COURT FILE AND PARTIES
ONTARIO
SUPERIOR COURT OF JUSTICE
BANKRUPTCY AND INSOLVENCY
IN MATTER OF THE BANKRUPTCY OF NORMAN GAAL OF THE CITY OF TORONTO IN THE PROVINCE OF ONTARIO
Patrick H. Floyd, for the applicant Susan Gaal
Scott A. Rosen, for the respondent Norman Gaal
HEARD: February 28, 2013
Newbould J.
Reasons for Judgment
1The applicant for a bankruptcy order against Norman Gaal is Susan Gaal, his estranged wife. They separated in March, 2007. This application is but one of a number of proceedings outstanding in the courts of Ontario.
2The parties operated several businesses together for 25 years, including P.S. Shop AT Home Foods Limited and Beefeaters Inc. They sold large quantities of meat products to homeowners. Ms. Gaal looked after the accounts payable. She remained employed in the businesses, she says to October, 2008 and Mr. Gaal says to January 2009 when she stopped signing cheques.
3The parties executed a separation agreement on May 25, 2007. Included was a provision that Ms. Gaal would be paid spousal support of $75,000 per annum for a minimum of 5 years, that the matrimonial home would be sold, that one-half of the proceeds would be paid to Ms. Gaal and that Mr. Gaal's one-half interest in their cottage property be transferred to Ms. Gaal.
4The evidence of Mr. Gaal was that at the time of the separation agreement, the business of the companies was flowing properly. He and his wife each drew $75,000 per annum, she from Shop at Homes and he from Beefeater.
5Ronald Gaal, a son of Ms. Gaal from a previous marriage but who took on the surname Gaal, worked in the business until October, 2008. In the fall of that year, Mr. Gaal said that he noticed some irregularities in amounts being paid to creditors. He asked Ms. Gaal and Ron Gaal for the last 3 months’ invoices. He said he found that they were paying for inventory for restaurants that they did not sell to their customers, as they never sold to restaurants. After Mr. Gaal began interviewing employees about these things, Ronald Gaal told Mr. Gaal that he had decided not to come in any more. Ronald Gaal already had an office a block away and he started operating the same kind of business, being distribution of frozen foods, and he took some employees with him.
6In February 2009 Mr. Gaal, Shop AT Home and Beefeaters commenced a civil action in the Superior Court of Ontario against Ms. Gaal, Ronald Gaal and others for payment of damages of $3 million and other relief on the basis of the alleged fraud. Mr. Gaal commissioned a report from the auditors of the business, Schwartz Levitsky Feldman LLP ("SLF") which concluded that money in excess of $1 million had improperly been taken from the business by Ms. Gaal and her son Ronald Gaal.
7In 2008 Mr. Gaal had commenced divorce proceedings in the Family Court in Newmarket against Ms. Gaal. Mr. Gaal moved and was granted permission by order of April 3, 2009 in the family court proceedings to amend his pleadings. In his amendments, he has claimed that the separation agreement should be set aside and that the support payments provided for in the agreement be set aside retroactively to May 21, 2007. The grounds for the relief included allegations that Ronald Gaal, with the assistance of Ms. Gaal, defrauded the companies Shop AT Home and Beefeaters of several million dollars, which was unknown when the separation agreement was made.
8Ms. Gaal denies having taken any money improperly and asserts that if there was any money improperly taken, it was taken by Mr. Gaal. Sometime in 2009 after Mr. Gaal's action had been commenced in the Superior Court of Justice, Ms. Gaal commenced an action in the Superior Court of Justice against Mr. Gaal, Shop AT Home, Beefeaters, other corporations in the business, Ms. Florence Dinunno, the common law spouse of Mr. Gaal, the accountants SLF and others. She acknowledged on cross-examination that the central issue in the two civil actions in the Superior Court of Justice is whether it is she and her son or Mr. Gaal who was responsible for the fraud on the businesses. That issue is also central to the family law proceeding by Mr. Gaal to set aside the separation agreement.
9On June 17, 2009 an order was made by Justice McGee in the Superior Court Family Court Branch requiring Mr. Gaal to make payments of $6,250 per month in spousal support commencing April 1, 2009 pursuant to the separation agreement, without prejudice to Ms. Gaal's claim for support for the period prior to April 1, 2009. The order provided that it was to be enforced by the Office of the Director of Family Responsibility (FRO). This was an interim order and the issue of the setting aside of the separation agreement and payments to be made under it was not dealt with.
10The principal debt relied on by Ms. Gaal is support of her bankruptcy application is the arrears of spousal support. As at January 28, 2013 the FRO had a lien claim for $261,023.26, which will increase monthly along with interest.
11Ms. Gaal paid to BNS $203,933 as guarantor of a debt owing by Shop At Home and a numbered company belonging to her took an assignment of the security held by BNS on October 30, 2009, being equipment used in the business. She claims that her husband owes her half of the amount she paid as he is a co-guarantor. However, it was conceded in argument that she has never made a claim against Mr. Gaal for payment of this. Thus whether it would become a debt owing is unknown. If a claim were made by Ms. Gaal against Mr. Gaal for this, it no doubt would be defended on the basis of the fraud alleged by Mr. Gaal against her. Thus Ms. Gaal has not proven that Mr. Gaal has failed to pay any debt due to her with respect to this.
