COURT FILE NO.: 32-1332343

DATE: 2012-04-12

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: IN THE MATTER OF THE BANKRUPTCY OF JEFFREY ANTHONY GEORGE VOLA, of the Town of Waterdown, in the City of Hamilton, in the Province of Ontario

BEFORE: Mr. Justice H.J. Wilton-Siegel

COUNSEL: David Jackson, for the Applicant Trustee Paul Marshall, for the Respondent Barbara Slywka

HEARD: February 27, 2012

ENDORSEMENT

[1] Scott and Pichelli Limited (the “Trustee”) seeks a declaration that it is entitled to a fund in the amount of $72,588.52 (the “Fund”) held by a solicitor William Jones (“Jones”) that was received in connection with the Settlement (defined below) of certain litigation.

Background

[2] The Fund represents the proceeds of sale of a property in the Town of Flamborough (the “Property”) previously owned by Jeffrey Anthony George Vola (the “Bankrupt”) and Heidi Gertrude Vola (“Heidi”), his wife. The Bankrupt and Heidi purchased the Property on May 15, 1997, as joint tenants. The Bankrupt transferred his one-half interest to Heidi for nil consideration on December 9, 2008 (the “Transfer”). On March 11, 2010, the Bankrupt made an assignment in bankruptcy (the “Assignment”) and the Trustee was appointed trustee of his estate.

[3] On March 3, 2010, Heidi entered into an agreement of purchase and sale for the Property. The purchase price was $715,000. The transaction was completed on or about July 5, 2010.

[4] On June 7, 2010, without knowledge of the Assignment, Deborah Slywka (“Slywka”), a judgment creditor of the Bankrupt, commenced an action for a declaration that the Transfer was fraudulent and void pursuant to the Fraudulent Conveyances Act, R.S.O. 1990, c. F.29 (the “FCA”) (the “Action”). Slywka had obtained a default judgment against the Bankrupt on January 20, 2010. On June 8, 2010, Slywka’s solicitor, Jones, registered a certificate of pending litigation against the Property pursuant to an order dated June 7, 2010 of the Superior Court (the “Order”).

[5] In the statement of claim in the Action, Slywka made alternative claims. In paragraph 1(a), Slywka sought relief against both the Bankrupt and Heidi in respect of the alleged fraudulent conveyance. Specifically, she sought a declaration that the Transfer was fraudulent and void under the FCA and that the Property was subject to execution by Slywka as a judgment creditor. She also sought a declaration of trust in her favour and a tracing claim in respect of any proceeds of sale of the Property. In paragraph 2(b), Slywka sought judgment against Heidi in the amount of the default judgment, being $264,894.99 plus costs and interest from the date of judgment, “as damages for civil conspiracy, deceit, knowing assistance of fraud and knowing receipt of proceeds of wrongdoing”.

[6] In the course of negotiations in late June 2010 among Heidi, Slywka and certain other parties who had liens against the Property, the solicitor for Heidi advised the parties by letter dated June 25, 2010 of the bankruptcy of the Bankrupt. The letter also referred to Slywka’s Action and stated “[T]he Trustee in Bankruptcy is not proceeding with such claim”. It is not clear how the solicitors for Heidi reached this conclusion as there is no evidence of communication between them and the Trustee or his legal counsel. There is also no evidence that the Trustee was aware of, or consented to, either the Action or the Settlement prior to completion of the Settlement. As a result of this communication, however, Slywka became aware of the Assignment prior to the Settlement.

[7] In order to complete the sale of the Property on July 5, 2010, Slywka agreed to a settlement of the Action. Pursuant to the settlement, the certificate of pending litigation was deleted from title to the Property against delivery to Jones of the Fund, which represented one-half of the net proceeds of sale after payment of the outstanding mortgages and other liens registered against the Property, closing adjustments and real estate commission (the “Settlement”).

[8] Jones contacted the Trustee after the Settlement was completed. By letter dated July 12, 2010, he advised the Trustee of the circumstances giving rise to his holding the Fund. Jones stated that he did not believe the Fund should be paid to the Bankrupt’s estate and sought the Trustee’s confirmation that it was not interested in the Fund and that the monies belonged to Slywka. Jones expressed Slywka’s position to be that the funds were received:

… against the possible damages and the costs incurred by my client on the action against Mrs. Vola. That is, (in addition to the reversal of the conveyance that we were seeking which would have been to the benefit of all of the creditors of Mr. Vola) under a separate head of damages, my client was entitled to compensation from Mrs. Vola for having participated in the fraudulent scheme.

