruptcy - Topic 8983

Discharge of debtor - Liabilities not released by discharge - Act of defalcation or misappropriation in fiduciary capacity - Bruni and Garlicki were in a business together - A dispute arose - Bruni was found to be the beneficial owner of half of the company's shares - Garlicki was in breach of trust when she failed to deliver the shares - Bruni was awarded judgment for the fair market value of half of the business's shares - Garlicki assigned herself into bankruptcy - Bruni applied for a declaration that the judgment survived Garlicki's bankruptcy under s. 178(1)(d) of the Bankruptcy and Insolvency Act - The trial court held that the judgment did not survive bankruptcy discharge - While the money taken to create the debt belonged to someone other than the taker and the taker received the money as a fiduciary, the taking was not "wrongful" as required under s. 178(1)(d) - Garlicki had done virtually all of the work to make the company grow and had taken all the risks - The circumstances resembled a business deal gone bad, rather than conduct that should result in a debt surviving bankruptcy - The Manitoba Court of Appeal allowed Bruni's appeal - While the trial judge correctly concluded that s. 178(1)(d) required "wrongful" conduct by the fiduciary for a debt or liability to survive bankruptcy discharge, she committed a palpable and overriding error in finding that Garlicki's failure to turn over the shares was not wrongful - In deciding whether conduct was wrongful for the purposes of s. 178(1)(d), the belief or motive of the bankrupt was not relevant - Garlicki had an obligation as trustee to turn the shares over to Bruni on demand - She refused to comply with that demand and, moreover, shortly after the demand was made, had sued Bruni, claiming that he owned no shares at all - Her conduct was deliberate, willful and extremely persistent, flying in the face of the agreement between the two - Her failure to deliver was not in any sense innocent or caused by any inadvertence, negligence or mistake, but was clearly wrongful - Whether this conduct constituted misappropriation or defalcation or, perhaps, both, Garlicki's ongoing liability for the value of the shares survived her discharge from bankruptcy - See paragraphs 72 to 79.

Bankruptcy - Topic 8995

Discharge of debtor - Liabilities not released by discharge - Practice - Bruni and Garlicki were in a business together - A dispute arose - Bruni was found to be the beneficial owner of half of the company's shares - Garlicki was in breach of trust when she failed to deliver the shares - Bruni was awarded judgment for the fair market value of half of the business's shares - Garlicki assigned herself into bankruptcy - Bruni applied for a declaration that the judgment survived Garlicki's bankruptcy under s. 178(1)(d) of the Bankruptcy and Insolvency Act - The trial court held that the judgment did not survive bankruptcy discharge - While the money taken to create the debt belonged to someone other than the taker and the taker received the money as a fiduciary, the taking was not "wrongful" as required under s. 178(1)(d) - Garlicki had done virtually all of the work to make the company grow and had taken all the risks - The circumstances resembled a business deal gone bad, rather than conduct that should result in a debt surviving bankruptcy - Bruni appealed - At issue was the standard of review - The Manitoba Court of Appeal stated that the issue raised a question of mixed fact and law - First, the trial judge had to consider the proper interpretation of s. 178(1)(d) and whether "wrongful" conduct was required before a debt or liability incurred by a fiduciary would survive bankruptcy discharge - That determination was reviewable on a standard of correctness - Once the legal principle was extricated, the remaining question was purely factual - This involved the weighing of evidence, the evaluation of blameworthiness and a determination of whether Garlicki's conduct reached the required standard - The appeal court had to show considerable deference to the trial judge's view of the matter, which was reviewable on a standard of palpable and overriding error - See paragraphs 22 to 29.

Practice - Topic 8800.1

Appeals - General principles - Duty of appellate court regarding findings of mixed law and fact by a trial judge - [See Bankruptcy - Topic 8995 ].

Statutes - Topic 502

Interpretation - General principles - Intention of legislature - [See third Bankruptcy - Topic 8983 ].

Statutes - Topic 516

Interpretation - General principles - Ordinary meaning of words - [See third Bankruptcy - Topic 8983 ].

Words and Phrases

Defalcation - The Manitoba Court of Appeal considered the meaning of this word in s. 178(1)(d) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 - See paragraphs 49 to 61.

