Court File and Parties

COURT FILE NO.: CV-16-553897 DATE: 20170623 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: BRYON WILFERT and ELIZABETH WILFERT Plaintiffs – and – IAN MCCALLUM and JACQUELINE BOUGHNER Defendants

Counsel: Paul H. Starkman, for the Plaintiffs Shaun A. Hashim, for the Defendants

HEARD: February 21, 2017

M. D. FAIETA, j.

Reasons for Decision

Introduction

[1] The defendants bring this motion pursuant to Rule 21 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, for an order dismissing this action on the basis that: (1) the plaintiffs have no standing to bring this action; (2) the claim is statute barred; and (3) the plaintiffs do not have the legal capacity to commence and continue this action.

[2] I have granted the defendant’s motion to dismiss this action for the reasons described below.

Background

[3] In a defamation action bearing Court File No. CV-14-513382, the plaintiffs, Bryon Wilfert and Elizabeth Wilfert, obtained a default judgment in the amount of $658,000.00 against the defendant Ian McCallum (“McCallum”) on May 12, 2015. It was alleged that McCallum made defamatory statements about the plaintiffs in August 2014.

[4] On September 25, 2015 McCallum made an assignment in bankruptcy of all his property to the benefit of his creditors pursuant to the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”).

[5] The Wilferts filed a proof of claim in respect of the McCallum’s bankruptcy.

[6] On September 28, 2015 the Wilferts were notified by the Trustee in Bankruptcy that McCallum would be discharged from bankruptcy on June 26, 2016. The Wilferts did not oppose the discharge of McCallum as a bankrupt. The Wilferts’ proof of claim was approved by the Trustee in Bankruptcy.

[7] On May 24, 2016 the Wilferts sought and obtained an order, pursuant to section 38 of the BIA, with the Trustee in Bankruptcy’s consent, authorizing the Wilferts to commence and prosecute proceedings in their own name against McCallum on the grounds that: (1) the Trustee in Bankruptcy has a prima facie cause of action against the proposed defendants in that it alleges a fraudulent conveyance of McCallum’s home to his spouse Jacqueline Boughner (“Boughner”); (2) the Trustee in Bankruptcy refused to commence such action; and, (3) the Applicants are creditors of McCallum.

[8] This action was commenced on June 1, 2016.

[9] The plaintiffs no longer advance a claim in unjust enrichment and constructive trust. What remains are the following claims:

(a) Compensation from McCallum in the amount of $658,000; (b) A declaration that the transfer of McCallum’s interest in the Property constitutes a fraudulent conveyance; (c) An order rectifying the Land Registry to reflect that McCallum is a joint owner of the Property; (d) A declaration that one-half of the Property is held in a resulting trust by Boughner for the benefit of McCallum; (e) A declaration that McCallum’s one-half interest in the Property is subject to execution by his execution creditors, including the Plaintiffs; (f) An Order granting the Plaintiffs leave to issue a Certificate of Pending Litigation against the Property; and (g) Punitive damages in the amount of $250,000.00.

[10] On June 26, 2016, McCallum was discharged and released from all debts, except those matters referred to in s. 178(1) of the BIA, pursuant to s. 168.1(1)(a)(i) of the BIA. McCallum was automatically discharged on the expiry of nine months.

[11] On August 25, 2016, this Court granted the Wilferts’ motion, without notice to McCallum and Boughner, for an Order permitting the registration of a Certificate of Pending Litigation against Boughner’s house. An affidavit in support of this motion, states:

McCallum and Boughner were joint owners of a house located [in Richmond Hill, Ontario]. …

In order to judgment proof himself, McCallum has taken steps to defeat, hinder, delay or defraud his creditors and future creditors including the Plaintiffs, by arranging for the Property to be transferred for no or nominal consideration so that it became registered solely in the name of Boughner. …

McCallum continued to live in the Property despite the above referenced transfer.

At the time of the Transfer of the Property to Boughner solely there was a Charge in favour of the Royal Trust Corporation of Canada … naming both McCallum and Boughners as Chargors. The RT Charge was not discharged until the registration of a Discharge of Charge on January 31, 2007.

The Plaintiffs believe that the transfer referred to above was completed for the purpose of defeating, delaying, hindering or defrauding McCallum’s creditors and future creditors and should be declared void as set out in the Statement of Claim.

