SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

COURT FILE NO.: CV-10-9014-CL

DATE: 20130808

AND IN THE MATTER OF THE RECEIVERSHIP ORDER OF THE HONOURABLE JUSTICE CAMPBELL DATED DECEMBER 8, 2010

RE: CHRISTINE MARIE HAUNERT-FAGA, Applicant

AND:

STEPHEN LEONARDO GLEN FAGA, Respondent

BEFORE: Newbould J.

COUNSEL:
Robert Rueter and Sara J. Erskine, for the applicant Christine Marie Haunert-Faga

M.Susan Balz, for the respondent Stephen Leonardo Glen Faga

Megan Marrie, for the respondent Presta Caparrotta LLP

Michael McQuade, for the respondents Guiliana Caprara et al

Jeffrey Long, for the respondent Domenico Faga

Chris E. Reed, for the receiver A. Farber & Partners Inc.

HEARD: August 7, 2013

ENDORSEMENT

[1] The applicant Christine Haunert-Faga (“Christine”) applies for an order lifting a stay of proceedings under a receivership order of December 8, 2010 to bring an application for a bankruptcy order against the respondent Stephen Leonardo Glen Faga (“Stephen”). The receiver was appointed an equitable receiver in aid of execution of a 2007 divorce judgment against Stephen in the amount of $4,434,825.47. For the reasons that follow, the application is allowed.

Proceedings to date

[2] In May 2007, the Superior Court of Justice Family Court Branch granted a divorce judgment in favour of Christine against Stephen. Pursuant to the judgment, Stephen was ordered to pay Christine $4,434,825.47 for spousal support, child support, Section 7 expenses, costs and equalization of net family property. As part of the divorce judgment, Stephen was ordered to transfer his 50% ownership in Delzap Construction valued at $686,000 to Christine as partial settlement of the equalization of net family property. Subsequent to the issuance of the divorce judgment, Christine made numerous attempts to execute on the assets of Stephen and was only able to recovery payments of $61,000.

[3] As a result of Christine’s inability to realize on the divorce judgment, she brought an application to appoint an equitable receiver in aid of execution. By order dated December 8, 2010, A. Farber & Partners Inc. was appointed as the equitable receiver in aid of execution of the divorce judgment over all of the past and present assets, income and properties of Stephen. The order contained the usual stay of proceedings provision requiring the consent of the receiver or court order to proceed with any action.

[4] Froese Forensic Partners Ltd. was retained by the receiver to assist the receiver and its counsel with investigations into and tracing the location of property belonging to Stephen. It is alleged by the receiver that the forensic analysis revealed that Stephen, members of his family and the accountant for the Faga family business, Presta Caparrotta LLP, had engaged in actions to conceal and/or dissipate Stephen’s income and assets.

[5] The receiver commenced an action in the Commercial List (“Recovery Action”) in its capacity as the court appointed receiver of Stephen pursuant to the power conferred on it in paragraph 4(j) of the receivership order.

[6] The Recovery Action seeks declarations that Stephen’s 50% interest in the Faga family business was fraudulently transferred to his sister Giuliana Caprara and that she holds this interest in trust for Stephen. The Recovery Action further seeks damages against the defendants in the amount of $4,880,000 (with the exception of Marco Caprara and Christian Caprara in respect of whom a tracing order in the amount of $500,000 each is sought) for breach of trust and/or knowing assistant in breach of trust.

[7] The allegations in the Recovery Action include an allegation that the assets and undertakings of Faga Group Limited were fraudulently transferred to a newly incorporated company, Faga Group Construction Limited without consideration. It is alleged that Stephen held a 50% interest in Faga Group Limited which was completely dissipated by the transfer of the assets and undertakings to Faga Group Construction Limited. Stephen is not a registered shareholder of Faga Group Construction Limited.

[8] The Recovery Action also asserts a claim of oppression against Giuliana Caprara in her personal capacity and in the capacity as the estate trustee without a will of the Estate of Bruno Caprara (her late husband), both of whom were officers, directors and/or shareholders of Faga Group Construction Limited. The receiver pleads that it stands as a security holder or creditor in respect of Stephen’s interest in the Faga Group companies. In the alternative, the receiver seeks leave of the court to commence a derivative claim on behalf of the companies against the defendants for the recovery of assets transferred to Faga Group Construction Limited and for the recovery of funds and assets wrongfully removed and/or dissipated from Faga Group Construction Limited.

[9] The statement of claim was served on the defendants in the fall of 2012. However, pursuant to an order of October 24, 2012, the defendants were not required to file any statements of defence until after a motion by the receiver for a protective costs order.

