Indcondo Building Corp. v. Sloan, 2010 ONCA 890 (discoverability in a fraudulent conveyance action brought by a creditor)

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Indcondo Building Corp. v. Sloan, 2010 ONCA 890, involved the interplay between the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”) and the Limitations Act, 2002, S.O. 2002, c. 24, in a fraudulent conveyance action brought by a creditor, Indcondo, pursuant to a section 38 order under the BIA.  Section 38 provides a mechanism for creditors to proceed with an action when a trustee refuses or fails to act.  The issue was whether the discoverability principle under sections 5 and 12 of the Limitations Act is based on the discoverability of the trustee or on the discoverability of the creditor. Under section 12 of the Limitations Act, the limitation period for a creditor claiming through a trustee begins to run the earlier of when the creditor or trustee discovered the claim.

Indcondo obtained judgment against the debtor in 2001.  After obtaining judgment, Indcondo subsequently discovered that on two separate occasions, the debtor had engaged in a fraudulent conveyance.  In 2004, the debtor filed a voluntary assignment in bankruptcy. During the course of the bankruptcy proceedings, Indcondo requested that the trustee commence proceedings for the recovery of settlements and preferential payments, and/or fraudulent conveyances made by the debtor.  The trustee never did so.  Accordingly, in 2006, Indcondo obtained an order under s. 38 of the BIA authorizing it, as creditor, to proceed in its own name and expense to reverse the conveyances of the properties.

The debtor brought a motion to dismiss the action on the basis that it was time-barred under the Limitations Act.  The motion judge allowed the motion and held that it was only the trustee’s discovery of the claim that was relevant under the Limitations Act.  The motion judge found that the Limitations Act applied to bar a fraudulent conveyance claim made more than two years after the trustee first learned of the alleged fraudulent conveyance.   In his view, because the appellant was exercising the right of the trustee in commencing the action under section 38 of the BIA, the appellant could not acquire any higher rights in the cause of action than the trustee.  Since the trustee discovered the claim more than two years prior to bringing the action, the appellant was statute barred.

The Court of Appeal reversed the motion judge’s decision, holding that section 12(1) of the Limitations Act requires a determination as to the earlier of the discoverability dates as between the trustee in bankruptcy and the creditor who commences a proceeding through section 38 of the BIA. Section 12(1) states as follows:

For the purpose of clause 5(1)(a), in the case of a proceeding commenced by a person claiming through a predecessor in right, title or interest, the person shall be deemed to have knowledge of the matters referred to in that clause on the earlier of the following:

  1. The day the predecessor first knew or ought to have known of those matters.
  2. The day the person claiming first knew or ought to have known of them

The application of section 12(1) to a creditor claiming through the trustee will be to make effective the earlier discoverability date of either the assignor or the assignee, so that an assignment cannot have the effect of re-starting the running of a limitation period. Ordinarily, this would operate to the benefit of the defendant.  If the creditor was aware of the underlying facts under section 5(1)(a) of the Limitations Act, and failed to bring a proceeding within the limitation period, the creditor would be statute barred from proceeding with its claim.  However, in this case, the earlier discoverability date, which was that of the creditor, Indcondo, preceded the coming into force of the Limitations Act, at a time where there was no limitation period for a fraudulent conveyance action.  Under the transition section 24(6), therefore, there was no limitation period for this action.  Thus, Indcondo’s action was not statute barred.