D'Alimonte v. Porretta, 2011 ONCA 307
COURT OF APPEAL FOR ONTARIO
Moldaver, Sharpe and Armstrong JJ.A.
BETWEEN
Rosaria D’Alimonte and 1398740 Ontario Limited, carrying on business as Dalco Dental Studios
Appellants
and
Rosanna Porretta and 1398471 Ontario Limited, carrying on business as the Bolton Family Dental Centre
Respondents
Richard Macklin and Maureen Whelton, for the appellants
Jonathon D. A. Baker, for the trustee in bankruptcy Patrick D. Schmidt and George Karahotzitis, for the respondents
Heard: February 25, 2011
On appeal from the order of Justice David Corbett of the Superior Court of Justice dated April 28, 2010
Background
1The appellants Ms. D’Alimonte and 1398740 Ontario Limited (Dalco Dental) seek to set aside the order of Corbett J. dated April 28, 2010, dismissing their action (the joint venture action) against the respondents Dr. Porretta and 1398471 Ontario Limited (Bolton Dental).
2The joint venture action was commenced by the appellants on May 13, 2002. The statement of claim was served on the respondents on June 27, 2002. The essence of the action centres on Ms. D’Alimonte’s claim that in February 2000, she and Dr. Porretta entered into a joint venture agreement to establish a dental clinic in which Dr. Porretta would run the dental operation (Bolton Dental) and Ms. D’Alimonte would operate a dental laboratory (Delco Dental).
3According to Ms. D’Alimonte, the agreement was implemented and honoured for about two years, until February 2002, when Dr. Porretta unilaterally terminated Ms. D’Alimonte’s “employment” with Bolton Dental and locked her out of the Bolton Dental premises. As a result of the alleged breach of the joint venture agreement, Ms. D’Alimonte commenced the joint venture action against Dr. Porretta and Bolton Dental seeking, among other things, a declaration that she was the beneficial owner of 50 percent of Bolton Dental and that she was entitled to an equitable lien against it.
4At the time Ms. D’Alimonte commenced the joint venture action, she was a discharged bankrupt. On November 1, 2000, when she was purportedly a 50 percent owner in Bolton Dental, she made an assignment in bankruptcy. In that context, Ms. D’Alimonte prepared a sworn document entitled “Statement of Affairs of Non-Business Bankruptcy” in which she stated that she had no assets. She made no mention of her alleged interest in Bolton Dental, nor did she disclose her interest in Dalco Dental. Rather, she claimed that she was an employee of Dalco Dental. In response to a question asking if she had operated a business within the last five years, Ms. D’Alimonte again made no mention of Dalco Dental. Instead, she declared that she had operated “Legends Rock & Roll Bar & Grill” and that her financial difficulties stemmed from the failure of that business.
5In the Statement of Affairs, Ms. D’Alimonte listed nine arms-length creditors whose debts totalled $22,551. In addition, she showed a debt of $90,000 (the largest by far) owing to her sister Sylvia Forletta.
6On August 15, 2001, Ms. D’Alimonte was discharged from bankruptcy. At no time during the course of the bankruptcy did she disclose her alleged interest in Bolton Dental to her Trustee in Bankruptcy, Mr. Quinney; nor did she inform Mr. Quinney of this in May 2003 when she retained counsel and commenced the joint venture action against Dr. Porretta and Bolton Dental.1 Indeed, it was not until the spring of 2006 that Mr. Quinney was first made aware of Ms. D’Alimonte’s action and her alleged 50 percent interest in Bolton Dental – and then, only because Dr. Porretta’s counsel, who had been informed of Ms. D’Alimonte’s bankruptcy by Dr. Porretta, insisted that Ms. D’Alimonte produce bankruptcy documents that she had not listed in her affidavit of documents.
7Ms. D’Alimonte’s counsel had resisted Dr. Porretta’s numerous requests for the bankruptcy documents on the ground that they were irrelevant. Dr. Porretta’s counsel took the view that they were relevant for two reasons. First, if Ms. D’Alimonte did have an interest in Bolton Dental as she claimed, then that interest vested with the trustee when she made her assignment in bankruptcy on November 1, 2000; hence, only the trustee could bring the joint venture action unless Ms. D’Alimonte’s interest in Bolton Dental had been dealt with in the bankruptcy and returned to her. Second, if Ms. D’Alimonte did not disclose her alleged interest in Bolton Dental in her Statement of Affairs, Dr. Porretta could rely on this to show that there never was a joint venture agreement and certainly none by which Ms. D’Alimonte became a 50 percent beneficial owner in Bolton Dental.
8After learning of Ms. D’Alimonte’s action against Dr. Porretta and Bolton Dental, Mr. Quinney, who had long since been discharged as trustee, wrote a note to Ms. D’Alimonte’s counsel in mid-May 2006 stating that if Ms. D’Alimonte did “have an interest in a dental clinic, then I would be interested in pursuing that on behalf of the bankrupt’s creditors”. Thereafter, the matter went into abeyance for the better part of three years while both sides considered their positions.
