In the Matter of the Bankruptcy of Hafiz Rehman, 2015 ONSC 188
COURT FILE NO.: 32-1774657
DATE: 20150410
ONTARIO
SUPERIOR COURT OF JUSTICE
IN BANKRUPTCY AND INSOLVENCY
COMMERCIAL LIST
IN THE MATTER OF THE BANKRUPTCY OF HAFIZ REHMAN OF THE CITY OF MISSISSAUGA, IN THE REGIONAL MUNICIPALITY OF PEEL, IN THE PROVINCE OF ONTARIO
BEFORE: L. A. Pattillo J.
Counsel
Philip J. Gertler and Allan Fogel
For Brief & Associates Limited, trustee of the estate of Hafiz Rehman, a bankrupt
Syed Abid Hussain
For Zohaib Rehman, Haseeb Rehman and Rakhshanda Rehman
Ziba Heydarian, Agent for Jay Chauhan
For Khalida Rehman
Matthew Harris and Monica Goyal
For the Bankrupt
HEARD: December 10, 2014
REASONS FOR JUDGMENT
Introduction
[1] On April 6, 2010, Hafiz Rehman (the “Bankrupt”) purchased 771 Sombrero Way in Mississauga (the “Property”). Subsequently, on August 23, 2010, the Bankrupt transferred 99% of his interest in the Property to two of his children. On April 2, 2012, in a further transfer, the Bankrupt ceased to own any interest in the Property and title was in the name of three of his children.
[2] On July 4, 2013, the Royal Bank of Canada (“RBC”) obtained a judgment against the Bankrupt for $981,301.52 in total (the “RBC Claim”).
[3] On August 1, 2013, the Bankrupt made an assignment in bankruptcy. Brief & Associates was appointed as trustee of the Estate of the Bankrupt (the “Trustee”).
[4] The Trustee brings this motion for a declaration that the Bankrupt’s transfers of the Property to his children for nominal or no consideration on August 23, 2010 and April 2, 2012 are void against the Trustee pursuant to s. 96 of the Bankruptcy and Insolvency Act (Canada), R.S.C. 1985, C. B-3 as amended (“BIA”); s. 4 of the Assignment and Preferences Act, R.S.O. 1990, c. F.29 as amended (“APA”); and s. 2 of the Fraudulent Conveyances Act, R.S.O. 1990, c. B. 29 as amended (“FCA”) and for an order delivering the Property to the Trustee or in the alternative, for a judgment against the Bankrupt’s three children for $150,000 or for the value of the Trustee’s interest in the Property.
Background
[5] The Bankrupt has four children. The eldest three are Rakshanda, Haseeb and Zohaib (collectively the “Children”). The youngest child is not involved in these proceedings. Their mother is Khalida Rehman (“Khalida”). Prior to 2010, the Bankrupt was in the currency exchange and cheque cashing business.
[6] In the fall of 2009, two corporations controlled by the Bankrupt cashed cheques in three fraudulent schemes totaling almost $800,000 utilizing accounts at the RBC. On October 21, 2009, the Bankrupt and his two corporations commenced an action against RBC following RBC’s freezing and debiting of the accounts of the two corporations as a result of cashing the fraudulent cheques. RBC subsequently counterclaimed against the corporations for the overdrafts in the two accounts and against the Bankrupt on a guarantee limited to $30,000. On July 16, 2010, RBC amended its counterclaim to claim, among other things, full repayment of the overdraft amounts against the Bankrupt personally.
[7] On July 4, 2013, the Bankrupt’s claim against RBC was dismissed and RBC was awarded judgment on the counterclaim against the Bankrupt and his two corporations in the amount of $706,487.20. RBC was subsequently awarded $274,814.32 in costs. RBC filed a proof of claim in the Estate of the Bankrupt for $981,301.20.
[8] In March 2010, the Canadian Revenue Agency (“CRA”) advised the Bankrupt that one of his companies was under review and the scope of the audit may extend to personal records. CRA filed a proof of claim in the bankruptcy for $326,102 which amount related to the taxation years 2006 through 2008.
