Superior Court of Justice – Ontario (Commercial List)

Citation: Mercado Capital Corporation v. Qureshi, 2017 ONSC 5572

Court File No.: CV-16-11610-00CL

Date: 2017-09-20

Re: Mercado Capital Corporation, Applicant

And: Hafsa Faisal Qureshi and Pollard & Associates Inc., Trustee in Bankruptcy for the Estate of Faisal Iqbal Qureshi, Respondents

Before: Hainey J.

Counsel: Michael S. Myers and James S. Quigley, for the Applicant Veena Pohani and Kristine Holder, for the Respondent Hafsa Faisal Qureshi

Heard: July 7, 2017

ENDORSEMENT

Background

[1] The applicant, Mercado Capital Corporation, seeks a declaration that what it characterizes as a notional gift of 50% of the equity in property located at 55 Davina Circle, Aurora, (“Davina”) by Faisal Iqbal Qureshi (“Faisal”), a bankrupt, to his spouse, Hafsa Faisal Qureshi (“Hafsa”), is a transfer at undervalue and is therefore void pursuant to s. 96(1)(b)(i) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”).

[2] Faisal and Hafsa were married for 15 years. They have three children. Their eldest child has been diagnosed with autism and epilepsy. He is a special needs child who requires around-the-clock care.

[3] Hafsa was a stay at home mother throughout most of the marriage. She cared for their children and did all of the domestic work and household management. She supported Faisal at home while he earned the family income by operating various businesses.

[4] In 2011, Faisal and Hafsa bought a family home at 278 Selwyn Avenue in Richmond Hill (“Selwyn”). According to Hafsa, her parents contributed $50,000 toward the purchase price of the home. Faisal and Hafsa lived there with their children for around four years. Selwyn was registered in Faisal’s name although both Faisal and Hafsa believed that they each owned an equal share.

[5] On February 18, 2015, Hafsa entered into an Agreement of Purchase and Sale on behalf of Faisal and herself to purchase Davina.

[6] On June 30, 2015, Faisal and Hafsa sold Selwyn. The net proceeds from the sale were $372,177. They then closed the purchase of Davina on the same date. The purchase of Davina was funded with the $372,177 net proceeds from the sale of Selwyn, $256,240 from funds obtained by Faisal, $89,654 from Hafsa’s parents and mortgage funds of $1,902,081. Faisal and Hafsa were registered on title as joint tenants. They believed that they each had a 50% interest in Davina because it was their matrimonial home.

[7] In 2016, Faisal and Hafsa’s marriage broke down. Faisal moved out and began a relationship with another woman. For several months he lived with this woman in Dubai while Hafsa was left on her own in Aurora with their three children.

[8] On June 2, 2016, the applicant brought an application for bankruptcy against Faisal. Faisal did not oppose the application and he was adjudged bankrupt on July 5, 2016. Pollard & Associates Inc. was appointed by the court as the trustee in bankruptcy of Faisal’s estate (“Trustee”).

[9] In the summer of 2016, Davina was sold for $2,838,000. Faisal and Hafsa realized net proceeds from the sale of approximately $696,815. Hafsa’s 50% share of the net proceeds is currently being held by the Trustee pending the outcome of this application.

[10] Faisal is alleged to have been involved in a multi-million dollar fraud. In February 2017, while en route from Dubai to London, England, Faisal’s passport was cancelled and he was forced to return to Canada. He was arrested upon arriving in Toronto and charged with multiple counts of fraud. He is currently living with his father in Markham. There is no evidence that Hafsa was aware of Faisal’s alleged fraudulent activities.

[11] Hafsa has no separation agreement with Faisal, no court ordered support or any firm commitment from him to pay child and spousal support. Davina was Hafsa’s only asset. Because all of the proceeds from Davina are currently being held by the Trustee as a result of this application, Hafsa is entirely dependent on Faisal’s goodwill and willingness to pay family support. She is currently living with her mother in Richmond Hill.

[12] According to Hafsa, she needs her share of the net proceeds from Davina in order to build an independent life with her three children.

