Court File and Parties
COURT FILE NO.: CV-17-86 DATE: 2020/12/21 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
Royal Bank of Canada Plaintiff – and – Chul Yung Kim and MSI Spergel Inc., In its capacity as Trustee in Bankruptcy for Chul Yung Kim Defendants
Counsel: J. Ross Macfarlane, Counsel for the Plaintiff Andrew Ostrom, Counsel for the Defendant Kim No one appearing for the Defendant MSI Spergel Inc.
HEARD: November 18, 19, 20 and December 2, 2020 by teleconference
G.E. Taylor
Reasons for Judgment
Background
1This action had its genesis in a loan made by Royal Bank of Canada to Dr. Chul Yung Kim in 2011. In April 2013, the loan went into default. RBC commenced an action against Dr. Kim for repayment of the loan. Default judgment was obtained against Dr. Kim in August 2013. In December 2013, Dr. Kim was petitioned into bankruptcy by RBC.
2In December 2014, the stay of proceedings pursuant to the Bankruptcy and Insolvency Act was lifted to permit RBC to seek a declaration that Dr. Kim had obtained the loan, which resulted in the default judgment, by false pretences or fraudulent misrepresentation. The statement of claim in this action was issued on September 18, 2015. The statement of defence was delivered on November 15, 2015.
3Dr. Kim brought a motion for summary judgment dismissing the present action. That motion was heard by Broad J. on December 19, 2018 and on February 2, 2019 the motion was dismissed (Royal Bank of Canada v. Kim 2019 ONSC 798).
4Pursuant to Rule 20.05 of the Rules of Civil Procedure, Broad J. found that the following facts were not in dispute:
a) That the representations made by Dr. Kim regarding his ownership of a condominium at 22 Jackson Street, Hamilton, Ontario and regarding his ownership of a Cessna aircraft in Personal Statements of Affairs submitted to RBC dated June 19, 2011 and April 8, 2013 were false at the time he made them;
b) That Dr. Kim intended RBC to act on the Personal Statements of Affairs to enable him to obtain credit from RBC in April 2011 and June 2013; and
c) That RBC had no knowledge of the misrepresentations prior to obtaining default judgment against Dr. Kim and could not have discovered those misrepresentations before obtaining that judgment with reasonable diligence.
5In dismissing the motion, Broad J. found that there were two genuine issues requiring a trial which were:
a) Whether Dr. Kim knew that the representations regarding his ownership of a condominium at 22 Jackson Street, Hamilton, Ontario and regarding his ownership of a Cessna aircraft in Personal Statements of Affairs submitted to RBC dated June 19, 2011 and April 8, 2013 were false; and
b) Whether RBC relied on the false representations in extending credit to Dr. Kim.
6My task is therefore to decide if Dr. Kim knew that his Personal Statements of Affairs contained false representations and, if so, whether RBC relied on those false representations.
Legal Principles
7Section 178(1)(e) of the Bankruptcy and Insolvency Act provides that an order of discharge does not release the bankrupt from any debt or liability resulting from obtaining property or services by false pretenses or fraudulent misrepresentation.
8In Korea Data Systems v. Aamazing Technologies Inc. 2015 ONCA 465 the Court of Appeal explained that the Bankruptcy and Insolvency Act is a comprehensive code relating to insolvent persons which seeks to achieve the goals of the equitable distribution of the bankrupt’s assets among the bankrupt estate’s creditors and the financial rehabilitation of insolvent individuals. However, there are limited exceptions designed to ensure that purposeful wrongdoers cannot take unjustified advantage of the bankruptcy’s regime of protections (paragraphs 1 and 2). The purpose of the exceptions is to ensure that wrongdoers who engage in the type of conduct which is unacceptable to society do not benefit from the protections afforded by the bankruptcy regime (paras 56 and 57).
9In his reasons on the summary judgment motion, Broad J. listed the elements of fraudulent misrepresentation for the purpose of s. 178(1)(e) as follows:
a) the existence of a representation;
b) that the representation was false;
c) that the bankrupt knew the representation was false and intended the creditor to act upon it so as to enable the bankrupt to obtain the credit sought; and
d) that the creditor did rely upon the false representation and extend credit (para 58).
