RE: WF Canada, 2017 ONSC 3074

Court File and Parties

Court File No.: 31-457583-T Date: 20170601 Ontario Superior Court of Justice in Bankruptcy and Insolvency

Re: WF Canada Ltd. 1173 Salmers Drive, Oshawa, ON, L1K 0A9

Counsel: Nancy Tourgis, for the Trustee, A. Farber & Partners Inc. Bernard Gassee, for Rocky Racca Derek Ketelaars, for Jessica Agostino

Heard: May 15, 16 and 17, 2017

Before: L. A. Pattillo J.

Introduction

1This is an application by A. Farber & Partners Inc. (“Farber”) in its capacity as Trustee (the “Trustee”) of the bankruptcy estate of WF Canada Ltd. (“WF”) for an order pursuant to s. 96 of the Bankruptcy and Insolvency Act (Canada) (the “BIA”) requiring the Respondents, Mr. Rocky Racca (“Racca”) and Ms. Jessica Agostino (“Agostino”) to pay the sum of $411,000 to the Estate on the basis that the monies were received by them pursuant to what the Trustee alleges were transfer at undervalue transactions (the “Application”).

2The Application proceeded before me as a trial of an issue pursuant to the order of Justice Wilton-Siegel dated October 27, 2014. The Trustee filed as Exhibits, among others things, the following Trustees’ Reports to the Court: the First Report dated January 24, 2014; the Supplemental First Report dated February 10, 2014; the Second Report dated May 13, 2014 and the Fourth Report dated December 9, 2016.

3Allan Nackan, from Farber, testified as did Racca and Agostino. In addition, both Peter Cook (“Cook”) and Jean-Marc D’Aoust (“D’Aoust”), the principles of WF, attended and testified pursuant to summonses to witness.

The Facts

4The following are my findings of fact from the evidence.

5On October 23, 2013, Farber was appointed as receiver of WF. Subsequently, WF was placed into bankruptcy on December 10, 2013 and Farber was appointed the Trustee. Mr. Nackan is the individual at Farber in charge of the file.

1) WF

6WF was incorporated online on March 26, 2013 by D’Aoust. Both D’Aoust and Cook were the directing minds of WF. Cook was the sole director, Chief Executive Officer, Vice-President and a 50% shareholder of WF. D’Aoust was the President and a 50% shareholder. There is no minute book, share certificates, corporate resolutions or shareholder agreement.

7On or about May 6, 2013, WF opened a bank account at the Royal Bank of Canada (“RBC”) (the “Account”). Cook was the sole signing authority on the Account.

8The first series of transactions in the Account occurred on May 28, 2013. On that day, $50,000 was deposited to the Account, from an unknown source. Subsequently, monies were withdrawn from the Account via cheque, electronic transfers and on-line-banking such that on June 5, 2013, there was a balance in the Account of only $287.77.

9On June 6, 2013, WF entered into a Full Factoring Agreement and General Security Agreement with Liquid Capital Exchange Corp. (“Liquid Capital”), a factoring company, which provided, among other things, that Liquid Capital would purchase at a discount certain receivables due and owing to WF on account of work done and services supplied by WF (the “Factoring Agreement”).

10Subsequent to the Factoring Agreement, Liquid Capital advanced a total of $1,107,017.87 to WF’s Account between June 10 and June 28, 2013, as follows: $326,585.74 on June 10th; $123,066.94 on June 11th; $131,926.96 on June 24th; and $56,759.02 on June 28, 2013.

11WF’s principal source of monies was from Liquid Capital. Although it received $183,320.00 from Jobec Trade Finance Inc. on August 6, 2013, an identical amount was transferred out of the Account on the same day by way of bank transfer.

12WF had no employees, no payroll, no HST number, and made no remittances to Revenue Canada. The Trustee found no evidence that it had ever carried on business.

2) D’Aoust and Cook

13D’Aoust worked for a number of years in the financial industry initially with Beneficial Finance and then with City Bank. After City Bank he worked until 2007 for Allied, a call center, when he left to start his own business. He established Virtucall Inc., which ran a call center at Dixon Road and the 401 in Toronto. He also sold medical supplies. Virtucall eventually lost its main customer and closed in early 2013. He also said that 2242116 Ontario Inc. (carrying on business as Superior Medical Services) was a legitimate business at the outset but subsequently engaged in what D’Aoust referred to as “inappropriate conduct”.

14D’Aoust identified a number of other companies, including Greenlink Canada Inc., Greenlink Canada Group, LC Exchange, 1461350 Ontario Inc., all of which he said also engaged in inappropriate conduct.

15D’Aoust testified that it was the intention from the outset that WF would also be used for inappropriate conduct.