Facts

[13] The parties entered into an agreed statement of facts that is attached as Appendix 1. It contains all of the relevant facts necessary for the determination of this motion.

Issue

[14] The issue that I must determine is whether Hafsa is entitled to 50% of the net proceeds from the sale of Davina or whether she is disentitled to receive this amount because it constitutes a transfer from Faisal to her at undervalue and is therefore void pursuant to s. 96(1)(b)(i) of the BIA.

Positions of the Parties

[15] The applicant submits that because Faisal was the sole wage earner in the family and Hafsa was a “stay at home” mother earning no income, Faisal “notionally” gifted one-half of the purchase price of Davina to her in order to enable her to acquire a one-half interest in their new home.

[16] The applicant further submits that Faisal’s “gift” to Hafsa had a fair market value of $359,035 and that Hafsa did not provide Faisal with any consideration for this gift. Accordingly, the gift to Hafsa, which occurred on June 30, 2015, less than one year before Faisal’s initial bankruptcy event on June 2, 2016, is a transfer at undervalue pursuant to s. 96(1)(b)(i) of the BIA. It is therefore void as against the applicant.

[17] Hafsa submits that there was no transfer or gift from Faisal to her when they purchased Davina and took title as joint tenants. She submits that even if there was, Hafsa’s domestic services and childcare and her parents’ direct financial contribution toward the purchase price of Selwyn and Davina constitute sufficient consideration to support the transfer to her of one-half of the equity in Davina, which was their matrimonial home.

Analysis

[18] Section 96(1)(b) of the BIA provides as follows:

Transfer at undervalue

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; 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.

[19] The applicant submits in its factum that “this application fits squarely within the confines of the ratio” of the decision of Myers J. in Re Lee, 2017 ONSC 388 at para. 16 as follows:

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 the 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… In my view, judgment should be nearly automatic in such case.

[20] I disagree that the decision in Re Lee applies to this case. There is much to distinguish this case from the case of Re Lee. In Re Lee, the bankrupt and his spouse were joint tenants of the property in question and severed their joint tenancy by the bankrupt transferring his one-half interest in the property to his spouse for nominal consideration. This left the bankrupt with no interest on title to the property within one year of the initial bankruptcy event. In my view this clearly constituted a deliberate attempt by the bankrupt to defeat his creditors. In this case there is no evidentiary basis for concluding that Faisal was attempting to defeat his creditors when Davina was purchased and held by Hafsa and him as joint tenants. This is a significant difference from the facts in Re Lee.

[21] I agree with Myers J.’s conclusion in Re Lee on the facts of that case. However, I have concluded that his decision does not apply in this case because of the significant differences in the underlying facts.

[22] In Re Lee, Myers J. acknowledged the discretionary nature of the relief provided for under s. 96 which provides that the court “may” declare a transfer at undervalue void. There is no jurisprudence concerning when it is appropriate to exercise the court’s discretion not to declare a transfer at undervalue void under s. 96 of the BIA. It is, therefore, helpful to review the jurisprudence that considered the section of the BIA that s. 96 replaced when amendments were made to the BIA in 2009.

[23] Section 96 of the BIA replaced the reviewable transaction provision contained in the former s. 100 of the BIA. This previous section also gave the court discretion by providing that a court “may” give judgment to the trustee for the difference in the value of the consideration in a reviewable transaction.

[24] The relevant provisions of the previous s. 100 provided as follows:

Examination of consideration in a reviewable transaction

100 (1) Where a bankrupt sold, purchased, leased, hired, supplied or received property or services in a reviewable transaction within the period beginning on the day that is one year before the date of the initial bankruptcy event and ending on the date of the bankruptcy, both dates included, the court may, on the application of the trustee, inquire into whether the bankrupt gave or received, as the case may be, fair market value in consideration for the property or services concerned in the transaction.

