SUPERIOR COURT OF JUSTICE – ONTARIO

(COMMERCIAL LIST)

COURT FILE NO.: CV-12-9629-00CL
DATE: 20130116

RE: DAVID JONAS IN TRUST, FOVERE CAPITAL HOLDINGS INC., 1285632 ONTARIO LIMITED, 1449400 ONTARIO INC., CAMERON STEPHENS FINANCIAL CORPORATION, KDL CAPITAL INC., DOTRUSTCO LTD., 1650333 ONTARIO INC. AND SCOTIA TRUST RRSP, Plaintiffs

AND:

KEVIN SCOTT MCCONNELL, RACHELLE MCCONNELL, WILLIAM YARN, 1142167 ONTARIO LIMITED, LOGOTECH INC., STEVE TOBIAS, KING KOATING HOLDINGS, INC. KING KOATING ROOFING INC., KING KOATING CONSTRUCTION INC., AND MCCONNELL FAMILY TRUST, Defendants

BEFORE: CUMMING J.

COUNSEL:
J. W. Kramer, for the Plaintiffs

M. Greenglass, for the Defendants Rachelle McConnell, King Koating Holdings Inc., King Koating Roofing Inc. and McConnell Family Trust

HEARD: JANUARY 14, 2013

ENDORSEMENT

The Motions

[1] The Defendants, Rachelle McConnell (“Ms. McConnell”), King Koating Holdings Inc. (“Holdings”), King Koating Roofing Inc. (“Roofing”) and the McConnell Family Trust (the “Trust”) bring a motion for summary judgment under Rule 20.01(1). Their motion seeks to dismiss the Plaintiffs’ claim as against these four defendants.

[2] The Plaintiffs bring a cross-motion seeking leave for an order pursuant to s. 38 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 as am. (“BIA”).

Background

[3] The Defendant, Kevin Scott McConnell (“Mr. McConnell” or the “Bankrupt”) is an undischarged bankrupt by Order dated March 24, 2010. Schwartz Levitsky Feldman Inc. (the “Trustee”) was appointed trustee.

[4] The Plaintiffs’ action was commenced on March 1, 2012 pursuant to an Order of Registrar Nettie dated July 22, 2010 (and varied on January 19, 2012 by Registrar Sproat) under s. 38 of the BIA.

[5] A further, third s. 38 Order, was obtained by the Plaintiffs from Registrar Mills on April 24, 2012 wherein leave was granted nunc pro tunc to add a claim for punitive damages in reference to the so-called “imputed income” claim.

[6] The Plaintiffs attack various mortgages (Part C of the Statement of Claim) over a cottage property owned by Mr. McConnell, alleging fraudulent conveyances. This component of the Statement of Claim is not the subject of the summary judgment motion at hand.

The Moving Parties’ Summary Judgment Motion

[7] The moving party Defendants’ summary judgment motion is directed at two components of the Statement of Claim: first, relating to the redemption of special shares and second, in respect of alleged “imputed income”.

The Redemption of Special Shares issue

[8] The Plaintiffs challenge (Part D of the Statement of Claim) a redemption on November 21, 2008 (some 16 months before the bankruptcy) by Holdings of 24,002 special shares held by Mr. McConnell. The redemption was for the quantum of paid up capital, $240.02.

[9] The Statement of Claim claims that the redemption of Mr. McConnell’s special shares by Holdings was done to defeat or defraud the Plaintiffs and all other creditors of the Bankrupt’s estate.

[10] The moving party Defendants claim that the Plaintiffs have no standing to bring this claim as no s. 38 Order has been made for the relief requested and that it is not possible for a s. 38 Order to be granted as, in their view, the limitation period has expired.

[11] The July 22, 2010 s. 38 Order granted by Registrar Nettie permits the Plaintiffs to pursue a claim to set aside the transfer of Mr. McConnell’s shares in Holdings to the Trust. In fact, there was no transfer of any shares; rather, there was a redemption of special shares.

