Case Summary

The Trustee in Bankruptcy moved for an order declaring a transfer of a 50% interest in a house from the bankrupt, Paul W. Lee, to his spouse, Annie Koo, as a transaction at an undervalue under s. 96 of the Bankruptcy and Insolvency Act. The Trustee sought judgment against Ms. Koo for $135,000. The court found the statutory requisites for a transaction at undervalue were met, as the transfer was non-arm's length for nominal consideration and occurred within one year of the initial bankruptcy event. The court accepted the Trustee's valuation of the property in the absence of contrary evidence. The court rejected arguments for deductions related to joint unsecured debt, notional costs of disposition (due to lack of evidence), and subsequent property tax arrears. The court also rejected the argument for residual discretion to decline relief, stating that judgment should be nearly automatic for non-arm's length transactions attacked within one year. Judgment was granted against Ms. Koo for $135,305, and costs were awarded to the Trustee. interesting_citations_summary: > The decision provides a robust interpretation of s. 96 of the Bankruptcy and Insolvency Act regarding transactions at undervalue, particularly for non-arm's length transfers within one year of bankruptcy. It clarifies the burden of proof for challenging a trustee's valuation, emphasizing that mere disagreement or unsworn letters are insufficient. The court also addresses the treatment of disposition costs and subsequent encumbrances, ruling against their deduction without proper evidence. Crucially, it limits the court's residual discretion under s. 96, asserting that relief should be "nearly automatic" when statutory requisites are met for non-arm's length transactions attacked within one year, distinguishing it from cases seeking alternative relief. final_judgement: > The motion is granted. Judgment is issued requiring Annie Koo to pay the Trustee the sum of $135,305. Paul Lee and Annie Koo are jointly and severally liable to pay costs to the Trustee forthwith in the amount of $14,300 inclusive of disbursements and taxes. winning_degree_applicant: 1 winning_degree_respondent: 5 judge_bias_applicant: 0 judge_bias_respondent: 0 year: 2017 decision_number: 388 file_number: "31-2044262" source: "https://www.canlii.org/en/on/onsc/doc/2017/2017onsc388/2017onsc388.html" keywords: - Bankruptcy - Insolvency - Transaction at undervalue - Section 96 BIA - Non-arm's length transfer - Property valuation - Costs of disposition - Residual discretion - Consumer proposal - Joint tenancy areas_of_law: - Bankruptcy and Insolvency Law - Property Law cited_cases: legislation: - title: "Bankruptcy and Insolvency Act, R.S.C. 1985, c. B.3" url: "https://laws-lois.justice.gc.ca/eng/acts/b-3/" case_law: - title: "Rassel, Re, [1999] A.J. No. 901 (Alta. C.A.)" url: "https://www.canlii.org/en/ab/abca/doc/1999/1999abca901/1999abca901.html" - title: "Brisco, Re, 2006 CarswellOnt 2770 (ON SC)" url: "https://www.canlii.org/en/on/onsc/doc/2006/2006canlii16000/2006canlii16000.html" - title: "Rehman, Re, 2015 ONSC 188" url: "https://www.canlii.org/en/on/onsc/doc/2015/2015onsc188/2015onsc188.html" --- # Court File and Parties **COURT FILE NO.:** 31-2044262 **ONTARIO SUPERIOR COURT OF JUSTICE** **IN BANKRUPTCY AND INSOLVENCY** **IN THE MATTER OF THE BANKRUPTCY OF PAUL W. LEE** **OF THE CITY OF MARKHAM** **IN THE PROVINCE OF ONTARIO** --- # Endorsement [1] The Trustee in Bankruptcy of the estate of Paul W. Lee moves for an order declaring that the transfer from Mr. Lee to his spouse Annie Koo on March 25, 2014 of a 50% interest in their house located at 45 Norn Crescent, Markham, Ontario was a transaction at an undervalue under [s. 96 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B.3](https://laws-lois.justice.gc.ca/eng/acts/b-3/). The Trustee seeks judgment against Ms. Koo in the amount of $135,000 representing the value of the bankrupt’s interest in the property as at the date of the transaction. [2] The relevant portions of s. 96 of the BIA provide 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… (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… ### Establishing values (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 accordance with s. 2 of the BIA, the “date of the initial bankruptcy event,” as that phrase is used in subsection 96(1)(b)(i), means the earlier of the date of a proposal or the date of bankruptcy (among other things). Section 2 also provides that the definition of a “proposal” includes a consumer proposal. [4] On March 25, 2014, the bankrupt and his spouse severed their joint tenancy and the bankrupt transferred his 50% undivided interest in the property to his spouse for nominal consideration. On February 27, 2015, less than one year later, the bankrupt filed a consumer proposal. The proposal was unsuccessful and led to the bankrupt making an assignment in bankruptcy. The bankrupt admits that he transferred his interest to his spouse in a non-arm’s-length transaction for nominal consideration. Accordingly, the statutory requisites are made out. [5] At para. 8 of its report, the Trustee opines that the value of the property at the time of the transaction was $712,500. Under s. 96(2) of the BIA the court is required to find the value of the property is the amount opined by the Trustee in the absence of evidence to the contrary. In forming its opinion, the Trustee relied upon an appraisal based on a number of comparables the details of which were not disclosed. Mr. Lee obtained an appraisal that he gave to the Trustee which determined that the value for the property was somewhat lower. The basis for that appraisal was also not disclosed. Mr. Page argues that since Mr. Lee’s appraiser made