Drummie (Bankruptcy of)

Re : Drummie 2002 NBQB 315 COURT NO : NB 8881

ESTATE NUMBER: 51-092558

IN THE COURT OF QUEEN'S BENCH OF NEW BRUNSWICK

IN BANKRUPTCY AND INSOLVENCY

IN THE MATTER OF the bankruptcy of Thomas Blair Drummie

HEARD: February 1, 2002

DECISION: October 7, 2002

APPEARANCES: George L. Cooper - for the bankrupt

Bernard F. Miller - for Society of Lloyds

R. Gary Faloon, Q. C. - for Grant Thornton Limited - Trustee for the Estate

DECISION

Thomas Blair Drummie (hereinafter "the Bankrupt") born February 20, 1931, a lawyer practising in Saint John since 1954, filed an Assignment in Bankruptcy on March 29, 2001. Grant Thornton Limited was appointed Trustee of the Estate of the bankrupt by Certificate of the Official Receiver dated April 18, 2001.

At the first meeting of creditors chaired by Vincent L. Duff on April 19, 2001, the Statement of Affairs of the Bankrupt indicated assets of $683,378.97, comprising $325,877.97 in RRSP funds and $1,000.00 for personal effects upon which exemptions were claimed. The balance of $356,500.00 was held in securities upon which exemption was not claimed. The major part of this amount consisted of a personal holding company, Ground Floor Holdings Ltd.

The Statement of Affairs listed three primary creditors with the following debts: Society of Lloyds (hereinafter "Lloyds") - $635,140.00, Minister of National Revenue (hereinafter "CCRA") - $90,000.00 and the Royal Bank of Canada (hereinafter "RBC") - $312,410.82. The Bankrupt declared his indebtedness to Lloyds to be the principal reason for his insolvency.

The Trustee's Preliminary Report to Creditors tabled at the first meeting of creditors noted that the Bankrupt had agreed to make monthly payments of $1,860.00 pursuant to the guidelines of the Superintendent of Bankruptcy and based on his estimated monthly income of $6,221.00, of which $5,000.00 was from his professional employment. It was further noted that the market value of non-exempt assets was not known at that time.

The minutes of the first meeting of creditors indicate that Grant Thornton Limited was confirmed as Trustee of the estate and that George Benchetrit representing Lloyds was appointed as inspector. No other significant decisions are recorded.

On December 7^th, 2001, the Trustee examined the Bankrupt under oath before the Registrar pursuant to subsection 163(1) of the Bankruptcy and Insolvency Act (hereinafter "the Act"). It may be noted that counsel for Lloyds was in attendance and was permitted by counsel for the Trustee to pose questions which the Bankrupt voluntarily answered although no application to the court had been made pursuant to subsection 163(2) of the Act.

On December 10, 2001, the Trustee prepared a Section 170 Report stating that the Bankrupt had performed his duties under the Act satisfactorily, explaining that the Bankrupt's fluctuating income fell below the Superintendent's Guidelines over the period of the bankruptcy and recommending a discharge without conditions. The automatic discharge date for this first time bankrupt would have been December 30, 2001.

The discharge of the Bankrupt was opposed by Lloyds which raised the following grounds of objection:

1. The assets of the Bankrupt are not equal to fifty cents on the dollar of the Bankrupt's unsecured liabilities and, as a result, the amount realized for the benefit of unsecured creditors is wholly disproportionate to the amount of the Bankrupt's liabilities;

2. At the time of choosing bankruptcy, the Bankrupt's three main creditors had not demanded payment and were not actively pursuing enforcement of their debts. The Bankrupt could have made a viable proposal and chose bankruptcy rather than a proposal to creditors as the means to resolve his indebtedness;

3. The Bankrupt failed to make regular monthly payments or any significant contribution to the estate during bankruptcy.

4. The Bankrupt attempted to make a substantial, preferential payment to his wife six months before the bankruptcy and the Bankrupt failed to disclose all of his liabilities in his Statement of Affairs as required by the Bankruptcy and Insolvency Act;

5. The Bankrupt's primary motivation in bankruptcy appears to be to attempt to use the bankruptcy process to entirely defeat the claim of the Society of Lloyd's and to avoid payment of his income tax obligations for income earned during the year 2000 and certain deferred income.

