Court of Appeal for Ontario

COURT OF APPEAL FOR ONTARIO DATE: 20221114 DOCKET: C70501 Feldman, Hoy and Favreau JJ.A.

BETWEEN

Gary Stevens, Linda Stevens and 1174365 Alberta Ltd. Applicants (Respondents)

and

Sandy Hutchens, also known as Sandy Craig Hutchens, S. Craig Hutchens, Craig Hutchens, Moishe Alexander Ben Avrohom, Moishe Alexander Ben Avraham, Moshe Alexander Ben Avrohom, Fred Hayes, Fred Merchant, Alexander MacDonald, Mathew Kovce and Ed Ryan and Tanya Hutchens, also known as Tatiana Hutchens, Tatiana Brik and Tanya Brik-Hutchens Respondents

Counsel: Brett Moldaver, for the appellant, Adroit Advocacy LLC (Non-Party) Justin Necpal, for the respondents, Gary Stevens, Linda Stevens, and 1174365 Alberta Ltd. James Gibson, for the respondent, A. Farber & Partners Inc. (Receiver) Barbara F. VanBunderen, for the respondents, CGC Holding Company, LLC, Harlem Algonquin LLC, and James T. Medick

Heard: October 11, 2022

On appeal from the order of Justice Cory A. Gilmore of the Superior Court of Justice, dated March 9, 2022, with reasons reported at 2022 ONSC 1508.

Reasons for Decision

1The appellant, Adroit Advocacy LLC, is a U.S. law firm. It appeals the order of the motion judge declaring that mortgages over six Ontario properties granted to it by its clients to secure the payment of legal fees were void ab initio.

Background

2The motion resulting in the order under appeal was brought by the respondents, who are judgment creditors of Tanya Hutchens and Sandy Hutchens (together the “Hutchens”). The judgment, dated July 5, 2019, recognizes two 2018 judgments of the United States District Court for the Eastern District of Pennsylvania, each for more than $26 million USD. The Pennsylvania judgments arose from a mortgage financing fraud perpetrated by the Hutchens.

3The respondents are not the Hutchens’ only judgment creditors. A Colorado class action claim was brought by other victims of the Hutchens’ mortgage fraud scheme, resulting in a jury award of damages to the plaintiffs in that action of more than $24 million USD. The presiding judge in Colorado also imposed a constructive trust over several properties, including five of the six mortgaged properties at issue, finding that they were probably purchased using funds advanced by the Colorado plaintiffs in the fraudulent scheme.

4The appellant acted for various defendants in the Colorado action, including the Hutchens and, until they were released from the action, the corporations (the “mortgagor corporations”) which were the registered owners of the mortgaged properties. On October 4, 2017 – eight days after the Colorado judgment – the appellant registered a $2 million CAD mortgage against six properties in Ontario, five of which were subject to the constructive trust imposed by the United States District Court for the District of Colorado. Tanya Hutchens gave the mortgages in her capacity as the sole shareholder of the mortgagor corporations.

5At the time, the appellant’s outstanding invoices were in the range of $180,000 USD. In an email to Sandy Hutchens, a lawyer at the appellant law firm complained about the delay in the granting of the mortgages: “[I]t is nearly incomprehensible to me that there is a delay in allowing us to receive a lien to ensure our payment that will put us ahead of the plaintiff….”

6The Hutchens live in Ontario and their known assets are in Ontario. In February 2019, over the objections of the Hutchens, an interim receiver was appointed in Ontario over their property, including the mortgagor corporations. The mortgages represent over half of the value of the just over $3 million CDN available to creditors.

7The respondents brought their motion in the context of the receivership proceeding. The Colorado plaintiffs supported their motion. The receivership has been very costly. The receiver deferred to the appellants to bring the motion and took no position on the motion for cost reasons.

