COURT FILE NO.: 33-165775 and 33-165776
DATE: 2022/11/18
COURT FILE NO. 33-165775
ONTARIO
SUPERIOR COURT OF JUSTICE
(IN BANKRUPTCY AND INSOLVENCY)
IN THE MATTER OF THE BANKRUPTCY OF MARTHA LORRAINE BEACH, a.k.a. MARTHA BEACH, OF THE VILLAGE OF INVERARY IN THE COUNTY OF SOUTH FRONTENAC, IN THE PROVINCE OF ONTARIO
COURT FILE NO. 33-165776
ONTARIO
SUPERIOR COURT OF JUSTICE
(IN BANKRUPTCY AND INSOLVENCY)
IN THE MATTER OF THE BANKRUPTCY OF JONATHAN GARY BEACH, a.k.a. JOHNATHAN GARY BEACH, OF THE VILLAGE OF INVERARY IN THE COUNTY OF SOUTH FRONTENAC, IN THE PROVINCE OF ONTARIO
COUNSEL: Percy Ostroff, for the Applicant Creditor, Heliotrope Investment Corporation
R. Graham Phoenix and Sarah White, for Martha Lorraine Beach and Gary Johnathan Beach
HEARD: March 3 and April 19, 2022
REASONS FOR JUDGMENT
RYAN BELL j.
Overview
[1] By applications dated November 10, 2021, the creditor, Heliotrope Investment Corporation, applies for orders adjudging Martha Lorraine Beach (“Martha”) and Johnathan Gary Beach (“Gary”) bankrupt. Heliotrope says that at the date of the bankruptcy applications, the Beaches were each indebted to Heliotrope with debts that included the principal amount of $50,980.40 as of October 29, 2021 under various costs awards, and approximately $1,000,000 under promissory notes.
[2] Heliotrope also says that the Beaches have committed an act of bankruptcy within the six months preceding the filing of the applications because they ceased to meet their obligations generally as they became due to Heliotrope and their creditors generally. The Beaches’ creditors are said to include Gavin Marshall (“Marshall”), his spouse, Susan Marshall (“Susan”), Magenta Waterfront Development Corporation, Heliotrope, Magenta Capital Corporation, Magenta Mortgage Investment Corporation, Magenta II Mortgage Investment Corporation, and Magenta III Mortgage Investment Corporation. A writ of execution search conducted on each of the Beaches as of October 29, 2021 reveals writs against each of the Beaches for executions in respect of judgments totalling more than $1,500,000.
[3] Martha and Gary oppose the applications and ask that they be dismissed. They say they have sufficient assets to pay their debts. They also contend that no order ought to be made because: (i) Heliotrope and the creditors named in the applications are, in effect, a single creditor group, seeking to use the bankruptcy process to enforce a private debt; (ii) the amount of the debt is being disputed in related civil proceedings; and (iii) the effect of any bankruptcy orders would be to end the Beaches’ claims against Marshall and his companies in the civil proceedings.
[4] In the alternative, Martha and Gary ask that the bankruptcy applications be stayed pending the resolution of the so-called “Accounting Proceedings” in which they dispute the accounting of the debt and the application of the proceeds of sales of various properties. A further alternative proposed by the Beaches is that the bankruptcy application against Gary be dismissed on the basis that there would be no purpose served by bankrupting him.
The Record and the Issues
[5] The record on these applications is immense. It consists of:
(i) Heliotrope’s applications for bankruptcy orders and the notices disputing the applications;
(ii) Martha and Gary’s responding record, consisting of nine volumes and 2,791 pages;
(iii) Heliotrope’s reply motion record, consisting of four volumes and 1,048 pages;
(iv) Martha and Gary’s supplementary motion record of 207 pages;
(v) Marshall’s supplementary affidavit of 117 pages;
(vi) Martha and Gary’s reply motion record of 218 pages;
(vii) cross-examinations of Gary, Martha, and Marshall, conducted on February 14, 15, and 16, 2022, respectively;
(viii) Heliotrope’s brief of exhibits and undertakings from the cross-examinations;
(ix) Martha and Gary’s four volumes of undertakings given on Marshall’s cross-examination; and
(x) the viva voce testimony of Gary and Marshall at the hearing.
[6] Compendia, which would have been of considerable assistance to the court, were not filed.
[7] Notwithstanding the size of the record, the issues I must determine on these applications are narrow:
(i) Was a debt of at least $1,000 owing by each of Martha and Gary to Heliotrope as at the date of the applications?
(ii) Did each of Martha and Gary cease to meet their liabilities generally as they became due within six months of November 10, 2021?
(iii) If the answers to (i) and (ii) are “yes,” have the Beaches satisfied me that there is “sufficient cause” that no order ought to be made?
