G. Non-Dischargeable Claims

Author:Roderick J. Wood
Profession:Faculty of Law. University of Alberta

Page 289

The BIA sets out a list of claims that are not released by a bankruptcy discharge.88An exception is made in these cases in order to recognize that the fresh start policy of bankruptcy law must yield to certain overriding social policy objectives that require that certain claims be protected against the discharge.89Non-dischargeable claims are subject to the automatic stay of proceedings90and are entitled to participate with the other creditors in a bankruptcy distribution in the ordinary manner.91A failure to file a proof of claim in the bankruptcy does not prevent a creditor from pursuing a non-dischargeable claim against the debtor, although it will prevent the claimant from participating in a bankruptcy distribution.92Any interest associated with non-dischargeable claims is also recoverable from the debtor.93If a judgment was obtained before the bankruptcy, the costs associated with the award are recoverable following the bankruptcy discharge.94There are a number of different ways in which a claimant can establish that his claim falls within one of the categories of non-dischargeable claims. If the claimant obtained a judgment before the bankruptcy that contains a finding of facts sufficient to bring the claim within one of the categories of non-dischargeable claims, nothing else need be done.95If the judgment does not expressly make a finding of the necessary elements, the claimant can seek a declaration of the court that the claim

Page 290

was not discharged by the bankruptcy of the debtor.96If no judgment has been obtained, the claimant can bring an action against the debtor, and, if the alleged facts are proven, the existence of a bankruptcy discharge will be no defence to the action.97

A determination of whether the claim falls within one of the categories of non-dischargeable claims must be made by a court.98A decision of an administrative tribunal is not sufficient.99Opinion is divided on whether a default judgment obtained before the bankruptcy constitutes proof of the alleged facts. Some hold that it does not, since the entry of a default judgment is a ministerial act that does not involve a finding by a court.100Others have held that it constitutes proof of the facts alleged in the pleadings.101

1) Fines, Penalties, and Restitution Orders

The first category of non-dischargeable claims covers fines, penalties, and restitution orders. These are not restricted to penalties associated with criminal law but also include fines imposed for regulatory offences and for violations of municipal by-laws.102It does not cover civil penalties, such as an award for punitive damages.103The category encompasses penalties that are imposed by a judge in a criminal or quasi-criminal context in which the court engaged in the exercise of sentencing the offender considers factors such as the ability of the accused to pay the fine, penalty, or restitution as well as the rehabilitation of the offender. It therefore does not cover statutes that provide for man-

Page 291

datory orders for repayment of tax.104Increasingly, government agencies are using administrative monetary penalties to ensure regulatory compliance. These do not fall within the category of non-dischargeable claims, since the courts have held that the fine or penalty must be one that relates to a criminal or quasi-criminal proceeding.105

2) Damages Awards for Intentional Bodily Harm or Sexual Assault

The second category of non-dischargeable claims covers damages awards for bodily harm that was intentionally inflicted, for sexual assault, or for wrongful death caused by either.106It is not necessary that the debtor have actually inflicted the harm, so long as the debtor is a joint tortfeasor who acted in concert with a person who intentionally caused the harm.107It does not cover physical harm that results from defamation or malicious prosecution where there is no finding that the act was done with the intent of causing injury to the victim.108

3) Family Support Claims

The third and fourth categories of non-dischargeable claims covers claims for alimony109and claims arising under a judicial decision establishing affiliation or respecting support or maintenance, or under an agreement for maintenance and support of a spouse, former spouse, former common-law partner, or child living apart from the bankrupt.110

Claims for support were not formerly provable in bankruptcy but were made provable and given a preferred creditor ranking by amendments to the BIA in 1997.111

The difference in treatment in bankruptcy between family support obligations and obligations that relate to the division of property often makes characterization of the obligation a critical issue. If the obligation is for support, it survives. If it relates to the division of property, it is released. The difficulty is that a separation agreement may not make

Page 292

it clear how the obligation is to be characterized, with the result that this task falls to a court to decide. In making this determination, a court must look to the nature of the liability, the words of the agreement, and the circumstances surrounding the negotiation of the agreement.112

4) Fraud or Misappropriation by a Fiduciary

The fifth category of non-dischargeable claims covers claims arising out of fraud, embezzlement, misappropriation, or defalcation while acting in a fiduciary capacity.113The requirement that the debtor act in a fiduciary capacity applies to all of the types of conduct listed in the provision.114Fiduciary relationships are ones in which a person must act with loyalty and in good faith for the interests of another. Fiduciary relationships are not restricted to the classic categories, such as between a trustee and a beneficiary or between a corporation and its directors and officers. They may also arise outside the established categories when there is a "mutual understanding that one party has relinquished its own self-interest and agreed to act solely on behalf of the other party."115

Although the relationship between an employer and employee is not by its nature a fiduciary relationship, the employee may be found to be acting in a fiduciary capacity when he or she is responsible for handling money belonging to the employer.116A fiduciary relationship has been found to exist when a claimant advances funds to permit the borrower to acquire an asset on behalf of the claimant and the recipient fails to use the funds for this purpose.117

A breach of a fiduciary relationship alone is not sufficient to fall within the category of claim. There must also be an act of fraud, embezzlement, misappropriation, or defalcation on the part of the debtor. Some courts have held that a defalcation or misappropriation might occur simply from a failure to account when called upon to do so.118

Page 293

Other courts have held that the association of those terms with fraud and embezzlement indicates that there must be an element of dishonesty.119This latter view better accords with the fresh start policy of bankruptcy law. A breach of fiduciary obligation can occur without any intentional wrongdoing,120and there is little justification for making these types of claims non-dischargeable in the absence of moral misconduct on the part of the debtor.

5) Obtaining Property Services by False Pretences or Fraudulent Misrepresentation

The sixth category of non-dischargeable claims covers claims for obtaining property services by false pretences or fraudulent misrepresentation.121Unlike the previous category, it does not require the existence of a fiduciary obligation. In order for a...

To continue reading