Court of Appeal for Ontario

Bank of Montreal v. EL04 Inc. (Just Between Us and Pink Elephant), 2012 ONCA 80

Date: 2012-02-07
Docket: C54214
Before: Laskin, Sharpe and Juriansz JJ.A.

Between:

Bank of Montreal
Plaintiff (Respondent/ Appellant by way of Cross-Appeal)

and

EL04 Inc. trading as Just Between Us and Pink Elephant, and Elizabeth Stolper also known as Liz Stolper also known as Elizabeth Derksen
Defendant (Appellant/ Respondent by way of Cross-Appeal)

Counsel:
David Swift, for the appellant/respondent by way of cross-appeal
Sean N. Zeitz, for the respondent/appellant by way of cross-appeal

Heard: January 9, 2012

On appeal and cross-appeal from the judgment of Justice Peter B. Hambly of the Superior Court of Justice, May 30, 2011 with reasons reported at 2011 ONSC 2115.

Laskin J.A.:

A. Introduction

[1] Elizabeth Stolper appeals from the summary judgment finding her personally liable to the respondent, the Bank of Montreal. The Bank seeks leave to cross-appeal the motion judge’s costs award. The motion judge found that Ms Stolper's company, EL04, and her father's company, Deln Construction, had engaged in a non-arm's length transaction for less than fair market value. Under the former s. 100 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, this made EL04 liable to Deln's creditors after Deln went bankrupt. The motion judge also found Ms Stolper personally liable as "privy" to the transaction. His finding that Ms. Stolper was “privy” is the main issue on this appeal.

B. A Brief Summary of the Facts

(1) The Parties

[2] EL04 operated two businesses: a clothing store called Just Between Us, and a marketing and consulting business called Pink Elephant. Ms. Stolper was the sole officer and director of EL04. Just Between Us ceased operations in 2010.

[3] Deln was a contractor. Ms. Stolper’s father, Herman Derksen was the company’s principal. Ms. Stolper’s husband, Jason Stolper, was an officer and employee of the company. In September 2008, Deln made an assignment in bankruptcy. KPMG Inc. was appointed trustee. At the time of the bankruptcy, the respondent, the Bank of Montreal, was a proven creditor of Deln.

(2) The Non-Arm’s Length Transaction

[4] Between September and December 2007, Deln did renovations for the new location of the Just Between Us clothing store in Waterloo. The trustee estimated that the fair market value of the work was $157,735.36. EL04 did not pay for the work, and the motion judge gave summary judgment in accordance with the trustee’s estimate. The amount itself is not challenged on this appeal.

(3) The Action and the Motion

[5] After Deln went into bankruptcy, the Bank of Montreal obtained an order under s. 38 of the Bankruptcy and Insolvency Act authorizing it to bring this action as an assignee of the trustee’s interest. It brought this action against EL04 and Ms. Stolper on its own behalf and on behalf of five other creditors of the bankrupt to recover the unpaid amount for the renovations.

[6] In their defence, EL04 and Ms. Stolper asserted an off-set agreement between EL04 and Deln: the renovation work performed by Deln would be off-set by marketing and consulting services provided to Deln by Pink Elephant. In support of this agreement, Deln produced two credit notes it had issued to Just Between Us. The first credit note for $49,076.03 was issued on July 22, 2008, just two months before Deln made an assignment in bankruptcy. The second credit note for $74,290.80 was issued on September 8, 2008, just two weeks before the assignment. The second note stated that it was “in lieu of consulting services provided over the last 18 months”.

[7] In addition to the defence of an off-set agreement, Ms. Stolper maintained that she was not personally liable for a debt incurred by her company.

[8] The motion judge rejected the defences put forward by EL04 and Ms. Stolper and held them both liable. He found that EL04 had not provided consulting services to Deln, and even if it had, there was no off-set agreement. He wrote at paras. 15 and 17 of his reasons:

Deln gave to EL04 credits though JBU in the three months before the bankruptcy of Deln, on September 24, 2008, of $123,366.23. This was allegedly for services provided by EL04 to Deln through Pink Elephant for marketing and consulting work between February 2007 and January 2008. They were allegedly provided pursuant to an agreement that they would be off set against the amount owing by EL04 to Deln for construction work that Deln had done for JBU by constructing renovations for JBU. There is no corroborating evidence that the services were provided or of the alleged set off agreement. The defendants have provided no affidavits from Herman or Jason. The evidence is that Elizabeth is on good terms with both. It would have been a simple matter for her to obtain affidavits from them confirming her evidence if it is true.

