Court File and Parties
COURT FILE NO.: CV-15-533423 DATE: 20160422 SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Sheila Di Florio, Applicant AND: Tony Di Florio (also known as Fernando Anthony Di Florio), and Frank Di Florio, Respondents
BEFORE: S.F. Dunphy J.
COUNSEL: M. Harris, for the Applicant C. Tonks for Tony Di Florio, Respondent T. McLean for Frank Di Florio, Respondent
HEARD: April 21, 2016
Endorsement
1This application considers the question of who can bring a claim for contribution after a co-debtor makes an assignment in bankruptcy. Where the joint debtor becomes bankrupt, the creditor is entitled to file its claim for the full amount of the joint debt and the right, if any, to pursue co-debtors for contribution belongs to the trustee in bankruptcy as and when the estate makes a payment giving rise to such a right in contract or in law. Contribution rights do not belong to defendants who settle a fraudulent conveyance action by making a payment to the bankrupt estate but to the estate of the bankrupt that pays the joint claim from the property of the bankrupt however realized. The analysis is not altered where the fraudulent conveyance action is assigned by the trustee pursuant to s. 38 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”), even if the assignee is the creditor holding the joint claim.
2The application is brought by Ms. Sheila Di Florio, the separated spouse of Mr. Sandy Di Florio. She alleges that she was required to discharge more than her former spouse’s proportionate share of a joint and several judgment debt and is suing her two brothers-in-law, Mr. Frank Di Florio and Mr. Tony Di Florio, claiming to exercise her spouse’s rights of contribution in respect of the debt that she claims that she satisfied. Given the shared last names of all of the parties, I shall refer to each by their first name to avoid confusion.
3At the conclusion of the hearing, I dismissed this application with reasons to follow. These are those reasons.
Facts
4On May 18, 2011, Cumming J. issued a judgment in favour of Mary Di Sano and Steven Di Florio (the “Judgment Creditors” hereafter). The judgment came at the conclusion of a trial of an oppression claim that had been commenced in 2006. The defendants included the three brothers Di Florio (Sandy, Frank and Tony) as well as three numbered companies owned by them. The judgment declared all of the defendants to be jointly and severally liable to the Judgment Creditors in the amount of $301,582.38 plus costs in the amount of $116,939.26 and post-judgment interest at the rate of 3% per year.
5On September 22, 2011, the Judgment Creditors instituted an action against Sandy and Sheila as well as their son Santino Di Florio (hereafter, “Santino”). The action sought, among other things, declarations that a house located at 104 Jay Street in Toronto registered in the name of Santino was in fact beneficially owned by Sandy, that a mortgage on the house held by Sandy and Sheila was beneficially owned by Sandy and that Mary’s interest in the mortgage was void. The Statement of Claim pleaded the Assignment and Preferences Act, R.S.O. 1990, c. A.33 and the Fraudulent Conveyances Act, R.S.O, 1990, c. F.29. I shall refer to this as the “Santino FCA Action”.
6Sandy made an assignment in bankruptcy on March 27, 2012. His statement of affairs listed minimal assets and debts in excess of $1 million, including the claims of the Judgment Creditors. It also recited that Sandy had conveyed his half interest in the matrimonial home to Sheila on February 1, 2011 pursuant to a separation agreement. He claimed to be separated but still living in the basement of the matrimonial home.
7This disclosure did not pass unnoticed by the Judgment Creditors although the stay of proceedings in bankruptcy imposed a certain degree of delay. A second action was commenced by the Judgment Creditors against Sheila under s. 96 of the BIA and under the Fraudulent Conveyances Act on December 20, 2012. The plaintiffs sought an order setting aside the conveyance of the matrimonial home. I shall refer to this second action as the “Sheila BIA Action”.
8The Judgment Creditors were authorized to bring this second action - and to pursue the Santino FCA Action – by way of assignment of the claims of the trustee to both such actions under s. 38 of the BIA. The section 38 orders were obtained on October 2, 2012. No other creditors elected to participate in the actions so assigned.
9During the course of the Santino FCA Action, Santino decided to sell the house at 104 Jay Street. The house was sold subject to the proceeds being paid into court. Proceeds totaling $520,000 were paid into court.
10The Santino FCA Action and the Sheila BIA Action were tried together in November 2014. A mid-trial pre-trial succeeded in settling the matter and Minutes of Settlement were entered into. The Minutes of Settlement directed that all of the monies paid into court from the sale of Santino’s house ($520,000) be paid to the Judgment Creditors in full and final settlement of the Sheila BIA Action and the Santino FCA Action – both such claims were to be dismissed without costs.
11The settlement was completed in accordance with the Minutes of Settlement. The funds were paid out of court to the Judgment Creditors and retained by them in satisfaction of their proven claims in bankruptcy pursuant to the s. 38 orders.
