What Fraud Victims Should Know about Fraudulent Conveyance Claim

A victim of fraud should be aware of conveyances of property made by those they intend to sue or have sued as often the primary target of their fraud recovery litigation will not have any assets in their name by the time a judgment is rendered. This blog provides some information on what is often referred to as fraudulent conveyances, and some information on limitation period issues that fraud victims must consider in the recovery efforts.

The Basics of Fraudulent Conveyance Allegations

The 2015 decision in Miller v. Debartolo-Taylor, 2015 ONSC 2654, tells the typical story alleged in fraudulent conveyance actions. Ms. Miller and Mr. Taylor were business partners in an ATM business. Ms. Miller alleged that Mr. Taylor misappropriated funds from their business for himself and to her detriment. Ms. Miller brought an action against Mr. Taylor to recover the allegedly misappropriated funds.

In November 2008 Ms. Miller obtained judgment against Mr. Taylor for fraud. In a subsequent fraudulent conveyance action, Ms. Miller alleged that in May 2008, after the underlying action was commenced, Mr. Taylor transferred his 50% interest in his residence to his wife, and transferred his interest in the ATM business to his wife’s corporation, 935 Ontario Inc. Ms. Miller alleged the two transfers were fraudulent conveyances carried out to defeat her recovery on her judgment as against Mr. Taylor.

The Judgment on Ms. Miller’s fraudulent conveyance action was delivered by Justice Vallee of the Newmarket Superior Court of Justice. Justice Vallee’s Judgment set out a standard review of the Fraudulent Conveyance Act, RSO 1990, c.F.29 (“FCA”). Section 2 of the FCA provides that every conveyance of real or personal property made with the intent to defeat, hinder delay or defraud creditors of their recovery for a judgment resulting from an action are void against the person who received the property (paraphrased).

Justice Vallee relied on the 2014 decision of Penny J. in Incondo v. Sloan, 2014 ONSC 4018, as a comprehensive source of the legal principles relevant to fraudulent conveyance actions in Ontario. Those principles include:

1. the purpose of the Fraudulent Conveyance Act is to prevent fraud on creditors;
2. in order to void a transaction, there must be a conveyance made with an intent to defeat a creditor or “others”;
3. the term “others” includes subsequent or potential creditors – that is, a person who made a transaction who was not yet a creditor when the transaction occurred;
4. the terms “creditors and others” includes any person who has a legal right or claim against the transferor – meaning any person who, while not a creditor at the time of the conveyance, may become one in the future;
5. if the transferor had an intention to defeat a future creditor when the conveyance was made, it does not matter that the person attacking the conveyance was not a creditor at the time the conveyance was made;
6. establishing state of mind of the transferor is difficult. In the absence of direct evidence, the Courts may rely upon circumstantial evidence referred to as the “flags of fraud” to establish a prima facie intent to defraud or delay the recovery on a judgment;
7. examples of “badges of fraud” include, but are not limited to, the following:

• the transfer was made in the face of threatened legal proceedings;
• the transaction was made in secret;
• the transferor continues to possess and use the property as his or her own;
• some benefit was retained by the transferor;
• there was a close relationship between the transferor and the transferee; and
• the consideration for the transfer was grossly below market value.

1. proof of one or more badges of fraud may result in a prima facie evidentiary case of fraudulent conveyance – whether there is a prima facie evidentiary case of fraudulent conveyance depends on a view of all the facts and not a tally of badges of fraud; and
2. mere suspicion of a fraudulent conveyance is not sufficient. There must be a preponderance of evidence that leads to the conclusion that the conveyance by the debtor or potential debtor was intended to defeat a creditor of future creditor from a recovery on a judgment.

Justice Vallee held that a spouse can have various legitimate reasons for transferring an interest in a family residence to the other spouse. One such reason is for estate planning such as when one spouse can foresee that he or she will outlive the other spouse due to illness or age – meaning the transfer was made to remove any steps in property transfer after the other spouse’s death.

In the Miller v. Taylor action, the transfers occurred shortly before the trial in the underlying fraud action, and the consideration for the transfers were made below market value. After the transfer, Mr. Taylor continued to use the residence that he transferred as his own. Based on these reasons, Justice Vallee found that Ms. Miller had proven a prima facie case the home transfer was a fraudulent conveyance even though a judgment against Mr. Taylor did not exist at the time the transfer was made. The onus then shifted to Mr. Taylor to prove the transfer was not made to defeat Ms. Miller’s pending recovery on a judgment against him.

