COURT OF APPEAL SUMMARIES (SEPTEMBER 23-27, 2019)Urbancorp Toronto Management Inc. (Re), 2019 ONCA 757 (CanLII)
[van Rensburg, Hourigan and Huscroft JJ.A.]
Matthew Milne-Smith and Chantelle Cseh, for the appellant, KSV Kofman Inc., in its capacity as Monitor
Kevin D. Sherkin and Jeremy Sacks, for the respondent, Speedy Electrical Contractors Ltd.
Neil Rabinovitch, for GG, the Israeli court-appointed Functionary and Foreign Representative of Urbancorp Inc.
King Residential Inc. (“KRI”) was part of the Urbancorp group of companies, which were all owned by AS and involved in proceedings under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (“CCAA”).
Speedy Electrical Contractors Ltd. (“Speedy”) performed electrical services for members of the Urbancorp group. In September 2014, Speedy made a personal loan to AS for $1 million, with interest at the rate of 12.5%, evidenced by a promissory note which was to mature on September 23, 2015 (the “Promissory Note”). Speedy also completed work for Edge on Triangle Park Inc. (“Edge”), another Urbancorp entity. A construction lien was registered against this latter project for $1,038, 911.44 on September 30, 2015.
On November 14, 2015, KRI, Speedy, AS and Edge executed a debt extension agreement (the “DEA”) under which:
- Speedy agreed to extend the due date of the Promissory Note to January 30, 2016;
- Edge confirmed its debt to Speedy and Speedy agreed to discharge its lien against the Edge project;
- In consideration of the extension of the Promissory Note, the discharge of the lien, and payment by Speedy to KRI of $2.00, KRI agreed to guarantee the two outstanding debts, secured by a collateral mortgage in Speedy’s favour over 13 KRI condominium units and parking spaces; and
- KRI agreed to provide evidence showing that there were no common element arrears of the subject condominium units or to pay such arrears on closing, confirmed the taxes on the units were up to date, and agreed that it would obtain a discharge or postponement of a Travellers Guarantee Company of Canada mortgage registered on the subject units.
On November 16, 2015, Speedy discharged its lien against the Edge property, and the collateral mortgage in favour of Speedy was registered on title to the KRI properties.
At the time of the DEA, the beneficial owners of the Urbancorp group’s various development projects were three limited partnerships. KRI was a wholly-owned subsidiary and nominee of one of the limited partnerships, while Edge was a wholly-owned subsidiary and nominee of another.
Part of the impetus behind the DEA was to facilitate a financing of the Urbancorp group through a public bond issuance in Israel. The Israeli bond issuance closed in December 2015. Shortly thereafter, the Urbancorp empire collapsed and all of the Urbancorp group entities commenced insolvency proceedings. On May 18, 2016, KRI and the other Urbancorp entities involved in the proceedings were granted protection under the CCAA.
Speedy filed a proof of claim against KRI pursuant to the secured guarantee given by KRI to Speedy for the debts owed by Edge and AS. KRI’s monitor, KSV Kofman Inc. (the “Monitor”) disallowed the claim. The Monitor later brought a motion for an order declaring that Speedy’s $2,323,638.54 claim be disallowed on the basis that the secured guarantee was a transfer at undervalue under s. 96 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”) and a fraudulent conveyance under s. 2 of the Fraudulent Conveyances Act, R.S.O. 1990, c. F.29 (the “FCA”). The motion judge dismissed the Monitor’s motion and the Monitor subsequently appealed, with leave. The Monitor challenged the motion judge’s finding that the secured guarantee was between arm’s length parties. Specifically, the Monitor argued that the motion judge erred in law in focussing on the relationship between KRI and Speedy, rather than the relationships among KRI, Edge and AS. The Monitor further contended that the motion judge made a reversible error in concluding that the fraudulent intent necessary under s. 96(1)(a) of the BIA and s. 2 of the FCA was not established.
(1) Did the motion judge err in focussing on the relationship between Speedy and KRI rather than between Edge and AS (as beneficiaries of the secured guarantee) and KRI?
(2) Did the motion judge err by failing to consider the record as a whole, including all of the potential badges of fraud, when he refused to find fraudulent intent?
(3) Did the motion judge err in misapplying the Rule in Browne v. Dunn?
(4) Did the motion judge err in his award of costs of the motion against the Monitor?
(1) No. The motion judge properly considered the relationship between KRI and Speedy, rather than the relationship between KRI, Edge and AS, in determining whether the impugned transfer was to a non-arm’s length party. The issue, under a proper construction of s. 96(1)(b) of the BIA, is whether the transferee, Speedy, was dealing at arm’s length with KRI, the transferor, in relation to the impugned transfer, which was the secured guarantee. The court held that while Edge and AS were parties to, and beneficiaries of, the transaction that provided for the secured guarantee, the transfer sought to be impugned by the Monitor was KRI’s secured guarantee in favour of Speedy. In other words, the overall agreement pursuant to which the guarantee and security were provided to Speedy did not make the entirety of the DEA the “transfer” for the purpose of s. 96.
(2) No. The motion judge made no error in refusing to find fraudulent intent. In making its determination, the court noted that while badges of fraud are indicia of fraudulent intent, their presence does not mandate an inference of fraud to be drawn. Accordingly, the court held that the failure to consider a particular badge of fraud was not, in itself, a legal error justifying review on a correctness standard. The real issue on appeal was thus whether the trial judge failed to take into account the entirety of the factual situation and made conclusions of fact, or mixed fact and law, that were not supported by the record.
Ultimately, the court held that the motion judge’s finding that the Monitor had not established the debtor’s fraudulent intent was available on the record and did not ignore any relevant evidence. The burden of proving fraudulent intent rests with the party seeking to avoid the transfer. Accordingly, the relevant intent was that of KRI in relation to the transfer with Speedy. The overall context was the impending Israeli bond financing. There was uncontroverted evidence that Speedy’s lien had to be discharged in order to facilitate the financing and that the lawyers for Speedy and Urbancorp group were seeking alternative security for Speedy’s debts. This was accommodated by the secured guarantee and mortgages on KRI’s completed units and parking spaces. While the bond financing was expected to be available to discharge debts of the Urbancorp group, the funding was instead used for other purposes, and ultimately the Urbancorp group defaulted on its obligations to the Israeli bondholders and others.
(3) No. The court held that no such error was made. In any event, the court found that the main issue with the Monitor’s argument that the motion judge misapplied the Rule in Browne v Dunn was its apparent lack of relevance to any issue which continued to be in dispute on appeal.
(4) No. The motion judge’s costs award against the Monitor, on behalf of the debtor, and not in its personal capacity, was a proper exercise of discretion and revealed no reversible error. The court held that there was nothing unreasonable in the motion judge’s decision that costs of the Monitor’s unsuccessful attempt to disallow Speedy’s claim should follow the event and be borne by the debtor’s estate, since, if the disallowance had been successful, that would have benefitted KRI’s creditors. With respect to the quantum of the award, the court held that the amount in dispute was only one of a variety of factors relevant to the determination of costs. In the circumstances, the quantum reflected the legal work that was required, which was the same, irrespective of the amount in dispute. Moreover, there was nothing to suggest that the agreed amount of $25,000 was other than proportional to the work and reasonable in all of the circumstances.
The court awarded costs of the appeal to Speedy, including the motion for leave to appeal, fixed at the inclusive amount of $15,000 to be paid by the Monitor on behalf of the debtor and not in its personal capacity. No costs were awarded in favour or against the Israeli Functionary.
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