CITATION: Re Radlo, 2016 ONSC 651

COURT FILE NO.: 32-1675054

DATE: 20160126

SUPERIOR COURT OF JUSTICE – Ontario

(IN BANKRUPTCY AND INSOLVENCY)

IN THE MATTER OF THE BANKRUPTCY OF

MICHAEL FRANCIS RADLO

OF THE CITY OF BRANTFORD

IN THE COUNTY OF BRANT

IN THE PROVINCE OF ONTARIO

SUMMARY ADMINISTRATION

BEFORE: MESBUR J.

COUNSEL: Michael Francis Radlo, bankrupt, in person

Allan Fogul, for the Trustee, MNP Limited

Corrinne Radlo, opposing creditor, in person

HEARD: January 13-15, 2016

E N D O R S E M E N T

Nature of the hearing:

[1] The bankrupt applies for a discharge. His former wife, a major creditor, opposes the discharge. The Trustee takes the position the bankrupt should be granted a conditional discharge. The Trustee says, however, that because of the bankrupt’s incomplete information it cannot recommend specific conditions.

The legal framework:

[2] Since the bankrupt is a first-time bankrupt, the provisions of s. 168 of the Bankruptcy and Insolvency Act (BIA) apply. That section says that in the case of a bankrupt who has never been bankrupt before the bankrupt is automatically discharged on the expiry of 9 months after the date of bankruptcy unless, in that 9-month period, an opposition to the discharge has been filed or the bankrupt has been required to make payments under section 68 to the estate of the bankrupt, or on the expiry of 21 months after the date of bankruptcy unless an opposition to the discharge has been filed before the automatic discharge takes effect.

[3] If, however, any facts are proved under s. 173(1) of the Bankruptcy and Insolvency Act (BIA) the bankrupt cannot be granted absolute discharge.

[4] Section 173(1) sets out the following facts that preclude an absolute discharge:

(a) the assets of the bankrupt are not of a value equal to fifty cents on the dollar on the amount of the bankrupt’s unsecured liabilities, unless the bankrupt satisfies the court that the fact that the assets are not of a value equal to fifty cents on the dollar on the amount of the bankrupt’s unsecured liabilities has arisen from circumstances for which the bankrupt cannot justly be held responsible;

(b) the bankrupt has omitted to keep such books of account as are usual and proper in the business carried on by the bankrupt and as sufficiently disclose the business transactions and financial position of the bankrupt within the period beginning on the day that is three years before the date of the initial bankruptcy event and ending on the date of the bankruptcy, both dates included;

(c) the bankrupt has continued to trade after becoming aware of being insolvent;

(d) the bankrupt has failed to account satisfactorily for any loss of assets or for any deficiency of assets to meet the bankrupt’s liabilities;

(e) the bankrupt has brought on, or contributed to, the bankruptcy by rash and hazardous speculations, by unjustifiable extravagance in living, by gambling or by culpable neglect of the bankrupt’s business affairs;

(f) the bankrupt has put any of the bankrupt’s creditors to unnecessary expense by a frivolous or vexatious defence to any action properly brought against the bankrupt;

(g) the bankrupt has, within the period beginning on the day that is three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy, both dates included, incurred unjustifiable expense by bringing a frivolous or vexatious action;

(h) the bankrupt has, within the period beginning on the day that is three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy, both dates included, when unable to pay debts as they became due, given an undue preference to any of the bankrupt’s creditors;

(i) the bankrupt has, within the period beginning on the day that is three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy, both dates included, incurred liabilities in order to make the bankrupt’s assets equal to fifty cents on the dollar on the amount of the bankrupt’s unsecured liabilities;

(j) the bankrupt has on any previous occasion been bankrupt or made a proposal to creditors;

(k) the bankrupt has been guilty of any fraud or fraudulent breach of trust;

(l) the bankrupt has committed any offence under this Act or any other statute in connection with the bankrupt’s property, the bankruptcy or the proceedings thereunder;

(m) the bankrupt has failed to comply with a requirement to pay imposed under section 68;

(n) the bankrupt, if the bankrupt could have made a viable proposal, chose bankruptcy rather than a proposal to creditors as the means to resolve the indebtedness; and

(o) the bankrupt has failed to perform the duties imposed on the bankrupt under this Act or to comply with any order of the court.

