Executive Summary: Key Legal and Evidentiary Issues

• Plaintiffs applied to lift the automatic stay under the BIA, alleging that their fraud claims against Ms. Grace fall within statutory exceptions.

• The application centered on whether Ms. Grace's conduct constituted fraud while acting in a fiduciary capacity or involved false pretences or fraudulent misrepresentation.

• Plaintiffs alleged Ms. Grace improperly caused OFC to receive and disburse $366,060.76 from a foreclosure surplus without entitlement.

• The Court found insufficient evidence that Ms. Grace owed fiduciary duties to the Plaintiffs as secured creditors.

• Allegations of fraud under both s. 178(1)(d) and s. 178(1)(e) of the BIA lacked factual support and specific evidence.

• The Court dismissed the application, finding no sound reason to lift the stay based on the claims presented.

Background of the dispute

The Plaintiffs—Michael Koldijk, Martijn Koldijk, and 973632 Alberta Ltd.—claimed to be secured creditors of Oliver Forest & Carrington Ltd. (“OFC”). They asserted that OFC improperly received $366,060.76 from the Clerk of the Court following a 2012 foreclosure sale of lands previously owned by OFC. The Plaintiffs maintained that the funds were meant for them as secured creditors and that Karen Grace, then OFC’s sole director, wrongfully used the funds for unauthorized purposes.

The Plaintiffs alleged that Ms. Grace, acting in breach of her fiduciary obligations, caused the funds to be paid from OFC to herself, fraudulently concealed this from OFC’s shareholders, and should be held liable as a constructive trustee. Ms. Grace revived OFC in January 2015 after it had been struck from the corporate register in October 2011, received the cheque for $366,060.76 on January 26, 2015, and subsequently disbursed the funds to CRA, lawyers, accountants, and to herself—including for a $140,000 payment toward her home.

Claims and bankruptcy context

The Plaintiffs commenced this action on February 3, 2017. They later applied to lift the stay of proceedings imposed by Ms. Grace’s assignment into bankruptcy on May 9, 2023. The application was based on s. 69.4 of the Bankruptcy and Insolvency Act (BIA), with reliance on the fraud exceptions under s. 178(1)(d) and (e) of the BIA.

Section 178(1)(d) excludes from discharge debts arising from fraud, embezzlement, misappropriation, or defalcation while acting in a fiduciary capacity. Section 178(1)(e) excludes debts resulting from false pretences or fraudulent misrepresentation.

Court’s analysis

The Court held that to qualify under s. 178(1)(d), the alleged fraud must have occurred in the context of a fiduciary relationship with the Plaintiffs. However, fiduciary duties are generally owed by directors to the corporation, not to creditors. The Plaintiffs failed to demonstrate that Ms. Grace owed them a fiduciary duty. As such, s. 178(1)(d) did not apply.

Under s. 178(1)(e), the Plaintiffs had to show that Ms. Grace obtained property or services through false pretences or fraudulent misrepresentation. The only fraud pled was concealment of the funds’ receipt from OFC’s shareholders. There was no evidence of deceitful statements or misrepresentations made by Ms. Grace to obtain the funds. She was not present at the April 29, 2014 hearing where the Court ordered distribution, nor was there evidence that she made or influenced any representations during that application. The Court concluded that there was no air of reality to the allegation that Ms. Grace obtained funds through fraud as defined by s. 178(1)(e).

Outcome

The Court dismissed the application to lift the stay. It found that the Plaintiffs did not provide sufficient evidence of either a fiduciary duty owed by Ms. Grace to them or any deceitful conduct by Ms. Grace to justify lifting the stay under either s. 178(1)(d) or s. 178(1)(e) of the BIA. The Court noted that any recoveries that may be available could be addressed through bankruptcy proceedings.