ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
DOYLE SALEWSKI INC, in its capacity as Trustee in Bankruptcy of GOLDEN OAKS ENTREPRISES INC. and JOSEPH GILLES JEAN CLAUDE LACASSE
Plaintiff
– and –
PATRICK BRUNETTE and ISABELLE BROUSELL
Defendants
Gordon Douglas for the Plaintiff
Denis Cadieux for the Defendants
HEARD: September 26 to 28, 2022
JUDGMENT
Justice Sally Gomery
1As trustee in bankruptcy of Golden Oaks Enterprises Inc. (“Golden Oaks”), Doyle Salewski Inc. (“DSI”), asks the court to set aside $121,845.37 in payments that the company made to Patrick Brunette in the twelve months prior to its assignment into bankruptcy. DSI alleges that these were preferential payments made while the company was insolvent and that they must be repaid to the trustee under s. 95(1) of the Bankruptcy and Insolvency Act, RSC 1985, c B-3. Brunette does not deny that he received the payments or that he was a creditor of Golden Oaks. He contends, however, that he and Golden Oaks were dealing at arm’s length when the payments were made, and that he did not know that the company was insolvent. He also disputes the amount claimed.
2For the reasons that follow, I find that the payments at issue are void as against the trustee and must be repaid by Brunette.
The statutory basis for recovery
3Section 95(1) of the Bankruptcy and Insolvency Act allows a court to order the recovery of payments made by an insolvent person prior to the bankruptcy as unlawful preferences.
4With respect to payment made in the three month period prior to bankruptcy, ss. 95(1)(a) states that a payment by an insolvent person “in favour of a creditor who is dealing at arm’s length with the insolvent person … with a view to giving that creditor a preference over another creditor is void as against … the trustee”. A payment made during this three month period is presumed to have been a preference. A creditor may, however, rebut this presumption.
5Under ss. 95(1)(b), a trustee in bankruptcy may seek recovery of payments made up to year before the bankruptcy, but only if they were made to creditors who were not dealing at arm’s length with the insolvent person. As noted by the Alberta Court of Appeal in Piikani Nation v. Piikani Energy Corp., 2013 ABCA 293, 556 A.R. 200, at para. 16, intent to give a preference is no longer required under ss. 95(1)(b): “If a preference arises in fact between non-arm’s length parties, it is simply void as against the trustee.”
Context
6Golden Oaks was used to run a Ponzi scheme masterminded by Jean-Claude Lacasse. Lacasse was the founder and president of Golden Oaks and held all the company’s voting shares. Brunette is Lacasse’s nephew. Brunette invested money in the company beginning in 2009 and worked full time for it from September 2012 until July 9, 2013.
7Golden Oaks’ history and downfall are set out in detail in my earlier decision in Doyle Salewski Inc. v. Scott, 2019 ONSC 5108 (appeal dismissed and cross-appeal granted in part at 2022 ONCA 568). In short, the company advertised a rent-to-own scheme designed to open the door for home ownership to individuals who did not qualify for conventional mortgages. Golden Oaks purchased properties and attracted some tenants. The rent-to-own scheme was never viable, however. Beginning in 2011, the company was funded almost entirely by short term loans by individual investors who were issued promissory notes at usurious rates of interest. Golden Oaks was, by definition, insolvent. The interest due to existing note holders was paid using money loaned by further investors or investors who were convinced to re-invest. Lacasse was assisted by others, notably Lorne Scott and Vincent Ho, in recruiting investors. The scheme collapsed when Golden Oaks failed to attract enough new investment to pay off the company’s ongoing debt. A receiver was appointed on July 9, 2013, and the company was assigned into bankruptcy on July 26, 2013.
8Brunette co-operated with DSI’s efforts to obtain information about Golden Oaks’ operations. He provided a copy of company records in his possession and participated in two examinations under oath before retaining counsel. The parties agree on how much money Brunette advanced to the company and the payments he received between 2010 and its bankruptcy. They disagree on how to characterize some of these transactions, and on Brunette’s status within Golden Oaks.
