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Fraudulent Conveyances – Examining the Start Date of the Limitation Period

Posted on August 19, 2018 | Posted in Collections

We have written a number of times about the length of time a creditor is given under the Limitations Act to commence a fraudulent conveyance action. The law is still not fully settled as to whether it is a 2-year period or a 10-year period. Regardless of the length of the period, the start date of the period is crucial. The start date was analysed in Prima Technology Inc v. Yang, a 2018 decision of the British Columbia Supreme Court.

An hourglass counts down beside other identical hourglasses.

Fraud

A debtor was involved in an action commenced in the State of Washington in 2010 in which the debtor and her husband were alleged, and ultimately proven by way of a 2015 jury verdict, to have engaged in a massive fraud. The debtor appealed the $15 million judgment, but the appeal was ultimately dismissed for want of prosecution. In 2016, the creditor had the British Columbia Supreme Court recognise the judgment as enforceable in that court.

In 2007, while the fraud was ongoing, the debtor and her husband transferred property in British Columbia to their daughter and two relatives for what was found to be no consideration.

The transfer had all of the earmarks of a fraudulent conveyance:

(i)   the debtor was aware before she transferred the property that substantial financial claims had been made against her as a result of her business dealings in Washington State;

(ii)  the debtor continued to reside in the property after the conveyance;

(iii) the transfer was made to the debtor’s 14-year-old daughter and the debtor’s sister and brother-in-law;

(iv)  the transfer was made without consideration and falsely declared consideration of $2.7 million;

(v)   the transfer divested the debtor of her most substantial asset;

(vi)  the transfer was made after the debtor was aware of the possibility of legal proceedings against her; and

(vii) the debtor had received a demand letter from the creditor’s lawyers 3 months before the transfer.

Preliminary

Relying on mostly Ontario cases, the trial judge noted the following:

1. Fraudulent conveyance legislation is intended to prevent fraud and is to be interpreted liberally.

2. The complainant must fall within the category of “creditors and others”. The courts have historically regarded “and others” as persons who do not have debts owing to them by the transferor, but who have “just claims” not yet brought to fruition in terms of legal process.

3. If there is an intention to defeat creditors at the time of the transfer, then it does not matter whether it was to defeat present or future creditors; it is irrelevant that the person attacking it was not a creditor at that time.

Accordingly, merely because the creditor was not a creditor at the time of the transfer was no defence for the debtor.

Aside from her contention that there was a Chinese custom “to leave your children property if you have it,” and, later as a variation on a theme, a motherhood statement that she, as a parent, had a duty to provide financial security to her daughter, the debtor had only one significant defence: the limitation period had passed.

Legislation

The fraudulent conveyance legislation of all Canadian provinces emanated from an English statute going back hundreds of years. Most provinces have updated the language of their legislation and British Columbia and Ontario are no exceptions. The applicable legislation in BC, at the time, stated that time does not start to run until the claimant knows (i) of the existence of a duty that the defendant owes to the claimant and (ii) that a breach of that duty caused damage to the claimant. Further, knowing the facts and having taken appropriate advice, the claimant would need to know that an action would have a reasonable prospect of success and, accounting for the claimant’s own interests and circumstances, a reasonable claimant would regard those facts as showing that the claimant ought to be able to bring an action.

In the context of a fraudulent conveyance action, a creditor needs to know that there was a conveyance that appears to be fraudulent and, given the creditor’s own circumstances, know that it ought to be able to bring an action to set aside the conveyance.

The Ontario Limitations Act is not identical, but is similar. Section 5(1)(a)(iv) notes that a claim is not “discovered” until the person with the claim (e.g. the creditor) first knows that a proceeding would be an appropriate means to remedy the loss.

Knowledge

The debtor argued that the limitation period started to run either when she and her husband transferred the property in 2007 or sometime later in the early stages of the Washington State action. The debtor submitted that the creditor merely had to continually conduct title searches to learn of the transfer.

The judge asked himself the following two questions:

1. “Was it reasonable for the (creditor), while engaged in litigation in the Washington court, to conduct periodic land title searches in British Columbia to determine if (the debtor) had conveyed an interest in real property she owned in circumstances that could give rise to an inference that the conveyance met the test for a fraudulent conveyance?”

2. “Was it then incumbent on the (creditor) to commence a fraudulent conveyance action in anticipation of obtaining a judgment from the Washington state court, execution on which would have been hindered by the fraudulent conveyance?”

We suggest that the same two questions would have been asked had the judge been dealing with the Ontario Limitations Act. In particular, translating one of the questions into Ontario terminology, would a claimant, who had not yet obtained a judgment, know that a fraudulent conveyance action “would be an appropriate means to remedy the loss?”

No Way

The judge’s answer to both questions was “No.” In essence, the answer to the 2nd question informed the answer to the first.

In a fraudulent conveyance action, a claimant must: (i) succeed in the underlying action so that the claimant ultimately has a judgment against the transferor; and (ii) establish that the transferor fraudulently conveyed the property. Therefore, a claimant may well be successful in proving that there was a fraudulent conveyance, but still lose the fraudulent conveyance action because of a lack of success in establishing a judgment in the underlying claim.

Accordingly, it is simply not reasonable for a claimant to be expected to commence a fraudulent conveyance action until the claimant obtains a judgment in the underlying action. As a corollary to that proposition, and in answer to the first question, if it is not reasonable to commence a fraudulent conveyance action until after obtaining judgment, why should a creditor be forced to make multiple title searches to determine whether a fraudulent conveyance, upon which no action will be taken at that time, has occurred?

Since, in this case, the creditor commenced its fraudulent conveyance action in the same year that it obtained the judgment, there was no limitation problem.

The judge therefore determined that the 2007 conveyance of the real property was intended to defeat potential judgment creditors, including the creditor, and declared that the property was fraudulently conveyed and, consequently, void and of no effect. The judge also ordered the sale of the property.

 

Image courtesy of sideshowmom.

Jonathan Speigel

 

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

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