COURT OF APPEAL FOR ONTARIO

DATE: 20001215

DOCKET: C31611

CHARRON, MACPHERSON AND SHARPE JJ.A.

IN THE MATTER OF THE ) John MacDonald and

BANKRUPTCY OF ) Steven Golick

OLLIE MASTRONARDI ) for the appellant John Brabander,

) Administrator of the Estate of

) Scott Brabander, deceased

) Robert Reynolds

) for the respondent Ollie Mastronardi

) Heard: September 25, 2000

On appeal from the judgment of Justice Peter B. Hockin dated February 15, 1999.

MACPHERSON J.A.:

OVERVIEW

[1] Three Ohio plaintiffs obtained a huge civil judgment in the Ohio courts because of the negligence in Ohio of an Ontario resident. The Ohio plaintiffs sought unsuccessfully for several months to collect on the judgment. There was evidence that the judgment debtor may have conveyed assets for nominal consideration. Eventually, one of the Ohio creditors turned to the Ontario courts and brought a petition for a receiving order under the Bankruptcy and Insolvency Act, R.S.C. 1985, c.B-3 (“BIA”). This appeal invites a consideration of the statutory prerequisites of the BIA in the context of a foreign petitioner whose principal motivation for bringing the petition is a desire to collect money owed to him pursuant to an order of a foreign court.

A. FACTS

[2] On a summer day in 1995 two pleasure boats were on Lake Erie, on the American side. The Brabander family of Broadview Heights, Ohio was in one boat. The other boat, a very fast cigarette type boat, was operated by Ollie Mastronardi, a resident of Leamington, Ontario. As the cigarette boat bore down on the Brabander boat, John and Susan Brabander jumped into the water. They survived. Unfortunately, their 24 year old son Scott was killed in the collision of the two boats.

[3] The tragedy on the water gave rise to both criminal and civil proceedings in the Ohio courts. Mr. Mastronardi (“Mastronardi”) was convicted in May 1996 of a serious criminal offence in relation to the death of Scott Brabander. He spent several years in an Ohio prison, but is now free.

[4] The Brabander family initiated a civil action against Mastronardi in Ohio. The plaintiffs were successful. On February 12, 1998, following a trial with judge and jury, the three named plaintiffs were awarded damages against Mastronardi as follows:

(1) for John Brabander, administrator of the estate of Scott Brabander, on his survivorship claim on behalf of the estate - $581,705.84 U.S.;

(2) for John Brabander, administrator of the estate of Scott Brabander, on his wrongful death claim on behalf of the next of kin and survivors of Scott Brabander - $1,829,287.56 U.S.;

(3) for John Brabander, personally, for negligent infliction of serious emotional distress - $581,705.83 U.S.; and

(4) for Susan Brabander, personally, for negligent infliction of serious emotional distress - $581,705.83 U.S.

[5] An appeal from this judgment was dismissed by the Court of Appeals of Ohio on June 25, 1998 for failure by the appellant Mastronardi to file the record.

[6] In the Ohio civil proceedings, the Brabander family was represented by Thomas Schrader and Mastronardi was represented by Matthew O’Connell. On February 12, 1998, when the Ohio court’s final judgment was rendered, Mastronardi was present with O’Connell and Arthur Barat, a lawyer from Windsor, Ontario. Barat was identified to Schrader as Mastronardi’s corporate or personal attorney. Schrader was told that any further communication regarding the final judgment should be addressed to Barat.

[7] On February 24, 1998, Barat wrote to Schrader questioning whether the Brabanders would be able to enforce such a large judgment in Ontario. He invited Schrader “to discuss this with us on review”.

[8] Schrader telephoned Barat in March 1998 to discuss the payment of the judgment. Barat informed Schrader he would discuss the matter with Mastronardi’s wife Ann and get back to him.

[9] On June 17, 1998, Schrader wrote to Barat as follows:

Last March I made a demand upon you as the attorney for Ollie Mastronardi regarding payment of the outstanding judgment against your client. No payment of any kind has been made, and you have not returned my calls. The judgment was due and payable at the time of the jury verdict on February 12, 1998.

[10] Schrader followed up this correspondence with another call to Barat. Barat did not return the call or respond to the letter.

[11] On June 22, 1998, John Brabander, acting as administrator of the estate of Scott Brabander, filed a Petition for a Receiving Order in the Ontario Court (General Division) in Bankruptcy in London, Ontario. The petition stated that “Ollie Mastronardi is justly and truly indebted to Brabander in the sum of at least $2,842,738.40 (U.S.)”.

