Court File and Parties

COURT FILE NO.: CV-16-546482 DATE: 20161007 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 2081451 ONTARIO LTD., Applicant AND: 2221306 ONTARIO INC., HEE KYUNG SHIN also known as HEEKYUNG SHIN and 2165348 ONTARIO INC., Respondents

BEFORE: Lederman J.

COUNSEL: William Murray, for the Applicant Martin Goose for the Respondent

HEARD: September 26 and 27, 2016

Endorsement

[1] On April 24, 2008, the Respondent, 2165348 Ontario Inc. (“216”), purchased a convenience store business and assets from the Applicant 2081451 Ontario Ltd. (“208”). Dongik Shin was the sole shareholder and officer and director of 216.

[2] The purchase price was $1 million dollars. The sellers were prepared to provide some security to allow the purchaser to finance the purchase. To facilitate the purchase, 216 obtained two loans from the Korea Exchange Bank of Canada (“KEBC”) of $150,000 each. 208 and its principal provided security for the loans. 208 pledged a $150,000 term deposit with KEBC to secure one loan of $150,000. The principal of 208 and Dongik Shin also gave personal guarantees to secure the second loan of $150,000.

[3] On closing, 208 accepted cash, as well as two promissory notes from 216 each in the amount of $30,000, a post-dated cheque from Dongik Shin for the balance owing for inventory and an indemnity from both 216 and Dongik Shin for any loss that 208 might suffer regarding the promissory notes and the $150,000 term deposit that it pledged to the KEBC.

[4] There was default on the payments under the promissory notes and the cheque for inventory was dishonoured. In August 2008, 208 sued 216 and Dongik Shin for these amounts and later asserted a claim for the loss of $150,000 term deposit after it was seized by the KEBC.

[5] On July 28, 2009, Dongik Shin and his wife, (the Respondent, Hee Kyung Shin), purchased a home for $797,500 as tenants in common, 60% for Heekyung Shin and 40% for Dongik Shin. A mortgage of $734,976 was taken on the property requiring monthly payments of $3,218.19.

[6] On or about October 20, 2009, Hee Kyung Shin incorporated the Respondent Corporation 2221306 Ontario Inc. (“222”). She is an officer and director of 222.

[7] In early January 2010, 222 entered into a new lease for the store premises that had been previously leased and occupied by 216. Dongik Shin was an indemnifier under the lease. 222 changed the business name and began to operate the convenience store. Dongik Shin continued to work in the business as an employee of 222, earning wages of only $1,733 per month. In effect, 222 acquired the business and assets from 216 without any consideration and in the absence of any purchase and sale documentation.

[8] This effective transfer of the business to 222 was done as Dongik Shin was taking steps to strip 216 of value: he reduced his shareholder loans in 216, decreased the saleable inventory held by 216 and increased the company’s debt.

[9] The effect was to remove assets from the reach of creditors of 216 at a time when 216 was involved in litigation with 208. Also, Dongik Shin returned a Toyota car to Toyota Credit and four days later acquired a Ford Edge automobile against which a lien was registered in the names of himself and Hee Kyung Shin as joint debtors.

[10] 222 made payments to KEBC to reduce the balance on the second loan that was given to 216 for which Dongik Shin had given a personal guarantee.

[11] Dongik Shin filed for bankruptcy on June 8, 2010 and made misleading and inconsistent statements in his bankruptcy documents.

[12] Even though he was purportedly earning a small monthly amount from 222, he managed to meet the monthly mortgage payments of $3,200 on the house purchased by himself and Hee Kyung Shin in July 2009 and in which they both resided. Hee Kyung Shin was not working and was not earning any income.

[13] 208 obtained default judgment against 216 on November 17, 2010 for the following:

(1) $187,538.62 plus post-judgment interest at the rate of 2% per year; (2) $122,130 plus post-judgment interest at the rate of 1.75% per month; and (3) Costs of $14,000.

Position of the Respondents

[14] The Respondents allege they had no knowledge of the debts owing by 216. Hee Kyung Shin alleges that she was not involved in 216’s purchase of the business from 208 and did not know about the promissory notes, the cheque by Dongik Shin to 208, the term deposit pledged to KEBC, or the judgment against 216.

