Court File and Parties

COURT FILE NO.: CV-18-608271-00CL DATE: 2022/03/09 SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL LIST

RE: Gary Stevens, Linda Stevens and 1174365 Alberta Ltd., Applicants AND: Sandy Hutchens, also known as Sandy Craig Hutchens, also known as S. Craig Hutchens, also known as Craig Hutchens, also known as Moishe Alexander Ben Avrohom, also known as Moishe Alexander Ben Avraham, also known as Moshe Alexander Ben Avrhohom, also known as Fred Hayes, also known as Fred Merchant, also known as Alexander MacDonald, also known as Mathew Kovce, also known as Ed Ryan, and Tanya Hutchens, also known as Tatiana Hutchens, also known as Tatiana Brik, also known as Tanya Brik-Hutchens, Respondents

BEFORE: C. Gilmore, J.

COUNSEL: Justin G. Necpal, Counsel for the Applicants/Moving Parties Brett Moldaver for Adroit Advocacy LLC/Responding Non-Party Jamie Gibson for the Receiver, A. Farber and Partners Barbara VanBunderen for the Colorado Plaintiffs (CGC Holding Company LLC, Harlem Algonquin LLC, James T. Medick)

HEARD: February 28, 2022

Endorsement on Motion

Introduction

[1] The Moving Parties, Gary Stevens, Linda Stevens and 1174365 Alberta Ltd. (the “Applicants”) move for the following relief:

(a) a declaration that the charges/mortgages in favour of Adroit Advocates, LLC, a Colorado Limited Liability Company, d.b.a. Klenda Gessler & Blue LLC, registered on October 4, 2017 on the properties listed in Schedule "A" to the Notice of Motion dated September 16, 2021 are void ab initio;

(b) an order directing the Land Registrar to discharge the mortgages or, to the extent the properties have been sold by the Receiver, an order permitting the proceeds of sale to be distributed without regard for the mortgages or an order that Adroit shall not be entitled to any proceeds from the sale of the properties.

[2] The Applicants are judgment creditors under the judgment of this Court dated July 5, 2019 (the “Judgment”). The Judgment recognizes two judgments of the Pennsylvania District Court in favour of the Applicants and against the Respondents Tanya Hutchens and Sandy Hutchens (together the “Hutchens” or “Sandy” or “Tanya”) each in the amount of $26,774,736.09 USD (the “Pennsylvania Judgments”). As found by the Pennsylvania Court, the Pennsylvania Judgments arose from a mortgage financing fraud perpetrated by the Hutchens against the Applicants commencing in 2014.

[3] The Pennsylvania claim was brought against numerous Defendants including Westmoreland Equity Fund LLC (“Westmoreland”) and “Ed Ryan” an alias used by Sandy when he held himself out as an executive at Westmoreland. Judgments were entered against Ed Ryan and Westmoreland in the amount of $9,117,817.97 in Pennsylvania District Court. During the course of a similar suit in Colorado, when it became clear that Ed Ryan was an alias, the Colorado claim was amended to include Sandy and Tanya.

[4] The Colorado claim was a Class Action brought by numerous victims of the fraud which resulted in a ten-day jury trial (the “Colorado Class Action”). The jury unanimously found Sandy and Tanya liable for substantive violations of U.S. Federal Racketeer Influenced and Corrupt Organizations Act (“RICO”). The Colorado District Court awarded damages to the Plaintiffs of $24,239,101 USD on September 25, 2017 (the “Colorado Judgment). The Colorado Court also imposed a constructive trust on five of the six properties which are part of the within Receivership. No constructive trust was imposed on the property located at 17 Serpentine Street, Sudbury, Ontario (“Serpentine”).

[5] On October 4, 2017, the Responding Party law firm Adroit Advocates LLC (“Adroit”), registered a $2M mortgage (the “Mortgage” or “the Mortgages”) against six of the Ontario properties that form part of the Receivership in this matter (the “Mortgaged Properties”). Tanya gave the Mortgages in her capacity as the sole shareholder of the corporations that held the properties to secure payment of future and ongoing legal fees. Each of the Mortgages had identical terms with an interest rate of 10% and a due date of July 1, 2019.

