DATE: 20120605

DOCKET: 31-1580085

SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: IN THE MATTER OF THE PROPOSAL OF ARNOLD MILAN, OF THE CITY OF VAUGHAN, IN THE REGIONAL MUNICIPALITY OF YORK, IN THE PROVINCE OF ONTARIO

BEFORE: L. A. Pattillo J.

COUNSEL: A. Kauffman , for BDO Canada Limited, Proposal Trustee

Harry Fogul , for Arnold Milan

G. Benchetrit, for Deposit Insurance Corporation of Ontario in its capacity as Liquidator for Croatian (Toronto) Credit Union Limited

Fred Tayar¸ for B. Pfeiffer

Barbara Frederiksa , for Bank of Nova Scotia

Jeffrey Spiegelman , for 784753 Ontario Ltd., Paulo Holdings, Rogi Holdings and Bany Goldlist

B. Salsberg , for 1245094 Ontario Inc.

HEARD: May 15, 2012

ENDORSEMENT

[ 1 ] This is a motion by Arnold Milan (“Milan”) pursuant to s. 58 of the Bankruptcy and Insolvency Act , R S. C. 1985, c. B-3, as amended (the “Act”) for the approval of a proposal made by him under the Act.

Background

[ 2 ] On October 5, 2011, the Crotian (Toronto) Credit Union Limited (“CCU”), by its liquidator, the Deposit Insurance Corporation of Ontario (“DICO”) commenced an application for a bankruptcy order against Milan. Milan disputed the application and a hearing date was set for January 25, 2012.

[ 3 ] On January 12, 2012, Milan filed a proposal under the Act dated January 11, 2012 naming BDO Canada Limited as Trustee (the “Proposal”). The Proposal provides, among other things, that Milan will pay to the Trustee sufficient monies to pay 15 cents on the dollar to unsecured creditors who have filed valid proofs of claim. The monies will be provided by a third party and are to be paid as follows: $1 million 60 days after approval of the Proposal by the court; $1 million every 6 months after the initial payment for a period of 18 months; 24 months after the initial payment, an amount sufficient to pay all proven claims 15 cents on the dollar taking into account all previous payments; and a subsequent payment or payments to pay 15 cents on the dollar to any claims finalized as proven claims after the 24 month period within 60 days of being finalized.

[ 4 ] The Proposal provides in paragraph nine that the provisions of s. 38 and ss. 95 to 101 of the Act and the provisions of the Fraudulent Conveyances Act and the Assignments and Preferences Act shall not apply if the Proposal is accepted.

[ 5 ] The Proposal was approved at a meeting of creditors on January 23, 2012 by 19 of 20 creditors eligible to vote representing 90.5% by value.

[ 6 ] The Trustee has filed its First Report dated March 2, 2012 setting out the background leading up to the Proposal and its recommendations concerning it. The Trustee notes that it met with Milan and his counsel prior to the Proposal being finalized and obtained information concerning his affairs but was not provided with any records relating to such matters including bank account records, lists of payments to creditors and documents relating to his involvement in many companies. Milan advised the Trustee that some documents were lost in a number of physical moves and he has been denied access to others.

[ 7 ] As a result of not receiving any documentation, the Trustee was unable to express an opinion as to the reasonableness of the exclusions contained in paragraph nine of the Proposal relating to any preferential payments or the improper transfer of assets.

[ 8 ] Notwithstanding various reservations including the lack of any documentation to enable an independent review of Milan’s affairs, the Trustee concluded having regard primarily to the expense and challenge of unraveling the “complex web” of Milan’s affairs in a bankruptcy compared with the potential payment of a substantial amount of money over a reasonably short period of time that the terms of the Proposal were more beneficial to the creditors than a bankruptcy.

[ 9 ] In reaching its recommendation, the Trustee noted that it had received “some comfort” from Milan with respect to the source and financial ability of the third party funder.

[ 10 ] The approval motion is supported by William Pfeiffer who is the largest creditor by far. Mr. Pfeiffer, who resides in Florida, acquired his claim of $15,238,798 against Milan (approximately 80% of the total unsecured claims accepted for voting) for $375,000.

[ 11 ] The approval motion is opposed by the DICO in its capacity as Liquidator for CCU which obtained a judgment against Milan on May 19, 2011 for $1,654,228.64 plus interest and costs of $67,207. DICO is also the Liquidator for the Portuguese Canadian Credit Union which has a pending action against Milan and others for fraud.

