Court File and Parties

Court File No.: BK-21-208521-OT31 Date: 2022/04/06 Superior Court of Justice – Ontario Bankruptcy and Insolvency

Re: Jewish Foundation of Greater Toronto, Moving Party And: The Joseph Lebovic Charitable Foundation, Responding Party

Before: C. Gilmore, J.

Counsel: Matthew Gottlieb, Paul Fruitman and Crystal Li, Counsel for the Moving Party Wojtek Jaskiewicz and Michael Ly, Counsel for the Responding Party

Heard: March 29, 2022

Endorsement on Motion to Dismiss

Introduction

[1] In October 2021, the Responding Party, The Joseph Lebovic Charitable Foundation (the “JLCF”) applied for an Order adjudging the Moving Party, the Jewish Foundation of Greater Toronto (the “Foundation”) bankrupt. The grounds for the Application were that the Foundation was indebted to the JLCF in the amount of $15,983,651.79 and that the Foundation had failed to meet its obligations to the JLCF as they became due.

[2] The Foundation moves to dismiss or stay the JLCF’s Application for a bankruptcy Order (“Bankruptcy Application” or “Application”) pursuant to ss. 43 and 44 of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (the “BIA”). Alternatively, the Foundation seeks an Order to strike the JLCF Bankruptcy Application pursuant to rr. 21.01 and 25.11 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (the “Rules”) without leave to amend.

[3] The JLCF defends on the grounds that the Foundation has not met the test to dismiss or stay the Bankruptcy Application under the BIA. Further, the Foundation is not permitted to rely on the Rules as there is no gap in the relief sought under the BIA.

[4] For the reasons set out below, the Foundation’s motion is granted and the JLCF’s Application shall be dismissed. The grounds for the dismissal are that JLCF’s Application raises no reasonable cause of action under the BIA in that there is no evidence of a debt, an act of bankruptcy or any special circumstances to justify a bankruptcy Order in a single creditor case.

Background Facts

[5] The Foundation is a non-profit corporation located in Toronto and is designated by the Canada Revenue Agency (“CRA”) as a Public Foundation. The Foundation’s focus is on creating long-term charitable resources for the Jewish community in Toronto and globally.

[6] The JLCF is an Ontario non share capital corporation designated by the CRA as a Private Foundation. The JLCF was controlled by its founder, Joseph Lebovic (“Joseph”), until his death on May 1, 2021. The JLCF is now controlled by Joseph’s brother Wolf Lebovic (“Wolf”), who is the executor of Joseph’s Estate.

[7] The JLCF donated to the Foundation through a Donor Advised Fund (“DAF”). Once donated, the DAF becomes part of the Foundation’s assets which they then invest and distribute to charities. A DAF can designate an Advisor who can make recommendations regarding the distribution of DAF monies. The Foundation may, but is not required to, take an Advisor’s recommendations into account but cannot bind itself regarding the use of future funds.

[8] Between 2011 and 2016, the JLCF donated over $19M to the DAF. For each donation, the JLCF received an acknowledgment confirming the donation as an irrevocable gift. The JLCF also made corresponding declarations to the CRA regarding its gifts to the Foundation.

[9] Throughout this time, Joseph was the Advisor to the DAF and made recommendations to the Foundation as to distributions. Generally, the Foundation accepted Joseph’s recommendations. Between 2011 and 2021, the Foundation made 146 distributions from the DAF totalling over $11M.

[10] On June 21, 2021, after Joseph’s death, Wolf instructed the Foundation to distribute the remaining funds in the DAF (approximately $16M) to specific charitable organizations. When the Foundation did not do so, the JLCF commenced an action against the Foundation in August 2021 (the “DAF Action”) and sought an Order compelling the Foundation to make the distributions.

[11] On September 29, 2021, the Foundation served a motion to strike certain portions of the DAF Action. The motion is set to be heard on April 13, 2022.

[12] On March 4, 2022, the JLCF brought a motion for a preservation Order over the DAF and also requested an interlocutory injunction preventing the Foundation from making distributions from the DAF. The motion was heard on March 21, 2022, and a decision is pending.

[13] On October 28, 2021, the JLCF brought the current Bankruptcy Application. The grounds for the Application are that the Foundation has ceased to meet its liabilities generally as they come due, and it has failed to meet its obligations to the JLCF in the six months preceding the filing of the Bankruptcy Application.