[5] If any of those facts are found, the court has a broad discretion as to what disposition it should make. These range from suspending the discharge to making an order for conditional discharge, including conditional orders for payment.

Background:

[6] The bankrupt and the opposing creditor are former spouses. They were married for 19 years and had two children. They were involved in acrimonious and protracted litigation which culminated in a trial before Maddalena J over four days in August of 2013.

[7] The trial was originally scheduled to take place in the fall of 2012. On October 12, 2012, about a week before the trial was to begin, the bankrupt made a voluntary assignment into bankruptcy. Since one of the wife’s claims was for equalization of net family property, she required an order from the court lifting the automatic stay imposed by the bankruptcy and permitting her to continue the family law proceeding so her equalization claim could be quantified. She obtained the requisite order, and the trial ultimately proceeded. The trial judge awarded the wife an equalization payment of $268,683.00 together with an order for costs. These sums make up the former wife’s claims in the bankruptcy.

[8] The Trustee has accepted the claims, as well as her claim as a preferred creditor for outstanding amounts of support.

[9] The bankrupt is a first time bankrupt. When his application for an automatic discharge came on before the court his creditors were given notice of the application. The bankrupt’s former wife, who is the only opposing creditor at this hearing, delivered an opposition to his discharge. The bankrupt complains that the opposition came at the last minute, and the opposing creditor should have advised the Trustee of her complaints long before the discharge hearing so that he could have “worked with” the Trustee to resolve the complaints. The bankrupt seeks to deflect the court’s attention away from him and his obligations, onto the opposing creditor instead.

[10] The bankrupt’s position misses the point. The creditor’s obligation to deliver a notice of objection arises on being served with the bankrupt’s application for discharge. This is precisely what she did. The creditor did nothing untoward in delivering her opposition when she did.

[11] The opposing creditor filed extensive material in opposition to the discharge. This included both her affidavit and, as exhibits to that affidavit, copies of the Reasons for Judgment from the family trial, copies of various emails that had been entered into evidence in the family trial, and a copy of the bankrupt’s U.S. Dollar stock trading statements dated February 27, 2009 and December 31, 2009, showing a balance of $476,043.69. The bankrupt had failed to disclose this account in any financial statement after June, 2008 in the family proceedings. He failed to mention it to his Trustee. Since filing her first affidavit, the opposing creditor has delivered two more affidavits, providing significant additional financial information about the bankrupt.

[12] Once the opposing creditor delivered her notice of objection and additional material, the Trustee had the documents and information that had been filed in the family trial. The Trustee has now had an opportunity to review this material, and has discussed it in its supplementary report. I will review the Trustee’s findings in due course. In order to put them into context, however, it is important to consider the factual findings of the trial judge in the family trial.

[13] The trial judge’s findings in the family trial are significant. Although the bankrupt tells me he launched an appeal from the trial decision, he has not perfected the appeal, notwithstanding obtaining an extension from the Court of Appeal to do so. He says he lacks sufficient funds to pursue the appeal. Whether that is so or not remains to be seen. Suffice to say I am faced with very significant findings of fact from the trial decision that are extremely relevant in this discharge hearing. In a nutshell, the headnote to the case[^1] summarizes the situation well:

Parties were married 19 years and had two children — Wife claimed husband failed to disclose two large sums of money, $353,600 and $80,000 — Husband asserted both sums belonged to wealthy friends who lived outside of Canada — Wife claimed undisclosed monies ought to be considered in equalization of net family property and/or as income for husband — Both sums originated from husband’s account and were proper monies to be dealt with in equalization of net family property — Husband’s evidence that money initially belonged to his wealthy friends or that monies were post-separation monies was not accepted — Husband prepared correspondence and presented it to court as if it had been prepared by another individual — Husband presented nefarious scheme to deceive wife and court with respect to two sums — Husband’s explanations were preposterous and unbelievable — Monies en route to and from various places were eventually destined for husband and were parties’ monies — Husband did not disclose two sums of money.

