Simone v. Daley

Simone v. Daley Collection Decisions of the Court of Appeal Date 1999-03-01 Docket numbers C24521 Judges McKinlay, Hilda Margaret; Weiler, Karen Merle Magnuson; Blair, Robert Ashley Subject Civil Decision Content DATE:19990301 DOCKET: C24521 COURT OF APPEAL FOR ONTARIO McKINLAY AND WEILER JJ.A. AND BLAIR J. (ad hoc) BETWEEN: ) Victor L. Freidin, Q.C. ) for Appellants and MICHAEL SIMONE and SANDY ) Respondents on Cross- SIMONE ) Appeal ) Plaintiffs (Respondents and ) E. Zeppieri and G.F. Ahmadi Appellants on Cross-Appeal) ) for Respondents and ) Appellants on Cross-Appeal - and - ) ) SEAN LEO KEVIN DALEY, SANDRA ) MONTANARI PEAT MARWICK ) THORNE INC., TRUSTEE FOR THE ) ESTATE OF SEAN LEO KEVIN DALEY, ) MANULIFE BANK OF CANADA, ) GIUSEPPINA DINOTO, and DOMENIC ) Heard: October 5 and 6, 1998 DINOTO ) ) Defendants (Appellants and ) Respondents on Cross-Appeal) ) R. A. BLAIR J (ad hoc): I - OVERVIEW AND FACTS Overview [1] On December 27, 1991, Michael and Sandy Simone orally agreed to purchase a home located at 55 Bayside Court in the Town of Vaughan from the Defendants, Sean Daley and Sandra Montanari. They moved in immediately, and have continued to live in the premises to the present time -- although not in their capacity as purchasers. The transaction was to have closed in January 1993, but it aborted. It failed to close largely because of the financial travails of the appellant, Sean Daley, which ultimately led to his voluntary assignment in bankruptcy in October 1993. Mortgagees sold under power of sale. Relatives of the Respondent purchasers acquired the premises from the mortgagee and the Simones still reside in the premises, but as tenants. In the meantime, they have lost more than $130,000 in payments they made to the appellant vendors on account of the purchase price, and on behalf of the appellants to the first mortgagee, and in improvements which they made to the property in contemplation of becoming its owners. [2] The trial judge concluded that the transaction had failed to close because of Sean Daley's failure to arrange for the financing on closing, which he held Mr. Daley had agreed to do as part of the transaction. As a result of the breach the Simone's lost the amounts above referred to; however, the trial judge deducted from those amounts the sum of $11,000 for taxes which he held were the responsibility of the Simone's under the oral agreement, and a further sum of $64,800 for occupation rent. He therefore awarded the Simones damages in the amount of $53,320 plus pre-judgment interest from January 1, 1995. The trial judge also concluded that Mr. Daley had been acting in a fiduciary capacity and that his breach constituted a misappropriation or defalcation as contemplated in paragraph 178(1)(d) of the Bankruptcy and Insolvency Act R.S.C. 1985, c. B-3, as amended (the "BIA"), and accordingly he granted a declaration that Mr. Daley's discharge from bankruptcy does not extinguish the debt as against him. [3] The central issue on this appeal relates to that declaration and to the trial judge's conclusion that Mr. Daley had committed a misappropriation or defalcation while acting in a fiduciary capacity. An additional element on the appeal relates to damages (the appellants argue further deductions should have been made), and the Respondents cross-appeal as to damages as well (submitting that fewer deductions should have been made). Facts [4] At the time of the agreement, Mr. Daley was a young lawyer recently called to the Bar, and Ms. Montanari was his secretary. They had been engaged to be married, but at the time had had a falling out1. In contemplation of their pending marriage they had purchased 55 Bayside Court, which was situated across the street from Ms. Montanari's parents. Because of the falling out, however, Mr. Daley no longer wished to live across the street from Ms. Montanari and her parents. Moreover, with a large mortgage against them and taxes, calling for monthly payments in the area of $5,000, the premises were difficult to carry. Accordingly, Mr. Daley was looking for a solution to this problem. [5] He found what was thought to be the solution in his friend, Michael Simone. Mr. Simone is a real estate agent of 20 years experience. He and Mr. Daley had first become acquainted when Mr. Daley had successfully represented Mr. Simone in some court proceedings. A friendship developed. They began to socialize together. Mr. Daley became aware that Michael and Sandy Simone were looking for a place to live. Mr. Simone discovered that Mr. Daley was an interested seller. In late December, 1991 B with some involvement of Sandy Simone B they negotiated the agreement. [6] The agreement, however, was never reduced to writing. The parties disagreed as to some of its terms. They were substantially in agreement that: (a) the purchase price was to be $380,000.00; (b) the Simones were to take possession immediately, and were to assume the costs of utilities; (c) the Simones were to make monthly payments on account of the purchase price at a minimum of $1,000.00 to a maximum of $2,000.00 per month for about one year; and, (d) title was to transfer from the defendants to the Simones in or about January 1993 when the balance of the purchase price was to be paid. [7] There were three issues upon which the parties could not agree, however, and the trial judge was required to resolve them. The issues, and his findings with respect to them, were as follows: (1) Who was responsible for the payment of municipal taxes during the period of possession prior to closing? Jennings J. found that the taxes were to have been paid by Mr. and Mrs. Simone, the purchasers. (2) Had the Simones agreed to make a payment of up to $60,000 to Mr. Daley, on account of the purchase price, by June 30, 1992? The trial judge found that there was to be no such "maximum" payment made by that date. (3) Who was to arrange for the financing required to pay the balance of the purchase price due on closing? Significantly, for the purposes of this case, the trial judge found that it was Mr. Daley who agreed to find the financing to close, and that he failed to comply with that obligation. [8] In making his findings, the trial judge assessed the evidence of Michael Simone and of Sean Daley and concluded that where the evidence of the two differed on critical matters he preferred and accepted the evidence of Mr. Simone. It was open to the trial judge to make the foregoing findings on the evidence, and I see no basis for interfering with them. The trial judge then went on to conclude that the appellants had breached their agreement of purchase and sale, that Sean Daley was in breach of fiduciary obligations owed to the plaintiffs, that his fiduciary breach constituted a misappropriation or defalcation as contemplated by paragraph 178(1)(d) of the BIA, and accordingly that the judgment against him survives his discharge from bankruptcy. I turn now to an analysis and consideration of those issues. II - LAW AND ANALYSIS Fiduciary Obligations [9] From the start of his analysis, Jennings J. rejected "out of hand" the submission that Mr. Daley was acting as the Simone's solicitor in connection with the transaction. This finding is well-supported by the evidence. It meant, however, that the finding of a fiduciary relationship, if one were to be made, had to be based on something other than the existence of a solicitor- client relationship B a clear category of fiduciary. That circumstance has given rise to some difficulties in this case, in my view. [10] The trial judge correctly relied upon the observations of appellate courts to the effect B as stated by Griffiths J.A. in Knoch Estate v. John Picken Ltd.