336239 Alberta Ltd. Carrying on Business As Dave's Diesel Repair Plaintiff - v. -, 2016 ABQB 190

Court of Queen ’ s Bench of Alberta Citation: 336239 Alberta Ltd (Dave’s Diesel Repair) v Mella, 2016 ABQB 190 Date: 20160331 Docket: 1403 15969 Registry: Edmonton Between: 336239 Alberta Ltd. Carrying on Business As Dave's Diesel Repair Plaintiff - and - Francis Emanuel Mella, Matrix Consulting Ltd., M2 Systems Inc., ABC Corp., and Mella Fitness Consulting Ltd. Defendants _______________________________________________________ Reasons for Decision of the Honourable Madam Justice D.L. Shelley _______________________________________________________ Introduction [ 1 ] The Plaintiff seeks judgment against Ms.

Olena Afonska, Mr. Mella’s wife, who is not a party to this action. Facts [ 2 ] One or more of the Defendants provided accounting and management services to the Plaintiff, until the Plaintiff discovered

that they had fraudulently misappropriated funds from it. The Plaintiff commenced an action against the Defendants for fraud, breach of fiduciary duty, breach of trust, and wrongful conversion. [ 3 ] On October 31, 2014, the Plaintiff obtained an Attachment Order directing the Defendants to limit their monthly expenditures. This Attachment Order was extended by consent on November 21, 2014 and November 28, 2014. On March 27, 2015, the Plaintiff obtained a Consent Judgement against the Defendants in the amount of $2,269.757.00. [ 4 ] Ms. Afonska married Mr.

Mella in 2012, but she did not move to Canada from Ukraine until sometime in 2014. She has limited English language skills, and Mr. Mella speaks very little Russian. [ 5 ] Mr. Mella opened a bank account in Ms. Afonska’s name in October 2014, at about the time of the Attachment Order. With small exceptions, he made deposits into the account for his own or his companies’ benefit. Nearly all of the funds in the account were paid out by Mr. Mella or his related businesses to pay creditors and expenses. Ms. Afonska spent approximately $3,165.70 through point of sale purchases at Edmonton stores. [ 6 ] Ms.

Afonska testified in Questioning that she did not know about the proceedings against her husband. In her Affidavit, she indicated that she signed the cheques he presented to her for her signature without her knowing what they were for. [ 7 ] Mr. Mella conveyed the following to Ms. Afonska’s account: a. $19,118.86 from himself; b. $40,466.39 from Matrix via Pay Pal transfers; c. $6,408.59 wages from Matrix; d. $17,249.84 from Matrix; and e. $16,434.66 from rents by the tenants of Mr. Mella’s condo. [ 8 ] Other funds paid into the account include: a. Wages paid to Ms. Afonska for services she performed in Mr.

Mella’s business [1] ; b. $75 paid by the Plaintiff’s solicitor for the garnishee summons issued to Ms. Afonska (and not responded to until an application was brought to complete her response); and c. $11,007.50 paid into the account by Mr. Mella’s brother as a loan. [ 9 ] The following were paid out of Ms. Afonska’s account: a. Mr. Mella’s insurance premiums: $15,424.20; b. Condominium fees: $10,555.92; c. Payments toward Mr. Mella’s credit cards, business expenses, including payroll: $47,405.41; d. Mortgage payments: $16,434.66; e. Ms. Afonska’s personal expenses: $3,165.70 (the point of sale purchases); and f.

Other family related expenses: $1,307.60. [ 10 ] Mr. Mella admitted that he instructed his tenants to pay the rent to Ms. Afonska to avoid the Plaintiff’s garnishments. He also admitted that he transferred funds from his PayPal account, also to avoid garnishment. The Issue [ 11 ] At issue is whether the Court, under either the Fraudulent Preferences Act , RSA 2000, c F-24 or the Fraudulent Conveyances Statute, 13 Eliz. I, C-5 (UK) ( Statute of Elizabeth) , can grant judgement against a non-party recipient of assets, who no longer has possession of the assets, and who received little or no benefit from them.

Analysis [ 12 ] The Plaintiff is seeking judgment against Ms. Afonska in order to repay the funds conveyed to her by Mr. Mella. The Statute of Elizabeth authorizes the Court to set aside conveyances of property that have been transferred for the purpose of delaying, hindering, or defrauding creditors. The Fraudulent Conveyances Act has the same purpose but is limited in application to situations where the transferor is insolvent. [ 13 ] Ms.

Afonska asserts that, while a creditor may seek to set aside a fraudulent conveyance or have fraudulently conveyed assets sold and the proceeds paid out, a creditor cannot obtain judgment against a non-party if the assets or funds have been transferred.

