COURT FILE NO.: CV-15-535859 DATE: April 29, 2016
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: The Bank of Nova Scotia for itself and on behalf of all creditors of Alfonso Fulchini and Helen Fuchini v. Alfonso Fulchin and Helen Fulchini;
BEFORE: MASTER C. WIEBE
COUNSEL: Morris, B. for Alfonso Fulchini and Helen Fulchini; Klaiman, Ian for The Bank of Nova Scotia.;
HEARD: April 19, 2016.
REASONS FOR DECISION
I. Introduction
[1] The defendants, Alfonso Fulchini (“Al”) and Helen Fulchini (“Helen”), bring this motion for an order discharging a Certificate of Pending Litigation (“the CPL”) that was registered on the title to property registered in the name of Helen and municipally known as 35 Elizabeth Grove, King City, Ontario (“Elizabeth Grove”). This was done pursuant to an ex parte order from Master Abrams dated November 10, 2015 that was obtained by the Bank of Nova Scotia (“BNS”). Al and Helen are spouses, and together they will be called “the Fulchinis.”
[2] In support of the motion, the Fulchinis filed an affidavit from Helen sworn January 8, 2016. BNS filed a responding affidavit of Denise Yeomans, a branch manager, sworn January 12, 2016. The motion came originally before Master Dash on January 20, 2016. He required that the motion be adjourned to allow the ex parte motion material to be placed before the court. The Fulchinis did that. As a result, there was also the affidavit of Julie Collie, as assistant manager with BNS, that was sworn on October 30, 2015 and that was before Master Abrams when she made her order. There were no cross-examinations, as this is under the Simplified Rules.
II. Background
[3] Here are the relevant facts I have found, based on the evidence. On February 14, 1990 Al purported to execute a “Declaration of Trust” wherein he declared that he holds certain lands municipally known as 452 Easy Street, Richmond Hill, Ontario (“Easy Street”) in trust for himself (50%) and Helen (50%). This was not disclosed to Master Abrams.
[4] Al became the sole registered owner of Easy Street subsequently on November 22, 1990. Al and Helen resided here. Twenty years later, on October 4, 2010, a mortgage to the BNS for $500,000 was registered on title. Subsequently, a second mortgage for $75,000 to a third party was registered. This was disclosed to Master Abrams.
[5] Al had a company named Alfa-Tech Enterprises Inc. (“the Company”). In June, 2011 the BNS granted the Company a line of credit (capped at $25,000) that was secured by a personal guarantee from Al. At the same time, the BNS granted the Company a Visa facility (capped at $20,000) that was also secured by a personal guarantee from Al. Al represented to the BNS that he owned Easy Street outright. This was disclosed to Master Abrams.
[6] On March 17, 2014, Al sold Easy Street for $824,500. The BNS first mortgage was discharged on the same day. This was disclosed to Master Abrams. The BNS also disclosed that $284,547.50 of the sale proceeds was paid to the BNS to discharge the first mortgage. What was not disclosed was that $203,185.92 was also paid to the BNS from the sale proceeds to “discharge [a] previous line of credit.”
[7] Unknown to BNS and not disclosed to Master Abrams, Al paid off the second mortgage on Easy Street and certain legal costs totaling $50,658.73 from the sale proceeds, and transferred the remaining sale proceeds, $266,308.95, to Helen.
[8] On March 18, 2014, the next day, Helen purchased Elizabeth Grove for $660,000. She gave a first mortgage to the BNS to secure a loan for the purchase price of $660,000 along with an immediate down payment of $231,000. This was disclosed to Master Abrams. What was not disclosed was the fact that, before this first mortgage, the BNS required that Helen pay eight other creditors certain debts totaling $72,714, and that one of these debts was Al’s debt to the Bank of Montreal for $4,312.43. It was also not known to the BNS and not disclosed to Master Abrams that Al moved immediately into and resides in Elizabeth Grove with Helen.
[9] Al had financial difficulties. From March 31, 2015 to June 30, 2015 the Company failed to meet its minimum monthly deposit obligations. On June 15, 2015, Al filed a consumer proposal under the Bankruptcy and Insolvency Act (“BIA”). In the filed forms, he disclosed the Easy Street sale, but stated that, after payment of sale costs and the secured lenders, “there were no funds available to the debtor.” Furthermore, he stated that the Company ceased operating on August 31, 2014, namely 5 ½ months after the Easy Street sale. This was all disclosed to Master Abrams.
