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What Fraud Victims Should Know About Bankruptcy Discharge Hearings

We are often asked by fraud victims – what happens to their judgment if the defendant assigns him or herself into bankruptcy? Does the bankruptcy assignment wipe away the debt? The answer is generally “no” when the claim was pleaded as a fraud and/or breach of trust, where a declaration is pleaded that the judgment survives bankruptcy, and where a Court makes a finding of fraud and/or breach of trust.

That said, in some cases fraud victims do not plead fraud. They may have various reasons for doing so. They may not have the evidence required to prove it. They may be concerned about adverse cost awards if they do not prove their fraud allegation. Or, they may seek a higher damages award that may be available by not pleading fraud.

Whatever the case, if fraud and/or breach of trust are not pleaded and a debtor assigns him or herself into bankruptcy, the victim may still be able to oppose an application for discharge of his or her debts on the basis that the debtor has frustrated the bankruptcy process. As a creditor, a victim is entitled to attempt to have the debtor account for his or her investment. If the debtor refuses, the debt may not be wiped away. The following is an example of one such story.

On January 22, 2018, the Ontario Superior Court of Justice in Bankruptcy released its decision in an application by the bankrupt Wolf Heinrich Rubin (“Rubin”) for discharge from his debts. Rubin had personal debts of more than $2M based on improvident investment transactions. There was no allegation of fraud made against Rubin. The Court, however, refused to grant a discharge of Rubin’s debt due to his cavalier and disdainful conduct towards his creditors, in the administration of his estate and in his testimony before the Court. This is why this story is important to our readers.

The story is somewhat complex and involves the interpretation of section 173 of the Bankruptcy and Insolvency Act (“BIA”). The legal concepts are novel and are of interest to those involved in the fraud recovery industry, as pleading fraud has its risks – such as adverse cost awards – if it is not proven. The facts, as set out by the Court, are as follows:

The Investment

On January 25, 2006, Randy Shiff, the principal of the corporate plaintiff Radonna Investments Ltd., entered into an agreement involving the investment of funds of Radonna Investments into an electronics business operating as Sakar Europe Limited, which operated its business through Sakar Germany GmbH. The operating mind of Sakar Europe was Rubin.

The agreement was reduced to writing in the form of a letter. It contained the following terms:

  1. Radonna Investments was to invest US $500,000 in Sakar Europe;
  2. Radonna Investments was to arrange and guarantee a loan to Sakar Europe by CIBC Wood Gundy of US $1,000,000;
  3. Sakar Europe was to make the loan payments to CIBC Wood Gundy on this loan;
  4. R. International (Rubin’s holding company) was to make an equity investment in Sakar Europe of US $1,000,000 (thereby putting in his own equity);
  5. R. International was to make a loan of US $2,000,000 to Sakar Europe;
  6. R. International and Rubin undertook to make Radonna Investments whole on its investment in the event of liquidation or bankruptcy of Sakar Europe.

As Rubin was the controlling mind of Sakar Europe, this transaction benefited him.

In 2006, Radonna Investments completed its part of the agreement.

In 2007, Rubin caused Sakar Europe to cease making its monthly interest payments to CIBC Wood Gundy. The nature of the guarantee undertaken by Radonna Investments on the bank loan made it directly liable to CIBC Wood Gundy.

On April 24, 2008, Sakar Germany GmbH was declared insolvent. On April 14, 2009, Sakar Europe was dissolved. Radonna Investments argued that those events entitled it to be made whole with respect to the principal amount on the loan and its equity investment.

The Investment Litigation

On April 15, 2010, Radonna Investments filed its Notice of Action. On October 20, 2011, the Ontario Superior Court of Justice issued judgment for Radonna Investments of Cdn. $625,000 (the cost in 2006 of US $500,000), and Cdn. $1,296,737.80 (the cost of US $1,000,000 guarantee). This was because W.R. International and Rubin had undertaken to make Radonna Investments whole on its equity investment in the event of liquidation or bankruptcy of Sakar Europe.

On May 14, 2012, the Ontario Court of Appeal dismissed an appeal of W.R. International and Rubin.

The only claim at issue in the action was for breach of contract. There was no fraud claim advanced by Radonna Investments – an issue relevant to the rest of the story. Rubin was therefore personally required to pay Radonna Investments approximately $1.9M Cdn.

The Bankruptcy Assignment

On August 6, 2013, Rubin assigned himself into bankruptcy.

On December 15, 2015, the creditors successfully moved to replace the Trustee appointed by Rubin with a Trustee of their own choice.

As found by the bankruptcy Court and discussed below, Rubin engaged in a campaign to frustrate the bankruptcy process.

The Discharge Application

Rubin brought an application for an absolute discharge from bankruptcy. Rubin relied on section 172 of the BIA which provides:

On the hearing of an application of a bankrupt for a discharge … the court may:

(a) grant or refuse an absolute order of discharge;

(b) suspend the operation of an absolute order of discharge for a specified time; or

(c) grant an order of discharge subject to any terms or conditions with respect to any earnings or income that may afterwards become due to the bankrupt or with respect to the bankrupt’s after-acquired property.

