Honest disclosure of assets

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Debtors, when subject to examination under oath by creditors, and bankrupts in dealings with their trustee in bankruptcy, have a duty to honestly disclose their assets and in the case of bankrupts, their after acquired property. Two recent cases highlight instances regarding dishonesty by a debtor and a bankrupt.

Re Brennan

In Re Brennan, 2019 ONSC 4712, Lawrence Brennan became a judgment debtor to his lawyer, André Robert. Mr. Robert obtained judgment and attempted to realize on that judgment. Mr. Brennan, after first failing to appear at a judgment debtor examination and being cited for contempt, eventually submitted to the examination. During the course of the examination he was specifically asked if he owned any RRSPs and he responded, under oath, that he did not.

Mr. Brennan made an assignment in bankruptcy 17 days later and at that time confirmed in his statement of affairs that he had $13,017.00 in RRSPs. Those RRSPs were exempt from seizure by the trustee in bankruptcy as they had been held for more than one year.

Mr. Robert was, not surprisingly, vexed by Mr. Brennan’s dishonesty in the course of the judgment debtor examination. Had the RRSPs been disclosed, Mr. Robert would have been entitled under Ontario law to have the RRSPs seized and applied against the judgment debt. The bankruptcy stayed Mr. Robert’s rights in this regard.

Mr. Robert applied to the court to lift the stay of proceeding. Mr. Brennan took the position that he had been considering bankruptcy for some time prior to the examination and in fact told Mr. Robert of this intention. He said he did not know of the existence of the RRSPs in his name and sought compassion from the court.

Given Mr. Brennan’s failure to disclose the RRSPs during the examination, the court ordered that the stay be lifted to allow the RRSPs to be seized and distributed in accordance with the relevant legislation. As Mr. Robert was the only execution creditor, and the trustee had no claim to the RRSPs for the benefit of creditors, no other creditors would be affected by the lifting of the stay. In the end, the RRSPs that Mr. Brennan perhaps thought would be safe from creditors in his bankruptcy were made available to Mr. Robert, the judgment creditor.

Re Norman

In Re Norman, 2019 NLSC 149, the bankrupt, Allen Norman, was the recipient of the proceeds of a $300,000 insurance policy, while he remained an undischarged bankrupt, which proceeds he did not disclose to his trustee in bankruptcy. While he had received a conditional discharge prior to receiving the insurance proceeds, the condition had not yet been satisfied. Accordingly, he continued to have the obligation to disclose his after acquired property to his trustee. Mr. Norman’s failure to disclose the insurance proceeds came to light when the trustee in bankruptcy received an anonymous tip.

The deceased was Mr. Norman’s then girlfriend, soon to be wife, who died a few days prior to the wedding. The insurance policy originally named the deceased’s parents as beneficiaries, but was changed to name Mr. Norman as the 100% beneficiary.

When confronted by the trustee regarding the failure to report the receipt of the insurance proceeds, Mr. Norman said the deceased had wanted the insurance proceeds to be held in trust by Mr. Norman for his three year old son Parker for whom the deceased “cared deeply” and referred to as her son.

The evidence, however, did not support Mr. Norman treating the funds as trust funds for Parker. To the contrary, his affidavit showed he spent some $256,000 of the $300,000 on purchasing, renovating and furnishing a home in the name of a new partner (nearly $215,000), a new motorcycle, (over $19,000), and lawyers ($22,000). While other expense might have been viewed as beneficial for Parker, it was by no means clear that was in fact the case. Over $293,000 of the $300,000 had been spent by the time of the hearing.

The sworn list of expenditures differed from what Mr. Norman had previously advised the trustee and the trustee’s counsel regarding how the money had been spent. The court, stated: “Mr. Norman was not a good witness on cross-examination. He evaded various questions and had selective memory and could not recall certain events that should have been clear to him.” He was found to be less than forthright.

The insurance designation, and Mr. Norman’s subsequent conduct, significantly undermined Mr. Norman’s position that he was a mere trustee for his son. Mr. Norman was named as the primary beneficiary without qualification. However, the deceased named Parker as contingent beneficiary of 75% of the proceeds, presumably in the event of Mr. Norman’s death, and appointed her brother as trustee in such event. If her intention had been to name Parker in the first place, with Mr. Norman as the trustee, one would have expected she would have done so and named her brother as an alternate trustee if Mr. Norman could not or would not take on the role. Moreover, why would she have named Parker a contingent beneficiary for only 75% if her intention was that Parker should have the whole of the proceeds if Mr. Norman was the primary trustee?

Mr. Norman did nothing consistent with the funds being solely for Parker’s benefit. He did not set up a separate account or obtain any advice related to his duties and obligations as a trustee. He started spending the funds immediately on receipt, taking a trip to visit his adult children from a prior marriage. He purchased, renovated and furnished the house all for the benefit of his new partner.

The court concluded that there was no trust for Parker’s benefit and accordingly ordered that the trustee was entitled to recover the sum of $300,000 from Mr. Norman.

Honesty is the best policy!

While there is probably little doubt that debtors and bankrupts will continue to attempt to conceal their assets from creditors and trustees in the hope they will not be discovered; they run the risk they will not be successful. Something as simple as an anonymous tip may be one’s undoing. Honesty regarding one’s assets during the course of a debtor examination and with one’s trustee in bankruptcy remains the best policy.

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