Westcorp Inc v H & H Stucco & Siding Ltd, 2016 ABQB 650

Court of Queen’s Bench of Alberta Citation: Westcorp Inc v H & H Stucco & Siding Ltd, 2016 ABQB 650 Date: 20161121 Docket: 0603 07038 Registry: Edmonton Between: Westcorp Inc. Plaintiff - and - H & H Stucco & Siding Ltd. and H Homes Inc. Defendants _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice S.M.

Bensler _______________________________________________________ Introduction [ 1 ] The issue arising in this dispute is whether a transfer of a home in Calgary by H & H Stucco & Siding Ltd. to H Homes Inc. constitutes a fraudulent transfer pursuant to the Fraudulent Preferences Act , RSA 2000, c F-24, or the Statute of Elizabeth , 13 Eliz. 1, c 5. Background [ 2 ] H & H Stucco & Siding Ltd. (“H Stucco”) and H Homes Inc. (“H Homes”) are Defendants in this action. The Plaintiff in this action hired H Stucco to install stucco and siding on a project.

In 2001, the Plaintiff sued H Stucco for breach of contract stemming from this project, and in 2006, the Plaintiff was granted judgment against H Stucco for over $400,000.00.

[ 3 ] H Homes was incorporated as part of a proposed corporate reorganization of H Stucco in 2002. The reorganization sought to have H Homes acquire all of H Stucco’s assets, while H Stucco would conduct the business operations, namely stucco and siding work. According to the Defendants, the purpose behind the reorganization plan was to allow the wife of the director of H Stucco to accumulate income from the business by way of an ownership share of H Homes, to facilitate a possible sale of the business at a later date, and to establish a tax effective corporate structure.

There was also the hope for a potential benefit for the H Stucco director’s children to benefit from the disposition of H Stucco’s real estate property. [ 4 ] While the reorganization plan was finalized in 2002, the actual execution of the plan was fraught with delays. [ 5 ] The property at issue in this case was purchased by H Stucco in 1998. H Stucco acquired a residential home in Calgary (the “Calgary Home”). The 2002 reorganization plan called for all assets of H Stucco to be transferred to H Homes, which included the Calgary Home.

However, H Homes did not register its title in the Calgary Home at the Land Titles Office until May of 2005. [ 6 ] In March of 2003, H Stucco had a workplace fatality on its job site. As a result of the fatality, H Stucco decided to shut down operations.

In the years that followed, H Stucco’s reorganization plan resulted in capital assets being shifted from the company’s balance sheet to H Homes, while revenue dropped as operations were being wrapped up. [ 7 ] By the time the Plaintiff was granted judgment in their original action against H Stucco in 2006, there were virtually no assets for the Plaintiff to seize to satisfy the judgment. [ 8 ] The Plaintiffs position is that the transfer of the Calgary Home from H Stucco to H Homes, finalizing in May of 2005, represents a fraudulent transfer, designed to prejudice creditors, and as such, should be set aside pursuant to the Fraudulent Preferences Act , or the Statute of Elizabeth . [ 9 ] The Defendants argue that while there was delay in the final execution of the conveyance of the Calgary Home, it had actually been transferred in 2002 or early 2003 with the finalization of the reorganization plan.

The Defendants take the position that at the time of the transfer, H Stucco was solvent, and even if it was insolvent, the conveyance did not have the fraudulent intent necessary to set aside the transfer of the Calgary Home. Issues [ 10 ] The issue in this case is easily stated: does the transfer of the Calgary Home from H Stucco to H Homes constitute a fraudulent preference pursuant to either the Fraudulent Preferences Act or the Statute of Elizabeth , resulting in the transfer being set aside? Analysis The Fraudulent Preferences Act [ 11 ] The Plaintiff alleges that the conveyance of the Calgary Home breaches

section 1 of the Fraudulent Preferences Act , which makes the conveyance void.

Section 1 requires a claimant to prove three elements: 1. That there was a conveyance or transfer of real or personal property; 2. That the conveyance was made by a person that is in insolvent circumstances or is unable to pay the person’s debts in full or knows that the person is on the eve of insolvency, and 3. That the conveyance was done with the intent to defeat, hinder, delay or prejudice the person’s creditors. [ 12 ] The actual conveyance of the Calgary Home is not in dispute, nor is it disputed that the Plaintiff was a creditor of H Stucco, as H Stucco conceded this point.

