M.P.H. Supply Ltd. v. Pajger et al.

2006 BCSC 1918 M.P.H. Supply Ltd. v. Pajger et al

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: M.P.H. Supply Ltd. v. Pajger et al., 2006 BCSC 1918 Date: 20061229 Docket: L041650 Registry: Vancouver Between: M.P.H. Supply Ltd. Plaintiff And: Emil Pajger and Milena Kanak Defendants Before: The Honourable Mr. Justice Ehrcke Reasons for Judgment Counsel for the Plaintiff: M.S. Frost Appearing on his own behalf: E. Pajger Counsel for the Defendant M. Kanak: A.K. Seabrook Date and Place of Trial/Hearing: October 18-19, 2006 Vancouver, B.C. Introduction [1] Emil Pajger is a plumber. He owned a company called Nordel Plumbing & Heating (1997) Ltd., of which he was the only director and shareholder. In the course of operating that business, he had to order supplies and materials from various suppliers including the plaintiff, M.P.H. Supply Ltd. On March 10, 1997, Mr. Pajger gave the plaintiff a personal guarantee for the obligations of his company. [2] On March 18, 2004, Mr. Pajger made an assignment in bankruptcy and listed among his liabilities an unsecured debt to the plaintiff of "$244,164.93 cont." Although there is no direct evidence on the point, it has been suggested that "cont." means "contingent." On April 30, 2004, a representative of the plaintiff filed a proof of claim in the amount of $242,966.93. [3] The present action was commenced July 2, 2004. The plaintiff obtained an order from Master Tokarek on November 12,

2004, authorizing it to conduct these proceedings in its own name pursuant to s. 38 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3. [4] The basis for the plaintiff's claim is an allegation that Mr. Pajger fraudulently transferred funds to his former common-law wife, Milena Kanak, in the fall of 2003. [5] The relief sought by the plaintiff in the statement of claim is: § a declaration that the transfer to Milena Kanak from Emil Pajger of monies received from a third party is fraudulent, void and of no effect pursuant to the Fraudulent Conveyance Act, R.S.B.C. 1996, c. 163, and the Fraudulent Preference Act, R.S.B.C. 1996, c. 164; § a declaration that Milena Kanak holds a one-half interest in her home at 7626 Garfield Drive, Delta, BC, in trust for Emil Pajger, who in turn remains the beneficial owner of that one-half interest; § judgment for debt in the amount of $244,164,93; an accounting and the equitable remedy of tracing. Facts [6] Both the plaintiff and the defendant Milena Kanak were represented by counsel at this trial. Mr. Pajger appeared on his own behalf, without counsel. The plaintiff presented its case by reading into the record large portions of the examination for discovery of Emil Pajger conducted on March 30, 2005 and the examination for discovery of Milena Kanak conducted on September 21, 2005. The plaintiff also filed a number of documents as

exhibits. Milena Kanak called three witnesses for the defence: herself; Peteris Pupols, the controller and credit manager of the plaintiff; and Emil Pajger. Emil Pajger did not choose to call any further witnesses although he did participate in the cross-examination of the other witnesses. From that body of evidence the following facts emerged. [7] Emil Pajger is 56 years old and has lived in Canada since he moved here from Czechoslovakia in 1969. Milena Kanak is 63 years old. She also moved here from Czechoslovakia in 1969. They met each other in January 1970 and started living together in 1978. They maintained a relationship as common-law spouses from 1978 until they separated in late 1999. They both testified that they have not maintained a spousal relationship since their separation, and that there have been no attempts at reconciliation. [8] For a period of time after their separation, Mr. Pajger lived and slept in his truck. Later, Ms. Kanak agreed that he could sleep on the sofa in the family room of her home at 7626 Garfield Drive. That situation continues to the present day, with Mr. Pajger living in the family room and garage of the residence and Ms. Kanak occupying the remainder of the house. They both testified that they seldom speak to each other and communicate mainly through written notes. They rarely eat meals together. They both maintain that despite living