[6] The Applicants submit, among other arguments, that Adroit knew or ought to have known that the subject properties had insufficient equity to satisfy the outstanding judgments, that the effect of the Mortgages was to remove equity in the subject properties and put it out of reach of the Creditors, that the intent of the Mortgages was to defeat Creditors, that Adroit knew at the time of registration of the Hutchens’ fraudulent intent, that the Hutchens were insolvent at the relevant time and that Adroit intended to receive a preference over other Creditors. The Applicants’ position on this motion is supported by the Colorado Plaintiffs (125 U.S. borrowers).

[7] Adroit argues that the motion should be dismissed because the Applicants lack standing to pursue relief against a non-party and that the Mortgages were granted by solvent entities and taken in good faith and for good consideration. There is no credible basis to challenge the Mortgages which were for legal fees for a legitimate defence.

[8] The Receiver has not taken a position on this motion in order to reduce costs. However, the Receiver remains interested in the results of this motion as it cannot move forward to distribute the estate until the priority disputes between Creditors have been adjudicated.

[9] For the reasons set out below, I find that the Mortgages cannot stand. They were intended to give Adroit a preference over other Creditors and were given for insufficient consideration.

Background Facts

[10] The Applicants have been pursuing the Hutchens since 2017. The Colorado Plaintiffs have been pursuing them since 2011. The judgment amounts owing to the Colorado and the Pennsylvania Creditors exceeds $50M USD. Only the Pennsylvania Judgments have been recognized in Canada. In the Colorado and Pennsylvania actions, the Court found that Sandy used a variety of aliases and fraudulent front companies to defraud victims and transfer and conceal illegitimate proceeds. Tanya was a partner in the schemes including facilitating the concealment of fraudulent loan commitment monies in real estate held by corporations she controlled.

[11] The amount available for all creditors by way of the sale of the Hutchens’ various properties by the Receiver is just over $3M CDN. The Mortgages represent over half of the amount available to all Creditors.

[12] The Receiver in this matter was appointed on February 28, 2019. The Receivership included all of the property owned by Sandy, Tanya and certain other companies. The scope of the Receivership was subsequently expanded in March and July 2019.

[13] On March 7, 2013, the Hutchens retained Steven Klenda (“Klenda”) of the Denver firm Adroit to act on their behalf with respect to the Colorado Class Action. Adroit later acted for the Hutchens in relation to other litigation including appeals of the Pennsylvania Judgments.

[14] Klenda represented Sandy and Tanya throughout the 10-day Colorado Class Action jury trial. Once retired, the jury took only two hours to return a unanimous verdict in favour of the Class and awarded compensatory damages. The judgment for damages and other amounts totalling $24,239,101 USD was entered on September 26, 2017. Specifically, the Colorado Court found that Sandy, Tanya and their adult daughter Jennifer were all engaged in racketeering.

[15] Following the jury verdict on September 26, 2017, Judge Jackson issued rulings on post-trial motions. He directed that pursuant to the RICO legislation, the damages were to be trebled and judgment entered against the Hutchens jointly and severally for $24,239,101 USD. Judge Jackson also found that a number of the Hutchens’ properties appeared to have been purchased using funds advanced by the Colorado Plaintiffs for illegitimate loans and imposed a constructive trust on five of the six properties on which Adroit registered its Mortgages. The ruling with respect to the constructive trust was later set aside on appeal. The constructive trust issue has not been resolved.

[16] Eight days after the jury verdict was delivered, Adroit registered a $2M mortgage against six of the Hutchens’ Ontario properties. At the time the Mortgages were registered, Adroit’s unpaid invoices totalled $158,324.85 USD. The remaining approximately $1.5M USD in fees was not billed until 2020.

