Court of Appeal for Ontario

Date: August 31, 2018

Docket: C64376

Judges: Feldman, Benotto and Brown JJ.A.

Parties

Between

Mercado Capital Corporation Applicant (Appellant)

and

Hafsa Faisal Qureshi and Pollard & Associates Inc., Trustee in Bankruptcy for the Estate of Faisal Iqbal Qureshi Respondents (Respondent)

Counsel

Michael Myers and Michael Krygier-Baum, for the appellant

Veena Pohani, for the respondent

Hearing

Heard: February 27, 2018

On appeal from: The judgment of Justice Glenn A. Hainey of the Superior Court of Justice, on October 13, 2017, with reasons reported at 2017 ONSC 5572.

Decision

Feldman J.A.:

[1] Introduction

[1] The appellant, Mercado Capital Corporation, is a creditor of the respondent's husband, Faisal Qureshi. While Mr. and Mrs. Qureshi were married, they sold their matrimonial home, which was registered in Mr. Qureshi's name, and used the proceeds plus other money to purchase a new home in both their names. After petitioning Mr. Qureshi into bankruptcy within one year of the purchase, the appellant sought to void the transfer of half of the new home into the respondent's name, as a transfer for undervalue contrary to s. 96(1)(b)(i) of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 ("BIA").

[2] The application was denied.

[3] On appeal, the appellant submits that the application judge erred in his interpretation and application of s. 96 of the BIA.

[4] For the reasons that follow, I would dismiss the appeal.

Background Facts

[5] Mr. and Mrs. Qureshi married in 2001 and have three children. Mrs. Qureshi obtained her MBA from the Schulich Business School in 2004. A few months after her graduation, Mr. and Mrs. Qureshi had their first child, who was soon diagnosed with autism and epilepsy. Because their son required around-the-clock care, they agreed that Mrs. Qureshi would stay home and care for him. Her evidence was that, from a financial standpoint, retaining specialized staff to care for their child would likely have cost more than she would have been able to earn. As a result, she did not enter the workforce.

[6] While Mrs. Qureshi was responsible for caring for the children and maintaining the household, Mr. Qureshi owned and operated a consulting and trading company, Client360 Group Inc. The trial judge found that Mrs. Qureshi supported Mr. Qureshi at home while he earned the family income by operating his businesses.

[7] In 2011, Mr. and Mrs. Qureshi bought a family home on Selwyn Avenue in Richmond Hill for $810,000. That home was registered only in Mr. Qureshi's name. The purchase was funded in part by $283,500 cash; a mortgage covered the rest. Mrs. Qureshi's parents provided $50,000 of that cash, and the remainder came from the family's savings. The trial judge found that while the Selwyn home was registered in Mr. Qureshi's name, both Mr. and Mrs. Qureshi believed they each owned an equal share. Mr. Qureshi testified that the only reason the home was registered in his name was because Mrs. Qureshi was not available to attend the lawyer's office to sign the documents.

[8] On February 18, 2015, Mrs. Qureshi entered into an agreement of purchase and sale on behalf of her husband and herself to purchase a home on Davina Circle in Aurora. In March and May of 2015, Mr. Qureshi put down deposits totalling $256,240 towards the purchase of Davina from funds from Mr. Qureshi's companies, Client360 Group Inc. and Eastern Equity Partners Ltd.

[9] On June 30, 2015, the Selwyn property was sold for $1,180,000 with net proceeds of $372,177. The purchase of the Davina property closed on the same date.

[10] The purchase of the Davina home was funded with the $372,177 obtained from the sale of the Selwyn home, the $256,240 from the deposits made in March and May, mortgage funds of $1,902,081, and a last-minute contribution of $89,654 from Mrs. Qureshi's parents. Her parents provided this cash to make up for an equity shortfall and to ensure that Mr. and Mrs. Qureshi could complete the purchase on time.

