Mar 1, 2020

Fraudulent Conveyance and the Real Property Limitations Act

Anisman v. Drabinsky, 2020 ONSC 1197 (CanLII)

One often finds that a person in business puts the title to the family home only in the name of the other spouse, rather than having joint title. The hope is that the house will remain safe from his creditors if he cannot pay his business debts. This can backfire for a variety of reasons, particularly if the spouses later separate, as I have written elsewhere.

One situation in which it will fail to provide protection is when unpaid debts were already looming at the time the transfer occurred. If such a transfer of ownership is done with the intent of defeating creditors, it can be deemed to be a fraudulent conveyance. Pursuant to the Fraudulent Conveyances Act, R.S.O. 1990 (“FCA”), the court can order that such a transfer was void, in which case the creditor can then force the property to be sold to obtain payment of the transferor’s debts.

Such a scenario has played out for former theatre entrepreneur Garth Drabinsky. He failed to pay the fees of one of his former lawyers. The latter wanted to seize Mr. Drabinsky’s assets, and discovered that he had transferred ownership of the family home into the name of his wife.

Justice Morgan found that there were “badges of fraud,” and declared the transfer void. One of the issues argued in the case was whether the plaintiff’s claim had been brought after the limitation period expired. In the present case, the transfer of ownership had taken place in 2015, while the claim was not brought until nearly four years later, in 2019.

The normal limitation period for bringing a claim in Ontario is two years, pursuant to the Limitations Act, 2002. However, that is rarely the end of the story. First, the two-year period starts from when the event was reasonably discoverable, which becomes a question of factual investigation.

A second factor pertinent to this case that often adds confusion and uncertainty is that Ontario has a separate limitations statute for real property, known as the Real Property Limitations Act (“RPLA”). Under that statute, claims for ownership of real estate may be brought for up to ten years after a disputed event occurred.

The question is: should the RPLA apply to issues of this type? The plaintiff’s claim is not actually for ownership of land, but for the recovery of a money debt. The fact that land is involved appears merely incidental to the central issue. In such a case, the plaintiff is not attempting to take ownership of the land, but to ask the sheriff to sell it so that the creditor can be paid out of the proceeds, pursuant to Rule 60.7 of the Rules of Civil Procedure.

Justice Morgan’s decision has only added to the uncertain state of the law on this topic.

The preponderance of views in the case law until now has been that the RPLA is only applicable to the actual “recovery of land,” rather than all debts connected to land. In Zabanah v. Capital Direct Lending Corp., 2014 ONCA 872, the court rejected the view that the RPLA applies to “every action in which a mortgage or piece of real estate is in any way involved.”

The main exception in which the RPLA was applied is McConnell v Huxtable, 2014 ONCA 86. That was a spousal constructive trust claim for a share of a house where the spouse who was not the legal owner had provided work to help renovate it, in which the court held that it constituted a claim for the “recovery of land,” and therefore the ten-year limitation period of the RPLA applied. I wrote about that case previously.

There was no Fraudulent Conveyances Act (FCA) claim in McConnell v Huxtable, but there was an FCA claim in Conde v Ripley et al., 2015 ONSC 3342. That was also a spousal constructive trust claim, and Justice Dunphy followed McConnell v Huxtable and concluded that the RPLA applied. He acknowledged the additional complication of the FCA claim in that case, but concluded that it would be contrary to common sense to apply a shorter limitation period on that account.

It is Justice Dunphy’s decision in Conde v Ripley that Justice Morgan chose to follow in the present case.

Interestingly, in a later debtor-creditor case dealing with an FCA claim, the judge went out of his way to disagree with the conclusion in Conde v Ripley. In Wilfert v McCallum, 2017 ONSC 3853, Justice Faieta emphasized that “an action to set aside a fraudulent conveyance of land is not an action to recover land.”

Another family law case with an FCA claim regarding real property was Stravino v. Buttinelli, 2015 ONSC 1768. There was no constructive trust claim in that case, and the judge explicitly distinguished McConnell v Huxtable on that ground. The RPLA did not apply because it was not an action to recover land: “The fact that land is incidentally involved in the proposed fraudulent conveyance claim does not mean that the action is governed by the RPLA.”

Based on the above, it appears that the existence of a constructive trust interest in property was the decisive differentiator in previous case law. Justice Morgan’s decision appears to have overlooked that. (In Mr. Drabinsky’s case, even if the judge was wrong about this, it might still not save the house, as the judge also accepted the argument that the transfer was not discoverable until the claim was brought.)

It is obvious that this is a source of ongoing confusion in Ontario law, and a problem that comes up with some frequency. It would be desirable for the legislature to revisit the statute and add some certainty.