[12] At the time of obtaining the July 22, 2010 s. 38 Order, the creditor Plaintiffs believed that Mr. McConnell had owned 100% of the shares of Holdings and that they had been fraudulently conveyed to the Trust on the eve of his insolvency to defeat his creditors.

[13] The March 1, 2012 Statement of Claim (para. 22) refers to 24,001 common shares in Holdings held by the Trust and to 24,002 special shares issued to Mr. McConnell (para. 23). Each of the two classes of shares had a single vote so that voting control rested with ownership of the special shares. Mr. McConnell was trustee of the Trust. As a director and president of Holdings (until April 17, 2009), Mr. McConnell caused Holdings to redeem the special shares on November 21, 2008 (para. 27), resigning the same day as trustee of the Trust. Ms. McConnell was appointed as trustee in his place.

[14] The affidavit of Leah Anderson-Vojdani dated December 11, 2012 in support of the cross-motion acknowledges that on October 18, 2010, the Trustee and Plaintiffs’ counsel received and reviewed the minute book for Holdings and therefore were made aware the special shares had been redeemed on November 21, 2008.

[15] First, the moving party Defendants claim that the Plaintiffs have no standing (para. 6(b) of the Statement of Defence) under the July 22, 2010 s. 38 Order (or the January 19, 2012 varying Order) to bring a claim relating to the redemption of the special shares and that this cannot be rectified nunc pro tunc by a new s. 38 order as sought by the Plaintiffs’ cross-motion.

[16] Second, they assert that the limitation period for the commencement of a claim with respect to the matter “involving the redemption of Special Shares had expired as of the date of the commencement of the summary judgment motion” i.e. November 21, 2012.

[17] I disagree with respect to both assertions. My reasons follow.

[18] On October 26, 2010, Mr. McConnell was examined pursuant to s. 163(1) of the BIA on the Trustee’s behalf. Mr. McConnell was asked to produce the file of the solicitor for Holdings who had acted on the special share redemption. The request was taken under advisement by Mr. McConnell’s counsel but the file was only produced on March 26, 2011 following upon a motion to the Registrar to obtain answers to undertakings and refusals.

[19] The file contained an email exchange between Mr. McConnell’s counsel and Tony Cina, a chartered accountant, as to advising Mr. McConnell to effectuate the redemption of the special shares and to remove Mr. McConnell as a trustee of the Trust except as an employee in order to avoid or hinder Mr. McConnell’s creditors.

[20] Mr. McConnell, on his examination, denied having any knowledge as to why he redeemed his special shares in Holdings and resigned as trustee of the Trust in November 2008. Ms. McConnell claims she was the only one involved in discussions in respect of the share redemption.

[21] However, Mr. Jeffrey Goldberg, an accountant for Holdings/Roofing/Mr. McConnell (but not an advisor in respect of the redemption), on his examination stated that the redemption seemed to be due to the concerns which Mr. McConnell and his other advisors had regarding his financial affairs as “he owed a lot of money to a lot of people” (Q142, 147, 148).

[22] The Statement of Claim issued on March 1, 2012 expressly includes a claim for the setting aside of the redemption of Mr. McConnell’s special shares. (See Part D, paras. 1 (e) and 22 to 30 of the Statement of Claim.) Thus, there is no real issue as to a limitation of action insofar as the issuance of the pleading. The moving party Defendants base their limitation of action defence on the fact the Plaintiffs’ counsel examined the minute book for Holdings on October 18, 2010 and thereby learned of the redemption of special shares. The Statement of Claim was commenced within two years of October 18, 2010.

[23] In my view, the evidentiary record establishes that the creditor Plaintiffs only ascertained in March 2011 the material facts underlying the asserted cause of action of a fraudulent conveyance by reason of the special share redemption. As such, in my view, in all events, the limitation period with respect to the claim arguably has not yet passed.

[24] I turn now to the question of standing under the s. 38 Order.

