Court and Parties

COURT OF APPEAL FOR ONTARIO DATE: 20241001 DOCKET: COA-24-CV-0013

Miller, Copeland and Gomery JJ.A.

BETWEEN

Gary Stevens, Linda Stevens and 1174365 Alberta Ltd. Applicants (Respondents)

and

Sandy Hutchens, also known as Sandy Craig Hutchens, also known as S. Craig Hutchens, also known as Craig Hutchens, also known as Moishe Alexander Ben Avrohom, also known as Moishe Alexander Ben Avraham, also known as Moshe Alexander Ben Avrohom, also known as Fred Hayes, also known as Fred Merchant, also known as Alexander MacDonald, also known as Mathew Kovce, also known as Ed Ryan, and Tanya Hutchens, also known as Tatiana Hutchens, also known as Tatiana Brik, also known as Tanya Brik-Hutchens Respondents

Counsel: Brett D. Moldaver, for the appellant Adroit Advocates LLC (non-party) James Gibson and Emily Wuschnakowski, for the respondent receiver B. Riley Farber Inc. Justin Necpal, for the respondents Gary Stevens, Linda Stevens and 1174365 Alberta Ltd. [1] Barbara VanBunderen, for the respondents CGC Holding Company, LLC, Harlem Algonquin LLC and James T. Medick [2]

Heard: September 17, 2024

On appeal from the order of Justice Cory A. Gilmore of the Superior Court of Justice, dated November 28, 2023.

Reasons for Decision

[1] The appellant, Adroit Advocates LLC, appeals the order of the motion judge authorizing the distribution of the remaining assets under a receivership. The crux of the appeal is the appellant’s objection to the motion judge’s approval of a pooled distribution of the assets of the individual debtors and three corporate debtors controlled by one of the individual debtors. The appellant is an unsecured creditor of both the individual and the corporate debtors. The remaining creditors, the Pennsylvania and Colorado plaintiffs, are unsecured judgment creditors of only the individual debtors. The effect of the distribution authorized by the motion judge is that the appellant shares the assets held by the corporations on a pro rata basis with the Pennsylvania and Colorado plaintiffs – creditors of the individual debtors – rather than receiving all of the corporate assets.

[2] For the reasons that follow, we see no error in the motion judge’s authorization of a pooled distribution on the basis of piercing the corporate veil.

The motion judge’s decision

[3] The motion concerned the distribution of the last remaining assets under a receivership. The receiver was appointed in February 2019 under s. 101 of the Courts of Justice Act, R.S.O. c. C.43, over the assets and undertakings of Sandy and Tanya Hutchens (the “individual debtors”) as well as several corporate debtors for which Tanya Hutchens was the sole shareholder (the “corporate debtors”). The individual debtors are Ontario residents who were found to have engaged in fraudulent lending schemes.

[4] As part of its mandate, the receiver sold 16 Ontario properties held by the corporate debtors. The receiver also carried out an extensive tracing exercise to identify assets owned by the debtors.

[5] The last remaining assets at the time of the motion were $505,900 held by three of the corporate debtors. There was a creditor dispute over these assets. At the time of the motion, three creditors remained. The Pennsylvania plaintiffs were judgment creditors of the two individual debtors. The Colorado plaintiffs were also judgment creditors of the individual debtors. The appellant was the law firm that had represented the debtors. It had an unsecured claim for unpaid legal fees jointly against the individual debtors and the corporate debtors. The appellant had the only unsecured claim against the remaining corporate debtors.

[6] In the normal course, the appellant’s unsecured claim against the corporate debtors would have priority over the equity claims of the Pennsylvania and Colorado plaintiffs. However, the Pennsylvania and Colorado plaintiffs contested the appellant’s priority for the corporate assets on the basis that the remaining assets of the corporate debtors were received as a result of fraudulent transfers by the individual debtors with the intent of defeating their creditors.

[7] The central factual finding that underlies the motion judge’s analysis was that all of the assets of the debtor corporations were fraudulently “funneled” to them by the individual debtor who controlled them (Tanya Hutchens) for the purpose of defeating creditors. This finding was based on investigation done by the receiver, and accepted by the motion judge, tracing the funds held by the corporations to fraudulent transactions by the individual debtors.

[8] The motion judge found that it was appropriate to pierce the corporate veil in order to pool the corporate and individual assets to satisfy claims against both the individual and corporate debtors. She found that the corporate debtors that held the remaining assets were dominated by Tanya Hutchens, and that she used the corporations to engage in fraudulent transactions in order to defeat creditors.

[9] As an alternative basis to authorize the pooled distribution, the motion judge found that the pooled distribution was also justified on the basis of substantive consolidation.

Analysis

(1) The motion judge did not err in piercing the corporate veil to implement a pooled distribution to the creditors of the individual and corporate debtors

[10] The appellant argues that the motion judge’s reasoning was improperly results-driven based on the concern that if a pooled distribution to the creditors of the individual and corporate debtors was not ordered, the Pennsylvania and Colorado plaintiffs would receive nothing in the final distribution.

[11] Respectfully, this argument mischaracterizes the basis of the motion judge’s decision. Her decision was not driven by the fact that the Pennsylvania and Colorado plaintiffs would receive none of the final distribution if a pooled distribution was not authorized. Rather, what drove her decision was that the assets held by the corporate debtors had been fraudulently transferred to them by Tanya Hutchens, at the direction of Sandy Hutchens, in order to defeat creditors. In other words, the appellant’s claim to priority was based on the fact that it had a claim against the corporate debtors, while the Pennsylvania and Colorado plaintiffs only had claims against the individual debtors. The motion judge found that piercing the corporate veil and pooling the assets of the corporate and individual debtors was justified because the assets in the hands of the corporate debtors, to which the appellant asserted priority, were only in possession of the corporate debtors as a result of fraudulent transfers by the individual debtors.