12In support of this application, Sandy swore an affidavit indicating “On the condition that Sheila Di Florio paid for the judgment, I assigned my right of recovery of contribution under the Judgment of Justice Cumming from Tony Di Florio and Frank Di Florio to Sheila Di Florio.”
Issues
13This application raises the following issues:
a. Did Sheila pay anything to the Judgment Creditors? b. If there is a right of contribution, who owns it? c. Is there a right of contribution between co-debtors under the judgment of Cumming J.? d. Is the claimed right of contribution barred by the Limitations Act, 2002, R.S.O. 2002, c. 24?
Analysis and Discussion
(i) Did Sheila pay anything to the Judgment Creditors?
14The Application Record as filed contains an affidavit of Sandy that states “Sheila Di Florio paid from monies that had previously been paid into court from the sale of my son’s home $520,000” and attached a copy of the Minutes of Settlement.
15Conspicuously absent from the record was any evidence to establish how and by what means $520,000 of sale proceeds from the sale of Santino’s house could be attributed to Sheila sufficient to give her standing to bring this claim for contribution.
16When challenged on this point during oral argument, counsel for the applicant suggested that the mortgage over Santino’s house could provide the link. The applicant’s record contained no record of the mortgage. It is referenced in pleadings, but pleading are not evidence (except where they constitute admissions).
17Fortunately for the applicant, the respondents filed at the opening of the hearing a volume of exhibits from the cross-examination of Sandy. A close examination of those exhibits provided some assistance to the applicant in attempting to establish a link, but not enough.
18The exhibits filed included the mortgage over Santino’s house in favour of Sandy and Sheila. That mortgage however was interest free and in the name of both Sandy and Sheila. Furthermore, the principal amount was only $300,000 out of the $520,000 paid under the Minutes of Settlement.
19Sheila’s interest in the mortgage and thus in the proceeds paid into court, on the record before me, would not have been greater than $150,000. That is less than one-third of the amount paid to the Judgment Creditors and would have been a shaky foundation for this contribution claim.
20Even this foundation was weakened by reference to Sheila’s pleadings in the Santino FCA Action that was also contained in the same volume of exhibits. Her own statement of defence alleges that the house was purchased as a gift for Santino and claims that the mortgage was put in place variously to protect the interest of Santino’s brother Joseph or to protect Santino pending execution of a pre-nuptial agreement with his future spouse. On its face, Sheila’s pleading is a disclaimer of any beneficial interest in the mortgage or the house. Her own pleading is admissible evidence of an admission by her.
21In short, I have no evidence before me that the applicant Sheila has paid anything at all in satisfaction of the claim of the Judgment Creditors. The proceeds of the sale of Santino’s house were utilized to settle both the Santino FCA Action and the Sheila BIA Action. Sheila has established no beneficial interest in any part of those proceeds. While Sheila was certainly a beneficiary of the settlement reached, there is no evidence that she contributed anything towards it. The only identified source of funds was proceeds of the sale of Santino’s house (albeit funds alleged to be assets of the bankruptcy estate of Sandy by reason of the claims being settled).
22This finding alone is sufficient to dispose of the application in its entirety. The wrong applicant has brought the claim. It has not been established that the applicant paid anything at all from her own funds.
23I make no finding that Sheila would have standing if she had made the payment. It would seem obvious that a defendant in a fraudulent conveyance action can have no claim provable in bankruptcy arising from a payment made to the trustee following a judgment obtained by the trustee. If the transaction by which she acquired the property is void as against the trustee and the estate, it cannot give rise to a claim in her favour. I have grave doubts that the analysis would be any different in the event of the settlement of such a claim prior to actual. The matter need not be determined by me here.
(ii) If there is a right of contribution, who owns it?
24There is a second and equally fundamental reason why the application cannot succeed. In my view, the right of contribution as between co-debtors is one that is vested in the trustee upon the bankruptcy of one of them, whether in respect of payments made by the bankrupt pre-bankruptcy or made by or on behalf of the estate following.
25No payment had been made by Sandy to the Judgment Creditors prior to his assignment in bankruptcy on March 27, 2012 1. Whatever right to contribution that he may have had from his joint debtors was an inchoate right until such time as he actually made a payment beyond the level of his pro rata share. Upon Sandy’s assignment in bankruptcy, all of the property of the bankrupt vested in the trustee in bankruptcy. Section 67(1)(c) of the BIA provides that the property of the bankrupt shall comprise “all property wherever situated of the bankrupt at the date of the bankruptcy or that may be acquired or devolve on the bankrupt before their discharge” (emphasis added). To the extent that Sandy had an inchoate right to contribution from his co-debtors under the judgment of Cumming J., that right belonged to his trustee in bankruptcy and matured when a payment was made by or on behalf of the estate. By the same token, the claims of the Judgment Creditors were transformed from being an in personam claim against Sandy to a claim against the estate in bankruptcy administered by the trustee and distributed in accordance with the scheme of priorities established by the BIA.