[10] On March 8, 2013, the receiver brought a motion for an order declaring that the receiver would not have personal liability for the costs of the Recovery Action (“Protective Costs Order Motion”). On the motion, the receiver took the position that it was not satisfied that there were sufficient assets in the receivership estate to provide the receiver with an indemnity in respect of any potential costs award, and accordingly the receiver was not prepared to proceed unless it was granted a protective costs order.

[11] By endorsement dated March 15, 2013, Justice D.M. Brown dismissed the receiver’s Protective Costs Order Motion.

[12] As at June 5, 2013, the amount owing to Christine under the divorce judgment including post-judgment interest was approximately $4.98 million.

[13] Christine wants to continue to prosecute the Recovery Action. Once a bankruptcy order is obtained, Christine will request that the trustee in bankruptcy continue prosecution of the Recovery Action, failing which she will apply to the court for an order authorizing her to take the proceeding in her own name pursuant to section 38 of the BIA.

[14] The receiver takes no position on the application by Christine. Stephen and the other parties appearing oppose the orders sought, essentially on the grounds that on the Protective Costs Order Motion, the receiver made a representation to the Court that if the order was not obtained, it would discontinue the action. They assert that the receiver cannot resile from that representation and that Christine should not be permitted to proceed with the receiver’s action.

Principles for Lifting a Stay of Proceedings

[15] In considering whether a stay of proceedings should be lifted, the court must consider the totality of the circumstances and the relative prejudice to both the creditor and the debtor. The court should consider a balancing of the interests of all affected parties. In General Motors Corp. v. Tiercon Industries Inc., [2005] O.J. No. 3750 (S.C.J.) at para. 18, aff’d [2006] O.J. No. 1804 (C.A.), Hoy J. (as she then was) stated:

18. Where relief from a stay is sought in an insolvency context, whether from an order issued pursuant to the Courts of Justice Act or the Bankruptcy and Insolvency Act, R.S. 1985, c. B-3, the Court should consider a balancing of the interests of all affected parties: Toronto Dominion Bank v. Ty (Canada) Inc., [2003] O.J. No. 1552, (2003) 2003 43355 (ON SC), 42 C.B.R. (4th) 142 (Ont. S.C.J.) at paragraph 22.

[16] In considering an application for leave to lift a stay, there is no requirement to establish, nor is it the courts function to inquire into, the merits of any action sought to be commenced or continued. See Re Ma (2001), 2001 24076 (ON CA), 24 C.B.R. (4th) 68 (Ont. C.A.).

Analysis

[17] There is no doubt that if Christine is not permitted to lift the stay in the receivership order and permitted to apply for a bankruptcy order, she will be prejudiced. She would not be able to proceed with the Recovery Action, as it is clear that the receiver has no intention of proceeding with it. Some of the relief sought in that action would not be open to Christine to assert in any action she commenced on her own, such as a derivative action against the company in which Stephen was a shareholder or an oppression action against the company and associated persons. As well, Mr. Reuter, counsel for the receiver in the Recovery Action, stated that there would be limitation defences available to the defendants if Christine were to commence a new action for those claims open to her, and as none of the defendants appearing questioned that statement, I accept that there were be limitation defences available if Christine is not able to pursue the Recovery Action. This further compounds the prejudice to Christine if she is not able to pursue the Recovery Action.

[18] There is no requirement that an applicant for a bankruptcy order must exhaust all other remedies open to him or her before proceeding with a bankruptcy application. Further, it is not improper to make a bankruptcy application to gain remedies not available outside of the bankruptcy regime. See Re Mastronardi (20000, 2000 17002 (ON CA), 21 C.B.R. (4TH) 107 (Ont. C.A.). Bankruptcy and a resulting use of a section 38 assignment of a cause of action is a proper use of the BIA. See Royal Bank of Canada v. Sun Squeeze Juices Inc., (1994), 24 C.B.R. (3d) 302.

[19] On the other hand, I do not see any prejudice to Stephen or to the other defendants in the Recovery Action. They are defendants now to that action, and cannot contend that they would be prejudiced by continuing to have to defend that action.

[20] Stephen and the other defendants assert that they will be prejudiced by reason of the position taken by the receiver in the Protective Costs Order Motion. In its third report to the court, the receiver stated:

The Receiver is not prepared to assume personal liability for the costs of the Recovery Action. The Receiver will not personally benefit from the Recovery Action. If the Court does not grant an Order that the Receiver has no personal liability for the costs of the Recovery Action, then the Receiver will discontinue that action and the Receivership estate will be deprived of any benefit of the claims advanced in that action.