[ 12 ] It is also opposed by the Bank of Nova Scotia which obtained a judgment against Milan on September 15, 2011 in the amounts of approximately $772,732 (plus interest) and US $124,515 (plus interest) and by 784753 Ontario Ltd., Paulo Holdings, Rogi Holdings and Barry Goldlist and 1245094 Ontario Inc.

[ 13 ] The principal grounds of opposition by the opposing creditors are that the Proposal is an abuse of the Act and does not meet the minimum mandatory requirements of the Act.

Preliminary Matter

[ 14 ] When DICO’s original application came before the court on January 25, 2012, because the Proposal had been filed and approved by creditors, a timetable was set for the filing of material in support of the approval motion including the Trustee’s Report. On March 6, 2012, the approval motion was set for May 15, 2012.

[ 15 ] As a result of the way in which the approval motion came about, the Proposal Trustee inadvertently failed to serve notice of the date for the approval motion on all creditors with proven claims as required by s. 58(b) of the Act. Although there are a number of creditors who are represented by counsel and who participated in the court scheduling process, there are a number who did not. When the error was discovered, the Trustee sent notice of the May 15 th date by email or fax on May 14, 2012.

[ 16 ] At the outset of the approval motion, the Trustee requested an order, pursuant to s. 187(9) of the Act validating the late service. That section provides that no proceeding in bankruptcy shall be invalidated by any formal defect or irregularity unless the court is of the opinion that “substantial injustice” has been caused by the defect or irregularity which cannot be remedied by any order of the court. The Trustee submitted that in the circumstances, no substantial injustice had been caused by the late notice.

[ 17 ] The creditors who received the late notice of the approval motion all voted in favour of the Proposal at the creditors’ meeting. All except one were subsequently examined by counsel for DICO in respect of the approval motion pursuant to an order of the court. It is fair to say those creditors were aware the approval motion was going to take place but not the date. The creditors at the approval motion who are represented by counsel represent the great majority of creditors dollar wise. While that does not excuse the late notice, it reduces the prejudice in my view to those who received the late notice as the positions both for and against approval of the Proposal were well represented on the motion. Any issue that may have been raised by them, whether for or against approval, was amply covered by counsel. Finally, none of the parties appearing before me raised any concern with the Trustee’s request or took any issue with it.

[ 18 ] As a result, it was my view that the defect in service was not such that the approval motion should be delayed. In the circumstances, I was of the opinion that the late notice did not cause a substantial injustice to the creditors who received it. Accordingly, I indicted I would issue an order pursuant to s. 187(9) of the Act validating the late service of the approval motion on the individuals identified by the Trustee.

Background

[ 19 ] Milan is described by the Trustee in its Report as “a businessman who had investments in a complex web of businesses, including businesses involved in gaming in the United States.” Milan is identified as the chair and CEO of the Milan Group on its website which is still active. The Milan Group is described as focusing on three strategic business sectors: financial and technology; commodities & development; and gaming, sports and entertainment. Milan is described as: “a self-built entrepreneur and dynamic leader with an unparalleled reputation and track record of success. He is considered a foremost expert on merchant banking, electronic transactions and electronic cash management. A well versed financier and broker in both national and international business projects and currently doing business through over thirty companies in North America, Central America, Europe, Africa and Asia.”

[ 20 ] A Statement of Personal Net Worth prepared by Milan’s accountant as of September 2008 showed total assets valued at over $67 million and net worth valued at approximately $55 million.

[ 21 ] In his Statement of Affairs dated January 11, 2012, Milan swore under oath that he had incurred debts totaling over $21 million and that his net assets were approximately $50,000. He valued at $1.00 “shares in various private companies which are either dormant, insolvent or not operating.” The Trustee has provided a list of 48 corporations which are intended to be the “various private companies” referred to in the Statement of Affairs.

[ 22 ] The Trustee states in its Report that it was not provided with any records relating to the affairs of Milan such as bank account records or lists of payments. It was further advised by Milan and his counsel that the businesses which Milan was involved in were insolvent and he did not have access to the books and records of the businesses.

[ 23 ] The proofs of claim filed with the Trustee indicate that various parties were issued promissory notes by Milan at a time when he was insolvent, including several parties who were issued notes within 12 months prior to the “initial bankruptcy event” pertaining to Milan and some who were issued promissory notes after DICO’s bankruptcy application.