10Broad J. concluded that Dr. Kim made representations on his Personal Statements of Affairs regarding the Hamilton condominium and the Cessna aircraft and that those representations were false. Broad J. also found that Dr. Kim intended RBC to act on the representations contained in his Personal Statements of Affairs (para 79).
Did Dr. Kim Know the Representations Were False?
11Dr. Kim first dealt with RBC in 2009. He applied for financing but he decided not to proceed. In or about June 2011, Dr. Kim approached RBC about obtaining a loan. He was required to provide an appraisal of his dental practice, copies of income tax returns and notices of assessment and a Personal Statement of Affairs. Dr. Kim signed the Personal Statement of Affairs on June 19, 2011 immediately below a paragraph of the form which began:
I hereby certify that all information provided is true and complete. I have no other undisclosed financial obligations and acknowledge this foregoing will be used to determine my credit worthiness.
12In the Personal Statement of Affairs, Dr. Kim stated that one of his assets was a condominium valued at $175,000. He also stated that one of his assets was an aircraft worth $750,000.
13Based on the evidence presented at the trial I conclude that the condominium listed in Dr. Kim’s Personal Statement of Affairs was the condominium located at 22 Jackson Street, Hamilton, Ontario. I am also satisfied that the aircraft said to be worth $750,000 was a Cessna 421B twin engine airplane. As of June 2011, Dr. Kim was the legal owner of the condominium but he held it in trust for his father pursuant to a Trust Agreement dated May 25, 1999. The Cessna was owned by 1473219 Ontario Limited. These matters were not brought to the attention of Scott Urquhart, the RBC account manager who dealt with Dr. Kim.
14Scott Urquhart testified that he asked Dr. Kim about the condominium because he did not see any rental income being received by Dr. Kim. He testified that Dr. Kim told him that he occasionally stayed overnight at the condominium. Dr. Kim did not tell him that the condominium was the residence of his parents. Dr. Kim testified that he did not recall telling anyone that he lived at the condominium on a part-time basis. I accept the testimony of Scott Urquhart and find that Dr. Kim falsely stated that he stayed at the condominium from time to time. There is no dispute that Dr. Kim did not advise Scott Urquhart that the condominium was beneficially owned by his father and he was holding the property in trust.
15On April 25, 2011, Dr. Kim and his wife separated. The Corporation Profile Report for 1473219 Ontario Limited was made an exhibit at the trial. According to that document, Maria Kim, Dr. Kim’s mother, became the sole officer and director of the corporation on April 1, 2011. Dr. Kim was examined pursuant to section 163(1) of the Bankruptcy Act on August 15, 2014. Some of the questions and answers at that examination were introduced as evidence at trial. Dr. Kim testified that he had no interest in the corporation that owned the Cessna aircraft. He testified that he had transferred all of the shares in the corporation to his mother but he could not remember when. An undertaking was given to advise of the date on which the shares of the corporation were transferred to Dr. Kim’s mother. That undertaking was fulfilled by advising that Dr. Kim’s mother became the sole shareholder of the corporation on April 1, 2011.
16Dr. Kim was examined for discovery in the present action on December 16, 2016. He testified that the shares in the corporation that owned the aircraft were transferred to his mother on April 1, 2011 (questions 31 and 311). He confirmed that evidence at the continuation of his examination for discovery on October 29, 2018 (question 92).
17Dr. Kim testified at trial that he made a mistake when, he said the shares were transferred on April 1, 2011. He testified that the shares were not transferred to his mother until September 2012.
18Dr. Kim testified that he had discussions with his mother in September 2012 about transferring the shares in the corporation that owned the Cessna to her. He said he was struggling with divorce issues at the time. He said the recommendation to transfer the shares to his mother came from his legal and financial advisors so as to make the settlement with his wife proceed more smoothly. The verbal agreement provided for his mother to pay him $60,000 when the airplane was returned to Canada. He testified that he answered the undertaking as to when his mother became the sole shareholder of the corporation based on the date shown on the Corporation Profile Report. He said he did not think that was the correct date and it was only during the course of preparing for trial, when he saw that the Corporation Profile Report was registered in September 2012, that he realized that the information he had previously provided was incorrect. Dr. Kim explained that after entering into the verbal agreement for the sale of the shares to his mother, he instructed his financial advisor to prepare the appropriate forms to document the transfer of the shares. He said it was his financial advisor who inserted the date of April 1, 2011 as the date on which his mother became the sole officer and director of the corporation and he did not review the document before it was filed with the ministry. Dr. Kim’s financial advisor did not testify.
