Court upholds ‘dirty’ hands deal

An Ontario court has ruled that a transaction designed to temporarily hide assets from creditors should be completed as planned, after the recipient of the assets refused to return them, noting that the creditors stand to benefit if the assets are returned.  

According to a decision of the Ontario Superior Court of Justice, in 2013, Robert Halliday convinced a friend to participate in a scheme to help him evade his creditors by agreeing to temporarily take possession of 11 plots of land that he’d inherited from his parents and to hold them in trust for him, to keep them out of reach of potential creditors, and later to return them.

Those lots were transferred to the friend, Mike Bromley, but he later refused to return them, claiming that he bought the land for fair market value, and owned it outright.

“Between these two accounts there is no middle ground. One of these men is telling the truth. The other is not,” the court said. “The court must decide which is which — and then ask what equity demands of the answer.”

Halliday sued Bromley, seeking the return of the land — effectively arguing that the court should enforce a transaction that was originally designed to evade creditors.

The court noted that Halliday’s effort to avoid creditors arose in the wake of a series of financial misfortunes — including a fraud that took most of his assets, a fire that destroyed his home that proved to be underinsured, and a $375,000 legal judgment against him in connection with the original fraud.

“Over the years, through misfortune and misplaced trust, he lost most of what he had inherited. A fraudster stripped him of his dignity and nearly of his land. A fire took his home. Creditors closed in on every side,” the court noted.

Ultimately, the court ruled that the land transfer transaction did arise from a scheme cooked up by Halliday to avoid his creditors — and it found that his lands should be returned to him.

“I accept that Mr. Halliday’s prime motivation in transferring the property … was to put the properties out of jeopardy arising from his ongoing turbulent financial circumstances,” the court concluded, adding that both sides knew that the transactions “were irregular and improper” and that a trust in favour of Halliday was created by their actions.

However, the defendants argued it’s not up to the court to enforce a transaction that was improper from the start. They argued that when someone “transfers property to defraud creditors [they] cannot call on the court to enforce the trust he thereby created and recover the property.”

Instead, the law should “leave him where he has placed himself,” they argued.

In response, Halliday argued that the court has discretion about whether to intervene or not.

And, in this case, he argued that ordering the return of his land would benefit the creditors that he was originally trying to evade by returning assets to him that he could sell to satisfy those creditors — including a $972,000 judgement against him from TD Bank and the additional legal judgment for $375,000.

The court agreed, finding that,” To apply the clean hands bar in these circumstances would not vindicate any creditor interest; it would enrich the defendants at the creditors’ expense.”

“Mr. Bromley is not an innocent third party caught up in someone else’s fraud: he was a knowing and willing participant in a scheme that all parties knew to be improper. The clean hands doctrine is directed primarily at preventing plaintiffs from using equity as a tool of their own wrongdoing; it is a different matter when both parties are equally implicated in the underlying impropriety,” the court said.

The court acknowledged that it may be contrary to public policy to intervene to enforce a transaction that aimed to evade creditors.

“… if courts routinely assist parties in recovering property they transferred to defeat creditors, the mechanism of fraudulent conveyance is undermined,” it said.

However, ultimately, it decided that the “balance of equitable considerations” favour enforcing the trust and ordering the return of the land, “primarily because of the combination of Mr. Bromley’s knowing participation and the fact that enforcement of the trust serves rather than frustrates the interests of innocent creditors.”

The court concluded that Halliday “is entitled to a declaration that Mr. Bromley … hold the 11 lots on trust for Mr. Halliday, together with an order for reconveyance.”