[ 24 ] Prior to the return of the approval motion, all that had been disclosed by Milan to the creditors about the source of the approximately $8 million required to enable him to meet the Proposal were two letters from an alleged bank in Mexico with the name of the bank redacted. The first letter dated January 18, 2012 indicated that the bank was loaning the money to Milan and the second dated January 31, 2012, after the approval meeting, indicated that the money was being provided by a “bank client” from the proceeds of a “lawsuit settlement”. When asked about the source of funds on his examination under oath, Milan refused to provide the name of the financial institution or information as to the source of the funds other than to say that they were coming from a lawsuit.

[ 25 ] In a supplementary affidavit sworn by Milan on May 14, 2012, and presented at the approval motion, Milan attached the two bank letters, unredacted. In the affidavit, Milan provided the name of the individual who will be supplying the money, stated he has known him for over 10 years and provided some information concerning the litigation and the settlement.

The Test for Approval of a Proposal

[ 26 ] The test for approval of a proposal is set out in s. 59(2) of the Act. If the court is of the opinion the terms of the proposal are not reasonable or are not calculated to benefit the general body of creditors, the court shall refuse approval. The court may refuse to approve when it is established that the debtor has committed any of the offences mentioned in ss. 198 to 200 of the Act.

[ 27 ] In Mister C’s Ltd. (Re) , [1995] O.J. No. 1390 (Ont. Gen. Div.) at para. 5 , MacPherson J. (as he then was) set out the three interests that the court should take into account in approving a proposal: the interests of the debtor in making settlement with creditors; the interests of the creditors in procuring a settlement which is reasonable and which does not prejudice their rights; and the interests of the public in the fashioning of a settlement which preserves the integrity of the bankruptcy process and complies with the requirements of commercial morality. See too: Re Mernick (1994), 24 C.B.R. (3d) (Ont. Gen. Div. Commercial List).

[ 28 ] At first blush, the payment of 15 cents on the dollar may appear reasonable to creditors and in their best interests, particularly given Milan’s listed assets at the time of the Proposal. In my view, however, in the absence of the production by Milan of any books and records and other relevant documentation to enable the Trustee to do an independent review of his affairs, there is no basis to permit the court or the creditors to determine that the amount being offered as a settlement is reasonable.

[ 29 ] This is particularly so in the circumstances of this matter given the substantial nature of Milan’s assets as at September 2008 including his interest in many businesses and companies around the world when compared with his stated assets at the time of the Proposal.

[ 30 ] I am also of the view that the Proposal is not reasonable because of the proposed exclusion in paragraph nine of the application of s. 38 and ss. 95 to 101 of the Act and the provisions of the Fraudulent Conveyances Act and the Assignments and Preferences Act is not reasonable.

[ 31 ] Section 50(10)(b) of the Act requires the Proposal Trustee to provide its opinion as to the reasonableness of the exclusion of ss. 95 to 101 in a proposal. Milan advised the Trustee that the exclusion was not done to cover any specific transaction but to avoid continued litigation and legal costs. In its Report, the Trustee states at paragraph 38:

As indicated in this report, the Trustee has not been provided with any records relating to the affairs of the Proponent such as bank account records or lists of payments to creditors. Consequently, the Trustee has been unable to independently review or consider payments made by the Proponent or transfers of assets made by the Proponent in the relevant time periods. Accordingly, the Trustee is unable to express an opinion as to the reasonableness of the exclusions contained in paragraph nine of the Proposal.

[ 32 ] The requirement in s. 50(10)(b) of the Act that the Trustee give its opinion as to the reasonableness of the exclusions of the claims recognized in ss. 95 to 101 of the Act emphasizes the importance of ensuring such exclusion is reasonable. In my view, the absence of such an opinion in circumstances such as here where Milan has provided no records or independent means of verification by itself results in exclusion provision in paragraph nine of the Proposal being unreasonable. Improper preferences and/or transfers of property may form a significant part of Milan’s recoverable assets. The creditors may be giving up significant rights to such recovery which they are unaware of. In the absence of any independent information from Milan to enable the Trustee to conclude that the exclusion of such rights is reasonable and does not prejudice creditors’ rights, I am unable to conclude that paragraph nine of the Proposal is reasonable.

[ 33 ] The opposing creditors further submit, having regard to the evidence in this case, that s. 59(3) of the Act requiring security for the payment applies and the court must refuse approval of the Proposal because Milan has failed to provide any security in the Proposal. In response, Milan submits that sufficient security has been provided and, in the alternative, if the court determines that is not the case, requests that the amount of the security required by s. 59(3) be reduced to match the security provided.