19I am of the opinion that Dr. Kim’s explanation with respect to the timing of the transfer of the shares of the corporation which owned the Cessna is a fabrication. I find that the transfer of the shares took place on April 1, 2011 in anticipation of his pending marital separation. He and his wife separated on April 25, 2011. He completed a Financial Statement for the purposes of the matrimonial litigation in June 2012. In that Financial Statement he stated that the shares of the corporation had a negative value of $350,000. This of course resulted in a decrease in the value of Net Family Property by an equal amount. While I accept the testimony of Dr. Kim that the reason for the share transfer was to benefit himself in the matrimonial litigation, I reject his testimony that it was at the suggestion of his legal and financial advisors. Dr. Kim’s testimony that the share transfer took place in September 2012 is a feeble attempt to create evidence to suggest that he did not knowingly misrepresent the ownership of the airplane corporation in June 2011 when he completed the Personal Statement of Affairs.
20Having sworn in his Financial Statement for matrimonial purposes in June 2012 that the shares in the corporation that owned the Cessna had a negative value of $350,000, he declared in his April 2013 Personal Statement of Affairs the value of the Cessna aircraft was $500,000. Both values cannot be correct. In my view Dr. Kim was and is prepared to misrepresent the value of his assets when he perceives it to be to his advantage. In the matrimonial proceedings, it was to his advantage to assign a negative value to the airplane whereas when he was attempting to arrange further funding from RBC it was to his advantage to place a significant positive value on the same asset. This supports my conclusion that Dr. Kim knowingly misrepresented the value of the Cessna aircraft in his Personal Statement of Affairs dated April 8, 2013.
21Dr. Kim completed a Statement of Affairs in his bankruptcy which was dated December 19, 2013. There is no mention in that Statement of Affairs of the Cessna airplane or the corporation that owned it.
22In his examination for discovery on December 16, 2016, Dr. Kim testified that he was separated from his wife when he completed the Personal Statement of Affairs dated June 19, 2011. He said he could not remember if he provided that information to the bank. However, in the Personal Statement of Affairs he erroneously stated that his wife worked at the dental practice. In my view, this is a false statement intended to conceal from the bank the true matrimonial situation.
23Dr. Kim’s mother, Maria Kim, testified. She testified that she has been the sole officer, director and shareholder of 1473219 Ontario Limited since 2012. She said Dr. Kim was having some problems with his marriage and she wanted to help him. As a result, they came to an agreement that when the airplane returned to Canada she would pay the sum of $60,000 towards the outstanding cost of repairs. She acknowledged that on prior occasions she had stated that she became a director of the corporation prior to September 2012 but that recently Dr. Kim had told her that the date was wrong and she was shown a government document saying it was registered in September 2012.
24In cross-examination, Maria Kim said she was unsure of the date of Dr. Kim’s separation. She cannot be sure if she became a director of the corporation around the time Dr. Kim separated from his wife.
25I found Maria Kim to be an unreliable witness. It was apparent that most of her testimony was based on what she had been told to say by Dr. Kim.
26In summary, I found Dr. Kim to be a completely unreliable witness for a number of reasons. Those reasons include:
a) when seeking the loan from RBC, Dr. Kim included the condominium as one of his assets which he valued at $175,000 in 2011 and $150,000 in 2013 when he knew he was not the beneficial owner of that asset;
b) Dr. Kim did not tell Scott Urquhart that he was not beneficial owner of the condominium although he did falsely tell him that he stayed there occasionally;
c) when seeking the loan, Dr. Kim included the value of the Cessna airplane as an asset valued at $750,000 in 2011 and $500,000 in 2013;
d) Dr. Kim did not tell Scott Urquhart that the airplane was owned by a corporation and that all of the shares of the corporation were owned by his mother;
e) in June 2012 when he completed a financial statement for his matrimonial litigation, Dr. Kim deposed that the 1973 Cessna 421B was “presently not marketable” and it had a negative value of $400,000;
f) Dr. Kim transferred the shares in 1473219 Ontario Limited to his mother on the eve of separating from his wife in an attempt to put those shares out of reach of his wife in the matrimonial litigation if it was to his advantage;
g) as of June 2011, Dr. Kim and his wife were separated but he indicated to RBC on his Personal Statement of Affairs that his wife was employed as the office manager at his dental practice which was a false statement.
