Finding of Fraudulent Conveyance in Family Law Proceeding


Finding of Fraudulent Conveyance in Family Law Proceeding
Posted in Michael Stangarone, Stephen Kirby Posted on November 19, 2020

Finding of fraudulent conveyance in a family law proceeding and rare vesting order hands non-compliant ex-husband’s share of the matrimonial home to former spouse

A rare vesting order granting a woman full ownership of a matrimonial home could save years in enforcement efforts against her former husband, says Toronto family lawyer Michael Stangarone.

In the recent case of I. v. I., the judge ordered the husband’s equity in the $1-million home to be vested in his former wife’s name, to satisfy part of the equalization and spousal support lump sum payments owing to her.

According to the judgment, the man’s past misconduct in the case included removing funds from the RESP accounts of the couple’s children, as well as surreptitiously transferring funds to his mother in an attempt to have them excluded from equalization and support calculations.

“Under such circumstances, there is a legitimate fear that [the former husband] will not comply with the payment orders that I have made in this judgment,” the judge concluded. “He has shown bad faith in the past, and there is no remedy that will work.”

As a result, the trial judge Justice McDermot ordered that the husband’s 50-per-cent stake in the couple’s matrimonial home – the only major asset between the pair – should be vested in the wife’s name. Even after accounting for the $530,000 value of his equity, the husband still owed his wife $147,535 in lump-sum spousal support, which the judge gave him 30 days to pay or face a further judgment for that amount and support deduction order.

 

A Significant Remedy

“It is a very significant remedy,” says Stangarone, a partner with MacDonald & Partners LLP, who acted for the successful wife along with firm associate Stephen Kirby. “This has been a horrific and tragic situation for our client, but the judge’s decision goes a long way towards rectifying that.”

“In effect, it gives her a clean break, because without the vesting order, she could have been attempting to take enforcement measures for years,” he adds. 

The couple separated in 2014 after 19 years of marriage.

Blaming financial and personal difficulties for multiple breaches of a temporary support order made in 2014, the husband claimed his former spouse should become immediately self-sufficient and that their house should be sold – allowing him to realize the value of his share.

He also claimed that his income had dropped to around $50,000 per year, with his ability to earn any more impaired by complications resulting from cancer in his muscles.

Meanwhile, the wife claimed that her former husband had understated his income from a design business co-owned with his mother, and raised questions about payments made between the two in the dying days of the marriage.

According to Stangarone, the judge’s findings on the credibility of the parties were critical to the result.  Concluding that the wife’s testimony was “significantly more reliable and credible” than her former husband’s, the judge went on to add that he was “not a believable witness.” 

 

Destroyed Evidence

One particular exchange highlighted in the decision dealt with the husband’s explanation for the lack of records showing cash he received from the business. Under cross-examination, he admitted to disposing of  the phone on which he had tallied up all his cash income after the litigation had begun, despite undertaking through his lawyer not to destroy any evidence.

“When that was brought to his attention, he then said that his phone had crashed and the contents of the hard drive was lost. Although he testified that he took it to Apple to unsuccessfully retrieve his data, he had nothing proving that,” the judge wrote. “It was similar to a child telling his teacher that the dog had eaten his homework and as believable.”

Ultimately, the court imputed the husband’s annual income at $142,000, ordering him to pay just over $3,000 per month in child support, as well as $335,000 to his ex-wife in lump sum spousal support.

When it came to the equalization of assets, the husband was ordered to pay $340,000 after the judge found he had made fraudulent conveyances to his mother with the intent of defeating his wife’s matrimonial claims.

 

The Badges of Fraud

The trial judge reviewed the “badges of fraud” that have been long standing elements of English Law.  These “badges” can raise an inference of intent resulting in a shift of the onus on the conveying party to explain himself.  At para. 52 of the decision of Indcondo Building Corp. v Sloan 2014 ONSC 4018, they are outlined as follows:

 The badges of fraud derive from Twyne's Case, Re (1601), 76 E.R. 809 (Eng. K.B.). As interpreted by modern courts, 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.

 

There were two transactions called into question in this case, as noted by the trial judge. The first was the payment of $149,000 by the husband to his mother. He claimed that this was to repay her for cash that he had taken out of the business over the six previous years which he owed her.  The second was the repayment of a $200,000 mortgage registered against the matrimonial home in favour of his mother in 1995.

Stangarone says the opaque nature of the man’s financial situation left his client with some detective work to do with the assistance of an expert in order to show that money transferred from the former husband to his own mother during the marriage were fraudulent conveyances, and that the funds should be treated as assets included in his net family property at the time of the separation.

The mother acknowledged receiving around $350,000 from her son in the last few years of the marriage and admitted under cross-examination that the same money may have been used to pay for a house bought in her daughter’s name in 2014. Following the daughter’s death that same year, the home was transferred to the mother.

 

Secret Transfers

The trial judge was satisfied that a series of transfers worth $149,000 from joint accounts shared by the former spouses to the husband’s mother bore a number of the badges of fraud: 

“…A number of the “badges” are present in respect of the payment of the $149,000 to his mother.  These transactions were kept secret from Ms. I and were set up to conceal the true nature of them.  Mr. I knew that there were “threatened legal proceedings” as he knew that the marriage was breaking down, and that he needed to protect these assets from Ms. I’s equalization and support claims.  The transfer documents were patently false and intended to deceive.  And the consideration is “grossly inadequate”; Mr. I said that he owed his mother $114,000 which was the cash that he had removed from the business over the previous six years; however, he acknowledged in his submissions that he had in fact over paid his business partner by $57,000 as he only owed his mother half of the cash payments that he had received.  This leaves $92,000 in unexplained transfers to his mother; Mr. I says that he repaid the mortgage from a joint business account.

Finally, one of the badges of fraud is that the settlor of the funds retains the use or benefit of the monies after the transfer.  In this case, it is probable that these funds received by his mother were used in the purchase of the home on 2189 Old Rutherford Road in Maple.  That home has been placed in the name of the motherwho appears to be the repository of most of Mr. I’s assets.” 

 

Suspicious Transactions

“[He] has not explained the transactions which were suspicious in both the method by which they were effected, and as to the purpose of the transfers.  Therefore, I find that the transfer of these funds was a fraudulent conveyance,” he concluded. 

In addition, the trial judge found that the $200,000 repayment of a mortgage held by the mother on the couple’s home was another fraudulent conveyance, noting that the 10-year limitation period on the loan had already passed and that no payment installments or demands had ever been made between 1995, when the property was purchase, and 2012, when the husband repaid the loan in full.

“If there was ever an intent to repay the loan, that intent had long expired by the time the loan was paid by [the husband] in March, 2012. This was, by the time it was repaid, an unenforceable debt, and [he] failed to adequately explain how it was repaid or why it was repaid as the marriage broke down, and at the same time he was diverting funds to transfer $149,000 to his mother,” the judge wrote.

The costs order in the case followed a similar pattern to the trial judgment, delivering another boost to the wife.

Finding that the wife was entirely successful at trial, the judge concluded that the husband’s bad faith conduct required him to assess costs on a full recovery basis. Ultimately, the husband was ordered to pay the wife costs of $250,000, inclusive of disbursements and HST, collectable as support.

 

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