BDO Dunwoody Ltd. v. Canada (Minister of Date:, 2011 MBCA 93

Citation: BDO Dunwoody Ltd. v. Canada (Minister of Date: 20111124 National Revenue), 2011 MBCA 93 Docket: AI 11-30-07538 IN THE COURT OF APPEAL OF MANITOBA Coram: Chief Justice Richard J. Scott Madam Justice Freda M. Steel Mr. Justice Richard J. Chartier BETWEEN: BDO DUNWOODY LIMITED as trustee ) P. L. Piperof the estate of KAREN MAY ANDREWS ) for the Appellant ) (Applicant) Respondent ) P. A.

Sim ) for the Respondent- and - ) ) Appeal heard:THE MINISTER OF NATIONAL ) October 19, 2011REVENUE ) ) Judgment delivered: (Respondent) Appellant ) November 24, 2011 CHARTIER J.A. 1 Karen May Andrews (the Debtor) made two payments of income tax to the Minister of National Revenue (the MNR)within three months prior to her bankruptcy. BDO Dunwoody Limited, as trustee of the estate of the Debtor (the Applicant), successfullychallenged those payments as fraudulent preferences under s. 95 of the Bankruptcy and Insolvency Act (the BIA).

The MNR appealsfrom that decision. 2 The principal issue on this appeal is whether the application judge erred in finding that the MNR had not rebutted thefraudulent preference presumption under s. 95 of the BIA. This issue raises a question of mixed fact and law and is to be reviewed on thedeferential standard of palpable and overriding error (see Forbes (Bankrupt), Re, 2011 MBCA 41 at para. 41, 268 Man.R. (2d) 30). 3 The law with respect to fraudulent preference applications, while not disputed, bears repeating.

Pursuant to s. 95, adebtor is deemed to have made a fraudulent preference when: 1) the debtor made a payment to a creditor within three months prior tothe date of bankruptcy; 2) the debtor was an “insolvent person” (see s. 2 of the BIA) at the time of the payment; and 3) the payment wasmade with a view to giving that creditor a preference over the other creditors. The applicant has the initial onus of establishing a primafacie case that these three factors exist.

If the application judge is satisfied that this onus has been met, the onus then shifts to thedeemed preferred creditor to rebut the fraudulent preference presumption. At that point the application judge will review the evidenceadduced by that creditor to see whether it rebuts that prima facie case. To be successful, the deemed preferred creditor must convincethe application judge, on a balance of probabilities, that at least one of the three factors did not exist when the debtor made the payment.

See Forbes at paras. 19 - 26 and Norris (Bankrupt), Re (1996), 1996 ABCA 357 , 193 A.R. 15 (C.A.). 4 On the preference factor, the deemed preferred creditor must show that there was no dominant intent to prefer onecreditor over another. The dominant intent of the debtor must be determined objectively, based on factors that were known at the timethe debtor made the payment. As Hamilton J.A. recently explained in Forbes (at para. 24): The dominant intent is based on an objective assessment of the circumstances.

In other words, the intention will be what the debtor’sconduct objectively demonstrates when reasonably construed and not what the debtor (or others) may claim was his or her intention longafter the payment was made. …. 5 In his reasons, the application judge correctly stated the legal principles to be applied when considering such anapplication. It was uncontested that the Debtor made the impugned payments to the MNR within the three-month pre-bankruptcy

period. After reviewing the evidence at some length, he determined that the Debtor was, as of the date of the first payment, spending$2,475 per month more than her monthly income (which he defined as the burn rate). He found that the Applicant had demonstrated aprima facie case that the Debtor was insolvent at the date she made the payments and that the MNR had received a preference over othercreditors.

Key to these findings were, on the question of insolvency, the Debtor’s high burn rate and her own acknowledgment that twoinsurance policies were valueless and, on the question of preference, that while the MNR’s debt accounted for only 13 per cent of thetotal debt, it received 100 per cent of its account. 6 Having satisfied the application judge of a prima facie case, the onus shifted to the MNR to rebut the fraudulentpreference presumption. After considering the evidence, the application judge found that in the period between the first and secondpayments, the Debtor’s burn rate had increased significantly.