9Only two witnesses testified at trial: Marcia Collins, a DSI vice-president, and Brunette.
10Collins is a certified general accountant and certified professional accountant. A trial, she described records and information about Golden Oaks that DSI obtained as trustee and explained why DSI believes that Brunette’s dealings with the company were not at arm’s length in the year preceding the bankruptcy. Collins’ testimony was methodical and measured. With one exception I will mention later, she answered questions in a forthright way and conceded points appropriately. I reject Brunette’s argument that her evidence is inherently suspect or biased because she works for DSI and DSI advocates a position in this litigation. Collins was not, however, qualified as an expert. I therefore do not rely on her opinion with respect to the characterization of the payments made to Brunette or the legal implications of that characterization. My conclusions are based instead on the records and information she presented, and on my assessment of Brunette’s evidence.
11Brunette’s recollection of events was not always consistent with contemporaneous documents, and I find that he understated his financial sophistication, his knowledge of Golden Oaks’ operations, and the extent of his involvement in them. Despite this, I found him sincere and sympathetic. He has clearly struggled with the realization that he, like others in Lacasse’s orbit, was misled.
12Lacasse passed away prior to trial and so was unavailable to testify. Another potential witness was Jennifer Sallis, Golden Oaks’ bookkeeper. Since she could have been called by either party, I draw no adverse inference from either party’s failure to do so. Given her absence, however, Sallis’ working papers, such as a list of investors that refers to share capital issued to Brunette, are inadmissible as evidence.
Brunette’s involvement with Golden Oaks prior to September 2012
13Brunette testified that he had a close relationship with Lacasse, seeing him more as an older brother than an uncle. He knew that both Lacasse and a company he owned had declared bankruptcy in 1989, but he believed Lacasse’s explanation that this happened because financing paperwork was neglected while he was on vacation.
14After finishing high school and taking some post-secondary courses in administration, Brunette was employed with the information technology group at the National Research Council of Canada (NRC). He gradually acquired some savings. In 2009, he and Lacasse began to discuss purchasing a small apartment building together. The plan was that Brunette would put up the money for a down payment, Lacasse would manage the building and its tenants, and they would share in the profits. Lacasse asked Brunette to advance $130,000 for a down payment. Brunette initially told him he only had $80,000 to invest.
15It is unclear whether Lacasse ever had the intention to buy a multi-unit residence with Brunette. In any event, the plan never came to fruition.
16In July 2009, Brunette advanced $25,000 to Golden Oaks. He advanced a further $55,000 in November 2009, and another $20,000 on January 1st, 2010. When Brunette agreed to make the third advance, bringing the total amounts advanced to $100,000, he was issued a promissory note by Golden Oaks and Lacasse in November 2009. Under the note’s terms, the company and Lacasse would pay Brunette an annual interest of 25% on the loan. Brunette would receive twelve monthly payments of $1000 each beginning January 1, 2010. At the end of the year, Golden Oaks would repay Lacasse the principal, unless Brunette opted to renew or extend the loan.1
17At trial, Brunette stated that the notes’ term was two years, not one, and that Lacasse gave him 24 post-dated cheques for $1,000 when the promissory note was executed. He cashed the first two on January 1, 2010, and February 1, 2010, respectively.
18According to Brunette, Lacasse suggested early in 2010 that, instead of receiving interest on the money he had advanced, Brunette could instead receive 10% of all profits made by Lacasse in any business venture. At the end of three years, Brunette would get his $100,000 back, but would continue to receive 10% of all profits that Lacasse generated either through Golden Oaks or as a result of personal ventures. Brunette testified that he agreed to this proposal, because he trusted his uncle implicitly and relied on his glowing forecast of profits from Golden Oaks’ real estate ventures.
19Based on Lacasse’s calculations, 10% of Golden Oaks’ net income since November 2009 amounted to $5,405.50. Brunette cashed three more of the post-dated cheques he had in hand as well as another cheque from the company for $405.50 in early May 2009. He returned the rest of the post-dated cheques to his uncle, on the understanding that he would continue to receive 10% of the profits of Golden Oaks and Lacasse going forward.