Words and Phrases

Misappropriation - The Manitoba Court of Appeal considered the meaning of this word in s. 178(1)(d) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 - See paragraphs 38 to 48.

Cases Noticed:

Ross & Associates v. Palmer (2001), 153 Man.R.(2d) 147; 238 W.A.C. 147; 2001 MBCA 17, refd to. [para. 18].

Director of Investigation and Research, Competition Act v. Southam Inc. et al., [1997] 1 S.C.R. 748; 209 N.R. 20, refd to. [para. 25].

Towers Ltd. v. Quinton's Cleaners Ltd. et al. (2009), 245 Man.R.(2d) 70; 466 W.A.C. 70; 2009 MBCA 81, refd to. [para. 26].

Manitoba Association of Health Care Professionals v. Nor-Man Regional Health Authority Inc. (2010), 255 Man.R.(2d) 93; 486 W.A.C. 93; 2010 MBCA 55, refd to. [para. 27].

Housen v. Nikolaisen et al., [2002] 2 S.C.R. 235; 286 N.R. 1; 219 Sask.R. 1; 272 W.A.C. 1; 2002 SCC 33, refd to. [para. 28].

Plan Group et al. v. Bell Canada (2009), 252 O.A.C. 71; 96 O.R.(3d) 81; 2009 ONCA 548, refd to. [para. 28].

Valastiak v. Valastiak (2010), 283 B.C.A.C. 204; 480 W.A.C. 204; 2010 BCCA 71, refd to. [para. 31].

International Corona Resources Ltd. v. LAC Minerals Ltd., [1989] 2 S.C.R. 574; 101 N.R. 239; 36 O.A.C. 57, refd to. [para. 33].

Ste. Rose & District Cattle Feeders Co-op v. Geisel (2010), 255 Man.R.(2d) 45; 486 W.A.C. 45; 2010 MBCA 52, refd to. [para. 35].

Simone v. Daley et al. (1999), 118 O.A.C. 54; 170 D.L.R.(4th) 215 (C.A.), refd to. [para. 36].

Janco v. Vereecken (1982), 44 C.B.R.(N.S.) 211 (B.C.C.A.), refd to. [para. 39].

Ironwood Investments Joint Venture v. Leggett (Trustee of) (1996), 38 C.B.R.(3d) 256 (Ont. Gen. Div.), refd to. [para. 40].

Smith v. Henderson et al. (1992), 10 B.C.A.C. 249; 21 W.A.C. 249; 10 C.B.R.(3d) 153 (C.A.), refd to. [para. 43].

Abstainer's Insurance Co. v. Pellegrino (1989), 77 C.B.R.(N.S.) 108 (Ont. Dist. Ct.), refd to. [para. 47].

Evancio Estate (Bankrupt), Re (2004), 185 Man.R.(2d) 310; 2004 MBQB 145, affd. (2004), 190 Man.R.(2d) 224; 335 W.A.C. 224; 2004 MBCA 178, refd to. [para. 57].

Confederation Life Insurance Co. v. Waselenak et al. (1997), 210 A.R. 241; 49 C.C.L.I.(2d) 215 (Q.B.), affd. (2000), 255 A.R. 357; 220 W.A.C. 357; 20 C.C.L.I.(2d) 200; 2000 ABCA 136, refd to. [para. 58].

McAteer v. Billes et al. (2006), 397 A.R. 365; 384 W.A.C. 365; 26 C.B.R.(5th) 119; 2006 ABCA 312, refd to. [para. 66].

Dillon v. Catelli Food Products et al.; Assessment Act, Re, [1937] 1 D.L.R. 353 (Ont. C.A.), refd to. [para. 68].

Statutes Noticed:

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, sect. 178(1)(d) [para. 1].

Authors and Works Noticed:

Sullivan, Ruth, Sullivan on the Construction of Statutes (5th Ed. 2008), pp. 206 [para. 67]; 210 [para. 35].

Counsel:

M.N. Trachtenberg, for the appellant;

E.G. Zazelenchuk, for the respondent.

This appeal was heard on April 1, 2010, by Steel, Freedman and Chartier, JJ.A., of the Manitoba Court of Appeal. On July 16, 2010, Freedman, J.A., delivered the following judgment for the court.