2 Application Of Act

CASE LAW

The Interplay between Sections 1 and 2

In March 2009, the defendants D and L transferred property they owned to the defendants AT and LT, who were D’s parents, and continued to live on the property and pay the mortgage as rent. In July 2009, an arbitration proceeding in Ontario resulted in judgment against D for $293,000. In August 2014, AT and LT transferred the property to the defendant, M. Inc., a company owned by the defendant M, a friend and business associate of D. M leased the property to D and L and granted them an option to purchase the property. At that time, M made a verbal agreement with AT and LT that they would receive any profits that came out of the subsequent sale of the property. Therefore, M agreed that AT and LT retained an interest in the property until the profits, if any, were realized. The plaintiff, Balfour, was a creditor of D and L. He was granted judgment against them for $200,000 in July 2015. The plaintiff brought an action claiming that the property transfers in 2009 and 2014 were made to delay, hinder, or defraud the creditors of D and L, contrary to the Fraudulent Conveyance Act. M. Inc. sold the property to an unrelated party in 2016. Part of the proceeds from that sale were being held in trust until the resolution of the trial. Following Abakhan & Associates Inc. v. Braydon Investments Ltd., 2009 BCCA 521, leave to appeal refused 2010 CanLII 34795 (SCC) (see above) for the proposition that proof of a dishonest intent or mala fides is not necessary, the court found the 2009 conveyance to AT and LT to be fraudulent. The transfer was made at a time when D was a respondent in an arbitration that resulted in judgment against him for $293,000. D was aware of the arbitration and must have been aware of the risk of a judgment when he transferred the property to his parents. He testified that the property was sold to his parents because the mortgage on the property was in arrears and the property was about to be foreclosed. Even if that were the case, he gave no explanation for why alternatives other than a transfer to his parents were not pursued. There was no explanation offered as to why the transfer was necessary to avoid a foreclosure. There seemed to be no reason for the transfer other than to put the property out of reach of creditors. After the property was transferred, D and L continued to live on it pursuant to a rental agreement with D’s parents. It was fallacious to characterize the consideration paid by the parents as good consideration. No funds were actually paid. By his own admission, D considered that the debts on the property continued to be his responsibility. After the transfer, D and L paid the mortgage as rent. Therefore, the parents did not pay good consideration for the property, and the transfer was a fraudulent conveyance. Following the reasoning in Chan v. Stanwood, 2002 BCCA 474, the court said s. 1 of the Act focuses the conduct and intentions of the transferor, while s. 2 focuses on the transferee. The purpose of the Act is to provide a remedy to creditors who have been fraudulently denied access to the transferor’s assets but not at the expense of a bona fide purchaser for value without notice of the transferor’s intentions. There was no evidence that the defendant M was aware of any fraud or collusion to defraud the creditors of D and L or the parents. The 2014 transfer was not a fraudulent conveyance. The defendant M. Inc. sold the property in 2016. The agreement between M. Inc. and the parents was that the parents were to receive the profits of $46,995 from that sale. Since the parents received the property by a fraudulent conveyance, the profits were not theirs to keep. They had to be returned to D and L for the benefit of their creditors (Balfour v. Tarasenko, 2019 BCSC 2212).

Appeals Dismissed in Fraudulent Conveyance and Debt Quantification Case

Veronica Canlas, the appellant in Canlas v. Global Pacific Financial Services Ltd., 2022 BCCA 438, and her former spouse, Virlie Canlas, owned a house in joint tenancy. In an attempt to avoid Virlie Canlas’s indebtedness to the respondent Global Pacific Financial Services (who was the appellant in the related mortgage debt case), Veronica and Virlie Canlas transferred their joint tenancy interest in the house to Veronica Canlas and her sister, Myrna Buffie, as tenants in common, with Veronica Canlas owning 99% and Ms. Buffie owning 1%, in exchange for Virlie Canlas’s release from the existing mortgage debt.

The judge declared the transfer was a fraudulent conveyance. The court found the proven quantum of Virlie Canlas’ debt to Global was $195,739.58 and awarded judgment in favour of Global against Virlie Canlas in that amount.

Veronica Canlas and Myrna Buffie appealed the order declaring the transfer a fraudulent conveyance, saying the judge had failed to apply the exception in s. 2 of the Fraudulent Conveyance Act, and that the judge had erred by concluding that the transfer was not for good and valuable consideration. Global appealed the quantification of Virlie Canlas’s debt.

Held, both appeals dismissed. The court cited Chan v. Stanwood, 2002 BCCA 474 for the proposition that inadequate or nominal consideration does not amount to “good consideration” for purposes of s. 2. Here, the judge did not err in finding the transfer of Virlie Canlas’s interest in the house was not for good and valuable consideration, as Veronica Canlas’s loss of the right to seek contribution from Virlie Canlas in the event of a shortfall “lacked genuine value and plainly amounted to palpably and grossly inadequate consideration” (at para. 31). Nor had the court erred in its quantification of Virlie Canlas’s debt to Global.