“A spouse can become a creditor of the other spouse. In Stone v. Stone, 2001 CanLII 24110 (C.A.), Feldman J.A. rejects the proposition that spouses are in a constant debtor-creditor relationship but instead, sets out at para. 26 five triggering events where one spouse becomes a creditor when that spouse has the lesser net family property and is entitled to one-half the difference: “(1) the date of separation with no reasonable prospect of resuming co-habitation; (2) the date of divorce; (3) the date of declaration of nullity; (4) the date one of the spouses commences an application under s. 5(3) of the Family Law Act for improvident depletion of net family property, if the application is granted; and (5) the date before the death of the spouse with the greater net family property.”
“A spouse has standing to allege a fraudulent conveyance where they had an existing claim at the time of the impugned transaction” and “the spouse can initiate a claim after the fact where the transfers were kept secret from them” (Kimmel, J. in Habibi v. Aarabi, 2021 ONSC 5574 at para. 55, leave to appeal dismissed: 2021 ONSC 6586).
The legal framework of fraudulent conveyances was explained by Myers J. in Purcaru v. Seliverstova et al., 2015 ONSC 6679 at para. 10, affirmed by the Court of Appeal in 2016 ONCA 610,
…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. 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. 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, R.S.O. 1990, c.A-33 allows the creditors to execute against proceeds received by the transferee.
The Fraudulent Conveyances Act, R.S.O. 1990, c. F. 29, sections 2, 3, and 4 provide,
Where conveyances void as against creditors
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- 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.
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Where s. 2 does not apply
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- 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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Where s. 2 applies
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- Section 2 applies to every conveyance executed with the intent set forth in that section despite the fact that it was executed upon a valuable consideration and with the intention, as between the parties to it, of actually transferring to and for the benefit of the transferee the interest expressed to be thereby transferred, unless it is protected under section 3 by reason of good faith and want of notice or knowledge on the part of the purchaser.
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Myers J. further explains at paras. 11 and 12,
…Therefore, the law provides that the court can infer the existence of a transferor’s fraudulent intention to defeat or delay creditors where there are recognized “badges of fraud” associated with a transaction. The badges of fraud are facts or fact patterns that courts have held to be indicative of fraudulent transactions. Facts such as: secrecy, transfer of property when an action or execution is pending, transfer of property to non-arm’s-length parties, transfers made with undue haste, and transfers for a conspicuously insufficient price, are all recognized examples of badges of fraud. There are others such as the breach of family law orders requiring a party to preserve his or her assets pending a trial. If the court draws the inference of fraudulent intent due to the existence of badges of fraud, then an evidentiary burden will fall to the respondents to explain their conduct to try to rebut the inference of fraudulent intent. Of course, the ultimate persuasive burden remains on the applicant throughout. A&B Landscaping & Interlocking Ltd. v. Bradsil, 1993 CarswellOnt 664 (Ont. Ct. Gen. Div.) at para 69. Business Development Bank of Canada v. Samarsky, [2012] ONSC 3002 at para 15. Conte Estate v. Allessandro, [2002] O.J. No. 5080 at para 21 and 22.
The statute and the case law interpreting it also provide that where a purchaser or transferee has paid for property, it is not enough to prove that the seller had a fraudulent intention. Rather, to set aside a transaction where a buyer has paid for property, the applicant must also prove that by participating in the transaction the buyer too intended to defeat or delay the creditors of the seller.
B.W. Miller, J.A. for the Court of Appeal confirmed that that the evidential burden first falls on the challenger and then those defending the transaction. B.W. Miller, J.A. held at para. 5,
If a challenger raises evidence of one or more ‘badges of fraud’ that can 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 (Re Fancy, (1984), 1984 CanLII 2031 (ON SC), 46 O.R. (2d) 153 (H.C.J.)), Nuove Ceramiche Ricchetti S.p.A. v. Mastrogiovanni, [1988] O.J. No. 2569 (H.C.J.), pp. 4, 5).
also prove that by participating in the transaction the buyer too intended to defeat or delay the creditors of the seller.
