Legal Blog

Smell

Fraudulent conveyance cases are generally decided on their facts. Did the plaintiff prove that there are sufficient badges of fraud to demonstrate that the impugned transfer was done with a view to defeating the creditors? In essence, does the defendant fail the smell test? Sometimes the law finds itself relegated to second place after the facts because the smell is so bad. This seems to be the situation in Pilot Insurance Co. v. Foulidis, a 2004 decision of the Ontario Superior Court of Justice.

Prior Judgment  

Pilot had been paying wife for accident benefits at the same time that she obtained benefits from the then Workers’ Compensation Board. On September 6, 1994, Pilot commenced an action against wife and her son, George, for repayment of the benefits. Pilot ultimately obtained judgment (the “Judgment”) against wife on October 16, 2001; the action against George was dismissed. We have no idea why it took so long to bring the 1995 action to trial.

Pilot tried to collect on the Judgment but found that wife had mysteriously transferred most of her assets abroad or to others.

The Conveyance  

In July 1995, wife transferred her share of the matrimonial home to husband for $2.00 and other good and valuable consideration. Translation – husband paid nothing. Husband and wife had held the property in joint tenancy. (We learned this from the plaintiff’s solicitor because it was not mentioned in the reasons for decision). In November 1999, husband sold the property and received all of the proceeds.

Pilot attacked the conveyance as fraudulent. Normally a creditor doing so asks for the conveyance to be set aside, slaps a certificate of pending litigation against the land to ensure that it cannot be re-transferred pending the action, and deals with the land when and if the action is successful. In this case, husband had already sold the land by the time Pilot had commenced its action. Pilot therefore asked for a judgment against husband personally, tracing to him the wife’s share of the sale proceeds.

Badges of Fraud  

1. By December 1995, wife had transferred $446,000 into the control of husband and son George.

2. By the end of 1995, wife had dissipated her assets in Canada, either by “investments” in Greece or by providing them to the sons for expensive consumption.

3. Wife and husband relied heavily on son George to guide them in protecting their investments. Son George was a successful businessman. He knew of the procedure of splitting legal and beneficial title to “protect property” and had done so in the past. Also, in 1999, he had protected his own settlement money by having his solicitor transfer the funds to his brother. We assume that son George had not wanted those funds available to be seized because he was a defendant in Pilot’s first action, an action that had not yet been resolved.

4. In January 1999, sons, George and Danny, purchased a property in husband’s name. Son George said that he had supplied the money for the purchase. Son Danny signed husband’s name to the offer without husband even knowing about it. This again shows how son George ensured that there was no property in his name, pending the resolution of Pilot’s first action; it was a continuing course of conduct demonstrating that, to this family, registered ownership meant nothing.

5. In November 1999, husband sold the matrimonial home and received the net proceeds of sale upon closing in February 2000. Wife signed the transfer in her capacity as spouse.

6. In September 2001, 19 months after the closing of the sale of the matrimonial home, husband paid wife $187,000, representing one-half of the net proceeds of the sale. Wife endorsed the cheque over to son George who arranged for the money to be sent to Greece for investment in property there.

Findings  

Husband argued that wife had transferred her share in the

matrimonial home to him to facilitate the sale of the matrimonial home while wife was in Greece. However, as the judge pointed out, this made no sense because wife ultimately had to sign a transfer of the matrimonial home, even if she was not an owner. A spouse who is not the registered owner of a matrimonial home must still execute any transfer of it to release his or her interest in the matrimonial home. Subject to fraud, which is becoming more and more prevalent, if a spouse does not sign, the transfer does not take place.

The judge noted, correctly, that the parties could have accomplished their desire of easily effecting the transfer of the matrimonial home if wife had executed a power of attorney. However, this would have meant that wife was still the registered owner of the matrimonial home and, presumably, husband, wife, and son George did not want this to happen.

The judge did not give any credence to husband’s assertion that the wife transferred the matrimonial home to him for the innocent purpose suggested. The judge felt that the assertion was contrived. Since there was no other explanation and since wife made the transfer without consideration, after wife had divested herself of almost all assets that she had in Canada, the judge concluded that the 1995 transfer was fraudulent.

The judge ordered that Pilot could trace the funds that husband received from the 1999 sale of the matrimonial home and that husband was therefore liable for the Judgment amount.

Upshot  

Husband had to pay Pilot’s judgment. We found this a touch unusual because, in 2001, husband, seemingly, had purged his fraud by paying the full value of wife’s share in the matrimonial home back to wife. After that payment, for purposes of wife’s creditors, she was in no different position than if she had continued to own a half interest in the house, sold the house in 1999, and received her share of the money in 2000. Pilot did not obtain judgment against wife until after the sale and, indeed, after the husband had repaid half of the equity to wife.

Of course, the dealings between wife, husband, and sons were all subterfuge. Wife never really received the money; she signed it over to son George to allow him to spirit it out of Pilot’s clutches. Accordingly, in this case, did husband really purge his fraud or did he pay half the equity as part of a new scheme to defraud wife’s creditors?

The judge did not give the answer in his reasons, but the plaintiff’s solicitor had provided him with a 1923 Nova Scotia Court of Appeal decision, dealing with facts similar to the Foulidis case, which would have given the judge a jurisprudential justification for the decision he made. As far as we are concerned, husband, wife, and sons failed the smell test. Once that happens, judges will go out of their way to right the wrong and provide justice to the aggrieved party. 

By George  

Had son George been a co-defendant with husband, we can see, with the benefit of hindsight, how son George could also have been liable to Pilot. As far as we can determine, he assisted wife in her fraudulent disposition of assets.