Lloyds requests that the following conditions be imposed upon the discharge of the Bankrupt:

1. That the Bankrupt's discharge be suspended for a period of six (6) months;

2. That the Bankrupt pay the $10,000.00 which he has accumulated and holds in a bank account (instead of making monthly payments) into the estate forthwith;

3. That the Bankrupt continue to make monthly contributions of $1,868.00 to the estate during the six month period which the discharge is suspended; and

4. That the Bankrupt be required to consent to judgment to the Trustee in the amount of $50,000.00 for the benefit of the unsecured creditors.

The objections will be dealt with seriatim.

1. Are the assets of the bankrupt of a value not equal to fifty cents on the dollar on the amount of the bankrupt's unsecured liabilities?

The fact of the assets of the Bankrupt being not of a value equal to fifty cents on the dollar on the amount of the Bankrupt's unsecured liabilities is one for which discharge may be refused, suspended or granted conditionally pursuant to paragraph 173(1)(a) of the Act, unless the Bankrupt satisfies the court that this occurrence has arisen from circumstances for which he cannot justly be held responsible. Although the issue of security interest is still before the courts on appeal, on the face of the documents presented the assets available for distribution to unsecured creditors do not amount to this threshold value and the burden falls upon the Bankrupt to prove that he cannot justly be held responsible for this. Although the Trustee opines in his Section 170 Report that the Bankrupt is not responsible for the shortfall, this alone is not determinative of the issue.

The liabilities of the Bankrupt which precipitated the assignment in bankruptcy were the debt of $635,140.00 to Lloyds and that of $312,410.82 to the RBC. A large percentage of the indebtedness to the RBC was a carryover in the form of loans from the letter of credit paid to Lloyds. The investment in Lloyds undertaken by the bankrupt in 1986 and his becoming a "name" in 1987 could not be characterized as reckless or foolhardy behaviour deserving sanction. Lloyds, at that time, was a well-established institution and for the reasonable person subscribing therein, precipitous losses would not have been foreseeable. This type of investment is not equivalent to rash speculation on the market.

When significant losses started to occur the bankrupt took measures to disengage from his contractual obligations but could not do so immediately due to the terms thereof. Attempts to recover losses by way of legal action in Canada proved fruitless.

There is no culpability on the part of the bankrupt for the sudden downturn in his financial circumstances and the consequent shortfall in assets relative to liabilities. The legal actions taken by the Bankrupt were reasonable under the circumstances although no adverse inference may be drawn against Lloyds because the court did not dispose of the substantive issue.

The bankrupt did not create the circumstances which led to the disparity between his assets and liabilities.

2. The Bankrupt could have made a viable proposal rather then choosing bankruptcy.

The rationale for making a proposal is that it benefits both the debtor in not having the stigma of bankruptcy and the creditors in receiving a better recovery than would have been available by assignment. An objective examination of the circumstances is required to ascertain if the choice of assignment by the Bankrupt in this case has been detrimental to the creditors. One must consider the assets available and the future earning potential at the time of assignment. The shortfall of assets relative to liabilities has already been considered. The majority of non-exempt assets were held in securities, primarily those of Ground Floor Holdings, which were available to the Trustee and the value in realization of which would not have been substantially different in a proposal from that in bankruptcy.

Future earning potential of the Bankrupt is difficult to estimate with precision. His earnings had at one time been substantial but consideration must be given to the fact of his being in his seventieth year at the time of assignment as well as the erosion of his client base to which he testified during examination.

The earning potential of the debtor would show the amount, if any, that could be contributed directly as being surplus to necessary expenses. It would also be indicative of the capacity to obtain further credit to fund payments during the term of a proposal.

Evidence of expenditures by the Bankrupt in his Income and Expense Statement of March 24, 2001 indicates a generally comfortable but not extravagant lifestyle for a professional who has practiced for over forty-five years. Claimed expenditures of five hundred dollars per month on alcohol and one hundred fifty dollars per month on club fees, however, are not justifiable. With those exceptions, there is no evidence of the bankrupt artificially inflating expenses to outstrip income.

Revenue statements during the course of the bankruptcy showed an average total monthly income of $1,819.00. Although there might be a possibility of upward fluctuations, the probability of a sustained high income at the Bankrupt's present age is low.

Given the extent of the Bankrupt's liabilities and the limited potential for earnings that would provide substantial amounts over and above those recovered by liquidating non-exempt assets, I am not satisfied, that there is any culpability in his not having made a proposal.

3. Did the Bankrupt fail to make required monthly payments or some significant contribution to the estate during bankruptcy?

The Bankrupt showed average gross monthly earnings of $1,249.00 for the period of bankruptcy ending in October 2001 according to the Section 170 Report. This provided an amount inferior to the Superintendent's Guidelines for surplus income.

