ONTARIO

SUPERIOR COURT OF JUSTICE

No. 88353/14

Date: 20151110

BETWEEN:

BUSINESS DEVELOPMENT BANK OF CANADA

Plaintiff

– and –

JOANNE M. ALMADI and GORDON ALMADI

Defendants

Sean Zeitz, for the plaintiff

Brandon Jaffe, for the defendants

HEARD: April 14 2015

Bale J.

Introduction

[1] Almadi Enterprises Inc. (AEI), a Suzuki dealer, was indebted to Business Development Bank of Canada (BDC). The debt was guaranteed by the principal of AEI, Gordon Almadi, and his wife, Joanne Almadi. On December 11, 2012, Mr. Almadi contacted BDC requesting a payout statement, and on the following day, the amount owed, $106,207.78, was paid by AEI to BDC.

[2] On December 14, 2012, an interim receiver of AEI was appointed upon the application of Ally Credit Canada Limited (Ally). Ally was AEI’s motor vehicle floor-plan lender.

[3] In May of 2013, following the acquisition of all of the shares of Ally, Royal Bank of Canada obtained an assignment of the debt owed by AEI to Ally, and Ally’s related security.

[4] In June of 2013, AEI was adjudged bankrupt. RBC then took the position that the payment from AEI to BDC was void under s. 95 of the Bankruptcy and Insolvency Act, and obtained an assignment, under s. 38(2) of the BIA, of the trustee’s rights under s. 95. After some negotiation, a settlement was reached pursuant to which BDC paid, to RBC, the money that BDC had received from AEI, to be distributed in accordance with the BIA. The settlement was reached without the necessity, on the part of RBC, of commencing an application for an order under s. 95 declaring the payment from AEI to BDC to be void.

[5] In this action, BDC sues the defendants on their guarantee of the debt of AEI; and, on this motion, requests summary judgment for the amount originally owed to it by AEI, and subsequent interest.

[6] BDC’s position is that it would have been unsuccessful in defending against a preference claim, and that the money received from AEI having been paid over to RBC, the debt owed by AIE, and the guarantees of that debt, were revived.

[7] The guarantors raise the following defences:

• that in its statement of claim, BDC admits that it was paid in full by AEI, thereby extinguishing any liability of the guarantors;

• that the payment made by AEI to BDC has not been set aside by the bankruptcy court, and therefore remains valid as between AEI and BDC;

• that BDC has no cause of action against the guarantors, because only a trustee, or an assignee of a trustee, has a cause of action under s. 95 of the Bankruptcy and Insolvency Act;

• that the evidence does not establish that AEI was insolvent when it paid BDC the money in question;

• that the evidence does not establish that the payment was made to BDC with a view to giving BDC a preference over another creditor; and

• that BDC failed to make a demand on the defendants for payment in accordance with the terms of the guarantees, and that the action is therefore premature, and should be dismissed.

Analysis

Whether BDC has admitted that the liability of the defendants was extinguished

[8] In its statement of claim, BDC pleads:

On or about December 14, 2012, the Bank received the total sum of $106,207.78 from the Company in full satisfaction of its outstanding indebtedness thereby extinguishing any liability of the defendants herein pursuant to their joint and several guarantee.

[9] The defendants rely upon this paragraph, and rules 51.05 and 51.06 of the Rules of Civil Procedure, to argue that the plaintiff has admitted that the defendants are not liable on their guarantees.

[10] However, paragraph 13 of the statement of claim must be read in context, and together with paragraph 20, in which BDC pleads that the debt was revived as a result of the payment from BDC to RBC. When the two paragraphs are read together, it is clear that the statement of claim does not contain the alleged admission.

[11] In any event, Rule 51 deals with admissions of the truth of facts, or the authenticity of documents. The pleading relied upon by the defendants is neither. Rather, it is a statement of the legal consequences, at the time, of the payment made by AEI to BDC.

Whether payment from AEI to BDC remains valid; whether BDC has a cause of action

[12] Where payment of a debt is made by the principal debtor, and the payment is later set aside under s. 95 of the Bankruptcy and Insolvency Act upon the application of the trustee, the debt, any guarantees of the debt, and any security for the guarantees, are revived: Roofmart (Ontario) Limited v. Pompeo (1994), 1994 7297 (ON SC), 19 O.R. (3d) 572 (Gen. Div.), at paras. 81ff. In the present case, however, the payment was made by BDC to RBC, without a prior determination under s. 95 having been made.

[13] It is common ground between the parties that an application under s. 95 of the BIA may only be made in the bankruptcy court, and only by a trustee, or an assignee of a trustee. It then follows, argue the defendants, that this court does not have jurisdiction to make a finding, in a claim by a preferred creditor against guarantors, that the payment in question was void. For the following reasons, I disagree, and find that the payment from AEI to BDC was void, and that the debt and the guarantees of the debt, are revived.

[14] First, a result that would have required BDC to insist that RBC litigate the preference issue in the bankruptcy court, when they were agreed as to the result, would, in my view, be contrary to public policy.

[15] Second, I am not being asked to make a declaration of right, or to set aside the payment from AEI to BDC. No such order is necessary, because BDC has admitted, and paid, RBC’s claim. Rather, I am simply being asked to make findings of fact, and to apply the law to those facts, in adjudicating a claim in debt, against the defendants.

[16] Third, a judge sitting in bankruptcy court does not have jurisdiction to decide a claim by a preferred creditor against guarantors. Such a claim must be determined in the “ordinary civil courts”: Roofmart, at paras. 13ff.