[10] This filing caused a default on the Company’s line of credit and the Visa facility. The BNS made demands for payment. As of October 23, 2015, the Company (and Al on his guarantee) owed the BNS $25,726.83 on the line of credit and $20,788.34 on the Visa facility. There were no payments. This was all disclosed to Master Abrams.
[11] On September 8, 2015 the BNS started this action on its own behalf and other creditors of Al and Helen as against Al for payment under his guarantees for the amounts owing on the Company credit line and Visa facility, $45,584.08, plus interest. The action was also against Helen for disgorgement of the Easy Street sales proceeds that Al transferred to her, a tracing of those funds into the purchase of Elizabeth Grove, a CPL on Elizabeth Grove and payment of the $45,584.08 that Al owes to BNS. On November 10, 2015, the BNS moved ex parte before Master Abrams and obtained the CPL order.
III. Issues
[12] Having reviewed the facta, authorities, the evidence and heard the arguments, I believe that the following are the issues to be determined:
a) Does the BNS have a reasonable claim to an interest in Elizabeth Grove? b) If so, should the CPL be discharged because damages are an adequate alternative? c) In any event, should the CPL be discharged due to non-disclosure at the ex parte motion?
IV. Analysis
(a) Does the BNS have a reasonable claim to an interest in Elizabeth Grove?
[13] Section 103 (a)(ii) of the Courts of Justice Act (“CJA”), R.S.O. c. C.43 states that a court may discharge a CPL where the party at whose instance the CPL was issued does have a “reasonable claim” to an interest in the land in question. This is the test to be applied.
[14] The BNS claim to an interest in Elizabeth Grove is based on a claim of fraudulent conveyance, namely the allegation that the transfer by Al of the net sale proceeds of Easy Street to Helen was intended to avoid creditors, plus a tracing of those sale proceeds into the purchase of Elizabeth Grove by Helen. This claim is based on the Fraudulent Conveyances Act (“FCA”), R.S.O. 1990, c. F.29 and the Assignment and Preferences Act (“APA”), R.S.O. 1990, c. A.33.
[15] It is well established law that a creditor can have a reasonable claim to an interest in land (and therefore a CPL) where the land has been obtained from a fraudulent conveyance of money; see Transamaris Farms Ltd. v. Sieber, 1999 CarswellOnt 234 (SCJ) at paragraph 62. The test to be applied in such a case is summarized apply by Justice Blair in the Transmaris decision (which concerned alleged fraudulent conveyances) at paragraph 62 as follows: “The party seeking the certificate need not prove its case at this point. The test is met where there is sufficient evidence to establish a reasonable claim to an interest in the land based upon the facts, and on which the plaintiff could succeed at trial.”
[16] FCA section 2 specifies that “every conveyance” of an asset “made with the intent to defeat, hinder, delay or defraud creditors or others” is void as against such creditor or others. Section 3 states that section 2 does not apply to a conveyance for good consideration to a transferee who does not know of the fraudulent intent. Therefore, the question is whether the BNS has established a reasonable claim of such a fraudulent conveyance concerning the transferred sales proceeds from Al to Helen and the purchase of Elizabeth Grove.
[17] Mr. Morris argued that the standard for a fraudulent conveyance claim was higher and pointed to the decision in Royal Bank v. Djurdevic, 2003 O.J. No. 2418 (Ont. Master) at paragraph 10. I note that there is language in that paragraph suggesting that the party defending the CPL had to “establish” the fraudulent intent at this stage. I do accept that language as reflecting the proper test. The proper test is that the party defending the CPL must prove a reasonable claim of a fraudulent conveyance.
[18] Has the BNS established this reasonable claim? The first issue is whether the BNS can rely on the FCA, as it was not a “creditor” at the time of the impugned transaction. It was at best a contingent creditor on a guarantee. Justice Penny disposed of this issue in Indcondo Building Corp. v. Sloan, 2014 ONSC 4018 (SCJ) at paragraph 47 held that the word “other” in FCA section 2 extends to include holders of guarantees. I find that the BNS can pursue a claim of fraudulent conveyance based on Al’s guarantee.
