Primer on Fraudulent Conveyance Claims

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is a litigation lawyer practicing at Perley-Robertson, Hill & McDougall LLP in Ottawa, Ontario. He may be reached at 613.566.2823 or obourns@perlaw.ca.

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The Fraudulent Conveyances Act provides that the court can declare a transfer of property void if the intention of the person who made the transfer was to defeat or delay his or her creditors. [1]  This can happen where an individual is attempting to hide assets from a creditor or ex-spouse.

The statute is designed to stop a debtor from hiding assets from creditors by fraudulently transferring the assets to another person.  If it is applicable, an Order under the statute makes property that was fraudulently conveyed available for execution on behalf of the creditors of the transferor.[2]

In addition, if the transferred property has been disposed of prior to the transaction being declared void, s.12 of the Assignments and Preferences Act allows the creditors to execute against proceeds received by the transferee.[3]

The relevant provisions of the FCA are sections 2 and 3, which state:

Where conveyances void as against creditors

2.  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. [emphasis added]

Where s. 2 does not apply

3.  Section 2 does not apply to an estate or interest in real property or personal property conveyed upon good consideration and in good faith to a person not having at the time of conveyance to the person notice or knowledge of the intent set forth in that section.

Therefore, to set aside a fraudulent conveyance under the FCA, a creditor must prove three elements:

  1. The debtor made a “conveyance”, as defined in the FCA;
  2. The debtor conveyed real or personal property; and
  3. Either:
    1. There was no valuable consideration, in which case the creditor must show that the debtor intended to defeat his/her creditors or others; or
    2. There was valuable consideration, but the debtor and the transferee did not act in good faith and the transferee had knowledge or notice of the debtor’s intention to defeat his/her creditors.

The term “conveyance” is broadly defined and includes a “gift, grant, alienation, bargain, charge, encumbrance, limitation of use or uses of, in, to or out of real property and personal property by writing or otherwise”.[4]

Burden of Proof & Badges of Fraud

In an action to set aside a fraudulent conveyance, the burden of proof is on the plaintiff.  The main hurdle that a creditor often faces in setting aside a fraudulent conveyance is proving that the debtor intended to defeat his/her creditors.  However, the plaintiff may raise “badges of fraud” – suspicious circumstances surrounding the conveyance that support an inference of fraudulent intent – that shifts the evidentiary burden to the debtor to rebut a presumption of fraud.  The presence of any badges of fraud shifts the evidentiary burden to the debtor to rebut a presumption of fraud.[5]

The badges of fraud are derived from Twyne’s Case (1601) 76 E.R. 809.  As interpreted by modern courts, the badges of fraud include:[6]

  1. the donor continued in possession and continued to use the property as his own;
  2. the transaction was secret;
  3. the transfer was made in the face of threatened legal proceedings;
  4. the transfer documents contained false statements as to consideration;
  5. the consideration is grossly inadequate;
  6. there is unusual haste in making the transfer;
  7. some benefit is retained under the settlement by the settlor;
  8. embarking on a hazardous venture;
  9. a close relationship exists between parties to the conveyance; and
  10. loss of documents evidencing the transaction;
  11. the debtor’s continued involvement with the transferee; and
  12. the debtor kept the power to revoke the conveyance.

The presence of any one or more of the above circumstances gives rise to an inference of fraudulent intent.  If there are several badges of fraud, the Court will often conclude that the debtor intended to defeat the rights of his/her creditors.

As stated in Pucaru v. Seliverstova:[7]

[W]here a person transfers property for no consideration, only the intention of the transferor is considered under s.2 of the statute.  The transferor’s intention to defraud creditors may be inferred upon proof that the transaction occurred in conjunction with one or more badges of fraud.   In that case, an evidentiary burden to support the bona fides of the transaction will fall upon the respondents. [emphasis added]

Further:[8]

Where the impugned transaction was, as here, between close relatives under suspicious circumstances, it is prudent for the court to require that the debtor’s evidence on bona fides be corroborated by reliable independent evidence. [emphasis added]

Remedies where Fraudulent Conveyance is Found

If judgment is granted in favour of the creditor, the Court will declare the transfer void against the creditor and re-vest the property in the name of the debtor as though the transfer had not taken place.

In McGuire v. Ottawa Wine Vaults Co, the Supreme Court of Canada stated: “In actions such as this [alleging a fraudulent conveyance], the relief granted is properly confined to setting aside the impeached conveyance, thus removing it as an obstacle to the creditor’s recovery under executions against their [sic] debtor”.[9]   It is not appropriate to grant judgment against the transferees in favour of the creditor.[10]  However, the property may then be seized and sold under a writ.

As stated in Conde v. Ripley et al.:[11]

In many ways, an FCA action can be likened to a class proceeding.  The outcome of such an action is neither a conveyance of the subject land to the plaintiff nor even a money judgment against the transferee in favour of the plaintiff.  Rather, the conveyance is deemed void as against “creditors or others” with the result that whatever remedies that the creditor may have exercised as against the transferor’s property may similarly be asserted against the subject property as if the transfer had never occurred because – as against “creditors or others” least – the transfer is void. [emphasis added]

A creditor has the right to have a writ of seizure and sale issued by the registrar if the Order sought to be enforced is for the payment or recovery of money.[12]  Once issued, the writ can be deposited with the sheriff in any county where the debtor has assets and can be filed in a Land Titles Office where the debtor owns land.[13]

[1] Fraudulent Conveyances Act, RSO 1990, c F.29 [FCA].

[2] Purcaru v. Seliverstova et al., (2015) ONSC 6679 (Ont. S.C.J.) at para 10 [“Purcaru”]

[3] Assignments and Preferences Act, R.S.O. 1990, c.A-33 at s.12

[4] FCA at s. 1

[5] Cambone v Okoakih, 2016 ONSC 792 (Ont. S.C.J.) at para 181. [“Cambone”]

[6] Cambone at para 180 & Frank Bennett, Bennett on Creditors’ and Debtors’ Rights and Remedies, 5th ed. (Toronto: Thomson Carswell, 2006) at 92.

[7] Purcaru, supra note 2 at para 99.

[8] Purcaru, supra note 2 at para 100 citing Re Fancy (1984), 1984 CanLII 2031 (ON SC), 51 C.B.R. (N.S.) 29.

[9] McGuire v. Ottawa Wine Vaults Co, (1913) 48 SCR 44 (S.C.C.) at p. 56.

[10] Bank of Montreal v. Cyr (1985), 61 NBR (2d) 283 (NBCA) at para 20.

[11] Purcaru, supra note 2 at para 114 citing Conde v. Ripley et al., (2015) ONSC 3342 (Ont. S.C.J.) at para 29.

[12] Meehan, supra note 4 at 247.

[13] Meehan, supra note 4 at 247.

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