Court File and Parties
COURT FILE NO.: 16-70683 DATE: April 18, 2019 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN: Philipos Yigzaw and Aster Abraham Applicants/Moving parties – and – Asnaketch Ashagrie (cob “Telling Roses”) and Yilma Gari Respondents
Counsel: Glen Schruder for the Applicants/Moving parties Chantal Beaupré for the Respondents
HEARD: April 4, 2019
Ruling on motion to lift stay
Introduction
[1] This is a motion to lift a stay of proceedings to permit enforcement of an order obtained against debtors who have filed a consumer proposal.
[2] The applicants Philipos Yigzaw and Aster Abraham seek to enforce an order issued by Kershman J. on February 21, 2017 (the “2017 order”). The 2017 order was obtained on the basis of a summary judgment on an application commenced by Yigzaw and Abraham in November 2016. In their application, they sought repayment of $102,500 that they had advanced to the respondents Anaketch Ashagrie and Yilma Gari to finance a business operating under the name “Telling Roses”, as well as an accounting of how the funds had been spent.
[3] The respondents did not file any materials in response to the application and did not appear at the hearing of the summary judgment motion. In a letter dated January 30, 2017, they denied any liability to the applicants and told them that, in any event, they intended to file a consumer proposal under the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (the “BIA”).
[4] The 2017 order required Ashagrie and Gari to pay $102,500 to Yigzaw and Abraham as well as costs of $6250. The respondents were also ordered to provide an accounting. The judge refused to issue a certificate of pending litigation against the respondents’ home, although he did grant a writ of execution. The respondents filed a consumer proposal the next day.
[5] In this enforcement motion, the applicants say that the respondents have failed to comply with the 2017 order. They seek further orders that would require Ashagrie and Gari to undergo examinations and to pay the amount of the judgment forthwith. They also want me to find the respondents in contempt.
[6] The respondents take the position that they were not required to comply with the 2017 order because the filing of the consumer proposal stayed all proceedings against them.
[7] I initially heard the applicants’ enforcement motion on August 23, 2018. I held that, pursuant to s. 69.2 of the BIA, the respondents’ filing of a consumer proposal automatically stayed execution of the 2017 order. The applicants could seek to lift the stay under s. 69.4 of the BIA, but they first had to serve this motion on the trustee and any other interested party. I accordingly adjourned the motion to give the applicants the opportunity to do so.
[8] On April 4, 2019, the parties re-attended to present arguments on whether the stay should be lifted.
Legal principles applicable to this motion
[9] Section 69.2(1) of the BIA, states that, on the filing of a consumer proposal, “no creditor has any remedy against the debtor or the debtor’s property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy”. This stay remains in place until the consumer proposal has been withdrawn, refused, annulled or deemed annulled, or the administrator has been discharged.
[10] Section 69.4 of the BIA provides that a court may, in certain circumstances, lift the stay to permit a creditor to pursue its rights against a party who has filed consumer proposal. To obtain a lifting of a stay, the creditor must persuade the court that it is likely to be materially prejudiced by its continued operation, or that lifting the stay is equitable on other grounds.
[11] Canadian courts have held that the criteria in s. 69.4 may be met where the creditor’s debt will not be discharged as a result of the insolvency process; Re Advocate Mines Ltd., [1984] O.J. No. 2330 (S.C.). The types of debts that are not discharged are listed in s. 178(1) of the BIA. They include a debt or liability “arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity” (ss. 178(1)(d)) and a debt or liability “resulting from obtaining property or services by false pretenses or fraudulent misrepresentation” (ss. 178(1)(e)).
[12] Lifting a stay is “far from a routine matter”; Re Ma, [2001] O.J. No. 1189 (CA), at para. 3. The burden is on the applicant to show that there are sound reasons for the stay to be lifted. The court must have proof of objective prejudice if the applicant is not permitted to proceed, and it must consider the possible impact of lifting the stay on other creditors and the administration of the bankruptcy; Re Pietrzak, 2016 ONSC 4700, at paras 7 and 14.
Application of these principles in this case
[13] To succeed on this motion, the applicants must show that they are likely to be materially prejudiced by the stay, or that there are other equitable grounds to lift it.
[14] In a typical motion under s. 69.4, the applicant seeking to lift the stay argues that it should have the opportunity to prove allegations underlying a cause of action listed in s. 178(1) so that it may obtain judgment against a debtor. The court reviews the creditor’s allegations to determine if the claim, if proved, would be discharged as a result of the bankruptcy or proposal. In some cases, the court may also consider evidence submitted by the creditor.
