A. Overview

[1] In August 2016, WED Investments Ltd. entered into an agreement with Showcase Woodycrest Inc. (“Woodycrest”) to buy 3775 Brook Street North in Whitby, Ontario. The deal never closed and in May 2017 WED sued Woodycrest for breach of contract. WED claimed specific performance and registered a certificate of pending litigation (“CPL”) on the Brock Street property.

[2] WED’s breach of contract claim went to trial before Schabas J. in November 2020. At the start of trial, WED elected to pursue its claim in damages and abandoned its claim for specific performance. The trial ended on November 23, 2020 and Schabas J. reserved judgment.

[3] After electing to pursue its claim in damages, WED consented to an order discharging its CPL on the Brock Street property. Schabas J. signed the order on December 15, 2020. The CPL was lifted on December 23, 2020 and, that same day, Woodycrest registered a $2 million mortgage on the Brock Street property in favour of Showcase Developments Inc. (“Developments”).

[4] Schabas J. released his judgment on January 19, 2021. He granted judgment to WED in the amount of $3.2 million: WED Investments Limited v. Showcase Wooycrest Inc., 2021 ONSC 237.

[5] WED now brings an application for a declaration that mortgage registered in favour of Developments on the Brock Street property on December 23, 2020 is void under the Fraudulent Conveyances Act, R.S.O. 1990, c. F.29 or the Assignments and Preferences Act, R.S.O. 1990, c. A.33.

[6] A conveyance will be void under s. 2 of the Fraudulent Conveyances Act if it was made “with intent to defeat, hinder, delay or defraud creditors.” A conveyance will be void under s. 4(1) of the Assignments and Preferences Act if it was made when a person was insolvent or knowingly on the eve of insolvency with the intent to defeat, hinder, delay or prejudice creditors.

[7] Counsel for Woodycrest and Developments concedes that the registration of the mortgage on the Brock Street property in favour of Developments is a “conveyance” for the purpose of both the Fraudulent Conveyances Act and the Assignments and Preferences Act. Counsel for Woodycrest and Developments also concedes that WED has standing to bring this application as a future creditor even though the mortgage was registered before Schabas J. released his judgment: Beynon v. Beynon, 2001 28147 (ON SC), (2001), 21 R.F.L. (5th) 255 (S.C.), at para. 43.

[8] There are, therefore, two issues for me to decide:

(a) Did Woodycrest intend to defeat or hinder WED’s ability to secure its judgment when it registered the mortgage in favour of Developments in December 2020?

(b) Was Woodycrest insolvent or on the eve of insolvency when it registered the mortgage in favour of Developments in December 2020?

B. Was the mortgage registered with the intent to defeat or hinder WED?

[9] The burden is on WED to establish that Woodycrest intended to defeat or hinder WED’s ability to secure its judgment when it registered the mortgage in favour of Developments in December 2020: Purcaru v. Seliverstova, 2016 ONCA 610, 39 C.B.R. (6th) 15, at paras. 5 and 9. Often, there will be no direct evidence that a party had a fraudulent intent at the time of the impugned transaction. In the absence of direct evidence of intent, I can rely on the circumstances in which the impugned transaction occurred to infer intent.

[10] Canadian courts have identified several circumstances or “badges of fraud” that can give rise to an inference that a conveyance was made with the intent to defraud: Bank of Montreal v. Bibi, 2020 ONSC 2948, at para. 23; Indcondo v. Sloan, 2014 ONSC 4018, 121 O.R. (3d) 160, at para. 52; DBDC Spadina Ltd. v. Walton, 2014 ONSC 3052, at para. 67; and Montor Business Corp. (Trustee of) v. Goldfinger, 2016 ONCA 406, 36 C.B.R. (6th) 169, at para. 73. The presence of one or more badges of fraud will not necessarily result in a finding of fraud. I must consider all the circumstances to decide whether Woodycrest registered the mortgage in favour of Developments to defeat WED’s claim. Nonetheless, if WED adduces evidence of one or more badges of fraud that support an inference of an intent to defraud, the evidential burden shifts to Woodycrest to showing the absence of fraudulent intent: Purcara at para. 5.

