|
[Indexed as: Bialek (Re)] File No. 31-262202 Ontario Court (General Division) Registrar in Bankruptcy 25 C.B.R. (3d) 271 (S.C.
Ont.) May 11, 1994 KEYWORDS: [*1] BANKRUPTCY — Discharge — Bankrupt graduated in U.S. as doctor of medicine in 1985 — Bankrupt owed $104,000 in U.S. student loans — Repayment was deferred because bankrupt was going to Nepal to work as volunteer for five-year period — Political problems forced bankrupt to leave Nepal and he came to Canada and commenced practice of medicine — Bankrupt earned $12,000 monthly from practice — Bankrupt sought discharge from bankruptcy — Discharge was granted conditional on monthly payments to trustee of $2,000 for 45 months COUNSEL: Ward R. Passi, for the bankrupt, applicant, Alex. L. MacFarlane, for The United States of America, opponent, David R. Rothwell, for The Royal Bank of Canada, opponent. JUDGES: D. Lane J. Dennis Lane, J.: [1] Barry Benjamin Bialek applies for discharge from Bankruptcy. Dr. Bialek was born and educated in the United States as a doctor of medicine, graduating in 1985. In gaining that education he relied extensively upon financial aid from various United States government-funded student loan programs. These loans totalled some US$104,000 over the four years of his studies. With interest, they have resulted in a claim proved in the Estate at over $200,000. This [*2] was his second degree, the first being a degree in Mathematics and Science and a teaching certificate earned in 1974. He spent two and a half years in Nepal as a teacher after his Math degree and then worked in the U. S. until entering the medical course. His experience in Nepal has had a strong influence upon him. For several years he has returned more or less annually to work as a volunteer in that country. Dr. Bialek interned in Canada and also did a 6-month residency in Toronto. He has practiced since then In Ontario, primarily as an emergency room physician on a part-time basis in hospitals in Toronto during the week and in Woodstock and Campbellford on the week-ends. His wife is expecting a child in June. [2] Dr. Bialek&##146;s agreement with the U.S. lending agencies required him to begin repayment upon graduation: In 1987 he paid $ 6400 but he obtained a deferral of the balance of his obligation in 1988 upon the basis that he was going to Nepal to work for 5 years. He testified that he did intend to do so, but political unrest in Nepal forced him to leave after a few months and he came to Canada. He did not advise the U.S. lending authorities of this change in plans. In 1989 [*3] or 1990 they contacted his mother and he told her to give them his address in Canada. They were soon in contact with him. It appears that he had the impression that so long as he was in Canada, the U.S. authorities either could not, or would not, seek to enforce repayment of his obligations, but this proved not to be the case. Collection agencies began to call him. In March, 1992, he went to Nepal for a month. In June 1992. he made an assignment in bankruptcy. It was apparent to me from the evidence that the bankruptcy was largely as a result of his discovery that the U. S. loans were enforceable in this country. [3] Under U.S. law, one way of repayment of student loans is by service in an under-serviced area in the U.S. In 1989 he contacted the U.S. Indian Health Service to explore this possibility. He did not pursue this initiative because, he said, his life was in turmoil due to a separation from his then-wife and the revolution in Nepal. He did not renew the contact until 1993 when he did so as a reaction to the U.S. agencies opposition to his discharge. He Save extensive evidence as to the possibility that he would be accepted into there payment through service program [*4] this year and said that, if accepted. he would go. [4] As a doctor, he has a very significant earning capacity which is only partially being tapped. He explains his choice of part-time work by reference to a burn-out factor, which quite possibly has some truth to it. However, he conceded that the trips to Nepal did interfere with maximizing his earnings. He made it clear in the hearing that he was satisfied that giving priority to his volunteer work in Nepal was entirely appropriate for one in his position, indeed he was quite eloquent on the subject of the poverty in that country. [5] His earnings and expense statements bear out his sense of priorities. The expenses show that in the first half of 1993. while bankrupt. he made a gift of over $9,000 to the Nepal Foundation. This is an organization of his creation whose purpose is to fund his travels to Nepal. He then spent April and May 1993 in Nepal, earning no income. His monthly phone expenses of $578 include many calls to Nepal. I admire Dr. Bialek's devotion to improving the lot of the people of Nepal. However, I cannot permit him to force his creditors to bear the brunt of this devotion. For present purposes, I do [*5] not recognize his Nepal-related expenses as justifiable. [6] Apart from Nepal, there are questionable expenses: his computer, leased for $391 monthly, is not used to earn income; over $700 a month is allocated to Travel, Vacation and Wilderness, the last being a travel-photography scheme with his wife which has some possible chance, at best, of resulting in significant income. At over $ 11,000 a month, his expenses are perhaps