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

Wednesday, June 07, 2017 @ 9:24 AM  

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Application by the plaintiffs, KD Lang and her companies, for a declaration that a British Columbia order recognizing a California judgment survived the discharge of the bankruptcy of the defendant, Lapp. The primary plaintiff was a renowned recording artist. The defendant and her company acted as the plaintiff's business manager. The plaintiff alleged the defendant misappropriated funds in the course of her management duties. In 2007, the plaintiffs obtained an unopposed California judgment against the defendants for $1.9 million in damages for breach of fiduciary duty, constructive fraud, concealment, professional negligence and breach of contract. In 2009, the plaintiffs obtained an order in the British Columbia Supreme Court for recognition and enforcement of the California judgment. In 2011, the defendant made an assignment in bankruptcy. She subsequently applied for discharge. The plaintiffs sought a declaration that the BC order survived any discharge of the defendant's bankruptcy. The defendant opposed the relief sought on the basis the foreign default judgment represented a debt without any proven misappropriation or defalcation.

HELD: Application allowed. Application of the principles concerning the legal consequences of a default judgment allowed the court to use the deemed admissions arising from the California judgment to characterize the defendant's conduct for the purposes of s. 178(1)(d) of the Bankruptcy and Insolvency Act. Those deemed admissions specifically included allegations of constructive fraud, concealment and breach of fiduciary duty within the scope of s. 178(1)(d). It would be inappropriate to reward the defendant by releasing her from liability for unacceptable conduct while in a fiduciary position to the plaintiffs. The plaintiffs were granted the relief sought.

Lang v. Lapp, [2017] B.C.J. No. 792, British Columbia Supreme Court, E.J. Adair J., April 26, 2017. Digest No. TLD-June52017006