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Fraud - Fraudulent Conveyance
MORE CASES
Part 2
. 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. . Bank of Montreal v. Iskenderov
In Bank of Montreal v. Iskenderov (Ont CA, 2023) the Court of Appeal, after allowing a preliminary limitations appeal issue that the Limitations Act (LA) applied to a fraudulent conveyance declaration rather than the RPLA, considered whether s.16 LA ["No limitation period"] applied on the argument that this "a proceeding for a declaration if no consequential relief is sought" [LA 16(1)(a)]:The two-year limitation period in the Limitations Act, 2002 applies to this action
[57] There are two provisions of the new Act that could apply to a fraudulent conveyance action, s. 16(1)(a) where there is no limitation period, and s. 4 which provides the two-year limitation period subject to discoverability.
[58] Section 16(1)(a) provides:(1) There is no limitation period in respect of,
(a) a proceeding for a declaration if no consequential relief is sought; [59] In paragraph 2 of the Statement of Claim, the respondent Bank asks for three orders: a declaration that the transfer of the subject property was a fraudulent conveyance, an order setting aside the conveyance and a certificate of pending litigation.
[60] In Perry, Farley & Onyschuk, this court stated that the FCA “provides for a declaratory type proceeding”: at para. 30. However, the declaration is only part of the remedy the court orders. First, the court must determine whether the transfer was fraudulent, that is, made by the debtor-transferor with the intent to defraud its creditors by putting the property into another person’s hands and beyond the creditors’ reach. The finding of fraudulent intent is made on evidence after a trial. As Newbury J.A. stated in Guthrie, the impugned transfer is actually “voidable”: at para. 19. It is declared void as against creditors based on findings of fact made by the court on disputed evidence. It is not a declaration of rights based on, for example, the meaning of words in a statute or bylaw.
[61] If the finding of fraud is made, the transfer becomes void and is so declared. Then there is an order to set aside the transfer as it affects creditors or others. As in this case, the declaration is just part of the required relief for the creditor to be able to obtain access to the property for execution purposes: see McGuire v. Ottawa Wine Vaults Co. (1913), 1913 CanLII 7 (SCC), 48 S.C.R. 44, at p. 56.
[62] In his text, The Law of Declaratory Judgments, 4th ed. (Toronto: Thomson Reuters, 2016), Professor Lazar Sarna explains the distinction between a remedial judgment and a declaration at p. 54:A distinction is made between a remedial judgment and a declaration. In those provinces where declaratory orders are excluded from limitations statutes or the purview of juries, the distinction is crucial. A remedial judgment carries within its own terms a solution for the cure of a dispute, be that an order to do or not to do, or more specifically, to pay, deliver over, seize, sell, dissolve, remove, or refrain. It is self-executing in the sense that the parties and the executing officer need no further direction or authorization that that contained in the judgment. A declaration confirms or denies the existence of a right, as if bearing witness to what has always been the legal relationship between the disputing parties. Put that way, it is an existential judgment that considers rights to be or not to be. [63] A fraudulent conveyance judgment is remedial. While it includes a declaration that a transfer is void, it also includes the consequence of that declaration, the remedy of setting aside the transfer as against creditors. Because the Bank seeks consequential relief, s. 16(1)(a) is not applicable.[7]
[64] That leaves the general two-year limitation period in s. 4 to bring a proceeding in respect of a claim, which is defined in s. 1 as “a claim to remedy an injury, loss or damage that occurred as a result of an act or omission”. Section 4 provides:Unless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered. [65] In a fraudulent conveyance action under the Fraudulent Conveyances Act, the loss is the loss of the property that was transferred as an exigible asset available to the creditor. The impugned act is the transfer with fraudulent intent. The remedy is the declaration that the transfer is void against creditors and the consequential setting aside of the conveyance as against the creditors.
