Written By Jim Patterson and Danish Afroz
The Ontario Fraudulent Conveyances Act1 (the FCA), a concise statute of long-standing that traces its history to an English statute of 1571, is intended to prevent conveyances of property made with the intent to defeat, hinder, delay or defraud “creditors or others” of their just and lawful actions, suits, debts, accounts, damages, penalties or forfeitures.
While the statute has a lengthy history, the Ontario Court of Appeal was recently faced with a novel question concerning the scope of potential claimants under the FCA. In Stevens v Hutchens, 2022 ONCA 771 [Stevens], the Court considered whether mortgages on six Ontario properties, which were granted by mortgagor corporations that held the properties, could be attacked as fraudulent conveyances under the FCA by judgment creditors of the sole shareholder of the mortgagor corporations (the Principal). The Court of Appeal was required to examine whether the claimants, who were creditors of the Principal of the mortgagor corporations but not creditors of the mortgagor corporations themselves, fell within the scope of the statutory phrase “creditors or others” within the meaning of section 2 of the FCA for the purpose of challenging the impugned mortgages.
In 2018, certain creditors (Judgment Creditors) of the Principal and the Principal’s spouse obtained two judgments in their favour from the United States District Court for the Eastern District of Pennsylvania, each for more than US$26 million (the Pennsylvania Judgments). As described in the decision of the motion judge and the Ontario Court of Appeal, the Pennsylvania Judgments “arose from a mortgage financing fraud perpetrated by” the Principal and the Principal’s spouse.2
The Principal and her spouse live in Ontario and their known assets are in Ontario. In February 2019, an interim receiver (the Receiver) was appointed in Ontario over their property, including the mortgagor corporations (the Receivership). Subsequently, the Ontario Superior Court of Justice issued a judgment declaring that the Pennsylvania Judgments were recognized and enforceable in Ontario.
In October 2017, a U.S. law firm that acted for the Principal and her spouse in respect of litigation in the United States (the U.S. Law Firm)3 registered a $2 million mortgage against six properties in Ontario (the Mortgage or Mortgages) that form part of the Receivership. The Principal gave the Mortgages in her capacity as the sole shareholder of the mortgagor corporations that held the properties to secure payment of future and ongoing legal fees.4
The amount available for all creditors by way of sale of various properties by the Receiver was just over $3 million. The Mortgages represented over half of the amount available to all creditors.
Decision of the Motion Judge
The Judgment Creditors brought a motion in the Receivership proceedings seeking, among other things, a declaration that the Mortgages were void. The Receiver deferred to the Judgment Creditors to bring the motion and took no position on the motion in order to reduce costs.
Section 2 of the FCA provides:
2. 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.
For section 2 of the FCA to apply with respect to voiding a transaction, three elements are required:
- a conveyance of property;
- an intent to defeat; and
- “creditors or others” towards whom that intent is directed.
The Judgment Creditors submitted that the FCA applied to this case for the following reasons:5
- The Mortgage is clearly a “conveyance” under the FCA.
- The Judgment Creditors have standing as “creditors or others.”
- With respect to the issue of intent, the Judgment Creditors raised and the motion judge considered, the following issues, among others:
- The context in which the Mortgages were given, including that the U.S. Law Firm knew at the time of the conveyance of “an enormous judgment” against the Principal and the Principal’s spouse, and that they did not have sufficient assets to satisfy that judgment.6
- The effect of the Mortgages, which was to remove equity for other creditors.
- The suspicious timing of the registration.
- The inadequate consideration for the Mortgages.7
The U.S. Law Firm was required to rebut the presumption of an intention to defeat other creditors by its registration of the Mortgages. The motion judge determined that the U.S. Law Firm had not done so.8
The motion judge also considered certain exceptions in the FCA which apply to situations in which a conveyance may have been made with a fraudulent intent but where there is good consideration and the recipient acts in good faith and is not aware of the fraudulent intent, the conveyance may not be set aside. The motion judge was of the view that this case did not come within such exceptions.9
The motion judge granted the motion. As a result, the Mortgages were declared void, the Land Registrar was directed to discharge the Mortgages and proceeds of sale held by the Receiver were to be distributed without regard for the Mortgages.
