Re Diena, 2016 ONSC 4566

Court File and Parties

Court File No.: 31-457238 Date: 2016-07-29 Ontario Superior Court of Justice in Bankruptcy

In the Matter of the Bankruptcy of: Emmanuel Joseph Diena of the City of Toronto in the Province of Ontario

Before: Mr. Justice H.J. Wilton-Siegel

Counsel: Emmanuel Diena, Self-represented Harry Fogul, for the Objecting Parties, Kohl & Frisch Limited and Joddes Limited

Heard: June 15, 2016

Reasons for Judgment

1The bankrupt, Emmanuel Diena (the “bankrupt”), seeks an absolute discharge from bankruptcy under s. 170(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”). The discharge is opposed by two creditors, Kohl & Frisch Limited (“K&F”) and Joddes Limited, formerly Tolim Management Inc. (“Tolim” and collectively with K&F, the “Objecting Parties”).

Background to the Bankruptcy

2The bankrupt and his brother Daniel Diena (“Daniel”) operated a dispensing pharmacy business through a number of corporations including Dedicated National Pharmacy Inc., which appears to have been the top holding corporation, Union Medical Pharmacy Inc. and Methadrug Clinic Limited (collectively, the “Corporations”). The Corporations were in the business of selling methadone on a prescription basis. The business commenced in or about May 2007. In 2010, the Corporations collectively owned fourteen locations and had nineteen satellite offices located in doctors’ offices.

3The shares of the Corporations were owned as to 83% by members of the Diena family, including the wives of the bankrupt and Daniel or their personal holding corporations, and as to 17% by Tolim. Pursuant to a unanimous shareholders’ agreement, however, Tolim had the right, among other things, to approve all purchases of additional pharmacies.

4The actual profitability of the Corporations is not in evidence in this proceeding. The triggering event in the bankrupt’s bankruptcy was the receivership of the Corporations. The evidence is that, in November 2009, the Corporations obtained funding, pursuant to a commitment entered into earlier for a $25 million loan from the Bank of Montreal and the Bank of Nova Scotia, to finance the purchase of seven or eight additional pharmacies. Tolim opposed the purchase after the loan was extended, although it apparently had previously led the Corporations to believe otherwise at an earlier date. In any event, as a result of Tolim’s opposition, the purchase transaction did not complete and, in or about February 2010, the Corporations returned the loan proceeds to the banks. Thereafter, the Bank of Montreal was unwilling to continue to extend a line of credit to the Corporations and the Corporations were unable to obtain operating facilities from any other institutional lender or to find a purchaser for the business. Ultimately, the Bank of Montreal called an outstanding loan, the Corporations were placed in receivership in September 2010, and their assets were sold by the receiver.

The Bankruptcy

5The bankruptcy order against the bankrupt was made on November 13, 2012. In his Statement of Affairs dated January 7, 2013, the bankrupt declared nil assets and liabilities totaling $4,421,291. K&F was a supplier to the Corporations and held guarantees from the bankrupt. It filed a proof of claim in the amount of $1,135,721.52, of which it recovered approximately $350,000 out of the receivership. K&F also filed a claim in the amount of $779,565.64 in respect of another company after it acquired that company but this claim is not relevant for present purposes. Tolim filed a proof of claim in the amount of $2,298,524.45 in respect of guarantees of the bankrupt given in respect of two loans made in 2008 to Union Drug Clinic Limited.

Issues Raised by the Trustee in Bankruptcy

6In its s. 170 report, the trustee in bankruptcy, MSI Spergel Inc. (the “trustee”), opposed the discharge on the following grounds referable to the provisions of s. 173(1) of the BIA:

(1) The assets of the bankrupt were less than fifty cents on the dollar;

(2) The bankrupt failed to keep adequate books and records of his financial affairs and, together with Daniel, failed to keep adequate books and records of the financial affairs of the Corporations;

(3) The bankrupt failed to account for the absence of any assets at the date of bankruptcy, notwithstanding the disclosure of net assets totaling $14,217,000 in a personal financial statement that was provided to K&F and Tolim dated March 30, 2009, and failed to account for the absence of any salary from the Corporations notwithstanding his active participation in the management of the Corporations with Daniel;

(4) The bankrupt put Tolim to unnecessary expense in opposing its action to enforce the guarantees given to it; and

(5) The bankrupt failed to perform duties imposed under the BIA in that he failed to respond to inquiries and requests made by the trustee with respect to bank accounts, credit card statements and some prior year tax returns as required by s. 158(b) of the BIA.

7The following findings with respect to each of these matters are relevant to the issue in this proceeding.