8The motion judge found that the mortgages were void under two statutes: they constituted fraudulent conveyances under s. 2 of the Fraudulent Conveyances Act, R.S.O. 1990, c. F.29 (the “FCA”) and were made with the intent to defeat creditors and were an unjust preference under ss. 4(1) and 4(2) of the Assignments and Preferences Act, R.S.O. 1990, c. A.33 (the “APA”).

The issues on appeal

9The appellant argues that the motion judge’s finding that the mortgages are void under the FCA cannot stand for several reasons:

1. She erred in concluding that the respondents had standing to bring their motion;
2. She erred in concluding that the respondents, who were creditors of Tanya Hutchens and not creditors of the mortgagor corporations, were “creditors or others” within the meaning of those terms in s. 2 of the FCA;
3. The motion record does not support her finding that the mortgages were made with “intent to defeat…creditors or others”;
4. She erred in concluding that the mortgages were not made “in good faith” and “upon good consideration”, and, therefore, that the exceptions to s. 2 of the FCA set out in ss. 3 and 7(2) did not apply; and
5. She failed to conclude that that motion was barred by res judicata or was an abuse of process.

10For the reasons below, we conclude that there is no basis for the court to interfere with the motion judge’s finding that the mortgages are void as fraudulent conveyances under the FCA.

11The appellant also argued that the motion judge’s finding that the mortgages were an unjust preference under s. 4 of the APA is tainted by error. However, given that we do not interfere with the motion judge’s finding that the mortgages are void under the FCA, there is no need to detail the issues the appellant raises in relation to the APA.

The relevant provisions of the FCA

12Sections 2, 3, and 7(2) of the FCA are relevant to this appeal:

2. 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.

3. Section 2 does not apply to an estate or interest in real property or personal property conveyed upon good consideration and in good faith to a person not having at the time of the conveyance to the person notice or knowledge of the intent set forth in that section.

4. (2) No lawful mortgage made in good faith, and without fraud or covin, and upon good consideration shall be impeached or impaired by force of this Act, but it has the like force and effect as if this Act had not been passed. [Emphasis added.]

Analysis

(1) The respondents had standing

13Without citing any authority, the appellant says that, in the context of a receivership, only the receiver, and not a creditor in the receivership, can bring a motion affecting the rights of another creditor in the receivership.

14Like the motion judge, we reject this argument.

15A receivership proceeding has a time sensitive and multi-stakeholder nature: Ontario Securities Commission v. Money Gate Mortgage Investment Corporation, 2020 ONCA 812, 153 O.R. (3d) 225, at para. 10. The mortgagor corporations were included in the scope of the receivership order, and the appellant and the respondents were creditors in the receivership. The respondents’ motion involved a priority dispute between two creditors asserting claims against the assets of the receivership. The motion judge found, and the appellants do not dispute, that the receiver deferred to the respondents to bring the motion for cost efficiency reasons. Moreover, the appellants do not point to any prejudice to them resulting from the respondents proceeding in the manner that they did.

(2) The respondents were “creditors or others”

16The appellant argues that, properly interpreted, s. 2 of the FCA requires the mortgagor corporations to have made the mortgages with the intent to defeat creditors or prospective creditors of the mortgagor corporations and that there was no evidence that the mortgagor corporations had creditors or prospective creditors other than the appellant. Hence, the mortgages were not made to defeat “creditors or others” within the meaning of s. 2 of the FCA. In other words, in this context, “creditors or others” means a creditor or prospective creditor of the mortgagor corporation, and the respondents (and the Colorado plaintiffs) were creditors of the Hutchens, not the mortgagor corporations.

17We reject this argument. The appellant construes s. 2 of the FCA too narrowly and ignores the substance of what occurred.

18The FCA, which is couched in very general terms, is clearly remedial in nature and should be given a fair, large, and liberal interpretation that best achieves its purpose, namely to strike down all conveyances of property made with the intention of delaying, hindering, or defrauding creditors and others except for conveyances made for good consideration and bona fide to persons not having notice of such fraud: Royal Bank of Canada v. North American Life Assurance Co., 1996 SCC 219, [1996] 1 S.C.R. 325, at p. 365.