16D’Aoust said that they loaned money from various lenders including Racca who he has known and worked with for a number of years. Although he knew Agostino through Racca, he had no dealings with her in respect of the loans with Racca.

17Prior to September 2013, Cook spent 24 years in the banking industry and 10 years in asset back lending, the last 5 or 6 in the factoring industry, where he worked for Liquid Capital, TFS RT and Trade Capital Finance Corp. (“Trade Capital”).

18In addition to WF, Cook testified that he was the principal of Jobec Trade Finance Inc., which was originally a consulting business which evolved into lending money through factoring; 2299430 Ontario Inc., which borrowed money from TFS RT and Jobec Investments RT. He said that he and D’Aoust had common business goals and worked together.

19Cook testified that WF was incorporated to carry on the business of a call center but that at some point its purpose changed and it was used to obtain money from Liquid Capital by issuing false invoices in respect of work that was never done.

20Cook knew Racca through D’Aoust.

21It is clear from the evidence of both D’Aoust and Cook that at some point in 2012 or early 2013, when one or more of their various businesses began to have financial trouble, they embarked on a course of conduct to obtain money by fraudulent means. The “inappropriate conduct” as D’Aoust referred to it, involved, among other things, borrowing money through fraudulent means. In respect of WF, it involved obtaining money from Liquid Capital pursuant to the Factoring Agreement by delivering false invoices to Liquid Capital for services that were never rendered.

22Both D’Aoust and Cook said that depending on what monies were available, their practice was to discuss and agree on how much and to whom money should be paid, without regard to what company was paying.

3) Racca and Agostino

23Racca and Agostino are husband and wife.

24Racca is in the mortgage broker/lending business. He has known D’Aoust since 1997 and worked for him full time managing the call center between 2010 and 2012 and then part time after that for a year.

25Between October 2012 and April 2013, Racca lent money to various companies controlled by D’Aoust, Cook or them both. He said that the payee for the loans was directed by D’Aoust. In total the evidence establishes that Racca provided $1,051,500 to five different companies by way of bank draft or credit note as follows:

Date Company Amount Form of Payment October 25, 2012 Greenlink Canada Group $100,000.00 Bank Draft October 30, 2012 233989 Ontario Inc. $ 80,000.00 Bank Draft November 13, 2012 Jobec Trade Finance Inc. $ 26,250.00 Bank Draft November 19, 2012 Greenlink Canada Inc. $ 30,000.00 Credit Note January 7, 2013 Virtucall Inc. $320,000.00 Bank Draft February 28, 2013 Jobec Trade Finance Inc. $100,000.00 Credit Note March 25, 2013 Jobec Trade Finance Inc. $115,000.00 Bank Draft April 18, 2013 Virtucall Inc. $ 46,500.00 Bank Draft April 18, 2013 Innovative Working Capital $ 70,000.00 Bank Draft November 25, 2013 233989 Ontario Inc. $163,750.00 Bank Draft

26Apart from the bank drafts and credit notes, the only other documentary evidence in respect of the Racca loans were four promissory notes, two with respect to the Virtucall Inc. loans, and two with respect to the 2339989 Ontario loans. Except for the amounts and the repayment amounts, the promissory notes were virtually similar in wording. They all provided for an annual interest rate of 39.99%, were due in full after approximately a year and required specified monthly payments.

27Racca said that the monies which he lent came from family and friends but he has no records to corroborate that except a series of cheques written by him which he said represented repayments to his lenders.

28Between June 3 and July 12, 2013, WF made five payments from the Account which were deposited into an account at the RBC jointly held by Racca and Agostino (the “Joint Account”) by way of bank transfer or cheque. The payments totaled $411,000 and were as follows:

Date Amount Form of Payment June 3, 2013 $12,000.00 Bank Transfer June 5, 2013 $10,000.00 Bank Transfer June 11, 2013 $113,000.00 Bank Transfer June 25, 2013 $30,000.00 Cheque to Racca July 12, 2013 $246,000.00 Bank Transfer

29D’Aoust directed the repayments to Racca.

30Racca testified that the Joint Account was initially set up to service the mortgage on their home. During the events in question, he said that it was used by him for his business and Agostino did not use it.

31Agostino’s evidence was to the same effect. She testified that she was not involved in the loans to the various companies nor did she provide any money for the loans.

Position of the Parties

32The Trustee relies on s. 96(1)(a) of the BIA and submits Racca was dealing with WF at arms-length in respect of the five payments from WF between June 3 and July 12, 2013 and that each of the three requirements of s. 96(1)(a) have been met in respect of those payments. Each of the payments are transfers at undervalue and must be repaid to WF’s Estate. The Trustee further submits that because Agostino owned the Joint Account with Racca, she was either a “party to the transfer” or “privy to the transfer” in respect of the payments and accordingly is also liable for the transfers at undervalue.

