COURT FILE NO.: 32-2753972 DATE: 2022/02/16 SUPERIOR COURT OF JUSTICE – ONTARIO IN INSOLVENCY AND BANKRUPTCY

RE: In the Matter of the Bankruptcy of Kate Alexander of the Town of Caledon in the Province of Ontario

BEFORE: C. Gilmore, J.

COUNSEL: Matthew R. Harris and Vincenzo Ruso, Counsel for Erich Genseberger Ken Page, Proposal Trustee for Erich Genseberger Jeff Rosekat, Counsel for The Fuller Landau Group, Trustee for Kate Alexander Ken Pearl, Trustee for Kate Alexander James Riewald for the mortgagee, National Holdings Inc. Surksha Nayar for the Department of Justice

HEARD: February 14, 2022

ENDORSEMENT

Introduction

[1] This is a motion by Erich Genseberger (“Erich”), to annul the bankruptcy of Kate Alexander (“the Debtor”) pursuant to section 181 (1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c.B-3 (the “BIA”) and an Order that the Debtor will not declare bankruptcy or commence a proposal proceeding under the BIA until the final determination of Erich’s equalization claim and enforcement.

[2] The Debtor filed a voluntary bankruptcy assignment on August 11, 2021 with the Fuller Landau Group being named as the Trustee. Erich submits that the Debtor was not insolvent at the time and that the assignment is an abuse of process.

[3] The Trustee, on behalf of the Debtor submits that the Debtor was insolvent on the date of the assignment and that her past conduct in this matter, while problematic, is not an abuse of process.

[4] For the reasons set out below, Erich’s motion is dismissed. The Family Law stay will be lifted to permit the completion of the outstanding claims in that Court, but the Trustee will be permitted to realize on the Debtor’s assets in the interim. Further directions are provided below.

Background Facts

[5] Erich and the Debtor were spouses. They separated on May 10, 2014. They have been involved in bitter and acrimonious Family Law proceedings which are still ongoing.

[6] Erich alleges that between 2006 and 2016 the Debtor dissipated family assets and offshore accounts totalling $1.8M. In 2015 Erich obtained a non-dissipation order against the Debtor. Following the non-dissipation order, Erich alleges that the Debtor continued to dissipate assets. In 2015 the Debtor sold the parties’ business for $1.00 shortly after he had negotiated a sale of over $3M with a purchaser. Erich alleges that the Debtor received in excess of $1M from the sale of the business, plus a percentage of sales, but did not disclose this to the Court or on her financial statement.

[7] The Debtor failed to answer a Request for Information in Family Court from 2016. It remains outstanding.

[8] In November 2016 the Debtor served a Financial Statement in Family Court showing that her savings and bank accounts had depleted from $1.5M in 2014 to $138,036 in 2016. There was no explanation for the dissipation. Erich also alleges that the Debtor failed to disclose bank accounts she owns in Greece, Ireland and other European countries and that she transferred over $200,000 to a friend in Greece in order to keep the funds out of reach of the Family Court proceedings.

[9] The Debtor has failed to pay a costs Order of $2,500 ordered by the Family Court.

[10] The Debtor filed a civil sexual assault claim against the Creditor for $400,000 in damages. The civil claim was dismissed for administrative delay as the Debtor did not pursue her claim.

[11] In March 2018 Erich registered a Matrimonial Home designation on the home at 21 Keily Crescent in Bolton (“the home”). In January 2019, unbeknownst to Erich, the Debtor registered a mortgage on the home in the amount of $650,000. In January 2020, while Erich was working out of the country, First National Inc. (“the mortgagee”) took steps to enforce on its mortgage which was in default. Erich had been left completely in the dark regarding the mortgage and the default.

[12] In order to obtain the mortgage, the Debtor made declarations which she knew to be false including that she was a spouse (the parties were not divorced at the time), that the home was owner occupied (she was the registered owner but had not lived there since 2014) and that there were no civil or matrimonial matters which have Court Orders pending which would affect the property or security (of course the family proceeding was ongoing including a non-dissipation Order). LawPRO is now defending the lawyer who acted on the mortgage.

[13] The Family Court granted a further non-dissipation Order against the Debtor in October 2020.

[14] When the mortgagee attempted to sell the home, Erich was forced to obtain an Order for exclusive possession of the home as the Debtor refused to consent to him entering the home. On March 11, 2021 Erich was granted temporary exclusive possession of the home. The Debtor has not lived in the home since 2014 although the home remains in the Debtor’s name.