[11] The following is a non-exhaustive list of circumstances that, if established, could give rise to an inference that the mortgage registered in favour of Developments was fraudulent:

• Woodycrest remained in possession and control of the Brock Street property;

• Woodycrest registered the mortgage in secret;

• The mortgage was registered in the face of threatened legal proceedings or in the face of an outstanding judgment;

• Woodycrest was facing an actual or potential liability when the mortgage was registered;

• The mortgage contained self-serving or unusual terms;

• The mortgage documents contained false statements as to consideration;

• The mortgage was registered in unusual haste;

• The mortgage was a risky venture;

• Woodycrest had little or no equity in the property after the mortgage was registered; or

• There was a close relationship between Woodycrest and Developments.

[12] For the purpose of my analysis, I have grouped the badges of fraud into three broad categories: the relationship between the parties to the conveyance, the nature of the conveyance, and the timing of the conveyance.

(i) The relationship between Woodycrest and Developments and the nature of the conveyance

[13] There is a very close relationship between Woodycrest and Developments.

[14] Woodycrest and Developments are both controlled by Elliot Kirshenbaum. Mr. Kirshenbaum is the sole director and officer of Developments. He is also an officer and director of Woodycrest. Mr. Kirshenbaum uses both companies in his land development business.

[15] Woodycrest was incorporated solely to purchase and develop the Brock Street property. Woodycrest bought the Brock Street property for $2.55 million in May 2015. Woodycrest gave the vendor of the Brock Street property a $ 1.5 million vendor take back mortgage (“VTB”) that was registered on title.

[16] The Brook Street property was Woodycrest’s only asset. Since Woodycrest had no independent source of income to pay the balance of the property’s purchase price, Developments agreed to loan Woodycrest up to $2 million. As security for the loan, Developments was given the right to register a mortgage on the Brock Street Property. Mr. Kirshenbaum signed the loan agreement between Woodycrest and Developments on May 15, 2015 on behalf of both companies. This is compelling evidence that Mr. Kirshenbaum is the operating mind behind both companies.

[17] Notwithstanding the close relationship between Woodycrest and Developments, there is nothing suspicious about the loan agreement. It was a legitimate loan agreement entered into for legitimate business reasons. Developments advanced Woodycrest more than $1 million on April 30, 2015 to cover the balance of the purchase price for the Brock Street property. Between April 2015 and September 2019, Developments has periodically advanced additional funds to Woodycrest to pay its mortgage and to cover the costs to develop the property.

(ii) Timing of the Registration of the Mortgage

[18] The key issue is whether the timing of the registration of the mortgage in favour of Developments while Schabas J.’s decision was under reserve gives rise to an inference of fraudulent intent. In my view, it does.

[19] Developments did not register its mortgage on the Brock Street Property when the loan agreement was signed in 2015, although it had the right to do so.

[20] Mr. Kirshenbaum filed an affidavit in response to WED’s application. Mr. Kirshenbaum says there was “no need” for Developments to register its mortgage when Woodycrest first bought the Brock Street property because no work was being done to develop the property and the property had sufficient value to satisfy the VTB mortgage and Development’s initial investment.

[21] The 2015 VTB mortgage had a one-year term. In June 2016, Woodycrest secured a new mortgage with Cameron Stevenson Financial Corp for $2.4 million. The VTB mortgage was paid and discharged. The Cameron Stevenson mortgage was registered on title. One of the terms of the Cameron Stevenson mortgage was that Woodycrest could not register a second mortgage on the Brock Street Property without Cameron Stevenson’s consent.

[22] Mr. Kirshenbaum says in his affidavit that Developments could not register its mortgage while Cameron Stevenson mortgage was in place. However, there is no evidence that Developments sought Cameron Stevenson’s consent to register its mortgage.

