Page: 1 PROVINCE OF PRINCE EDWARD ISLAND PRINCE EDWARD ISLAND COURT OF APPEAL Citation: E.R.I. Engine v. MacEachern 2011 PECA 2 Date: 20110107 Docket: S1-CA-1195 Registry: Charlottetown BETWEEN: STEVEN W. MacEACHERN and J. WALTER MACKINNON LIMITED, as Trustee in Bankruptcy for Steven W. MacEachern APPELLANTS AND: E.R.I. ENGINE REBUILDERS INCORPORATED RESPONDENT Before: Chief Justice David H. Jenkins Justice Michele M. Murphy Justice Wayne D. Cheverie Appearances: Pamela J. Williams, counsel for the appellant Steven W. MacEachern Kenneth L. Godfrey, counsel for the Respondent Place and Date of Hearing Place and Date of Judgment Charlottetown, Prince Edward Island December 7, 2010 Charlottetown, Prince Edward Island January 7, 2011 Written Reasons by: Justice Michele M. Murphy Concurred in by: Chief Justice David H. Jenkins Justice Wayne D. Cheverie
Page: 2 BANKRUPTCY - provable claims - effect of discharge The Court of Appeal dismissed the appeal of a discharged bankrupt who asked the Court to discharge a personal guarantee he had executed in favour of the respondent. The applications judge held that the respondent s default judgment, which was for the amount outstanding pursuant to the guarantee, was valid and enforceable. The Court of Appeal held there was no provision in the Rules of Civil Procedure for an application to confirm the validity of a default judgment but the order issued by the applications judge would not be disturbed on appeal. The Court also held that the bankruptcy discharge of the appellant did not extinguish the guarantee as the debt relating to the judgment was all incurred subsequent to the appellant s discharge from bankruptcy. Authorities Cited: CASES CONSIDERED: Ontario New Home Warranty Program v. Jiordan Homes Ltd., [1999] O.J. No. 944, 43 O.R. (3d) 756, Ont. Ct. of J. (General Division); Seaboard Acceptance Corp. v. Moen, [1986] B.C.J. No. 87 (BCCA) STATUTES CONSIDERED: Judgment and Execution Act, R.S.P.E.I. 1988, J-2, s-ss. 1(2) and (3); Bankruptcy and Insolvency Act, R.S., 1985, c. B-3, s-s.121(1), s.178; RULES CONSIDERED: Prince Edward Island Rules of Civil Procedure, Rule 14 TEXT CITED: Honsberger, John D., and DaRe, Vern W.: Bankruptcy in Canada, 4 th Ed. (Aurora: Canada Law Book 2009); Houlden, Lloyd W., Morawetz, Geoffrey B., and Sarra, Janis P.: The 2011 Annotated Bankruptcy and Insolvency Act (2011 Edition Carswell) Reasons for judgment: MURPHY J.A.: [1] This is an appeal from a decision of the applications judge wherein he confirmed that the default judgment entered by the respondent ( E.R.I. ) has priority over any claims of the bankruptcy trustee and operates as a valid charge against any interest the appellant, Steven W. MacEachern ( MacEachern ), may have in any land. [2] The history of the matter is as follows: (1) On October 17, 2003, Stevenson and MacEachern Ltd. ( the company ) entered into
Page: 3 Articles of Agreement with E.R.I. to purchase engine parts and related products from E.R.I. (2) In this agreement, MacEachern agreed to personally guarantee the indebtedness of the company. (3) On June 22, 2004, MacEachern made an Assignment for the General Benefit of Creditors. (4) On January 26, 2005, the Trustee in Bankruptcy, Walter MacKinnon Limited (the Trustee ) caused a Notice of Assignment to be filed at the Queens County Registry office which would create a lien on property owned by MacEachern. (5) On March 3, 2005, MacEachern was given a conditional discharge from bankruptcy. (6) On February 17, 2006, the Trustee conveyed a Quit Claim Deed to MacEachern which contained the matrimonial property of MacEachern and his spouse located at Meadowbank, Prince Edward Island ( the lands ). (7) On March 15, 2006, MacEachern received an absolute discharge from bankruptcy. (8) E.R.I. never received notice that MacEachern had made an Assignment in Bankruptcy or was discharged from bankruptcy. (9) On July 10, 2006, the company, Stevenson and MacEachern Ltd., filed an Assignment in Bankruptcy. (10) On July 12, 2006, E.R.I. made a formal demand on the company for payment of the money owing to it. (11) On August 21, 2006, E.R.I. served MacEachern with a Statement of Claim claiming the sum of