[15] Peremptory questioning of the Debtor in the Family Law proceedings was scheduled for April 26, 2021. The Debtor failed to attend and a Certificate of Non-Attendance was obtained on April 27, 2021.The Debtor offered to pay $5,000 in costs for the failed attendance (through her counsel) but when Erich’s counsel accepted the Offer, the Debtor failed to confirm the settlement and the costs were never paid.

[16] Erich then offered to settle the entire matrimonial proceeding on April 28, 2021. Again, there was an agreement in principle to the settlement, but it was never confirmed.

[17] Given Erich’s frustration with the Debtor’s lack of engagement in the Family Law proceedings, he requested a Case Conference to obtain leave to bring a motion to strike the Debtor’s pleadings and proceed by way of uncontested trial. The Court granted leave. The Debtor’s responding material on the motion was due on August 4, 2021. Erich’s materials on the uncontested trial indicated that the Debtor owed him an equalization payment of over $3M. Instead of receiving responding materials, Erich received the Debtor’s Notice of Bankruptcy on July 26, 2021. The Family Court matter has been stayed as a result of the Debtor’s bankruptcy and awaiting the result of this motion.

[18] The Debtor has registered herself as a Creditor in Erich’s proposal proceeding. The Debtor’s proof of claim (a claim for an equalization payment in the family law matter) in Erich’s insolvency proceeding exceeds $2M. The Trustee disallowed this claim. The Debtor appealed the disallowance. In October 2019 the Trustee brought a motion to dismiss the appeal as the Debtor had not taken any steps. Neither the Debtor’s appeal motion nor the Trustee’s motion to dismiss have been heard. Those matters also await the result of this motion before they can proceed.

[19] Erich’s position is that the Debtor chose to submit a Proof of Claim in his insolvency proceeding in order to cause him further financial distress.

[20] The Debtor has provided a sworn Statement of Affairs dated July 21, 2021. That statement discloses assets of approximately $1.5M (the home) and debts of approximately $1.48M. Creditors have now filed proofs of claim totalling $1.7M. The debts include $710K owed to the mortgagee and $850K owed to CRA. Other debts include outstanding taxes owed to the Town of Caledon, legal fees and credit cards. Erich has not filed a proof of claim in the Debtor’s bankruptcy.

The Test to Annul a Bankruptcy

[21] Section 181(1) of the BIA gives the Court the authority to annul a bankruptcy:

181(1) If, in the opinion of the court, a bankruptcy order ought not to have made or an assignment ought not to have been filed, the court may by order annul the bankruptcy.

[22] A bankruptcy will be annulled only where it is shown that:

(a) the debtor was not an insolvent person when she made the assignment; or

(b) the debtor abused the process of the court or committed a fraud on her creditors. See Re Wales at para 17.

[23] The test to consider an annulment is "flexible and fact specific." In determining whether there has been an abuse of process, the debtor's motive is the primary concern. Some relevant questions to consider the debtor's motive include:

(1) Is the debtor's financial situation 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 could 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? See Wales at para 26.

[24] Granting an annulment of a bankruptcy is a rare and extraordinary remedy. Erich requests that the Court grant such a remedy consistent with the test set out in Wales for the following reasons:

a. The Debtor spent the mortgage proceeds and has dissipated a further $1.4M since 2014.

b. The Debtor has failed to provide proper disclosure to the Court and has recklessly hidden or dissipated assets to put them out of reach of any equalization payment owed to Erich.

c. The Debtor registered the mortgage in the face of two non-dissipation Orders which were well known to her.

d. The Debtor filed her assignment in bankruptcy within days of receiving Erich’s material for the uncontested trial showing that he was owed an equalization payment of over $3M.

e. The Debtor is unreliable and should not be believed given that she made false declarations to obtain the mortgage including a statutory declaration stating she was not a spouse when she was.

f. The Debtor has flagrantly disobeyed Family Court orders and the Family Court process including failing to attend for a peremptory examination and failing to respond to Requests for Information.

g. The Debtor’s Statement of Affairs cannot be relied upon because her failure to obey Family Court orders, her dissipation of assets and her false declarations to obtain a mortgage make it clear that she is a stranger to the truth.

Erich’s Position on Annulling the Bankruptcy

[25] Erich makes two legal arguments based on the abovementioned position. First, the Debtor is solvent. She has dissipated the mortgage proceeds, over $1.4M from European bank accounts, and RSPs, RRSPs and Insurance Policies in contravention of the non-dissipation Orders. At least $2.5M of her assets are simply unaccounted for. An adverse inference should be drawn with respect to the Debtor’s alleged insolvency.

