Klapstein v. Klapstein, 2011 ABQB 336

Court of Queen ’ s Bench of Alberta Citation: Klapstein v. Klapstein, 2011 ABQB 336 Date: 20110517 Docket: 0703 07273 Registry: Edmonton Between: MacKay & Company Ltd., as Trustee in Bankruptcy of the Bankruptcy of Arthur Cecil Klapstein (Bankruptcy #24-722764) Plaintiff/Respondent - and - Arthur Cecil Klapstein, Grant Klapstein, and Cove Properties Ltd. Defendants/Appellants _______________________________________________________ Memorandum of Decision of the Honourable Mr. Justice R.P. Marceau _______________________________________________________ [ 1 ] On July 12, 201, Master Wacowich delivered oral reasons granting

summary judgment to the Plaintiff (Respondents in this appeal), MacKay & Company as trustee in bankruptcy of Arthur Cecil Klapstein against the bankrupt, his son, Grant Klapstein, and Cove Properties Ltd., a company whose sole shareholder and Director is Grant Klapstein. The judgment was for $149,736.27 plus judgment interest from the date of transfer of the funds.

The Master’s decision is unpublished and is attached as Appendix “A”. [ 2 ] The funds in question were transferred from a trust owned and controlled by Arthur Klapstein in the U.S. to Cove Properties through a transfer to a lawyer’s trust account in Edmonton and then to Cove Properties. In fact, the funds transferred were $100,000.00 (U.S.) But, in July 1999, that amounted to $149,736.27 in Canadian funds.

[3] Master Wacowich found both a fraudulent preference under s. 91 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3and the Fraudulent Conveyances Act 1571 (13 Eliz. 1) c. 5, often simply referred to as the Statute of Elizabeth, which Justice H. J.Macdonald held in Goyan v. Kinash, (AB KB), [1945] 2 D.L.R. 749 (Alta. S.C. - T.W.) was in force in Alberta. [4] Against this decision the Defendants (Appellants) have appealed.

Standard of Review [5] This is an appeal on the record but I am permitted to allow other evidence. [6] The issues raised by the Appellants were somewhat expanded from what was argued in the written memorandum. I concludethe issues are: 1. With respect to the Bankruptcy and Insolvency Act (BIA), is the law to be applied to fraudulent preferences under s. 91 of the BIA(1985) or s. 96.1 (Preferences & Transfers at Undervalue) 2007 c. 36, in force September 18, 2009? 2.

As I will find that the Master was correct in using s. 91 of the 1985 Act which was the enactment in force in July 1999, has theMaster made a palpable and overriding error in granting

summary judgment under s. 91? 3. Has the Master made a palpable and overriding error in concluding the

summary judgment is also granted under the Statute ofElizabeth? Standard of Review [7] The standard of review for questions of mixed fact and law which is the question in #2 and #3 above, is “palpable andoverriding error”: Baugh v.

Faculty Assn. of Red Deer College, 2004 ABCA 203 (Macklin J.). [8] I will deal with each of the points: Question #1: With respect to the Bankruptcy and Insolvency Act (BIA), is the law to be applied to fraudulent preferences under s. 91 of the BIA (1985)or s. 96.1 (Preferences & Transfers at Undervalue) 2007 c. 36, in force September 18, 2009? [9] It is clear to me that the legislation proclaimed in force in 2009 is not the legislation which is applicable to a transaction in1999.

Legislation is not to be taken to affect substantive rights retroactively unless it expressly says that it is to operate retroactively.There is no provision in the BIA which would make s. 96.1 operate retroactively: (Bank of Nova Scotia v. Plastic & Allied BuildingProducts Ltd., [1992] 15 C.D.R. (3d) 161 (Ont. S.C.J. per Farley J.). The statute does not expressly state that s. 96.1 is to operateretroactively and therefore the applicable statute is that in force in 1999. Section 91(2) and (3) of the BIA at that time read:

If bankrupt within five years 91.