33Racca submits that in his business dealings with D’Aoust and Cook, he dealt with them in good faith and considered their group of companies to be one enterprise or joint venture. Accordingly, the repayment from WF was in fact repayment of the loans by or on behalf of the companies to whom the money was lent in the first place. Racca further submits that he was never “dealing” with WF. He loaned money to other Cook/D’Aoust companies as directed by D’Aoust and received repayments also as directed by D’Aoust. At no time did he ever have any business or dealings with WF.

34Agostino submits that she is an innocent good faith party with no knowledge of the payments in issue. She had no involvement in the loans from Racca and received no benefit from any of the payments deposited into the Joint Account, nor did she have any involvement in the operation of the Joint Account.

Analysis

35Section 96 of the BIA provides as follows:

96. (1) On application by the trustee, a court may declare that a transfer at undervalue is void as against, or, in Quebec, may not be set up against, the trustee - or order that a party to the transfer or any other person who is privy to the transfer, or all of those persons, pay to the estate the difference between the value of the consideration received by the debtor and the value of the consideration given by the debtor – if

(a) the party was dealing at arm's length with the debtor and

(i) the transfer occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and that ends on the date of the bankruptcy,

(ii) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, and

(iii) the debtor intended to defraud, defeat or delay a creditor; or

(b) the party was not dealing at arm's length with the debtor and

(i) the transfer occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and ends on the date of the bankruptcy, or

(ii) the transfer occurred during the period that begins on the day that is five years before the date of the initial bankruptcy event and ends on the day before the day on which the period referred to in subparagraph (i) begins and

(A) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, or

(B) the debtor intended to defraud, defeat or delay a creditor.

(2) In making the application referred to in this section, the trustee shall state what, in the trustee's opinion, was the fair market value of the property or services and what, in the trustee's opinion, was the value of the actual consideration given or received by the debtor, and the values on which the court makes any finding under this section are, in the absence of evidence to the contrary, the values stated by the trustee.

(3) In this section, a "person who is privy" means a person who is not dealing at arm's length with a party to a transfer and, by reason of the transfer, directly or indirectly, receives a benefit or causes a benefit to be received by another person.

36There is no issue that Racca received the five payments from WF in June and July 2013. He acknowledged that he received the moneys from WF as partial re-payment of the loans he had previously made to the D’Aoust/Cook companies.

37I am unable to accept Racca’s submission that because he had no involvement with WF, he was not “dealing” with it within the meaning of s. 96(1)(a) of the BIA. In my view, the receipt by him of the five payments from WF is sufficient to constitute “dealing” within the meaning of the section. Further, I agree with the Trustee that the evidence establishes in accepting the five payments from WF, Racca was dealing with it at arm’s length.

38Nor is there any evidence that the various D’Aoust/Cook companies were operating as a joint venture or single enterprise. Each of Cook and D’Aoust had different and often separate interests in each of the companies they were involved in, some of which actually carried on legitimate distinct businesses. The fact that some of the companies embarked on fraudulent activities which were directed by Cook and D’Aoust and that they decided to utilize monies from one company for the benefit of others does not transform the companies into a single entity. Each of the companies remained as separate legal entities.

39Based on the evidence which I accept, therefore, I find the Trustee has established that the three requirements in s. 96(1)(a) have been met in respect of Racca as follows:

i. The transactions (the payments by WF to Racca) all took place between June 3 and July 12, 2013 and were all clearly within the period of one year before WF’s bankruptcy on December 10, 2013;

ii. WF was clearly insolvent at the time of the transactions. WF’s activity following its incorporation (or more particularly the lack thereof) confirms D’Aoust’s evidence that it was incorporated for the purpose of carrying out “inappropriate conduct”. WF was never in a position to pay its debts as they fell due. From its incorporation, it had no employees and never conducted any business. Nor did it have any real assets. Although $50,000 was initially deposited to the Account, the source is unknown, it was quickly dispersed and there is no evidence any debts were owing or paid from it. Thereafter, the only source of funds WF received (apart from the monies from Jobec Trade Finance which went in and out on the same day) were the monies from Liquid Capital which were obtained through fraudulent means.

iii. Given the timing of events, it is clear and I find that WF was incorporated for the specific purpose of defrauding Liquid Capital, which it subsequently did. However, Liquid Capital did not become a creditor of WF until June 10, 2013, which was when it advanced the first monies to WF.

40Based on the above, therefore, I conclude that the transfers by WF to Racca after June 10, 2013 when Liquid Capital became a creditor totaling $389,000 (June 11, 2013 of $113,000; June 25, 2013 of $30,000 and July 12, 2013) are each transfers at undervalue and must be repaid by Racca to the Estate of WF.