[11] Title to the Davina property was registered in the names of Mr. and Mrs. Qureshi as joint tenants. The application judge accepted Mr. and Mrs. Qureshi's evidence that they believed each had a 50% interest in Davina because, like Selwyn, it was their matrimonial home.

[12] In early 2016, Mr. and Mrs. Qureshi's marriage ended. Mr. Qureshi moved out and began a relationship with another woman in Dubai, while Mrs. Qureshi remained in Aurora with their three children.

[13] Also in early 2016, allegations arose that Mr. Qureshi was involved in a multi-million dollar fraud through Client360 Group Inc. and his other companies. In early 2017, he was forced to return to Canada when his passport was cancelled. He was arrested and charged with multiple counts of fraud upon his return to the country. There is no evidence that Mrs. Qureshi was aware of any alleged fraudulent activities on Mr. Qureshi's part.

[14] Mercado claims to be a victim of Mr. Qureshi's fraud. On June 2, 2016, Mercado petitioned him into bankruptcy, and he was adjudged bankrupt on July 5, 2016. Soon after, the Davina house was sold for $2,838,000, yielding net proceeds of $696,815, with Mrs. Qureshi's share of the proceeds of sale amounting to $348,407.50.

[15] Mrs. Qureshi has no separation agreement, no court ordered support, nor any firm commitment to pay child and spousal support from Mr. Qureshi. The Davina house was her only asset. She needs her share of the proceeds from it in order to build an independent life with her children.

[16] Mercado obtained an order under s. 38 of the BIA to bring an application for an order that Mrs. Qureshi's 50% share of the proceeds from the Davina home was the result of a transfer to her at undervalue, and is therefore void pursuant to s. 96(1)(b)(i) of the BIA.

[17] Paragraph 96(1)(b) provides:

96 (1) On application by the trustee, a court may declare that a transfer at undervalue is void as against, or, in Quebec, may not be set up against, the trustee – or order that a party to the transfer or any other person who is privy to the transfer, or all of those persons, pay to the estate the difference between the value of the consideration received by the debtor and the value of the consideration given by the debtor – if

(b) the party was not dealing at arm's length with the debtor and

(i) the transfer occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and ends on the date of the bankruptcy; or

(ii) the transfer occurred during the period that begins on the day that is five years before the date of the initial bankruptcy event and ends on the day before the day on which the period referred to in subparagraph (i) begins and

(A) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, or

(B) the debtor intended to defraud, defeat or delay a creditor.

Application Judge's Reasons

[18] In dismissing Mercado's claim, the application judge relied primarily on discretionary language in s. 96. His view was that judicial discretion not to award judgment under s. 96 should be guided by the jurisprudence interpreting its predecessor provision, the former s. 100, including Standard Trust Co. Ltd. v. Standard Trust Co. (1995), 26 O.R. (3d) 1 (C.A.) and Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68, [2004] 3 S.C.R. 461. Much like s. 96, s. 100 allowed a court to void a transaction between a bankrupt and another party where the consideration was conspicuously less than the fair market value of the property and the transaction occurred within a year of the initial bankruptcy event.

[19] The application judge concluded that:

[I]t is not necessary for me to decide whether Hafsa's 50% interest in the equity of Davina resulted from a transfer at undervalue contrary to s. 96(1)(b)(i) of the BIA. Even if it did, which I doubt, I would exercise my equitable discretion not to declare her 50% interest in Davina void.

[20] Exercising his "equitable discretion", he declined to declare Mrs. Qureshi's 50% interest in the Davina home void, relying on the following factors:

• The good faith of Mr. and Mrs. Qureshi and the lack of any intention to defeat creditors;
• Mrs. Qureshi's "substantial non-monetary contribution to the family by her hard work managing the household and caring for their children";
• Mrs. Qureshi's parents' contributions to the purchase price of both of their matrimonial homes;
• Mr. and Mrs. Qureshi's honest belief that Mrs. Qureshi was entitled to a 50% interest in Davina because it was their matrimonial home;
• That Mrs. Qureshi and her children have no other guaranteed form of financial support, that the Davina home is Mrs. Qureshi's only asset, and that Mrs. Qureshi needs the proceeds from the sale of the home to support herself and her children; and
• That the agreement of purchase and sale for the Davina home was signed by Mrs. Qureshi in February 2015, well before the one year period preceding Mr. Qureshi's initial bankruptcy event.