26The two actions that were assigned pursuant to s. 38 of the BIA to the Judgment Creditors were assets of the bankruptcy estate. Even after assignment, the assignees had an obligation to account for the proceeds if any of the actions assigned to the extent a surplus was realized.
27There were three transactions (among others) that were challenged by the two actions:
a. The alleged gift of the house to Santino; b. The alleged gift of the interest in the mortgage on Santino’s house to Sheila; and c. The transfer of a half-interest in the matrimonial home to Sheila.
28Prior to bankruptcy, the first two of these were being challenged under the Assignment and Preferences Act and the Fraudulent Conveyances Act in the Santino FCA Action. The effect of succeeding in those claims would have been to render the two transactions void as against creditors. If void, the Judgment Creditors would then be in a position to execute the judgment of Cumming J. over those assets as if the transactions had not occurred and as if the transferee (Santino or Sheila as the case may be) had no beneficial interest at all. For all practical purposes, the effect of the proceeding – if successful – would have been to return the assets to Sandy’s estate for the purpose of enabling the creditor to levy execution.
29The Sheila BIA Action had not been commenced pre-bankruptcy, but the potential action under s. 96 of the BIA or under the provincial statutes would have been subject to much the same analysis.
30When Sandy made an assignment in bankruptcy, the right to set aside those three transactions under the two Ontario statutes and thereby bring the assets back into the bankrupt estate was vested in the trustee in bankruptcy. In addition, the trustee obtained the right to use the BIA’s provisions, in particular s. 96, to broadly similar effect but with certain additional advantages (including as to evidence and burden of proof).
31The Judgment Creditors were able to prove their claim in bankruptcy pursuant to s. 124 of the BIA but lost their right to pursue Sandy personally thereafter. As with a creditor filing a claim under a guarantee, the Judgment Creditors were entitled to prove the full amount of their claim but also became obliged to account for payments received in respect of the claim. Double recovery is not permitted and the trustee is entitled to assert whatever rights of contribution the bankrupt had or would have acquired in respect of any payments made thereafter.
32When the defendants to the Santino FCA Action and the Sheila BIA Action reached a settlement, they were settling the claim of Sandy’s estate against them (as assigned to the Judgment Creditors under s. 38 of the BIA) and not settling the claims of the Judgment Creditors against Sandy. They are strangers to that claim.
33The right of contribution, if any, arising from Sandy’s estate having paid the Judgment Creditors proceeds of the settlement in excess of Sandy’s pro rata share of the judgment belongs solely to Sandy’s estate and not to a debtor of the estate settling a claim of the estate against her.
34The applicant submits that Sandy has assigned the contribution claim to them. The response is that Sandy had no claim to assign after his bankruptcy in any event – the claim belonged to his trustee. Sandy did not make the payment pre-bankruptcy and clearly had no contribution rights to assign after his bankruptcy on March 27, 2012 in respect of payments made by or on behalf of his bankrupt estate to settle claims proved against it.
35The applicant submits that since the trustee in bankruptcy has not asserted a right of contribution against the respondents, those rights revert to Sandy. I disagree. The action or inaction of a trustee in bankruptcy does not define the extent of property of the bankrupt. Property of the bankrupt – including a contingent chose in action such as an unproved (and disputed) right of contribution – is nevertheless an asset of the bankrupt estate. Its status as an asset of the estate is impaired neither by the trustee’s ignorance of it nor by the trustee’s business decision not to pursue it. The only road for property of the bankrupt to be re-vested in the bankrupt is through payment in full of all claims or a successful proposal. Neither of those events has occurred.
36This application has simply been misconceived. The applicant has no standing at all to bring the claim. The right claimed, if it exists at all, belongs to the trustee in bankruptcy and not to the applicant.
(iii) Other defences raised by Respondents
37The respondents have strongly argued in their facta that (i) the right of contribution claimed through Sandy does not arise in any event since no allocation of responsibility inter se was made by Cumming J.; and (ii) a claim for contribution, if it exists, is subject to s. 4 and s. 18 of the Limitations Act and would have been prescribed long ago.
38In light of my findings on the first two issues, I find it unnecessary to make any determination in respect of either of these two arguments.
Disposition
39I ordered the application to be dismissed. The parties were able to come to an agreement on costs that I approved in my endorsement on the Application Record.
S. F. Dunphy J.
Date: April 22, 2016