KOR Machining and Mechanical Ltd v KOR Welding and Machining Inc and SICO Welding and Fabrication Inc, 2017 ABQB 290

Court of Queen’s Bench of Alberta Citation: KOR Machining and Mechanical Ltd v KOR Welding and Machining Inc and SICO Welding and Fabrication Inc 2017 ABQB 290 Date: 20170425 Docket: 1510 01118 Registry: Red Deer Between: KOR Machining and Mechanical Ltd. Plaintiff - and - KOR Welding and Machining Inc. Defendant - and - KOR Welding and Machining Inc. and SICO Welding and Fabrication Inc. Respondents _______________________________________________________ Memorandum of Decision of A.R.

Robertson , Q.C., Master in Chambers _______________________________________________________ Background This is an application for a declaration that the conveyance of certain chattels from the defendant KOR Welding and Machining Inc. to

the respondent SICO Welding and Fabricating Inc. was a fraudulent conveyance and a fraudulent preference. The plaintiff is a judgment creditor of KOR Welding. The Chronology of Events [ 1 ] The sequence of events leading to the impugned transfer is important. [ 2 ] The action was in debt, based upon a promissory note. It was commenced October 2, 2015. A statement of defence was filed February 16, 2016 and a

summary judgment application was brought, originally scheduled for August 19, 2016. The application was adjourned initially to August 26, 2016. [ 3 ] The application was finally heard on September 13, 2016, by Master Mason. She granted judgment against KOR Welding for $215,688.50 plus interest from August 1, 2015 at 4% per annum, plus costs of $3,958.53. [ 4 ] The plaintiff filed a writ of enforcement on November 2, 2016. [ 5 ] On November 15, 2016, Simon Louis Denis Tremblay was examined in aid of enforcement.

He is the sole director of both respondents, KOR Welding and Machining Inc. and SICO Welding and Fabricating Inc. He was accompanied by his legal counsel. On the basis of Mr. Tremblay’s evidence given in the examination (now known to have been false, as discussed below), on the same day the plaintiff filed a garnishee summons and served it on SICO Welding.

SICO Welding has still not responded to the garnishee summons, but there is currently no application brought by the plaintiff against SICO Welding for judgment based on that non-response. [ 6 ] The plaintiff eventually learned that on August 25, 2016 - the day before the first adjourned return date for the

summary judgment application - an Asset Purchase Agreement had been entered into between KOR Welding and SICO Welding. All or substantially all of the assets of KOR Welding, including “all interests of the vendor under contracts or agreements relating to the vendor’s business”, were transferred to SICO Welding for $24,000, payable at $500 per month. The Asset Purchase Agreement was prepared by the same counsel who attended at the examination in aid of enforcement on November 15, 2016.

Although that counsel had not filed the statement of defence, it was the same counsel who has represented KOR at all subsequent appearances. [ 7 ] An appraisal of the assets was done by Cliff Knull on March 29, 2017. He reviewed the inventory list (attached to his appraisal), which lists what appears to be the same equipment that was listed as “purchased assets” in the Asset Purchase Agreement of August 25, 2016.

The appraisal is for $24,175. [ 8 ] There are some important things to note about the purchase price and the appraisal, aside from the obvious fact that the numbers are almost the same. [ 9 ] The first point is that the appraisal is not done until about seven months after the sale from KOR Welding to SICO Welding. [ 10 ] The second is that the appraisal does not take into account the interests of KOR Welding under contracts or agreements. [ 11 ] The third is that the appraisal by Mr.

Knull was done five days after this application was filed. [ 12 ] It is obvious that the appraisal was done for the defence of this application. The appraisal did not determine the amount that SICO agreed to pay for the assets. [ 13 ] No affidavit was provided by Mr. Knull. Rather, his appraisal was attached as an exhibit to Mr. Tremblay’s affidavit. It does not address the question of whether he knew, at the time he prepared his appraisal, what SICO had already agreed to pay. The circumstances of this appraisal are, at least, suspicious. The Alberta Treasury Branches Statements [ 14 ] Mr.