[12] The stated ground for the bankruptcy petition was that, contrary to s.43(1) (b) of the BIA, “Ollie Mastronardi, within the six months next preceding the date of the filing of the petition, has committed the following act of bankruptcy, namely, he has ceased to meet his liabilities generally as they become due”.

[13] The petition was heard by Hockin J. sitting in London on September 21, 1998. The petitioner called three witnesses, John Brabander, Thomas Schrader and Susan Brabander. The respondent placed in evidence the cross-examination of John Brabander on his Affidavit of Verification, which had been conducted on September 20, 1998, the day before the bankruptcy hearing.

[14] Hockin J. dismissed the petition in a written judgment released February 15, 1999. He found that the petitioning creditor had proved that the debt exceeded the threshold figure of $1,000. However, he held that “there is no evidence that the debtor has ceased to meet his liabilities generally as they become due”. In reaching this conclusion, he regarded all the Brabanders as a single creditor and said that there were no ‘special circumstances’, within the meaning of the case authorities, to permit this single creditor to invoke the BIA as a means of collecting on its debt. The essence of his reasoning is contained in this passage in the final paragraph of his judgment:

The evidence is that a demand was made of the debtor but there has really been no attempt to collect on this debt beyond the issuance of the petition. Without more, I am concerned that the Bankruptcy Court would become in this case a collection agency for a single creditor. I do not find that the petitioner has made a serious effort to collect on the debt. The circumstances of the case are otherwise compelling, but I may not for that reason only depart from the cases and the language of the Act.

[15] The petitioner appeals from Hockin J.’s judgment. He seeks an order setting aside Hockin J.’s order, adjudging Mastronardi a bankrupt, and appointing Shiner and Associates Inc. as trustee of Mastronardi’s property.

B. ISSUE

[16] The issue on this appeal is: did the bankruptcy judge err in holding that Mastronardi did not commit an act of bankruptcy by ceasing to meet his liabilities as they generally became due?

C. ANALYSIS

[17] The appellant initiated his petition for a receiving order pursuant to sections 43(1) and 42(1) (j) of the BIA, which provide:

43(1) Bankruptcy petition – Subject to this section, one or more creditors may file in court a petition for a receiving order against a debtor if, and if it is alleged in the petition that,

(a) the debt or debts owing to the petitioning creditor or creditors amount to one thousand dollars; and

(b) the debtor has committed an act of bankruptcy within six months next preceding the filing of the petition.

42(1) Acts of bankruptcy – A debtor commits an act of bankruptcy in each of the following cases: …

(j) if he ceases to meet his liabilities generally as they become due.

[18] The bankruptcy judge seemed to rely heavily on two factors in dismissing the petition. First, he treated the Brabanders as a single creditor and held that there were no special circumstances justifying resort to the BIA by a single creditor. Second, he held that the creditor had not made a serious effort to collect on the debt beyond the issuance of the petition. Each of these, in the eyes of the bankruptcy judge, worked against a conclusion that Mastronardi had ceased to meet his liabilities generally as they became due. Presumably, the single creditor conclusion undercut the ‘liabilities generally’ component of s.42(1)(j) of the BIA and the lack of serious effort to collect the debt counted against a conclusion that the debtor had breached the ‘ceases to meet his liabilities’ component of the same provision. I will consider these two rationales in turn.

(1) Single Creditor/Special Circumstances

[19] There is a line of cases, anchored in Re Holmes and Sinclair (1975), 1975 667 (ON SC), 20 C.B.R. (N.S.) 111 (Ont. Bktcy.), holding that a receiving order should not be made based on a default to only one creditor unless there are ‘special circumstances’. The bankruptcy judge applied Re Holmes and Sinclair. He held that the receiving order was being sought by the only creditor of Mastronardi and that none of the special circumstances enumerated by Henry J. in Re Holmes and Sinclair applied.

[20] In my view, the bankruptcy judge erred in determining that Mastronardi had only one creditor, in effect the Brabander family lumped together. The civil action in Ohio proceeded from start to finish as an action brought by three separate plaintiffs – the estate of Scott Brabander, John Brabander personally and Susan Brabander personally. The final judgment of the Ohio Court of Common Pleas identified each of these three as a separate plaintiff and awarded specific damages to each plaintiff.

[21] The respondent does not quarrel with the fact that only one creditor, John Brabander, acting as administrator of his son’s estate, brought the petition for a receiving order. Such a contention would fail because s.43(1) of the BIA provides that a bankruptcy petition may be filed by “one or more creditors”.

[22] However, the respondent does contend that the separate identity of the three Brabander creditors is belied by the fact that the petition, brought on behalf of the single creditor “the estate of Scott Brabander”, states that “Mastronardi is justly and truly indebted to Brabander in the sum of at least $2,842,738.40 (U.S.)”. This amount, contends the respondent, “constitutes the entire foreign judgment against the Respondent.” (factum, paragraph 35).