41The only evidence that the Trustee has to establish that Agostino was a party or privy to the above transfers is that she was an owner, along with Racca of the Joint Account into which the monies in issue were transferred. The Trustee submits that is sufficient to establish that Agostino was involved directly in the transfers into the Joint Account or was privy to the transfers.

42As noted above, s. 96(3) of the BIA defines “person who is privy” to be a person who is not dealing at arm’s length with a party to the transfer and who, by reason of the transfer, receives a benefit directly or indirectly by reason of the transfer.

43Section 96(1) by its wording is discretionary. I agree with the comment by Meiklem J. of the British Columbia Supreme Court in his interim reasons for judgment in Re Anderson, 2012 BCSC 956, at para. 13, that once the trustee establishes a prima facie case under s. 96 of the BIA, the onus shifts to the party to the transfer or who is privy to the transfer, to establish that they did not actually receive the property in question or did not directly or indirectly receive a benefit.

44Re Anderson involved the question of whether the party to the transfer was merely a bare trustee and did not transfer a beneficial interest in the property. In subsequent reasons for judgment dealing with the issue, reported at 2013 BCSC 317, 2013 CarswellBC 488, at para. 22, Meiklem J. stated in part at para. 22: “In my view, s. 96 of the BIA was not intended simply to punish a participant in a transfer at undervalue in circumstances such as we have here in this case, but was intended to bring the real value of assets transferred at undervalue back into the bankrupt’s estate for the benefit of creditors.”

45I accept the Trustee in this case has established a prima facie case against Agostino under s. 96 by establishing that she was a joint owner of the Joint Account into which the monies paid by WF were deposited. In response, Agostino has testified that she had no dealings with the Joint Account, was not involved in Racca’s loans and received no benefit from them.

46The Trustee submits that Agostino’s bare testimony is not sufficient to overcome its prima facie case. It submits that in the absence of Racca and Agostino producing all of the records of the Joint Account for the relevant period including copies of all cheques and other withdrawals, there is no way to corroborate that Agostino was not involved with the payments and received no benefit from them.

47I accept Agostino’s testimony that she was not involved in the loans, was not involved in operating the Joint Account and received no benefit from the monies received from WF. She testified that she operated her affairs out of a separate account at a different bank. I consider her evidence in that regard to be credible. Further, it is corroborated by the evidence of Racca, D’Aoust and Cook all of whom said she was not involved in the loans. In addition, Racca said Agostino had no involvement in the operation of the Joint Account which he used for his business. As a result, I do not consider her failure to produce detailed records of the Joint Account to be fatal to her position that she received no direct benefit from nor was she privy to the transfers.

48Accordingly, I find that Agostino was neither a party or privy to the transfers of the monies from WF to the Joint Account and is therefore not liable to the Estate pursuant to s. 96 of the BIA.

Conclusion

49For the above reasons, therefore, the Application is allowed against Racca. The payments to Racca by WF of $113,000 on June 11, 2013; $30,000 on June 25, 2013 and $246,000 on July 12, 2013 are declared to be transfers at undervalue. Racca is ordered to repay to the Trustee on behalf of the Estate of WF, the total of those payments, $389,000.00, pursuant to s. 96(1)(a) of the BIA.

50The Application is dismissed against Agostino.

51Based on the results, the Trustee is entitled to its costs of the Application from Racca and Agostino is entitled to her costs from the Trustee, both on a partial indemnity basis.

52The Trustee has submitted a Bill of Costs in connection with the application claiming total partial indemnity costs of $30,488.41 (fees of $25,020.19 and disbursements of $5,468.22). In my view, both the hourly rates claimed and the hours spent are reasonable given the issues and the fact that counsel had to prepare for trial twice. I arbitrarily reduce the costs claimed by 25% on account of some of the time being spent in respect of the claim against Agostino which was unsuccessful. The claim against Agostino was less complicated and flowed from the claim against Racca.

53Racca points out in his Bill of Costs that some of the scheduling appointments related to the Trustee’s s. 96 claim against another party which was settled. The Trustee has indicated, however, that costs relating to its other s. 96 claim have not been included.

54In the result, I fix the Trustee’s total partial indemnity costs of the Application against Racca at $22,866.00. For the above reasons, I consider that amount to be fair and reasonable.

55Agostino has submitted a Bill of Costs for partial indemnity costs totaling $8,997.25. Having regard to the issues raised and the length of the hearing, I am also of the view that amount is a fair and reasonable assessment for her costs. Agostino did not obtain separate representation until sometime after the Application was commenced. I consider counsel’s partial indemnity hourly rate and the hours spent to be reasonable, particularly given the issues and the fact the hearing lasted two and a half days.

56Accordingly, I fix Agostino’s costs of the Application at $8,997.25 inclusive of disbursements and taxes.

L. A. Pattillo J.