[17] Adroit was paid for its services from a third-party entity, American Escrow & Settlement Services LLC (“American Escrow”). Between 2014 and 2017 Adroit received over $528,077 USD in wire transfers from American Escrow. American Escrow and its operator, Bernard Feldman, were defendants in the Pennsylvania action. Using his alias Ed Ryan, Sandy directed his U.S. clients to pay advance fees for their loans to American Escrow via Westmoreland.

The Position of the Applicants

[18] The Applicants take the position that Adroit, through Klenda, knew or ought to have known that American Escrow contained fraudulently obtained funds.

[19] Further, the Applicants take the position that Klenda knew that the Ontario properties were the Hutchens’ main assets and that the registration of the subject Mortgages would put Adroit “ahead” of other Creditors.

[20] The Applicants request that the Mortgages be declared void for the following reasons:

a. Adroit/Klenda had acted for the Hutchens for at least four years prior to the registration of the Mortgages.

b. Adroit/Klenda was well aware of the findings made by the Colorado Court that the Hutchens had perpetrated an advance fee loan fraud using front companies to conceal illegal proceeds.

c. Klenda knew that Sandy had a criminal record and could not enter the U.S. and that he had no gainful employment.

d. Klenda was aware that American Escrow was a defendant in the Pennsylvania action and alleged that it received illegal proceeds of fraud. Klenda was also aware that Hutchens had operated the Pennsylvania scheme in a manner similar to the Colorado scheme.

e. Klenda knew that the Hutchens did not have sufficient funds to satisfy any of the outstanding judgments.

f. Klenda knew, from attending at Sandy’s depositions in Toronto, that the Hutchens admitted that their net worth statements were false and misleading.

g. Klenda knew, from participating in the deposition of the Hutchens’ former accountant, that he admitted that the Hutchens had been participating in fraudulent schemes since 2005.

h. Klenda was aware of the finding of Judge Jackson in the Colorado matter that Tanya had used funds received from Class Members to invest in properties in Ontario.

i. Klenda led no evidence at the Colorado trial to challenge the Plaintiffs’ expert report which detailed how the Hutchens had defrauded U.S. borrowers.

j. Klenda, by his own admission, needed to register the Mortgages in order to “get ahead of” the U.S. Plaintiffs.

The Position of Adroit

[21] Klenda, on behalf of Adroit, deposed that when he was initially retained by the Hutchens in 2013, he travelled to Ontario to meet with them. He confirmed with Sandy and Tanya that Tanya owned several rental properties which were purchased before Sandy began soliciting loans in the U.S. and that the properties were not intermingled with Sandy’s business in Canada or the U.S. Klenda’s affidavit in this motion states that he received confirmation of this from the Hutchens’ Ontario lawyer Michael Spiro (“Spiro”).

[22] The Hutchens paid all invoices rendered up to 2015. However, by 2016, substantial amounts were owing and Klenda required a further retainer for upcoming trial and appeal matters. When the Colorado trial concluded, Klenda did not demand payment or provide a detailed account as it was apparent that the Hutchens would have to sell another property in order to satisfy outstanding accounts. Once the judgments in the Colorado case were rendered, Klenda required security for his fees before proceeding with the appeals. That is when he approached Tanya about registration of the Mortgages.

[23] Klenda was referred to Spiro, an Ontario lawyer who acted for Tanya when she purchased the various Ontario properties. Spiro told Klenda that the properties had no connection to Sandy and were held in trust for the benefit of the Hutchens’ children.

[24] When Sandy enquired why a $2M mortgage was required for mostly unbilled fees, Klenda advised that Adroit was owed at least $1.5M in unbilled fees and that the Mortgage was required as security for those fees. The Mortgages were registered on October 4, 2017, with an interest rate of 10% per annum. The Mortgages came due on July 1, 2019.

[25] Prior payments to Klenda and Adroit were made via wire from American Escrow. Klenda had no reason to believe this was other than an escrow account as represented by Sandy. Further, Klenda had no obligation to investigate the source of the funds in the American Escrow account.

