B.C. – land transfer made during arbitration later voided as fraudulent attempt to defeat creditors

In Balfour v. Tarasenko, 2019 BCSC 2212, knowledge of a pending but unfinished arbitration qualified as one of the facts relevant to a declaration under B.C.’s Fraudulent Conveyance Act, RSBC 1996, c 163 to void a land transfer made during the arbitration and before the final award issued. Though hampered by an incomplete evidentiary record presented by self-represented litigants, Mr. Justice Dennis K. Hori did identify the land transfer as having the effect of delaying, hindering or defeating creditors.

Hori J. was asked to declare that two (2) transactions involving the same land were void as fraudulent transactions under the Fraudulent Conveyance Act (“FCA”).  The first transaction was made by way of purchase agreement dated March 15, 2009 with the transfer being registered in the land title office May 14, 2009 (“2009 transaction”).  The second transaction occurred on August 22, 2014 (“2014 transaction”).  For the purposes of identifying the role of the arbitration in the FCA, only the 2009 transaction is considered in this note. 

The 2009 transaction involved a non-arms length sale of land by a son and his wife to the son’s parents.  Though the sale of the land involved both the son and his wife, the facts and Hori J.’s analysis focus on the son’s knowledge and his actions as vendor and party to the arbitration.

Due to all parties being self-represented at trial, at paras 11-14, Hori J. commented that the evidence “was lacking in detail that would have been expected in a case alleging fraudulent conveyance”.   Despite the gaps, Hori J. stated that “the parties have come to the Court for a final decision” and “I have done my best to make the findings of fact from the admissible evidence tendered”.

A key uncontested fact was the son’s/vendor’s knowledge of ongoing arbitration process.  That knowledge lead Hori J. to infer that the vendor as arbitral party must also have had knowledge of the arbitration’s risk and was thereby motivated to transfer the land.

[63] The transfer was made at a time when David was a respondent in an arbitration in Ontario that resulted in a judgment against him for $293,000 in July 2009. David was aware of the arbitration proceeding and must have been aware of the risk of a judgment against him when he transferred the Property to his parents.

At paras 47-60, Hori J. identified the key provisions of the FCA and the applicable indicia required to establish intent to fraud. Section 1 of the FCA focuses on the conduct and intentions of the transferor and section 2 focuses on the transferee. “The purpose of the Act is to provide a remedy to creditors who have been fraudulently denied access to the transferor’s assets but not at the expense of a bona fide purchaser for value without notice of the transferor’s intentions.

He noted that proof of dishonest intent is not necessary but there must be evidence of an intention to put assets out of the reach of creditors or evidence upon which the intention could be inferred.  The simple effect of a transaction delaying, hindering or defrauding creditors is insufficient.  See Mawdsley v. Meshen, 2012 BCCA 91, leave to appeal refused, Mawdsley v. Meshen et al., 2012 CanLII 49137 (SCC).

At para. 60, Hori J. summarizes the indicia of an intent to defraud creditors, consolidated from his reading of Prima Technology Inc. v. Yang, 2018 BCSC 94, Hawkeye Power Corporation v. Sigma Engineering Ltd., 2014 BCSC 1444 and Banton v. Westcoast Landfill Diversion Corp. et al, 2004 BCCA 293:

a) where a transfer of property has the effect of delaying, hindering, or defeating creditors, the necessary intent is presumed;

b) inadequate consideration paid for the transferred property may be indicative of fraudulent intent;

c) a transfer that renders the transferor unable to meet his then existing liabilities or which divests the transferor of all or a substantial portion of his or her assets may be indicative of an intent to defraud creditors;

d) a transfer between related parties in suspicious circumstances may be an indication of an intent to defeat creditors unless the parties present an adequate explanation;

e) the state of the debtor’s financial affairs at the time of the transaction, including his income, assets, and debts, may indicate a specific intention;

f) a transfer of property made in haste may be indicative of a fraudulent intent; and

g) a transfer of property made at a time when a debt or claim against the transferor is in existence or is imminent may be indicative of an intent to defraud creditors.

