In Esfahani v. Samimi, 2018 ONCA 516  the Ontario Court of Appeal confirmed that a plaintiff pursuing a fraudulent conveyance or preference must recognize that the legal landscapes changes with a bankruptcy and that the effects of a bankruptcy filing cannot be ignored. The unfortunate outcome for the plaintiff, Djalaleddin Esfahani (“Esfahani“), was that an otherwise valid claim to set aside a fraudulent conveyance was dismissed because it was brought outside of the bankruptcy process.

Foreign Judgment Obtained

Esfahani obtained a judgment in Germany against Kamran Samimi (“Samimi“) in 2007, which was recognized in Ontario. Esfahani brought an action in 2011 claiming that the defendants/respondents fraudulently conveyed properties to evade payment of the judgment. In 2013, Samimi filed an assignment into bankruptcy, and he was discharged in 2014.

 Mini-Trial

In 2013, Esfahani brought a summary judgment motion on his claims under Ontario’s Fraudulent Conveyances Act, R.S.O. 1990, c. F.29, and the Assignment and Preferences Act, R.S.O. 1990, c. A.33.  Counsel for the parties agreed that the motion ought to proceed as a mini-trial on the issue of whether the defendants/respondents including Samimi engaged in a series of transactions with the intent to defeat, delay, hinder or prejudice Esfahani from receiving payment for the outstanding judgment.

In the mini-trial, Justice Dunphy found that the evidence was strong and convincing that the transfers of property were made with the intent to defeat, hinder or delay Esfahani. However, Justice Dunphy also noted in his decision that the German judgment was discharged as a result of Samimi’s bankruptcy and that a post-bankruptcy claim to set aside the property transfers belongs to the bankruptcy trustee. After also noting that if the bankruptcy trustee fails to pursue the claim then a creditor can do so only after following the specific procedure set out under section 38 of the Bankruptcy and Insolvency Act (BIA), Justice Dunphy dismissed the part of Esfahani’s motion that sought a declaration that his claims were unaffected by Samimi’s bankruptcy.

Summary Judgment Motion & Appeal

Samimi unsuccessfully appealed the mini-trial finding which resulted in a 2 year delay. Oddly, Esfahani brought but then abandoned a motion under s.38 of the BIA to obtain an assignment of the right to pursue Samimi. Instead, Esfahani continued the summary judgment motion and sought to rely on the Fraudulent Conveyances Act and the Assignment and Preferences Act to recover the proceeds of the fraudulent conveyances. However, Samimi argued that there was no debt which could form the basis of a judgment because the debt had been discharged by his bankruptcy. Justice Wilson agreed with Samimi ruling that:

The materials delivered by the Plaintiff fail to adequately address the real issue in this motion: whether they are procedurally correctly pursuing the remedy or whether they ought to have proceeded in bankruptcy court…the Plaintiff cannot ignore the bankruptcy issue in its attempts to recover on the judgment. An action brought by a creditor to recover property belonging to a bankrupt vests in the trustee…

Having failed to follow the procedures set out in the BIA, Esfahani’s claim was dismissed. On appeal, the Court of Appeal confirmed the dismissal of the claims reiterating that the correct forum to pursue the fraudulent conveyance claims was through the bankruptcy process.

Key Take Aways:

• Foreign judgments that have been recognized Ontario are debts that can be discharged by bankruptcy. The plaintiff’s ordinary civil judgment did not morph into an undischarged judgment in fraud the survives bankruptcy merely because of the difficulties encountered in collecting upon it.
• The Fraudulent Conveyances Act and Assignment and Preferences Act does not confer a cause of action in damages against a transferee. Rather, it results in an order setting aside the conveyance/preference.
• Bankruptcy vests in the bankruptcy trustee the right to pursue claims under the Fraudulent Conveyances Act and Assignment and Preferences Act and therefore an assignment pursuant to section 38 of the BIA is required if they are to be pursued by a creditor.