Page: 4 $41,753.91. Upon receipt of the statement of claim, MacEachern sought legal advice and was advised that he did not need to do anything that the bankruptcy would have extinguished the debt. For that reason MacEachern took no action with respect to the statement of claim. (12) On September 12, 2006, default judgment was entered against MacEachern in the amount of $42,747.41. (13) On September 27, 2006, the Trustee, represented by John W. Hennessey, Q.C., obtained a court order from the Prothonotary declaring null and void the Quit Claim Deed of February 17, 2006, which was a conveyance of lands from the trustee to MacEachern and that the Notice of Assignment filed by the trustee against the property would remain in full force and effect. From the record, it appears that MacEachern sought to have the lands refinanced through the Royal Bank but was not successful. (14) E.R.I. did not receive any notice of the application to have the Quit Claim Deed declared null and void. [3] In the application, E.R.I. sought the following relief, which ultimately is the subject matter of this appeal: The Applicant, E.R.I. Engine Rebuilders Incorporated, makes application under R. 14 of the Rules of Court for: (a) (b) an Order declaring that the Judgment issued in favour of E.R.I. Engine Rebuilders Incorporated against the Respondent Steven MacEachern on September 12, 2006 (the Judgment ) is in full force and effect; [emphasis mine] an Order declaring that the vested rights of the Applicant to execute on certain property (the Property ) under the Judgment are not affected by the subsequent order of this Honourable Court issued on September 27, 2006, in S1- GS-21856 and the Applicant is free to proceed to execute
Page: 5 its Judgment against the Property;[emphasis mine] (c) (d) an Order declaring that any purported lien on the Property of the Respondent J. Walter MacKinnon Limited was lost on his conveyance of the Property to Steven MacEachern on February 17, 2006; in the alternative, an Order that any purported lien of the Respondent J. Walter MacKinnon Limited, if it exists, is limited to $9,200.00 and is subordinate to the Judgment; and... [4] The applications judge held the default judgment was enforceable as E.R.I. did not receive notice of MacEachern s bankruptcy and therefore was unable to file a claim against the bankrupt s estate. Further, the applications judge held whatever interest the Trustee may have obtained would be subject to the judgment of E.R.I. The judge relied on s.1(2) and (3) of the Judgment and Execution Act, R.S.P.E.I. 1988, J-2. [5] MacEachern s new counsel Pamela J. Williams filed a Notice of Appeal on March 4, 2010, asking this Court to set aside the Order of the applications judge and judgment be granted as follows: A. THAT the Appellant s personal guarantee that supported financing to a principal debtor as provided to the Respondent be discharged as per s.178 of the Bankruptcy and Insolvency Act; and... [emphasis mine] [6] The grounds of appeal were listed as follows: 1. The Application Judge failed to properly apply the Bankruptcy and Insolvency Act, R.S.C. 1985, C. C-27 ( BIA ) in determining that the claim of the Respondent was not discharged by virtue of the Appellant s bankruptcy which included: a. Failing to determine whether the guarantee was a provable claim; b. Applying the wrong standard to the Appellant in determining that the guarantee would not be subject to the bankruptcy discharged; and c. Failing to consider and apply the appropriate remedy as identified in the BIA under s.178.
Page: 6 DISPOSITION [7] For the reasons which follow, I would dismiss the appeal. ANALYSIS [8] In my view, this case presents the following atypical or anomalous facts: (1) At the hearing of the appeal, counsel for the appellant invited the court to review the references by John D. Honsberger and Vern W. DeRa in Bankruptcy in Canada, 4 th Ed. The fundamental objective of the bankruptcy legislation is to provide relief to debtors from the stress of insurmountable debt and to permit a debtor to make a clean fresh start. The authors stated that the objective is that debtors... be free from the obligations and responsibilities consequent on what was originally described as business misfortunes. It appears from the record that MacEachern went personally bankrupt first in 2004, followed by the company in 2006. (2) E.R.I. s application to the Supreme Court sought relief which is not provided for in the Rules of Civil Procedure. There is no provision which allows a creditor to apply for confirmation or a declaration that the judgment is in full force and effect. As well, there is no provision in Rule 14 that declaratory relief would issue to the effect that an applicant is free to proceed to execute its judgment against the property. No such relief exists. (3) The appellant is seeking relief at this appeal that was not adjudicated upon in the court below. [9] I would make the following three determinations. [10] First, the Order issued by the applications judge should not be disturbed by this appeal and remains in effect.
