Dec 14, 2017

AREAS OF LAW: Fraudulent Conveyance Act; Bankruptcy; Effect of declaring conveyance “void”

Guthrie v. Abakhan & Associates Inc., 2017 BCCA 102 (CanLII)

Once a conveyance has been found to infringe the Fraudulent Conveyance Act, it remains fraudulent and is ineffective as against all creditors who may be hindered or delayed. It cannot be declared void only for a limited time, or only in respect of a specific creditor or debt.~

BACKGROUND: The ex-husband of the Appellant, Jodi Guthrie, transferred a residential property to his second wife for no consideration in 2008. In the divorce proceeding between the Appellant and her ex-husband, a judge found this to be a fraudulent conveyance intended to make it more difficult for anyone with a claim against the ex-husband to “get at the house.” The judge ordered that the transfer was void and of no force and effect insofar as it affected the Appellant’s rights. The Appellant was entitled to pursue her just and lawful remedies as a judgment creditor against the ex-husband as if he were still the legal and beneficial owner of the property. This included the entitlement to register judgments against either the ex-husband’s or the second wife’s title to the property. On May 17, 2013, the Appellant registered her costs judgment as a charge against title to the property. There were already mortgages and other charges registered against it. One of the mortgagees began foreclosure proceedings and the property was sold. After the mortgages were paid off in accordance with an order of a Master, sales proceeds of $108,000 were paid into court. The second wife became bankrupt in 2015. The proceeds paid into court were her only significant asset. In the foreclosure action, in which the Appellant was a respondent, a Supreme Court judge ordered that the funds in court be paid to the Respondent, Abakhan & Associates Inc., as the trustee in the bankruptcy. The Appellant then filed a proof of claim seeking possession of the funds in court. The Respondent disputed the claim, asserting that she was only an unsecured creditor of the second wife. The Respondent relied on the trial judge’s reasons in asserting that the trial order's declaration was restricted to child support arrears he had owed at the date of the trial order. Since those arrears had been paid off, the Respondent took the position that the order had been spent. The chambers judge accepted this argument. He considered the Bankruptcy and Insolvency Act and the Court Order Enforcement Act, but did not refer to the Fraudulent Conveyance Act in his review of the legislative framework. The chambers judge reasoned that since the trial judge had given the parties liberty to apply for further orders and directions regarding costs, she must have been referring in the trial order to the Appellant’s status as a judgment creditor at the time of that order, for the amount of the child support arrears only. The chambers judge ruled that the Appellant had no interest in the proceeds of sale, and that her claim under s. 81(1) of the Bankruptcy and Insolvency Act had been properly rejected by the Respondent.

APPELLATE DECISION: The appeal was allowed. The Court of Appeal considered the Fraudulent Conveyance Act and the Fraudulent Preference Act, as well as the Law Reform Commission’s Report on Fraudulent Conveyances and Preferences, in determining “what exactly happens” when the court sets aside a fraudulent conveyance. In British Columbia, most plaintiffs seek an order returning the property to the grantor, to make it available for his or her creditors. The authorities suggest that when a fraudulent conveyance is set aside, the property is somehow transferred back, or “reverts”, to the grantor as if the conveyance had not occurred. However, the Law Reform Commission questioned this approach, as the grantee is also entitled to retain the transferred property as against the fraudulent grantor. Some courts have held that the grantee holds the property in trust for the creditors. The Court of Appeal held that the relief granted is confined to setting aside the conveyance, removing it as an obstacle to the creditor’s recovery under executions against the debtor. The creditor may then pursue such remedies as may be necessary, such as the registration of a judgment against land or a declaration of trust. Section 7 of the Fraudulent Preference Act provides that a creditor delayed or hindered by a fraudulent conveyance may seize or recover the proceeds of sale of the property. The Court found that the chambers judge erred in holding that the trial order restricted the Appellant’s remedies under the Fraudulent Conveyance Act to the enforcement of the child support arrears. It is not open to a court to declare a fraudulent transfer “void” under the Act only to a certain extent, only to permit a certain debt to be recovered, or only for a limited time. Once a conveyance has been found to infringe the Act, it remains fraudulent and is ineffective as against all creditors who may be hindered or delayed.