9During this timeframe, Dr. Porretta took steps, albeit unsuccessfully, to settle the action. In the meantime, she remained firm that Ms. D’Alimonte had no standing to bring the joint venture action because whatever interest she was claiming in Bolton Dental remained vested in the trustee. Dr. Porretta insisted on receiving a response to this concern, failing which she indicated that she would move to have the joint venture action dismissed. Ms. D’Alimonte maintained that Dr. Porretta’s concerns were unfounded and that Dr. Porretta was holding up the proceedings. Dr. Porretta had refused to answer a number of questions on discovery and an outstanding motion to compel her to answer those questions was being delayed by reason of Dr. Porretta’s failure to act on her threat to have the action dismissed for want of standing.
10On June 1, 2009, without notifying Dr. Porretta, Ms. D’Alimonte moved before the Registrar of the Superior Court of Justice for an order regularizing the joint venture action against Dr. Porretta and Bolton Dental. In particular, she sought an order “to continue the action of Rosaria D’Alimonte .... with respect to her claim for beneficial ownership of [Bolton Dental] by her trustee in bankruptcy, Richard Quinney...”. In her Notice of Motion, Ms. D’Alimonte acknowledged that some of her claims against Dr. Porretta and Bolton Dental “cover[ed] the time period between November 1, 2000 to August 2, 2001”, when she was an undischarged bankrupt. And because Dr. Porretta and Bolton Dental were asserting “that, as a result of Ms. D’Alimonte’s bankruptcy, those claims ... properly belong[ed] to the Trustee ... and not Ms. D’Alimonte”, Ms. D’Alimonte was seeking to regularize the proceeding by “bringing those aspects of her claim which may be affected by the bankruptcy in the name of her trustee in bankruptcy” who had “agreed to pursue that part of the action on behalf of [her] creditors”.
11For reasons that are not clear, the motion was not heard by the Registrar but by Lemon J. of the Superior Court of Justice. On July 7, 2009, Lemon J., ordered that the proceeding “continue” and that the plaintiffs in the proceeding should thereafter be described as follows:
Rosaria D’Alimonte in her own capacity and/or by her Trustee in Bankruptcy, Quinney and Associates Ltd. and [Dalco Dental].
12Not unexpectedly, when Dr. Porretta learned of the order regularizing the proceedings, she sought to have it set aside on consent, failing which she would move to have it set aside on the basis that it had been made without notice to her. After some quibbling, Ms. D’Alimonte capitulated and Lemon J.’s order was set aside on consent by Corbett J. on October 14, 2009 – the same day on which he heard Dr. Porretta’s motion to dismiss Ms. D’Alimonte’s action.
The Motion Judge’s Ruling on Dr. Porretta’s Motion to Dismiss
13The motion judge reviewed the history of the matter in some detail. It is unnecessary to repeat his work. We simply note that in para. 24 of his reasons, he was not quite accurate in stating that “from July 2006 to the commencement of this motion in June 2009, neither the plaintiffs nor the trustee took any steps to regularize or advance this proceeding, or to commence a new proceeding brought by a person with the legal capacity to do so”. As indicated, on June 1, 2009, Ms. D’Alimonte did move, albeit without notice to Dr. Porretta, before the Registrar of the Superior Court for an order that the action be continued by her trustee. As noted, that order was eventually granted by Lemon J. on July 7, 2009, only to be set aside on consent by Corbett J. on October 14, 2009.
14In dismissing the joint venture action, the motion judge found at para. 41 that “the claim was a nullity from the outset” and that he was not dealing with a “mere formal irregularity”. While he recognized at footnote 12 of his reasons that “the bankruptcy court is a court of equity” and that “[no] proceeding in bankruptcy should be invalidated by any formal defect or by any irregularity”, he explained at para. 36 why he did not view the matter before him as a “mere formal irregularity”:
This was no “mere formal irregularity”. Ms. D’Alimonte had a duty to report all of her assets to the trustee. Failure to do so was a breach of s. 198 of the Act [Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3]. On the basis of the allegations contained in Ms. D’Alimonte’s claim, this could not have been a matter of oversight: this was, potentially, a substantial asset, and her only asset.
15The motion judge also took issue with the trustee’s assertion contained in a letter dated October 9, 2009, that had Ms. D’Alimonte disclosed her alleged interest in Bolton Dental at the time of her bankruptcy, “this chose in action would have been an unrealizable asset of the estate” and it would likely have been returned “to Ms. D’Alimonte upon discharge with the proviso that any recovery net of legal fees be attached for the benefit of creditors”. The trustee maintained that position on Dr. Porretta’s motion to dismiss. In his view, “the court ought to exercise its overarching legal and equitable jurisdiction to make ... orders in bankruptcy and other proceedings to ensure that the purposes of the Bankruptcy and Insolvency Act are not thwarted by mere formal irregularities and that the interests of the creditors are protected”.
