Court File and Parties

COURT FILE NO.: BK-23-02783327-0032 DATE: 20230918 ONTARIO - SUPERIOR COURT OF JUSTICE – IN BANKRUPTCY AND INSOLVENCY

IN THE MATTER OF THE BANKRUPTCY OF IAN ROSS McSEVNEY, an individual residing in the Town of Ancaster, in the Province of Ontario

RE: BDO Canada Limited, Trustee in Bankruptcy AND: Elaine McSevney, Debtor

BEFORE: Peter J. Osborne J.

COUNSEL: Gregory Azeff and Monica Fahiem, for the Trustee in Bankruptcy, BDO Canada Limited Sheridan L. Smith, for the Debtor, Elaine McSevney

HEARD: June 2, 2023

Endorsement

The Motion

1. BDO Canada Limited, in its capacity as Trustee in Bankruptcy of Altmore Mortgage Investment Corporation (“Altmore”) and Ian Ross McSevney (“McSevney”), seeks an order:

   a. declaring that the sale of a property by McSevney to a corporation owned and controlled by his sister, Elaine McSevney (“Elaine” or “Elaine McSevney”), was a “transfer at undervalue” as contemplated in section 96 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”); b. declaring that Elaine McSevney was a person privy to the transfer at undervalue; and c. directing Elaine McSevney and her corporation to pay to the Trustee an amount equal to the difference between the value of the property and the amount of the purchase price paid.

2. The Trustee relies principally on the Second Report of the Trustee which sets out in detail the particulars of the relevant transactions and related facts, together with the Supplement and Second Supplement to the Second Report. In addition, it relies on the transcript of the s. 163 examination of Elaine McSevney dated January 24, 2022 and the expert appraisal report of Mr. Bill Boros of iAppraise Inc.

3. The Respondent, Elaine McSevney, disputes that there was any transfer at undervalue. She relies on her affidavit sworn April 11, 2023, her supplementary affidavit sworn April 28, 2023 (together with attached “Drive-by Residential Appraisal Report” of Bruce Rae of Rae Appraisals and Consultants), and the affidavit of Bruce Rae sworn May 24, 2023.

Background and Chronology

4. Altmore purported to operate as a mortgage investment corporation. McSevney is the exclusive directing mind of Altmore and its affiliates. It successfully solicited investment capital of millions of dollars from investors purportedly for the purpose of investing in mortgage portfolios. The investors were not repaid.

5. BDO was initially appointed as interim receiver by order of Dunphy, J. dated May 25, 2021, with investigative powers. The receivership was expanded beyond Altmore and affiliates to include McSevney on June 19, 2021. The receiver was subsequently discharged as there were insufficient funds to continue its mandate.

6. Dunphy, J. observed in his Endorsement dated May 25, 2021 that, at that time, McSevney confirmed that the business of Altmore was not active and that he had been trying then for almost two years to find a way to wind up the company and pay out the investors. He did not, however, have any concrete plan as to how to do so.

7. Indeed, Dunphy, J. granted the interim receivership order and denied an adjournment request from McSevney who submitted that he was looking to retain counsel and possibly apply for Legal Aid. Dunphy, J. determined that the adjournment request should be denied and that further delay in securing the books and records and whatever revenue there was, would be detrimental to the investors. He observed that:

   [T]he record indicates that McSevney has been fending off investor inquiries for almost two years and it has been almost that long since any payments were made on the outstanding investments … What is clear to me is that … funds are coming in regularly but none have gone out to investors in some time … No reporting of material financial or corporate information has been made for two plus years … The situation cries out for the books and records to be secured and examined and for what funds and assets there are to be brought under court control until further order.

8. BDO was then appointed as full Receiver over McSevney, Altmore and related entities on November 8, 2021 by order of Conway, J.

9. The evidence of the Receiver is to the effect that, while the complete absence of business records has made it challenging to quantify accurately the total amount of such investments, as well as the use of the funds raised, it appears that gross investments in Altmore totalled between $4.53 million and $6.26 million.

