The techniques in which debtors attempt to hide their assets or ensure that their creditors cannot seize them are varied and plentiful. The job of creditors’ counsel or the creditors themselves is to investigate, determine what happened to the assets, and act to recover them. In Bearsfield Developments Inc. v. McNabb, a 2016 decision of the Ontario Superior Court of Justice, the debtor had a really good plan. Just before her employer discovering her embezzlement, she transferred $206,000 into a creditor proof segregated mutual fund (which we assume had an insurance component). She was therefore able to tell her defrauded employer, who ultimately obtained a judgment against her for almost $1 million, that she was very sorry, but she had no assets to repay the employer the money she stole from it. Was she able to get away with this?
The Fraudulent Conveyances Act applies to every conveyance of real property or personal property made with the intent to defeat creditors of their lawful debts. It allows a creditor to set aside the conveyance. The employer brought an action to do just that, arguing that a transfer of seizable assets into a form of property that could not be seized was, in itself, a fraudulent conveyance.
The fraudster debtor, who was represented by counsel, argued that the employer had not adduced any evidence upon which a court could infer that the debtor, in making the transfer, did so to avoid a judgment. The judge was not impressed with this argument. He indicated that he had little difficulty in concluding that the debtor knew the money was stolen when she transferred the property and was aware of the risk that, at some future date, she was going to be caught and would have to repay what she had embezzled.
The judge noted that it was inconceivable that the Act would not apply to a situation in which a person embezzled money from another, put it into a creditor proof fund, and declared bankruptcy when the fraud was discovered. Under these circumstances, the debtor could not be allowed to retain the fruits of the embezzlement.
The judge set aside the transfer so that it was available for execution and awarded costs to the creditor in the amount of $31,000. Unfortunately, the costs award will likely be pyrrhic because the award may be as uncollectible as the difference between the judgment amount and the $206,000 that the employer was able to collect because of the action.
Image courtesy of mconnors.
Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.