Barter (Re)

2014 BCSC 528 Barter (Re)

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Barter (Re), 2014 BCSC 528 Date: 20140327 Docket: B51386 Registry: Vernon In Bankruptcy and Insolvency In the Matter of the Bankruptcy of Raymond Kevin Barter Before: Master Young (as Registrar) Reasons for Decision Counsel for the Bankrupt: C. Burnett Appearing for Superintendent of Bankruptcy: T. Tang Appearing for D. Thode & Associates Inc.: D. Thode Place and Dates of Trial/Hearing: Kelowna, B.C. January 20 and February 5, 2014 Place and Date of Judgment: Vernon, B.C. March 27, 2014 [1] This is a contested discharge application in a bankruptcy. [2] The bankrupt assigned himself into bankruptcy in November 2012. It was his first bankruptcy brought on partially because of business failure. Prior to his assignment, his house mortgage was in foreclosure. An order nisi was granted in the foreclosure proceedings in December 2012, and the bankrupt was given six months to redeem the mortgage. [3] The bankrupt stopped paying his mortgage payments prior to the assignment. [4] The bankrupt had his house (the "property") listed for sale and intended to sell it if he could during the redemption period. [5] When the bankrupt met with Ms. Varga of the trustee's office to sign the assignment documents, the bankrupt says he was not told that he was not allowed to sell the property. I have to accept this evidence since Ms. Varga did not

appear in court to testify. The bankrupt thought Ms. Varga was the trustee and did not meet Mr. Thode until the third meeting at the trustee's office. [6] The statement of affairs was signed by the bankrupt on November 26, 2012, and witnessed by Janet Varga. On that statement of affairs, the value set for the property was $482,500. There is a note in the description of the property indicating that a foreclosure action had been commenced on October 10, 2012. Given that there was a secured charge registered against the property in the amount of $441,812.66, the trustee estimated the realizable dollar value for the property at zero. [7] The bankrupt says that there was no discussion at the time between him and Ms. Varga telling him that he could not continue to list the property for sale. He was of the view that she was well aware that the property was listed for sale and that they were hoping to get sufficient value from the sale so that there would not be a shortfall on the mortgage and the bankrupt's wife would not have to assign herself into bankruptcy. [8] Because there was no realizable value, the trustee did not register his interest in the property against title. At the hearing of the matter before me, Mr. Thode indicated that he did not wish to spend the money to register his interest given that there was no realizable value to this property. [9] The parties had listed

the property for sale, I believe, in September 2012 with Venture Realty. The realtor, Saffron Quist, provided an opinion of value to them on August 7, 2012, indicating that she believed the property would sell for a price between $465,000 and $500,000. She recommended an initial list price of $510,000. [10] The parties also obtained an appraisal from Dream Home Appraisal Corp. on September 5, 2012, appraising the property at $520,000. [11] The trustee was asked how he or Ms. Varga arrived at the value of $482,500 in the statement of affairs. Mr. Thode explained that he relied on the realtor's opinion of what the property would sell for and took the midpoint between $465,000 and $500,000. [12] At tab 10 of Exhibit 2 on page 2, there is a D. Thode Associates Inc. Property Valuation form as of October 30, 2012. Mr. Thode valued the property at $482,500. He estimated sales costs at $26,406. He calculated the current outstanding amount on the mortgage at $442,855.94, which does not factor in per diem interest. The total estimated equity without taking into account foreclosure costs and per diem interest was $6,618.59, which would not cover the bankrupt's exempt portion of the equity. For this reason, the trustee was of the view that the property had no realizable value. [13] In April 2013, the bankrupt's wife assigned herself into bankruptcy with another trustee. That trustee valued

the property at $499,000, which was the list price for the property at that time. The outstanding balance on the mortgage at that time was $153,890, and that trustee estimated there was a realizable value of $2,046 dollars. In the letter dated June 3, 2013, which is found at tab 4 of Exhibit 2, the bankrupt says: He speaks about me having not purchased the estates [sic] interest ! but until I spoke to Mr. Thode regarding a possible offer for our house that he only then mentioned it some 6 months after filing for bankruptcy. When I spoke to my wife's Trustee and asked why he put an offer to my wife to purchase the estates [sic] interest for $2k he said he owed her a duty of care!, she has just filed bankruptcy and this was the first I have ever heard of this, why did not Janet or Mr. Thode put this option to me especially as he says I quote there is an asset of $20k for his unsecured creditors ‑ don't ask me where. So you can see here he has [implied] that I am at fault ! for not purchasing the estate interest! and perhaps had he told me about it then quite possibly I would have [14] I find that it was not until the bankrupt received an offer to purchase the house and was intending to make a counteroffer in May 2013 that the trustee advised the bankrupt that he did not have the right to sell the house. [15] The trustee says that he was not told what the offer was but that the