Rule 9.24 [14] The Plaintiff asserts that r 9.24 of the Alberta Rules of Court permits a judgment creditor to seek relief against the transfereewithout the necessity of commencing a new action, even if the transferee is not a party to the original action. It reads: 9.24(1) If a judgment creditor claims to be entitled to relief under the Fraudulent Preferences Act or under the Fraudulent ConveyancesStatute, 13 Eliz. I,

Chapter 5 (U.K.), on application by the judgment creditor, the Court may order property or part of property to besold to pay the amount to be collected under a writ of enforcement. [Emphasis added.]

(2) Notice of the application must be served on (

a) the judgment debtor, and (

b) the person to whom it is alleged the property was conveyed.

(3) If a transfer or conveyance is made to defeat, defraud or hinder the rights of a judgment creditor, the judgment creditor, for thepurpose of obtaining an order under sub rule (1), need not have obtained judgment at the time of the impugned transfer or conveyance. [15] The Plaintiff cites Woodmann Interiors Ltd v Zeh (Alta. QB.) (AB KB), 98 AR 68, and Forsey v HydroKleen Systems Inc, 2011 ABQB 14, for the proposition that the Court can grant relief to a non-party. Ms. Afonska replies that the Ruledoes not permit the Court to summarily award judgment.

Rather, it permits the Court to order the non-party who received the wrongfullyconveyed property to sell the property to pay the debt. [16] In Woodmann, Conrad J ordered the matter be set down for trial. At issue were whether the property in question wasconveyed in breach of the Statute of Elizabeth or the Fraudulent Preferences Act and whether the property was exempt as homesteadproperty.

Her comments regarding the purpose of then r 383 indicated that the relief could be claimed against a non-party, but did notgrant judgment. [17] In Forsey, the Defendant corporation repaid an alleged shareholder loan to its non-party sole shareholder, Watts. As well, theDefendant corporation sold assets to Watts and several other non-parties, including other of Watts’ solely owned corporations, leavingthe Defendant corporation without assets. The corporation then transferred funds to repay alleged debts owed to the non-parties. Therewas little to no evidence of either the shareholder loan or these other debts.

Watts admitted he used some of the cash received from theassets sale to improve his primary residence, to purchase a car, and to transfer money to his common law spouse. The Court concludedthat Watts, as the sole shareholder, had intended to prefer himself and his corporations over the Plaintiff creditor, and that the Plaintiffcould realize upon Watt’s personal residence.

The Court ordered the non-party corporations to repay to Watts the value of the Plaintiff’sjudgment. [18] The Court did not discuss the basis upon which the Plaintiff could realize upon Watts’ primary residence, but from thecontext, it appears that the Court pierced the corporate veil to find that Watts was the sole shareholder and operating mind. Further, someof the money from the asset sale was conveyed to Watts to improve his home. [19] The clear language of r 9.24 provides that a Court may order the sale of the property that was fraudulently conveyed to paythe amount owing.

It does not say that the Court can summarily award judgment against the non-party that received the property. [20] In that regard, the Court of Appeal, in Milavsky v Milavsky, 2011 ABCA 231, citing Sharpe J.A. in Perry, Farley &Onyschuk v Outerbridge Management Ltd (2001), (ON CA), 199 DLR (4th) 279, 146 OAC 144, noted that aplaintiff’s entitlement to money or damages exists independently from the action to set aside the conveyance as the Statue of Elizabethgives no right to damages or compensation for loss.

For example, in Pigeon Lake Park Maintenance Ltd. v Foley (1997), (AB KB), 52 Alta LR (3d) 146 Master Funduk commented that if the fraudulently conveyed property was not available forseizure and sale, the plaintiffs could sue the recipients of the property relying on s 3 of the Statute of Elizabeth.[2] [21] Finally, as noted by counsel for Ms. Afonska, the plaintiff has not brought an application for

summary judgment under r 7.3. [22] I conclude that this Court cannot grant judgment against a non-party and cannot order her to pay damages or compensation.Rule 9.24, in conjunction with the Fraudulent Preferences Act and the Statute of Elizabeth, is limited to striking down the allegedfraudulent conveyance or ordering the sale of the property wrongfully conveyed. Was the conveyance to Ms. Afonska fraudulent? [23] Having found that r 9.24 does not authorize the Court to grant judgment against a non-party, I need not go further. I dismissthe application.

However, if I am wrong on this, I will consider whether the conveyance to Ms. Afonska was fraudulent. [24] Clackson J in Proulx v Proulx, 2002 ABQB 151 (at para 14), (cited in Palechuk v Fahrlander, 2004 ABQB 330 at para 66), set out the requirements to determine whether a judgment creditor is entitled to relief under the Statute of Elizabeth: 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 settler to defraud, hinder or delay his creditors; 4.