(2) Any settlement of property made within the period beginning on the day that is five years before the date of the initial bankruptcy event in respect of the settlor and ending on the date that the settlor became bankrupt, both dates included, is void as against, or in the Province of Quebec, may not be set up against, the trustee if the trustee can prove that the settlor was, at the time of making the settlement, unable to pay all the settlor’s debts without the aid of the property that was the subject of the settlement or that the interest of the settlor in the property did not pass on the execution of the settlement. 91.

(3) This

section does not extend to any settlement made in favour of a purchaser, encumbrancer or holder of a charge in good faith and for valuable consideration. [ 10 ] A settlement is defined in the BIA as follows: 2. (1) . . . “settlement” includes a contract, covenant, transfer, [or] gift and designation of beneficiary in an insurance contract, to the extent that the contract, covenant, transfer, [or] gift or designation is gratuitous or made for merely nominal consideration. [ 11 ] On the facts, there is no real question that Arthur Klapstein was insolvent when he transferred the funds to his son’s company via a trust account and that he became bankrupt within five years of the date of the settlement.

It is also clear that the transfer of funds was a settlement. [ 12 ] The only argument the Appellant can advance is that s. 91(3) applies as a defence. [ 13 ] On the subject of consideration the Master wrote: In my view, the

Section ( BIA s. 91 ) has been met. Counsel for the Defendants/Respondents argues that there was consideration which was granted here in that Grant did not have the use of the property, and in fact made all of the payments necessary for the continued use of the property by his parents. And that is really the essence of the lawsuit, is can [sic] a bankrupt or someone who is about to become bankrupt take funds and provide them through a series of transactions to end up receiving a property for his sole use. In essence, a life tenancy. Mr.

Livingstone correctly points out that in this case the amount in question was one-third of the value of the property. So I say in answer to that it is still a third, and it is still a third that was not available to creditors.

And in my view, consideration cannot occur to the detriment of creditors to defeat creditors and in my view, that is what occurred here. [ 14 ] I turn now to some facts which, in my view, make it highly improbable that Grant Klapstein will be believed when he deposes that when the funds were transferred to his company there was valuable consideration given to Arthur Klapstein because there was at that time an agreement as follows: (

a) The funds would be used to fund in part the purchase of a condominium in Arizona to be owned by Grant. (

b) The condominium would be made available free of charge to his father, Arthur Klapstein, i.e. the condominium would be paid for in full; all condominium fees, utilities, taxes, upkeep and the like would be the sole responsibility of Grant, presumably for life. [ 15 ] Here is what happened in 2005 and early 2006: The Trustee only discovered the transfer through legal proceedings. Based on some initial information, the Trustee directed a series of s. 164 Demands to Cove.

(

a) On December 21, 2005 Grant, in replying to the Trustee, advised: “In July of 1999, we received the sum of $149,736.27 (Cdn) from Art Klapstein. In November of 1999, we received additional funds from Art in the sum of approximately $100,000 (Cdn). All of these funds were used to purchase unit 3201 at the Belle Vista condominiums located in Scottsdale, Arizona”, (the “Arizona Condo”). (

b) In a subsequent reply to the Trustee dated January 6, 2006, Grant stated: “As for the money that was sent to us totalling approximately $250,000 (Cdn) there were no terms or conditions attached and there has never been a demand that these monies be returned or repaid”. (

c) The Trustee made further inquiry by its letter dated January 12, 2006 as follows: “Also as noted in your letter of December 21, 2005 Art paid Cove the sum of approximately $100,000 CDN in November of 1999. Please provide copies of the following documents for our review in connection with these funds: · Copy of cheques or other receipt for funds paid by Art to Cove; · Copy of accounting records and journal entries to record the receipt and use of these funds; · Copy of bank deposit slip for the deposit of these funds; and · Copy of bank statement confirming that the funds were deposited in Cove’s account. You should consider this another

Section 164 demand and therefore, please respond as soon as possible and in any event within five days of the date of this letter. (

d) Cove, in a response dated January 16, 2006 through its officer Clay K. Hamdon (In-House Legal Counsel), stated: “. . . in relation to the enquiries set forth in your January 12, 2006 letter relating to accounts, advances, unit transfers, the $100,000 or otherwise, we have provided you all information and documentation in our possession related thereto”. [ 16 ] Also, interestingly, it was not until 2007, when Grant swore his affidavit, that he referred to the agreement.

