Welcome Ford Sales Limited v. Hellec, 2011 ABQB 753

Court of Queen ’ s Bench of Alberta Citation: Welcome Ford Sales Limited v. Hellec, 2011 ABQB 753 Date: 20111201 Docket: 1003 09446 Registry: Edmonton Between: Welcome Ford Sales Limited by its Receiver and Trustee in Bankruptcy Meyers Norris Penney Limited Respondent (Plaintiff) - and - Robert Hellec and Connie Hellec Applicants (Defendants) _______________________________________________________ Reasons for Judgment on Application to Terminate an Attachment Order of the Honourable Mr. Justice D.R.G. Thomas _______________________________________________________ I.

Background .......................................................................................................... Page: 2 II. The legal context for this application to review an ex parte attachment order . Page: 4 III. Analysis ................................................................................................................. Page: 5 A. Failure to make full disclosure at the time of the ex parte application for the attachment order . ........................................................................................................ Page: 5 B.

Reasonable likelihood that the Receiver ’ s claims against the Hellecs will be established ............................................................................................... Page: 6 C. Proof of the dissipation of assets by the Hellecs ........................... Page: 8

I. Background [ 1 ] This is my decision on an application by the Defendants, Robert Hellec (“Hellec”) and Connie Hellec (“Mrs. Hellec”), (together the “Hellecs”) who seek to vacate an attachment order made on June 4, 2010 and extended on June 30, 2010 (the “Attachment Order”).

The Attachment Order was granted in Action No. 1003 09446 (the “Action”) in which Welcome Ford through its Receiver is named as Plaintiff (the Respondent on this application) and the Hellecs who, along with some other senior employees of Welcome Ford, are named as Defendants. [ 2 ] This Action is an off-shoot from the overall Receivership Proceedings in respect to which there is a significant amount of background information and found in Ford Credit Canada Limited v. Welcome Ford Sales Ltd. , 2010 ABQB 199 , affirmed, sub nom Ford Motor Company of Canada Ltd. v.

Welcome Ford Sales Ltd. , 2011 ABCA 158 , a decision which was issued by the Court of Appeal on May 27, 2011.

Reference should be had to those decisions for some of the background to this Action and some of the defined terms found in 2010 ABQB 199 are also used in this decision. [ 3 ] On January 14, 2010 I granted the Receivership Order which, inter alia , specifically directed the Receiver to investigate the affairs of Welcome Ford in respect to an apparent shortfall of funds owing to Welcome Ford. [ 4 ] The Receiver proceeded with an investigation resulting in a number of reports including the Receiver’s First Report to the Court (“First Report”) dated February 16, 2010 which stated that $3.7 million dollars was unaccounted for and that 41 used vehicles were missing from Welcome Ford. [ 5 ] On April 14, 2010 the Third Report was filed and used in by the Receiver in support of an ex parte application for an order to compel disclosure of the personal banking information of senior employees of Welcome Ford who appeared to have received significant payments from Welcome Ford during 2009, including an alleged amount of over one million dollars paid to Hellec by Welcome Ford between January 1, 2009 and January 19, 2010. [ 6 ] The Third Report identified a number of payments to Hellec which the Receiver had concluded were not in the ordinary course of the business of Welcome Ford.

The Receiver was concerned with transactions involving parties related to Welcome Ford, and sought to gather greater detail about payments from Welcome Ford to senior employees and directors, and also payments from senior employees to Welcome Ford. [ 7 ] In the Third Report the Receiver made some specific observations in respect to Hellec including in

Section 6.0 about deposits made to the accounts of Welcome Ford by Hellec, in

Section 7.0 about undocumented deposits to the accounts of Welcome Ford through automatic bank machines by both Hellec and the alleged rogue Greg Duffy (“Duffy”) and in

Section 17.0 about sizable deposits from Hellec which required further explanation. [ 8 ] Based on this preliminary information about unexplained deposits from Hellec to the accounts of Welcome Ford and about almost contemporaneous payments from Welcome Ford to Hellec I made an order on April 15, 2010 which came to be known as the Norwich Order.

