Fraudulent Conveyances

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE: 

According to Ontario’s Fraudulent Conveyances Act, any conveyance of real property or personal property made with the intent to defeat, delay, or defraud creditors or others of their just and lawful actions is void as against such persons.  You can’t transfer ownership of your property to someone else in order to keep it out of the hands of your creditors.  The Courts have established a system for identifying the types of behaviour captured by fraudulent conveyance legislation. These guidelines, referred to as the “badges of fraud”, include:

a)    the donor continued in possession and continued to use the property as his own;

b)    the transaction was secret;

c)    the transfer was made in the face of threatened legal proceedings;

d)    the transfer documents contained false statements as to consideration;

e)    the consideration is grossly inadequate;

f)     there is unusual haste in making the transfer;

g)    some benefit is retained under the settlement by the settlor;

h)    embarking on a hazardous venture; and,

i)      a close relationship exists between parties to the conveyance.

Courts have interpreted the term “creditors and others” broadly to include potential beneficiaries of a guarantee (even if no demand has been made) and future creditors. In some cases, courts have held that the presence of existing creditors at the time of a transaction is not required to establish an intent to defeat creditors. In situations where there has been good and valuable consideration (i.e. an actual conveyance for real value), a transaction may still be deemed a fraudulent conveyance if it was not conducted in good faith or if it was made to an individual who knew of the debtor’s intent to defraud.  Some transactions like those done for estate planning may appear legitimate, but property transfers may be considered fraudulent conveyances and set aside where there is evidence that the estate planning was undertaken because of outstanding debts.

A case considered by the Court of Appeal for Ontario involved a creditor seeking to enforce a 2009 judgment against property owned by the spouse of the debtor.  The debtor had borrowed $250,000 and defaulted on the loan.  The creditor obtained default judgment against the debtor (“default” because the debtor didn’t defend the proceeding) for $268,920.  The debtor claimed to have no assets to pay the judgment, asserting that he dealt only in cash, kept no business records, and had a gambling problem. The debtor’s family home and a cottage were both registered in his wife’s name and the debtor claimed that he had made no contribution toward the purchase of the properties. The debtor also alleged that his wife made all mortgage payments from the income earned from her part-time jobs.

In 2018, the creditor commenced a new action against the debtor and the debtor’s wife claiming that the debtor held a beneficial interest in his wife’s properties against which the 2009 judgment could be enforced.  The creditor alleged that the transfer of title to the properties into the debtor’s wife’s name and not into their names jointly (or into the debtor’s name alone) constituted a fraudulent conveyance.  While the wife passed away prior to the trial, there was evidence from her admitted in the trial that she was to be the sole owner of the properties to safeguard them from any future debts arising from the debtor’s gambling habit.  She had attempted to demonstrate how she was able to pay for the mortgages without contributions from her husband.  The wife’s total income from 2010 to 2019 was only $15,471, yet bank records showed total debits to her account of $449,668 in the same period.  The source of these funds was redacted in the records, and neither the debtor’s wife nor her legal counsel disclosed the origin of the funds.  As the trial judge found no evidence that the debtor himself had provided any of the original funds to purchase the properties, the Fraudulent Conveyances Act claim seeking a declaration that the debtor had an ownership interest in the properties failed.  The debtor had never owned the properties or transferred them to his wife.

However, that’s not the end of the story.  The trial judge did find that the debtor’s wife had received $434,000 from unidentified sources and drew an adverse reference against her for the lack of disclosure regarding the sources of the funds. The trial judge also did not accept the claim that the debtor made no contributions to paying the mortgages or the household finances generally.  The judge considered that each spouse would be apportioned an equal share of the unidentified source funds, meaning that the debtor was considered to have contributed $217,000 in value to his wife. On that basis, the trial judge ordered that the transfer of $217,000 was a fraudulent conveyance and void as against the creditor.  He ordered the debtor’s wife’s estate to pay the creditor $217,000, which fell short of the full amount owed under the 2009 judgment.

The creditor appealed the decision to the Court of Appeal, arguing that the trial judge erred both in not attributing a 50% beneficial interest in the properties to the creditor and also in his analysis and computation of the amount of cash to be awarded to the creditor.  The Court of Appeal accepted the trial judge’s finding that that there was no fraudulent conveyance of real property.  However, the Court of Appeal found that the trial judge erred in designating only $217,000 as the amount fraudulently conveyed by the debtor to his wife (to be paid by the wife’s estate to the creditor).  The Court of Appeal decided that the correct interpretation of the trial judge’s adverse inference was that the entire $434,000 was attributable to the debtor and available to the creditor for execution of its judgment.

