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Fraud - 'Badges of Fraud'. Aquino v. Bondfield Construction Co.
In Aquino v. Bondfield Construction Co. (SCC, 2024) the Supreme Court of Canada considers the evidentiary status of 'badges of fraud', here in an insolvency context:[43] Section 96(1)(b)(ii)(B) of the BIA requires the party seeking to reverse a transfer at undervalue to prove the debtor’s intent to defraud, defeat, or delay a creditor. This is a question of fact to be decided based on all the circumstances that existed at the time of the transfer (Urbancorp, at para. 53; Montor Business Corp. (Trustee of) v. Goldfinger, 2016 ONCA 406, 36 C.B.R. (6th) 169 (“Montor CA”), at para. 72).
[44] Because it is often difficult to adduce evidence of a debtor’s subjective intent, the intent requirement is often proved through the evidentiary shortcut of badges of fraud. Badges of fraud are suspicious circumstances from which a court may infer the debtor’s intent to defraud, defeat, or delay a creditor (Urbancorp, at para. 52; Montor CA, at para. 72; Wood (2018), at p. 24). The badges of fraud approach to inferring a debtor’s intent to defraud creditors is of ancient vintage, dating back to Twyne’s Case in 1601 (Wood (2018), at p. 24; Twyne’s Case (1601), 3 Co. Rep. 80b, 76 E.R. 809).
[45] Case law has recognized the following non-exhaustive examples of badges of fraud: (a) the debtor had few remaining assets after the transfer; (b) the transfer was made to a non-arm’s length party; (c) the debtor was facing actual or potential liabilities, was insolvent, or was about to enter a risky undertaking; (d) the consideration for the transaction was grossly inadequate; (e) the debtor remained in possession of the property for their own use after the transfer; (f) the deed of transfer had a self-serving and unusual provision; (g) the transfer was secret; (h) the transfer was made with unusual haste; and (i) the transaction was made despite an outstanding judgment against the debtor (Montor CA, at para. 73; see also Wood (2018), at p. 24; Wood (2015), at pp. 223-25 (in the fraudulent conveyance context)).
[46] A badge of fraud must be considered in the context of the surrounding circumstances and in relation to the question of the debtor’s intention at the time of the transfer (Urbancorp, at para. 65). A court must avoid analyzing the debtor’s actions with the benefit of hindsight; it “must resist the temptation to inject back into the circumstances surrounding the impugned transaction knowledge about how events unfolded after that time” (Montor Business Corp. (Trustee of) v. Goldfinger, 2013 ONSC 6635, 8 C.B.R. (6th) 200, at para. 272, aff’d 2016 ONCA 406, 36 C.B.R. (6th) 169). The presence of one or more badges of fraud does not require the court to infer an intent to defraud, defeat, or delay a creditor, nor does the absence of a particular badge of fraud prevent the court from inferring this intent (Urbancorp, at paras. 53 and 55; Montor CA, at para. 72; see also Wood (2018), at pp. 24-25).
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[50] I would not give effect to this submission. The application judge did not misapply the badges of fraud approach to inferring fraudulent intent. It is no answer to an application under s. 96(1)(b)(ii)(B) of the BIA to say that the debtor was not insolvent and was paying its creditors in full and on time at the time of the transfers. The BIA is clear that insolvency is not a prerequisite to finding a debtor intended to defraud, defeat, or delay a creditor. Section 96(1)(b)(ii) is disjunctive: the debtor must either be insolvent at the time of the transfer (s. 96(1)(b)(ii)(A)) or intend to defraud, defeat, or delay a creditor (s. 96(1)(b)(ii)(B)). The appellants’ argument would effectively introduce an insolvency requirement into the latter provision, contrary to Parliament’s decision not to do so.
[51] The appellants’ argument would also give a potentially determinative role to one factor, namely, the debtor’s financial condition at the time of the transfer. Although the debtor’s financial condition at the time of the transfer is one badge of fraud that may be relevant in inferring an intent to defraud, defeat, or delay a creditor (Urbancorp, at para. 64), whether that intent exists must be determined based on all the circumstances. Again, the presence of a particular badge of fraud does not require a court to infer an intent to defraud, defeat, or delay a creditor, nor does the absence of a particular badge of fraud require the court to refrain from inferring that intent (Urbancorp, at paras. 53 and 55; Montor CA, at para. 72). A court may find that a debtor intended to defraud, defeat, or delay a creditor under s. 96(1)(b)(ii)(B) even if the debtor was not insolvent at the time of the transfer at undervalue. . 6071376 Canada Inc. v. Khedmatgozar
In 6071376 Canada Inc. v. Khedmatgozar (Ont CA, 2024) the Ontario Court of Appeal considered a case of fraudulent conveyance, here focussing on 'badges of fraud':[9] As Laskin J.A. explained in FL Receivables Trust 2002-A v. Cobrand Foods Ltd., 2007 ONCA 425, 85 O.R. (3d) 561, at paras. 39-40:The crucial question in any fraudulent conveyance action is whether the plaintiff has proved the fraudulent intent of the debtor. While the legal burden to prove fraudulent intent remains on the plaintiff throughout the trial, the plaintiff can raise an inference of fraud sufficient to put a "burden of explanation" on the defendant debtor. The plaintiff typically raises an inference of fraud by putting forward "badges of fraud". These "badges of fraud" vary from case to case. They are no more than typical and suspicious facts that may allow the court to make a finding of fraud absent an explanation from the debtor. See C.R.B. Dunlop, Creditor-Debtor Law in Canada, 2nd ed. (Toronto: Thomson Canada, 1995) at 613-15.
The court, however, is not compelled to draw this inference of fraudulent intent from badges of fraud pleaded by the plaintiff. See Koop v. Smith (1915), 1915 CanLII 26 (SCC), 51 S.C.R. 554, at pp. 558-59. The court may dismiss a fraudulent conveyance action because it has decided that the surrounding circumstances taken as a whole explain away the plaintiff's evidence. [10] To the same effect, as noted in in Montor Business Corporation v. Goldfinger, 2016 ONCA 406, 351 O.A.C. 241, at para. 72, leave to appeal refused [2016] S.C.C.A. No. 361:An inference of intent may arise from the existence of one or more badges of fraud. However, the presence of such indicia does not mandate a finding of intent. Whether the intent exists is a question of fact to be determined from all of the circumstances as they existed at the time of the conveyance: see Re Fancy (1984), 1984 CanLII 2031 (ON SC), 46 O.R. (2d) 153 (H. Ct. J.), at p. 159.
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