Re Gilgeous (Bankruptcy), 2013 ONSC 1406

ONSC 1406

COURT FILE NO.: 35-1572367
DATE: 2013/03/06

ONTARIO

SUPERIOR COURT OF JUSTICE

IN BANKRUPTCY AND INSOLVENCY

RE: IN THE MATTER OF THE BANKRUPTCY OF

ANGELA LOUISE GILGEOUS OF THE TOWNSHIP OF ENNISKILLEN, COUNTY OF LAMBTON IN THE PROVINCE OF ONTARIO

• and –

PAUL J. PICKERING LIMITED, TRUSTEE IN BANKRUPTCY (MOVING PARTY)

-and-

CANADIAN IMPERIAL BANK OF COMMERCE (RESPONDING PARTY)

-and-

HAZLITT STEEVES HARRIS LLP (RESPONDENT)

-and-

DENNIS JOHN KIRBY (RESPONDENT)

BEFORE: Justice J. N. Morissette

COUNSEL:
Ron Aisenberg, For the Responding Party, CIBC

Harry Van Bavel, For the Moving Party, Paul J. Pickering

Frank A. Highley, For the Respondent, Hazlitt Steeves Harris LLP

Ed Gresham, for the Respondent, Dennis John Kirby

HEARD: January 23^rd, 2013

ENDORSEMENT

1The trustee in bankruptcy seeks directions from this Court with respect to the priority disputes as between CIBC, a judgment creditor of the bankrupt, and Hazlitt Steeves Harris (HSH) and John Kirby (Kirby) who both held mortgage security over the bankrupt’s property.

2On December 15^th, 2011, the bankrupt made an assignment in bankruptcy, at which time she owned a property located in Corunna, Ontario. The trustee sold the property in Corunna on March 22^nd, 2012 giving rise to proceeds of sale of $115,386.33.

3In its motion the trustee has recommended that the court recognize the validity and enforceability of the HSH mortgage and authorize payment of the mortgage. In its submissions at the hearing, HSH recognizes that its claim ought to be reduced by $2000 of disbursements not paid yet, plus HST.

4Further the trustee has opined that the Kirby mortgage is preferential and ought to be disallowed. CIBC agrees with the trustee’s position, however CIBC opposes the trustee’s position with respect to HSH’s amount claimed.

The issues:

5The issues for this court are:

1. The amount to be paid over to HSH;

2. Whether the Kirby’s mortgage is valid or not.

The facts:

6Title to the property was encumbered by the following:

1. A judgment in favour of CIBC dated August 19^th, 2010 in the amount of $66,307.13, plus interest and costs;

2. A mortgage to HSH registered December 8^th, 2010 in the amount of $48,000 (but the claim is for the actual outstanding amount of $35,117.29);

3. A mortgage to Kirby registered August 16^th, 2011 in the amount of $28,250.

7When the bankrupt consented to the judgment in favour of CIBC in August of 2010, the property was valued at $234,000 and the title was free and clear.

8In November of 2009, the Custom’s and Revenue Agency (CRA) demanded the bankrupt file outstanding tax returns for the bankrupt personally for the years 2003 through 2008 and for the two corporations she was director of for the same years.

9HSH were retained to conduct these filings on behalf of the bankrupt. Due to the lack of documentation, delays occurred until December 2010 when the bankrupt agreed to mortgage the property in favour of HSH to secure their fees and disbursements to be incurred. Shortly after the registration of the mortgage, HSH commenced its work on behalf of the Bankrupt, which totalled approximately $35,000 from December 2010 to November 29^th, 2011.

10Kirby provided legal services to the bankrupt from December 2008 through the date of the bankruptcy with respect to her divorce proceedings, corporate matters and income tax charges, property tax arrears and the sale of her property prior to the bankruptcy. Kirby was not paid for his services.

11In June of 2011, the bankrupt and Kirby discussed the possibility of a mortgage on the property to secure his fees rendered to date and thereafter. On August 16^th, 2011, the bankrupt granted a mortgage to Kirby in the amount of $28,250.

12The bankrupt listed the property for sale on July 4^th, 2011 for a sale price of $169,000, although the realtor said it ought to be listed for $149,000.

13At the time of the Kirby mortgage the bankrupt had $150,550 in known debts comprised as follows:

1. Property taxes $8000

2. CIBC judgment $66,307 (without the accrued interest and costs)

3. HSH mortgage $48,000

4. Kirby mortgage $28,250

5. CRA penalties unknown at that time; (October 6^th, 2011the court levied fines in the amount of $15,000)

14The evidence demonstrates that the decrease in the property value was due to the general reduction in the market values of the area, plus the bankrupt’s ex-husband who had remained in possession of the property and allowed its deterioration until he finally left on June 28^th, 2011.

