Jul 10, 2014

Summary of HXP Debenture Trust v Guillaume

HXP Debenture Trust v Guillaume, 2014 SKQB 123 (CanLII)
Bankruptcy – Fraudulent Preference – Bankruptcy and Insolvency Act, Section 95
Debtor and Creditor
Real Estate – Fraudulent Preference

In 2007, the defendant company HXP transferred the real and personal property used to operate the Tunnels of Moose Jaw (“Tunnels”) to the defendant company 1010. The plaintiff, a creditor of HXP, claimed that the transaction was a settlement, fraudulent preference, or fraudulent conveyance for the benefit of the defendant DG. The plaintiff claimed $600,000 as the amount of preference given to DG. DG was a major shareholder and director in both HXP and 1010. HXP was a company that operated the Tunnels and an attraction known as Storyeum in Vancouver. The Tunnels were making a profit but Storyeum was consistently losing money. A third party, Moose Jaw Group, offered to purchase the Tunnels for $1.7 million. DG testified that the City of Vancouver did not want to deal further with the Moose Jaw Group and suggested to him that he put together a group to purchase the Tunnels. The City of Vancouver was involved because HXP owed the City of Vancouver money in relation to Storyeum. DG formed the purchaser, 1010, and offered to purchase the Tunnels for $1.75 million. The City of Vancouver authorized the sale to 1010. The net cash value paid to HXP was $743,000, with the remainder of the purchase price being forgiveness of debt owed to DG and other shareholders of 1010. There was no written and signed agreement for sale with respect to the transfer. Shortly after the transfer, DG met with a trustee in bankruptcy regarding HXP and sent a notice of intention to make a proposal to creditors, pursuant to s. 50.4(1) of the Bankruptcy and Insolvency Act (“BIA”).The proposal was not approved by the creditors and HXP was petitioned into bankruptcy with a receiver being appointed. The first report of the receiver listed the sale of the Tunnels as a reviewable transaction and the final report indicated that there was a $600,000 preference given to DG and others. The plaintiff was authorized to commence proceedings for recovery of the money or for setting aside the real property transaction pursuant to s. 38 of the BIA.
HELD: The Court concluded that DG was not a forthright, credible witness, and where his testimony contradicted another witness, the Court preferred the other witness. The Court did not believe DG’s evidence that he only became a buyer at the insistence of the City of Vancouver and not for his benefit. Further, there was no evidence that the $1.75 million offer from 1010 was used to try and generate a larger offer from the Moose Jaw Group. The Court also found that DG took steps to change the corporate record of 1010, from showing DG as the sole shareholder to showing HXP as a shareholder, so that the two companies were affiliates and an approval for the transfer would not be required by the Tunnels of Little Chicago Association pursuant to an agreement. The Court found that the conditions precedent to be fraudulent pursuant to s. 95 were met, namely: 1) the transfer was within three months of the initial bankruptcy event; 2) HXP was insolvent at the time of the transfer; 3) DG was preferred over other creditors because he was given full credit for his payments to HXP even though they went to operating expenses and were not advances to the purchase price of the transaction. The sale was at about fair market value, however, the shareholders of 1010 received full credit or payment of their unsecured loans to HXP as part of the purchase price; and 4) there was in fact a preference made out. The Court concluded that the defendants did not rebut the presumption of fraudulent preference and the dominant intention for the transaction on an objective basis was found to be to prefer DG and the other members of his group. A sale to the Moose Jaw Group for $1.7 million would not have required forgiveness or payment to DG and members of his group for their unsecured loans, and therefore, an additional $900,000 cash would have been paid to HXP in that case. It was found that HXP never even responded to the Moose Jaw Group regarding their offer for $1.7 million. There was no evidence that a sale to 1010 would have enabled HXP to survive; at all times during the transaction HXP was insolvent and in a dire financial situation. The Court did not consider the plaintiff’s alternative claims pursuant to s. 91 of the BIA, the Fraudulent Preferences Act, or The Fraudulent Conveyances Act, 1571. The Court declined to award punitive damages concluding that DG and HXP’s conduct was reprehensible but was short of calling for retribution, deterrence or denunciation. The Court took into account the following factors in making its determination on punitive damages: 1) DG continued to make some attempt to solve HXP’s financial problems after the transaction; 2) DG and his members did contribute $900,000 to HXP at a time it was insolvent; and 3) the transaction was approved by the City of Vancouver, who could otherwise seize and sell HXP’s assets. The Court declared that the transaction was a fraudulent preference pursuant to s. 95 of the BIA and directed that either party could arrange a hearing if they could not agree on a remedy.