Applying those indicia to the facts before him to the son’s role as transferor of the land, Hori J. concluded that it was reasonable to infer the vendor’s intent to delay, hinder or defraud his creditors. 

Regarding the parents’ role as transferees, Hori J. makes no express mention of their intention or an inference but does qualify their role as wilful compliance by examining it through the mother’s involvement. Hori J. recorded the parents’ evidence as denying knowledge of the existence of the arbitration.

[24] Lidia testified that when she and Alexander decided to purchase the Property, she assumed that her son was having financial problems because the house was in foreclosure. However, Lidia denied any knowledge of what those problems were, and she specifically denied having any knowledge of the Ontario arbitration proceedings.

Though Hori J. noted that the parents asserted lack of knowledge, he did consider that their involvement as transferees qualified as wilful compliance with their son’s proposal.

[74] I further find that the Tarasenkos knew that their son was having financial difficulties although they may not have known the specifics of those problems. Lidia acknowledged that her son must have been having financial problems because the house was in foreclosure. Lidia testified that she and Alexander trusted their son. He prepared all of the documents for the Tarasenkos to sign. Lidia testified that when David provided those documents to them, they signed them.

[75] It was apparent from Lidia’s evidence that she relied totally on her son. I have concluded that on matters involving financial transactions, Lidia would do whatever her son asked of her without question. I further conclude that even if David explained what he was doing, it would be difficult for her to understand. Therefore, it is my conclusion that this transaction was entirely orchestrated by David and that his parents willingly complied.

Further to his analysis at paras 61-76 of the facts as presented to him, Hori J. held that the non-arms length 2009 transaction between the son as an arbitral defendant and his parents was made with the intent to delay, hinder or defraud creditors. He concluded that the “entire transaction seems unnecessary” if the transaction sought only to save the land from foreclosure.

 “[72] From the evidence that I have outlined, it is reasonable to infer that David and Leslie made the transfer to the Tarasenkos with the intent to delay, hinder or defraud creditors. The evidence includes many of the indicia of a fraudulent transaction:

a)   the transfer had the effect of delaying, hindering or defeating creditors, including the creditor in the Ontario arbitration;

b)   the consideration paid for the Property by the Tarasenkos was of questionable value;

c)   there is no business or other financial advantage to be gained by transferring the Property to the Tarasenkos that could not be achieved by other means;

d)   there is no evidence that David and Leslie had significant assets other than the Property; and

e)   the transfer was made at a time when a financial claim against David was in existence and known to him.

In contrast, Hori J.’s analysis of the 2014 transaction lead him to conclude that it was made to a transferee which had no notice or knowledge of collusion or fraud and was not a fraudulent conveyance.

urbitral note – Much discussion in arbitral practice regarding post-award execution involves activities which take place after the award issues.  This case involves activity which occurred during the arbitration and which lead to unwinding an asset transaction made before the award but which put that subsequent arbitral award at risk of not being satisfied.

The case involves creditors who were not party to the arbitration but were allowed to void the 2009 transaction.  The reasons implicitly acknowledge that the successful arbitral party to the 2009 arbitration could also have applied to void that 2009 transaction and recover the value of the asset transferred.

The case signals that an arbitral party must be careful in how it handles its assets during an arbitration and not just afterwards.  While the facts disclosed a number of indicia relevant to creating a reasonable inference, the first and primary indicia was the arbitral party’s knowledge of the arbitration and its risk to his assets.

The case also underlines that, despite knowledge by an arbitral party as transferor of an asset, the transferee’s own knowledge of collusion or fraud is equally relevant and necessary before a transaction can be voided.  Hori J.’s handling of the 2009 transaction and the 2014 transaction demonstrates the necessity of examining the conduct and knowledge of both the transferor and transferee to a challenged transaction.