20Brunette’s evidence about the new arrangement early 2010 is consistent with a document in a file entitled “Patrick Brunette” (the “Brunette file”), found in Lacasse’s office at Golden Oaks. The Brunette file contained an income statement that he recognized. The statement indicates that Golden Oaks’ net income from November 16, 2009, to April 30, 2010, was $54,050, and that a 10% share of this income was $5,405.50. Whoever prepared the statement (almost certainly Lacasse) was aware that Brunette had already received $2,000, since this was deducted to come up with a total of $3,405, the amount that Brunette received in early May. A handwritten note even identifies the cheque numbers associated with the payments.
21On the other hand, Brunette file also contains emails from Brunette that contradict the idea that he was financially naïve or that he passively complied with Lacasse’s proposals.
22On February 22, 2010, Brunette sent an email to Lacasse inviting him to lunch so they could continue an earlier discussion about strategies that Brunette could explore. It suggests that it was Brunette, rather than Lacasse, who proposed a change in their financial deal, and shows that Brunette was aware of the different tax treatment of various forms of income. Brunette set out six scenarios for Lacasse to consider. These included “Rework our current agreement so that I get shares of properties as opposed to taxable interest”. In the same email, Brunette sought feedback from Lacasse on extending the term of his investment in Golden Oaks for more than a year, paying off his personal mortgage with a line of credit or vice versa, and finding other investors. He concluded the email by saying: “I guess I’m looking for ways to take advantage of your return to real estate”.
23In the May 12, 2010, email, Brunette set out a detailed plan to purchase a multi-unit property with Lacasse’s help. By this time, Lacasse had made a pitch to Brunette to entice him to make further investments in Golden Oaks. Another document in the Brunette file, an “Investment Overview Report”, is signed “JC” and says:
With Rent2Own I can pay investors up to 35% and make more money than without them. Because the amount required per deal is only approximately $15,000 to pull out my cash invested and 35% is only $5,250. And I get to reinvest much sooner. That’s why I love Real Estate.
24Brunette did not recall this particular document, but he did recall the pitch. What is interesting about his May 12, 2010, email is that he asks very good questions about Lacasse’s assumptions. For example, Brunette pointed out that Lacasse’s calculations overstated the profit that Golden Oaks would make on a typical rent-to-own transaction, and that his projections did not seem to factor in the company’s need to have cash on hand to repay investors in the short term.
25The other key document in the Brunette file, from DSI’s perspective, is entitled: “Reconciliation of funds paid to P. Brunette”. Brunette denied that he had seen this document. It refers to the “Issuance of share capital”, which was shown to reduce Golden Oaks’ indebtedness to Brunette by $100,000. DSI contends that what in fact happened in May 2010 is that Brunette became a shareholder, and not merely an investor, in Golden Oaks. I will return to this contention later in these reasons.
26What is not disputed is that Brunette received payments from the company of $8,000 in August 2010; $2,439 in February 2011; and $15,000 in April 2012. Had this represented 10% of Golden Oaks’ net income for its 2011 and 2012 fiscal years, the company would have had to generate over $250,000 in profits.
27Brunette testified that he was not concerned that he did not receive payments every quarter, because he trusted Lacasse. When the Golden Oaks made payments to Brunette in respect of his $100,000 investment, Lacasse showed him underlying calculations and documents that appeared to be copies of screen shots of a bank account. They indicated that Golden Oaks was making good money by reselling properties, and that it had cash reserves that increased from $300,000 to $600,000. In reality, Golden Oaks had no net profits and was, by 2011, deeply in debt.
28Brunette advanced further amounts of money to Golden Oaks in 2010. On May 25, 2010, he loaned the company $30,000, for which he received a new promissory note (the “second promissory note”) with a two year term at 40% annual interest. Pursuant to this note, Golden Oaks paid Brunette $1,000 in interest per month between June 2010 and May 2012. On August 13, 2010, he loaned the company another $50,000. The promissory note he got in return this time (the “third promissory note”) provided for 30% annual interest over two years. This resulted in Golden Oaks paying Brunette another $1,250 per month as of September 2010. For unexplained reasons, Brunette did not cash cheques for the last two payments of interest due under the terms of the third promissory note. Taking into account the interest he received, however, Brunette made a profit of $51,500 on an $80,000 investment between 2010 and 2012.
