What is “material prejudice” to a creditor in a bankruptcy?

November 2018

A case comment on Fiorito v Wiggins, 2017 ONCA 765

Background

In October 2015, after several years of bitter custody and access litigation involving two trials and an appeal to the Ontario Court of Appeal, Anna Fiorito was ordered to pay costs of $200,000.00 to her former husband, Jefferson Wiggins. At the same time, the parties were instructed to return to court in February 2016 for an access review hearing.[1]

Anxious to obtain payment, and fearful that his ex-wife would declare bankruptcy to evade the costs award, Mr. Wiggins brought a motion in January 2016 seeking either payment of or security for costs as a condition of proceeding with the review hearing. In response, Ms. Fiorito swore that she planned to pay the award and had no intention of filing for bankruptcy. Justice Pamela Hebner, who heard the motion, was reluctant to delay the review hearing and refused to grant the relief sought by Mr. Wiggins, instead ordering that Ms. Fiorito provide financial disclosure and refrain from disposing of her RRSPs and other assets.

Despite her assurances, Ms. Fiorito made an assignment into bankruptcy in the midst of the review hearing in February 2016, resulting in an automatic stay of proceedings under section 69 of the Bankruptcy and Insolvency Act,[2] and leaving Mr. Wiggins unable to enforce payment of the $200,000.00 costs award.

Motion to Lift the Stay

To salvage some hope of recovering the costs awarded to him, Mr. Wiggins applied to the court for an order annulling Ms. Fiorito’s bankruptcy. In the alternative, Mr. Wiggins sought an order lifting the automatic stay of proceedings, pursuant to section 69.4 of the BIA, and authorizing him to enforce the award of costs against Ms. Fiorito’s RRSPs. Section 69.4 of the BIA authorizes the court to lift the stay of proceedings as against a particular creditor, where it is satisfied that the creditor in question is “likely to be materially prejudiced” by the continued operation of the stay, or it is “equitable on other grounds” to lift the stay.

Justice Hebner determined that Mr. Fiorito was entitled to have the stay lifted, both on the basis that he was “likely to be materially prejudiced” and because it was “equitable on other grounds” to lift the stay of proceedings. In reaching this decision, the judge noted the following considerations:

  1. This was an extreme case of parental alienation in which Mr. Wiggins was forced to fight with Ms. Fiorito in court for eight years – just to have a relationship with his daughters;
  2. The Court of Appeal had ordered Ms. Fiorito to pay $200,000.00 in costs, but she had paid nothing;
  3. When the court allowed the review hearing to go ahead without payment of the costs award, it relied on Ms. Fiorito’s evidence that she intended to pay the costs award and had no intention of filing for bankruptcy;
  4. Wiggins was likely to receive nothing unless the stay was lifted; and
  5. Lifting the stay and allowing Mr. Wiggins to enforce the costs award against Ms. Fiorito’s RRSPs would not affect any other creditors, since these assets are exempted from claims by creditors in bankruptcy, by virtue of subsection 67(1)(b.3) of the BIA.

Court of Appeal Decision

Ms. Fiorito appealed Justice Hebner’s decision, arguing that Her Honour had erred in three respects. First, Ms. Fiorito asserted that a line of cases in which the stay had been lifted to allow a spouse to enforce a claim for equalization of property could not be extended to permit a creditor spouse to enforce an award of costs. The Court of Appeal rejected this argument, noting that the Supreme Court of Canada has held that it is a policy objective of bankruptcy law to maximize returns to the family unit as a whole, rather than focussing on the needs of the bankrupt alone, and that this objective applies equally to equalization claims and awards of costs.

Second, Ms. Fiorito took the position that Justice Hebner misinterpreted the meaning of both “material prejudice” and “equitable” under section 69.4. With regard to the former, Ms. Fiorito argued that “material prejudice” requires prejudice to the applicant creditor that is different from what is experienced by other creditors in a similar position. In this case, the prejudice to Mr. Wiggins was no different from that suffered by any other unsecured creditor, and was, therefore, not “material prejudice” within the meaning of section 69.4.