The Hellecs raised no concerns about the extent of disclosure to the Court at the time of the application by the Receiver for the Norwich Order. [ 9 ] The investigations of the Receiver continued and on June 3, 2010 the Receiver applied ex parte for what became the Attachment Order under the provisions of the CEA, RSA 2000, c. C-17 (the “CEA”) against the property of the Hellecs on the basis of the information set out in the Receiver’s Fifth Report (“Fifth Report”). This Report expanded on the findings of the Third Report in respect to Hellec, in particular.

It indicated that funds had moved between Hellec and the accounts of Welcome Ford in August and

November of 2009. It was alleged that this was done in order to supplement the accounts of Welcome Ford during audits by Ford Credit. The Hellecs take issue about the extent of disclosure made to the Court at the time of this application which was granted on June 4, 2010.

I will comment further on this alleged failure to disclose argument raised by the Hellecs in due course. [ 10 ] As a result of the Attachment Order, all of the assets of the Hellecs, in the amount of approximately $1 million including their family home in Fort Saskatchewan, their vehicles, and all of their savings in their BMO bank accounts (of over $400,000) were frozen. [ 11 ] Also, on June 4, 2010, the Receiver had filed a statement of claim commencing this Action, alleging that Hellec had fraudulently misappropriated at least $1,279,525.12 from Welcome Ford during 2009, and that Mrs.

Hellec knew or should have known of her husband’s fraud. [ 12 ] Several weeks later on June 29 and after filing a statement of defence the Hellecs made an application to revisit the Attachment Order. The Hellecs had only recently retained new counsel and an agreement was reached with the lawyers for the Receiver to continue the Attachment Order on the condition that it could be revisited at any time on two days notice.

Accordingly, the Attachment Order was extended until further order of the Court and remains in place at this time. [ 13 ] The Court has been advised that there were indications from the lawyers for the Receiver to the counsel for the Hellecs that an amended statement of claim would be filed. However, nothing happened until December 23, 2011 when the Hellecs filed a new application to set aside the Attachment Order, and observed that the Receiver had not yet filed an amended statement of claim. [ 14 ] On February 8, 2011, the Receiver applied for leave to file an amended statement of claim.

That application was not opposed by the Hellecs and I granted leave and the Amended Statement of Claim was filed on February 8 and served on the Hellecs on March 2, 2011. An Amended Amended Statement of Defence was filed by the Hellecs on March 29, 2011. [ 15 ] In the meantime, a number of affidavits had been made by various representatives of the parties and several cross- examinations on those affidavits took place.

On April 13, 2011 this matter came on for an oral hearing before me. [ 16 ] At the end of oral argument on that date, I asked counsel to provide supplemental written submissions on a number of the issues which had been raised during argument. Those submissions were received and have now been reviewed. As noted later in May the Court of Appeal issued a written decision in 2011 ABCA 158 . II. The legal context for this application to review an ex parte attachment order. [ 17 ] In Alberta, an application to review an ex parte attachment order is de novo , and the following legal principles apply: (

a) the claimant/plaintiff /applicant bears the onus of justifying the continuation of the attachment order; (

b) an attachment order shall not be maintained unless the current circumstances justify its continued existence; and (

c) if the applicant for the attachment order has failed to make full and fair disclosure of material information to the Court at the time of the original ex parte application, including disclosure of facts that might tend to weaken the case of the claimant, the Court may, for that reason alone, vacate an attachment order. See: Lyons v. Creason , 2008 ABQB 550 , at para 3 and the Royal Bank of Canada v. Levy , 2009 ABQB 564 , at para 3 . [ 18 ] In this case, the Attachment Order was made pursuant to statutory powers provided for in the CEA . Under s. 17(2) and (4) of

the CEA, an applicant for an attachment order must demonstrate three things to obtain such relief in the first place and then to maintain it in place if challenged. Those three things are: (

a) That there is a reasonable likelihood the claim against the defendants will be established; (

b) That if the relief is not granted, there are reasonable grounds to believe that the defendants will dissipate assets outside of the ordinary course and to the substantial prejudice of the claimant/plaintiff; and (

c) That the claimant/plaintiff has provided a suitable undertaking in damages to make good any harm cause by an attachment order that ultimately turns out to be improperly obtained. [ 19 ] I will say at this point that there is no issue taken by the Hellecs as to the adequacy of the undertaking on damages which has been made by the Receiver.

