SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: IN THE MATTER OF THE BANKRUPTCY OF Daniel Diena

BEFORE: D. M. Brown J.

COUNSEL:
W. Jaskiewicz, for the Applicant, Tolim Management Inc.
G. McGuire, for the Respondent, Daniel Diena

HEARD: October 15, 2012

REASONS FOR DECISION

I. Application for a bankruptcy order

[ 1 ] Tolim Management Inc. applies for a bankruptcy order against Daniel Diena. Mr. Diena does not dispute that an act of bankruptcy has occurred. Instead, he submitted that the application should be dismissed under section 43(7) of the Bankruptcy and Insolvency Act , R.S.C. 1985, c. B-3, on the basis that Tolim was using the bankruptcy process for an improper purpose and nothing would be gained by a bankruptcy.

[ 2 ] For the reasons set out below, I grant the application and adjudge Daniel Diena a bankrupt.

II. The act of bankruptcy

[ 3 ] Tolim issued its application for bankruptcy order on April 17, 2012. Tolim’s sole shareholder, Gershon Sone, testified that Tolim had obtained a judgment dated June 20, 2011 from Corrick J. against three defendants, including Daniel Diena, to pay Tolim $1,863,750.00 for breach of a loan agreement and guarantees, together with interest to that date of $300,021.84. In his testimony Daniel Diena acknowledged that he still owed Tolim that amount. The applicant therefore proved a debt owing of $1,000.00: BIA , s. 43(1)(a).

[ 4 ] Tolim alleged, as an act of bankruptcy, that Mr. Diena had ceased to meet his liabilities generally as they had become due in that he had failed to meet his obligations to it: BIA , s. 42(1)(j). Tolim proved that three judgments have been made against Mr. Diena and remain unpaid: (i) Tolim’s judgment of Corrick J. dated June 20, 2011; (ii) a default judgment dated January 11, 2007 obtained by CIT Financial Ltd. in the amount of $2,454,967.30, together with interest at the rate of 26.8%; and, (iii) a default judgment dated November 16, 2011 obtained by Amerisource Bergen Canada Corporation in the amount of $974,480.18, together with interest at the rate of 24%. Mr. Gershon Sone, on behalf of Tolim, testified that Tolim’s judgment remained unsatisfied. Mr. Diena acknowledged his indebtedness to Tolim and to CIT. He disputed his liability to Amerisource, contending he knew nothing about the default judgment. Mr. Diena did not suggest he was unaware of Amerisource’s lawsuit or his failure to defend it.

[ 5 ] The existence of more than one unpaid judgment is sufficient to support a finding that an act of bankruptcy has occurred. [1] It is not necessary for a judgment creditor to continue demanding payment of the judgment to satisfy the requirement that an act of bankruptcy occur within the six months preceding the filing of an application; a judgment operates as a continuing demand for payment by the judgment creditor, just as the failure to satisfy the judgment is a continuing refusal by the judgment debtor. [2] As put by the Court of Appeal in Malmstrom v. Platt :

Once a judgment or an order has been entered against a debtor, that judicial decree, even if entered more than six months before the filing of the petition, constitutes sufficient evidence of an act of bankruptcy having been committed within six months of the filing date. There is nothing improper in allowing a petitioning creditor to rely, as proof of bankruptcy, on formal judgments awarded against the debtor before the six-month period. Further, allowing petitioners to rely upon judicial pronouncements in order to establish current acts of bankruptcy is not contrary to the objectives of the BIA . [3]

[ 6 ] Mr. Diena filed an Amended Notice Disputing Bankruptcy Application (the “Amended Notice”) in which he withdrew his denial of having committed an act of bankruptcy. In his final submissions counsel for Mr. Diena conceded that the respondent had committed an act of bankruptcy. I find that the three outstanding and unsatisfied judgments establish that Mr. Diena committed an act of bankruptcy within the six months preceding the filing of this application in that he had ceased to meet his liabilities generally as they became due.

[ 7 ] The applicant has satisfied the requirements of section 43(1) of the BIA .