12Ms. Gaal also claims a debt owing by Mr. Gaal for an equalization payment pursuant to the separation agreement. The agreement provided that if Foodex Investments, which was equally owned by the parties, had receivables which fell below $900,000, Ms. Gaal was entitled to payment of $430,000. The amount of $183,000 is claimed in the application for a bankruptcy order as being owed, although there was no evidence how that figure was arrived at. Ms. Gaal testified that she did not know if the receivables of Foodex fell below $900,000 and it was acknowledged in argument that there was no evidence before me that the receivables had fallen below $900,000. Therefore the alleged debt has not been proven.
13It is also claimed in the application that Mr. Gaal owes $1,740.87 pursuant to a cost order. On March 3, 2011 Nelson J. in the family court proceedings ordered Mr. Gaal to pay $5,000 in costs within 21 days. Ms. Gaal testified that she had not received total payment but then said that she did not know how much has been paid. Mr. Gaal testified that he was not sure if the order had been paid in full. In argument it was conceded that there has been no proof of what amount, if any, is outstanding for this cost order. Thus the alleged debt has not been proven.
14There is evidence that Mr. Gaal has been indebted to other creditors other than the FRO for spousal arrears. None of these were listed in the application for a bankruptcy order, nor were they the subject of evidence in chief from Ms. Gaal.
15Property owned at 9 Dunnet Street in Markham owned jointly by Mr. Gaal and Ms. Dinunno was sold by them, and the closing was intended to take place on January 28, 2013. Ms. Gaal has a certificate of pending litigation which prevented the sale from closing without her consent, which was not provided as her solicitor raised an issue of the proceeds that were to be paid on closing to Ms. Dinunno. The evidence discloses, however, that apart from the amount owed to the FRO, which has a lien against the property being sold, there were other creditors with liens against the property as at January 28, 2013, being Meridien Credit Union which is the first mortgagee, CRA for $42,582.49, municipal taxes of $9,430.79, Standard Life for $13,448.43 and two amounts owing to the Employment Standards branch of $5,414.45 and $5,671.50. These amounts were to be paid out on the closing of the sale. As a result of the sale not closing, the property is now being sold to the same purchaser by Meridien Credit Union, the holder of the first mortgage, as the certificate of pending litigation is no impediment to such sale. There was no evidence as to whether the sale has yet closed. It is apparent from the sale price that all of these creditors, with perhaps the exception of FRO, have been or will be substantially paid on the closing of the sale.
Analysis
16The principal defence of Mr. Gaal to this application is that it is being brought for an improper purpose and there is a genuine dispute as to whether any amount for spousal support is properly owing in light of the application to set aside the separation agreement and the outstanding litigation in the Superior Court of Justice, all of which is to determine whether it was Ms. Gaal and her son Ronald Gaal or Mr. Gaal who defrauded the businesses.
17Thus I am asked to exercise the discretion contained in section 43(7) of the BIA to dismiss an application for a bankruptcy order if there is "sufficient cause" to do so, a discretion to be exercised on sound judicial reasoning based on credible evidence. See Re Churchill Forest Industrial (Manitoba) Ltd. (1971). 1971 994 (MB QB), 16 C.B.R. (N.S.) 158.
18In Dimples Diapers Inc. v. Paperboard Industries Corp. (1992), 15 C.B.R. (3d) 204 Farley J. said the following regarding the purposes of the BIA:
… the Bankruptcy Act RSC 1985 c. C-3 has as its purpose the provision of "the orderly and fair distribution of the property of the bankrupt among its creditors on a pari passu basis." (Houlden and Morawetz, Bankruptcy Law of Canada, 3rd ed. p. 1-3). Re De La Hooke (1934), 15 CBR 485 (Ont. SC) held that the petition must not be filed for some collateral purpose.
19See also Re: Dallas/North Group Inc. (1999), 1999 19932 (ON SC), 46 O.R. (3d) 602 per Ground J. as follows:
The case law is clear that the bankruptcy courts and bankruptcy proceedings should not be used for the purpose of obtaining some collateral advantage or to settle a dispute between shareholders…
20If the debt on which a bankruptcy application is based is the subject of a bona fide dispute, the court can stay or dismiss the application under sections 43(7) or (10) of the BIA. See Houlden, Morawetz and Sarra, the 2012-13 Annotated Bankruptcy and Insolvency Act (Carswell) at D§39.
21The relevant date for determining whether an act of bankruptcy has occurred is the date of the filing of the application for bankruptcy. See Houlden, Morawetz and Sarra, supra, at D§9. At that date, there were the unpaid debts listed as outstanding on January 28, 2013 at the time of the aborted sale of the property at 9 Dunnet Street. There is no evidence that the mortgage to Meridien Credit Union was in arrears at the time of the bankruptcy application. The other five totalling approximately $76,460 were. As well, there was outstanding the lien of FRO for $261,023.26 for spousal arrears, which is the subject of the family court proceedings.
