D. P. Ball Court No. 16211 2010 SKQB 51 Estate No. 22-1032810 J.C.R. IN THE COURT OF QUEEN'S BENCH PROVINCE OF SASKATCHEWAN IN BANKRUPTCY AND INSOLVENCY IN THE MATTER OF THE BANKRUPTCY OF ROBERT ALAN BURROUGHS Dean Burlingham, Burlingham Associates, trustee Michael Hall, for Synergy Credit Union Robert Alan Burroughs, bankrupt JUDGMENT LIAN M. SCHWANN, Q.C. February 8, 2010 Registrar in Bank­ruptcy [1] Robert Alan Burroughs (“Burroughs”) applies for his discharge from bankruptcy through his trustee. Discharge is opposed by the Synergy Credit Union (“SCU”) and by the trustee. His Statement of Affairs shows assets of $171,255 (mostly exempt or encumbered) against unsecured debts totalling $433,750, and secured debt of $150,000. Burroughs is first time bankrupt. [2] Burroughs assigned into bankruptcy on January 25, 2008. His discharge application came before me initially on November 14, 2008 at which time SCU exercised its right to cross-examine Burroughs. That examination was marred by acrimony but served to highlight informational gaps in the bankrupt’s disclosure as well as raising questions about surplus income obligations. His application was then adjourned sine die and fiat issued requiring further disclosure. The matter came back before me on October 16, 2009 and Burroughs was again cross-examined by SCU. [3] The context for this bankruptcy is set out in the decision of Dovell J. in Lloydminster Credit Union Limited v. Robert Alan Burroughs, 2007 SKQB 81 (CanLII) (the “Judgment”). The pertinent facts are these. Burroughs was cattle farmer. He financed this undertaking principally through the Lloydminster Credit Union (now SCU) having taken out numerous loans over the years. In 2001 Burroughs began to experience cash flow problems culminating in series of loans and consolidations. His financial problems worsened in 2002. In April of that year he advised SCU of his intention to sell cattle through Heartland Livestock in order to raise cash. SCU supported his plan. Instead of selling cattle, Burroughs did the opposite. He purchased cow/calf pair, paid for by cheque which he believed would be backed by financing from SCU. That financing did not transpire and his cheque was returned NSF. Eventually this debt was covered by an unsecured loan from friend. [4] His situation grew progressively worse. The drought, which began in 2001, persisted. As he couldn’t grow sufficient feed for his cattle operation, he was forced to purchase it at great expense. Burroughs obtained further $12,000 loan from SCU to cover his operational expenses however it fell short of his $20,000 request. Things worsened and in July 2002 he sold off his entire herd. [5] SCU sued Burroughs on the various loans. Burroughs counter-claimed arguing ‘negligent misstatement’ based on reliance he placed on discussions with SCU respecting financing the cow/calf pair and operational expenses. In his terms, ‘forced sale’ ensued which resulted in return of .40 cents on the dollar, or loss of $89,000. [6] SCU succeeded with its claim and was granted judgment in the amount of $91,126.29. Burroughs’ counterclaim was dismissed. The Court found there was no agreement to lend him $30,000 for the cow/calf pair or the full $20,000 for feed and other operational expenses. [Judgment, para. 40 and 43] [7] In dismissing his counterclaim, the trial judge made the following observation: [47] In final argument Robert expressed to the Court that he did not expect to win his lawsuit but that he had to do what he believed in and what he had to do. Unfortunately, Robert was mistaken about what he perceived was told to him on two occasions. Having said that, the Court is perplexed by Robert’s actions in pursuing his unreasonable positions in light of the mountain of documentary evidence in support of the Credit Union’s position. [8] In subsequent ruling, the Court awarded SCU costs fixed at $12,000. [fiat of Dovell, J. March 29, 2007] [9] SCU objects to Burroughs discharge on the following grounds: the bankrupt’s assets are not equal to fifty cents on the dollar compared to his unsecured liabilities (s.173(1)(a)) the bankrupt failed to keep his books and records and failed to disclose the business transactions in the three year period before bankruptcy (s.173(1)(b)) the bankrupt continued to trade after becoming insolvent (s. 173(1)(c)) the bankrupt failed to account for loss of assets (s. 173(1)(d)) the bankrupt put his creditors to unnecessary expense by frivolous or vexatious defense (s. 173(1)(f)) the bankrupt failed to comply with duties of bankrupt imposed under s. 158 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”), notably his intentional failure to provide proper and complete information to the trustee (s.173(1)(o)) POSITION OF THE PARTIES [10] SCU objects to discharge on multiple grounds, discussed in detail later in this decision. They point to Burroughs intentional failure to provide proper documentation to the trustee and to cooperate in these proceedings. Whereas bankruptcy is intended to assist the ‘honest but unfortunate debtor’, Burroughs, they suggest, is anything but. The multiple s. 173 grounds, his total disregard and disrespect for the process, his failure to produce books and records, and his abusive nature collectively and more accurately depict him as neither honest nor