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We often write about attacking a transaction on grounds that it is a fraudulent conveyance. What does that mean; what is the remedy; and is that remedy relevant to anything outside of the action? These questions were answered in part in Guthrie v. Abakhan & Associates Inc., a 2017 decision of the British Columbia Court of Appeal. Although the language of the BC Fraudulent Conveyance Act has been updated as compared to the Ontario Fraudulent Conveyances Act, and the 1571 English Statute of Elizabeth on which both were based, the substance of the Ontario and BC statutes is still essentially the same.

Essence

Fraudulent conveyance statutes have but one purpose: to stop a debtor from successfully transferring away assets for no or inadequate consideration (i.e. payment or other value). The simplest example is a husband transferring assets to his wife to avoid having to pay his debts. With this simple transfer the family unit keeps and enjoys the asset and the husband’s creditors are left howling in frustration.

The BC and Ontario statutes (and, probably, the statutes of most other provinces across Canada dealing with fraudulent conveyances) state that, if made to delay, hinder, or defraud creditors of their collection remedies, a disposition of property is void as against creditors whose rights will be prejudiced. However, the statutes do not apply to dispositions in good faith and for good consideration to a person who has no knowledge of any collusion or fraud.

Fight

The original judgment arose out of a family law action. Husband had transferred property into the name of Wife #2; Wife #1, who had been making various claims against Husband was not amused. Ultimately, the trial judge held that Husband pay spousal support arrears to Wife #1 of $19,000. The judge also ordered that the transfer of property to Wife #2 was a fraudulent conveyance and void as against Wife #1 and that Wife #1 was entitled to pursue her remedies against Husband as if he were the legal and beneficial owner of the property. We assume that more than this was in issue at the trial because the judge also ordered costs of the trial to Wife #1 and these costs were estimated at $168,000.

Husband paid the arrears, but he and Wife #2 defaulted on payment of the mortgage against the property. The mortgagee sold the property under power of sale and paid the $108,000 surplus from the sale into court. Wife #2 became bankrupt and her trustee in bankruptcy claimed the surplus on behalf of the bankrupt estate. Ultimately, Wife #1, who had still not assessed her costs, disputed that claim, claiming the proceeds for herself.

Interpretation

Both the motions judge and the Court of Appeal had to interpret the original judgment. Unfortunately, it was less than clear. The motions judge held that the judgment voiding the conveyance was limited to the $19,000 monetary award such that Wife #2, through her trustee in bankruptcy, was entitled to the surplus. Although Wife #1 filed a proof of claim in the bankruptcy of Wife #2, this claim would have had to have been rejected because Wife #1 was never a creditor of Wife #2; she was only a creditor of Husband. Wife #1 appealed.

Remedy

The confusion in this case arose out of the remedy that the trial judge attempted to craft. Normally in this type of action, the request for relief is a re-conveyance of the impugned property. However, the law states that the conveyance is only voidable (i.e. it is of no effect against the affected creditors), but it continues to be valid as between the grantor and the grantee.

For example, a husband may improperly convey a property to his wife. The award can state that the property is to be re-conveyed to husband so that his execution creditor can seize and sell the property. After the sale proceeds are used to pay execution creditors, the equity in the property would go to the wife. Viewed another way, the wife is holding the property in trust for the creditors who were defrauded by way of the transfer, but, after their debts are satisfied, the wife becomes the absolute owner of the property.

The fraudulent conveyances statutes do not provide for any right to damages or compensation for loss. They are only available for declaratory relief having the effect of nullifying transfers so as to allow creditors to enforce their claims. The only claim for damages that we ever make in a fraudulent conveyance action is for damages arising out of the reduction of the equity in the property. In many cases, the transferee takes title and then immediately mortgages the property, thereby reducing the equity. We attempt to have this reduction disgorged as damages.

Analysis

The Court of Appeal stated that once the trial judge declared that the transfer to Wife #2 was a fraudulent transfer, which was void under the Act, the judge no longer had any authority to limit that declaration to a particular debt owed to Wife #1. Once a transfer is void, then it is always void; it is not void for a limited time. It would make no sense for Wife #1 to obtain a declaration that the conveyance was void regarding the spousal support arrears and then have to commence another action to accomplish the same result for the costs of the trial. Further if a conveyance is void, it is ineffective as against all creditors who might be hindered or delayed. Accordingly, Wife #2 was not limited only to the original declaration of $19,000 in spousal support arrears, she was able to look to the property for all of her claims against Husband, including the claim for costs.

In the result, the Court of Appeal directed the trustee in bankruptcy to make the remaining sale proceeds of the property available to Wife #1 to the extent necessary to enforce her costs order and any other judgment she might have against Husband.

Confusion

A fraudulent conveyance action has been analogised to a class action. Although there is only one plaintiff, the benefit of the action would accrue to all execution creditors if the property were ordered to be re-transferred. In practice, once there is a judgment, either the property is sold and the proceeds go to all of the transferor’s execution creditors (but not to all creditors) or the parties to the action make a deal. The transferee and the successful creditor agree upon a payment, the payment is made, and then the creditor takes no steps to enforce the order; in particular, it does not register the order against title to the property. The transferee takes its chances in making a deal if the transferor still has outstanding creditors because any of those creditors could move to enforce the order or to obtain a new one based on the order.

If, however, the transferor became bankrupt and the property were sold, then the successful creditor would not only have to share the proceeds of the property’s equity with other execution creditors, all of the proceeds would have to be paid to the transferor’s trustee in bankruptcy and the trustee would then distribute the proceeds rateably to all of the creditors, not just the execution creditors, of the bankrupt transferor.

In this action, we had a variation on a theme; it was not Husband who went bankrupt, but Wife #2. Her trustee in bankruptcy would have no greater rights than Wife #2 would have and, if Wife #2 had no interest in the $108,000 paid into court because of the original fraudulent conveyance, then it would seem that there is no relevance to the bankruptcy of Wife #2.

The Court did not discuss this issue or what would happen if other creditors of Husband claimed against the money paid into court. Rather, it skirted the issue and stated: “I note that the trustee in bankruptcy did not advance any argument based on the operation of the BIA on the facts of this case. I therefore make no comment on that matter. Not do I comment on the entitlement of other creditors, if any, who may assert rights as secured creditors or as holders of beneficial interests in the proceeds by virtue of the Fraudulent Conveyance Act or otherwise.”

 

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