J. Court No. 2402 IN THE QUEEN'S BENCH PROVINCE OF SASKATCHEWAN IN BANKRUPTCY IN THE MATTER OF THE BANKRUPTCY OF BRENT ASHTON BETWEEN: THOMAS BURKE MOODY, PATRICK MOODY and DARREL MOODY PETITIONERS and BRENT ASHTON RESPONDENT J.M. Lee for the petitioners R.J. Dumonceaux for the respondent JUDGMENT BARCLAY J. February 12, 1997 This is an application by the petitioners, ThomasBurke Moody, Patrick Moody and Darrel Moody (the Petitioners),for a receiving order against the respondent, Brent Ashton(Ashton). FACTS The Petitioners are three brothers from the Districtof Perdue, Saskatchewan who carry on a family farm operationand who operate a family-owned farm implement dealershipbusiness. In 1985, the accountant for the Petitioners was Lorne Broten of the Saskatoon accounting firm of Chamberlain, Broten McKenzie. Mr. Broten recommended to the Petitioners that they become involved in certain real estate partnerships, in order to derive certain tax advantages. Relying upon Mr. Broten's advice, the Petitioners invested in these partnerships. The two real estate partnerships in which thePetitioners invested were known as "Key West Carleton" and "KWProperties" ("the Partnerships"). The Partnerships are currently comprised of seven individuals, including the Petitioners and four other individuals, namely: (a) Mr. Broten, who now resides in Surrey, British Columbia; (b) Jack Picketts of Asquith, Saskatchewan; (c) Lionel Labelle of Saskatoon, Saskatchewan; and (d) Ashton, of Saskatoon, Saskatchewan. The Partnerships own various apartment buildings in Saskatoon, Saskatchewan, as well as various other commercial real estate holdings ("the Properties"). The acquisition and operation of the Properties by the Partnerships have been financed by various lenders ("the Lenders"), including Royal Bank of Canada and Federal Business Development Bank. The Lenders hold various mortgages on the properties ("the Mortgages"). In order to obtain waivers of The Limitation of Civil Rights Act, R.S.S. 1978, c. L-16, in respect of the Mortgages, the Lenders have required that title to the Properties be held in the name of various nominee corporations controlled by the Partnership. The individual members of the Partnerships have then personally guaranteed repayment of the Mortgages to the Lenders. Over the years between 1985 and the present date, the Partnerships have been operated through various nominee corporations and trust arrangements and have operated under various business names. Further, the membership of the Partnerships has changed from time to time, as new member Ashton joined the Partnerships and former member (Del Peters) left the Partnerships. Changes in the membership of the Partnerships have occurred by unanimous agreement between the existing members of the Partnerships. By means of "Partnership Agreement" dated May 1, 1985 ("the 1985 Partnership Agreement"), the "K.W. Properties" partnership was formed, comprising the Petitioners, Mr. Broten, Mr. Labelle, Mr. Picketts and Del Peters of Saskatoon, Saskatchewan. The members of the K.W. Properties partnership each became shareholders of nominee corporation known as Key West Developments Ltd. ("Developments"). Relations between these seven shareholders were governed by "Shareholder's Agreement" dated May 1, 1985 ("the 1985 Shareholders Agreement"). By his signature to the January 23, 1986 Addendum to the 1985 Partnership Agreement, Ashton agreed to become member of the K.W. Properties partnership and agreed to be bound by the 1985 Partnership Agreement, including paragraphs and 15 of the 1985 Partnership Agreement, which read as 7. All expenses incurred in the course of the business and any losses arising therefrom shall be borne out of the earnings of the business, or in the case of deficiency, the losses shall be paid by the parties hereto in accordance with their shares as shown in attached Schedule 15. If the partnership requires additional money for the bona fide operation of its business, then each of the partners agrees that he will within ten days of the mailing of the notice to this effect by the board to all the partners, lend to the partnership his proportionate share of additional funds as may be required. The proportionate share shall be in accordance with the respective partnership interests. If any partner fails to lend to the partnership his proportionate share as provided within the time limit, then any other partner may advance this money to the partnership and shall immediately be entitled to recover from the defaulting partner the amount of such advance plus interest at the rate of the Royal Bank of Canada's prime commercial lending rate of interest plus 3% per annum to the date of payment. All interest of the partnership owned or controlled by such defaulting partner, and all loans payable by the partnership to such defaulting