COURT FILE AND PARTIES

COURT FILE NO.: 31-207905-T

DATE: 2013-06-26

SUPERIOR COURT OF JUSTICE – ONTARIO

IN THE MATTER OF THE BANKRUPTCY OF RITA DINARDO OF THE TOWN OF MILTON IN THE PROVINCE OF ONTARIO

BEFORE: Mr. Justice H.J. Wilton-Siegel

COUNSEL:
Lou Brzezinski/John Polyzogopoulos, for the Applicant

Richard Campbell, for the Respondent

HEARD: May 6, 2013

ENDORSEMENT

[1] The applicant Manjit-Singh Ark (the “applicant”) has brought an application for a bankruptcy order in respect of Rita DiNardo (the “respondent”). The application alleges two acts of bankruptcy: (1) ceasing to meet her liabilities generally as they fall due; and (2) assigning or disposing, or being about to assign or dispose of, her property with the intent to defraud, defeat or delay creditors. The application was scheduled to be heard on May 6, 2013. However, the applicant sought a stay of the application until after the respondent’s trial for one count of fraud and being in the possession of proceeds of crime. The applicant’s motion was denied for written reasons to follow. This Endorsement sets out the Court’s reasons for the decision to deny the stay.

Background

[2] The applicant invested $125,000 in Hillcorp International Services (“Hillcorp”) in October, 2008. Hillcorp confirmed the investment. The investment was to have been for a six-month term, after which the applicant would receive a lump-sum payment of $312,500 on May 1, 2009. The applicant says the respondent solicited the monies on behalf of Hillcorp. He says she offered him a 150% return on his investment after six months. The applicant did not receive his money back, let alone the return he anticipated on his investment. To date, he has only received a distribution of $11,842.12 from a bank account that was frozen by the Ontario Securities Commission (the “OSC”).

[3] It appears that several individuals were conducting a “Ponzi scheme” through Hillcorp. In August, 2009, the applicant heard that the OSC was investigating Hillcorp’s activities. He met with an investigator working for the OSC. In April, 2011, two individuals who worked for Hillcorp, Steven Hill and Danny DeMelo, pleaded guilty to violation of a cease trade order of the OSC pertaining to Hillcorp. As mentioned, the respondent has been charged as a result of a criminal investigation that has also resulted in charges being laid against Paul DiNardo, the respondent’s cousin, Danny De Melo and Steven Hill. The trial has been postponed several times and is not yet scheduled.

[4] The application was issued on or about June 20, 2012. The respondent served a notice disputing the application on or about July 9, 2012, in which she disputes that she committed either act of bankruptcy alleged by the applicant.

[5] The respondent also disputes a number of allegations made by the applicant in the application respecting her involvement in the alleged Ponzi scheme including: (1) that she induced or solicited anyone to invest in securities in Hillcorp or its successor, Suncorp Holdings (“Suncorp and, collectively with Hillcorp, the “Companies”); (2) that she had any position or affiliation with, or ownership position in, the Companies; (3) that she directed the activities of the Companies or is otherwise responsible or liable for their activities; (4) that she ever received funds on behalf of the applicant; (5) that she promised any return or result to the applicant on any investment in the Companies; and (6) that she conducted, or was in any way involved in, a Ponzi scheme or other scheme with an intent to defraud the applicant or others.

[6] The applicant says he does not have the money to pursue a court case against the respondent for fraud. He relies upon a criminal conviction to provide the evidence necessary to support his claim of fraud. He acknowledges that, without any such evidence, he would not be able to prove the alleged fraud on the part of the respondent and, therefore, would not be in a position to establish a debt in excess of $1,000 owing to him. The applicant says he decided to pursue this application as a result of the criminal charges laid against the respondent, which were laid in April, 2012. He says he intended and hoped that the criminal charges would be disposed of prior to the hearing of this application so that the findings in the criminal matter would assist in the proof of fraud in this application.

[7] The applicant has identified several house purchases by the respondent or her private corporation, RDN Holdings Corporation (“RDN”), in 2007, 2008 and 2010. In addition, the respondent has provided each of her two sons and her daughter with a mortgage of $300,000, secured separately against properties owned by each of them respectively (the “Mortgages”). These occurred in June and July, 2011. The terms of the Mortgages are not available to the applicant and are therefore not on the record. The Mortgages were delivered on or after June 21, 2011 and are therefore within one year of the date of issue of the application.

