The evolution of fraudulent conveyance – Indcondo v. Sloan

On July 31, 2014, the Honourable Mr. Justice Penny of the Ontario Superior Court of Justice ruled in favour of the plaintiff in Indcondo Building Corporation v. Sloan (S.C.J.). For the plaintiff, Indcondo Building Corp (“Indcondo“), the ruling represents the culmination of more than two decades of litigation, which witnessed an intervening bankruptcy and subsequent orders under the Bankruptcy and Insolvency Act (the “BIA“) as well as two separate dismissal motions brought by the defendants on limitation period and abuse of process/issue estoppel defences.  Each were initially successful, but both were reversed by the Ontario Court of Appeal [See Indcondo Building Corporation v. Sloan (C.A.) – Abuse of Process & Issue Estoppel & Indcondo Building Corporation v. Sloan (C.A) – Limitations].

The plaintiff and Robin Sloan were principals of a private real estate development company called Steeles-Jane Properties Inc. (“Steeles-Jane“), formed in the 1980’s when the Toronto real estate market was booming. In 1992, the plaintiff commenced an action against Sloan pursuant to a shareholders agreement, and in 2001, after almost 10 years of litigation, the plaintiff obtained an $8,010,575 judgment (the “Judgment“).

Shortly thereafter, the plaintiff learned that, prior to the Judgment, Sloan had transferred his interest in his matrimonial home and a Florida condominium to his wife (in 1992 and 1993).  A fraudulent conveyance action was commenced in 2002, but was then stayed when Sloan declared bankruptcy.  In the context of the fraudulent conveyance action, the plaintiff also learned that Sloan had, in 1987 and 1988, transferred two other properties to a company owned by his wife. The plaintiff ultimately obtained authorization to proceed under section 38 of the BIA to set aside all of these property transfers.

In this important decision, Justice Penny voided two of the four property transfers relying on s. 2 of the Fraudulent Conveyances Act (the “FCA“), which provides that:

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.

In order for a transfer to be voided under this section of the FCA, three elements must be proven on a balance of probabilities:

1. A “conveyance” of property;
2. An “intent” to defeat; and
3. A “creditor or other” towards whom that intent is directed.

Evidence of actual intent is rarely available.  As a result, our courts have identified certain “badges of fraud” which provide circumstantial evidence of fraudulent intent:

• the transaction was secret;
• the transfer was made in the face of threatened legal proceedings;
• the transfer documents contained false statements as to consideration;
• the donor continued in possession and continued to use the property as his own
• the consideration is grossly inadequate;
• there is unusual haste in making the transfer;
• some benefit is retained under the settlement by the settlor;
• embarking on a hazardous venture; and
• a close relationship exists between parties to the conveyance.

In considering the two transfers in 1987 and 1988, Justice Penny found that, although there were high levels of debt in Steeles-Jane at the time, Sloan had reason to be optimistic about his business prospects and those of the housing market. While several of the badges of fraud existed, Justice Penny focused on the question of whether Sloan had any reason to think that, as a result of the impugned transaction, his potential future liabilities would exceed his ability to pay.  In conducting this analysis, Justice Penny found that Sloan could not be said to have reasonably believed then, that giving title to his wife would impact his ability to satisfy his existing or contemplated future obligations (this analysis involved a review of Sloan’s assets and liabilities or future liabilities.

Sloan’s situation was different in 1992 and 1993 when the Toronto property market bubble had burst, major banks were pursuing him on personal guarantees, and the plaintiff had also sued him. Justice Penny noted that, although Sloan’s wife had provided consideration in the amount of $500,000 (in satisfaction of Sloan’s obligation to the Bank of Nova Scotia), the 1992 and 1993 transfers were nonetheless fraudulent and completed for the purpose of sheltering assets from creditors, something that the wife was well aware of given her knowledge of Sloan’s business affairs.  This voided any defence under s. 3 of the FCA that the conveyance was made for good consideration. 

Justice Penny emphasized that the consideration of “intent” should be focused on intent at the time of the impugned transfer. This entails an examination of the debtor’s particular circumstances around the time of the transfer to determine if it can reasonably be inferred that there was an intent to defeat creditors.

This decision should be seen, in the whole, as strengthening the position of victims of fraud seeking to set aside transfers of property.