[12] We see no error in the motion judge’s application of the law on piercing the corporate veil. The motion judge recognized that the starting point in considering claims against the individual debtors and the corporate debtors was the separate legal personality of the corporate debtors. She recognized that the court did not have an open-ended discretion to pool assets of the individual and corporate debtors. She correctly set out the two-part test for piercing the corporate veil. Citing this court’s decision in FNF Enterprises Inc. v. Wag and Train, 2023 ONCA 92, at paras. 18-20, the motion judge considered whether the corporate entities were completely dominated and controlled by the individual debtors and whether the corporation was being used as a shield for fraudulent or improper conduct.

[13] The motion judge also considered authority for “reverse” corporate veil piercing – the basis for the order she made – to make a corporation responsible for the shareholder’s debts, where the shareholder has fraudulently used the corporation to avoid the shareholder’s personal obligations: Wildman v. Wildman (2006), 82 O.R. (3d) 401 (C.A.), 215 O.A.C. 239, at paras. 23-25 and 43-46; Borden Ladner Gervais v. Sinclair et al., 2013 ONSC 7640, at paras. 17-20.

[14] We see no error in the motion judge’s findings that the corporations were controlled and dominated by the individual debtor Tanya Hutchens, that she used the corporations to fraudulently transfer funds to them to defeat creditors, and that the remaining assets held by the corporations were derived solely from the proceeds of fraud. These findings were amply supported by the tracing carried out by the receiver and reported in the 11th and 19th Report of the receiver.

(2) There was no procedural unfairness in the motion judge determining whether to pierce the corporate veil on the motion

[15] The appellant also argues that it was procedurally unfair for the motion judge to consider piercing the corporate veil in the motion for directions in the receivership. The appellant argues that creditor claims and priorities cannot be determined on a motion for directions and that the receiver’s role is limited to an orderly distribution of funds to creditors based on established claims. The appellant argues that the pooled distribution effectively permitted new claims by the Pennsylvania and Colorado plaintiffs against the corporate debtors.

[16] We see no procedural unfairness in the procedure employed by the motion judge. One of the functions of a court-appointed receiver is to establish a summary procedure for determining the validity and value of creditors’ claims, so that they are determined in a single proceeding. A court may make a summary determination of creditor rights on a motion for directions in receivership proceedings so long as there are no genuine issues that require a trial: Ontario Securities Commission v. Money Gate Mortgage Investment Corporation, 2020 ONCA 812, 153 O.R. (3d) 225, at paras. 10 and 40; Stevens v. Hutchens, 2022 ONCA 771, 3 C.B.R. (7th) 312, at paras. 13-15.

[17] In this case, both before the motion judge and on appeal, there was no dispute about the results of the tracing conducted by the receiver, which was the basis for the motion judge’s finding that the assets held by the remaining corporate debtors were solely derived from fraudulent transactions designed to defeat creditors. The appellant did not cross-examine on the receiver’s evidence about the tracing or file contradictory evidence. There was no procedural unfairness.

[18] Nor do we agree with the submission that the pooled distribution was unfair to the appellant as a third-party creditor to the corporate debtors. Although the appellant had the only remaining claim against the corporate debtors, the motion judge found, based on the tracing done by the receiver, that the assets held by the corporations were fraudulently transferred to the corporations in order to defeat creditors of the individual debtors. In the circumstances, there was no unfairness to the appellant in the pooled distribution, which effectively reversed the fraudulent transfers to the corporations.

[19] As we see no error in the motion judge ordering the pooled distribution on the basis of piercing the corporate veil, it is not necessary to address the appellant’s arguments challenging her alternate conclusion that the pooled distribution was also justified on the basis of substantive consolidation. The corporate veil piercing standing alone justified the order made.

(3) The motion judge did not err in disallowing certain interest charges claimed by the appellant

[20] In its factum, the appellant argued that the motion judge erred in disallowing its claim for certain interest charges on its legal accounts; however, it made no oral submissions on this point.

[21] We see no error in the motion judge’s findings disallowing certain interest charges on legal accounts claimed by the appellants. She correctly disallowed interest claimed by the appellant after the date of the receivership on the basis that, as an unsecured creditor, the appellant was barred from claiming interest after the date of the receivership order: Deloitte & Touche Inc. v. Shoppers Trust Co. (2005), 74 O.R. (3d) 652 (C.A.).

[22] Further, we see no palpable and overriding error in the motion judge’s conclusion that the appellant was not entitled to claim retroactive interest on previously unbilled legal fees at the time of issuing statements of account. The appellant’s retainer with the debtors did not permit the charging of retroactive interest at the time of issuing statements of account for legal fees. Rather, the retainer provided that interest may be charged on any statement not paid within thirty days after the statement was issued.

Disposition

[23] The appeal is dismissed. As agreed by the parties, there is no order as to costs of the appeal.

“B.W. Miller J.A.”

“J. Copeland J.A.”

“S. Gomery J.A.”

Footnotes:

[1] Mr. Necpal appeared but made no written or oral submissions on behalf of Gary Stevens, Linda Stevens, and 1174365 Alberta Ltd. (the “Pennsylvania plaintiffs”).

[2] Ms. VanBunderen appeared but made no written or oral submissions on behalf of CGC Holding Company, LLC, Harlem Algonquin LLC, and James T. Medick (the “Colorado plaintiffs”).