Grant’s position at the application before the Master was that to date those expenses he had paid for the condominium amounted to about one-third of the $149,736.27. That is referenced by the Master in his decision when he says: “So I say in answer to that that it is still a third, and it is still a third that was not available to creditors.” [ 17 ] I agree with the Master.

I think it highly unlikely that Grant would be believed having done the about-face from, I guess, claiming a fait accompli, none of the business of the trustee, i.e. a gift, to suddenly claiming valuable consideration for the transfer of funds and “in good faith.” [ 18 ] Even if Grant was believed, the promise to make available a condominium that was not built for three years to his aging

father for life is a covenant which could end one day after the transfer with the death of his parents. This is nominal, inadequateconsideration, in fact, illusory. [19] Because the transaction was difficult to trace from a U.S. trust to an Alberta lawyer’s trust account to a corporation, then toGrant and to a condominium in Arizona and was not discovered except by court proceedings, good faith becomes an issue. Secondly, theattempts to obscure the real use to which the funds were put affects good faith.

The Master did not say it, but on the facts I believe Grantwill not be able to establish either branch of the exception: valuable consideration and good faith.

This transaction is a sham to divertfunds from creditors. [20] I also believe the Master was correct in his statement of the law at page 3 of his decision: The Applicant also raises the Statute of Elizabeth which is still in force in Alberta and again, this comes out of Re Cyr where the Courtstated: Having found the Trustee entitled to succeed under the Act as I have, it is not necessary for me to deal with the Trustee’s submissionunder the Statutes [sic] of Elizabeth.

I would say, however, that as that statute is in force in Alberta, that it does not require the Trustee toprove the bankrupt was insolvent at the time, and that he need only show that as a result of the impugned conveyance the necessaryconsequence is that there is nothing left for his creditors. He states: In my opinion, the Trustee would likewise succeed under that statute. And it is my view that that same statement is applicable here. (Re Cyr (1982), 45 C.B.R. (N.S.) 195, 1982 CarswellAlta328 (ABQB). [21] Moody v. Ashton, [2004] S.J.

No. 758 (Q.B.), a decision of Baynton J. of the Court of Queen’s Bench of Saskatchewan, isauthority for the proposition that the insolvency of the transferor is not an essential element of a fraudulent conveyance within the ambitof the Statute of Elizabeth. Baynton J. cited Virtue J. in Nicholson v. Milne (1989), (AB KB), 74 C.B.R. (N.S.) 263(Alta. Q.B.) for that proposition. The Respondent does not need to rely on that here as the insolvency of the debtor at the time of thetransaction is beyond doubt. [22] The Master cited Proulx v.

Proulx, 2002 ABQB 1151, (2002), 2002 ABQB 151 , 25 R.F.L. (5th) 370 at paragraph 14(Alta. Q.B.), where Justice Clackson summarized the principles to be considered in determining whether an impugned conveyance isvoid pursuant to the Statute of Elizabeth: 14 It seems to me that the basic principles defining the remedy in 13 Elizabeth c. 5 are now well settled. 1. There must be a conveyance of either real or personal property; 2. The transaction must have been for no or nominal consideration; 3. It must have been the intent of the settlor to defraud, hinder or delay his creditors; 4.

The intent of the settlor may be inferred from his circumstances and the circumstances of the settlement or may be the result ofdirect evidence;

5. The fact that there was no consideration or voluntary consideration will in most cases justify the inference of the necessary intentabsent evidence rebutting that inference; 6. Inference of intent will be strong if the settlor was insolvent at the time of settlement or the settlement effectively denuded him ofassets sufficient to cover existing obligations; 7. The party challenging the conveyance must be a creditor or someone with a legal or equitable right to claim against the settlor; 8. The conveyance must have had the intended effect. [23] All of these elements are present.