Read the decision at:  2024 ONCA 733 (CanLII).

The Mystery of the Missing Will(s)

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE: 

Estate administration can be contentious and complex.  Family dynamics and emotions often ignite and drive disputes and litigation between executors, estate beneficiaries and others even where the true last wishes of a deceased relative would appear to be clearly stated.  There are many formal requirements for making a valid will in Ontario.  A failure to fulfill even one of those requirements can provide an opening for a will challenge and costly litigation.

In a case decided by the Court of Appeal, a dispute over the future of an estate farm property boiled down to legal formalities and a scenario that could make for a mystery novel (or at least a short story).  The deceased farm owner allegedly signed two versions of the same will, only one of which was witnessed, and neither of which was available in original form at trial.  By the time of the appeal, the original copy of one of the wills had been found, but it was not enough to convince the Court of Appeal that either will should be accepted.  Instead, the rules of intestacy (where a deceased has no valid will) were to apply.

The farm owner was a bachelor with no children; he died in 2015.  He had executed a will in the 1990s naming his parents as sole beneficiaries of his estate, but they had both pre-deceased him.  Absent a subsequent valid will, the farm owner’s estate would pass to his brother (50%) and the two daughters of his deceased sister (50% jointly) in accordance with the provisions of the Succession Law Reform Act: “Where a person dies intestate in respect of property and there is no surviving spouse, issue or parent, the property shall be distributed among the surviving brothers and sisters of the intestate equally, and if any brother or sister predeceases the intestate, the share of the deceased brother or sister shall be distributed among his or her children equally.”

For two decades prior to his death, the farm owner had been assisted in his farming operation by a long-time friend.  In 2009, he named the friend as his attorney for property and personal care.  In 2013, the legal assistant of the farm owner’s long-time lawyer prepared a draft will naming the friend as the sole trustee of the farm owner’s estate and the beneficiary entitled to inherit the farm property.  The friend asked the Court to determine that the 2013 will was valid so that she would receive the farm.  The farm owner’s brother opposed the request on the basis that there was no valid 2013 will.

At trial, two copies of the 2013 will were marked as exhibits.  One copy – Version 1 – had the farm owner’s signature but no witness signatures.  The other copy – Version 2 – had the farm owner’s signature as well as the signatures of two witnesses.  Both copies were marked “Draft” as the will had only been sent to the farm owner by his lawyer for review and comment; the farm owner had never attended at his lawyer’s office to revise and/or execute the will.  However, the friend claimed that Version 2 had been signed by the farm owner and witnessed prior to his death in 2015.  The brother claimed that Version 2 was signed by the alleged witnesses only after the farm owner’s death once the friend had discovered that Version 1 would not be valid without the signatures of witnesses. 

The friend testified that, after the farm owner’s death, she had searched for a will.  She said that she had found Version 1 in a filing cabinet in the farm owner’s house and took it to the lawyer’s office where she learned that the lawyer had no fully executed copy of the will.  During the visit, the lawyer’s assistant made a copy of Version 1 and returned the original to the friend.  The lawyer’s assistant also advised the friend at that time that Version 1 was not valid because it was not signed by witnesses.  The friend further testified that, after her visit to the lawyer’s office, she found the original Version 2 will on top of a kitchen cupboard in the farm owner’s house (not in the filing cabinet where she found Version 1).  Version 2 was signed by two witnesses and would be valid.  In fact, the Trial Judge found that Version 2 was valid and ruled in the friend’s favour.

No original of Version 1 or Version 2 of the 2013 will was produced at trial.  However, between the time judgment was rendered following trial and the hearing of the appeal, the friend located the original of Version 2 of the will and asked the Court of Appeal to allow it to be admitted as “fresh evidence”.  The Court rejected the request, finding that the new evidence would not change its conclusion that the friend had failed to prove the validity of the 2013 will.  The Court of Appeal found that the Trial Judge made a key error in failing to appreciate the relevance of the evidence of an expert in handwriting called by the farm owner’s brother.  The expert testified that the farm owner’s signatures on the two copies of the 2013 will – Version 1 and Version 2 – were identical.  Without being able to produce the original of Version 1 and, in doing so, prove that each of Version 1 and Version 2 was signed (separately) by the farm owner, the friend failed to overcome the appearance that Version 2 was not signed by the witnesses until after the farm owner’s death.

Read the Court of Appeal's decision at: 2021 ONCA 442 (CanLII).