twice what a responsible person in his position and station in life would require. They are either artificially inflated to eat up his income or they reflect a wholly inappropriate approach to his finances. Oddly, but perhaps a further expression of financial irresponsibility. he has made no provision for income taxes in these statements. [7] His income has steadily grown during the bankruptcy, from about 39600 monthly in 1992 to $10,200 monthly in the second half of 1993 to $12, 679 monthly in the first quarter of 1994. [8] The opposition to discharge comes from two sources. The US. authorities oppose on the basis that their loans got him the education that enables him to earn an exceptional income and that the principles applied in [*6] this court to Canadian student loans should apply equally to them. The Royal Bank opposes on the basis that he obtained credit from them knowing that he was insolvent and that he committed fraud upon them by concealing his US. indebtedness when applying for credit. [9] I can see no reason why the student loans should not receive the same consideration as similar loans by Canadian student lenders. In such cases the court takes into account whether the earning capacity of the bankrupt has been enhanced for the future by the education paid for by the loans. If so, and assuming that there is a present capacity to pay, it is surely necessary, for fairness and for the protection of the integrity of the bankruptcy system, that some of that enhanced earning capacity be harnessed for the benefit or the creditors as a whole, including the student-loan lender. In this connection, see the discussion of the authorities in the Alberta case of Re Wasylowich , Sept. 20, 1993, [1993] A.J. No. 676 where Registrar Breitkreuz referred to the overriding principle that the bankrupt should not put her education to use and then say with impunity that she need not pay for it. Such a case is to be distinguished [*7] from that of a person unable to use the education who has fallen upon evil days and Is to be given a chance for a new start in conformity with the underlying purpose of the bankruptcy legislation. While it may be too strong to refer to the principle as "overriding", it is clear that a powerful element in a discharge judge's thinking must be the unfairness of allowing the bankrupt to use the system to escape altogether from paying for the cost of an education which is actively producing an income of a size enjoyed by very few in our society. In my view. Dr. Bialek has a substantial surplus income beyond his legitimate needs and some of it must be devoted to the benefit of the estate for a period of time. Before deciding how much and for how long, I turn to the second Opposition. that of the Royal Bank. [10] The Royal Bank asserts and the evidence establishes that the bankrupt obtained a loan from it in order to pay off loans from the Toronto-Dominion Bank without disclosing his student loan indebtedness. I accept the evidence of the bank's witness, Ms. Madan, that the loan would not have been made had the truth been disclosed. The bankrupt admitted that he said nothing about the [*8] US. loans, saying that he believed that they were not enforceable In Canada. He also admitted that he did not use the proceeds to pay off the T-D loans and they are still outstanding. In February. 1992. he obtained a further $3,000 loan from the Royal for an RRSP. A few days before going into bankruptcy, he cashed in the RRSP at another branch of the bank. In the period from February, 1992, to his bankruptcy on June 3,1992. he increased his Visa indebtedness by some $17,000. The bank says that all this was fraudulently done. I make no finding as to fraud; that is for another forum if the bank chooses to pursue it. However the evidence satisfies me that the bankrupt continued to trade after he knew himself to be insolvent. Taking the very best view of the evidence from his standpoint, the Visa activity took place when he must have known he was insolvent. The financial activity just set out can only be described as irresponsible. [11] Counsel for the bankrupt asks for an absolute discharge. He says that it was the bankrupt's devotion to Nepal that caused these troubles, the cause is praiseworthy and is an extenuating circumstance. I do not agree. In the first place the evidence [*9] does not show that the loan proceeds were devoted to Nepal. Even if they had been. that was not their disclosed purpose. It is not open to an insolvent debtor to divert the funds available to pay his creditors in favour of a charitable enterprise, however worthy, and then come for an absolute discharge. The creditors have the right to pick their own uses for the money owed to them. [12] Counsel for the U.S. student lenders took the position that those loans would not be discharged by any order of this court. They would no longer be enforceable in this country, but would be in the U.S. Counsel for the bankrupt argued that I should not hear counsel for the U.S. opponent because the opponent was refusing to sub mit to the jurisdiction of the court. He relied on the decision of McQuaid J. in Re Taylor (1988) 68 C.B.R. (N.S.) 93 (P.LI.S.C.) where U.S. student lender agencies took the same position as Is taken before me. He also relied on Paul Magder Furs Ltd., et al. v. Attorney-General for Ontario (1991) 85 D.L.R. (4th) 