The Issues and the Law

1. Standing

[26] Adroit argues that the Applicants have no standing to bring this motion. Permitting the Applicants to obtain declaratory relief allows the Colorado Plaintiffs to, in effect, avoid their need to address their unproven claims to a constructive trust over the Ontario properties. Further, the Receiver has taken no position on the propriety of this motion or the validity of the Adroit Mortgages despite its very active and investigative role in the case to date.

[27] Adroit also submits that the Applicants cannot obtain relief against a non-party. They are not Creditors of the companies which own the subject properties nor were they at the time of registration of the Mortgages.

[28] Adroit’s standing arguments must be rejected for several reasons. First, this is a Receivership. In the context of the Receivership, orders have already been made against banks and other non-parties. Further, Receivers often bring Motions for Directions in relation to non-party creditor disputes or priorities. Their standing to do so is not contested. In this case, the Receiver opted to defer to the Applicants to bring the motion for cost efficiency reasons.

[29] As well, the debtor entities that own the six subject properties form part of the property encompassed in Schedule A of the Receivership Order dated February 28, 2019.

[30] I reject Adroit’s argument that since the Colorado Plaintiffs do not have judgment in Ontario, this motion is an abuse of process because those Plaintiffs are using the Receivership to take procedural steps they should have taken in the U.S. I accept Ms. Van Bunderen’s argument on behalf of the Colorado Plaintiffs that they are supporting the actions of the Pennsylvania Plaintiffs (which includes these Applicants) to avoid duplicate proceedings in Ontario. Further, the London, Ontario action is also on hold to avoid duplicative proceedings. This makes sense procedurally and from the perspective of cost efficiency.

[31] As for the constructive trust issue, I am not being asked to make any findings in relation to that issue. A constructive trust was imposed on five of the six subject properties by Judge Jackson in Colorado in 2017. The issue of the imposition of the constructive trusts was appealed and remanded to the District Court to be dealt with at a later date. The only issue of importance for this motion in relation to the constructive trust was that they were in existence at the time of registration of the Mortgages.

[32] Finally, this motion is being brought pursuant to legislation related to fraudulent conveyances and preferences. Both pieces of legislation are remedial and intended to be interpreted broadly by this Court. In short, if this motion is dismissed on the issue of standing, it is likely it will simply be reconstituted as a Motion for Directions by the Receiver. That is neither efficient nor economical given what is at stake in relation to the various Creditors in this matter.

2. The Fraudulent Conveyances Act

[33] The purpose of the Fraudulent Conveyances Act, R.S.O. 1990, c. F.29 (the “FCA”) is to prevent fraud. This purpose is explained by C.R.B. Dunlop in Creditor-Debtor Law in Canada, 2nd ed (Toronto: Carswell, 1995) at 598:

The purpose of the Statute of Elizabeth and of the Canadian Acts based on it, as interpreted by the courts, is 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. The legislation is couched in very general terms and should be interpreted liberally.

[34] Section 2 of the FCA provides as follows:

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 unlawful actions, suits, debts, accounts, damages, penalties or forfeitures are void as against such persons and their assigns.

[35] For s. 2 of the FCA to apply with respect to voiding a transaction, three elements are required:

a. A conveyance of property;

b. An intent to defeat; and

c. “creditors or others” towards whom that intent is directed.

[36] In Indcondo Building Corp. v. Sloan, 2014 ONSC 4018, 121 O.R. (3d) 160, “creditors and others” was interpreted to mean present and future creditors including judgment creditors. The Court must also determine the intention of the conveyance. The intention to defeat creditors need not be the primary intention of the transfer but can be among the intentions of the transferor: at paras. 44-48.

