Titan Investments Limited Partnership, Re, (2005) 383 A.R. 323 (QB)

• Judge: Hawco, J.
• Court: Court of Queen's Bench of Alberta (Canada)
• Case Date: August 19, 2005
• Citations: (2005), 383 A.R. 323 (QB);2005 ABQB 637

Titan Inv. Ltd. Partnership, Re (2005), 383 A.R. 323 (QB)

MLB headnote and full text

Temp. Cite: [2005] A.R. TBEd. AU.074

In The Matter Of Titan Investments Limited Partnership, and Titan Genpar Inc., and Evolution Capital Management Ltd., and the Estate of David Comte, Deceased, and the Comte Family Trust and Predator Holdings Ltd.

In The Matter Of the Judicature Act, R.S.A. 2000, c. J-2 and Rules 467 and 468 of the Alberta Rules of Court

(0401-19905; 2005 ABQB 637)

Indexed As: Titan Investments Limited Partnership, Re

Alberta Court of Queen's Bench

Judicial District of Calgary

Hawco, J.

August 19, 2005.

Summary:

The receiver of Titan Investments Limited Partnership (Titan), and certain of Titan's unpaid investors (together, the applicants) applied for an order declaring that redemptions made by Titan to certain of the investors in Titan (the overpaid investors) were void as fraudulent preferences. The applicants sought that the order direct the overpaid investors to repay the full amount of the redemptions to the receiver, failing which the applicants would be entitled to judgment against those parties that had not paid the amount of the redemption. Alternatively, the applicants requested that the order direct the overpaid investors to repay the difference between the amount of their initial investment and the amount they received in redemptions (the false profits), failing which the applicants would be entitled to judgment against those parties who had not paid the amount of the false profits.

The Alberta Court of Queen's Bench allowed the application. The court ordered that redemptions made by Titan to the overpaid investors were void pursuant to s. 2 of the Fraudulent Preferences Act and directed the overpaid investors to repay the full amount of the redemptions to the receiver, failing which the applicants were entitled to judgment against those parties that had not paid for the amount of the redemption.

Bankruptcy - Topic 7210

Setting aside transactions prior to bankruptcy - Fraudulent preferences - General - Titan Investments Limited Partnership (Titan) was formed in April 2003 and presented as an investment vehicle whereby investor funds were purported to be pooled for the purposes of trading in the futures and equities markets - Individuals became investors in Titan by purchasing units - In November 2004, a notice was sent to the investors advising that Titan was winding up - Titan paid full or partial redemptions to 87 of the investors (overpaid investors) - It was later discovered that Titan was a fraudulent Ponzi scheme - Titan's receiver and the unpaid investors applied for an order declaring that the redemptions made to the overpaid investors were void as fraudulent preferences under s. 95 of the Bankruptcy and Insolvency Act (BIA) - The Alberta Court of Queen's Bench declined to make any findings under the BIA - A receiving order had not yet been granted against Titan, and thus no trustee had been appointed, and there was no one with standing to make a claim under s. 95 - See paragraphs 39 to 41.

Fraud and Misrepresentation - Topic 1408

Fraudulent conveyances and preferences - Impeachable conveyances and preferences under Statute of Elizabeth (1571) - Requirement that grantor receive benefit - Titan Investments Limited Partnership (Titan) was formed in April 2003 and presented as an investment vehicle whereby investor funds were purported to be pooled for the purposes of trading in the futures and equities markets - Individuals became investors in Titan by purchasing units - In November 2004, a notice was sent to the investors advising that Titan was winding up - Titan paid full or partial redemptions to 87 of the investors (overpaid investors) - It was later discovered that Titan was a fraudulent Ponzi scheme - Titan's receiver and the unpaid investors applied for an order declaring that the redemptions made to the overpaid investors were void as fraudulent preferences under the Statute of Elizabeth - The Alberta Court of Queen's Bench held that the Statute of Elizabeth did not apply because Titan's director reserved no benefit to himself by paying out the overpaid investors - See paragraphs 32 to 38.

