QUEEN’S BENCH FOR SASKATCHEWAN IN BANKRUPTCY AND INSOLVENCY Citation: 2009 SKQB 201 Date: 2009 06 02 Docket: Court No. 1308 Estate No. 23-022447 Judicial Centre: Regina BETWEEN: VERONICA LEAY ARMBRUSTER and KPMG INC., trustee in bankruptcy of the estate of Veronica Leay Armbruster Counsel: Michael J. Krawchuk for the Applicant Murray W. Douglas for the Respondent JUDGMENT WIMMER J. June 2, 2009 [1] bankruptcy petition against the applicant was filed on May 18, 1995 and receiving order with respect to her property issued the following month. KPMG Inc. (formerly Peat Marwick Thorne Inc.) is the trustee of her bankrupt estate. The applicant received an absolute discharge on March 8, 1996. The trustee has never applied for discharge. [2] The trustee did not oppose the applicant’s discharge and in its report, prepared pursuant to s.170 of the Bankruptcy Act, R.S.C. 1985, c. B-3 as am. by the Bankruptcy and Insolvency Act, S.C. 1992, c. 27, s.2 (the “Act”), stated there were no facts, matters or circumstances that would justify the court in refusing an unconditional order of discharge. The report, dated February 8, 1996, also stated that the applicant’s duties under the Act had been satisfactorily performed; that her conduct either before or after the bankruptcy was not subject to censure; and that she had not committed any offence in connection with the bankruptcy. Now, more than 13 years later, there remains an unresolved issue concerning non-exempt equity in the applicant’s homestead. [3] The applicant is, and was at the date of her bankruptcy, registered as owner of residential property in the City of Saskatoon having an exemption in the amount of $32,000.00. The trustee’s s.170 report assigned an estimated dollar value of $200,000.00 to this asset. Its realizable value at the time was said to be unknown. Nevertheless, the report noted that the “trustee is transmitting an 82% interest in the real property to the trustee’s name.” That transaction was completed on February 19, 1996. [4] In Re Zemlak and Deloitte, Haskins Sells Ltd. (1988), 1987 CanLII 4662 (SK CA), 42 D.L.R. (4th) 395, the Saskatchewan Court of Appeal set out minimum requirements for trustee to meet when dealing with non-exempt equity in bankrupt’s homestead. These include requirement that the report of the trustee on the bankrupt’s application for discharge should set forth the value of any such equity if the trustee intends to attach it for further realization. That did not occur here. [5] There is evidence that the 82% interest referred to in the trustee’s report was calculated as follows: Potential sale price $215,000 Less encumbrances (rounded) (37,500) Total equity $177,500 Bankrupt’s exemption Interest ($32,000/$177,500) 18% Trustee’s Interest ($145,500/$177,500) 82% It seems the trustee had some notion of what the realizable value of the property might have been in February, 1996 although there is no indication of how the potential sale price was arrived at. City of Saskatoon Tax Summary shows the fair market value as at February 24, 2009 as $332,700.00. [6] The applicant feels aggrieved by the trustee’s transmission of 82% of her title. She says it was an arbitrary action taken without her agreement and knowledge. She also complains of the transmission being made without her having had an opportunity to oppose it because there was no hearing associated with her discharge. Her present application is for relief under s. 37 of the Act. She seeks an order reversing the trustee’s decision and restoring the 82% interest to her. It is an order the court is empowered to make under s. 37 if warranted by the circumstances. [7] Upon her bankruptcy, the applicant’s property, subject to exemptions, vested and remains vested in the trustee unless it is released to her by the trustee or re-vested by court order under the Act. Zemlak, supra is the leading authority in this province referring to trustee’s handling of the non-exempt value of bankrupt’s home. [8] In that case the court ordered the removal of caveats registered by the trustee against the bankrupt’s residential property when it claimed an interest in non-exempt equity. The trustee and the bankrupt had both been discharged before any non-exempt equity in the property existed. However, the trustee’s position was that future accumulation of such equity should accrue to the benefit of creditors. Mr. Justice Tallis rejected the argument as contrary to the spirit and intent of bankruptcy legislation. The following passage from his reasons for judgment appears at page 403: In the factual context of this case we conclude that nonexempt equity did not exist at the time of the application for discharge. On that ground alone the caveat should be vacated if it were not for the trustee's position that any increase in the equity will accrue to the benefit of the creditors. In argument before this court the appellant's counsel used the following example in his factum to illustrate the ultimate result result which was not disputed by the respondent: "The following is submitted as specific example of the ultimate result if the Learned Chambers judge is correct: i. At the date of discharge of the Trustee Bankrupt's home is valued at $50,000.00; ii. The $50,000.00 is apportioned by way of an $18,000.00 real property mortgage and $32,000.00 exempt equity; iii. At the time of discharge, the Trustee does not specifically return the home to the Bankrupt pursuant to s. 22(1); iv. Some 30 or 40 years later the discharged bankrupt has paid off the mortgage and the home, through inflation, is then valued at $82,000.00; v. When the discharged bankrupt moves to retirement home, he would be entitled to his $32,000.00 exemption and the Trustee would distribute the $50,000.00 nonexempt equity to the creditors without any obligation to maintain or administer the home in the intervening years. If this result were permitted, property acquired by the debtor after an absolute discharge in bankruptcy would be appropriated to payment of the discharged debtor's debts. The equity built up in the property after issue of an absolute discharge order would form realizable fund for creditors at some future date, notwithstanding the final discharge. Such result does not comport with the philosophy of the Act. He went on to observe that the result would be tantamount to converting an absolute discharge into conditional discharge which might continue in place indefinitely and ultimately require the bankrupt or the estate in bankruptcy to surrender an interest in property acquired after an absolute discharge. [9] Counsel for the trustee says the Zelmak, supra judgment is distinguishable from this case on the facts because the trustee there was discharged whereas here the trustee is not. That argument supposes that it is appropriate in summary bankruptcy administration proceedings for trustee to withhold timely application for discharge and await market enhancement of the value of non-exempt equity in homestead property. do not take Zemlak to stand for such proposition. On the contrary, I take it to mean that only the value of non-exempt homestead equity existing at the time of the bankrupt’s application for discharge can be attached by the trustee. [10] I will make the order applied for by the applicant including the order for costs. In so doing, do not say that the trustee may not realize upon the value of her non-exempt equity in the homestead, but as at what date and to what extent remain open questions which can be addressed upon an application by the trustee for discharge. J. C.R. WIMMER
A bankruptcy petition against the applicant was filed on May 18, 1995 and a receiving order with respect to her property issued the following month. KPMG Inc. (formerly Peat Marwick Thorne Inc.) is the trustee of her bankrupt estate. The applicant received an absolute discharge on March 8, 1996. The trustee has never applied for a discharge. The trustee did not oppose the applicant's discharge and in its report dated February 8, 1996 stated that the there were no facts, matters or circumstances that would justify the Court in refusing an unconditional order of discharge. Now, more than 13 years later, there remains an unresolved issue concerning non-exempt equity in the applicant's homestead. The applicant applies for relief under s. 37 of the Bankruptcy and Insolvency Act for an order reversing the trustee's decisions and restoring the property interest to her. The Court reviewed the relevant case law and found that only the value of non-exempt homestead equity existing at the time of the bankrupt's application for discharge can be attached by the trustee. HELD: The Court made the order applied for by the applicant including an order for costs.