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Evidence

Posted on June 1, 2008 | Posted in Collections

We keep harping on the concept that facts are paramount in a legal action. The law will set the ground rules, but, without proper facts, a litigant is doomed. In Salna v. Hie, a 2007 decision of the Ontario Superior Court of Justice, the plaintiff learned, the hard way, that without evidence, there are no facts and, without facts, there is no case. 

Surprise 

The defendant had a cause of action against a health provider for alleged negligence in her treatment. She entered into an arrangement with the plaintiff by which the plaintiff loaned her money to retain a lawyer to prosecute her action. In return, the plaintiff was to receive repayment of the loan and 20% of whatever the defendant was awarded in the negligence action.

The defendant’s action ultimately settled for $298,000, although the amount is not clear from the reasons for decision. Instead of taking the money in cash, the defendant agreed that the health provider would purchase for her an annuity of $1,450 per month for life. The defendant was so grateful to the plaintiff for providing her the opportunity to receive the settlement money that she decided not to pay the plaintiff the money due to him. Not only did she not pay the 20%, she also did not repay the original loan.

The plaintiff sued the defendant and obtained a default judgment for $165,000. However, the defendant had no easy assets against which to collect the judgment debt.

The plaintiff garnished the insurance company that was paying the annuity. At the same time, through a convoluted procedure, the plaintiff claimed that the purchase of the annuity was, in itself, a fraudulent conveyance and should therefore be set aside.

Garnishment 

The insurance company defended the garnishment proceedings. It took the position that, under sections 196 and 216 of the Insurance Act, the proceeds of the annuity could not be garnished. Section 196 states that, if there is a stated beneficiary, the proceeds under an insurance policy are not part of the insured’s estate and are not subject to the claims of the insured’s creditors. Section 216 states that if the insurance proceeds are payable in instalments, then “the insurer shall not, unless the insured subsequently directs otherwise in writing, commute the instalments or pay them to any person other than the beneficiary.”

The judge disposed of the garnishment in one paragraph. He agreed that an annuity is not exigible, citing 5 cases in support of that proposition.

Fraudulent 

Accordingly, the plaintiff’s only chance to collect the money owed to him was to demonstrate that the purchase of the annuity was a fraudulent conveyance that was made to defeat or hinder the defendant’s creditors.

The judge quoted prior cases that stated that the statute “cannot receive too liberal a construction, or be too much extended in suppression of fraud.” He referred to a 1996 Supreme Court of Canada decision that had determined that a life insurance beneficiary designation was a juridical act and a disposition or conveyance of property. In essence, the designation of a beneficiary that would make an asset non-exigible was a transaction that might be caught by fraudulent conveyance legislation.

Did it matter that the health provider purchased the annuity instead of the defendant? No. It was simply purchasing the annuity as the defendant’s agent.

The judge then referred to his own previous article to interpret the Fraudulent Conveyances Act. He noted that there are two types of transactions: one for which there is no or nominal consideration (e.g. one spouse transfers property to another for no payment whatever) and the other where the consideration is more than nominal, but less than full value. In the first type of case, the plaintiff need only prove that the defendant transferor had the fraudulent intent. In the second type of case, the plaintiff had to prove that both the transferor and the transferee had a fraudulent intent.

Since it was apparent that the insurance company providing the annuity did not have a fraudulent intent, the plaintiff in Salna had to prove that his case fell within the first type of transaction.

The judge held that the case fell within the first type of transaction for three reasons:

1.   The defendant was both the transferor and the transferee. The insurance company was only a conduit to transform capital into an income stream.

2.   There was no policy reason to enquire into the intent of the insurance company when it was just a conduit.

3.   The defendant, as the owner of capital, received no consideration for the transfer of the money. She had one asset before the transaction and another asset for approximately the same value after the transaction.

Proof 

So far, the plaintiff had passed all of the hurdles. The transaction could be attacked as fraudulent and the plaintiff needed to prove that the defendant, and only the defendant, made the transfer with fraudulent intent. Did the plaintiff prove it?

The plaintiff had summonsed the defendant as a witness. However, the defendant did not appear at the trial to give testimony and the plaintiff did not adjourn the trial to force her to appear. Accordingly, only the plaintiff testified. Although he could testify about what he knew had happened, he could not delve into what the defendant knew and why the defendant did what she did.

In essence, all that the plaintiff proved was that (a) the defendant did not defend the proceedings, (b) the plaintiff had been delayed in executing on his judgment; and (c) the defendant used her settlement to purchase an annuity.

The judge held that this evidence was insufficient to prove fraudulent intent. He stated, “there are many benign motivations for structuring a settlement of a personal injury action.” In that regard, he is quite correct. There is an entire industry dealing with the structuring of personal injury settlements. There are tax and other reasons for which such a settlement is preferred over a lump sum settlement.

Result 

Since the plaintiff did not prove fraudulent intent, the judge dismissed the action. The plaintiff’s lawyer made a tactical error in prosecuting this action. One never goes to trial in a fraudulent conveyance matter without first examining the defendant for discovery. Since the plaintiff cannot necessarily prove what is occurring in the mind of a defendant, the plaintiff has to prove badges of fraud (i.e. occurrences that would point to the fact that fraud was involved in the transaction). For example, the fact that a defendant continues to use an asset after the transaction is a badge of fraud. The fact that the transaction is clandestine is another. There are many badges of fraud, but one needs to examine the parties to the transaction to be able to demonstrate them.

The judge would dearly have liked to grant the plaintiff the relief that he requested. Unfortunately, the plaintiff came to court without enough bullets in his gun.

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