Court File and Parties
Court File No.: BK-23-2907255-0031 Date: 2024-12-02 Superior Court of Justice – Ontario Commercial List
Re: IN THE MATTER OF THE BANKRUPTCY OF JOSE LAVA SUGUITAN OF THE CITY OF TORONTO, IN THE PROVINCE OF ONTARIO
Before: Penny J.
Counsel: Daniel Litsos and Howard Manis, for the Trustee, MSI Spergel Frank Spizzirri, Special Counsel for the Trustee Sarah Morrison, on her own behalf Jose Lava Suguitan, Bankrupt, on his own behalf
Heard: November 25, 2024
Endorsement
Overview
[1] msi Spergel Inc. is the licensed insolvency trustee charged with the administration of the bankrupt estate of Jose Lava Suguitan (the “Bankrupt”). The Bankrupt was deemed to have made an assignment in bankruptcy on March 3, 2023.
[2] The Trustee applies under s. 96(1)(b)(ii) of the Bankruptcy and Insolvency Act (the "BIA") for a declaration that the Bankrupt’s August 15, 2018 transfer of his interest in a Florida Property to his wife, Sarah Morrison, was a transfer at undervalue and therefore void. The Trustee also seeks an order that Ms. Morrison pay to the Trustee $250,000 (USD), representing the purchase price on her subsequent sale of that property in 2020.
[3] Under s. 96(1)(b)(ii), the court may declare that a transaction at undervalue is void if three preconditions are met:
(a) the transferee was not dealing at arms length with the debtor; (b) the transfer occurred within five years before the date of bankruptcy; and (c) the transfer was intended by the debtor to defraud, defeat or delay a creditor.
Transfer at Under Value
[4] Section 2 of the BIA defines a transfer at undervalue to mean the “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”.
[5] The property in issue is in Florida: 17941 Bonita National Blvd., # 318, Bonita Springs, FL 34135-8674. The evidence establishes, and I find, that:
- the Florida Property was acquired in 2015 by both the Bankrupt and Ms. Morrison;
- title to the Florida Property vested in both their names at the time of purchase;
- while it is not entirely clear from the documents filed what the purchase price was, the Florida Property was insured by the title insurer in 2015 for $204,694. I find that this represents the purchase price in 2015;
- the Bankrupt transferred his interest in the Florida Property to Ms. Morrison on August 15, 2018 for $10; and
- Ms. Morrison sold the Florida Property in 2020 for $250,000 and received net proceeds of $234,680.36.
[6] I will address the nature of the interest in the Florida Property that the Bankrupt transferred to Ms. Morrison in 2018 later in these reasons, but, by any measure, the value of the transferred Florida Property in 2018 was conspicuously less than fair market value. Thus, the transfer was indisputably at undervalue.
Non-Arms’ Length Parties
[7] Persons are related to each other if they are individuals connected by blood, relationship, marriage, common-law partnership or adoption. Ms. Morrison admits that she was married to the Bankrupt at the time of the transfer (they remain husband and wife today), thereby satisfying the condition that they are related parties under to the BIA.
[8] Subsection 4(5) of the BIA states that persons who are related to each other are deemed not to deal with each other at arm’s length while so related. For the purpose of ss. 95(1)(b) or 96(1)(b), these persons are, in the absence of evidence to the contrary, deemed not to deal with each other at arm’s length. There is no evidence to the contrary. Thus, it is clear that the parties to the transfer of the Florida Property were not dealing at arms’ length.
Within Five Years of the Date of Bankruptcy
[9] The Bankrupt was deemed to have made an assignment in bankruptcy on March 3, 2023. The impugned transfer of the Florida Property took place on August 15, 2018. Thus, the transfer took place within five years prior to the bankruptcy.
Intent to Defraud, Defeat or Delay Creditors
Overview
[10] The final requirement for the application of s. 96 is the intent to defraud, defeat or delay creditors. This is the issue on which the dispute between the parties focussed and upon which the outcome of the Trustee’s motion principally turns.
[11] The Trustee maintains that the Bankrupt knew he was in financial trouble prior to the transfer; he had already been sued by two investors and within a matter of months, was subject to many additional investor claims. The Trustee maintains that the intent to defraud, defeat or delay creditors should be inferred from the surrounding circumstances, which reveal the existence of a number of the “badges of fraud”.
[12] Ms. Morrison maintains that the transfer was made for personal and family financial planning purposes which had nothing to do with any actual or pending financial troubles and/or lawsuits against her husband.
Legal Framework
[13] Section 96(1)(b)(ii) provides that if the criteria discussed in paras. 4 to 9 above are satisfied, a transaction my be set aside if: (A) the transferor 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. Options (A) and (B) in s. 96(1)(b)(ii) are clearly disjunctive. It is (B), whether the debtor intended, by the transfer, to “defraud, defeat or delay” his creditors, which is relevant to this case.