10. On November 18, 2021, the Receiver filed assignments in bankruptcy in respect of Altmore and McSevney. BDO was then appointed Trustee.

11. The Trustee initially was not aware of any significant asset of McSevney other than his interest in a property located at Unit 17 -81 Valridge Drive, Ancaster, Ontario (the “Unit 17 Property”). The Unit 17 Property was registered in the names of McSevney and his spouse, Christie Ward-McSevney.

12. In December 2021, the Receiver learned that McSevney and his spouse in fact did not reside in the Unit 17 Property, which was occupied by a third party tenant. The tenant vacated the Unit 17 Property as of February 2, 2022, and it was sold by the Trustee.

13. However, in the course of its inquiries into Unit 17, the Trustee learned that McSevney had in fact been residing in another unit at the same location, Unit 9, although he had apparently moved out in early December, 2021.

14. Upon investigation, the Trustee learned that Unit 9 was owned by 12195585 Canada Inc. (“585”). The Trustee obtained a corporation profile report for 585 and upon further investigation learned that it was controlled by McSevney’s sister, Elaine.

15. The Parcel Register for Unit 9 reflects that McSevney sold Unit 9 to 585 on August 4, 2020 for $530,000.

16. Notwithstanding the sale of Unit 9 by McSevney to the company controlled by his sister, 585, he continued to reside at Unit 9 until early December, 2021.

17. 585 sold Unit 9 to an unrelated third party on December 20, 2021 for a purchase price of $700,000.

Transfers at Undervalue

18. The Trustee moves under s. 96(1) of the BIA which provides that the court may declare that a transfer at undervalue is void as against the trustee, order that a party to the transfer or any other person who is privy to the transfer pay to the estate the difference between the value of the consideration received by the debtor and the value of the consideration given by the debtor, if:

    b. the party was not dealing at arm’s length with the debtor and i. the transfer occurred within one year before the date of the initial bankruptcy event, or ii. the transfer occurred within five years before the date of the initial bankruptcy event and a. the debtor was insolvent at the time of the transfer or was rendered insolvent by it, or b. the debtor intended to defraud, defeat or delay a creditor.

19. Section 2 of the BIA defines transfer at undervalue as: “a disposition of property or provision of services for which no consideration is received by the debtor or for which the consideration received by the debtor is conspicuously less than the fair market value of the consideration given by the debtor”.

20. Pursuant to s. 96, a “person who is privy” is a person who is not dealing at arm’s length with a party to a transfer and, by reason of the transfer, directly or indirectly, receives the benefit or causes a benefit to be received by another person. A privy includes a person who has knowledge of the transaction for less than fair market value and benefits either directly or indirectly from it. The term “privy” is broad enough to include, in appropriate cases, individuals who are the sole principals of corporate defendants. [1]

21. As recognized by the Supreme Court of Canada, the primary purpose of s. 96 of the BIA is to reverse the effects of a transaction that stripped value from the estate of a bankrupt person with the result that it makes sense to adopt a more inclusive understanding of the word “privy”. [2]

The Relationship between Ian McSevney and Elaine McSevney

22. There is no issue that Elaine McSevney is McSevney’s sister. Section 4 of the BIA presumes that related parties are, in the absence of evidence to the contrary, not dealing with each other at arm’s length.

23. Elaine McSevney states in her affidavit that notwithstanding that McSevney is her brother, they have carried on “very independent lives since achieving adulthood” with the result that their relationship is arm’s length. She states that they have been self-employed in different industries, have never acted in concert without separate interests and that with respect to the impugned purchase, she was not influenced in her bargaining by anything other than her own self-interest.

24. I do not accept that submission and I find that the presumption created by s. 4 of the BIA is not rebutted. I find that Elaine McSevney was a privy of McSevney and was not dealing with him at arm’s length.

25. In the same affidavit on which she relies, Elaine McSevney states that in the summer of 2020, McSevney was experiencing “headwinds” in Altmore. She says she had supported Altmore for many years by way of personal loans totaling approximately $100,000.