8First, the bankrupt does not dispute that his assets represented less than 50 cents on the dollar in that he had nil assets and substantial liabilities. As mentioned, the bankrupt has conducted his affairs so that he would have no assets in the event of bankruptcy. In particular, the shares of the Corporations were owned by his wife and Daniel’s wife, or their personal holding corporations, and he received no salary from the Corporations notwithstanding his involvement as one of the two managing parties. All salary that would otherwise have been payable to him was paid to his wife or her personal corporation. Daniel says that this was done on the advice of legal and accounting advisors dating back to 1981.

9Second, while the bankrupt may have kept less than adequate records of his personal financial situation, this consideration is not of material significance except in respect of the alleged transfer to his wife of a portfolio of securities having an approximate value of $1.1 million and the status of a Florida condominium, both of which are addressed below. There is no suggestion that the status of the bankrupt’s records reflects a concealment of assets of the bankrupt.

10The Objecting Parties also say that the bankrupt and his brother failed to keep adequate records of the financial affairs of the Corporations. It is not possible to establish the adequacy of these records given the conflicting testimony of the receiver’s representative and Daniel. This would require expert evidence. In any event, I conclude this is not relevant given the lack of any suggestion that the absence of records was, in some manner, a contributing factor in the bankruptcy of the bankrupt or the receivership of the Corporations, or is associated with the bankrupt’s receipt of undisclosed assets from the Corporations. In regard to the latter, the issue in this proceeding is not the inability to trace payments to the bankrupt and other family members, which appear to be documented, but rather the absence of any payments to the bankrupt notwithstanding his active management role in the Corporations. This is addressed further below.

11Third, the failure to account for a loss or deficiency of assets is addressed below.

12Fourth, on the evidence, it is not possible to conclude that the bankrupt’s defences to the Tolim action were without any merit and therefore that the bankrupt caused Tolim to incur unnecessary expense. There is no judicial determination to this effect and, while costs were awarded in favour of Tolim, the order does not refer to substantial indemnity costs. The Tolim opposition to the proposed acquisition of the additional pharmacies was connected to the circumstances that led to the Bank of Montreal’s withdrawal of the line of credit to the Corporations and the subsequent receivership. In certain circumstances, such actions could provide a defence to claims under guarantees given to a shareholder lending money to a corporation.

13Fifth, the failure to provide some requested documentation was not detailed by the trustee. There is no suggestion, however, that the documentation sought would have revealed undisclosed assets. The only relevant documentation would appear to be that pertaining to the transfer of the securities portfolio to the bankrupt’s wife and the Florida condominium, which have been referred to above and are discussed further below.

The Misrepresentation of the Bankrupt in his Personal Financial Statement

14The principal consideration before the Court upon which the Objecting Parties base their opposition is the alleged misrepresentation by the bankrupt of his assets in a personal financial statement given to Tolim and K&F on or about April 1, 2009. In this financial statement, the bankrupt disclosed net assets totaling $14,217,000. The status of those assets was the subject of Daniel’s testimony as follows.

15The preponderant amount of assets shown on this statement, being $12,500,000, represented the valuation of the shares of the Corporations prepared by a third party financial advisor in 2009 in respect of the failed acquisition transaction. This asset ceased to have value on the appointment of the receiver.

16The statement also included the securities portfolio referred to above valued at $1.1 million, which was held by an offshore trust and was apparently transferable by a simple designation. Daniel says that the bankrupt owned these securities at the date of the statement but subsequently conveyed the portfolio to his wife in connection with a mediated settlement of marital differences. There is, however, no evidence of either this transfer or of the suggestion of the mediator/marriage counsellor, who was a rabbi who was not called to testify. In addition, it is not clear whether, as a matter of law and as a matter of the understanding between the bankrupt and his wife, the securities portfolio was transferred to his wife on an irrevocable basis or on a more conditional basis under which the bankrupt retained access to it if he needed it.

17In addition, the personal financial statement includes a condominium in Florida having a value at the time of $450,000. Daniel says that this condominium was owned by a corporation whose shares are owned by his wife and the bankrupt’s wife. He says that it has been fully mortgaged to fund the legal expenses incurred by him and the bankrupt in their unsuccessful opposition to the receivership. Daniel says that the expenses of the condominium, including debt service, are being paid by their parents. There is also no documentation supporting these assertions.

18The personal financial statement further includes amounts of $100,000 for personal property, apparently principally a car and certain books which Daniel says are quite valuable, $10,000 for a note receivable that was apparently not paid, and $60,000 for retirement funds. These amounts are not at issue in this proceeding.