[17] Fourth, if the test under s. 95 of the BIA is met, then the payment from AEI to BDC was void as against the trustee. If the payment from AEI to BDC was void as against the trustee, then BDC was right to pay the money to RBC. While it is true that a preferential payment to a creditor remains valid as between the debtor and the preferred creditor absent a court order to the contrary, such a payment is automatically void as against the trustee. In this regard, it may be useful to contrast the language in s. 95 of the BIA with the language in s. 96 relating to transfers at undervalue – the latter transfers are not void, until declared to be so, upon application by the trustee.

Whether AEI was insolvent when it made the payment to BDC

[18] I am satisfied that AEI was insolvent when it made the payment to BDC. Ally Credit made demand for payment under the floor-plan financing agreement in April of 2012. By means of a series of forbearance agreements, the time for payment of the amount owed was extended to November 17, 2012. On December 3, 2012, Ally served AEI with a notice of intention to enforce security pursuant to s. 244 of the BIA. Between December 11 and December 14, 2012, multiple creditors were paid in addition to BDC, but not Ally. On December 14, 2012, an interim receiver was appointed pursuant to s. 47(1) of the BIA to take possession of, and preserve, the assets of AEI.

[19] The only evidence given upon behalf of the defendants relating to the solvency of AEI is a reference in Mr. Almadi’s affidavit sworn April 6, 2015 to the notice of interim receiver which Almadi says shows that AEI had equipment and cars valued at over $1.3 million, while Ally was owed $1.1 million, and there was unsecured debt of $67,000. However, in doing so, he ignores the fact that as of December 13, 2012, only twelve of eighty vehicles financed by Ally were actually on AEI’s lot, and that as of December 17, 2012, just over $27,000 remained in AEI’s bank account. If AEI had assets over and above the $27,000 and twelve vehicles with which to satisfy the amount owed to Ally, then evidence of such assets ought to have been provided. AEI was required to pay out Ally’s interest in a sold vehicle within three days of the vehicle being delivered to a customer. With respect to the financed vehicles not on the lot, AEI had failed to pay its current obligations, in the ordinary course of business, as they generally became due.

[20] The facts relating to insolvency contained in the preceding paragraphs are drawn, in large part, from the affidavits of Tracy Gushue (an employee of Ally), and Lawrence Pick (a member of the law firm that represented Ally) which were filed on the receivership application. Counsel for the defendants objected to the admissibility of the affidavits on this motion, on the grounds that he had not been able to cross-examine the deponents. However, no evidence was given by the defendants to contradict the evidence that I have relied upon, and counsel could have could have moved for an order allowing him to cross-examine the deponents.

Whether the payment was made to BDC with a view to giving BDC a preference

[21] Pursuant to s. 95(2) of the BIA, if a payment has the effect of giving a creditor a preference, it is, in the absence of evidence to the contrary, presumed to have been made with a view to giving the creditor the preference. In this case, there is no evidence to the contrary.

[22] When Mr. Almadi requested a payout statement from BDC, he represented that he would be paying all of AEI’s creditors. In a note to file made of his conversation with Mr. Almadi, Robert MacFarlane of BDC recorded the following statement: “He has decided to pay out our loan at this time to ensure the business has no further obligations so he can cleanly close it on a moment’s notice – he’s planning on making a move this Friday and has requested a payout to clear off our loan with a draft on that date.” This is clearly a misstatement of AEI’s intention in making the payment to BDC.

Whether this action is premature as a result of a failure to make a demand for payment

[23] Prior to the commencement of this action, BDC wrote to the defendants demanding payment pursuant to their guarantees of AEI’s debt. However, the letters were sent to a prior address, and the defendants deny receiving them.

[24] Where the obligation of a third party guarantor is to pay on demand, then a demand is a condition precedent to that obligation. The rationale is that where the guarantee obligation is stated to be on demand, the third party guarantor is given an opportunity to marshal the funds before the obligation is due: Bank of Nova Scotia v. Williamson, 2009 ONCA 754, at para. 14.

[25] In the present case, now more than a year after the action was commenced, it is clear that the defendants have no intention of marshalling the funds necessary to satisfy their guarantees. No interest would be served by dismissing the current action and requiring BDC to commence a new one, following the making of a new demand for payment. Following service of the statement of claim, the defendants did not request time to marshal the necessary funds; rather, they denied liability, and continue to do so.

[26] As noted by the Court of Appeal in Williamson (at para. 14), the issue of the need for a demand has traditionally arisen in the context of a defence by a third party guarantor to the effect that an action on the guarantee was statute-barred, because it was commenced more than six years (the former limitation period) after the principal debt was due. In the present case, however, the issue is not the commencement of a limitation period, but rather, whether the commencement of the action was premature.

[27] Under rule 14.01(4) of the Rules of Civil Procedure, a party may rely upon a fact that occurs after the commencement of a proceeding. In the present case, I see no reason why BDC should not be able to rely upon service of the statement of claim, as a sufficient demand for payment.

Disposition

[28] For the reasons given, I find that there is no genuine issue requiring a trial. The plaintiff is entitled to summary judgment in the amount of $106,207.78, with prejudgment interest from December 14, 2012. If the parties are unable to agree on the quantum of interest or costs, I will consider brief written argument provided that it is delivered to Judges’ Reception, at the Durham Region Courthouse, no later than December 14, 2015.

“Bale J.”

Released: November 10, 2015

Court file no. 88353/14

Date: 20151110

ONTARIO
SUPERIOR COURT OF JUSTICE