Setting Aside Fraudulent Conveyances – A New Judicial Trend?
by Andrew Rogerson TEP
STEP Journal – October 2009
In a landmark ruling, the Ontario Superior Court has rejected the so-called Collateral Attack defence, much used in Fraudulent Conveyance litigation. The judgment in Peake v Dashney (1) has wide implications for those practitioners engaged in asset protection, trustees in bankruptcy and counsel engaged in attacking or defending dispositions involving Orders made in Family Court property settlements.
The asset protection schemes at risk constitute those of a crude, yet very widespread nature. A husband (or wife), on the eve of bankruptcy transfers his share in the matrimonial home to the wife. He alleges matrimonial breakdown and thereupon obtains a Family Court Order sanctioning the transfer. Thereafter, he bankrupts himself, sure in the knowledge that the house is safe from his creditors.
Very frequently, when Trustees in Bankruptcy have challenged such Fraudulent Conveyances / Preferences in the Bankruptcy courts, their efforts have been defeated by the Collateral Attack Rule. In brief, this “rule” purports to prevent a Bankruptcy Court setting aside an Order of a Family Court. In Ontario, the decision of the Saskatchewan Court of Appeal in Ostapowich (2) has largely held sway. It is authority for the proposition that one must return to the Family Court and seek to set aside the Order in that court, not bring collateral proceeding in the Bankruptcy Court. The Order of the Family Court therefore acted as an estoppel to proceeding in the Bankruptcy Court. Ostapowich has been widely followed since decided in 1996 and itself is the reincarnation of earlier decision from the 1800’s. Australian Courts, for example, have largely followed the same path.
Peak v Dashney
At the hearing before Gordon J in Peak v Dashney, counsel for the Trustee in Bankruptcy argued that Ostapowich was wrongly decided and should be distinguished (3). Counsel also proffered the following flexible approach based on Australian and United States jurisprudence: (a) declare that the impugned Order is spent by reason of being carried out and then order appropriate re-transfers of the property; (b) order an early sale of the property and the application of the proceeds to the bankrupt estate; (c) order one of the parties to move the Matrimonial Division to set aside the Order.
In 2004, Cumming J, sitting in Bankruptcy had foreshadowed the decision Gordon J was to take in Peake v Dashney. In Re Payne (4) His Honour, hearing the matter in the Bankruptcy Court, refused to transfer the matter back to the Family Court, explaining that both courts were in fact simply branches of the Superior Court and Judges of each were equally empowered to deal with the matter. In this case, owing to the specialisation inherent in the staffing of the Bankruptcy Court, the matter was best dealt with by a Bankruptcy Judge. His Honour also stressed the advantage inherent in the Bankruptcy Court of having the creditors heard as well as the husband and wife.
Gordon J, in reviewing the decision of Cumming J, held it was unnecessary to pray in aid the specialisation of Bankruptcy Court Judges when deciding the Bankruptcy Court should set aside or vary an Order of the Family Court. His Honour agreed on the jurisdictional issue, the Family, Bankruptcy and Commercial Courts being, in reality, “Lists” within the Superior Court. At all times the jurisdiction exercised was that of the Superior Court, whether it be in a location within Ontario that had a specialised list or not.
‘The Superior Court has sole jurisdiction and if the matter is to be returned to the “same” court for a declaration of invalidity then that is what is happening here. It is being returned to the Superior Court of Justice.’
His Honour went further, and this may be of persuasive value in jurisdictions where Family Courts and Bankruptcy Courts are creatures of different statutes and therefore truly separate Courts.
‘To return to the respondent’s position that the within application is a “collateral attack” on the (Family Court Order), there is more than sufficient evidence here to establish prima facie financial non-disclosure and misrepresentation (pensions and debts) and questionable separation for either a matrimonial court or a bankruptcy court, even if they were separate entities, to assume jurisdiction………Jurisdiction should be and accordingly is accepted by this court.’
Manifest in the decision in Ostapowich is another important factor as to why it was wrongly decided:
‘…In a matrimonial property application, if the parties come to an agreement the judge must still decide whether the agreement is just and equitable before making the order and thus has a power of review over any agreement and is not bound by the parties’ agreement. The Court must decide, based on the facts and the law, and that decision may ultimately reflect the agreement made by the parties but it is still the Court ‘s decision, not that of the parties… ‘(5).
This, with respect, does not reflect the day to day procedure busy Family Court Judges who certainly, do not have any opportunity to hear from creditors of the parties.
