Canada: "Braydon" — The Requisite Intent For Fraudulent Conveyances

Last Updated: June 17 2011
Article by Matthew Peters and Gordon S. Funt

INTRODUCTION

The British Columbia Court of Appeal's decision in Abakhan & Associates Inc. v. Braydon [Braydon]1 is of signal import to the insolvency bar and trustees. Leave to appeal to the Supreme Court of Canada has been denied2 (McLachlin C.J., Abella and Cromwell JJ.).

Braydon defines the requisite intent for a fraudulent conveyance under B.C.'s Fraudulent Conveyance Act [BCFCA].3 The BCFCA is short:

Fraudulent conveyance to avoid debt or duty of others

1 If made to delay, hinder or defraud creditors and others of their just and lawful remedies

  1. a disposition of property, by writing or otherwise,
  2. a bond,
  3. a proceeding, or
  4. an order

is void and of no effect against a person or the person's assignee or personal representative whose rights and obligations by collusion, guile, malice or fraud are or might be disturbed, hindered, delayed or defrauded, despite a pretence or other matter to the contrary.

Application of Act

2 This Act does not apply to a disposition of property for good consideration and in good faith lawfully transferred to a person who, at the time of the transfer, has not notice or knowledge of collusion or fraud.
[Our emphasis]

Ontario's Fraudulent Conveyance Act (the OFCA)4 is longer than the BCFCA but its operative language regarding intent is very similar with the exception that the BCFCA includes the language "by collusion, guile, malice or fraud" whereas the OFCA does not. The additional BCFCA language is not significant. As the B.C. Court of Appeal stated in Braydon:

[70] However, for many years, and certainly since the repeal of the penal provisions in 1987, the purpose and scheme of the B.C. Fraudulent Conveyance Act has been to provide a civil remedy to creditors. Its purpose is to protect creditors where property dispositions by debtors "... were effected for the purpose of defeating the legitimate claims of creditors" [...]. As a result, the words "by collusion, guile, malice or fraud" no longer perform a meaningful function in the text.5

Both statutes have their roots in the Statute of Elizabeth, 1571 (U.K.), 13 Eliz. I, c. 5, 1571. The operative language of the Statute of Elizabeth was:

... Wth Foeffement Gyftes Grauntes Alienations Conveyaunces Bondes Suit Judgement and Executions have been and are devised & contrived of MaIyce Fraude Convyne Collusion or Guyle, to Thend Purpose and Intent to delaye hinder or defraude Creditors and others of theyr juste and lawfull Actions Suites Debtes Accomptes Damages Penalties Forfaitures Heriott Moruaries and Releffes, ...

While the Statute of Elizabeth was declaratory6 and the BCFCA and OFCA are remedial,7 the distinction is not significant. The current law has been developed over the last four centuries by the courts. As the B.C. Court of Appeal noted in quoting Professor C.R.B. Dunlop:8

... Since 1571, the courts have been active in creating a large and complex body of law which purports to interpret the Statute but which in reality constructs a new right in 'creditors and others' to challenge and avoid fraudulent conveyances.9

The point is that in reality it is this new right, a common law creation, that governs the law of fraudulent conveyances. The statutes serve as context.

BRAYDON'S FACTS

For our purposes, Braydon's facts may be briefly summarized:10

  1. The debtor, Botham Holdings Ltd. ("BHL"), had significant real estate assets which it transferred on October 31, 2005 to Braydon Investments Ltd. ("BIL"), a related corporation incorporated for this purpose.
  2. Two months earlier BHL had become partner in a general partnership formed to undertake an auto leasing business.
  3. For income tax purposes, BHL needed to remove the real estate assets. "As expressed in the appellant's factum: '... the plan was to empty an old company of its assets unrelated to auto leasing, and use the old company for the partnership rather than incorporate a new one, because using the old company allowed for the tax benefit'".11
  4. The assets were transferred to BIL on a tax efficient basis by way of a transaction, in tax parlance, called a "single-winged butterfly".
  5. The principal of BHL and BIL had no "dishonest intent" or any intent to "defraud creditors".12
  6. The principal of BHL also admitted

    that the purpose and intent and effect of the transaction was to make sure that the assets of BHL were removed from BHL so that creditors of the general partnership could not have access to them.13
  7. No creditor was "pressing for payment" at the time of the transaction.
  8. The general partnership failed. The trustee in bankruptcy commenced an action under the BCFCA against BIL.