 

Radonna Investments and the Trustee it and the other creditors had appointed opposed the application, claiming that s. 173(1)(a), (b), (d), (e), (f) and (o) facts had been sufficiently proven to warrant refusing a discharge. Section 173 of the BIA provides that the facts for which discharge may be refused, suspended or granted conditionally referred to in section 172 are:

(a) the assets of the bankrupt are not of a value equal to fifty cents on the dollar on the amount of the bankrupt’s unsecured liabilities, unless the bankrupt satisfies the court that the fact that the assets are not of a value equal to fifty cents on the dollar on the amount of the bankrupt’s unsecured liabilities has arisen from circumstances for which the bankrupt cannot justly be held responsible;

(b) the bankrupt has omitted to keep such books of account as are usual and proper in the business carried on by the bankrupt and as sufficiently disclose the business transactions and financial position of the bankrupt within the period beginning on the day that is three years before the date of the initial bankruptcy event and ending on the date of the bankruptcy, both dates included;

(d) the bankrupt has failed to account satisfactorily for any loss of assets or for any deficiency of assets to meet the bankrupt’s liabilities;

(e) the bankrupt has brought on, or contributed to, the bankruptcy by rash and hazardous speculations, by unjustifiable extravagance in living, by gambling or by culpable neglect of the bankrupt’s business affairs;

(f) the bankrupt has put any of the bankrupt’s creditors to unnecessary expense by a frivolous or vexatious defence to any action properly brought against the bankrupt;

(o) the bankrupt has failed to perform the duties imposed on the bankrupt under this Act or to comply with any order of the court.

Rubin’s Conduct at the Discharge Hearing

The Bankruptcy Court held that in his examination in chief, Rubin gave his evidence in a direct and forthright manner, answering all questions put to him in a thoughtful and compelling way. He appeared as a knowledgeable and intelligent businessman with extensive international import-export businesses in various sectors.

The cross-examination then commenced and it was as though an entirely different person took occupation of the seat. Rubin, although unfailingly polite, became difficult, obstructionist, painfully literal and obfuscated on the most simple and direct inquiries. The disparity in the manner of his evidence between examination in chief and cross-examination was too significant to be anything other than a deliberate and continued attempt to thwart the efforts of the opposing creditors to challenge the conduct and affairs of the bankrupt.

When asked if he sat down to discuss with BDO the obligation to fully and truthfully complete the statement of affairs upon his assignment into bankruptcy, Rubin requested a definition of the word “truth” as though it was a concept unknown to him. Rubin claimed not to understand the meaning of simple words and phrases such as “frequent”, “for some time”, “bounced checks”, “financially overextended”, “authorized”, and “insolvent”. Rubin refused to accept simple propositions when put to him, frequently claiming not to understand the nature of the question.

It quickly became apparent during the cross-examination that Rubin was simply refusing to answer any questions he felt might call into question the manner in which he conducted his business affairs prior to the assignment and his conduct throughout the administration of the estate. Rubin operated multimillion dollar international businesses and yet he claimed not to understand simple terms of commerce.

Findings of the Bankruptcy Court

The Bankruptcy Court held that any credibility Rubin established in his examination in chief was thoroughly eviscerated by his conduct throughout the cross-examination.

His attitude and appearance in the witness box indicated that he had something to hide and was being very careful not to incriminate himself in any way. He did not impress me as being an honest debtor who should be relieved of his debts. The great majority of his answers to questions were evasive or forgetful and in fact not answers at all. . . .

I am convinced that the bankrupt has never cooperated with his Trustee, or fulfilled his general obligations under the Act, with a few minor exceptions. He is gone through a fiction of pretending to co-operate, but in fact has been evasive, forgetful or unwilling to answer.

The Court held that through Rubin’s testimony and documents it was apparent that he conducted his personal and business affairs interchangeably as a single entity. He was unable to identify which debts were personal to him or those which belonged to Wolf Rubin International Trading Corporation (”WRITC”), a company for which Rubin was the sole officer and director. Equally, the bankrupt treated his various businesses interchangeably, claiming that they were all subsidiaries in some manner or other of WRITC.

The Court found that the investments that Radonna Investments had made into Sakar Europe were transferred by Rubin, without the knowledge or consent of Radonna Investments, to WRITC so as to reduce a corporate indebtedness for which Rubin had provided a personal guarantee. Rubin then became evasive, misleading and avoiding Radonna Investments for several months when demands were made to account for the investments with appropriate financial reporting.

No Finding of Fraud in a Bankruptcy Court as Fraud Not Pleaded in the Civil Action

The Bankruptcy Court went on to find that it was not for the Bankruptcy Court to make any findings of fraud. The Court held that a discharge application is intended to be a summary procedure whereby issues of fraud are only considered if the fraud has previously been established.

