Sager (Re), 2021 NSSC 281

SUPREME COURT OF Nova Scotia IN BANKRUPTCY AND INSOLVENCY Citation: Sager (Re) , 2021 NSSC 281 Date: 20210927 Docket: No. 43943 Registry: Halifax Estate Number : 51-2635933 In the Matter of: The bankruptcy of Arthur Ian Sager Judge: Raffi A. Balmanoukian, Registrar Heard: March 31, 2021, in Halifax, Nova Scotia Final Written Submissions: April 24, 2021 (status update only) Counsel: Tim Hill, QC, for the bankrupt, Arthur Ian Sager Gavin D.F. MacDonald, for the Trustee, Ernst & Young Inc. Balmanoukian, Registrar: [ 1 ] In his closing submissions, counsel for Mr.

Sager encourages the Court to invoke Mercutio in placing a plague on the house [1] of the major creditor, Bank of Montreal (“BMO” or the “bank”), who petitioned Mr. Sager into bankruptcy. COVID-19’s plague notwithstanding, after reviewing the resultant banker’s box of evidence and materials, a more appropriate allusion to the bard may reference Much Ado About Nothing. Or, at least, the ado has been about far less than has been litigated by the bank, for very different reasons, and on very different calculations. [ 2 ] Mr. Sager is a self-described serial entrepreneur, now in his mid-70s.

He operated interrelated companies directly or through holding vehicles which will take their proper place in this narrative. Eventually, the operating entities failed and the bank called Mr. Sager’s personal guarantee. As he was unable to pay the outstanding corporate indebtedness, the bank petitioned him into bankruptcy [2] . Justice Gabriel granted that order on March 3, 2020 and Ernst & Young Inc. (the “Trustee”) was appointed Trustee. Although I emphasize that there is no allegation that the Trustee has not acted in any way other than is appropriate under the Bankruptcy and Insolvency Act , RSC 1985, c.

B-3 as amended (the “ BIA ”), it is fair to say that the Trustee is in place at the instance of the Bank and its fees are guaranteed by the Bank. That is, of course, not improper or unusual in the least, but it is asserted by Mr.

Sager that the vengeance and persistence by which the Trustee has pursued various aspects of his affairs are coloured by the effectively unlimited resources of the objecting creditor. [ 3 ] I do not propose to set forth every scintilla of evidence, although the parties may rest assured that after having presided over the comprehensive s. 163 examination and a half-day of submissions and argument, I have reviewed them in all of their elaborate detail. It is adequate to provide an overview of Mr. Sager’s corporate enterprise, its ultimate failure, and the ways in which Mr.

Sager has structured his affairs over the years when I determine an appropriate disposition. As will appear, with limited exceptions I find that Mr. Sager meets the definition of “honest but unfortunate debtor.” But not universally.

He has several s. 173 factors weighing against him, most notably a series of transactions which, while not meeting the timeline for a s. 95 preference, nonetheless have the effect of putting otherwise non-exempt assets out of the reach of creditors; he has also engaged in confusing and sometimes contradictory financial assertions and engagements which run afoul of s. 173, and at least arguably ss. 68 and 158. It is with those caveats that I must consider what are the just conditions for Mr. Sager’s discharge. Background [ 4 ] Mr. Sager has operated a number of enterprises.

Some of them produced cash which was vested in different non-arm’s length entities which will take their respective stations in this decision, and which were discussed in great detail both in the written submissions and in a lengthy s. 163 BIA examination before me on November 13, 2020. [ 5 ] The most important to our purposes, however, are Kocken Energy Systems Inc. (“Kocken”) and Kocken Energy Systems International (“KESI”). Put in its briefest form, these were successful in multinational operations, until they weren’t.

Although the company had suffered other setbacks [3] , including a $1.6 million dollar supplier fraud, the fatal blow came when a large-scale project in California was the subject of bankruptcy proceedings in the United States (under questionable circumstances, according to Mr. Sager). BMO froze Kocken’s accounts in late 2016.

[ 6 ] Mr. Sager attempted to salvage the company, both by trying to negotiate a sale of operations abroad, and through a Division I proposal. [4] The sale negotiations were unsuccessful [5] . The Division I proposal resulted in a recovery of over $1,000,000 [6] out of $2.25 million agreed to be paid on a $3.3 million dollar indebtedness but it, too, ultimately defaulted [7] . I am advised that the resultant bankruptcy of Kocken resulted in negative additional recovery, net of fees. [8] [ 7 ] Kocken was originally formed by five stakeholders, including Mr. Sager; three cashed out, leaving another 50% shareholder.

