Focus: Indcondo dispute drags on

A 23-year-old legal dispute between a real estate developer and his bankrupt former business partner is heading for a third trip to the Ontario Court of Appeal after a partially successful fraudulent conveyance claim resulted in the voiding of two property transfers that took place more than two decades ago.

The seeds of the fight date back to the mid-1980s when John Di Paola, the sole shareholder of the plaintiff in Indcondo Building Corp. v. Sloan, teamed up with David Robin Sloan and several other developers to form Steeles-Jane Properties Inc. at the height of the booming Toronto real estate market. Together, they bought and developed property before selling it at a profit or leasing and refinancing it.

Indcondo first sued Sloan back in 1992 for breach of contract related to a shareholder agreement and won an $8-million judgment in 2001. It was during enforcement proceedings on that judgment that Indcondo discovered Sloan had transferred his assets to his wife in a series of transactions between 1987 and 1993. In 2002, Indcondo launched a fraudulent conveyance claim against Sloan to undo the transfers, but it was stayed two years later when he declared bankruptcy and the case was then dismissed on his discharge in 2005.

Di Paola and Indcondo then got a second kick at the can in 2008 when they launched another fraudulent conveyance claim over the same transactions via s. 38 of the Bankruptcy and Insolvency Act that allows creditors to pursue a claim in their own name when the trustee refuses to do so, often due to a lack of funds. Although motion judges dismissed the 2008 claim on two occasions, Indcondo was successful at the appeal court each time and finally got its trial heard last summer.

After seven days of hearings, Ontario Superior Court Justice Michael Penny ruled that two properties transferred from Sloan to his wife in 1987 and 1988 weren’t fraudulently conveyed. While Indcondo argued the transfers bore many of the badges of fraud, Penny found the evidence wasn’t sufficient to convince him that the transfers were “made with the intent to defeat” Sloan’s creditors.

“In 1987 and 1988, there is no evidence that Steeles-Jane was in, or heading for, trouble. There is no evidence that the market was turning or that Sloan was embarking on a new, uniquely risky, venture,” wrote Penny.

Two further transfers in 1992 and 1993, however, came in a very different financial context. The property bubble had burst and Steeles-Jane was in trouble.

“Sloan knew by July 1992 that he was in significant financial jeopardy, not only to the Bank of Nova Scotia but to Steeles-Jane’s lenders . . . and, potentially, to Indcondo as well,” wrote Penny before concluding that both transfers were an effort to defeat creditors and he should them aside.

James Zibarras, the co-managing partner at Toronto law firm Brauti Thorning Zibarras LLP who acted for Indcondo, says the company’s long battle still has some way to go. Both sides have appealed Penny’s judgment.

“One of the reasons it has taken so long is that the defendant has thrown every resource they have at this,” says Zibarras. “They have delayed our ability to pursue it by bringing every conceivable motion they can think of.”

Zibarras says as part of its appeal, Indcondo will suggest the earlier transfers cleared by Penny of fraudulent intent actually occurred later than 1987 and 1988 when the rosy outlook for Steeles-Jane undermined the fraudulent conveyance claim.

“We don’t believe there is the proper corroborated evidence required to show that’s when they were transferred,” says Zibarras.

In any case, he says Penny placed too much emphasis on the soundness of Steeles-Jane’s finances at the time of the earlier transfers due to Sloan’s personal guarantees to cover the company’s debts.

“When someone has signed a personal guarantee, you have to look at the person’s assets and whether that’s enough to cover their potential exposure, not the company’s,” says Zibarras.

Ahmed Shafey, a lawyer in the financial restructuring and recovery practice group at Baker & McKenzie LLP in Toronto, says Penny’s decision is a boon for fraud victims because it provides a “good road map” for future creditors that may want to invoke s. 38 of the Bankruptcy and Insolvency Act to pursue their own fraudulent conveyance claims against a bankrupt. He says he was impressed by Penny’s close scrutiny of Sloan’s finances in the decision.

“Where the more traditional badges of fraud are not available, it shows that this sort of financial analysis can be used to prove fraudulent intent or at least an inference of the same,” says Shafey.

According to Shafey, the case is particularly encouraging for fraud victims because Sloan’s wife actually paid $500,000 for one of the transactions in question that in turn was used to pay off a bank loan taken by Sloan. Despite the payment, Penny found it was “inconceivable” that Sloan’s wife was unaware of his financial troubles at the time of the transfer and “must have known that the chief purpose of the transfer” was to protect their home against execution by his creditors.

“That is definitely significant for those of us who act for people who are trying to set aside transfers,” says Shafey.

Jeffrey Levine, a principal in the litigation group at McMillan LLP, says the Indcondo case has already provided a treasure trove of guidance for insolvency lawyers on the operation of s. 38 of the Bankruptcy and Insolvency Act thanks to its two previous visits to the appeal court and is looking forward to seeing how it will rule on the third.

Sloan first convinced a motions judge to dismiss the fraudulent conveyance claim in 2010 as statute barred since the 2008 action began more than two years after the trustee had learned of the potential claim. Later in 2010, the Court of Appeal reversed the decision, effectively ruling that discoverability lies with the creditor and not the trustee. In most cases, this gives creditors two years to pursue a s. 38 claim from the time they discovered it, but since Indcondo’s discovery predated the 2002 Limitations Act, the clock was still ticking on the claim.

In 2011, Sloan again got the case tossed by a motions judge, this time as an abuse of process because it advanced claims identical to the 2002 action that was stayed by his bankruptcy. However, the appeal court again reversed the decision, distinguishing the first claim, which Indcondo advanced on its own behalf, from the second one it brought as if it were the trustee in bankruptcy. In addition, the court ruled it couldn’t dismiss the case on the basis of res judicata since the 2002 claim was never actually determined on its merits.

“What this puts front and centre for people is that a trustee’s claim to recover funds for the benefit of all the creditors is an entirely separate cause of action from any of those other creditors’ claims against the bankrupt,” says Levine.   

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