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Badges of fraud

Some people, for legitimate estate planning purposes, divest themselves of valuable assets or arrange their affairs in a way that would make probate unnecessary. In our practice, it is not uncommon to come across estates with no value as a result of estate planning. Then there are cases where people transfer assets out of their hands for the purposes of defeating the claims of their spouses and other creditors.

Section 2 of the Fraudulent Conveyances Act is applicable to family law and estate proceedings alike and may be useful to potential creditors of an estate. Section 2 of the Act provides:

Every conveyance of real property or personal property and every bond, suit, judgment and execution heretofore or hereafter made with intent to defeat, hinder, delay or defraud creditors or others of their just and lawful actions, suits, debts, accounts, damages, penalties or forfeitures are void as against such persons and their assigns.

To satisfy the conditions under section 2, there must be:

  1. A conveyance of real or personal property;
  2. An intention to defeat, hinder, delay or defraud; and
  3. That intention is directed specifically towards creditors or others.1

As a matter of practice, it is often difficult for creditors to prove fraudulent intent as the most incriminating evidence is usually in the hands of the opposing party2. The following are “badges of fraud”, which are indicators that a conveyance of property was made with the intent to defeat or defraud creditors of any financial rights or damages that existed within the property and which may assist the court in determining intent:

  1. the donor continued in possession and continued to use the property as his own;
  2. the transaction was secret;
  3. the transfer was made in the face of threatened legal proceedings;
  4. the transfer documents contained false statements as to consideration;
  5. the consideration is grossly inadequate;
  6. there is unusual haste in making the transfer;
  7. some benefit is retained under the settlement by the settlor;
  8. embarking on a hazardous venture; and
  9. a close relationship exists between parties to the conveyance.3

Creditors and their counsel should keep these badges of fraud in their litigation arsenal as they confront an insolvent debtor or estate.

1. Goldman v. Kudelya & Kharkhurkina, 2015 ONSC 4674, at para. 9

2. Supra, para. 14

3. Indocondo Building Corp. v. Sloan, 2014 ONSC 4018, at para. 53

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