[ 34 ] Section 59(3) of the Act provides that the court shall refuse to approve the proposal where any of the facts mentioned in s. 173 are proved against the debtor unless it provides reasonable security for the payment of not less that 50 cents on the dollar on all the unsecured claims or such other percentage as the court may direct.

[ 35 ] Based on the evidence, I find the following facts mentioned under s. 173 of the Act have been proved:

a) Milan’s assets are not equal to a value of fifty cents on the dollar on the amount of his unsecured liabilities and Milan has not established that he should not be held responsible for such failure;

b) Milan has either omitted to keep proper books of account for his projects and businesses or has chosen not to provide them to the Trustee as required by s. 50 of the Act;

c) Milan continued to incur liabilities when he was insolvent. Milan through his lawyer indicated to the Trustee that he was insolvent dating back to the 2008/2009 period. Subsequent to that period, Milan issued personal promissory notes which have not been repaid; and

d) Milan has failed to account satisfactorily for the loss of his assets or for any deficiency of assets to meet his liabilities.

[ 36 ] As a result, s. 59(3) of the Act applies and Milan is required to provide security for the payments under the Proposal of not less than 50 cents on the dollar on all unsecured claims, unless the court orders otherwise.

[ 37 ] The Proposal itself does not provide for any security for the proposed payments. When the opposing creditors raised the issue of lack of security, Milan responded by stating in his supplementary affidavit sworn May 14, 2012, that the person who is putting up the money has agreed to make a loan advance of US $4 million within 60 days of court approval of the Proposal. It is submitted on Milan’s behalf that because the proposed payment is 50% of the total of the estimated $8 million to be paid under the Proposal, sufficient security has been provided.

[ 38 ] In my view, the $4 million amount offered does not amount to the security required by s. 59(3) of the Act. The Proposal calls for an initial payment of $1 million 60 days from approval. As a result, assuming payment of the $4 million as indicated, the security which will be in place (after the first $1 million payment) to secure the remaining payments of $7 million is really $3 million which is less than 50% of the remaining monies to be paid.

[ 39 ] In the absence of the security being sufficient, Milan requests that I exercise the discretion provided for in s. 59(3) and reduce the amount of security required to accommodate the monies to be paid on Milan’s behalf. In the circumstances, I am not prepared to do that. I say this for a number of reasons. First is my general concern arising from Milan’s failure to produce any books and records relating to his affairs. I am unable to accept that Milan has no records or access to records in respect of his personal affairs and of his many and varied businesses. I am also concerned with the secrecy surrounding the details of where the monies are coming from to fund the Proposal. The initial information that was provided is both contradictory and lacking in detail. It was only at the argument that the name of the bank and the third party were provided. While the Trustee may have received “some comfort” concerning the source of the funds and the financial ability of the funder, I have not. At the very least, I would have expected information about the agreement between the third party and Milan concerning the provision of the funds. Finally, the proposal for “security” has only come forward at the last minute and suffers, in my view, from the same concerns as the funding proposal itself.

[ 40 ] The integrity of the bankruptcy proposal process requires full and complete disclosure by the proponent to enable the creditors and the court to determine whether the proposal is reasonable and in the best interests of all interested parties. That has not happened here. Milan has failed to provide any books and records to enable the Trustee to confirm his statements to the Trustee about his affairs or the reasonableness of the Proposal. He has also been very guarded about the source of the money to enable him to fund the Proposal and how he is able to obtain such money.

[ 41 ] In my view, by proceeding as he has, Milan is attempting to use the proposal process to compromise all claims against him, including claims for fraud and breach of trust, without properly accounting for his assets and any transactions that may constitute a preference or an improper transfer of property. Given the substantial nature of his assets as at September 2008 including his interest in many companies, his Statement of Affairs raises many questions as to what happened and what, if anything remains. It is important for the creditors and the bankruptcy process generally that a proper review of Milan’s assets take place. The circumstances of this case cry out for such a review.

[ 42 ] For the above reasons, therefore, it is my view that the terms of the Proposal are not reasonable having regard to both the interests of the creditors and the interests of the public in maintaining the integrity of the bankruptcy proposal process. I am also of the view that Milan has not provided reasonable security for the proposed payments under the Proposal as required pursuant to s. 59(3) of the Act.

[ 43 ] As a result, Milan’s approval motion is dismissed.

L. A. Pattillo J.

Released: June 5, 2012