According to Mr. Sager, Kocken for a considerable time had a warm and amiable relationship with BMO; it is fair to say that Kocken was the local branch’s “fair haired boy,” which included at least one invitation to Mr. Sager to participate in a bank-sponsored symposium as its guest and on its dime. And as in many cases with smaller-town enterprises, much of this relationship was personal and a matter of chemistry between the company principals and its local bank management. That management eventually changed, and unfortunately for Mr. Sager it was prior to Kocken’s series of difficulties.

One may speculate as to how persistent the bank would have been under its prior local officials, but speculation so it is and must remain, and outside the scope of my analysis. [ 8 ] Mr. Sager also asserts that he repaid BMO some $1.4 million in personal debt, or debts on properties owned by various entities other than Kocken or KESI, in the few years leading to his bankruptcy. These were funded from various commercial lenders, or private sources. He urges, by implication, that he slogged it out above and beyond the call to pay BMO everything he could get his hands on.

While these efforts were substantial, and bank recovery notable, these transactions were really more akin to “robbing Peter to pay Paul” over a series of years, whether prompted by bank recalcitrance or by third party lender requirements. The result was an even greater exercise in financial whack-a-mole than would otherwise have been the case, and contributed to much of the distractions as to what the source and destination (and timing) of funds were in various impugned transactions. This discussion occupied much time, and paper.

With limited exceptions, my finding is that they come to naught for the purposes of determining what is an appropriate discharge roadmap for this specific debtor. The impugned affairs of the bankrupt [ 9 ] As Mr. Sager’s bankruptcy progressed, the Bank pursued inquires into various of his assets and ownership vehicles, including: 1. Sager Venables Family Trust (2005) (the “Trust”), of which Mr. Sager and his spouse [9] are co-trustees and in which their family members, including themselves, are discretionary beneficiaries.

The Trust in turn owns a. 100% of Taksindu La Limited (“Taksindu”) [10] , which owns i. 3297807 Nova Scotia Limited, later Thirteen Rivers Limited; ii. An interest in Kocken Energy Systems Incorporated (in this decision, when I refer to “Kocken” I mean this entity unless otherwise stated) [11] ; iii. An interest in Kocken Energy Systems International (“KESI”), a Barbados company which in turn engaged Kocken for operations. KESI paid dividends to Taksindu which in turn funded some of the impugned operations at issue in these proceedings; [12] iv. a $450,000 mortgage on 150 Pentz Road, the principal residence Mr.

Sager and his spouse own jointly; the result is that Mr. Sager asserts there is no realizable equity in this asset, and in fact there is a $161,750 deficiency after giving effect to the fair value of the asset and a first mortgage in favour of The Toronto-Dominion Bank. This mortgage was executed after many of the advances from Taksindu for the construction and improvement of 150 Pentz Road, Lunenburg, and after Kocken’s financial difficulties were apparent. [13] v. A $100,000 mortgage on 26-28 Oakland Drive, Bridgewater; b. Pine Grove Developments Inc. 2.

LaHave Research Inc. 3. 146 Pentz Road, Lunenburg County; 4. 150 Pentz Road, Lunenburg County, the principal residence noted above; 5. 26-28 Oakland Drive, Bridgewater; 6. Various indebtedness and transfers respecting the foregoing, and receipts and disbursements by Mr. Sager, his spouse, and the Trust and other entities, including an inheritance by Mr.

Sager’s spouse, non-arm’s length transfers, and the funding of the construction of the Sager principal residence. [14] [ 10 ] I will discuss these but in a different order, given how I propose to dispose of the associated issues the Trustee says arises out of them. [ 11 ] As of bankruptcy, Mr. Sager’s liability under his BMO guarantees was just short of $3,000,000 [15] , out of total personal liabilities of just under $4.3 million. The bulk of the rest is mortgage debt to TD and Taksindu. [ 12 ] I say at the outset, given the nested affairs of Mr.

Sager and when they were put in place, that it is perfectly in order for a person to arrange their affairs during times of financial solvency and liquidity so as to have no or few net assets in their personal name. It is also in order to refinance and rearrange those affairs for legitimate purposes. As a person’s financial clouds gather, it sometimes appears either prospectively or in hindsight that they have (to say again) “robbed Peter to pay Paul,” and indeed sometimes that is in fact the case. That in itself is not inherently wrong either.