What is at issue is whether the conveyance occurred while H Stucco was insolvent or on the eve of insolvency, and whether the conveyance was done with the requisite intent to defeat the H Stucco’s creditors. Was H Stucco Insolvent or on the Eve of Insolvency? [ 13 ] Both parties disagree about the precise date on which the assessment of H Stucco’s solvency should occur. The Plaintiff argues that the conveyance of the Calgary Home was finalized with transfer and registration at the Land Titles Office in June of 2005, and it is at this time when the assessment of solvency should take place.

The Defendants argue that the assessment should be done in 2002, after the reorganization plan was approved by H Stucco, because this is when the substance of the conveyance took place. [ 14 ] In my view, a conveyance occurs when all legal rights have passed from the transferor to the transferee. In this case, this occurred when the transfer of the legal rights of the Calgary Home was finalized with the Land Titles Office in June of 2005. Before the transfer and registration occurred, the conveyance was incomplete. The language of

section 1 of the Fraudulent Preferences Act contemplated a completed transfer or conveyance, and in the case of real property, registration is a prerequisite to a proper and final conveyance. [ 15 ] This is consistent with

section 53 of the Land Titles Act , RSA 2000 c L-4, which makes registration a prerequisite to the transfer of real property from one party to another. Requiring registration creates commercial certainty, which is driving purpose of the Torrens System in Alberta. The Court in Bank of Montreal v 1323606 Alberta Ltd , 2013 ABQB 596 wrote, at para 22, “[The Torrens System] designed to meet a simple policy goal - to provide a clear, definitive mechanism to evaluate the status of land.”

[ 16 ] Thus, in this case, the appropriate time to asses H Stucco’s solvency is June of 2005. This was the date on which the conveyance of the Calgary Home was finalized. [ 17 ] Whether H Stucco was insolvent, or on the eve of insolvency, in June of 2005 is a factual determination subject to the evidentiary record. [ 18 ] In March of 2003, H Stucco decided to wind down business operations after a workplace fatality occurred on their job site.

This decision is reflected in H Stucco’s financial statements, with revenues declining from over $4 million in 2003, to under $15,000 in 2005. [ 19 ] H Stucco operated at a loss in 2003 and 2004, as reported in the January 2004 and 2005 financial statements. Furthermore, H Stucco’s assets were depleting while the liabilities remained sizable.

Ultimately, the financial statements prepared in January 2005 revealed negative equity in H Stucco, with the company’s liabilities greatly outweighing its assets. [ 20 ] While the bulk of the listed liabilities on H Stucco’s balance sheet were debts to “related parties” and “shareholders” that did not have any interest payments or a fixed term of repayment, it is clear H Stucco was in a dire financial situation. [ 21 ] Adding to this, H Stucco had several looming liabilities that could possibly accrue to them in the near future.

The fatal accident also resulted in a claim being brought against H Stucco pursuant to the Occupational Health and Safety Act , RSA 2000, c O-2. At the time of the conveyance of the Calgary Home, the fine was unknown, but it ultimately came out to approximately $300,000.00. Lastly, H Stucco and the Plaintiff were proceeding to trial on the parties’ other action, which resulted in a judgment of over $400,000.000 in favor of the Plaintiffs. [ 22 ] It is not within the knowledge of the Plaintiff whether H Stucco was truly insolvent or on the eve of insolvency.

Yet, based on the evidence, a reasonable inference can be drawn that H Stucco was either insolvent or on the eve of insolvency in May of 2005. Accordingly, the evidentiary burden shifts to H Stucco to disprove their insolvency at the relevant time: Krumm v McKay , 2003 ABQB 437 , at para 42 . [ 23 ] I am satisfied that H Stucco was either insolvent or on the eve of insolvency at the time of the conveyance. Accordingly, the next question in the analysis under

section 1 of the Fraudulent Preferences Act is whether H Stucco intended to defeat its creditors with the conveyance of the Calgary Home. Did H Stucco Intend to Defeat its Creditor’s Interest? [ 24 ] Assessing intent in the context of the Fraudulent Preferences Act requires an assessment of all the facts and circumstances surrounding the conveyance.

