Legal Blog: Collections

Due Diligence

The Fraudulent Conveyances Act allows “creditors or others” to attack improper mortgages. We have occasionally attacked mortgages as being fraudulent under the Act, usually when we determine that the mortgages are really a sham. Can mortgages be attacked under the Act when the mortgages are real and secure money actually advanced under the mortgages? As usual, the answer depends on the circumstances. One set of these circumstances formed the factual basis for the decision in Chen v. Huang, a 2025 decision of the Ontario Court of Appeal.

Overview

The applicants were majority shareholders of a corporation that owned a multi‑unit residential property. The minority shareholder was the corporation’s sole director and officer. Acting alone, the officer executed a $6M second mortgage (1 year at 13% per year) and a $1.7M third mortgage (6 months at 15% per year) against the property. The mortgagees were arm’s‑length private lenders.

Fraudulent Conveyance/Preference

Crowe Soberman Inc. v Noir Property Management Ltd. 2025 Ont SCJ

Mortgagee claimed secured status through a mortgage granted by an insolvent mortgagor for no seeming consideration. The judge held that the mortgage was both a fraudulent conveyance and a fraudulent preference. It was not made in good faith, and the mortgagee knew of the mortgagor’s financial difficulties at the time.

BIA Attacks

We often discuss attacking a transfer under the Fraudulent Conveyances Act and the Assignment and Preferences Act. These are provincial statutes (in this case, Ontario). However, the Bankruptcy and Insolvency Act, a Canada statute, also has effective, and sometimes more effective, provisions to set aside improper transactions. These are set out in s. 95 and s. 96 of the BIA. Both sections were discussed in Ernst & Young Inc. v. Anwar, a 2025 decision of the Saskatchewan Kings Bench.

Purposes

Section 95 of the BIA governs fraudulent preferences (i.e.  transactions an insolvent person makes before bankruptcy that unfairly favour one creditor over others).

Section 96 governs undervalued transfers that strip assets from a bankrupt before bankruptcy. It is interpreted expansively to protect the integrity of the bankruptcy process.

These sections allow a trustee in bankruptcy to distribute assets among all creditors fairly by disallowing preferential payments to some creditors and setting aside improper transfers.

CPL

N. and G. Lazos Building Contractors O.E. v. Kapsalis‑Fragaki 2025 Ont SCJ (AJ)

Action to enforce a Greek judgment. During the Greece proceedings, the debtor entered into an alter ego trust in which title to Ontario land was transferred to the trust. The creditor alleged that this transfer was a fraudulent conveyance; the debtor claimed that the trust was proper and done before the Greek judgment. The associate judge held that there were issues as to the timing of the trust and allowed the motion for a CPL.

Trust & Fraud

Debtors often try to stymie their creditors from seizing their assets in payment of their debts. The most prevalent means to do this is to transfer real property to a non-arm’s-length person. In that way, the debtor can enjoy the use of the property and keep it out of the hands of the creditors. Creditors can attack this transfer, known as a fraudulent conveyance, by way of the Fraudulent Conveyances Act (Ont) and the undervalue provisions (s. 96) of the Bankruptcy and Insolvency Act (BIA). Once a creditor proves that a debtor transferred the property for no or inadequate consideration, the transferee has very little ammunition left to fend off the attack. One defence is a claim that the debtor’s transfer was only made to return legal title to the transferee, which the debtor held by way of a trust, whether express, resulting, or constructive. That was the defence in E. Sands & Associates v. Gidda a 2025 Ontario Superior Court of Justice decision.

CPL (2)

A certificate of pending litigation (CPL) is a notice registered against title to property informing the world that title to this property is in issue. Any purchaser or mortgagee who then deals with the property does so at its peril. An action to set aside a mortgage or a transfer of land under the Fraudulent Conveyances Act (Act) is often joined with a motion for the issuance of a certificate of pending litigation. After all, what good will it do to bring an action to set aside a transfer if, just before trial, the fraudsters simply re-transfer the property to another person complicit in the fraud or, worse yet, sell or mortgage the property to arm’s length third parties.

A CPL may be obtained on motion without notice (Rule 42.01 of the Rules of Civil Procedure) and, if there is an apparent claim for an interest in land, it is not overly difficult to obtain a CPL. The real fight ensues when the property owner is notified, as required by the Rules, that the land has now been bound by the CPL. Such was the case in Nedaneg Financial Corporation v. Talebzadeh, a 2025 decision of the Ontario Superior Court of Justice. In Nedaneg, however, the plaintiff brought its motion on notice to the defendants.

Norwich Order

Canadian Tire Corporation Limited v. Eaton Equipment and Milburn 2025 Ont CA

Canadian Tire recovered against Eaton and others a $3.3 mil judgment for a fraudulent warranty repair scheme in which Eaton billed Canadian Tire for non-authentic repairs. The defendants appealed the summary judgment decision and then brought a motion before the Court of Appeal seeking a Norwich order to compel production of insurance information from Canadian Tire and its insurers. The chambers judge refused the order because a Norwich Order is a pre-trial discovery remedy only. The judge also held that, given their established fraudulent conduct, the defendants did not come to the court with clean hands and were therefore disentitled to an equitable remedy.

Guarantee

Zurich Insurance Company Ltd. v. Aquino 2025 Ont SCJ

John Aquino, a former director of Bondfield Construction Company Limited, provided an unlimited personal guarantee for Bondfield’s credit facility agreement with Bridging Finance Inc. Bondfield defaulted, leading Zurich Insurance Company Ltd. (who acquired the debt) to sue Aquino on the guarantee. Aquino argued against summary judgment, claiming the matter was too complex, key documents were missing, and partial summary judgment was inappropriate given his third-party claims against other Bondfield officers. The court disagreed, finding the guarantee’s enforceability was straightforward despite the insolvency’s complexity. The motion judge rejected Aquino’s claims of creditor misconduct, including impairing security, and altering priority interests; the guarantee explicitly permitted these actions. The court granted summary judgment for $40.8 mil plus interest of $27.8 mil. Aquino has appealed. SNF acted for Zurich.

CPL

Nedaneg Financial Corporation v. Talebzadeh 2025 Ont SCJ

Creditor had a consent judgment against debtor. After the judgment, the debtor’s wife, son, and non-arms length corporation bought real properties. The creditor alleged that the debtor beneficially owned the properties and moved for a certificate of pending litigation (CPL). The associate judgment dismissed the motion. The Superior Court judge granted the appeal and allowed the CPL. The judge held that the associate judge failed to account for the constellation of facts typical of machination that debtors pursue to avoid paying a judgment – using layers of different entities and related individuals and corporations to shield them from judgment creditors while the debtors continue to carry on business.

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Privies (BIA)

Ernst & Young Inc. v. Anwar 2025 Sask KB

Trustee in bankruptcy applied to void transactions as transfers at undervalue (s. 96) or preferences (s. 95) under the Bankruptcy and Insolvency Act. Investigations revealed $1,383,800 in questionable transactions, primarily involving transfers to family members and associated entities of the bankrupts’ principal. The court found that several payments totaling $1.013 mil to the principal and his spouse were transfers at undervalue that diminished the bankrupts’ estates; the bankrupts received insufficient or no consideration,. Two payments to the principal’s nephew, totaling $140,000, were deemed voidable preferences. The court also declared several individuals and entities privy to and liable for these transfers. A privy is someone who benefits directly or indirectly from, and has knowledge of, the transaction for less than fair market value.