Chief Justice Finch writing for a unanimous panel (Lowry J.A., Groberman J.A.) held for the creditors in denying BIL's appeal from the B.C. Supreme Court. As noted, leave to the Supreme Court of Canada has been denied.

ISSUE

Chief Justice Finch framed the issue in the following terms:

... More precisely, the question may be framed as whether a transfer of property made with a view to protecting assets from creditors, present or future, if made honestly, without moral blameworthiness, and for other legitimate business purposes, is prohibited by the Fraudulent Conveyance Act.14

The answer to the issue framed by Chief Justice Finch is yes.

In describing the requisite intent for a fraudulent conveyance under the BCFCA, Chief Justice Finch stated:

[73] The only intent now necessary to avoid a transaction under the modern version of the Act is the intent to "put one's assets out of the reach of one's creditors" [. . . ]. No further dishonest or morally blameworthy intent is required.15
(Our emphasis)

Chief Justice Finch also noted with approval the language of Lord Hatherley in Freeman v. Pope:16 "that persons must be just before they are generous, and that debts must be paid before gifts can be made."17

Clearly, any vestiges of penal aspects or morally blameworthy intent have been decoupled from the BCFCA. The ruling is entirely consistent with the creditor-friendly policy of the Statute of Elizabeth both as enacted and as it evolved under the common law. As May observed 100 or so years ago:

As to the statute 13 Eliz. c. 5, at least, it may be said that its effect has been, throughout this length of time, uniformly beneficial. It has been well observed that 'it must be a fundamental policy of all enlightened nations to protect and subserve the rights of creditors.' The absence of such protection must, in the language of the Statute, be 'not only to the let or hindrance of the due course and execution of law and justice, but also to the overthrow of all true and plain dealing, bargaining and chevisance between man and man, without the which no commonwealth or civil society can be maintained or continued.' For the well-being of a great commercial country like England, it must always be a matter of the highest importance that the interests of creditors should be secured by every possible means consistent with justice.18 (Our emphasis)

RAMIFICATIONS

(A) Badges of Fraud

Since Twyne's Case19 in 1601, fraudulent conveyance litigation has involved examining the "badges of fraud" to ascertain the requisite intent for a fraudulent conveyance. It is unusual for a transferor to state his or her intent. Accordingly, intent is usually inferred by examining the badges of fraud. The badges serve as a presumptive guide.

Over the centuries the badges of fraud have expanded as circumstances and commerce have changed.

With respect to the badges of fraud, Professor Dunlop states:

Lists of the badges of fraud vary from writer to writer, and no comprehensive catalogue is likely to be agreed upon. The judges in Twyne's Case listed six "signs and marks of fraud" present in the facts before them:

  1. The gift was general "without exception of his apparel, or any thing of necessity".
  2. The donor continued in possession and used the goods as his or her own, including selling them.
  3. The transaction was secret.
  4. The transfer was made pending the writ.
  5. The transfer amounted to a trust of the goods "and fraud is always apparelled and clad with a trust, and a trust is the cover of fraud".
  6. The deed contained the self-serving and unusual provision 'that the gift was made honestly, truly, and bona fide'.

Later judges and writers have added other fact situations which raise one's suspicions of fraud:

  1. The deed gives the grantor a general power to revoke the conveyance.
  2. The deed contains false statements as to the consideration.
  3. The consideration is grossly inadequate.
  4. There is unusual haste to make the transfer.
  5. Some benefit is retained under the settlement by the settlor.
  6. Cash is taken in payment instead of a cheque.
  7. A close relationship exists between the parties to the conveyance.

One can think of other candidates for the list.20

With Braydon, although not as grabbing, the badges of fraud should now more properly be described as the "badges of requisite intent". The requisite intent is not set as high as fraud, as understood in a criminal context, mala fides, or dishonesty. The requisite intent is simply the intent "to put one's assets out of the reach of one's creditors". With this in mind, counsel should expect judges in examining the badges as an aid to determining the transferor's intent will more likely shift the evidentiary burden to the defendant as to the transferor's intent.

(B) Debtors and Creditors

From a debtor's perspective and that of the debtor's transferee, the obvious ramification is that the BCFCA and the OFCA may have broader application than previously thought. Less obvious is the possible ramification for creditors.

On a first read, Braydon would appear to be a creditor-friendly decision. In many cases it will be. In some cases it will not be so. Where a creditor has lent money to a borrower who was a party to a fraudulent conveyance (usually the transferee), the creditor may subsequently find that the borrower does not have the assets that the creditor thought the borrower had.

