Creditors want to recover as much money as they can from their debtors as quickly and painlessly as possible. When those debtors take steps to delay, defeat and hinder a creditor's recovery, creditors can rely on the Fraudulent Preference Act, RSBC 1996, c. 164 ("FPA") and the Fraudulent Conveyance Act, RSBC 1996, c. 163 ("FCA") to set aside transactions that have that intention and effect. Generally, the FCA allows "creditors and others" to void dispositions of property designed to delay, hinder or defraud their claims. The FPA generally sanctions debtors who prefer one creditor over another or others.
Such legislation is not self-enforcing. Creditors usually have to bring an action to set aside fraudulent transactions, the cost of which reduces their recovery. There is, therefore, a demand for summary processes that allow creditors to attack transactions meant to stop a creditor from collecting.
The FPA provides a such a process. Under section 9 of that Act, it is not necessary to start an action to set aside the fraudulent conveyance of a debtor's lands. Rather, a judgment creditor of such debtor can bring a summary, "show cause" hearing to impugn the transaction.
Recently, the BC Court of Appeal considered—and declined to answer—the question of whether a person must be a "judgment creditor" under Section 9 of the FPA at the time a debtor enters into an impugned transaction, rather than at the time the person applies for relief under that section. The Court nonetheless provided guidance for parties to avoid this uncertainty and upheld Fasken's win at the BC Supreme Court.
Underlying Proceeding
The underlying action involved a foreclosure proceeding arising from a property development project in Langley, BC. Fasken's client, Forjay and RMIC (together, "Forjay"), held first and second mortgages against the development. A numbered company, 625536 B.C. Ltd. ("625"), held a third-ranking mortgage on the development.
Foreclosure proceedings commenced in 2017. 625 disputed the priority of and amounts owing under the Forjay mortgages, resulting in protracted litigation, including an appeal to the Supreme Court of Canada.
In June 2021, Forjay notified 625 that it was considering bringing an application to seek special costs from 625 in relation to the underlying foreclosure proceeding. In September 2021, Forjay sent unfiled copies of the application to 625's counsel, seeking special costs of more than $500,000. The principal of 625 disputed that he personally received these documents. About a month later, in October 2021, 625 granted a mortgage over the only property held in its name (the "Lands") to a company also exclusively controlled by the same principal ("105"). A week thereafter, 625 transferred the Lands to 105 (the "Impugned Transactions").
At the time of the Impugned Transactions, Forjay was a "judgment creditor" of 625, but only for a $1,000 costs award incident to the foreclosure proceedings, which it had registered against the Lands. Interestingly, this costs award remained registered against the Lands despite the Impugned Transactions.
In August 2022, Forjay was awarded more than $270,000 in special costs against 625 as a result of the above application. When Forjay went to register this further judgment against the Lands, it discovered the Impugned Transactions.
Decision of the Chambers Judge
In December 2022, Forjay brought an application under s. 9 of theFPA, against 625 and 105, seeking that they show cause why the Lands should not be sold to satisfy the special costs judgment. Forjay's position was that the Impugned Transactions were fraudulent dispositions within the meaning of the FCA and of no force and effect.
No formal response was filed by 625. However, 105 filed a response and opposed the application. What followed was a case-managed, hybrid summary process that involved document production and the cross-examination of 625/105's principal on affidavits. It culminated in a two-day hearing before the Honourable Justice Fitzpatrick.
On the eve of the hearing, 105 raised a new argument: because Forjay was not a "judgment creditor" (as defined by the FPA) at the time of the Impugned Transactions, it did not have standing under the FPA to apply for a show cause hearing (the "Standing Argument"). 105 asserted that while Forjay may be a "creditor and other" under the FCA, the FPA had a narrower test for standing that Forjay did not meet. Over the course of the hearing, 105 abandoned the Standing Argument.
The show-cause hearing resulted in the Court agreeing with Forjay: Justice Fitzpatrick concluded that there was a prima facie case of fraudulent intent by 625 under the FCA. She next found that 105 failed to establish that the Impugned Transaction were in good faith, for good consideration, and that 105 had no notice of 625's fraudulent intent. The judge declared the mortgage and transfer of the property to be fraudulent and ordered the Lands to be sold to satisfy the special costs judgment in favor of Forjay. Lastly, Justice Fitzpatrick held that the principal of 625/105 had put forward false or contrived evidence, and therefore awarded Forjay special costs of the "show cause" proceedings.
Court of Appeal
105 appealed. Among other arguments, it sought to resurrect the Standing Argument it had abandoned in the Court below.
The Court of Appeal found that there was "some strength" to the Standing Argument, noting differences in language between theFCA and the FPA. However, the Court took issue with the fact that 105 abandoned the Standing Argument at the lower Court. (At the Court of Appeal, new issues are only heard in exceptional cases, where there is no prejudice to the opposing party. It is even more difficult to raise an issue that was deliberately abandoned in the Court below.)
The Court of Appeal found that even if they agreed with the Standing Argument, the show cause hearing was only one of a number of summary processes available to Forjay. Allowing the appeal on the Standing Argument would simply require Forjay to bring costly and duplicative proceedings. On these unique facts, the Court found it was not in the interests of justice to allow 105 to raise the Standing Argument.
Interestingly, the Court made it clear that it did not regard the decision below as a "reliable precedent." Therefore, the question remains open as to whether a party must be a judgment creditor at the time of the impugned transactions in order to proceed under s. 9(1)(a) and (2) of the FPA.
Key Takeaways
The Court of Appeal's decision leaves open the legal question of whether a person who is not a creditor or a judgment creditor at the time a debtor enters into a fraudulent transaction has standing to bring a show cause hearing under the FPA.
On the Appeal, Forjay raised the existence of a well-established line of authority confirming that an applicant under the FPA need not be a judgment creditor at the time of the impugned transactions so long as they have such status at the time they bring the application. Nominally, these cases remain good law, as they were not addressed by either the Supreme Court (where the issue was abandoned) or the Court of Appeal (where the issue was not decided).
Until the law on this issue is clarified, the authors posit that parties should bring summary proceedings through other means if there is doubt about their standing under the FPA's show-cause process. This may require starting an action and bringing such "show cause" application while relying both on the FPA and Rule 9-7 (summary trial).
Separately, this case also demonstrates the importance of trial positions and always having one eye to the potential for an appeal. Appellate courts are naturally resistant to entertaining new arguments when the lower court has had no opportunity to weigh in. As shown in this case, appellate courts are even more resistant where a party abandons or concedes points in the lower court - even where there is a potentially meritorious legal issue raised. In such circumstances, it behooves a party to not only show that such a legal issue is a meritorious one, but also that some kind of injustice would follow if they are not allowed to raise it.
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