19An important issue in this proceeding is whether the bankrupt intentionally misrepresented the ownership of the assets. The bankrupt says that he understood the personal financial statement to be a statement of the family assets – that is, assets to which he had access even if he did not have actual ownership. He says that, accordingly, any misrepresentation was the result of imprecision rather than a fraudulent intention.

20The applicant is an experienced business person who knew that K&F would rely on his personal financial statement, particularly as it was delivered in connection with the negotiation of a forbearance agreement between the Corporations and K&F. I do not think that the applicant was merely “imprecise” in the presentation of his assets in his personal financial statement. He misrepresented these assets as his personal assets when, in fact, they were owned by his wife. At best, it is possible that he thought that any misrepresentation was of no consequence because he had access to the value of the Corporations if the guarantees were called.

21On the other hand, the actual significance of the personal financial statement should not be overstated. While the personal financial statement was shown to Tolim in 2009, Tolim did not rely on it. The Tolim loans to the Corporations were made earlier in 2008.

22Further, K&F only relied on the personal financial statement for the provision of credit to one pharmacy in or about April 11, 2009. Of the five guarantees given by the bankrupt to K&F in respect of particular pharmacies, the first four were given in 2008 in connection with the provision of credit to four pharmacies owned by the Corporations in reliance on credit applications signed by Daniel for which there is no evidence of any involvement of the bankrupt. Accordingly, K&F cannot establish reliance on the personal financial statement in the establishment of such credit facilities. While K&F suggests that the statement was also relied on in negotiations regarding a forbearance agreement at that time, the manner in which it relied on the statement for such purpose is unclear as no such agreement was reached between the parties.

23K&F says, however, that if it had received a personal financial statement that correctly identified the owner of the shares of the Corporation and of the Florida condominium as the bankrupt’s wife, it would have required guarantees of the bankrupt’s wife in respect of all of the credit facilities that it had established in respect of pharmacies owned by the Corporations, and would therefore have had access to her assets on the receivership of the Corporation, including the $1.1 million in securities allegedly transferred to her. I note that this assertion is inconsistent with K&F’s practice of seeking guarantees on a pharmacy-by-pharmacy basis. Nor is it clear that K&F required or obtained guarantees in respect of all of the pharmacies that the Corporations operated. However, even if K&F would have received such an unsecured guarantee, there is no certainty that it would thereby have avoided its loss. The important fact is that K&F was prepared to supply product on the basis of security over the assets of the Corporations supplemented by an unsecured guarantee by a party whose assets were overwhelmingly the value of the shares of the Corporations and over whose other assets K&F had no control.

Applicable Law

24The principles which should guide a court in the consideration of a discharge application are set out in Westmore v. McAfee (1988), 67 C.B.R. (N.S.) 209 (B.C. C.A.), at para 22. As stated therein at para. 23, these principles impose on the court the obligation to consider and balance the interests of the bankrupt, of the creditors and of the public.

Positions of the Parties

25The bankrupt says, as mentioned, that he did not intend to mislead K&F in the presentation of his assets in his personal financial statement. While he does not use the exact words, in substance he says that he is an honest but unfortunate debtor who should receive an absolute discharge after three and a half years. He also says that he does not have, or have access to, any funds to satisfy any payment condition that might be imposed as a condition of a discharge.

26The Objecting Parties argue that the bankrupt’s actions offend commercial morality and are not indicative of an honest but unfortunate debtor. In particular, they argue that the misrepresentation constituted unacceptable commercial behaviour that should attract the Court’s sanction in the form of a denial of the discharge at this time. In the alternative, if the Court is prepared to grant a conditional discharge, they suggest that the Court should impose a payment condition of an amount between $100,000 and $150,000. They suggest that such an order is appropriate to reflect the Court’s determination that the bankrupt’s behaviour was reprehensible. They say that the bankrupt should not be allowed to escape all of his debts in the present circumstances.

27As mentioned, the trustee indicated in its s. 170 report that it opposed the discharge. A representative of the trustee attended the hearing but did not make any submissions.

Analysis and Conclusions

Preliminary Observations

28The determination herein is informed largely by the following four considerations.

29First, as mentioned, the bankrupt has conducted his affairs so that, in the event of bankruptcy, he would have no assets.

30Second, of the assets shown on the personal financial statement, there is no documentation to support the applicant’s assertions regarding the status of the Florida condominium or of the alleged transfer of the securities portfolio valued at $1.1 million to the bankrupt’s wife.

31Third, the bankrupt misrepresented ownership of the shares of the Corporations in his personal financial statement in 2009, which was relied upon by K&F at least in respect of the extension of credit for one pharmacy.