The intent of the settler may be inferred from his circumstances and the circumstances of the settlement or may be the result of directevidence;

5. The fact that there was no consideration or voluntary consideration will in most cases justify the inference of the necessary intent absent evidence rebutting that inference; 6. Inference of intent will be strong if the settler was insolvent at the time of the settlement or the settlement effectively denuded him of assets 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 settler; 8. The conveyance must have had the intended effect. [ 25 ] Ms.

Afonska argues that she was an innocent bystander and never received any benefit from the conveyance. Further, she argues that the funds were never unconditionally conveyed to her, as the funds were at all times held in trust for Mr. Mella’s benefit. Finally, she argues that more than nominal consideration was given by Ms. Afonska to Mr. Mella. [ 26 ] In my view, there is no doubt that Mr. Mella conveyed money to Ms. Afonska for the purpose of delaying, hindering or defeating the Plaintiff’s claim. However, Ms.

Afonska sets out three grounds which she argues establish that the Statute of Elizabeth does not apply to her. [ 27 ] Among these grounds, she argues that more than nominal consideration was provided by her to Mr. Mella for the funds because she permitted Mr. Mella to use the account to pay debts and bills. I reject Ms. Afonska’s assertion that this constitutes consideration for the money transferred to her accounts. The confusion over consideration arises because we are talking about an asset that is cash.

Generally when one is considering whether the transferee compensated the transferor, the question would be what value did Ms. Afonska provide to Mr. Mella in return for receiving the asset, in this case cash. [ 28 ] Ms. Afonska cannot say that the cash was paid to her, and in return she allowed Mr. Mella to use it. The reality is that, except for the approximately $3000.00 allegedly paid to her as wages, she provided no value in return for the cash conveyed to her account. [ 29 ] Ms. Afonska further alleges that she was an innocent bystander that had no knowledge of what Mr.

Mella was doing, similar to the situation in Korea Data Systems Co v Aamazing Technologies Inc , 2012 ONSC 3922 . Ms. Afonska’s evidence was that she does not know how to access the account on the internet; she never saw any bank statements until after the action against her was commenced; she only accessed the account with her debit card when she was shopping; and she never knew the balance in the account; she signed cheques when asked to by Mr. Mella and accompanied him to the bank when asked.

She says that her husband used her account as a conduit to prefer certain creditors. [ 30 ] The innocent bystander analysis is relevant only when the transferee provided consideration for the transfer. If there was consideration, then the claimant must prove that the transferee had knowledge of the transferor’s fraudulent intention. Having concluded that there was no consideration, Ms. Afonska’s knowledge is irrelevant. [ 31 ] Finally, Ms.

Afonska argues that the conveyance was not absolute and unconditional, citing Dunlop & Buckwold at p 975 and Moody v Ashton , 2004 SKQB 488 , for the principle that the Statute of Elizabeth does not apply if the transferor retains a beneficial interest. She argues that the transfer could not be considered absolute and unconditional since Ms. Afonska needed her husband’s permission to use the funds.

Under the analysis in Moody , the creditors could have seized the account as Mella’s property since he retained a beneficial interest. [ 32 ] I note, however, that Dunlop & Buckwold suggest that the case does not stand for the broad principle suggested by Ms. Afonska, stating: If, however, a conveyance is conditional but does not leave the creditors with an asset to seize, they should not be denied their rights under the [ Statute of Elizabeth ].

The Court’s statement, read in context, does not stand for a general rule that only unconditional and complete conveyances fall within the [ Statute of Elizabeth ]. [ 33 ] Accordingly, I conclude that there was a fraudulent conveyance by Mr. Mella to Ms. Afonska. As in Pigeon Lake, the transferred asset has been dissipated, and therefore the result is that the Plaintiff must sue Ms. Afonska, as r 9.24 in combination with the Statute of Elizabeth only provide for seizing and selling the transferred asset.

As the Court of Appeal held in Milavsky : This provision neither creates a right of action that sounds in damages, nor does it create a legal duty, the breach of which gives rise to a cause of action. The plaintiff in a fraudulent conveyance action does not assert the breach of a legal duty, but rather asserts that the debtor has improperly placed assets beyond the reach of ordinary legal process. Any entitlement to the payment of money or damages in favour of plaintiff exists independently and apart from the action to set aside the fraudulent conveyance.

The Act gives no right of damages nor compensation for loss. It provides for a declaratory type proceeding that has the effect of nullifying transfers and conveyances of the debtor's property so as to make possible execution of the creditor's debt. Conclusion [ 34 ] For the above Reasons, I dismiss the Plaintiff’s application for judgment against Ms. Afonska. Heard on the 19 th day of January, 2016. Dated at the City of Edmonton, Alberta this 31 st day of March, 2016.

D.L. Shelley J.C.Q.B.A. Appearances: Walter J Pavlic, Q.C. and Sharon Au MacPherson Leslie & Tyerman LLP for the Plaintiff Alexander Mosaico Mosaico Law for Olena Afonska