Elizabeth has failed, if she could, to put her best foot forward or to lead trump. The principles set out in 1061590 Ontario Ltd., Pizza Pizza and Healy apply. I find that the Bank has established that Deln provided services to EL04 in doing renovations for JBU’s store. I find that Elizabeth has failed to establish that she did any marketing and consulting work for Deln and if she did, that there was an agreement between her father, on behalf of Deln and her, on behalf of EL04 that her work would be set off against the renovations done by Deln.

[9] The motion judge also found that Ms. Stolper was privy to the transaction between EL04 and Deln and, therefore, liable to the Bank for the amount of the claim. As well as granting judgment for that amount, he granted a declaration that the two credit notes were void.

[10] Only Ms. Stolper (and not the corporate defendant) has appealed the summary judgment.

C. Analysis

[11] Under the former s. 100 of the Bankruptcy and Insolvency Act, which governs this appeal,[^1] the trustee could assert a claim against the defendant in respect of a reviewable (or non-arm’s length) transaction for conspicuously less than fair market value. Sections 100(1) and (2) provided:

(1) Where a bankrupt sold, purchased, leased, hired, supplied or received property or services in a reviewable transaction within the period beginning on the day that is one year before the date of the initial bankruptcy event and ending on the date of the bankruptcy, both dates included, the court may, on the application of the trustee, inquire into whether the bankrupt gave or received, as the case may be, fair market value in consideration for the property or services concerned in the transaction.

(2) Where the court in proceedings under this section finds that the consideration given or received by the bankrupt in the reviewable transaction was conspicuously greater or less than the fair market value of the property or services concerned in the transaction, the court may give judgment to the trustee against the other party to the transaction, against any other person being privy to the transaction with the bankrupt or against all those persons for the difference between the actual consideration given or received by the bankrupt and the fair market value, as determined by the court, of the property or services concerned in the transaction.

[12] Thus to succeed in its claim against Ms. Stolper, the Bank (as assignee of the trustee’s interest) had to establish four elements:

• The transaction or transactions between EL04 and Deln were reviewable;
• The transactions occurred within 12 months of Deln’s bankruptcy;
• The consideration received by the bankrupt, Deln, was conspicuously less than the fair market value of the services it provided; and
• Ms. Stolper was privy to the transactions.

[13] Even if all four elements were made out, the court still retained the discretion to refuse to grant judgment: see Standard Trustco Ltd. (Trustee of) v. Standard Trust Co.(1995), 1995 CanLII 3508 (ON CA), 26 O.R. (3d) 1 (C.A.); and Peoples Department Store Inc. (Trustee of) v. Wise, 2004 SCC 68, [2004] 3 S.C.R. 461.

[14] Ms. Stolper does not contest the first two elements of the Bank’s cause of action. She does challenge the last two elements. Although I will review the facts relevant to all four, this appeal turns on the last element - whether Ms. Stolper was privy to the transaction between her company, EL04, and Deln.

(1) Reviewable Transactions?

[15] Whether the renovations performed by Deln alone, or the renovations and the two credit notes, constitute the transactions, all are reviewable under the Act. Under the former s. 3(1) of the Act, non-arm’s length transactions were deemed to be reviewable. Persons related to each other by blood or marriage were deemed not to deal with each other at arm’s length; related persons included two entities, each controlled by a related person. Thus, Ms. Stolper’s company, EL04, and her father’s company, Deln, were related persons and deemed not to deal with each other at arm’s length. Their transactions were reviewable under s. 100.

(2) Transactions Within 12 Months of Bankruptcy?

[16] The renovation work was performed from September to December 2007, within 12 months of Deln’s bankruptcy in September 2008. The credit notes were issued a few months and a few weeks before the bankruptcy. This element was therefore met.

(3) Considerations Conspicuously Less than the Fair Market Value of the Services?

[17] EL04 did not pay for the renovation work. Nonetheless, Ms. Stolper submits that whether there was an off-set agreement for Pink Elephant’s consulting services raises an issue for trial. She contends that the two credit notes issued by Deln support her submission.

[18] The motion judge rejected this submission, and I agree with him. As he pointed out, neither Ms. Stolper’s father, Mr. Derksen, nor her husband, Jason Stolper, filed an affidavit attesting to any off-set agreement or to the receipt of consulting services. Ms. Stolper did not produce any records, documents or notes supporting the existence of an off-set agreement. Nor did she produce particulars of any consulting service she provided to Deln to off-set the renovation work on the Just Between Us store. The motion judge was therefore entitled to conclude that no off-set agreement existed and no consulting services were provided.

[19] Accordingly, Deln did the renovation work without remuneration or for conspicuously less than its fair market value.

(4) Was Ms. Stolper Privy to the Transactions?

[20] The motion judge did not find that Ms. Stolper had been fraudulent, deceitful or dishonest. Thus, she argues that the motion judge had no basis to, in effect, pierce the corporate veil, and hold her personally liable for the debt of her company. I do not accept this argument.