Analysis and Conclusions

[8] The applicant seeks a stay of this application for a bankruptcy order pursuant to section 43(11) of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (the “BIA”), pending the disposition of the criminal proceedings against the respondent. The applicant says the appropriate test is the tri-part test set out in RJR-McDonald v. Canada, 1995 64 (SCC), [1995] 3 S.C.R. 199.

[9] I am not persuaded that this is correct. Section 43(1) of the BIA provides that a creditor may file an application for a bankruptcy order against a debtor if it is alleged in the application that a debt is owing to the applicant creditor and that the debtor has committed an act of bankruptcy. In my opinion, the scheme of the BIA requires a bona fide allegation. This in turn requires that the allegation be reasonably capable of proof at the time of filing of the application. An allegation that is not capable of proof and may never be capable of proof cannot be said to be a bona fide allegation.

[10] These are unfortunately the circumstances in the present case. The applicant cannot prove his allegation of the existence of a debt and may never be able to do so. Whether he will be able to do so will depend entirely upon the outcome of a criminal proceeding, the conduct of which is entirely outside his control and the evidence for which is not available to him. In these circumstances, I do not think that the “allegation” in his application for a bankruptcy order of a debt owing to him exceeding $1,000 qualifies as an allegation for the purposes of paragraph 43(1)(a) of the BIA.

[11] On this basis, I think that the application for a stay of the proceedings regarding the application for a bankruptcy order must be dismissed. I have, however, also addressed the application of the traditional test for a stay order based on the test in RJR-MacDonald in case I have erred in reaching the foregoing decision. I will address each of the elements of that test in turn.

[12] First, for the purposes of the test in RJR-McDonald, the threshold for demonstration of a serious issue to be tried is not a high one. The Court must only be satisfied that the applicant’s claim is not frivolous or vexatious. Notwithstanding the comments above regarding the insufficiency of proof of the existence of a debt owing to the applicant, I am satisfied that the evidence in this proceeding satisfies the low threshold for demonstration of a serious issue to be tried regarding the existence of a debt owed to the applicant.

[13] The evidence regarding the existence of a debt of at least $1,000 owing to the applicant consists of evidence of the respondent’s involvement in soliciting funds for investment in a Ponzi scheme. In particular, the evidence of the applicant, and it appears of other investors associated with this application, is that they were “promised” in some manner significant returns on their investments. The extent of the promised investment returns to the investors, including but not limited to the applicant, if established, could reasonably suggest that the respondent was at least willfully blind to the possibility of a fraud, even if the applicant was prepared to believe otherwise in respect of his own investment. Such a finding would support a judgment in civil fraud against the respondent giving rise to a debt owing to the applicant.

[14] The evidence regarding the commission of an act of bankruptcy consists of the transfer of $300,000 to the respondent’s children by way of the Mortgages. The Mortgages appear to bear no interest; the repayment terms, if any, are not set out in the mortgage documents registered on title to the relevant properties. However, the Mortgages appear to be enforceable and to secure equity in the properties acquired by the respondent’s children. It is not clear that this evidence is sufficient to establish a serious issue to be tried regarding an act of bankruptcy under paragraph 42(1)(g) of the BIA, even taking into account the low threshold for satisfaction of this requirement. However, given the determinations below, it is not necessary to reach a conclusion on this issue and I decline to do so.

[15] Second, I do not think that the applicant has established irreparable harm. The applicant has the right to commence a new application after disposition of the criminal proceeding if he so chooses. Therefore, the alleged irreparable harm is limited to loss of the right to proceed under section 95 of the BIA in respect of the Mortgages if a new application must be commenced after the disposition of the criminal proceeding.

[16] However, the applicant has not established a real likelihood that he and/or a trustee in bankruptcy would have any claim under section 95 of the BIA. On the evidence before the Court, as mentioned, the Mortgages are enforceable and secure equity in the properties acquired by the respondent’s children.

[17] Further, the rights of the applicant and any trustee in bankruptcy under the provisions of the Assignments and Preferences Act, R.S.O. 1990, c. A.33 and under section 96 of the BIA are not affected by the denial of a stay at this time.

[18] Accordingly, the most likely harm asserted by the applicant is an additional cost to realize on the Mortgages for the benefit of the creditors, which the applicant says he and his group cannot pay due to having limited means. This does not, on its own, constitute irreparable harm.