It is when those transactions result in a transfer for undervalue (within the time

frame outlined in the BIA ), are fraudulent or are misrepresented so as to deceive creditors - or are reconfigured in a fiscal shell game so that an asset changes its character or ownership in such a way as to defeat or frustrate a legitimate stakeholder - that the Court must analyze what happened and consider whether it should factor into how the Court’s discharge discretion will be exercised. [ 13 ] I say “discretion” deliberately.

If a bankrupt has misconducted themselves within the meaning of the BIA (including but not limited to running afoul of ss. 68 , 95 , 96 , 158 , 173 , etc.) then the Court must proceed with care with its disposition. It is common ground that the Court’s discretion under s. 172 is “considerable,” as Mr. Hill phrases it in his brief. My s. 172 (1) authority does not predicate itself on debtor “misconduct,” per se . When a fact is proven under s. 173, then 172 (2) comes into play which precludes the Court from issuing an absolute discharge; however, my discretion remains otherwise broad.

When there is high “personal income tax debt” within the meaning of s. 172.1, the Court’s authority is governed by that section; that is not the case here. [ 14 ] To rephrase, if I find that Mr. Sager has run afoul of s. 173, I cannot grant an absolute discharge but I have considerable remaining breadth of authority under s. 172(2); however, even if I do not so find, I also have considerable scope of authority under s. 172(1) as to treatment of the debtor. Those sections currently read: 172

(1) On the hearing of an application of a bankrupt for a discharge, other than a bankrupt referred to in

section 172.1, the court may (

a) grant or refuse an absolute order of discharge; (

b) suspend the operation of an absolute order of discharge for a specified time; or (

c) grant an order of discharge subject to any terms or conditions with respect to any earnings or income that may afterwards become due to the bankrupt or with respect to the bankrupt’s after-acquired property .

(2) The court shall , on proof of any of the facts referred to in

section 173, which proof may be given orally under oath, by affidavit or otherwise, (

a) refuse the discharge of a bankrupt; (

b) suspend the discharge for such period as the court thinks proper; or (

c) require the bankrupt, as a condition of his discharge, to perform such acts, pay such moneys, consent to such judgments or comply with such other terms as the court may direct . [emphases added]. [ 15 ] It will be seen that under s. 172(1) I may “grant” an absolute discharge, or require the bankrupt to comply with terms respecting after-acquired income or property; these differ in 172(2) in that the authority to grant an absolute discharge is removed and I shall order one of the dispositions called for, including an ability to require the bankrupt to perform a considerable variety of “such acts” as I think proper in a judicially-exercised discretion, and not just with respect to after-acquired property or income.

Position of the parties [ 16 ] For its part, BMO submits that various of Mr. Sager’s transactions are either improper attempts to diminish the distributable assets of Mr. Sager among his creditors, or preferences/transfers that should influence the Court’s discretion in formulating the conditions of Mr. Sager’s discharge. It also points to what it says are various considerations under s. 173 of the BIA which, as a result, prohibit me from granting an absolute discharge.

In a more general sense, and at the risk of oversimplification of the bank’s submissions together with its array of charts and graphs, it argues that Mr. Sager’s transactions do not pass a global sniff test and that I should act accordingly. Specifically, it suggests I order payment of $270,085 as a “minimum,” representing equity in property after disregarding the Taksindu mortgages on 150 Pentz and 26-28 Oakland, and the equity transferred in 146 Pentz Road from Mr.

Sager to his spouse for what it says is “no consideration.” It also says I should exercise my discretion and increase these amounts as a deterrence against what it says is Mr. Sager’s misconduct. Finally, it asks for a resubmission and recalculation of Mr. Sager’s s. 68 income obligation and for me to order remittance accordingly. [ 17 ] Mr. Sager submits that, with this bankruptcy being the result of guarantees being called following a legitimate business failure, he should be subject to no or very nominal discharge conditions.

He points to his age, level of cooperation with the Trustee, and level of performance of Kocken under its proposal. He also submits that the Bank is in effect persecuting him for no legitimate legal or practical reason, and that his affairs were arranged long ago and without a view to bankruptcy-eve creditor proofing. Finally, he submits that the various transactions in the time leading up to his bankruptcy were legitimate and either to retire or consolidate existing debt, or to comply with legitimate lender requirements and/or legal and tax advice.

He says that far from being deprived, BMO obtained the lion’s share of the benefit from these transactions. [ 18 ] I will review, as summarily as is consistent with demonstrating my findings and chain of reasoning, the impugned transactions and my findings thereon; followed by my calculation of what I think is appropriate for Mr. Sager in light of those findings, the circumstances of his business-driven bankruptcy, and his own personal rehabilitation in the twilight of his colourful career.