[15] This case is unusual because the applicants have already obtained judgment on their claim. They are not seeking to prove their claim but to enforce an order based on the claim. So the question I must consider is whether that order was made pursuant to a cause of action listed in s. 178(1). I will do this by reviewing the allegations and evidence before the judge who granted judgment, his endorsement, and evidence subsequently filed by the parties on this motion.
Allegations in the notice of application and supporting affidavit
[16] In the applicants’ notice of application and the supporting affidavit by Yigzaw, they allege that they provided the respondents with $100,000 in October 2014 for a business operating under the name “Telling Roses”. “Telling Roses” sold flowers embossed with personalized messages. Setting the business up required paying for a license and special equipment from a U.S.-based company called “Speaking Roses”.
[17] According to the applicants, half of the money advanced in October 2014 was a loan repayable over five years at 4% interest, and half was an investment in return for which Yigzaw would receive a portion of the profits of the business. Although a partnership agreement was drafted, it was never signed.
[18] Unfortunately for all concerned, “Telling Roses” made no profits. Its operations ceased in June 2015. In August 2015, Yigzaw and Abraham provided the respondents with a further $2500 to terminate the lease on the premises used for the business.
[19] According to the notice of application, Yigzaw and Abraham repeatedly asked the respondents for an accounting of how they had used their money, but the respondents refused.
[20] In their notice of application, the applicants seek reimbursement of the $102,500 advanced to the respondents but do not identify the cause of action they are relying on.
[21] The applicants’ claim with respect to the first $50,000 advanced to the respondents appears to be based on a verbal loan agreement. In their notice of application, the applicants claim this amount as “creditors” of the respondents. They allege that the respondents agreed to repay the loan over five years, with interest, but did not make any repayments. By seeking the return of the amount loaned, the applicants are essentially asking to be put in the position they would have had but for the respondents’ breach. This has all of the elements of a claim for breach of contract.
[22] The applicants’ claim for the additional $52,500 advanced to the respondents in October 2014 and August 2015 is also grounded in an alleged contract between the parties. The applicants set out the terms of a draft partnership agreement prepared by the respondents in October 2014. Under this agreement, the applicants’ additional advance of $50,000 would be invested in “Telling Roses”, and in return Yigzaw would have a right to a 41% share of any profits of the business. In his supporting affidavit, Yigzaw says that the parties agreed to these terms, even though no formal agreement was ever signed.
[23] In the notice of application, the applicants allege that the respondents failed to provide an accounting of how the funds were used. They do not explicitly state that this is a breach of the parties’ agreement, but I infer this to be the case. The applicants also say that they suspect the respondents did not in fact invest the money they advanced in the business, because Ashagrie bought a new house in June 2015, the same month that “Telling Roses” closed. The use of the money in this way would again be a breach of the parties’ agreement.
[24] These allegations could again support a claim for breach of contract and recovery of the remaining $52,500, on the theory that this remedy would put the applicants back in the position they would have enjoyed in the absence of the respondents’ breach.
[25] Reading the application in the most generous way possible, the allegations could not support a finding that the respondents obtained property from the applicants by false pretenses or a fraudulent misrepresentation. The applicants say that their investment was conditional on the money being used for “Telling Roses”. They do not allege that they were induced to invest in “Telling Roses” as a result of any fraudulent misrepresentation by the respondents or that the respondents engaged in any fraudulent acts that induced them to advance the funds. The exemption from discharge in s. 178(1)(e) of the BIA would therefore not apply to the applicants’ claim.
[26] The allegations in the application could likewise not support a finding that the respondents engaged in “fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity”. To meet the criteria under s. 178(1)(d), it is not enough for a debt to have been caused by fraud, embezzlement, misappropriation or defalcation. The fraud, embezzlement, misappropriation or defalcation must have taken place in the context of a fiduciary relationship; Re McAteer, 2007 ABCA 137, at para. 22; Smith v. Henderson, [1992] B.C.J. No. 211 (BCCA), at para. 26; Thorarinson v. Bruneau, 1996 MBCA 147, at para. 24.
[27] The applicants do not allege, either in their notice of application or their supporting affidavit, that the respondents had a fiduciary duty towards them. The relationship they describe with the respondents would furthermore not be consistent with such a claim. Fiduciary relationships are rare in arms’ length commercial transactions; McAteer, supra, at para. 25. Such a relationship is characterized by the power imbalance between the parties, and the fiduciary’s undertaking to act in the best interests of the party relying on them; Smith, supra, at paras. 14 to 16. Although Yigzaw states in his supporting affidavit that he had no business experience, he does not allege a relationship that would give rise to a fiduciary duty on respondents’ part.