16The motion judge disagreed. In addition to holding that the matter at hand was not a “mere formal irregularity”, he considered the following additional factors at paras. 37 and 38 of his reasons:
There is another problem with the trustee’s position, as set out in counsel’s letter. Ms. D’Alimonte’s contingent asset may have been difficult to realize after the breakup of her relationship with Dr. Porretta. Her interest may well have been realizable while the two of them were still in business together, in that Dr. Porretta might have been willing to purchase it during the bankruptcy. It is not at all clear that matters would have led to the same result, had the asset been disclosed in the bankruptcy.
It may be a simple matter to hide assets from creditors by having others, such as spouses, friends, or family members, hold them in trust. On the basis of Ms. D’Alimonte’s pleadings, that seems to be what has happened here. If the parties had remained together, this hiding of assets would have succeeded. To permit Ms. D’Alimonte to proceed with the claim now would be to turn a blind eye to her wrongful conduct in the bankruptcy. It would be to countenance this sort of fraud by finding that, in the minority of cases where it doesn’t work out as expected for the debtor, the court will let her proceed as if nothing untoward had happened. [Footnotes omitted.]
17In the end, the motion judge explained that his decision left the trustee with several options. The trustee could take steps to “transfer the property back to Ms. D’Alimonte ... on such terms as it thinks appropriate” and she could “then commence her action anew”, subject to limitation and laches defences potentially available to Dr. Porretta and Bolton Dental. Alternatively, the trustee could pursue the claim itself, subject to any defences attributable to delay that might apply to it.
Analysis and Disposition of Appeal
18The appellant submits that the motion judge erred in holding that the claim was a nullity from the outset and that he should instead, have exercised his equitable jurisdiction under the Bankruptcy and Insolvency Act to regularize the proceeding; alternatively, he should have granted an order nunc pro tunc pursuant to the Rules of Civil Procedure, regularizing the commencement date of the action.
19We disagree. While the motion judge found that “the claim was a nullity from the outset”, even if he was wrong in this, when his reasons are read as a whole, it is apparent that he recognized that he had the discretion under the Bankruptcy and Insolvency Act or the Rules of Civil Procedure to validate the claim and regularize the proceedings and he chose not to do so. In this respect, we note his observations in footnote 12 referred to above, as well as his consideration of this court’s decision in Murphy v. Stefaniak (2007), 2007 ONCA 819, 37 C.B.R. (5th) 6, in which the court made an order, nunc pro tunc, regularizing the commencement of the proceedings to overcome what was clearly a technical/ administrative formality.
20The motion judge was not prepared to make such an order in this case. He was obviously troubled by Ms. D’Alimonte’s failure to disclose her alleged interest in Bolton Dental on her bankruptcy. He described her conduct in this regard as “fraud”. While that may have been an overstatement, in our view, it was certainly open to the motion judge to find that Ms. D’Alimonte knowingly failed to disclose her purported interest in Bolton Dental, which he accurately described as her only asset of potential substance.
21The circumstantial evidence amply supports that finding. It remains unchallenged to this day. Ms. D’Alimonte did not disclaim it in her affidavit filed on Dr. Porretta’s motion to dismiss and she has still not explained why she failed to disclose her purported interest in Bolton Dental on her bankruptcy. Tellingly, she did not advise her trustee of her failure to disclose when she retained counsel and commenced the joint venture action that she now seeks to resurrect. Indeed, but for Dr. Porretta’s insistence that Ms. D’Alimonte disclose her bankruptcy documents, the trustee might never have become aware of Ms. D’Alimonte’s non-disclosure.
22In his reasons, the motion judge also took a dim view of the lapse of time between 2006, when the trustee first learned of the non-disclosed asset, and 2009, when the trustee took the position that it would have returned it to Ms. D’Alimonte on terms had she disclosed it in the bankruptcy.
23As noted, the motion judge was not prepared to accept at face value the trustee’s opinion that the property would likely have been unrealizable at the time of the bankruptcy. Moreover, he took into account the three year delay in which neither the trustee nor Ms. D’Alimonte did anything to regularize the proceedings. Indeed, as of the date of the hearing before the motion judge, the trustee had still not taken any formal steps to have the property returned to Ms. D’Alimonte; nor is there any evidence that he had informed her creditors of this “new-found” asset. This may be due to the fact that Ms. D’Alimonte’s sister would appear to be the only creditor of substance named in the Statement of Affairs.
24Be that as it may, it is apparent that the motion judge was troubled by the entire situation. He did not view the irregularities as “mere formalities”. Plainly, there were too many unanswered questions for his liking. In the circumstances, he was not prepared to grant equitable relief or otherwise regularize the proceedings. We are not persuaded that he erred in exercising his discretion as he did.
25Accordingly, we would dismiss the appeal with costs to the respondents in the amount of $10,000 inclusive of disbursements and HST. No costs are sought against the trustee, who in any event, was not a party to the appeal.
Signed: “M. J. Moldaver J.A.”
“Robert J. Sharpe J.A.”
“Robert P. Armstrong J.A.”
RELEASED: “MJM” APRIL 20, 2011
