Legal Blog

Fraudulent Conveyance

Financial institutions do not like fraudulent conveyances, but we do. They are fun to attack. Usually, one only needs a fine sense of smell and a little diligent homework to determine that something is rotten in the state of Denmark.

At that point, we move, usually without notice, to obtain a certificate of pending litigation (CPL). This allows us to tie up the land so that the transferee, who obtained the conveyance fraudulently, is unable to sell the land and disburse the proceeds. 

However, we take nothing for granted in obtaining a CPL. In our affidavit in support, we tell the court about our judgment against the debtor/transferor, give facts that would indicate that the debtor has no assets to satisfy the judgment without the land, and relate how the land was transferred either for no consideration or for inadequate (i.e. less than fair value) consideration.

Typically, we first have a judgment for the underlying debt. However, what happens if we do not have a judgment, but we have determined that our defendant has transferred land to, say, his wife, without consideration? Can we commence a fraudulent conveyance action, without a judgment, claim that the property should be transferred back to the husband, and tie up the land with a CPL?

This question was answered in Grefford v. Fielding, a 2004 decision of the Ontario Superior Court of Justice.

Purpose 

A CPL registered against land ensures that the owner may not deal with (e.g. mortgage or sell) that land. In order to obtain a CPL, a plaintiff must demonstrate that there is a claim in the action against the land. This can be achieved in one of two ways.

First, land can be the subject of the claim. For example, if a purchaser is claiming that the vendor has breached an agreement to sell land to the purchaser and is claiming specific performance of the agreement, that is a claim against land.

Second, if a debtor has transferred land and a creditor claims the transfer is a fraudulent conveyance that ought to be set aside, that is also a claim against land.

In the second case, if the creditor already has a judgment, the creditor still needs to provide some evidence that the conveyance appears to be fraudulent. However, is the situation the same if a plaintiff is attempting to become a creditor by way of a court process, but has not yet obtained a judgment?

Conflict 

There are two competing interests. The first interest is that of the creditor wannabe. The plaintiff in the main action has already seen what seems to be a fraudulent conveyance and does not want the property to be sold again. Conversely, the defendant wants to be able to deal, without restriction, with property he or she owns. Until there is a judgment, why can the defendant not do so? Why should someone be able to sue someone else and, without a judgment, tie up his or her land?

The judge set out the competing interests and outlined three tests that the plaintiff must meet to obtain a CPL in the non-judgment circumstances.

1.   The plaintiff must show that it has a high probability of recovering judgment in the main action;

2.   The plaintiff must introduce evidence demonstrating that the transfer was made with the intent to defeat or delay creditors; and

3.   The plaintiff must show that the balance of convenience favours issuing a CPL under the circumstances of the case.

Circumstances 

In Grefford, the plaintiffs had sued the defendant husband alleging conspiracy and non-payment of a debt. The husband had transferred his interest in the matrimonial home to his wife for $77,000. We do not know if the transfer was before or after the plaintiffs sued in the main action, but we presume that it was at least after the debt had arisen. The plaintiffs then commenced an action alleging a fraudulent conveyance. Just before the plaintiffs moved to obtain a CPL, the solicitors of the plaintiffs and the solicitors of the defendants partially settled the main action. The defendants were to and did repay the loan principal of $125,000 and the only remaining issues were interest and a claim for punitive damages. The plaintiffs then moved without notice to obtain the CPL. When the defendant and his spouse discovered that the CPL had been registered against their home, they moved to set aside the CPL.

Application of Tests 

The judge determined that the plaintiffs did not have a high probability of success in the main action because the interest that the plaintiffs were claiming exceeded the criminal interest rate of 60% per year. There were two loans. One loan bore interest of $10,000 for 15 days on principal of $25,000. The other bore interest of $25,000 for 15 days on principal of $100,000. You can see how a criminal rate of interest rapidly diverts the sympathies of justice from the creditor to the debtor.

The judge also decided that, in this case, the plaintiffs did not demonstrate that the transfer to the wife was made for purposes of defeating the husband’s creditors. The plaintiffs led no evidence that the husband had no other assets to satisfy a possible judgment or even that the wife’s consideration of $77,000 for the land was inadequate.

Finally, the judge held that on a balance of convenience, the plaintiffs also lost, essentially for the same reasons that the plaintiffs failed to meet the second test. The judge held that there was no reason why the defendant was to be restricted in dealing with his assets before the plaintiffs obtained a judgment in the main action. In effect, the plaintiffs were attempting to obtain security for a judgment in the future without demonstrating any reasons for doing so.

Nastiness 

The plaintiffs also engaged in a bit of sharp practice. When a moving party wishes to obtain an order without giving the other party notice of the motion, the moving party must always fully disclose all of the relevant facts to the judge hearing the motion because the opposing party, without receiving notice of the motion, certainly does not have the opportunity to do so.

In this case, when the plaintiffs obtained the CPL, their solicitors failed to mention the settlement with the defendants, the repayment of the entire principal, and the fact that a solicitor represented the defendants. Finally, the plaintiffs failed to disclose that the solicitors for all parties had agreed that they would take no further legal proceedings without giving each other notice.

Failure to disclose material facts is a reason unto itself to set aside an order obtained without notice. Since the judge had already decided that he would set aside the CPL, he warned that he would take note of the non-disclosure in his order for costs.

In deciding the amount of costs to award, the judge reflected on the non-disclosure and increased the costs award because of it. He ultimately awarded the defendants over $14,000 for a one-half day motion.