However, the strength of the claim against the Hellecs in fraud and the dissipation of assets point remained as live issues. [ 20 ] Where the cause of action is in fraud, and if the claimant/applicant has shown a reasonable likelihood that the cause of action will be established, the Court may conclude that the second requirement related to dissipation of assets is satisfied. However, this requirement cannot be met simply by making serious allegations of fraud; there must be concrete evidence. See: Osman Auction Inc. v.

Belland , 1998 ABQB 964 at paras 48-49 . [ 21 ] This requirement applies on an application to review the granting of an attachment order where the original applicant (in this case the Receiver) must demonstrate that there is some evidence that assets will be dissipated by the defendant (in this case the Hellecs). I come back to the dissipation issue in due course. III. Analysis A. Failure to make full disclosure at the time of the ex parte application for the attachment order. [ 22 ] On this application a serious issue has been raised by the Hellecs which I will deal with first.

The Hellecs submit that the Receiver failed to make full disclosure of material information at the time of the ex parte application leading to the granting of the Attachment Order.

The issue of full and frank disclosure of all information, good or bad, by an applicant for an attachment order is fundamental to the exercise by this Court of the discretionary powers related to the granting of this extraordinary remedy. [ 23 ] While ultimately I do not decide this application on the alleged failure by the Receiver to disclose pertinent information, that point was argued at length before me and will now be addressed, especially in respect to what I describe as the “in and out” loans by Hellec to Welcome Ford and the repayments by Welcome Ford to Hellec.

More specifically these were advances of funds made by Hellec to Welcome Ford during 2009 and the almost immediate repayment of those ‘loans’ with what appear to be bonus amounts in varying degrees sometimes within days of the original advance by Hellec to Welcome Ford. These “in and out” loans were initially described in the Third Report referred to above. [ 24 ] As noted, the Hellecs do not take issue with the extent of the information put before the Court at the time of the granting of the Norwich Order on April 14, 2010.

It is conceded that those were early days in the Receivership Proceedings. [ 25 ] However, the Hellecs say that by the time the ex parte application was made on June 3, 2010, resulting in the Attachment Order on June 4, 2010, there was a failure by the Receiver to make full disclosure to the Court. Reference was had to statements made early in 2010 by Duffy (an alleged rogue in this whole piece) to representatives of the Receiver, to the effect that Hellec was not involved in the scheme of Duffy and Smith to defraud Welcome Ford. Duffy is said to have reported that he i.e. Duffy and Royle Smith (the owner

of Welcome Ford) were the true villains draining the assets out of Welcome Ford.

The Receiver countered this argument with information which had emerged between January and June 2010 about questionable transactions in which Hellec is said to have participated for the purpose of deceiving creditors of the dealership, specifically Ford Credit. [ 26 ] After a review of the transcript of the proceedings before me on June 3 and 4, 2010 at the time of the hearing of the application for the Attachment Order I am satisfied that based on the state of knowledge of the Receiver on June 3 and 4 the Receiver did make full disclosure to the Court and that there was a reasonable basis for the Receiver, at that time, to believe that Hellec, in particular, was somehow involved in schemes to drain funds from Welcome Ford.

Certainly the “in and out” loans were not fully explained by Hellec primarily because at that time he had only limited opportunities to provide his side of the story.

Therefore, the initial granting of the Attachment Order cannot be attacked on the basis of inadequate disclosure and that aspect of the Hellecs application is rejected. [ 27 ] However, there remains the question of whether the challenged transactions were fully explained during the next several months or whether the Receiver came into possession of information that shows that Hellec was not involved in schemes designed to deceive the creditors of Welcome Ford or defraud Welcome Ford. [ 28 ] In that regard, a great deal of evidence was put before me which, in some instances, does provide an explanation for some of the suspicious transactions alleged against Hellec and relied on by the Receiver.

