Court of Queen's Bench of Alberta

Court of Queen's Bench of Alberta Citation: Da Silva v River Run Vistas Corporation, 2016 ABQB 433,, ALSER1"A.,...ALGARl, L~----------- nate: Docket: 1401 06279, BBE01 435267, BBE01 435262 Registry: Calgary Between: Action no. 1401 06279 Derek Da Silva, Hessel Kielstra, George Little, Shirley Little, Derek (Rex) Perchard, George Waslenchuk as Representative Plaintiffs -and- Plaintiffs River Run Vistas Corporation, Bridge Creek Development Corporation, William Lloyd Bradley, Colin Joseph Becker, William G. Taylor and Gateway Appraisal Ltd. Defendants.. and- Action no. BBE01 435267 In the Matter of The Bankruptcy of William Lloyd Bradley -and- Action no. BBE01 435262 In the Matter of The Bankruptcy of Colin Joseph Becker

Page:2 Reasons for Judgment of the Honourable Madam Justice J. Strekaf [1] The representative Plaintiffs in this proposed class action lawsuit are applying to lift the stay imposed by the Bankruptcy and Insolvency Act, RSC 1985, c B-3, as amended ("BIA") in respect of the defendants William Bradley and Colin Becker in order to pursue the proposed lawsuit against those defendants, along with the non-bankrupt defendants Gateway Appraisal Ltd ("Gateway") and William Taylor. The application is opposed by Messrs. Bradley and Becker who,submit that the affidavit evidence and transcripts from questioning do not provide the necessary foundation for any possible cause of action against them. [2] The Statement of Claim alleges that Messrs. Bradley and Becker were the directors, officers, shareholders and operating minds of River Run Vistas Corporation ("RRVC") and Bridge Creek Development Corporation ("BCDC") who were the promoters and developers of a real estate development project known as River Run Vistas near Blaiimore, Alberta. The Plaintiffs invested $14 million in the project based upon representations made by Messrs. Bradley and Becker, RRVC and BCDC in 2007. In 2009, further representations were made regarding the investment. It is alleged that the representations were made fraudulently based upon false appraisals and that the Plaintiffs lost substantially all of their investment as a result. [3] The evidence filed in support of the application is two affidavits of Derek Da Silva, one of the proposed representative plaintiffs, sworn on February 6, 2016 and on March 5, 2016, and the t:rans~ript from questioning. No evidence was put forward by the defendants. [4] Mr. DaSilva deposes that the plaintiffs and other members of the proposed class made investments exceeding $14 million in a proposed property development known River Run Vista in 2007-2008 as a result of marketing materials supplied by RRVC and BCDC. It was to be a residential riverside community development comprised of 67 homes near Blairmore, Alberta. Their investments were to be secured by a first mortgage against the project lands which were valued at $14 million in an appraisal prepared by Mr. Taylor of Gateway provided with the initial marketing materials. In 2009-2010, after an initial default by RRVC in December 2008, Messrs. Bradley and Becker represented to investors that the investments were still secure, relying on another appraisal by Mr. Taylor of Gateway valuing the lands between $11 and $13 million. However, there was no progress on the development by 2011and the lands were valued at $623,320 in April2015. Mr. DaSilva states Mr. Bradley and Mr. Becker were directors, officers, shareholders; operating minds and the alter egos ofrrvc and BCDC and solicited funds in furtherance of the developtnent. He states that the Canada Revenue Agency and the RCMP are investigating Messrs. Bradley and Becker and RRVC. [5] In November 2015, the Plaintiffs became aware that Mr. Bradley and Mr. Becker had been assigned into bankruptcy in November 2010, that the bankruptcy stays were lifted in 2011 to permit another class action commenced against them to proceed in relation to another real estate investment project in the same part of Alberta and that they received conditional