III. The respondent’s argument for dismissing the application

A. The allegation of improper purpose

[ 8 ] Notwithstanding that the applicant has proved the requirements of section 43(1) of the BIA , Mr. Diena submitted that the application should be dismissed pursuant to section 43(7) for two reasons: (i) the application had been filed for an improper purpose, namely malice; and, (ii) there was nothing to be gained from the bankruptcy.

B. The governing legal principles

[ 9 ] Section 43(7) of the BIA provides as follows:

43(7) If the court is not satisfied with the proof of the facts alleged in the application or of the service of the application, or is satisfied by the debtor is able to pay their debts, or that for other sufficient cause no order ought to be made , it shall dismiss the application. (emphasis added)

[ 10 ] Professor Roderick Wood, in Bankruptcy & Insolvency Law , summarized the jurisprudence in this area:

A court has the power to dismiss a bankruptcy application despite the fact that all necessary prerequisites and grounds alleged in the bankruptcy application have been proven. The Act provides little guidance on when this discretion is to be exercised since it merely permits the court to do so if there is “sufficient cause”…

Courts will sometimes dismiss bankruptcy applications if it is clear that the proceedings would be no benefit to the creditors. This might be established if it can be shown that the debtor has no assets and has no prospect of acquiring any in the future…

Courts will also dismiss a bankruptcy application if it is shown that the applicants brought it for an improper purpose. This occurs where the bankruptcy application is brought against the debtor out of spite or vengeance or as part of a vendetta. It also occurs where the application is brought in order to obtain a business advantage such as the elimination of a competitor or the termination of a contract. [4]

[ 11 ] Although these general principles have been extracted from the cases, it is important to read each case with care because the result s turned on the specific facts of each case. Counsel for the respondent referred me to five cases in support of his submission that Tolim had brought this application for a bankruptcy order for an improper purpose. Two involved judgment debt s . Briefly, the cases were:

(i) Dallas/North Group Inc. (Re) : [5] Unlike the present case, the trial judge found that the applicant had failed to prove a de bt owing or the alleged acts of bankruptcy. Nothwitstanding that finding, in obiter the trial judge concluded that the application ha d been brought for a collateral purpose, namely to remove the respondent as an officer and director of a third-party company and to reduce his shareholdings. H e also concluded that there had been "a concentrated effort… o f bullying, harassment and intimidation against" the respondent;

(ii) Hydrofoil Lake Jet Lines Inc. (Re) : [6] Although the trial judge found the existence of a debt and the committal of an act of bankruptcy , he concluded that the applications ha d been brought for the collateral purpose of removing the respondent from the business scene. Without knowing all the materials which were before the judge, it is not easy to follow all aspects of the oral reasons, but the trial judge not ed that the documents placed before him raised more questions than they answered . It would appear from his reasons that the trial judge concluded the application was motivated b y a belief that a bankruptcy o f the corporate respondent would enable the release of two hydrofoils which could then be put into operation through another corporation. On that basis the trial judge concluded that the applications were brought for a collateral purpose and not for the purpose of obtaining a distribution of the property of the respondents amongst their creditors;

(iii) Shepard (Re) : [7] The trial judge found that the dominant purpose of the application was to secure control over the shares in a company which constituted the sole asset of the respondent. The trial judge describe d that purpose as an effort to obtain a business advantage;

(iv) Westlake (Re) : [8] The trial judge concluded that there was no evidence the respondent was unable to pay her debts. The trial judge went on to identify three reasons which led him to conclude the application was part of a ven detta by the applic ant against the respondent. F irst, the respondent had paid the principal amount of t he judgment debt in issue and the applicant was proceeding only with respect to unpaid costs and interest on that judgment for which the applicant had failed to provide an accounting of the amount s owing. Second, t he applicant had commenced three other actions against the respondent, all of which had been dismissed or discontinued. In addition the applicant had signed a release in favo u r of the respondent. Against that background, the trial judge concluded that the a pplication constituted an abus e of the process of the court;

(v) Vipod v. Ewing : [9] The primary finding at trial was that there had been no failure to meet liabilities generally as they became due. The trial judge also concluded that the applicant was motivated by spite and a spirit of revenge. Previously, the applicant had lost an action brought against him by his brother. The applicant later discovered that his brother ’ s lawyers were the subject of a judgment against them. The applicant purchased the judgment at a time when he was in financial difficulties. The applicant had declared that he would get even and put the lawyers into bankruptcy. The applicant then brought a petition in bankruptcy against the lawyer. The court refused to grant the petition.