The Bankruptcy Court held that Radonna Investments had a civil judgment against Rubin that was not founded in fraud. Accordingly, the Bankruptcy Court did not attribute any fraudulent intent to the conduct of the bankrupt with respect to the investment of Radonna Investments. The Court did, however, take note of the impropriety of Rubin in admittedly treating his personal and business affairs interchangeably as one entity.

All that said, the Bankruptcy Court went on to find that Rubin provided a personal guarantee to Radonna Investments to stand as security in support of its investment in Sakar Europe. Rubin then immediately transferred the invested funds to pay the debts of WRITC, leaving Sakar Europe with no ability to repay its indebtedness and thereby ultimately ensuring demand on the personal guarantee. Rubin’s actions in this regard alone resulted in the assets of the bankrupt not being equal to 50 cents on the dollar of his unsecured liabilities (per s.173(a)). The Court held that Rubin was justly responsible for this situation.

No Discharge in the Circumstances

The Bankruptcy Court held that the BIA is intended to provide the honest but misfortunate debtor an opportunity to become financially rehabilitated without an overwhelming burden of debt. In exchange for this opportunity, a bankrupt is required to fully, faithfully and honestly complete a Statement of Affairs that: outlines the bankrupt’s assets and discloses any assets that have been disposed of prior to the assignment; provides a listing of all liabilities; discloses the bankrupt’s employment/business history and any prior insolvency filings; and identifies the cause of the financial difficulties which have led to the assignment.

In this case, Rubin was careless and indifferent to his obligations of truthful and complete disclosure on his Statement of Affairs. The Court found that the errors and omissions were so pervasive that it must conclude that Rubin either deliberately concealed information or was entirely reckless in completing and then swearing as to the truth of the contents of his Statement of Affairs.

The Court found that significant debts were omitted from the Statement of Affairs because Rubin either forgot to list them or was evidently instructed by BDO that it was unnecessary to disclose them.

The Court found that the only assets of Rubin that were identified as exempt were household furniture and personal effects valued at $1,000 and an exempt life insurance policy with a preferred beneficiary.

The Court found that Rubin disclosed ownership of shares in privately held companies, but valued them at one dollar. WRITC was valued at one dollar when in fact Rubin had been utilizing the company’s significant tax losses to offset his personal income tax for several years.

The Court found that Rubin failed to disclose the disposal of a condominium located in Hallandale Beach, Florida within five years of his assignment.

The Court found that Rubin did not file Canadian income tax returns and did not consider himself to be a resident of Canada. If Rubin did have a residence, it would appear to be in a Manhattan, New York, apartment leased by his daughter, who is a university student.

The Court found that Rubin failed to deliver all books, records, documents, writings and papers which in any way related to his property or affairs. He failed to submit a properly sworn Statement of Affairs that disclosed full particulars of his assets and liabilities, the names and addresses of his creditors, the cause of his insolvency and the disposition of his assets.

The Court found that relevant documentation had either been destroyed or was not produced on the basis that it predated the three-year production obligation under the BIA. By his own evidence, Rubin conceded he was insolvent as early as 2009 although this assignment was not made until August 2013, following the dismissal of Rubin’s appeal of the judgment mentioned above.

The Court found that to the extent documents and business records were produced, the reports of the Trustee suggest that the documentation generated as many or more questions than it answered. The Trustee was unable to satisfy itself as to the full nature of Rubin’s assets, liabilities and business affairs.

The Court found that Rubin failed to account satisfactorily for the loss of his assets or for the deficiency of assets required to meet his liabilities.

The Court found that Rubin’s income was disclosed as being in excess of US$6,200 per month from which he financially supported two adult daughters in attendance at top tier universities in New York.

Disposition

The Court held that a dishonest debtor and a debtor unwilling to make full disclosure of his financial affairs is entitled to no relief under the BIA. The Court held that Rubin’s conduct in respect of his creditors, in the administration of his estate and in his testimony before the Court was nothing short of cavalier and disdainful.

The Court held that Rubin’s conduct represented the extreme case warranting a refusal of discharge. The Court held that it would be an affront to the integrity of the BIA and public confidence in the insolvency system would be seriously undermined if Rubin were provided a fresh start free of debt to continue his life of international travel and to carry on with his import-export business without having made any meaningful recompense to his creditors.

Full Reasons for Judgment

It is unknown if this case is now under appeal. The Court’s decision reported at Re: Wolf Rubin, Bankrupt, 2018 ONSC 501, and is publicly available online: Full reasons for judgment Wolf Rubin, Bankrupt, 2018 ONSC 501

Inquiries

At Investigation Counsel, we investigate and litigate fraud recovery cases. If you discover you are a victim of fraud, contact us to have your case assessed and a strategy for recovery mapped out before contacting police or alerting the fraudster. We also promote victim advocacy and academic discussion through various private and public professional associations and organizations. If you have an interest in the topics discussed herein, we welcome your inquiries.

 

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Norman Groot

About Norman Groot

Based on my police experience and my experience thereafter as a litigator, I have joined forces with other lawyers with police experience and created the law firm Investigation Counsel Professional Corporation.

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