Hannah (Bankruptcy of)

2003BCSC0058 Citation: Bankruptcy of Hannah Date: 20030113 2003 BCSC 58 Docket: 204895VA00 Registry: Vancouver

IN THE SUPREME COURT OF BRITISH COLUMBIA

IN BANKRUPTCY

IN THE MATTER OF THE BANKRUPTCY OF

MONTE ARTHUR HANNAH

REASONS FOR JUDGMENT

OF

MASTER PATTERSON (IN CHAMBERS) Counsel for the Bankrupt: P.J. Reardon Counsel for the Opposing Creditors, William Lang and Ronald Penhall: C.L. Anderson Appearing on behalf of the Trustee, Campbell Saunders: L. Gilbertson Date and Place of Hearing: November 26, 2002 Vancouver, BC [1] This is an application by the bankrupt for his discharge from bankruptcy. [2] All parties agree that the discharge should be conditional upon the payment by the bankrupt of a sum of money to the estate for the benefit of creditors. The amounts differ: the trustee submits that the payment should be $53,450, the bankrupt argues it should be only $21,680, and the opposing creditors argue it should be $90,000. [3] The discharge application came on before me on September 25, 2001, at which time it was adjourned to allow the opposing creditors to cross-examine the bankrupt. That has taken place and a transcript is before the court. [4] The bankrupt made his assignment into bankruptcy on July 14, 2000. In his statement of affairs dated July 13, 2000, he shows assets of a value in excess of $1 million, and debts contingent and direct of over $1.6 million. [5] The opposing creditors argue that there is no adequate explanation by the bankrupt concerning the disposition of a considerable amount of money paid to the bankrupt by the various companies in which he was involved. They believe that the bankrupt

moved funds to Mexico, which is the home of his wife, Ms. Suarez. [6] The bankruptcy appears to have arisen due to the expansion of the bankrupt's business into Alberta and Washington State. The bankrupt was running a chain of pet food stores known as Bosley's in British Columbia. While proceeding with opening franchise stores in Alberta, the bankrupt became ill, subsequent to his illness, Bosley's Alberta was placed in receivership. The bankrupt attempted to raise additional capital for Bosley's Washington from private investors, but was unsuccessful. Bosley's Washington was sold. The bankrupt sold any interest he had in Bosley's British Columbia at an earlier date to help finance the ventures in Alberta and Washington State. [7] A number of factors, no doubt, contributed to the business failure, including the advent of big box stores, the bankrupt's illness, and a lack of capital. [8] The opposing creditors point to a number of anomalies in the bankruptcy: 1. There is evidence that the bankrupt received from Bosley's Washington a USD$477,000, of which $294,000 was received between May 1 and October 31, 1999, and $183,000 prior to April 30, 1999. Subsequent to October 31, 1999, the bankrupt received in addition $100,000 and $15,000 per month. This adds up to approximately USD$600,000; 2. In a report to the shareholders of Bosley's Washington Ventures Ltd. dated January 10,

2000, Mr. Dinning points out that: Mr. Hannah negotiated a management fee arrangement, which was fully disclosed, but none-the-less, was an invitation to disaster. A fee of 5% of sales was payable to Mr. Hannah without regard to profitability. A review of the past 9 years of operations revealed that accumulated losses over this 9-year period amounted to $1,965,000 yet management fees amounted to $2,134,000. . . . There is no evidence that the recipient felt the fee was too high and that funds should be left in the company, or that the contract should be reduced to meet the ability of the company to pay fees. In essence, Mr. Hannah violated the trust placed in him by all of the non-voting shareholders, and he also violated his fiduciary responsibility - being the sole director and operating officer, - to manage the assets of the company judiciously and to put the welfare of the company ahead of personal gain. (emphasis added) There is no explanation for the disposition of any of these funds.

3. At the first creditors' meeting it was alleged that the bankrupt's home at 4460 West 2nd Avenue on the west side of Vancouver was rented, this turned out to be incorrect as the bankrupt and his wife continued to reside there; 4. The Bank of Montreal commenced foreclosure proceedings (Vancouver Registry H000983), and on June 28, 2001, the bankrupt's wife, Ms. Suarez, purchased the home for $891,412.85, pursuant to the order of Master Scarth dated June 28, 2001. This purchase was, at least in part, financed by a mortgage in the amount of $675,000, with interest at three percent over Royal Bank prime; 5. Ms. Suarez alleges that the balance of funds came from property she had owned in Mexico, but there is no explanation how she was to make mortgage interest payments of some $5,000 per month. The mortgage was due and payable in full on July 1, 2002, there is no information before the court whether it was paid or not; 6. While the bankrupt was receiving large sums from Bosley's Washington, no bank accounts in the name of the bankrupt in the United States have ever been disclosed; 7. There is a letter from the realtor who had listed the bankrupt's home, pursuant to an order for conduct of sale in the foreclosure proceedings, indicating that the bankrupt and his wife were extremely uncooperative. The bankrupt has denied this. [9] The report of the trustee on the bankrupt's

application for discharge, pursuant to s. 170 of the Bankruptcy and Insolvency Act, dated November 25, 2002, makes several points which are significant when considering a bankrupt's discharge: 1. the assets of the bankrupt are not of a value equal to 50¢ on the dollar; 2. the bankrupt failed to disclose a wine collection which has since been appraised at a nominal value of $450; 3. the bankrupt failed to remit to the trustee surplus income as required, the trustee has calculated that amount to be in excess of $90,000; 4. the bankrupt has failed to make instalment payments to Canada Customs and Revenue Agency as required on self-employed income as a realtor during the course of the bankruptcy; and 5. the bankrupt is a self-employed realtor, with income after business deductions averaging $8,500 per month. [10] A review of the affidavits and the transcript of the cross-examination indicates that the bankrupt is still living in the same house as before and enjoying a similar lifestyle. It appears that he has not understood the message that personal bankruptcy is a serious matter and more than just the proverbial fiscal carwash. It appears that little or no effort has been made to explain either the disposition of the funds received from Bosley's or the source and application of funds used to buy the bankrupt's home out of the foreclosure. Ms. Suarez swears she received almost

CDN$400,000 from the sale of property in Mexico, but does not explain her entitlement to her former husband's share of those funds. [11] Once the trustee has stated in the s. 170 report that the bankrupt is responsible for any facts referred to in s. 173 of the BIA and the creditors have raised questions, the onus is on the bankrupt to adequately explain what took place. In my view, there has not been an adequate explanation. [12] There appears to be no point in adjourning the discharge application again, as it is unlikely that either the trustee or the opposing creditors will make any further headway in tracing the bankrupt's funds. It is appropriate that there be an order of discharge, conditional upon the payment of the sum of $90,000 to the trustee for the benefit of the creditors. That is the amount of surplus income the trustee found should be paid before taking any income tax into account. The bankrupt was not remitting tax, and consequently the before-tax amount is correct for this purpose. [13] If the parties are unable to work out a payment schedule, the matter may be set down for further submissions. "Master A. Patterson"