COURT FILE NO.: 18-600247-0000 DATE: 20181011 SUPERIOR COURT OF JUSTICE - ONTARIO
RE: JONATHAN KORMOS and ELIZABETH KORMOS, Applicants AND: JONATHAN CRAWFORD FAST and KATHERINE ANNE FAST, Respondents
BEFORE: Cavanagh J.
COUNSEL: James P.E. Hardy, for the Applicants Ken Page, for the Respondents
HEARD: October 10, 2018
Endorsement
Introduction
[1] The applicants, who are husband and wife, obtained a judgment against the respondents, their neighbours, who are husband and wife, in the Small Claims Court at St. Catherines in the amount of $25,565.64. This judgment resulted from an action brought by the applicants against the respondents for damages resulting from flooding on their property which, they had claimed, was caused by the respondents.
[2] After the judgment was granted, the applicants were advised by Paul Ihnatiuk, a licensed trustee in bankruptcy (the “Trustee”), that Mr. Fast had filed a consumer proposal pursuant to the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended (the “BIA”) several months earlier, on August 24, 2016. Mr. Fast had not previously advised the applicants of the consumer proposal or his outstanding bankruptcy.
[3] Fifteen days after the applicants attempted to enforce the judgment by serving a notice of examination on the respondent Katherine Anne Fast, she made an assignment into bankruptcy under the BIA on April 25, 2017.
[4] In their separate bankruptcy filings, each of the respondents listed their property in Queenston, Ontario (the “Property”) with a value of $630,000.
[5] The applicants submit that the Property was substantially undervalued in the BIA filings by Mr. Fast on August 24, 2016 when he made his consumer proposal and by Mrs. Fast on April 25, 2017 when she made an assignment into bankruptcy. The applicants submit that when a fair and accurate value is assigned to the Property on those respective dates, it is clear that neither Mr. Fast nor Mrs. Fast was insolvent when their respective filings were made under the BIA.
[6] The applicants seek orders under the BIA (i) annulling Mr. Fast’s consumer proposal and, if necessary, his 2014 bankruptcy; and (ii) annulling Mrs. Fast’s bankruptcy.
[7] For the following reasons, the applicants’ application is dismissed.
Background Facts
[8] Mr. Fast’s consumer proposal valued his assets at $843,671.99, including RRSP amounts of $192,371.99. It valued his liabilities at $690,945.72. It valued the Property at $630,000.
[9] In an effort to enforce the judgment against Mrs. Fast, a notice of examination was served in aid of execution on April 10, 2017. Fifteen days later, on April 25, 2017, Mrs. Fast filed for bankruptcy under the BIA and Mr. Ihnatiuk was named as the trustee. In her filings under the BIA, Mrs. Fast valued her assets at $722,461, including RRSP amounts of $83,461. Her liabilities were valued at $653,313.19, including the judgment in favour of the applicants. The Property was valued at $630,000.
[10] The lawyer for the applicants informed the Trustee by letter dated April 27, 2017 that there was reason to believe that the Property was worth significantly in excess of the $630,000 at which it was valued by both Mr. and Mrs. Fast in their BIA filings. The Trustee provided a letter dated April 21, 2017 from Sotheby’s International Realty valuing the Property as of April 21, 2017 at between $625,000 and $635,000. This was the same value as that in a valuation dated December 18, 2014, also conducted by Sotheby’s, and used in connection with Mr. Fast’s 2015 bankruptcy.
[11] On May 24, 2017, the applicants’ lawyer asked that the Trustee perform a walk-through appraisal of the Property. A further request was made on behalf of the applicants for the consent of Mr. and Mrs. Fast to conduct a walk-through appraisal by letter dated March 23, 2018. The Trustee confirmed by email dated March 28, 2018 that he had also requested the consent of Mr. and Mrs. Fast to grant the Trustee access to the Property to allow for an appraisal and that, as of that date, the Trustee had not been provided access.
[12] By email dated March 29, 2018 an email was sent on behalf of the respondents by Mr. Ken Page, a lawyer and counsel for the respondents on this application, who advised that (i) he was not formally retained, and (ii) the respondents were agreeable to allowing the Trustee access to the Property to conduct an appraisal to be done by a mutually agreed upon appraiser. In response, the applicants’ lawyer requested written confirmation that Mr. Page had been retained by the respondents in connection with this matter. The applicants’ lawyer advised that the respondents do not have a veto or the right to insist upon a mutually agreeable appraiser, and they asked for confirmation by April 3, 2018 that the respondents consent to allowing access to the Property for the appraiser named by the applicants to perform an appraisal. There was no response to this email.
[13] This application was then brought.
