Legal Blog

Trust & Fraud

Debtors often try to stymie their creditors from seizing their assets in payment of their debts. The most prevalent means to do this is to transfer real property to a non-arm’s-length person. In that way, the debtor can enjoy the use of the property and keep it out of the hands of the creditors. Creditors can attack this transfer, known as a fraudulent conveyance, by way of the Fraudulent Conveyances Act (Ont) and the undervalue provisions (s. 96) of the Bankruptcy and Insolvency Act (BIA). Once a creditor proves that a debtor transferred the property for no or inadequate consideration, the transferee has very little ammunition left to fend off the attack. One defence is a claim that the debtor’s transfer was only made to return legal title to the transferee, which the debtor held by way of a trust, whether express, resulting, or constructive. That was the defence in E. Sands & Associates v. Gidda a 2025 Ontario Superior Court of Justice decision.

Scene Setting

On July 27, 2016, a creditor obtained a judgment against the bankrupt for $1.6 million. One week later, the bankrupt transferred his 50% interest in a property to his sister-in-law, seemingly for no consideration. Approximately three months later, the bankrupt assigned himself into bankruptcy.

The transfer appeared to fall within the ambit s. 96(1) of the BIA. This section allows the court to declare a transfer void against the trustee in bankruptcy if the transferee was not dealing at arm’s length with the bankrupt and the transfer occurred within one year of the date of the bankruptcy.

Rather than just pay up or settle up, the transferee fought the trustee. She claimed that the transfer was not one for no consideration; rather, the bankrupt had held his interest in the property in trust for her and he was merely transferring his interest to her as the beneficial owner. Of course, the moment that a transferee initiates a “trust” defence, the facts become all-important and the action takes on a life of its own. More about that when we discuss costs.

History

The transferee claimed that, in 2008, she was unable to qualify for mortgage financing and that the bankrupt agreed to be registered as a titled owner to the property to get favourable mortgage terms from a mortgagee. So far, so good. However, this defence failed to account for some very important facts:

• The transferee actually paid $126,000 towards the transaction. Accordingly, not only did this make the mortgage financing available, it also reduced the principal and the mortgage payments.
• The evidence showed that $126,000 was approximately one half of the net equity in the property.

Did this dissuade the transferee? Nope. She claimed that the money the bankrupt paid towards the transaction was merely the repayment of a $60,000 loan that the bankrupt had received from the transferee’s (now deceased) mother and that the mother had directed the bankrupt to repay the debt by paying the transferee. Accordingly, the transferee claimed that the bankrupt was holding his interest in the property for her according to an oral express trust. In the alternative, the transferee claimed that she was entitled to compensation because she paid the mortgage payments and property taxes, and maintained the property and that therefore there was a constructive trust in her favour. The reasons for decision were silent on this point, but we assume that the bankrupt never occupied the property.

Express Trust

The problem with the express trust argument was that the trust was oral. It therefore did not comply with the formal requirements of the Statute of Frauds which state that an express trust cannot be established orally; it must be in writing.

There was another problem. The transferee had to prove her contention that the bankrupt owed her mother $60,000 and was merely repaying that loan (to her) when he paid $126,000 during the financing. All the transferee had was hearsay evidence. The mother gave no evidence – because she was dead. No one else gave any evidence. In particular, the transferee did not call the bankrupt to give evidence. Nor did she provide any reasonable explanation for not doing so. That resulted in an adverse inference that the bankrupt’s evidence would not have been favourable to the transferee.

Constructive Trust

In order to establish a constructive trust (in essence, unjust enrichment), a purported beneficiary must prove three elements: the enrichment of the defendant, the corresponding deprivation of the plaintiff, and the absence of a juristic reason for the enrichment.

The judge held that the transferee’s payment of the household expenses and the minor repairs that she undertook to the property from 2008 to 2022 did not enrich the bankrupt. The transferee paid household expenses in the range of $900 to $1,300 per month to maintain a four-bedroom house in Vaughan. Her only substantial maintenance charges were the replacement of the roof and furnace. It seems that she paid approximately $1,000-$1,500 per month in expenses to pay the mortgage, utilities, and property taxes.

We are not sure from the reasons for decision whether these amounts are cumulative, but it does not much matter. The important point is that payment of these amounts did not in any way add to the value of the property, and if she had not continued to live at the property, she would have incurred living expenses elsewhere.

The trial judge therefore concluded that the bankrupt was not enriched because he paid fair market value for his interest in the property and the transferee suffered no deprivation. Accordingly, there was no constructive trust.

Costs

For ease of reading, we have simplified the facts somewhat. However, the work behind presenting facts to a judge is like an iceberg. One third is visible and two thirds are hidden. We know from experience that a tremendous amount of work is involved in showing that spurious trust claims are just that, spurious.

In this case, the judge awarded the trustee in bankruptcy its costs of the action on a partial indemnity basis, fixed at $97,500. The judge did indicate that if there were a rule 49 offer to settle, she was open to changing the costs award. Regardless whether there was a rule 49 offer, we think that the transferee got away easy. Once fraud is involved, many judges have ordered substantial indemnity costs.

Assuming that partial indemnity was approximately 60% of the total costs, the costs actually incurred would have been approximately $162,500. Someone who has not been involved in this type of action might think that this amount is excessive, but that would be wrong. We expect that it was proportionate to the defences that the transferee raised. Was it proportionate to the amount at stake? No doubt the property value had increased significantly over the nine years that it took to resolve this matter. The return of a 50% equity interest would have been worth far more than $126,000.

We do not know whether there were any offers to settle or any settlement discussions at all. We do know that a smart transferee, whose actions have been caught out, tries to settle the matter before it gets to trial. In this case, we suspect that the transferee was not so smart.

Image courtesy of TierraMallorca.

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