Provincial courts are sanctioning execution before judgment and after discharge
A few recent decisions from Ontario and Alberta are giving new meaning to the phrases “putting the cart before the horse” or “jumping the gun.”
Typically, enforcement cannot be taken before judgment, and a bankruptcy wipes the slate clean when it comes to financial penalties. However, these decisions prove that this may no longer be the case.
Recently, in The Toronto Dominion Bank v. Picard, 2020 ONSC 1289, the Ontario Superior Court of Justice made the unusual finding that enforcement proceedings can persist even when the judgment that underlies them ceases to exist. In this case, TD Bank commenced an action against an individual for unpaid credit card debt. The action was not defended and after obtaining default judgment, the bank took out a Writ of Seizure and Sale and initiated a seizure of the defendant’s RRSP account.
The defendant alleged that she was never served with the claim and brought a motion to set aside the default judgment. Justice Robert Charney accepted her argument and ordered that the judgment be set aside. However, he also held that the writs were permitted to stand, despite the absence of the underlying judgment.
The rationale behind Charney’s ruling was that the defendant’s proposed defence to the bank’s action was very weak, and that she took a long time to bring her motion to set aside the default judgment. Charney also noted that the bank would be prejudiced if the writs were set aside because it would give the defendant a chance to dissipate her assets.
As such, the judgment went away but its enforcement was not affected. Charney conceded that such a ruling was unusual and “generally discouraged because the setting aside of the default judgment effectively turns the seizure into execution before judgment.” But he made the ruling nonetheless.
Although the facts of the Picard decision are pretty straightforward, its significance cannot be overlooked. As Charney pointed out, execution before judgment, although rare, is still a possibility. Therefore, making a judgment go away does not mean that the process will restart.
In a similarly unusual decision from Alberta, it was held that a financial administrative penalty can survive a discharged bankruptcy. In Alberta Securities Commission v Hennig, Justice Barbara Romaine of the Alberta Court of Queen’s Bench ruled that a $575,000 administrative penalty levied against the defendant by the Alberta Securities Commission was exempt from a bankruptcy discharge and was allowed to stand.
In 2008, the Alberta Securities Commission (ASC) had sanctioned the defendant for a number of infractions, including insider trading and improper disclosure. This resulted in a penalty of $400,000, plus $175,000 in costs against him personally. The ASC had the decision turned into a judgment by the Alberta Court of Queen’s Bench. The defendant filed for bankruptcy three years later and was discharged in 2015. The claim by the ASC was provable in bankruptcy and therefore his discharge would have usually released it.
However, the ASC brought an application for a declaration that the punitive judgment should survive the discharge. In this regard, the ASC relied on sections 178(1)(a) and (e) of the Bankruptcy and Insolvency Act, which provide that penalties, fines and restitution orders are not released from by discharge. These provisions also provide that a debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation can survive a discharge.
Justice Romaine accepted that both of these provisions prevented the defendant from using his bankruptcy discharge to escape the judgment obtained by the ASC. Specifically, it was held that the ASC’s judgment constituted a penalty and that it arose out of fraudulent misrepresentations committed by the defendant. Romaine also made it clear that the purpose of those sections is to prevent debtors from escaping dishonest actions. As such, despite the defendant’s discharge, he was still liable to face up to the ASC’s judgment. Romaine even went on to hold that all securities commission penalties will survive bankruptcy if they are turned into judgments.
The Hennig decision has been turning a lot of heads. Before the ruling, it was understood that, unless arising from fraud, penalties handed down from securities regulators are wiped out by bankruptcy discharges.
The potential impact of both of these decisions should be taken very seriously. Typically, debtors have taken comfort in knowing that they cannot be subject to execution in the absence of a judgment or after a bankruptcy discharge. But we now know that if the potential defence to the judgment is tenuous, a creditor can bypass the judgment phase and go straight to execution. Similarly, we also know that a penalty handed down by a securities regulator cannot be escaped, even in a bankruptcy.
It will be interesting to see how far the effects of these decisions go, especially if they are appealed and upheld by higher courts. In the meantime, we would be wise to be mindful that the status quo has been rattled.