Where there is a fraudulent conveyance that is void against a creditor, the transferee of the property becomes a trustee for the creditor and the property may be traced in a subsequent transfer and proceeds of sale. Wilson J. explained in Tsui-Wong v. Xiao, 2018 ONSC 3315 at paras. 252 to 254, affirmed by the Court of Appeal in 2019 ONCA 756,
A fraudulent conveyance is void against creditors of the debtor. The transferee of the property becomes a trustee for the creditor, and the creditor can remain entitled to the property. Where the transferee has sold the property to a bona fide purchaser, the creditor’s remedy is the proceeds of the sale.
As the Ontario Court of Appeal stated in Allen v. Hennessey (1997), 1997 CanLII 1182 (ON CA), 107 O.A.C. 69, at para. 5:
…A creditor is entitled to invoke the Fraudulent Conveyances Act to recover the proceeds of a conveyance void under the statute from a fraudulent transferee. The fraudulent transferee is and bears all the liability of a trustee of the property or its proceeds for the benefit of creditors. As this court stated in Westinghouse Canada Ltd. v. Buchar (1975), 1975 CanLII 638 (ON CA), 9 O.R. (2d) 137 (Ont. C.A.), at 141:
A remedial statute for the protection of creditors’ rights should receive a fair, large and liberal interpretation to ensure the attainment of its objects; the plain intention of the statutes [the Fraudulent Conveyances Act and Assignments and Preferences Act] to be read together is to constitute the fraudulent transferee a trustee of the proceeds replacing the land, for the benefit of the defrauded creditors.
With respect to tracing, when a conveyance is void under the Fraudulent Conveyances Act, the Court of Appeal held in Westinghouse Canada Ltd. v. Buchar (1975), 1975 CanLII 638 (ON CA), 9 O.R. (2d) 137 (C.A.), that the tracing provisions in s. 12 of the Assignments and Preferences Act, R.S.O. 1990, c. A.33 are available.
The Assignments and Preferences Act, R.S.O. 1990, c. A. 33, s. 12 (1) and (2) provide that if the transferred property has been disposed of prior to the transaction being declared void, a creditor may seize the proceeds:
Following proceeds of property fraudulently transferred
12 (1) In the case of a gift, conveyance, assignment or transfer of any property, real or personal, that is invalid against creditors, if the person to whom the gift, conveyance, assignment or transfer was made has sold or disposed of, realized or collected the property or any part thereof, the money or other proceeds may be seized or recovered in an action by a person who would be entitled to seize and recover the property if it had remained in the possession or control of the debtor or of the person to whom the gift, conveyance, transfer, delivery or payment was made, and such right to seize and recover belongs not only to an assignee for the general benefit of the creditors of the debtor but, where there is no such assignment, to all creditors of the debtor.
Taking proceeds under execution
(2) Where there is no assignment for the benefit of creditors and the proceeds are of such a character as to be sizeable under execution, they may be seized under the execution of any creditor and are subject to the Creditors’ Relief Act, 2010. R.S.O. 1990, c. A.33, s. 12 (2); 2010, c. 16, Sched. 4, s. 23 (1).
Furthermore, the Family Law Act, s.12 gives the court authority to make an order for the possession, delivering up, safekeeping, and preservation of property if the court considers it necessary to protect the other spouse’s interest. In Bronfman v. Bronfman (2000) 2000 CanLII 22710 (ON SC), 51 O.R. (3d) 336, Sachs J. explained the provision at paras. 18 and 19,
[18] Section 12 has been used by the courts in two ways:
(a) to place an onus on a spouse who has been required to preserve assets, to account for his or her assets at the date of trial, and
(b) to restrain a person’s conduct with respect to his or her property.
[19] The purpose of s. 12 is to ensure that if the court does determine that an equalization payment is owing, there are sufficient assets available to satisfy that payment (Lasch v. Lasch (1988), 1988 CanLII 4581 (ON SC), 64 O.R. (2d) 464, 13 R.F.L. (3d) 434 (H.C.J.)). While preservation orders are frequently made, the reported case law that discusses what criteria must be satisfied before they are granted is limited.
Sachs J. at para. 28 then set out the factors that courts consider in dealing with an interim order,
(a) The relative strength of the plaintiff’s case;
(b) The balance of convenience (or inconvenience); and
(c) Irreparable harm.”