29Under the terms of the second promissory note, Brunette was entitled either to get his $30,000 loan back from Golden Oaks or to renew the note’s terms in May 2012. Likewise, in September 2012, he should have either got his $50,000 loan back or re-invested it at 30% interest, under the terms of the third promissory note. There is, however, no evidence that Brunette got his capital back or that he was issued new promissory notes.
30Instead, Golden Oaks’ financial records show that Brunette made three more loans, totaling $38,000, to the company in early July 2012. Brunette testified that he advanced this money because Lacasse told him that the company needed it for a down payment on property it wanted to purchase. Brunette did not consider the loans to be substantial, and thought they would allow the company to grow, resulting in greater profit for him. In cross-examination, Brunette admitted that these were interest-free loans. There were no written terms for repayment, and they had not been repaid by September 1, 2012. Collins testified that Brunette did receive Lorne Scott’s used Toyota Camry in compensation for some of the money he was owed.
31Finally, Brunette made purchases totaling over $13,000 for Golden Oaks beginning in March 2011, for which he was reimbursed. According to Brunette, these were IT expenses.
Brunette’s involvement in Golden Oaks between September 2012 and July 2013
32Until September 2012, Brunette kept his job with the NRC. He gave Golden Oaks and Lacasse IT support on evenings and weekends, without compensation. He testified that he was willing to help because he had invested a lot of money in the company by this time.
33By the summer of 2012, Brunette had become unhappy at the NRC. When his attempt to negotiate a period of unpaid leave was unsuccessful, he quit. When Brunette gave Lacasse this news, Lacasse suggested that Brunette begin working full-time at Golden Oaks. Brunette agreed.
34In response to a request to admit by DSI on February 28, 2022, Brunette admitted that his duties at Golden Oaks included:
Management of the company’s IT infrastructure such as managing email accounts, setting up “cloud based” storage areas, attempting to manage documents, printing cheques, obtaining bank account documents and managing staff;
Keeping a spreadsheet of information on promissory note holders including the name of the note holder, the amount invested, the interest rate, the date, the term, the interest payments, and when the note was due;
Writing post-dated cheques to investors when Lacasse brought him a contract;
Otherwise preparing cheques for Lacasse’s signature, under Lacasse’s instructions and directions.
Forwarding investors’ T5 statements to Lacasse, and assisting in their preparation;
Dealing with questions from investors about payments;
Assisting in counting cash brought to Golden Oaks’ offices by tenants and property buyers; and
Providing administrative support to Lacasse and other persons who recruited investment in Golden Oaks.
35In this same response, Brunette admitted that he had access to some of Golden Oaks’ bank accounts, and he had the ability to transfer funds electronically under Lacasse’s instructions. He denied, however, having access to an account which Lacasse claimed held a reserve of funds of up to $1,000,000. Brunette also formally admitted that he saw the company’s 2012 unaudited financial statements. The statements showed, among other things, that the company had a deficit of over $3,000,000 as of July 31, 2012, roughly triple its deficit the year before. At trial, Brunette resiled from that admission, saying that he did not remember ever seeing the 2012 statements. He explained that he had seen some 2012 financial results in a much shorter document.
36Brunette admitted at trial that, in addition to the other services he performed at Golden Oaks, he signed three agreements of purchase and sale on its behalf in February and March 2013, as well as a buyer representation agreement in January 2013. In October 2012, Lorne Scott sent an email in which he referred to Lacasse and Brunette as “responsible for owning and operating the company”. Brunette denied that this statement was accurate. He admitted, however, that he would not have done anything to correct it, even though he was copied on the email.