Fraud and Misrepresentation - Topic 1452

Fraudulent conveyances and preferences - Impeachable conveyances and preferences under modern statutes - Creditor defined - Titan Investments Limited Partnership (Titan) was formed in April 2003 and presented as an investment vehicle whereby investor funds were purported to be pooled for the purposes of trading in the futures and equities markets - Individuals became investors in Titan by purchasing units - In November 2004, a notice was sent to the investors advising that Titan was winding up - Titan paid full or partial redemptions to 87 of the investors (overpaid investors) - It was later discovered that Titan was a fraudulent Ponzi scheme - Titan's receiver and the unpaid investors applied for an order declaring that the redemptions made to the overpaid investors were void as fraudulent preferences under s. 2 of the Fraudulent Preferences Act (FPA) - The Alberta Court of Queen's Bench held that the requirement that the transfer be made to a creditor was met - The parties acknowledged that the investors were not "creditors" in its everyday sense - However, s. 5 expanded the definition of creditor for the purposes of ss. 2 to 4 to include "a cestui que trust or other person to whom liability is equitable only" - It would be absurd to restrict the remedies under the FPA to the unexpanded definition of "creditor" - The unpaid investors were persons to whom Titan owed a liability in equity - See paragraphs 18 to 24.

Fraud and Misrepresentation - Topic 1454

Fraudulent conveyances and preferences - Impeachable conveyances and preferences under modern statutes - Preference to defeat or prefer creditors - Titan Investments Limited Partnership (Titan) was formed in April 2003 and presented as an investment vehicle whereby investor funds were purported to be pooled for the purposes of trading in the futures and equities markets - Individuals became investors in Titan by purchasing units - In November 2004, a notice was sent to the investors advising that Titan was winding up - Titan paid full or partial redemptions to 87 of the investors (overpaid investors) - It was later discovered that Titan was a fraudulent Ponzi scheme - Titan's receiver and the unpaid investors applied for an order declaring that the redemptions made to the overpaid investors were void as fraudulent preferences under s. 2 of the Fraudulent Preferences Act - The Alberta Court of Queen's Bench held that Titan intended to prefer those creditors that he paid out - The deliberate decision to ignore the requests of certain investors for redemption of their funds and to instead pay full redemptions to investors who had made no such requests was evidence of a decision to prefer the overpaid investors - See paragraphs 25 to 27.

Fraud and Misrepresentation - Topic 1454.1

Fraudulent conveyances and preferences - Impeachable conveyances and preferences under modern statutes - Amount of preference - Titan Investments Limited Partnership (Titan) was formed in April 2003 and presented as an investment vehicle whereby investor funds were purported to be pooled for the purposes of trading in the futures and equities markets - Individuals became investors in Titan by purchasing units - In November 2004, a notice was sent to the investors advising that Titan was winding up - Titan paid full or partial redemptions to 87 of the investors (overpaid investors) - It was later discovered that Titan was a fraudulent Ponzi scheme - Titan's receiver and the unpaid investors applied for an order declaring that the redemptions made to the overpaid investors were void as fraudulent preferences under s. 2 of the Fraudulent Preferences Act (FPA) - The overpaid investors argued in the event that the court found that the redemptions paid were void as fraudulent preferences, that they should only be required to repay the false profits to the receiver - The Alberta Court of Queen's Bench rejected the argument - Neither the FPA nor the case law supported a finding that the overpaid investors should be entitled to keep their principals - The FPA stated that transactions that were found to be fraudulent preferences were void - It did not provide that the preferences were only void to the extent of the excess paid to the creditor - See paragraphs 42 to 44.

