Manitoba – court relies on arbitral award to qualify award amount as debt surviving bankrupt’s discharge

Relying on findings made in an arbitral award, Madam Justice Colleen Suche in Bannerman Lumber Ltd. et al. v. Goodman, 2020 MBQB 76 declared that a bankrupt’s debt disputed in arbitration survived his discharge because the debt resulted from “obtaining property or services by false pretences or fraudulent misrepresentation”.  Though the arbitration proceeded without pleadings and the issue of fraud was not advanced in the arbitration, the arbitrator’s findings permitted Suche J. to determine that the bankrupt “lacked an honest belief in the truth of his statements” which were reckless and qualified as false pretences under section 178(1)(e) of the Bankruptcy and Insolvency Act, RSC 1985, c B-3.

Bannerman Lumber Ltd. (“Bannerman Lumber”) and R.N.G. Backyard Leisure Inc. (“R.N.G.”) were parties to a distribution and sale agreement for Coleman spas (“Agreement”).  Mr. Richard Neal/Neale Goodman (“Mr. Goodman”) was R.N.G.’s president and sole shareholder.

Bannerman Lumber opened a retail store pursuant to the Agreement but it failed. The Agreement contained an agreement to arbitrate and Bannerman Lumber and Mr. Jeff Bannerman (“Mr. Bannerman”) initiated arbitration against R.N.G. and Mr. Goodman.  Following the hearing, the arbitrator issued an award (“Award”) holding both R.N.G. and Mr. Goodman liable to Bannerman Lumber and Mr. Bannerman for $403,554.00.

R.N.G. ceased carrying on business prior to the arbitration.  Mr. Goodman made a July 2014 assignment in bankruptcy and was discharged in 2017. Bannerman Lumber and Mr. Bannerman (“Applicants”) applied for a declaration under section 178(1)(e) of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (“BIA”)the $403,554.00 debt owing to them under the Award survived Mr. Goodman’s discharge.

Despite a discharge, section 178(1) lists those certain debts not released by order of discharge. In particular, an order of discharge does not release the bankrupt from:

178(1)(e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim”.

Suche J. explained the purpose of section 178 as follows:

That right is based on the policy that bankrupts should be freed from crushing debt so they can return to contribute to society.  The exceptions all concern some type of unacceptable conduct on the part of the bankrupt”.

Suche J. also referred to Martin v. Martin, 2005 NBCA 32 para. 11 for further context on limitations to a bankrupt’s discharge:

[11] But even viewed as an exception to the general principle, and thus as a legislative provision to be interpreted restrictively, the object and clear purpose of the exceptions set out in s. 178 must be respected. The exceptions, as mentioned in Simone, for example, the types of debt which survive bankruptcy are any debts arising out of fraud, are based on an overriding social policy that certain claims should be protected against the general discharge obtained by a bankrupt because of the class of claimants involved, in the present case, the victim of an assault causing bodily harm, and because of the reprehensible nature of the bankrupt’s conduct. As mentioned in Simone, for example, the types of debt which survive bankruptcy are any debts arising out of fraud, dishonesty, or misconduct while acting in a fiduciary capacity. Parliament has clearly made a policy decision that a bankrupt should not be allowed to raise the shield of his or her general discharge against judgment creditors who hold judgments grounded on such reprehensible conduct. As the court in Simone stated, “[t]hose kinds of conduct are unacceptable to society and a bankrupt will not be rewarded for such conduct by a release of liability.”

Suche J. noted that the parties agreed that the first half of section 178(1)(e) was met: the liability fixed by the Award was “a liability resulting from obtaining property”.  The parties disagreed whether that liability resulted from Mr. Goodman’s “false pretences”.

Referring to (i) Ste. Rose & District Cattle Feeders Co-op v. Geisel, 2010 MBCA 52 paras 99 and 111-112, for a consideration of “false pretences” and para. 91 to determine the degree of knowledge required to establish deceit and (ii) Precision Drilling Canada Limited Partnership v. Yangarra Resources Ltd, 2017 ABCA 378 paras 33-36 to explore the notion of “recklessness”, Suche J. then examined the findings made by the arbitrator in the Award to determine whether the liability resulted from “false pretences”.

Suche J. noted that section 178

Lawyers’ Professional Indemnity Company v. Rodriguez, 2018 ONCA 171 para. 6 established the approach

[6] To be clear, in characterizing a judgment debt under s. 178(1)(d), a judge is not confined just to the cause of action pleaded in the action that produced the judgment debt. The issue under s. 178(1)(d) relates to the substance of the judgment debt. The judge can therefore look at the material filed that led to the obtaining of the judgment debt, including the facts pleaded in support of the action that led to the judgment debt, any evidence that was presented at the time to secure that judgment debt, and any reasons that might have been given. A judge cannot, however, consider extraneous evidence not grounded in the process that produced the judgment debt. Among other reasons, it could extend the reach of the section to statute-barred claims, and violate cause of action estoppel rules”.