The Sager Venables Family Trust (2005) (the “Trust”) [ 19 ] There is nothing especially notable about the establishment of a family trust. It is a common estate planning vehicle. Especially so here where it was established many years before Mr. Sager’s current financial problems. [16] [ 20 ] The difficulty, says the Trustee (and through it for all practical purposes, the objecting creditor) is that Mr. Sager and his spouse list Trust-owned assets and entities on their personal financial statements (filed from time to time with BMO). Mr.

Sager explains the ownership and quantum as a combination of “hubris” and de facto ownership and control in the sense that Mr. Sager and his spouse are principal trustees and beneficiaries along with their immediate families. It is a garden-variety discretionary family trust in that no beneficiary has a vested entitlement to capital or income. The Trustee has stated that the Trust itself “may be the basis for a subsequent

proceeding by the Trustee or a creditor pursuant to BIA s. 38 .” I do not find the basic reasoning to be compelling, but that is not before me. [ 21 ] In addition, Mr. Sager said that at all material times, the objecting creditor had actual knowledge of the structure of his (and the Trust’

s) holdings, and that the net worth statements were pro-forma (and allegedly executed in blank on bank forms). [17] [ 22 ] To my thinking, two points are substantially more important than whether Mr.

Sager filed statements with assets that were technically not his legally (and, not his by right beneficially given the requirement for Trust decision-making) or whether these were values and listings derived by “hubris.” [ 23 ] The first point is that the statements I have in evidence are substantially prior to the insolvency event (2011, 2013, and 2016; even this last statement is some months prior to BMO’s demand for payment from Kocken in November of that year). [ 24 ] The second and more significant is that there is no evidence that the BMO liabilities, at least the “BMO-Kocken” liabilities, were approved or forborne by virtue of these statements.

While it may have been prudent to note the structure of Mr. Sager’s affairs on these statements, the best evidence that I have is that BMO was at least generally aware that at least some of the underlying asset value was not that of Mr. Sager. [ 25 ] Mr. Sager asserts, in his March 11, 2021 affidavit [18] , that BMO was aware in fact of the Trust and at one point the Trust banked with them. This assertion of knowledge is also made by Mr. Hill at p. 3 of his letter to the Court of February 4, 2021, and was also asserted by Mr.

Sager at his s. 163 examination. [19] It is not clear that BMO knew what the Trust owned, or that it knew that the Trust was the ultimate owner of much of what was contained in the Sager family personal financial statement.

However, again, there is no evidence that Kocken’s financing was predicated on these statements; in fact given the scope and amount of financing at hand, it would be inconceivable that it did so in its primary decision-making. [ 26 ] More importantly, when I asked why BMO did not obtain cross-guarantees or debt subordination agreements, counsel neither denied BMO knowledge of the general structure, nor provided even a general explanation for this omission. At best, BMO did not move to protect its interests under Mr.

Sager’s guarantee by obtaining this information or documentation, and it should not be for the Court to act as its ex post facto securitizing agent. These same reasons are also adequate to address the assertions by the Trustee that the statements listed assets which were in fact legally owned by Mr. Sager’s son and daughter-in-law.

While knowing inclusion of such items is not to be condoned, there is simply no evidence of bank reliance on these assertions, particularly when it comes to the bank financing of Kocken or the applicable guarantees, and thus no evidence that the bank has been correspondingly deprived of anything. [20] [ 27 ] The Trust’s underlying assets, with the exception of the Taksindu mortgage on the matrimonial home, may be discussed in that light. 150 Pentz Road [ 28 ] This is the matrimonial home in which the bankrupt has an undivided 50% interest. In December 2018, it appraised for $759,500 which was very close to Mr.

Sager’s estimated construction costs to that date of $778,788 [21] . Since then, approximately $162,531 has been invested in the property of which $111,650 purports to have been advanced from Taksindu. While there is no clear path to where the rest came from, there is evidence that $176,000 was paid to Mr. Sager and his spouse on the disposition of the Oakland property in February 2018 which I will discuss in turn. Although there is a time gap, it is clear that Mr.

Sager and his spouse had at least some personal resources at their disposal, whether from this or another transaction, to fund the approximate $50,000 difference between what they say they put into the property and what they say they got from Taksindu after 2018. [ 29 ] At bankruptcy, The Toronto-Dominion Bank [22] had a $465,144 balance secured against this property. Taksindu purports to hold a $450,000 collateral mortgage in second position on the property. As noted, this was put in place in January 2019 just prior to a hearing on the Kocken default.