27It is my view that Dr. Kim will colour the truth to achieve his personal objectives. When he perceives it to his advantage, such as when seeking to obtain financing he inflates the values of his assets and includes assets which he does not own. When it is to his advantage to reduce the value of his assets he takes the opposite position. He will misstate the true facts to achieve his goals.
28I am satisfied that Dr. Kim knew the representations made in his Personal Statements of Affairs dated June 19, 2011 and April 8, 2013 regarding the condominium and the airplane were false at the time he made them.
Did RBC Rely on the False Representations
29Scott Urquhart testified that when arranging finances for professionals, a personal guarantee was always obtained. RBC also required income tax returns, notices of assessment and a signed Personal Statement of Affairs.
30Scott Urquhart testified that he first dealt with Dr. Kim in 2009 but financing was not arranged. He again dealt with Dr. Kim in 2011 about investing in a new dental practice. He told Dr. Kim that he would require an appraisal for the corporation that carried on the dental practice, financial statements for the dental corporation, personal and corporate income tax information and a Personal Statement of Affairs. He explained the purpose of the Personal Statement of Affairs was to assess whether the person seeking financing could support the business loan if the business ran into difficulty. He testified that he told Dr. Kim, for the purpose of completing the Personal Statement of Affairs, the information did not have to be perfect as long as it was reasonable.
31Scott Urquhart testified that there were some issues which had to be addressed in order to approve financing for Dr. Kim. The lease for the location from which the dental practice operated did not provide for an option to renew. This was of concern. Also, Dr. Kim had certain health issues which prevented him from being able to obtain life insurance which could be assigned to RBC as security. Both of these issues detracted from the approval of the loan.
32The loan was approved and advanced in July 2011.
33In April, 2013, Dr. Kim approached RBC to request a short-term $35,000 increase in the loan. Scott Urquhart testified that he approved this request. At this time, he requested an updated Personal Statement of Affairs. He said it was the practice of RBC to obtain an updated Personal Statement of Affairs annually or bi-annually. The purpose of obtaining an updated Personal Statement of Affairs is to determine if there have been any significant changes in the borrower’s financial situation.
34In cross-examination, Scott Urquhart testified that the amount of the loan approved was 60% of the appraised value of the dental practice. When the suggestion was first made that the loan be limited to 60% of the appraised value of the practice, the appraisal had not yet been obtained and Dr. Kim had not yet provided his Personal Statement of Affairs. He also said that the Personal Statement of Affairs was essential to the loan application and was required before starting any evaluation of the financing.
35Scott Urquhart testified that RBC did not have any policies in 2011 about how to complete a Personal Statement of Affairs and what assets should or should not be included. There was no effort made to verify the values of any of the assets in Dr. Kim’s Personal Statement of Affairs and he did not question Dr. Kim about how he had arrived at the values for any of the listed assets. There was no requirement that Dr. Kim’s personal assets be maintained at or above a certain value and no security was taken over any of the personal assets.
36Scott Urquhart testified that in 2013 Dr. Kim approached him about a temporary loan increase of $25,000 and he suggested that the loan be increased by $35,000. He ultimately approved the temporary loan increase on March 27, 2013 in the amount of $30,000 for a period of three weeks. This increase was approved before Dr. Kim provided his updated Personal Statement of Affairs. When he received the Personal Statement of Affairs, he did not ask Dr. Kim any questions and did not take any steps to verify any of the information contained in it.
37On April 23, 2013, Scott Urquhart testified that another RBC employee approved a further temporary loan of $35,000 for a further three-week period. He testified that he is unaware if the person who approved the $35,000 temporary loan increase reviewed the updated Personal Statement of Affairs. On May 3, 2013, the loan was referred to the Special Loans Unit of RBC.
