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Badges of Fraud

It is worthwhile to be reminded of the test for setting aside a transfer of property under the Fraudulent Conveyances Act.

In the recent decision of Anisman v. Drabinsky 2020 ONSC 1197, Justice E. M. Morgan confirmed “the test for whether a transfer of the Property is rendered void under section 2 of the FCA is one of intent: was the transfer of title done in order to defeat creditors?” [64].

The Court further confirmed “if there was an intention to defeat creditors, then it does not matter whether it was to defeat present or future creditors”: Incondo Building Corporation v Sloan, 2014 ONSC 4018, at para 48. All creditors of Mr. Drabinsky’s, including the Plaintiff (who in any case was already a creditor when the transfer occurred), could bring this claim. But to succeed they must establish that the transfer was done with intent to defeat the transferor’s creditors, and not just that it has this effect: Bank of Nova Scotia v Holland, [1979] OJ No 1190, at para. 12. [65].”

Justice Morgan noted that “Over the years, the courts have developed a list of indicia of fraudulent intent, allowing an assessment of the debtor’s subjective perspective to be inferred from objective criteria. These factors, or “badges of fraud”, must be considered as at the time of the impugned transaction: CIBC v Boukalis 1987 CarswellBC 513, at p. 4 (BCCA). [66].”

These “badges of fraud” were established more than four hundred years ago:

[67] “The badges of fraud derive from Twyne’s Case (1601) 76 E.R. 809.  As interpreted by modern courts, the badges of fraud include:

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

(e)  the transaction was secret;

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

(g)  the transfer documents contained false statements as to consideration;

(h)  the consideration is grossly inadequate;

(i)  there is unusual haste in making the transfer;

(j)  some benefit is retained under the settlement by the settlor;

(k)  embarking on a hazardous venture; and

(l)  a close relationship exists between parties to the conveyance.”

In the present case Mr. Drabinsky and his wife transferred their jointly owned property to his wife for nominal consideration.

The Court found that given “the timing and the way the transfer was done, many of the badges of fraud were present [68]” and the transfer was set aside as void as against the Plaintiff and other creditors.

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