26. Elaine McSevney states that, to further assist her brother, she offered to buy either Unit 9 or Unit 17, refinance it and make a further investment into Altmore. She says that rather than attempting to sell the rented unit, Unit 17, McSevney preferred to sell her Unit 9 to reduce expenses and focus on Altmore.

27. Elaine McSevney goes on to state in the affidavit that in addition to purchasing Unit 9, she also advanced another $40,000 “for the benefit of Altmore, which I believed at the time to be a worthwhile and viable enterprise”.

28. Elaine McSevney was examined by the Trustee on January 24, 2022 pursuant to s.163(1) of the BIA. That examination was challenging for the Trustee. First, Elaine McSevney advised the Trustee the night before the scheduled examination that she had been unaware of the examination and would not attend, and she did not do so. The examination was rescheduled and ultimately proceeded, resulting in numerous requests for documents and undertakings given. As of the date of this motion, she has neither produced all requested documents nor fulfilled the undertakings given on that examination.

29. On her s. 163 examination, Elaine McSevney gave evidence as to the following facts, among others (the transcript of the complete examination is attached to the Supplement to the Second Report as Appendix “D”):

    a. she knew little about the business of Altmore except that it had to do with mortgages; b. she had never invested in Altmore; c. she bought a property at 148 Blair Lane, Ancaster, Ontario to help her brother, so he could stay at that property as a renter. 148 Blair was a residential property previously owned by McSevney when he was at risk of losing that home due to power of sale proceedings commenced by a mortgagee; d. there was no lease with McSevney for his use of 148 Blair while Elaine McSevney owned it; e. McSevney continued to live in Unit 9 as he had previously done, following the sale to Elaine’s company, 585; f. there was no lease with McSevney for the use by him of Unit 9; g. Elaine McSevney bought Unit 9 because “the circumstances were, [McSevney] was struggling”; h. McSevney helped her obtain the private mortgages to acquire Unit 9; i. she purchased Unit 9 for a purchase price of $530,000; and j. as to the transactions between Elaine McSevney and Altmore, if she was “cash-strapped”, McSevney would send her money, and vice versa.

30. In my view, all of these facts (including the informal financial, loan and landlord/tenant relationships) are consistent with a non-arm’s-length relationship. Virtually all of the facts relevant to the nature of the relationship at the relevant time are inconsistent with the bald statement from Elaine McSevney that her relationship with her brother was distant and arm’s length. The facts simply do not support that statement.

31. In my view, my conclusion above that McSevney and Elaine McSevney had a non-arm’s-length relationship is consistent with that which has been described by this Court as a relationship in which there is no incentive for the transferor to maximize the consideration for the property being transferred in negotiations with the transferee. It addresses situations in which the economic self-interest of the transferor is, or is likely to be, displaced by other non-economic considerations that result in the consideration for the transfer failing to reflect the fair market value of the transferred property: Juhasz (Trustee of) v. Cordiero, 2015 ONSC 1781 at para. 41.

The Transfer and the Timing of the Transfer

32. There is no issue that the transfer was a disposition of property by McSevney and that it occurred on August 4, 2020 - the date of the sale by McSevney to 585. In her factum filed on this motion, Elaine McSevney submits that: “Elaine and the Trustee agree that Ian disposed of the Unit 9 Property on or around August 4, 2020”.

33. The initial bankruptcy event in this case occurred on June 19, 2021, on which date Dunphy, J. issued an order expanding the scope of the then existing interim receivership to include McSevney. That is within one year of the transfer.

Was McSevney Insolvent at the Time of the Transfer or Rendered Insolvent by It, or did McSevney intend to Defraud, Defeat or Delay a Creditor?

34. I find that McSevney was insolvent at the time of the transfer or rendered insolvent by it, for the reasons expressed above. Among other things, the mortgage was in arrears, property taxes were in arrears and McSevney’s company, Altmore, was in financial difficulty. In the words of Elaine McSevney herself, he was facing “headwinds” and “the circumstances were that he was struggling”. Dunphy, J. had already found in May 25, 2021 that Altmore had been fending off investors and had not repaid them for approximately two years. Elaine McSevney lent her brother money, permitted him to remain in Unit 9 following the transfer without a lease or rent payments, and assisted him financially.

