Legal Blog

Family First

One of the defences that we see in a fraudulent conveyance action is the family first defence (i.e. I transferred it because my spouse said that she expected to be protected and, if I did not, she would leave me). That defence was tried on for size in Penfinancial Credit Union Ltd. v. Magnum Crane Sales Inc., a 2011 decision of the Ontario Superior Court of Justice.

 Transfer

 Husband was one of four shareholders of a corporation. As security for a loan from the plaintiff, the shareholders guaranteed the corporate debt to the plaintiff.

 The corporation went bust, owing a large amount of money to the plaintiff. In the midst of the corporation’s financial slide, husband transferred his half interest in some commercial property and in the matrimonial home to his wife for no consideration.

 The plaintiff commenced an action against husband on its guarantee and against husband and wife for a re-transfer of the commercial property. The reasons for decision did not discuss whether the plaintiff also claimed to set aside the transfer of the matrimonial home. The plaintiff brought a motion for summary judgment on its claims, arguing that the defendants had not shown that there was a genuine issue to be tried.

 Defences

 Wife testified that the transfer was to “ensure that the property would stay intact, that I would be able to collect rent as my retirement income and that at some point if the business is wound down or whatever in the future. (sic)I would have the property for my hobbies.” The judge translated that to mean that the “The transfer was made to ensure that her husband’s interest in the property was available for Karen’s future needs and not lost to his creditors.” This was not a good finding for wife.

 Wife also argued that she put more into the commercial property and the matrimonial home than husband did, but she did not produce any evidence to this effect. The judge stated, “However, she has failed to provide documentary evidence that would support her allegations of significant unequal contributions. The plaintiff sought production of income tax returns and GST records and undertakings were given to produce these documents, yet they have not been produced. Rule 20.02(1) permits the court to draw adverse inferences where a party fails to provide evidence of contested facts.”

 Finally, wife reached into the defence bag of arguments and pulled out the family first defence, which the trial judge summarised and analysed as follows:

 “Similarly, Karen and Stephen’s allegation that the financial situation caused tensions in their marriage which the transfer was intended to resolve, is not a defence to this application. Reducing tensions in a marriage in the circumstances of this case is not a substitute for valuable consideration. Put another way, if the price of holding a marriage together is the commission of a fraud, the price is not one the law will support.”

 Result

 The judge granted the plaintiff the judgment it sought, presumably setting aside the transfer.