Tremblay attached to his affidavit as exhibits selected statements and excerpts of statements of Alberta Treasury Branches accounts for KOR Welding, SICO Welding, and his personal account. [ 15 ] The August 23, 2016 KOR Welding statement discloses that there was $12,104.07 in the account as of August 1. Only the first page of that statement is provided; we cannot see what remained as at the end of that monthly period. A copy of the SICO Welding account statement as of September 23, 2016, shows a $500 transfer to an account number ending in “5400”, which is apparently the KOR Welding account.

His personal ATB statement for October 23, 2016 shows a transfer to that same account from him personally in the amount of $10,500 on October 5. The KOR Welding statement for October 23 shows the reciprocal deposit of $10,500, plus another deposit of $3,500 on October 20. [ 16 ] Mr. Tremblay deposes that he personally loaned SICO $10,500 and $3,500 to pay off the balance of the $24,000 purchase price owed by SICO Welding to KOR Welding. [ 17 ] However, when he was examined in aid of enforcement on November 15, 2016, Mr. Tremblay gave a different story.

At that examination he swore that SICO Welding was still paying KOR Welding $500 per month in accordance with the August 25 agreement which provided for $500 per month “on the end last day [sic] of each month starting September 30, 2016”. He swore that the balance remained outstanding. The documents he has now produced indicate that the money was paid early – before he attended for examination in aid of enforcement. [ 18 ] I asked KOR’s counsel why Mr. Tremblay would give different evidence on this point. He said that Mr. Tremblay is not very sophisticated.

Although there is no evidence to this effect, in a letter submitted after oral argument (I had requested supplemental submissions), he suggested that “Mr. Tremblay was not in the best state of mind and wanted the cross [examination] to be over and failed to compute the two resulting in him saying yes to $22,000.00 outstanding.”

[19] However, the payments were made only a few weeks before the examination in aid and no correcting affidavit was filedpursuant to rule 5.27. (This rule would apply to an examination in aid of enforcement: see the analogy rule, 1.7(2) and the common law,such as Maryland Casualty Co v Roy Fourrures Inc, (SCC), [1974] S.C.R. 52.) The Asset Purchase Agreement wasmade the day before the first adjourned date for the application for

summary judgment. The appraisal to justify the consideration wasobtained only after this application was brought. It is difficult to accept that Mr. Tremblay is not sophisticated. As I discuss below, allfactors suggest that Mr. Tremblay has taken a very deliberate series of steps to prevent the plaintiff from recovering on its judgment. [20] Counsel for the plaintiff asks that I disregard the evidence in Mr. Tremblay’s affidavit because it is self-serving. However, theaffidavit attaches excerpts from the ATB account statements that corroborate, at least to some extent, the allegations made in the text.

Itis not self-serving. Rather, it contradicts evidence given by Mr. Tremblay in the examination in aid of enforcement and demonstrates oneof the “badges of fraud” I discuss below. [21] One might think, as a result of this series of events, that the $24,000 plus the previous balance of $12,104.07 would be in thehands of ATB Financial, and held on behalf of KOR Welding, and therefore available to the plaintiff to recover.

However, the statementsraise more questions than they answer, and suggest a deliberate attempt to prefer other creditors. [22] For example, we see a $600 payment by KOR Welding on September 29, 2016 to ATB MasterCard; on August 5 a $9,973.07payment to ATB MasterCard; and on October 20 a $1,668 payment to ATB MasterCard.

The money on account was being used to paycreditors of KOR Welding other than the plaintiff, or perhaps it was being used to pay the creditors of SICO Welding, since KORWelding had disposed of all of its assets in August. [23] In addition, we see a number of other suspicious payments being made by KOR Welding in October – about two months afterit ceased operations. For example, there are two direct debit payments to Intact Insurance Company on October 17, one for $487.91 andanother for $309.65. We also see a payment on the October 23 statement of KOR Welding for $2,000 to Direct Energy.

There is noexplanation given as to what these payments are for, but we know that in August KOR Welding’s vehicles, as well as it’s other hardassets and contracts, had been transferred to SICO Welding. There is no direct evidence as to what these October payments were for, butthe impression from KOR Welding’s ATB statements is that SICO Welding was paying KOR Welding’s expenses, using the moneypaid to KOR Welding by SICO.