[14] On December 20, 2021, the Foundation served a Notice Disputing the Bankruptcy Application. On January 27, 2022, the Foundation brought the current dismissal motion.

The Issues and the Law

Is there a Debtor/Creditor Relationship?

[15] Section 43(7) of the BIA directs that the Court shall dismiss an application for bankruptcy “if [it] is not satisfied with the proof of the facts alleged in the application…or is satisfied by the debtor that the debtor is able to pay its debts, or that for other sufficient cause no order should be made.”

[16] In order for the Bankruptcy Application to succeed, there must be a debtor/creditor relationship. In this case, the Foundation cannot be found to be a debtor because the debt referred to in the Application is a series of gifts. The JLCF seeks to compel the Foundation to pay out certain funds, not repay funds to it.

[17] When Joseph, as the designated Advisor of the DAF, wished to make a recommendation to the Foundation for a specific donation, he signed a “Donor Recommendation – Distribution from Fund.” That form contained the following acknowledgement:

I also acknowledge, in accordance with the Income Tax Act and Canada Revenue Agency guidelines, that no benefit of any kind has been provided to me, or to anyone designated by me, as a result of this gift.

[18] The case law is clear that a donor cannot compel the return of a gift unless there is an express power of revocation. No such revocation exists in this case. Indeed, one cannot exist, or the funds could not be considered a donation for the purposes of the Foundation or the CRA. As set out in Bacic v. Millennium Educational & Research Charitable Foundation, 2014 ONSC 5875, at para. 80:

Case law, for the most part, stands for the principle that powers of revocation must be express: Child v. Chase, 1980 CarswellSask 161, at para 5; Eberwein Estate v. Saleem, 2012 BCSC 250 (“Eberwein”) at para 19. As stated in Young v. Young (1958), 15 D.L.R. (2d) 138 (BCCA) at 139-40 (cited with approval by the Ontario Court of Appeal in Berdette v. Berdette, [1991] 3 O.R. (3d) 513 at p. 518 (“Berdette”)):

Nothing is clearer than that a gift thus made cannot be revoked unless an express power of revocation is preserved. None can be implied no matter how natural such an implication might be. Here, no matter what the plaintiff’s expectations were, no power to revoke the gift to the defendant was reserved; so that was the end of the matter.

[19] As the Moving Party correctly points out, the JLCF lost all interest in the donated funds once the gifts were made, while the Foundation assumed the duty to direct and control the gifts.

[20] While the Bankruptcy Application refers to the Foundation being indebted to the JLCF for over $15M, there is no evidence of such a debt, nor does Wolf’s affidavit make reference to any “debt” owed by the Foundation. In the DAF Action, the word debt is also never used. The Statement of Claim refers only to “donations”. Further, the DAF Action does not request repayment of a debt, rather, it demands that payment be made by the Foundation to a list of charities attached as a Schedule to the Action.

Are There Special Circumstances Which Would Permit JLCF to Apply for a Bankruptcy Order as a Single Creditor?

[21] The JLCF brings the Bankruptcy Application as a single creditor. In order for a bankruptcy order to be granted in such a case, one of three special circumstances must be present as set out by Justice Feldman in Valente v. Fancsy Estate (2004), 70 O.R. (3d) 31 (C.A.), at para. 8, and cited more recently in another Court of Appeal Decision: Levesque (Re), 2016 ONCA 393, at para. 10. Para 8 of Valente states:

It is now well-settled in the case law that the failure to pay a single creditor can constitute an act of bankruptcy under s. 42(1)(j) when there are special circumstances, which have been recognized in three categories: (a) where repeated demands for payment have been made within the six-month period; (b) where the debt is significantly large and there is fraud or suspicious circumstances in the way the debtor has handled its assets which require that the processes of the B.I.A. be set in motion; and (c) prior to the filing of the petition, the debtor has admitted its inability to pay creditors generally without identifying the creditors. [Citations omitted.]

[22] None of the abovementioned circumstances are present in this case. There is no evidence of any demands for payment; only a demand that payments be made to certain charities. Neither fraud nor suspicious circumstances exist in this case.

[23] Further, the Foundation has never admitted an inability to pay creditors. To the contrary, the affidavit evidence of the Chief Financial Officer of the Foundation, Mr. Eric Miller (“Mr. Miller”), provides that the Foundation is in “excellent financial health”. The financial statements of the Foundation attached as Exhibits “S” and “T” to his affidavit demonstrate that the Foundation has no trouble meeting its financial obligations as they become due. The financial statements show that the Foundation had $489.9M in assets under its management as of June 30, 2020. Mr. Miller was not cross-examined on his affidavit. As such, his evidence stands as unchallenged.