This includes reviewing the conduct of the debtor in light of the circumstances: Convoy Supply Alberta Ltd v Apex Insulation 1996 Ltd , 2003 ABQB 1 , at para 19 . [ 25 ] The decision to transfer the Calgary Home from H Stucco to H Homes originated out of the reorganization plan created in 2002. Corporate reorganizations are common and can happen for a variety of reasons. [ 26 ] The Defendants assert that the purpose of their reorganization was legitimate and not to defeat their creditors.

The Defendants claimed that the purposes were to allow the wife of the director of H Stucco to accumulate income from the business, to facilitate a possible sale of the business at a later date, and to establish a tax effective corporate structure. With respect to the Calgary Home in particular, part of the reason for the transfer, according to the Defendants, was to allow the director of H Stucco’s children benefit from the eventual sale of the home.

The Defendants also claim that any so-called “creditor proofing” that occurred as a result of the reorganization was an ancillary result of the reorganization, not a driving purpose. [ 27 ] I am satisfied that this was the Defendants’ purpose for the reorganization. After 2002, H Stucco’s financial statements show a drawdown of capital assets, which is consistent with the reorganization plan. With respect to the Calgary Home, the intention to transfer it from H Stucco to H Homes was clear at the outset.

The 3 year delay in finalizing the transfer was the result of delays in processing the legal documents by H Stucco’s solicitors. The removal of the Calgary Home from H Stucco’s balance sheet prior to 2005 is indicative of the consistent intent. [ 28 ] I am not satisfied that the delay in finalizing the transfer with the Land Titles Office by H Stucco’s solicitors represents any intent to defraud, delay or hinder H Stucco’s creditors.

The delay is problematic in its own right, but is not representative of H Stucco’s illicit intent for the purposes of the Fraudulent Preferences Act . [ 29 ] The Defendant’s reorganization plan had a legitimate business purpose in 2002, and while H Stucco’s financial situation deteriorated in the years that followed, the intention of the conveyance of the Calgary Home was to give effect to the reorganization plan. That is, the intention was to make a good faith business decision, not to defeat H Stucco’s creditors within the parameters outlined in the Fraudulent Preferences Act .

This good faith intention remained the driving reason behind the conveyance from 2002 up and until the transfer was finally registered and finalized in 2005. [ 30 ] It came to light at trial that H Stucco continued to make mortgage payments, and pay property taxes and utilities of the Calgary Home up an until 2005, even after H Stucco asserts the conveyance had been completed.

I find this to be indicative of bad management and poor execution of the reorganization plan, not an indication that the conveyance of the Calgary Home was intended to defeat the Plaintiff’s interests. [ 31 ] To summarize, the intent to defraud, defeat, or delay creditors is not present in this case. The conveyance of the Calgary Home had a bona fide business purpose. Accordingly, I find that there was not a fraudulent transfer of property. The conveyance will not be set aside pursuant to the Fraudulent Preferences Act , due to the fact that the requirements under

section 1 have not been met.

The Statute of Elizabeth [32] The Statute of Elizabeth originated in England 1570 in attempt to prevent debtors from defrauding creditors. The FraudulentPreferences Act was a provincial codification of much of what was contemplated in the Statute of Elizabeth. As such, both havesimilarities, but there are some differences.

In the context of this case, the chief difference between the two is that a debtor need not beinsolvent at the time of the transfer for the Statute of Elizabeth to void a conveyance that defrauds a creditor: Krumm, supra at para 35. [33] A conveyance will be void under the Statute of Elizabeth if the following are established: 1. there is a conveyance of real property; 2. for nominal or no consideration; 3. with intent to defraud, delay, or hinder creditors; 4. the party challenging the conveyance must be someone who was a creditor at the time of the conveyance or someone with a legalor equitable right to claim the transferor; and 5. the conveyance must have had the intended effect. (Palechuk v Fahrlander, 2006 ABCA 242, leave to appeal denied [2006] SCCANo 405, at para 31). [34] Of these 5 requirements, the one at issue is whether there was the requisite intent to defraud, delay, or hinder creditors.

Did H Stucco Intend to Defeat its Creditor’s Interest? [35] While I addressed intent in the analysis under the Fraudulent Preferences Act, the mechanics of the analysis is slightlydifferent under the Statute of Elizabeth. [36] The Plaintiff points to the case of Rogers Reality Ltd v Prysiazny, (1996) (AB KB), 182 AR 118 (ABQB)for the proposition that a presumption of fraudulent intent arises if the voluntary conveyance results in no assets available to the debtor topay their debts.

