


COURT OF APPEAL FOR ONTARIO

CITATION:
Bank of Montreal v. EL04 Inc.

(Just Between Us and Pink Elephant), 2012 ONCA 80

DATE: 20120207

DOCKET: C54214

Laskin, Sharpe and Juriansz
    JJ.A.

BETWEEN

Bank of Montreal

Plaintiff (Respondent/                                                                                   Appellant
    by way of Cross-Appeal)

and

EL04 Inc. trading as Just Between Us and Pink
    Elephant, and
Elizabeth
Stolper
also known as Liz
Stolper
also known as Elizabeth
    Derksen

Defendant (
Appellant/Respondent
    by way of Cross-Appeal
)

David Swift, for the appellant/respondent by way of
    cross-appeal

Sean N.
Zeitz
, for the
    respondent/appellant by way of cross-appeal

Heard: January 9, 2012

On appeal and cross-appeal from the judgment of Justice Peter
    B.
Hambly
of the Superior Court of Justice, May 30,
    2011 with reasons reported at 2011 ONSC 2115.

Laskin J.A.:

A.

introduction

[1]

Elizabeth
Stolper
appeals from the summary judgment finding her personally liable to the
    respondent, the Bank of Montreal.  The
    Bank seeks leave to cross-appeal the motion judges costs award.  The motion judge found that Ms
Stolper's
company, EL04, and her father's company,
Deln
Construction, had engaged in a non-arm's length
    transaction for less than fair market value. Under the former s. 100 of the
Bankruptcy and Insolvency Act
, R.S.C. 1985, c. B-3,
this made EL04 liable to
Deln's
creditors after
Deln
went
    bankrupt. The motion judge also found Ms
Stolper
personally liable as "privy" to the transaction. His finding that Ms.
Stolper
was privy is the main issue on this appeal.

B.

a brief summary of the facts

(1)

The Parties

[2]

EL04 operated two businesses: a clothing store
    called Just
Between
Us, and a marketing and consulting
    business called Pink Elephant.  Ms.
Stolper
was the sole officer and director of EL04.  Just
Between
Us
    ceased operations in 2010.

[3]

Deln
was a
    contractor.  Ms.
Stolpers
father, Herman Derksen was the companys principal.  Ms.
Stolpers
husband, Jason
Stolper
, was an officer and employee
    of the company.  In September 2008,
Deln
made an assignment in bankruptcy.  KPMG Inc. was appointed trustee.  At the time of the bankruptcy, the respondent,
    the Bank of Montreal, was a proven creditor of
Deln
.

(2)

The Non-Arms Length Transaction

[4]

Between September and December 2007,
Deln
did renovations for the new location of the Just
Between
Us clothing store in Waterloo.  The trustee estimated that the fair market
    value of the work was $157,735.36.  EL04
    did not pay for the work, and the motion judge gave summary judgment in
    accordance with the trustees estimate.  The amount itself is not challenged on this appeal.

(3)

The Action and the Motion

[5]

After
Deln
went into
    bankruptcy, the Bank of Montreal obtained an order under s. 38 of the
Bankruptcy and Insolvency Act
authorizing it to bring this action as an assignee of the trustees interest.  It brought this action against EL04 and Ms.
Stolper
on its own behalf and on behalf of five other
    creditors of the bankrupt to recover the unpaid amount for the
    renovations.

[6]

In their defence, EL04 and Ms.
Stolper
asserted an off-set agreement between EL04 and
Deln
:  the renovation
    work performed by
Deln
would be off-set by marketing
    and consulting services provided to
Deln
by Pink
    Elephant.  In support of this agreement,
Deln
produced two credit notes it had issued to Just
Between
Us.  The first
    credit note for $49,076.03 was issued on July 22, 2008, just two months before
Deln
made an assignment in bankruptcy.  The second credit note for $74,290.80 was
    issued on September 8, 2008, just two weeks before the assignment. The second
    note stated that it was in lieu of consulting services provided over the last
    18 months.