37Brunette continued to pay company expenses from his personal funds while working for Golden Oaks, for which he was reimbursed up until March 2013. The expenses included, on one occasion, salary owed to two employees. Brunette testified that he did this “as there was no money in Golden Oaks bank account and the employees really needed their funds”. When Golden Oaks went under in July, Brunette had incurred expenses of $29,203 that had not been reimbursed.
38Brunette paid these expenses using his personal credit card. He was never issued a corporate credit card. He likewise did not have the use of a company car. He continued to drive his used Camry while Lacasse, Scott and Ho drove Mercedes Benz vehicles leased by the company.
39In terms of compensation, Brunette could not recall what was contemplated at the outset. He thought he got about $2,000 per pay period. Contemporaneous records show that over the 35 weeks between October 16, 2013, and June 17, 2013, Brunette received income totaling $50,603. The amounts were paid irregularly, and the amounts fluctuated, as follows:
| Month | Amount paid | Dates paid |
|---|---|---|
| October 2012 | $11,923 | Oct. 16 ($6,000), Oct. 17 ($2,000), Oct. 17 ($2,000) and Oct. 24 ($1,923) |
| November 2012 | $14,000 | Nov. 20 ($6,000) and Nov. 21 ($8,000) |
| December 2012 | $4,000 | Dec. 11 ($2,000) and Dec. 20 ($2,000) |
| January 2013 | $10,000 | Jan. 2 ($4,000), Jan. 30 ($4,000) and Jan. 31 ($2,000) |
| February 2013 | $4,000 | Feb. 6 ($2,000) and Feb. 19 ($2,000) |
| March 2013 | $1,500 | March 7 ($1,500) |
| April 2013 | 0 | n/a |
| May 2013 | 0 | n/a |
| June 2013 | $3,180 | June 11 ($2,000) and June 17 ($1,180) |
| Total: | $50,603 |
40Brunette contends that these payments constituted his salary. I reject this characterization.
41Brunette received these payments via cheque, the subject line of which read “Dividends” or “Dividends payment”. He did not receive any other amounts that would represent income payable to him on account of the $100,000 he had advanced to the company in 2009 and 2010. He never received a T4. He instead received T5 slips listing separate amounts for interest and dividends received. Brunette testified that he did not really pay attention to this. Given his awareness of the tax consequences of receiving income in various forms evidenced by his February 22, 2010 email, and his involvement in preparing T5s for Golden Oaks, I find this demurral disingenuous and implausible.
42Brunette furthermore admitted, during an examination under oath on September 13, 2013, that he did not receive a salary from Golden Oaks:
Q: What about salary, were you a salaried employee?
A: On the recommendation of Jennifer Sallis, who was the accountant, she suggested that I take dividends, because it would be better for me. So instead of taking a regular salary, I was getting dividends.
43In response to a request to admit served by DSI on February 28, 2022, Brunette likewise acknowledged that, “between October 2012 and June 2013, he was paid $2,000.00 a week via payments called “dividends” by Golden Oaks’ bookkeeper.
44Despite these admissions, Brunette argued at trial that these amounts represented his salary, for two reasons.
45First, Brunette contended that he would have been entitled to receive shareholder dividends or a portion of profit whether or not he spent any time working for Golden Oaks, and so it makes no sense that he would have worked full time for the company without receiving a salary. This argument assumes that Brunette did not otherwise benefit from contributing to the company’s success. He clearly did. Whether Brunette was a shareholder or simply entitled to 10% of the company’s net profits, his return on his investment would increase if the company did well. In any event, averaged out on a monthly basis, Brunette received considerably more by way of “dividends” in the period that he worked for Golden Oaks than he had in earlier periods, even though his long-term investment remained the same.
46Second, Brunette pointed out that DSI has alleged that Brunette received a salary from Golden Oaks in another lawsuit it has taken against him and Scott (ONSC court file no. 15-66979). In paragraph 3 of the Amended Second Fresh Statement of Claim in that action, DSI claims payment over of “any and all income that was paid to [Brunette] by Golden Oaks”. In her response to written interrogatories in May 2022, Collins stated that “income” meant “any employment income paid to Brunette by Golden Oaks in respect of payment for services provided or allegedly provided by Brunette”.