[28] The applicants furthermore do not clearly allege that the respondents engaged in any fraud, embezzlement or misappropriation at any point. Because of the timing of the respondents’ house purchase, they say that they “can only assume” that the respondents used the money they provided “in a fraudulent manner”. As noted many years ago by the British Columbia Court of Appeal, the introduction of a “mere belief” is not sufficient to ground a cause of action, and allegations of fraud must be “precisely alleged”; McLean v. Johnston (1923), 32 B.C.R. 495, at para. 11. The applicants’ stated assumption falls well short of allegations of fact that could ground a finding of fraud.
The 2017 order
[29] The judge who granted the 2017 order appears to have done so on the basis that the entire amount advanced by the applicants was a loan and that they were entitled to the return of the capital. In his view, the applicants had not demonstrated any connection between this loan in October 2014 and the respondents’ purchase of a new house in June 2015. In rejecting the applicants’ claim for a certificate of pending litigation against that property, he wrote:
The Court does not find that there is a nexus between the loan of the monies five months prior to the purchase of a house and at a time when the business of the Respondent was still in operation and which operated for a further 5 months.
[30] There is nothing in the endorsement that suggests that the judge made any finding of any intentional wrongdoing by the respondents. He did order the respondents to provide an accounting. The purpose of this part of the order is unclear given that the applicants had already obtained the full amount of money they claimed in the application. I cannot however infer that this part of the order is based on anything that would fall under s. 178(1) of the BIA, in the absence of anything in the endorsement that suggests this.
Evidence on the motion
[31] The applicants argue that I should not limit my consideration of their claim to what is set out in their notice of application and endorsement underlying the 2017 order because, at the time they obtained summary judgment, they had not obtained any disclosure from the respondents. They say that the stay should be lifted so they have the opportunity to obtain evidence that the respondents used the money for their own purposes instead of investing it in “Telling Roses”.
[32] There are two problems with this argument. First, the allegations in the application simply do not ground any cause of action listed in s. 178(1) of the BIA. Second, even if they did, the evidence on the motion does not support the applicants’ theory that the respondents failed to invest their money into their business.
[33] The evidence before me is not consistent with a scheme to defraud the applicants, but rather a failed business venture.
[34] Yigzaw produced, as an exhibit to his affidavit, a printed version of an online statement of transactions in a CIBC bank account from October 7, 2014 to April 12, 2015. Yigzaw states that this is the account into which the applicants’ funds were deposited, and that it is Ashagarie’s personal account. This is the basis for his contention that the respondents did not use the applicants’ money for “Telling Roses” but for their own purposes.
[35] In Ashagrie’s affidavit sworn February 7, 2018, she states that the $100,000 advanced by the applicants in October 2014 was deposited into a business account set up for “Telling Roses”. She produces a monthly statement for this account, which bears the same number as the print-out of the online statement from the account that Yigzaw alleges is Ashagrie’s personal account. The statement is entitled “CIBC Basic Business Operating Account Statement” and the account holder is identified as “Asnaketch Ashagrie, o/ Telling Roses”. There was no money in the account when it was opened on October 16, 2014. Two deposits of $50,000 each were made on October 22 and 31, 2014. According to Ashagrie, these were the two amounts advanced by the applicants.
[36] On the basis of this evidence, I find that, contrary to what the applicants allege, the money they advanced in October 2014 was deposited in a business account set up by Ashagrie for “Telling Roses”.
[37] Ashagrie produces proof of payment on October 22, 2014 of $48,730.90 to Florabella International LLC, which she identifies as the operator of “Speaking Roses”, for the embossing equipment to be used for “Telling Roses”. This same amount was withdrawn from the business’ bank account that same day. I find, based on this evidence, that this part of the money advanced by the applicants was used to invest in the business.
[38] The bank statements do not clearly show how the balance of the money advanced by the applicants was used. There was a steady flow of payments from the account to hardware stores, office supply stores and other payees. According to Ashagrie’s affidavit, the money in the account was used to set up the store and to cover other business expenses. No specific payments on the statements leap out as inappropriate. The statements show that the expenses of the business quickly exceeded any revenue. Setting aside deposits that appear to be reversals of draws made in error, less than $1,000 in new funds were deposited in the account over this period of time. By April 2, 2015, only $2,660.30 remained.
