In McGoey (Re), 2019 ONSC 80, Justice Penny of the Ontario Superior Court of Justice found trusts over two properties held by a bankrupt were void as shams. In his decision, Justice Penny noted that had he not found the trusts to be sham trusts, he would still have set them aside as fraudulent conveyances, making us ask: “what is the difference between a sham trust and a fraudulent conveyance?”
A sham trust occurs where documents or acts give the appearance of creating legal rights that the parties have no intention of actually creating. In contrast, the documents and acts for a fraudulent conveyance accurately reflect the intentions of the parties and the legal rights that they want to create. The issue with a fraudulent conveyance is not that the transfer of rights is a sham, but that the transfer is being done for fraudulent purpose. With the evidence in front of him, Justice Penny was satisfied that, even if the McGoeys intended to transfer the properties, it was for a fraudulent purpose.
Proving Sham vs Proving Fraudulent Conveyance
Proving that a trust is a sham does not require specific evidence of deceit. It is enough to prove that the trust as it appears is different from what the parties know and mean it to be. The bankrupt, Gerald McGoey, and his wife alleged that the family cottage and various other properties, were held in trust for their children. To support their assertion, Mr. McGoey produced trust documents. The centerpiece of Justice Penny’s conclusion that these documents were a sham was the testimony of an expert in typography, who found that the fonts used in the trust documents were not in existence at the time when those documents were allegedly created.
In addition, Justice Penny reviewed the pattern of behaviour that showed the McGoeys did not intend to create the legal rights and obligations that their trusts appeared to create. As a result, the trusts were a sham. The red flags or “badges of fraud” which led to this conclusion included:
- Mr. McGoey’s previous cottage was sold without mention of any trust;
- there was no registration of the purported trust on title;
- the McGoeys had free reign to use the cottage as they wished, to the point that they used it to secure financing which flowed into their personal accounts;
- the McGoeys had never mentioned the existence of any trusts to anyone until many years after they were allegedly created;
- the McGoeys paid all operating expenses while the alleged beneficial owners contributed nothing;
- the trust documents were backdated and the McGoeys’ lied about its creation;
- one of the McGoeys’ sons was added to title of the cottage in 2012, at which time a land transfer tax statement described the McGoeys as beneficial owners; and
- by early 2010, Mr. McGoey knew he was in serious financial jeopardy and thus had the motive and incentive to attempt to put his assets beyond the reach of creditors.
Establishing that a conveyance is fraudulent requires proof of an intent to defraud, because unlike the creator of a sham trust, a fraudulent conveyor wants their transaction to create real rights and obligations to “defeat, hinder, delay or defraud creditors of their lawful claims.” The court will also look for “badges of fraud” when deciding whether there was a fraudulent purpose to the conveyance. While the list will vary from case to case according to the circumstances, the traditional “badges of fraud” are:
- the donor continued in possession and continued to use the property as his own;
- the transaction was secret;
- the transfer was made in the face of threatened legal proceedings;
- the transfer documents contained false statement as to consideration;
- the consideration is grossly inadequate;
- there is unusual haste in making the transfer;
- some benefit is retained under the settlement by the settlor;
- embarking on a hazardous venture; and
- a close relationship exists between parties to the conveyance.
Where the plaintiff raises evidence of these “badges of fraud”, the defendant has to prove that there was no intent to defraud. Where the transaction is between close relatives under suspicious circumstances, the court will generally require independent corroboration of the debtor’s claim that the conveyance was not fraudulent. Ultimately, Justice Penny had no qualms about declaring the trusts a sham or a fraudulent conveyance calling the conclusion “unavoidable”.