[23] In May 2017, while the Cameron Stevenson mortgage was still in place, WED issued its statement of claim against Woodycrest for breaching the August 2016 agreement of purchase and sale (“APS”) for the Brock Street property. WED obtained a CPL and registered it on the Brock Street property on May 9, 2017.

[24] Woodycrest refinanced the Brock Street Property again in June 2018, a year after the CPL was registered on title. Woodycrest arranged a $2.4 million mortgage with Atrium Mortgage Investment Corp. WED agreed to postpone enforcement of its CPL to allow Woodycrest to use the funds from Atrium to pay off the Cameron Stevenson mortgage.

[25] The Cameron Stevenson mortgage was discharged and the Atrium mortgage was registered on title on June 28, 2018. The Atrium mortgage did not include any term that would limit Development’s ability to register its mortgage. However, Mr. Kirshenbaum says in his affidavit that he did not think Developments’ mortgage could be registered on the Brock Street property while WED’s CPL was on title.

[26] The trial between WED and Woodycrest started November 9, 2020 and ended November 23, 2020. Schabas J. reserved judgment at the end of the trial.

[27] The CPL was removed from title on December 23, 2020 and Developments registered its mortgage on title the same day.

[28] Schabas J. released his reasons on January 19, 2021 granting WED judgment in the amount of $3.2 million.

[29] WED first learned that Developments had a registered mortgage on the Brock Street property on January 25, 2021 when it registered its judgment. Despite the ongoing litigation, Mr. Kirshenbaum did not advise WED that Woodycrest intended to register a mortgage on the Brock Street property in favour of Developments.

[30] WED argues that the registration of the mortgage in favour of Developments after the trial ended but before Schabas J. issued his judgment supports an inference that Woodycrest intended to prioritize the repayment of its loan from Developments and hinder WED’s ability to enforce any judgment granted in its favour. WED also relies on the fact that the mortgage was registered in secret on the very day the CPL was lifted to support an inference that Woodycrest had a fraudulent intent.

[31] Woodycrest argues that the registration of the loan was not fraudulent. Woodycrest argues that the loan was legitimate and Developments had a right to register the mortgage on the Brock Street property before any litigation arose with WED. Woodycrest argues Mr. Kirshenbaum honestly believed he could not register Developments’ mortgage until December 2020 and was entitled to do so once the CPL was removed.

[32] Mr. Kirshenbaum was not cross-examined on his affidavit and I accept his evidence. I accept that he did not think there was any need to register a mortgage on the Brock Street property in favour of Developments when the property was first purchased. I accept his evidence that there was no need to register the mortgage in 2015 because the property was worth enough to satisfy all of Woodycrest’s debts, including Developments’ initial loan. While Mr. Kirshenbaum may have been wrong, I also accept that he subjectively believed that Woodycrest could not register a mortgage in favour of Developments while the CPL was on title.

[33] Nonetheless, I still find that Woodycrest registered Developments’ mortgage with the intent to hinder WED’s ability to secure its judgment should Schabas J. rule in WED’s favour.

[34] There is no evidence that Woodycrest made any effort to register the mortgage in favour of Developments before December 23, 2020. According to Mr. Kirshenbaum, who is the owner and controlling mind of both companies, there was no need to secure Developments’ loan to Woodycrest so long as the Brock Street Property (Woodycrest’s only asset) had sufficient value to cover its mortgage and the loan from Developments.

[35] It follows from the fact that Mr. Kirshenbaum decided to register the mortgage in December 2020 after leaving the loan unsecured for five years that he felt there was a need to do so at that time. Based on the evidence before me, only two things changed between 2015 and 2020. First, Developments had advanced additional funds to Woodycrest. Second, Woodycrest was facing a significant liability in its lawsuit with WED if Schabas J. ruled in WED’s favour.

[36] By December 2020, Woodycrest owed Developments $1,614,455. The Brock Street property still had enough value to cover Woodycrest’s $2.4 mortgage with Atrium and the $1.6 million loan from Development at that time.