The balance outstanding to Taksindu purports to exceed the secured mortgage limit. The approximate $915,000 purported to be secured against the property would mean that, if given effect for the purposes of Mr. Sager’s discharge, there is little to no net realizable equity after giving effect to notional disposition costs. [ 30 ] Before I embark on how I will treat this asset for the purposes of discharge, I wish to make it plain that I am not analyzing the Taksindu mortgage from a s. 95 BIA preference perspective. It does not fall within the 12 months preceding Mr.

Sager’s bankruptcy, although certainly the storm clouds were gathering. Although I disagree with Mr. Hill’s assertion that I do not (apparently ever) have jurisdiction to make a finding under s. 95 [23] , I need not and do not make a jurisdictional or factual decision here. My analysis is under s. 172 and s. 173 of the BIA . Specifically, I refer to the “books of account” and “failure to account” in 173(1)(

b) and 173(1)(d) [24] , and the “unjustifiable extravagance in living” in s. 173(1)(e ) [25] . [ 31 ] I deliberately have not referenced the “fifty cents on the dollar of unsecured liabilities” test in s. 173(1)(a). Assuming that “assets” mean all assets and not “assets net of security against them” (ie assuming that a $100,000 house with a $90,000 mortgage is a $100,000 asset and not a $10,000 ‘net’ asset for the purposes of 173(1)(a)), if one excludes the BMO indebtedness it is not at all clear that Mr. Sager runs afoul of this provision. For the purposes of my analysis, I am prepared to assume without deciding that (a) “assets” in 173(1)(

a) has the gross, not net, meaning I discuss and may not be less than 50 cents on the dollar of unsecured liabilities excluding BMO and (

b) Mr. Sager comes within the saving provision of that section, namely that “…the amount of the bankrupt’s unsecured liabilities has arisen from circumstances for which the bankrupt cannot justly be held responsible” when the liability under the BMO guarantees are included . The Kocken bankruptcy and the resultant call on the guarantees may have been the result of poor decisions in with whom Kocken did business, but that is all that I can say from the material in evidence. I agree with Mr.

Hill’s brief in this regard that Kocken/KESI was a legitimate business enterprise that failed for legitimate business reasons and that in these circumstances Mr. Sager’s liability under his guarantee falls within the saving provision in s. 173(1)(

a) noted above. It is quite adequate for me to rely on the other aspects of s. 173 that have been proven. [ 32 ] I also observe that s. 158 of the BIA imposes duties on the bankrupt including, in general and among others, disclosure of assets, provision of books and records, aid in realization of non-exempt assets, and cooperation with the Trustee. Although there has been

voluminous disclosure in this case, including as I have found many dead-ends and fruitless lines of inquiry, I cannot fully say that Mr. Sager’s line of travel or path of reasoning has always been completely candid. That said, the inquiries upon him have been several deviations beyond that ordinarily made upon a debtor [26] , even a business debtor, and at times bordered upon the persecutorial. And, to reiterate, these were made by a Trustee backstopped by essentially unlimited resources. Some were completely warranted; others, less so. [ 33 ] As I have noted, once s. 173 is triggered, I have the authority under s. 172(2)(

c) to require the bankrupt to “perform such acts, pay such moneys….or comply with such other terms as the Court may direct.” I emphasize that this is a discretion that is independent of any s. 95 preference analysis. My disposition does not turn on s. 95, or the Taksindu timeframe, in any way. [ 34 ] With that said. In my view, and in my s. 172(2) discretion, it would be unfair and unjust to creditors to allow Mr. Sager to have the benefit of his interest in this asset calculated on the basis of including the Taksindu debt.

It is clear that it was used as a vehicle not only to continue construction after his business troubles arose, but Taksindu itself was funded at least in part from KESI cash flow which in turn was from the contracts in which Kocken was the “operating” entity. [27] In so doing, this reduced Mr.

Sager’s equity that would otherwise have been available to creditors when he filed for bankruptcy, calculated in accordance with principles laid down by this Court. [ 35 ] The net effect is he purports to owe a debt to Taksindu which, as and when paid, can flow up through the Trust and into himself or whatever eligible beneficiaries the Trustees elect. In formulating my s. 172(2) discretion after finding s. 173 “facts,” in my view that is unjust and unwarranted. [ 36 ] So, what is that equity?

I can take judicial notice that it is likely that the 150 Pentz Road fair market value has increased from the time of appraisal in 2018 to present. I do not think I can take judicial notice of a specific number; none was presented to me. Although I believe I have the jurisdiction to order an updated valuation, this was not asked of me and I do not so order. Instead, I take notice that the original 2018 construction calculation and appraisal are close in value.

