When will a court overturn a settlement agreement as a fraudulent preference?
Andrew, the appellant Magdalena’s husband, and his brother were the directors and shareholders of a corporation. In 2016, the respondents obtained judgments against the corporation for an amount in excess of $300,000. In 2018, the respondents obtained a further order permitting them to enforce the debts against Andrew and his brother personally on the basis that the brothers fraudulently transferred property belonging to the corporation to themselves.
In the course of enforcing this debt, the respondents came to learn that Magdalena and Andrew were plaintiffs in an action against a third-party respecting a property dispute. In 2018, a Master granted Magdalena and Andrew summary judgment on liability. The Master noted that on the face of the claim, they would be entitled to damages of $873,500. The action was ultimately settled for $215,000. The settlement agreement also contained a “No Admission of Liability” provision. Upon Magdalena’s receipt of the full settlement amount, Magdalena and Andrew each agreed to discontinue and release their individual actions against the third party.
The settlement agreement was disclosed to the respondents, who requested that Magdalena and Andrew’s counsel not release any funds that may have been received by Magdalena. The following morning, counsel for Magdalena and Andrew advised that not only had the full $215,000 settlement amount been paid ahead of schedule, but that the entirety of those funds (less approximately $10,000 held in trust as a retainer) had been disbursed to Magdalena. That same day the respondents were granted an ex parte interim attachment order prohibiting Andrew and Magdalena from disbursing any of the funds received under the settlement agreement.
The respondents applied to a Master for an order directing that half of the settlement amount be paid into court for distribution to Andrew’s creditors. The respondents argued that the settlement agreement was a fraudulent transfer of Andrew’s interest in the property action from Andrew to Magdalena. The Master granted the order, and declared that the settlement agreement contravened both the Fraudulent Preferences Act and the Statute of Elizabeth.
Magdalena filed new evidence on appeal in the form of an affidavit from Magdalena and a transcript from questioning on that affidavit. The appellant argued that Andrew’s discontinuance of his claim via the settlement agreement was akin to a disclaimer of an interest in an estate. The chambers judge admitted the new evidence on appeal, but held that it did not change her conclusion that the Master was correct. The chambers judge held that the settlement agreement was a fraudulent transfer.
In this appeal, Magdalena argued that the chambers judge erred in concluding that the settlement agreement was a transfer or conveyance of property. She argued that neither the settlement agreement nor the release signed by Andrew were a transfer or conveyance of property by Andrew to Magdalena. Andrew’s decision to decline to pursue his claim against the third party was akin to the disclaimer of an interest in an estate.
The appellate Court agreed with both the Master and the chambers judge, who highlighted the significance of Andrew’s execution of the settlement agreement, which included a release in favour of the third party. The settlement agreement and release, when considered in their overall context, demonstrated that Andrew had effectively transferred his cause of action in the property action to Magdalena for no consideration, thus allowing Magdalena to reach a final settlement with the third party, and thus defeating and prejudicing Andrew’s creditors by taking all settlement proceeds for herself. Having regard for the totality of the circumstances, the overall flow of events constituted a transfer or conveyance of property within the meaning of section 1 of the Fraudulent Preferences Act and the Statute of Elizabeth.
The Court dismissed Magdalena’s appeal.
Counsel: Counsel: Brad Findlater of Wilson Laycraft for Fish Creek Finish Carpentry Ltd.; Richard Harrison of Wilson Laycraft for Tracey Higashi; Loran V. Halyn of Sugimoto & Company for Magdalena Lindner
Judge: Kirker J.A.