[9] The Property was purchased by the Bankrupt on April 6, 2010 for $615,000 and a mortgage in the amount of $492,000 was obtained from the Equitable Trust Company.
[10] On August 23, 2010, the Bankrupt transferred 99% of his interest in the Property to Rakshanda and Haseeb and retained 1% himself. Rakshanda, who was 21 years old at the time and a full time student, received a 49.5% interest and Haseeb, who was 19 and also in school, received a 49.5% interest. There is no indication on the Transfer document that the Bankrupt holds the Property as a Trustee. The stated consideration was for $2.
[11] The Bankrupt swore an affidavit in response to the Trustee’s motion. He stated that in October 2009, he sold property listed as 12 Ellen Street which netted $86,431.91 to him and his wife Khalida. In January 2010, he agreed to purchase the Property and the sale closed April 6, 2010. He said that his daughter Rakshanda and son Haseeb gave him cheques towards the purchase of the home but because they did not qualify for a mortgage, he remained on title. He also said both he and Khalida contributed towards the purchase of the Property.
[12] Attached to the Bankrupt’s affidavit as an exhibit was a trust agreement purporting to be signed on August 23, 2010 but made as of April 6, 2010, between the Bankrupt as the trustee and Rakshanda and Haseeb as beneficial owners (the “Trust Agreement”). The Trust Agreement provides, among other things, that the Property is held by Bankrupt as bare trustee for and on behalf of Rakshanda, Haseeb and the Bankrupt as tenants in common and that Rakshanda and Haseeb each have a 49.5% in the Property and the Bankrupt has a 1% interest.
[13] On April 2, 2012, the Property was transferred from Rakshanda, Haseeb and the Bankrupt to Rakshanda, Haseeb and Zohaib. Rakshanda, who was now 22 years of age, obtained a 1% interest, Haseeb who was 20 retained his 48.5% interest and Zohaib, who was 19, obtained a 48.5% interest. The Bankrupt said that he was empowered to do the transaction under the Trust Agreement with the permission of the beneficial owners. The Bankrupt explained the reason for the transaction in paragraph 12 of his affidavit:
- The 1% which was then registered in [Rakshanda’s] name on title was a change of title by [Zohaib, Rakshanda and Haseeb], as part of the funding for the purchase of the Property was given by [the Bankrupt] and his wife. However, this was done by [Rakshanda] and [Haseeb] as beneficial owners under the [Trust Agreement], not [the Bankrupt].
[14] There is no explanation of why Rakshanda’s 49.5% interest was reduced to 1% or why Zahaib, in the absence of any evidence of consideration, received a 48.5% interest in the Property.
[15] On May 1, 2013, a mortgage for $600,000 from Computershare Trust Company of Canada was registered against the Property.
[16] On November 28, 2013, the Trustee obtained an opinion from a real estate agent that the current market value of the Property was between $725,000 and $750,000.
Procedural Background
[17] The Trustee commenced this motion on December 26, 2013. The Bankrupt swore a reply affidavit on January 31, 2014, and the Trustee filed a reply affidavit sworn February 24, 2014. On April 15, 2014, the Bankrupt was cross-examined on his affidavit. On August 8, 2014 the motion was scheduled to be heard on October 7, 2014 for two hours. At all material times, the Bankrupt and the Children were represented by Mr. Matthew Harris.
October 7, 2014
[18] On October 7, 2014, the motion came on before me. In addition to Mr. Harris, Mr. Hussain was present and gowned. Mr. Hussain advised that he had been retained by the Children and Khalida, the Bankrupt’s wife. He requested an adjournment in order to file material. Counsel for the Trustee opposed the adjournment, on the basis of the matter had been set for sometime and costs had been incurred.
