Legal Blog

Conspiracy

Has a client ever walked into your office and requested you to transfer his matrimonial home from joint tenancy with his wife to his wife alone? Or, upon discovering that a client in a real estate purchase has an execution against her, did you suggest that the client execute a direction to take title in her spouse’s name alone?

If you did so, are you liable for conspiracy, together with the spouses, to harm a creditor by way of a fraudulent conveyance or preference? Do you need to have actual knowledge of the creditor(s) or will you be deemed to have knowledge if there are enough badges of fraud?

Mraiche Investment Corp v. Paul, [2012] 7 W.W.R. 448 (Alta C.A.) answers some of these questions.

Actions

The principal (the “Principal”) of a corporation (the “Debtor”) retained a lawyer (the “Solicitor”) to incorporate a new corporation (“Newco”) and to transfer the Debtor’s four real properties to Newco and, ultimately, to another associated corporation (“Finalco”). The Solicitor incorporated Newco and transferred the properties to Newco in April 2008. He then acted for Newco when it transferred the four properties to Finalco in August 2008.

In the meantime, a creditor (the “Creditor”) had commenced an action against the Debtor and the Principal in 2007. Another lawyer (the “Barrister”) in the Solicitor’s law firm acted for the Debtor in that action. However, in September 2008, the Barrister and his law firm ceased to act. We are not told why.

In November 2008, the Solicitor acted for the Debtor when it sold $200,000 of take back mortgages for $146,000.

In December 2008, the Debtor consented to a $2.5 million judgment against it in the Creditor’s action. The happy Creditor investigated, found that all of the Debtor’s properties were gone, and quickly became unhappy.

The Creditor commenced an action against the Debtor, the Principal and his wife, and the law firm of both the Solicitor and the Barrister. It alleged that the law firm, through the Solicitor, engaged with the other defendants in a conspiracy to injure the Creditor by virtue of the various transfers of property.

The law firm brought a motion to strike the action against it based on the Alberta equivalent to the Ontario Rule that requires a genuine issue for trial. The law firm was successful on the motion and the Creditor appealed to the Alberta Court of Appeal.

Test

The seminal case regarding the tort of conspiracy is Canada Cement LaFarge v. Columbia Lightweight Aggregate, [1983] 1 S.C.R. 452. It postulates two scenarios, either of which will support the civil tort of conspiracy:

“whereas the law of tort does not permit an action against an individual defendant who has caused injury to the plaintiff, the law of torts does recognize a claim against them in combination as the tort of conspiracy if:

(1) Whether the means used by the defendants are lawful or unlawful, the predominant purpose of the defendants’ conduct is to cause injury to the plaintiff; or,

(2) Where the conduct of the defendants is unlawful, the conduct is directed towards the plaintiff (alone or together with others), and the defendants should know in the circumstances that injury to the plaintiff is likely to and does result.

 

In situation (2) it is not necessary that the predominant purpose of the defendants’ conduct be to cause injury to the plaintiff but, in the prevailing circumstances, it must be a constructive intent derived from the fact that the defendants should have known that injury to the plaintiff would ensue. In both situations, however, there must be actual damage suffered by the plaintiff,”

 

In Mraiche, the Creditor was not alleging that the law firm and the Debtor conspired to injure the Creditor (i.e. the first scenario); rather, the Creditor alleged that the defendants’ conduct was directed towards the Creditor and injury was likely to result.

The Creditor argued it was sufficient if the Solicitor knew or ought to have known, of facts that might have caused the Solicitor, not otherwise motivated to harm the Creditor, to become suspicious of his client’s motives in the instructions the client gave him. In essence, the Creditor argued that a lawyer can be held to be constructively liable for the tort of conspiracy by unlawful means.

Hear no Evil

The Solicitor swore in his affidavit that he was aware that the Barrister acted for the Debtor in connection with a dispute with the Creditor, but was not aware, until the Creditor commenced its action against the law firm, that the Creditor had commenced the 2007 action against the Debtor. He testified further that he knew nothing of the particulars of the 2007 action or the details of the dispute and did not even know that the Barrister had ceased to act for the Debtor in September 2008. In short, he stated he was just an ordinary solicitor doing transactional work for his client.

The law firm therefore argued that the conduct of the Solicitor was no worse than that of any lawyer who failed to ask his client questions, which might or might not have occurred to a different prudent lawyer. 

Negligence

The Court refused to incorporate an element of negligence into the tort of conspiracy. It was not sufficient, in its view, for there to be a deemed agreement. Conspirators must actually have an agreement. Only once there is an actual agreement does the court query what the conspirators ought to know that would cause harm to the aggrieved claimant. While badges of fraud are important for a finding of a fraudulent conveyance or preference (i.e. the unlawful conduct), they are not sufficient to support a finding that there is an actual agreement to injure.

Since the Creditor did not prove that the Solicitor was aware of the particulars, or quantum, of claims against the Debtor, nor was there evidence supporting a duty on the part of the Solicitor to ascertain the issues in the dispute between the Creditor and the Debtor, the court held that there was no agreement and therefore no tort of conspiracy.

Query

Had the Solicitor and the Barrister been at different law firms, we would have no problem with the Court’s decision. We have more difficulty with two lawyers at the same law firm in which the right hand professes not to know what the left hand is doing. We would have thought that the law firm, the actual defendant, was imbued with the knowledge of both the Solicitor and the Barrister.

In any case, if a client asks you to transfer title for $2.00 and natural love and affection and you know of the financial problems of the client, resist the temptation to act and send the client away.