Page: 3 discharges in February 2014. The conditional discharges are not scheduled to be completed until March and May 2019 in the case of Mr. Becker and Mr. Bradley, respectively. [6] The Trustee's Supplementary Report filed in Mr. Bradley's bankruptcy states in part: The bankrupt was a Y2 shareholder in a group of companies that were involved in various developments in the Crowsnest Pass area of Alberta... Coincidental with the assignment a Court Appointed Inspector undertook a forensic examination of the affairs ofbridgecreek Financial Corporation, one of the companies that the bankrupt was a director and shareholder and in which investors contributed significant sums of money. The Court Appointed Inspector has prepared an initial report, which is attached. The inspector's preliminary conclusions are that monies taken from investors were used in what appears to be a direct contravention of the planned use in an offering memorandum given to investors. [7] While that report relates to Bridge gate Financial Corporation, the corporate defendants RRVC and BCDC and Messrs. Bradley and Becker were also parties to that proceeding. That report notes that "no work has been visibly performed on constructing the project, and the principals ofbfc have not provided an explanation regarding what happened to the Project and to investors' funds", which is similar to the allegations in this case. The report refers to transactions in which $2.2 million was paid to BCDC and $202,000 received from BCDC and that $500,000 was paid to and received from RRVC between,.2006 and 2008 and that the purpose of some of these transactions is currently unknown. The interim conclusion in that report was: Our review of the use of funds by BFC has revealed that significant sums of money were liberally transferred between the bank account of related parties controlled by Colin Becker and William Bradley. Many of these transactions are inconsistent with the terms and conditions of the OM1 and the stated planned use of investor funds, as described in Paragraph 18 to this"report. Many transactions do not appear to serve any business purpose, such as the purchase of residential properties in California. [8] The Defendants filed no evidence in opposition to this application. Their position is that none of the allegations were made against them individually and were all only made against the corporate defendants and/or them, that Mr. DaSilva that he never communicated with Mr. Becker and only talked to or met Mr. Bradley on several occasion in 2009, after the investments were made. They submit that the alleged representations were contained in marketing materials distributed by the corporate defendants or in the trust indenture and that no basis for piercing the corporate veil has been established. [9]. The Plaintiffs are bringing thi~ application because section 69.3 of the BIA prohibits a creditor from pursuing a remedy against a debtor who is in bankruptcy for the recovery of a claim provable in bankruptcy until the debtor's trustee is discharged. Section 69.4 permits an affected creditor to apply to the court for a declaration that sections 69 to 69.31 "no longer operate in respect of that creditor or person, and the court may make such a declaration, subject to any qualification that the court considers proper, if it is satisfied: a) that the creditor or person is likely to be materially prejudiced by the continued operation of those sections; or b) that it is equitable on other grounds to make such a declaration.

Page: 4 [1 0] The test generally applied on such an application is whether there are "sound reasons to lift the stay" as outlined by the Ontario Court of Appeal in Re Ma (200 1 ), 24 CBR (4th) 68: As this passage makes clear, lifting the automatic stay is far from a routine matter. There is an onus on the applicant. to establish a basis for the order within the meaning of s. 69.4. As stated in Re Francisco, the role of the court is to ensure that there are "sound reasons, consistent with the scheme of the Bankruptcy and Insolvency Act" to relieve against the automatic stay. While the test is not whether there is a prima facie case, that does not, in our view, preclude any consideration of the merits of the.proposed action where relevant to the issue of whether there are "sound reasons" for lifting the stay. For example, if it were apparent that the proposed action had little prospect of success, it would be difficult to find that there were sound reasons for lifting the stay. (at para 3) [11] Some.ofthe circumstances where courts have considered it appropriate to lift the stay were outlined in Re Advocate Mines Ltd, 1984 Carswell Ont 156 and include actions against the bankrupt for a debt (sp.ch as fraud) where a discharge would not be a defence, actions which have a degree of complexity that makes the summary procedure prescribed by the BIA inappropriate (at the time section 95(2) of the Bankruptcy Act, RSC 1970, c B-3), and actions in which the bankrupt is a necessary party for the complete adjudication of the matters at issue involving other parties. [12] The Plaintiffs rely on all of these these grounds in this application. [ 13] The Plaintiffs note that a discharge order does not release a bankrupt from debts arising out of fraud (section 178(1)(d)) or of obtaining property by false pretences or fraudulent misrepresentation (section 178(1 )(e)). [14] ~,The Alberta Court of Appeal in Gaastra v Watts, 2012 ABCA 262 upheld an order lifting the stay and confirmed that while so.nie evidence,offraud must be provided on an application to lift the stay, they noted that the threshold is low: The chambers judge recognized that in order to justify lifting the stay, some evidence must be produced to demonstrate that there is some substance to the., allegations of fraud. The threshold of evidence required to prove fraud at this stage of the proceedings is low. While there is arguably no overt evidence of fraud on the record, the chambers judge concluded that there were sufficient suspicious circumstances to warrant an inference of fraud. At this stage, it is not necessary that fraud be the only way of interpreting the available evidence, nor is the possibility of a defence decisive. (at para 2) _, [15] In the court below, Hall J (2012 ABQB 271} rejected the Defendants' argument that there was no case to meet or evidence of fraud: I have read the excerpts referred to by Mr. Watts. I have also read the affidavits of Mr. Gaastra and the remainder of the transcripts. I do not agree with Mr. Watts. There are many indicia that the defendants controlled by Mr. Watts and Mr. Watts himself have failed to properly explain how the Plaintiffs' investments of in.excess of $1.8 million have dissipated. Absent a full and transparent explanation by those defendants, some case for a finding of fraud against Watts is put forward by the Plaintiffs. Fraud can be difficult to prove without full examination or cross

