ONTARIO SUPERIOR COURT OF JUSTICE In Bankruptcy
COURT FILES NO.: 31-1484655 and 31-1484672
DATE: 20120605
IN THE MATTER OF THE BANKRUPTCY OF DEREK BARRY ERDMAN OF THE CITY OF TORONTO IN THE PROVINCE OF ONTARIO
IN THE MATTER OF THE BANKRUPTCY OF NORMAN HILTON ERDMAN OF THE CITY OF TORONTO IN THE PROVINCE OF ONTARIO
BEFORE: Justice Newbould
COUNSEL:
Jonathan C. Lisus and Daniel Z. Naymark, for Daryl Erdman and the Derek Erdman Family Trust, Applicant
Sarit E. Batner and Moya J. Graham, for Laura Erdman and the Norman Erdman Family Trust, Applicant
George Benchetrit, for Derek and Norman Erdman, bankrupts
Catherine Francis and Hans Rizarri, for the trustee Soberman Inc., Respondent
Fred Myers, for Goodmans LLP
DATE HEARD: June 1, 2012
E N D O R S E M E N T
[ 1 ] Daryl and Laura Erdman, the wives of the bankrupts Derek and Norman Erdman, the Derek Erdman Family Trust and the Norman Erdman Family Trust (“Family Trusts”) move to set aside or vary an ex parte order obtained by the Trustee of the estates of Derek Erdman and Norman Erdman, on February 7, 2012 and to discharge certificates of pending litigation registered pursuant to that order against the matrimonial homes of each of the bankrupts, each registered in the name of the wife of the bankrupt.
[ 2 ] The bankruptcies of Derek and Norman arise out of a dispute between Derek, Norman and their father Jeffrey on one hand, and their brother Anthony on the other. Jeffrey, Derek, Norman and Anthony built Multy Industries Inc., (“Multy”) a family-owned business manufacturing and selling floor coverings. The relationship with Anthony began to break down in the late 1990s.
[ 3 ] In 2001, Jeffrey, Derek and Norman fired Anthony from Multy as a result of these issues, although all four retained 25% ownership interests in Multy. Anthony commenced an oppression application against his father and brothers in June 2003, alleging that salary and bonuses they had paid themselves since his termination were in reality shareholder distributions in which he should have been proportionately included. Later that same year, Multy commenced an action against Anthony, seeking damages for Anthony’s alleged wrongdoing.
[ 4 ] Jeffrey, Derek, Norman, and Anthony settled the lawsuits in June 2004 on the basis that Derek and Norman would purchase Anthony’s interest in Multy. Derek’s and Norman’s debt to Anthony arose pursuant to that settlement. The settlement called for Anthony to receive $8,250,000. He was paid $4,550,000. As of November, 2008 Derek and Norman owed Anthony in excess of $3.7 million. In 2008 Anthony commenced a further lawsuit to enforce judgment against his brothers.
[ 5 ] On June 16, 2008, Derek and Norman caused Multy and related companies to file for protection under the CCAA. Eventually the assets of Multy were sold to Natco Home Fashions Inc. and a related company (“Natco”) for approximately $22 million. Natco assigned its interests to Multy Home LP (“Multy Home”), a newly formed limited partnership. The sale closed on November 21, 2008. Derek and Norman became executives of Multy Home and continued to run the business. Just two weeks ago the Trustee was provided documentation which disclosed that the Family Trusts each hold a 20% percent interest in Multy Homes through a limited partnership agreement.
[ 6 ] The Trustee believes the assets of Multy were sold at a substantive undervalue. Based upon the very limited information available to the Trustee at the time of the Trustee’s first report dated January 26, 2012, the Trustee estimated that the value of the assets acquired for $22 million by Multy Home (excluding goodwill) may have been in excess of $40 - 45 million.
[ 7 ] On April 1, 2009, Multy Home entered into agreements with each of Derek and Norman permitting them to retain a “personal assistant” to assist in the performance of their duties and to pay their personal assistant up to 25% of their salaries. Pursuant to these agreements, each of Derek and Norman retained their wives, Daryl and Laura, to provide services for Multy Home and directed a portion of their salaries to Daryl and Laura.
[ 8 ] In 2009 and 2010, the reported income of Derek, Norman, Daryl, Laura from Multy Home was approximately as follows :
2009
2010
Derek
$397,957
$414,325
Daryl
$ 46,600
$ 81,000
Norman
$400,968
$424,370
Laura
$ 13,600
$ 62,776
[ 9 ] The evidence of Daryl given on cross-examination was that she does no work for Multy Homes. Laura’s evidence was that she does little work-she makes travel arrangements.
[ 10 ] On April 8, 2011, Derek and Norman filed Notices of Intention to File a Proposal under the BIA . BDO was named as proposal trustee. On April 19, 2011, Derek and Norman filed their proposals under the BIA. Derek's proposal was for payment of $105,000 to BDO as proposal trustee and Norman's proposal was for payment of $120,000 to BDO as proposal trustee, for distribution to creditors after payment of trustee fees, priority claims and the superintendant’s levy. In each case, the reason given for their financial difficulties was "Debt owed to Anthony Erdman".