47In cross-examination, Collins was unable to explain how to reconcile DSI’s inconsistent positions in the two lawsuits against Brunette. I do not, however, find this consequential. It falls to this court, not DSI, to determine whether Brunette was a Golden Oaks employee who received a salary. Based on the evidence in this action that I have already reviewed, I find that he never received employment income from Golden Oaks.
48Brunette advanced further amounts to Golden Oaks as short term loans during this period, and received some repayments either of past loans or new ones. Between September 4, 2012, and February 7, 2013, he loaned the company another $34,107 (in addition to the $38,000 he had advanced in July 2012), and he was repaid $47,107. According to Brunette, he funded these loans by borrowing against his personal line of credit.
49From September 2012 to the end of March 2013, Brunette worked daily at Golden Oaks’ offices. Beginning in early April 2013, he began working primarily from home. He was motivated in part by the birth of his daughter, and in part by Lacasse telling him that he had received physical threats (presumably from disgruntled creditors). When Golden Oaks was put into receivership, Brunette was in dire financial straits. He had to cash in his NRC pension to make ends meet. He eventually returned to work at the NRC.
Is DSI entitled to recover the amount claimed from Brunette?
50Brunette acknowledges that he received $3,180 in payments from Golden Oaks in the three month period before it was assigned into bankruptcy on July 26, 2013, and that the other criteria for recovery under ss. 95(1)(a) are met. With respect to the remaining $118,665.17 claimed by DSI for payments he received over the preceding 9 months, he acknowledges that he was Golden Oaks’ creditor. He contends, however, that the payments he received are not void as against DSI because (1) he was at arm’s length when he dealt with the company; (2) he did not know the company was insolvent; and (3) some of the payments — those made to reimburse advances he made to the company after September 2012 — are not subject to recovery.
(1) Was Brunette dealing at arm’s length with Golden Oaks?
51The Bankruptcy and Insolvency Act does not describe what constitutes arm’s length dealings. I reviewed the considerations developed by Canadian courts on this issue in DSI v. Scott, at paras. 203 to 205:
Overall, in determining whether parties’ dealings were at arm’s length, I must assess whether they reflect “ordinary commercial dealing between parties acting in their separate interests”: McLarty v. R., 2008 SCC 26, [2008] 2 S.C.R. 79, at para. 43. Although McLarty is an income tax case, this same test applies in cases pursuant to ss. 95(1)(b) of the BIA: see Piikani, at paras. 22-27, cited by the Ontario Court of Appeal in Montor Business Corporation v. Goldfinger, 2016 ONCA 406, [2016] W.D.F.L. 3770, at para. 68.
Ordinary commercial dealing means that the parties are acting pursuant to “generally accepted commercial incentives such as bargaining and negotiation in an adversarial format and the maximizing of a party’s economic self-interest”: National Telecommunications v. Stalt, 2018 ONSC 1101, 291 A.C.W.S. (3d) 24, at para. 41. In a non-arm’s length relationship, there is “no incentive for the transferor to maximize the consideration for the property being transferred in negotiations with the transferee”: Juhasz (Trustee of) v. Cordeiro, 2015 ONSC 1781, [2015] O.J. No. 1654, at para. 41. Instead, the economic self-interest of the transferor is, or is likely to be, displaced by other “non-economic considerations.”
In Crawford & Co. v. Minister of National Revenue, [1999] T.C.J. No. 850, at para. 43, Justice Porter aptly compared an arm’s length transaction to the kind of bargain that might be struck between strangers at a marketplace. To determine whether a transaction was at arm’s length, the court should consider whether the parties showed “the same kind of independence of thought and purpose, the same kind of adverse economic interest and same kind of bona fide negotiating” that you might expect to find in that marketplace. If so, the parties were dealing at arm’s length. If these hallmarks are absent, they were not.
