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Insolvency (BIA) - Pooled Distribution. Stevens v. Hutchens
In Stevens v. Hutchens (Ont CA, 2024) the Ontario Court of Appeal dismissed an appeal of an interlocutory insolvency motion that ordered "a pooled distribution of the assets of the individual debtors and three corporate debtors controlled by one of the individual debtors", here as a result of fraudulent conveyancing and piercing the corporate veil:(1) The motion judge did not err in piercing the corporate veil to implement a pooled distribution to the creditors of the individual and corporate debtors
[10] The appellant argues 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.
[11] Respectfully, this argument mischaracterizes the basis of the motion judge’s decision. Her decision was not driven by the fact that the Pennsylvania and Colorado plaintiffs would receive none of the final distribution if a pooled distribution was not authorized. Rather, what drove her 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. In other words, the appellant’s claim to priority was based on the fact that it had a claim against the corporate debtors, while the Pennsylvania and Colorado plaintiffs only had claims against the individual debtors. The motion judge found that piercing the corporate veil and pooling the assets of the corporate and individual debtors was justified because the assets in the hands of the corporate debtors, to which the appellant asserted priority, were only in possession of the corporate debtors as a result of fraudulent transfers by the individual debtors.
[12] We see no error in the motion judge’s application of the law on piercing the corporate veil. 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. Citing this court’s decision in FNF Enterprises Inc. v. Wag and Train, 2023 ONCA 92, at paras. 18-20, the motion judge considered whether the corporate entities were completely dominated and controlled by the individual debtors and whether the corporation was being used as a shield for fraudulent or improper conduct.
[13] The motion judge also considered authority for “reverse” corporate veil piercing – the basis for the order she made – to make a corporation responsible for the shareholder’s debts, where the shareholder has fraudulently used the corporation to avoid the shareholder’s personal obligations: Wildman v. Wildman (2006), 2006 CanLII 33540 (ON CA), 82 O.R. (3d) 401 (C.A.), 215 O.A.C. 239, at paras. 23-25 and 43-46; Borden Ladner Gervais v. Sinclair et al., 2013 ONSC 7640, at paras. 17-20.
[14] We see no error in the motion judge’s findings that the corporations were controlled and dominated by the individual debtor Tanya Hutchens, that she used the corporations to fraudulently transfer funds to them to defeat creditors, and that the remaining assets held by the corporations were derived solely from the proceeds of fraud. These findings were amply supported by the tracing carried out by the receiver and reported in the 11th and 19th Report of the receiver.
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[18] Nor do we agree with the submission that the pooled distribution was unfair to the appellant as a third-party creditor to the corporate debtors. 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 corporations 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.
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