Legal Blog

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.

Image courtesy of Flikr, Creative Commons.

Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.