DISCHARGE OF BANKRUPT - Debts not released by discharge - Debts arising from fraud, misconduct, or breach of fiduciary duty

Appeal by the defendant from a decision finding that her debt to the respondent survived her discharge from bankruptcy. The parties were former spouses. Shortly before leaving the relationship, the appellant withdrew $157,000 from a joint line of credit. The respondent sued for reimbursement and was awarded judgment in the amount of $157,000. The respondent had not pleaded misappropriation or breach of a fiduciary duty in the action. The appellant then made an assignment in bankruptcy. The chambers judge held the failure to plead a case, which if proved, would have come within s. 178 of the Bankruptcy and Insolvency Act, was not fatal to an application as to whether or not a debt survived bankruptcy. He found that the appellant had misappropriated the money from the line of credit and that she was acting in a fiduciary capacity when she removed the funds from the line of credit. The appellant argued that the doctrine of res judicata precluded the respondent from pursuing a motion at the discharge hearing to find that the debt survived an absolute discharge. She challenged the chambers judge’s finding that she misappropriated the funds from the line of credit and that she was acting in a fiduciary capacity.

HELD: Appeal dismissed. Res judicata did not apply. The application before the chambers judge arose from the appellant’s motion to determine whether the debt survived her discharge was a separate procedure which raised fundamentally different issues than those that were before the judge hearing the respondent’s application to lift the automatic stay in the bankruptcy proceedings. It was not open for the appellant to now challenge the procedure that she put in motion. The application to lift the stay turned on whether the respondent could have brought proceedings for a constructive trust in his action. The chambers judge’s finding of fact that the appellant had misappropriated the money from the line of credit that belonged to both her and the respondent, and then used those funds solely for her own purpose, was entitled to deference. No error of law or palpable overriding error of fact had been established with respect to the chambers judge’s finding of a fiduciary duty, therefore the decision was upheld on appeal.

Lehman (Re), [2016] B.C.J. No. 2738, British Columbia Court of Appeal, P.M. Willcock, R. Goepel and G.J. Fitch JJ.A., December 30, 2016. Digest No. 3640-001