(1991), 4 O.R. (3d) 385, at p. 394 B that, it is a question of fact in each case whether a fiduciary relationship exists and that it is the nature of the relationship, not the special category of the actors involved, which gives rise to the finding of a fiduciary. [11] He then proceeded to examine the facts in light of the "three general characteristics" first attributed to fiduciaries by Wilson J., in dissent in Frame v. Frame, [1987] 2 S.C.R. 99, and subsequently adopted by the majority of the Supreme Court of Canada (per Sopinka J.) in Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 S.C.R. 574, at pp. 598-599, as a "rough and ready guide", namely that: (a) the fiduciary has scope for the exercise of some discretion or power; (b) the fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary's legal or practical interests; and, (c) the beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power. [12] Applying the foregoing principles to the circumstances of this case, Jennings J. concluded that, once the agreement had been made, the appellant vendors were in "a special relationship" with the plaintiffs by reasons of their obligation, as vendors, to act as trustees of the title to the property for the purchasers pending closing. I quote in full his reasoning with respect to the fiduciary finding, which is contained in the following passage from his Reasons: In the case before me, once the agreement was made, I find the defendants were in a special relationship with the plaintiffs. Although they were the legal owners of the property, the plaintiffs were the beneficial owners, subject to complying with the terms of the agreement. To that extent, the defendants acted as trustees of the title to the property. They were obliged to take no steps to deal with that title in a manner harmful to the plaintiffs' beneficial interest. As legal owners, they clearly had the scope to exercise power, and to exercise it unilaterally, to affect the beneficiaries' interest. As legal owners, they knew they were trusted, as friends of the plaintiffs, and because of that trust the plaintiffs were vulnerable to or at the mercy of any dealing they chose to take with the title. They were obliged to keep the mortgages in good standing so that they could be discharged, and they did not. They were obliged to keep the title clear of executions so that a clear title could be transferred, and they did not. Most importantly, they were obliged not to further encumber the title, and by placing a third mortgage for $60,000 on title six months into the deal, without the knowledge of the plaintiffs, they breached what I find to be their fiduciary duty to the plaintiffs. [13] I have serious reservations about the finding of a fiduciary relationship between the plaintiffs and the defendants in the circumstances here. Nonetheless, the existence of such a relationship is a question of fact for determination in each case, and I would not interfere with the trial judge's ultimate disposition in this regard. Some further comments with respect to the fiduciary aspect of this case are nevertheless in order however, in my opinion. [14] The relationship between the parties was that of vendor and purchaser, and in my opinion the existence of such a relationship does not, in itself, give rise to fiduciary duties. Nor does the fact that the vendors and purchasers happened to be friends, elevate the relationship to a fiduciary level. The normal contractual relationship between a vendor and purchaser is not characterized by the reposing of a trust or confidence by one person in another and a consequent dependence resulting therefrom, which the authorities indicate give rise to a fiduciary duty. It is true that the vendor acts as trustee of the title for the purchaser pending completion of the transaction. However, to the extent that there may be an obligation of the vendor "to take no steps to deal with [the] title in a manner harmful to the [purchaser's] beneficial interest", as the trial judge concluded, it is only in the sense of an obligation to be in a position to deliver title on closing, in my view. Breach of the obligation to convey the title, on tender of the purchase price at closing, is remedied by damages or, in appropriate circumstances B because of the equitable requirement to hold title B by the equitable remedy of specific performance. There is no need to resort to the fiduciary concept. [15] Thus, I would be reluctant to attribute to vendors and purchasers, generally, the obligations pending the completion of a sale which the trial judge attributes to them in order to seal the existence of a fiduciary obligation. It goes too far, in my respectful view, to suggest categorically that a vendor is obligated "to keep the mortgages in good standing so that they could be discharged", or "to keep the title clear of executions so that a clear title could be transferred", or even "not to further encumber the title". The obligation of a vendor is to convey clear title on closing. Not infrequently people find themselves in a position where it is necessary to re-organize and restructure their financial and proprietary affairs in order to place them on a sounder footing and avoid insolvency. They are not always successful in this endeavour. There will be many circumstances where mortgages continue to be in default with arrears continuing to accumulate, or where the property becomes subject to other executions because of a vendor's outstanding financial difficulties in other areas, pending the closing of a transaction. Such developments in themselves do not constitute the sort of unilateral exercise of power in respect of a "vulnerable" beneficiary which gives rise to a fiduciary duty or a breach of that duty. Even