C. Analysis

C.1 Was the application filed for an improper purpose, namely malice?

[ 12 ] In his closing submissions counsel for Mr. Diena argued that the real reason motivating the bankruptcy application was the desire by one Morris Goodman to settle a personal score with the respondent. Mr. Goodman is involved in the pharmaceutical business.

[ 13 ] Let me review the evidence.

[ 14 ] The commercial relationship which led to Mr. Diena’s indebtedness to Tolim involved a company called Uniondrug Clinic Limited. Daniel Diena was an officer, director and indirect shareholder of Uniondrug; Tolim was a minority shareholder in the company. [10]

[ 15 ] Gershon Sone, Tolim’s president, testified that Tolim had loaned money to Uniondrug. Daniel Diena and his brother, Emmanuel, were guarantors of the loan. Uniondrug defaulted on the loan. Tolim moved for summary judgment on the loan and the guarantees. Uniondrug, Daniel Diena and Emmanuel Diena opposed the motion. They lost. Corrick J. ordered all three defendants to pay Tolim “$1,863,750.00 for breach of the loan agreements and the guarantees of the loan agreements”, together with $300,021.84 in accumulated interest and costs of $30,000.00.

[ 16 ] Sone testified that the funds Tolim used to loan money to Uniondrug came from a company called Joddes, in which Goodman had an interest. Sone stated that he was not aware of the precise makeup of Joddes. According to Sone, it was the Dienas who had asked Joddes to lend money to Uniondrug.

[ 17 ] Sone acknowledged that the action commenced against Uniondrug and the Diena brothers which led to the June 20, 2011 summary judgment was directed by Joddes. Although much was made of that on the cross-examination of Sone, I see nothing improper in that circumstance. Tolim was not an operating company. Joddes funded the Tolim loan to Uniondrug. The receivable was an asset of Tolim, so obviously Joddes had a legitimate commercial interest in providing funds to Tolim to attempt to recover that asset.

[ 18 ] Sone did not know who at Joddes was involved in directing the Tolim litigation against Uniondrug. He did not know whether Goodman was involved.

[ 19 ] Against this simple backdrop of a loan gone bad and a resulting court judgment, Mr. Diena attempted to attribute an improper motive to the initiation of this application. According to Mr. Diena, following his initial meeting with Goodman in Montreal in 2007, he felt that Goodman regarded him as his protégé. Later, according to Mr. Diena, their relationship soured, for several reasons. First, Mr. Diena testified that when he refused to hire Sone’s son, Todd Sone, at one of his companies, Methadrug, Goodman was “not happy” with him. Second, Mr. Diena contended that some on-line posting of the EBITDA of Methadrug somehow embarrassed Goodman. I must confess that I was not able to make much sense of this portion of Mr. Diena’s testimony. Finally, some dispute arose over potential Bank of Montreal funding for Methadrug or Uniondrug which, according to Mr. Diena, caused “a huge rift” with Goodman. According to Mr. Diena, before Tolim brought its motion for summary judgment, Goodman told him during a phone call that he would make Diena’s life miserable and hurt him as much as possible. Therein, according to Mr. Diena, lay the malice motivating this bankruptcy application.

[ 20 ] Sone disputed that Goodman had ever asked Mr. Diena to hire Todd Sone.

[ 21 ] Goodman was not called as a witness.

[ 22 ] I do not accept Mr. Diena’s contention that the evidence supports a finding that this bankruptcy application was motivated by malice. Evidently a business relationship amongst Mr. Diena, Uniondrug, Tolim and Goodman fell apart at some point – that was after Tolim had loaned real money to Uniondrug and obtained Mr. Diena’s guarantee, and before Tolim successfully moved for summary judgment against Uniondrug and the two Diena brothers. This bankruptcy application is not based on the assertion of some unadjudicated claim for the repayment of monies. On the contrary, it follows a judicial finding that Mr. Diena owed Tolim money. It is not surprising that Tolim, as a judgment creditor, now seeks to invoke one of the legal mechanisms available to unsecured creditors; unpaid judgment creditors tend to do that. Significantly, in this case Tolim does not stand as a solitary judgment creditor; two other significant unpaid judgments exist against Mr. Diena and they have been proved in this proceeding. In those circumstances I find no evidentiary basis for Mr. Diena’s contention that this bankruptcy application was brought for an improper purpose.