[19] What about the evidence of fraud? The law specifies that the plaintiff in a fraudulent conveyance action must establish the existence of certain “badges of fraud” in order to shift the onus of proof onto the defendant to disprove the fraudulent intent. Some of these “badges of fraud” are outlined by Justice Penny in Indcondo at paragraph 52. Mr. Klaiman argued that several of these badges apply in this case:
a) Close relationship: There is no doubt that there is a close relationship between Al and Helen. They are spouses; they have been spouses for some time; and there is no evidence of a marital breakdown. Transfers between spouses are particularly suspicious, and must be scrutinized with care; see Indcondo, op. cit., at paragraph 56. b) Continued benefit: There is no doubt that Al continues to benefit from the transfer. He moved into and continues to reside in Elizabeth Grove. Al confirmed this in his Consumer Proposal. c) Substantially all of the debtor’s assets: In his statement of affairs filed with his consumer proposal on June 15, 2015, Al makes it clear that he has no realizable assets or income other than the proceeds of sale of Easy Street. This means that the transfer of the proceeds of sale to Helen put Al’s only significant asset out of the reach of his creditors. d) Secrecy/false statement: In the consumer proposal Al also stated that there were no net proceeds of sale of Easy Street “available to the debtor.” That was a false statement. There were net proceeds that were available to Al. He transferred the proceeds to Helen. There was no evidence that Al owed Helen anything. This suggests an intention on the part of Al to hide the transfer from his creditors. e) Timing of the transfer: The evidence indicates that Al was in financial distress at the time of the transfer. In paragraph 3 of her affidavit, sworn on January 8, 2016, Helen states that Al has been in financial difficulties “for at least the last two years.” That would be for a period that started prior to the transfer. This indicates that Al was in financial difficulty at the time of the transfer. f) No consideration: There was considerable argument on this point. First, there was the Declaration of Trust that Al signed in relation to Easy Street on February 14, 1990. Mr. Morris argued that this document justified the transfer, as it purported to give Helen a half interest in Easy Street. The bona fides of this document are, in my view, in issue. It was prepared without a lawyer. Most importantly, Al made subsequent statements to the BNS that are inconsistent with the document. When he got the credit facilities for the Company from the BNS in 2011 Al told the bank that he owned Easy Street outright. In any event, even if the document is valid, Al’s half share of the net proceeds was transferred to Helen and covers Al’s debt to the BNS. Second, Helen asserted in her affidavit that the transfer was consideration for her efforts to sustain the couple during Al’s financial difficulties. She alleges that she cashed in about $100,000 worth of her RRSP’s for the purpose of paying repair, maintenance, mortgage and upkeep costs on Easy Street, where the two lived. There is no corroboration for this statement other than a document entitled “Five Year Comparative Review – Federal - 2014” that she attached to her affidavit and that inter alia showed certain RRSP deductions. Yet the document is stated as relating to “Al Fulchini.” This is not corroboration for Helen’s point. Mr. Morris argued that the onus is on the BNS to prove the lack of consideration here. I was given not authority on this point, and I fail to understand it as a matter of logic. Helen and Al are the ones who would have this evidence, if it exists, not the BNS. They have the onus to produce it, particularly given the other badges of fraud in this case. I note as a final comment here that there is no evidence from Al in this motion, which is telling.
[20] Mr. Morris argued that I should exercise my discretion as a matter of equity in favour of Helen because the BNS had full knowledge of the transfer at the time and had the ability to secure its position as a contingent creditor, and chose not to do so by not getting further security from Helen. He argued that the BNS should not be allowed to do now indirectly what it chose at the time not to do directly. He relied upon the decisions of Justice Hollingworth in Toronto Dominion Bank v. Zukerman et al., 1982 CarswellOnt 2085 (H.C.) and Master Albert in Djurdevic.
[21] I do not agree. First, there is no evidence that the BNS knew of the transfer of the net proceeds to Helen at the time. Mr. Morris argued that the BNS’s denial of this knowledge is not credible, given its involvement in both the sale of Easy Street and the purchase of Elizabeth Grove. I do not accept that point. The bank would not necessarily have this knowledge. If it did, Al and Helen should be able to prove the point, and they have not. In fact, Al’s conduct in hiding the transfer in his consumer proposal shows that the BNS did not have this knowledge. Mr. Morris argued that the onus of proving this point rested on the BNS, but, again, I was given no authority for that proposition.
[22] Second, there is no evidence that the BNS had reason to be concerned about its position as a contingent creditor on Al’s guarantee at the time of the transfer. The Company started defaulting on its deposit obligations a year later. Therefore, the BNS had no reason to take steps to protect itself at the time.