the placing of a further mortgage against the property is not necessarily prohibited, provided the vendor can convey title free of it on closing B particularly where, as here, the additional mortgage was placed on title in order to raise funds to reduce the outstanding obligations pursuant to the first mortgage. [16] Purchasers are well able to protect themselves with respect to title by registering the agreement: see the Land Titles Act, R.S.O. 1990, c. L-5, section 71. I observe in passing that Mr. Simone, the purchaser in this case, was hardly a neophyte when it came to matters of real estate. He is a real estate agent with more than 30 years of experience. It is apparent that the trial judge was not impressed with Mr. Daley as a witness. Nor was he impressed with his financial and investment lifestyle, for a young professional of such limited experience. A fiduciary obligation must be grounded in the nature of the relationship which exists between the parties, however, and not on the result in law or equity which it is sought to reach. The courts have cautioned against the latter approach and the resort to what have been referred to as "false indicators of a fiduciary relationship", one of which may be the presence of conduct which attracts judicial sanction: see, Hodgkinson v. Simms, [1994] S.C.R. 277, per Sopinka J. and McLachlin J., at p. 463. [17] Subject to the caveat of the foregoing reservations, however, I think there was evidence which might have supported a fiduciary finding in this case. That evidence relates to the undertaking on the part of Mr. Daley to arrange the financing, which he was unable to do. A fiduciary finding based upon the power/discretion/vulnerability analysis might have been sustained on that footing. In the end, I would not interfere with the conclusion of Jennings J. that in the peculiar circumstances of this case Mr. Daley owed a fiduciary duty to the plaintiffs. Debt Surviving Bankruptcy [18] Having concluded that Mr. Daley owed a fiduciary duty to the plaintiffs, the trial judge went on to find that he had committed a misappropriation or defalcation in that capacity, as contemplated by paragraph 178(1)(d) of the BIA. He accordingly granted the plaintiffs a declaration that the debt of Mr. Daley arising from the judgment was not extinguished by his discharge from bankruptcy. [19] Respectfully, I am of the opinion that he erred in this regard. [20] Section 178 of the BIA, in its entirety, reads as follows: 178(1) An order of discharge does not release the bankrupt from (a) any fine, penalty, restitution order or other order similar in nature to a fine, penalty or restitution order, imposed by a court in respect of an offence, or any debt arising out of a recognizance or bail; (b) any debt or liability for alimony; (c) any debt or liability under a support, maintenance or affiliation order or under an agreement for maintenance and support of a spouse or child living apart from the bankrupt; (d) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity; (e) any debt or liability for obtaining property by false pretences or fraudulent misrepresentation; or (f) liability for the dividend that a creditor would have been entitled to receive on any provable claim not disclosed to the trustee, unless the creditor had notice or knowledge of the bankruptcy and failed to take reasonable action to prove his claim. (2) Subject to subsection (1), an order of discharge releases the bankrupt from all claims provable in bankruptcy. [21] The trial judge addressed both paragraphs (d) and (e). He found that there was no evidence of false pretences, that Mr. Daley had not made any fraudulent misrepresentations, and that he had committed no fraud. This left him with the concepts of "misappropriation" and "defalcation", as contemplated by paragraph 178(d), and he concluded that Mr. Daley had fallen afoul of those provisions. Specifically, he held that Mr. Daley had committed a misappropriation and defalcation in a fiduciary capacity, (a) by failing to keep the mortgages in good standing so that they could be discharged; (b) by failing to keep title clear of executions so that a clear title could be transferred; and, (c) by further encumbering the title by placing a third mortgage on the property, without the knowledge of the purchasers. [22] I have already indicated that, in my view, the foregoing conduct neither creates a fiduciary duty in relation to a real estate transaction, nor constitutes a breach of such a duty. Even accepting the existence of a fiduciary duty on the part of Mr. Daley, based on the evidence as a whole, I am satisfied, in the same way, that they do not amount to a "misappropriation or defalcation while acting in a fiduciary capacity", as contemplated in paragraph 178(1)(d) of the BIA. In the circumstances of this case, they do not entail the misapplication of, or failure to account properly for, property or funds entrusted to a fiduciary which is the characteristic of conduct amounting to misappropriation or defalcation. [23] It is worth observing at this point that not only did the trial judge negative fraudulent misrepresentation and fraud on the part of Mr. Daley, and make no finding of bad faith; importantly, he did not make a finding that the parties had agreed the funds paid by the Simones were to be used solely for purposes of reducing the defendant's obligations vis à vis the subject property. It was Mr. Daley's position that he was permitted to use the funds to make payments towards other obligations. While Mr. Simone testified at one point that he was under the assumption the monies were going to be used to pay the mortgages on 55 Bayside Court, he ultimately conceded in cross- examination that he didn't care where the money went or what Mr. Daley did with it, as long as it went towards reducing the purchase price. [24] The problems with accumulating arrears on the mortgages to which the property was subject, and the registration of executions against the lands, had their origins in Mr. Daley's inability to cope with his overall financial difficulties arising from the six or seven bad real estate investments in which he found himself entangled. He did not have sufficient revenues from all sources B including the monies coming from the Simone's B to defray the costs of carrying those investments. His financial world was tumbling down over his head. Even the criticized third mortgage in question, as I have previously noted, was placed on title in order to raise funds to reduce the outstanding obligations under the first mortgage, and thus did not have any overall negative affect on the net encumbrances outstanding against the property. [25] Not infrequently, bankrupts are at least to