Analysis
[14] The applicants bring this application for:
a. An Order pursuant to s. 66.3(1) of the BIA annulling the consumer proposal filed by Mr. Fast. Because a result of such an annulment would be that Mr. Fast is deemed to make an assignment into bankruptcy under s. 66.3(5) of the BIA, the applicants also seek an annulment of that bankruptcy on the ground that Mr. Fast is not currently insolvent. b. An order pursuant to ss. 181(1) and 187(5) of the BIA annulling the bankruptcy of Mrs. Fast. c. An order pursuant to Rule 60.07 of the Rules of Civil Procedure authorizing the issuance of a writ of seizure and sale of the Property.
[15] The applicants submit that the Property was substantially undervalued in the BIA filings by Mr. Fast on August 24, 2016 when he made his consumer proposal and by Mrs. Fast on April 25, 2017 when she made an assignment into bankruptcy. The applicants submit that when a fair and accurate value is assigned to the Property on those respective dates, it is clear that neither Mr. Fast nor Mrs. Fast was insolvent when their respective filings were made under the BIA.
What was the proper value of the Property on August 24, 2016 and April 25, 2017?
[16] In support of this application, the applicants rely upon the affidavit of Agnes Lee who is a professional appraiser at Acuity Professional Appraisals. As exhibits to her affidavit, Ms. Lee provided her expert report dated June 11, 2018 as well as a copy of her current CV and her executed Acknowledgement of Expert’s Duty. In her affidavit and report, Ms. Lee provided her opinion of the market values of the Property as of August 24, 2016 and April 25, 2017.
[17] Market value was defined in Ms. Lee’s report as the most probable price which a property should bring in a competitive and open market as of the specified date under all conditions requisite to a fair sale, the buyer and seller each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.
[18] In her report, Miss Lee noted that the Property was observed only from the public street and that interior inspection was not possible as she was not granted access to the Property. For this reason, the Property was inspected from the exterior only and information regarding the building and site were obtained from MPAC records that were considered reliable. In her report, Ms. Lee states that based on the Property’s age and exterior appearance, she assumes the interior condition to be good and interior finishes to be of a good-quality consistent with other custom-built homes in the immediate area of similar age.
[19] In performing her appraisals of market value, Ms. Lee relied upon the selling prices of several comparable properties that are identified in her report.
[20] Ms. Lee expressed her opinion in her affidavit and report that (i) the estimated market value of the Property as of August 24, 2016 is from $1,000,000 to $1,100,000, and (ii) the estimated market value of the Property as of April 25, 2017 is from $1,300,000 to $1,400,000.
[21] Ms. Lee was not cross-examined on her affidavit. The respondents did not rely upon any expert evidence from another qualified appraiser.
[22] The respondents rely upon the affidavit of Mr. Fast in response to this application. In his affidavit, Mr. Fast states that although the home on the Property is large, it has been built on modest terms. He states that the floors are not real hardwood, the countertops are laminate and the basement foundation wall is cracked. Mr. Fast also states that he believes that the Property has now suffered a loss in value due to the conduct of the applicants who constructed a retaining wall and fence along the border of the Property, the effect of which is to have water pool into the Property. According to Mr. Fast’s affidavit, the pooling is damaging the foundation of the house on the Property.
[23] Mr. Fast has been a realtor in the Niagara area for 25 years. He included statements in his affidavit providing his opinions on the report provided by Ms. Lee, including the comparable properties that she considered as part of her analysis. Mr. Fast is not an independent and qualified expert witness and his opinions concerning the value of the Property are disregarded because they are inadmissible in evidence: Pinarreta v. Abreu Refrigeration Ltd., 2009 CarswellOnt 6880 at para. 14.
[24] I do not regard the factual evidence of Mr. Fast to be such that it affects the opinions of value given in the affidavit of Ms. Lee in any significant respect. The fact that the floors are not real hardwood and the countertops are laminate would not materially affect the market value of the Property. The retaining wall and fence built by the applicants along the border of the Property that Mr. Fast states now affects the value of the Property would not have affected the value of the Property on the material dates, August 24, 2016 and April 25, 2017.
[25] It was open to the respondents to challenge the expert evidence given by Ms. Lee by delivering an opposing expert affidavit or through cross-examination. They did not do so.
[26] I accept the evidence of Ms. Lee, and find that the market value of the Property on August 24, 2016 was between $1,000,000 and $1,100,000 and that the market value of the Property on April 25, 2017 was between $1,300,000 and $1,400,000.
Should an order be made annulling Mrs. Fast’s bankruptcy order?