[23] Third, I distinguish the facts in Zukerman and Djurdevic from the facts in this case. In Zukerman, a husband and wife purchased a home and obtained loans from the bank to make improvements. The bank obtained a guarantee from both the husband and the wife before advancing the loans. The house was put into the wife’s name. Presumably aware of this transaction, the bank then allowed the wife’s name to be removed from the guarantee. Later it pursued the home under the FCA when the loans went into default and the husband did not honour the guarantee. This is a case where the bank did not establish a reasonable claim to a fraudulent conveyance. There was no secrecy. The bank knew of the impugned transaction, and made a bad business decision allowing the wife off the guarantee. That is not the case here where the BNS did not know of the impugned transaction when it extended credit to the Company.
[24] Djurdevic is another case where the bank did not establish a reasonable claim to an interest to land pursuant to the FCA. Here there was a transfer of property from husband to wife for “natural love and affection.” The bank pursued the husband for his debts, and the house under the FCA. The evidence came out that the transfer was in fact in settlement of a martial dispute. Master Albert found that the settlement was bona fide. Therefore, the transfer was for real consideration. That is not so with the case at bar. I have found that there is no credible evidence of consideration for the transfer of the net proceeds of sale of Easy Street.
[25] Given the apparent badges of fraud as described above and the lack of adequate proof from the defendants to negate the claim of fraud, I find that the BNS has a reasonable claim to an interest in Elizabeth Grove.
(b) Should the CPL be discharged because damages are an adequate alternative?
[26] The defendants argue, in the alternative, that, since the BNS has asserted a claim of damages as an alternative remedy as against Helen, it has the onus of proving that Helen cannot pay these damages in order to sustain the CPL and has failed to meet this onus. Concerning the onus point, Mr. Morris pointed to the case of Homebuilder Inc. v. Man-Sonic Industries Inc., 1987 CarswellOnt 499 (Ont. Master) at paragraph 14. This decision concerned a motion for a CPL in the context of an action against the defendants for appropriation of a construction design. The motion was denied for inter alia the absence of evidence that the defendant could not pay the damages claimed.
[27] I do not agree with Mr. Morris’ argument. First, I am not satisfied that paragraph 14 of the Homebuilder decision stands for the proposition advanced by Mr. Morris. The language is unclear on this point. In my view, the usual evidentiary rules should apply. As the one asserting the point and the one with the evidence to prove it, Helen should have the onus to prove that she can pay the claimed damages. In this regard, I find that she has failed to do so. The only evidence of her ability to pay damages is the RRSP statement in Al’s name and her interest in Elizabeth Grove which may be liquidated if the CPL is lifted.
[28] Second, Mr. Kleiman rightfully pointed out that the question of damages is part of the test outlined in the leading case of 572383 Ontario Inc. v. Dhunna, 1987 CarswellOnt 551 for discharging CPLs in cases concerning specific performance of agreements of purchase and sale. This test is not appropriate where the primary remedy being pursued is a tracing of fraudulently misappropriated funds. That is essentially the case before us. Leaving the plaintiff with a claim for damages when it has established, as I have found it has established, a reasonable claim that the defendants have committed a fraudulent conveyance exposes the plaintiff to an inordinate and unfair level of risk of non-recovery should the CPL be removed; see Roseglen Village for Seniors Inc. v. Doble, 2010 ONSC 3239 (Ont. Master) at paragraphs 15 and 17.
[29] I do not find that the question of damages favours the removal of the CPL in this case. However, I note that CJA section 103(6)(b) allows the court to order security to be posted in place of the CPL “where the interests of the party at whose instance [the certificate] was issued can be adequately protected by another form of security.” I asked Mr. Kleiman whether an order allowing Helen to post cash security for the principle and interest of Al’s debt to the BNS would suffice as an alternative form of security. He said it was. I will, therefore, consider such alternative security.
(c) Should the CPL be discharged due to non-disclosure at the ex parte motion?
[30] It is well established law that an ex parte motion for a CPL places a very high onus on the moving party. The moving party must “state its own case fairly and must inform the Court of any points of fact known to it which favour the other side;” see United States v. Friedland, 1996 CarswellOnt 5566 at paragraph 27. The moving party must also make disclosure of the known or reasonably likely opposite party’s position; see Passarelli v. Di Cenzo, 1989 CarswellOnt 366 at paragraph 30. A failure to make full disclosure is in itself grounds for setting aside the ex parte order; see Rule 39.01(6) of the Rules of Civil Procedure.