He noted that “[n]o explanation ha[d] been given” (at para. 51) for thisincrease. While the application judge accepted that the Debtor honestly intended “to continue to make monthly payments to her othercreditors and gradually settle those accounts” (at para. 45), he concluded that her plan was simply not objectively reasonable in thecircumstances.

In the end, the application judge was not convinced, on a balance of probabilities, that the MNR had rebutted the s. 95fraudulent preference presumption. 7 As already stated, the MNR claims the application judge committed palpable and overriding error by not finding thatit had met its onus with respect to rebutting the s. 95 presumption. One of the key factors to be remembered is that the MNR has notappealed the application judge’s ruling that the Applicant had established a prima facie case that the Debtor was insolvent and intendedto prefer the MNR at the time she made the payments.

As a result, the payments gave the MNR a preference in fact and the presumptionof intent to prefer applied (see Forbes at para. 26). The onus had shifted from the applicant to the MNR. This appeal has to be viewed inthat light. 8 The MNR submits that the application judge made three errors. First, the MNR argues that the application judgeerred when conducting his analysis by considering facts subsequent to the first payment. It points to the Debtor’s subsequent job lossand to post-payment bank account details. 9 I would not accede to this ground.

The Debtor’s own evidence was that she obtained employment in Manitoba, aftermoving from Ontario, three weeks after the first payment. It was therefore open to the application judge to conclude that when theDebtor made that payment, she was in fact unemployed. While it is true that the application judge did take into account the Debtor’sspending conduct for approximately two months prior and subsequent to the first payment, it was for the purpose of determining her stateof solvency and dominant intent at the time of payment.

For example, the application judge examined the Debtor’s bank statements forthat time period to infer a realistic monthly income and expense figure at the time of payment. He also inferred that the Debtor’smonthly living expenses at the time of payment would be the same as was stated in her bankruptcy assignment papers. 10 In my view, the drawing of such inferences was reasonable in the circumstances.

It was done to assist the applicationjudge in his consideration of the question of insolvency at the time the payment was made and whether the Debtor’s dominant intent inregards to the payment was objectively reasonable when it was made. 11 The second error claimed by the MNR is that the application judge failed to give adequate weight to the Debtor’saffidavit evidence. It gives two examples: first, that he was clearly wrong when he stated that no explanation was given for the Debtor’s“significantly higher” burn rate, when the Debtor explains in her affidavit that she incurred additional moving expenses.

The MNRsubmits that these moving expenses explain the higher burn rate. It also argues that, because they were one-time expenses, they shouldnot have been factored into that rate. The MNR’s second example relates to the application judge’s conclusion that the MNR had failedto rebut the presumption to prefer, when the Debtor’s stated evidence was that she was not contemplating bankruptcy and that her planwas to continue to pay the other creditors. The MNR points to Malisic v. Peat Marwick Thorne Inc. (1994), (ON SC),20 O.R. (3d) 48 (Gen.

Div.), as authority for the proposition that “[i]f he did not know he was insolvent, he could not intend to confer afraudulent preference” (at p. 54), and this is so “even though in fact it is later established that the debtor was insolvent and that thepayment did in fact prefer one creditor over others” (at p. 59). 12 I would not give effect to this ground of appeal. While it is true the Debtor did state she incurred some movingexpenses, the fact of the matter is that she did not say when they were incurred and provide the amount of those expenses.

Unfortunatelyfor the Debtor, a review of her bank statements does not shed any more light on that subject. Turning to the Debtor’s plan to pay theother creditors, there was no real evidence as to how she could have reduced these debts in any significant way. In my view, on theevidentiary record before him, it was open for the application judge to find, first, that no satisfactory explanation was given for the“significantly higher” burn rate and, second, that her repayment plan to avoid bankruptcy was not objectively reasonable. 13 I make but one comment on the case cited in support of the MNR’s position.

Malisic is not the law in Manitoba. It is acase from the Ontario Court (General Division) which, since the 17 years it has been pronounced, has never been cited by any appellatecourt in the country. This court prefers to rely on appellate jurisprudence, including that of our own court (see Forbes at paras. 24, 59). It also finds comfort in respected secondary sources, such as the leading textbook of L.W. Houlden, G.B.

