Legal Blog

Overturned

Subject to a decision of the Supreme Court of Canada, a decision of the Ontario Court of Appeal is binding on that court and any lower court – until it is not. Before the Ontario Court of Appeal will overturn a prior decision of a three-person panel of that court, it will deal with the appeal by way of a five-person panel. This is what happened in Bank of Montreal v. Iskenderov 2023 ONCA 528.

Fraudulent Conveyance

In this case, husband and wife were defendants in a fraudulent conveyance action and sought, by way of a summary judgment motion, to dismiss the action on grounds that the limitation period had passed. If the applicable limitation period were the 10-year limitation pursuant to the Real Property Limitations Act (RPLA), the defendants were out of luck; if it were the two-year limitation period pursuant to the Limitations Act, 2002 (New Act), the defendants had a chance.

A three-person panel of the Court of Appeal in Anisman v. Drabinsky 2021 ONCA 120 had determined, without significant historical analysis, that the RPLA applied to a fraudulent conveyance action. The motion judge in Iskenderov was bound to follow the Anisman. ruling He dismissed the defendants’ motion because the action had been started well within the 10-year period. He also held that, even if the New Act applied, there was a triable issue whether the plaintiff had the requisite knowledge to give it the plausible inference of liability and that, for this reason alone, the matter would proceed to trial. The motion judge dismissed the defendants’ motion for each of those reasons. The trial was therefore going to proceed regarding only the issue as to whether the transfer was fraudulent, an issue that was not the subject of the motion.

The defendants challenged both of the motion judge’s reasons and moved to have the appeal determined by a five-person panel – because they requested the court to overturn the Anisman decision.

RPLA History

A claim under the Fraudulent Conveyance Act relies on section 2 of that statute that says “every conveyance of real property or personal property … made with intent to defeat, hinder, delay, or defraud creditors or others … are void as against such persons …”

The court noted that the RPLA was merely part 1 of the old Limitations Act (Old Act). The New Act had replaced the Old Act in 2004, carved out part 1, and renamed it the RPLA. Accordingly, the court reviewed pre-2004 cases, some of which went back to the 19^th century, interpreting part 1 of the Old Act regarding fraudulent conveyance claims.

The court found that, because a fraudulent conveyance action was not an action to recover land, judges have held that the 10-year limitation under the Old Act did not apply. Judges had also held that, based on the wording of the standard limitation section in the Old Act, the basic six-year period also did not apply. In essence, there was no limitation period under the Old Act for a fraudulent conveyance action. So why would the RPLA now apply to fraudulent conveyance actions?

FCA Relief

Many courts, after deciding that there was a fraudulent conveyance, have ordered a reconveyance of the property back into the hands of the fraudulent debtor who had been trying to strip assets. The Court of Appeal stated that this is not the proper remedy. A fraudulent conveyance is void as against “creditors or others,” but the transaction remains valid as between the transferor and the transferee. Accordingly, title should not change merely because of a declaration that the transfer is fraudulent; rather, creditors are to be able to treat the property registered in the name of the transferee as exigible for the debts that the transferor owes to them. The creditors can register executions against, and bind, that property. Unfortunately, the court did not give the exact words of the order so that will be a work in progress.

Accordingly, given that there is no actual re-conveyance of the property, the court concluded that section 4 of the RPLA, and its reference to “an action to recover any land”, did not accord with the actual remedy available under the Fraudulent Conveyances Act.

The court acknowledged that the RPLA did apply to equitable claims for a constructive trust. These are actions to recover land. An action to recover land is one in which the judgment of the court grants a property right in land or in money that was paid for land.

RPLA Conclusion

In summary, the court held that the RPLA did not apply to fraudulent conveyance actions because: (i) under the Old Act there was no limitation period for fraudulent conveyance actions, (ii) an order declaring a conveyance of real property void as against creditors does not return the property to the transferor, and (iii) in an action to “recover any land,” the judgment of the court must grant a property right rather than the property merely being the subject matter of an action.

New Act

On first blush, it would seem that the New Act, with its general provisions, would apply to a fraudulent conveyance action. However, the court first had to reckon with s. 16(1)(a) of the New Act, which provides that there is no limitation period regarding a proceeding for a declaration – if no consequential relief is sought.

The court agreed that, before the creditor receives a remedy in a fraudulent conveyance action, it needs a declaration that the impugned transfer is void against creditors. But this is just the first step; more is needed. The court must set out the consequences of that declaration, which is the remedy of setting aside the transfer as against creditors.

Accordingly, s. 16(1)(a) does not apply and the two-year limitation period under the New Act does.

Discoverability

The defendants argued that the motion judge made factual errors in giving effect to the creditor’s evidence that the creditor did not have sufficient knowledge of the fraudulent transfer to commence the action before it did. This argument was doomed to fail. Once a motion judge makes findings of fact, an appeal court normally accords deference unless the motion judge completely misses the boat. In this case, the motion judge did not.

Consequences

In this case, the matter was sent back for trial on the issue of discoverability and on the merits as to whether there was a fraudulent conveyance. It may be that the defendants’ victory in the Court of Appeal will be pyrrhic and that the defendants’ transfer will still be held to be void against the creditor.

The consequences to creditors in general are more far-reaching. No longer can the creditors rely merely on a 10-year limitation period; the creditors are subject to a two-year limitation period and, to extend the running of that period, have to rely on all of the other aspects of the New Act, such as the discoverability concepts.

Image courtesy of KeithJJ.

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