Or perhaps KOR Welding was using the money on hand to pay its own creditors other than the plaintiff. [24] As well, there are two cheque deposits on the October 23 statement for SICO Welding that attract attention. One is datedOctober 5 for $19,687.50, and another is October 20 for $7,143.75. More cheque deposits appear on the November 23 statements forSICO Welding. From the information before the Court, it is not clear what work, done when, by what company, led to this income. Weknow that the Asset Purchase Agreement had transferred all contracts from KOR Welding to SICO Welding.

The Late-Breaking Affidavit from Mr. Tremblay [25] I asked plaintiff’s counsel why he had not cross-examined on Mr. Tremblay’s affidavit. He explained that it was onlyprovided at the last moment. Mr. Tremblay’s affidavit was sworn on April 10, the day before the (adjourned) return date of theapplication. The application had been filed March 24, 2017 and was originally returnable April 4, but adjourned to April 11.

In light ofthe apparent dissipation of assets and the changing story, plaintiff’s counsel did not want another adjournment. [26] It is clear that an adjournment was granted to April 11 to accommodate the respondent’s wish to provide evidence.Nonetheless, the affidavit from the respondents was provided essentially at the last moment. Counsel for the respondents explained thathe had trouble getting information from his client and copies of the exhibits to be attached.

Furthermore, his client is in Rocky MountainHouse, and counsel is in Calgary. [27] Rule 6.6 says that a respondent must serve reply evidence “a reasonable time before the application is to be heard orconsidered.” Failing that, the party is not entitled to rely on the last-minute evidence “unless the Court otherwise permits” and the ruleallows possible costs consequences. In the circumstances, I have allowed the evidence to be relied upon. Costs will be addressed later.

Case Law on Fraudulent Conveyances and Preferences [28] The leading case on fraudulent conveyances and fraudulent preferences is Krumm v McKay, 2003 ABQB 437, and that casewas followed in Builders’ Floor Centre Ltd v Thiessen, 2013 ABQB 23. [29] Krumm established several principles, in particular the following: 1. The purpose of the Statute of Elizabeth (also known as the Fraudulent Conveyances Statute), 13 Eliz.

I, Chap. 5 (U.K.) and theFraudulent Preferences Act, RSA 2000, c F-24 is to strike down all conveyances of property made with the intention of defraudingcreditors, except for conveyances made for good consideration and bona fide to persons not having notice of fraud. The legislation is tobe interpreted liberally, and they apply to conveyances with the requisite intent to defraud or hinder creditors, no matter what the form. 2. Under the Statute of Elizabeth, where a transfer is made for nominal or no consideration, it is only necessary to consider whetherthe intent of the debtor is fraudulent.

Cases involving nominal consideration have been held to be voidable in two circumstances: wherethe fraudulent intent is established as a presumption of law, or where fraudulent intent is actually established as a fact in evidence. 3. Where there has been a transfer for value, the creditor must establish that the transferor had the necessarily fraudulent intentionand that the transferee was privy to the fraud. Furthermore, there is no presumption where the transfer has been for value; the creditormust prove an actual intent to defraud.

That intent must be concurrent – that is, both the transferor and transferee must have had thatintent. 4. Direct evidence of intention is usually not available, and where there has been a close relationship between transferor andtransferee, the burden shifts to the debtor to rebut a prima facie case of fraudulent intent. In those circumstances, the courts look at the“badges of fraud” to determine intention.

[ 30 ] Under the Fraudulent Preferences Act , it is necessary to prove the insolvency of the debtor. Analysis [ 31 ] Here, the respondents argue that KOR Welding was not insolvent at the time of the transfer. My view is to the contrary. The insolvency of the debtor is obvious. KOR Welding was facing a

summary judgment for a considerable sum of money when it sold its assets to a related company, and shut down its operations. The purpose was to allow Mr. Tremblay to use the same equipment and contracts to carry on a similar business. The only inference that can be drawn from these facts is that KOR Welding was insolvent at the time of the transaction in August 2016. It was not able to pay its current obligation to the plaintiff. [ 32 ] It is not an answer to say that the plaintiff had not yet obtained judgment at the time of the conveyance.