[27] Section 181(1) of the BIA provides:
If, in the opinion of the court, a bankruptcy order ought not to have been made or an assignment ought not to have been filed, the court may by order annul the bankruptcy.
[28] In Re Wale (1996), 45 C.B.R. (3d), O’Connor J., as he then was, addressed the court’s jurisdiction under s. 181 of the BIA:
The jurisdiction of this court, sitting as a bankruptcy court, is limited by the special rules and procedures set out in the Act. The court has no authority, either on an interim or permanent basis to stay an assignment. However, the Act does give the court authority to annul a bankruptcy. [Citation omitted].
An annulment will be granted only where it is shown either the debtor was not an insolvent person when he made the assignment or where it is shown that the debtor abused the process of the court or committed a fraud on his creditors.
[29] The applicants submit that Mrs. Fast was not an insolvent person when she made an assignment into bankruptcy on April 25, 2017 and that she abused the process of the court in making this assignment.
[30] An “insolvent person” is defined in s. 2 of the BIA:
insolvent person means a person who is not bankrupt and who resides, carries on business or has property in Canada, whose liabilities to creditors provable as claims under this Act amount to one thousand dollars, and
(a) who is for any reason unable to meet his obligations as they generally become due,
(b) who has ceased paying his current obligations in the ordinary course of business as they generally become due, or
(c) the aggregate of whose property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due.
[31] The applicants submit that if the midpoint of the estimates of value of the Property given by Ms. Lee as of April 25, 2017, $1,350,000, is used as the value of the Property instead of the value included in Mrs. Fast’s statement of assets in her filing under the BIA, $630,000, the effect would be that her assets actually total $1,359,000 (excluding RRSP amounts) which significantly exceeds her listed liabilities of $653,313.19. The applicants submit that even if only one half of the value of the Property is considered to be an asset of Mrs. Fast, the value of her assets would still significantly exceed her liabilities.
[32] In her filing under the BIA, Mrs. Fast also included a statement of monthly income and expenses. According to the statement, her monthly expenses exceed her monthly income by $2,010.
[33] The applicants submit that given that the value of Mrs. Fast’s assets significantly exceeds her liabilities as of the date of her BIA filing, the fact that her monthly expenses exceed her monthly income does not support a finding that Mrs. Fast is an insolvent person. The applicants rely upon the decision of the Registrar in Bankruptcy in Benoit, Re, 1930 CarswellOnt 32 where the Registrar addressed the question of whether the debtor had ceased to meet his liabilities generally as they become due. In that case, the debtor owned real property with a value of more than $500,000 over and above all liabilities or charges thereon. The Registrar concluded that the debtor’s failure to pay certain small amounts for taxes was not sufficient for him to find that the debtor had committed an act of bankruptcy because his financial statement showed that his obligations under all the mortgages were well provided for: Re Benoit, at paras. 11 and 19.
[34] I am not satisfied that the simple fact that a person may own real property with a value significantly in excess of his or her liabilities should lead to the conclusion that this person, through recourse to the equity in the property, would be able to meet his or her obligations generally as they become due where there is a deficiency between the person’s monthly income and monthly expenses. I do not regard Re Benoit as standing for this general proposition.
[35] On this application under s. 181(1) of the BIA, the onus is on the applicants to show that Mrs. Fast was not an insolvent person on the date of her assignment in bankruptcy. The court has a wide discretion, and there is no single test or principle to be applied: Re Wale, at para. 26. The remedy under s. 181(1) is one that is not lightly granted and should be exercised only in very special circumstances: Sangha v. Crowe Mackay & Company Ltd., 2016 BCSC 260 at paras. 19-20.
[36] The respondents submit that on this application, it would be improper to apply a simple balance sheet test. I agree. The applicants must show that the bankruptcy order ought not to have been made or an assignment ought not to have been filed. I am not satisfied that the applicants have discharged their onus of showing that Mrs. Fast was not an insolvent person on the date of her bankruptcy because I am not satisfied that they have shown that, on that date, Mrs. Fast was not unable to meet her obligations generally as they become due or that she had not ceased paying her current obligations in the ordinary course of business as they generally become due.
[37] The applicants also submit that when Mrs. Fast made an assignment in bankruptcy, she abused the process of the court.