under the same roof, they have been living separate and apart since late 1999 and there has not been a common-law spousal relationship between them since that time. [9] The defendants purchased the lot on Garfield Drive in the 1983. They both contributed towards the down payment. Mr. Pajger built a house on that lot in 1984, and they subsequently resided there. They took out a mortgage, which was discharged in 1990. [10] Over the years Ms. Kanak worked in a variety of jobs. For a time she operated a coffee shop. Mr. Pajger ran his plumbing business, which at one point had approximately 20 employees. From 1995 to 1999 Ms. Kanak worked as an employee of Mr. Pajger's plumbing company. She prepared the payroll cheques, answered telephone calls and sorted the mail. She sorted personal mail from business mail. Both she and Mr. Pajger testified that she did not open the envelopes, but merely sorted the envelopes from various suppliers into separate piles. [11] In operating his business, Mr. Pajger ran accounts with various suppliers. One supplier, EMCO, required him to secure the amounts owing to it from time to time by placing a mortgage in the amount of $150,000 on the couple's home, which at that time was held in joint tenancy by Mr. Pajger and Ms. Kanak. Ms. Kanak signed as a guarantor of Mr. Pager's debt. The EMCO mortgage was registered against their property on January 26,

1994. [12] In the spring of 1995 Mr. Pajger determined that he needed more cash to operate his business. Accordingly, he applied to the Canadian Imperial Bank of Commerce for a mortgage in the amount of $250,000 (the "1995 Mortgage"). His intention was to pay off the EMCO mortgage, which would leave him with an additional $100,000 for use in his plumbing business. At that time the value of the property on Garfield Drive was approximately $300,000. As the requested amount of the mortgage exceeded the value of Mr. Pajger's one-half interest, the bank required that the mortgage be signed by both owners, that is, Mr. Pajger and Ms. Kanak. [13] When Ms. Kanak learned that she was being asked to agree to the 1995 Mortgage she became very upset. She initially refused to sign it, as she realized that by doing so she, as well as Mr. Pajger, would be under an obligation to make the payments, and her half-interest in the property would be encumbered as well as Mr. Pajger's. Mr. Pajger explained to her that he could not continue with his business unless he obtained the money from the 1995 Mortgage. In order to induce her to sign, he promised her that he would pay it off within six months and would transfer his half-interest in their home to her. On that basis she agreed and signed the document on April 10, 1995. The EMCO mortgage was discharged on April 11, 1995. The 1995 Mortgage was

registered against the property on April 12, 1995. [14] Time went by and Mr. Pajger found that he could not pay off the 1995 Mortgage within six months as he had told Ms. Kanak. She therefore held him to his agreement to transfer his half interest in the residence to her. That transfer was completed in the fall of 1996 by an instrument registered in the Land Title Office on October 31, 1996. Both Mr. Pajger and Ms. Kanak testified that this transfer was pursuant to their agreement in April 1995. Both testified that the agreement was that Mr. Pajger would assume full responsibility for paying off the 1995 Mortgage and that Ms. Kanak would be the sole owner of the property. Both testified that there was never any agreement that she would reconvey a half-interest to Mr. Pajger if and when the 1995 Mortgage was fully paid. [15] In the fall of 1996, the 1995 Mortgage was transferred to TD Canada Trust in order to obtain a better interest rate. [16] In April 1999 Mr. Pajger needed more money for his business, and he borrowed $30,000 from Ms. Kanak. They prepared an I.O.U. document which contemplated 36 monthly payments of $1,000 each, representing the $30,000 principal amount plus $6,000 interest. Mr. Pajger made eight of the monthly payments and then stopped. [17] The couple separated toward the end of 1999. Around the same time, Mr. Pajger was injured in a series of motor vehicle