Utility Easements and Swimming Pools – A Costly Combination

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:

In conducting a title search on a property, it is not uncommon to discover one or more registrations for easements for public and even private utility services.  A municipality may have an easement for a sewer line through a property or an easement for access to maintain a sewer in an adjacent property.  Oil and gas companies have easements for pipelines.  Electricity distributors have easements for electricity transmission and distribution lines.  Telephone companies have easements for telephone lines.  A neighbour may have an easement for a private water line.  In all of these cases, there will be some restriction on the use that may be made of the land encumbered by the easement.  The “servient” owner of the affected land, whether by the terms of a contract or through the Common Law, is generally prohibited from substantially interfering with the rights of the “dominant” owner for whose benefit the easement exists.

Some minor utility easements will have little effect on property use, such as those running parallel to a road allowance where building is already prohibited by setback requirements in a zoning by-law.  Other utility easements can have a major impact on land use.  For instance, the easement for a large diameter high-pressure natural gas pipeline or for an overhead electricity transmission line can effectively sterilize a property.  Within urban centres, such easements may be condemned to serve as “green space”.  In agricultural areas, these easements can often continue to be used for cultivation and other agricultural purposes but not for any other non-agricultural development.

In standard forms of Agreement of Purchase and Sale for land, buyers agree that they will take title to the property subject to minor easements for utility or telephone services or easements for public utility lines that do not have a material effect on the use of property.  While the seller is generally obligated to provide clear title to the property, those easements are an exception.  In some cases, a buyer will know about easements affecting a property before signing the Agreement of Purchase and Sale.  In other cases, easements will only be disclosed after the deal is signed when a title search is conducted.  Sometimes the discovery of an easement can scuttle the closing of a transaction.

In a case decided in 2016, the Ontario Superior Court of Justice ordered that sellers return a $50,000 deposit to a buyer in a failed transaction involving a $1,685,000 home.  The Agreement of Purchase and Sale included the exceptions to clear title mentioned above, but the buyer refused to close the transaction after discovering that there was an easement for a TransCanada Pipelines natural gas pipeline running through the backyard directly beneath the property’s pool, cabana and patio.  There was an agreement registered on title that provided TransCanada with the right to remove the pool and cabana if necessary to deal with its pipeline.

There were actually two TransCanada easements registered on title to the property.  While the sellers had disclosed the existence of one of the easements (registered in 1959), which did not affect the pool, cabana and patio, they failed to disclose the second easement (registered in 1992), which did affect those components of the property.  The sellers had constructed the pool, cabana and patio in 2011 without TransCanada’s consent, and had subsequently entered into the agreement by which TransCanada could require removal of the pool and cabana in order to allow construction to be completed.

The Court ruled in the buyer’s favour, finding that he was entitled to rescind the agreement to purchase the property because of the undisclosed easement and agreement which could “affect, in a significant way, the [buyer’s] use and enjoyment of the property.”

The Court of Appeal for Ontario just released a decision in another utility easement/swimming pool case.  This time, homeowners constructed a swimming pool on a part of their property that was subject to a 1972 general municipal utility easement.  The terms of the easement reserved to the landowners the right to use the surface for any purpose which did not conflict with the Municipality’s rights.  The easement also specifically prohibited planting of trees and the erection of any building or structure.

The homeowners had purchased the property in 2012.  They knew about the utility easement, but believed it was abandoned or never used.  They were wrong.  The easement contained an electricity distribution line servicing a neighbouring property.  The homeowners built their pool in 2014 without a building permit, which resulted in prosecution under the Building Code Act.  In 2018, the easement rights holders (the Municipality and the local electricity distributor) applied to the Court for orders declaring that the pool encroached upon the easement and requiring the removal of the pool.

A judge of the Superior Court granted the application, ruling that the pool “actionably” encroached on the easement because it contravened the express prohibition in the terms of the easement.  Without that express prohibition, though, the judge would have found that the pool did not have to be removed because it did not meet the test for “substantial interference” with the easement; the pool could only “cause some unspecified or unknown, but probably quite minor, degree of inconvenience” to the rights holders in exercising their easement rights.

On appeal, the Court of Appeal upheld the finding that the construction of the pool was an actionable encroachment.  The words of the easement document were clear – do not under any circumstances plant a tree or build a structure within the easement lands. 

Whether you own a property or plan to buy one, don’t ignore easements.  And, no, that caution doesn’t just apply to properties with swimming pools.

Read the Court of Appeal's decision at: 2021 ONCA 1.