35. In any event, I also find that McSevney completed the transfer with the intent to defraud, defeat or delay his creditors.

36. In my view, the intention to defraud, defeat or delay creditors on the part of McSevney is easily satisfied on the basis of the evidence here. That evidence is consistent with those indicia or badges of fraud that have been identified and recognized by this Court in Ernst & Young v. Aquino, 2021 ONSC 527 as including:

    (i) the conveyance transferred substantially all of the transferor's property; (ii) the transferor continued in possession and used the goods; (iii) the conveyance was secret; (iv) the conveyance was made in the face on ongoing legal proceedings; (v) the deed contained self-serving provisions; (vi) the deed gives the transferor a general power to revoke the conveyance; (vii) the deed contains false statements as to consideration; (viii) the consideration is grossly inadequate; (ix) there is unusual haste to make the conveyance; (x) some benefit is retained under the settlement; (xi) cash is taken in payment instead of a cheque; and (xii) a close relationship exists between the parties to the conveyance. [3]

37. As observed by the Court in that case, these badges serve an evidentiary function and can be viewed as circumstantial evidence that may cause a court to draw an inference of intent. Where a transaction displays one of the badges of fraud, this will usually be enough to establish the debtor’s illegal purpose unless the debtor can provide an innocent explanation. The existence of the badges of fraud creates a rebuttable presumption of the intention to defraud, defeat or delay creditors with the result that the onus is then shifted to those defending the transfer to adduce evidence to show the absence of fraudulent intent. [4]

38. In this case, several badges of fraud are present. They include the factors already referred to such as:

    a. McSevney continued to live in Unit 9 after the sale to 585; b. there was no lease agreement governing his continued occupancy, nor is there any clear evidence that he paid rent, regularly, in what amounts, or at all; c. the Parcel Register reflects $530,000 as the purchase price. So too does the land transfer affidavit sworn by Elaine McSevney at the time of the transfer; d. however, the evidence of Elaine McSevney was to the effect that the purchase price was in fact the materially lower amount of $398,469.10 and, moreover, that even that lower amount was paid through a combination of the retirement of mortgages and the payment of other expenses; e. the purchase price actually paid was inadequate and lower than the fair market value of the property (further discussed below); f. McSevney and Elaine McSevney are siblings and Elaine is the directing mind of 585; and g. notwithstanding that her affidavit evidence included the bald statement that she and her brother had lived separate lives as adults and had an arm’s-length relationship, I find this directly at odds with the objective evidence (mostly from Elaine herself) to the effect that when her brother McSevney was “cash-strapped” she helped him, and vice versa, resulting in various loans and advances, all in circumstances where there is a complete absence of any objective evidence of such advances suggesting their informality such as would be in a close relationship of a non‑arm’s-length nature. Such evidence might include loan agreements, evidence of repayments on a regular or any basis, the agreement as to interest rate, term for other factors. None of that is present here.

The Value of the Consideration Given (Property Title) and The Value of the Consideration Received (Purchase Price Paid)

39. The issue is whether the consideration received by the debtor was “conspicuously less than the fair market value of the consideration given by the debtor”.

40. The Supreme Court of Canada has held, (quoting with approval from Houlden and Morawetz, Bankruptcy and Insolvency Law of Canada (3rd ed., vol. 2 at p. 4-114.1), that in determining whether a difference in consideration is “conspicuously less than fair market value” and considering all relevant factors as required by the BIA, the court might consider, among other things: evidence of the margin of error in valuing the types of assets, any appraisals made and evidence of the parties’ honestly held beliefs as to the value of the assets in question, and other circumstances adduced in the evidence by the parties to explain the difference between the consideration received and fair market value. [5]

41. This matter is somewhat unusual and atypical in that the Trustee and the Respondent disagree on both the consideration actually paid and on the fair market value.

Consideration Actually Paid

42. The Trustee submits that the consideration actually paid was, according to the evidence of Elaine herself, $398,469.10. Elaine McSevney submits that the value of the consideration paid for the purposes of this motion should be no less than $530,000, the fair value she agreed with her brother, and the value that she swore as being accurate in her land transfer tax affidavit.

