An interesting yet somewhat perplexing decision came out of the Court of Appeal recently that dealt with what appear to be creditor avoidance issues.
The case, which involved the wife, the husband, and one of his unsecured creditors, illustrates the courts’ apparent struggle with the competing interests of spouses and creditors.
The parties in Schwartz v. Schwartz married in 1986. Karen Schwartz commenced her divorce application in early 2009. During the marriage, the spouses bought a home together. In 2000, they transferred the title to Karen’s name alone. While David Schwartz said they did the transfer because “it was the right thing to do,” Karen indicated it was due to an estate rollover by her husband’s father to him and that there were business considerations behind it.
In 2006, the couple again transferred the house. This time, Karen was involved in a business that she operated from the home selling what she termed “knock off” casual wear. She received a letter from a lawyer indicating she may have infringed certain trademarks as a result of her business. It appears her husband became concerned about a potential lawsuit and suggested she transfer the house back to him, which she did.
Unbeknownst to Karen, her husband had obtained credit for his business from a company called Vast-Auto Distribution Ltd. a year earlier. In his credit application, he indicated he owned the home, which wasn’t the case at the time, and gave a personal guarantee on behalf of his company.
The parties separated a few years after the 2006 title transfer. After his business defaulted on its loan, Vast-Auto obtained a judgment of about half a million dollars and began enforcement of its writ against the matrimonial home that by then belonged solely to the husband.
The wife then brought a motion seeking to have the transfer to her husband set aside. She argued she never intended to gift the house to him and that he held it in trust for her by way of a resulting trust. The motions judge granted her the relief she sought and set aside the initial transfer. Interestingly, the husband didn’t participate in the motion and Vast-Auto was the only party to oppose it. There were also a number of procedural irregularities in the case, including the fact that the issue didn’t arise by way of a summary judgment motion.
Justice Janet Simmons, speaking for a unanimous court, confirmed that a trier of fact must focus primarily on the actual intention of the transferor at the time of the gratuitous transfer. In doing so, the court must determine whether the transferor intended to gift and divest of the property or whether the intention was that the transferee would hold it in trust.
What’s interesting and at the same time troubling with this case is that the motions judge found that the wife didn’t in fact intend to divest herself of her interest in the matrimonial home, a finding the Court of Appeal upheld. What it set aside, on the basis of procedural unfairness in that the issue arose only in oral argument and wasn’t previously pleaded, was the motions judge’s finding that the wife was under undue influence at the time of the transfer.
In the meantime, the court nevertheless sent the matter back to the motions judge to determine the extent of the wife’s beneficial interest in the home. This result seems to conflict with the other findings of fact, namely that the husband earlier had transferred his entire interest in the matrimonial home to his wife and, therefore, that what she had in 2006 was a 100-per-cent ownership stake in the property. If it’s truly the case that she didn’t intend to transfer her interest in the home to her husband and she had full ownership, there should be no need to send the matter back for further findings.
What seems to have happened in this case is an attempt by the Court of Appeal to protect the wife from losing the entirety of her equity stake in the matrimonial home while at the same time attempting to allow some recovery by the creditor. The result, however, creates uncertainty in these types of situations that occur very frequently in a family law practice.
Marta Siemiarczuk is a lawyer practising family law litigation and collaborative family law at Nelligan O’Brien Payne LLP in Ottawa. She can be reached at email@example.com.
[This article is reprinted with permission and first appeared in the April 2012 issue of The Law Times.]