Lawyers who engage in collection cannot be faint of heart. Sometimes, collection is easy; low-hanging fruit is there for the plucking. At other times, the lawyers must be prepared to climb to the top of the fruit tree and, if the climb takes 10 years, so be it. Such is the case of Luu v. Abuomar and Rumanek & Co. Ltd. v. Abuomar, 2017 and 2019 decisions of the Ontario Superior Court of Justice.
Many moons ago, the creditor commenced an application to enjoin the debtor from offering competing products in a strip mall. After much difficulty, the creditor was successful and was awarded significant costs of the application. Did the debtor pay? Of course not. And so began the odyssey.
The debtor owned a mortgage-free, nice (and relatively valuable) house in Oakville as a joint tenant with his wife. One would think that this would result in an easy collection. After all, the creditor would only need to sell the house, take half the proceeds, and pay the debt. Not so fast. You cannot sell the land; you can only sell the debtor’s interest in the land and this is not easy (see June 2016 newsletter).
The creditor attempted to sell the debtor’s interest in the house by way of a sheriff’s sale, but found that the debtor and his son had orchestrated a judgment in favour of the son for an amount that greatly exceeded the creditor’s judgment. This meant that the lions’ share of anything that would be collected would flow to the debtor’s son and, presumably, the debtor. The creditor was forced to bring an application (the 2017 Luu application) to declare the judgment to be fraudulent and void as against the creditor. The application also sought an order for a judicial sale of the house. The application judge held that the son’s judgment was fraudulent, but declined to order a judicial sale.
By this time, costs to be collected and costs of the collection exceeded $100,000.
The creditor then attempted to sell the debtor’s interest in the house on three more occasions: by sheriff’s sale: though auction, sealed bid, and MLS. No success. The creditor also scheduled a judgment debtor examination; it never took place because the debtor attended with a non-lawyer legal adviser who refused to leave the examination room.
Finally, after the creditor had tried everything she could to collect the debt, she brought an application to have the court appoint an equitable receiver for the debtor.
An equitable receiver, unlike a creditor, is authorised to take possession of a debtor’s estate or other property in the place of the debtor and, under the supervision of the court, to take all steps to realise value from property to benefit the people entitled to the funds. In effect, the receiver can do whatever the debtor could do if the debtor were in possession.
These are very wide powers and the court will not appoint an equitable receiver lightly. In essence, the court will appoint an equitable receiver on behalf of an execution creditor only if the creditor has exhausted all ordinary remedies at law to collect the creditor’s debt.
The appointment of an equitable receiver was crucial to the creditor’s ability to monetise the debtor’s interest in the house. Since an equitable receiver has the power to receive all property and income of the debtor, it therefore presumably has a right to commence an application under the Partition Act for partition and sale of land in which the debtor has an interest. Although a creditor is limited to selling a debtor’s interest in land, an equitable receiver acts in the place of the debtor to force the sale of the land itself.
As luck (good or bad depending upon one’s point of view) would have it, the very judge who found the son’s judgment to be fraudulent, but who, more importantly, decided that the creditor did not have the right to request a judicial sale, was the judge who decided the application for the appointment of an equitable receiver.
The judge agreed that the debtor had met all requirements for the appointment; in particular, he noted that the house was not exigible, in practical terms, at common law. Legal execution was difficult, if not impossible. Accordingly, he granted the appointment of an equitable receiver and conferred on the receiver the power to receive all property and income due to the debtor and to commence proceedings under the Partition Act for the jointly-owned house.
However, the judge specifically noted that he entertained some “doubts as to whether a receiver has the right to apply under the Partition Act for the sale of jointly-owned property, thus depriving the non-debtor joint owner of his or her interest in the property.” However, the judge stated that he was not determining that issue; it would be determined when the equitable receiver applied under the Partition Act for sale of the jointly-owned property.
After it was appointed, the receiver commenced an application (the 2019 Rumanek application), joining the debtor and his spouse as respondents, requesting partition and sale of the house. That application was heard 14 months after the original decision appointing the receiver. As luck (again, good or bad) would have it, the judge hearing the previous two applications was the judge who heard the receiver’s application.
The respondents raised an initial complaint; they submitted that the lawyers for the receiver, who were also the lawyers for the creditor, should not be allowed to act for the receiver. The judge agreed that a receiver ought to have independent counsel to avoid any bias, conflict, or prejudice. However, this applies to a regular court-appointed receiver, not a court-appointed receiver by way of an equitable execution. The judge had appointed the equitable receiver for essentially one purpose: to assist in collecting the money due to the creditor. There was no conflict of interest between the creditor and the receiver.
The respondents then relied on the judge’s “doubts,” expressed in his decision to appoint the receiver, as to whether the receiver could force a sale under the Partition Act. However, the judge’s reservations were eliminated after reviewing the relevant authorities. Since the receiver stood in the shoes of the debtor, the receiver could seek the sale of the property to the same extent that the debtor could himself do so.
Finally, the judge dealt with the merits of the application. In general, a court will order partition and sale of jointly held property. However, the court has discretion to refuse the order if the applicant is acting vexatiously or oppressively or comes to court with unclean hands. In that regard, mere personal inconvenience of, or hardship to, the respondents is insufficient to justify the exercise of that discretion.
The judge reviewed the affidavit material and concluded that the inconvenience that the debtor’s spouse would suffer from the sale of the property was insufficient to overcome the creditor’s right to collect the money due on the outstanding orders. To refuse the application would mean that, for practical purposes, the creditor would never be able to collect the money owed to her. Conversely, to grant the application would mean that the spouse would obtain $700,000 – $800,000 from the sale proceeds and then she and her husband would be able to purchase an alternative property with the proceeds. Further, the judge held that the application was neither vexatious nor oppressive and that the creditor came to court with clean hands.
The judge granted the order for the sale of the house. The respondents have appealed that order and the odyssey continues.
Image courtesy of Ahborson.
Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.