22I see no legitimate purpose in this bankruptcy application. It was not brought with a view to "the orderly and fair distribution of the property of the bankrupt among its creditors on a pari passu basis." The applicant did not refer to or rely on any creditors other than herself, and no other creditor was served with the application. What Ms. Gaal may be owed is the subject of a dispute in the family court proceedings and the two civil proceedings in the Superior Court. No thought was given to having an orderly and fair distribution of property of the bankrupt among Mr. Gaal's creditors.
23Ms. Gaal testified that she had not heard about the outstanding litigation in three or four years, and it was suggested in argument that nothing is going on in the litigation, the implication being that there is no bona fide dispute. This ignores the evidence of Mr. Apostolidis who is the solicitor acting for Mr. Gaal in the family law matter. It also ignores steps taken by Ms. Gaal and her son Ronald Gaal to delay the litigation.
24The evidence of Mr. Apostolidis, which I accept, is that after the report of the accountants SLF which concluded that a significant fraud had been perpetrated by the Ms. Gaal and her son, an order was made in the family court proceedings dated August 24, 2011 directing the appointment of an independent business valuator who is to conduct a business/asset valuation and an income analysis. This will include consideration of the alleged fraud. Mr. Errol Soriano of the well-known firm of Campbell Valuation Partners Limited was appointed.
25Mr. Soriano has been trying to get the working papers and notes of SLF, so far without success. SLF takes the position that it is owed $22,000 for past fees in connection with its report and that it would require another $6,000 for necessary work to be done. All of the fees of SLF have so far been paid from RRSP funds of Mr. Gaal, which are protected by a court order and a further court order is required to pay the fees now demanded by SLF. Mr. Apostolidis has requested the consent of Mr. Floyd on behalf of Ms. Gaal to have the necessary funds released to pay SLF, but so far has not received any consent. He has scheduled a motion for March 6 to obtain the necessary order.
26Mr. Soriano has also stated that he has requested corporate documents from companies owned by Ms. Gaal and her son Ronald Gaal that were said in the SLF report to have been used in the fraudulent transactions, but that he has received no co-operation and has not received the documents. Mr. Apostolidis testified that he has written to Mr. Floyd saying it is important that his clients co-operate, but there has not been any positive response. Mr. Soriano has said that if necessary, he will release a report without having the benefit of the requested documents from these companies and note the limitations in his report. This would obviously not be a satisfactory outcome.
27Delay of course works to the advantage of Ms. Gaal. She has the benefit of an execution by the FRO. All of Mr. Gaal's assets are frozen by court order. He has lost his driver's licence because of the claim of FRO having been outstanding. He is struggling in his business which is competing with the business set up by Ronald Gaal.
28If Mr. Gaal were adjudged bankrupt, his assets would be taken over by a trustee, assuming a trustee were willing to act. It is apparent that Mr. Gaal has no liquid assets. The RRSP, which at one time was worth approximately $400,000, now is down to $85,000. All of the costs of the family court litigation, including Mr. Gaal's legal expenses and the funding of SLF and Mr. Soriano have been paid from the RRSP on court order, and it is likely that what is left in the RRSP will be reduced substantially by court order permitting payment of SLF, Mr. Soriano and Mr. Gaal's legal fees.
29The claim by Mr. Gaal in the family court proceedings and in the Superior Court would become an asset of the trustee. Who would fund the trustee to continue with this litigation is unknown. It can safely be assumed that Ms. Gaal would not fund the trustee to assert a fraud claim against her. There would be no other creditors to fund it as they will have been paid out from the proceeds of the sale of the property at 9 Dunnet Street.
30Ms. Gaal did not bring the bankruptcy application in order to have a trustee sue her for fraud. I think it obvious from the circumstances, and I draw the inference, that the bankruptcy application has been brought for the improper purpose of putting a wrench in the position of Mr. Gaal in the litigation who asserts fraud on the part of Ms. Gaal and her son. The refusal of Ms. Gaal and her son to assist with the independent report of Mr. Soriano is evidence of bad faith on their part in dealing with the issue which is central to the dispute and raises a question as to whether their defence of the fraud claim is a bona fide defence. I am satisfied that the claim of Mr. Gaal against Ms. Gaal and her son is a bona fide dispute so far as he is concerned.
31In the circumstances, the application for a bankruptcy order against Mr. Gaal is dismissed. Mr. Gaal is entitled to his costs against Ms. Gaal. If these cannot be agreed, brief cost submissions along with a proper cost outline may be made in writing within 10 days and Ms. Gaal shall have 10 days to file brief responding submissions in writing.
Newbould
Released: March 6, 2013
COURT FILE AND STYLE OF CAUSE
COURT FILE NO.: 31-207823-T
DATE: 20130306
ONTARIO
SUPERIOR COURT OF JUSTICE
BANKRUPTCY AND INSOLVENCY
BETWEEN:
IN MATTER OF THE BANKRUPTCY OF NORMAN GAAL OF THE CITY OF TORONTO IN THE PROVINCE OF ONTARIO
REASONS FOR JUDGMENT
Newbould J.
Released: March 6, 2013