[19] I was not pleased with Mr. Hussain’s last minute request and told him so. The practice of the Commercial List requires counsel to not only abide by dates given but to also communicate with each other. According to him, he had been retained in August 2014 but did not get in touch with Mr. Harris, who was acting for the Children, until the end of September. And at the time of his appearance before me, he had still not filed a notice of change of solicitors. However, because the asset in question was in the Children’s names, I was of the view they should be given an opportunity to respond, notwithstanding that they had been represented from the outset. As there was no urgency from the Trustee’s perspective (a certificate of pending litigation was registered against the Property), I reluctantly granted an adjournment on the following terms:
Mr. Hussain shall file a notice of change forthwith;
Mr. Hussain shall serve and file any responding material on or before October 27, 2014;
The Trustee shall serve and file any reply material, if required, by November 27, 2014;
Cross-examinations, if required, by November 21, 2014;
Motion returnable before me on December 10, 2014 for 1.5 hours, peremptory to the Bankrupt and the Children; and
The Children shall pay the Trustee’s costs thrown away fixed at $4,000 on or before October 31, 2014, failing which Counsel for the Trustee can attend before me, on notice, to discuss the remedy, including striking any responding material.
December 10, 2014
[20] On December 10, 2014, when the motion came back on before me, I was advised by Mr. Harris that his retainer had been terminated by the Bankrupt the evening before and that Ms. Goyal was now acting for him. Ms. Goyal indicated that she had not yet been retained. In the circumstances, I excused Mr. Harris.
[21] Ms. Heydanan advised that she was acting as agent for Mr. Chauhan who had been retained by the Bankrupt’s wife Khalid in respect of a Family Law Act Application (“FLA Application”) that had been commenced by her in Brampton on November 28, 2014. Mr. Chauhan was not appearing for cost reasons. Khalida was present in the courtroom. Ms. Heydanan requested an adjournment of the motion to permit the FLA Application to be dealt with in the Brampton Family Court. No time estimate was provided as to when it would be heard.
[22] Ms. Goyal submitted that the Bankrupt was concerned about his wife’s family law issues and wanted to see them decided.
[23] The Trustee opposed Khalid’s request for an adjournment and moved to strike the responding record of the Children filed by Mr. Hussain on December 9, 2014 at 4 p.m. without any affidavit of service. In support, the Trustee filed the affidavit of Lee Gertler, sworn December 9, 2014. The Trustee’s position was that both the adjournment request and the late filing were designed to further delay the motion.
[24] For brief reasons given orally at the time, I refused Khalida’s request for an adjournment and declined to consider the Children’s Responding Record. I briefly restate my reasons.
[25] The FLA Application was commenced by Khalida on November 28, 2014. It seeks, among other things, support for herself, joint custody of the children and child support. In respect of property, Khalida sought equalization of net family properties and exclusive possession of the matrimonial home.
[26] The FLA Application has been started late in the process. There is no explanation of why that is so, given that she has been represented by Mr. Hussain in this proceeding since August, 2014. Further, based on the evidence, I agree with the Trustee that the Property is not a matrimonial home within the meaning of s. 18(1) of the Family Law Act, R.S.O. 1990, Chapter F.3, as amended (“FLA”). That section provides:
18(1) Every property in which a person has an interest and that is or, if the spouses have separated, was at the time of separation ordinarily occupied by the person and his or her spouse as their family residence is their matrimonial home.
[27] Although Khalida has been represented by Mr. Hussain since August 2014 in connection with this proceeding, she has filed no material nor has she asserted any interest in the Property prior to the FLA Application.
[28] In the FLA Application, Khalida states at two separate places that she and the Bankrupt separated and have lived separate and apart since January 1, 2010. Although the FLA Application also says at one point that the date of separation was January 1, 2011, the earlier 2010 date is confirmed by the Bankrupt who said in his cross-examination on more than one occasion that he and his wife were not living together at the time of the purchase of the Property. Because the Property was never occupied by the Bankrupt and his wife prior to their separation, it is not a matrimonial home within the definition of s. 18(1) of the FLA.
[29] Accordingly, and based on the above, I was not satisfied that Khalida’s request for possession of the matrimonial home in the FLA Application will entitle her to any interest in the Property. In my view, the FLA Application, commenced more than four years after the separation and after the children are past 18 years of age, was commenced to further delay the Trustee’s motion. I therefore refused Khalida’s request for an adjournment to await the outcome of her FLA Application.