[37] The Court need not find actual intent but can refer to the badges of fraud to make inferences with respect to intent. The badges of fraud are well known and recognized by modern courts as follows:

(1) the donor continued in possession and continued to use the property as his own;

(2) the transaction was secret;

(3) the transfer was made in the face of threatened legal proceedings;

(4) the transfer documents contained false statements as to consideration;

(5) the consideration is grossly inadequate;

(6) there is unusual haste in making the transfer;

(7) some benefit is retained under the settlement by the settlor;

(8) embarking on a hazardous venture; and

(9) a close relationship exists between parties to the conveyance

see Indcondo, at para. 52

[38] The Applicants submit that the FCA applies to this case for the following reasons:

a. The Mortgage is clearly a “conveyance” under the FCA.

b. The Applicants and the Colorado Plaintiffs have standing as “creditors or others.”

c. With respect to the issue of intent, the Applicants raise the following issues:

i. The Hutchens were fraudsters. This was known to Adroit and forms part of the context in which the Mortgages were given.

ii. The transfer was made in the face of threatened legal proceedings. In this case it was made within days of the $24M USD judgment in favour of the Colorado Class and the Court’s imposition of a constructive trust over five of the six properties.

iii. There was haste in making the transfer. Klenda urged Sandy to register a lien to put him “ahead” of the Plaintiffs.

iv. The consideration is inadequate. Most of Adroit’s invoices for which it sought security for payment were not issued until years after the Colorado Judgment and contained significant charges for interest. The outstanding invoices at the time of registration totalled only $158,324.85 USD.

v. The effect of the Mortgages on creditors is self-evident. In short, the effect was to remove equity for other creditors when Klenda/Adroit knew that the Hutchens had no other assets. Further, at the time the Mortgages were registered the Pennsylvania action was underway in which similar allegations were made against the Hutchens.

vi. The timing of the registration is suspicious given that it was done within days after the May 2017 jury verdict.

[39] The question to be asked at this point is whether Adroit has offered a plausible theory of honest purpose for having registered the Mortgages within days of the Colorado Judgment. Adroit must rebut the presumption of an intention to defeat other creditors by the registration of its Mortgages: see Mohammed v. Makhlouta, 2020 ONSC 7494. It has not done so for reasons which are set out below.

[40] Klenda knew the history of the Hutchens. Indeed, he had lived it for four years during the course of the Colorado Class Action matter culminating in a 10-day jury trial. During the course of that trial, he heard extensive expert evidence about how the loan advance fraud was perpetrated. Klenda did not call any expert evidence in response.

[41] The jury clearly accepted the expert evidence as they awarded damages in the exact amount calculated by one of the Plaintiffs’ experts. While “association” with fraudsters is not part of the test under the FCA, certainly the context in which the conveyance is made must be considered. As such, I infer that Klenda knew two important facts at the time of the conveyance:(1) the Colorado Plaintiffs had been awarded an enormous judgment against the Hutchens and (2) the Hutchens did not have sufficient assets to satisfy a $24M USD judgment.

[42] While Klenda claims to have relied on statements made by Spiro that Tanya’s real estate holdings were not purchased with fraud proceeds, this cannot be true. In Judge Jackson’s post trial rulings, he made the following findings:

a. Tanya’s evidence that she bought the subject properties with her own funds was not credible;

b. Sandy did not deny that money from the advance loan fees was transferred to Tanya and other family members;

c. Sandy’s explanation that the transfer of funds to Tanya was to pay her for sums owed as per their separation agreement and other amounts owed to Tanya were found to be not credible.

d. Importantly, the Court found that the transfer of funds and the use of those funds by Tanya was a cover for getting funds out of Sandy’s hands and into the safer hands of Tanya and other family members. The Court then goes on to list five of the six properties on which mortgages were registered by Adroit and finds that they were probably purchased in whole or in part by funds provided by the Colorado Plaintiffs as advance loan fees. A constructive trust is then imposed on those properties (other than Serpentine).

[43] Klenda was well aware of these findings because he continued to represent Sandy at this point. As he intended to appeal the judgment and sought a separate retainer for that purpose, one can infer he read the post trial rulings. He then proceeded to register mortgages on all of the properties which he knew the Court had already found to be purchased with the proceeds from the loan advances and over which he knew the Court had imposed a constructive trust.

[44] Mr. Moldaver submits that the knowledge of the constructive trust is irrelevant as the imposition of the trust was overturned on appeal and remanded back to the District Court and Judge Jackson. Mr. Moldaver submits that the Colorado Plaintiffs have taken no steps in this regard because they know there is insufficient evidence to have the finding reinstated.