[7]

In addition to the defence of an off-set
    agreement, Ms.
Stolper
maintained that she was not
    personally liable for a debt incurred by her company.

[8]

The motion judge rejected the defences put
    forward by EL04 and Ms.
Stolper
and held them both
    liable.  He found that EL04 had not
    provided consulting services to
Deln
, and even if it
    had, there was no off-set agreement.  He
    wrote at paras. 15 and 17 of his reasons:

Deln
gave to EL04 credits though JBU
    in the three months before the bankruptcy of
Deln
, on
    September 24, 2008, of $123,366.23.  This
    was allegedly for services provided by EL04 to
Deln
through Pink Elephant for marketing and consulting work between February 2007
    and January 2008.  They were allegedly provided
    pursuant to an agreement that they would be off set against the amount owing by
    EL04 to
Deln
for construction work that
Deln
had done for JBU by constructing renovations for JBU. There
    is no corroborating evidence that the services were provided or of the alleged
    set off agreement.  The defendants have
    provided no affidavits from Herman or Jason.  The evidence is that Elizabeth is on good terms with both. It would have
    been a simple matter for her to obtain affidavits from them confirming her
    evidence if it is true.

Elizabeth has failed, if she could, to put her best foot
    forward or to lead trump.  The principles
    set out in
1061590 Ontario Ltd.
,
Pizza
Pizza
and
Healy

apply
.  I find that the Bank has established that
Deln
provided services to EL04 in doing renovations for
    JBUs store.  I find that Elizabeth has
    failed to establish that she did any marketing and consulting work for
Deln
and if she did, that there was an agreement between
    her father, on behalf of
Deln
and her, on behalf of
    EL04 that her work would be set off against the renovations done by
Deln
.

[9]

The motion judge also found that Ms.
Stolper
was privy to the transaction between EL04 and
Deln
and, therefore, liable to the Bank for the amount of
    the claim.  As well as granting judgment
    for that amount, he granted a declaration that the two credit notes were void.

[10]

Only Ms.
Stolper
(and
    not the corporate defendant) has appealed the summary judgment.

C.

analysis

[11]

Under the former s. 100 of the
Bankruptcy and Insolvency Act
,
    which governs this appeal,
[1]
the
    trustee could assert a claim against the defendant in respect of a reviewable
    (or non-arms length) transaction for conspicuously less than fair market
    value.  Sections 100(1) and (2) provided:

(1)

Where a bankrupt sold, purchased, leased, hired,
    supplied or received property or services in a reviewable transaction within
    the period beginning on the day that is one year before the date of the initial
    bankruptcy event and ending on the date of the bankruptcy, both dates included,
    the court may, on the application of the trustee, inquire into whether the
    bankrupt gave or received, as the case may be, fair market value in consideration
    for the property or services concerned in the transaction.

(2)

Where the court in proceedings under this
    section finds that the consideration given or received by the bankrupt in the
    reviewable transaction was conspicuously greater or less than the fair market
    value of the property or services concerned in the transaction, the court may
    give judgment to the trustee against the other party to the transaction,
    against any other person being privy to the transaction with the bankrupt or
    against all those persons for the difference between the actual consideration
    given or received by the bankrupt and the fair market value, as determined by
    the court, of the property or services concerned in the transaction.

[12]

Thus to succeed in its claim against Ms.
Stolper
, the Bank (as assignee of the trustees interest)
    had to establish four elements:

·

The transaction or transactions between EL04 and
Deln
were reviewable;

·

The transactions occurred within 12 months of
Delns
bankruptcy;

·

The consideration received by the bankrupt,
Deln
, was conspicuously less than the fair market value of
    the services it provided; and

·

Ms.
Stolper
was privy
    to the transactions.

[13]

Even if all four elements were made out, the
    court still retained the discretion to refuse to grant judgment: see
Standard
Trustco
Ltd. (Trustee of) v. Standard Trust Co.
(1995)
,
    26 O.R. (3d) 1 (C.A.); and
Peoples
    Department Store Inc. (Trustee of) v. Wise
, 2004 SCC 68, [2004] 3
    S.C.R. 461.

