Legal Blog

Subsequent Creditors

Under the Fraudulent Conveyances Act (“Act“), creditors are given the ability to obtain a court order setting aside a conveyance of property if that conveyance was made with the intent to defraud creditors or others of their lawful debts. The question that often arises is “Which creditors?” Sometimes that question is very easy to answer. A claimant who was a creditor at the time of the transfer is certainly an included creditor. How about a claimant who became a creditor many years after the transfer? This question was answered in Ontario Securities Commission v. Camerlengo, 2023 ONCA 93.

Claim

The statement of claim set out the following allegations:

• Husband carried on an electrical contracting business with a business partner, using various corporations.
• In February 1996, husband and his partner incorporated another corporation. Four months later, using the same lawyer and on the same day, husband and his business partner each conveyed their interest in their respective matrimonial homes to their spouses for no consideration.
• Husband and his wife continued to live in the matrimonial home, which wife intermittently mortgaged to fund husband’s business activities.
• At the time of the transfer, husband and wife were concerned about husband’s potential exposure to personal liability from husband’s rapidly expanding electrical contracting business that started bidding, and working on, million-dollar, high-risk projects.
• In 2011, husband was facing financial difficulties and arranged for a $200,000 loan to husband’s corporation from a third party lender. Husband’s corporation never repaid that loan. The plaintiff later obtained a judgment against the lender and then a judgment against husband’s corporation after the plaintiff garnished the lender and husband’s corporation did not honour the garnishment.
• The plaintiff then brought its action against husband’s corporation, husband, and wife claiming oppression and a constructive and resulting trust; it also sought to set aside, as fraudulent, the 1996 transfer of the matrimonial home.

Husband and wife brought a motion to strike the statement of claim. The motion judge dismissed the motion regarding the trust claims, but allowed the motion regarding the fraudulent conveyance claim. The judge concluded that the lender, and therefore the plaintiff, did not come within the class of persons contemplated by section 2 of the Act – holding that they were not “creditors or others” at the time of the 1996 matrimonial home transfer. She held that the statement of claim did not set out sufficient particulars of the allegations, such as the names of creditors, actual debts, or precarious financial position of husband at the time of the 1996 transfer.

The plaintiff appealed to the Ontario Court of Appeal.

The Act

Section 2 of the Act states the following:

Every conveyance of real property or personal property and every bond, suit, judgment and execution heretofore or hereafter made with intent to defeat, hinder, delay or defraud creditors or others of their just and lawful actions, suits, debts, accounts, damages, penalties or forfeitures are void as against such persons and their assigns.

The court held that the motion judge erred in both her interpretation and application of section 2 of the Act. Case law is clear that a subsequent creditor (i.e., a claimant who is not a creditor at the time of the transfer) can attack a transfer if the transfer was made with the intention to “defraud creditors generally, whether present or future.” Further, a plaintiff at the pleadings stage will not know who the settlor’s creditors were at the time of transfer. It is sufficient, therefore, to plead facts that support the allegation that “at the time of the conveyance the settlor perceived a risk of claims from a general class of future creditors and conveyed the property with the intention of defeating such creditors should they arise.”

In recognition of the difficulty of establishing by way of direct evidence what was in a debtor’s mind when making a transfer, the courts have defined a number of “badges of fraud,” that give rise to an inference of a subjective intent to defraud, including:

• the settlor continued in possession and continued to use the property as his or her own;
• the transaction was a secret;
• the transfer was made in the face of threatened legal proceedings;
• the transfer documents contained false statements as to consideration;
• the consideration was grossly inadequate;
• there was unusual haste in making the transfer;
• the settlor was embarking on a risky or hazardous venture;
• the settlor retained some benefit under the settlement; and
• a close relationship existed between parties to the conveyance (which is one of the more significant badges of fraud).

Proof of one or more badges of fraud will not compel a finding for a plaintiff, but it may raise a prima facie evidentiary case that the defendants would be prudent to rebut. To support a claim that a transfer was made with the general intent to defeat future creditors, a subsequent creditor need only plead sufficient badges of fraud to raise a suspicion that needs to be answered. This answer would be made by way of a defence, discoveries, and a trial.

Ruling

The motion judge had relied on an order in Wilfert v. McCallum 2017 ONCA 895 in concluding that the plaintiff had not set out sufficient particulars of the fraud. The court noted that the decision emanated from an appeal judge in chambers on a motion to stay a lower court’s decision pending appeal and merely restated a well-established rule that sufficient particulars had to be pleaded in a fraudulent conveyance action. The court held that, to the extent that the motion judge relied on this decision to hold that the plaintiff had not alleged sufficient particulars, the motion judge had erred.

The court referred to the allegations stated in the statement of claim and noted that they identify, with sufficient particularity, the facts that could support the inference of an intention to defraud future creditors. It noted that a pleadings motion is not a motion for summary judgment and whether badges of fraud are sufficient to establish the fraudulent intent is a matter to be established on the evidence led at trial. It was undoubtedly not plain and obvious that the claim was certain to fail and without that finding on a pleadings motion, the motion itself is certain to fail. The court allowed the appeal and dismissed the motion.

Consequence

There may be reasons to transfer an interest in land from, say, one spouse to another. For example, it may be made to settle a family dispute. However, if the reason for the transfer is to ensure that, down the road, the land is shielded from the settlor’s future creditors, that transfer can be attacked and, depending upon the facts involved and the badges of fraud proven, attacked successfully.

We expect that this consequence will be a surprise to many people, not just the lawyers who are attempting to collect on judgment debts, but also to lawyers and other professionals who, out of an abundance of caution, transferred their interests in their matrimonial homes to their spouses. And if you think that a transferor is home free if the land was initially taken in the name of the spouse, disabuse yourself of that notion. If one spouse puts up all the money to buy the matrimonial home and pays most, if not all, of the matrimonial home carrying costs, that has been held to be the equivalent of a fraudulent transfer.

Image courtesy of Schluesseldienst.

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