[39] In a further affidavit sworn by Yigzaw on August 8, 2017, he states that, between November 2014 and January 2015, Ashagrie paid $7,129 owing on her credit card, even though she had previously only paid about $100 per month on her outstanding credit card balance. The implication is that Ashagrie used the funds advanced by the applicants for “Telling Roses” for this purpose.
[40] The CIBC bank statement shows that there were amounts transferred to the respondents during this period: $2,000 on November 7, 2014; $600 on November 27, 2014; and $2,000 on January 21, 2015. These transfers do not total the credit card balance allegedly paid by Ashagarie at the time.
[41] There were other transfers to Ashagarie in February and March 2015, and ABM cash withdrawals. In her affidavit, Ashagrie explains that “Telling Roses” did not have a credit card, so purchases were made with cash or using her credit card. She says that Yigzaw also made purchases on behalf of the business and then was reimbursed from the funds on account. The bank statement support this. It shows two transfers to Yigzaw: $903.55 in December 2014 and $350.00 in February 2015.
[42] Having reviewed all of this evidence, I cannot find that Ashagrie used funds from the account for herself as opposed to the business. Her explanation for the reimbursements to her and to Yigzaw is credible.
[43] Ashagrie’s affidavit also contradicts the applicants’ claim that they had no participation or insight into the business. Ashagrie states that Yigzaw and Gari spoke regularly after the store opened in January 2015 and conferred on purchases and expenses. She furthermore states that Yigzaw had “unfettered access” to the store and its records. Ashagrie’s affidavit details the interactions between the parties. She produces contemporaneous emails and text messages in support. The applicants did not cross examine her on her affidavit. Although Yigzaw states repeatedly in his affidavits that the respondents have refused to provide him with an accounting, I accept their evidence regarding his participation in the business.
[44] The applicants argue that there are various irregularities and inaccuracies in the respondents’ consumer proposal and the accounting they provided in response to the 2017 order. In his affidavits, Yigzaw repeatedly says, without any substantiating evidence, that the respondents’ conduct has been fraudulent. An allegation of fraud should not be made lightly. There has been nothing presented on this motion that leads me to conclude that the respondents have engaged in any intentional misconduct, either in respect of “Telling Roses” or their consumer proposal. As noted by one of my colleagues, the loss of an investment “does not entitle someone who feels hard done by to have the BIA stay lifted to make as yet completely unevidenced allegations of fraud against a bankrupt”; Re Sheikh, 2011 ONSC 939, at para. 28.
[45] The applicants relied on 822878 Ontario Ltd. v. Firth, 2013 ONSC 2422 for the proposition that, where a debtor has defied a court order, a stay resulting from bankruptcy should not prevent a court from proceeding with contempt hearing proceedings. In that case, the bankrupt was in contempt of a court order months before petitioning for bankruptcy. In the case at bar, the respondents filed their consumer proposal the very next day after the applicants presented their motion for summary judgment. The respondents were accordingly not in defiance of the order when the proceeding was stayed.
[46] In Walchuk v. Houghton, 2016 ONCA 643, at para. 9, the Ontario Court of Appeal distinguished between the situation in 822878 Ontario and in a case like ours. It overturned an order requiring a bankrupt to attend a judgment debtor examination, observing that the enforcement of an order to examine a judgment debtor was “exactly the kind of proceeding” that the BIA was intended to stay. The Court furthermore noted that “the bankruptcy process is intended to be a single forum for creditors” and that permitting the contempt process to unfold in the circumstances would offend this principle.
Conclusion
[47] The applicants seek enforcement of an order made a day before they filed a consumer proposal. The basis for the 2017 order was a finding that the applicants loaned the respondents $102,500. There is nothing in the underlying endorsement, or in the allegations in the application on which judgment was obtained, or in the evidence on this motion, that puts the applicants’ claim in the category of debts that are not discharged under s. 178(1) of the BIA.
[48] In these circumstances, the applicants’ motion to lift the stay under s. 69.4 of the BIA is dismissed. They have not shown that they are likely to be materially prejudiced by the continued operation of the stay or that there are other equitable reasons to lift it.
[49] If the parties are unable to agree on costs, the respondents may file a cost outline and a bill of costs by April 26, 2019. The applicants may file a cost outline and bill of costs by May 6, 2019. Each outline may not be longer than three pages in length.
Justice Sally Gomery Released: April 18, 2019