[66] I conclude that the two-year limitation period applies, subject to discoverability. . Bank of Montreal v. Iskenderov
In Bank of Montreal v. Iskenderov (Ont CA, 2023) the Court of Appeal considered (and allowed) an appeal where the trial judge held that a ten-year s.4 ["Limitation where the subject interested"] RPLA limitation applied, rather than the general two-year limitations period:[1] The respondent bank, a creditor of Roufat Iskenderov, the appellant, sought to set aside as a fraudulent conveyance, Mr. Iskenderov’s transfer of his residence to his wife, the appellant, Elena Lazareva. The action was commenced more than two years but less than ten years after the transfer. The appellants’ position was that the claim was statute barred under the Limitations Act, 2002, S.O. 2002, c. 24, Sch. B, but the motion judge found that the ten-year limitation period under s. 4 of the Real Property Limitations Act, R.S.O. 1990, c. L.15 (“RPLA”), applied, and that the claim was brought in time and could proceed.
[2] That finding followed this court’s decision in Anisman v. Drabinsky, 2021 ONCA 120 (“Anisman (ONCA)”). On appeal, the appellants sought to argue that Anisman (ONCA) was not a binding authority of this court because full reasons were not given and it was wrong in law, and that this court should find that the two-year limitation period under the Limitations Act, 2002 applied to the subject action. The court heard the appeal with a five-judge panel in order to be able to fully address the legal issue of which limitation statute and which limitation period applies to an action to set aside a fraudulent conveyance of real property (a “fraudulent conveyance action”).
[3] For the reasons that follow, I would allow the appeal. Anisman (ONCA) was decided without the benefit of the relevant historical authority. The ten-year limitation period in s. 4 of the RPLA does not apply to an action to declare a fraudulent conveyance of real property void as against creditors under s. 2 of the Fraudulent Conveyances Act, R.S.O. 1990, c. F.29. Instead, the two-year limitation period from the date the claim was discovered under s. 4 of the Limitations Act, 2002 applies.
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[8] On issue one, the motion judge reviewed the conflicting case law in the Ontario Superior Court of Justice on the issue of which limitation period applies to a claim to set aside a transfer of real property as a fraudulent conveyance, but rejected the submission that he was not bound by this court’s decision in Anisman (ONCA) that the RPLA and not the Limitations Act, 2002 applies. He therefore found that the ten-year limitation period in the RPLA applies and the action was commenced well within that time.
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[12] The appellants raise three issues on the appeal: 1) Did the motion judge err in law by following Anisman (ONCA) for the principle that the RPLA ten-year limitation period rather than the Limitations Act, 2002 two-year limitation period applies to an action to declare a fraudulent conveyance of real property void as against creditors? .... The court extensively considers [at paras 13-56] the RPLA-Limitations Act competing issue, deciding that RPLA s.4 does not apply to fraudulent conveyances.
. Tibollo v Robinson
In Tibollo v Robinson (Div Court, 2023) the Divisional Court considered the application of fraudulent conveyance law:[14] The Fraudulent Conveyances Act, R.S.O. 1990, c. F.29 defines what is meant by the term “fraudulent conveyance” at s. 2:Every conveyance of real 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 other persons and their assigns. [15] The term, “creditor or others” is broad enough to contemplate a person who, while not a creditor at the time of the conveyance, may become one in the future. If the transferor had the intention to defraud when the conveyance was made, it does not matter whether it was to defeat present or future creditors: Indcondo Building Corp v. Sloan, 2014 ONSC 4018, 121 O.R. (3d) 160, at para. 48. . Ontario Securities Commission v. Camerlengo Holdings Inc.
In Ontario Securities Commission v. Camerlengo Holdings Inc. (Ont CA, 2023) the Court of Appeal considers the adequacy of pleadings for fraudulent conveyance:[13] As stated in Cambone v. Okoakih, 2016 ONSC 79, 67 R.P.R. (5th) 305, at para. 180, “[p]roof of one or more badges of fraud will not compel a finding for the plaintiff but it may raise a prima facie evidentiary case which it would be prudent for the defendant 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. A pleadings motion is not a motion for summary judgment. Whether the badges of fraud are in fact sufficient to establish the fraudulent intent is a matter to be established on the evidence led at trial: Lad v. Marcos, 2020 ONSC 6215, at para. 93.