accidents. As a result, he anticipated receiving a settlement from the Insurance Corporation of British Columbia, although, of course, he could not know the precise amount of his anticipated settlement. [18] His accident claim was settled in the fall of 2003. From the proceeds of that settlement he gave Ms. Kanak $180,000 on October 27, 2003, and told her to use it to pay off the 1995 Mortgage. The cheque or money order was put into a joint account, and was then immediately transferred to her personal account. Subsequent to this, she obtained a statement from TD Canada Trust showing that the amount required to discharge the 1995 Mortgage was $196,371.03. She informed Mr. Pajger that the $180,000 he had given her was insufficient, and he gave her an additional $30,000 from his I.C.B.C. settlement on November 12, 2003. Again, the money was initially placed in a joint account and then transferred to her sole account. On that same day $196,371.03 was paid from her account to TD Canada Trust, and the 1995 Mortgage was discharged. [19] A little more than four months later, on March 18, 2004, Mr. Pajger filed an assignment in bankruptcy. He testified that he only made the decision to do so a few days before. He denied that he had been contemplating bankruptcy when he made the payments to Ms. Kanak in October and November 2003. He testified that at that time he still believed that by

working hard he could meet his financial obligations. He did not consider himself insolvent or on the eve of insolvency at that time. [20] Ms. Kanak, for her part, testified that she had no awareness of what financial pressures Mr. Pajger was under. When Mr. Pajger paid her first $180,000 and then $30,000 in October and November 2003, she knew it was from his I.C.B.C. settlement, but she knew nothing about his other financial obligations. She considered those payments to be in fulfilment of Mr. Pajger's obligations to her, which consisted of the obligation he had undertaken in April 1995 to pay off fully the 1995 Mortgage, as well as his debt remaining on the $36,000 I.O.U. from April 1999. [21] The position of the defendants is that there was nothing fraudulent about the payments of $180,000 and $30,000 from Mr. Pajger to Ms. Kanak in October and November 2003. They say that those payments were in satisfaction of his obligations to her, and that there was no intent to defraud other creditors. [22] The plaintiff maintains that those payments were a fraudulent conveyance or fraudulent preference. Mr. Pupols, the controller and credit manager of the plaintiff, testified that he had been dealing with Mr. Pajger and his company's account since 1997. He said that the amount owing to the plaintiff from Mr. Pajger totals $244,164.93, representing goods purchased between March 2002 and

January 2004. He acknowledged that Mr. Pajger made payments in 2003, including two payments in October 2003 of $7,500 and $8,000 respectively. Those payments are reflected in the calculation of the total amount owing. Mr. Pupols agreed that the plaintiff never made any formal written demand on Mr. Pajger. He said they were trying to work with him. He said that Mr. Pajger mentioned that he expected to receive money from I.C.B.C., and the plaintiff thought that if they worked with him, they would get their money. He said the plaintiff would have taken action against Mr. Pajger earlier if it had not been for his I.C.B.C. claim. Does the Plaintiff Have a Claim under the Fraudulent Preference Act? [23] The relevant sections of the Fraudulent Preference Act are ss. 1, 3 and 6(1): 1 In sections 3, 4 and 5, "creditor" includes (a) a surety and the endorser of a promissory note or bill of exchange who would, on payment by that person of the debt, promissory note or bill of exchange for which the suretyship was entered into or endorsement was given, become a creditor of the person giving the preference within the meaning of the sections, and (b) the beneficiary of a trust or other person to whom liability is equitable only. ... 3 Subject to section 6, a disposition of property by a person at a time when the person is in insolvent circumstances, is unable to pay the person's debts in