694 (C.A.) where the court refused an audience to an appellant who had repeatedly disobeyed an order of the court and would not undertake to obey it pending [*10] his appeal. In Magder, the appellant was in contempt already and was ref using to obey in Ontario an order of an Ontario court. These opponents are admitting that the order of discharge from bankruptcy would be effective and would be obeyed by them in this country. They assert that the court's jurisdiction does not extend to discharging a debt Incurred under a contract governed by the law of the United States. I do not think that the Magder principle applies to the case before me. [13] Faced with this same problem, McQuaid J. in Re Taylor, supra, held that the opponent, there, as here, a U.S. student lender, had no standing to be heard. The opponent did admit the validity of a discharge within Canada, 'but by maintaining the right to pursue the debtor in the U.S. was refusing to submit to the full jurisdiction of the court while at the same time seeking relief from that court. [14] Counsel for the bankrupt submits that the present case is on all fours with Re Taylor on this issue, and I agree. If Re Taylor is right, I ought not to give any effect to the representations of the U.S. opponent. [15] Counsel for the opponent submits that a discharge under the bankruptcy [*11] laws of this country of a contractual debt governed by the law of the U.S., while fully effective here, cannot, under recognized rules of private international law, prevent enforcement of the debt in the U. 5. If this position is correct according to our concepts of private international law, then there can be no objection to his stating that position before me. It would not be a question of refusing to submit to the jurisdiction of the Ontario court, but rather one of drawing to this court's attention a recognized limit on its jurisdiction. [16] In the 12th edition (1993) of Dicey & Morris: The Conflict of Laws at p. 1181: “…a discharge of a contractual debt under the bankruptcy law of the country whose law governs the contract is a valid discharge in England. Conversely, a discharge of a contractual debt under the bankruptcy law of any other foreign country … is not a valid discharge in England.” [17] In support of this statement, the authors cite, inter alia, International Harvester Company of Canada, Limited v. Zarbok [1918] 3 W.N.R. 38 (Sask. K.B.) where the court cited a statement from Halsbury, vol. 6 p.247 to the same effect. The modern Halsbury, the 4th [*12] edition, vol. 8 in the article Conflict of Laws. para. 702 is to the same effect: a foreign discharge is not recognized in England “… unless it is a discharge under the proper law of the contract giving rise to the debt." [18] Zarbok (supra) is also cited as authority for a statement to the same effect in Houlden and Morawetz, The Bankruptcy and Insolvency Act, 1993, P.350, para. H 24.1. See also: Antony Gibbs & Sons v. La Societe Industrielle et Commerciale des Metaux (1890) 25 Q.B.D. 399 (C.A.) and Marine Trust Co. v. Weinig [1935] 3 D.L.R. 282 (Ont. S.C.). [19] The contracts under which the debt in question arose were a series of promissory notes in favour of U.S. banks, guaranteed by the U.S. government under the U.S. Health Education Assistance Loan Program authorized by legislation. Each note was accompanied by an application form filled out by Barry Bialek, giving his U.S. citizenship, a U.S. address and stating an intent to enroll in a U.S. educational institution. Each note specifies that it is to be construed according to the U.S. legislation authorizing the program. The proper law of these contracts can only be U.S. law, being that law with which the [*13] contracts have their closest and most real connection. [20] Thus, according to our own notions of private international law, a bankruptcy discharge would not affect the debt arising from these contracts unless it is a discharge of the courts of the U.S. as the proper law of the contracts. The position of the United States' government before me is thus not a refusal to accept the jurisdiction of the court, but merely a statement of the limits of that jurisdiction according to our own law. [21] For these reasons, and with great respect, I cannot follow Re Taylor (supra). My normal reluctance to differ from a judge in a sister province is reduced by the fact that, as is noted by the learned judge, the point was one on which no jurisprudence had been brought to his attention. [22] Returning to the merits of the
discharge application, the evidence shows that the bankrupt is earning at a
rate of about $12,000 monthly or some $144,000 annually. Allowing for perhaps
$10.000 in deductible expenses for the purpose of earning the income. (he has
no office) gives a net of $134,000. Such a net income would generate tax in the
area of $55,000 using the standard deductions. [*14] This leaves $79,000 or $6500
monthly. which significantly exceeds the reasonable requirements of a
professional person with a wife, one child and a responsible attitude towards
his debts. The bankrupt will be discharged. The discharge will be conditional
upon the bankrupt making payments to the Trustee of $2,000 monthly for 45
months commencing July 1, 1994. Should he enter a program for re-payment of his
U.S. obligations by service, he may apply to have the condition varied. |