Legal Blog

Foiled

We seem to be on a roll with fraudulent conveyances and trust defences, so we are going to continue our analysis with another fact scenario, one that was the subject of Mitchell Jenner & Associates Inc. v. Saunders, a 2011 decision of the Ontario Superior Court of Justice.

History

Husband and wife married in 1983 and bought their first house in 1986. They were very careful from the outset. Since husband was a businessman, they put title in wife’s name. They wanted to ensure that if husband had a run of bad luck, the house would be insulated from husband’s assumedly voracious creditors.

Twelve years later, husband and wife sold the 1^st house and bought a 2^nd house. They directed title to be put in wife’s name alone and husband guaranteed the mortgage. They paid the down payment from the proceeds of the sale of the 1^st house and money from their joint bank account. For the next seven years, they paid all of the expenses of the 2^nd house from their joint bank account.

In 2002, while they were still living contentedly in the 2^nd house, a creditor had the audacity to commence an action against husband. Husband thought the claim was nonsense and, since the action was moving slowly, paid little heed to it.

In November 2004, wife entered into an agreement to sell the 2^nd house and in January 2005 entered into an agreement to buy a 3^rd house.

For some reason, which was never explained in the reasons for decision, husband and wife decided to place a substantial mortgage on the 2^nd house in December 2004, after the agreement to sell, but before the sale was completed. The mortgagee insisted that if husband and wife were going to be liable for the mortgage, then husband and wife both had to be on title to the 2^nd house.

Accordingly, in December 2004, at the same time that the mortgage was registered and advanced, wife transferred the 2^nd house into the name of husband and wife jointly.

The mortgage had the usual provision that it would become due if husband and wife transferred title to the house without the mortgagee’s consent. Thirty-three days later, before the closing of the agreement to sell the 2^nd house, husband and wife transferred title to the 2^nd house back into wife’s name alone – without the knowledge of the mortgagee and using a different lawyer than the one who acted on the mortgage.

The sale of the 2^nd house duly closed in March 2005; the mortgage was discharged; and wife pocketed the equity of $230,000 and then ultimately closed the purchase of the 3^rd house in May 2005.

Debt

The trial of the nonsense action took place in 2007 and, surprise, the creditor was successful. Because the action was nonsense and the judgment was therefore nonsense, husband appealed. The appeal was dismissed in 2009. Husband owed the creditor $356,000 on the nonsense claim.

When the creditor attempted to collect the judgment debt, it discovered that husband had no assets. The creditor then commenced an action to declare that the transfer of the 2^nd house from husband and wife as joint tenants back to wife alone was a fraudulent conveyance and that, pursuant to the Assignment and Preferences Act, the creditor was entitled to trace the sale proceeds to obtain a judgment against wife.

Trust

Husband and wife claimed that their conveyance was not fraudulent because husband was never really an owner. The conveyance was merely from husband, as trustee, back to wife, as beneficiary, pursuant to husband’s duties as a trustee. Again, the dreaded “resulting trust” defence.

Husband and wife claimed that the only reason why they had transferred the 2^nd house into joint tenancy was to satisfy the mortgagee and that, as soon as reasonably possible, they simply transferred title to the house back into wife’s name alone.

The trial judge did not accept that explanation. She noted that the impugned transaction was not merely a change in title, it was a change in ownership, a change that the mortgagee required. The mortgagee’s lawyer, and husband and wife, all certified to the mortgagee that husband and wife were the owners of the 2^nd house. They did not set any limitations on that ownership.

The judge also noted that husband signed the mortgage commitment and that the mortgage proceeds were deposited into the joint account of husband and wife. The judge referred to a prior court decision in which the court held that the fact that an owner pledged credit to facilitate a transaction (as husband did) was fatal to the existence of a resulting trust.

Accordingly, the judge held that there was no resulting trust and that, when husband transferred his interest in the 2^nd house to wife, he was not doing so as trustee. The normal rules therefore applied to determine whether the conveyance was fraudulent as an attempt to defeat creditors.

Fraud

Husband and wife readily admitted that the purpose for putting title into wife’s name was to ensure that husband’s creditors could not attack the house. They claimed that they did not transfer the title to defeat the creditor – presumably because his claim was nonsense – and therefore the conveyance was not fraudulent. However, the judge held that, at the time of the transfer, both of them knew about the creditor’s action; husband had gathered up and produced his documents and discoveries had been scheduled. Further, the judge stated, “even if the (husband and wife) did not intend to defeat, hinder or delay the plaintiff’s claim, the fact that they intended to prejudice future creditors is enough to act contrary to the Fraudulent Conveyances Act.”

The badges of fraud were overwhelming. The transfer was not at arm’s length; it was for no consideration; it was completed when husband and wife knew about the creditor’s action; the mortgagee did not approve the transfer; they used another lawyer because the original lawyer for the mortgagee refused to do it; the lawyer who did do it issued no report; the transaction was completed in haste; and husband remained in possession of the 2^nd house.

Remedy

The judge held that the transaction was a fraudulent conveyance and allowed the creditor to trace the funds of the sale to, and obtain judgment against, wife. The creditor requested a judgment for the full $230,000, but the judge only allowed judgment for half of that, because the creditor was entitled to no more than it would have received had the conveyance not taken place.

We have successfully attacked the ultimate transfer of property after a transferee, by way of a fraudulent transfer, purchases a new property with tainted money received from the sale of a fraudulently conveyed property. We can only assume that the creditor decided that it was advantageous to have a monetary judgment, rather than having title to the 3^rd house being transferred back to husband and wife jointly.

Query

We do not understand why the December 2004 transfer was in the name of husband and wife as joint tenants. Wife could just have easily transferred a 0.01% interest to husband as a tenant-in-common. The mortgagee would have been satisfied and the creditor would have been able to look to wife for only 0.01%, rather than 50%, of the equity.