[14] The “nefarious scheme” referred to above was discovered in the husband’s emails which the wife had obtained using a “family” password or passwords the parties had utilized throughout their marriage. The husband failed to disclose any of the funds in question, and objected to the admission of the emails into evidence on the basis of their being “stolen”, “fake” or obtained by illegal means. The trial judge rejected this argument, holding at paragraph 44: “When parties separate if they do not amend their computer passwords, then they do so at their own peril.”

[15] The trial judge determined the two sums of money belonged to the family/husband, he had failed to disclose the funds, and had surreptitiously moved the money abroad so the wife would not find it.

[16] Notwithstanding the clear findings of the trial judge, the bankrupt failed to disclose these funds to the Trustee. He still takes the position the money is not his and never was. He still takes the position the court cannot look to the emails to support any such finding. He still asserts the funds in question actually belong to his supposedly wealthy friend, Steve Rush.

[17] As was the case in the family trial, the opposing creditor relied on the emails to support her position that the bankrupt actually has funds, and can pay his debts.

[18] As was the case in the family trial, the bankrupt vigorously opposed the admissibility of the emails. I held a voir dire on the issue. As was the case in the family trial, I ruled the emails admissible. I gave oral reasons for my decision at the hearing.

Evidence on the discharge hearing:

[19] Ultimately, the issues on this discharge hearing revolve around two significant financial transactions and their ultimate effect on the bankrupt’s discharge. The first transaction was a wire transfer in November of 2008 of $353,600 from an account in Switzerland to the bankrupt’s account, and then a wire transfer of the same sum from the bankrupt’s account to an account in Spain in the name of Steven Douglas Rush. The bankrupt takes the position this was a “surprise gift” from a wealthy friend, to enable him to buy a house, since he was effectively homeless and destitute following his separation. Nevertheless, he says he was too proud to accept such largesse, and immediately wired the money back to the account of his friend Steven Rush in Spain.

[20] The second is a wire transfer of $80,000. At the family trial, according to the trial judge’s reasons, the bankrupt took the position this was a “gift” from Mr. Rush which he sent to the bankrupt to keep and invest on his behalf.

[21] At this trial, the bankrupt and his two witnesses Dipak Lam and Chris Blake testified they, the bankrupt and Mr. Rush were all very close friends, like the “Four Musketeers”, and the $80,000 was “seed money” from Mr. Rush for investments the bankrupt was to make on their joint behalf, like an investment club.

[22] Eventually, this $80,000 grew to over $271,000 US. In January of 2010, the bankrupt’s friend Chris Blake (who lives near Seattle, Washington) received a wire transfer from the bankrupt in the amount of $281,400 US. At the bankrupt’s request, the funds were transferred almost immediately back to Canada into the bank account of the bankrupt’s mother. The wire transfer instructions and details all came from the bankrupt. Nevertheless, the bankrupt and Mr. Blake suggest the funds were really Mr. Rush’s money, and because he and the bankrupt’s mother were very close, it made sense for the money to be held in an account in her name, so Mr. Rush could provide her with trading instructions. I simply do not believe it. I have no credible evidence to support this explanation. In fact, a close look at the bankrupt’s emails to Mr. Blake suggest nothing of the kind.

[23] Instead, they suggest a clear scheme to move money out of the bankrupt’s name and to try to put it out of the reach of any claim from his wife in the matrimonial proceedings. On January 10, 2010 the bankrupt sent an email to Chris Blake, saying:

OK

I’ve thought it over

Would like to ask you if I can wire transfer equivalent to approx. $300k in $US this week to you

Could you receive, then wire back next day in $US to me (my mom’s account)?

We would have to exchange bank information including SWIFT # etc.

Could you talk to your bank Manager and have him help you?

Maybe say that I am wiring you money because you were going to borrow it from me to cover off purchases for your business, but then you secured other sources and wired it back (explains the wiring back 1-2 days later)

Please let me know what you think.