[14]

Ms.
Stolper
does not
    contest the first two elements of the Banks cause of action.  She does challenge the last two
    elements.  Although I will review the
    facts relevant to all four, this appeal turns on the last element - whether Ms.
Stolper
was privy to the transaction between her
    company, EL04, and
Deln
.

(1)

Reviewable Transactions?

[15]

Whether the renovations performed by
Deln
alone, or the renovations and the two credit notes,
    constitute the transactions, all are reviewable under the Act.  Under the former s. 3(1) of the Act, non-arms
    length transactions were deemed to be reviewable.  Persons related to each other by blood or
marriage were
deemed not to deal with each other at arms
    length; related persons included two entities, each controlled by a related
    person.  Thus, Ms.
Stolpers
company, EL04, and her fathers company,
Deln
, were
    related persons and deemed not to deal with each other at arms length.  Their transactions were reviewable under s.
    100.

(2)

Transactions
Within
12
    Months of Bankruptcy?

[16]

The renovation work was performed from September
    to December 2007, within 12 months of
Delns
bankruptcy in September 2008.  The credit
    notes were issued a few months and a few weeks before the bankruptcy.  This element was therefore met.

(3)

Considerations Conspicuously
    Less than the Fair Market Value of the Services?

[17]

EL04 did not pay for the renovation work.  Nonetheless, Ms.
Stolper
submits that whether there was an off-set agreement for Pink Elephants
    consulting services raises an issue for trial.  She contends that the two credit notes issued by
Deln
support her submission.

[18]

The motion judge rejected this submission, and I
    agree with him.  As he pointed out,
    neither Ms.
Stolpers
father, Mr. Derksen, nor her
    husband, Jason
Stolper
, filed an affidavit attesting
    to any off-set agreement or to the receipt of consulting services.  Ms.
Stolper
did not
    produce any records, documents or notes supporting the existence of an off-set
    agreement.  Nor did she produce
    particulars of any consulting service she provided to
Deln
to off-set the renovation work on the Just
Between
Us
    store.  The motion judge was therefore entitled
    to conclude that no off-set agreement existed and no consulting services were
    provided.

[19]

Accordingly, Deln did the renovation work
    without remuneration or for conspicuously less than its fair market value.

(4)

Was Ms.
Stolper
Privy to
    the Transactions?

[20]

The motion judge did not find that Ms.
Stolper
had been fraudulent, deceitful or dishonest.  Thus, she argues that the motion judge had no
    basis to, in effect, pierce the corporate veil, and hold her personally liable
    for the debt of her company.  I do not
    accept this argument.

[21]

The traditional and well established bases for
    piercing the corporate veil do not apply to those persons who might be liable
    as privy under s. 100.  The purpose of s.
    100 is to preserve the bankrupts assets for its creditors by allowing the
    trustee to recover economic losses suffered by the bankrupt in non-arms length
    transactions: see
Standard
Trustco
,
at p. 11. In the light of this
    purpose, the courts have interpreted the term privy to include those persons who
    have knowledge of a transaction for less than fair market value and benefit
    either directly or indirectly from it: see Peoples, at para. 91.

[22]

In
Peoples
,
    the Supreme Court of Canada set out the purpose of s. 100 and explained why it required
    a broad definition of the term privy.  Major and
Deschamps
JJ.
wrote
at para. 91:

The primary purpose of s. 100 of the BIA is to reverse the
    effects of a transaction that stripped value from the estate of a bankrupt
    person.  It makes sense to adopt a more
    inclusive understanding of the word privy to prevent someone who might
    receive indirect benefits to the detriment of a bankrupts unsatisfied
    creditors from frustrating the provisions remedial purpose.  The word privy should be given a broad
    reading to include those who benefit directly or indirectly from and have
    knowledge of a transaction occurring for less than fair market value.  In our opinion, this rationale is
    particularly apt when those who benefit are the controlling minds behind the
    transaction.