[31] However, this obligation to disclose pertains only to “material” facts. In Euro United Corp. (Reciever of) v. Rehani [2003] O.J. No. 2426 at paragraph 11, Master Egan pointed out that material facts are those which “may have” influenced the master at first instance. Put another way, they are the facts which, looked at objectively, are relevant to the court’s assessment of the motion.
[32] The defendants allege that the BNS made three material non-disclosures to Master Abrams: (a) the non-disclosure of the Declaration of Trust which purported to give Helen a half interest in Easy Street; (b) the non-disclosure of the $275,000 that the BNS got Al and Helen to pay the BNS from the sale proceeds of Easy Street; and (c) the non-disclosure of the BNS’s knowledge of Al’s intention to sell Easy Street and Helen’s intention to buy Elizabeth Grove. I will examine each of these points.
[33] Concerning the Declaration of Trust, there was no evidence that the BNS was aware of this document at the time of the ex parte motion. Mr. Morris argued that the BNS knew about the Trust Declaration because it referred to both Al and Helen as “borrowers” in mortgage statements concerning the Easy Street mortgage. I do not accept this proposition. Referring to the two as “borrowers” could simply mean that the BNS considered the two as the borrowers of the loan secured by the mortgage. I, therefore, do not find that the BNS failed to disclose this document to Master Abrams.
[34] Concerning the $275,000 worth of payments required by the BNS, Mr. Kleiman admitted that these payments were not brought to Master Abrams’ attention. However, he argued that they were not material as the net proceeds of sale of Easy Street following these payments were well in excess of what is owed to the BNS. Therefore, he argued that the payments were not material and would not have affected the outcome of the ex parte motion.
[35] Mr. Morris responded that it was not so much the quantum that was material, as it was to whom the payments were made. For instance, he pointed out that the $72,714 that the BNS had Helen pay to eight creditors included a payment to a creditor of Al (namely the BMO). This, according to Mr. Morris, showed that the BNS was capable of protecting its position on Al’s guarantee at that time, and chose not to do so, thereby shifting the equities in favour of the defendants on the ex parte motion. I have already dealt with this argument above. Suffice it to say here that I do not accept, based on the evidence presented, that the BNS was aware of the impugned transaction at the time or had reason to be concerned about its exposure on the guarantee to take steps to protect itself. Bringing the detail of these payments to the Master’s attention would not, in my view, have changed her decision as a result.
[36] Concerning the BNS’s knowledge of Al’s intention to sell Easy Street and Helen’s intention to buy Elizabeth Grove, I am satisfied that this was disclosed to Master Abrams. It obviously had no impact on her decision.
[37] Therefore, in the end, I find that the BNS made full disclosure of all material facts to Master Abrams and that the CPL should not be discharged for this reason.
V. Conclusion
[38] In conclusion, I dismiss the motion in its entirety.
[39] I further order that if the defendants post with the court cash security in an amount equivalent to the amounts alleged to be owed by Al to the BNS as described in paragraph 1A of the Statement of Claim, the defendants may obtain an order on notice discharging the CPL.
[40] Concerning costs, costs outlines were filed at the end of the argument. The BNS outline shows a partial indemnity claim of $5,203.09 and a substantial indemnity claim of $7,160.82. The defendants’ outline appears to show a partial indemnity claim of $2,889.33.
[41] Being a Simplified Procedure action and given the amounts in issue, I have decided not to seek further submissions on costs. The BNS is the successful party and is entitled to costs of this motion. I see no reason to award substantial indemnity costs. The defendants’ resistance and arguments were not unreasonable. Mr. Kleiman’s written and oral arguments were very helpful and well organized. The quantum of the BNS claim, however, seems somewhat excessive since the BNS did not submit a large affidavit, and since it no doubt had available the research that was garnered for the ex parte motion. Given the size of the defendants’ outline, I also think that the BNS claim exceeds what the defendants could reasonably expect to pay in defeat.
[42] In the end, I have decided to grant the BNS the costs of this motion on a partial indemnity basis in the amount of $2,500, to be paid in 30 days from the date of this order.
DATE: April 29, 2016
MASTER C. WIEBE