[24] In Levesque (Re), 2016 ONCA 393, the Ontario Court of Appeal dealt with a bankruptcy commenced against a single creditor. In that case, there was no issue that the creditor had obtained a judgment against the debtor for $600,000. The creditor commenced an application for bankruptcy alleging that the debtor failed to “meet his liabilities generally as they became due”: at para. 5. The application judge dismissed the Application finding that no special circumstances existed. She found that while the debt was large, there was no allegation of fraud or suspicious circumstances, the debt had been outstanding for a relatively short time and the creditor had not taken steps to collect on a general security interest in its favour: at para. 11.

[25] In Levesque there was an undisputed debtor/creditor relationship with a judgment already secured. The Court of Appeal agreed with the application judge that no special circumstances existed and reiterated that the bankruptcy process is generally intended for the benefit of a debtor’s creditors as a class and not individually: at para. 7.

[26] Given all of the above, I do not find that any act of bankruptcy has occurred. There is no debtor/creditor relationship. The Foundation is clearly able to meet its financial obligations as they become due and there are no special circumstances which would permit a single creditor application.

Should the Application be Dismissed under Section 43(7) of the BIA?

[27] Section 43(7) of the BIA provides as follows:

Dismissal of application

(7) If the court is not satisfied with the proof of the facts alleged in the application or of the service of the application, or is satisfied by the debtor that the debtor is able to pay their debts, or that for other sufficient cause no order ought to be made, it shall dismiss the application.

[28] The facts alleged in this case are that the Foundation owes JLCF $15M and that the Foundation has failed to meet its liabilities generally. None of these facts are supported by evidence for the following reasons:

a. There is no debt. The amounts donated by Joseph to the Foundation were gifts as evidenced by the Acknowledgements he signed and his deduction of those donations for tax purposes. The essential ingredients of a legally valid gift are well-known and may be set out as follows: 1) an intention to make a gift without consideration or remuneration, 2) an acceptance of the gift by the donee, and 3) a sufficient act of transfer or delivery of the gift to complete the transaction: see Cassan v. The Queen, 2017 TCC 174, at para. 263 citing McNamee v. McNamee, 2011 ONCA 533, 106 O.R. (3d) 401, at para. 24. I find that the $15M referenced in the Bankruptcy Application is the sum of donations made to the Foundation by the JLCF, which were legally valid gifts. They cannot be taken back or somehow transformed into debts. That is the nature of a gift, it is irrevocably given.

b. There is no evidence that the Foundation cannot meet its liabilities. As referenced above, the unchallenged evidence of Mr. Miller and a review of the Foundation’s financial statements show that it is in a superior financial position. The JLCF argues that a positive financial statement is not sufficient to show that the Foundation has sufficient cash to pay its obligations. As there was no cross-examination of Mr. Miller concerning those financial statements, this argument is simply a bald allegation.

[29] The JLCF argues that that the Foundation has both a legal and moral obligation to consider the recommendations from JLCF in good faith. The Foundation always complied with the direction of the JLCF in the past. Failing to do so now is akin to failing to meet their obligations as they come due. I reject this argument entirely. First, the Foundation has no obligation to make donations in accordance with the DAF Advisor’s recommendations. Doing so would mean that the JLCF retained some form of control over the funds. This would put into question their status as legal gifts and permissible tax deductions.

[30] If I am wrong and the JLCF has proven the alleged facts, the Court retains discretion to dismiss a Bankruptcy Application where it is found to be an abuse of process. Such a finding may be made where the Court is persuaded that the Bankruptcy Application is brought for a collateral purpose.

[31] In Dallas/North Group Inc. (Re), [2001] O.J. No. 2743 (C.A.), the Respondents were petitioned into bankruptcy based on a $10,000 promissory note. The Court found that the petitioning creditors had failed to prove that a debt was owing or the alleged acts of bankruptcy. The Court went further and found that the application had been brought for a collateral purpose which did not include a distribution of property amongst creditors but was found to be a concentrated effort to bully and harass the Respondents.