43. Moreover, she submits that the consideration was paid to McSevney effectively through a combination of prior advances and loans totaling $100,000 and a further advance of $40,000 given at the time of the closing of the purchase of Unit 9 by 585.

44. I pause to observe that there is no objective, let alone contemporaneous, written evidence of these loans such as agreements, term, regular payments etc. There is no evidence at all beyond the bald statement that they were made.

45. In any event, the Trustee has already factored the $40,000 advance into its calculation of the purchase price actually paid by 585. That calculation, set out at Appendix “C” to the Supplement to the Second Report is as follows: I am satisfied that the consideration actually paid was $398,469.10. I also observe that Elaine McSevney expressly agrees with this in her factum filed on this motion at para. 28: “Elaine and the Trustee agree that Ian disposed of the Unit 9 Property on or around August 4, 2020, when Ian received approximately $398 $469.10 as consideration from the Company for the Unit 9 Property.” [6] [emphasis added].

Fair Market Value

46. The Trustee submits that the fair market value should be determined to be somewhere between $530,000 and $700,000, the latter figure being the consideration paid when the property was sold to an arm’s‑length purchaser some 16 months after the impugned transfer.

47. Elaine McSevney submits that the fair market value as at the date of transfer should be $530,000, with the result that since she submits that this amount is also the value of the consideration paid, there was no transfer at undervalue and accordingly the TUV Amount is nil.

48. The Trustee has obtained comparative sales figures for similar properties to Unit 9 that occurred in and around August 2020 and concedes for the purposes of this motion that an accurate estimate of the fair market value of Unit 9 at and around the date of the sale in August 2020, is the amount that Elaine McSevney testified that she paid and which is reflected in her land transfer tax affidavit of $530,000. [7]

49. This is based on the Boros appraisal report attached as Appendix “A” to the Second Supplement which indicates an estimated value of $523,000 as at that date, an amount that the Trustee considers to be materially equivalent to the elected value of $530,000 used by Elaine McSevney for land transfer tax purposes.

50. The Trustee submits that this figure is evidence of the parties’ honestly held beliefs regarding the value of the assets in question (as required by the Supreme Court of Canada in People’s) and is “irrefutable evidence of [585’s] honestly held beliefs regarding the value of Unit 9 as of the date of the August 4, 2020 transfer”. The Trustee further submits that to the extent that the Respondent disagrees with their own reported purchase price in connection with the transfer, that “the Respondent purposely falsified legal sale documents and for that reason the Court should attribute little weight to the evidence adduced by them”.

51. As stated above, and in the alternative, the Trustee relies on the December 2021 sale price of $700,000 and submits that that sale price is a valid estimate of fair market value as at the date of transfer, for a number of reasons, including that:

    a. that sale price is the true measure of the actual fair market value of Unit 9 as of December, 2021; b. notwithstanding that that sale occurred 16 months after the August 4, 2020 transfer at issue, it serves as a strong reference point to inform the analysis of the competing appraisals, and is particularly relevant in the circumstances of this case where: i. McSevney continued to live at Unit 9 after the sale to 585; ii. the Court should infer that by the transfer, Elaine McSevney was assisting her brother with his continuous attempts to put his assets out of reach of his creditors; iii. McSevney and his sister Elaine McSevney were not parties dealing at arm’s length; iv. the August 2020 transfer to 585 was not the first time that Elaine McSevney had assisted her brother in this manner as she and/or her company had previously taken ownership of his personal residence to avoid loss of the home due to power of sale: the 148 Blair property; and v. the December 2021 sale price is the single best and most accurate measure of the actual value of Unit 9 as it is a true test of the property’s worth in the market.

52. For her part, Elaine McSevney relies on the retroactive Rae appraisal indicating an estimated value between $430,000 and $450,000 to support her submission that the fair market value should be the midpoint of $440,000.