[19] Lastly, in regard to the balance of convenience, the applicant submits that there would be no irreparable harm to the respondent if the stay were granted. He argues that there is no incremental damage to the respondent’s reputation given the pending criminal proceeding. He is prepared to undertake to withdraw the application if the respondent is acquitted.

[20] The respondent argues that there is significant irreparable harm to her so long as the application for a bankruptcy order remains outstanding and is not dealt with. In particular, she says that there is both an impairment of her personal credit and reputational damage to her. I accept that these consequences necessarily flow from the existence of an outstanding application for a bankruptcy order in this case, notwithstanding the pending criminal proceeding, and constitute irreparable harm to the respondent.

[21] I conclude that the balance of convenience favours withholding of the stay sought by the applicant in respect of his application for a bankruptcy order. Given that the Court has determined that the respondent would suffer irreparable harm if the stay were granted and that the applicant has failed to demonstrate irreparable harm if it were not granted, the balance of convenience necessarily favours a denial of the stay. However, the following considerations also militate in favour of a denial of the stay in the event I have erred in finding an absence of irreparable harm to the applicant.

[22] First, as mentioned, the applicant commenced this proceeding without there being any means of establishing the existence of an outstanding debt owed to him. His counsel says the intention all along was to use the evidence from the criminal proceeding and therefore not to proceed to trial until after completion of the criminal proceeding. This was not, however, communicated to counsel for the respondent.

[23] More importantly, there is no certainty that the criminal proceeding will result in a conviction against the respondent, despite the applicant’s belief that she should be found guilty. There is also a real possibility that even if the respondent is convicted, the criminal proceeding will not yield the evidence that the applicant requires for this proceeding because of a guilty plea or the nature of the charge upon which there is a conviction. As the applicant acknowledges, the applicant does not know the specific circumstances upon which the charges against the respondent are based.

[24] Third, as mentioned, the applicant has not established, on a balance of probabilities, that the respondent has committed an act of bankruptcy. Insofar as the applicant relies upon an act of bankruptcy under paragraph 42(1)(g) of the BIA, a conviction could not, in any event, provide evidence of such requirement.

[25] Lastly, there is an issue of principle. Can a creditor commence an application where fraud is alleged with a view to preserving a right in respect section 95 of the BIA where there is no possibility of proving that a debt exists without a trial of the applicant on the fraud charge? The applicant says the answer should be in the affirmative – that is, that an applicant should be entitled to commence an application for bankruptcy with no intention of proceeding unless and until criminal proceedings provide evidence of fraud in order solely to prevent the expiry of the limitation period under section 95 without having established the existence of a voidable transaction under that provision.

[26] I think this goes beyond the purpose of the BIA, which requires instead that the applicant have a bona fide intention to prove the existence of a debt and an act of bankruptcy at the time of commencing an application. In this case, the applicant has no more than a hope that the criminal proceedings will establish the basis for a debt owing to him. Permitting applications for a bankruptcy order to proceed on the basis proposed by the applicant would, in my opinion, open the door to the use of such bankruptcy applications for improper purposes.

[27] Given the combination of these factors, I conclude that the balance of convenience favours denial of a stay of the application in the present circumstances.

[28] Accordingly, if it were necessary to apply the test in RJR-McDonald in the consideration of the applicant’s request for a stay of proceedings in respect of his application for a bankruptcy order, I would conclude that the stay should be denied on the grounds that he has not demonstrated either that he will suffer irreparable harm or that the balance of convenience favours the granting of such an order.

Conclusion

[29] Based on the foregoing, the applicant’s motion for a stay of the proceedings pending completion of the respondent’s criminal trial is denied.

Motion to Withdraw the Application

[30] In these circumstances, the applicant argues that he should be allowed to withdraw the application without costs. While the respondent initially sought a dismissal of the application, the real issue between the parties is the costs of this proceeding, rather than the applicant’s withdrawal of his application to avoid a dismissal of the proceeding.

[31] I have considerable sympathy for the applicant who has been the victim of a fraud perpetrated by certain parties whose respective contributions to the fraud have yet to be established. It is understandable that he would like to take whatever steps he can to preserve his right to attack the validity of the Mortgages if he is able to establish the requirements for an application for a bankruptcy order in the future.

[32] Accordingly, the applicant is granted leave to withdraw his application for a bankruptcy order subject to payment of costs, if any, awarded by the Court. The parties shall have thirty days to make written costs submissions, not to exceed five pages in length, regarding the costs of this proceeding.

Wilton-Siegel, J.

Date: June 26, 2013