Issues

[21] Mercado's appeal raises the following issues:

1. Did the purchase of the Davina home in the joint names of Mr. and Mrs. Qureshi constitute a transfer by Mr. Qureshi to Mrs. Qureshi of one half of the home at undervalue?

2. If so, did the transfer take place within one year or five years of the date of Mr. Qureshi's initial bankruptcy event?

3. If the transfer was within five years, did the appellant prove that the transferor was either insolvent when the transfer took place or intended to defraud, defeat, or delay a creditor?

4. Does the court have discretion under s. 96(1) of the BIA to decline to declare the transfer void as against the trustee in bankruptcy or against the creditor authorized to bring the application under s. 38?

5. If the court has that discretion, did the application judge err in law in the basis on which he exercised it?

Analysis

(1) Issue 1: Was there a transfer at undervalue?

[22] Transfer at undervalue is defined in s. 2 of the BIA to mean:

[A] disposition of property or provision of services for which no consideration is received by the debtor or for which the consideration received by the debtor is conspicuously less than the fair market value of the consideration given by the debtor[.]

[23] Mrs. Qureshi submits that, besides the cash contributions made by her parents which were for her benefit, she made a non-financial contribution to the purchase of both homes by running the household and looking after the children, allowing Mr. Qureshi to work and earn income. She asks that that contribution be given legal recognition in determining whether there was any disposition of property at all when Davina was purchased, or in calculating the value of her contribution.

[24] This submission is consistent with the evidence that was accepted by the application judge: Mr. and Mrs. Qureshi both believed that each had an equal interest in their matrimonial homes, even though the Selwyn home was registered in Mr. Qureshi's name alone, and the funds used to purchase both homes came from Mr. Qureshi's business and from Mrs. Qureshi's parents. Mrs. Qureshi's direct contribution was in running the home and raising the children.

[25] This submission is also consistent with the philosophy of the Family Law Act, R.S.O. 1990, c. F.3 ("FLA"). Mesbur J. recently described the FLA's premise in a s. 96 transfer for undervalue case, Re Cameron, 2011 ONSC 6471, 108 O.R. (3d) 117, at paras. 39-41:

[Q]uite apart from what money each might have contributed to the actual purchase of the properties, I would have concluded each had made an equal contribution, whether by way of money or money's worth. I base this on the premise of our Family Law Act, namely that marriage is an economic partnership. The roles of the partners in that partnership are to acquire assets, earn income, raise children and run the household. All those roles are deemed to be of equal value, entitling each partner to an equal share of the net value of assets acquired during the marital partnership.

As I see it, regardless of what each of the spouses contributed in money to acquire their matrimonial homes, the law presumes that each widow contributed as much as her husband to that acquisition, whether by way of money, or money's worth. Part of what each acquired was the hope of surviving and becoming the sole owner of the whole. Each acquired an inchoate right to sole ownership at the time the property was acquired with their equal, joint efforts. That inchoate right crystallized at the moment of the other joint tenant's death.

Although neither widow paid anything to acquire the whole of their matrimonial homes on their husbands' deaths, it seems to me each had already provided ample and adequate consideration for their right to acquire the whole property by way of survivorship.

[26] This same philosophy has been applied by the courts to common law relationships that are not governed by the FLA. It has allowed a court to impose a constructive trust on a portion of the property accumulated by the parties during their relationship, regardless of legal title, as a remedy in favour of the spouse who makes a non-monetary contribution to the home for unjust enrichment: see Kerr v. Baranow, 2011 SCC 10, [2011] 1 S.C.R. 269, at para. 50.