Fraud and Misrepresentation - Topic 1456

Fraudulent conveyances and preferences - Impeachable conveyances and preferences under modern statutes - Insolvency defined - Titan Investments Limited Partnership (Titan) was formed in April 2003 and presented as an investment vehicle whereby investor funds were purported to be pooled for the purposes of trading in the futures and equities markets - Individuals became investors in Titan by purchasing units - In November 2004, a notice was sent to the investors advising that Titan was winding up - Titan paid full or partial redemptions to 87 of the investors (overpaid investors) - It was later discovered that Titan was a fraudulent Ponzi scheme - Titan's receiver and the unpaid investors applied for an order declaring that the redemptions made to the overpaid investors were void as fraudulent preferences under s. 2 of the Fraudulent Preferences Act - The Alberta Court of Queen's Bench held that the requirement that there was a transfer by an insolvent person or a person who was on the eve of insolvency was met - Titan, which was run as a Ponzi scheme, was insolvent from its inception - Further, Titan was on the eve of insolvency during the fourth quarter of 2004 when the Alberta Securities Commission had issued freeze trading orders against Titan and it was on the verge of collapse - See paragraphs 15 to 17.

Fraud and Misrepresentation - Topic 1458

Fraudulent conveyances and preferences - Impeachable conveyances and preferences under modern statutes - Intention required - [See Fraud and Misrepresentation - Topic 1454 ].

Fraud and Misrepresentation - Topic 1468

Fraudulent conveyances and preferences - Impeachable conveyances and preferences under modern statutes - Exceptions - Payment of money to a creditor - Titan Investments Limited Partnership (Titan) was formed in April 2003 and presented as an investment vehicle whereby investor funds were purported to be pooled for the purposes of trading in the futures and equities markets - Individuals became investors in Titan by purchasing units - In November 2004, a notice was sent to the investors advising that Titan was winding up - Titan paid full or partial redemptions to 87 of the investors (overpaid investors) - It was later discovered that Titan was a fraudulent Ponzi scheme - Titan's receiver and the unpaid investors applied for an order declaring that the redemptions made to the overpaid investors were void as fraudulent preferences under s. 2 of the Fraudulent Preferences Act (FPA) - The overpaid investors argued that the redemptions were exempt under s. 6 of the FPA where they bore a fair and reasonable value to the consideration which gave rise to the obligation to pay - The Alberta Court of Queen's Bench rejected the argument - Realizations between 242% and 5,500% based on units fraudulently valued at more than five times their actual value did not constitute fair and reasonable payments relative to the amounts that the overpaid investors invested in Titan - See paragraphs 29 to 31.

Restitution - Topic 8003

Defences - General - Change of position - Titan Investments Limited Partnership (Titan) was formed in April 2003 and presented as an investment vehicle whereby investor funds were purported to be pooled for the purposes of trading in the futures and equities markets - Individuals became investors in Titan by purchasing units - In November 2004, a notice was sent to the investors advising that Titan was winding up - Titan paid full or partial redemptions to 87 of the investors (overpaid investors) - It was later discovered that Titan was a fraudulent Ponzi scheme - Titan's receiver and the unpaid investors applied for an order declaring that the redemptions made to the overpaid investors were void as fraudulent preferences under s. 2 of the Fraudulent Preferences Act - The overpaid investors argued that the equitable defence of change of position or estoppel applied - The Alberta Court of Queen's Bench rejected the argument - First, they received the payments as a result of a fraud, and therefore, it would be against public policy to allow the defence to apply - Second, any consideration of equity with respect to the overpaid investors would also have to include a consideration of equity with respect to the underpaid investors - See paragraphs 45 to 47.

Cases Noticed:

Alberta (Attorney General) v. Doz (Samuel) Professional Corp. et al. (1993), 139 A.R. 198; 9 Alta. L.R.(3d) 201 (Q.B.), refd to. [para. 15].

Stihl Ltd. v. Motion Engine Services Ltd. (1990), 106 A.R. 118 (Q.B. Master), refd to. [para. 15].

Clarke v. Sutherland (1917), 37 D.L.R. 368 (Alta. C.A.), refd to. [para. 15].

Merrill v. Abbott; In Re Independent Clearing House Co. (1987), 77 B.R. 843 (D. Utah), refd to. [para. 16].

Martino v. Edison Worldwide Capital; In Re Randy (1995), 189 B.R. 425 (N.D. Ill. Bktcy.), refd to. [para. 16].