Proving Intent to defeat Creditors

Proving that the intent of a transfer was to hinder a recovery on a judgment is an important element to fraudulent conveyance actions. In this regard, it is worth reviewing how other courts commented on proving “intent”. In Hawkeye Power Corporation v. Sigma Engineering Ltd., 2014 BCSC 1444, the British Columbia Superior Court stated:

The requisite intent can be inferred from the circumstances. If a transferor with debts makes a transfer the effect of which is to render him unable to meet his then existing liabilities, that circumstance furnishes very strong evidence of an intent to defraud creditors. Where parties to a transaction are related and the circumstances are suspicious, the burden of explaining them falls on the related parties.

In Banton v. Westcoast Landfill Diversion Corp. et al, 2004 BCCA 293, at para. 5, the Court held the following to be indicia of fraudulent intent:

1. the state of the debtor’s financial affairs at the time of the transaction, including his income, assets and debts;
2. the relationship between the parties to the transfer;
3. the effect of the disposition on the assets of the debtor, i.e. whether the transfer effectively divests the debtor of a substantial portion or all of his assets;
4. evidence of haste in making the disposition;
5. the timing of the transfer relative to notice of debts or claims against the debtor; and
6. whether the transferee gave valuable consideration of the transfer.

In Indcondo at paras. 49-52 an Ontario Court held:

[49]       The Fraudulent Conveyances Act was enacted to prevent fraud. It is remedial legislation and must be given as broad an interpretation as its language will reasonably bear. The purpose of the Act was expressed by Prof. Dunlop in Creditor-Debtor Law in Canada, 2nd ed. at p. 598:

The purpose of the Statute of Elizabeth and of the Canadian Acts based on it, as interpreted by the courts, is to strike down all conveyances of property made with the intention of delaying, hindering, or defrauding creditors and others except for conveyances made for good consideration and bona fide to persons not having notice of such fraud. The legislation is couched in very general terms and should be interpreted liberally.

[50]       Prof. Dunlop also considered the judicial difficulties in establishing fraud by ascertaining the state of mind of the debtor; that is, the dominant motive for effecting the impugned transaction. In the absence of direct evidence of intent, he said, “courts have been ready to rely on the surrounding circumstances as establishing prima facie the intent to defraud or delay… the so-called badges of fraud being nothing more than typical and suspicious fact situations which may be enough to enable the court to make a finding.”

…

The badges of fraud derive from Twyne’s Case (1601) 76 E.R. 809. As interpreted by modern courts, the badges of fraud include:

1. the donor continued in possession and continued to use the property as his own;
2. the transaction was secret;
3. the transfer was made in the face of threatened legal proceedings;
4. the transfer documents contained false statements as to consideration;
5. the consideration is grossly inadequate;
6. there is unusual haste in making the transfer;
7. some benefit is retained under the settlement by the settlor;
8. embarking on a hazardous venture; and
9. a close relationship exists between parties to the conveyance.

Summary Judgment and Fraudulent Conveyance Actions

The judgment given by the Court to Ms. Miller was that Mr. Taylor’s transfer of his residence and his interest in the ATM business was that the transfers were void as against his creditors including Ms. Miller. The Court issued declarations restoring title of Mr. Taylor’s residence and interest in the ATM business back to him so that Ms. Miller could seize upon these properties to recovery on her judgment.

Interestingly, the Court found that the case was appropriate for summary judgment because the motion and action was largely document based, and because there were no serious credibility issues that required a trial to resolve. Summary judgment is often difficult to obtain on cases built on circumstantial evidence.

The Court found that Mr. Taylor:

• was dishonest to Ms. Miller as a result of misappropriating money from the business;
• was dishonest to Ms. Miller when she found out and required an explanation;
• transferred his interest in his residence and the business when a trial date was looming; and
• made an assignment into bankruptcy when he was about to be examined as a judgment debtor.

In making this decision in a summary judgment motion context, Justice Vallee referenced the Court of Appeal for Ontario’s decision in Baywood Homes Partnerships v. Haditaghi, 2014 ONCA 450, at paragraph 44, which explains why summary judgment is rarely granted in circumstantial evidence cases:

Evidence by affidavit, prepared by a party’s legal counsel, which may include volumes of exhibits, can obscure an affiant’s authentic voice. This makes the judge’s task of assessing credibility and reliability especially difficult in a summary judgment and mini-trial context.

Great care must be taken by the motion judge to ensure that decontextualized affidavit and transcript evidence does not become the means by which substantive unfairness enters in a way that would not likely occur in a full trial where the trial judge sees and hears all.

In other words, Justice Vallee found that Mr. Taylor had not presented evidence such that a trial was necessary to determine credibility based disputes.

Piercing the Corporate Veil in a Fraudulent Conveyance Action

As mentioned above, Justice Vallee made reference to and relied on the decision of Penny J., in Incondo v. Sloan, 2014 ONSC 4018, as a leading case involving fraudulent conveyance allegations. In that action, Incondo Building Corporation (“Incondo”) sued Valarie Sloan, David Sloan and their company Cave Hill Properties Ltd. Incondo’s underlying case was a breach of contract allegation against David Sloan. Judgment was issued in favor of Incondo again David Sloan only.