[15] Hee Kyung Shin and Dongik Shin separated in February, 2008. Hee Kyung Shin states that she only became involved in the business in January, 2010 when the lease to 208 was about to expire and when Dongik Shin was depressed and could no longer operate the business as she was trying to preserve the ability for Dongik Shin to pay debts that he owed to her and the KEBC.

[16] At the time that 222 entered into the new lease and took over the business, Hee Kyung Shin had the chattels and inventory of 216 appraised. The value was only $26,042 and she submits that 208 would only be entitled, in any event, to judgment in that amount.

[17] Hee Kyung Shin maintains that the funds to purchase the home came from her family in South Korea.

Disposition

[18] Even though the parties allegedly separated in 2008, they continued to reside together in the house that they purchased subsequently in July 2009.

[19] As with 216, Dongik Shin continued to work in the store now operated by 222. Hee Kyung Shin did not do any work in the store whether when it was operated by either 216 or 222.

[20] Although Hee Kyung Shin says that she incorporated 222 to take steps in January 2010 to salvage the lease that was expiring, its terms indicate that it would not expire for another 7 months and the tenant had the option of renewing the lease for 3 terms of 5 years each.

[21] In her cross-examination, Hee Kyung Shin admitted that she knew about the term deposit and personal guarantees given by 208 and its principals. Further, she acknowledged that she had a large stake in the business and wanted to preserve that.

[22] 222 and Hee Kyung Shin were paying off the second $150,000 loan from KEBC because it still had the personal guarantee of Dongik Shin. No payments were made on the first $150,000 loan which was not guaranteed by Dongik Shin.

[23] The circumstances of this case demonstrate certain “badges of fraud” surrounding the transfer of the 216’s business and assets to 222, including:

(a) the transfer was made without any consideration; (b) the transfer was made after litigation was brought by 208 against 216; (c) Dongik Shin continued to work in the store and receive benefits whereas Hee Kyung Shin never worked in the store; (d) the close relationship between the shareholders of 216 and 222: husband and wife; (e) the actions taken by Dongik Shin to remove any value in 216 which had the effect of removing assets available to 216’s creditors; (f) there is no evidence that at the time the new lease was entered into there were any acts of default under 216’s lease; nor had the landlord threatened to terminate the lease. In fact, the lease provided for a series of renewable terms and was not in jeopardy as Hee Kyung Shin suggests. (g) the proximity in time of Dongik Shin’s bankruptcy; (h) the payment by 222 of one loan for which Dongik Shin had given a personal guarantee; (i) the separation agreement between Dongik shin and his wife raises some serious questions as to its bona fides given that they subsequently purchased a house together and resided in it. (j) the evidence does not demonstrate clearly that the monies to purchase the house came from Hee Kyung Shin’s family in South Korea.

[24] These facts give rise to an inference of intent to defraud. No credible explanation has been offered for the transfer of the business and assets of 208 to 216. No corroborative reliable independent evidence has been given by the Respondents to justify a finding that it was bona fide.

[25] The only logical conclusion from these facts is that the transfer of the business of 216 to 222 without any semblance of consideration was a fraudulent conveyance for the purpose of defeating or hindering creditors of 216, and in particular 208.

[26] The acts in question amounted to a blatant fraudulent conveyance, and in these circumstances, it is clear that the officers and directors of 216 and 222 acted in a manner that is oppressive and unfairly prejudiced or disregarded the interests of 208 as creditor.

[27] Accordingly, there will be a declaration that 208 is a proper person to make an application under the oppression remedy provision in the Ontario Business Corporations Act, R.S.O. 1990, c. B. 16. The appropriate relief is for an order under s. 248(1)(3)(j) compensating an aggrieved person, namely 208. Since 222 and Hee Kyung Shin stepped into the shoes of 216 taking all the benefit from operating the business and not facing up to the responsibility and obligations owed by 216, judgment should go against them in the same terms as the judgment that 208 has obtained against 216. Therefore, judgment will issue against 222 and Hee Kyung Shin for the total amount of damages, pre and post judgment interest and costs, awarded by Low J. on November 17, 2010 against 216.

[28] If the parties cannot agree upon the costs of this application, they may make submissions in writing within 30 days.

Lederman J. Date: October 7, 2016