some extent the authors of their own misfortune. This does not disqualify them from ultimately obtaining their discharge; nor should it necessarily turn them into fiduciaries of those with whom they have dealt. Suppose that people make reasonable, but ultimately unwise, attempts to stave off bankruptcy by agreeing to sell certain of their assets in order to reduce liabilities and free up funds to carry other remaining assets. Are those people to be precluded from obtaining a discharge, after bankruptcy, from liabilities relating to the failed attempts, because arrears have continued to accumulate against the properties which are subject to the sale pending closing, and third party executions are registered during the same period as a result of other judgments incurred? In my opinion, a significant purpose of bankruptcy legislation might well be jeopardized, if such were to be the case. [26] I turn now to a consideration of that purpose and of the scheme of section 178 of the BIA, and to an examination of the concepts of "misappropriation" and "defalcation" as found in that section. [27] An important purpose of bankruptcy legislation is to encourage the rehabilitation of an honest but unfortunate debtor, and to permit his or her re-integration into society B subject to reasonable conditions B by obtaining a discharge from the continued burden of crushing financial obligations which cannot be met: see, Re Newsome (1927), 8 C.B.R. 279 (Ont. S.C.); Canadian Bankers' Association v. Saskatchewan (Attorney General) (1955), 35 C.B.R. 135 (S.C.C.); Cleve's Sporting Goods Ltd. v. J.G. Touchie & Associates Ltd. (1986), 58 C.B.R. (N.S.) 304 (N.S.C.A.); Ironwood Investments Joint Venture v. Leggett (Trustee of) (1995), 38 C.B.R. (3d) 256 (Ont. Gen. Div.), at p. 264; and Jerrard v. Peacock (1985), 57 C.B.R. (N.S.) 54 (Alta. Q.B., Master). [28] Debts which survive a bankruptcy as a result of the provisions of subsection 178(1), therefore, are exceptions to this overriding principle, and should be addressed accordingly. [29] An analysis of the provisions of subsection 178(1) shows that the types of debt which survive a bankruptcy may be divided into four overall categories, namely, (1) those which have been imposed by a court in the form of a fine or some other penalty for an offence against the state (paragraph (a)); (2) those which reflect the legislative policy decision to protect spouses and children requiring support (paragraphs (b) and (c)); (3) those arising out of acts of fraud, dishonesty, or misconduct while acting in a fiduciary capacity (paragraphs (d) and (e)); and finally, (4) those which, if discharged, would undermine the integrity of the bankruptcy process itself (paragraph (f)). [30] In Jerrard v. Peacock, supra, Master Funduk B an experienced official in matters of this nature B subjected section 178 to the following analysis, which in my opinion is an accurate one. At pp. 62-63 he said: Considering the new start object ingrained in the Act, the logical interpretation of the two subsections in question is that subs. (2) creates the general principle (being a release of all debts) with subs. (1) being an exception to the general principle. Subsection (2) [sic]2 establishes exceptions, not the principle, and must be viewed in that light. It is as if the section literally reads that the order of discharge releases the bankrupt from all claims provable in bankruptcy "except the following" and then lists the seven (now six) categories in subs. (1). . . . All of the exceptions in the section are based on what might be classed as an overriding social policy. In other words, they are the kinds of claims which society (through the legislators) considers to be of a quality which outweighs any possible benefit to society in the bankrupt being released of these obligations. Paragraph (a) is essentially an administration of justice concept. The liabilities caught by it will be in relation to criminal or quasi-criminal matters. Paragraphs (b) and (c), regardless of the language used, are nothing other than society's vested interest in ensuring that a person "supports" a dependent spouse and children. Obligations incurred for that cannot be shucked by the bankruptcy. Paragraphs (d) and (e) are morality concepts which look at conduct. Those kinds of conduct are unacceptable to society and a bankrupt will not be rewarded for such conduct by a release of liability. [31] Others have taken a different approach to paragraphs (d) and (e), however. In Smith v. Henderson (1992), 10 C.B.R. (3d) 153, the British Columbia Court of Appeal held that a "defalcation while acting in a fiduciary capacity", as envisaged by paragraph 178(1)(d), did not necessarily involve dishonesty and that, in the case of a fiduciary, a simple failure to meet an obligation was sufficient. Herold D.C.J. (as he then was) adopted a similar view with regard to a "misappropriation" in Abstainer's Insurance Company v. Pellegrino (1989), 77 C.B.R. (N.S.) 108 (Ont. D.C.). [32] Smith v. Henderson involved a judgment against Mr. Smith, the principal of a small trucking operation, Normax Transport Inc. Mr. Smith was an officer and director, and the operating mind of the company. Normax had contracted with another trucker, Mr. Henderson, to permit him to work off the purchase of a truck and trailer through the payment of $1500 per month over 48 months. Normax was itself purchasing the truck under a conditional sales contract. After 34 2 months and the payment of $43,128 by Mr. Henderson, however, the truck was repossessed by the conditional vendor because the company had not kept up payments or paid off liens which had accumulated against the vehicles for non-payment for repairs. At trial, Smith was found to be personally liable on the ground that, as the sole directing mind of the corporation, he had caused Normax to be in breach of trust by allowing the liens to accumulate and not making the payments, and accordingly he was equally liable for breach of trust. Smith ultimately went bankrupt. He was granted a discharge from bankruptcy, but the judge granting the discharge held that it did not release him from the liability under the judgment because it was caught by paragraph 178(1)(d) of the Bankruptcy Act. That decision was upheld on appeal. [33] In Abstainer's Insurance Company v. Pellegrino (1989), 77 C.B.R. (N.S.) 108 (Ont. D.C.), the defendant, Pellegrino, had obtained judgment against Abstainer's for the recovery of accident benefits and for damages for mental distress, in an earlier action. The insurer had appealed, but had agreed to pay certain monies to the defendant in order to reduce the risk of post-judgment interest. The payment pending appeal, however, was subject to a