[14] In this case, the OSC pleaded the following facts which, if established on the evidence, would together provide some support for the allegation that the conveyance was made with the intention of fraudulently defeating future creditors:i) Fred conveyed the property to his wife;
ii) No consideration was paid for the transfer;
iii) The transfer was made after 16 years of joint ownership;
iv) The transfer was made 4.5 months after Fred and his business partner incorporated Gridd;
v) The transfer was made at the same time and using the same lawyer that Fred’s business partner used to transfer his family home to his wife;
vi) The transfer was made at a time when Fred and his wife were concerned about exposure to personal liability from Fred’s “rapidly expanding electrical contracting business that started bidding on, and working on, million dollar high-risk projects”.
vii) Fred continued to treat the property as his own. He not only continued to live there, but caused his wife to mortgage the property multiple times for the benefit of his corporations. He paid all costs and expenses related to the property and gave personal guarantees for the mortgage obligations. [15] The pleadings identify, with sufficient particularity, the facts that could support the inference of an intention to defraud future creditors, including the general class of creditors – creditors arising out of Fred’s electrical contracting business, which was poised to bid on much larger contracts than had previously been the case. To the extent that the motion judge relied on Wilfert as holding to the contrary, the motion judge was in error. Wilfert is the decision of a chambers judge on a stay motion that simply re-iterates the well established rule that there must be sufficient particulars in a pleading of a fraudulent conveyance.
[16] On a rule 21.01(1) motion “a pleading will only be struck if it is ‘plain and obvious’ that the claim is certain to fail because it contains a radical defect. A claim must be permitted to proceed to trial if there is even a faint chance of success”: Lad, at para. 40. The pleaded facts recited above, which the court is required to accept as true, were sufficient to defeat the rule 21.01(1) motion, and the motion judge erred in striking the claim with respect to the conveyance of the property. . Ontario Securities Commission v. Camerlengo Holdings Inc.
In Ontario Securities Commission v. Camerlengo Holdings Inc. (Ont CA, 2023) the Court of Appeal agrees that a subsequent creditor can attack of prior fraudulent conveyance transaction - that is, that an anticipatory fraudulent conveyance was not immune only because the fraud was not yet 'ripe' [my term] at the time of the fraudulent transaction:[11] We agree that the motion judge did not correctly interpret or apply s. 2 of the FCA. The case law interpreting s. 2 of the FCA is clear that a subsequent creditor – that is, a claimant who was 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.”: IAMGOLD Ltd. v. Rosenfeld, [1998] O.J. No. 4690, at para. 11; see also McGuire v. Ottawa Wine Vaults Co. (1913), 1913 CanLII 7 (SCC), 48 S.C.R. 44. An intent to defraud creditors generally can be made manifest by taking steps to judgment proof oneself in anticipation of starting a new business venture. To plead a fraudulent conveyance on this basis, it is not necessary that a claimant be able to identify a particular, ascertainable creditor that the debtor sought to defeat at the time of the conveyance. It is enough, on the case law, 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. The types of facts that can support an inference of such an intention to convey property away from creditors – present or future – are often described as “badges of fraud”.