[12] On October 6, 2016 the Trustee in Bankruptcy assigned all of its rights, title and interest in McCallum’s bankruptcy to the Wilferts.

Issue #1: Do the Wilferts have standing to bring this action?

[13] The defendants submit, pursuant to Rule 21.01(1)(a) of the Rules of Civil Procedure, that it is “plain and obvious”, under Rule 21.01(1)(a) in light of the pleadings that the Wilferts’ do not have standing to bring this claim under the Fraudulent Conveyances Act, R.S.O. 1990, c. F.29 (“FCA”).

[14] Section 2 of the FCA 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. [Emphasis added]

[15] Standing to impeach the transfer of property under section 2 of the FCA is given to “creditors or others”.

[16] A “creditor” is not defined in the FCA however, applying its ordinary meaning, means a person to whom a debt is owed and includes a judgment creditor.

[17] The phrase “creditor or others” was explained by the Ontario Court of Appeal in Stone v. Stone (2001), 55 O.R. (3d) 491:

23 Longstanding case law decided under the Fraudulent Conveyances Act has addressed the issue of who is a "creditor or other" for the purpose of s. 2. In Hopkinson v. Westerman (1919), 45 O.L.R. 208 (Ont. C.A.), at 211, the court held that "others" extended to persons who, though not judgment creditors, had pending actions in which they were sure to recover damages. In that case, the person who transferred the land was a defendant in a tort action. In Bell v. Williamson, [1945] O.R. 844 (Ont. C.A.) the court similarly held that the claimant need not be a judgment creditor at the time of the conveyance, but a person may fall within the words "or others" even if the person has, at the time of the impugned transaction, only a claim for unliquidated damages in contract or in tort. Robertson C.J.O. stated at p. 848:

I do not doubt for a moment that a transaction may be null and void within s. 2 of The Fraudulent Conveyances Act, although the plaintiff who brings the action attacking it may, at the time of the transaction, and even when action is brought attacking it, have had nothing more than a claim for unliquidated damages in contract or in tort. The effect of the words "or others" following the word "creditors" is to give to such persons a right of action to have a transaction set aside as null and void as against them, if made with the required intent. . . .

24 This interpretation of the phrase "creditors or others" has been applied many times including in the family law context: …

25 Therefore, in order for a spouse to qualify as a person who is intended to be protected from conveyances of property made with intent to defeat her interest, she must have had an existing claim against her husband at the time of the impugned conveyances, that is a right which she could have asserted in an action. [Emphasis added.]

[18] The following allegations are made at paragraphs 6-12 of the Statement of Claim:

On May 12, 2015, the Plaintiffs obtained Default Judgment against McCallum in the action they commenced in the Ontario Superior Court of Justice bearing Court File No. CV-14-513382 …

As of the date of this Claim, the full amount of the Judgment remains outstanding.

In order to judgment proof himself, McCallum, with the cooperation and assistance of Boughner, has taken steps to defeat, hinder, delay or defraud his creditors and future creditors including the Plaintiffs, by among other things:

(a) Arranging for the Property, which was jointly owned by McCallum and Boughner to be transferred for no or nominal consideration so that it became registered solely in the name of Boughner;

(b) Effecting the transfer of subparagraph (a) above, in spite of the fact that McCallum paid all or substantially all of the down payment for the Property as well as paid and continued to pay the expenses associated with it and continued to live in the Property.

At the time of the Transfer of the Property to Boughner solely, namely November 1, 1993, there was a Charger/Mortgage of Land in favour of the Royal Trust Corporation of Canada … naming both McCallum and Boughner as Chargors. The RT Charge was not discharged until the registration of a Discharge of Charge on January 31, 2007.

At the time of the transfer, McCallum had creditors including, but not limited to Royal Trust Corporation.

The transferred [sic] referred to above was completed for the purpose of defeating, delaying, hindering or defrauding McCallum’s creditors and further creditors and should be declared void as against the Plaintiff and other creditors.

The registered owner, Boughner, did not take title in good faith. Boughner knew or ought to have known that the Property was being registered solely in her name as part of a scheme to delay, hinder, defeat or defraud creditors and future creditors of McCallum.

[19] The Wilferts’ claim arises more than eleven years after the impugned transfer. The Wilferts do not have standing to bring this action as they had no claim, in any sense, against the Defendants at the time of the impugned transfer and thus are not “creditors or others” within the meaning of section 2 of the FCA in respect of the transfer.

