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FCA & Limitations

Posted on August 1, 2021 | Posted in Collections

We have previously written about fraudulent conveyance actions and how these actions have been affected by limitation statutes (see newsletters: February 2021, August 2018, October 2011, and February 2011). These issues are important to us because we often commence fraudulent conveyance actions on behalf of our creditor clients.

A hand holding a stopwatch.

As a result of two recent Ontario cases and a relatively recent British Columbia case, we now have some definitive answers on a number of questions. We discussed the British Columbia case in our February 2021 newsletter. The Ontario cases are Anisman v. Drabinsky, a 2021 Ontario Court of Appeal decision and Midland Resources Holdings Ltd. v. Bokserman, a 2021 Ontario Superior Court of Justice decision.

Drabinsky

Garth was back in the courts again. If you do not know who he is, then look him up. This time, his former lawyer, who had acted for him in a proceeding before the Ontario Securities Commission, commenced an action against Garth and his wife under the Fraudulent Conveyances Act (“FCA“). The lawyer sought to set aside a September 11, 2015 transfer of a matrimonial home, seemingly for no consideration, from Garth (whom we will now reference as the debtor) and his wife jointly to his wife alone.

Before, and even after, the transfer, the debtor had been paying his former lawyer in dribs and drabs bringing the original debt of $111,000 down to a final amount of $61,000. However, by January 2018, the lawyer had had enough of continued excuses for not paying the debt and commenced an action. The lawyer obtained a judgment in that action on November 15, 2018. In preparation for an examination in aid of execution, the lawyer searched title to the debtor’s residence and discovered the 2015 transfer. The lawyer brought the FCA action in May 2019.

Merits

The fact scenario surrounding the conveyance is convoluted and we will not bore you with the details. Ultimately, the judge held that, notwithstanding the other explanations given for the transfer of title, the only real explanation for the transfer was for the debtor to put the matrimonial home out of the reach of his creditors, including the lawyer.

Limitations

The defendants claimed that the lawyer’s FCA action was proscribed because it was commenced more than two years after the impugned transfer took place in September 2015. This defence raised a number of questions:

1. Which limitations statute applied, the general Limitations Act, 2002 (the “Act“) or the Real Property Limitations Act (the “RPLA“). The Act has a two-year limitation period, but the period only starts to run when the creditor knows or ought to have known that an action would be an appropriate means to remedy a wrong. The RPLA has a 10-year limitation period and applies if the claim is being made to recover land. There had been conflicting jurisprudence before this case, but most judges had held that the RPLA applied to FCA actions.

2. If the Act applied, did the limitation period start to run immediately upon the transfer even though the lawyer did not even know of the transfer and had not even obtained judgment against the debtor at that time?

The judge, by way of a summary judgment motion, decided that the RPLA applied, not the Act.

The motion judge also held that, if he was wrong and the Act applied instead, the lawyer did not know of the transfer until sometime after November 2018 and commenced his action within a few months of that knowledge. The judge further stated that he was not prepared to hold that the lawyer ought to have known of the transfer. He noted that a duty to investigate arises only when something leads a creditor to investigate. Nothing in the previous interactions between the debtor and the lawyer would have caused the lawyer to suspect that the debtor had transferred his residence.

Procedure

The defendants complained that, because the lawyer did not file a formal reply to the defendants’ limitation defence, his RPLA and discovery principle arguments surprised them. They were indeed correct regarding procedure. Normally, when a limitations defence is raised, the plaintiff, if he is relying on the discovery principle to postpone the commencement of the limitation period, should deal with that principle by way of a reply. In this case, however, the defendants were served with the material by which the lawyer had obtained a certificate of pending litigation and, in that material, the lawyer had sworn an affidavit stating that he did not discover the transfer until 2019. Accordingly, the defendants were not taken by surprise when the lawyer raised the discovery principle at the summary judgment motion. The judge stated that to ignore what was in the motion record because it was not repeated in a reply “would be to elevate form over substance to an unacceptable degree.” The judge also stated that a failure to actually reference the RPLA in a reply also could not have surprised the defendants – given that previous cases had stated that the RPLA applied.

Appeal

This may well have been just one more Superior Court decision. Fortunately, the defendants appealed to the Ontario Court of Appeal. The Court dismissed the appeal stating “For reasons of Morgan J. with which we substantially agree, the appeal is dismissed.” We now have an unequivocal decision of the Ontario Court of Appeal stating (i) the RPLA applies to FCA actions and (ii) when the Act does apply to a case, the duty to investigate does not commence until something arises that would lead a creditor to investigate.

Midland

This was another decision decided by Morgan J. It is no surprise that his decision was consistent with his reasoning in Drabinsky. This case involved another FCA action arising out of a transfer without consideration from a debtor and his wife to the wife alone. The defendants used the same limitation defence as in Drabinsky. In this case, the transfer took place in 2014, after a judgment had been granted against the debtor. Accordingly, the defendants argued that the limitation period started to run in 2014 and, because the FCA action was commenced in April 2018, the action was proscribed.

The defendants had two problems. The judge again ruled that the RPLA applied and the FCA action was commenced well within the 10-year limitation period. Further, even if the two-year limitation period applied, the debtor had appealed the underlying judgment and the appeal was not dismissed until January 2018. Applying the “no duty to investigate” principle, the judge held that the creditor, who did not know about the transfer until after January 2018, had no duty to investigate until the appeal had been dismissed. He stated “nothing could have alerted (the creditor) to search title … prior to January 15, 2018, since, according to (the debtor) himself, there was nothing yet to enforce.”

Although the judge tied the investigation principle to the finality of the underlying action by way of the appeal dismissal, the same reasoning would apply to the British Columbia decisions stating that it makes no sense to commence an FCA action until the underlying action creating the debt has been finally completed – again, because there is “nothing yet to enforce.”

 

Image courtesy of TheDigitalArtist.

Jonathan Speigel

 

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.

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