Pooling individual and corporate assets in a receivership?

Overview: In this case, the Court considered an appeal of a decision to pierce the corporate veil in a receivership proceeding to allow a pooled distribution of corporate and individual assets. The motions judge found that the corporate debtors were dominated by their principal, who used them to engage in fraudulent transactions in order to defeat creditors. On appeal, the Court did not find any reason to disturb these findings. The assets held by the corporate debtors were fraudulently transferred to the corporations in order to defeat creditors of the individual debtors. In the circumstances, there was no unfairness in the pooled distribution, which effectively reversed the fraudulent transfers to the corporations.

The appellant, Adroit Advocates LLC, appealed the order of the motion judge authorizing the distribution of the last remaining assets under a receivership. The receiver was appointed in February 2019 under s. 101 of the Courts of Justice Act over the assets and undertakings of Sandy and Tanya Hutchens (the “Individual Debtors”) as well as several corporate debtors for which Tanya Hutchens was the sole shareholder (the “Corporate Debtors”). As part of its mandate, the receiver also carried out an extensive tracing exercise to identify assets owned by the debtors. The last remaining assets at the time of the motion were $505,900 held by three of the Corporate Debtors. There was a creditor dispute over these assets. At the time of the motion, three creditors remained.

The Pennsylvania plaintiffs were judgment creditors of the two Individual Debtors. The Colorado plaintiffs were also judgment creditors of the Individual Debtors. The appellant was the law firm that had represented the debtors. It had an unsecured claim for unpaid legal fees jointly against the Individual Debtors and the Corporate Debtors. It also had the only unsecured claim against the Corporate Debtors. In the normal course, the appellant’s unsecured claim against the Corporate Debtors would have had priority over the equity claims of the Pennsylvania and Colorado plaintiffs. However, the Pennsylvania and Colorado plaintiffs contested the appellant’s priority for the corporate assets on the basis that the remaining assets of the Corporate Debtors were received as a result of fraudulent transfers by the Individual Debtors with the intent of defeating their creditors.

The central factual finding underlying the motion judge’s analysis was that all of the assets of the Corporate Debtors were fraudulently “funneled” to them by the Individual Debtor who controlled them (Tanya Hutchens) for the purpose of defeating creditors. The motion judge found that it was appropriate to pierce the corporate veil in order to pool the corporate and individual assets to satisfy claims against all debtors. She found that the Corporate Debtors that held the remaining assets were dominated by Tanya Hutchens, and that she used the corporations to engage in fraudulent transactions in order to defeat creditors. The effect of the distribution authorized by the motion judge was that the appellant shared the assets held by the Corporate Debtors on a pro rata basis with the Pennsylvania and Colorado plaintiffs, as creditors of the Individual Debtors, rather than receiving all of the corporate assets.

On appeal, the appellant argued that the motion judge’s reasoning was improperly results-driven, based on the concern that if a pooled distribution to the creditors of the individual and corporate debtors was not ordered, the Pennsylvania and Colorado plaintiffs would receive nothing in the final distribution. The Court of Appeal rejected that argument and held that what drove the motion judge’s decision was that the assets held by the Corporate Debtors had been fraudulently transferred to them by Tanya Hutchens, at the direction of Sandy Hutchens, in order to defeat creditors. The motion judge recognized that the starting point in considering claims against the Individual Debtors and the Corporate Debtors was the separate legal personality of the Corporate Debtors. She recognized that the court did not have an open-ended discretion to pool assets of the individual and corporate debtors. She correctly set out the two-part test for piercing the corporate veil. The motion judge’s findings—that the Individual Debtor used the corporations to fraudulently transfer funds to them to defeat creditors, and that the remaining assets held by the Corporate Debtors were derived solely from the proceeds of fraud—were amply supported by the tracing carried out by the receiver.

The Court found no procedural unfairness in the procedure employed by the motion judge. Both before the motion judge and on appeal, there was no dispute about the results of the tracing conducted by the receiver, which was the basis for the motion judge’s finding that the assets held by the Corporate Debtors were solely derived from fraudulent transactions designed to defeat creditors. The appellant did not cross-examine on the receiver’s evidence about the tracing or file contradictory evidence. There was no procedural unfairness.

Although the appellant had the only remaining claim against the Corporate Debtors, the motion judge found, based on the tracing done by the receiver, that the assets held by the Corporate Debtors were fraudulently transferred to the corporations in order to defeat creditors of the Individual Debtors. In the circumstances, there was no unfairness to the appellant in the pooled distribution, which effectively reversed the fraudulent transfers to the corporations.

The Court dismissed the appeal.

Judge: Miller, Copeland and Gomery JJ.A.

Counsel: James Gibson and Emily Wuschnakowski of Naymark Law for the respondent receiver B. Riley Farber Inc.; Justin Necpal for the respondents Gary Stevens, Linda Stevens and 1174365 Alberta Ltd.; Barbara VanBunderen of Siskinds for the respondents CGC Holding Company, LLC, Harlem Algonquin LLC and James T. Medick; and Brett Moldaver of Moldaver Barristers for the appellant Adroit Advocates LLC