[26] The second argument advanced by Erich is that the Debtor’s bankruptcy is an abuse of process. Even if the Debtor is insolvent, case law supports this Court having the discretion to annul a bankruptcy if an abuse of process is found (see Re Moss (1999), 12 C.B.R. (4th) 62).

[27] Specifically, the Debtor had an ulterior agenda which has frustrated the Family Law proceeding. It is clear that the timing of her bankruptcy is close to the date on which her responding materials were due in the uncontested trial. She saw the writing on the wall and, as she has done throughout the Family Law proceeding, she simply flouted the process. In this case, her bankruptcy stayed the entire Family Law proceeding.

[28] Erich also argues that the assignment into bankruptcy is being used for the purpose of obtaining a collateral advantage. Erich submits that the bankruptcy puts the Debtor’s assets beyond his reach for the purpose of an equalization payment.

[29] Further, the Debtor will stop at nothing to gain an advantage. This includes signing false declarations to obtain a mortgage without Erich’s knowledge, and then spending all of the proceeds with abandon.

[30] Finally, Erich argues that the assignment into bankruptcy was a flagrant breach of the 2015 and the 2020 non-dissipation orders. It is a contemptuous act which should not be tolerated by the Court and is an abuse of process.

The Position of the Trustee and Other Creditors

[31] The Trustee reminded the Court that he was not the Debtor’s advocate, rather, his submissions were directed to his duty to the Creditors and as an officer of the Court. The Trustee’s position is that an annulment should not be granted. The Debtor does not meet the test in Wales as set out below.

[32] On the issue of whether the Debtor is insolvent, the Trustee submits that this Court is only permitted to examine her financial position as of the date of the assignment. At that time, her assets barely exceeded her liabilities. Proofs of claim subsequently filed by Creditors resulted in her liabilities exceeding her assets. The Trustee notes that Erich has not filed a Proof of Claim in the Debtor’s bankruptcy, however, the Trustee did not object to him having standing at this hearing. The Trustee’s position is that there is no evidence that the Debtor was not an insolvent person as of July 22, 2021.

[33] The Trustee was frank about the fact that the Debtor has mismanaged her money. She has apparently spent all of the mortgage proceeds and some $1.4M since the date of separation. That, however, does not affect the issue of her insolvency as of the date of the assignment.

[34] Erich alleges as well that the Debtor has undisclosed accounts and other assets. Those assets do not form part of the Statement of Affairs. The Trustee submits that it has significant investigative powers in the interests of ensuring all assets are gathered in for Creditors. If some evidence of undisclosed accounts can be provided, the Trustee will investigate.

[35] As for the issue of abuse of process and collateral purpose, the Trustee submits that the Court must be satisfied that the Debtor has attempted to put assets out of reach of the Court or Creditors. In this case, there is no evidence that the Debtor has attempted to remove assets. The Caledon home is the main asset. It remains intact.

[36] While the coincidental timing of her assignment in bankruptcy and the Family Law proceedings could give rise to an argument with respect to a hidden agenda or collateral purpose, the Trustee argues that the stay in the Family Law proceedings and any resultant delay was related to waiting for this motion to be heard. The Trustee will agree to lift the stay to allow the uncontested trial to proceed so that Erich can establish his equalization claim. The Trustee does not agree to an Order vesting the home in Erich (as he has claimed in his Family Law proceeding) as that asset must be realized for the benefit of all creditors.

[37] The Trustee does not agree that a breach of the non-dissipation Order or the assignment in bankruptcy itself can be considered an abuse of process. The fact that the Debtor was financially irresponsible or misbehaved in the Family Court process is not sufficient to exclude her from the bankruptcy process. Her assets have not been put beyond Erich’s reach or those of other Creditors. It should be mentioned that Erich also dissipated significant funds after the date of separation and that the Debtor’s CRA debt is actually Erich’s debt which was assigned to her as a result of certain property transfers.

[38] If the bankruptcy is annulled, all the Debtor’s creditors will suffer. The financial devastation will be exacerbated if the home is vested in Erich’s name.

[39] Ms. Nayar on behalf of CRA advised the Court that the Debtor’s CRA debt was assigned to her from Erich as a result of a s.160 assessment. Erich has over $1.7M in his own tax debt. If the home was vested into Erich’s name and the bankruptcy annulled, the $800,000 tax debt which was originally his, would be eliminated. Ms. Nayar submitted that all assets (including the home) should be brought into the Estate for distribution to the Creditors.