38There were a number of emails which were made part of the evidence at the trial in the period leading up to the approval of the loan facility in July 2011. The first is an email dated June 16 from Dr. Kim to Scott Urquhart indicating that he was anxious to proceed with the loan arrangements. Scott Urquhart responded on the same day and asked if Dr. Kim had completed the personal information form which had been left with him. The email indicates that another copy of the form was enclosed. Dr. Kim responded on the same day and said he would complete the form and provide it shortly. He also said he could not wait until the middle of July and asked if the loan could be approved based on the appraisal of his dental practice only. Scott Urquhart again responded promptly and asked Dr. Kim to contact him by telephone. Dr. Kim sent his Personal Statement of Affairs to Scott Urquhart by way of an email dated June 19. Again in this email, Dr. Kim expressed the need to move expeditiously. In an email dated June 22, Scott Urquhart inquired about the appraisal and Dr. Kim responded that the appraisal was still being worked on and that he would send a draft which would be essentially the same as the final version. Interestingly, the only appraisal report which was made an exhibit at the trial was dated May 3, 2011.
39Dr. Kim argues that because RBC did not make efforts to verify the existence of any of the assets listed on the Personal Statements of Affairs, did not attempt to confirm ownership of any of the assets and took no steps to independently determine the value of any assets, it cannot be found to have relied on those representations. This submission was also made on the motion for summary judgment. Broad J. held, and I agree, that there is no standalone obligation on a lender to verify information provided by an applicant for credit particularly when the information is accompanied by a statement certifying that it is true and complete (para 89).
40I am satisfied that the Personal Statement of Affairs was part of the package of information which was required by RBC as part of its loan approval process. I accept Scott Urquhart’s testimony that he told Dr. Kim that a Personal Statement of Affairs was one of the documents required for the loan to be considered and approved. He explained the purpose of obtaining the Personal Statement of Affairs was to assess whether the person seeking the loan could support the business loan if the business ran into difficulty.
41Dr. Kim submits that the loan facility was approved solely on the basis of the appraised value of the dental practice. He points out that the amount of the loan which was approved is exactly 60% of the appraised value of the dental practice. I accept the evidence that the amount of the loan was determined based on the appraised value of the dental practice but I do not accept that the other documents which were required by RBC as part of the loan approval process were not relied on as well.
42Scott Urquhart testified that he adjusted Dr. Kim’s net worth to $800,000 from the self-reported net worth shown in the Personal Statement of Affairs. In his written recommendation dated July 5, 2011 he referred to Dr. Kim’s net worth as being $800,000. In that same document, another RBC employee noted that Dr. Kim’s adjusted net worth in June 2011 was $494,000. To my mind, these references indicate that the Personal Statement of Affairs was considered as part of the loan approval process.
43In my view, the Personal Statement of Affairs provided at the time of the temporary loan increases in 2013 is immaterial. It is questionable as to whether the updated Personal Statement of Affairs was a requirement of the temporary loan approval but I am satisfied that the increases in the amount of the loans would not have been approved but for the 2011 Personal Statement of Affairs.
44In summary, I am satisfied that RBC relied on Dr. Kim’s Personal Statement of Affairs dated June 19, 2011 when it approved the financing for Dr. Kim’s dental practice in July 2011 and when it granted the temporary loan increases in March and April 2013.
Conclusion
45In my view, the false representations made by Dr. Kim in his Personal Statements of Affairs were made for the purpose of inducing RBC to approve a loan facility for his dental practice. The false representations were intentional and are the type of socially unacceptable conduct on the part of debtors that Parliament had in mind when it legislated in s. 178(1)(e) of the Bankruptcy and Insolvency Act the debts obtained by fraud or false pretenses will not be released by the discharge of the bankrupt.
46For these reasons, there will be a judgment in favour of the plaintiff, Royal Bank of Canada, against the defendant, Chul Yung Kim, as follows:
a) declaring that the defendant, Chul Yung Kim, obtained property and/or services from the plaintiff, Royal Bank of Canada, by false pretenses or fraudulent misrepresentation;
b) granting judgment in favour of Royal Bank of Canada against Chul Yung Kim in the amount of $1,173,626.47 as damages for fraud and fraudulent representation; and
c) declaring that the judgment in favour of Royal Bank of Canada shall not be released by Chul Yung Kim’s discharge from bankruptcy.
Costs
47If the parties are unable to agree on the costs of this motion, they may make submissions in writing. Cost submissions are not to exceed three pages exclusive of a Costs Outline and Bill of Costs. Cost submissions of RBC are to be submitted within 30 days of the release of these Reasons. Cost submissions of Dr. Kim are to be submitted within 60 days of the release of these Reasons.
G.E. Taylor, J.
Released: December 21, 2020