[8] On the evidence before the court and for the following reasons, I am satisfied that as of the date of the bankruptcy applications, Martha and Gary each owed Heliotrope a debt in excess of $1,000. I am also satisfied that each of the Beaches ceased to meet their liabilities generally as they became due within six months of November 10, 2021. The Beaches have not persuaded me that there is sufficient cause that the orders should not be made, nor am I persuaded that the applications should be stayed. Bankruptcy orders will issue against the Beaches.
Background Facts
[9] Marshall is the sole director of Heliotrope and a director of Magenta Capital Corporation, Magenta Mortgage Investment Corporation, Magenta II Mortgage Investment Corporation, Magenta III Mortgage Investment Corporation, and Magenta Waterfront Development Corporation, all of which are corporations related to Heliotrope. Canadian Western Trust Company, referred to in the affidavits of verification, acts as trustee for RRSP holdings of Marshall and Susan. I will refer to these corporations, together with Marshall and Susan, collectively, as the “Marshall parties.”
[10] Martha and Gary are spouses. Martha is the sole shareholder and director of 1073650 Ontario Inc., 1324789 Ontario Inc., and 2290998 Ontario Inc. (collectively, the “Beach companies” and, together with Martha and Gary, the “Beach parties”). Gary is the controlling mind of the Beach companies.
[11] Gary and Marshall, through their respective corporations, have been involved together in four residential land development projects since 2014. Three of these projects are subject to written agreements. The first joint venture agreement, between Magenta Waterfront and 132 Ontario, was entered into on February 6, 2014 (“JVA 1”). The projects known as Applewood Lane and Johnston Point in Frontenac County are the subject matter of JVA 1. The second joint venture agreement, also between Magenta Waterfront and 132 Ontario, was entered on July 9, 2014 (“JVA 2”). JVA 2 covers the project known as Pine Point. The fourth property, known as Cranberry Cove, was purchased by one of Marshall’s companies. Gary asserts that Cranberry Cove was to be treated in the same way as the other properties. Marshall denies this.
[12] The purpose of the joint ventures was the development of the subject lands as vacant land condominiums and the marketing and sale of freehold residential building lots. Gary was the project manager. Magenta Waterfront’s responsibilities included ensuring there was financing sufficient to complete the project, providing banking, administrative, and bookkeeping services, and acting as the sole signing authority for the joint venture.
[13] Gary started out developing Applewood Lane and Johnston Point with another individual named Jeff McEwen. That relationship ultimately failed, and Gary approached a mortgage lending business owned by Marshall for financing, including to pay Mr. McEwen’s mortgages. Before the JVAs were entered into, $1,387,616 had been loaned “to or for the benefit of” 132 Ontario and parties related to 132 Ontario by parties related to Magenta Waterfront. The JVAs recognize and define these loans as the “Pre-Existing Loans.” The Pre-Existing Loans included substantial amounts advanced to the Beaches to pay personal debts in relation to properties owned by them or their companies, including to discharge mortgages where their principal residence was located.[^1]
[14] The Court of Appeal has described what happened next: “[a]fter cost overruns and delays on the projects, the relationship between Mr. Beach and Mr. Marshall soured and a flurry of litigation commenced.”[^2] Gary was the first to threaten litigation but the Marshall parties sued first in May 2018, for the enforcement of promissory notes given by Heliotrope to 132 Ontario and guaranteed by Martha and Gary (the “Heliotrope Notes”).[^3] Eleven days later, the Beach parties sued the Marshall parties alleging breach of contract, breach of fiduciary duties, and bad faith, and asserting constructive trust claims over Cranberry Cove (the “JVA action”).[^4]
[15] Between June 2018 and July 2019, the Marshall parties commenced five mortgage enforcement actions.[^5] In September 2020, Gary sued the Marshall parties claiming wrongful termination and breach of human rights, as well as breach of contract and breach of fiduciary duties.[^6]
[16] Three of the mortgage enforcement actions proceeded to motions for summary judgment.[^7] Justice Hurley granted summary judgment in all three actions. The Court of Appeal dismissed the appeals, with costs to Heliotrope and Canadian Western. The judgment in favour of Heliotrope has been paid. As of November 10, 2021, the outstanding judgments in favour of Canadian Western stood at approximately $1,300,000.
[17] The various litigation proceedings have resulted in costs awards against the Beach parties, including Martha and Gary, some of which were unpaid as of November 10, 2021.
[18] In September 2021, 132 Ontario and 107 Ontario commenced a claim against Magenta Capital Corporation, Canadian Western, and Heliotrope for an accounting of amounts due under various mortgages (the “Accounting Proceedings”).[^8]
[19] Most recently, and after the bankruptcy applications were filed, two additional proceedings were commenced. First, the Beaches, 132 Ontario, and 107 Ontario commenced an application against Canadian Western and Heliotrope seeking an accounting for the proceeds of the sale of joint venture properties, production of documentation related to the sales, an accounting of the amounts charged and paid on the “Heliotrope Mortgages,” and an assessment of the legal fees charged on the Heliotrope Mortgages.
