Legal Blog

Back Door

We write this in a room in a residence at Queen’s College, University of Cambridge, the home of Erasmus, Isaac Newton, Watson & Crick, and 89 Nobel Prize winners. Unfortunately, their genius has not rubbed off on us, but the lectures we have attended have been very interesting.

 

Back to the matter at hand.

 

We often have a situation in which a remedy or right has been closed to us through one route (the front door), but somehow another route opens up (the back door). We cheerfully move to the second route. Sometimes it works; sometimes it does not. Such was the situation in Re Viola, a 2012 case in the Ontario Superior Court of Justice.

 

Timeline

 

There are three tracks of fact.

 

1.   Husband and wife buy property in May 1997 as joint tenants. Husband transfers his interest to wife in December 2008 for no consideration. On March 11, 2010, husband makes an assignment in bankruptcy.

 

2.   On March 3, 2010, 8 days before husband’s bankruptcy, wife enters into an agreement to sell the property. The transaction is to be completed in July. Husband does not inform his trustee about the property or the upcoming sale. He and wife are attempting to avoid (evade?) husband’s debts and truthful oaths and full disclosure do not mean much to husband. Bad bad husband.

 

3.   One of husband’s creditors ($265,000) obtains a judgment against husband and, on June 7, 2010, commences a fraudulent conveyance action against husband and wife. At the same time, she obtains and registers a certificate of pending litigation against the property, which effectively shuts down the completion of the sale scheduled a month later. Creditor commenced the action in the face of husband’s bankruptcy because, presumably, husband had not informed his trustee in bankruptcy of creditor and the trustee had therefore not notified creditor of the bankruptcy.

 

The three tracks converge in June 2010. Wife is negotiating with creditor and other lien holders of the property and wife’s lawyer informs creditor and the other lien holders about husband’s bankruptcy. Wife’s lawyer also states, incorrectly, that the trustee was not proceeding with a fraudulent conveyance claim. If the trustee were not aware of creditor’s claim or the property, it would hardly be in a position to claim against the property or to waive that claim.

 

New Route

Once creditor knew about husband’s bankruptcy, she knew that she had no right to have commenced the action and that any rights to the property belonged to the trustee. Did this stop her? No. She took the back door.

 

Bankruptcy or not, wife’s sale of the property was not going to be completed in July without a court order or creditor’s consent. Wife agreed to pay the lien holders the money due to them and then pay half of the remaining net proceeds of sale, $72,000 (the “Fund”), to creditor’s lawyer in trust. Creditor agreed to remove the certificate of pending litigation and, presumably, discontinue her action.

 

To his credit, creditor’s lawyer informed the trustee of the Fund shortly after the sale closed. The lawyer took the position that the Fund was not payable to the trustee and sought the trustee’s confirmation that it was not interested in the Fund. Surprise! The trustee was interested; hence the court motion.

 

We heard nothing about the payments to the lien holders. We assume that the trustee had no problem with the payments because the lien holders would have taken their security against the land regardless of the bankruptcy.

 

Argument

The issue was simple. If creditor received the Fund because wife owned 50% of the property by way of a fraudulent conveyance, then the trustee, on behalf of all of husband’s creditors, had the right to the Fund. The right to make the fraudulent conveyance claim was that of the trustee. The creditor had no right to commence the action or negotiate the settlement of it in the face of husband’s bankruptcy.

 

Creditor argued that no court had ever adjudicated that husband had fraudulently conveyed his interest in the property. Accordingly, she argued that the court in this case could only review her statement of claim to determine how to characterise the settlement proceeds. Creditor asserted that her statement of claim was not just a garden-variety fraudulent conveyance action. Hers was different. Not only did she request a declaration in her action that the conveyance was fraudulent, she also sought judgment for civil conspiracy, deceit, knowing assistance of fraud, and knowing receipt of proceeds of wrongdoing. She therefore claimed that the Fund did not arise out of the fraudulent conveyance aspect of her claim; rather, it arose from the damages that she claimed.

 

Nice Try

 

The judge noted that, notwithstanding the protests of creditor to the contrary, the action was a typical fraudulent conveyance action that entailed the assertion of a remedy against husband’s property. The action was entirely based on the allegation that husband continued to own a 50% interest in the property regardless of his attempted transfer of it to wife. The claim for damages was not a separate, freestanding claim. It was a claim for alternative relief and lived or died depending on creditor’s allegation that husband fraudulently conveyed his interest in the property. No fraudulent conveyance; no claim for damages.

 

Worse yet for creditor’s argument, it was obvious that the settlement arose because there was an implicit acknowledgment from wife that there had been a fraudulent conveyance. Wife received her share of the net proceeds of sale and creditor received husband’s share. The settlement was not based on the damages that creditor claimed in her action; it was based on the value of husband’s interest in the property.

 

Accordingly, since the bankruptcy stayed the action, regardless whether creditor initially knew of the bankruptcy and regardless whether the trustee knew of the action, creditor had no right to the Fund. The judge ordered that creditor pay the Fund to the trustee.

 

Charge

You might think that it would be unfair for creditor to have done the work to obtain the Fund and receive nothing. After all, were it not for creditor’s quick action, wife would have sold the property, taken all of the net proceeds, and the trustee and husband’s creditors, would have received nothing.

 

The law allows a lawyer to claim a charge for his legal fees and disbursements against the proceeds obtained through his efforts. Accordingly, the  fees of creditor’s lawyer of $27,000 were paid to him from the Fund and the balance of $45,000 went to the trustee. Creditor performed all of the work and received nothing, but at least her legal fees incurred in obtaining the Fund were covered.

 

Unfortunately for creditor, she had to pay the Trustee’s costs of the motion that the judge assessed at $8,000 and her own costs, which would have been about $15,000. The route through the back door, which was ultimately blocked, was very costly.