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The Fraudulent Conveyances Act restricts parties from defeating creditors’ rights by conducting fraudulent transactions. This may arise in family cases where one spouse tries to divest themselves of property to defeat an equalization claim. In those circumstances, spouses could be “creditors” to seek a remedy from a fraudulent conveyance. Courts have also found that a fraudulent conveyance could occur before a separation if the spouse anticipated a separation when they executed the conveyance. As one recent case shows, this can require courts to consider the state of the parties’ relationship leading up to a separation.
Applicant Alleges Sale Was a Fraudulent Transaction
Shokoufimoghiman v. Bozorgi involved a dispute between two spouses who were married. The applicant added her husband’s brother as a party to her proceeding, and he, in turn, brought a motion for a summary judgement to dismiss her claims and be removed as a party. The dispute centred on the sale of the husband’s company. The applicant had established a company and subsequently transferred ownership to her husband. In January 2020, the husband sold the company to his brother. The applicant argued this sale was carried out so the husband could avoid financial liability in their imminent separation. She also claimed that the transaction was a fraudulent conveyance and that her husband continued to hold a beneficial interest in the company that was subject to equalization.
Under the Family Law Rules, a party can seek summary judgement by showing that there is no genuine issue requiring a trial. In Hryniak v. Mauldin, the Supreme Court of Canada explained there will be no genuine issue requiring a trial when “the judge is able to reach a fair and just determination on the merits on a motion for summary judgment”.
Fraudulent Conveyance Can Occur Before Separation
Section 2 of the Fraudulent Conveyances Act provides that conveyances of property “made with intent to defeat, hinder, delay or defraud creditors” are void. In Stone v. Stone, the court held that the term “creditors” in the Fraudulent Conveyances Act included spouses who had an “existing claim […] at the time of the impugned conveyance”. Additionally, the judge accepted that a person who is alleging a fraudulent conveyance can point to several recognized “badges of fraud”. The burden of proof falls on the party claiming a fraudulent conveyance; however, if the badges of fraud 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”.
In Shokoufimoghiman, the judge had to determine whether there was a genuine issue for trial on the alleged fraudulent conveyance. In support of his claim that there was no genuine issue for trial on the question of a fraudulent conveyance, the husband’s brother argued that the applicant’s claim was strategic and not genuine, that she was not a “creditor”, and that there were no badges of fraud. However, the judge recognized that a spouse could claim that a fraudulent conveyance occurred before separation. In Goldman v. Kudelya, the court suggested this could arise if the marriage was strained and a separation and equalization claim would be forthcoming. In this case, the two brothers claimed that neither spouse was contemplating a separation at the time of the conveyance. Nor was there any intention by the husband to defeat an equalization claim. Instead, the husband alleged that while the parties had separated for a short time in 2018, they reconciled only three months later. The applicant disagreed with this account and explained that the marriage was under strain in January 2020 when the sale occurred, and that they were contemplating separating in 2020.
Justice Mathen took note of the time between the initial separation in 2018, the conveyance in January 2020, and the eventual separation in 2022, and concluded that the time between a fraudulent conveyance and separation would be a factor when assessing the strength of a case. Nevertheless, there is no bright line test since cases instead look “to the particular circumstances and context in which a fraud may have occurred”. The judge further recognized that a bright line test could ignore cases where a party undertook a fraudulent conveyance when they anticipated a separation might occur. Still, the final separation actually took longer to occur. Here, the past context was important. It was true that the parties were undergoing counselling in January, but this was ambiguous. And the judge thought it could indicate the marriage was under strain, but could equally suggest the parties were attempting to strengthen their relationship. Overall, the judge agreed with the applicant that her eligibility as a creditor under the Act was a triable issue.
The State of the Parties’ Marriage Is Relevant
The evidence on the state of the marriage in January 2020 was contested, and it was not clear which of the spouses was more credible. In 2021, the applicant signed a release that released both the husband and the company from any actions regarding the company, its corporate shares, and its property. The husband’s brother claimed that the applicant would not have signed the release if it were true that the marriage was close to collapse. When questioned on the release, the applicant explained that she was told she needed to sign the release so that her husband could obtain a loan for his business. She claimed that she did not understand that she was agreeing not to sue the company. In any case, the judge found that the release was not determinative. The relevant date for determining whether the applicant was a creditor was at the time of the conveyance, which was January 2020. The applicant signed the release in 2021, so that later release was not illustrative of the state of their marriage in January. Instead, Justice Mathen recognized that a key question was whether the husband anticipated a separation when he executed the conveyance. And that question required a trial since it required assessing the parties’ credibility, which was not available on the current evidence. Overall, the judge concluded there was a genuine issue requiring a trial on whether the applicant was a creditor under the Act.
Badges of Fraud Can Indicate Intent to Defeat Creditor’s Rights
The judge found that there was a genuine triable issue concerning the badges of fraud. First, the conveyance was not an arms-length transaction, since it was between two brothers, which was an acknowledged badge of fraud. The parties also disagreed about whether the sale of the company was kept secret from the applicant. The applicant claimed to have been unaware of the sale. In contrast, the husband suggested that she would have seen deposits into their joint bank account. However, the judge did not find this persuasive, especially since the funds from the sale were not transferred at once but were added to the husband’s compensation following the sale. The judge agreed there was a serious question of whether the sale was kept secret.
When it came to considering the sale price, the brothers argued that the final sale price of $35,00 for which the company was sold was fair. After the sale, the husband was repaid $200,000 in shareholder loans. For the applicant, this large loan did not make sense for a company with such a low valuation. The husband stated that he was originally hoping to have his brother join as an investor in the company. This led to a different arrangement where he sold the company instead and stayed on as an employee. Justice Mathen found the explanation was puzzling and questioned its plausibility. Although this badge of fraud was weaker, there remained a genuine issue about whether the company was fairly valued.
There were additional questions about the company’s purchase of residential property and the husband’s connection and possible possession of the property. It was also a genuine question whether the husband retained benefits after the sale. On this point, the applicant alleged that the husband continued to use the company credit card for personal expenses. Although there were email exchanges between the brothers acknowledging this was an improper business expense, the judge could not discount that the messages were written to create an impression that they had a business relationship. Especially since the objections to the husband’s use of the credit card only began after it was clear he would be involved in a family law dispute, and that his link to the company would be relevant. For the judge, it remained a genuine issue for trial whether the husband personally benefited from the company after its sale.
Determining whether the applicant was a creditor in January 2020 required making credibility findings at a trial when the parties would be subject to cross-examination. Furthermore, credibility findings were also needed to resolve questions of a fraudulent conveyance. And the applicant had a real chance of success on more than one badge of fraud.
Courts Consider the Context in Which a Fraud May Have Occurred
A spouse can claim that a fraudulent conveyance occurred prior to their separation if the marriage was strained and an equalization claim would have been “impending”. The claimant may point to “badges of fraud,” indicating a conveyance was made to defeat their financial rights.
Windsor Family Lawyers Advising You On Hidden Assets in Divorce
Navigating complex family law matters, especially those involving concerns about hidden assets or fraudulent conveyances, requires experienced legal guidance. The dedicated team at Johnson Miller Family Lawyers understands the intricacies of these cases and can provide the strategic advice you need to protect your financial interests. If you suspect a fraudulent conveyance or have questions about property equalization in your divorce, contact us today for a confidential consultation. Complete our online questionnaire or call us at 519.973.1500 to discuss your unique situation and understand your rights and options.