C.2 Is there nothing to be gained from the bankruptcy?

[ 23 ] Notwithstanding that under the three proved judgments Mr. Diena owes three judgment creditors principal amounts totaling $5.293 million, Mr. Diena submitted that granting a bankruptcy order would not further the distribution of assets amongst his creditors. Why? Mr. Diena contended that his testimony that he owned no assets was a sufficient basis upon which to dismiss the bankruptcy application.

[ 24 ] When he testified that he owned no assets, Mr. Diena did not adduce any documentary evidence in support of his bald assertion – no tax returns, no bank statements, no loan documents, nothing. He contended that the only asset he possessed was a contingent one – the possible proceeds from a lawsuit he commenced this past August, on the eve of the bankruptcy hearing, against Tolim and Sone.

[ 25 ] By contrast, Sone testified that in the past Mr. Diena had told him that he did own assets: at least one condo in Florida, State of Israel bonds, property in Israel, an interest in an ambulance company in the Toronto area, and an interest in a door manufacturing company. Sone testified that Tolim brought the application because it wanted to know where the assets were, and Sone thought Tolim would recover something in the bankruptcy. As Sone put it, Tolim feels Mr. Diena has assets because Mr. Diena previously said he had the assets.

[ 26 ] The evidence disclosed that in the case of each of the three judgments, Mr. Diena had given a personal guarantee of a corporate debt. Usually lenders seek personal guarantees when they think the individual owns sufficient assets to provide some security, albeit often unsecured, for the loan advanced. It makes perfect sense that Sone would recall representations by Mr. Diena that he owned assets because Mr. Diena was attempting to secure funds for his company.

[ 27 ] In light of that evidence, I do not accept Mr. Diena’s bald, unsupported, assertion that he is penniless. The evidence suggests that an investigation by a trustee might reveal otherwise. I therefore do not accept Mr. Diena’s submission that there was nothing to be gained by granting the bankruptcy order.

[ 28 ] In sum, I find no basis in the evidence to exercise my discretion under section 43(7) of the BIA against the applicant.

IV. Summary

[ 29 ] For these reasons I grant the application, adjudge Daniel Diena bankrupt, and appoint msi Spergel Inc. as trustee in bankruptcy of his estate.

V. Application against Emmanuel Diena

[ 30 ] I adjourned the companion application against Emmanuel Diena because of the lack of evidence that Emmanuel Diena knew about the hearing date. Applicant’s counsel can appear before me at a 9:30 appointment on November 13, 2012 to arrange a new hearing date. The applicant must give notice to Emmanuel Diena of the 9:30 appointment.

D. M. Brown J.

Date : October 18, 2012

[1] Re Joyce (1984), 51 C.B.R. (N.S.) 152 (Ont. S.C.), para. 5 .

[2] Malmstrom v. Plat (2001), 53 O.R. (3d) 502 (C.A.), paras. 10 , 11 and 18.

[3] Ibid. , para. 19.

[4] Roderick Wood, Bankruptcy & Insolvency Law (Toronto: Irwin Law, 2009), pp. 68-69.

[5] (2001), 27 C.B.R. (4 th ) 40 (Ont. C.A.)

[6] (2000), 18 C.B.R. (4 th ) 212 (Ont. S.C.J.)

[7] (1996), 40 C.B.R. (3d) 145 (Man. Q.B.)

[8] (1984), 53 C.B.R. (N.S.) 207 (Ont. S.C.)

[9] (1939), 21 C.B.R. 129 (Que. S.C.)

[10] Tolim Management Inc. v. Uniondrug Clinic Limited , 2011 ONSC 3807 , para. 2 .