partner, shall thereafter be deemed to be charged (for all purposes) with the amount of such advance plus interest at the same rate until paid, provided; however, that any decision to invest additional funds for any new project shall require the unanimous consent of the partners. added). By January 1, 1989, the K.W. Properties partnership had acquired ownership of several apartment buildings in Saskatoon, as well as additional commercial real estate properties in Saskatoon and in the Province of Ontario. It was decided by the members of the K.W. Properties Partnership to create new real estate partnership to be known as the "Key West/Carleton" Partnership ("Key West/Carleton"), to be comprised of the same eight individuals who had comprised the K.W. Properties Partnership. It was also decided that equitable title to the properties previously owned by Developments would be transferred to Key West/Carleton, and that Developments would thereafter hold title to these properties as mere trustee for Key West/Carleton. No formal partnership agreement has ever been prepared in respect of Key West/Carleton. However, from 1989 to the present date, the members of the Key/West Carleton partnership have continued to conduct themselves as equal members of real estate partnership who are each entitled to their respective share of the profits of that partnership and who are each liable for their respective share of the loses of that partnership. Over the years between 1989 and the present date, the Partnerships have sustained heavy ongoing losses, which have resulted in the need for significant injections of capital contributions to the Partnerships. For the most part, these capital contributions have been funded largely (if not entirely) by the Petitioners. The remaining partners have not paid their respective shares of capital contributions to the Partnerships. The Petitioners have continually been required to advance additional capital contributions to the Partnerships (over and above their respective proportionate shares) on behalf of the defaulting partners, in order to prevent the Partnerships from defaulting on the Mortgages. Notwithstanding that the ongoing operations of the Partnerships have been funded primarily by the Petitioners, the business losses of the Partnerships have always been allocated equally among the partners and claimed by each of the partners as personal business losses on an equal basis. As result, the defaulting partners have obtained the benefits of business losses from the Partnerships, which business losses they have been able to use to offset their other sources of income and to decrease their personal income tax liability by very significant amounts. In the result, the defaulting partners (including Ashton) have been obtaining the benefits of the Partnerships (in the form of reduced income taxes resulting from business losses) without paying for them. This situation has been ongoing since at least 1989. Procedural History of This Bankruptcy Petition The petition was issued by the Registrar in Bankruptcy on July 25, 1996. On that same date, the Registrar in Bankruptcy granted an ex parte order ("the Preservation Order") directed against each of Ashton, his wife, Susan Ashton and his holding company, Ashton Holdings Ltd., requiring each of them to preserve and retain intact and in specie various market securities ("the Securities") previously owned by Ashton Holdings Ltd. and purportedly "seized" by Susan Ashton pursuant to an alleged security interest granted in her favour by Ashton Holdings Ltd. In response to the petition, Ashton filed notice of disputing petition. The petition came on for hearing in Bankruptcy Court in Saskatoon on August 22, 1996. The Court granted to the Petitioners an order requiring Ashton to submit to cross-examination on his affidavit and his notice disputing petition. The cross-examination of Ashton on his affidavit and his notice disputing petition took place on September 19, 1996. Acts of Bankruptcy Relied Upon by the Petitioners Paragraph 4 of the petition alleges that Ashton hascommitted three acts of bankruptcy within the six months priorto the filing of the petition, namely:(a) he has ceased to meet his liabilities generally as theybecome due, having ceased to make payments to the threePetitioners in February and March of 1996, and continuing tofail the Petitioners to the present date;(b) he has made or caused to be made a fraudulent conveyance,gift, delivery or transfer of his property, by causing orpermitting his interest in the Securities, comprising theprincipal asset of his wholly owned holding company, AshtonHoldings Ltd., to be "seized" or realized upon by his wife,Susan Ashton, pursuant to an alleged security interest in theSecurities granted to her by Ashton Holdings Ltd., for thepurpose of sheltering those assets