[30] Mr. Hussain said he deeply regretted the delay in filing the Children’s Responding Record but it resulted from circumstances beyond his control. He indicated there was a delay in obtaining the documents. He strongly opposed striking out the Children’s Responding Record.
[31] The late delivery of the information was a clear breach of the timetable that had been put in place by the court. Mr. Hussain had more than sufficient time to file responding material on behalf of the Children. When he knew that he could not meet the timetable date, Mr. Hussain took no steps to advise Trustee’s counsel or to obtain an extension from the court of the deadline. Nor has he, in my view, provided a sufficient explanation for the delay. To allow the material to be placed before the court on the eve of the motion, peremptory to the Respondents will inevitably result in further delay which, in my view, is precisely what the Respondents seek. Accordingly, I refused to consider the Children’s Responding Record.
Position of the Parties
[32] The Trustee relies on s.96 (1) (b) of the BIA and s. 2 of the FCA and submits that the conveyance by the Bankrupt to Rakshanda and Haseeb of 99% of the Property on August 23, 2010 and the subsequent conveyance of his 1% interest in the Property on April 22, 2012 should be set aside on the grounds that they were undervalue non-arms length transfers, done within three years of the bankruptcy and with the intent to defeat creditors or when the Bankrupt was insolvent.
[33] Ms. Goyal, on behalf of the Bankrupt, submitted that the evidence establishes that a trust was created in April 2010 and that the 2010 transaction between the Bankrupt and the trust was a valid transaction. In the factum filed by Mr. Harris for the October 7, 2014 return date, the Bankrupt takes no issue with the fact that the conveyances were non-arms length. It is submitted, however, that the transactions were not at undervalue and were not done with the intention to defeat creditors or when the Bankrupt was insolvent.
[34] Mr. Hussain, on behalf of the Children, submits that a valid trust was created in April, 2010 and the evidence establishes that Rakshanda and Haseeb provided value for the Property. Further, the Bankrupt was not insolvent at the time of the transfer.
Discussion
[35] Section 96(1) (b) of the BIA provides as follows:
96(1) On application by the trustee, a court may declare that a transfer at undervalue is void as against, or in Quebec, may not be set up against, the trustee – or order that a party to the transfer or any other person who is privy to the transfer, or all of those persons, pay to the estate the difference between the value of the consideration received by the debtor and the value of the consideration given by the debtor – if
(b) the party was not dealing at arm’s length with the debtor and
(i) the transfer occurred during the period that begins on the day that is five years before the date of the initial bankruptcy event and ends on the date of the bankruptcy, or
(ii) the transfer occurred during the period that begins on the day that is five years before the date of the initial bankruptcy event and ends on the day before the day on which the period referred to in subparagraph (i) begins and
(A) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, or
(B) the debtor intended to defraud, defeat or delay a creditor.
[36] Section 2 of the FCA provides:
Every conveyance of real property or personal property and every bond, suit, judgment and execution heretofore or hereafter made with intent to defeat, hinder, delay or defraud creditors or others of their just and lawful actions, suits, debts, accounts, damages, penalties or forfeitures are void as against such other persons and their assigns.
Trust
[37] The Bankrupt submits that he purchased the Property on April 6, 2010 in trust for Rakshanda, Haseeb and himself. In support of that position, he points to copies of cheques and money orders he says establishes that Rakshanda and Haseeb contributed money to the purchase and to the Trust Agreement.
[38] In my view, the evidence does not support a finding that the Property was purchased by the Bankrupt in trust for himself and his children. The Transfer document does not indicate he was purchasing as a trustee. The Bankrupt admitted in his cross-examination that he arranged the Equitable Trust mortgage and he did not tell Equitable Trust that he was purchasing the Property as a trustee.
[39] The evidence with respect to what Rakshanda and Haseeb actually paid for a 99% interest in the Property on August 23, 2010 is not clear. The two children were full time students at the time. The Bankrupt produced some checks and money drafts and purported to say that money came from his two children. That evidence is far from conclusive. The cheques were illegible and one did not have the payee inserted. Some were dated a week before the purchase and sale agreement was even entered into. The drafts were drawn on bank branches far apart and apart from a name thereon, had no connection to the Children or the Children’s bank branch.
