Court File and Parties

COURT FILE NO.: CV-18-601560-00CL DATE: 20200514 SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL LIST (IN BANKRUPTCY AND INSOLVENCY)

RE: ZEIFMAN PARTNERS INC., privately-appointed receiver of, and agent for, JOMAR ELECTRIC COMPANY LIMITED Applicant

AND:

SAM BALDASSARE, MARIA BALDASSARRE, GUISSEPE BALDASSARE, ANNE BALDASSARRE and BOZ ELECTRIC SUPPLY LTD. Respondents

BEFORE: Hainey J.

COUNSEL: Colby Linthwaite, for the Applicant, Zeifman Partners Inc. John LoFaso, Stefania Del Rizzo for the Respondent, Boz Electric Supply Ltd. Miranda Spence for the Respondents, Sam Baldassare, Maria Baldassarre, Guiseppe Baldassare and Anne Baldassarree

HEARD: January 15, 2020

Endorsement

BACKGROUND

[1] This is an application for a declaration that certain payments made by a now-bankrupt company were preferential or at undervalue, for orders that the recipients disgorge those payments and for an order that the principal of the bankrupt, Sam Baldassare, who directed the payments, be held personally liable for them.

[2] The bankrupt company, Discovery Electric Ontario Limited, (“Discovery”), carried on business for at least two years while it was insolvent. Notwithstanding this, Discovery continued to order goods from its suppliers until shortly before its bankruptcy.

[3] Discovery’s principal, Sam Baldassare, (“Sam”) caused it to pay $537,966.08 to himself and immediate members of his family in the 12-month period preceding Discovery’s bankruptcy. He also caused Discovery to pay $122,534.02 to a company he controlled.

[4] Discovery also paid $1,136,831.30 to a third-party supplier, Boz Electric Supply Ltd., (“Boz”) during the three-month period prior to Discovery’s bankruptcy which is alleged to have given Boz a preference over Discovery’s other creditors (“Boz Payments”).

[5] The application for bankruptcy resulting in Discovery’s bankruptcy was brought by Zeifman Partners Inc., (“Zeifman”), the privately-appointed receiver and agent for Jomar Electric Company Limited, (“Jomar”). Jomar subsequently obtained an order pursuant to s. 38 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 as amended (“BIA”) granting it leave to pursue the relief sought in this application (“Section 38 Order”).

[6] I heard the application on January 15, 2020. At the conclusion of argument, I requested additional written submission on an issue relating to the limitation period defence. I have now received and considered these additional submissions.

Discovery’s Payments to the Baldassare Family

[7] I intend to deal first with Discovery’s payments to the Baldassare family members and Tuscany Lighting and Furniture Ltd., (“Tuscany”), a company owned and controlled by Sam.

[8] There is no dispute that during the 12 months preceding its bankruptcy, each of Sam, Anne (“Sam’s wife), Guiseppe (Sam’s father), and Maria (Sam’s mother) received cheques from Discovery in the following amounts:

Sam - $190,000; Anne - $226,399; Guiseppe - $65,673; and Maria - $55,893.

These payments totalled $537,966 and were made at a time when Discovery had a deficit exceeding $6.5 million and owed Jomar almost $1 million.

[9] Discovery also paid $122,534 to Tuscany during the twelve-month period preceding its bankruptcy. Tuscany is now bankrupt.

[10] Zeifman alleges that these payments are void pursuant to s. 96(1)(b) of the BIA because they were all made to non-arm’s length parties during the twelve-month period preceding Discovery’s bankruptcy. These respondents have not denied this and rely solely on a limitation period defence.

[11] As a result, the only issue I must therefore consider is the respondents’ assertion that this application is statute-barred.

[12] The respondents submit that by May 24, 2016, Zeifman had discovered or should have discovered the “claim forming the basis of the within application”. They submit that the application was not commenced until July 13, 2018, and therefore it is statute-barred under the Limitations Act, 2002 (Ontario) (“Limitations Act”) because it was commenced more than two years from when the claim was or should have been discovered.

[13] The respondents rely upon Zeifman’s Preliminary Report dated April 8, 2016 and Zeifman’s dockets that confirm that Zeifman “review[ed] [the] bank statements” on May 24, 2016, in support of their position that Zeifman discovered, or ought to have discovered, this claim upon its review of Discovery’s bank statements.

[14] Zeifman disputes that it had sufficient information as of May 24, 2016 to trigger the commencement of the limitation period. However, in July 2016, Zeifman provided Boz with a bill of costs which stated that by May 27, 2016 Zeifman had conducted a thorough and complete analysis of Discovery’s financial records and bank statements. In my view, Zeifman should have discovered this claim as a result of that review. I have therefore concluded that the limitation period began to run on May 27, 2016.

[15] The respondents submit that because Zeifman did not commence this application until July 13, 2018 the claim is statute-barred. However, on May 18, 2018 Jomar served and filed a motion record in Discovery’s bankruptcy proceeding seeking the relief authorized by the Section 38 Order. This is the same relief that is sought on this application.

[16] Zeifman submits that the BIA requires that a trustee in bankruptcy must pursue a declaration of a preference or a transfer at undervalue by way of a motion in the bankruptcy proceeding.