[21] The traditional and well established bases for piercing the corporate veil do not apply to those persons who might be liable as privy under s. 100. The purpose of s. 100 is to preserve the bankrupt’s assets for its creditors by allowing the trustee to recover economic losses suffered by the bankrupt in non-arm’s length transactions: see Standard Trustco, at p. 11. In the light of this purpose, the courts have interpreted the term “privy” to include those persons who have knowledge of a transaction for less than fair market value and benefit either directly or indirectly from it: see Peoples, at para. 91.

[22] In Peoples, the Supreme Court of Canada set out the purpose of s. 100 and explained why it required a broad definition of the term “privy”. Major and Deschamps JJ. wrote at para. 91:

The primary purpose of s. 100 of the BIA is to reverse the effects of a transaction that stripped value from the estate of a bankrupt person. It makes sense to adopt a more inclusive understanding of the word “privy” to prevent someone who might receive indirect benefits to the detriment of a bankrupt’s unsatisfied creditors from frustrating the provision’s remedial purpose. The word “privy” should be given a broad reading to include those who benefit directly or indirectly from and have knowledge of a transaction occurring for less than fair market value. In our opinion, this rationale is particularly apt when those who benefit are the controlling minds behind the transaction.

[23] The court’s broad interpretation of “privy”, gleaned from the purpose of s. 100, has effectively created an exception to the well established principles of separate corporate personality. The term “privy” is broad enough to include, in appropriate cases, individuals who are the sole principals of corporate defendants.

[24] Given the broad meaning of “privy”, the motion judge was correct to conclude that Ms. Stolper was privy to the transaction or transactions between her company, EL04, and Deln. Even if she did not know about the credit notes, as she claims, she did know about the renovations on the clothing store. Her company received the benefit of those substantial renovations and did not pay for them. The company could then use the money for other purposes.

[25] Ms. Stolper was the sole principal of EL04. She was the controlling mind behind the arrangement with Deln to renovate the Just Between Us store. At a minimum, she benefited indirectly, if not directly, from her company’s failure to pay Deln for the renovations. She was, in short, privy to the transaction.

[26] The Bank, therefore, has established all four elements of a successful claim under s. 100. The only remaining question is whether the court ought to exercise its discretion not to grant judgment against Ms. Stolper. Major and Deschamps JJ. described this discretion at para. 92 of Peoples:

A finding that a person was “privy” to a reviewable transaction does not of course necessarily mean that the court will exercise its discretion to make a remedial order against that person. For liability to be imposed, it must be established that the transaction occurred: (a) within the past year; (b) for consideration conspicuously greater or less than fair market value; (c) with the person’s knowledge; and (d) in a way that directly or indirectly benefited the person. In addition, after having considered the context and all the above factors, the judge must conclude that the case is a proper one for holding the person liable. In light of these conditions and of the discretion exercised by the judge, we find that a broad reading of “privy” is appropriate. [Emphasis added.]

[27] The motion judge concluded that this was a proper case for holding Ms. Stolper liable. I see no basis to interfere with his conclusion. I would, therefore, dismiss Ms. Stolper’s appeal.

[28] In doing so, I emphasize the rather narrow limits of these reasons. They should not be taken to hold that in every case of a non-arm’s length transaction at less than fair market value between a bankrupt and a company owned by a single person, that that person is automatically privy. These cases tend to be fact specific and should be decided as they arise. Moreover, even where a sole shareholder or principal is found to be privy, considerations may exist that persuade a court to exercise its discretion not to grant judgment against that person.

D. The Cross-Appeal on Costs

[29] The motion judge awarded the Bank partial indemnity costs in the amount of $13,131.30. The Bank seeks leave to appeal his costs award and asks for substantial indemnity costs of approximately $25,000.

[30] I see no merit in the cross-appeal. The motion judge considered and rejected the Bank’s request for substantial indemnity costs. He said at para. 1:

I do not think that substantial indemnity costs are warranted. In my view, the conduct of the defendants does not rise to the level of “reprehensible conduct, either in the circumstances giving rise to the cause of action, or in the proceedings, which makes such costs desirable as a form of chastisement.” [Citation omitted.]

I see no basis to interfere with this finding. I would deny leave to appeal costs.

E. Conclusion

[31] I would dismiss the appeal. I would also dismiss the cross-appeal on costs by denying leave to appeal. Taking into account the divided success, I would award the Bank costs of $6,000, inclusive of disbursements and applicable taxes, for the proceedings in this court.

Released: Feb. 7, 2012 “John Laskin J.A.”

“JL” “I agree Robert J. Sharpe J.A.”

“I agree R.G. Juriansz J.A.”

[^1]: Section 100 has now been repealed and replaced by s. 96.