[12] A useful catalogue of badges of fraud identified in the case law is provided in Paul M. Perell, “A Pragmatic Approach to Fraudulent Conveyances”, (2005) 30:3 Advoc. Q. 373, at pp. 391-92:. the debtor's financial state at the time of the transaction was precarious, including deficiencies in income, assets, solvency, and an inability to pay debts;
. the existence of a family or close relationship between the parties to the transaction;
. the transfer effectively divested the debtor of a substantial portion or all of his or her assets;
. the transfer had the effect of defeating, hindering, delaying, or defrauding creditors;
. there was evidence of haste in making the transaction;
. there was evidence of secrecy, fabrication, falsehood, destruction or loss of documents, or suspicious circumstances in the making of the transaction;
. the transaction occurred near in time to notice of debts or claims against the debtor;
. the consideration for the transfer did not correspond to the value of the property;
. the absence of a business purpose or other justification for the transaction;
. the transferor retained possession or use of the property;
. the transferor retained a benefit or an ownership interest in the property. [13] As stated in Cambone v. Okoakih, 2016 ONSC 79, 67 R.P.R. (5th) 305, at para. 180, “[p]roof of one or more badges of fraud will not compel a finding for the plaintiff but it may raise a prima facie evidentiary case which it would be prudent for the defendant 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. A pleadings motion is not a motion for summary judgment. Whether the badges of fraud are in fact sufficient to establish the fraudulent intent is a matter to be established on the evidence led at trial: Lad v. Marcos, 2020 ONSC 6215, at para. 93. . Stevens v. Hutchens
In Stevens v. Hutchens (Ont CA, 2022) the Court of Appeal dismissed an appeal from an order that declared several mortgages void under the Fraudulent Conveyances Act:[8] The motion judge found that the mortgages were void under two statutes: they constituted fraudulent conveyances under s. 2 of the Fraudulent Conveyances Act, R.S.O. 1990, c. F.29 (the “FCA”) and were made with the intent to defeat creditors and were an unjust preference under ss. 4(1) and 4(2) of the Assignments and Preferences Act, R.S.O. 1990, c. A.33 (the “APA”).
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[12] Sections 2, 3, and 7(2) of the FCA are relevant to this appeal: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.
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 the conveyance to the person notice or knowledge of the intent set forth in that section.
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7. (2) No lawful mortgage made in good faith, and without fraud or covin, and upon good consideration shall be impeached or impaired by force of this Act, but it has the like force and effect as if this Act had not been passed. [Emphasis added.] ....
[16] The appellant argues that, properly interpreted, s. 2 of the FCA requires the mortgagor corporations to have made the mortgages with the intent to defeat creditors or prospective creditors of the mortgagor corporations and that there was no evidence that the mortgagor corporations had creditors or prospective creditors other than the appellant. Hence, the mortgages were not made to defeat “creditors or others” within the meaning of s. 2 of the FCA. In other words, in this context, “creditors or others” means a creditor or prospective creditor of the mortgagor corporation, and the respondents (and the Colorado plaintiffs) were creditors of the Hutchens, not the mortgagor corporations.
[17] We reject this argument. The appellant construes s. 2 of the FCA too narrowly and ignores the substance of what occurred.
[18] The FCA, which is couched in very general terms, is clearly remedial in nature and should be given a fair, large, and liberal interpretation that best achieves its purpose, namely to strike down all conveyances of property made with the intention of delaying, hindering, or defrauding creditors and others except for conveyances made for good consideration and bona fide to persons not having notice of such fraud: Royal Bank of Canada v. North American Life Assurance Co., 1996 CanLII 219 (SCC), [1996] 1 S.C.R. 325, at p. 365.
[19] Tanya Hutchens was the sole shareholder or “principal” of the mortgagor corporations. The receiver’s investigative report found that to a significant extent, payments from the mortgage financing fraud were used to acquire or refinance the mortgaged properties. After Tanya Hutchens was found by two courts to be a fraudster, she granted (“made” in the language of s. 2 of the FCA) the mortgages in her capacity as sole shareholder of the mortgagor corporations. The terms of the mortgages stated that the charges were given as security for payment of outstanding and future legal fees owing to the appellant related to or associated with the principals of the mortgagor corporations. Both the respondents and the Colorado plaintiffs are creditors of Tanya Hutchens. Tanya Hutchens caused the mortgages to be granted as security for, among other liabilities, her liabilities to the appellant. She treated the properties registered in the name of the mortgagor corporations as her own.