[27] It is not necessary for this court to decide whether the Selwyn property was impressed with Mrs. Qureshi's beneficial interest. The issue does not need to be decided because even if – as the appellant submits – there was a transfer at undervalue, the effective date of the impugned transaction was more than a year before the bankruptcy event and the appellant failed to prove that Mr. Qureshi was insolvent or intended to defraud, defeat or delay a creditor on the day of disposition.

(2) Issue 2: What is the effective date of the impugned disposition of property?

[28] Mrs. Qureshi entered into the agreement of purchase and sale for the purchase of Davina on behalf of herself and Mr. Qureshi on February 18, 2015. The transaction closed on June 30, 2015, when the property was registered in the names of Mr. and Mrs. Qureshi as joint tenants.

[29] The initial bankruptcy event occurred on June 2, 2016, when the appellant creditor brought a bankruptcy application against Mr. Qureshi. If the closing of the Davina purchase and the joint registration on title is the impugned disposition of property, then it occurred within one year of the initial bankruptcy event and is captured by s. 96(1)(b)(i). If, however, the date of the agreement of purchase and sale constitutes the disposition of property, then s. 96(1)(b)(ii) applies.

[30] This court settled the above legal issue in Buchanan v. Oliver Plumbing and Heating Ltd., [1959] O.R. 238 (C.A.). There, the court adopted Jessel M.R.'s definition of the relationship between a vendor and purchaser of land who have entered into a valid contract for sale, as set out in Lysaght v. Edwards (1876), 2 Ch. D. 499, at pp. 505-6:

It appears to me that the effect of a contract for sale has been settled for more than two centuries; certainly it was completely settled before the time of Lord Hardwicke, who speaks of the settled doctrine of the Court as to it. What is that doctrine? It is that the moment you have a valid contract for sale the vendor becomes in equity a trustee for the purchaser of the estate sold, and the beneficial ownership passes to the purchaser, the vendor having a right to the purchase-money, a charge or lien on the estate for the security of that purchase-money, and a right to retain possession of the estate until the purchase-money is paid, in the absence of express contract as to the time of delivering possession.

[31] As long as a contract for the sale of land is carried out or is specifically performable, "the completion relates back to the contract": Buchanan, citing Rayner v. Preston (1881), 18 Ch. D. 1, at p. 13. Even if the purchaser pays the sale price upon closing, the purchaser becomes the beneficial owner of the property as soon as the contract is formed.

[32] Further, in Russo Corp. v. Deborah Essery, 2016 ONSC 321, Pattillo J. held that the word "transfer" in the context of s. 96 does not refer to the act of registering an interest in property on title. In that case, the alleged transfer at undervalue was a husband's conveyance of a half-interest in a property to his wife. Pattillo J. held that the date of transfer for s. 96 purposes was the date the document executing the transfer was signed, rather than the date wife's title was registered on the property. In coming to this conclusion, Pattillo J. observed at paras. 37-38:

The wording of Section 96 speaks of "transfer". It does not contain the words "register" or "registration". Black's Law Dictionary, 10th ed., defines "transfer" as "any mode of disposing of or parting with an asset or an interest in an asset". By contrast, "registration" is something completely different. It is the act of registering something, in the case of a transfer of land, in the land tiles or registry office. In that regard, s. 20 of the BIA, which deals with the trustee's divestiture of property, refers to registration of a quit claim or renunciation in land titles or registry.

It is also important to note that s. 96 does not deal just with land. It deals with a disposition of property in general and provision of services.