52Much of the focus of Collins’ evidence and DSI’s arguments concerned whether Brunette held shares in Golden Oaks. Brunette initially admitted that he was a shareholder during his September 13, 2013 examination. In response to DSI’s February 28, 2022, request to admit, however, he stated that Lacasse repeatedly promised to make him a shareholder, but these shares never materialized. Brunette also argued that the payments he received could not have been dividends, because Golden Oaks never actually made a profit. DSI acknowledges that it has not found a copy of any shares issued to Brunette, nor a minute book, nor share register. It relies, however, on Golden Oaks’ 2012 financial statements; the re: line of “Dividends” or “Dividends payments” on the re: lines of cheques received by Brunette; and the T5 slips issued to Brunette for the 2010, 2011, and 2012 tax years, which stated that he received dividend income.
53I conclude that Brunette was a shareholder of Golden Oaks. The 2012 financial statements show that the company issued 100,000 non-voting class A shares worth $100,000. This is the amount that Brunette had advanced to the company when he and Lacasse sat down, in early 2010, to discuss what he would get in return for his investment. Prior to trial, Brunette admitted that he saw the 2012 financial statements. I find it impossible to believe that he would have made a formal admission carelessly on this issue while represented by counsel. His unvarnished admission, at his 2013 examination, that he was “given some shares” rings true, given the way the payments were described as made and the issuance of T5s to him. The absence of actual share certificates or a registry is unsurprising, given the state of record keeping at the company. It is true that no dividends should have been payable to shareholders in Golden Oaks, at any point. But the fact that dividend payments were made inappropriately does not render them anything other than dividend payments.
54Whether or not Brunette was a shareholder, however, he was not dealing at arm’s length from Golden Oaks from September 2012 forward. His dealings with the company did not in any way reflect ordinary commercial dealing between parties acting in their separate interests. I find it particularly significant that, beginning in 2012, after he should have received the return of the $80,000 in capital secured by the second and third promissory notes, he did not take any steps to get this money back, but instead advanced further substantial sums of money to the company without obtaining any security in return or even a promise that he would be paid interest. This is not the conduct of a person negotiating for their own interests.
55Brunette’s conduct while working at Golden Oaks was also inconsistent with non-arm’s length dealings. He acted as though he had an ownership stake in the company or, at the very least, in the company’s profits. Although he testified that he always acted further to Lacasse’s instructions, he admits that he had access to most of the company’s bank accounts and could transfer the company’s funds within these accounts. He had significant insight into the company’s core business, the issuance of promissory notes. He arguably had more insight than anyone else into the company’s indebtedness, because he tracked how many notes had been issued and the company’s obligations as a result of those notes. He prepared cheques, communicated with investors, and signed legally binding contracts on the company’s behalf. He even used his personal funds to pay employees’ salaries on at least one occasion.
56Brunette’s lawyer argued that Brunette’s conduct while working at the company does not demonstrate that he acted in concert with the directing mind of Golden Oaks, Lacasse. Brunette testified that he was duped by his uncle. His lawyer compared the situation to a one-sided romantic relationship. If a person accepts gifts from someone who is in love with them, but that person has no intention of entering into a relationship with the giver, the parties cannot be said to be in a common enterprise. There is no evidence that Lacasse intended to give Brunette any benefit flowing from the Ponzi scheme. He did not transfer any properties to him, or even reward him with perks given to other associates, such as the use of a high end company car or corporate credit card. Lacasse simply used Brunette as a line of credit.
57This argument mis-states the test for non-arm’s length dealing. Brunette may very well not have realized the precarity of Golden Oaks’ finances in 2012 and 2013, notwithstanding the data he had assembled showing the company’s ballooning debt, because he believed his uncle’s assurances about a non-existent $1,000,000 reserve fund. But the fact that Brunette displayed poor business judgment does not transform a non-arm’s length relationship into an arm’s length relationship. Brunette supplied money and labour to Golden Oaks without taking steps to protect his own interests. He did not think he had to, because he believed that his interests were aligned with those of the company.
