Goodman Rosen Inc. v. Kwan

Goodman Rosen Inc. v. Kwan Court Supreme Court Date 2003-08-06 Citation 2003 NSSC 169 Docket 173730 Judge/Registrar/Adjudicator McDougall, Glen G. (Honourable Justice) Document Type Decision Decision Content IN THE SUPREME COURT OF NOVA SCOTIA Citation: Goodman Rosen Inc. v. Kwan, et al, 2003NSSC169 Date: 20030806 Docket: 173730 Registry: Halifax Between: Goodman Rosen Inc., Trustee in Bankruptcy of the Estate of Pentagon Investments Limited Applicants v. Joyce Kwan, Pentagon Investments Limited, and 3011569 Nova Scotia Limited Defendants Before: The Honourable Justice Glen G. McDougall Heard: October 3, 2002 Written Submissions: October 11, 2002 October 18, 2002 Counsel: Victor J. Goldberg, Esq. David G. Coles, Esq. McDougall, J.: [1] An originating notice (application inter partes) was initially filed by PriceWaterhouseCoopers Inc., the Trustee in Bankruptcy of the Estate of Pentagon Investments Limited, on September 6, 2001. The defendants included James Chen, May Yin Chen, Joyce Kwan, Pentagon Investments Limited and 3011569 Nova Scotia Limited. [2] An amended originating notice (application inter partes) was subsequently filed by the Trustee in Bankruptcy on March 6, 2002 wherein James Chen and May Yin Chen were dropped as defendants. [3] Subsequent to this, a consent order was issued by this honourable court on the 26th day of September, 2002, substituting Goodman Rosen Inc., as Trustee of the Estate of Pentagon Investments Limited (the “Trustee”), in the place of PriceWaterhouseCoopers Inc. consistent with an earlier order of the Acting Registrar of the Supreme Court of Nova Scotia in Bankruptcy dated the 26th day of April, 2002. [4] The Trustee seeks an order: 1. Declaring that the November 20, 1999 transfer of property located at 930 Young Street, Halifax, Nova Scotia, from Pentagon Investments Limited to 3011569 Nova Scotia Limited was fraudulent and void as against the Trustee pursuant to the provisions of the Assignments & Preferences Act, R.S.N.S. 1989, c. 25 and/or the Statute of Elizabeth (1571), 13 Eliz, c. 5; 2. Declaring that the transfer of the property is fraudulent and void as against the Trustee as a settlement within the provisions of Section 91 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3; 3. Prejudgment interest; 4. Costs; and 5. Any further or additional Orders which this Honourable Court deems appropriate and necessary in the circumstances. [5] The defendants, Joyce Kwan (“Kwan”) and 3011569 Nova Scotia Limited (the “Company”) contended that the conveyance of the property at 930 Young Street [sic - should be Young Avenue] Halifax, Nova Scotia from Pentagon Investments Limited (“Pentagon”) to the Company was to a bona fide purchaser for value without notice and that the application should be dismissed with costs to the defendants on a solicitor/client basis. BACKGROUND [6] On November 1, 1999 Pentagon made an Assignment in Bankruptcy. PriceWaterhouseCoopers Inc. was appointed as Trustee on November 3, 1999. Prior to this, on November 20, 1997, Pentagon conveyed three condominium units located at 930 Young Avenue, Halifax, Nova Scotia to the Company. The Company was incorporated by Kwan solely for the purpose of acquiring title to these properties. She was the sole officer and director of the Company. The purchase price for the three condominium units was $845,000.00. The Company paid the purchase price, according to the statement of adjustments appended as exhibit “C” to the affidavit of the Trustee, Mr. Mark Rosen (also found at exhibit 1, tab 13 of the applicant’s book of exhibits), as follows: Date: November 19, 1997 Statement of Adjustments Location: 930 Young Avenue From: Pentagon investments Limited To: 3011569 Nova Scotia Limited COST OF PROPERTY TO PURCHASER: Purchase Price................. $845,000.00 Taxes 1997......................... $0.00 ............................................................................................................... $845,000.00 CREDITS TO PURCHASER: Deposit................................................................... $0.00 Taxes 1997 12.477.12 )365x233........................... $7,963.94 Arrears of taxes..................................................... $12,329.70 Interest.................................................................... $1,802.47 Recording Release................................................. $42.00 Tax Certificates (3@$86.25)............................... $258.75 Promissory Note ($325,000 x 1.43).................... $464,750.00 Promissory Note ($100,000 x 1.43).................... $143,000.00 Payout of Credit Union............................ $207,521.68 Rent Paid................................................................ $2,053.37 Total Credits....................................................... $839,721.91 Balance to Close:..................................................... $5,278.09 Total:....................................................................................................... $845,000.00........... [7] The two promissory notes included in the statement of adjustments were for advances made by Kwan to Pentagon by way of four separate instalments as follows: July 8, 1994:................................ $ 75,000.00 USD August 26, 1994:......................... $200,000.00 USD September 12, 1994:................... $ 50,000.00 USD July 29, 1997:.............................. $100,000.00 USD Total:........................................... $425,000.00 USD [8] Pentagon gave promissory notes to Kwan, first on September 12, 1994 for $325,000.00 USD and the second on July 29, 1997 for $100,000.00 USD. The Trustee questioned the timing of these promissory notes, however, there was no conclusive evidence presented to convince me that the promissory notes were not issued on the dates indicated. The promissory notes did not provide a date certain for repayment, however, they did state that they were non-interest bearing. [9] The advances were made to James Chen’s personal account at the Bank of Montreal, Spring Garden Road, Halifax, Nova Scotia and not to the account of Pentagon. Letters from Kwan to James Chen c/o Pentagon dated September 12, 1994 and July 29, 1997 suggest that the funds were intended as loans to Pentagon. The evidence of Kwan was that she was sending the funds at the request of her father, James Chen, to assist in the repair of an apartment building owned by Pentagon at Old Sambro Road, Halifax. This building had been damaged by fire and in order to access insurance funds, the repairs had to be carried out first and since Pentagon could not finance the repairs out of operations, Kwan agreed to help out her parents who were the owners of Pentagon. Other than the promissory notes she did not receive any other form of collateral security from Pentagon or her parents. [10] It is clear from the evidence on discovery of James Chen and his son, Jason Chen, who worked with his father in running the business, that Pentagon was having financial problems at the time of the conveyance of the condominium units to the Company. Further evidence of Pentagon’s financial woes is contained in the annual financial statements produced during this period showing annual losses from as far back as 1993, up to, and including, 1997. At the time of the sale of the condominium units to the Company, Pentagon was in arrears of payment on property taxes as well as to a host of trade creditors. Shortly after the sale to the Company, James and May Chen sold their shares in Pentagon to George Armoyan for $10.00 and the balance of the shareholder loans were acquired by Mr. Armoyan for substantially less than book value on January 15, 1998. In short order, all of the remaining properties of Pentagon were foreclosed upon and between February 2, 1998 and October 10, 1998, judgments were granted in favour of various creditors against Pentagon in an amount approaching nearly $3,000,000.00. Obviously this did not happen in the few short months after Pentagon sold the condominiums to the Company. This was years in the making and certainly should have been obvious to the owners of Pentagon when it arranged for the sale of 930 Young Avenue to their daughter’s company. DISCUSSION (1) The Assignments and Preferences Act, R.S.N.S., 1989, c. 25 [11] The Assignments and Preferences Act, R.S.N.S. 1989, c. 25 states at 4(1): Void property transfer 4 (1) Every transfer of property made by an insolvent person (a) with intent to defeat, hinder, delay or prejudice his creditors, or any one or more of them; or (b) to or for a creditor with intent to give such creditor an unjust preference over other creditors of such insolvent person, or over any one or more of such creditors, shall as against the creditor or creditors injured, delayed, prejudiced or postponed, be utterly void. Insolvent person is defined in section 2(a) of the Act as: Interpretation 2 In this Act, (a) "insolvent person" means any person who is in insolvent circumstances, or is unable to pay his debts in full, or knows himself to be about to become insolvent; Clearly, at the time of conveyance of title from Pentagon to the Company, Pentagon was insolvent. The financial records of Pentagon and the litigation commenced by creditors shortly after the sale of the condominiums to the Company, as well as foreclosure proceedings against all the remaining properties owned by Pentagon in the months following the sale of Pentagon to Mr. Armoyan, speak for themselves. Pentagon was not able to service its debt nor could it pay its creditors out of operations - it was insolvent. Indeed, both James Chen and his son, Jason Chen, admitted this during discovery. [12] In Kent Building Supplies v. Cumberland Builders (1997), 163 N.S.R. (2d) 289 (N.S.S.C.) the Honourable Justice Hilroy Nathanson of this court stated at paragraph 28: Determination of the issue depends upon whether Cumberland Builders