[20] Section 2 of the FCA focuses on whether the conveyance was made with the intent of defeating creditors or others, and, as discussed below, the motion judge found that the mortgages were granted with the intent of defeating the respondents and the Colorado plaintiffs.
[21] Even if one interprets s. 2 in the manner urged by the appellant (that is, by requiring that the mortgagor corporations have made the mortgages with the intent of defeating their “creditors or others”), its argument fails. It argues that the meaning of “others” is restricted to prospective creditors of the mortgagor corporations. The appellant is correct that “others” has been interpreted as including prospective creditors of the debtor: Indcondo Building Corp. v. Sloan, 2014 ONSC 4018, 121 O.R. (3d) 160, at para 45; Mohammed v. Makhlouta, 2020 ONSC 7494, at para. 45. But in our view, “others” could also include creditors of the mortgagor corporation’s sole principal, in circumstances such as this where all or some of the money used to purchase the mortgaged properties came from the defrauded creditors of the principal, and where the principal caused the mortgages to be granted and did so with the intention of defeating her creditors. . Lawyers’ Professional Indemnity Company v. Mangat
In Lawyers’ Professional Indemnity Company v. Mangat (Div Ct, 2022) the Divisional Court considered (and granted) the costs of a separate fraudulent conveyance proceeding as compensable enforcement costs on a judgment:[40] The fraudulent conveyances action was commenced after LawPro had been unsuccessful in its other attempts to enforce the judgment. On the evidence, it was initiated for the very purpose of recovering payment of its judgment. Thus, as a matter of fact, LawPro used the fraudulent conveyances action as an enforcement tool and it appears to have been effective - the action was commenced in April 2017 and in August 2017, the Mangats satisfied the judgment. In these circumstances, I find that the costs of the fraudulent conveyance action were incidental to the enforcement of LawPro’s judgment obtained in the original action against Malkit. I would, therefore, award costs of the fraudulent conveyances action against him as costs of the enforcement of the judgment in this action. . Midland Resources Holding Limited v. Bokserman
In Midland Resources Holding Limited v. Bokserman (Ont CA, 2022) the Court of Appeal considered the law of fraudulent conveyance:[11] In Purcaru v. Seliverstova, 2016 ONCA 610, 80 R.F.L. (7th) 28, at para. 5, this court held that a plaintiff challenging a transaction as fraudulent has the burden of proving “on the balance of probabilities that a conveyance was made with the intent to ‘defeat, hinder, delay or defraud creditors or others’, within the meaning” of s. 2 of the Fraudulent Conveyances Act, R.S.O. 1990, c. F.29. If the plaintiff establishes, however, that the transaction is tainted by one or more “badges of fraud” that could “give rise to an inference of an intent to defraud, the evidential burden then falls on those defending the transaction to adduce evidence showing the absence of fraudulent intent”: para. 5. Badges of fraud may include such matters as non-arms length transactions or transactions without consideration: para. 6. Here the defendants conceded that there were “badges of fraud” which were associated with the transfer of property to Krasnov alone. . Palkowski v. Ivancic
In Palkowski v. Ivancic (Ont CA, 2016) the Court of Appeal upheld a trial level finding of unjust enrichment against parties who had entered into a real estate conveyance to avoid creditors. The court held that there was no juristic reason for the resulting enrichment and deprivation, since the transaction was a 'sham':[8] The trial judge found that the appellant had been enriched and that there was a corresponding deprivation on the part of the respondents. He concluded that there was no juristic cause to justify the enrichment. The appellant submits that in this respect the trial judge erred because the existence of a contract can constitute a juristic reason for an enrichment. (See: Garland v. Consumers’ Gas Co. 2004 SCC 25 (CanLII)). The existence of the agreement of purchase and sale, they argue, constitutes an absolute bar to a claim for unjust enrichment.
[9] This submission ignores the trial judge’s unchallenged finding with respect to the agreement of purchase and sale. The trial judge found that the agreement was a “sham” transaction. Thus, as between the appellant and respondent, there was no contract to bar the claim for unjust enrichment.
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