Firstly, it was a debt claim, and secondly rule 9.24(3) specifically states that if the intent was to defeat creditors “the judgment creditor need not have obtained judgment at the time of the impugned transfer or conveyance.” [ 33 ] The respondents are intimately connected. Mr. Tremblay controls both transferor and transferee. SICO Welding was privy to whatever intention KOR Welding had.

That results in a shifting of onus to KOR Welding to disprove the fraudulent intent. [ 34 ] Here, although there was value given on the face of the transaction, the question of whether the consideration was appropriate is very much in doubt. I give no weight to the appraisal that was done seven months after the transaction and only on the eve of this application. It is striking that the appraisal is almost exactly the same amount that Mr. Tremblay arranged for the purchaser to pay. Furthermore, the appraiser was apparently not asked to provide any opinion of value for the goodwill and the existing contracts.

They are simply not addressed in the evidence. [ 35 ] What is not addressed in the evidence, then, is the answer to the question, “What would a third party have paid for all the assets of KOR Welding?” [ 36 ] In addition, there is a question of whether the value that was given was destined for other obligations that Mr. Tremblay seemed to prefer to see paid. Counsel for KOR Welding argues that placing the funds in the ATB account was appropriate because ATB had a “higher security” on all of KOR Welding’s assets than the plaintiff as judgment creditor.

However, there is no evidence that ATB held a general security agreement. In support of this position counsel relies on Re Williams , 1903 CarswellOnt 793, 3 O.W.R. 251, 7 O.L.R. 156, where, at p. 159 (O.L.R.) the Court said, “A bank has a lien on all moneys, funds and securities of a depositor for the general balance of his account.” [Emphasis added.] [ 37 ] This does not mean that a financial institution (ATB is not a bank) has a general all-encompassing “higher lien”.

What a lending financial institution has is a right of set-off for debts against funds held on account . [ 38 ] By paying the $24,000 for the assets to ATB, by making a deposit to the KOR Welding account, the respondents created a right of set-off for ATB that it otherwise would not have had. It was a step that preferred ATB over all other creditors.

Based on the information before the Court, it is clear that that was KOR Welding’s intent. [ 39 ] The badges of fraud direct the Court to the conclusion that the transaction was effected in order to defraud or hinder the plaintiff in its collections proceedings. [ 40 ] The badges of fraud here are these: (

a) The money was paid to the account of KOR Welding where it was used to pay other creditors in preference to the plaintiff; (

b) The evidence put before the Court further suggests that SICO Welding’s debts may have been paid by KOR Welding from the funds paid in consideration; (

c) The transaction was done on the eve of the

summary judgment application; (

d) Mr. Tremblay misled the plaintiff’s counsel in the examination in aid as to the status of payments; and (

e) The appraisal was first done seven months after the transaction, and only after this application was filed. [ 41 ] In the result, Mr. Tremblay has advanced $24,000 to the benefit of KOR Welding which it has used to pay other creditors in preference to the judgment granted to the plaintiff. [ 42 ] For all of these reasons, I conclude that the burden of proof is on the respondents to disprove the fraudulent conveyance of assets in August, 2016, and they have failed to do so. The conveyance described in the Asset Purchase Agreement is therefore declared to be invalid.

The plaintiff is allowed to instruct a licensed bailiff to seize and sell the assets listed in the Asset Purchase Agreement, subject of course to any secured creditors’ rights. [ 43 ] Costs are reserved and may be addressed by separate application as described below. The formal entry of the order reflecting these reasons is not to be delayed pending an award addressing costs. [ 44 ] If they cannot agree on costs, Counsel may contact the clerk in masters’ chambers either for an appearance in chambers in Red Deer for oral submissions or for submissions in writing.

If they cannot agree on how submissions are to be made, then either may contact the Court for directions.

Heard on the 11 th day of April, 2017. Dated at the City of Calgary, Alberta this 24 th day of April, 2017. A.R. Robertson Q.C., M.C.Q.B.A. Appearances: Robert J. McCarty Reynolds Mirth Richards and Farmer LLP for the Applicant George Huang MacPhail Harding for the Respondents