In Peake v Dashney His Honour, in refusing to follow Ostapowich, accepted this reasoning:
‘Consent orders based upon minutes of settlement afford a judge little opportunity for scrutiny……. As a Member of the Superior Court …. for many years I can confidently state that such orders are usually produced for signature without the full file. Review is generally restricted to determining if the order properly follows the terms in the minutes of settlement and does not contain terms that are unenforceable or contrary to precedent. To espouse settlement of issues, a court is predisposed to give effect to agreement between parties.’
The basic unfairness of the Collateral Attack estoppel is summarized by His Honour thus:
‘In principle, once a judgment or order is signed, the parties should be able to rely upon it for future order in their lives. This is logical with regard to parties who deal in good faith but with respect, makes no practical sense if the parties who proposed the order did so based upon minutes of settlement entered into with fraudulent or illegal intent or in bad faith.’
His Honour then provided a cogent rationale for the Bankruptcy Court to reopen the Order:
‘…in the case at hand all parties are before the court. The trustee representing the interests of the creditors, the bankrupt husband represented separately and competently and his spouse also represented separately and competently. The parties are fully represented in the motion, whereas the creditors had no representation at the time of the (Family Court Order). If the matter was brought back in the family action, which might possibly be said to have been completed and the judge “functus”, the parties could be no more fairly represented.’
In the instant case, the Family Court Order in respect of the transfer of the matrimonial home from husband (bankrupt) to wife was not one made after any form of consideration of the merits, indeed the transfer of the house had already occurred before any Judge saw the papers. His Honour reflected on the status of the agreement between the parties, the transfer that followed it and the Family Court Order thus obtained:
‘The (Family Court Order) order simply recognizes that this has been done. There is no wording of approval, ratification, or sanction. If the minutes of settlement were entered into for illegal or fraudulent purpose, they should fall as should the order. ….If the agreement is shown to be fraudulent or illegal, the transfer was void not voidable. The court order, even if it had specifically purported to ratify, approve, and confirm, could not validate a void document.’
His Honour went further:
‘Even if the Order can be considered ratification, it is my view that where a Consent Order is obtained through underlying fraud or illegality, especially if there is significant lack of financial disclosure the proceeding is not a “collateral attack”…..To hold that there is “collateral attack” here would be to surrender substance to illusory form where merits should enjoy preference.’
His Honour’s decision was handed down 6 years to the day since the husband purported to transfer his share in the matrimonial home to his wife. In holding there was ample evidence that the parties had “professed to separate under an engineered illegal or fraudulent separation agreement”; he Ordered an immediate reversal of the illegal transfer in favour of Mr Peake, the Trustee in Bankruptcy. (6) (7)
- #31/0434764 (ON S.C., July 15 ,2009) (I.M. Gordon J) . The writer appeared as counsel for the Trustee in bankruptcy, Kenneth Peake. This case has not been reported yet, but the author will be pleased to supply a pdf copy upon request to firstname.lastname@example.org at the proof reading stage of this article, news was received that the bankrupt intended appealing.
- Bank of Montreal v Coopers & Lybrand Inc. and Ostapowich (1996), 40 C.B.R. (3d) 161 (Sask. C.A.).
- In this regard, counsel adopted, with grateful acknowledgement, the opinion set forth by Robert A Klotz in his seminal work Bankruptcy, Insolvency and Family Law, (2nd Edn.).
- 2004 CanLII 4784 (ON S.C.) (Cumming J),(Leave to appeal refused, McPherson J.A, (Ont.C.A., September 22, 2004))
- note 2 ibid
- The Fraudulent Conveyances Act (Ontario’s successor to the Statue of Elizabeth, 1571) was argued at the hearing by counsel for the Trustee in Bankruptcy, over objection from counsel for the bankrupt and his wife, as it had not been pleaded when proceedings were commenced some years earlier. In rendering his decision Gordon J, found it unnecessary to rule on this argument, and held there was sufficient before him to declare the transaction void under s95 of the Bankruptcy and Insolvency Act (Federal) and s4(1) of the Assignments and Preferences Act (Ontario).
- Gordon J also disagreed with a further limb of Ostapowich, that held the wife was not a creditor, therefore could not be the subject of a fraudulent preference. His Honour held Mrs Dashney to be a creditor in terms of s95 Bankruptcy and Insolvency Act as follows: “Where a. wife’s property claims are frustrated by a. husband’s bankruptcy filing, she is entitled to prove a claim as a creditor. In addition, real property in Net Family Property statements and equalization issues are debt based clearly implying creditor status. In this regard. see Thibodeau v Thibodeau (2009) OJ number 1965 QCJ Backhouse, J.”.