[37] Woodycrest’s ability to repay Developments would only be compromised if Schabas J. ruled in favour of WED. WED was seeking $6.2 million in damages for the profits it would have earned if it had acquired and developed the Brock Street property. In the alternative, WED was seeking $3.2 million in damages based on the increase in value of the Brock Street property between the date the APS was signed and the expected closing date. At the time Woodycrest registered the mortgage in favour of Developments, it did not know if Schabas J. would find in favour of WED or if Schabas J. would accept the lost profits assessment of damages. If Schabas J. awarded WED $6.2 million in damages, Woodycrest would not have enough in assets to cover the judgment as well as Atrium’s $2.4 million mortgage and Developments’ $1.6 million loan. WED adduced evidence that in July 2018, the Brock Street Property was worth $7.6 million. That would not be enough to pay its mortgage and a $6.2 million judgment and repay Developments. If Developments’ loan remained unregistered and if Schabas J. awarded WED $6.2 million in damages, Developments’ loan would likely never be repaid and Mr. Kirshenbaum would lose his investment in Woodycrest.

[38] I find that the risk of an adverse judgment, which created a risk that Woodycrest would be unable to repay Developments, motivated Mr. Kirshenbaum to register the mortgage in December 2020. The mortgage was registered to prioritize the repayment of Developments’ loan over any judgment in favour of WED. In other words, Mr. Kirshenbaum wanted to ensure Developments was repaid in full for the money advanced to Woodycrest before any damages were paid to WED. I find that the mortgage in favour of Developments was done with the intent to defeat or hinder WED’s ability to collect on its judgment if Schabas awarded WED $6.2 million.

[39] I find the registration of the mortgage in favour of Developments is void as against creditors under the Fraudulent Conveyances Act.

C. Was Woodycrest insolvent or on the eve of insolvency when it registered the mortgage in favour of Developments in December 2020?

[40] The registration of the mortgage in favour of Developments will also be void under the s. 4(1) of the Assignments and Preferences Act if it was done when Woodycrest was insolvent or knew it was on the eve of insolvency with the intent to defeat, hinder, delay or prejudice WED.

[41] WED argues that while Schabas J.’s judgment was under reserve, Woodycrest was on the eve of insolvency. WED argues that Woodycrest knew it would be insolvent if Schabas J. ruled in favour of WED and awarded $6.2 million in damages.

[42] Woodycrest argues that it was not on the eve of insolvency in December 2020. Woodycrest argues that it did not know in December 2020 that Schabas J. was going to rule in favour of WED. Woodycrest’s insolvency was contingent on WED winning the case and being awarded $6.2 million in damages. Woodycrest argued that it would not have been insolvent if Schabas J. awarded $3.2 million in damages, which is what ultimately happened. Woodycrest argues that while it was possible Woodycrest would have become insolvent, its insolvency was not sufficiently certain on December 23, 2020 to establish that it was “on the eve of insolvency” when the mortgage was registered. I disagree.

[43] According to Schabas J.’s reasons, the trial between WED and Woodycrest was largely focused on assessing of damages in relation to the Brock Street property: WED Investments Limited v. Showcase Wooycrest Inc. at 92. WED advanced two theories for calculating damages. First, WED sought the profits it says it would have earned if it had acquired and developed the property. WED adduced evidence that it would have made over $6 million in profits on the development of the Brock Street property. In the alternative, WED sought $3.2 million in damages, which represented the increase in the value of the undeveloped property between the date the APS was signed and the expected closing date in July 2018. The agreed upon purchase price for the Brock Street property was $4.4 million. WED adduced evidence that the Brock Street Property was worth $7.6 million on the expected closing date.