The Law and analysis:

15Section 135 of the Bankruptcy and Insolvency Act (BIA) provides that:

The trustee shall examine every proof of claim or proof of security and the grounds therefore and may require further evidence in support of the claim or security.

16Given the position of the parties the Trustee was unable to determine which creditor had priority over the proceeds from the sale of the Property and therefore has sought directions from this court.

17Section 135 (5) of the BIA permits creditors to apply to expunge or reduce the claim if the trustee declines to interfere in the matter. This is what occurred here.

18Accordingly the question is whether the claim in indeed legitimate. The issues of the amounts of the claims of HSH and Kirby, and the security of Kirby’s claim must be determined by this Court based on both the viva voce evidence and the affidavit evidence.

19Section 4(2) of Assignments and Preferences Act, RSO 1990, c. A.33 (“APA”) states:

Subject to section 5, every such gift, conveyance, assignment or transfer, delivery over of payment made by a person being at the time in insolvent circumstances, or unable to pay his, her or its debts in full, or knowing himself, herself or itself to be on the eve of insolvency, to or of a creditor with the intent to give such creditor an unjust preference over other creditors or over any one or more of them is void as against the creditor or creditors injured, delayed, prejudiced or postponed.

20At the time that the bankrupt granted the mortgage to HSH, it was more than 12 months prior to the assignment in bankruptcy on December 15^th, 2011. The evidence establishes that there is no reason to suspect that HSH mortgage was granted on the eve of insolvency or with the intent to hinder or defeat other creditors.

21For those reasons, this court accepts the position of the trustee and approves the validity of the HSH mortgage.

22The Kirby mortgage was registered only 4 months prior to the date of bankruptcy. Although it falls outside the timelines of section 95 of the BIA, the trustee has opined that it falls within the provisions of section 4 of the APA.

23The evidence establishes that Kirby was well aware of the CIBC judgment and was further aware of the HSH mortgage. Further Kirby was aware of the fact that the property was still being possessed by the ex-husband of the bankrupt in June of 2011, when the decision to grant a mortgage to Kirby was discussed.

24The bankrupt’s evidence is that in June of 2011, she believed that the property was worth $180,000 because of a conversation she had with a real estate agent friend of hers. However the evidence establishes that the property was listed for sale for $169,000 in July of 2011, even though the realtor believed it ought to be listed for $149,000. Both the bankrupt and Kirby knew the listing price when the mortgage was granted in Kirby’s favour in August of 2011.

25Further both Kirby and the bankrupt knew that there was a tax hearing coming up with a potential for fines which would increase the debt load of the bankrupt.

26Armed with this knowledge, both the bankrupt and Kirby knew that she was unable to pay all of her debts. I note that Mr. Kirby testified that he believed that there would be money left over for the bankrupt once the sale was completed. Knowing that the debts would exceed $150,000 and given that the realtor’s commission is a priority, I find that both Mr. Kirby and the bankrupt knew or ought to have known that she was on the eve of insolvency.

27Finally even though Mr. Kirby testified that he did not register this mortgage in his favour with the intent to give himself priority over CIBC, a reasonable inference can be made that surely he understood what he was doing and that indeed the purpose of this mortgage was to be in priority to CIBC, given the fact that this property was not going to be enough for all of the creditors.

28In my view the Kirby mortgage is a preference within the meaning of the APA and therefore is void.

29The next issue is whether the amounts claimed by both HSH and Kirby are legitimate claims. CIBC has made much about the amounts claimed.

30In my view, there is no reason to doubt the trustworthy and reliability of the HSH claim for substantial tax and accounting services provided on behalf of the bankrupt. The only claim that ought to be reduced is the $2000 of unpaid disbursements plus HST that counsel for HSH conceded in his closing remarks.

31With respect to the Kirby claim, again there is no reason to doubt the reliability of Kirby’s claim in having dealt with a number of legal issues for the bankrupt including a long and protracted divorce proceeding. Accordingly, the claim of $28,250 appears to be reasonable and therefore no reduction is warranted.

Disposition:

32The proceeds of sale in trust shall be distributed in the following manner:

1. $35,117.29 less ($2000 plus HST) to HSH;

2. Balance to be distributed to the bankrupt’s estate including the two unsecured creditors CIBC and Kirby.

Costs:

33Should the parties be unable to agree on the issue of costs, I may review brief written submissions within 30 days hereof.