full, or knows that he or she is on the eve of insolvency, is void as against an injured creditor, if made (a) with intent to defeat, hinder, delay or prejudice creditors or some of them, and (b) to or for a creditor with intent to give the creditor preference over other creditors or some of them. ... 6(1) Nothing in sections 3, 4 and 5 applies, if the money paid, or the property disposed of bears a fair and reasonable relative value to the consideration, to a sale in good faith, to a payment made in the ordinary course of business to innocent persons, to a payment to a creditor, or to a disposition in good faith of property of any kind made in any of the following circumstances: (a) in consideration of a present actual payment in good faith in money; (b) by way of security for a present actual advance of money in good faith; (c) in consideration of a present actual disposition in good faith of any property. [24] The defendants submit that the plaintiff's claim under the Fraudulent Preference Act must fail because the plaintiff was not, at the time of the payments to Ms. Kanak, a creditor of Mr. Pajger within the meaning of s. 1. [25] The definition of "creditor" in s. 1 is not exhaustive. Nevertheless, the requirement is clear that a claimant under the Fraudulent Preference Act must have been a creditor at the relevant time. [26] In Lyman Robinson's British Columbia

Debtor-Creditor Law and Precedents (Carswell, loose-leaf), the requirement is expressed at para. 11.9.100 as a matter of standing: 11.9.100 Persons who have standing to commence proceedings under the Fraudulent Preference Act include: (1) Creditors who had judgment against the transferor at the time of the alleged fraudulent preference; and (2) Creditors who had a liquidated claim against the transferor at the time of the alleged fraudulent preference. [27] In the present case, the plaintiff did not have a judgment against Mr. Pajger at the time of the transfer to Ms. Kanak. Did the petitioner have a liquidated claim against Mr. Pajger at that time? [28] The evidence is that the plaintiff supplied materials to Mr. Pajger's company, Nordel Plumbing & Heating (1997) Ltd. It was the company that was principally responsible for paying for those materials. Mr. Pajger's liability was only contingent. He had signed a document on March 10, 1997, by which he guaranteed the payment of all of his company's liabilities to the plaintiff. But the effect of that document was not to make the plaintiff a creditor of Mr. Pajger in October and November 2003. The plaintiff did not at that time have a liquidated claim against him. Mr. Pupols admitted in his evidence that the plaintiff had not, at that time, made any formal demand. [29] I conclude that the plaintiff was not a creditor of Mr. Pajger

at the time of the transfers in the fall of 2003, and the claim under the Fraudulent Preference Act must fail. The Claim Under the Fraudulent Conveyance Act [30] Sections 1 and 2 of the Fraudulent Conveyance Act provide: 1 If made to delay, hinder or defraud creditors and others of their just and lawful remedies (a) a disposition of property, by writing or otherwise, (b) a bond, (c) a proceeding, or (d) an order is void and of no effect against a person or the person's assignee or personal representative whose rights and obligations by collusion, guile, malice or fraud are or might be disturbed, hindered, delayed or defrauded, despite a pretence or other matter to the contrary. 2 This Act does not apply to a disposition of property for good consideration and in good faith lawfully transferred to a person who, at the time of the transfer, has no notice or knowledge of collusion or fraud. [31] It is clear from the wording of s. 1 that the scope of the Fraudulent Conveyance Act is wider than that of the Fraudulent Preference Act, in that it applies to dispositions of property made "to delay, hinder or defraud creditors and others of their just and lawful remedies." By virtue of the phrase "and others" the plaintiff's claim under the Fraudulent Conveyance Act is not barred by the fact that it was not a creditor of Mr. Pajger at the relevant time. [32] The disposition of property

which the plaintiff says was fraudulent in this case is the two payments of money by Mr. Pajger to Ms. Kanak in the fall of 2003. The plaintiff does not say that the transfer of Mr. Pajger's half-interest in the Garfield Drive property was a fraudulent conveyance. [33] What, then, is the basis for the plaintiff's claim that the payments of $180,000 and $30,000 from Mr. Pajger to Ms. Kanak in October and November 2003 were made "to delay, hinder or defraud creditors and others of their just and lawful remedies"? [34] The plaintiff argues that there is rarely direct evidence of a fraudulent conveyance. Such a finding must usually rest on circumstantial evidence. The plaintiff submits that the circumstances here should lead to an inference of fraud. [35] In assessing whether the evidence goes beyond mere suspicion, and rises to the level of proof, reference has sometimes been made for the so-called "badges of fraud," as discussed, for example, by Krever J. in Solomon v. Solomon (1977), 16 O.R. (2d) 769 (H.C.J.) at p. 778: Circumstances that are merely suspicious are not sufficient. But all the circumstances surrounding the conveyance of the property must be examined to determine if there are among them some which have been termed "badges of fraud". In Bank of Montreal v. Vandine et al., [1953] 1 D.L.R. 456, 33 M.P.R. 368, the Appeal Division of the Supreme Court of New Brunswick