[21] Stephen and the other defendants assert that the receiver made a representation to the court that it would discontinue the action if it did not get the protective order it sought, and thus as it did not get that order, it must now discontinue the action, failing which these parties assert they will be prejudiced. I do not accept that assertion for a number of reasons.

[22] The receiver in its factum on its Protective Costs Order Motion stated its position a little differently. It was stated:

The Receiver is not prepared to assume personal liability for the costs of the Recovery Action. If the Receiver is not protected from personal liability for the costs of the Recovery Action, then the Receiver is not prepared to continue with that action and the receivership estate will be deprived of any benefit of that action.

[23] The receiver’s position was confirmed on the present motion. The receiver will not continue to pursue the action and, if Christine does not take it over under the procedure of a bankruptcy and a section 38 assignment to her, the receiver will discontinue the action. It is quite apparent that Brown J. understood the dynamic that Christine might take over the action. In paragraph 28 of his endorsement, he stated that he was not prepared to conclude that Christine would not proceed with the Recovery Action on her own. Undoubtedly all of the parties on that motion understood that the Recovery Action might be pursued by Christine.

[24] I do not see how Stephen and the other defendants relied in any way on the statements of the receiver to the court on the Protective Costs Order Motion. If the receiver had stated on that motion that it would proceed with the Recovery Action regardless of whether it obtained the protective order that it sought, the respondents would have taken the same position in opposing the order sought, as the order sought would be against their interests, and Ms. Marrie, counsel for the respondent Presta Caparrotta LLP, confirmed that in argument. Thus there is no basis to contend that they should be entitled to rely on a “representation” of the receiver to the court, even assuming the statement of the receiver’s position was as clear as they contend, which I also have some difficulty with . The fact is that they put no reliance on that statement.

[25] Moreover, it cannot be said that the receiver obtained some relief on its Protective Costs Order Motion based on the statement that it made regarding its intentions. To the contrary, the receiver lost its motion. Thus there can be no suggestion that the receiver is improperly trying to obtain something now by not taking any position on the motion by Christine for leave to commence bankruptcy proceedings and then respond to a section 38 assignment process by her.

[26] Moreover, I do not understand why Christine should suffer from anything done by the receiver. Christine is not responsible for what the receiver said to the court on the motion before Brown J.

[27] The receiver as an officer of the court has fiduciary duties to the parties. It takes the position that it could be construed as a breach of that duty to Christine and other creditors of Stephen if it had discontinued the Recovery Action without affording Christine or the creditors the opportunity to proceed with the Recovery Acton on their own. I agree with that. The receiver has no obligation to Stephen and the other defendants in the Recovery Action to discontinue it. It is opposite in interests to those defendants in that action.

[28] Stephen raises another ground of prejudice. He contends that if Christine is allowed to proceed with bankruptcy proceedings, it will be unfair to him as the receiver for two and a half years has refused to allow him to file for bankruptcy and has opposed or refused to agree to him applying to the family court to reduce the size of the award made in favour of Christine. He says that a bankruptcy would have relieved him of the equalization and costs portions of the judgment in the family court and that an application to reduce the size of the award would have succeeded.

[29] There is no basis for this argument. There is no evidence at all on the record as to his dealings with the receiver on these issues. Counsel for the receiver advised that while Stephen raised these issues with the receiver, the response of the receiver was that Stephen should apply to court for whatever order he wished, and that the receiver would take no position on any such motion, just as it takes no position on the current motion by Christine. Stephen chose not to apply to court to vary the receivership order to permit him to take any steps he wished to take.

[30] On this motion, counsel for Stephen asserted that Stephen could find no one to act as trustee in bankruptcy for Stephen if the bankruptcy was to be contested as it would be more expensive. There is no evidence of this and it makes little sense. It is not the role of a trustee in bankruptcy to contest a bankruptcy application. In any event, if Stephen could not afford a trustee in bankruptcy, the failure of the receiver to consent to a bankruptcy would have made no difference to Stephen.

[31] Accordingly, leave is granted to Christine to bring an application for a bankruptcy order against Stephen and, if the bankruptcy order is made, to request an assignment of the Recovery Action under section 38 of the BIA. While she has asked for a bankruptcy order in this motion, I think it preferable that the bankruptcy application be first issued and issues regarding the right to such an order, if any, can be dealt with on that application.

[32] Christine is entitled to her costs. If they cannot be agreed, cost submissions in writing of not more than three pages, along with a proper cost outline, may be made within 10 days, and the responding parties will have 10 further days to make cost submissions in writing of not more than three pages.

Newbould J.

Date: August 8, 2013