[40] Mr. Riewald on behalf of the mortgagee agrees. His position is that an annulment would be a windfall to Erich and a detriment to all other creditors. Mr. Riewald does not oppose the lifting of the stay in the Family Law proceedings to allow the Family Court to determine any equalization payment owed to either party.

Analysis and Ruling

[41] I decline to order that the Debtor’s bankruptcy be annulled. In general, the effect of doing so would be unfair to all of the Creditors involved in this matter who find themselves seeking repayment from a Debtor whose financial management was appalling and who was married to a spouse who was equally afflicted.

[42] On the issue of whether the Debtor was insolvent, I agree with the Trustee. The Court must look to the evidence on the date of the assignment. No creditors, or even Erich’s counsel who attended at the First Meeting of Creditors raised issues about the propriety of the bankruptcy or of assets missing from the Statement of Affairs. I accept the Trustee’s submission that it will investigate such allegations if there appears to be some relevant evidence.

[43] While there are a number of allegations about the mortgage on the home, these can be addressed as follows:

a. The mortgage proceeds were entirely dissipated prior to the assignment.

b. While there may be an attack on the validity of the mortgage, the result of that attack will only go to its status as either a secured or unsecured debt.

[44] The Statement of Affairs of the Debtor clearly shows that she was insolvent on the date of the assignment. It cannot be ignored that a significant portion of the Debtor’s debt is related to tax debt belonging to Erich which was subsequently assigned to her. Annulling the bankruptcy and vesting the home in Erich’s name would eliminate this tax debt. This is, of course, a concern for CRA.

[45] As for the abuse of process argument, in order to be successful Erich must prove that the Debtor’s conduct is tainted by bad motives. Erich specifies these motives as being related to the Debtor’s alleged conduct in the Family Law proceedings, her dissipation and lack of disclosure of assets, and the timing of the bankruptcy.

[46] Missing scheduled Court dates, failing to pay costs and non-attendance at scheduled examinations are examples of bad behaviour which may attract sanctions from the Court and are frustrating to the opposing litigant, but they do not generally represent an abuse of process that would bring the administration of justice into disrepute.

[47] As for the dissipation and failure to disclose assets, the dissipation issue may be relevant in the Family Law proceedings in terms of the equalization of net family property, but for the purpose of this hearing the Court’s jurisdiction is directed solely to the Debtor’s financial circumstances as of the date of the assignment. There is no evidence she has dissipated assets since then. As for the non-disclosure, the Trustee has indicated a willingness and indeed an obligation to pursue the alleged missing assets if reasonable to do so.

[48] Erich is clearly upset and frustrated by the Debtor’s bankruptcy. That is not surprising given the seven years of acrimonious Family Law litigation these estranged spouses have left in their wake. However, the Debtor’s actions reflect a reality which cannot be ignored. The Debtor has dissipated all of her liquid assets and her liabilities now exceed what is left. That is extremely unfortunate but both parties find themselves in similar financial positions. Neither party should be given an advantage in terms of assets given the amount owing to Creditors by both.

[49] Erich should be permitted to pursue his equalization claim and file a Proof of Claim in the Debtor’s bankruptcy. The home should be sold, the validity of the mortgage determined, and the proceeds distributed by the Trustee based on the proven claims.

Orders

[50] Erich’s motion is dismissed.

[51] The stay in the Family Law proceedings shall be lifted to permit Erich to pursue his equalization claim.

[52] Erich’s counsel shall serve a copy of his materials for the uncontested trial (if not already done) on the Trustee, CRA and Mr. Riewald, all of whom should be permitted to file responding materials, particularly in relation to the vesting Order, if so advised. The Family Court may wish to set a schedule with respect to when those materials should be received.

[53] A copy of this endorsement to be provided to the Family Team Lead to ensure the matter is put back on track now that the stay has been lifted.

[54] Once Erich’s claim for an equalization payment is determined (if one is owed to him), he may file a Proof of Claim in the bankruptcy.

[55] The Caledon home shall be sold by the Trustee and the proceeds held pending the determination of the equalization of net family property.

Costs

[56] Costs were not sought by either Trustee. Erich’s Family Law lawyer sought costs. However, I decline to order such costs in this case. I have made no findings against the Debtor personally. All the findings related to the test for an annulment.

C. Gilmore, J. Date: February 16, 2022