affirmed the judgment of Harrison, J., who listed the following features of transactions alleged to be made with fraudulent intent as badges of fraud: (1) Secrecy (2) Generality of Conveyances, by which is meant the inclusion of all or substantially all of the debtor's assets (3) Continuance in possession by debtor (4) Some benefit retained under the settlement to the settlor. He included as minor badges of fraud: (5) Gross excess of value of property over price paid and (6) Cash taken in payment instead of a cheque. [36] Appellate courts have, however, advised caution in applying the "badges of fraud." In Meeker Cedar Products Ltd. v. Edge (1968) 68 D.L.R. (2d) 294 (B.C.C.A.), McFarlane J.A. warned that there is no authoritative list of badges or indicia from which fraud must be inferred. Rather, "Fraudulent intent in a transferee is essentially a matter of fact to be proved in the circumstances of each particular case." [37] In the present case, the plaintiff points to three factors which it says are badges of fraud: the fact that Mr. Pajger remained in possession of the property, the fact that he and Ms. Kanak were related, and the fact that there was no or insufficient consideration. [38] The first point misconstrues the transaction. The plaintiff argues that because Mr. Pajger continues to live in the Garfield Drive property, that shows he has retained possession. But the

Garfield Drive property is not the property that is alleged to have been fraudulently conveyed. The transfer of his half-interest in the house is not being attacked. The alleged fraudulent conveyance is the transfer of money from the I.C.B.C. settlement. Mr. Pajger has not retained possession of that money. The first alleged badge of fraud, therefore, is not present. [39] The next argument is that Mr. Pajger and Ms. Kanak are, in reality, spouses. They are not, of course, legally married, but the plaintiff contends that they are common law partners. I do not accept that argument. Although it might seem odd to an outsider that a couple could separate and yet remain living under the same roof, that is a circumstance that these courts see routinely in family law proceedings. Both Mr. Pajger and Ms. Kanak testified that they occupy different parts of the house, that they do not eat meals together, and that they rarely communicate. They both say that they are not a couple. I have no reason to disbelieve them. [40] The plaintiff's most substantial argument is that the payments made by Mr. Pajger to Ms. Kanak in the fall of 2003 cannot truly be in satisfaction of his pre-existing obligations to her from their 1995 agreement, since there was no adequate consideration for that agreement. Sufficiency of Consideration [41] The defendants claim that the payments made by Mr. Pajger to Ms.

Kanak in the fall of 2003 were in satisfaction of the obligations he incurred when she agreed to sign the 1995 Mortgage. The plaintiff submits that that agreement is a sham, since there was no real consideration for it. The plaintiff says that it makes no sense to suppose that Mr. Pajger would agree both to transfer his half interest in the Garfield Drive property and to assume the sole responsibility of paying off the $250,000 mortgage debt. The plaintiff submits that the defendants must have a secret agreement that she will reconvey a half interest to him in return for his having paid the mortgage debt in full. [42] To resolve this issue, it is necessary to examine what each of the defendants really obtained as a result of their 1995 agreement. Looking at it first from Mr. Pajger's perspective, he needed additional cash to run his business. He had obtained credit from EMCO in the amount of $150,000, but he needed $100,000 more. He could only obtain that extra $100,000 if Ms. Kanak agreed to sign the 1995 Mortgage. He decided that he was willing to assume full responsibility for paying the mortgage debt. That is not surprising, since the entire proceeds of the mortgage went to his benefit: $150,000 to pay off his existing obligation to EMCO and an additional $100,000 to run his business. Ms. Kanak received no direct benefit from the 1995 Mortgage. She decided to demand a

