The law of fraudulent conveyance in Ontario is a crucial area of law for individuals and businesses alike. It prevents debtors from hiding assets or transferring them to avoid paying money owed, which would be unfair to creditors. In a recent case, the Court of Appeal for Ontario was asked to consider whether fraudulent conveyance claims were sufficient to establish a cause of action under the Fraudulent Conveyance Act, as required under Rule 21 of the Rules of Civil Procedure. The Court ultimately allowed the appeal, shedding light on the operation of Rule 21 motions within this context.
A Rule 21 motion is a procedure used in civil litigation to request that a court dismiss a claim or part of a claim without a trial where there is “no reasonable cause of action or defence.” A party bringing a Rule 21 motion seeks to avoid arguing a claim that cannot succeed. It also allows the parties to focus on the issues that are more likely to lead to a resolution of the dispute.
This motion is based on the argument that the claim is “plain and obvious,” as developed in MacDonald v Ontario Hydro, and has no chance of success. It is made before the parties engage in lengthy, expensive discovery or trial proceedings. The test is a high bar: only claims with a “radical defect” should be struck. If the court grants the motion, the affected or part of the claim will be dismissed without needing a trial. If the motion is denied, the parties proceed with the litigation process.
In Ontario Securities Commission v. Camerlengo Holdings Inc., the Ontario Securities Commission brought a claim against respondent spouses alleging that several transfers were made with “the intent and purpose of defeating … Fred’s existing and future creditors of their just and lawful actions, suits, debts, accounts and damages.”
The case involved Fred and Mirella Camerlengo, spouses and respondents in an Ontario Securities Commission claim for fraudulent conveyance. Fred is also the sole director, officer, and shareholder of Camerlengo Holdings Inc., the corporate respondent.
In 1988, the couple purchased a home in joint tenancy. After incorporating an entity named Gridd Electrical Services Inc., Fred conveyed his interest in the home to Mirella for no consideration. Fred continuously lived in the house while Mirella mortgaged the property to fund her husband’s business activities.
Throughout the years, Fred accrued significant debt. Around 2011, a client should have paid him $1.3 million in construction draws. As a result, he took a loan from an associate who provided $200,000 to Camerlengo Holdings Inc. through another entity called Bluestream International Investments Inc. It was eventually discovered that the associate ran a fraudulent investment scheme, and the Camerlengos were defrauded $600,000.
In 2018, the Ontario Securities Commission issued a disgorgement order against Bluestream International Investments Inc. to recover funds and a garnishment order against Camerlengo Holdings Inc. to recover the $200,000 owed. The Commission also sought to have the property transfer and several payments made from Camerlengo Holdings Inc. to the Camerlengos as fraudulent conveyances.
The Camerlengos brought a motion to strike under Rule 21 because the Ontario Securities Commission’s pleadings “did not disclose a reasonable cause of action.” The motion judge struck the claims of fraudulent conveyance based on their consideration of section 2 of the Fraudulent Conveyance Act, which states:
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.
The motion judge’s findings are based on their interpretation of “creditors.” In the motion judge’s opinion, Bluestream International Investments Inc. and the Camerlengos are not creditors regarding the property transfer, which occurred before debts were accrued. The motion judge relied on the case of Wilfert v. McCallum, 2017 ONCA 895, 54 C.B.R. (6th) 249, which required that such a claim for a fraudulent property transfer “must contain particulars such as the names of creditors at the time of the transfer or of an impending risky financial venture.”
The Court of Appeal found that the motion judge erred in their interpretation and application of section 2 of the Fraudulent Conveyance Act. In doing so, the Court relied on several cases that support the interpretation that “a subsequent creditor – that is, a claimant who was not a creditor at the time of the transfer – can attack a transfer if the transfer was made to ‘defraud creditors generally, whether present or future.’
In considering the pleading in light of the motion to strike, the Court considered several “badges of fraud” that “raise a suspicion that needs to be answered”:
- Fred transferred the property to his wife at no consideration;
- The transfer was made “after 16 years of joint ownership”;
- The transfer was made only 4.5 months after Fred incorporated Gridd Electrical Services Inc., which was done using the same lawyer;
- The Camerlengos were concerned about Fred’s liability due to his work; and
- Fred continued to live at the property, paid property expenses, and gave personal mortgage guarantees.
When considering the above, the Court found that if the facts were supposed to be true (as required under Rule 21), it is not “plain and obvious” that the claim would fail. As a result, the Court allowed the appeal and dismissed the motion in its entirety.
The highly experienced litigation team at Milosevic & Associates is familiar with complex commercial matters involving the Fraudulent Conveyance Act. We represent business owners at all levels of court, including before the Ontario Court of Appeal and the Supreme Court of Canada. To speak with a litigation lawyer today, contact us online or at 416-916-1387.