Lloyds urges that the taxable earnings shown in years preceding the bankruptcy be used to arrive at a deemed income, predicated on the assumption that the post-bankruptcy lowering of professional earnings was avoidable. The opposing creditor also submits that the bankrupt testified to an accumulation of $10,000.00 realized during this period and that this amount should be surrendered to the Trustee (Question 259 of the Section 163(1) examination).

The Bankrupt testified that the accumulation came from a draw of $5,000.00 per month from his law firm which had been reduced from $10,000.00 pre bankruptcy. The Trustee, advising the Bankrupt that no continuing monthly payments during bankruptcy would be necessary, based his calculations on this amount. What status can be given to this draw? A partner of the law firm indicated that the bankrupt was overdrawn on his capital account at the firm on the date of bankruptcy. The draw, therefore, was his obtaining funds based on anticipated future income, whether the origin of this would be from billable hours or other sources. Although the income was not earned strictly speaking during the bankruptcy period, it would be unfair to creditors to allow the bankrupt to benefit therefrom during this time and have the opportunity to redeem these amounts after an absolute discharge. The bankrupt cannot fail to make the required monthly payments during bankruptcy and yet make substantial drawings on anticipated future income while arguing that future earnings will be insufficient to allow payments conditional to discharge. The accumulated surplus of $10,000.00 from this draw must be surrendered to the Trustee. Although the bankrupt testified that some of this amount had now been used for living costs, account has been taken of required lifestyle adjustments previously mentioned.

4. Did the Bankrupt attempt to make a substantial preferential payment to his wife six months prior to the bankruptcy and neglect to disclose all his liabilities in this Statement of Affairs as required by the Bankruptcy and Insolvency Act?

Lloyds submits that the overdraft by the Bankrupt on the capital account of his law firm and his assignment of a note of Ground Floor Holdings to his wife during the year preceding the bankruptcy constitute a dereliction of duties under the Act that should prohibit an absolute discharge.

The bankrupt explained his actions in assigning a note from Ground Floor Holdings to his wife, thinking that it was a justifiable security for a debt owed due to a loan. He testified that this was done prior to the Bank's final claim for advanced repayment and that there was no intention to declare bankruptcy at this point. The Bankrupt reversed the decision and had the note reassigned to the Trustee when so requested by the latter. The Bankrupt stated that there might be an overdraft on his capital account with his law firm but that "it's close". He stated that detailed calculations were made only once annually. Although this response may not be totally satisfactory, I cannot conclude that there was

any conscious attempt at concealment. The explanations given negate a conclusion of deliberate wrongdoing and the estate has not been thereby prejudiced. No additional penalty need be imposed upon the discharge due to these circumstances.

5. Was the Bankrupt's motivation in declaring bankruptcy to defeat the claim of Lloyds and avoid payment of income tax on earnings in the year 2000 and certain deferred income?

Lloyds argues that there is a deliberate attempt to avoid payment of their judgment, that the Bankrupt chose not to pay taxes on his income for the year 2000 and that he should be found at fault for these decisions.

The Bankrupt explained the circumstances related to tax remittance at Q. 172 & 207-223 and 259 of his section 163(1) examination on December 7^th, 2001. His normal practice had been to pay on April 30^th the amount due for the previous year with the exception of one year when a higher than anticipated income permitted instalment payments during the imposable year of 1999. There is no history of tax evasion. The Bankrupt testified that the accumulating surplus from his draw was to be used for current tax payment. Although this was an incorrect approach and not in conformity with the provisions of the Act, there is no convincing evidence that the bankruptcy was tax driven or that there was a deliberate attempt at evading the payment of taxes. It is noted that CCRA is not an objecting creditor in these proceedings.

The bankruptcy has obviously had an adverse affect on the claim of Lloyds. The Bankrupt testified that he had considered and dismissed the possibility of a 35% settlement with Lloyds because one half of his earnings after taxes were going to pay down the bank loan. He was also afraid that the amount of debt reduction would have been added to his income for tax purposes. He held that a subsequent assessment would have jeopardized any potential plan. Much has been made of the bankrupt's declaration that he was "happy" being bankrupt. Many bankrupts, although embarrassed and suffering a sense of economic loss in bankruptcy, are happy to have removed the stress of a crushing burden of debt. When testifying concerning his attempts to service his loans during the 1990's, the bankrupt stated that he had not wanted to go bankrupt and felt a

sense of obligation to the Bank that had assisted him during difficult times. This negates any attitude of willful or callous disregard for the rights of creditors. Any negative feelings that the bankrupt may hold for Lloyds, holding the latter to be the cause of his misfortune, are of little consequence unless these have motivated him to subvert the purpose of the Act. The court must examine objectively the position of the bankrupt to determine whether there is misconduct.