19Tanya Hutchens was the sole shareholder or “principal” of the mortgagor corporations. The receiver’s investigative report found that to a significant extent, payments from the mortgage financing fraud were used to acquire or refinance the mortgaged properties. After Tanya Hutchens was found by two courts to be a fraudster, she granted (“made” in the language of s. 2 of the FCA) the mortgages in her capacity as sole shareholder of the mortgagor corporations. The terms of the mortgages stated that the charges were given as security for payment of outstanding and future legal fees owing to the appellant related to or associated with the principals of the mortgagor corporations. Both the respondents and the Colorado plaintiffs are creditors of Tanya Hutchens. Tanya Hutchens caused the mortgages to be granted as security for, among other liabilities, her liabilities to the appellant. She treated the properties registered in the name of the mortgagor corporations as her own.

20Section 2 of the FCA focuses on whether the conveyance was made with the intent of defeating creditors or others, and, as discussed below, the motion judge found that the mortgages were granted with the intent of defeating the respondents and the Colorado plaintiffs.

21Even if one interprets s. 2 in the manner urged by the appellant (that is, by requiring that the mortgagor corporations have made the mortgages with the intent of defeating their “creditors or others”), its argument fails. It argues that the meaning of “others” is restricted to prospective creditors of the mortgagor corporations. The appellant is correct that “others” has been interpreted as including prospective creditors of the debtor: Indcondo Building Corp. v. Sloan, 2014 ONSC 4018, 121 O.R. (3d) 160, at para 45; Mohammed v. Makhlouta, 2020 ONSC 7494, at para. 45. But in our view, “others” could also include creditors of the mortgagor corporation’s sole principal, in circumstances such as this where all or some of the money used to purchase the mortgaged properties came from the defrauded creditors of the principal, and where the principal caused the mortgages to be granted and did so with the intention of defeating her creditors.

(3) There is no basis to interfere with the motion judge’s conclusion that the exceptions to s. 2 of the FCA did not apply

22To fall within the exceptions to s. 2 of the FCA set out in ss. 3 and 7(2), the conveyance must be made both “in good faith” and “upon good consideration”. The motion judge found that the grant of the mortgages did not satisfy either requirement.

23It is unnecessary to address the appellant’s argument that there was good consideration for the mortgages. The motion judge’s finding that the mortgages were not granted in good faith is a finding of fact and is entitled to deference. That finding was rooted in, among other evidence, the appellant’s own email evidencing its intent to “get ahead” of other creditors, the appellant’s knowledge of the Hutchens’ fraudulent activities, and the appellant’s registration of the mortgages in the face of court-imposed constructive trusts. The motion judge was entitled to reject the appellant’s evidence that it was simply an arms’ length party taking appropriate steps to ensure it would be paid for past and anticipated legal services. The appellant has failed to identify any palpable and overriding error and the motion judge’s finding is amply supported by the record.

(4) No res judicata or abuse of process

24The motion judge rejected the appellant’s argument that the Colorado plaintiffs’ support of the respondents’ motion was an abuse of process because they did not have a judgment in Ontario and were using the receivership to take steps that they should have taken in Colorado. The motion judge found that the Colorado plaintiffs’ course of action in supporting the respondents’ motion made sense procedurally and was cost efficient. It was not an abuse of process. There is no indication that the appellant argued that the bringing of the motion by the respondents was an abuse of process by the respondents.

25Without reference to any legal authority, the appellant renews its argument that the motion should have been barred by the doctrine of res judicata or as an abuse of process. There is no merit to this argument. Apart from the standing issue discussed above and its argument that the respondent was not a “creditor” within the meaning of that term in the FCA, the appellant does not suggest that there was anything inappropriate in the respondent bringing its motion. Further, there was nothing inappropriate in the Colorado plaintiffs supporting it.

Disposition

26For these reasons, the appeal is dismissed. The appellant shall pay the respondents’ costs in the agreed upon amount of $7500, inclusive of HST and disbursements.