Common creditor proofing method can be fraudulent conveyance: commercial litigator Allison Speigel

Appeal court case from earlier this year should put debate to bed, she says

Common creditor proofing method can be fraudulent conveyance: commercial litigator Allison Speigel
Allison Speigel, a partner at Speigel Nichols Fox LLP

It may be running afoul of a lawyer’s ethical duties to advise a client to transfer property to a spouse in a common manoeuvre intended to prevent access to potential future creditors, says Allison Speigel, a partner at Speigel Nichols Fox LLP

An example of this scenario is when a person goes into business and decides to put the family home in the name of their spouse to avoid the possibility that sometime in the future, someone will sue them in their personal capacity, or their business will owe money, and their creditors will be able to take the house.

The prevailing view among lawyers has been that it is lawful creditor protection to transfer the house, as long as the person did not have a specific creditor in mind when they made the transfer, says Speigel. But she says she has long argued that under Ontario law if a person transfers property to the spouse to shield it from possible future creditors, those creditors will have an argument that that was a fraudulent conveyance that should be set aside.

“People were like, ‘That's the craziest thing I've ever heard. People transfer properties to their spouses all the time for the purpose of creditor protection.’”

She says her view was confirmed at the Court of Appeal in February in Ontario Securities Commission v. Camerlengo Holdings Inc., 2023 ONCA 93. The court allowed the appeal of a successful Rule 21 motion to strike the OSC’s fraudulent conveyance claim.

The respondents in the case were a married couple. The husband is an electrician who ran an electrical contracting business in partnership with another person. In 2011, the husband faced financial difficulties because a client had failed to pay the $1.3 million it owed the business. He got a $200,000 loan from a company that the OSC later discovered had stolen from various clients through a fraudulent investment scheme. The respondents had lost over $600,000 in the fraud.

The OSC got a garnishment order against the respondents to recover the debt on the $200,000 loan and sought a remedy for oppression and to impose a constructive and resulting trust. The regulator also sought to set aside the transfer of the respondents’ family home, which they had executed in 1996, as a fraudulent conveyance.

The motion judge agreed to strike the fraudulent conveyance claim, finding that s. 2 of the Fraudulent Conveyance Act did not apply to the house transfer and later $200,000 loan. Section 2 states: “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.”

The Court of Appeal found that the motion judge had not correctly interpreted or applied s. 2 of the Act. The caselaw interpreting s. 2 is clear that a creditor, who was not a creditor at the time of the transfer, can attack the transfer if it was intended to “defraud creditors generally, whether present or future,” said the court.

An intent to defraud creditors generally can arise from “taking steps to judgement proof oneself” in anticipation of a new business venture, and the party pleading fraudulent conveyance on this basis is not required to identify a “particular ascertainable creditor that the debtor sought to defeat at the time of the conveyance,” said the court.

The court found it was enough to plead facts supporting the allegation that the party “perceived a risk of claims from a general class of future creditors” and transferred the property to defeat these creditors if they later emerged.

“What advice do lawyers give to clients?” says Speigel. “For many years, it's not uncommon for lawyers to say, ‘Consider in whose name the asset should be owned if you're going into business. Consider whose name the house should be in. That question amounts to: ‘Who is the least likely to get sued?’”

“What I'm posing as a question is: If conveying property from one spouse to another for the sole purpose of defeating future creditors is a fraudulent conveyance, is that advice that a lawyer should be giving?”

Speigel spoke to Canadian Lawyer in her personal capacity, and she said her comments do not necessarily reflect the views of any client.

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