transferred property, whether it was then an insolvent person, and whether it did so within intent to defeat, hinder, delay or prejudice its creditors, or any one or more of them. If all three questions are answered in the affirmative, then the transaction is utterly void against a creditor or creditors injured, delayed, prejudiced or postponed. This Court has concluded that all three questions must be answered in the affirmative. [13] The answer to all three questions in the case of the transfer by Pentagon to the Company is also in the affirmative. [14] In addition, when considering Section 4(1)(b) of the Assignment and Preferences Act, clearly, the transfer of title from a company owned by the parents to another owned by their daughter resulted in an unjust preference to her over other creditors if one accepts that Kwan was indeed a creditor of Pentagon. The funds that Kwan advanced first in 1994 and later in 1997 were to her father personally. No doubt she knew that he would use these funds to sure up the operations of Pentagon. Kwan is the president of a large food wholesale business which she operates along with her husband in the United States of America. She is familiar with business principles. She is anything but unsophisticated in the operation of a business and in the principles of borrowing and providing or obtaining security for business loans. Pentagon did not pass any corporate resolutions authorizing it to borrow funds from Kwan or to provide her with any form of security other than the promissory notes. Indeed, based on the Doane Raymond letter directed to Jason Chen and dated December 30, 1997, the purchase price for the condominiums included the payout of a loan to James and May Chen “...after providing for sale of property at 930 Young Avenue, Dartmouth [sic], Nova Scotia.” The schedule attached to this letter entitled: “Pentagon Investments Limited, Payable to Shareholder, December 23, 1997", lists a number of withdrawals, one of which is shown as: Joyce Chen - 930 Young - est. 529,016.05. Joyce Chen (now Joyce Kwan) was not a shareholder of Pentagon - only her parents were shareholders at that time. It is apparent from this that the funds loaned to James Chen by his daughter were injected into Pentagon as a loan from him, as shareholder, to his company. [15] When one also considers that one of the three condominium units at 930 Young Avenue was occupied by James and May Chen and their son, Jason Chen, as their residence, it is abundantly clear that this asset of Pentagon was stripped out to protect it from being used to pay off creditors in the event of foreclosure or bankruptcy. By conveying title to Kwan’s company, not only was the asset protected but the loans extended to James Chen by Kwan would be paid. This showed a preference first by Pentagon to James Chen in the partial payout of his shareholder’s loan and then by him to his daughter, all to the prejudice of Pentagon’s other creditors. [16] Section 5 of the Assignments and Preferences Act reads as follows: Section 4 does not apply 5 Nothing in Section 4 shall apply to (a) any assignment made to an official assignee for the county in which the debtor resides or carries on business for the purpose of paying rateably and proportionately, and without preference or priority, all the creditors of the debtor their just debts; (b) any bona fide sale or payment made in the ordinary course of trade or calling to innocent purchasers or parties; (c) any payment of money to a creditor; or (d) to any bona fide gift, conveyance, assignment, transfer or delivery over of any property which is made in consideration of any present actual bona fide payment in money, or by way of security for any present actual bona fide advance of money, or which is made in consideration of any present actual bona fide sale or delivery of property; provided that the money paid, or the property sold or delivered, bears a fair and reasonable relative value to the consideration therefor. R.S., c. 25, s. 5. [17] I do not accept the argument advanced on behalf of the respondent, Kwan, that she was a bona fide purchaser for value without notice. Surely she knew that her parents’ company was experiencing financial problems. In 1994 she had advanced $325,000.00 USD to her father. Three years later, in 1997, she advanced an additional $100,000.00 USD without having received any repayment of the initial funds loaned. It was a family business. A transfer of property to close relatives in suspicious circumstances can be a “badge of fraud” from which the requisite intention may be inferred. The Supreme Court of Canada decision in Koop v. Smith (1915), 25 D.L.R. 355, where Duff, J. stated at page 358: ... but I think it is a maxim of prudence based upon experience that in such cases a tribunal of fact may properly act upon that when suspicion touching the reality or the bona fides of a transaction between near relatives arises from the circumstances in