[33] Because Mr. and Mrs. Qureshi carried out the terms of the agreement of purchase and sale for Davina, Mrs. Qureshi acquired her beneficial interest in Davina upon signing that agreement, making February 18, 2015 the effective date of the impugned disposition of property, not the date of registration. I note as well that while the balance of the funds for the purchase was paid on the date of registration, the March and May 2015 deposits by Mr. Qureshi for the purchase of Davina – which form part of the transfer impugned by Mercado – were also made more than one year before the date of the initial bankruptcy event.

(3) Issue 3: Did the appellant creditor prove that the bankrupt was insolvent or intended to defraud, defeat, or delay a creditor on the date of the disposition to the respondent?

[34] Since the beneficial ownership of Davina passed to Mrs. Qureshi on February 18, 2015, more than one year before the initial bankruptcy event, but within five years of that event, s. 96(1)(b)(ii) applies. The transaction may be declared void if the appellant creditor proves that Mr. Qureshi was insolvent on that date or that he intended to defraud a creditor in making the disposition of property. Mercado, as a creditor authorized by the court to bring this proceeding in the trustee's stead, bears the burden of establishing one of the above requirements in order to impugn the transfer at undervalue: Wood, at pp. 2, 22; The Late Honourable Lloyd W. Houlden, Mr. Justice Geoffrey B. Morawetz & Dr. Janis P. Sarra, Bankruptcy and Insolvency Law of Canada, loose-leaf, 4th ed. (Toronto: Thomson Reuters, 2009) at F§201.

[35] Mr. Qureshi was insolvent when he was petitioned into bankruptcy on June 2, 2016. He swore in his statement of affairs of July 28, 2016 that he had not made any significant financial changes in the one year prior to that date. From that, the appellant argues that there was no evidence that he was also not insolvent when he made the Davina deposits in March and May 2016.

[36] This submission is misconceived: the onus is on the appellant to prove all of the factors in the subsection in order to be entitled to the order under s. 96. While it is certainly possible that Mr. Qureshi was already insolvent in February 2015, there is no evidence on the record that proves that fact on a balance of probabilities. The record is silent on his financial status on that date and at that time.

[37] Further, in his examination by the Official Receiver on March 2, 2017, Mr. Qureshi was asked the following questions:

[Q]: Please describe the events that led up to your current financial position.

Answer: I was running business building a factory overextended myself in terms of debt in Feb 2016, my business creditors began calling their loans I had personal guarantees on some loans they came after me personally, at this time I was financially strapped and I was unable to defend the legal action.

[Q]: When was the last time you used credit?

Answer: Last borrowing no later than March 2016.

[Q]: Approximately on what date did you become aware that you were unable to meet your debts as they became due? What made you aware of this fact? When did you first become aware of your insolvency?

Answer: March 2016- I was sued by business creditors.

[38] This evidence runs counter to the appellant's suggestion that Mr. Qureshi was insolvent over a year before the initial bankruptcy event.

[39] On the alternative condition, the intent to defraud, defeat, or delay a creditor, the application judge found that Mr. Qureshi did not intend to defeat his creditors by taking joint title in Davina.

[40] Because the appellant has not proved the elements required to satisfy s. 96(1)(b)(ii), there is no basis for the court to void the purchase of Davina in joint names and in particular, to void the impugned disposition to Mrs. Qureshi.

(4) The Issue of the Court's Discretion Not to Make an Order

[41] The application judge did not decide whether there was a transfer for undervalue, instead determining that he had the discretion not to make the order voiding the transaction in any event, and that for the reasons he listed he would not make the order. The appellant submits on this appeal that the application judge erred in interpreting the basis for and limits on his ability to exercise discretion not to make the order.

[42] As there is no finding of an impeachable transfer for undervalue, there is no need for the court to address the issue of the scope of the discretion in the court not to make the order when all the conditions are met.

Result

[43] I would dismiss the appeal with costs to the respondent fixed at $32,000 on the partial indemnity scale, inclusive of disbursements and HST.

Released: August 31, 2018

"K. Feldman J.A."

"M.L. Benotto J.A."

"David Brown J.A."