[45] The issues related to the imposition of the constructive trust by the Colorado Court are corollary to this motion and do not change this Court’s opinion. The issue of intent must be determined at the time of registration of the conveyance. The registration in this case was done long before the appeal was heard. Adroit and Klenda were well aware that the Mortgages were being taken over property (other than Serpentine) which the Court had determined (at that time) were subject to rights of the Plaintiffs and acquired through fraudulent means.

[46] Other knowledge which Klenda had at the time of registration must also be part of the constellation of considerations with respect to Klenda’s intent. For example, Klenda knew that his client had to testify at the Colorado trial by video because he was not permitted to enter the United States. A document obtained from U.S. Homeland Security dated January 16, 2013, confirmed that because of previous criminal convictions, Sandy was “inadmissible to enter the United States.”

[47] A copy of Sandy’s criminal record search dated February 7, 2013, was in evidence on the motion. That record contains multiple offences of dishonesty spanning a period of over 20 years including one count of fraud over $1,000, 3 counts of uttering a forged document and two counts of fraud over $5,000. Once again, I infer that if it was common knowledge that Sandy was not permitted in the U.S. because of his criminal record (this was in evidence at the trial) Klenda must have had some knowledge of the nature of that record. Indeed, the Plaintiffs proved at trial that the reason Sandy used aliases in deceiving borrowers was also because of his criminal record.

[48] Given this knowledge, the fact that Sandy had no employment, and the knowledge of Judge Jackson’s findings in relation to the acquisition of the subject properties and the Hutchens’ credibility, one can only conclude that Klenda must have had some understanding that he was registering mortgages on properties which were assets be used to satisfy the outstanding judgment creditors.

[49] Klenda was also present at the Colorado trial when the Plaintiffs’ expert witness, Kevin Baker, testified. Mr. Baker was qualified as an expert fraud investigator. He makes several significant findings in his report which were not contradicted by the Hutchens. Specifically, Mr. Baker found that:

a. The $89M which Sandy claimed as Estate Funds on Deposit in the Caymans in his net worth statement did not exist.

b. Sandy did not have a $1.5M line of credit at TD Bank as he claimed.

c. Sandy represented that he was a joint venture partner with TD Bank. This was wholly untrue.

d. Sandy’s international bank accounts and corporations did not exist.

e. Sandy collected fees for over 130 promised U.S. loans but only funded one loan for $265,000.

[50] Mr. Baker quotes Sandy’s former lawyer in his report. In a telling comment from March 2010, Mr. Alvin Meisel’s letter to Sandy set out as follows:

At the risk of repeating myself for the third or fourth time, I urge you to heed my advice. I am afraid that the multiplicity of complaints, taken together with the magnitude of deposit funds which you received without having funded a single deal and an established history of alleged "mortgage scamming" that fills the blogosphere, will end very badly for you.

[51] Klenda was aware of the contents of this expert report and others as it was all available at the Colorado trial. Klenda did not call any expert evidence to contradict the Plaintiffs’ reports. Klenda had knowledge, therefore, that the Hutchens had no liquid assets. The properties were all that was left.

[52] The timing of the mortgage registration is also important as it relates to intent and the badges of fraud. The Mortgages were registered within eight days of the Colorado Judgment being rendered. In his affidavit sworn November 29, 2021, Klenda clearly states at paragraph 104 that the day after Judge Jackson gave judgment in the Colorado case, he signed a memorandum for Michael Spiro regarding the registration of the Mortgages. The Mortgages were registered seven days later.

[53] The issue of timing also comes up after the Mortgages were registered. In October 2019, Klenda sought an adjournment of the appeal of the Pennsylvania matter in order to apply to the Receiver for fees for that appeal. The fact that he made such a request in the face of the already registered Mortgages suggests that he had concerns about their validity. If the Mortgages secured future fees, why did he need to apply to the Receiver for fees? Klenda never actually pursued his request to the Receiver but did file a brief indicating that Sandy intended to obtain Canadian counsel to pursue the request expeditiously.