The Court of Appeal rejected this interpretation, holding that “material prejudice” occurs whenever a bankruptcy “would treat a creditor unfairly, differently or in some way worse than other creditors.” While differential treatment may justify a finding of material prejudice, it is merely one factor to be considered. Moreover, the Court of Appeal found that, in this instance, Mr. Wiggins was treated unfairly and differently from other creditors as a result of the nature of the debt, Ms. Fiorito’s failure to make any payment towards the costs ordered against her, and her thwarting of enforcement of the costs award through misrepresentations made to the court.

As for the meaning of “equitable,” Ms. Fiorito submitted that the cause of a debt is not a relevant consideration when determining the equities of a case and that, consequently, Justice Hebner erred by taking into account that the debt in this case arose as a result of lengthy court proceedings made necessary by Ms. Fiorito’s efforts to alienate her children from their father. The Court of Appeal disagreed, noting that the courts have a “wide discretion” under section 69.4, to be exercised based on the “particular facts of the particular case.”[3] As such, Justice Hebner was “clearly entitled to take into account the circumstances regarding the background of the debt,” particularly in this context, where the order sought would have no effect on other creditors since Mr. Wiggins would be enforcing the costs award against bankruptcy-exempt assets.[4]

Finally, Ms. Fiorito argued that Justice Hebner had erred in finding that Mr. Wiggins would likely receive nothing unless the stay was lifted. She submitted that Mr. Wiggins could have opposed her discharge from bankruptcy and, based on the potential for future growth of equity in her (at that time fully-mortgaged) home and the value of her exempt assets, likely would have received some payment. According to Ms. Fiorito, the judge’s finding that Mr. Wiggins would receive nothing “misapprehends and denigrates the bankruptcy regime and the rights of creditors under that regime.”[5]

Once again, the Court disagreed, commenting that any increase in the equity in Ms. Fiorito’s home was purely speculative and noting that, while it is open to any creditor to oppose a debtor’s discharge from bankruptcy, there is no guarantee that an order for payment will be made or that any funds will be available. More importantly, the Court stressed that Canada’s bankruptcy regime authorizes the court to lift the stay in favour of a particular creditor in certain circumstances; the use of that provision where, as here, there are “sound reasons” for doing so does not denigrate the bankruptcy regime.[6]

For the reasons outlined above, the Court of Appeal concluded that regardless of whether Mr. Wiggins would have received nothing, or some small payment towards the costs award, Justice Hebner’s findings were reasonable and “amply justified” lifting the stay of proceedings.[7] Accordingly, Ms. Fiorito’s appeal was dismissed.

Significant Takeaways

  1. For the purposes of s. 69.4 of the BIA, “material prejudice” arises where bankruptcy results in a particular creditor being treated “unfairly, differently or in some way worse than other creditors.” Differential treatment is significant, but is not an exhaustive or necessary factor. (This is rather remarkable in that Mr. Wiggins was in no worse position than any other creditor in the bankruptcy.)
  2. Courts have a wide discretion under s. 69.4 to consider the particular facts of any case and are “entitled to take into account the circumstances regarding the background of the debt.”
  3. The impact of an order under s. 69.4 on other creditors is a significant factor in determining whether it is “equitable on other grounds” to grant such an order.
  4. The possibility that a creditor could receive some small dividend towards a debt by opposing the debtor’s discharge from bankruptcy does not preclude the court from finding that an order under s. 69.4 is justified.

Special thanks to Colin Steffler, student-at-law (at the time), for his assistance with this article.

 

[1] Fiorito v. Wiggins, 2017 ONCA 765 [Wiggins].

[2] R.S.C. 1985, c. B.3 [BIA].

[3] Wiggins at para. 35.

[4] Ibid.

[5] Ibid. at para. 40.

[6] Ibid. at para. 42.

[7] Ibid. at paras. 41 and 43.

Author

Ben practises in commercial litigation, including insolvency, secured transactions, Internet law, contractual disputes, shareholder and partnership disputes, real estate litigation, creditor remedies, debt recovery, estate litigation and commercial tenancy matters. More →