negotiated condition that the defendant would repay the monies if the insurer were successful on an appeal. Abstainer's succeeded on the appeal. Nonetheless, the defendant refused to repay the monies. He had gone bankrupt in the interim and argued, amongst other things, that the debt had been extinguished by his bankruptcy. In response to this argument, Abstainer's relied upon paragraph 178(1)(d) of the Bankruptcy Act. Herold D.C.J. agreed with the insurer, concluding that the defendant's failure to repay the monies constituted a "misappropriation" of funds by a fiduciary in the circumstances. He held that the defendant had accepted the monies on the premise that he would have an obligation to account for them in the event the insurer was successful on the appeal, that he was acting on behalf of the insurer to the extent of an accounting, and that he had misused the position of trust which was created by his implied undertaking. At p. 111, Herold D.C.J. noted: The word "misappropriate" in the Bankruptcy Act is not, as I read the cases, used in any pejorative or accusatory sense; rather, it may simply be the failure of a person to account when he is called upon to do so, particularly where, as here, he is in possession of the necessary funds to do so and chooses for reasons which he believes are valid not to do so. [34] Jennings J. followed Smith v. Henderson and Abstainer's Insurance. [35] Mr. Justice Day, on the other hand, declined to follow the reasoning of Abstainer's Insurance in Ironwood Investments Joint Venture v. Leggett, supra. He does not appear to have been referred to Smith v. Henderson. Before Day J., the issue revolved around a disputed management fee which the promoter and manager of a joint venture, Mr. Leggett, had caused the joint venture to pay to him. The project failed and Mr. Leggett subsequently went bankrupt and was later discharged. The unit holders sought to recover the monies against him nonetheless, on the grounds that he had obtained the monies through fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity. Day J. immediately ruled out fraud or embezzlement on the part of Mr. Leggett. He was then faced with deciding whether or not the monies had been obtained as a result of misappropriation or defalcation while acting in a fiduciary capacity. Day J. concluded that the defendant had not deliberately misappropriated the funds, believing that he was entitled to them and that the fee had been disclosed to the unit holders, notwithstanding that under the strict terms of the agreement he had not properly formalized authorization for the payment. With regard to the interpretation of paragraph 178(1)(d) of the BIA, Day J stated (p. 264): In any event, the subsection read as a whole includes fraud and embezzlement, both of which are quasi-criminal in nature, along with misappropriation and defalcation. In my opinion if a debt is to survive bankruptcy pursuant to s. 178(1)(d) of the Bankruptcy and Insolvency Act, there must have been some wrongful conduct on the part of the debtor sufficient to exclude the debtor from the relief granted by the Act. One of the prime purposes of the Bankruptcy Act is to permit an honest but unfortunate debtor to obtain a discharge from his debts subject to reasonable conditions. The Act is designed to permit a bankrupt to eventually receive a complete discharge so that he can integrate himself into the business life of the country as a useful citizen, free from the crushing burden of his debts: Re Newsome (1927), 8 C.B.R. 279 (Ont. S.C.); Canadian Bankers' Association v. Saskatchewan (Attorney General) (1955), 35 C.B.R. 135 (S.C.C.). Given that a bankrupt may be saved from the consequence of his negligence and incompetence, as was the case in Urbanowski v. Demkiw (1992), 12 C.B.R. (3d) 129 (Man. C.A.), it is preposterous that a discharged bankrupt might remain accountable for monies paid to himself as compensation, when in all the circumstances he had very good reason to believe he was acting properly and with the knowledge of the affected parties, with neither their objection nor challenge. Accordingly, I adopt the approach taken in Janco (Huppe), supra,3 that misappropriation is the act of misappropriating or turning to a wrong purpose.[Emphasis added.] [36] Thus, there appear to be two approaches which have been taken to the interpretation of the words "misappropriation or defalcation while acting in a fiduciary capacity". On the one hand, the approach reflected in Ironwood Investments Joint Venture v. Leggett and in Jerrard v. Peacock views the words in the context of those with which they are associated in the paragraph and attributes to them some element of dishonesty, wrongdoing, or misconduct. On the other hand, decisions such as that of the British Columbia Court of Appeal in Smith v. Henderson suggest a broader interpretation which eschews the need for dishonesty, wrongdoing or misconduct, and is prepared to extend the exception to all cases in which a fiduciary is in breach of any fiduciary obligation. [37] In my view, the former approach is the correct one, having regard to the purposes of bankruptcy legislation and to the language used in section 178, and keeping in mind as well that not all breaches of obligation by a fiduciary are breaches of a fiduciary obligation. They may simply be inadvertence, negligence or incompetence. In this latter regard, the remarks of Sopinka J. and McLachlin J. in Hodgkinson v. Simms, supra, concerning what they viewed as the second "false indicator" of a fiduciary obligation, are worth noting. At p. 463 they observed: The second consideration which may act as a false indicator of a fiduciary obligation is the "category" into which the relationship falls. Professional relationships like doctor-patient and lawyer- client often possess fiduciary aspects. But equally, many of the tasks undertaken pursuant to these relationships may not be trust-like or attract a fiduciary obligation. (citation omitted) Just as not every act in a so-called fiduciary relationship is encumbered with a fiduciary obligation, so conversely fiduciary obligations may arise in relationships which have not been traditionally considered as fiduciary. [Emphasis added.] [38] I agree with the observation of Day J., cited above, that if bankrupts are normally saved from the consequences of their negligence or incompetence by a discharge, it makes no sense that they should remain accountable for similar conduct simply because the conduct is carried out by someone who may now be classified as falling within a certain category of relationship, namely that of fiduciary. The courts have resisted a rigid approach to the determination of what constitutes a fiduciary