[40] At the time of his assignment, when the Trustee raised the question of the Property transfer to his children, the Bankrupt told him that, in light of his ongoing litigation with RBC, his lawyer advised him to transfer the Property out of his name. It was his litigation lawyer at the time who allegedly drafted the Trust Agreement. When asked about his statement to the Trustee in cross-examination, the Bankrupt said he didn’t remember it. Later he agreed it “might be” what he said. Nor did he say anything to the Trustee about the trust or the Trust Agreement. The first time the Trustee became aware of the Trust Agreement was when the Bankrupt filed his reply affidavit in January 2014.
[41] On the evidence, I am not prepared to find that the Bankrupt purchased the Property on April 6, 2010 in trust for Rakshanda, Haseeb and himself as alleged. In my view he purchased it in his own name beneficially. It was only when his lawyer advised him later in April that he transferred the Property and entered into the Trust Agreement on April 23, 2010.
[42] There is no question that the transfer of the Property from the Bankrupt to Rakshanda, Haseeb and himself on August 23, 2010 and the subsequent transfer to the Children on April 2, 2012 were not arm’s length. Section 4(5) of the BIA deem persons related to each other not to be at arm’s length in the absence of evidence to the contrary. Neither the Bankrupt nor the Children have attempted to assert otherwise.
[43] Further, the transfers occurred more than one year but less than five years prior to the date of bankruptcy bringing s. 96(1) (b)(ii) of the BIA into play.
[44] The remaining issues to be determined, therefore, are whether the transactions were undervalue and whether at the time, the Bankrupt was insolvent or intended to “defraud, defeat or delay” a creditor.
Undervalue
[45] As noted, I have great difficulty accepting the Bankrupt’s evidence that his two children contributed any money towards the purchase of the Property in 2010. In my view, the evidence does not support such a finding. They were both full time students at the time. The Bankrupt said that they got the money from their mother. But there is no independent evidence of that.
[46] At his cross-examination, and based on the cheques the Bankrupt produced, he agreed that they demonstrate that he contributed $47,400 towards the purchase of the Property, Rakshanda contributed $33,200 and Haseeb $33,800. Even if I accept the Bankrupt’s evidence in that regard, the amount contributed by Rakshanda and Haseeb was still less than the value of the Property after considering the Equitable Trust mortgage. In my view and I so find, the transfer of the Property to Rakshanda and Haseeb on August 23, 2010 was for undervalue.
[47] Further, there is no evidence that any of the Children paid the Bankrupt any moneys for his 1% interest in the Property which he conveyed in April 2012 transfer.
Insolvent or Intent to Defeat Creditors
[48] The Trustee submits that given the assets the Bankrupt listed at the time of his Bankruptcy and the fact that by early 2010, the Bankrupt’s business had ceased, that I should infer that the Bankrupt was insolvent at the time of the August 2010 transfer. The Bankrupt’s assignment was on August 1, 2013, almost three years after the transfer. While he was facing significant claims by both the RBC and CRA in August 2010, they were not final. He was paying lawyers and had money from the sale of his house. While he was unemployed, I am unable to infer, in the absence of further evidence that in the spring/summer of 2010 the Bankrupt could not meet his debts as they fell due. I decline therefore to find that the Bankrupt was insolvent at the time of the August 2010 transfer.
[49] In my view, however, the evidence which I accept establishes that the Bankrupt transferred the Property with the intent to defeat his creditors, in this case either the RBC or CRA or both. He denied that he was concerned by the RBC’s counterclaim or CRA. But both were significant. RBC’s claim, which the Bankrupt became aware of a month before the August 2010 transfer, was for in excess of $700,000 and involved indemnity for the cashing of fraudulent cheques. CRA’s audit, while only in its initial stages, raised serious questions of the co-mingling of business funds in his personal bank accounts.