[38] In Re Wale, O’Connor J. held that the debtor’s motive is the primary consideration in determining abuse of process or fraud. O’Connor J. identified at para. 26 some of the questions the court might pose to ascertain the debtor’s motive:
(1) Is the debtor’s financial situation genuinely overwhelming or could it have been managed? (2) Was the timing of the assignment related to another agenda or was bankruptcy inevitable in the near or relatively near future? (3) Was the debtor forthcoming in revealing his situation to his creditors or did he hide assets or prefer some creditors over others? (4) Did the debtor convert money or assets to himself which would otherwise have been assets in the bankruptcy? (5) What had been the debtor’s relationship with his creditors, particularly his major ones? Was it such that they might have assisted him, if he had approached them, by granting time or terms of repayment or had any goodwill been destroyed by past unfulfilled promises? (6) Are there other relationships - business partnerships, shareholder arrangements, spousal, competitors for an asset, or simply personal associations which could cast light on a possible bad faith motive for making an assignment?
[39] The applicants submit that Mrs. Fast’s bankruptcy filing has multiple indices of abuse of process. They submit that her financial situation was manageable, with significant equity available in the Property. As well, they submit that the timing of the assignment is indicative of an agenda, coming as it did just 15 days after receiving a notice of examination from the legal representative of the applicants. The applicants submit that Mrs. Fast was not forthcoming regarding her financial affairs, providing an unreliable opinion of value and refusing the applicants and the Trustee access to the Property to conduct a formal appraisal. The applicants submit that Mrs. Fast appears to have a good relationship with the lender which has held a mortgage on the Property since 2012, and that the amount of the mortgage debt has decreased significantly over time. They submit that the acrimonious relationship between the applicants and the respondents suggests a possible bad faith motive for the assignment.
[40] When I consider the factors identified by the court in Re Wale and apply them to the evidence before me, I am not satisfied that Mrs. Fast engaged in an abuse of the process of the court in making an assignment in bankruptcy on April 25, 2017. I accept that it is likely that Mrs. Fast was prompted to take this action by the steps that were taken on behalf of the applicants to enforce their judgment. I do not, however, accept that the fact that Mrs. Fast listed a value for the Property that is significantly less than what I have found to be the market value of the Property on this application, based upon the expert evidence of Ms. Lee, is evidence that Mrs. Fast was intentionally not forthcoming in her financial affairs. Her statement was supported by a statement of value provided by Sotheby’s Canada dated April 21, 2017. The statement by Sotheby’s was not put into evidence on this application as admissible opinion evidence of value, but the fact that it was provided to Mrs. Fast is relevant to whether she acted in a way that amounted to an abuse of the process of the court. There is no evidence before me of the relationship between Mrs. Fast and the entity that holds a mortgage on the Property, and I do not regard the fact that the mortgage appears to be in good standing and that the mortgage debt has been reduced over time is indicative of conduct by Mrs. Fast that is an abuse of process. The fact that the respondents may have an acrimonious relationship with the applicants is also insufficient, on its own or in combination with evidence relevant to the other factors, to show that Mrs. Fast acted in a way that amounts to an abuse of process.
[41] For these reasons, I conclude that the applicants have failed to satisfy their onus under s. 181(1) of the BIA, and I exercise my discretion and decline to make an order annulling Mrs. Fast’s bankruptcy.
Should an order be made annulling the consumer proposal filed by Mr. Fast?
[42] Section 66.3(1) of the BIA provides:
Where default is made in the performance of any provision in a consumer proposal, or where it appears to the court
(a) that the debtor was not eligible to make a consumer proposal when the consumer proposal was filed,
(b) that the consumer proposal cannot continue without injustice or undue delay, or
(c) that the approval of the court was obtained by fraud,
the court may, on application, with such notice as the court may direct to the consumer debtor and, if applicable, to the administrator and to the creditors, annul the consumer proposal.
[43] Under s. 66.11 of the BIA, a “consumer debtor” means be an individual who is bankrupt or insolvent and whose aggregate debts, excluding any debt secured by the individual’s principal residence, are not more than $250,000. Under section 66.12(1) of the BIA, a consumer proposal may be made by a consumer debtor.
[44] The applicants submit that on the date of Mr. Fast’s consumer proposal, the Property had a market value of between $1,000,000 and $1,100,000 and that, using the midpoint, he had assets valued at $1,263,671.99, significantly in excess of his liabilities of $690,945.72. The applicants submit that Mr. Fast was not insolvent on the date of his consumer proposal, although he was bankrupt. They also submit that Mr. Fast was not insolvent on the date of his assignment into bankruptcy on January 7, 2015.
[45] The Applicants submit that notwithstanding that Mr. Fast was bankrupt when he made his consumer proposal I should, nevertheless, annul the consumer proposal on the ground that “it would be a significant irregularity if an individual who was never insolvent was able to benefit from both a bankruptcy and consumer proposal solely because his bankruptcy was not challenged prior to his consumer proposal”. At the hearing of this application, counsel for the applicant submitted that I should also annul Mr. Fast’s assignment into bankruptcy on January 7, 2015.