unfortunate. [11] SCU’s position, briefly stated, is this: it would be unfair and unjust to allow Burroughs to receive his discharge without making sizeable contribution to his creditors. The fact he has no assets should be diminished consideration and they urge me to impose an order requiring payment of the cost award ($12,000) coupled with an order requiring him to consent to judgment in the amount of $50,000 which represents half of their Judgment. [12] SCU cross-examined Burroughs extensively on cattle sales which occurred in the five years prior to bankruptcy. Some of the probing was designed to assist SCU sort out whether it had security over the cattle and what happened to the proceeds. By fiat of November 24, 2008 declined to make any order directing production of the records sought. [13] SCU contends that Burroughs’ should be held accountable for his actions and not be permitted to simply hide behind his exempt farm assets. This bankrupt should be forced to give up farming and ranching because it has become losing proposition for him and at this point simply ‘lifestyle’ choice. Finally they suggest he has ability to earn substantial off-farm income if forced to do so by sizeable order. [14] When the matter first came before me, the trustee simply sought conditional order limited to the balance owing for trustee fees. The trustee’s recommendation changed following receipt of Burroughs’ income and expense statements for the intervening period. Based on family of two, and having regard to Burroughs’ net income and the Superintendent’s Standards, the trustee recommends conditional order of discharge in the amount of $188 per month 12 months for total of $2,256. [15] The trustee found no assets available for creditors. What Burroughs owns is either encumbered or exempt, including the cattle. The trustee took no exception to Burroughs having sold cattle in the year preceding bankruptcy because it simply amounted to sale of inventory in the ordinary course of business. Furthermore, the trustee maintains that the BIA imposes no duty on the trustee to examine Burroughs’ farming records in the five year period preceding bankruptcy. [16] In more general terms, the trustee found Burroughs evasive, uncooperative and un-attentive to his duties under the BIA and at times verbally abusive. [17] Burroughs spoke strongly and passionately on his own behalf. He claims to have been insolvent since 2002, not of his own doing but because of the combined forces of drought and the BSE crisis. To illustrate, he says he purchased cattle for $1,000 per head prior to the BSE crisis but can only sell them now for $200. Not only had the market bottomed out, but because of drought he was forced to purchase cattle feed at roughly $500 annually per animal simply to keep them alive and his farming operation going. In short, it was losing proposition with no easy off-ramp even if he wanted to cease farming. [18] When he first came before me Burroughs was working in the oil patch earning $19 per hour. He described his tenure there as ‘shaky’. He supplements his income with odd jobs here and there to earn cash for basic necessities and he farms the home quarter which is in the throws of foreclosure proceedings. He struggles to stay ahead of those proceedings and to keep his farming operation alive, however finds the cost of doing so consumes most of his off-farm income. [19] Burroughs resists any form of conditional order claiming to struggle just to make ends meet. At the time of hearing he was earning $2,300 net per month with $1,000 of that applied towards his mortgage in an attempt to retain the land. Burroughs admits to also paying off debts owed to neighbours and self-financing his farming operation out of his monthly income. Whether these debts were pre or post bankruptcy was not explained by Burroughs, nor explored by the trustee or SCU. Finally he blames SCU and his own bankruptcy proceedings for his on-ongoing struggle to hold down job and his employment uncertainty. [20] The bankrupt lives very frugally. His home lacks electricity or propane. He claims to work from sunrise to sunset with no time off. He wishes to start over and put this mess behind him and to once again build up his farm operation. [21] Subject to the limitations imposed by s. 172(2), there is wide judicial discretion with regard to the type of order which may be imposed on discharge. If s. 173 fact is proven, though, an order of absolute discharge is unavailable to the bankrupt and the range of discharge orders is limited to conditional, suspended, or combination or both, or in some circumstances an outright refusal of discharge. The onus is on the objecting creditor to prove the existence of s. 173 fact if it is not otherwise reported by the trustee. (Houlden and Morawetz, The 2009 Annotated Bankruptcy and Insolvency Act, (Toronto: Carswell, 2007) at p. 816). [22] now turn to the grounds of objection advanced by SCU. Section 173(1)(a) assets not .50 cents on the dollar [23] The trustee’s report does not report on this fact, consequently am left to form an opinion based on the Statement of Affairs and the Claims Register. Applying the former, there’s no question that Burroughs’ assets were less than .50 cents on the dollar compared to his unsecured debt at the time of assignment, however, as case law suggests, asset