Scholes v. Lehmann (1995), 56 F.3d 750 (7th Cir.), refd to. [para. 16].

Krumm v. McKay et al. (2003), 342 A.R. 169; 2003 ABQB 437, refd to. [para. 18].

First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988), 60 Alta. L.R.(2d) 122 (Q.B.), revd. (1989), 71 Alta. L.R.(2d) 61 (C.A.), refd to. [para. 18].

Ashby v. White (1703), 2 Ld. Raym. 938; 92 E.R. 126, refd to. [para. 20].

Christensen (Bankrupt) v. Christensen (1994), 166 A.R. 161 (Q.B.), revd. (1996), 184 A.R. 202; 122 W.A.C. 202 (C.A.), leave to appeal refused (1997), 209 N.R. 395; 200 A.R. 397; 146 W.A.C. 397 (S.C.C.), refd to. [para. 25].

Fowlis - see Hobbema Farms Ltd. v. Grande Cache Motor Inn Ltd.

Canadian Imperial Bank of Commerce v. Grande Cache Motor Inn Ltd. - see Hobbema Farms Ltd. v. Grande Cache Motor Inn Ltd.

Hobbema Farms Ltd. v. Grande Cache Motor Inn Ltd. (1977), 9 A.R. 208; 4 Alta. L.R.(2d) 319 (T.D.), refd to. [para. 26].

Goyan v. Kinash, [1945] 2 D.L.R. 749 (Alta. S.C.), refd to. [para. 32].

Proulx v. Proulx (2002), 316 A.R. 150; 2002 ABQB 151, refd to. [para. 33].

Murdoch v. Murdoch, [1977] 1 W.W.R. 16; 1 A.R. 378 (T.D.), refd to. [para. 34].

Mulcahy v. Archibald (1898), 28 S.C.R. 523, refd to. [para. 37].

Glegg v. Bromley (1912), 3 K.B. 474 (C.A.), refd to. [para. 37].

Anderson Lumber Co. v. Canadian Conifer Ltd. (1977), 4 A.R. 282; 77 D.L.R.(3d) 126 (C.A.), refd to. [para. 37].

Canadian National Railway Co. v. Harnett (1979), 31 C.B.R.(N.S.) 203 (Nfld. C.A.), refd to. [para. 40].

Carson, Re (1924), 55 O.L.R. 649 (C.A.), dist. [para. 42].

Principal Group Ltd. (Bankrupt) v. Anderson et al. (1994), 164 A.R. 81 (Q.B.), affd. (1997), 200 A.R. 169; 146 W.A.C. 169 (C.A.), refd to. [para. 45].

Statutes Noticed:

Fraudulent Preferences Act, R.S.A. 2000, c. F-24, sect. 2, sect. 3, sect. 6 [para. 13].

Statute of Elizabeth, 1571 (U.K.), 13 Eliz., c. 5, generally [para. 32 et seq.].

Authors and Works Noticed:

McDermott, Mark A., Ponzi Schemes and the Law of Fraudulent and Preferential Transfers (1998), 72 Am. Bankr. L.J. 157, p. 160 [para. 43].

Snell, E.H.T., Principles of Equity (31st Ed. 2005), pp. 94 [para. 17]; 102 [para. 47].

Springman, M.A., Stewart, George R., Morrison, J.J., and MacNaughton, Michael J., Fraudulent Conveyances and Preferences (2004), p. 17-3 [para. 19].

Counsel:

Frank R. Dearlove and Kelsey Drozdowski (Bennett Jones LLP), for the Investors Committee;

Clive O. Llewellyn (Fleming LLP), for the Receiver;

Shane B. King (McLeod & Company LLP), for the respondents;

Lisa J.P. Gaunt (Field LLP), for the respondents;

David LeGeyt (Fraser Milner Casgrain LLP), for the respondents;

James B. Rooney, Q.C. (Rooney Prentice), for Janet Comte.

This application was heard by Hawco, J., of the Alberta Court of Queen's Bench, Judicial District of Calgary, who delivered the following reasons for judgment on August 19, 2005.