53. In addition, Elaine McSevney submits that the increase in value of Unit 9 reflected in the sale price of $700,000 16 months later merely reflected the increase in the market generally and ought not to be taken as any confirmation that the purchase price represented a transfer at undervalue.

54. In my view, having considered all of the evidence (much of it conflicting), and balancing all of the factors described by the Supreme Court of Canada in People’s, the fair market value of Unit 9 as at August 4, 2020 is $530,000, and the consideration received by McSevney ($398,469.10) was conspicuously less than the fair market value of the consideration given by him (i.e., title to the property).

55. As stated above, $530,000 is the amount that Elaine McSevney testified she agreed with her brother as the purchase price and it is the fair market value reflected in the Parcel Register. It is the amount to which she swore, at the time, as representing the fair market value for the purposes of the land transfer tax affidavit. It is further corroborated by the retrospective appraisal obtained by the Trustee of Boros.

56. I reject the submission of Elaine McSevney that the fair market value should be $440,000, a figure supported only by the retrospective appraisal she commissioned of Rae, and an amount that is materially less than the amount she herself swore at the time to be the fair market value. That figure is simply not credible.

57. I also reject the characterization by Elaine McSevney of the $530,000 amount as being only “notional” for the reasons set out above. Her land transfer tax affidavit was not “notional”.

58. Equally, I reject the submission of the Trustee that the fair market value should be $700,000. While there is some significant attraction to that figure because it represents the only objective, arm’s-length, market evidence as to the value of Unit 9, in contradistinction to the multiple inconsistent statements of Elaine McSevney and what I have found to be the fraudulent intent of Ian McSevney, I am unable to conclude that the sale price realized in December, 2021 is accurate as at the date in question some 16 months earlier, given the complete absence of evidence as to the market appreciation of comparable properties during that 16 month period.

59. It follows, given my conclusion as to the consideration actually paid of $398,469.10, and my conclusion as to the fair market value as at August 4, 2020 of $530,000, the transfer from McSevney to 585 is a transfer at undervalue as defined in the BIA.

60. It also follows that the TUV Amount is the difference, being $131,530.90.

Conclusion and Disposition

61. A declaration is granted that:

    a. the sale of Unit 9 on August 4, 2020 by Ian McSevney to 585, a company controlled by Elaine McSevney, was a transfer at undervalue within the meaning of s. 96 of the BIA; and b. Elaine McSevney was a person privy to that transfer at undervalue.

62. Elaine McSevney and 585 are ordered and directed to pay to the Trustee the TUV Amount of $131,530.90.

63. The parties were not prepared at the conclusion of the hearing of this motion to address costs. I directed that they attempt to agree on at least the quantum of costs and advise the Court of that agreed quantum or of the fact that they were unable to agree.

64. Counsel for the parties advised the Court subsequently that they were unable to agree on costs and requested that they be permitted to address the issue in writing following the disposition on the merits.

65. Accordingly, the Trustee shall deliver submissions on costs, not to exceed three pages in length, together with its bill of costs, within 10 days of the date of this Endorsement. The Respondent shall deliver its submissions on costs, also not to exceed three pages in length, within 10 days thereafter.

66. Order to go in accordance with these reasons.

Osborne J.

[1] Bank of Montréal v. EL04 Inc., 2012 ONCA 80 at paras. 21 and 23 [2] Peoples Department Store Inc. (Trustee of) v. Wise, 2004 SCC 68 at para. 91 [3] Ernst & Young v. Aquino, 2021 ONSC 527 at para 153. [4] supra; at paras. 154, 155 and 160. [5] Peoples’ Department Stores Ltd., (1992) Inc. Re., 2004 SCC 68 at para. 86 [6] I note for completeness that there is a difference of one dollar in this amount referred to in various places in the materials (i.e., $398,469.10 or $398,468.10). In my view, this delta of one dollar is of no consequence. [7] In its Supplemental Factum filed on this motion, the Trustee puts it this way: "the purchase and sale price explicitly chosen by the Respondent and included in the purchase and sale documents (i.e., $530,000) is a reasonable approximation of the fair market value of the Unit 9 Property as at that date”. See para. 20.