Positions of the Parties

[9] Slywka’s principal argument is that the Trustee should not be entitled to the Fund as no determination was ever made by a court that the Transfer was a fraudulent transfer and therefore void. Because the parties settled without such a determination having been made, Slywka says that she is entitled to assert that Heidi owned the Property. On this basis, she asserts further that the Fund represents the proceeds of settlement of the conspiracy claim against Heidi in paragraph 1(b) of the statement of claim rather than the proceeds of an interest of the Bankrupt that had been fraudulently conveyed

[10] Slywka submits that the Bankrupt alienated his entire interest in the Property to his wife 15 months prior to the Assignment. She says the only right that the Bankrupt held from December 9, 2008 to July 5, 2010 was a possessory right under s. 19 of the Family Law Act R.S.O. 1990, c. F-3 (the “FLA”). Under s. 19(1) of the FLA, that right was personal as between the Bankrupt and Heidi and bestowed no rights upon the Bankrupt’s creditors or the Trustee. On this basis, given the absence of any determination of a fraudulent transfer, she argues that the proceeds of sale were therefore the property of Heidi..

[11] The Action was commenced after the Assignment without obtaining an order under s. 38 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”). The Trustee says the Action was an action relating to property of the Bankrupt. It says that there were no special circumstances or facts particular to Slywka with respect to her claim. Therefore, the Trustee says that the payment of the Fund to Jones was not made pursuant to a settlement of an independent cause of action against Heidi but rather pursuant to a proceeding with respect to the property of the Bankrupt, the right to which was vested in the Trustee. Accordingly, the Trustee says that the Action asserted a claim that should be for the benefit of all unsecured creditors. It says it would be unjust, as well as contrary to the BIA, to allow Slywka to retain the Fund as it would amount to a preference to her in the face of the stay provided in s. 69.3 of the BIA.

Analysis and Conclusions

[12] While the circumstances of this action are perhaps novel, I think it is clear that the Trustee is entitled to the relief sought in this motion by virtue of the operation of both the stay in s. 69.3 of the BIA and the precedence of bankruptcy principle in s. 70 of the BIA, given the nature of the payment to Slywka based on the nature of the payment to Slywka pursuant to the Settlement.

The Nature of the Payment to Slywka

[13] The Action, although commenced against both Heidi and the Bankrupt, was “an action, execution or other proceeding” for the recovery of Slywka’s unsecured claim against the Bankrupt that was provable in bankruptcy. In the Action, Slywka asserted that the Transfer was fraudulent and void and that the Bankrupt held a one-half interest in the Property. She sought a declaration to this effect as well as execution against that interest and a tracing of any proceeds of sale.

[14] The Action was, therefore, a typical fraudulent preference action that, by its very nature, entailed the assertion of a remedy against the Bankrupt’s property. The Action was entirely based on the assertion that the bankrupt continued to have a one-half interest in the Property.

[15] Slywka says that the Fund was paid in settlement of a separate claim against Heidi for damages in respect of “civil conspiracy, deceit, knowing assistance of fraud and knowing receipt of proceeds of wrongdoing” set out in paragraph 1(b) of the statement of claim. This is not, however, a separate claim. It is merely a means of characterizing alternative relief. In fact, insofar as it purports to be a separate claim it must fail for three reasons.

[16] First, in order to obtain any relief in the Action, including the alleged separate relief against Heidi, Slywka had to obtain a determination that the Transfer was a fraudulent transfer under the FCA. There are no other facts pleaded in the statement of claim in the Action that would support a finding of the claim alleged against Heidi.

[17] Second, while the claim against Heidi is for the full amount of the default judgment, being $264,894.99 plus interest from the date of judgment and costs, the maximum amount Slywka could have received was the value of the Bankrupt’s interest in the Property. Again, there are no facts pleaded in the statement of claim that would support any other damage award.

