Bankruptcy is Not Always the Way Out of Trouble

In the interesting case of Indcondo Building Corporation v. Sloan, released July 18, 2012, the Ontario Court of Appeal dealt with a situation in which a couple attempted to use the bankruptcy process to avoid an action attacking the husband’s transfer of his matrimonial home to his wife as a fraudulent conveyance. 

In 2001, Indcondo Building Corporation obtained a judgment against one David Sloan for about $8 million.  After obtaining the judgment, Indcondo found out that Mr. Sloan had transferred title to his home to his wife about 45 days after having been served with the Statement of Claim issued by Indcondo. 

A couple attempted to use the bankruptcy process to avoid an action attacking the husband’s transfer of his matrimonial home to his wife as a fraudulent conveyance.

As a result, in 2002, Indcondo sued the Sloans to set aside that transfer as a fraudulent conveyance. 

Two years later, Mr. Sloan declared bankruptcy.  That had the effect of bringing Indcondo’s action to a halt. 

Shortly thereafter, Indcondo asked the Trustee in Bankruptcy whether or not he planned to continue the attack on the conveyance of the matrimonial home.  The Trustee indicated that because the estate had no money, any such action would have to be undertaken by Mr. Sloan’s creditors. 

In 2005, Mr. Sloan was discharged from bankruptcy.  The conveyance was not raised as an issue in the discharge proceeding. 

In 2006, Indcondo obtained an Order from the Registrar in Bankruptcy authorizing Indcondo to proceed with an action against the Sloans to set aside the transaction.  That Order was made pursuant to a section of the Bankruptcy and Insolvency Act that permits creditors to proceed on their own behalf and for the benefit of all creditors contributing towards the costs of the action, to advance a cause of action that the Trustee could have advanced.

Having obtained that Order, Indcondo commenced a new action against the Sloans.  The Sloans then brought a motion to stay the new action as an abuse of process. 

The Sloans were successful in motions court.  The motions judge found that the action was really a collateral attack on the discharge Order and could not succeed because the underlying debt owed to Indcondo had been released upon Mr. Sloan’s discharge from bankruptcy.

To summarize, Indcondo sued Mr. Sloan and obtained a sizeable judgment.  Indcondo was unable to collect on it because Mr. Sloan went bankrupt with no assets.  One of the reasons he had no assets was that he had transferred title to his matrimonial home to his wife.  As far as the motions court judge was concerned, Indcondo had no right to pursue Mr. Sloan with respect to that transaction because of the bankruptcy.  Having sued him once, it was not permitted to sue him again.

The Court of Appeal did not agree.  The Court of Appeal pointed out that the claims now being advanced by Indcondo were not the same as those that it had advanced earlier.  In the earlier action, Indcondo sued on its own behalf.  The new action was brought by Indcondo to assert a claim belonging the Trustee, and on behalf of all creditors. 

What the Court of Appeal did not mention is that actions to set aside fraudulent conveyances are always deemed to have been brought on behalf of all creditors, and not only on behalf of the creditor named as the Plaintiff.  This may not have been raised before the Court.

In any event, as a practical matter, the distinction was not significant.  It appears that Indcondo was the only party interested in funding the litigation, and as a result, Indcondo was the only party that stood to benefit from success in the new action.  Technically, however, because Indcondo was not bringing the new action in its personal capacity but rather stood in the shoes in the Trustee in doing so, the new action was not affected by the discharge Order and did not constitute an abuse of process.  Accordingly, the new action was permitted to proceed.

This is an example of the Court of Appeal refusing to permit individuals who may have entered into a fraudulent conveyance transaction from using the bankruptcy rules to avoid liability by insulating the conveyed asset from attack by legitimate creditors. 

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