benefit. She said she would not sign the document unless Mr. Pajger agreed to convey his equity in the property to her, which she would retain even after he paid off the mortgage debt. The defendants' position is, essentially, that Mr. Pajger needed immediate access to the additional $100,000 so urgently that he was prepared to agree to this bargain. [43] The plaintiff argues, however, that the deal was so one-sided that there was not sufficient consideration flowing from Ms. Kanak back to Mr. Pajger. We must therefore examine the transaction from her perspective. [44] What was Ms. Kanak's equity position prior to April 1995? The Garfield Drive property was at that time worth about $300,000. It was encumbered by the EMCO mortgage for $150,000. From one point of view, therefore, her equity was $75,000, representing her half-interest after the $150,000 EMCO mortgage was deducted from the $300,000 value of the property. However, while that perspective might be accurate from a third party's point of view, it does not realistically represent her position as against Mr. Pajger. The EMCO mortgage was his responsibility. The funds from the mortgage were for his benefit and that of his company. He had the principal responsibility for paying that mortgage. Ms. Kanak had signed that document as a guarantor. Thus, as between themselves, if there was a default on the EMCO mortgage, the

money would come first out of Mr. Pajger's equity. Since the property was worth $300,000, if the full $150,000 were paid out of his half, she would retain her $150,000 interest and he would be left with nothing. [45] In April 1995, therefore, she had to consider how her position would change if she signed the 1995 Mortgage. Under the new mortgage, she would be named not merely as a guarantor, but as having joint responsibility for the debt. If, despite his promises to her that he would pay, there was nevertheless a default on the $250,000 debt, that would leave only $50,000 from the $300,000 value of the property. Assuming that she took that full amount, since he had the benefit of the proceeds of the mortgage, she would now be left with $100,000 less than she would have had if she had not signed the 1995 Mortgage. That is, her downside risk as a result of agreeing to sign, was $100,000. [46] On the other hand, what was her upside potential? Without the agreement for Mr. Pajger to transfer his half-interest to her, there would be no direct benefit to her from signing the 1995 Mortgage. However, since, in accordance with their agreement, he did transfer his interest and did pay off the debt from the proceeds of his I.C.B.C. settlement, she is now left with the full $300,000 equity (leaving any effect of inflation out of account). [47] As discussed above, if Ms. Kanak had not

signed the 1995 Mortgage, her interest in the property, vis-à-vis Mr. Pajger would have been $150,000. As things turned out, she now has $300,000. Thus, she accrued a $150,000 benefit as a result of their 1995 agreement. However, in order to obtain that benefit, she had to expose herself to a possible loss of $100,000. [48] In my view, 1995 agreement cannot be described as a sham. It was not so one-sided that one could say there was a failure of consideration. Ms. Kanak was reluctant to expose herself to the $100,000 risk of loss that the 1995 Mortgage entailed. In return for agreeing to endure that risk, she demanded that Mr. Pajger transfer his half-interest in the property to her. He was willing to do so because he urgently needed access to the funds that the 1995 Mortgage loan would provide to him. There was nothing fraudulent about this transaction. There is no evidence of any secret agreement that Ms. Kanak will some day reconvey an interest in her home back to Mr. Pajger. Conclusion [49] On all the evidence, I am not satisfied that the payments of $180,000 and $30,000 by Mr. Pajger to Ms. Kanak in the fall of 2003 were made "to delay, hinder or defraud creditors and others of their just and lawful remedies." The petition is dismissed. The defendants shall have their costs on scale 3. "W.F. Ehrcke, J." The Honourable Mr. Justice W.F. Ehrcke