[20] Second, the Beaches, 132 Ontario, and 107 have commenced an action against the “Marshall Group” for damages arising from the improvident sales of certain properties.[^9]
Analysis
[21] Section 43(1) of the Bankruptcy and Insolvency Act[^10] (“BIA”) provides that one or more creditors may file an application for a bankruptcy order against a debtor if it is alleged in the application that (i) the debt or debts owing to the applicant creditor(s) amount to $1,000; and (ii) the debtor has committed an act of bankruptcy within the six months preceding the filing of the application.
[22] A debtor commits an act of bankruptcy if they cease to meet their liabilities generally as they become due: BIA, s. 42(1)(j).
[23] 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, the court shall dismiss the application: BIA, s. 43(7).
[24] Section 43(11) provides that the court may “for other sufficient reason” make an order staying the bankruptcy proceedings, either altogether or for a limited time, on such terms and conditions that the court considers just.
(i) A debt owing to Heliotrope of at least $1,000
[25] A debt is a sum payable in respect of a liquidated demand, recoverable by action: Diewold v. Diewold.[^11] Section 43(1)(a) of the BIA requires only that a debt be “owing” and not that it be “payable” as at the date of the petition: Zeller, Re, at para. 28,[^12] citing Ground J. in 484030 Ontario Ltd. (Re).[^13]
[26] So long as it is proved that the debtor is indebted to the applicant creditor for at least $1,000, it is unnecessary for the court to determine the exact amount owing to the applicant creditor: Relectra Limited, Re.[^14]
[27] Martha and Gary do not seriously challenge that each of them had a debt of more than $1,000 owing to Heliotrope when the bankruptcy applications were issued on November 10, 2021. It is not in dispute that from the morass of litigation between the Beach parties and the Marshall parties, the following costs awards against Martha and Gary personally (in addition to other Beach parties) in favour of Heliotrope (among other Marshall parties) were outstanding as at the date of the bankruptcy applications:[^15]
• $5,000 to be paid by 132 Ontario, 107 Ontario, Martha, and Gary, jointly and severally, to the defendants (including Heliotrope) in the JVA Action. The Beach parties moved unsuccessfully to transfer a benefit permit held by 132 Ontario.
• $7,418 to be paid by 132 Ontario, 107 Ontario, Martha, and Gary to the responding parties (including Heliotrope) in respect of the motion for leave to appeal from the “benefit permit” order.[^16]
• $8,640 to be paid by 132 Ontario, 107 Ontario, Gary, and Martha arising from their unsuccessful motion seeking leave to appeal from an order of Hurley J. in the JVA Action confirming Magenta Waterfront’s power of attorney to sign certain documents on 132 Ontario’s behalf.
• $11,074 arising from the Beach parties’, including Martha and Gary, unsuccessful motion seeking leave to appeal a scheduling motion in the JVA Action.
• $5,000 against 132 Ontario and Gary arising from the Marshall parties’, including Heliotrope, motion for particulars and other relief in CV-20-84558.
[28] There is evidence that these costs awards have now been paid; however, for the purpose of establishing debts owing to the applicant creditor of $1,000, the relevant date is the date of the applications.
[29] I am also satisfied that the Heliotrope Notes are debts of the Beaches that were owing to Heliotrope as at the date of the applications. Martha and Gary personally guaranteed the Heliotrope Notes. Thirty-four of the Heliotrope Notes are unpaid. The dispute of a debt must be bona fide for a bankruptcy not to follow: Aquasure Technologies Inc. (Re), at paras. 5–6.[^17] The Beaches admit promissory notes were given to Heliotrope and they gave personal guarantees. There is no dispute that a demand has been made under the Notes. However, the Beaches deny that they are required to make payments because of an alleged understanding that the debts would be paid from the sale of development properties. There is, however, no written agreement between the parties that would support this allegation.
[30] I agree with Heliotrope that it is not open to the Beaches to argue that they have no debt under the Heliotrope Notes based on claims the Beach companies may have against Magenta Waterfront or Marshall under the JVAs. Heliotrope is not a party to the JVAs. Whatever contingent and future claims the Beaches might have, they do not meet the test for legal set-off: Air Canada (Re), at para. 13.[^18]
[31] Nor would any claims by Martha or Gary qualify for equitable set-off. Equitable set-off is granted only in cases where it would be manifestly unjust to refuse the relief: Goma v. Raghunandan,[^19] cited in Nicolou v. McLennan & Associates, at para. 16.[^20] In my view, the Beaches’ litigation conduct disqualifies them from equitable set-off. The Court of Appeal described their litigation conduct in the following terms:
The Beach parties have not pursued their claims with any diligence or dispatch. They have pursued ill-conceived motions, failed to pay costs awards against them in a timely way, initiated new actions with duplicative claims, and obstructed efforts to bring the JVA projects – and hopefully with them the litigation – to a close. These facts seriously undermine any unfairness to the Beach parties by refusing to grant them a stay of enforcement. Given their own actions, the Beach parties can no longer expect patience and indulgence from the court.[^21]
[32] In awarding costs to Canadian Western on a substantial indemnity basis against the Beaches, 132 Ontario, and 107 Ontario following their unsuccessful motion for a certificate of pending litigation, I described their motion as,
... an ill-conceived effort to stop power of sale proceedings in the absence of any evidence of fraud or any pleading of fraud in relation to the mortgages...