relationship, as previously noted, emphasizing that it is "the nature of the relationship and not the category of actors involved" which is important for purposes of that exercise. In this same spirit, it seems to me, the courts should avoid attempting to sweep into concepts such as "misappropriation" or "defalcation" B which in their ordinary meanings connote some element of wrong doing, improper conduct, or improper accounting B any and all failures by the fiduciary to comply with the obligations attending upon that capacity. When it comes to the application of insolvency legislation, the results of not resisting that temptation can be far reaching and inconsistent with the purposes of such legislation. [39] The Shorter Oxford Dictionary defines the words "misappropriate", "defalcate", and "defalcation" as follows: Misappropriate To appropriate to wrong uses; chiefly, to apply dishonestly to one's own use. So, misappropriation. Defalcate To cut or lop off (a portion from the whole); to retrench, deduct; to curtail, reduce; to commit defalcations; to misappropriate property in one's charge. Defalcation To reduce by deductions; to lop off; to abate; defection; shortcoming; failure; a fraudulent deficiency in money matters; also, the amount misappropriated. [40] Black's Law Dictionary, 6th ed., defines "misappropriation" as "the unauthorized, improper, or unlawful use of funds or other property for purpose other than that for which intended". [41] In Smith v. Henderson, Legg J.A. cited the definition of "defalcation" from Black's Law Dictionary 5th ed., in the following fashion (supra, p. 158): Defalcation: The act of a defaulter . . . failure to meet an obligation . . . [42] Respectfully, this citation omits important aspects of the full definition, and takes the phrase "failure to meet an obligation" out of context. The full definition in the 5th edition of Black's Law Dictionary reads as follows: Defalcation The act of a defaulter; act of embezzling; failure to meet an obligation; misappropriation of trust funds or money held in any fiduciary capacity; failure to properly account for such funds. Commonly spoken of officers of corporations or public officials.4 [43] Looked at in its entirety, then, the Black's definition demonstrates that the reference to a failure to meet an obligation must be read in the context of the references to "embezzling", to "misappropriation of trust funds" and to a "failure to properly account". Moreover, an examination of the American authorities on which the inclusion by Black's of "failure to meet an obligation" within the concept of defalcation for purposes of bankruptcy legislation, confirms that they can be explained in these terms, notwithstanding that they may appear on the surface to stand for the proposition that an innocent default in duty on the part of a fiduciary will suffice to create a debt that survives bankruptcy. [44] Re Anderson (1986), 64 B.R. 331, a decision of the U.S. Bankruptcy Court, Northern District of Illinois, Western Division, is an example. In that case the court ruled that a creditor need not show wrongdoing on the part of a fiduciary debtor for the purposes of establishing a nondischargeable debt under section 523(a)(4) of the U.S. Bankruptcy Code. "Defalcation", for such purposes, was held to encompass a debt resulting from fraud or defalcation by a debtor while acting in a fiduciary capacity, a failure to meet an obligation, misappropriation of trust funds or money held in any fiduciary capacity, and a failure to properly account for such funds. Mr. Anderson, the bankrupt debtor, had undertaken to act as the treasurer for a non-profit corporation which was established to set up a bicycle racing track for community children, and which earned revenues through entry fees and concessions. He failed to account for the revenues he had received. There was no evidence of wrongdoing. During a period of ill health and family difficulties, he had failed to deposit the proceeds from three races in a timely fashion. Instead he kept the monies in a paper back in his desk at home. The monies were stolen from his home, apparently by someone else. Mr. Anderson agreed to repay the funds, and signed a promissory note to that effect, but eventually went bankrupt. The court held his debt survived his discharge from bankruptcy, concluding that his failure to deposit the monies that had been entrusted to him by the corporation in a timely fashion amounted to a failure to account properly, and constituted a breach rising to the level of a defalcation. [45] In Re Anderson the court relied upon a decision of Justice Learned Hand in Central Hanover Bank & Trust Co. v. Herbst, 93 F. 2d 510 (2nd Cir. 1937). It attributed to Learned Hand J. the proposition that, in the context of the U.S. Bankruptcy Code, Adefalcation" did not contemplate fraud or dishonesty, but rather, because of the special trust given to a fiduciary, the word included innocent defaults in duty on the part of the fiduciary. An examination of Learned Hand J's decision shows, however, that the learned justice did not stop there. [46] In Central Hanover Bank & Trust Co. v. Herbst a privately appointed receiver in a foreclosure action had withdrawn and spent for his own account monies which had been awarded to him on an interim passing of accounts when he knew that the time for appeal had not elapsed and without consulting with the plaintiff in the foreclosure action as to whether it intended to appeal. The plaintiff successfully appealed and obtained judgment against the receiver, who subsequently went bankrupt and obtained a stay of execution. The stay was vacated, and it was the appeal from the order vacating the stay which came before the Second Circuit. That Court held that when a fiduciary takes money upon a conditional authority which may be revoked and knows at the time that it may be, the fiduciary is guilty of a "defalcation" though it may not be a "fraud" or an "embezzlement" or perhaps not even a "misappropriation". [47] The Court did not rule, however, that any innocent default on the part of a fiduciary gives rise to a debt which is not discharged by bankruptcy. It pointed out (p. 512) that the bankrupt "had not been entirely innocent . . . though possibly one may acquit him of deliberate wrongdoing." Learned Hand J. noted that in its origins a bankruptcy discharge "relieved bankrupts of all their debts without exception, provided they conducted themselves properly" (p. 511). His reference to "innocent defaults" was as follows (p. 511): . . . Colloquially perhaps the word, "defalcation," ordinarily implies some moral dereliction, but in this context it may have included innocent defaults, so as to include all fiduciaries