Thereafter Incono issued a fraudulent conveyance action alleging that David Sloan transferred his interest in his marital home to his wife to frustrate the recovery by Incondo on its breach of contract judgment. Incondo also alleged that David Sloan transferred his interests in other property to Cave Hill Properties, a company controlled by his wife. It is the transfer of David Sloan’s interest to Cave Hill Properties that led to Incondo’s action for a declaration to pierce the corporate veil of Cave Hill Properties, to have Cave Hill itself and its shareholder Valerie Sloan, held personally liable.

Justice Penny reviewed the badges of fraud concept, and held that the badges of fraud were an evidentiary rule that had the effect of transferring the onus of proof on the defendant once the badges of fraud were established. The badges of fraud were referred to as “suspicious circumstances coupled with a close relationship” which give rise to an inference of intent to defraud a creditor or others unless the defendant provides a compelling explanation that there was no intention to frustrate a recovery.

With respect to the piercing of the corporate veil issue, Incondo’s position was that it was entitled to trace all of David Sloan’s assets to Cave Hill to satisfy its judgment. Incondo submitted that this entitlement to trace was a form of piercing Cave Hill’s corporate veil, and that this entitlement was especially important because it was David Sloan who was really the directing mind of Cave Hill.

Justice Penny dismissed the requested corporate veil piercing declaration on the basis that it added nothing to Incondo’s efforts to obtain recovery. The Court held that transactions to Cave Hill could be declared void under fraudulent conveyance legal principles, and thus Incondo could recover against David Sloan by transactions unwound involving Cave Hill.

Conspiracy Allegations in the Context of Fraudulent Conveyance Actions

In the 2018 case of Tsui-Wong v. Xiao, 2018 ONSC 3315, the plaintiff Katty Tsui-Wong obtained a Judgment against the defendant Daniel Xiao resulting from an oppression action in the context of a shareholders dispute. After the judgment was issued, Daniel disappeared into China. The fraudulent conveyance action named Daniel’s wife June and June’s parents as defendants.

Through the fraudulent conveyance action, Katty sought an order for June to account for monies she received from Daniel or alternatively an order to trace the funds that June received. June acknowledged that she used funds obtained from Daniel to purchase a property. Katty further alleged that June and her parents conspired with Daniel to prevent Katty from recovery on her Judgement.

The Judgment describes a long and complex history of how Katty was swindled out of the value of her shares in a company that she had created with Daniel. The essence of the allegations were that David and June purchased a home together in Toronto. After the litigation commenced, title to their home was transferred to June’s parents. After judgment was issued, the Toronto property was sold and the proceeds were used to buy a Vancouver property in the name of June. June divorced Daniel, leaving Daniel without assets in his name in Canada.

The Court held June and her parents liable for conspiracy with Daniel on the basis of fraudulent conveyance allegations. The Court held that June and her parents acted in concert with Daniel for the unlawful purpose of fraudulently conveying his assets to frustrate the recovery efforts of Katty. The Court held that June and her parents should have known that their conduct would have caused injury to Katty, and that their conduct did in fact cause harm to her. Thus, the Court held that although Katty did not have a cause of action in her underlying oppression action against June and her parents, she did have a cause of action in conspiracy for their role in Daniel’s fraudulent conveyance of his property.

With respect to the tracing and accounting actions, the Court held that since a fraudulent conveyance by Daniel is void as against transfers he made when Katty was his potential creditor, June and her parents became trustees for Katty, meaning a constructive or resulting trust resulted from the fraudulent transfers by Daniel to June and her parents. To state otherwise, June and her parents were trustees to Katty and were required to account to her for what happened to the funds they received directly or indirectly from Daniel.

As a result, because the transfers of Daniel to June and her parents are void as against Katty, she could trace funds from any transaction Daniel made involving funds that were received by June and / or her parents. This is because the Fraudulent Conveyance Act was created for the purpose of preventing a debtor from hiding assets from creditors by fraudulent transferring assets to another person.

Fraudulent Conveyances is not Criminal Conduct

Often fraud victims whether evidence of a fraudulent conveyance is grounds for making a criminal fraud complaint to police. These inquiries often result from the frustration fraud victims feel when they are required to pay a civil lawyer to undergo the expensive process of seeking fraudulent conveyance declarations to unwind transactions. In Judgment Proofing: Where Are The Lines, The Canadian Bar Association, January 27, 1994, the authors advised that the term “fraudulent conveyance” is a “fraud at law” and not a fraud in the criminal sense. We are not aware of criminal fraud cases based on fraudulent conveyance complaints.