58DSI does not need to prove that Brunette discovered Lacasse’s fraud and agreed to assist with it, or that he stood to benefit as much as Lacasse from the company’s activities. All it needs to show is that he did not approach his relationship with Golden Oaks as an ordinary commercial relationship. It has done so.
59I therefore conclude that Brunette was not dealing at arm’s length with Golden Oaks when he received payments from the company from September 2012 to June 2013.
Did Brunette realize that Golden Oaks was insolvent when he received the payments?
60Brunette’s lawyer did not advance any authority for the proposition that DSI would have to prove that Brunette knew that Golden Oaks was insolvent when he received the payments. I do not find that this is required on the wording of ss. 95(1)(b). I find, in any event, that Brunette knew that the company was insolvent. Even if he believed Lacasse’s assurance about the $1,000,000 reserve fund, he also knew that Golden Oaks had issued promissory notes requiring it to pay millions of dollars in interest. The text messages he sent to Lacasse in March and May 2013 show that he knew that the company did not have funds to pay debts as they became due. He admitted that he had to pay employees salaries because there was not even enough money in the company’s bank account to meet these basic obligations.
Has DSI proved that all of the payments should be set aside?
61Brunette argued that he should not have to repay all of the money he received in repayment of loans to the company between September 2012 and January 2013, because he ended up lending the same money back to the company a short time later, and then getting it back again. In essence, he argued that DSI was counting the same money twice, and it would be unfair not to take this into account.
62The fallacy underlying this argument is that Brunette received the same money back that he advanced to Golden Oaks. He admitted, in cross-examination, that the money he loaned to the company during this period was co-mingled with the company’s other funds. When Brunette was repaid, he was accordingly not getting the same money back.
63This argument also illustrates why a trustee in bankruptcy is entitled to recover payments like this. At the time that Brunette received repayments of loans he made to the company in late 2012 and early 2013, there were other creditors who were not being paid anything, because Golden Oaks was insolvent. The amounts he received were paid to him at a time when he was not at arm’s length to the company, in preference to others with equally valid claims. That is the very mischief that s. 95(1) seeks to remedy.
Disposition
64Golden Oaks’ payments of $121,845.37 to Patrick Brunette between September 4, 2012, and June 17, 2013, are void and set aside as preferences under s. 95(1) of the Bankruptcy and Insolvency Act. As a result, Brunette must reimburse this amount to Doyle Salewski Inc., in its capacity as Golden Oaks’ trustee in bankruptcy, and pay any pre- and post-judgment interest due on these amounts.
65This was not the only claim asserted by DSI in this action. At the outset of trial, however, it advised that it had settled its claim against the defendant Isabelle Broussel, and it formally abandoned its unjust enrichment and civil conspiracy claims against Brunette set out in para. 1(e) and 1(g) of its Amended Statement of Claim. DSI did not abandon its request for a declaratory order limiting Brunette’s dividend claims against the bankruptcy at para. 1(f), but Brunette advised that he would not be pursuing such claims in any event. Since this leaves no issues to adjudicate, I leave it to the parties to submit an order that reflects that the action is at an end.
66If the parties are unable to agree on costs, DSI shall serve and file cost submissions within fourteen days of receipt of this judgment. Brunette will have fourteen days from receipt to serve and file responding submissions. Each party’s submissions shall not exceed three pages in length but may attach documents relevant to the court’s determination of an appropriate cost award.
Justice Sally Gomery
Released: October 24, 2022
COURT FILE NO.: 15-64769
DATE: October 24, 2022
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
DOYLE SALEWSKI INC et al.
Plaintifs
-and-
PATRICK BRUNETTE et al.
Defendants
REASONS FOR JUDGMENT
Justice Sally Gomery
Released: October 24, 2022
Footnotes
- The note also includes a “Bonus clause”, which reads: “Lender will receive 10% of Golden Oaks Enterprise Inc. Net profit for the year and payment are to match Term date of December 31, 2010”. This appears to give Brunette the right to a portion of the company’s profits as well as interest. Neither party asked Brunette to explain his understanding of this term during his testimony, however, and neither relied on it in argument.