[25] Section 187 (5) of the BIA authorizes the court to review, rescind or vary any order made under its bankruptcy jurisdiction.

[26] Section 187 (9), (11) provides that no proceeding in bankruptcy shall be invalidated by reason of any irregularity unless to do so would cause substantial injustice. Further, the court may extend the time for doing any act, before or after the time for doing such act.

[27] The commencement of an action without a s. 38 order is an irregularity which may be cured through an order nunc pro tunc. DeGroote v. Canadian Imperial Bank of Commerce, 1996 CarswellOnt 4712 [in Bankruptcy](Gen. Div.) para. 24, aff’d by 1998 CarswellOnt 250 (C.A.), leave to appeal refused by [1998] S.C.C.A. No. 149; Silver v. Imax Corp., 2012 ONSC 4881, 2012 CarswellOnt 10391, (OSC) para. 45, 49 and 50.

[28] Irregularities with respect to the procedure under s. 38 may be corrected after the commencement of an action even when the limitation period related to the action has passed. De Groote, (Gen. Div.), supra, para. 20.

[29] The moving party Defendants’ argument relates to the claimed inadequacy of the s. 38 Orders authorizing the commencement of the Plaintiffs’ action. That is, the moving party Defendants claim the Plaintiffs have no standing to bring the action insofar as it relates to the special share redemption and more than two years has now lapsed since October 18, 2010, the date the Plaintiffs’ counsel examined the minute books and learned of the special share redemption.

[30] However, the Defendants have been fully aware of the Plaintiffs’ claim since, at least, the issuance of the Statement of Claim on March 1, 2012. Moreover, the refusal of Mr. McConnell to produce relevant documents until compelled by the court to do so meant that Plaintiffs’ counsel was delayed until March 2011 in gaining access to material facts relevant to asserting this claim.

[31] In my view, given the record before this court, there is no prejudice to the Defendants in granting the cross-motion and varying the July 20, 2010 Order of the Registrar to substitute the Plaintiffs’ claim relating to the redemption of the special shares for the claim connected with the transfer of the shares, nunc pro tunc. Indeed, in my view, it would be prejudicial, unfair and a substantial injustice to the Plaintiffs not to grant their cross-motion.

[32] The moving party Defendants emphasize that Holdings/Roofing are private, family companies. They say that the common shares or equity rests with the Trust and is removed from the Bankrupt. They submit that it is up to the family to determine how profits of the underlying business are shared. They submit that the special shares class was created historically simply to enable dividend distributions in such a way as to split income from the business as amongst family members i.e. as between beneficiaries of the Trust and Mr. McConnell as owner of the special shares until November 21, 2008. They submit the shares only had the value equal to the paid up capital for the class of shares.

[33] Once the special share class was created it had legal effect in respect of the structure of Holdings. I do not agree with the moving party Defendants’ assertion that the only value to the special shares was simply the paid-up capital for the class on any redemption. The simple fact is that the owner of the special shares had voting control of Holdings and, with such control, could elect the directors, appoint officers, fix remuneration of employees and determine distributions of any surplus accounts (a $66,000 capital dividend was distributed on the special shares in 2006) and profits for all shareholders. Moreover, with control of Holdings, the owner of the special shares could effectively determine if, and when, there would be a redemption of the special shares by Holdings.

The Imputed Income Issue

[34] The Plaintiffs also make a so-called “imputed income” claim (Part E-paras. 31 to 37 of the Statement of Claim) that the moving party Defendants fraudulently conspired with the Bankrupt to divert away from Mr. McConnell and his creditors money and other remuneration “properly due to him”. The Plaintiffs claim the moving party Defendants have reduced artificially Mr. McConnell’s income during his period of bankruptcy by paying monies to themselves or other members of the McConnell family so as to defeat his creditors. The Plaintiffs seek an order for an accounting and imputing of income to Mr. McConnell and the payment of such determined amount by the Defendants Holdings, Roofing, Ms. McConnell, and the Trust (para.1. (i), (j) and (k) of the Statement of Claim).