and putting them beyond thereach of Ashton\'s creditors; and(c) he has assigned, removed, secreted or disposed of hisproperty with intent to defraud, defeat or delay hiscreditors, by causing or permitting his interest in theSecurities to be purportedly "seized" by his wife, SusanAshton, in the manner described above in paragraph 8(b)hereof. At the hearing the Petitioners relied solely on the first act of bankruptcy alleged against Ashton, namely: that he has ceased to meet his liabilities generally as they become due, by having ceased to pay the Petitioners. The two real estate partnerships that are the subject of these proceedings are the "KW Properties" partnership and the "Key West Carleton" partnership. Ashton has admitted that he is member of the KW Properties partnership and has been member of that partnership continuously from January of 1986 to the present date. He admits that the other six members of the KW Properties partnership are the Petitioners, Lorne Broten and Jack Picketts. Ashton admits that the relationship between the seven partners in KW Properties are governed by the 1985 Partnership Agreement, supra, pp. and 4. Ashton admits that he has also been member of the "Key West Carleton" partnership continuously from 1989 to the present. He also admits that, notwithstanding that he was not originally involved in the decision to create the Key West Carleton partnership, he subsequently agreed to become member of that second partnership. Ashton acknowledges that "Key West Carleton" is partnership comprising himself, the Petitioners, Jack Picketts, Lionel Labelle and Lorne Broten (i.e. the same seven persons comprising the KW Properties partnership). He acknowledges that there was no written partnership agreement in place for Key West Carleton. Ashton admitted that he knew that the two partnerships owned real estate properties in Saskatoon, and that various lenders had mortgages on these properties. He knew that he had personal liability to these lenders through his involvement in the two partnerships. Ashton admitted that it was not uncommon for the partnerships to run short of monies required to pay their mortgage debts. When that occurred, the partnerships would make calls on individual partners to contribute more money to the partnerships. "Statement of Partners' Equity" for each of KW Properties and Key West Carleton for the year ended December 31, 1994 show the total relative financial contributions to the two partnerships made by each of the seven partners. Ashton admits that he knew that, if the partnerships failed to meet their obligations to the lenders on the mortgages, the banks would have called the loans and the partners would have faced liability to the banks. He quite candidly admits that he was called upon to make additional capital contributions to the partnerships (including throughout 1994 and 1995), but that he did not do so. Ashton knew that, if he did not pay his share of the monies necessary to fund the mortgage debts of the partnerships, somebody else would have to pay on his behalf, or else the bank would call the mortgage. Notwithstanding this knowledge Ashton frequently refused to make these contributions to the partnerships when asked to do so. He was told repeatedly over the last five years that the Petitioners were paying more into the two partnerships than he was. Ashton admitted that he expected to derive tax advantages from being involved in these two partnerships. He further admitted that, as result of his involvement in the two partnerships, he claimed business losses (to deduct against his income, in order to reduce the amount of tax paid by him) in the following amounts for the following tax years: Business Losses Claimed Tax Year By Brent Ashton 1989 86,013 1990 83,637 1991 70,050 1992 26,931 1993 24,426 1994 6,990 1995 17,261 Total $315,308 1. Have the Petitioners proven to the satisfaction of the Bankruptcy Court that the respondent is indebted to them in an amount exceeding One Thousand ($1,000.00) Dollars? 2. Have the Petitioners proven to the satisfaction of the Bankruptcy Court that the respondent has committed an act of bankruptcy within the six months preceding the filing of the 3. In any event, is it appropriate for the Bankruptcy Court to grant the receiving order requested? 