Bank allowed to allege fraud in second ‘Kick at the Can’

When a plaintiff obtains a judgment from the court, that party is normally precluded from starting another lawsuit seeking the same judgment debt from the defendant. However, in Royal Bank of Canada v Kim, 2019 ONSC 798, Justice Broad of the Ontario Superior Court made an exception because the bank had discovered evidence of fraud after it obtained summary judgment against the defendant. The bank sought to pursue a second action for a judgment in fraud so that the judgment would survive and be enforceable after the bankruptcy of the defendant who, in turn,  vigorously resisted the second action arguing that  the plaintiff had already obtained judgment against him and could not reconstitute the judgment after the fact.

Key Takeaways

• As a plaintiff, if you have evidence of fraud that you do not allege prior to obtaining judgment, then you will likely be precluded from doing so after a bankruptcy of the judgment debtor.
• Where a fraud is discovered after a judgment has been obtained, a plaintiff may obtain permission from the court to pursue fraud allegations against a bankrupt as long as applicable limitations periods have not expired.

Analysis

As discussed in a previous post, section 178(1) of the Bankruptcy and Insolvency Act (BIA) states that bankruptcy does not release the bankrupt from certain debts including from any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation. This is to ensure that liabilities arising from unacceptable conduct are not eligible to be discharged through the bankruptcy process which is intended to give the ‘honest but unfortunate debtor’ a fresh start.

In arguing that the a second action should not be permitted, the defendant relied on the Ontario Court of Appeal’s decision in Lawyers’ Professional Indemnity Company v. Rodriguez (“Rodriguez”)  where the Court ruled that in deciding whether a judgment survives bankruptcy, a judge is only entitled to consider evidence grounded in the process that produced the judgment debt or that is “linked to the judgment debt”. A judge may consider the facts pleaded in the statement of claim, any evidence presented to secure the judgment debt and any reasons that might have been given. However, a judge may not consider “extraneous evidence” not so linked to the judgment itself. The defendant argued that this appellate decision barred the bank’s second action.

In distinguishing this case, Justice Broad noted that the Court of Appeal expressly found that the plaintiff in Rodriguez had the requisite knowledge to plead and prove fraud at the time that it reduced its claim to judgment and chose not to do so. In contrast, in the present case, the bank had no knowledge of the fraud until after judgment was obtained and it could not have discovered the alleged fraud by the exercise of reasonable diligence. Justice Broad found it manifestly unfair to permit creditors who had not obtained judgment by the date of the bankruptcy to seek to have their claims survive the bankrupt’s discharge while denying the creditors who had reduced their claims to judgment any right to do so. Barring claims where the plaintiff could not have known of the fraud would, in effect, reward those who successfully concealed their fraud for as long as possible.