Court of Appeal for Ontario

Docket: C66117

Judges: Sharpe, Pepall and Roberts JJ.A.

Parties

Between

Jonathan Kormos and Elizabeth Kormos Applicants (Appellants)

and

Jonathan Crawford Fast and Katherine Anne Fast Respondents (Respondents)

Counsel

James P.E. Hardy, for the appellants

Kenneth Page, for the respondents

Hearing and Appeal

Heard: May 17, 2019

Appeal from: The order of Justice P. Cavanagh of the Superior Court of Justice, dated October 11, 2018, with reasons reported at 2018 ONSC 6044.

Reasons for Decision

Background

[1] The appellants appeal from the dismissal of their application under s. 181(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA"), to annul the bankruptcy of the respondent, Katherine Anne Fast.

[2] The appellants and the respondents are neighbours. On November 2, 2016, the appellants obtained a Small Claims Court judgment against the respondents, in the amount of $25,565.64, for water damage to their property.

[3] On April 25, 2017, Mrs. Fast made a voluntary assignment into bankruptcy, fifteen days after the appellants attempted to enforce their judgment by serving on her a notice of examination. In her Statement of Affairs filed, she disclosed assets having a value of $722,461, including her RRSPs of $83,461 and real property that she estimated at $630,000. Her liabilities were listed as $653,313.19, including two mortgages in the total amount of $606,866.85, and the debt owed to the appellants.

[4] The appellants brought an application to annul Mrs. Fast's assignment into bankruptcy, arguing that she was not an insolvent person and that her assignment was an abuse of process.

[5] Unbeknownst to the appellants, on August 24, 2016, the respondent, Jonathan Crawford Fast, had filed a consumer proposal. In their application, the appellants also sought to annul Mr. Fast's consumer proposal. They do not appeal from the dismissal of that part of the application judge's order.

Application Judge's Decision

[6] The application judge accepted the appellants' opinion of value of the respondents' jointly held property and found that its market value at the date of Mrs. Fast's bankruptcy was between $1,300,000 and $1,400,000, and not $630,000 as she alleged in her Statement of Affairs. He also accepted that the mortgages appeared to be in good standing and that the mortgage debt had been reduced over time. An apparent mortgage debt of $900,000 in 2012 was now stated to be $476,565. Nevertheless, the application judge was not satisfied that the appellants had discharged their onus of showing that Mrs. Fast was not an insolvent person on the date of her bankruptcy.

[7] The application judge's decision turned on his acceptance that according to Mrs. Fast's Monthly Income and Expense Statement, monthly expenses of $4,910 exceeded monthly income of $2,900 by $2,010. As a result, the application judge concluded that the appellants had not shown that Mrs. Fast was able to meet Mrs. Fast's obligations generally as they became due or that she had not ceased paying her current obligations in the ordinary course of business as they generally became due. He also rejected that her bankruptcy was an abuse of process. He dismissed the application.

Appellants' Submissions

[8] The appellants submit that the application judge erred by failing to find that Mrs. Fast was not an insolvent person or that her bankruptcy application was an abuse of process, and he thus legitimized an unjustified asset management strategy.

Court of Appeal's Analysis

Error in Application Judge's Decision

[9] We agree that the application judge erred in failing to find that Mrs. Fast was not an insolvent person. It is therefore unnecessary for us to determine whether her bankruptcy was an abuse of process.

Definition of "Insolvent Person"

[10] At the date of her bankruptcy, Mrs. Fast was not an "insolvent person" as that term is defined under s. 2 of the BIA. Her assets greatly exceeded and were available to satisfy all her liabilities. Other than the unexplained monthly deficit, there was no evidence that she could not meet or had ceased paying her obligations as they generally came due. Rather, the unchallenged evidence was that she could. The only evidence of any obligation she had not paid was the debt owed to the appellants.

Legal Test for Annulment

[11] Under s. 181(1) of the BIA, a court may annul a bankruptcy order if it is of the opinion that it ought not to have been made. The circumstances under which the court's jurisdiction pursuant to s. 181(1) of the BIA should be exercised were addressed in Re Wale (1996), 45 C.B.R. (3d) 15, at para. 17:

An annulment will be granted only where it is shown either the debtor was not an insolvent person when he made the assignment or where it is shown that the debtor abused the process of the court or committed a fraud on his creditors.

[12] Section 2 of the BIA defines an "insolvent person" as follows:

"Insolvent person" means a person who is not bankrupt and who resides, carries on business or has property in Canada, whose liabilities to creditors provable as claims under this Act amount to one thousand dollars, and

(a) who is for any reason unable to meet his obligations as they generally become due,

(b) who has ceased paying his current obligations in the ordinary course of business as they generally become due, or

(c) the aggregate of whose property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due.

Application to Mrs. Fast's Circumstances

[13] Mrs. Fast clearly did not meet any criteria of the definition of "insolvent person". Bankruptcy is reserved for "clear cut situations where the liabilities on which the petition is founded and the act of bankruptcy are clearly established by sound and convincing evidence": Sangha v. Crowe MacKay & Company Ltd., 2016 BCSC 260, at para. 20, citing Houlden & Morawetz, Bankruptcy & Insolvency Law of Canada, 3d ed. Looseleaf (Toronto: Carswell 2002), at p. 2-93. That is not the case here.

[14] The application judge erred by failing to consider Mrs. Fast's ability to meet her obligations, in the light of her access to substantial assets, with a view to determining whether she was unable or merely unwilling to satisfy her outstanding obligations.

[15] At the date of her bankruptcy, the total value of Mrs. Fast's assets in excess of her liabilities, including her share in the appraised value of the property, was $417,581.24. The only evidence of any default is the debt that Mrs. Fast owes to the appellants in the amount of $25,565.64 plus interest. As the application judge noted, "it is likely that Mrs. Fast was prompted to take this action by the steps that were taken on behalf of the [appellants] to enforce their judgment". The fact that she reduced her mortgages and the absence of any mortgage default belie any claim that she cannot meet her expenses as they come due or has ceased to pay her current obligations. That Mrs. Fast may have elected to structure her affairs to run a monthly deficit of $2,010 in order to build up her equity in the property, or for any other purpose, does not mean she is insolvent when she has available significant assets to satisfy this deficit and the debt to the appellants. As this court concluded in Thorne Riddell v. Fleishman, 1983 CarswellOnt 201, 47 C.B.R. (N.S.) 233, at para. 22, if, as here, a person has ample funds to meet obligations and chooses not to do so, that person is not insolvent.

Decision and Costs

[16] For these reasons, we are satisfied that the appellants have met their onus of demonstrating that Mrs. Fast was not an insolvent person as at the date of her bankruptcy. Accordingly, we allow the appeal and order the annulment of Mrs. Fast's bankruptcy.

[17] The appellants are entitled to their partial indemnity costs of the appeal in the amount of $2,000, inclusive of disbursements and applicable taxes.

Robert J. Sharpe J.A.

S.E. Pepall J.A.

L.B. Roberts J.A.