a personal inspection of the site, his valuation is to be preferred. [6] There is no expert evidence properly before the court. Mr. Lee and Ms. Koo submitted no admissible evidence to undermine the Trustee’s opinion. [7] Nothing in the BIA required the Trustee to set out in its report the reasons for its opinion of value under s. 96(2). It is not the court’s role to choose between competing inputs used or not used by the Trustee. Rather, the court is required to accept the Trustee’s opinion “in the absence of evidence to the contrary.” The only sworn evidence is Mr. Lee’s statement that he disagrees with the Trustee’s value. That, and the unsworn, bald, conclusory letter from Mr. Lee’s real estate agent, (that was properly disclosed by the Trustee) do not amount to evidence to the contrary so as to undermine the Trustee’s opinion. [8] In order to assess the Trustee’s entitlement, the statute directs the court to consider “the difference between the value of the consideration received by the debtor and the value of the consideration given by the debtor.” The bankrupt debtor, Mr. Lee, received $2.00 for his interest. The more difficult question is how much value did he give to Ms. Koo. [9] The parties agree that there were $441,890 in outstanding mortgages against the property on the date of the transfer and that this amount is to be excluded from the value of the net equity conveyed by Mr. Lee. Mr. Page argues for three further exclusions: a. A portion of the value of a joint unsecured debt that was owing by Mr. Lee and Ms. Koo at the date of the transfer; b. The costs of disposition that would have been incurred in an arm’s length sale; and c. Realty tax arrears that have arisen since the date of the transaction but which will have to be paid if the property is to be sold now to pay for any judgment obtained. [10] Mr. Lee and Ms. Koo had a joint unsecured line of credit with a bank on which they owed about $32,000 when Mr. Lee filed his proposal. Ms. Koo has since filed her own proposal and she too lists that debt. Mr. Page argues that since some of this debt will be paid in Ms. Koo’s proposal that relies on her owning 100% of the property in issue, in effect Mr. Lee’s one-half of the property is already being used to pay the joint debt so that there will be a double counting unless it is excluded from the value received by Mr. Lee. Mr. Lee’s creditor, who is the same as Ms. Koo’s creditor, will be paid by Ms. Koo, so that value will already have been received by Mr. Lee’s creditors. I reject this argument. Joint debts, like guaranteed debts, may be advantaged in bankruptcy since they can be claimed against both joint debtors. But it is no part of the calculus in which I am engaged to consider the dividends available to individual creditors. Similarly, I have no real idea as to how creditors claiming against Ms. Koo will be paid or why they may choose to accept or reject any proposal that she may make. I am seeking to discern the “value of the consideration given by the debtor.” The fact that the Mr. Lee owed an unsecured debt to a bank jointly with his spouse has no bearing on the value of the equity in the house that he conveyed to her. [11] The treatment of costs of disposition that would have been incurred in an arm’s length sale raises a different issue. Had Mr. Lee and Ms. Koo sold the property on an arm’s length basis, the proceeds that they would have received would have been the net amount remaining after paying the costs of sale. That is, they would have had to pay their lawyer, the real estate agent, and other costs of sale leaving them to receive only the net amount left over. Arguably therefore, the value of the consideration that Mr. Lee conveyed to his spouse should be reduced by the actual costs of sale and perhaps more for notional costs saved. The goal is not to give a windfall to Mr. Lee’s creditors but to compensate them for value forgone. All they could have received, had a proper arm’s length sale of Mr. Lee’s interest occurred, would have been the proceeds net of costs of disposition. [12] In [Rassel, Re, [1999] A.J. No. 901 (Alta. C.A.)](https://www.canlii.org/en/ab/abca/doc/1999/1999abca901/1999abca901.html) the court was asked to decide to what extent should a trustee who wishes to sell estate assets privately, deduct from the proposed sale price, commission or other expenses saved by not having a public sale. The reasons in that case were adopted more recently by Morawetz J. (as he then was) in [Brisco, Re, 2006 CarswellOnt 2770 (ON SC)](https://www.canlii.org/en/on/onsc/doc/2006/2006canlii16000/2006canlii16000.html). In both cases, the court focused on the duty of the trustee in bankruptcy to maximize the yield from all assets. The court held that it would be improper for a trustee to automatically reduce the price of an asset by the full amount of disposal costs notionally saved. Rather, in making a private sale, the trustee should try to negotiate an appropriate sharing of the savings, notionally or through a competitive sale. [13] The issue before the court in the case at bar is not quite the same. By proceeding with a non-arm’s length sale to his spouse, Mr. Lee deprived the Trustee of the opportunity to negotiate an appropriate, value-maximizing fair market value sale. Moreover, he has declined to adduce evidence to establish the disposition costs actually incurred or the notional costs saved. In fact, he has failed to fulfil undertakings given both to the Official Receiver and to counsel for the Trustee that positively obligated him to disclose the costs of disposition. It would be inappropriate for the court to guess at the actual or notional costs of disposition. The burden lay upon the bankrupt and his spouse to prove any deductions