[17] I agree with this submission. Section 96(1) of the BIA provides that “on application by the trustee, a court may declare that a transfer at undervalue is void”. Rule 11 of the Bankruptcy and Insolvency General Rules states that “every application to the court must be made by motion unless the court orders otherwise”. Therefore, the type of relief sought on this application should be initiated by a motion in the bankruptcy proceeding. (“Preference Motion”).

[18] In Re National Telecommunications Inc., 2017 ONSC 1475, Myers J. acknowledged this practice and commented as follows at para. 33:

It is trite law that the BIA is a businessperson’s statute. Its aim is particularly focused on efficiency and affordability.

[19] The Limitations Act applies to the BIA. Section 4 of the Limitations Act provides that “unless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered”.

[20] In Re Dilollo, 2013 ONSC 578, Justice D.M. Brown (as he then was) stated as follows:

Limitation periods set deadlines by which a person must initiate legal process in respect of a cause of action…As matters transpired the Trustee was left with ample time following the dismissal of the appeal to commence its Preference Motion.

[21] Implicit in this finding is the court’s acceptance of the initiation of the Preference Motion as the commencement of a proceeding for the purpose of the Limitations Act. His decision was upheld by the Court of Appeal for Ontario in which the court also concluded that the Preference Motion constituted the commencement of a proceeding for the purposes of the Limitations Act.

[22] Courts have come to the same conclusion in Re Saran, 2018 ONSC 2998 and in Re Edwards, 2010 ONSC 5718, a decision of the Registrar in Bankruptcy, that was ultimately upheld by the Court of Appeal for Ontario.

[23] On the strength of these authorities I have concluded that the initiation of the Preference Motion by Jomar on May 18, 2018 constituted the commencement of proceedings within the two-year limitation period pursuant to s. 4 of the Limitations Act. As a result, the claims against the members of the Baldassare family and Tuscany are not statute-barred.

[24] In the absence of any defence on the merits, I have concluded that all of these payments are void under s. 96(1)(b) of the BIA. Further, since Sam benefitted from all of these payments to his family members and Tuscany, and Discovery received no consideration, Sam is personally responsible to repay Zeifman for these amounts.

[25] The motion is granted as against these respondents.

Payments to Boz

[26] My conclusion with respect to the respondents’ limitation period defence applies equally to Boz’s assertion that Zeifman’s claim against it is statute-barred.

[27] The only issue that I must therefore decide is whether the Boz Payments are void as preferences under s. 95(1)(a) of the BIA as Zeifman alleges.

[28] Under s. 95(1)(a) of the BIA, if a payment is made to a creditor of an insolvent person with a view to giving that creditor a preference over another creditor within three months before the date of the initial bankruptcy event, the payment is void as against the trustee in bankruptcy.

[29] Section 95(2) of the BIA provides that if the payment “has the effect of giving the creditor a preference”, it is presumed to have been made “with a view to giving the creditor a preference”.

[30] This presumption in s. 95(2) of the BIA can be rebutted by the creditor establishing, on a balance of probabilities, that the dominant intent of the debtor was not to prefer the creditor.

[31] Mr. Lo Faso, on behalf of Boz, submits that the Boz Payments were made in the ordinary course of business, and not with an intent, on the part of Discovery to prefer Boz. Therefore, he submits that the s. 95(2) presumption is rebutted and the payments are not void as preferences.

[32] In my view, in determining whether the payments were made in the ordinary course of business, I should consider the following:

a. Whether, viewed objectively, solvent persons would, in the normal course of business, have acted the same way as the parties involved in the transaction; and b. Whether the payment was normal in the context of the business relations between the parties and was standard for their particular type of business.

[33] The Supreme Court of Canada explained that there is not a comprehensive definition of the term “ordinary course of business” in Pacific Mobile Corp., Re, [1985] 1 SCR 290 at para. 3 as follows:

It is not wise to attempt to give a comprehensive definition of the term ‘ordinary course of business’ for all transactions. Rather, it is best to consider the circumstances of each case and to take into account the type of business carried on between the debtor and creditor.

[34] I have concluded on the evidentiary record before me that the Boz Payments were made in the ordinary course of business. Boz had been Discovery’s primary supplier for many years because Boz supplied Discovery with discounted electrical supplies that Discovery could not obtain from other suppliers.

[35] I am satisfied that a solvent person with the same business relationship as Boz and Discovery had, would have acted in the same way. Discovery had to make payments to Boz to obtain supplies to enable it to carry on its business in the ordinary course. These payments were therefore made by Discovery to Boz in the ordinary course of its business.

[36] The fact that Boz’s sales to Discovery during 2015 were comparable to its sales to Discovery in the two previous years is further support for my conclusion that the Boz Payments were made in the ordinary course of business.

[37] For these reasons, I have concluded that the Boz Payments are not void under s. 95 of the BIA because they were made in the ordinary course of business. The application against Boz is therefore dismissed.

[38] I urge the parties to settle the issue of costs. If they cannot, they shall schedule a 30-minute videoconference with me.

[39] I thank counsel for their helpful submissions.

Hainey J. Date: May 14, 2020