Page: 5 examination of the defendants and their documentation. For the purposes of this application, the Plaintiffs need not prove a prima facie case, only that there is a case to be met. A review of the merits of the case leads me to find that the Plaintiffs have done so. (at para 9) [16] The opposite result occurred in Echino v Munro, 2014 ABCA 422, where the Alberta Court of Appeal dismissed an application by the plaintiffs for leave to appeal a decision granted by Veit J who had declined to lift the stay of proceedings imposed by section 69(1)(a) of the BIA because she concluded that the continued operation of the stay did not materially prejudice them as they did not establish that their claim would survive bankruptcy as they proffered no evidence that supported their conclusion that their claim arose from fraud or misrepresentation rather than simply from a failed investment. Bielby JA noted: '\ If the applicant's claims arise from fraud, they will not be extinguished by the respondents' bankruptcies and may be pursued, without leave, once they are discharged from bankruptcy; see BIA s 178(1 ). However they wish to proceed with their action immediately and thus applied for an order pursuant to s69.4 of the BIA, which gives the Court jurisdiction to lift the stay imposed by s 69(1)(a) of the BIA and order that an action against a party still in bankruptcy may continue, subject to the meeting of certain prerequisites which include a finding that the creditor is likely to be materially prejudiced by the continued operation of the stay or that it is equitable on other grounds to lift the stay. (at para 3) [17] She denied leave as she found that the chambers judge had "applied the appropriate principles and the correct legal standard,. namely whether there were 'sound reasons' to lift the stay" (para 2). She went on to conclude: Justice V eit refused to lift the stay because the applican~s had done no more than make allegations against the respondents. While the threshold required to pierce the bankruptcy shield was low, she relied on this Court's decision in Gaastra, supra for the proposition that the creditor must do more than merely make allegations. She found they were unable to point to any evidence that suggested that they had some chance of winning their cause of action. There is no basis to interfere with these findings. (at para 24) " [18] The Plaintiffs are seeking to pierce the corporate veil in the action and have a finding of fraud made against the defendants that would survive bankruptcy. The corporate veil can be pierced to allow a claim to be brought against the directors or shareholders who were the operating mind of a corporation in circumstances involving fraud. Messrs. Bradley and Becker were the sole directors and shareholders of BCDC and RR VC at the relevant time. While property values can fluctuate, the unexplained reduction of value for land in Blairmore, Alberta from $14 million in 2007 to less than $700,000 in 2015 raises concerns, as do the comments in the Inspector's report about transfers between related parties (including BCDC and RRVC) and transactions that did not appear to serve any business purpose. At the time that this decision was delivered orally by me, counsel advised that Messrs. Bradley and Becker had been charged criminally with fraud, although it was unclear whether the charges related to the transactions in this action or other transactions. I have reviewed both Da Silva affidavits and the questioning transcript. Having regard to the low threshold of evidence and the absence of any contradictory evidence from the Defendants, the evidence befor~ me raises sufficient suspicious circumstances

I r Page:6 to warrant an inference of fraud that merits permitting the action to proceed against Messrs. Becker and Bradley at this stage. [19] I am also satisfied that Messrs. Bradley and Becker are necessary and proper parties for the trial of the remaining Defendants to proceed in an orderly and efficient fashion, having regard to the allegations in the Statement of Claim, including those of conspiracy amongst the Defendants. [20] In addition the claims advanced against Bradley and Becker by the Plaintiffs involve a degree of complexity that makes the summary procedure prescribed by the BIA inappropriate for their determination. [21] Finally, as the Defendants will not be discharged unti12019, the Plaintiffs would be prejudiced if they are delayed a further 3 years in proceeding with the action which relates to matters that arose in 2007. [22] The Plaintiffs have demonstrated that they would likely be materially prejudiced if the stay continued and that it would be equitable to lift the stay to allow this action to proceed. As a result, the Plaintiffs' application to lift the stay is granted. [23] The Plaintiffs are entitled to their taxable costs for this application, payable forthwith and in any event... Heard on the 25th day of May, 2016 and delivered orally on the 8 1 h day of July, 2016.. Dated at the City of Calgary, Alberta this 24th day of August, 2016. Appearances: Chad Babiuk and Ben Frenken for the Plaintiffs Michael.D. Aasen for Colin Joseph and William Lloyd Bradley Mark Alexander for the Defendants William G. Taylor and Gateway Appraisal Ltd.