[14] Whether the debtor intended to defraud, defeat, or delay a creditor is a question of fact to be decided based on all the circumstances that existed at the time of the transfer: Urbancorp Toronto Management Inc. (Re), 2019 ONCA 757, at para. 53; Montor Business Corp. (Trustee of) v. Goldfinger, 2016 ONCA 406, 36 C.B.R. (6th) 169, at para. 72.
[15] Because it is often difficult to adduce evidence of a debtor’s subjective intent, the intent requirement is usually proved through evidence of “badges of fraud”. Badges of fraud are suspicious circumstances from which a court may infer the debtor’s intent to defraud, defeat, or delay a creditor (Urbancorp, at para. 52; Montor, at para. 72). The badges of fraud approach to inferring a debtor’s intent to defraud creditors dates back to Twyne’s Case in 1601 (Wood (2018), at p. 24; Twyne’s Case (1601), 3 Co. Rep. 80 b, 76 E.R. 809: see Aquino v. Bondfield Construction Co., 2024 SCC 31.
[16] Case law has recognized the following non-exhaustive examples of badges of fraud:
(a) the debtor had few remaining assets after the transfer; (b) the transfer was made to a non-arm’s length party; (c) the debtor was facing actual or potential liabilities, was insolvent, or was about to enter a risky undertaking; (d) the consideration for the transaction was grossly inadequate; (e) the debtor remained in possession of the property for their own use after the transfer; (f) the deed of transfer had a self-serving and unusual provision; (g) the transfer was secret; (h) the transfer was made with unusual haste; and (i) the transaction was made despite an outstanding judgment against the debtor: Aquino at para. 45.
[17] The badges of fraud represent evidentiary rules developed over time which, when considered in all the circumstances, may enable the court to make a finding unless the proponents of the transaction can explain away the suspicious circumstances. The legal or persuasive burden to prove the case remains on the applicant throughout. Nevertheless, the applicant may raise an inference of fraud sufficient to shift the evidentiary burden to the respondent if the plaintiff can establish that the transaction has characteristics which are typically associated with fraudulent intent. Proof of one or more of the badges of fraud will not necessarily compel a finding for the applicant but they may raise a prima facie evidentiary case which it would be prudent for the defendant to rebut. In such circumstances, there is an evidentiary onus on the defence to adduce evidence showing an absence of fraudulent intent, failing which the respondent risks having an adverse inference of fraudulent intent drawn from the surrounding circumstances: Indcondo v. Sloan, 2014 ONSC 4018 at para. 53, aff’d 2015 ONCA 752.
[18] The transfer of property to a person in a close relationship is itself a badge of fraud. In such cases, the testimony of the parties as to their subjective intent must be scrutinized with care and suspicion. It will be seldom that such evidence can be safely acted upon as sufficient on its own. In cases involving a transfer to near relatives, as matter of prudence, the court should look for corroborative evidence of the bona fides of the transaction: Indcondo, para 56.
Analysis
Is the Transfer Void Under s. 96(1)(b)(ii)?
[19] I start with the observation that it is the transferor’s intent, not the intent of the transferee, which determines the outcome. While evidence of the transferee’s intent may be relevant, it is only relevant in so far as it may cast light on the key question – the intent of the transferor.
[20] The principal factors relied on by the Trustee in this case are:
(a) the transfer of the Florida Property was made to Ms. Morrison, the Bankrupts wife and a non-arm’s length party; (b) the Bankrupt continued after the transfer to make use of the Florida Property as his own; (c) the consideration paid by Ms. Morrison to the Bankrupt for the Florida Property was grossly inadequate when compared to the acquisition price and the net proceeds of sale Ms. Morrison received upon disposition of the Florida Property; and (d) to the Bankrupt’s knowledge, there were significant actual and potential liabilities facing the Bankrupt at the time of the transfer, namely up to ten court actions involving claims in the millions of dollars in which he was named as a defendant.
[21] Proof of the first three “badges” is not in dispute. There is no question that the transfer of the Bankrupt’s interest in the Florida Property was to a closely related person – his wife. There is also no question that the Bankrupt’s interest was worth considerably more than $10. Likewise, both the Bankrupt and Ms. Morrison continued to make use of the Florida Property after the transfer.
[22] The dispute is over: a) whether the transfer was made with knowledge of potentially serious financial consequences due claims by clients of the Bankrupt for the recovery of investments they made by way of loans to various real estate development projects as a result of recommendations made by the Bankrupt; and (b) whether this evidence is sufficient, together with the other relevant surrounding circumstances, to infer an intent to defraud, defeat or delay the Bankrupt’s creditors.