value is to be determined at the time of discharge (Re Pehlke (1939), 1939 CanLII 397 (ON SC), 20 C.B.R. 415). This makes information from the Claims Register (October 2008) and the trustee’s s. 170 report pertinent to this consideration. [24] These documents reveal admitted unsecured claims of $139,866 against realized assets of $408 with further anticipated receipts of $1,250. If this information is the appropriate measure for purposes of s. 173(1)(a), then, unquestionably, this ground has been met. The onus shifts to Burroughs to satisfy the Court that his situation has arisen from circumstances beyond his control. This he failed to do other than to point in very general terms to the combined effect of drought and BSE which had occurred five or six years prior to his assignment. Unfortunately, these events occurred too many years prior to his assignment to satisfactorily explain his present circumstance and therefore conclude that he has failed to meet the onus. Section 173(1)(b) and (c) failure to keep books and records and continuing to trade after becoming insolvent [25] These next two grounds failure to keep books and records and continuing to trade after becoming insolvent were thoroughly explored by SCU in cross-examination. have no hesitation finding Burroughs to be totally inept bookkeeper. By his own admission, buttressed by the trustee’s observations, his business records were in state of total disarray. His practice was to simply throw everything (receipts, contracts, bills etc) into box or garbage pail until such time as his mother could retrieve them and organize his financial affairs. Prior to his mother’s involvement, his farm and personal accounts were handled by bookkeeper who declines to have anything further to do with Burroughs or to assist with his disclosure duties. [26] However, as Burroughs professes to be rancher, must consider s. 173(2) of the BIA which provides: 173(2) Paragraphs (1)(b) and (c) do not apply in the case of an application for discharge by bankrupt whose principal occupation and means of livelihood on the date of the initial bankruptcy event was farming or the tillage of the soil. [27] ‘Farming’ is undefined in the BIA however notice is taken of the breadth of the definition in other legislative schemes. [see for example: The Saskatchewan Farm Security Act, S.S. 1988-89, c. S-17.1, s. 2(1)(g)]. On his Statement of Affairs Burroughs describes himself as rancher/ truck driver, and although no evidence was led as to whether ranching was his principal occupation, decline to make any finding on this ground in the absence of any evidence, and in any event find it unnecessary to do so given my findings on the other grounds. Section 173(1)(d) failure to satisfactorily account for any loss of assets [28] Burroughs was extensively cross-examined on the fourth ground failure to satisfactorily account for any loss of assets or for any deficiency of assets to meet the bankrupt’s liabilities. SCU contends that some of its loans were secured by cattle owned by Burroughs and that in the five years preceding bankruptcy Burroughs indiscriminately sold cattle without their consent and without applying the proceeds of sale against their loans. [29] Depletion of cattle was explored in two factual respects. First, there was extensive examination on cattle sales occurring between 2001 and 2002 (prior to when he liquidated his herd), application of those proceeds, and whether SCU held security over that cattle. The trustee expressed no concern over these transactions pointing to the fact they occurred well before Burroughs’ assignment and consequently were beyond his reach. SCU unsuccessfully sought an order directing the bankrupt to make full disclosure of cattle sales within this time frame. [Fiat November 24, 2008] [30] SCU cross-examined on second series of cattle transactions which arose from what Burroughs describes as his ‘cow/calf operation’. This operation consisted of yearly pattern of birthing calves in the spring, raising and feeding them over the ensuing months, and subsequently selling the calves each fall. He said the proceeds were applied towards secured loan with feeder/ breeder co-op with the balance used to cover expenses and hopefully generate profit. This was his usual practice over the years with exception in 2007/08 when he delayed sale until February 2008 in an attempt to take advantage of an improved market. SCU asserted security interest over the equity. The trustee reports to having thoroughly reviewed Burroughs cattle and cow/calf operation and was satisfied his remaining herd was exempt and not available for the benefit of his creditors. [31] In circumstances of significant asset depletion without corresponding satisfactory explanation, this ground has been applied. Re Schreiner (1998), 1998 CanLII 13960 (SK QB), C.B.R. (4th) 135 is case where over 200 head of cattle were inexplicably unaccounted for. The trustee commissioned detailed analysis of cattle transactions by reputable accounting firm which in turn formed the basis of his s. 170 report. In those circumstances, the court readily found s. 173(1)(d) to have been established. [32] am satisfied s. 173(1)(d) does not apply to Burroughs’ pattern of breeding and raising cattle with view to selling the calves in the same year. Burroughs’ practice