[emphasis added]

[24] This email clearly implies the money will be coming from the bankrupt himself, and then will be wired back to him, but care of his mother’s account. The bankrupt then suggests a story Mr. Blake can concoct to explain the transfers in and out, should anyone ask. Interestingly, a year later, on March 4, 2011 the bankrupt wrote to Mr. Rush in a similar vein. His email of that date says :

And tomorrow, I will be withdrawing the monies from this account of mine [CIBC chequing account][^2] and depositing them into my mom’s account for wire transfer over to you as I described to you (I do not want any transfers to show within my account for obvious reasons)

[25] I conclude from the January 10, 2010 email the funds in question belonged to the bankrupt and continued to be his funds continually after they were wired back into his mother’s account. I reject any suggestion the money ever belonged to Steve Rush. I conclude from the March 2011 email the bankrupt was continuing to move large sums of money out of his name and into the names of others.

[26] As was the case in the family trial, the bankrupt asserts a wire transfer in November of 2008 of $353,600 from an account in Geneva Switzerland to his bank account in Toronto was an unexpected “gift” from his friend Steve Rush. The bankrupt asserts he was too proud to keep this gift and immediately wired it back to Mr. Rush.

[27] On February 15, 2009 the bankrupt emailed Steve Rush saying:

Could you send me an e-mail that specifically states that the money transferred (state the date of 2/12) was a GIFT from you for the purposes to assist me with clearing debt and obtaining a house after my separation.

Those words will remove any doubt or attempt on Corrie’s [the bankrupt’s wife, and now opposing creditor] lawyer’s part to say it was my money

[28] At the family trial, this transaction was identified as “unclear” by the jointly retained forensic expert from BDO, who sadly never received clear information about where the money came from or where it went. The BDO report says:

You will recall we inquired as to the details of the following two transactions in Mr. Radlo’s account (Transit 01312; Account 5220512):

1. A deposit for $353,600.80 on November 12, 2008 with a description of TT1/Madame”; and

2. A withdrawal for $353,642.80 on November 14, 2008 with a description of “Steven Douglas”

The documents provided by RBC are copied for purposes of this report. It is unclear the source or use of these funds, beyond that the deposit appears to originate in Switzerland and the payment appears to finish in Spain. You may consider asking for more information about these transfers from RBC.

[29] The forensic analysis was never completed.

[30] Unbeknownst to the forensic expert who testified at the family trial, the bankrupt had also emailed Rush in December of 2008 asking for “the money” during the latter part of January because he was looking to buy a house. He went on to say:

… When the time is best for you (after finalization of my separation), I would ask you to transfer $80,000 CAN. I would use to resolve separated debt and downpayment on a new home …[^3]

[31] At the family trial, the bankrupt alleged the $80,000 was used to support Mr. Rush’s “lavish lifestyle” while in Canada.[^4] At the discharge hearing, the bankrupt and his two witnesses testified the $80,000 was “seed money” Mr. Rush provided to the four men (Rush, Lam, Blake and the bankrupt) for investment purposes for their joint benefit.

[32] At no time has the bankrupt ever produced a shred of evidence to support the allegation that any funds ever came from the elusive Mr. Rush. According to the bankrupt and his witnesses, Mr. Rush:

• Is extremely wealthy and got his wealth from his parents (Dipak Lam’s evidence);

• Brought nothing into his marriage but married a very wealthy woman (Chris Blake’s evidence)[^5];

• Plays golf all day in Europe, but gives trading instructions over the phone between holes;

• Needs cash in Canada to support his “lavish” lifestyle and hence had money here either in the bankrupt’s name, or else in the bankrupt’s mother’s name;

• Directed the investment of “his” money, deposited in either the bankrupt’s name or the bankrupt’s mother’s name;

• Does not use a credit card to meet his expenses, even though he has a credit card;

• Stayed with the bankrupt’s mother in Brantford instead of in hotels.

[33] I come to the same conclusions as the trial judge did in the family trial. Both tranches of money were the bankrupt’s. He went to great lengths, and undertook many transactions to try to hide the funds from both his wife and the court. He continues to do so in failing to disclose them to the Trustee.

[34] At this discharge hearing, the bankrupt still takes the position the $353,600 was not his money; he asserts it was and remains the property of Mr. Rush. The bankrupt continued, and continues, to attack the factual findings made at the family trial.