[35] The Statement of Claim alleges that on April 17, 2009, some 11 months prior to the bankruptcy, Mr. McConnell resigned as president, director and secretary treasurer of Holdings and Roofing and his spouse, Ms. McConnell, was elected in his place. Thereafter, the Plaintiffs assert, Mr. McConnell was only an employee of Roofing earning a relatively modest salary of $70,000 annually (and which was only $40,000 for some months). The Plaintiffs allege that Mr. and Ms. McConnell, Holdings and Roofing fraudulently schemed to defeat his creditors by diverting monies to themselves that properly would otherwise have gone to Mr. McConnell as income for his services.

[36] At his examination on October 26, 2010 (page 107), Mr. McConnell stated that he had pre-bankruptcy income of $49,764.60 for the first 87 days of 2010, and then only $19,427.36 for the 278 days in the balance of the year after bankruptcy. Mr. McConnell admitted (Q 222) to some $85,000 in employment income in 2008 and did not object to the suggestion that Ms. McConnell’s income had doubled since he had become bankrupt (Q 226). Ms. McConnell, at her examination, stated that Mr. McConnell is a secondary credit card holder to the card in her name which is used to charge his personal expenses which she in turn has Roofing pay with the payment then brought into her income for income tax purposes (Q 470 to p. 400).

[37] First, in reference to the Plaintiffs’ claim of imputed income (Part E in the Statement of Claim), the Defendants assert there is no proper claim against the Defendants, Ms. McConnell, the Trust and Roofing. They rely upon the affidavit of Ms. McConnell dated December 10, 2012. She denies there is any substance to this claim, asserting that Mr. McConnell is drawing the same salary as he received prior to the bankruptcy other than in respect of a period when he was not working full time. She states that he is paying surplus income as required under the BIA. The Defendants also assert that no evidence is put forward by the Plaintiffs in support of the imputed income claim.

[38] However, the supplementary affidavit of Leah Anderson-Vojdani dated December 19, 2012 sets forth references to the transcripts of Mr. McConnell’s examination of October 26, 2010, May 2, 2011, March 7, 2012 and Jeffrey Goldberg’s examination dated March 4, 2011, Ms. McConnell’s examination dated December 1, 2011, Diane Butler’s examination dated December 20, 2011, Mike Dirstein’s examination on December 20, 2011 and Tony Suomela’s examination on February 16, 2012.

[39] Current employees of Roofing, Ms. Diane Butler and Mr. Mike Dirstein, and former employee Tony Suomela, in their examinations were able to provide only a vague description of Ms. McConnell’s role at Roofing. The evidence of the accountant for Holdings, Roofing and Mr. McConnell, Mr. Jeffrey Goldberg, is that it is primarily Mr. McConnell who instructs him for the companies and that there has not been any change in Mr. McConnell’s role for the past five years (Q 169-171,181, 182).

[40] In my view, there is some disputed evidence supporting the arguable claim relating to alleged imputed income. This issue cannot be determined on a summary judgment motion. This issue is dependent upon an evidentiary record determined in the context of a full review of proven material facts within the context of determinations of credibility.

[41] The requisite principles for hearing a summary judgment motion are set forth by the Court of Appeal in Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764. In my view, the full appreciation of the evidence required to make dispositive findings in respect of the imputed income claim cannot be achieved by way of summary judgment. The required full appreciation can only be achieved by way of a trial.

Disposition

[42] For the reasons given, the moving party Defendants’ motion for summary judgment is dismissed and the cross-motion of the Plaintiffs is granted.

[43] The Plaintiffs are entitled to costs on a partial-indemnity basis from the moving party Defendants on a joint and several basis, which costs I fix at $10,500 inclusive of all applicable taxes and disbursements, payable forthwith, i.e. within 30 days.

CUMMING J.

Date: January16, 2013