4. If the Bankruptcy Court is satisfied that the receiving order should be granted, is it appropriate to extend the Preservation Order? The Petitioners Have Proven That the Respondent is Indebted to Them in An Amount Exceeding One Thousand ($1,000) Dollars Section 43(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("the BIA") requires that petitioning creditor must allege in its petition: (a) that the indebtedness owing to it by the respondent debtor amounts to at least one thousand dollars; and (b) that the debtor has committed an act of bankruptcy within six months next preceding the filing of the petition. Section 43(6) of the BIA provides that the Bankruptcy Court shall require proof of the facts alleged in the petition. The section also provides that, if the Bankruptcy Court is satisfied with the proof of such facts, it may make receiving order against the respondent debtor. Paragraph of the petition alleges that Ashton was justly and truly indebted to the three Petitioners in the following amounts as at May 31, 1996: (a) Debt owed by Ashton to Thomas Burke Moody: $117,716.92 (b) Debt owed by Ashton to Patrick Moody: 50,286.77 (c) Debt owed by Ashton to Darrel Moody: $110,753.66 These debts are verified by affidavits filed by the Petitioners. The facts relied upon by the Petitioners to prove the indebtedness owed to them by Ashton comprise the uncontroverted evidence as to the facts described above. Ashton admits all of these facts. Very briefly, the Petitioners allege (and Ashtonadmits): (a) that the three Petitioners, Ashton, and three other individuals were equal members of two real estate partnerships; (b) that the KW Properties partnership was governed by written partnership agreement, while the Key West Carleton partnership had no written partnership agreement; (c) that the two real estate partnerships owned real estate properties and owed money to various lenders on mortgages registered against these properties; (d) that the partnerships very frequently ran short of funds to meet their mortgage payments and subsequently called upon the seven partners to contribute additional monies to the partnerships for that purpose; (e) that Ashton frequently did not contribute the additional monies required of him by the partnerships. In particular, he has made no financial contributions to the partnerships since 1993; (f) that when Ashton failed to contribute his share of additional monies to the partnerships, the other six partners had to contribute additional monies to the partnerships on his behalf and in his place and stead; (g) that the three Petitioners contributed the vast majority of the additional monies required by the partnerships over the last four years; (h) that as result of Ashton's failure to make his share of contributions to the partnerships, as at May 31, 1996, Thomas Burke Moody had contributed an additional $117,716.92 to the partnerships on behalf of Ashton and in the place and stead of Ashton; (i) that as result of Ashton's failure to make his share of contributions to the partnerships, as at May 31, 1996, Patrick Moody had contributed an additional $50,286.77 to the partnerships on behalf of Ashton and in the place and stead of Ashton; (j) that as result of Ashtonï¿½s failure to make his share of contributions to the partnerships, as at May 31, 1996, Darrel Moody had contributed an additional $110,753.66 to the partnerships on behalf of Ashton and in the place and stead of Ashton; (k) that Ashton has received substantial tax advantages as aresult of his involvement in the two partnerships. Further, and in particular, as result of his involvement in the two partnerships, Ashton has claimed business losses totalling $315,308.00 on his personal income tax returns and has thereby saved total of $108,625.65 in personal tax liability; and (l) that Ashton has claimed share of the business losses of the two partnerships equal to those shares of his six fellow partners, notwithstanding that he has only made fraction of the additional contributions to the partnerships that have been made by his fellow partners. In my view the Petitioners have established that Ashton is very clearly indebted to them in the amounts claimed. With respect to the KW Properties partnership, that conclusion is clear by reason of para. 15 of the 1985 Partnership Agreement, whereby partners called upon to make advances on behalf of their defaulting partners are entitled to recover those amounts as debts owing to them by the defaulting partners. With respect to the Key West Carleton partnership, that result is clear from consideration of The Partnership Act, R.S.S. 1978, c. P-3 and the common law of partnership. Sections 26(1) and 26(2) of The Partnership Act read as follows: 26. The interests of partners in the partnership property and their rights and duties in relation to the partnership shall be determined, subject to any agreement express or implied between the partners, by the following rules: 1. All the partners are entitled to share equally in the capital and profits of the business and must contribute equally towards the losses whether of capital or otherwise sustained by the 2. The firm must indemnify every partner in respect of payments made and personal liabilities incurred by him: (a) in the ordinary and proper conduct of the business of the firm; or (b) in or about anything necessarily done for the preservation