simply constitutes the routine turn over of inventory in the normal course of his farming operation. It makes little sense to fault bankrupt for selling inventory in the normal course when it’s part of the business operation itself and done for purposes of earning livelihood in recognized, routine way. Intentional depletion or hiding assets is another matter entirely however nothing in the evidence points in that direction. Section 173(1)(f) of the BIA creditors put to expense by frivolous or vexatious defense [33] The next ground of objection to discharge is framed around s. 173(1)(f) of the BIA – the bankrupt put his creditors to unnecessary expense by a frivolous or vexatious defense to any action properly brought against the bankrupt. The basis for this ground stems from comments made by the trial judge which bear repeating: [47] the Court is perplexed by Robert’s actions in pursuing his unreasonable positions in light of the mountain of documentary evidence in support of the Credit Union’s position. [34] Houlden and Morawetz, Bankruptcy and Insolvency Law of Canada (4th ed. Looseleaf vol. p. 6-211) summarize the elements of this ground as follows: frivolous defence is one lacking in any legal merit. vexatious defence is one put in to annoy or embarrass the creditor. The fact that the debtor filed for bankruptcy immediately upon judgment being entered against him in defended action does not in itself establish that his defence was frivolous or vexatious...Where debtor defended an action by large creditor by setting up esoteric defences in an attempt to obtain settlement of the claim, these actions were found to constitute frivolous and vexatious defence…[citations omitted] [35] In Wolverton Securities Ltd. v. Schemel, 2009 BCSC 1048 (CanLII), 56 C.B.R. (5th) 47, the Court held that defence lacking in legal merit was not necessarily frivolous. Inability to afford legal counsel and refusing to consent to judgment where defendant has bona fide belief in meritorious legal defence does not always or necessarily meet the parameters of s. 178(1)(f). [36] Stancer, Re, 2009 BCSC 398 (CanLII), 53 C.B.R. (5th) 76 is another case where this issue arose. The frivolous and vexatious defence was established in the overall context of sham debt elimination scheme, debt collection spanned over two years, numerous debt elimination documents as well as involvement in class action proceedings against the bankrupt’s creditor. [37] Burroughs’ position on this ground is quite simple. He was self-represented litigant in the SCU action and advanced his defence and counterclaim as best he could with limited grade education. He was entitled to have his day in court and to be heard before an impartial decision-maker. Simply because litigant is self-represented or is insolvent does not mean he or she must fold their position in favour of creditor’s claim. [38] Burroughs concedes mentioning to the trial judge that he would not win, but claims his remarks reflected his self-represented status and were not concession that his defence and counter-claim lacked merit. He was fighting to save his farm albeit in an unorthodox, aggressive and combative manner. hesitate to add that his demeanour before me was much the same and serves to underscore the observations of the trial judge. [39] The trial lasted two and half days on simple debt claim. The trial judge had ample opportunity to assess the merits, review the documentary evidence and hear his position, and in the end she found him to be completely unreasonable and took the unusual step of saying so. The significant award of costs against him reflects her assessment of his argument along with the undue delay and expense incurred by SCU because of his tactics. In the result, find this ground of objection is also substantiated. Section 170(1)(o) failure to comply with duties of bankrupt [40] The final ground of objection failure to comply with duties of bankrupt was advanced by both SCU and the trustee. Considerable deference is given to the trustee’s comments on this score as he was in the best position to assess compliance. Section 158 of the BIA lists the many duties imposed on bankrupts. won’t repeat them here other than to observe that the list is extensive and requires timely cooperation by the bankrupt in concert with the work of the trustee. On this score, the trustee reports Burroughs failed to produce proper records and to assist the trustee to the fullest. More generally, he reports Burroughs to have been abusive and disrespectful. [41] Based on the trustee’s information, conclude that Burroughs was deficient in his duties, consequently the s. 173(1)(o) ground is established as well. TERMS OF DISCHARGE [42] Having found justification on several grounds of objection, am unable to grant Burroughs an absolute discharge by virtue of s. 172(2), and turn now to the appropriate terms of his discharge. [43] Burroughs is 42 years of age. He has one son from previous relationship who does not currently reside with him. He did not indicate if he financially supports his son. He is currently employed with an excavating company earning $20 per hour and working as much as 160 hours per week. In addition, he claims to work other odd jobs although no information was provided about income earned. He also admits to working on the side in some