[54] Further, on October 3, 2017, Klenda sent an email to Sandy about his fees and the Mortgages. He tells Sandy that based on his “quick eyeballing and mental adjustment of reports from our bookkeeping system” he estimates further accounts will total $1.5M. He goes on to state that “...I’m not sure why any uncertainty on the final number has to do with ensuring that we have a lien that ensures we will eventually be paid… it 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….” Klenda put pressure on Sandy to permit the registration of Mortgages for fees which had not yet been billed and which Klenda “eyeballed” as to accuracy.

[55] There are two concerns with the October 3, 2017 email. The first concern relates to Klenda’s admission that the Mortgages must be registered to “put us ahead of the plaintiff.” This is clearly an intention to defeat the judgment Creditors and ensure payment of legal fees before the payment of the judgment. The second concern relates to the admission by Klenda that the mortgaged amount would be made up of fees which had not yet been invoiced and for which he was only providing an estimate. This concern is dealt with more expansively below with respect to the issue of consideration.

[56] Finally, there is one other issue related to intent which cannot be ignored. Adroit registered Mortgages on five out of six properties which were subject to a constructive trust. The propriety of that Order remains in issue but at the time of registration, it was intact. Klenda knew this Order formed part of the Colorado Judgment. Clearly, Klenda intended to register the Mortgages and “get ahead” of the Plaintiffs even where the Court had made a determination that five of the subject properties had been wrongfully acquired by a party or entity who was not entitled to them.

[57] There are two exceptions in the FCA as per ss. 3 and 7(2) as set out below:

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.

[58] Essentially, these exceptions apply to situations in which a conveyance may have been made with a fraudulent intent but if there is good consideration and the recipient acts in good faith and is not aware of the fraudulent intent, the conveyance may not be set aside. In this Court’s view this case does not come within the enumerated exceptions under the FCA.

[59] In DBDC Spadina Ltd. v. Walton, 2014 ONSC 3052, the Court, citing Feher v. Healey, [2006] O.J. No. 3450, discussed the meaning of “good consideration” under the FCA and determined that “nominal or grossly inadequate consideration is not sufficient and can be an indication or badge of fraud”: at paras. 20-21.

[60] In this case, there is no dispute that the actual amount of outstanding invoiced fees at the time of the mortgage registration was in the range of $180,000 USD. It is also not disputed that a further $1.5M USD in legal fees was billed on June 1, 2020. In the lengthy invoice provided by Adroit, interest is billed including a charge of $135,132 USD for interest on fees between January 2017 and June 2020 and a further $207,144 USD for fees between January 2018 and June 2020 (different work). The total interest charged on all accounts was $366,231 USD. Some of the billings in the invoice go as far back as 2014.

[61] I find that the there was a lack of good consideration in this case as the consideration was almost entirely future legal fees which had not yet been billed and which, at the time of registration, were only “eye-balled” by Klenda as accurate. While consideration in a good faith transaction can be nominal and still valid, in this case the consideration was for future unknown amounts. Given the lack of good consideration, the Mortgages do not fall within the exceptions of the FCA.

[62] If I am wrong on the issue of the sufficiency of the consideration, the lack of good faith on the part of Adroit is enough to disqualify it from any of the exemptions under the FCA. I have already listed above the evidence going to intent which included, among other evidence, knowledge of fraudulent activity on the part of the Hutchens, the constructive trust and an intention on the part of Klenda to place himself ahead of other creditors.

[63] In Mohammed, Justice Kimmel dealt with a request under the FCA to declare a mortgage void. In that case, a mortgage was registered by the vendor in favour of his brother after the requisition date and unbeknownst to the purchaser, the purchaser’s lawyer or the vendor’s lawyer. The mortgage was not paid out on closing. The mortgage was discovered five years later when the purchaser attempted to re-finance his existing mortgage. The mortgagee died and his estate took the position that the mortgage was valid and enforceable.