of the business or property of the firm. These statutory provisions appear largely to be codification of the common law. In Lindley on Partnership, 11th Edition (London: Sweet Maxwell, 1950), the learned author states (at 470): In the absence of any agreement to the contrary, partners are liable to share losses equally, but if it has been agreed that profits shall be divided in certain proportion, the inference in the absence of any agreement to the contrary is that losses are to be shared in the same proportion. As general rule, therefore, if one partner has been compelled to pay more than his share of partnership debt, or if, in properly conducting the affairs of the firm, he has personally incurred liability, he is entitled to be indemnified by his co-partners so far as may be necessary to place all on footing of equality. The Petitioners Have Proven That the Respondent Has Committed An Act of Bankruptcy Within Six Months Prior to the Filing of the Petition The Petitioners demanded from Ashton full payment of the amounts owed to them on July 6, 1996. similar demand had previously been made on Ashton on February 23, 1996. Notwithstanding these demands, Ashton has failed or refused to pay the Petitioners. As I am satisfied that Ashton is indebted to thePetitioners in the amounts claimed, then it is clear that hehas ceased to meet his liabilities generally as they becomedue. It is common ground that Ashton has paid nothing towardhis partnership obligations since 1993. The Petitioners have repeatedly demanded that he pay the indebtedness owing to them. No adequate explanation has been offered by Ashtonfor his failure to pay his partnership obligations. In the circumstances, this act of bankruptcy has been proven. It is Appropriate for the Bankruptcy Court to Grant this Receiving Order In my view there is evidence of no extenuatingcircumstances which would warrant the Court refusing to granta receiving order. The material discloses the very substantial financial hardships visited upon the Petitioners as result of Ashton's refusal to pay the indebtedness owed by him. Further, the evidence establishes that Ashton is awealthy individual who is quite capable of paying his debts,but has simply chosen not to do so. He earned over $1.4 million dollars in his last four years as professional hockey player in the NHL. He has the means to pay his debts and should be required to do so. Therefore a receiving order shall issue. The Extension of the Preservation Order Evidence obtained at the cross-examination of Ashton establishes that the majority of his wealth is contained in the Securities purportedly "seized" by his wife, Susan Ashton, in the spring of 1996. therefore continue the preservation order for 30 days, in order to permit the Trustee in Bankruptcy to assess the situation, consult with the inspectors and determine whether or not the bankruptcy estate wishes to take action to challenge these transactions pertaining to the Securities. Costs may be spoken to.
Three brothers who carried on a family farm operation and family farm implement dealership applied for a receiving order against the respondent who had been in two real estate partnerships with them. The Partnerships sustained heavy operating losses since 1989 and the petitioners had made large capital contributions on behalf of the defaulting partners in order to prevent the Partnerships from defaulting on the mortgages. The defaulting partners obtained the benefits of business losses which they used to offset their other sources of income and to decrease their personal income tax liability by significant amounts, obtaining benefits without paying for them. The petitioners alleged that Ashton had committed three acts of bankruptcy within the six months prior to filing the petition including ceasing to pay liabilities as they became due in failing to make payments to the petitioners, making a fraudulent conveyance to his wife and disposing of his property with intent to defraud or defeat his creditors by permitting his interest in the Securities to be purportedly seized by his wife. HELD: A receiving order was granted. 1)No adequate explanation was offered by Ashton who was a wealthy individual for his failure to pay his partnership obligations. It was common ground that Ashton had paid nothing toward his partnership obligations since 1993. The defendant admitted that he was indebted to the petitioners in the amount of approximately $278,758 and that he had received substantial tax advantages as a result of his involvement in the two partnerships.  2)The majority of the respondent's wealth consisted of the Securities purportedly seized by his wife in 1996. The preservation order was continued for 30 days to permit the Trustee in Bankruptcy to determine whether the bankruptcy estate wished to challenge these transactions.