Tracing and Fraudulent Conveyances

David Debenham
Co-Chair of the McMillan Fraud Law Group

How often do fraud victims chase fraudsters only to find that at the end of the road the fraudster has conveyed all his or her assets to a family member, and gone bankrupt? Despite the familiarity of this scenario, the path forward remains unclear to many. In Esfahani v. Samimi,1The Plaintiff obtained a judgment in Germany against the Defendant Kamran in 2007. An Ontario judgment was then obtained in 2009 recognizing the German judgment in the amount of $645,754.08 and finding it to be enforceable in the Superior Court of Ontario. The Plaintiff received no payments pursuant to the Judgment and as such brought a second lawsuit in 2011 claiming damages and pleading that Kamran fraudulently conveyed real estate to the Defendants in this lawsuit in order to evade payment of the Judgment. Kamran filed an assignment in bankruptcy on November 6, 2013 under the Bankruptcy and Insolvency Act (“BIA”). Kamran was discharged from bankruptcy on August 7, 2014.

In 2013, the Plaintiff originally brought this summary judgment motion. In September 2013, counsel agreed that the motion ought to proceed as a mini trial with the judge answering a single issue. The mini trial proceeded before Justice Dunphy in early 2015.2 Justice Dunphy found that the Defendants did engage in various transactions with the intent to defeat, hinder or delay the Plaintiff from receiving payment from Kamran for the Judgment. The Defendants appeal was dismissed in May 2016.3

The Plaintiff now claims for a money judgment against the Defendants. The Plaintiff relies on the provisions of the Fraudulent Conveyances Act (“FCA”) and the Assignment and Preferences Act (“APA”)4 to recover the proceeds of the fraudulent conveyances to satisfy the outstanding judgment. It is submitted that any funds from the fraudulent conveyances are imprinted with a trust for the Plaintiff. The Plaintiff asserts that when a transaction is declared to be fraudulent under the FCA, the net proceeds of the transaction will be ordered to be paid over to the creditors of the judgment debtor pursuant to s.12 of the APA.

The Defendants argue that the Plaintiff has no entitlement to judgment and the Plaintiff has followed the incorrect procedure. Counsel for the Defendants submits that the Plaintiff did not object to the discharge from bankruptcy. Since Kamran went bankrupt, the Plaintiff ought to have followed the scheme set out in the BIA. The Defendants submit that the motion ought to be dismissed because Kamran has been discharged from bankruptcy and the debt upon which these proceedings are based has also been discharged so there is no “debt” which can form the basis of a judgment.

The Plaintiff was the only listed creditor in the bankruptcy, duly filed and proved its claim and appointed the sole inspector. The trustee could have been financed by the Plaintiff or replaced or an assignment of the causes of action sought. Post-bankruptcy, an FCA claim can only belong to the trustee. Section 38 of the BIA Section 38 of the BIA provides a ready answer to a creditor who wishes to continue or commence an FCA action after bankruptcy of the debtor should the trustee fail to pursue it. The Plaintiff can commence a motion in bankruptcy court seeking to set aside Kamran’s discharge and for permission to proceed with the bankruptcy proceeding in his own name pursuant to s.38 of the BIA if the trustee has failed to do so, and the Plaintiff purchases the cause of action from the trustee as a result.

As a result of the findings of Dunphy J., the transactions are void and the properties revert to Kamran, who has been discharged from bankruptcy and is no longer a debtor to the Plaintiff. It is the bankruptcy estate that has the claim under the FCA and an action that seeks to claim against others belongs to the trustee, regardless of whether or not there has been a discharge. It is up to the trustee whether or not claims are pursued, but in the event that the trustee elects not to proceed with a claim, the Plaintiff, who is a creditor against the estate, has various remedies available to it. The Plaintiff may seek the reappointment of the trustee or even the appointment of a different trustee. If such remedies are pursued by the Plaintiff these motions must be set down in a bankruptcy court, not as a standard summary judgment motion in the regular civil court.

The FCA does not confer a cause of action in damages against a transferee.5 An action brought by a creditor to recover property belonging to a bankrupt vests in the trustee. In these circumstances, there are only two methods for pursuing that cause of action: by the Trustee initiating an action pursuant to section 30(1)(d) of the BIA; and by a creditor under the authority of section 38 of the BIA.6

Section 12 of the APA provides that in the case of a fraudulent conveyance found invalid against creditors, and the property fraudulently conveyed has been sold or encumbered, the resulting money may be seized as if the property remained in the hands of the debtor, and “ … and such right to seize and recover belongs not only to an assignee for the general benefit of the creditors of the debtor but, where there is no such assignment, to all creditors of the debtor.” Thus, the right to claim damages under s.12 of the APA belonged to Kamran’s trustee as well.

Conclusion

Fraud victims cannot treat the fraudster’s bankruptcy as a ruse to throw them off the scent of the fraudsters’ colleagues in crime. Instead, they must carefully examine the new opportunities that the apporintment of a trustee in bankruptcy presents for them and adjust their strategies accordingly.


1 2017 ONSC 7167
2 see Esfahani v. Samimi, 2015 ONSC 657 (CanLII),

3 (see Esfahani v. Samimi, 2016 ONCA 418 (CanLII),
4 Fraudulent Conveyances Act, R.S.O. 1990, c. F.29, (“FCA”) and the Assignment and Preferences Act, R.S.O. 1990, c. A.33, (“APA”)LEGAL_28874450.1

5 Chiang (Trustee of) v Chiang, 2014 ONSC 3070 (CanLII), at para. 8,6 Marco v. Levy, [2001] O.J. No. 1310 (S.C), at para. 8,

Published by

David Debenham

David Debenham

David, CPA, CMA, is the co-chair of the Fraud Law Group of the law firm of McMillan LLP