which the transaction took place then the fact of relationship itself is sufficient to put the burden of explanation upon the parties interested and that, in such a case, the testimony of the parties must be scrutinized with care and suspicion; and it is very seldom that such evidence can safely be acted upon as in itself sufficient. [18] The fact that the face amounts of the two promissory notes converted to Canadian funds was used as partial payment of the purchase funds resulted in a conveyance of title for substantially less than what the property was worth. There is also the argument that past consideration is no consideration which I believe also applies in this situation. [19] I find that the conveyance of title of the property at 930 Young Avenue is contrary to section 4(1)(a) and (b) of the Assignments and Preferences Act and so is void. (2) The Statute of Elizabeth (1571), 13 Eliz., c. 5 [20] In the case of Bank of Montreal v. Crowell (1980) 37 N.S.R. (2d) 292 (N.S.S.C., T.D.), Hallett, J. (as he was then) stated at page 301: In my opinion, the Assignments and Preferences Act, although it deals with the same subject matter as the Statute of Elizabeth (fraudulent conveyances), does not repeal the Statute of Elizabeth by implication. The Statute of Elizabeth enables an attack on conveyances made by solvent persons while the Assignments and Preferences Act deals with insolvent persons and the matter of preferences which are not subject to attack under the Statute of Elizabeth. The two acts are not inconsistent or repugnant. I am satisfied that effect can be given to both statutes at the same time and there is therefore no repeal by implication. [21] Since I have already determined that Pentagon was insolvent at the time of the conveyance it is not necessary to discuss the Statute of Elizabeth other than to say that if I had determined that Pentagon was solvent when the conveyance to the Company took place, I would have found for reasons similar to those stated earlier that the conveyance of title of the property at 930 Young Avenue was fraudulent and void and contrary to the Statute of Elizabeth. (3) Bankruptcy and Insolvency Act, R.S.C. 1985, C. B-3 [22] The Trustee has also argued that the conveyance of the property at 930 Young Avenue is a settlement within the meaning of s. 2(1) of the Bankruptcy and Insolvency Act (“BIA”) and hence void as per s. 91(2) of the BIA. Section 91(2) reads as follows: If bankrupt within five years 91. (2) Any settlement of property made within the period beginning on the day that is five years before the date of the initial bankruptcy event in respect of the settlor and ending on the date that the settlor became bankrupt, both dates included, is void against the trustee if the trustee can prove that the settlor was, at the time of making the settlement, unable to pay all the settlor's debts without the aid of the property comprised in the settlement or that the interest of the settlor in the property did not pass on the execution thereof. [23] In the case of Re Woolf (1992), 15 C.B.R. (3d) 292, the Ontario Court of Justice (General Division) in Bankruptcy indicated that a settlement may involve conveyances where the property is held by the donee in a form permitting tracing. This is certainly the case with the property conveyed by Pentagon to the Company. [24] Since I have already determined that the money loaned by Kwan was to James Chen personally and not to Pentagon directly the promissory notes cannot be included as consideration towards the purchase price. When the value of the promissory notes are excluded, the only consideration paid by Kwan is the payout of the existing mortgage at the time, along with the arrears of property taxes and a few other expenses. This represents only about 27% of the purchase price. Purchase Price:..................................... $845,000.00 Payout of Credit Union:.......................... 207,521.68 1997 Taxes:............................................... 7,963.94 Arrears of taxes:....................................... 12, 329.70 Interest on taxes:........................................ 1,802.47 Recording release:.................................... 42.00 Total:................................................... $229,659.79 % of purchase price:............................. $229,659.79 x 100 = 27% ........................................................... $845,000.00 This is clearly a situation in which the consideration paid is only a small percentage of the properties estimated value. Therefore, Pentagon cannot claim that the settlement was made in good faith and for valuable consideration as provided for in s. 91(3) of the Act which reads: Non-application of section (3) This section does not extend to any settlement made in favour of a purchaser or incumbrancer in good faith and for valuable consideration. [25] The requirements of s. 91(2) of the BIA have been met. Pentagon conveyed or transferred title