who for any reason were short in their accounts. [Emphasis added.] [48] Finally, and significantly, Learned Hand J. concluded (p. 512): . . . We do not hold that no possible deficiency in a fiduciary's accounts is dischargeable; in Re Bernard, 87 F. 2d 705, 707, we said that "the misappropriation must be due to a known breach of the duty, and not to mere negligence or mistake." Although that word probably carries a larger implication of misconduct than "defalcation," "defalcation" may demand some portion of misconduct; we will assume arguendo that it does. [Emphasis added.] [49] See also: Re Gagliano, 44 B.R. 259 (Bankr. N.D. Ill. 1984), where an insurance agent who had failed to remit collected premiums to the insurance company had committed a defalcation; and Re Alvey, 56 B.R. 170 (Bankr. W.D. Kentucky, 1985), which involved the unauthorized use of cash collateral received by a debtor in possession under Chapter 11 proceedings without reporting to the court as required. [50] Thus, it would appear that the American authorities which have held that a failure by a fiduciary to meet an obligation gives rise to a debt which is not discharged from bankruptcy, and which have given rise to the reference to such an event in the definition of "defalcation" in Black's Law Dictionary, are all cases where there has been "some portion of misconduct" in the sense, at least, of a failure by the fiduciary to account properly for funds entrusted to the fiduciaries possession and care. [51] There is a qualitative difference in the nature of the breaches involved in the American authorities referred to above, and in the Canadian authorities which have extended the meaning of "defalcation" or "misappropriation" to innocent breaches, on the one hand, and the type of breach committed by Mr. Daley in the circumstances of this case, on the other hand. Those cases in which it has been held that an innocent default in duty or a failure to meet an obligation on the part of a fiduciary create a debt which survives a bankruptcy all involve at least a failure to account in a proper fashion for monies or entrusted to the fiduciary. That is not the case with Mr. Daley, whose breach was not a failure to account for monies paid to him by the Simones, but rather a failure to close the real estate transaction in his capacity as vendor. [52] Consequently, I am not persuaded that the exception to a release of liability upon a bankruptcy discharge which is provided for in paragraph 178(1)(d) of the BIA should be extended to conduct which does not display at least some element of wrongdoing or improper conduct on the part of the fiduciary in question in the sense of a failure to account properly for monies or property entrusted to the fiduciary in that capacity or inappropriate dealing with such trust property. Had Parliament intended that any innocent breach of an obligation on the part of fiduciary would give rise to a debt that would not be released by a discharge from bankruptcy it could very easily have said so, by providing that an order of discharge does not release the bankrupt from any debt or liability arising from a breach of fiduciary obligation. It did not do so. It chose to couch the types of debts or liabilities "while acting in a fiduciary capacity" which would attract the exceptions of subsection 178(1), in the context of debts or liabilities arising from fraud, embezzlement or misappropriation, as well as defalcation. While these notions may have slightly different shades or gradations of meaning, I can only conclude that Parliament intended the words "misappropriation" and "defalcation" to bear their plain and ordinary meaning, as the context in which they are used suggests. [53] Here, there was no finding of bad faith with respect to the conduct of Mr. Daley. The trial judge expressly found that there was neither fraud nor fraudulent misrepresentation on his part. Had there been a finding that Mr. Daley had agreed to use the funds paid by the Simones solely for purposes of paying down the mortgages and indebtedness against 55 Bayside Court, and that he had failed to do so, the results might arguably be different. In such a case, a finding that there had been a misappropriation or a defalcation would have been justified. There was no such finding, however. [54] In my view, the declaration that the judgment against Mr. Daley survives his discharge from bankruptcy cannot be sustained. Damages [55] The appellants submit that the trial judge erred in including in his assessment of damages the value of improvements made to the property by the respondents. They argue that the appellants received no benefit from the improvements, although the plaintiffs have, and that the plaintiffs assumed the risk of any improvements they made when they made them without title having yet been transferred. The appellants accordingly seek to have the damages assessed by the trial judge reduced by the sum of $40,000 which was allowed for improvements. They also seek a further reduction of $45,000 in the damages awarded on the basis that this later amount was paid by the Simones after they knew that the transaction had not closed in January 1993. These two deductions would have the effect of wiping out the damage award altogether. [56] There is no merit in the latter claim. Mr. Daley and Ms. Montanari gladly accepted the $45,000 from the Simones during the period in question, after they knew that the transaction had not closed in January 1993. It hardly lies in their mouths now to say that the plaintiffs should not have paid the monies, particularly when approximately $32,000 of it went to pay down obligations on the first mortgage. All parties were operating on the hope, during this period of time, that the agreement would ultimately be completed. In my view the trial judge was quite correct in including those sums paid in the losses sustained by the plaintiffs. [57] The issue of recovery for the improvements made by the plaintiffs stands on a different footing, however. There was no express approval on the part of the defendants for the improvements that were made, although it could be said that they were aware of them and acquiesced in what was being done. Neither Mr. Daley nor Ms. Montanari (except indirectly) received any benefit from any of the improvements. With the exception of the paving done to the driveway, which may have been necessary to meet subdivision requirement, the improvements seem to have been made by the Simone's without asking for permission on the premise -- as Mr. Simone testified -- that he "didn't think he needed to ask Daley's consent to do any work because it was my house", and to convenience them in their new home. It could be said that