[50] The Bankrupt’s explanation to the Trustee at the time of his assignment that he transferred the Property to his two children in light of his ongoing litigation with RBC clearly indicates that he did the August 23, 2010 transfer with the intention of protecting the Property against a possible judgment by RBC.
[51] Apart from the above evidence of the Bankrupt’s direct intent behind the initial transfer, in my view there is ample circumstantial evidence concerning both transfers to give rise to the inference that they were done by the Bankrupt with the intent to defeat creditors.
[52] In Indcondo Building Corp. v. Sloan, 2014 ONSC 4018 (S.C.J.) at paras. 43 to 56, Penny J. considered in some detail the legal principals arising in a fraudulent conveyance action. As the learned judge noted, a finding of intent is almost always based on circumstantial evidence. In that regard, at paragraph 52 of the decision, he lists nine “badges of fraud” or factual occurrences which, if present, enable a court to find, in the absence of a credible explanation, an intent to defeat creditors. Some of those “badges” are: a close relationship between the parties to the conveyance; the donor continued in possession and continued to use the property as his own; the transaction was secret; the transfer was made in the face of threatened legal proceedings; the consideration is grossly inadequate; there is unusual haste in making the transfer; and some benefit is retained by the settlor.
[53] In this case, many of those “badges of fraud” exist. The transfers were to the Bankrupt’s children. They were done in the face of significant legal proceedings and threatened proceedings. The consideration was inadequate. The Bankrupt retained a 1% interest in the Property following the August 23, 2010 transfer. The Bankrupt continued to pay the mortgage and carrying costs for the Property after the transfer. The fact of a trust was kept secret from the Trustee. Further, the Bankrupt has failed to provide a credible explanation of the above facts to dispel the inference that the transfers were done to defeat creditors.
[54] For the above reasons, therefore, I conclude that the Bankrupt purchased the Property on April 6, 2010 beneficially and not in trust for Rakshanda and Haseeb. Further, his transfer of a 99% interest in the Property to Rakshanda and Haseeb on August 23, 2010 and the subsequent transfer of his remaining 1% interest on April 2, 2012 were for undervalue and done with the intent of defeating a creditor.
[55] Accordingly, pursuant to s. 96 (1) (b) of the BIA, the transactions are void against the Trustee.
[56] The Trustee seeks in the alternative judgment against the Children in the amount of $150,000 or such other amount (greater or lesser) as determined by the Court to be the value of the Trustee’s interest in the Property as at the date of judgment.
[57] I am reluctant to make such an order against the Children based on the evidence before me. In my view, proper evidence of the value of the Trustee’s interest in the Property at the time of the motion is necessary before such an order can be made.
[58] The Trustee seeks its costs as against the Bankrupt and the Children. In that regard, the Trustee has filed a Cost Outline claiming substantial indemnity costs of $20,600.03 and partial indemnity costs of $24,607.01. The Cost Outline covers costs up to and including the October 7, 2014 motion date which was adjourned.
[59] I have received no Cost Outline from either the Bankrupt or the Children.
[60] The issue of awarding costs in this motion is problematic. The Bankrupt, who was the principal actor, is bankrupt and accordingly there is no benefit to a cost order against him. I view the Children, given their ages at the time, as pawns in the Bankrupt’s purported attempt to insulate the Property. To saddle them with a significant cost award would be unfair in my view. There is no evidence they were involved in the planning of the transactions.
[61] Accordingly, I decline to make any cost award.
L. A. Pattillo J.
Released: April 10, 2015
CITATION: In the Matter of the Bankruptcy of Hafiz Rehman, 2015 ONSC 188
COURT FILE NO.: 32-1774657
DATE: 20150410
ONTARIO
SUPERIOR COURT OF JUSTICE
IN BANKRUPTCY AND INSOLVENCY
COMMERCIAL LIST
IN THE MATTER OF THE BANKRUPTCY OF HAFIZ REHMAN
OF THE CITY OF MISSISSAUGA, IN THE REGIONAL MUNICIPALITY OF PEEL, IN THE PROVINCE OF ONTARIO
REASONS FOR JUDGMENT
L. A. PATTILLO J.
Released: April 10, 2015