Allegations of Fraudulent Conveyance against Plaintiffs in a Fraud Action

We have had the unfortunate experience of representing plaintiffs in a fraud action who have been the subject of fraudulent conveyance allegations by defendants that they sued for equitable fraud. In this particular action the defendants served a motion for security for costs and brought a motion to have the fraud action against them dismissed in the context of a summary judgment motion. After the motion was served, one of the plaintiffs transferred title to her marital home to her husband for love and affection.

The defendants alleged that the plaintiff’s intent in making the transfer was to make herself debtor proof from a pending cost order if the defendants were successful in their summary judgment motion. Rather than litigate the issue, the plaintiff simply reversed the transaction on a without admission of liability basis. This scenario demonstrates that fraud victims also have to be aware of making transfers while litigation is ongoing.

Recent Developments from the British Columbia Superior Court

In Jasmur Holdings Ltd. v. Callaghan, 2019 BCSC 1966, the British Columbia Superior decided by way of summary judgment a fraudulent conveyance action. The relief claimed by the Plaintiff was an order setting aside a transfer of Gary Callaghan’s half interest in a property to his spouse and co-defendant, Suzanne Callaghan, on the grounds that the transfer was a fraudulent conveyance.

The underlying facts were simple. Mr. and Mrs. Callaghan’s father loaned the Callaghan’s a total of $204,000.00 for the purpose of a purchasing a vacant property and constructing a home on the property. In or around 2005 Mr. Callaghan considered a business venture involving a separate parcel of land in B.C. Mr. Callaghan sought investors for the project and set up corporation for the project. Shortly thereafter Mr. Callaghan transferred his half interest in the Property to Mrs. Callaghan for $1. At the time, the assessed value of the property was $505,000.00. At the time of the transfer, Mr. Callaghan held no other significant assets.

Eventually, Mr. Callaghan’s business venture failed, and Mr. Callaghan was pursued by his investors for fraud, misrepresentation, and breach of contract. Judgment was subsequently issued against Mr. Callaghan. In addition to the fraud claim, Mr. Callaghan’s pending judgment-creditors also commenced the action for fraudulent conveyance.

Mr. Callaghan defended the fraudulent conveyance action on the basis that he did not have the intention to delay his creditors, but his intention was to protect his father-in-law’s investment into the property. The Court did not accept this defence. The Court found that there were many ways in which the in-laws investment into the property could have been protected, including through the registration of a mortgage as security. Given that the property had an assessed value of $505,000.00, the investment of $204,000.00 by the parents could have been secured while also leaving the property in the name of Mr. and Mrs. Callaghan. The Court also found that seeking to protect the interest of one creditor (the in-laws), over the interests of all other creditors of Mr. Callaghan was not a legitimate defence.

Accordingly, the Court found that the transfer was made with the intent to defeat, hinder and delay Mr. Callaghan’s present and future creditors. The Court unwound the transaction, declaring it void.

Fraudulent Conveyance Actions and Limitations Periods

Fraud victims should also be aware of the applicable limitations periods to fraudulent conveyance actions. In the Jasmus Holdings case reference above, the defendants Mr. Callaghan also defended the fraudulent conveyance action on the basis that the Plaintiffs had commenced the action outside the two year limitation period. In Jasmus, the Court found that the limitation period in relation to FCA actions does not begins to run on the date of the transfer of the property in all cases.

While there is some debate and confusion regarding the state of the law regarding limitations periods and fraudulent conveyance actions in Ontario, Justice Dunphy in the case of Conde v. Ripley et al., 2015 ONSC 3342 provided some guidance. In conclusion, Justice Dunphy found that:

…The nature of the claim by which the “creditors or others” obtain standing to bring a claim under the FCA has no bearing upon whether the claim to set aside the conveyance itself is one governed by the Real Property Limitations Act, R.S.O. 1990, c. L-15 (the “RPLA”) or the Limitations Act, 2002, S.O. 2002, c. 24. 

Rather, if a claim is brought under the Fraudulent Conveyance Act to set aside a conveyance of real property, such a claim is on its face a claim to “recover any land” to which the RPLA applies a 10 year limitation period, whereas conveyances of personal property give rise to “claims” under the Limitations Act, 2002, which governs other types of conveyances attacked under the Fraudulent Conveyance Act. 

The outcome, while somewhat inelegant in applying two different statutory limitation periods to two actions under the same section of the same statute (s. 2 of the Fraudulent Conveyance Act), appears to me to be the correct one mandated by the statutes.

Inquiries

At Investigation Counsel PC, we investigate and litigate fraud recovery cases. If you discover you are a victim of fraud, contact us to have your case assessed and a strategy for recovery mapped out before contacting police or alerting the fraudster. We also promote victim advocacy and academic discussion through various private and public professional associations and organizations. If you have an interest in the topics discussed herein, we welcome your inquiries.

Norman Groot & Ashley Ferguson

Investigation Counsel PC

February 11, 2020

www.investigtioncounsel.com