to the Company which remains as registered owner of the three condominiums. Furthermore, the conveyance occurred less than two years prior to Pentagon’s assignment in bankruptcy on November 1, 1999, well within the five year period mentioned in s. 91(2) of the BIA. It is also abundantly clear that the settlor was unable to pay all its debts without aid of the property comprised in the settlement. Unlike the Assignments and Preferences Act and Statute of Elizabeth, it is not necessary to show that the property was transferred with the intent to defeat, hinder, delay or prejudice creditors. In discovery, James Chen and Jason Chen suggested that the conveyance of 930 Young Avenue, which was not generating sufficient revenue to cover its operating costs, would help make the remaining assets of Pentagon more marketable. This was advanced as the rationale for selling it to the Company. I cannot accept that as a valid reason for the sale unless of course there had been valuable consideration which I have already decided there was not. [26] I therefore find that the transfer of the property at 930 Young Avenue by Pentagon to the Company is void as being a settlement pursuant to s. 91(2) of the BIA. (4) Limitation of Actions Act, R.S.N.S. 1989, c. 258 [27] Counsel for the defendants raised the Statute of Limitations defence on the day of the hearing. The thirty days notice required by s. 3(3) of the Limitation of Actions Act (“LOAA”) was not complied with. Despite this, for the reasons that I am about to give, I do not accept this defence as a bar to the Trustee’s application on behalf of the creditors of the Estate of Pentagon. [28] I am guided by the Ontario Court of Appeal decision in Perry, Farley and Onyschuk v. Outerbridge Management Ltd. (2001), 54 O.R. (3d) 131. This case dealt with s. 2 of the Fraudulent Conveyances Act of Ontario which is very similar to s. 4(1) of the Assignments and Preferences Act. Fraudulent Conveyances Act Assignments and Preferences Act Where conveyances void as againstcreditors 2. Every conveyance of real property or personal property and every bond, suit, judgment and execution heretofore or hereafter made with intent to defeat, hinder, delay or defraud creditors or others of their just and lawful actions, suits, debts, accounts, damages, penalties or forfeitures are void as against such persons and their assigns. Void property transfer 4 (1) Every transfer of property made by an insolvent person (a) with intent to defeat, hinder, delay or prejudice his creditors, or any one or more of them; or (b) to or for a creditor with intent to give such creditor an unjust preference over other creditors of such insolvent person, or over any one or more of such creditors, shall as against the creditor or creditors injured, delayed, prejudiced or postponed, be utterly void. [29] There is no limitation prescribed by the Assignments and Preferences Act. The application brought by the Trustee does not fall within any of the categories described in the LOAA and particularly not with s. 2(1)(b) of the Act as argued by the defendants counsel. [30] If I am wrong in my conclusion and the application does indeed fall within the ambit of s. 2(1)(b), then I further find that it was brought within the two year period required by the statute. The assignment in bankruptcy occurred on November 1, 1999 and this application was initiated on September 6, 2001 which is prior to the expiration of the two year limitation period. [31] I need not get into a long discussion of the Court’s authority under s. 3(2) of the LOAA to disallow the defence based on time limitation other than to say that if I had determined that the application was out of time I would exercise my discretion to disallow it as a defence so that the application could proceed. [See: Sweete v. Burry (1996), 148 N.S.R. (2d) 109 (N.S.S.C.)] CONCLUSION [32] For the reasons stated earlier, the conveyance of the property at 930 Young Avenue, Halifax (all three condominium units) is declared void under the Assignments and Preferences Act and the Statute of Elizabeth. [33] Furthermore, it is void as being a settlement pursuant to s. 91(2) of the Bankruptcy and Insolvency Act. [34] The defendants shall be required to discharge both mortgages that were caused to be placed on the property. They should receive credit for the Credit Union mortgage that they paid off at the time of conveyance from Pentagon as well as credit for any property taxes they paid at that time. [35] If the defendants cannot rid the property of these encumbrances due to circumstances beyond their control, a further hearing will have to be conducted to carry out an assessment of damages both against the Company and Kwan personally. [36] I have not made any decision with regard to costs. If the parties cannot agree on an amount of costs to pay to the Trustee I will expect to hear from them so that a further hearing can be scheduled to deal with this issue as well. J.