There are limits to that approach.  Lawyers’ Professional Indemnity Company v. Rodriguez also held, at para. 7, that “[b]y going beyond the information linked to the judgment debt and considering extraneous evidence, the application judge therefore erred”.

Applicants relied on Cruise Connections Canada v. Szeto, 2015 BCCA 363. Though the case was not based on fraud, the trial judge had made several findings of fact that could potentially trigger the application of section 178(1).  The bankrupt’s joint liability with others whose conduct amounted to deceitful conduct lead the Court of Appeal to conclude that the trial decision engaged section 178(1).

Mr. Goodman countered with H.Y. Louie Co. Limited v. Bowick, 2015 BCCA 256.  That decision had been made on consent and there was no evidence at trial to consider because there had been no trial.  Neither the pleadings nor the consent judgment alleged fraud or dishonest conduct.   See also Lawyers’ Professional Indemnity Company v. Rodriguez, 2018 ONCA 171 and Sharma v. Sandhu, 2019 MBQB 160.

Having identified the elements required to establish the nature of the liability listed in section 178(1)(e), Suche J. then turned to the Award.  She observed that “[u]nlike a civil action, the arbitration had no pleadings”.  Rather, the mandate given to the arbitrator resulted from negotiations between Applicants and R.N.G. and Mr. Goodman.  Applicants and Mr. Goodman agreed that the issue of fraud was “not advanced in the arbitration”.

Despite the fact that arbitration included testimony and exhibits, Suche J. had access only to a portion of the transcript and none of the exhibits.  She then turned to the substance of the dispute between the parties to the arbitration.  See paras 22-26.

R.N.G. negotiated with Bannerman Lumber to grant the latter status as a dealer for Coleman spas in Manitoba and Saskatchewan and to operate a retail store.  However, R.N.G. lacked the authority to do so.  Its own contract to use the Coleman marketing rights limited its sales to “bona fide retail customers”, not other retailers.

The allegations and findings of fact documented in the Award involved breach of representations, warranty of authority and pricing agreement involving the grant of certain rights to Bannerman Lumber.  Mr. Goodman was held personally liable for having made negligent misrepresentations of authority and benefitting from them.  Based on her reading of the Award, Suche J. held that Applicants had established that Mr. Goodman’s misrepresentations were reckless and his “conduct was thus deceitful” and that Mr. Goodman “lacked an honest belief in the truth of his statements”. 

[27] There is no question that Goodman made something appear to be true which was not – RNG simply did not have the authority to enter into the Agreement.  For his misrepresentations to amount to false pretences however, the applicants must also show Goodman was deceitful.  Like the situation in [Valastiak v. Valastiak, 2010 BCCA 71], this was not a question the Arbitrator was asked to answer.  Further, the Arbitrator’s finding that Goodman was careless and “knew or ought to have known” that RNG did not have the necessary authority on its face leaves this question unanswered.

[28] This, of course, does not end the inquiry.  A review of the entirety of the Arbitrator’s findings reveals that he did not consider Goodman’s conduct to be mere inadvertence or incompetence.  He dismissed outright Goodman’s interpretation of RNG’s obligations in its agreement with Maax.  He found that Goodman “chose to put his own spin on them” and that he never sought clarification from his lawyers or “more important” from Maax.  Of significance is his finding that Goodman “did not tell Maax the details of the agreement so as to insure that they would have no objections”, and that these were all simple precautions Goodman could have but did not take.  Very telling is the Arbitrator’s finding that Goodman “concealed” RNG’s lack of authority”.

Using the Award, Applicants justified engaging section 178(1)(e) to prevent the discharge from applying to the debt owed to Applicants.

urbitral note – First, section 178(1) does not limit determinations of a debt or liability to those made by a court.  The determination by way of arbitration qualifies.

Second, the decision illustrates how an arbitral award can be repurposed for more than just recognition and enforcement.  The decision does not mention whether the Award was recognized and enforced but does proceed on the basis that an award can serve to qualify and confirm a debt or liability as one listed in section 178(1) of the BIA.  Despite being eligible to serve that purpose, an award may still fall short of that purpose if the arbitral pleadings are limited in scope or detail.

Third, the decision serves to caution how consent awards may have limited utility later if the consent award contains few details. A consent award may not be sufficient if it does not refer to or summarize the evidence when confirming the parties’ consent.