Page: 7 [11] I would not adopt the reasoning that absence of notice of the assignment of the bankruptcy prevented a provable claim. However, in my opinion, the conclusion reached by the applications judge regarding priority of the competing claims was correct. [12] Secondly, the appellant s request to discharge the guarantee of MacEachern pursuant to s.178 of the Bankruptcy and Insolvency Act (the BIA ) should not be granted. Legal authority advises that a discharge from bankruptcy does not necessarily discharge a guarantee. The contract, the Articles of Agreement and guarantee contained therein, did not evaporate in the bankruptcy. [13] The case at bar is on point with Ontario New Home Warranty Program v. Jiordan Homes Ltd., [1999] O.J. No. 944, 43 O.R. (3d) 756, Ont. Ct. of J. (General Division). In that case a motion was made for summary judgment seeking determination of whether a bankruptcy terminated a discharged bankrupt s guarantee. The liability under the guarantee actually arose after the discharge from bankruptcy as is the case at bar. The trial judge found that s.121(1) of the BIA provides that all present or future debts or liabilities to which the bankrupt is subject at the date of the bankruptcy or to which the bankrupt may become subject before discharge by reason of any obligation incurred before the date of bankruptcy are claims provable in bankruptcy. In the case at bar, the claim of E.R.I. was not a provable claim in bankruptcy because it did not exist at the date of MacEachern s assignment into bankruptcy or the obligation was not incurred prior to his discharge. The Company s account with E.R.I. was then current. [14] The case of Seaboard Acceptance Corp. v. Moen, [1986] B.C.J. No. 87 (BCCA) is analogous and instructive. In this case, the debtor, Moen, agreed to lease a motor vehicle for three years, afterwards went bankrupt, was discharged, continued to lease and make payments, and then defaulted. Seaboard seized and sold the vehicle and successfully claimed for the deficiency. Moen had not informed the Trustee about the lease contract and she continued to make her payments:... from before the bankruptcy, right through the bankruptcy, past the time of her discharge, and several payments after the discharge had been granted. [15] Lambert J.A. asked the question: under what basis was possession of the vehicle retained and on what basis were the payments made? His answer was that the proper view was that the lease contract continued through the bankruptcy and continued after the discharge from bankruptcy; that it was never terminated in accordance with the provisions for termination; and the fact that there might have been a claim provable in bankruptcy, or that a provable claim might have been made,
Page: 8 did not affect the fact that the contract itself continued, and continued to regulate the relationship of the parties after the discharge from bankruptcy. Lambert J.A. also found that the continuation of the leasing relationship post-bankruptcy was merely a continuation of the contract, and the debtor continued abiding by the terms of the contract that had been made between the parties. He concluded: In effect, the contract was endorsed by the defendant after the discharge. In those circumstances, no order is possible in relation to damages than that the contract provisions apply... [16] Similarly in this case, MacEachern s contractual obligation to E.R.I. to be answerable for the default of the company regarding indebtedness incurred pursuant to the agreement continued through MacEachern s bankruptcy and after his discharge, and the company and MacEachern continued post-bankruptcy and post-discharge to receive and accept credit from E.R.I. It follows that the relief sought in this appeal that the guarantee be discharged pursuant to s.178 of the BIA must be denied. [17] In the circumstances, MacEachern s three particularized grounds of appeal do not have any impact on the outcome of this appeal. [18] Thirdly, I would decline any request for this Court to make any further determination regarding the guarantee other than it was not discharged by the BIA as a result of MacEachern s discharge from bankruptcy. The contract of guarantee contained in the Articles of Agreement was the basis of E.R.I. s claim against MacEachern that resulted in judgment. The circumstances of the guarantee, the relationship among the parties, and default judgment are not matters before this court, and are all beyond the scope of this appeal. This Court should not make findings about such matters that might compromise or affect underlying rights or potential litigation. Costs [19] E.R.I. should have its costs against MacEachern on a partial indemnity basis. In this appeal there was no cost of transcript and MacEachern incurred the cost of producing the appeal book. I would fix the respondent s costs at $2,500. plus
Page: 9 reasonable disbursements and applicable taxes. Madam Justice Michele M. Murphy I AGREE: Chief Justice David H. Jenkins I AGREE: Justice Wayne D. Cheverie