that they assert should be taken from the purchase price otherwise determined in accordance with the statutory calculation. I do not wish to be seen to be ruling that costs of disposition or some notional costs saved, or some portion thereof, can never be an appropriate consideration in determining the value of the consideration given by the debtor under s. 96 of the BIA. However, in light of the circumstances, especially including the lack of any evidence of actual or notional costs of disposition before the court, I am unable to conclude that there ought to be any deduction in this case. [14] The bankrupt also asks for a deduction in respect of property taxes arrears that will have to be paid if the property is sold in future to pay any judgment that may be granted by the court in this proceeding. This argument misconceives the nature of the inquiry. Under s. 96 of the BIA, the court is calculating the difference between the value received by the bankrupt and the value given by the bankrupt at the time the transaction occurred. The fact that the bankrupt and his spouse may have allowed encumbrances to accrue subsequent to the date of the transaction is of no consequence. They say they put have new mortgages on title and they have allowed tax arrears to mount. None of that affects the value gifted by the bankrupt to Ms. Koo previously. Similarly, the court pays no heed the fact that the value of the property has likely grown by a very significant amount over the past three years in light of the sustained real estate boom in the GTA. [15] In all therefore, the value of the consideration given by the bankrupt is one-half of the fair market value of $712,500 less the pre-existing mortgages in the aggregate amount of $441,890. The net amount of equity in the property at the time of the transfer was $270,610. One half of that amount is properly characterized as the value of the bankrupt’s interest that he gave to Ms. Koo at that time. Accordingly, judgment will issue requiring Ms. Koo to pay the Trustee the sum of $135,305. [16] Finally, the bankrupt argues that the court has a residual discretion to decline to grant relief under s. 96 in light of the use of the word “may” in the opening words of the section. He relies as well on the decision of Justice Pattillo in [Rehman, Re, 2015 ONSC 188](https://www.canlii.org/en/on/onsc/doc/2015/2015onsc188/2015onsc188.html) in which His Honour granted an order declaring void a transaction in which a bankrupt transferred property to his children. Justice Pattillo expressed reluctance to grant a further monetary judgment against the children without a better understanding of the value of the trustee’s interest in the property at the time of the decision. The bankrupt argues that he has a teenager and that his in-laws live in the property so that the court should be reluctant to grant judgment against Ms. Koo in light of the others who live in the premises. The argument that the debtor may be excused from a conveyance at an undervalue because he or she has dependents is a nonstarter. First, there is no evidence before the court of any circumstance that would engage a court of equity. In addition, in Rehman, Justice Pattillo had already declared the transaction void and was considering whether to grant additional, alternative relief. Here, the primary relief sought by the Trustee is judgment against Ms. Koo. The ultimate purpose of the section is to ensure that the property of a bankrupt is treated fairly and justly balancing the rights of all stakeholders. The bankrupt and his family’s rights are provided for in statutory exemptions from seizure, family income rules, and in other provisions of the bankruptcy and insolvency regime. Section 96 imposes a strict test to remedy non-arm’s length transfers among family members. While the statute allows relief using the word “may,” in my view, on proof of the requisite facts, relief should be granted at the amount calculated in accordance with statute, in all but the most exceptional circumstances. This is especially so in the case of a non-arm’s length transaction that is attacked within one year. Section 96 sets out different rules for different types of transactions. For a non-arm’s length transaction that is attacked within one year, the transaction may be avoided without any consideration or proof of an intention to defraud, to prefer, or any other fact other than the simple existence of the transaction at an undervalue. In my view, judgment should be nearly automatic in such cases. [17] There is no basis in the evidence to decline relief to the Trustee in this case. [18] The Trustee is entitled to its costs on a partial indemnity basis. Counsel for the bankrupt concedes that the hourly rates utilized by counsel for the Trustee in its Costs Outline are reasonable. He takes some exception to the quantum of hours claimed. It does not lie well in the mouths of either Mr. Lee or Ms. Koo to complain about the costs to which they put the Trustee given the lack of participation by both of them in this proceeding. Although provided with more than ample opportunity, Ms. Koo chose not to file any evidence. She only retained counsel at the very last minute. Mr. Lee had to be cross-examined and wholly failed to fulfil his undertakings. Moreover, the Trustee’s report notes several instances in which both Mr. Lee and Ms. Koo have made inaccurate disclosures in their bankruptcy proceedings (to say the least). In my view, the time spent by the Trustee’s counsel is reasonable in the circumstances. Accordingly, Mr. Lee and Ms. Koo are jointly and severally liable to pay costs to the Trustee forthwith in the amount of $14,300 inclusive of disbursements and taxes. --- F.L. Myers J. Date: January 17, 2017