... In my view, the pursuit of the motion was reprehensible litigation conduct that justifies punitive cost sanctions.[^22]
[33] Finally, it is important to note that, contrary to the suggestion in the Beaches’ materials, Heliotrope’s motion for summary judgment on the Notes was not dismissed on the merits; rather, the motion was dismissed on the basis that the record was too voluminous for the matter to be heard by way of a summary judgment motion.[^23]
[34] Heliotrope has proved on a balance of probabilities that as at the date of the bankruptcy applications, each of Martha and Gary owed the corporation debts exceeding $1,000.
(ii) Martha and Gary ceased to meet their liabilities generally as they became due
[35] I am also satisfied that Martha and Gary ceased to meet their liabilities generally as they became due within the six months preceding the filing of the applications and thereby committed an act of bankruptcy under s. 42(1) (j) of the BIA.
[36] In addition to the Heliotrope Notes and the various unpaid costs awards, approximately $1,300,000 remains owing on the judgments in favour of Canadian Western.
[37] In August 2019, The Toronto-Dominion Bank commenced proceedings against 132 Ontario, and Martha and Gary as guarantors, on mortgages registered on title to lands on which the Beaches’ principal residence is located. The Bank seeks payment of the principal amounts of $287,098.16 and $106,135.92 due under the loans, guarantees, and mortgages.
[38] There is also evidence of other debts, including credit card debt, as disclosed on credit bureau searches.
[39] Where it is shown that the debtor has failed to pay the debts due the applicant creditor and other creditors, there is a presumption the debtor was not meeting their liabilities generally as they became due; the onus then shifts to the debtor to prove that they are able to pay the debts: Re 484030 Ontario Ltd.;[^24] Smith (Re), at para. 59.[^25] To meet their onus, the debtor must tender cogent evidence by way of financial statements or other material to prove that they are able to pay their debts. Payment to the applicant creditor or other creditors on the eve of the application or thereafter does not satisfy the debtor’s onus: Bankruptcy of S.C.M. Farms Limited, at para. 26;[^26] Zeller, Re, at para. 40; Groia & Company Professional Corporation v. Medcap Real Estate Holdings Inc., at para. 136.[^27]
[40] The Beaches submit that they have sufficient assets to satisfy their debts and liabilities generally. Their arguments are threefold: (i) they have existing land assets that are more than sufficient to satisfy their liabilities; (ii) they have significant claims and counterclaims against the Marshall parties that would, effectively, eliminate their debts; and (iii) the outstanding amount on the judgments in favour of Canadian Western is being challenged in the Accounting Proceedings.
[41] To meet the test of an ability to pay debts as contemplated in s. 43(7), the focus must be on all of the debts. A debtor is required to lead evidence sufficient to establish what all of their debts are and also of their ability to pay them: Medcap Real Estate (Re), C.A., at para. 14. I find that the Beaches have fallen far short of meeting their onus. I have reached this conclusion for the following reasons.
[42] First, the Beaches rely on unliquidated, contingent, and future claims, none of which are evidence that the debts and unpaid judgments were paid down within the six months preceding the date of the bankruptcy applications. The same is true of the considerable appraisal evidence that was tendered in evidence, aimed at proving the net equity that would be available to the Beaches in the future. That evidence does not change the fact that, as of November 2021, the judgments in favour of Canadian Western remained outstanding.
[43] In addition, the equity relied upon by the Beaches is in joint venture and non-joint venture properties wholly owned by 132 Ontario and lands owned by 229 Ontario. These are not assets that are owned directly by the Beaches. The Beaches would not be entitled to any proceeds from the sale of these properties until the companies’ creditors have been paid. The debts of these companies have not been disclosed. None of the Marshall parties have a contract with or a judgment against 229 Ontario.
[44] Second, the Beaches’ reliance on the Accounting Proceedings – in which they challenge the amount of the outstanding judgments – suffers from the same failings. It is a contingent, future claim which, while relevant on the issue of whether the bankruptcy proceedings should be stayed, does not evidence that the Beaches were meeting their liabilities generally as they became due in the six months preceding the applications. Here, too, I note that although the Accounting Proceedings were commenced by 132 Ontario, 107 Ontario, and the Beaches, the mortgagors are the companies, not the Beaches. Under the JVAs, the joint venture parties were 132 Ontario and Magenta Waterfront, not the Beaches.