[64] Justice Kimmel found that the mortgage registered by the vendor’s brother raised a presumption of fraud that had not been adequately rebutted by his estate. Specifically, she found that “[t]he Respondents [the Estate] have not proffered any plausible theory of an honest purpose for having registered the mortgage within weeks of the closing of the sale of the Property to the Applicant and take no steps in furtherance of it thereafter”: at. para. 58.

[65] In this within case, I do not find that Adroit has offered any plausible theory of an honest purpose for registering the Mortgage given Klenda’s knowledge of the Hutchens’ fraud, the existence of a constructive trust over the properties at the relevant times, his failure to provide good consideration and his intent to “get ahead” of the judgment creditors.

Was the Mortgage an Assignment Contrary to s. 4(1) of the Assignments and Preferences Act?

[66] The Assignments and Preferences Act, R.S.O. 1990, c. A.33 (the “APA”) in s. 4 provides:

Nullity of gifts, transfers, etc. ., made with intent to defeat or prejudice creditors

4 (1) Subject to section 5, every gift, conveyance, assignment or transfer, delivery over or payment of goods, chattels or effects, or of bills, bonds, notes or securities, or of shares, dividends, premiums or bonus in any bank, company or corporation, or of any other property, real or personal, made by a person when insolvent or unable to pay the person's debts in full or when the person knows that he, she or it is on the eve of insolvency, with intent to defeat, hinder, delay or prejudice creditors, or any one or more of them, is void as against the creditor or creditors injured, delayed or prejudiced.

Unjust preferences

(2) Subject to section 5, every such gift, conveyance, assignment or transfer, delivery over or payment made by a person being at the time in insolvent circumstances, or unable to pay his, her or its debts in full, or knowing himself, herself or itself to be on the eve of insolvency, to or for a creditor with the intent to give such creditor an unjust preference over other creditors or over any one or more of them is void as against the creditor or creditors injured, delayed, prejudiced or postponed.

[67] Under s. 4(1), the plaintiff must prove that the debtor was in insolvent circumstances and had an intention to defeat creditors. Under s. 4(2), the plaintiff must prove that the debtor was in insolvent circumstances, the conveyance was to a creditor and the conveyance was done with an intention to give that creditor an unjust preference over other creditors. Like the FCA, the APA, at s. 5(1), provides an exception for good faith conveyances made for fair and reasonable consideration.

[68] While the definition of creditors is less broad than the FCA in that it does not include “others,” the definition is still met here. The creditors are the Colorado Plaintiffs who supported this motion. I have already found above that the Applicants have standing to bring this motion in the context of the Receivership.

[69] Similar to the reasoning given above under the FCA, the exceptions under the APA do not apply in this case. As I have already found that the consideration given for the mortgage was inadequate, the bona fides of the Mortgage do not require examination. This issue was also addressed above with respect to Klenda’s intent.

[70] While it is not necessary to demonstrate that all of the requirements under s. 4(2) are met given my findings under the FCA, it is clear that the Hutchens were in “insolvent circumstances” as debtors. A $24M judgment had been issued against them. The evidence at trial which was accepted by Judge Jackson was that the myriad of international accounts, corporations and joint ventures allegedly owned by Sandy were an illusion at a most sophisticated level created to entice innocent loan applicants. That is, there was nothing there. As Sandy himself admitted, the $85M in the Cayman Island which he used ostensibly as security to obtain loans simply did not exist.

[71] I therefore find that the Mortgages are void under both the FCA and the APA.

Orders and Costs

[72] Given all of the above, the motion is granted:

a. The subject Mortgages are declared void ab initio.

b. The Land Registrar is directed to discharge the Mortgages;

c. The proceeds of sale held by the Receiver shall be distributed without regard for the Mortgages.

[73] If the parties cannot agree on costs, written submissions of no more than three pages, double spaced, (exclusive of any Offer to Settle or Bill of Costs) shall be provided on a five-day turnaround starting with the Applicants, five days after the release of this endorsement. Written submissions are to be provided directly to my assistant. If no written submissions are received within 35 days, costs will be deemed to be settled.

C. Gilmore, J. Date: March 9, 2022