[35] Notably, Mr. Rush did not testify at the family trial. He also did not testify at the discharge hearing. The evidence of the bankrupt’s friends Mr. Lam and Mr. Blake was self-serving and primarily based on hearsay. For example, Mr. Lam testified he was “aware” of the purpose and origin of the wire transfers because the bankrupt told him about it. Similarly, Mr. Lam testified that Mr. Rush told him he was going to buy a house for the bankrupt. This evidence is inadmissible hearsay, and does nothing to support the bankrupt’s version of the facts.

[36] At the discharge hearing the bankrupt wanted to introduce something from Mr. Rush about why he could not testify. I did not permit it. It seems to me that if Mr. Rush’s evidence would support the bankrupt’s case, and he was unavailable to testify at the hearing, the bankrupt could and should have requested an adjournment of his discharge so that Mr. Rush could attend. Since Mr. Rush is supposedly a very wealthy man, in the top 1% of income earners in the world, surely he could have easily come to trial to testify at a time convenient to him, and the hearing could have been adjourned. No such request was made. I draw an adverse inference as a result.

[37] The evidence before me was not materially different than the evidence that led Justice Maddalena to the conclusions she reached.

[38] I reviewed the same emails as were before Justice Maddalena. Although I heard some evidence from two of the bankrupt’s friends, as I have set out above, I did not find their evidence credible or helpful.

[39] The evidence of the bankrupt and his witnesses is self-serving, and in some instances contradictory. The witnesses allege they were very close friends with Mr. Rush, and yet the bankrupt refers to Mr. Blake as “my friend in Seattle” in an email to Mr. Rush. Surely he would have referred to him as “Chris”, if the parties were all as close friends as they suggested.

[40] For the family trial, the bankrupt concocted a letter for Mr. Rush to sign, setting out the purported plan to give the bankrupt a surprise gift. If the bankrupt did this for the family trial, I have no doubt he primed his friends with the evidence they gave at the discharge hearing. They candidly said most of what they “knew” they had been told by the bankrupt or by the elusive Mr. Rush. They had little in the way of independent observations of knowledge of any of the significant issues in this case.

[41] The bankrupt’s suggestion that Mr. Rush was the real owner and source of all the funds from both wire transfers simply defies belief. I agree completely with the conclusions the trial judge reached in the family trial. The bankrupt misled the court then, and continues to do so. He has failed to account for his assets in any meaningful way.

[42] The Trustee conducted its own investigation of the bankrupt’s banking records it finally obtained through the opposing creditor. From the Trustee’s review, it concluded the bankrupt had has failed to account for the disposition of the following transactions:[^6]

a) Withdrawals made from the RBC Personal Banking account that coincide with deposits from the investment account for which no evidence has been provided to account for them - $11.490.00;

b) RBC Personal Banking account balance at August 31, 2009 for which no evidence to account for its disposition was provided - $14,206.00;

c) Withdrawals from the RBC Direct Investing account for which no evidence was provided to account for their disposition - $56,600.00;

d) Net balance of the RBC Direct Investing account for which insufficient evidence was provided to account for its disposition - $255,396.61;

e) Withdrawals from the TD Waterhouse investing account for which no evidence has been provided to account for their disposition -$56,932.00;

f) Deposits to the TD Waterhouse investing account for which no accounting has been provided as to the source of the funds - $285,189.14;

g) Net balance of the TD Waterhouse investing account for which no evidence was provided to account for its disposition - $29,349.94.

[43] The Trustee goes on to note the bankrupt failed to disclose an asset referred to as “Panama Investment - $25,000”, which was listed in his sworn financial statement in the family law proceedings. The financial statement was sworn September 4, 2009. At the discharge hearing when cross-examined by the Trustee, the bankrupt testified his investment in the Panama scheme had been $40,000, but the investment was a “Ponzi” scheme. The bankrupt provided nothing to substantiate this statement.

[44] As I have mentioned, the bankrupt has failed to disclose, either to the Trustee or in the family proceedings, any details about his CIBC bank account to which he referred in his email to Mr. Rush in March of 2011.