Decision of the Ontario Court of Appeal
On appeal, the U.S. Law Firm argued that the motion judge’s finding that the Mortgages were void under the FCA could not stand for several reasons including, among other things, the following:
- that the motion judge erred in concluding that the Judgment Creditors had standing to bring their motion; and
- that the motion judge erred in concluding that the Judgment Creditors, who were creditors of the Principal and not creditors of the mortgagor corporations, were “creditors or others” within the meaning of those terms in section 2 of the FCA.
Judgment Creditors Had Standing to Bring the Motion
The U.S. Law Firm argued that, in the context of a receivership, only the receiver, and not a creditor in the receivership, could bring a motion affecting the rights of another creditor in the receivership. The Ontario Court of Appeal rejected this argument, noting that the mortgagor corporations were included in the scope of the receivership order, and that the Judgment Creditors and the U.S. Law Firm were creditors in the Receivership. The Judgment Creditors’ motion involved a priority dispute between two creditors asserting claims against the Receivership assets. The Receiver had deferred to the Judgment Creditors to bring the motion for cost efficiency reasons. The U.S. Law Firm did not show any prejudice to it resulting from the Judgment Creditors proceeding in this manner.10
Judgment Creditors Were “Creditors or Others”
The U.S. Law Firm also argued that section 2 of the FCA requires the mortgagor corporations to have made the Mortgages with the intent to defeat creditors or prospective creditors of the mortgagor corporations. The Judgment Creditors were not creditors of the mortgagor corporations. They were creditors of the Principal. Hence, according to the U.S. Law Firm’s argument, the Mortgages were not made to defeat “creditors or others” within the meaning of section 2 of the FCA.
The Court of Appeal rejected this argument on the basis that the U.S. Law Firm’s submissions construed section 2 of the FCA too narrowly and ignored the substance of what occurred. As part of the analysis in its judgment, the Court of Appeal emphasized the following:11
- The Receiver’s investigative report found that “to a significant extent, payments from the mortgage financing fraud were used to acquire or refinance the mortgaged properties”.
- The Principal granted the Mortgages “in her capacity as sole shareholder of the mortgagor corporations”.
- The terms of the Mortgages stated that the charges were given as security for payment of legal fees related to or associated with the principals of the mortgagor corporations.
- The Judgment Creditors were creditors of the Principal.
- The Principal “treated the properties registered in the name of the mortgagor corporations as her own”.
The U.S. Law Firm had argued that the meaning of “others” was restricted to prospective creditors of the mortgagor corporations. However, the Court of Appeal was of the view that, although the term “others” had been interpreted in earlier cases as including prospective creditors of the debtor, the term was not limited to that circumstance and could also “include creditors of the mortgagor corporation’s sole principal, in circumstances such as this where all or some of the money used to purchase the mortgaged properties came from the defrauded creditors of the principal, and where the principal caused the mortgages to be granted and did so with the intention of defeating her creditors."12 The Court of Appeal dismissed the appeal.
The Court of Appeal’s decision in Stevens, although rendered in a fact-specific context, confirms that courts view the FCA as remedial legislation that is to be given a fair, large and liberal interpretation that best achieves its purpose. The FCA’s purpose is to prevent conveyances of property made with the intention of delaying, hindering or defrauding creditors and others—except for conveyances made for good consideration and bona fide to persons not having notice of such fraud.13 This decision also illustrates that receivership proceedings have a multi-stakeholder dimension. Such proceedings provide a forum for creditors to assert and dispute priority over the debtor’s assets. Accordingly, upon discovery of a fraudulent scheme, it is imperative to obtain the assistance of experienced legal counsel familiar with insolvency laws and legislation that enables creditors to challenge fraudulent transactions.
1 Fraudulent Conveyances Act, RSO 1990, c F29.
3 Stevens et al v Hutchens et al, 2022 ONSC 1508 (Ont SCJ [Commercial List]) at para 13.
4 Ibid at para 5.
5 Ibid at para 38.
6 Ibid at paras 38, 41.
7 Ibid at para 38.
8 Ibid at para 39.
9 Ibid at para 58.
10 Stevens v Hutchens, 2022 ONCA 771 (Ont CA) at para 15.
11 Ibid at para 19.
13 Royal Bank of Canada v. North American Life Assurance Co.,  1 S.C.R. 325, at para 78.