[23] The Bankrupt was an investment advisor. His company, Sugi Financial, was an investment firm providing private financial advisory services to client investors. The Bankrupt introduced some of his clients to an investment, structured as a loan, in various real estate development projects owned by Hetti Group Inc. The Bankrupt’s clients did not receive the value they expected and wanted their loans repaid. The loans were never repaid.
[24] Particular reliance is placed by the Trustee on two actions bearing court file numbers CV-18-00000246-0000 (Pearl Tumandao claiming $500,000) and CV-18- 00601380-0000 (Betty Snell & Dwayne Snell claiming $429,000) which were commenced prior to the date the transfer of Florida Property occurred. Demands for the return of their investments were made by some of the Bankrupt’s client as early as October 2017 and at least formal demand was made in April 2017. In addition, on July 13, 2018, Betty and Dwayne Snell successfully obtained leave to register certificates of pending litigation against title to three properties, one of which was owned by the Bankrupt at the time. This occurred just over a month before the Bankrupt transferred his interest in the Florida Property to Ms. Morrison.
[25] Ultimately, the Bankrupt was named as a defendant in ten actions totalling millions of dollars. It was the Bankrupt’s exposure to claims for damages in these actions that became the main driver for the Bankrupt’s filing of his notice of intention under the BIA. The bankruptcy was deemed to have occurred on March 3, 2023 when the Bankrupt failed to file a cash flow statement or a proposal within the required time under the BIA. The claims in the Bankrupt’s estate are roughly:
- $1.3 secured; and
- $2.7 million unsecured.
[26] In essence, the Trustee argues that by the time of the transfer of the Bankrupt’s interest in the Florida Property to Ms. Morrison, he was aware that demands had been and were being made against him for the loss of his clients’ investments, at least two actions had been commenced against him claiming significant damages for various breaches of duty and breaches of contract and, in one case, a certificate of pending litigation had been obtained by two of the plaintiffs against a property that he owned.
[27] The record shows that the Bankrupt was not entirely forthcoming or co-operative with the Trustee in the disclosure of information when these proceedings began. The Trustee was required to obtain two orders from Associate Judge Rappos against the Bankrupt for disclosure of information and documentation.
[28] The Bankrupt filed no evidence and was not examined in connection with this application. There is material in the record filed by the Bankrupt in connection with a claim against him for the costs of the motions before Associate Judge Rappos, however, which touches on some of issues in this application. [1]
[29] Ms. Morrison filed an affidavit and was cross examined. She also filed a factum. The evidence in opposition to the Trustee application comes entirely from Ms. Morrison by way of her affidavit and cross examination.
[30] Ms. Morrison, in her affidavit and factum, makes, in essence, five points:
- the Florida Property was primarily purchased because of her health problems
- the Bankrupt was only placed on title because the home owners’ association required it in order for the Bankrupt to be able to access community amenities (such as the golf course)
- the Bankrupt held title to other properties and no attempt was made to transfer title for those properties to Ms. Morrison
- the Bankrupt had a stroke in 2018. He no longer needed access to the amenities, so they decided to transfer his interest in the Florida Property to Ms. Morrison
- this decision was made strictly as part of their ongoing family planning, consistent with a “mutual agreement regarding marital property”. This agreement was to the effect that certain properties, including the Florida Property, would remain in Ms. Morrison’s name to provide stability and security for our family. This decision was not motivated by any intent to shield assets from creditors.
[31] Ms. Morrison relies on cases such as Indcondo and Royal Bank of Canada v. Clarke, 2009 BCSC 481 for the proposition that transfers aligned with family agreements are legitimate, even within the 5 year period, provided they lack the relevant indicia of fraud. Ms. Morrison submits that the Bankrupt’s transfer of his interest in the Florida Property to her was “part of a legitimate family plan, consistent with marital, health, and long-term planning considerations”.
[32] I am unable to accept these arguments. There is no evidence supporting or corroborating the alleged mutual agreement regarding marital property. In any event, on her own evidence, Ms. Morrison was not the only owner upon acquisition; she shared ownership with her husband. They did this so that the Bankrupt could benefit from the use of the Florida Property and the associated amenities.
[33] I am also unable to agree that because the Bankrupt did not attempt to prefer the interests of his wife over the interests of his creditors by transferring all of his properties into his wife’s name, this shows that he did not intend to prefer the interests of his wife over his creditors regarding the transfer of the Florida Property. It simply does not logically or rationally follow.