I take a similar analysis to the improvements to the time of hearing, and use a value (or value-to-the-owners) of $922,000 (the $759,500 appraisal and $162,531 subsequent investment, rounded). [28] [ 37 ] I have discussed this Court’s realizable equity calculation in several cases, including Re McInnis, 2020 NSSC 64 , and Re Gavel, 2021 NSSC 5 . Applying that analysis, I calculate Mr.

Sager’s equity without regard to the Taksindu encumbrance as: Value: $922,000.00 Commission @ 5% plus HST ($53,015.00) Allowance for legal fees: ($1,000.00) TD Mortgage [29] ($465,144.00) Penalty [30] ($3,489.00) Net: $399,352 / 2 = 199,676 [ 38 ] I will return to how I will treat this in my disposition. The Oakland Drive Property [ 39 ] The Trustee urges a similar analysis for Oakland Drive. This property had been owned by 3297807 Nova Scotia Limited (aka Thirteen Rivers Limited) and was conveyed to the Sager family personally. It was appraised at $343,000 [31] but was conveyed for (apparently) $247,000.

I say “apparently” as the deed transfer tax calculation before me shows $214,782.61. This appears to be net of HST; it is not clear to me how or why this was treated as a transaction subject to HST but that is not germane. [ 40 ] The transaction was financed by a net advance of $212,940 from TD Bank, of which $176,909.16 was advanced to Mr. Sager and his spouse directly. There was no evidence of why this was not paid to Thirteen Rivers Limited. There is a second mortgage in favour of Taksindu, which Mr. Sager says wipes out any equity.

The Trustee says I should use the $343,000 appraisal less TD’s balance as of bankruptcy, without notional disposition costs, and order Mr. Sager to pay $67,907 as his 50% interest. [32] [ 41 ] I disagree; this transaction, however unsatisfactory it may be from an optics perspective, is on a completely different footing from the 150 Pentz Road transaction. In the Oakland situation, Mr. Sager acquired an asset which he says is fully encumbered, from Thirteen Rivers which in turn was owned by the Trust. Had he done nothing with this property prior to his bankruptcy, it would have been out of reach of his creditors.

As it turns out, he monetized it (acquiring it in his and his spouse’s personal names as a financing requirement [33] ) and took out at least $176,000 which was put to other uses. There is a dispute as to whether he paid it (either in a timely fashion or otherwise) to the lines of credit and suppliers as required by TD Bank – as noted above Mr. Sager says that this discrepancy is explained by him running up his credit cards again. True or not, that would be an issue for TD or another affected creditor to bring up. They have not.

BMO made up about $145,000 of the debts that were supposed to be paid, and these were ultimately paid (apparently from the Pentz mortgage proceeds). CIBC is the other creditor to be paid, and it is listed on Mr. Sager’s statement of affairs; again perhaps from re-borrowing, perhaps not. They have not objected. Neither has TD. [ 42 ] In Gavel, supra , at paras. 99-115, I discussed situations in which a bankrupt took assets which were exempt (or otherwise not “property of the bankrupt” within the meaning of s. 67 BIA ) and disposed of them to acquire or build equity in (

a) another exempt asset (

b) a non-exempt asset volitionally; and (

c) a non-exempt asset involuntarily (as was the specific instance in Gavel) . The case law was clear that in instance (a) – the replacement of an exempt asset with another exempt asset – the exemption continues. In my view, the same situation pertains here, albeit in a different way. The asset was (legitimately) out of reach of Mr. Sager’s personal creditors before the Oakland transfer as it was not owned by him (or a company owned directly by him), and it was out of reach after the bank-motivated

transfer because (although, for clarity, no longer a non-exempt asset), it was fully encumbered. Mr. Sager’s personal creditors are in the same, or better, position than before. [ 43 ] As I have noted, some $50,000 that has been ‘put into’ the 150 Pentz Road property came from some place other than Taksindu. It may or may not have its direct or indirect source in the Oakland transaction. It doesn’t matter. To repeat, the fact remains that Mr. Sager’s unsecured creditors are at least as well off, and likely better off, for the Oakland transaction having taken place.

As a corollary, the fact he has “debted up” any equity in favour of Taksindu has not hindered or impaired his creditors over and above where they would have been had the Thirteen Rivers – Sager transaction not taken place. I am not ordering any payment as a result. Pine Grove Developments Inc. [ 44 ] This company is owned by the Trust and, in turn appears to own an encumbered property at 305 Highway 10.

