Mercado Capital Corporation v. Qureshi, 2018 ONCA 711

Can the court exercise discretion when determining if a transaction is at undervalue?

The Respondent and her husband (the “Debtor”) married in 2001 and have three children. As one of their children required around-the-clock care, they concluded that retaining specialized staff to care for their child would have cost more than the Respondent would have been able to earn. As a result, the Respondent did not enter the workforce. While the Respondent maintained the household and cared for the children, the Debtor owned and operated a consulting and trading company.

In 2011, the Respondent and the Debtor bought a family home in Richmond Hill (the “Selwyn Property”). The purchase was financed through, inter alia, a cash contribution by the Respondent’s parents. While the Selwyn Property was registered in the Debtor’s name, both believed that they each owned an equal share.

In 2015, the Respondent entered into an agreement of purchase and sale on behalf of her and the Debtor to purchase a home in Aurora (the “Davina Property”). The purchase of the Davina Property closed on the same date as the sale of the Selwyn Property. The purchase of the Davina Property was funded with, inter alia, the net proceeds from the sale of the Selwyn Property and a last-minute contribution of $89,654 from the Respondent’s parents. Title to the Davina Property was registered in the names of the Respondent and the Debtor as joint tenants. The application judge accepted that they believed they each had a 50% interest in the Davina Property because, like the Selwyn Property, it was their matrimonial home.

In 2016, the Respondent’s marriage ended. In 2017, the Debtor was charged with multiple counts of fraud. There was no evidence that the Respondent was aware of any alleged fraudulent activities on his part. Mercado Capital Corporation (the “Appellant”) is a creditor of the Debtor, and claims to be a victim of his fraud. In 2016, the Appellant successfully petitioned the Debtor into bankruptcy. Soon after, the Davina Property was sold, yielding net proceeds of $696,815, with the Respondent’s share of the proceeds of the sale amounting to $348,407.50.

The Appellant brought an application for an order that the Respondent’s 50% share of the proceeds from the Davina Property was the result of a transfer to her at undervalue, and was therefore void pursuant to s. 96(1)(b)(i) of the Bankruptcy and Insolvency Act (the “BIA”). In dismissing the Appellant’s application, the application judge relied primarily on the discretionary language of s. 96, and declined to declare the Respondent’s 50% interest void on account of the following:

the Respondent’s “substantial non-monetary contribution to the family by her hard work managing the household and caring for their children”;
the Respondent’s parents’ contributions to the purchase price of both of the matrimonial homes;
the couple’s honest belief that the Respondent was entitled to a 50% interest in the Davina Property because it was their matrimonial home;
the fact that the Respondent and her children have no other guaranteed form of financial support, and the Respondent needs the proceeds from the sale to support herself and her children; and
the fact that the agreement of purchase and sale for the Davina Property was signed by the Respondent well before the one year period preceding the Debtor’s initial bankruptcy event.

On appeal, the Appellant submitted that the application judged erred in his interpretation and application of s. 96. The Respondent submitted that her non-financial contributions ought to be given legal recognition when determining whether there was any disposition to her of the Davina Property.

In denying the appeal, the Court of Appeal agreed with the Respondent that her direct contribution to the purchase of both matrimonial homes was in running the home and raising the children. Such argument is consistent with the philosophy of the Family Law Act—that marriage is an economic partnership, and the roles of the partners in acquiring assets, earning income, raising children and running the household are of equal value, entitling each partner to an equal share of the net value of the assets acquired during the marital partnership. The Court considered that the Respondent has no separation agreement, no court-ordered support, nor any firm commitment to receive child and spousal support from the Debtor. The Davina Property was her only asset, and she needs her share of the proceeds to build an independent life with her children.

Even if there was a transfer at undervalue, the effective date of the impugned transaction was more than a year before the bankruptcy event, and the Appellant failed to prove that the Debtor was insolvent or intended to defraud, defeat or delay a creditor on the day of the disposition. The Respondent entered into the agreement of purchase and sale for the purchase of the Davina Property on February 18, 2015. The initial bankruptcy event occurred on June 2, 2016, when the Appellant brought a bankruptcy application against the Debtor. The Respondent acquired her beneficial interest in the Davina Property upon signing the agreement on February 18th, making that the effective date of the impugned disposition of property. A purchaser becomes the beneficial owner of the property as soon as the contract is formed, even if the purchase price is paid upon closing. As such, the transaction could only be declared void if the Appellant proved that the Debtor was insolvent on February 18th, or that he intended to defraud a creditor in making the disposition of the Davina Property. The Appellant failed to prove either ground on a balance of probabilities.

The Court of Appeal concluded that there was no basis for it to void the impugned disposition of the Davina Property to the Respondent, and dismissed the appeal with costs to the Respondent.

Counsel: Michael Myers and Michael Krygier-Baum of Papazian Heisey Myers for the appellant and Veena Pohani of Veena Pohani and Associatesfor the respondent

Full case: http://canlii.ca/t/htr3g

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