It is also noted the intention or good faith of the transferee is not relevant to the finding,although it is fairly obvious that Grant could hardly not have known that his father was insolvent in 1999 since he had been sued underthe same personal guarantees as his father in 1993 and had declared bankruptcy well before his father. [24] Finally, the Master stated that the test for

summary judgment was well known to he and the parties. That test has beenconsidered per curiam by the Alberta Court of Appeal in Dow Chemical Canada Inc. v. Shell Chemicals Canada Ltd., 2010 ABCA126. The Court adopted the following test from Tottrup v. Clearwater (Municipal District) No. 99, 2006 ABCA 380 at paragraph 33: 10. Applications for

summary judgment or

summary dismissal can take many forms. In some cases the application is simply based onthe factual merits of the case. In other words, the applicant argues that it can prove its case on the facts without a trial. In this type ofsummary judgment application, the approach is as stated in Pioneer Exploration Inc. (Trustee of) v. Euro-Am Pacific Enterprises Ltd., 2003 ABCA 298, 339 A.R. 165, 27 Alta. L.R. (4th) 62: [18] First, the plaintiff bears the evidentiary burden of proving its cause of action on a balance of probabilities. Each and every factnecessary to support the claim must be proven: Bank of Montreal v.

Kalin (1992), 1992 ABCA 278 , 131 A.R. 397 (C.A.). [19] After the plaintiff has proved its case on a balance of probabilities, the evidentiary burden shifts to the defendant but the ultimateburden remains, as always, with the plaintiff. The defendant can avoid a

summary judgment in favour of the plaintiff by proving thatthere is a genuine issue for trial. If the defendant meets this evidentiary burden, the plaintiff fails to meet its ultimate burden. It must bebeyond doubt that no genuine issue for trial exists. [25] This passage was cited to the Master and it is clear he found that there was no doubt there was no defence to the action for the$149, 736.27.

I find that the Master made no palpable or overriding error in doing so. [26] Finally, the Appellants complain that the judgment should be for $100,000.00 (U.S.) because that was what the funds werewhen they left the U.S. No authority was cited for this. I see no reason at all to find that the Master should have granted a judgment inU.S. funds just so Grant Klapstein would be able to take advantage of the fact that the Canadian dollar today is much stronger in relationto the American dollar than it was in 1999. [27] The appeal is dismissed. The parties may speak to costs by appointment if necessary.

Heard on the 25th day of January, 2011. Dated at the City of Edmonton, Alberta this 17th day of May, 2011.

R.P. Marceau J.C.Q.B.A. Appearances: Stephen J. Livingstone for the Defendants/Appellants Gary A. Befus for the Plaintiff/Respondent Appendix “A” Decision MASTER WACOWICH: I will give my decision. I should start by saying that in this Court Masters often deal with the issue of

summary judgment, and so we are well versed with dealing with these applications. This has a bit of a twist in that we are also dealing with the Bankruptcy and Insolvency Act which this Court also deals with, and deals with as Registrar. In any event, the one part of this decision is easy and that is the issue of the $100,000. There is clear record of $100,000 -- well, $149,000 and change having been paid from Art Klapstein to Cove, the company that is solely owned by his son Grant. So there is clearly an issue there.

Grant used -- Cove, I guess to use proper legal vernacular, purchased a condo in Scottsdale, Arizona which has been used by the father basically solely as if he were the owner of it. There was another alleged payment of $100,000 Canadian which went towards this property but there is a dispute on the facts as to that $100,000 payment, so that will not be dealt with today. That will not be dealt with on a

summary judgment because there are facts in dispute. That leaves the remaining question of the $149,000 which basically was what the Canadian money he had to come up with to make $100,000 American which was, of course, used for the purchase of this property.

By way of a bit of background, Art was a real estate developer here in Edmonton who, through a series of guarantees and othermechanisms, ended up owing a judgment of over $145,000,000 to Alberta Mortgage and Housing, as it then was. In 1993, Art created two trusts and he was the sole beneficiary of both and had signing authority. And in July of ‘99 Delray (phonetic)transferred this $149,000, or to be exact, $149,736.27 to Cove.

As I said, there is a dispute with regard to the $100,000 so I am not goingto refer to that again, other than to say that that is something which will have to be dealt with at trial if the Applicant wishes to pursue thematter. There is a series of facts but I think it is without dispute that the condominium in question has been used by Art and his wife Jean as theirresidence. In the meantime the son Grant, either through himself directly or through Cove, have been providing for the upkeep of theproperty and providing for payment of utilities and such things.