In short, with the broader scope of fraudulent conveyances there will be less certainty with respect to the true ownership of assets held by a borrower. Lenders may more frequently insist on audited financial statements with the auditor's duties expanded to consider past asset transactions.

(C) Future Creditors

The language, "creditors and others," found in the BCFCA and OFCA captures future creditors.21 With the potential application of the law of fraudulent conveyances expanded, the law with respect to future creditors becomes more important. To put matters another way: when can one organize one's affairs with creditor proofing in mind?

The trial judge in Braydon22 cited with approval the language of Vice Chancellor Malins in Mackay v. Douglas:23

A man who contemplates going into trade cannot on the eve of doing so take the bulk of his property out of reach of those who may become his creditors in his trading operations.24
(Our emphasis)

Vice Chancellor Malins in MacKay v. Douglas also stated:

So, in the present case, if Mr. Douglas had neither gone into nor contemplated going into trade at the time, but some years afterwards, by a totally new arrangement, made up his mind to do so, I should have had no hesitation in coming to the conclusion that his subsequent insolvency could have had no effect in producing invalidity of the settlement which he had made upon his wife and family.25 (Our emphasis)

Between these bookends of contemplation or no contemplation, where is the line? B.C. and Ontario appear to differ in approach.

Ontario

The Ontario Superior Court in Duca Financial Services Credit Union Ltd. v. Bozzo26 (now under appeal) in May of last year stated:

A person is not prevented from rearranging his affairs to isolate assets from future, as opposed to present, liabilities.27

The Court referred to the trial judge's decision28 in Braydon:

There is also dicta to suggest that an honest intent to remove assets from the reach of future creditors through a conveyance of property may be void under s. 2 of the FCA. Botham Holdings Ltd. v. Braydon Investments Ltd. [2004] S.C.J. No. 758 (Q.B.). However, as I have stated above, in my view, the law allows a person to rearrange his affairs to isolate his personal assets from future creditors, as opposed to present creditors. At the time of the execution of the January 29, 1988 trust declaration, Abbas Group had not even purchased the subject property, and the future borrowing from Duca was not in contemplation.29

In Petrone v. Jones30 the Ontario Court of Justice (General Division) held that:

[23] It is not too liberal a construction of the statute to extend it to a case where the conveyance was made to defeat future creditors and it in fact defeats, delays or hinders existing creditors even though there might have been no intention to do so at the time of the conveyance.31

In Beltos v. Tarala32 the Ontario Superior Court commented on Petrone:

11 I do not understand Petrone to stand for the proposition that one cannot put one's 'house in order' to protect assets in case the contingencies of life result in one having creditors in the future. However, in my view, an aspect of 'putting one's house in order' is making provision for the satisfaction of existing debts. In this case, had A. Tarala refinanced the house at the time it was transferred to his wife to generate funds to pay his existing debts, then he would have properly 'put his house in order' for the future.

12 I find that this case falls within the principle stated by Petrone because A. Tarala's stated intention was to protect the house from potential creditors in the future, and the conveyance had the effect of defeating, delaying or hindering an existing creditor. In my view, it is immaterial that A. Tarala offered additional reasons for conveying the house.33

In short, while the jurisprudence is still somewhat uncertain due to the pending appeal of the Duca Financial case, in Ontario if existing creditors are satisfied then the contemplation of future creditors should not attract the OFCA's application.

British Columbia

In B.C., the test is broader than that in Ontario. The contemplation of future creditors who may be hindered or delayed will suffice. In C.I.B.C. v. Boukalis,34 a five-member panel of the B.C. Court of Appeal cited with approval the Court's decision in Newlands Sawmills Ltd. v. Bateman:35

The submission of counsel for the defendants was that Bateman had no creditors at the time he entered into the contract he was entitled to make a voluntary conveyance to his wife of the property in question. The authorities to which we were referred do not sustain this contention. It is a question to be decided upon the proper inference to be drawn from the facts and circumstances of the particular case as to whether there was an intention to defeat creditors or not, and if there was the intention to defeat creditors, then it does not matter whether it was to defeat present or future creditors.36

Accordingly, the test in B.C. parallels the language of Vice Chancellor Malins in Mackay v. Douglas above.

Under either the B.C. or Ontario test, the policy underlying the protection of future creditors is difficult to understand where there is not fraud, dishonesty or mala fides. A future creditor with a little due diligence can ascertain the asset base and creditworthiness of the borrower. Why should the lazy creditor be protected?

It is possible that the Ontario Court of Appeal when it hears Duca Financial may give some guidance as to the law of future creditors and the underlying policy considerations. As described above, the law of fraudulent conveyances is, in its essence, the common law developed by the courts over the past four centuries.