[46] In their Notice of Application, the applicants do not seek an order annulling the assignment into bankruptcy by Mr. Fast that was filed on January 7, 2015. There is incomplete evidence before me of the factual circumstances relevant to whether Mr. Fast’s assignment into bankruptcy in 2015 should not have been filed.
[47] In my view, there is no proper evidentiary basis for me to make an order annulling Mr. Fast’s assignment into bankruptcy on January 7, 2015, and I decline to so order.
[48] Given that Mr. Fast was bankrupt when he made his consumer proposal on August 24, 2016, there is also no proper basis for me to conclude that he was not eligible to make this consumer proposal on that date, regardless of the proper market value of the Property. I decline to make such an order.
[49] The applicants also submit that it would be unjust to allow Mr. Fast’s consumer proposal to proceed, and that it should be annulled for this reason. They submit that the effect of the consumer proposal would be to allow Mr. Fast to substantially avoid responsibility for the harm caused to the applicants, despite his ownership of assets with a realizable value significantly exceeding the amount owed to the applicants and his other liabilities. In support of this submission, the applicants rely upon the following passages from Automotive Finance Corp. v. Davies, 2002 BCSC 509 at paras. 33 and 34:
33 It strikes me that if the Consumer Proposal process is to have any “integrity”, it must rest firmly on the foundation that all proper debts and liabilities will be disclosed by debtors seeking the protection of the Act; that the administrators will properly investigate the debtor’s financial affairs; and that all creditors will be provided with proper notice of a Consumer Proposal so as to be able to elect to participate in the process if they choose. Assuming the Act is complied with, the debtors, creditors and the public generally, can expect that the purpose of the Act will be fulfilled - that is there will be an orderly and equitable distribution of the debtors’ assets.
34 If a clear error, such as that which was committed in the case at bar, is allowed to stand without ramification, leaving the creditor (who received no notice of the Consumer Proposal) to absorb the loss, then the integrity of the process has surely been undermined. The creditor would be left with no remedy either against the debtor or for that matter the Administrator, whose error caused the loss.
In Automotive Finance, the court held that the persons making the consumer proposal were ineligible to do so because they had joint indebtedness under personal guarantees that exceeded the eligibility limit for a consumer proposal at that time.
[50] In this case, Mr. Fast was not ineligible to make a consumer proposal on the date that it was filed. It is true that he did not disclose his potential liability to the applicants in relation to their claim that resulted in the judgment against the respondents. However, unlike the circumstances in Automotive Finance, the failure to disclose this potential liability would not have affected Mr. Fast’s eligibility to make a consumer proposal.
[51] In addition, at the time that Mr. Fast filed his consumer proposal, he had in his possession a written letter of opinion of value in respect of the Property from Sotheby’s dated December 18, 2014 that showed a value of the Property of between $625,000 and $635,000. Although this letter is not admissible on this application as evidence of the value of the Property, it is evidence of information that was provided to Mr. Fast and that was in his possession at the time that he filed his consumer proposal. There was no affidavit from the Sotheby’s representative on this application, and no evidence of the basis for this opinion as to value or the reasoning that supported it. On the evidentiary record before me, I am not able to conclude that Mr. Fast intentionally misstated the value of the Property on his consumer proposal.
[52] I am not satisfied that my finding that the market value of the Property on August 24, 2016, when Mr. Fast made his consumer proposal was between $1,000,000 and $1,100,000 is sufficient for me to conclude that unless the consumer proposal is annulled, the applicants will be left with no remedy against the respondents, or that Mr. Fast’s consumer proposal cannot continue without injustice.
[53] In the affidavit from the applicants’ lawyer that was filed in support of this application, she indicated that the applicants would be contesting Mr. Fast’s consumer proposal. She also provided evidence that the applicants had delivered a Notice of Intended Opposition to the Discharge of Bankruptcy of Mrs. Fast and that the Trustee had also filed such a notice.
[54] My finding that the Property had a market value as at August 24, 2016 of between $1,000,000 and $1,100,000 and that it had a market value as at April 25, 2017 of between $1,300,000 and $1,400,000 may be taken into account by the court in respect of the ongoing bankruptcy proceedings.
[55] For these reasons, I exercise my discretion and decline to make an order setting aside Mr. Fast’s consumer proposal.
Disposition
[56] For the foregoing reasons, the application is dismissed.
[57] If the parties are unable to resolve costs, the respondents may make written submissions within 15 days. The applicants may make responding submissions within 15 days thereafter. If so advised, the respondents may make brief reply submissions within five days thereafter.
Cavanagh J.
Date: October 11, 2018