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Canadian Lawyer Magazine Article

We are thrilled to be featured in Canadian Lawyer Magazine, please find Allison Speigel’s article entitled: The Journey from the Billable Hour to Value-Based Flat Fees here.

a cat and mouse game

Debt collection is often akin to a cat and mouse game. Debtors use fraudulent conveyances, hidden assets, bankruptcy legislation, and, sometimes, downright lies to keep their assets out of the clutches of their current and prospective creditors. Creditors have to surmount all possible roadblocks to discover what has happened to the debtors’ assets and then pounce. In McGlynn v. Tune Family Bare Trustee Corp., a 2014 Ontario Superior Court of Justice decision, the creditor pounced.

Games

Debtor went bankrupt. He disclosed, as assets in the bankruptcy, his interest in some corporations with minimal or no assets, but, curiously, failed to list two corporations owning two rental properties. Creditor did its due diligence and then obtained an order under section 38 of the Bankruptcy and Insolvency Act allowing it to prosecute its action as assignee of the interest of the trustee in bankruptcy.

Creditor brought its action against debtor and the corporations claiming that the corporations were no more than the alter egos of debtor and, accordingly, their assets were debtor’s assets.

Evidence

Creditor was attempting to strip the corporate veil of the corporations. This is difficult to do. Creditor had to demonstrate that debtor was using the corporations for an improper or fraudulent purpose. Alternatively, creditor had to demonstrate that debtor, as the sole shareholder of the corporations, was treating the assets of the corporations as if they belonged to the shareholder to do with as he wished; without regard to the interests of other persons who were dealing with the corporations; so that, in effect, the corporations became “a mere instrumentality employed by the shareholder in pursuit of his or her own interest.” In essence, if the debtor shareholder disregarded the separate personality of the corporations, the court would do so also.

The creditor demonstrated that:

•  The corporations’ registered office was debtor’s home address.
• When debtor requested a loan to finance the purchase of the corporations’ rental properties, he referred to the properties as “my office condo units.”
• After the purchase, debtor resigned as the director and officer of the corporations in favour of his wife, but continued to sign all documents relating to the properties.
• One year later, debtor mortgaged the properties and signed documentation verifying that he had “authority to bind the corporation” – regardless of his prior resignations as director and officer.
• One year later, he listed the properties for sale in his non-existent presidential capacity.
• On November 7, 2012, debtor declared bankruptcy, without listing the corporations as assets. A mere three weeks later, debtor re-listed the two properties for sale.

Result

All of this was enough for the judge. She held that debtor never distinguished himself from the corporations; rather, he used the corporations and their assets as his own personal assets. He appeared to have ignored the separate legal nature of the corporate structures and referred to the corporations’ assets as his own and not as those of the corporations. The judge held that the debtor never treated the corporations, nor the assets held by them, as anything more than extensions of himself and that the corporations were a sham.

The judge held that debtor was the beneficial owner of the properties. Title to these properties therefore passed to the trustee in bankruptcy upon debtor’s bankruptcy and, by virtue of the section 38 order, were assigned to creditor. The judge vested the two properties in creditor’s name.

cat-1; mouse-0.

security for liens upon liens

When a lien is registered against title, the people above the lien claimant in the construction ladder have a choice: leave the registered claim for lien as is binding title to the property, or have the lien vacated. The first choice is rarely used because it almost always ensures that funding for the project and the project money flow to the contractors will come to a screeching halt. A lien is vacated from title by obtaining an appropriate order upon posting security (cash, letter of credit, or lien bond) into court for the amount claimed in the lien plus, for costs, the lesser of

(i) 25% of the lien amount claimed, and

(ii) $50,000.

What happens when there are, say, two liens registered, one by a subsub and one by the sub with whom the subsub contracted? The lien of the sub invariably encompasses the amount its subsub claimed and, accordingly, the quantum of the security to vacate the two liens is far higher than it should be. Often, in the rush to clear title so that money can again flow, the duplication is ignored and security for each lien is posted. However, once the dust settles, the general can move to reduce the amount of the security. That is what happened in Totalsiteworks Management v. Elite Construction Inc., a 2014 Ontario Superior Court of Justice decision.

Liens

© 2015

A sub liened for $245,000. One of its subsubs liened for $18,000. Another subsub liened for $228,000 and that subsub’s sub liened for $83,000. All of the lien claimants commenced actions to enforce their claims for lien. The general removed all four liens by posting four lien bonds in the aggregate amount of $699,000.

The general brought a motion in the sub’s action to reduce the total amount of security posted for all four actions from $699,000 to $295,000 plus $50,000 for costs. In exchange, the four lien bonds would be delivered up for cancellation.

This request to reduce the security seemed to us to be eminently reasonable. However, we would have thought that the amount to which the security should be reduced would be $246,000 plus costs (i.e. the sum of the lien claims of the two subsubs). Their aggregate claim was $1,000 more than the sub’s claim and the claim of the sub-subsub would have been subsumed in the claims of the subsubs.

The sub, subsubs, and sub-subsub (the “Claimants”) also thought the general’s request was eminently reasonable. All Claimants, other than one subsub, consented to the requested order and, although the remaining subsub did not consent, it took no position on the motion and did not appear at the hearing of the motion.

Obtaining this order was the proverbial slam dunk. Or was it?

Evidence

Section 44(4) of the Construction Lien Act authorises the court to reduce security already posted to vacate a lien. A motion to reduce security is similar to a motion for summary judgment in which, to be successful, the moving party must show that there is no genuine issue that requires a trial to decide whether the lien claims are inflated or the liens and corresponding lien bonds duplicate or overlap one another.

Like all other motions, its success depends in great part upon the facts adduced in the supporting affidavit evidence. The affidavit in support of the general’s motion stated that the subsubs and the sub-subsub “were suppliers and/or sub-trades working directly for (the sub), and therefore (emphasis added) the amounts claimed in their respective Construction Liens overlap with the amount claimed by (the sub) in its Construction Lien.”

This was not enough for the motions judge. He stated, that “the affidavit does not describe how (the affiant) reaches the conclusion that the liens claimed by (the subsubs and sub-subsub) overlap with the amount claimed in the (sub’s) lien. Furthermore, the affidavit does not explain if the amount of the lien claim by the (sub-subsub) is included with the lien claim and related security posted by (its subsub).”

The motions judge held that the motion materials were insufficient to satisfy him that there was no triable issue such that he could exercise his discretion to reduce the security. The motions judge was also uncomfortable with the general posting one bond in one action in exchange for the lien bonds filed in each of the four actions. He was concerned about a priority contest if the security was ultimately insufficient to satisfy all lien claims.

The motions judge dismissed the motion without prejudice to the general’s right to bring another motion in each of the four actions, not just one of them, with better evidence.