form of barter arrangement with neighbours and friends. As understand it, he provides farm labour in lieu of cash as means of retiring debts owed to them. Neither the odd jobs nor the barter arrangements were factored into surplus income calculations. [44] The trustee recommends the imposition of conditional order for surplus income generated in the past 12 months preceding his application. Within that time frame Burroughs supported his son, girlfriend and her child. The evidence was not clear how long each resided with him, however, conceding family of two over the entire 12 month period, the trustee calculates surplus income to be $2,256. [45] Burroughs pays $1,000 per month on his mortgage and is trying to catch up on mortgage arrears to stave off foreclosure. After making this payment he claims there isn’t much left to cover day-to-day living expenses. All of that said, Burroughs also admits to having paid off equipment loans and debts owed to neighbours. [46] have no doubt Burroughs works hard and lives subsistence life. However, even subtracting his monthly mortgage payment, he still has some funds left with an income level above the Superintendent’s Standard for a family of two. (At this point he is now family of one which places his net monthly income well above the accepted standard.) strongly suspect he’s using much of his monthly paycheque to pay off post bankruptcy debts and finance what remains of his farming operation. [47] SCU seeks an order directing payment directly to it, and not the trustee. No case law was provided in support and no order will be granted along the lines requested. From the point of view of creditors, it [bankruptcy] provides system for the collective execution and equitable distribution of the assets of failing debtor, initiated on voluntary or involuntary basis. …..The property, on being realized, is distributed subject to certain priorities, rateably among those persons to whom the debtor owes money or has incurred pecuniary liability. [Honsberger and Dare, Bankruptcy in Canada, (4th ed,), (Aurora: Canada Law Book, 2009) p. 3] [48] SCU urges the imposition of conditional order of discharge requiring Burroughs to consent to judgment. This form of order is made sparingly and only in appropriate circumstances. The situation before me does not lend itself to this form of disposition. [Houlden and Morawetz, The 2009 Annotated Bankruptcy and Insolvency Act, p. 806] Alternatively SCU seeks sizeable conditional order as anything less, they argue, would be unfair and unjust to creditors. Specifically, they seek payment in full of costs fixed by the trial judge coupled with conditional order equal to half of their total judgment. [49] This is very difficult case because of the conflicting interests at play, namely the creditors’ interest in obtaining fair recovery on their sizeable debts, the bankrupt’s need to be rehabilitated, and safeguarding the integrity of the bankruptcy system itself. [50] Having carefully considered all of the facts, the existence of multiple s. 173 grounds, Burroughs’ personal circumstance and his ability to pay, I find it appropriate to impose a conditional order in the amount of $8,000 in addition to surplus income. Burroughs should be able to comply with this order at his present income level within three years which is considered an acceptable period of time for a bankrupt to be burdened with a conditional order. Burroughs is resourceful, hard working person with ability to earn off-farm income to satisfy this order which in turn will release him from all claims provable in this bankruptcy. [51] Accordingly, an order shall issue granting Burroughs his discharge from bankruptcy conditional upon payment of the sum of $10,250 composed of $2,250 for surplus income and a further $8,000 for payment to his estate for the benefit of his creditors. This sum shall be paid at not less than $300 per month, with right of pre-payment. Upon compliance, an absolute order of discharge shall issue. DATED at the City of Regina, in the Province of Saskatchewan, this 8th day of February, 2010. Registrar in Bankruptcy
The Bankrupt applies for his discharge from bankruptcy. The discharge is opposed by the Credit Union and the trustee. The Bankrupt was a cattle farmer. He financed this undertaking principally through the Credit Union. HELD: The Bankrupt will be discharged conditional upon payment of $8,000 in addition to surplus income of $2,250 to his estate for the benefit of his creditors. He should be able to comply with this order within 3 years.  1) The bankrupt is 42 years old and a first time bankrupt. He is employed with an excavating company and earns $20 an hour and works as much as 160 hours per week. He is paying $1,000 per month on his mortgage and is trying to catch up on mortgage arrears to stave off foreclosure. He is working hard and living a subsistence life. However, he still has some funds left with an income level above the Superintendent's Standard for a family of two. 2) His assets are less than $.50 on the dollar. His creditors were put to the unnecessary expense by his frivolous or vexatious defence of their claim and he failed to comply with the duties of a bankrupt by failing to produce proper records and assist the trustee to the fullest. He has been abusive and disrespectful throughout.