bankrupt said he was planning on counteroffering. It was then that the trustee told the bankrupt that he did not have the right to negotiate a sale unless he settled the estate's interest in the property. [16] A sharply worded letter was sent to the bankrupt by the trustee. It can be found at tab 3 of Exhibit, and the bankrupt's complaints about this letter can be found at tab 4 of Exhibit 2. [17] The bankrupt received the letter which advised him that he had breached his obligations in the bankruptcy. He was very concerned and arranged a meeting with the trustee. At the meeting, Mr. Thode told him that the only way he could sell the property was if he purchased the interest in the property from the estate. Mr. Thode was aware that the bankrupt's wife had purchased the interest from her trustee for $2,000 and so this amount was suggested and the bankrupt agreed and signed the form. [18] The bankrupt says that he was coerced into signing the form and he was taken completely off guard. I have trouble accepting this evidence that he was caught completely off guard because the trustee's wife had signed a similar agreement one month prior to this meeting, and I have to assume that the bankrupt and his wife discussed their bankruptcies with one another. [19] After signing the bill of sale prepared by the trustee, the bankrupt went on to attempt to negotiate the sale of the house but

the counteroffer was not accepted. When no sale occurred, the bankrupt complained about having to pay the $2,000 to the trustee and said that he was coerced into this arrangement by the trustee. The Law [20] Section 71 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA"). Vesting of property in trustee 71. On a bankruptcy order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with their property, which shall, subject to this Act and to the rights of secured creditors, immediately pass to and vest in the trustee named in the bankruptcy order or assignment, and in any case of change of trustee the property shall pass from trustee to trustee without any assignment or transfer. [21] Pursuant to this section, the bankrupt's property, including the non-exempt equity in the home, became vested in the trustee. Registration of bankruptcy order or assignment 74. (1) Every bankruptcy order, or a true copy certified by the registrar or other officer of the court that made it, and every assignment, or a true copy certified by the official receiver, may be registered by or on behalf of the trustee in respect of the whole or any part of any real property in which the bankrupt has any interest or estate, or in respect of the whole or any part of any immovable in which the bankrupt has any

right, in the registry office in which, according to the law of the province in which the real property or immovable is situated, deeds or transfers of title and other documents relating to real property, an immovable or any interest or estate in real property or any right in an immovable may be registered. (emphasis added) [22] The trustee in this case did not register the bankruptcy order on title because there appeared to be no realizable value and the registration costs money. He is not obliged to do so. [23] The courts have considered the effect of trustees not making it clear to the bankrupt that it has a realizable claim to the non-exempt equity in the home. It appears to me that the best time to make this declaration is at the beginning of the bankruptcy when the value is estimated. Then the bankrupt knows from the beginning what is expected of him or her. However the case law suggests that this declaration can be made any time up until the discharge of the bankrupt. [24] The Fehr Estate case, 2008 NWTSC 70, deals with a situation where the trustee was estopped from realizing non-exempt equity in the bankrupt's home because the trustee never made it clear to the bankrupt that it had a claim to non‑exempt equity in the home and would take steps to realize it. In that case, the trustee told the bankrupt to keep paying the mortgage payments to avoid foreclosure. The

bankrupts assumed they would be able to keep their home if they kept the mortgage payments current. The trustee in that case had not demonstrated firm intention prior to the absolute discharge of the bankrupt. The court did not permit it to realize the non-exempt equity after the discharge. [25] In Deloitte, Haskings & Sells Ltd. v. Zemlak (1987), 66 C.B.R. (N.S.) 1 (Sask.C.A.), the trustee filed a caveat against the bankrupt's residential property claiming an interest in the non-exempt equity for the general benefit of creditors. The bankrupt continued to live in the house and was subsequently absolutely discharged. The trustee was also discharged. There was little or no non-exempt equity in the property at the time of the discharge. Subsequently the bankrupt became aware that its caveat would lapse unless continued. The trustee applied to continue the caveat. [26] The bankrupt appealed and the appeal court did not allow the trustee to continue with the caveat. The court found the trustee was obliged to either return the property under s. 22 (1) of the BIA and proceed to be discharged, or establish that there was non-exempt equity in the home and continue with the administration of the estate until completion. [27] The court said in general when the trustee is dealing with non-exempt equity in the bankrupt's homestead in a summary administration proceeding the s. 170 report

should set out the value of any non-exempt equity if the trustee intends to attach it for future realization. The notice to the creditors should clearly indicate that the trustee proposes to maintain a caveat after discharge of the bankrupt. As well, in such circumstances, it is important for the bankrupt have independent legal advice on the application for discharge. [28] At pp. 11-12 of Zemlak, the court says: Without articulating specific rules to guide a trustee, we suggest that the following minimal requirements be met when dealing with non-exempt equity in the bankrupts homestead.