[23] This is simply not the case. The total judgment in Ohio against Mastronardi was $3,574,405.06 (U.S.) The judgment in favour of the single creditor, the estate of Scott Brabander, was $2,410,993.40 (U.S.). The figure of $2,842,738.40 (U.S.) in the petition represents, as John Brabander testified at the bankruptcy hearing, “the amount awarded the Estate of my son, plus the recovered expenses which was $3,500 or something like that, plus interest since that date at ten percent”. In short, the petition was brought by a single creditor and asserts only the debt owed to that creditor.

[24] My conclusion is that the bankruptcy judge erred in determining that Mastronardi had only one creditor. In fact, there are at least three separate creditors. Accordingly, the bankruptcy judge did not need to consider whether there were ‘special circumstances’, within the meaning of Re Holmes and Sinclair and its progeny, justifying a receiving order. It was within his discretion to issue a receiving order on the basis that “the existence of two other unpaid debts is … sufficient to establish the act of bankruptcy”: see Re Joyce (1984), 51 C.B.R. (N.S.) 152 (Ont. S.C.), and Re Giusto (1994), 1994 7463 (ON SC), 25 C.B.R. (3d) 227 (Ont. Gen. Div.)

(2) Lack of Serious Effort to Collect the Debt

[25] The bankruptcy judge acknowledged that there was evidence that a demand had been made of the debtor. In my view, this observation was correct. During a four month period shortly after the Final Judgment of the Ohio trial court in the civil action the Ohio attorney for the Brabanders attempted to collect on the debt owing to them. He pursued this in precisely the way Mastronardi had instructed him through counsel – by contacting Arthur Barat, Mastronardi’s personal and corporate counsel in Windsor. No results were achieved.

[26] The bankruptcy judge recognized the legitimacy of the steps taken by the Brabanders to collect on the debt and he also knew that their efforts had been unsuccessful. Nevertheless, he decided not to grant the receiving order. He said:

It is the case that there has been no action commenced in Ontario by the Brabander family for the recovery of the amount in the judgment nor any attempt by the family through the Court of Common Pleas of Cuyahoga County to register the judgment in Ontario. In other words, there has been no attempt to execute in Ontario.

The evidence is that a demand was made of the debtor but there has really been no attempt to collect on this debt beyond the issuance of the petition. Without more, I am concerned that the Bankruptcy Court would become in this case a collection agency for a single creditor.

[27] In my view, the bankruptcy judge erred in dismissing the petition for a receiving order on the basis that the appellant should have pursued other routes to collect on the debt owed by Mastronardi. I reach this conclusion for several reasons.

[28] First, if a petitioner can satisfy the requirements of the BIA, I see no reason for denying him access to the process and remedies of the Act because there may be other civil routes open to him. The BIA is not a second-rate or fallback statute that can only be invoked if other avenues fail. I agree with Ground J. who said in Re Cappe (1993), 18 C.B.R. (3d) 229 at 235 (Ont. Gen. Div.):

I know of no statutory or common law which requires that a petitioning creditor have exhausted all other remedies available to that creditor to collect the debt owing to him or her before proceeding with a petition for a receiving order. In fact, the jurisprudence would seem to be to the contrary.

See also: Re Chu (1995), 30 C.B.R. (3d) 78 at 82 (Ont. Gen. Div.).

[29] Second, Mastronardi appears from the record to have made suspect transfers of property at suspect times. Mastronardi was examined in April 1997 in the Ohio civil action. John Brabander and Thomas Schrader testified at the bankruptcy hearing. From these sources the following picture emerges. Mastronardi’s principal corporate enterprise, MOS Enterprises, was a multi-million dollar corporation. In Leamington, Ontario, Mastronardi owned or operated a large greenhouse complex with outbuildings and houses, a trucking terminal and employees’ quarters. He had a large private residence in Leamington and an oceanfront condominium in Florida. He owned the 38 foot cigarette boat that was involved in the accident. In addition, one of his numbered companies owned a 63 foot Searay valued at approximately $1,000,000.

[30] I do not say that all of the above facts have been conclusively proven. However, they were all in evidence before the bankruptcy judge and Mastronardi introduced no evidence to contradict them. The prima facie conclusion I draw is that Mastronardi is a man with substantial personal and business assets.