[45] Third, the Beaches’ submissions ignore the debt owing to the TD Bank as of November 2021. On cross-examination, Gary stated that he did not think that “their claim has been addressed yet.” The Beaches failed to adduce any evidence that the loans to TD Bank are in good standing. Merely defending the action is not sufficient: Groia & Company Professional Corporation, at para. 106.
[46] Fourth, I find the Beaches have not been forthcoming about their assets and liabilities. In relation to some debts, the Beaches either did not provide evidence or the answers provided by them on cross-examination were evasive. For example, in relation to a specific credit card debt, there was no evidence that the debt as disclosed on the credit bureau report was inaccurate. Martha’s monthly credit card payments are not disclosed on her monthly expenses.
[47] I provide the following as examples of evasive responses. When asked on cross-examination about the status of a BMO loan, Gary responded “I have had talks with BMO ... I’m not sure where we left it.” When Gary was asked on re-examination whether any of the parties on the credit bureau search were actively pursuing him for the collection of debts, Gary’s cryptic response was “Just trying to think of – maybe I can think of one party who I wouldn’t call it chasing me, ... but a party that we’re working with to make sure something is paid off.”
[48] The Beaches failed to produce any evidence of agreements with creditors. There was no evidence that loans have been brought into good standing.
[49] Gary was asked on cross-examination if he was receiving or eligible to receive any compensation from a company identified as 2858385 Ontario Inc. – of which Gary is a director – for finding a particular property. Gary’s responses are telling:
A. Not at this time.
Q. At a future time?
A. Hard to say about the future.
Q. What are the conditions of you receiving compensation?
A. Nothing really to talk about at this time, that’s for certain.
Q. Well, nothing to talk about, or nothing that you want to disclose?
A. Both. It’s really the same thing. There’s nothing to disclose, so there’s really nothing to talk about.
[50] Instead of providing disclosure of their obligations generally, the Beaches elected to “spend their time... [the] substantive real estate assets.”[^28] The HST situation of the Beach companies is unknown. Marshall’s evidence that Gary told him the companies do not always remit their HST stands uncontradicted.
[51] The Beaches have not persuaded me, on the evidence they have adduced, that they were able to pay their debts as of November 2021.
[52] Accordingly, I find that the Beaches each committed an act of bankruptcy within the six months preceding the filing of the applications in that they ceased to meet their liabilities generally as they became due.
(iii) No sufficient cause to not make the bankruptcy orders
[53] The Beaches submit that there is sufficient cause to dismiss the bankruptcy applications because: (i) bankruptcy should not be used to enforce a private debt; and (ii) the debt supporting the applications is disputed. They say that the applications have been filed for an improper purpose and, if allowed, will deny the Beaches the ability to advance their claims against the Marshall parties.
[54] I disagree.
[55] I am satisfied that at the date of the bankruptcy applications, Martha and Gary owed a debt to Heliotrope consisting of the unpaid costs awards, a debt to Heliotrope under the Heliotrope Notes of approximately $1,000,000, judgment debts to Canadian Western of approximately $1,300,000, debts to TD Bank, and debts to other creditors. The corporations of which Marshall is the principal are, although related, separate legal entities. TD Bank is a separate legal entity and certainly, the other creditors identified on the credit reports are separate legal entities. This is not a “single creditor” bankruptcy.
[56] As the court explained in Holmes, Re,[^29] the general rule is that when relying on an act of bankruptcy under what is now s. 42(1) (j) of the BIA, the applicant creditor must strictly establish that the debtor ceases to meet their liabilities generally as they become due. In the “non-exceptional” case, this situation cannot, ordinarily, be proved by having regard to the experience of one creditor only. This is because resort to the BIA, rather than to the ordinary civil courts, is intended by Parliament to be for the benefit of the creditors of a debtor as a class. There are “special circumstances” in which the courts have granted an order under s. 43 on the basis of a debt owed to one creditor:
(i) the creditor is the only creditor of the debtor; and the debtor has failed to meet repeated demands of the creditor; in the circumstances he should not be denied the benefits of the BIA by reason only of his unique character; or
(ii) the creditor is a significant creditor and there are special circumstances such as fraud on the part of the debtor which make it imperative that the processes of the BIA be set in motion immediately for the protection of the whole class of creditors; or
(iii) the debtor admits that he is unable to pay his creditors generally, although they and the obligations are not identified: Blancco Oy Ltd. v. Inside the Box Inc., at para. 26,[^30] citing Holmes, at paras. 5-8.