1. The report of the trustee on the bankrupt's application for discharge should set forth the value of any non-exempt equity asserted in the "homestead" if the trustee intends to attach it for future realization. In this way the Registrar in Bankruptcy will be alerted to a potential trap for the unwary and may give suitable directions.

2. The notice to creditors, a copy of which is served on the bankrupt, should also indicate clearly that the trustee proposes to maintain a caveat after discharge of the bankrupt.

3. When the trustee intends to maintain a caveat or other encumbrance against the home of the bankrupt, it is important for the bankrupt to have independent legal advice on this point. Since a bankrupt often looks upon the trustee as handling the matter for him (the bankrupt) ‑ particularly in summary administration proceedings ‑ the trustee should advise the bankrupt to retain counsel on the application for discharge. [29] These cases are distinguishable in that the trustee was attempting to assert a claim after the bankrupt was discharged, and in this case, the trustee is asserting a claim at the discharge hearing. Nonetheless, they do set out a minimum standard which requires clear communication to the bankrupt, so they understand whether or not the trustee intends to make a claim against the non-exempt equity. That is what is missing in the case before me. In the case before me, the trustee communicated to the bankrupt that there was no realizable equity in the land. The trustee or its administrator was well aware that the house was for sale and in foreclosure, and that the bankrupt was attempting to acquire a reasonable sale price so that his spouse would not have to assign herself in the bankruptcy. [30] There is a discrepancy in valuation between this bankruptcy and the wife's bankruptcy. This bankrupt should be entitled to rely on the valuation done by his own trustee.

Based on his own trustee's valuation, there was no realizable equity in this property. That fact never changed. [31] In the May 17, 2013 letter, Mr. Thode refers to the appraisals on the property and the listing price in September 2012 and does not mention his assessment of the value of the equity which he set out in the statement of affairs. Mr. Thode was aware of the appraisal and the list price at the time of the assignment. This means at the end of the bankruptcy, Mr. Thode changed his position on valuation with no justification. [32] Mr. Thode demanded that the bankrupt deliver any offer to the trustee because the bankrupt did not have the right capacity to sell or dispose of the property. This is a correct statement of the law, but unfortunately this had not been properly communicated to the bankrupt prior to this conversation over six months into the bankruptcy. [33] I agree with Mr. Thode that what he sold to the bankrupt in the bill of sale dated March 21, 2013, was the right to negotiate a sale of the property directly with purchasers. He was not selling the equity or making a representation that there was $2,000 of non-exempt equity in the property. At that time, the bankrupt thought he was going to be able to negotiate a price higher than that which was assessed by the trustee. Rather than walking away from the negotiations, he opted to purchase the right to

negotiate a sale of the property in the same manner as what his wife had done one month previously. [34] When the sale did not go through, the bankrupt had second thoughts and many complaints about Mr. Thode, and is now opposing that term as a condition of his discharge. [35] Now with the benefit of hindsight, we know that the property ultimately sold in the foreclosure proceeding for the very low sum of $442,000, leaving a shortfall in the mortgage and of course no equity whatsoever. [36] As Justice Wilson said in Engels v. Richard Killen & Associates Ltd., [2002] O.J. No. 2877 (Sup.Ct.J.): [150] Bankruptcy is a court-supervised process governed by principles of fairness. The trustee in bankruptcy and its counsel are officers of the court. They must act with professional neutrality in the interests of the creditors and the bankrupt. The actions of trustees are accorded great deference by the Court. Coincidental with that deference is the responsibility of trustees and their counsel to be evenhanded and dispassionate with all parties affected [37] I find that the trustee and his administrator's conduct fell below the standard they should meet in communicating with this bankrupt. The discussion about the right to purchase an asset from the trustee should have taken place at the beginning of the bankruptcy. Before any bill of sale was entered into, Mr. Thode should have explained

to the bankrupt that he had been of the view that there was no non‑exempt equity in the property, and if he was correct, the bankrupt would be paying $2,000 and receiving nothing in return. [38] Instead, what happened was the bankrupt was pressured to make a decision in the middle of real estate negotiations and told that he had no right to continue the negotiations. Had it been fully explained to him that he was purchasing the right to negotiate a sale and that there was no guarantee that he would realize any money from the sale before he entered into this bill of sale, I likely would have upheld this condition of discharge. The evidence is to the contrary. I do not accept all of the bankrupt's evidence about the shock and surprise, but I do find that the procedure was not properly explained to him and that he was under an extreme amount of pressure imposed by the timing of the communication with the trustee. [39] For that reason, I find it unfair to the bankrupt to impose this condition on his discharge, and I am prepared to grant an absolute discharge. [40] I also reject the trustee's submission that the bankrupt should pay surplus income into the estate because he failed to pay his mortgage payments. The house was in foreclosure. He was told to stop paying his creditors. It is my understanding that once a mortgage is in foreclosure, the bank will not accept payments in any event. "B.M. Young"