The Trustee has, aside from pointing out that the company has a trade account with a building supply company whose purchases for 150 Pentz Road were paid by Sager and/or the Trust, not impugned any transactions or asserted any value attributable to Mr. Sager’s bankrupt estate. I note that Kocken’s books of account appear to show that Pine Grove is owed significant money by Kocken; it will not realize any of this. LaHave Research Incorporated [ 45 ] The Trustee has not identified any need for review or action for this company. It appears to have been a vehicle for commissions from one of Mr.

Sager’s prior enterprises, namely “white label” ATMs. Mr. Sager testified at his s. 163 examination that it has been inactive since the 1990s and has had no assets since at least 2015. 146 Pentz Road [ 46 ] This had been in Mr. Sager’s and his spouse’s joint names until early 2019 – again, more than a year prior to the s. 95 BIA “preference” date. In 2019, this was transferred to the bankrupt’s spouse alone, in exchange for which he says he was paid out of an inheritance she had received. He claims that net advance of $56,789.25 (U.S.) was in turn provided to Kocken.

He says that this title transfer was on the advice of counsel, and the deposit to Kocken was at least in part to minimize currency exchange fees. [ 47 ] The Trustee submits that the funds were ultimately transferred directly or indirectly back to the Sager family, and that if Mr.

Sager’s spouse wanted to retain control of these funds they should have remained in her account or at least put in the form of a formal loan. [ 48 ] The Trustee further submits at para. 54 of the Trustee’s Report that this is outweighed by some $125,000 advanced to “parties including Sager, PGD [Pine Grove Developments], expenditures associated with the construction of 150 Pentz and the Oakland mortgage.” As I have discussed above, the net effect of the advances for 150 Pentz is an enhancement to creditors; the only mention of Pine Grove is as a “flow through” for construction materials that were paid by Mr.

Sager or the Trust; and Oakland would have been out of reach of creditors. Thus, even if true, the net effect is that creditors are better, not worse, off. [ 49 ] It does not appear to be contested that Mr. Sager’s spouse received an inheritance and advanced it as noted. I do not agree that it is an inevitable conclusion that she intended to “put it in the pot” by not keeping it in her own segregated account. I agree with Mr. Sager that the lack of formal documentation between this long-term couple is far from fatal when there is objective corroboration for his explanation. Indeed, it appears Mr.

Sager’s spouse was advised to get some value for the advance/investment, in the form of acquiring sole title to 146 Pentz. If so, she was well advised. [ 50 ] I do not accept the assertion that this was a transfer “for no apparent consideration” as submitted by counsel for the Trustee, or that the funds, net of those put into 150 Pentz that I have included in my equity calculation, “looped back” to deprive creditors. Surplus Income [ 51 ] I have stated in many decisions, oral and written, that I rarely deviate from the s. 68 BIA calculation of surplus income.

I adhere closely to those guidelines for a number of reasons. It provides certainty to bankrupts and to trustees. It avoids “palm tree justice” outcomes. And in Nova Scotia (especially outside metropolitan Halifax) it provides reasonable and in some cases even generous guidance for liveable but not extravagant “walking around money” during one’s bankruptcy period. [ 52 ] Rarely does not, however, mean never. In Mr. Sager’s case, I will be calling for a significant payment for him to exit his bankruptcy. That will place strains on his, and perhaps his family’s, resources.

More substantively, it will not do anything of consequence to “move the needle” on the creditors’ dividend, as a percentage of proven debts. Mr. Sager’s own, and family, income is highly flexible given the rental properties, whatever may remain in liquidity in the Trust and its holdings, and so on.

While this is not unquantifiable, particularly given my authority to determine an appropriate amount under s. 68(11) where the payor and payee are at non-arm’s length, in my view the cost-benefit of going through that analysis here is fraught at best. [ 53 ] The Trustee asks that I order the bankrupt to (re)file income and expense statements for Mr. Sager and his spouse , for the 9 or 21 month bankruptcy period. I do not have jurisdiction to order that. I only have jurisdiction to order him to file income and expense statements. His spouse is free to disclose her income, or not [34] . If she doesn’t, Mr.

Sager is deemed to have 50% of the family income; how I treat that is a matter for my discretion, but it does not give me authority to order the spouse of a bankrupt to weigh in. [ 54 ] I will be the first to say that this allows for manipulation and splitting in many instances.

That is a structural issue for Parliament and for the Superintendent’s Guidelines, not for this Court except for my discretion to deviate from the s. 68 “table” amount when appropriate. [ 55 ] On a global basis, the disposition I make for this debtor in these circumstances is adequate to address the issues of concern to the Court, while allowing for a fair window from which debtor rehabilitation can be achieved.