Issue #2: Is the claim barred by statute?

[20] The plaintiffs seek a declaration that McCallum’s transfer of his interest in the Property in 1993 to Boughner was a fraudulent conveyance. The plaintiffs seek the following consequential relief: (1) an order rectifying the Land Registry to reflect McCallum’s joint interest; (2) a declaration that the one-half interest transferred is held in a resulting trust by Boughner for McCallum; (3) that McCallum’s half-interest is subject to execution by his execution creditors, including the plaintiffs.

[21] The defendants submit, pursuant to Rule 21.01(a) of the Rules of Civil Procedure, that it is “plain and obvious” that this action is barred by section 4 of the Real Property Limitations Act, R.S.O. 1990, c. L.15 (“RPLA”) because the alleged fraudulent transfer occurred about 23 years ago, on November 1, 1993. For the reasons that follow, I disagree with this submission.

[22] As a preliminary matter, I note that in exceptional circumstances this Court may consider whether a claim is barred by statute on a Rule 21 motion even though a Statement of Defence has not been delivered: see Maynards Industries Ltd. v. Cincinnati Industrial Auctioneers Inc., 2011 ONSC 2656, paras. 33-34.

[23] The Limitations Act, 2002, S.O. 2002, c. 24, Sched. B (“LA”), applies to claims pursued in court proceedings other than proceedings to which the RPLA applies: see LA, s. 2(a). The question that arises on this motion is whether the two year limitation period under the LA applies or the ten year limitation period under the RPLA applies.

[24] Section 4 of the RPLA states:

No person shall make an entry or distress, or bring an action to recover any land or rent, but within ten years next after the time at which the right to make such entry or distress, or to bring such action, first accrued to some person through whom the person making or bringing it claims, or if the right did not accrue to any person through whom that person claims, then within ten years next after the time at which the right to make such entry or distress, or to bring such action, first accrued to the person making or bringing it. [Emphasis added.]

[25] In Hartman Estate v. Hartfam Holdings Ltd. at para. 57, [2006] O.J. No. 69, the Ontario Court of Appeal found that the word recover" means to "obtain any land by judgment of the Court" and “… is not limited to obtaining possession of land nor does it mean to regain something that the plaintiff had and lost”. This view, in relation to the predecessor of section 4 of the RPLA, was found to equally apply to section 4 of the RPLA by the Ontario Court of Appeal in McConnell v. Huxtable, 2014 ONCA 86 at para. 19.

[26] With the greatest of respect for the views expressed by my colleague in Conde v. Ripley, 2015 ONSC 3342 at para. 48, the prospect that a financial benefit may accrue to a plaintiff/judgment creditor resulting from a declaration to set aside the transfer of land under the FCA does not result in the plaintiff “obtaining land by judgment of the Court”. Accordingly, an action to set aside a fraudulent conveyance of land is not an action to recover land.

[27] Further, the premise of the defendants’ position was that the ten year limitation period under section 4 of the RPLA commences when the cause of action under section 2 of the FCA accrued rather than when it was discovered. No authority was advanced to support this submission. Given the result, I need not decide this issue, however, I note that this Court in McConnell v. Huxtable, 2013 ONSC 948 at para. 83, highlighted the uncertain state of the law and that this Court in Stravino v. Buttinelli, 2015 ONSC 1768 at paras. 71-79 adopted the discoverability principle.

[28] Finally, whether the plaintiffs claim is statute barred under section 4 of the RPLA turns on a discoverability analysis which properly was not the subject of this motion under Rule 21.

Issue #3: Are the plaintiffs without legal capacity to commence this action?

[29] The defendants submit, pursuant to Rule 21.01(3)(b) of the Rules of Civil Procedure, that the plaintiffs are without legal capacity to commence or continue this action against McCallum on two grounds: (1) the plaintiffs did not obtain the necessary assignment of rights from the Trustee in Bankruptcy prior to commencing this action, and (2) the plaintiffs did not obtain an assignment of rights to pursue Boughner, being the owner of the Property.

[30] Section 38 of the BIA states:

38 (1) Where a creditor requests the trustee to take any proceeding that in his opinion would be for the benefit of the estate of a bankrupt and the trustee refuses or neglects to take the proceeding, the creditor may obtain from the court an order authorizing him to take the proceeding in his own name and at his own expense and risk, on notice being given the other creditors of the contemplated proceeding, and on such other terms and conditions as the court may direct.