Findings:

[45] Mr. Rush is the only person who could have proved one way or the other the original source of both the $353,600 and $80,000 wire transfers to the bankrupt. He did not testify at the family trial or at the discharge hearing. I draw an adverse inference from his failure to testify and conclude that had he done so, his evidence would not have supported the story the bankrupt and his witnesses put forward.

[46] For the reasons I have already articulated, I do not believe the evidence of the bankrupt or of his witnesses. I therefore conclude the bankrupt has under his control the $353,600 that was wired to his account and then to the account of Mr. Rush in Spain. I conclude the funds were and continue to be the property of the bankrupt. That money should have been disclosed to the Trustee, brought back to Canada from the offshore account and delivered to the Trustee.

[47] As to the $80,000 purportedly “seed money” for investment, I also conclude that money originated with the bankrupt, belonged to the bankrupt, grew to about $271,000 and was transferred from the bankrupt to Mr. Blake and then transferred back to Canada and placed in a trading account in the name of the bankrupt’s mother. This was the bankrupt’s elaborate scheme to try to shield the money from the claims of his wife and other creditors. Although the original $80,000 eventually grew to $271,000 US it later declined significantly in value because of the bankrupt’s mismanagement and reckless and speculative investments.

[48] I fully accept the Trustee’s conclusions which I have set out above.

[49] I am satisfied the following facts have been proved under s. 173(1) of the BIA.:

a) The bankrupt has failed to account for his assets being less than 50 cents on the dollar of his unsecured liabilities: s. 173(1)(a);

b) The bankrupt has failed to account satisfactorily for any loss of assets or for any deficiency of assets to meet the bankrupt’s liabilities: s. 173(1)(d);

c) The bankrupt has engaged in hazardous speculation in the operation of the investment trading accounts which contributed to his bankruptcy: s.173(1)(e); and,

d) The bankrupt has failed to perform his duties by failing to disclose assets on his Statement of Affairs and failing to disclose the disposition of the assets: s. 173(1)(o).

[50] As a result, the bankrupt cannot be granted an absolute discharge. The court has broad discretion on a discharge hearing such as this. As I see it, at the very least the bankrupt has improperly attempted to shield two tranches of money of more than $300,000 each from his creditors. While the funds from the original $80,000 seem to have been dissipated, I am persuaded the $350,000 sent to Spain more likely than not remains there under the bankrupt’s beneficial ownership and control. The bankrupt must be required to pay that amount to his Trustee in order to undo his improper dealings.

[51] The bankrupt was a joint owner with his former wife of their matrimonial home. His interest vested in the Trustee. There is apparently ongoing litigation in relation to the property in which the former wife is attacking the validity of a mortgage on the property. As I understand it, if the mortgage is found to be valid, there will be no equity remaining in the property after paying the mortgage to satisfy the claims of the bankrupt’s unsecured creditors. If, however, the mortgage is set aside, then the eventual proceeds of sale of the bankrupt’s interest would vest in the Trustee. I do not intend that any proceeds of the home should be used to satisfy the payment I have set out above. The payment I impose on the bankrupt is in addition to any net proceeds that might be generated from the sale of the home.

Disposition:

[52] The bankrupt’s discharge is conditional upon his payment of $350,000 to the Trustee. He shall make that payment within three years. Any proceeds of sale of the bankrupt’s former matrimonial home which are paid to the Trustee shall not be included in the payment above.

MESBUR J.

Released: 20160126

[^1]: Headnote in Radlo v Radlo, 2013 CarswellOnt 17341, 2013 ONSC 7329

[^2]: As far as I can tell, the bankrupt has never disclosed a CIBC account, either in his matrimonial proceedings or to the Trustee

[^3]: Quoted at paragraph 53 of Reasons for Judgment in family trial

[^4]: Ibid. paragraph 52

[^5]: This is contradicted by an email from Mr. Rush’s wife to the bankrupt on March 5, 2010 in which she writes: “… it is hard here at this moment without friends and most of the time home due to the cash problem …”

[^6]: Paragraph 8 of the Trustee’s supplementary report, filed for this discharge hearing.