32Fourth, the applicant is an intelligent and educated individual who, while self-represented, had prepared his presentation in a thoughtful and focused manner. Whether or not he had access to legal advice is unclear but he had clearly informed himself of the legal issues and procedure involved in this hearing. It is significant that he chose to introduce all of his evidence through Daniel rather than take the stand himself. Accordingly, his position that he did not intend to mislead the Objecting Parties in respect of the disclosure in the personal financial statement, and his submission that he does not have, or have access to, any funds to satisfy any payment condition of a discharge, were not subject to cross-examination. Upon reflection, I think that this was a deliberate decision. Further, the bankrupt would have been aware that the circumstances pertaining to the securities portfolio and the Florida condominium would be significant at the hearing. He chose not to provide any documentary or other evidence to support the statements of Daniel.

33Fifth, while Daniel appeared to be truthful in his evidence, there are two reasons to be cautious regarding his evidence. As the bankrupt’s brother and former business partner, he was naturally a sympathetic witness. In addition, he is also bankrupt and therefore has an interest in the outcome of this proceeding relative to his own discharge from bankruptcy. Accordingly, in respect of the bankrupt’s circumstances, as opposed to the factual background to the bankruptcy, I have relied more on the presence or absence of documentation than on Daniel’s testimony.

Conclusions

34Following the framework in Westmore, I reach the following conclusions.

35First, for the reasons set out above, I conclude that the bankrupt intentionally misrepresented the legal ownership of the shares of the Corporations and the Florida condominium. The fact that he may have considered that he had access to these assets if necessary does not change that fact. In addition, he went to extreme lengths to shield not only his assets but also the income to which he would otherwise have been entitled from the Corporations. Moreover, the circumstances pertaining to the Florida condominium and the securities portfolio were not disclosed by the bankrupt until this hearing.

36Further, as mentioned, although the bankrupt says that he has no funds, and no access to any funds, to satisfy a payment obligation, he chose not to testify personally. Therefore, these statements have not been given under oath or subject to cross-examination. His only witness was Daniel, who did not testify directly with respect to his brother’s inability to satisfy any such order. There is, therefore, no evidence of which the Court can take cognizance regarding the bankrupt’s ability to satisfy any payment condition that might be imposed.

37Given these circumstances and the record before the Court, I am not satisfied that the bankrupt has established that he has no access to any funds to satisfy a payment obligation. There are a number of circumstances that suggest that the contrary may be true. In particular, there is no documentation before the Court establishing an absolute entitlement of the bankrupt’s wife to the securities portfolio allegedly transferred to her. In addition, the evidence is clear that the personal corporation of the bankrupt’s wife received his salary from the Corporations, to the extent a salary was paid in respect of his services. There is also no documentation regarding the current equity in the Florida condominium, which the bankrupt implied in the presentation of his personal financial statement was available to him and, therefore, should be available to fund a payment order. There is, however, evidence that the bankrupt’s parents are paying the expenses of the condominium. Further, Daniel testified that the bankrupt had received monies from various family members to support himself during the bankruptcy, in addition to contributions from his wife to family expenses and his modest income from recently-obtained employment as a rabbi. These direct and indirect contributions from family members are consistent with the bankrupt’s own approach in the past to his personal financial statement that family members in fact received income and/or assets which he was entitled to access if required.

38Second, with respect to the Objecting Parties, as mentioned, I am not persuaded that Tolim acted to its detriment on the personal financial statement or otherwise. Also, even if K&F had required an unsecured guarantee from the bankrupt’s wife if the bankrupt had correctly set out the actual ownership of the shares of the Corporations and the Florida condominium, there is no certainty that K&F would thereby have avoided its loss.

39I would note, as well, that the Objecting Parties do not wish to pursue a judicial determination that the bankrupt’s actions fall within the provisions of s. 178(1)(e) of the BIA, nor do they wish to pursue a claim that the transfer of securities from the bankrupt to his wife constituted a fraudulent preference under s. 95 of the BIA or otherwise. Instead, they ask the Court to refuse the requested discharge.

40With respect to the public, I accept that the Court should sanction offensive behaviour and have regard to the possibility of a recurrence of such activity. The Court’s view of the bankrupt’s actions has been set out above. There is no apparent evidence of a risk of recurrence.

41Based on the foregoing, I conclude that the applicant is perhaps an unfortunate debtor but he has not established that he is entirely honest. I find that it is appropriate, in balancing the interests of the bankrupt, his creditors, and the public, to grant the bankrupt a discharge conditional on payment to the trustee of the amount of $100,000.

Wilton-Siegel J.