[32] In La Scala Bakery Ltd., Re, 1984 CarswellOnt 191, at para. 18, the Court held as follows:

18 Even if I had found the act of bankruptcy to be proved I would have been inclined to exercise my discretion not to grant the petition. It has been said over and over again that this court should not be used as a collection device or to resolve disputes between a petitioning creditor and a debtor.

[33] JLCF denies there is any collateral purpose. Its purpose in bringing the Application was out of a genuine concern for the charities which it says should be receiving the DAF funds. This argument is misplaced. A concern for payments to charities has nothing to do with the purposes of the BIA.

[34] Given the facts as found and the principles enunciated in La Scala and Dallas/North Group Inc., I find that this Bankruptcy Application has been brought for a collateral purpose, namely, to put pressure on the Foundation to pay out the amounts demanded by Wolf on behalf of the JLCF when such amounts are not debts and where the JLCF has no actual authority to direct such payments. Further, the JLCF has already commenced the DAF Action which is the more suitable forum for its dispute with the Foundation.

[35] Given all of the above, I am satisfied that the Foundation can pay its debts, there is no proof of the facts alleged, and that the Application is an abuse of process having been brought for a collateral purpose. The Bankruptcy Application is therefore dismissed.

Should the Application be Struck Pursuant to Rule 21.01?

[36] Rule 21.01 permits this Court to strike any claim on the ground that it discloses no reasonable cause of action or that it is frivolous, vexatious or an abuse of process. If I am wrong with respect to the dismissal of the Application under the BIA, I would strike the Application pursuant to the Rules.

[37] Not much needs to be said in support of striking the Application. The claim cannot stand as it simply has no reasonable chance of success. I have already found that the grounds for the Application cannot be proved in that there is no debt, and the Foundation is able to meet its obligations as they become due.

[38] Public policy reasons must prevail in ensuring integrity and efficiency in the justice system. Allowing such a claim to proceed would be futile. Further, the Court has the “inherent power to prevent the misuse of its procedure in a way that would…bring the administration of justice into disrepute”: see Canam Enterprises Inc. v. Coles (2000), 51 O.R. (3d) 481 (C.A.), at para. 55.

[39] I reject JLCF’s argument that I am precluded from having access to the Rules because the BIA already deals with the dismissal of bankruptcy applications. In this case, I have already found that there is no proof of the facts alleged as per s.43(7) of the BIA. However, if that were not the case, the Court retains discretion to advert to the Rules as the BIA does not set out a specific procedure as it relates to the dismissal of an application.

Orders and Costs

[40] The Foundation’s motion is granted, and the Bankruptcy Application is dismissed.

[41] The Foundation seeks its full indemnity costs of $133,303.84 or its substantial indemnity costs of $120,002.28. The Foundation submits that it is a charity which seeks to preserve its assets for charitable causes and not ill-advised litigation. It is concerned about a public and false allegation that it is insolvent.

[42] The Foundation is entitled to recover its fees for litigation that was based on false statements. That is, the Foundation is not a debtor of the JLCF nor is it unable to meet its financial obligations as they come due. The Foundation further submits that the entire Application is based on Wolf’s false affidavit which claimed a debt that simply does not exist.

[43] The JLCF submits that the intent of the litigation was to ensure the funds in the DAF are used for their proper charitable purposes. The JLCF has done nothing to extend or complicate this proceeding that would attract costs at the highest scale.

[44] The Respondent’s full indemnity costs were $34,310 and its substantial indemnity costs were $27,448.

Ruling on Costs

[45] The JLCF had no success on this motion. Its Bankruptcy Application was entirely struck and found to be an abuse of process. Further, this Court found that none of the facts alleged in support of the Bankruptcy Application could be proven. There was no debt and no inability on the part of the Foundation to meet its obligations as they came due. All of the arguments made by the JLCF were rejected.

[46] The main issue for this Court to decide is the scale of costs. Full indemnity costs are reserved for cases with the most egregious facts or allegations that a litigant has deliberately prolonged or undermined the court process. That is not the case here. However, a higher scale of costs must be considered where an abuse of the court process is found.

[47] The amounts sought by the Foundation are high given that the motion was argued in under two hours with no cross-examinations. Proportionality must also be a consideration of this Court on the issue of costs no matter its findings. Finally, there is the issue that the Foundation is a charity which has had to defend this litigation and use money to do so that would otherwise be earmarked for charitable purposes.

[48] Given all of the above, I order the JLCF to pay costs to the Foundation of $100,000 forthwith.

C. Gilmore, J. Date: April 6, 2022