Transferring Property to a Spouse to Dodge Creditors may be seen as Fraudulent

Introduction

Business owners often take strategic financial steps to protect their assets. One common strategy is transferring their family home into their spouse's name to shield it from creditors. Employing legal asset protection strategies to safeguard your hard-earned wealth is crucial. However, engaging in fraudulent activities can have serious repercussions. To ensure the legitimacy of your transfers, maintaining complete transparency is essential. Your intentions, financial status, and transparency in the transfer process are crucial for a responsible and accountable approach. It's your responsibility to guarantee this transparency. While marriage involves supporting each other, aiding your spouse in evading creditors through fraudulent property transfers can lead to severe consequences, including legal issues that could impact your business and personal life.

Leading Case

In the case of Ontario Securities Commission v. Camerlengo Holdings Inc., a debtor planned in 1996 to protect his jointly held family home by transferring it to his wife to safeguard it from potential business debts. However, in 2011, the Ontario Securities Commission (OSC), a creditor, challenged this transfer. The debtor sought to dismiss the claim at the lower court, arguing that the property was transferred when he had no business liabilities. While he initially succeeded, the Ontario Court of Appeal (OCA) overturned the motion judge's decision. The OCA emphasized that a transfer designed to evade future debts could still be deemed a fraudulent conveyance under S.2 of the FCA. This case is a compelling cautionary tale, underscoring the potential legal ramifications of such actions and urging individuals to be vigilant in their financial decisions.

The Fraudulent Conveyances Act (FCA)

In Ontario, the FCA states that a fraudulent conveyance involves three elements:

1. Must be a conveyance - (any transfer of property)

2. Of the debtor's real or personal property,

3. Made to hinder, delay, or defraud creditors.

S. 2 of the FCA provides that conveyances of real or personal property made to defeat, hinder, delay or defraud creditors or others of their lawful action are void against such persons.

Badges of Fraud

The transferor's intention is determined by reviewing the circumstances of the transfer and considering what the courts have termed the "badges of fraud." Some of these indicators of fraud identified by the courts include:

1. The transfer was a general conveyance involving substantially all the transferor's property.

2. The transferor continued to possess and use the goods as their own, including selling them.

3. Secret conveyance without informing creditors.

4. The transfer was made during an ongoing legal process.

5. The transfer amounted to a trust of the goods.

6. The deed contained a self-serving and unusual provision claiming that the gift was made honestly, indeed, and bona fide.

7. The deed gave the transferor the power to revoke the conveyance.

8. The deed contained false statements about the consideration.

9. The consideration was grossly inadequate.

10. There was unusual haste in making the conveyance.

11. The settlor retained some benefits under the settlement.

12. Cash payment instead of a cheque.

13. A close relationship existed between the parties involved in the conveyance.

This list doesn't cover everything, and finding one or more of these signs of fraud doesn't always prove there was fraudulent intent. However, if there are several signs, it will be hard for the person who received the transfer to convince a court that it wasn't done fraudulently. On the other hand, if there are no signs of fraud, a trustee, creditor, or anyone else trying to challenge the transfer will generally have a tougher time proving that fraudulent intent existed.

New Case Development

In a recent case, 2270752 Ontario Inc. v. Century 21 New Star Realty Inc. 2024, the OCA found a husband's transfer of the matrimonial home to his wife fraudulent. The judge discovered that Baljit failed to return $600,000 obtained from the company for a joint venture to build a gas station that was never constructed. In anticipation of legal action, Baljit transferred the matrimonial home to his wife, Arvinder, for $2.00 through an interim separation agreement, which the judge ruled fraudulent.

As for the conveyance of the family home, the trial judge found multiple badges of fraud and that the appellants failed to rebut the evidence of fraudulent intent. Besides, Arvinder refused to produce her family law file, bank statements, and accounting records. Moreover, the interim separation agreement dealt only with the matrimonial home and debts, ignoring the issue of equalization in circumstances where Arvinder would have owed Baljit a substantial equalization payment. The trial judge found, further, that the exception for conveyances made for reasonable consideration, in good faith, to a person without knowledge of the transferor's intention did not apply. The court ruled this transfer fraudulent. The appellate court upheld the decision, dismissing the appeal and awarding the company (creditor) $15,000 in total costs.

Ontario's Assignments and Preferences Act (APA)

While the FCA applies only to fraudulent conveyances, Ontario's Assignments and Preferences Act (APA) enables a creditor to attack fraudulent conveyances and unjust preferences.

Attacking fraudulent conveyances under the APA

The APA and FCA have similar fraudulent conveyance provisions, but some differences exist. Under the APA, four elements must be present to attack a transaction as a fraudulent conveyance. The challenging party must prove that,

1. there must be a gift, conveyance, assignment, transfer, delivery, or payment.

2. Of real or personal property.

3. Made by a person when insolvent or unable to pay their debts in full or when the person knows that he, she, or it is "on the eve of insolvency.

4. Intending to defeat, hinder, delay, or prejudice creditors or any of them.

The APA does not explicitly define "insolvent" or "insolvency," so case law must be referenced. The rest of the APA's provisions are like those of the FCA.

APA Attacks Unjust Preference

SS. 4(2) APA requires a creditor to establish four elements of an unjust preference:

1. The debtor made a gift, conveyance, assignment, transfer, or payment.

2. The transfer was made when the debtor was in insolvent circumstances, unable to pay his, her, or its debts in full, or

3. With the knowledge that he, she, or it was on the eve of insolvency.

4. The transfer must have been made with the intent to give the transferee an unjust preference over other creditors.

Conclusion

As per Camerlengo's decision, a creditor under S.2 of the FCA includes current and potential future creditors. This ruling has significant implications for business owners who attempt to protect their assets from creditors by transferring them to their spouses without receiving anything in return or with minimal consideration. In such cases, future creditors may contest these transfers as fraudulent conveyances, especially if there are indications of fraud. The OCA decisions in the two cases we discussed clarified that an order under the FCA does not change the property's title. Still, it allows creditors to seize the property to satisfy the debts owed by the transferor. The FCA and the APA have been designed to ensure that business owners are held to high standards when protecting personal assets. FCA and APA mandate that the transferor intends to act with integrity and fairness during the property transfer. The courts have consistently aimed to maintain a fair and balanced environment for all parties involved in the Ontario business community.