[57] The Beaches argue that Heliotrope relies on alleged debts to related parties and submit that the debts all relate to the joint venture relationship. In advancing this submission, the Beaches ignore that Heliotrope was not a party to the JVAs. The judgments in favour of Canadian Western are distinct from debts owing to Heliotrope. The Beaches ignore that different debts were incurred for different reasons, involving different lenders. They ignore the debt to the TD Bank and other, albeit smaller, creditors. To repeat, I am satisfied on the evidence adduced that the Beaches have ceased to meet their liabilities generally as they become due.
[58] The Beaches submit that where there is a bona fide dispute between the applicant creditor and the debtor with respect to the debt, the matter must be decided in the proceedings in the ordinary courts, rather than in the bankruptcy court: Re Bearcat Explorations Ltd., at para. 15;[^31] Re Concept Marketing Ltd.[^32]
[59] The Beaches’ position is outlined at paras. 59-60 of their factum:
The debts cited by the applicant are the judgments granted in favour of CWT. The existence of the judgments is not disputed. What is disputed, however, is whether the debt has been satisfied (or could be satisfied by remaining security).
The judgments are not “set piece” debts. Instead, the quantum is fluid. This is because the debts are secured by mortgages in the two years since the judgments were granted, the mortgaged properties have been sold and the proceeds ought to have been applied to the mortgages. In fact, based on mortgage statement[s] provided by Marshall through October 2021, 38 mortgaged properties have been sold and $4,583,895.76 in proceeds have accrued for the benefit of [the] Beaches.
[60] The Beaches say that the Accounting Proceedings constitute a direct challenge to the debt relied upon by Heliotrope in support of its applications and that these issues should, therefore, be determined in the civil courts. The Beaches also repeat that they have various claims and counterclaims against Marshall and the Marshall parties, including the JVA action and the improvident sale action.
[61] In advancing this argument, the Beaches again ignore that different debts were incurred for different reasons, involving different lenders. The Beaches have done nothing to advance the Accounting Proceedings. Further, the mere existence of a dispute between the applicant creditor and the debtor as to liability, even if bona fide, does not necessarily mean that the application will be dismissed if the other facts alleged in the application are established: 0757376 B.C. Ltd. (Re), at para. 30.[^33] The fact that civil proceedings are ongoing is not a bar to the making of a bankruptcy order: Central Coast Carrier Ltd., at para. 31;[^34] Vermillion Placers Inc. (Re).[^35]
[62] It is appropriate for the court to grant a bankruptcy order where it is to the benefit of all the parties that an independent trustee investigate the affairs of the debtor: 0757376 B.C. Ltd. (Re), at para. 32. It is not improper to commence a bankruptcy application for the collection of a debt. Further, it is not improper to commence an application to gain remedies not available outside of bankruptcy, including a “thoroughgoing investigation of the bankrupt’s affairs”: Four Twenty-Seven Investments Ltd. (Re), at p. 188.[^36]
[63] In my view, having regard to the Beaches’ failure to be forthcoming regarding their assets and liabilities and their evasive responses on cross-examination, the investigatory mechanisms and remedies available to a trustee in bankruptcy would be useful, appropriate, and desirable. The accounting issues raised by the Beaches can be effectively and efficiently carried out by a licensed trustee under the BIA.
[64] I do not consider that these applications were brought for an improper purpose as the Beaches contend. There is no question that the Beaches, Marshall, and their respective companies are engaged in litigation. I am satisfied, however, that it is not the litigation that has motivated these applications, but rather the Beaches’ actions in refusing to pay their debts justly due. In addition, bankruptcy orders against the Beaches would not necessarily prevent the Beach companies from asserting their claims and counterclaims because no bankruptcy orders are sought against the Beach companies.
[65] I am not satisfied that a sufficient cause exists such that the bankruptcy orders should not be made.
(iv) Stay of bankruptcy proceedings not appropriate in the circumstances
[66] Under s. 43(11) of the BIA, the court has the discretion to stay the application if the debtor can satisfy the court that “other sufficient reason” exists. The Beaches request a stay of the applications because they contend the applications are, at best, premature, and at worst, improper.
[67] Again, I disagree.
[68] I am satisfied that as at the date of the bankruptcy applications, there was a debt of $1,000 owing by each of the Beaches to Heliotrope. I am satisfied on the evidence that in the six months preceding the date of the applications, the Beaches ceased to meet their liabilities generally. These applications are not premature. I will not repeat my reasons why the applications are not improper.
[69] Justice Hurley declined to stay the enforcement of the judgments on the mortgage debt claims of Heliotrope and Canadian Western.[^37] In doing so, Hurley J. recognized that the Beach parties could be “forced into bankruptcy.”[^38] The decision was affirmed on appeal, with the Court of Appeal concluding that “[t]he orders for summary judgment, even if they functionally operate as orders for partial summary judgment, were appropriate in the circumstances, and stays under r. 20.08 would not be.” I have already referred to the Court of Appeal’s observation that the litigation conduct of the Beach parties “seriously undermined” any unfairness to them as a result of Hurley J.’s refusal to stay the enforcement of the judgments.
