November 4, 2015

Deceitful conduct of co-conspirator a bar to releasing bankrupt from judgment debt

When does a judgment debt arising out of fraudulent misrepresentation survive a bankruptcy?

Section178(1)(e) of the Bankruptcy and Insolvency Act provides that a discharge order does not release the bankrupt from a debt or liability resulting from obtaining property or services by false pretenses or fraudulent misrepresentation.  (The exception is a debt or liability that arises from an equity claim.)

But how does that provision operate, when there are joint tortfeasors, and where fraud was not expressly pleaded?

The British Columbia Court of Appeal considered these questions in Cruise Connections Canada v. Szeto, 2015 BCCA 363.  Three travel agents were in a dispute with their former employer, Cruise Connections Canada.  They joined a competing travel agency and took with them their confidential client lists and pre-existing bookings.  Cruise Connections sued, and the court found all three agents jointly and severally liable in damages for breach of contract, civil conspiracy and conversion.  (The decision in the original action is at 2012 BCSC 53.)  While two of the defendants were found to have participated in deceptive conduct (involving false database entries for cruise bookings), the court found that the third, Mr. Szeto, participated in the scheme, but not in the deceptive conduct.

Subsequently, Mr. Szeto made an assignment in bankruptcy.  The court had to determine whether the bankruptcy operated so as to discharge the judgment debt owing by him pursuant to s.178(1)(e), or whether the debt survived the discharge.

The application judge held that since there were no specific allegations of fraud in the claim, and since the bankrupt had not personally participated in making false pretenses, he ought to be excluded from the allegations of deception and therefore the debt should be extinguished by the discharge.  The Court of Appeal reversed that finding.  Writing for the Court, Justice Garson held that s.178 suggests a broader interpretation.  Where a finding of joint liability is made, the joint tortfeasor is liable for the deceitful actions of fellow tortfeasors.  Here, even though fraud had not been specifically pleaded, the bankrupt was liable for the actions of the joint tortfeasors and was not discharged from the debt.

Even absent a pleading of fraud, if there is deceitful conduct and joint liability, the bankruptcy may not extinguish the debt.