Morawetz & Janis Sarra,Bankruptcy and Insolvency Law of Canada, 4th ed., looseleaf (Toronto: Thomson Reuters Canada Limited, 2009). 14 The third error asserted by the MNR is that it was not open to the application judge to conclude that the Debtor had anintention to prefer because the MNR was incapable of providing to her a quid pro quo. It points to Norris at para. 18 and Clark(Bankrupt), Re (1999), 1999 ABQB 390 , 242 A.R. 344 at para. 23 (Q.B.), as authority for its position that a payment to acreditor cannot be considered a preference unless there is some quid pro quo.

I do not read the authorities referred to as supportive ofsuch a broad contention. In Clark, the debtor made a payment on a credit card which she continued to use for current expenses. Thecourt held in Clark that the quid pro quo for making the payment was to gain access to further credit, not to prefer the creditor (see para.26). In my opinion Norris and Clark do not stand for the proposition advanced by the MNR. Rather, they hold that whether any quidpro quo was given is a factor to be taken into account when a judge is considering whether a debtor has an intention to prefer.

In theresult, I remain unconvinced the application judge committed palpable and overriding error here. 15 At the appeal hearing, the MNR raised a new, yet fundamental issue that was not before the application judge.

Moreover, the argument was not well-developed on appeal. That issue is whether the Debtor’s payments to the MNR are entitled to thebenefit of the Crown prerogative of being paid in priority to other creditors of equal degree. 16 The MNR argues that, as the payments were made prior to bankruptcy, they were not caught by the BIA. As a result, itsays it was entitled to the benefit of the Crown prerogative. It submits that once so entitled, any payment received cannot be a preferenceunder s. 95 because of the MNR’s right to be paid in priority over the others.

The Applicant argues that the complete answer is found ins. 4.1 of the BIA, which plainly states that the BIA “is binding” on the Crown. It submits that because s. 95 refers to any payment made“three months before the date of the initial bankruptcy,” the payments made in the instant case fell within the BIA regime and, as such,there was no Crown prerogative. 17 I will dispose of this question succinctly on the basis of the brief submissions presented on this question. The MNRreferred to three cases in support of its position.

In my view, the authorities cited were neither definitive in any way nor did they involveBIA matters. In short, they were of little assistance to the present case. 18 I believe that reference to the well-accepted modern approach to statutory

interpretation answers the question. It is wellsettled that one of the purposes of the BIA is to put all unsecured creditors on the same footing (see s. 141 of the BIA) and that s. 95 is ameans of carrying into effect that principle. See Houlden et al. at F§201(2), who point to Hudson v. Benallack, (SCC),[1976] 2 S.C.R. 168 at 175, and Deloitte & Touche Inc. v. White Veal Meat Packers Ltd., 2000 MBCA 120 at para. 6, 153 Man.R. (2d)81, as their authorities.

When the above-mentioned provisions are read contextually and in their grammatical and ordinary sense,harmoniously with the scheme and objects of the BIA and the intention of Parliament, it is my view that s. 4.1 abrogates the Crownprerogative in s. 95 matters. 19 I also find support for this conclusion from the two bankruptcy cases cited by the Applicant, Perrette Inc., Re (2000), (QC CS), 24 C.B.R. (4th) 268 (Qc. Sup. Ct.), and Norris.

These cases have accepted that s. 4.1 of the BIA puts theCrown on an equal footing with other unsecured creditors and that this is also the case, as per Norris, with respect to s. 95 income taxpayments to the MNR. See Norris (at paras. 1-2): … [T]he traditional priority of the Crown theretofore enjoyed at common law for its claims for income tax owed by a bankrupt areremoved. In bankruptcies occurring after that date, proven Crown claims are to rank equally and be paid rateably with all other unsecuredcreditors.

The issue in this appeal is whether a payment of income tax to the Minister of National Revenue made within the three months precedingthe taxpayer’s bankruptcy was a fraudulent preference within the meaning of s. 95 of the Bankruptcy and Insolvency Act and void asagainst the Trustee. …. 20 In the result, the appeal is dismissed with costs. J.A. I agree: C.J.M. I agree: J.A.