The Bankrupt testified that the incomes of 1998 and 1999 were an anomaly and explained the change in his client base, particularly the loss of Aliant. Although earnings during the last twelve months might be lower than expected, consideration must be taken of the fact

that the Bankrupt is now aged seventy-one years. It cannot be concluded here, as it was in the case of Westmore v. McAfee, (1988) 67 CBR. (N.S.) 209, that the Bankrupt "seems to continue to have a bright future in the practice of law". Neither can one confidently extrapolate from past income to future income for someone of the Bankrupt's age as was done in the case of a 54 year old lawyer in Re Janowsky (1993) 19 C.B.R. (301) 77.

There are also some distinguishing elements between the case of the Bankrupt in the present instance and that of Touhey in Touhey v. Barnabe, 1995 Carswell Ont 3495. Touhey, a lawyer of 65 who had been earning in excess of $100,000.00 per annum for the preceding nine years, came to court with almost no personal assets. He was up to date with all creditors at the date of bankruptcy but was a debtor on judgment to the objecting creditor. The court found that the litigation leading to this judgment was vexatious on the part of Touhey. A further finding was that monthly expenses of $11,096.32 indicated an extravagant lifestyle, "perhaps twice what a responsible person in his position and station of life would require". It has already been noted in the present instance that assets in Ground Floor Holdings have been transferred to the Trustee, that the Bankrupt's income potential is declining and that, for several years prior to bankruptcy, he had made efforts to service his debts to the Bank. The efforts made by the Bankrupt to pursue his case

before the courts, although unsuccessful, were never deemed inappropriate, much less vexatious.

The Bankrupt in his assignment was obviously seeking relief from the judgment owed to Lloyds as this was by far his largest liability. The bankruptcy originated from the circumstances of the Bankrupt's association with Lloyds of which the judgment was one consequence and indebtedness to the Bank was another. At paragraph 47 in Touhey v Barnabe (supra) Platana, J. stated:

"If bankruptcy is precipitated by one judgment, courts have considered willful and discreditable conduct on the past of the bankrupt as grounds for refusal. They have also considered the actions of the bankrupt and have refused discharges in cases where the bankrupt has displayed a flagrant and callous disregard for the rights of creditors both before and after bankruptcy".

I cannot conclude that the past dealings of the Bankrupt in this case can be construed as willful and discreditable conduct. Neither on all the facts can it be fairly concluded that the Bankrupt has displayed a flagrant and callous disregard for the rights of creditors both before and after the bankruptcy. I would subscribe to the approach of Locke, J. A. in the matter of Re Heinomen, 3 C.B.R. (3d) 1 (B.C.C.A.):

"The foregoing remarks, in my view, justify a conclusion that a debtor is justified in filing for bankruptcy if the debt or civil judgment which confronts him is so large compared to his income and to his reasonable prospects of income that the result would be to saddle him with an impossible situation entailing years of payments, then a conditional discharge will be appropriate".

Given the Bankrupt's age and questionable future earning potential, there was no wrongdoing in the declaration of bankruptcy. A discharge subject to appropriate conditions is warranted.

Conclusion

The Act requires a balance to be made between the interests of the Bankrupt and those of the creditors and the public. The circumstances of the Bankrupt will be a question of fact in each particular case. He or she should not be permitted to casually shed debts, that have been carelessly accumulated, but neither should the Bankrupt be saddled with an insupportable burden over a long period of time such that the rehabilitative principle would be negated.

Consideration has been given to the Bankrupt's age and declining earning potential balanced by his registered retirement plan which, although exempt, offers a measure of future security. Account has been taken of his income draw during the period of bankruptcy.

The absolute discharge requested by the Bankrupt would be inappropriate under the circumstances. The conditions suggested by the opposing creditor, however, obligating the Bankrupt to pay over $71,000.00, would unreasonably impede any return to a useful lifestyle.

The Bankrupt, Thomas Blair Drummie, shall be discharged upon the condition of his consenting to judgment in favour of the Trustee in the amount of $10,000.00 with no execution thereon provided that the Bankrupt furnishes minimum monthly payments of $600.00 to the Trustee.

Costs of $800.00 shall be payable to the opposing creditor from the estate.

___________________

Michael Bray

Registrar