The Plaintiff asserts that the transfer of the Calgary Home reduced H Stucco’s assets to a negligible level, which wouldtrigger the presumption of fraudulence. [37] Rogers Reality also cites Mandryk v Merko, (MB CA), [1971] 2 WWR 542 (MBCA) which outlines theway in which the fraudulent presumption can be rebutted, at para 15: However strong the presumption may be that if the necessary effect of a voluntary transfer is to delay or defeat creditors an intention todo so should be inferred, it is not conclusive.

In an appropriate case the presumption may have to yield in favour of cogent andaffirmative evidence establishing an honest purpose in the making of the transfer, a purpose in no way designed to prejudice creditors. [38] I am satisfied that the legitimate business purpose of the corporate reorganization rebuts the presumption referenced in RogersRealty. [39] The burden of proving intent falls on the Plaintiff. The jurisprudence addressing the Statute of Elizabeth outlines many“badges of fraud”, which are a series of indicia on which a Plaintiff can rely when establishing intent.

Proof of one or more badges offraud will not compel a finding of intent in favor of the Plaintiff, but it does raise a prima facie case which the Defendants should attemptto rebut: CRB Dunlop, Creditor-Debtor Law in Canada, 2nd ed (Toronto: Carswell, 1995) at 613. [40] The Plaintiff referenced the following badges of fraud from the Statute of Elizabeth jurisprudence as present in this case: 1. A close relationship exists between the parties to the conveyance; 2. The transfer was general in nature in that it included virtually all of the assets of the transferor; 3.

The transfer documents contain false statements as to consideration; 4. The transferor continued in possession and used the goods as his or her own. (See Builders’ Floor Centre Ltd v Thiessen, 2013ABQB 23, at para 43.) [41] The parties to the conveyance of the Calgary Home were not only in a close relationship, they had identical directors. I findthis qualifies as one badge of fraud. [42] The consideration for the conveyance was that H Homes would assume the mortgage on the Calgary Property.

According toevidence, the transfer document stated that the consideration was not only the assumption of the mortgage, but also included cash. Thiswas not the case; the only consideration proved to be the alleged assumption of the mortgage. [43] While the mortgage came off the books of H Stucco, H Stucco continued to pay the mortgage, property taxes, and utilities upand until the final transfer and registration of the Calgary Home in 2005.

H Homes did not have a bank account nor did it have liquidassets with which to pay the recurring expenses on the Calgary Home. [44] The Plaintiff also takes the position that H Stucco was facing looming lawsuits, one as part of a separate claim by the Plaintiffand the other as a result of the Occupational Health and Safety Act charge. This serves as evidence that the transfer of the Calgary Homewas done to avoid one or both of these potential judgment creditors.

[ 45 ] In my view, one or all of these factors are appropriate badges of fraud and are sufficient to give rise to the prima facie case which the Defendant should rebut. I find that the Defendants do successfully rebut the prima facie case arising from the badges of fraud. [ 46 ] The purpose behind the conveyance of the Calgary Home was as part of the corporate reorganization initiated in 2002.

It is undeniable that the conveyance happened between related parties, but I am not convinced that this is sufficient to establish intent to defeat creditors; it is more consistent with a necessary part of the reorganization. [ 47 ] H Stucco misrepresented the consideration for the conveyance and wrongfully paid the mortgage of the Calgary Home out of H Stucco’s accounts. This is symptomatic of poor management and sloppy execution of the reorganization, not evidence of intent to defraud creditors. [ 48 ] In the absence of an intention to defraud a creditor, the Statute of Elizabeth will not void a conveyance.

I find that the Defendants did not have the requisite intent to defeat their creditors. Accordingly, the conveyance of the Calgary Home is not void under the Statute of Elizabeth . Conclusion [ 49 ] The requisite intent to defraud a creditor is not present in this case. This precludes the conveyance of the Calgary Home from being void under either the Fraudulent Preferences Act or the Statute of Elizabeth . [ 50 ] Accordingly, I dismiss this action. [ 51 ] If the parties cannot agree on costs, they may be spoken to within three months of today’s date.

Heard on the 24 th day of May, 2016 to the 26 th day of May, 2016. Dated at the City of Calgary, Alberta this 21 st day of November, 2016. S.M. Bensler J.C.Q.B.A. Appearances: Rod J. Wasylyshyn, Ogilvie LLP for the Plaintiff Murray L. Engelking, Engelking Wood for the Defendants