(2) On an order under subsection (1) being made, the trustee shall assign and transfer to the creditor all his right, title and interest in the chose in action or subject-matter of the proceeding, including any document in support thereof.

(3) Any benefit derived from a proceeding taken pursuant to subsection (1), to the extent of his claim and the costs, belongs exclusively to the creditor instituting the proceeding, and the surplus, if any, belongs to the estate.

(4) Where, before an order is made under subsection (1), the trustee, with the permission of the inspectors, signifies to the court his readiness to institute the proceeding for the benefit of the creditors, the order shall fix the time within which he shall do so, and in that case the benefit derived from the proceeding, if instituted within the time so fixed, belongs to the estate. [Emphasis added]

[31] In Toyota Canada Inc. v. Imperial Richmond Holdings Ltd., 1994 ABCA 261 at paras. 14-15, leave to appeal to S.C.C. refused, 24273 (September 6, 1994), the Alberta Court of Appeal explained the purpose of section 38 of the BIA as follows:

… its primary purpose is to ensure that the bankrupt's assets are preserved for the benefit of the creditors. It provides the mechanism for creditors to proceed with an action when the trustee refuses or fails to act; thereby ensuring that assets of the bankrupt (which may otherwise go unrecovered) are available to creditors willing to finance the litigation.

The secondary purpose, relating to notice, is to make sure the section operates fairly. While it is fair that those parties willing to accept the risks and costs of litigation receive a preference in terms of recovering their losses, the right to that preference must be shared with all creditors.

Failure to Obtain a Timely Assignment of Rights

[32] The defendants submit that the plaintiffs lacked capacity to bring this action because the Trustee’s assignment pursuant to s. 38(2) of the BIA was delivered after this action was commenced; however, there is no such requirement in the BIA. Under section 38 of the BIA, there are only two conditions precedent to a creditor’s commencement of an action: (1) the trustee's refusal or neglect to initiate it, and (2) the court's Order authorizing such action. The trustee in bankruptcy’s assignment of his rights, title and interest in the subject-matter of the proceeding, under s. 38(3) of the BIA, is not a pre-condition to the commencement of an action: see Penfold v. Provenzano, 30 O.R. (3d) 230 at 239h, 240f.

Failure to Obtain Permission to Commence an Action against Boughner

[33] The defendants submit that this Statement of Claim should be struck as having no chance of success because the court Order, dated August 25, 2016, did not authorize the commencement of this action against Boughner, being the transferee of the alleged fraudulent conveyance.

[34] The debtor making a fraudulent conveyance and the transferee are proper defendants in a fraudulent conveyance action: Paul Perell, A Pragmatic Approach to Fraudulent Conveyances, (2005), 30 Advocates Quarterly 373, at 386.

[35] It is the plaintiffs’ position that they did not require the court’s permission to commence an action against Boughner as she is not a bankrupt. The language of s. 38(1) of the BIA requires that court approval be obtained in respect of “any proceeding … for the benefit of the estate of a bankrupt”. There is nothing in s. 38(1) of the BIA which limits the requirement for court approval to the extent that a proceeding is commenced against a bankrupt. Accordingly, by failing to obtain court approval to commence this proceeding against all of the named defendants, the plaintiffs have not complied with s. 38(1) of the BIA.

[36] However, the plaintiffs’ failure to satisfy this condition precedent is an irregularity that may be cured, nunc pro tunc, in appropriate circumstances: see Jaston & Co. v. McCarthy at paras. 47-53, 168 D.L.R. (4th) 415 (B.C.C.A); De Groote v. Canadian Imperial Bank of Commerce, aff’d , 37 O.R. (3d) 651, [1998] O.J. No. 395 (C.A.); leave to appeal to S.C.C. refused 26568 (April 6, 1998).

Conclusions

[37] I dismiss this action. I also direct that the Certificate of Pending Litigation be discharged. I encourage the parties to resolve the issue of costs failing which the defendants may deliver their costs submissions within two weeks and the plaintiffs may deliver their costs submissions within three weeks. Costs submissions shall be a maximum of three pages maximum exclusive of each party’s outline of costs.

Mr. Justice M. D. Faieta Released: June 23, 2017