[23]

The courts broad interpretation of privy,
    gleaned from the purpose of s. 100, has effectively created an exception to the
    well established principles of separate corporate personality. The term privy
    is broad enough to include, in appropriate cases, individuals who are the sole
    principals of corporate defendants.

[24]

Given the broad meaning of privy, the motion
    judge was correct to conclude that Ms.
Stolper
was
    privy to the transaction or transactions between her company, EL04, and
Deln
.  Even if she
    did not know about the credit notes, as she claims, she did know about the
    renovations on the clothing store.  Her
    company received the benefit of those substantial renovations and did not pay
    for them.  The company could then use the
    money for other purposes.

[25]

Ms.
Stolper
was the
    sole principal of EL04.  She was the
    controlling mind behind the arrangement with
Deln
to
    renovate the Just
Between
Us store.  At a minimum, she benefited indirectly, if
    not directly, from her companys failure to pay
Deln
for the renovations.  She was, in short,
    privy to the transaction.

[26]

The Bank, therefore, has established all four
    elements of a successful claim under s. 100.  The only remaining question is whether the court ought to exercise its
    discretion not to grant judgment against Ms.
Stolper
.  Major and
Deschamps
JJ.
described
this discretion at para. 92 of Peoples:

A finding that a person was privy to a reviewable transaction
    does not of course necessarily mean that the court will exercise its discretion
    to make a remedial order against that person.  For liability to be imposed, it must be established that the transaction
    occurred:  (a) within the past year; (b)
    for consideration conspicuously greater or less than fair market value; (c)
    with the persons knowledge; and (d) in a way that directly or indirectly
    benefited the person.
In addition,
    after having considered the context and all the above factors, the judge must
    conclude that the case is a proper one for holding the person liable.
In light of these conditions and of the
    discretion exercised by the judge, we find that a broad reading of privy is
    appropriate. [Emphasis added.]

[27]

The motion judge concluded that this was a
    proper case for holding Ms.
Stolper
liable.  I see no basis to interfere with his
    conclusion.  I would, therefore, dismiss
    Ms.
Stolpers
appeal.

[28]

In doing so, I emphasize the rather narrow
    limits of these reasons.  They should not
    be taken to hold that in every case of a non-arms length transaction at less
    than fair market value between a bankrupt and a company owned by a single
    person, that that person is automatically privy.  These cases tend to be fact specific and
    should be decided as they arise.  Moreover, even where a sole shareholder or principal is found to be
    privy, considerations may exist that persuade a court to exercise its
    discretion not to grant judgment against that person.

D.

the cross-appeal on costs

[29]

The motion judge awarded the Bank partial
    indemnity costs in the amount of $13,131.30.  The Bank seeks leave to appeal his costs award and asks for substantial
    indemnity costs of approximately $25,000.

[30]

I see no merit in the cross-appeal.  The motion judge considered and rejected the
    Banks request for substantial indemnity costs.  He said at para. 1:

I do not think that substantial indemnity costs are
    warranted.  In my view, the conduct of
    the defendants does not rise to the level of reprehensible conduct, either in
    the circumstances giving rise to the cause of action, or in the proceedings,
    which makes such costs desirable as a form of chastisement. [Citation
    omitted.]

I see no basis to interfere with this finding.  I would deny leave to appeal costs.

E.

conclusion

[31]

I would dismiss the appeal.  I would also dismiss the cross-appeal on
    costs by denying leave to appeal.  Taking
    into account the divided success, I would award the Bank costs of $6,000,
    inclusive of disbursements and applicable taxes, for the proceedings in this
    court.



Released: Feb. 7, 2012                                          John
    Laskin J.A.

JL                                                                     I
    agree Robert J. Sharpe J.A.

I
    agree R.G.
Juriansz
J.A.





[1]
Section
    100 has now been repealed and replaced by s. 96.