[ 11 ] The meeting of creditors to consider the proposals was held on May 10, 2011. Anthony filed a proof of claim in the amount of $4,974,371. The only other claims filed were for $1,695 in Derek's estate and $480.25 in Norman's estate. Anthony voted against the proposals and each of Derek and Norman was adjudged bankrupt. In light of the amount owed to Anthony, it is difficult not to infer from the small amounts proposed in the proposals that Derek and Norman intended to go bankrupt by having Anthony vote down the proposals.
Matrimonial homes
[ 12 ] Derek and his wife Daryl live at 45 Gordon Road in Toronto, acquired in September, 2008. The history of their matrimonial housing prior to their current house is relevant to the ex parte order obtained by the Trustee.
[ 13 ] Since 1994, Daryl has held title to their matrimonial homes. On March 28, 2001, Daryl purchased a residence at 16 Renaissance Court, Toronto for $1,220,000. The purchase was financed in part by proceeds from the sale of her prior home and by an $800,000 mortgage from BNS which was guaranteed by Derek. There were renovations. The mortgage was paid in full by August 2005.
[ 14 ] On November, 2005, Daryl purchased 15 Wilket Road for $1.6 million. The purchase was financed by way of a line of credit secured against 16 Renaissance Court and guaranteed by Derek.
[ 15 ] In early 2006, the existing residence at 15 Wilket Road was demolished and Derek and Daryl commenced construction of a luxury home on the property. Derek acted as general contractor for the construction. Derek hired a Mr. Blake Aspden to perform the carpentry work on the new house. In support of the ex parte order obtained by the Trustee, an affidavit of Mr. Aspden was filed. Mr. Aspden’s evidence was that from 2006 to 2008 at Derek’s request, he invoiced Multy companies and other related companies several hundred thousand dollars for work done on the home at 15 Wilket Road and that he was paid those sums by those companies.
[ 16 ] In April 2008, Derek and Daryl moved into 15 Wilket Road, although the construction of the property was still not complete. On September 5, 2008, 15 Wilket Road was sold for $6.275 million. Daryl received over $4 million in net proceeds.
[ 17 ] Daryl purchased 45 Gordon Road for $2.8 million, and moved there in September, 2008. The purchase was funded entirely from the 15 Wilket Road proceeds. Mr. Aspden’s affidavit states that substantial renovation work was done on 45 Gordon Road, but he was not involved in doing any of the work. Some of the excess funds received from the sale of 15 Wilket Road were used for renovations at 45 Gordon Road. Daryl is still holding $600,000 from the proceeds.
[ 18 ] On December 22, 2010 a mortgage for $1.4 million in favour of BNS was registered on title. The Trustee was advised that no amounts were outstanding at the time of the ex parte order.
[ 19 ] Laura has owned the matrimonial homes that she and her husband Norman have lived in since 1995. They currently reside at 39 Clarkehaven Street in Toronto, which was bought in September 2001, for $705,000. The purchase was financed in part by a $700,000 mortgage from BNS guaranteed by Norman. Thereafter, the existing house was demolished and a new 5,000 square foot home was built on the property in 2002-3. According to Laura, Norman acted as general contractor for the construction. The construction costs were funded by a line of credit guaranteed by Norman and from their joint bank account, into which Norman’s salary and bonuses were deposited. Mr. Aspden was retained by Norman in May 2007 to perform repairs to the home. Norman arranged for Multy to issue a purchase order to Mr. Aspden for $23,425 and paid for the work with Multy cheques.
Ex parte order
[ 20 ] The ex parte order was obtained on February 7, 2008 on the basis of the first report of the Trustee and the affidavit of Mr. Aspden. The order provided as follows:
It declared that the documents described pertained or related to the bankrupts, their dealings and/or their properties and that the Trustee was entitled to request production of such records from any person in possession or control of the records pursuant to sections 163 and 164 of the BIA . Included in the documents described were all books, documents, computer records, etc. relating to the acquisition, financing, construction, repairs and maintenance for or in relation to 15 Wilket Road, 45 Gordon Road and 39 Clarkehaven Street and the furnishings therein, all records relating to the dealings between Derek, Norman, the Multy companies, and to the establishment of the Family Trusts and Multy Home LLP.
It authorized the Trustee to seek production from the Monitor in the CCAA proceedings of Multy and from the prior trustee in bankruptcy of Derek and Norman a number of financial and other records that had been sealed in the CCAA proceedings.
It granted leave to the Trustee to issue certificates of pending litigation against the matrimonial homes in which Derek and Norman live with their spouses pending the completion of its investigation into the affairs of Derek and Norman and the tracing of funds related to the construction and maintenance of these properties.
[ 21 ] Daryl and Laura and the two Family Trusts move to set aside the ex parte order on several grounds. I will deal with each ground.
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Newbould J.
DATE: June 05, 2012
[^1]: On the bankruptcy of Derek and Norman, Anthony was disqualified from voting on the appointment of the trustee because of his family relationship to Derek and Norman. As a result, BDO was appointed trustee on the proxy of the only other creditor. On November 2, 2011 on the application of Anthony, Soberman Inc. was appointed as replacement trustee and the two estates were consolidated for administrative purposes.