[34] I agree with Ms. Morrison that transactions which are done for legitimate family financial planning, even within the 5 year period, are not necessarily void. But, as Ms. Morrison concedes in her written evidence and submissions, the critical issue is the question of intention at the time of the transfer, which must be inferred from the evidence of the surrounding circumstances. The two central findings in Indcondo, for example, turn on this very point. One property was transferred at a time when the surrounding circumstances did not include the debtor’s knowledge of future claims and potential liabilities. The transfer was found not to be motivated by an intent to defeat creditors. Another property was transferred later, after the debtor had knowledge of pending claims and potential liabilities. This second transfer was found to have been motivated by an intent to defeat creditors and was ruled void.
[35] Similarly, in the Clarke case, Mr. Clarke transferred his one-half interest in real property to his wife while he remained indebted to the moving party in the sum of $146,649.25. The court acknowledged that couples commonly arrange their affairs so that family assets are not at risk to business creditors. There would have been no problem for the Clarkes had they originally purchased the property in Mrs. Clarke’s name alone for the reason of trying to keep their residence out of reach of Mr. Clarke’s potential or future creditors. The problem was, having purchased the property in their names jointly, the subsequent transfer of Mr. Clarke’s interest was at a time when there were known creditors. This engaged the “badges of fraud” analysis and enabled the court to conclude that: “The evidence is clear that the purpose of the transfer of Mr. Clarke’s one-half interest was to insulate his one-half share in the Property from creditors”: at para. 14.
[36] Here the evidence clearly establishes that the Bankrupt knew he was being sued for almost $1 million by at least two clients. In one of those cases, the plaintiffs obtained a certificate of pending litigation against a property owned by the Bankrupt. This was all before the transfer of his interest in the Florida Property. There is also circumstantial evidence that he was aware that other clients were also concerned and making demands for the return of their loan investments and that additional lawsuits would likely follow. These facts constitute a powerful indication that the timing of the Bankrupt’s transfer of his interest in the Florida Property to Ms. Morrison was motivated by an intention to prefer her interests over the interests of those who had asserted, or were likely to assert, significant claims against him for the loss of their investments. This inference has not been rebutted by the evidence and arguments presented in this case.
[37] For these reasons, I find that the transfer which took place on August 15, 2018, by which the Bankrupt transferred his interest in the Florida Property to Ms. Morrison, meets the preconditions set out in s. 96(1)(b)(ii) of the BIA and that the transfer is void.
What is the effect of voiding the transfer?
[38] The Trustee maintains that the transfer on August 15, 2018 shows only the Bankrupt as transferor and only Ms. Morrison as the transferee. On this basis, the Trustee maintains that the Bankrupt had a 100% interest in the Florida Property on August 15, 2018 and that he transferred that 100% interest to his wife. The Trustee therefore asks for an order that the full amount of the proceeds of transfer, $250,000, be found due and payable to the Trustee by Ms. Morrison.
[39] I am unable to agree with the Trustee’s argument on this issue.
[40] Firstly, the record clearly supports the conclusion that the Florida Property was acquired by both the Bankrupt and Ms. Morrison. The November 25, 2015 Special Warranty Deed names them both as Grantees. The accompanying title insurance report is addressed to both the Bankrupt and Ms. Morrison and the title insurance document itself clearly records that title in fee simple is vested in both the Bankrupt and Ms. Morrison and that the insureds are both the Bankrupt and Ms. Morrison.
[41] There is no evidence that ownership changed before the transfer on August 15, 2018.
[42] In the absence of any evidence to the contrary (of which there is none), I find that on the date of purchase, November 25, 2015, up to the day of the transfer on August 15, 2018, the Bankrupt and Ms. Morrison each owned an undivided half interest in the Florida Property.
[43] In the face of this finding, there can be no doubt that the transfer that took place on August 15, 2018 was only a transfer of the Bankrupt’s half interest. Ms. Morrison could not have been the transferee of the other half interest in the Florida Property because she already owned it and the Bankrupt did not.
[44] Accordingly, I find that the “transaction” that is void is restricted to the transfer of the Bankrupt’s half interest in the Florida Property.
[45] I also find that, although Ms. Morrison sold the Florida Property in 2020 for $250,000, she only received net proceeds of $234,680.36. Accordingly, the amount for which Ms. Morrison is liable to account as a result of the void transaction is half of the net proceeds: $117,340.18.
Costs
[46] The Trustee succeeded in establishing that the 2018 transfer was void but did not succeed in establishing that the Bankrupt transferred a 100% interest to Ms. Morrison. The Trustee is entitled to costs. Having regard to the relevant factors, including considerations of proportionality and what the losing party might reasonably expect to pay, I award all inclusive partial indemnity costs to the Trustee of $5,000.
Penny J. Date: December 2, 2024
Footnote
[1] The Bankrupt maintained in this submission that none of the claims were known to him before he transferred his interest in the Florida Property. As set out in these Reasons, this submission is demonstrably false.