These transactions include the purchase of the 2010 Ford Escape through the creation of a credit in favour of Hellec based on unused vacation days and pay in lieu, the claim for vacation pay in the Receivership proceedings and the issues around compensation through car allowances, loan over payments on trade-ins and prepaid leases, etc... All of these allegations have been responded to by evidence from the Hellecs and through argument made by their counsel. I do not propose to go into a detailed analysis on the transactions which I have just listed for reasons which will soon become apparent. B.

Reasonable likelihood that the Receiver’s claims against the Hellecs will be established. [ 29 ] On this application much of the argument focussed on the first statutory prerequisite outlined above, i.e. whether there is a reasonable likelihood that the Receivers’ claim will be established in this Action. There has been a great deal of evidence on a multitude of subjects including, in particular, the short-term or “in and out” loans made by Hellec to Welcome Ford.

While particular emphasis was put on the suspicious nature of these loans and the allegedly unexplained windfalls received by Hellec from Welcome Ford for the short- term loans, there were also the other transactions which I have just briefly commented upon. [ 30 ] Further, it is important to note that the Hellecs have specifically disputed the allegations of the Receiver through the filing of an Amended Amended Statement of Defence, which denies all allegations of fraud.

Further, there has been evidence by the Hellecs which attempts to explain the transactions which the Receiver claims are suspicious, if not fraudulent. [ 31 ] The Receiver has raised many alleged inconsistencies on the part of Hellec in respect to the “in and out” loans and the extent to which he had discussions about those loan arrangements with Smith. [ 32 ] The Receiver’s counsel argues that there are inconsistencies between facts disposed to by Hellec in his various affidavits and on his cross-examinations on affidavits in respect to these “in and out” loans and discussions with Royle Smith; also in respect to discussions around the creation of a credit based on unused vacation time to help purchase a Ford Escape vehicle; inconsistent stories about how his car allowance was calculated and over payments on trade-ins; and in respect to Hellecs evidence in relation to a numbered company 1467256 Alberta Ltd. (“146 Alberta") which is the corporation created to run a used cars sales business out of the Welcome Ford premises. [ 33 ] While all of this material may well provide a basis for cross-examination of Hellec at trial it is an unsatisfactory basis for what amounts to a request to make a final determination of fraud at this stage. [ 34 ] As between the evidence from the Receiver in his Reports and the evidence from the Receivers’ witnesses though affidavits and Hellecs affidavits of cross-examinations there are significant conflicts.

Essentially, the case of the Receiver is that I should conclude that the Hellecs were involved in a series of frauds involving Welcome Ford. To resolve such conflicts, I am invited to make findings which amount to both credibility findings and conclusions that the Hellecs were involved in fraudulent conduct which is the ultimate question for determination in this Action.

[ 35 ] In my view, it is not appropriate to make such findings at this stage of this lawsuit, which would essentially be conclusive findings in the Action in respect to Robert Hellec. [ 36 ] Most of the activities of the Robert Hellec which have been focussed on in this application by the Receiver had occurred in the year prior to the Receivership Order being made on January 14, 2010. While I will agree that some of the transactions involving Hellec and Welcome Ford seem odd, they may or may not be routine in the new and used car sales industry for all I know.

In any event, seemingly odd commercial behaviour is not an adequate evidentiary basis to underpin the granting or maintenance of this serious remedy. [ 37 ] Further, in respect to Connie Hellec the evidence of her involvement in alleged fraudulent schemes is sketchy at best. Apart from her limited interest in 146 Alberta the only other evidence of any significance relates to payouts on personal vehicle loans through the trade-in process. There is no evidence that this activity had any negative effect on Welcome Ford in the sense that it created a loss for that company.