[31] Did the accident cause him to do anything with these assets? It appears – I put it no higher – that it did. Thomas Schrader testified that in September or October 1995, Mastronardi transferred his entire 51 per cent interest in MOS Enterprises, his central business, to his wife for no consideration. He also testified that at the same time Mastronardi transferred his half interest in the family residence to his wife, again for no consideration. Both of these transactions took place after the accident in June 1995 and after the Brabanders had commenced their civil action in Ohio, but before the Ohio court had made a decision. In his examination in the Ohio action, Mastronardi said that he made the transfers because he could not obtain insurance in Canada after the boat accident. That may or may not be the case (Mastronardi introduced no supporting evidence on this issue at the bankruptcy hearing). However, on the state of the record before the bankruptcy judge, these are highly suspicious transfers of property: see Bombardier Credit Ltd. v. Find (1998), 1998 3000 (ON CA), 2 C.B.R. (4th) 1 at 10 (Ont. C.A.).

[32] Moreover, when he was examined in the Ohio civil action in April 1997 (ten months before the judgment in the civil action), Mastronardi admitted that he intended, within weeks, to transfer his half interest in his oceanfront Florida condominium to his wife for $50,000.

[33] All three of these transactions are precisely the kind of transactions that are particularly well-suited to investigation and review by a trustee in bankruptcy. They look vulnerable – again, I put it no higher – to an attack by a trustee as being settlements and, depending on when the Florida transfer was completed, reviewable transactions. To my mind, they constitute a compelling reason why a receiving order should have been granted. If a receiving order were made, time would start running backward from January 1998, when the petition was issued, and the three transactions might fall within the trustee’s net under the BIA.

[34] Third, Mastronardi owes three creditors more than $3.5 million pursuant to a valid Ohio court order. He appealed the trial court’s order but did not pursue the appeal. The Ohio court order is truly a final order. Mastronardi is a man with substantial assets. For four months in 1998, his Ohio creditors made demands for payment of the money they were owed. Mastronardi made no response and, importantly, he did not pay a penny on the judgments. In these circumstances, namely a lawful multi-million dollar debt, a person with substantial assets, and no payment at all, the bankruptcy route strikes me as entirely appropriate. There is no need for the petitioning creditor to spend time and money continuing on the ordinary civil track when Mastronardi has not complied with his responsibilities on that track and when the petitioning creditor has established prima facie compliance with the statutory conditions of the BIA.

[35] Fourth, the bankruptcy judge’s concern “that the Bankruptcy Court would become in this case a collection agency for a single creditor” is, in my view, misplaced. As discussed previously, this is not a single creditor case; there are at least three substantial creditors. Moreover, there is nothing in the record to suggest that the appellant has invoked the BIA for any ulterior purpose, such as trying to force a creditor to deal with him to the exclusion of, or in priority to, other creditors.

[36] The fact that the petitioning creditor desires, as he candidly admitted when he was cross-examined on his Affidavit of Verification in support of the petition, to collect on the debt owing to him, is not an impermissible or disqualifying feature. Virtually every creditor who initiates a bankruptcy petition would have this as an objective. On this point I agree with Catzman J. who said in Re Four Twenty-Seven Investments Limited; Re 495487 Ontario Limited (1985), 55 C.B.R. (N.S.) 183 at 188 (Ont. S.C.), aff’d (1985), 58 C.B.R. (N.S.) 266 (Ont. C.A.):

I also reject the debtor’s submission based upon the alleged improper or ulterior motive of the petitioning creditor. It is not an abuse of process or an improper purpose to commence a petition for the collection of a debt. It is not improper to petition to gain remedies not available outside of bankruptcy, including a thoroughgoing investigation of the bankrupt’s affairs. Indeed, on the evidence, I consider this to be a prototypal case where the full arsenal of investigatory mechanisms and remedies available to a trustee in bankruptcy would be useful, appropriate and desirable.

[37] I agree with that passage and regard it as equally applicable to the present appeal. Mastronardi owes substantial debts to several creditors, he has made several suspicious transfers of assets and he has not demonstrated any intention or inclination to pay even a penny of the debts he owes. In these circumstances, the petition for a receiving order brought by John Brabander, as administrator of his son’s estate, complies with the requirements of the BIA and a receiving order would be “useful, appropriate and desirable”.

DISPOSITION

[38] I would allow the appeal, set aside the order of the bankruptcy judge dated February 15, 1999, and make an order adjudging Ollie Mastronardi to be a bankrupt and appointing Shiner and Associates to act as trustee of Mr. Mastronardi’s property. I would also make an order of costs in favour of the appellant in respect of the appeal and the bankruptcy hearing below, both payable out of the estate of the bankrupt.

RELEASED: December 15, 20000

(signed) “J.C. MacPherson J.A.”

(signed) “I agree L. Charron J.A.”

(signed) “I agree R.J. Sharpe J.A.”