[70] The general test to be applied by the court in exercising its discretion under s. 43(11) is whether there is a bona fide claim of the debtor against the applicant creditor which is of a substantial nature and which would disappear if a bankruptcy order was made, and that there is no prejudice to the other creditors by granting a stay: ATI Technologies ULC v. Henderson Robb Group, at para. 54,[^39] citing Goldlund Mines Ltd., Re.[^40]
[71] I conclude that this test has not been met based on the following considerations.
[72] Overall, the Beach parties have not pursued their claims with diligence. The litigation against the Marshall parties began in 2018; it has not progressed beyond the pleadings stage. Instead, the Beach parties have engaged in what the Court of Appeal described as a variety of “ill-conceived motions.”[^41]
[73] The Accounting Proceedings were commenced in the fall of 2021. Following the initiation of the bankruptcy applications in November 2021, the Beach parties commenced the improvident sales action and a second proceeding seeking an accounting. The Beach parties’ practice of initiating new actions with duplicative claims is not new.[^42] The Court of Appeal observed that given their own actions, the Beach parties “can no longer expect patience and indulgence from the court.”[^43]
[74] The Beaches have previously refused to attend examinations in aid of execution. They have not been forthcoming regarding their assets and liabilities. They have refused to disclose who the accountants for the Beach companies are. They were evasive on their cross-examinations in these proceedings when asked about their liabilities to other creditors. Their evidence that Mr. McEwen was unable to continue working on the developments because of “personal reasons” is simply not credible: Mr. McEwen commenced power of sale proceedings against the Beaches and the Beaches responded by suing him.
[75] The Beaches’ failure to be forthcoming in the production of their financial records has been the subject of previous judicial comment. In his decision granting security for costs in the JVA action, Hurley J. found that the Beaches had prejudiced the payment of the Beach parties’ obligations under two unpaid costs awards in the manner in which they had dealt with their assets:
There is evidence that the principals of the plaintiff, Gary and Martha Beach, have sold assets and mortgaged properties, receiving funds which could have been applied to the costs awards but instead they chose to pay other creditors, none of whom had a court order against the plaintiff or them.
Mr. Beach has not been completely forthcoming in the production of financial records which would establish how much money he and his wife have received through the sale and mortgaging of their assets. In addition to not producing documents which would identify the funds which they received and to whom they were paid, Mr. Beach took under advisement the production of relevant financial records which, because of the passage of time from his cross-examination, now constitute refusals.[^44]
[76] Taken as a whole, the Beaches’ conduct does not warrant a stay of the bankruptcy proceedings; instead, it cries out for a thorough investigation of the Beaches’ affairs by a trustee in bankruptcy.
[77] Finally, I reiterate that the only bankruptcy orders sought are against the Beaches personally. No orders are sought against the Beach companies.
[78] Accordingly, I decline to stay the bankruptcy proceedings under s. 43(11) of the BIA.
(v) Should the application against Gary be dismissed because it serves no purpose?
[79] In the further alternative, the Beaches submit that I should dismiss the application against Gary because his bankruptcy would serve no purpose.
[80] Where a debtor has committed an act of bankruptcy by not paying debts as they generally come due and has failed to lead evidence to satisfy the court that they have the ability to pay their creditors, the debtor bears a very heavy onus to show that a bankruptcy would nonetheless serve no purpose: Medcap Real Estate (Re), C.A., at para. 23.
[81] Gary has committed an act of bankruptcy by not paying his debts as they generally came due. His evidence does not satisfy me that he has the ability to pay his creditors. Gary has not met his very heavy onus to show that a bankruptcy would serve no purpose. To the contrary, Gary’s conduct in responding to the bankruptcy application against him and his litigation conduct more generally, confirms that an investigation of his affairs by a trustee is necessary.
Disposition
[82] Accordingly, Martha Beach and Gary Beach are each adjudged bankrupt and bankruptcy orders will issue. MNP Ltd. is appointed the trustee in bankruptcy.
Madam Justice Robyn M. Ryan Bell
Released: November 18, 2022
COURT FILE NO.: 33-165775 and 33-165776
DATE: 2022/11/18
COURT FILE NO. 33-165775
ONTARIO
SUPERIOR COURT OF JUSTICE
(IN BANKRUPTCY AND INSOLVENCY)
IN THE MATTER OF THE BANKRUPTCY OF MARTHA LORRAINE BEACH, a.k.a. MARTHA BEACH, OF THE VILLAGE OF INVERARY IN THE COUNTY OF SOUTH FRONTENAC, IN THE PROVINCE OF ONTARIO
COURT FILE NO. 33-165776
ONTARIO
SUPERIOR COURT OF JUSTICE
(IN BANKRUPTCY AND INSOLVENCY)
IN THE MATTER OF THE BANKRUPTCY OF JONATHAN GARY BEACH, a.k.a. JOHNATHAN GARY BEACH, OF THE VILLAGE OF INVERARY IN THE COUNTY OF SOUTH FRONTENAC, IN THE PROVINCE OF ONTARIO
REASONS FOR JUDGMENT
Ryan Bell J.