[ 56 ] Further and in addition, it was not disputed that Mr. Sager did not cash his paycheques for the year prior to Kocken’s bankruptcy [35] . Once again, the major creditor is in at least as good if not a better position than it would have been had Mr. Sager either “walked,” or remained at the helm taking his pay.

If the $98,729.13 Kocken is said to have owed him at Kocken’s bankruptcy is even close to accurate, the major creditor has received more than the benefit of anything I could have reasonably imposed under s. 68 . [ 57 ] I am thus not imposing a s. 68 payment over the s. 172(2) terms I impose in this decision. Conclusion [ 58 ] After carefully considering all of the above, I am ordering Mr. Sager, as a condition of his discharge, to pay the sum of $200,000 into his estate for the benefit of creditors, payable at the rate of at least $2,500 per month.

This is, to reiterate, in the exercise of my discretion under s. 172(2). It is inspired by, but not a direct precipitate of, my calculation of the “Taksindu-removed” equity in 150 Pentz Road, my analysis of the other impugned transactions, the sometimes intertwined and often nitpicky and fruitless inquiries (some might say persecutions) by BMO and the Trustee, and the circumstances of the failure of Kocken/KESI as the bankruptcy trigger. I also factor in Mr. Sager’s age, prospects, and circumstances, including the very salient fact that this is his first bankruptcy after a storied lifetime.

I indeed submit to Mercutio’s wisdom in observing that ‘tis enough. ‘Twill serve. Mr. Sager deserves a reasonable opportunity to exit this process, in a manner that is fair to his general body of creditors, before he like Mercutio’s assassin Tybalt festers in his shroud. [ 59 ] In saying this, I am also not exonerating Mr. Sager for this level of cash flow/asset comingling and more-than-occasional failure to provide coherent and credible explanations for certain transactions.

However, they were far more often teapots than the tempests the Trustee attempted to make them out to be. [ 60 ] I am ordering the Trustee to register, and to retain on the parcel register, its claim of interest in 150 Pentz Road pending further order of the Court, if it has not already done so. [ 61 ] Lastly, I am ordering that this payment to the estate may be made, at Mr.

Sager’s option exercisable within 30 days of release of this decision, by Taksindu assigning its mortgage on 150 Pentz Road to the Trustee for the general benefit of creditors, provided that the outstanding balance under that mortgage is at least $200,000.

If this avenue is taken, Taksindu shall set out the amount due and owing as at the date of release of this decision (not the date of assignment), and warrant to that effect in that assignment and that such amount is justly due and owing as of the assignment, together with such verification thereof as may be satisfactory to the parties or, failing such agreement, acceptable to the Court. For clarity, any such assignment shall be for the full amount of the mortgage as of the date of release of this decision including interest accrued and unpaid, and to be paid, with the minimum set out above.

The Trustee will have its remedies in the event of default under that mortgage, in accordance with its terms (and the underlying promissory notes). Presumably Taksindu will have a loss and there may or may not be tax consequences to Taksindu, the Trust, or Mr. Sager and/or his spouse as a consequence. That is outside my bailiwick but I flag it as the stakeholders may wish to obtain professional advice before Mr. Sager pursues or declines this option. If Mr.

Sager declines this option, or if he cannot procure Taksindu’s assignment, or if he makes no election within the prescribed period that Taksindu then completes accordingly, the order for direct payment by Mr. Sager to the Trustee of $200,000 shall prevail. [ 62 ] It will be seen that the Trustee has been more successful than it submitted with respect to 150 Pentz, but for very different reasons and on a very different calculation matrix; a matrix which was or should have been known to the Trustee, at least insofar as it pertains to notional costs of disposition.

It has been unsuccessful in the remaining items, and less successful overall than it recommended; these issues took up the bulk of the parties’, and the Court’s, time. [ 63 ] At the close of the discharge hearing, I encouraged the stakeholders to engage in discussions with a view to putting a mutually acceptable recommendation before the Court. On April 24, 2021 I was advised that the parties were unable to arrive at that consensus. I am of course oblivious to the content of those discussions.

If the parties cannot agree on costs, I will hear them by written submissions of no more than 20 double-spaced pages each (exclusive of books of authorities) filed no later than 45 days from the release of this decision. [ 64 ] Mr. MacDonald shall prepare the draft order for Mr. Hill’s assent or dissent, and for submission to the Court. Balmanoukian, R.