CONCLUSION

The Braydon case will have significance for creditors (current and future), debtors, transferees, and their advisors.

It is unfortunate that "a transfer of property made with a view to protecting assets from creditors, present or future, if made honestly, without moral blameworthiness, and for other legitimate business purposes" has the word fraudulent associated with it. Reputations may be harmed when they should not be.

In the end, Braydon represents a significant evolution in the law of fraudulent conveyances which will continue to evolve, barring legislative reform, through further jurisprudence.

[Editor's note: Gordon is a member of the British Columbia bar. Matthew is a member of the Ontario bar. The authors would like to thank their partner Gordon Esau for his insights and comments.]

Footnotes

1 [2009] B.C.J. No. 2315, 2009 BCCA 521, leave to appeal to SCC refused, [2010] S.C.C.A. No. 26, File No. 33545 (June 24, 2010).

2 Ibid.

3 RSBC 1996, Chapter 163.

4 R.S.O. 1990, c. F.29.

5 See Braydon, supra note 1 at para. 70, quoting from Sykes (Re) [1998] B.C.J. No. 102, 156 DLR (4th) 105, 2 CBR (4th) 79.

6 See HW May, The Law of Fraudulent and Voluntary Conveyances: Being a Treatise on the Statutes of Elizabeth against Fraudulent Alienations, and on the Law of Voluntary Dispositions of Property, 3d ed (London: Stevens and Haynes, 1908) at 3.

7 Interpretation Act, RSBC 1996, CHAPTER 238, s 8; Legislation Act, S.O. 2006, c. 21, Schedule F, s. 64.

8 C.R.B. Dunlop, "Fraudulent Conveyances and Preferences: A Feasibility Study" (Paper presented to the annual conference of the Uniform Law Conference of Canada, Civil Section, Regina, SK, 21 August 2004), online: Uniform Law Conference of Canada http://www.ulcc.ca.

9 See Braydon, supra note 1 at para. 36, quoting from Dunlop, supra note 8 at para. 6.

10 For a more detailed review, see Gordon S Funt, "Asset Protection and Tax Planning" (Paper presented at the 2010 B.C. Tax Conference of the Canadian Tax Foundation, Vancouver, B.C., 20-21 September, 2010).

11 Braydon, supra note 1 at para. 19.

12 Ibid. at para. 10.

13 Ibid. at para. 9.

14 Ibid. at para. 14.

15 Ibid. at para. 73, quoting from Royal Bank of Canada v. Clarke, [2009] B.C.J. No. 720, 2009 BCSC 481 at para. 21.

16 (1870), L.R. 5 Ch. App. 588.

17 Braydon, supra note 1 at para. 58, quoting from Freeman, supra note 16 at 540.

18 May, supra note 6 at 8.

19 76 ER 809, [1774] All ER Rep 303 (Star. Ch.).

20 C.R.B. Dunlop, Creditor-Debtor Law in Canada, 2d ed (Toronto: Carswell, 1995) at 613-14 (citations omitted).

21 Braydon, supra note 1 at para. 67; see also McGuire v. Ottawa Wine, [1913] S.C.J. No. 18, 48 SCR 44.

22 [2008] B.C.J. No. 2192, 2008 BCSC 1547.

23 (1872), 41 LJ Ch. 539, 26 LT 721, 20 WR 652, LR 14 Eq 106 [Mackay cited to LR 14 Eq].

24 Braydon, supra note 22 at para. 59, quoting from Mackay, supra note 23 at 122.

25 Mackay, supra note 23 at 121.

26 [2010] O.J. No. 2233, 2010 ONSC 3104 (under appeal).

27 Ibid. at para. 54, citing Genereux v. Carlstrom, [2002] O.J. No. 1841 (O.S.C.J.).

28 It would appear that the Court may not have been aware of the B.C. Court of Appeal's decision in Braydon.

29 Duca Financial Services Credit Union, supra note 26 at para. 65.

30 [1995] O.J. No. 1478, 33 CBR (3d) 17.

31 Ibid. at para. 23.

32 [1999] O.J. No. 1743.

33 Ibid. at paras. 11-12.

34 [1987] B.C.J. No. 86, 11 BCLR (2d) 190, [1987] 3 WWR 505.

35 [1922] B.C.J. No. 76, [1922] 3 WWR 649, 70 DLR 165 (C.A.) [Bateman cited to BCR].

36 Boukalis, supra note 34 at para. 22, citing Bateman, supra note 35 at 354.

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