[18] Third, the form of the Settlement is consistent with a payment to Slywka of the net proceeds of the Bankrupt’s one-half interest in the Property and, therefore, an implicit acknowledgment that the Transfer was a fraudulent conveyance for purposes of the FCA. Pursuant to the Settlement, Heidi effectively renounced a one-half interest in the Property. The only evidence before the court that directly addresses this issue is the June 25, 2010 letter of Heidi’s solicitor. While the final accounting resulted in Heidi receiving a different net amount out of her one-half of the net proceeds of sale from the net amount received by Jones from the other one-half interest attributable to the Bankrupt, that letter indicates that each of these parties was allocated 50% of the net proceeds of sale.

[19] Based on the foregoing, I find that the Fund represented the proceeds of sale of the Bankrupt’s interest in the Property notwithstanding the absence of a court determination that the Transfer constituted a fraudulent conveyance for the purposes of the FCA.

Operation of Section 69.3 in this Proceeding

[20] Section 69.3 of the BIA imposed a stay of proceedings for the recovery of a claim provable in bankruptcy in respect of the property of the Bankrupt from the date of the Assignment:

69.3 (1) Subject to subsection (2) and sections 69.4 and 69.5, on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor's property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy, until the trustee has been discharged.

[21] As a fraudulent conveyance action, the Action was subject to the provisions of section 69.3 of the BIA. If the court had been aware of the Assignment on June 7, 2010, the Order would not have been granted in the absence of a compelling reason to lift the stay under section 69.3 on notice to the Trustee. There are no circumstances in the record that would have justified a lifting of the stay.

[22] I do not think that it matters that neither the court nor Slywka were aware of the Assignment on June 7, 2010. Section 69.3 is not qualified by any requirement of knowledge. In any event, in this case, the issue of knowledge does not arise. Jones became aware of the Assignment on or about June 25, 2010. Slywka’s subsequent actions in furtherance of the Action, including any negotiations in furtherance of the Settlement, contravened s. 69.3.

Operation of Section 70(1) in this Proceeding

[23] Section 70(1) of the BIA provides the general rule regarding the precedence of assignments in bankruptcy:

70. (1) Every bankruptcy order and every assignment made under this Act takes precedence over all judicial or other attachments, garnishments, certificates having the effect of judgments, judgments, certificates of judgment, legal hypothecs of judgment creditors, executions or other process against the property of a bankrupt, except those that have been completely executed by payment to the creditor or the creditor's representative, and except the rights of a secured creditor.

[24] Accordingly, Slywka could not enforce any judgment against the Bankrupt after the date of the Assignment. The Action was directed toward that purpose. Pursuant to the Settlement, the Fund was paid to Jones on behalf of Slywka in consideration of a discharge of the certificate of pending litigation which pertained to her claim that one-half of the beneficial interest in the Property continued to reside in the Bankrupt. Heidi was not jointly and severally liable in respect of that judgment. Until such time as a court determined that Heidi was jointly and severally liable, the Action must be treated as a claim in furtherance of the default judgment against the Bankrupt which was subject to the precedence of the Assignment pursuant to s. 70(1).

Conclusion

[25] Given the operation of ss. 69.3(1) and 70(1) of the BIA, I conclude that Slywka is not entitled to retain the proceeds. For the reasons set out above, the claim in the Action was fundamentally a claim for fraudulent conveyance and the Fund represented the proceeds of sale of the interest of the Bankrupt in the Property. On this basis, the Fund is property of the Bankrupt that has been assigned to the Trustee pursuant to the Assignment. To do otherwise would be to countenance a contravention of the BIA in respect of an important matter of policy under that statute ─ the equal treatment of all unsecured creditors from and after the date of an assignment in bankruptcy subject to leave of the court or an order under s. 38 of the BIA.

[26] As the Trustee has accepted the validity of the solicitor’s lien asserted by Jones against the Fund in the amount of $26,947.94, the Trustee is entitled to a declaration that it is entitled to the balance of the Fund, being $45,640.58.

Costs

[27] The Trustee is entitled to costs on a partial indemnity basis and seeks costs of $12,246.03. Slywka’s costs outline set out costs of approximately $10,000 on such basis, which I think reflects her reasonable expectations. Considering the nature of the case, including the somewhat unique issue, the relative seniority of counsel, and the importance to the parties, costs are fixed at $8,000 on an all-inclusive basis.

Wilton-Siegel J.

Date: April 12, 2012