Released: November 18, 2022
[^1]: See Canadian Western Trust Company v. 1324789 Ontario Inc., 2020 ONSC 810, aff’d Heliotrope Investment Corporation v. 1324789 Ontario Inc., 2021 ONCA 589, 462 D.L.R. (4th) 731 (“Heliotrope, C.A.”), at para. 17.
[^2]: Heliotrope, C.A., at para. 10.
[^3]: Court file no. CV-18-167.
[^4]: Heliotrope, C.A., at para. 10, Court file no. CV-18-178.
[^5]: Heliotrope, C.A., at para. 11.
[^6]: Heliotrope, C.A., at para. 12, Court file no. CV-20-84558.
[^7]: Court file nos. CV-18-201, CV-19-239, and CV-19-240.
[^8]: Court file no. CV-21-268.
[^9]: Affidavit of Gary Beach, at para. 55. Heliotrope acknowledges in its factum, at para. 53, that the improvident sales action and the application for an accounting have been commenced.
[^10]: R.S.C., 1985, c. B-3.
[^11]: 1940 CanLII 52 (SCC), [1941] S.C.R. 35, at para. 9.
[^12]: 2005 CanLII 35786 (ON SC), 16 C.B.R. (5th) 130 (ON SC).
[^13]: (1982), 1992 CanLII 8602 (ON SCDC), 90 D.L.R. (4th) 218 (Ont. Gen. Div.) (Bkcy.).
[^14]: (1979), 30 C.B.R. (N.S.) 141.
[^15]: Other costs awards against Martha and Gary personally were made following the date of the bankruptcy applications.
[^16]: Court file no. DC-054/21.
[^17]: (2008), 2008 CanLII 32310 (ON SC), 45 C.B.R. (5th) 300 (ON SC).
[^18]: (2003), 2003 CanLII 64234 (ON SC), 45 C.B.R. (4th) 13 (ON SC).
[^19]: 2011 ONSC 6598, 38 C.P.C. (7th) 183.
[^20]: 2013 ONSC 1622, 307 O.A.C. 56 (Div. Ct.).
[^21]: Heliotrope, C.A., at para. 78.
[^22]: Canadian Western Trust Company v. 1324789 Ontario Inc., 2019 ONSC 5948, at paras. 8–9.
[^23]: Heliotrope Investment Corporation v. 1324789 Ontario Inc. et al., 2021 ONSC 7688.
[^24]: (1992), 1992 CanLII 7417 (ON SC), 12 C.B.R. (3d) 302 (Ont. Gen. Div.).
[^25]: 2013 ABQB 151.
[^26]: 2007 MBQB 268, [2008] 2 W.W.R. 731.
[^27]: 2021 ONSC 7986, 95 C.B.R. (6th) 73, aff’d Medcap Real Estate Holding Inc. (Re), 2022 ONCA 318, 468 D.L.R. (4th) 253 (“Medcap Real Estate (Re), C.A.”).
[^28]: Cross-examination of Gary Beach, at Q. 95.
[^29]: (1975), 1975 CanLII 667 (ON SC), 9 O.R. (2d) 240 (Ont. Bkcy.), at para. 10.
[^30]: 2015 ONSC 277, 23 C.B.R. (6th) 126.
[^31]: 2003 ABCA 365, 46 C.B.R. (4th) 189.
[^32]: (1975), 20 C.B.R. (N.S.) 27 (Ont. S.C.).
[^33]: 2011 BCSC 1268.
[^34]: 2002 BCSC 312, 32 C.B.R. (4th) 200.
[^35]: (1982), 41 C.B.R. (N.S.) 173 (Ont. S.C.).
[^36]: 55 C.B.R. (N.S.) 183 (Ont. Bkcy.), aff’d (1985), 58 C.B.R. (N.S.) 266 (Ont. C.A.).
[^37]: Under r. 20.08 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.
[^38]: Canadian Western Trust Company, at para. 58.
[^39]: (2008) 2008 CanLII 11046 (ON SC), 41 C.B.R. (5th) 94 (ON SC).
[^40]: (1986), 58 C.B.R. (N.S.) 255 (Ont. S.C.).
[^41]: Heliotrope, C.A., at para. 78.
[^42]: See Heliotrope, C.A., Appendix.
[^43]: Heliotrope, C.A., at para. 78.
[^44]: 1324789 Ontario Inc. v. Marshall et al., 2020 ONSC 4651, at paras. 6(b) and (d).