[44] When someone knows a financial obligation, including an adverse judgment, will in all likelihood come due and he does not have assets to discharge that obligation, he is on the eve of insolvency: Rae v. McDonald, (1886) 13 O.R. 352 (C.A.), at p. 365, per Cameron C.J. (concurring); Davidson v. Ross, [1876] O.J. No. 296, per Burton J.; HSCB Bank Canada v. Dillon Holdings Ltd, 2005 19834 (S.C.), at para. 314; and Mutual Trust Co. v. Alidina, [2000] O.J. No. 4792 (S.C.), at para. 29. On December 23, 2020, Mr. Kirshenbaum and Woodycrest knew that Schabas J. would be releasing his judgment imminently. Mr. Kirshenbaum knew there was real risk of an adverse judgment in the ongoing litigation when Developments’ mortgage was registered. Mr. Kirshenbaum also knew that if Schabas J. awarded WED $6.2 million in damages, Woodycrest would be insolvent.

[45] Mr. Kirshenbaum testified at trial that he received an offer to purchase the Brock Street Property in April 2017 for $9.3 million. Schabas J. noted that there was “very little evidence about the credibility of this offer.” Nonetheless, Schabas J. accepted Mr. Kirshenbaum’s testimony about the 2017 offer as “some evidence” that the value of the Brock Street property was increasing: WED Investments Limited v. Showcase Wooycrest Inc. at para. 154.

[46] Woodycrest adduced evidence on this application that it received an offer to purchase the Brock Street Property for $7.775 million on February 19, 2021. That offer is currently on hold while the prospective buyer reviews the property with its planners and conducts further due diligence. I accept that the outstanding offer is some evidence that Brock Street Property was worth approximately $7.7 million in December 2020 when the mortgage was registered.

[47] According to Woodycrest’s financial statement, it had $3,784,643 in liabilities on December 31, 2020. Woodycrest owed Developments $1,614,455 and $2 million to Atrium. If Schabas J. awarded WED $6.2 million in damages, Woodycrest’s liabilities would exceed $9.6 million. The Brock Street property was Woodycrest’s only asset. Accepting Woodycrest’s evidence that the Brock Street property was worth approximately $7.7 million in December 2020, Woodycrest would have been insolvent if Schabas J. had granted WED $6.2 million in damages. In fact, Woodycrest would have been insolvent even if the property were worth $9.3 million, as Mr. Kirshenbaum testified at trial, if it was ordered to pay WED $6.2 million in damages.

[48] I, therefore, find that Woodycrest was on the eve of insolvency when the mortgage in favour of Developments was registered.

[49] Mr. Kirshenbaum was content for Developments’ loan to remain unsecured when he thought that Woodycrest had assets to repay the loan. However, when he feared insolvency, he registered Developments’ loan to prefer his own claim to be paid ahead of WED. That is an unjust preference.

[50] I find that Woodycrest registered the mortgage in favour of Developments with the intent to hinder, defeat or prejudice WED’s ability to enforce its judgment if Schabas J. awarded WED $6.2 million in damages. The registration of the mortgage is, therefore, void as against creditors under the Assignment and Preference Act.

D. Conclusion

[51] WED’s application is granted. The registration of the $2 million mortgage on the Brock Street property in favour of Developments is void as against creditors under s. 2 of the Fraudulent Conveyances Act and under s. 4(1) of the Assignment and Preference Act.

[52] I encourage the parties to reach an agreement on the issue of costs. If they are unable to do so, the parties may serve and file written submissions on costs of no more than five (5) pages together with their costs outline and any supporting authority and materials no later than September 10, 2021. In the event that I do not receive any written cost submissions by September 13, 2020, I will deem the issue of costs to have been settled.

Davies J.

Date: August 19, 2021

WED Investments Limited v. Showcase Woodycrest Inc., 2021 ONSC 5614

Case Summary

A. Overview

B. Was the mortgage registered with the intent to defeat or hinder WED?

(i) The relationship between Woodycrest and Developments and the nature of the conveyance

(ii) Timing of the Registration of the Mortgage

C. Was Woodycrest insolvent or on the eve of insolvency when it registered the mortgage in favour of Developments in December 2020?

D. Conclusion

Judge

Counsel

Parties

Areas of Law

Fact Patterns

Issues

Statutory Provisions 2

Legal Tests 1

Legislation 2