The issue is whether the transfer of funds from Arthur to Cove in 1999constitutes settlements of fraudulent transactions, entitling the Trustee to a judgment against Grant and Cover for the amounts transferred. The relevant provision of the Bankruptcy and Insolvency Act is Section 91(2) which both counsel are aware of and I need not repeat. Similarly, 91(3) and the definition of settlement under Section 2(1) which I will quote.

Settlement includes a contract, covenant transfer or gift and designation of beneficiary in an insurance contract to the extent that thecontract, covenant transfer or gift or designation is gratuitous or made for merely nominal consideration. Counsel for the Trustee referred me to Re Kostiuk (BC SC), [1998] 6 C.B.R. 4th 46 which looked at this issue of

Section 91, and the settlement in that case was a husband/wife transfer which often seems to be the background in these cases. But what is worth referring to is that the Court held that the issue of good faith or fraudulent intent is not relevant to the question of whether a settlement has been made within the meaning of

Section 91, and that the only relevant issue is whether the settler had the intention that the property be maintained in some use for the use of one of the parties. Further reference is made to Re Sir [1982] 45 C.B.R. N.S. 195. In that case the Court explained three elements that must be found under Section 91(2): (

a) that the transfer was a settlement, (

b) that the bankruptcy took place within five years of the settlement and, (

c) that at the time of making the settlement the bankrupt was unable to pay all his debts without the aid of the settlement property, or that the interest of the bankrupt in the property did not pass on the transfer. In my view, the

Section has been met. Counsel for the Defendants/Respondents argues that there was consideration which was granted here in that Grant did not have the use of the property, and in fact made all of the payments necessary for the continued use of the property by his parents. And that is really the essence of the lawsuit, is can a bankrupt or someone who is about to become bankrupt take funds and provide them through a series of transactions to end up receiving a property for his sole use. In essence, a life tenancy.

Mr. Livingstone correctly points out that in this case the amount in question was one-third of the value of the property. So I say in answer to that that it is still a third, and it is still a third that was not available to creditors. And in my view, consideration cannot occur to the detriment of creditors to defeat creditors and in my view, that is what occurred here. Mr. Livingstone takes the position that this is something that should be determined at trial, that it is a factual issue that cannot be determined at Chambers. I disagree.

I believe there is sufficient, adequate, proper evidence before me to make the determinations I have. The Applicant also raises the Statute of Elizabeth which is still in force in Alberta and again, this comes out of Re Cyr where the Court stated: Having found the Trustee entitled to succeed under the Act as I have, it is not necessary for me to deal with the Trustee’s submission under the Statutes of Elizabeth.

I would say, however, that as that statute is in force in Alberta, that it does not require theTrustee to prove the bankrupt was insolvent at the time, and that he need only show that as a result of the impugned conveyance thenecessary consequence is that there is nothing left for his creditors. He states: In my opinion, the Trustee would likewise succeed under that statute. And it is my view that that same statement is applicable here.

He sets out the Proulx case of 2002 ABQB 151 , [2002] 316 A.R. 150 which summarizes the principles under the Statute of Elizabeth, and in my view that case once again supports the fact that the Statute of Elizabeth applies here. The

Section 98 of the Bankruptcy and Insolvency Act provides the Court with jurisdiction to grant the relief sought in this case. And again, I will not read out the passage, both counsel are aware of the section. And also under the Statute of Elizabeth, the Court can set aside the transfer of funds to Grant and Cove and direct that these parties account for the finds and which I so do. So both under

Section 98 and under the Statute of Elizabeth I am granting judgment against Grant Klapstein and Cove Properties Ltd. jointly and severally for the amount of the funds transferred, plus judgment interestfrom the date of the transfers. Costs will follow the event.

I take it nothing further need be said on costs, gentlemen? MR. BEFUS: No, sir. MASTER WACOWICH: Thank you, Court is adjourned. MR. LIVINGSTONE: Thank you, sir. ___________________________________________________________________________ PROCEEDINGS CONCLUDED ___________________________________________________________________________