Consent judgment leads to fraud finding

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The recent Ontario case of M.O.S. MortgageOne Solutions Ltd. v. Heidary is a reminder of the danger lurking behind consent or default judgments, where the initial court action includes claims of fraud.  

In their Notice of Claim, M.O.S. claimed that their loan had been brought about in part by fraud on the part of the defendants including Mr. Heidary. After some negotiation, the defendants agreed to a consent judgment which set out the amount owing, the interest to accrue on the amount, and some other terms relating to the property which had been the subject of the loan. No mention of the fraud was made in the consent judgment.

Mr. Heidary then went bankrupt without paying the full amount of the judgment.

M.O.S. applied for a declaration that their claim against Mr. Heidary “survived” his bankruptcy and could still be pursued following his discharge from bankruptcy.  Under s. 178 of the Bankruptcy and Insolvency Act, certain claims such as ones based on fraud or relating to a fine or penalty, are not released by bankruptcy. M.O.S. argued that their claim was based on fraud and therefore survived bankruptcy. Mr. Heidary argued that fraud must be proven, and since the consent judgment made no mention of fraud, and he had denied fraud from the beginning, M.O.S.’s claim should be released as part of his bankruptcy.

The Ontario court ruled against Mr. Heidary, holding that since the claim was based on fraud, the court could take that into account in characterizing the claim for the purposes of s. 178 of the Bankruptcy and Insolvency Act.  As a result, Mr. Heidary’s bankruptcy did not allow him to escape the M.O.S. claim, which M.O.S. could continue to pursue against him following his discharge from bankruptcy.

For both the claimant and the defendant being claimed against, the future possibility of the defendant’s bankruptcy must be taken into account from the beginning. Alleging fraud or some other s. 178 claim can be the difference between losing a claim in bankruptcy or being able to continue with it notwithstanding the defendant’s bankruptcy.  Experienced advice is necessary to frame the claim, and to respond to it as defendant, in order to maximize the potential for the best outcome.

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