Judgment for difference

(2) Where the court in proceedings under this section finds that the consideration given or received by the bankrupt in the reviewable transaction was conspicuously greater or less than the fair market value of the property or services concerned in the transaction, the court may give judgment to the trustee against the other party to the transaction, against any other person being privy to the transaction with the bankrupt or against all those persons for the difference between the actual consideration given or received by the bankrupt and the fair market value, as determined by the court, of the property or services concerned in the transaction. (Emphasis added)

[25] The Ontario Court of Appeal in Standard Trust Co. Ltd. v. Standard Trust Co. (1995), 1995 CanLII 3508 (ON CA), 26 O.R. (3d) 1 (Ont. C.A.) held that granting the remedy under the former s. 100 (2) of the BIA was discretionary having regard to factors such as the good faith of the parties, the intention with which the transaction took place and whether fair value was given and received by the parties.

[26] The Supreme Court of Canada in Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68, endorsed the view of the Ontario Court of Appeal in Standard Trust Co. and held that “equitable principles guide the exercise of discretion”.

[27] Major and Deschamps JJ. concluded as follows at paras. 81 and 82 of the Supreme Court’s decision in Peoples Department Stores:

81. The word "may" is found in both ss. 100(1) and 100(2) of the BIA with respect to the jurisdiction of the court. In Standard Trustco Ltd. (Trustee of) v. Standard Trust Co. (1995), 1995 CanLII 3508 (ON CA), 26 O.R. (3d) 1 (Ont. C.A.), a majority of the Ontario Court of Appeal held that, even if the necessary preconditions are present, the exercise of jurisdiction under s. 100(1) to inquire into the transaction, and under s. 100(2) to grant judgment, is discretionary. Equitable principles guide the exercise of discretion. We agree.

82. Referring to s. 100(2) of the BIA, in Standard Trustco, supra, at p. 23, Weiler J.A. explained that:

When a contextual approach is adopted it is apparent that although the conditions of the section have been satisfied the court is not obliged to grant judgment. The court has a residual discretion to exercise. The contextual approach indicates that the good faith of the parties, the intention with which the transaction took place, and whether fair value was given and received in the transaction are important considerations as to whether that discretion should be exercised.

We agree with Weiler J.A. and adopt her position; …

[28] In light of this jurisprudence, which I have concluded applies to the exercise of my discretion under s. 96 of the BIA, it is not necessary for me to decide whether Hafsa’s 50% interest in the equity of Davina resulted from a transfer at undervalue contrary to s. 96(1)(b)(i) of the BIA. Even if it did, which I doubt, I would exercise my equitable discretion not to declare her 50% interest in Davina void.

[29] I have arrived at this conclusion by taking a contextual approach to the evidence. I find that Faisal and Hafsa were acting in good faith and intended that their joint tenancy in Davina represented the fact that it was their matrimonial home in which they each believed that they held a 50% interest. I find that there was no intention on the part of Faisal to defeat his creditors by taking title to Davina as a joint tenant with Hafsa. In adopting an equitable approach to the exercise of my discretion I have relied upon the following factors in deciding not to declare Hafsa’s 50% interest in Davina void:

• Faisal’s and Hafsa’s good faith;
• The fact that Faisal did not take joint title in Davina to defeat his creditors;
• Hafsa’s substantial non-monetary contribution to the family by her hard work managing the household and caring for their children, particularly in light of their special needs child;
• Hafsa’s parents’ contributions to the purchase price of both of their matrimonial homes;
• Hafsa’s and Faisal’s honest belief that Hafsa was entitled to a 50% interest in Davina because it was their matrimonial home;
• The fact that Hafsa and her children have no other guaranteed form of financial support and that Davina was her only asset which she needs to carry on an independent life with her children; and
• The fact that the Agreement of Purchase and Sale for Davina was signed by Hafsa in February 2015, well before the one year period preceding Faisal’s initial bankruptcy event.

Conclusion

[30] For all of these reasons the application is dismissed.

[31] The Trustee is hereby ordered to deliver to Hafsa her share of the net proceeds from the sale of Davina within 15 days.

Costs

[32] Hafsa is entitled to her costs of this application. If the parties cannot agree on costs they may schedule a 9:30 a.m. attendance with me at which time I will determine the issue of costs. The parties are to provide me with their costs outlines prior to the attendance.

[33] I thank counsel for their helpful submissions.

HAINEY J.

Date: September 20, 2017