Indeed there is a paucity of evidence against her. The Receiver has not met its onus of continuing the Attachment Order on this basis. Accordingly, in respect to Connie Hellec I make a finding that there is insufficient evidence presented to me in respect to her to provide a basis for concluding that there is a reasonable likelihood of establishing the claims against her in this Action. Therefore, the Attachment Order is terminated against Connie Hellec on that basis. C.

Proof of the dissipation of assets by the Hellecs. [ 38 ] Further, in respect to the maintenance of the Attachment Order against the Hellecs, I am not convinced that there are reasonable grounds to believe that the Hellecs were dissipating their assets or taking steps to dissipate their assets outside of the ordinary course and to the prejudice of the Receiver. [ 39 ] As I have noted earlier in this decision, the Receiver must show that there is a solid evidentiary foundation that the Hellecs had taken or likely taken active steps to dissipate their assets. [ 40 ] This requirement on the part of the claimant was described as “rigorous and specific” in First Mortgage Fund (

V) Inc. (Receiver Manager of) v. Boychuk , 2003 ABQB 217 para. 30 . [ 41 ] I also take particular guidance from Veit, J. in Edmonton Region Community Board for Persons with Development Disabilities v. Pearl Villa Homes Ltd. , 2003 ABQB 1026 , at paras. 28 and 29 . [ 42 ] As this extraordinary remedy developed at common law proof of actual or anticipated dissipation was a core issue in obtaining a Mareva injection. That common law remedy is now provided for in the CEA .

However, the law continues to be that if there is no risk of dissipation of assets, then the claimant must prove its case before it can secure judgment. Evidence of dissipation includes evidence that assets have disappeared, or evidence that assets have been sold to non-arm’s length parties for less than market value. [ 43 ] There is no evidence that prior to the Attachment Order being granted on June 4, 2010, that the Hellecs took any action to dispose of any assets, or to move assets beyond reach of the Receiver.

As the Hellecs point out, there is no evidence to suggest any sales or transfers of assets for no consideration to friends or relatives, no unexplained transfers of funds, or hidden bank accounts. Of particular importance to me, is that there is no evidence of any liquidation of real property, investments or attempts to move any assets to locations outside of Alberta.

In fact, the opposite is shown, namely, that the Hellecs have longtime roots in the community of Fort Saskatchewan and there is no evidence that they were planning to leave Alberta or take any steps in that regard. [ 44 ] In reaching my decision on the dissipation point, I put particular emphasis on the fact that the activities said to constitute fraud had to have been completed by Hellec before early January 2010. He has provided explanations in response to many of those allegations.

The Attachment Order was not sought until early June, 2010 and almost six months had gone by since the Welcome Ford Dealership had collapsed. There is no evidence shown to me that the Hellecs were taking any steps during that period to liquidate any of their assets, or were making any plans to move assets outside the jurisdiction.

[ 45 ] Specifically, the Hellecs have disputed any intention to dissipate assets in their Amended Amended Statement of Defence and have pointed out that there is no evidence to show that they took any steps to move in this direction. [ 46 ] In the result, I am not satisfied on this de novo hearing that the Receiver has satisfied the burden of showing that the Hellecs were preparing to dissipate or will dissipate their assets outside of the ordinary course and to the substantial prejudice of the Receiver. [ 47 ] Accordingly, for these reasons the Attachment Order against the Hellecs is vacated forthwith. [ 48 ] Costs may be spoken to if necessary.

Heard on the 13 th day of April, 2011 and by the filing of subsequent written submissions in April and May, 2011. Dated at the City of Edmonton, Alberta this 30 th day November 2011. D.R.G. Thomas J.C.Q.B.A. Appearances: Mr. D.R. Cranston, Q.C. and Ms. A.L. Archer (Bennett Jones LLP) for the Applicants (Defendants) Robert Hellec and Connie Hellec Mr. J.H. Hockin and Mr. D. Wedge (Parlee McLaws LLP) for the Respondents (Applicants) Receiver/Trustee of Welcome Ford, Myers, Norris, Penny Ltd.

Mr. D. Bieganek (Duncan & Craig LLP) for the Respondents (Applicants) Ford Credit Canada