This quote by Charles Dickens makes sense: “Good lawyers are clearly needed to deal with bad people”. A recent case in point is the frustrating saga of two German business partners (Mr. E and Mr. S) whose failed partnership led Mr. E to seek to recover assets of Mr. S in Ontario.

The Action:

In short, following the business failure, Mr. E obtained a German judgment for about $500,000.00 in March of 2007.

In addition to the business in Germany, Mr. S also operated a business with assets in Ontario. He unsuccessfully contested Mr. E’s efforts to have the judgment enforceable in Ontario in December 2009.

No money had ever been paid to satisfy the judgment. Accordingly, in 2011, Mr. E commenced an action alleging conspiracy amongst the defendants being Mr. S, his wife, and other non-arm’s length parties as well as their lawyer, to enforce his judgment. In it, he sought to set aside several asset transactions he alleged had been made fraudulently to the other defendants by Mr. S to avoid paying the judgment.

This attack was made under Ontario’s Fraudulent Conveyances Act (FCA). The FCA makes sales of assets potentially void where it is found that the intent of the transfer was to “defeat, hinder, delay or defraud creditors”.  If the sale is void the asset is then exigible. This potentiality is defeated where the sale is made in good faith, for fair market value and to a person without notice or knowledge of any fraudulent intent. This in theory makes either the asset or the consideration received available to the creditor.

Up to this point, this legal saga sounded pretty ordinary and mundane.  However, it started to unravel a little given the failure of Mr. E to also rely on Ontario’s Assignment and Preferences Act (APA). Although conceptually the same as the FCA, it is almost invariably added as a tool of attack in such cases.

The Motion for Summary Judgment:

Mr. S denied any fraud or wrongdoing and Mr. E. brought a motion for summary judgment to speed up recovery.

This was understandable given his frustration at the pace of the litigation. It was, however, not without risk as he would have to show there was no triable issue to succeed. If he did not, he would face a hefty cost order and have wasted more time.

That is likely why, in September of 2013, an agreement was reached by the parties to put the validity of the conveyances before the Superior Court as a mini-trial of an issue. The issue being –“did the defendants, or any of them, engage in the transactions with the intent to defeat, delay, hinder or prejudice Mr. E from receiving payment from Mr. S.”

Mr. S. Declares Bankruptcy:

In November of 2013, Mr. S made an assignment into bankruptcy. Mr. E was given notice of same. He proved his claim to the satisfaction of the trustee. His was the only claim. He was the sole inspector. This put Mr. S in a great position. He was in control.

The Canadian Bankruptcy and Insolvency Act (BIA) placed Mr. S’s estate in the hands of the trustee. Most importantly, it provided an additional method of attack under s.96, the “Transfer at undervalue” provisions.  Alternatively, Mr. S. could have taken an assignment of those rights from the trustee under s. 38. This is a very powerful tool crafted to address the very issues Mr. E. was raising.

Inexplicably, these steps were not taken. Mr. S was discharged from bankruptcy, without objection, in August of 2014. Mr. S was thus effectively relieved of the burden of Mr. E’s judgement.

The Mini-Trial:

The mini-trial commenced in January of 2015 at which point Mr. S advised the court of his bankruptcy.

Mr. E sought leave to continue his action against Mr. E despite his discharge from bankruptcy. He did so on the ground that the debt was not discharged by virtue of s. 178 (1) (d) of the BIA. This section reverses the usual benefits of a discharge where the debt arose out of fraud ….. while acting in a fiduciary capacity. Leave was granted as there were claims against other parties and to determine whether the debt survived the discharge.

The mini-trial was a slam dunk. All of the land transactions were impugned with the requisite elements of the FCA. Mr. E had now won his second court battle and not received so much as a penny for his efforts. Mr. E was still relieved from his debt by virtue of his discharge as s. 178(1) (d) of the BIA was found not to apply.

The judge did not mask his curiosity and frustration with how the litigation had proceeded. Why did the court hear of the bankruptcy on the eve of trial? Why had Mr. E not used the bankruptcy proceedings to his advantage in the year between the assignment into bankruptcy and the hearing of the mini-trial? Why was the mini-trial held at all? Why was Mr. E not seeking to set aside the discharge and use the BIA to his advantage?

In his words “The gift horse so offered (the bankruptcy) was eschewed in favour of striking out upon the bramble-strewn path of civil conspiracy and other claims”.

Mr. S Appeals:

Mr. S was not done his resistance. He appealed the result of the mini-trial to the Ontario Court of Appeal (OCA) in May of 2016. His position was that the judge had erred in failing to rule, prior to the mini-trial, the issue of whether the action against Mr. S had been stayed by his discharge. The appeal was unsuccessful.

Mr. E seeks to renew his Summary Judgment Motion:

Mr. E still continued on his bramble-strewn path. He brought a motion to pursue the personal causes of action and wanted it heard before the mini-trial judge. That effort came to a halt at a case conference before the judge on April 12, 2017. Yes, it was now two years after the mini-trial. The judge ruled he was not seized of the matter and could not hear it because of his schedule. He again expressed his frustrations with the course of the litigation.

The Summary Judgment Motion:

Mr. E persisted and in October of 2017 renewed his original 2013 motion for summary judgement against the non-arm’s length defendants (not Mr. S or the lawyer). The debt was now $645,754.08.

Mr. E was now relying on both the FCA and the APA. At this stage, it was learned that Mr. E did bring a motion in bankruptcy court in December of 2015 to set aside the discharge and be able then to proceed under s. 38 of the BIA. This had been the course suggested by the mini-trial judge a year earlier. It was also learned that that effort had ben inexplicably abandoned in favour of proceeding with the summary judgment motion.

Mr. E lost his motion for judgment. The FCA does not provide a remedy in damages against the transferees of the property. The Act sets aside the conveyances. Here that means the properties now again belong to Mr. S, a discharged bankrupt, who is no longer a debtor to Mr. E. As a result, the proper and only way to proceed was under the BIA.

Mr. E Appeals:

Mr. E persisted once more and appealed the result to the OCA. He lost again.

The Court noted that the motion decision was interlocutory and therefore the appeal should properly have been brought to the Divisional Court with leave. He can still do so. Further, Mr. E was still free to pursue his conspiracy claim.

Finally, the Court noted that he was still free to pursue his remedies under the BIA as had been recommended by both Superior Court judges below.

The Tally So Far:

• Five reported decisions;
• Somewhere between 8 & 10 judges;
• Two wins and two losses;
• Untold cost;
• No recovery to date.

It is likely we have not heard the last of this epic saga. Was Charles Dickens right? Perhaps Mr. Bentham was when he said “Lawyers are the only persons in whom ignorance of the law is not punished.”  Not all lawyers of course. That leads to the take aways.

Take Aways:

1. Foreign judgements are treated the same as all other debts and are discharged by bankruptcy;
2. The FCA and APA void prohibited transactions but do not provide a remedy in damages against the transferees;
3. The trustee in bankruptcy is the only person who can pursue claims under the FCA and APA so the creditor can only do so if those rights are assigned pursuant to s.38 of the BIA;
4. The BIA provides additional remedies to impugn voidable transactions of property by debtors and should be used in conjunction with the FCA and the APA;
5. These issues require counsel who is well versed in their intricacies to affect a speedy and effective recovery.

If you have a question about civil fraud, asset recovery, injunctive relief, enforcement of foreign judgments or similar, the highly skilled Toronto corporate lawyers at Milosevic & Associates can help. We can provide you with advice and guidance suited to your unique situation. Call us at 416-916-1387 or contact us online to learn more about how we can help.