Ms. Montanari received at least some indirect benefit from the paving because her father had posted a letter of credit on behalf of the defendants in the amount of approximately $10,000 regarding the completion of the pavement. The other improvements consisted of such things as interior painting and decorating, including the installation custom light switches, expensive french doors between rooms, window screens, locks, and an alarm system. The Simones continue to enjoy the benefits of these improvements to this day, abeit as tenants rather than owners. As far as the interior improvements are concerned, they could in fact be said to be very much in the nature of tenants improvements. [58] The trial judge did not provide any rationale for including the cost of the improvements in the recovery he awarded, other than to say that they formed part of the plaintiffs "investment' in the house. The respondents argue that they are entitled to such recovery on the basis of equitable compensation for breach of fiduciary duty. Except for the outside paving and related work B which could be said to be more "real property" related, and where at least an indirect benefit was enjoyed by the defendants as a result of the release of Mr. Montanari's letter of credit B I do not agree. The plaintiffs simply proceeded to decorate the premises to their liking, and they took the risk of losing these expenditures on improvements if the transaction, for whatever reason, failed to close: see Peter D. Maddaugh and John D. McCamus, The Law of Restitution, (Aurora: Canada Law Book), pp. 288-291. [59] I would reduce the amount credited to the plaintiffs for their investment in the property by the sum of $15,000.00, representing the amount which the trial judge allowed for the interior decorating and finishing matters. I would not alter the trial judge's decision to permit the $25,000.00 which was expended on the outdoor paving, curbing and drainage work. Cross-Appeal [60] On the cross-appeal, the plaintiff respondents attack, (a) the trial judge's finding that they were responsible for paying municipal taxes pending closing; (b) the reduction of their recovery by an amount representing the sum of $1,800 per month for occupation rent, both in terms of its quantum and in terms of the period of time for which it was applied; and, (c) the award of pre-judgment interest only from January 1, 1995, and only on the sum of $55,320.00 when the payments by the plaintiffs were made in 1992 and 1993. Municipal Taxes [61] The question whether it was the plaintiffs or the defendants who were to be responsible for the payment of municipal taxes under the terms of the agreement was one of fact. There was ample evidence upon which the finding of the trial judge in this regard could be based and it should not be interfered with. Occupation Rent [62] The trial judge was justified in the circumstances in finding the plaintiffs responsible for the payment of occupation rent. It is not correct to say, as the cross-appellants submit, that there was no evidence regarding what a reasonable rent would be. After the house was sold, in March 1995, the Simones have continued to live in it, as tenants to owners who are relatives, and they paid a monthly rental of $1,400. The amount they were to pay per month under the agreement with Mr. Daley pending closing was between $1,000 and $2,000. Moreover, Ms. Montanari B who had at least some experience in real estate matters as a legal clerk, and whose evidence the trial judge accepted in other respects B testified that in her view $2,500 per month was a reasonable rental for the premises. The trial judge made a finding in this regard, on the evidence he had, and I would not interfere with it. [63] As to the length of "rent-free use of the property", the trial judge found on the evidence that the period ended at the end of 1994. It was shortly thereafter that the property was sold under power of sale and the new owners obtained title. The finding is not unsupported by the evidence, and should stand. Pre-judgment Interest [64] For the same reason, I would not interfere with the trial judge's determination of the timing of pre-judgment interest, or the amount on which it is to be paid. The amount of the judgment is an amalgam of the payments made by the plaintiffs over the period 1992 - 93, and the deductions for taxes and occupancy rent extending throughout 1994. The trial judge obviously considered that matters were finally terminated at the end of 1994, as between the parties, and he allowed pre-judgment interest from that point on. [65] The court has a discretion under subsection 130(1) of the Courts of Justice Act R.S.O., c. C.43, to award pre-judgement interest for a period other than that provided for in section 128 of that Act. I would not interfere with the exercise of that discretion in the circumstances of this case. Motion for Leave to Introduce Fresh Evidence on Appeal [66] The appellants sought leave to introduce fresh evidence on the appeal to this Court. The evidence sought to be introduced related to an update of the plaintiffs' legal interest in and occupation of 55 Bayside Court since the date of the trial. It was said to relate to the issue of the plaintiffs' right to recover the cost of improvements. [67] In my view the proposed evidence would not be dispositive of the appeal, or even particularly helpful in its determination, to the extent that it adds anything to what was conceded by the plaintiffs, namely, that they continue to live in the premises and that the premises are owned by relatives. I would dismiss the motion with costs. III - DISPOSITION [68] In the end, then, I would allow the appeal to the extent of setting aside the declaration that the judgment as against Mr. Daley is not extinguished by his discharge from bankruptcy, and to the extent of reducing the principal amount of the recovery awarded by $15,000, from the sum of $55,320.00 to $40,320.00. The appeal is otherwise dismissed. As success was divided, I would not award any costs of the appeal. [69] The cross-appeal is dismissed. Again, in the circumstances, I would not award any costs of the cross-appeal. Released: March 1, 1999 _______________________________ 1 They have since been married. 2 From the context, this is clearly an error, and should be a reference to subsection (1). 3 Janco (Huppe) v. Vereechen (1982), 40 B.C.L.R. 106, 44 C.B.R. (N.S.) 211 (B.C.C.A.). 4 "Defalcation" also had a second meaning, namely that of set-off, recoupment or counterclaim, or the diminution of a debt or claim by deducting from it a smaller claim held by the debtor or payor. This aspect of "defalcation", also recited in Black's Law Dictionary, is not relevant to this case.