Court of Appeal sends fraudulent conveyance and oppression claims for fresh trial

by | Jan 13, 2025 | Litigation

Transferring assets in the lead-up to an insolvency could expose debtors to two similar, but distinct claims from their creditors.

In the context of insolvency, claims for oppression and fraudulent conveyance are frequently argued together, which is what happened in the case of Marketology Media Inc. v. DGA North American Inc. Both sides will eventually get a second kick at the can since the Court of Appeal ultimately ordered a new trial because of the inadequacy of the original trial judge’s reasons. 

The facts

The dispute in this case had its roots in DGA’s contract with Marketology to provide inserts for the Sears catalogue. When DGA terminated the brochure deal in 2010, Marketology launched a claim for $27 million.

In the coming years, DGA’s principal made a series of transfers — described as dividends, payments for expenses, and repayments of shareholder loans — moving assets out of the business and into other companies that she also controlled.

Meanwhile, the Sears case ended up in arbitration, where an arbitrator found DGA liable for breach of contract in 2014, issuing an award of almost $900,000 in favour of Marketology. DGA refused to pay, claiming it was insolvent, which Marketology blamed on the earlier asset transfers.

As a result, Marketology issued a fresh claim, alleging that the transfers were not only fraudulent conveyances, but that they were also oppressive, having been made for the purpose of defeating, hindering, delaying, or defrauding creditors.

Unusually, the trial judge hearing the case declined to rule on the fraudulent conveyance claim, instead finding that the plaintiff had met the stricter test for oppression on a basis not pleaded or explored in the evidence,

Rather than dealing with the transfers themselves, the trial judge concluded that DGA had behaved oppressively in failing to create a reserve fund to cover the arbitration award owing to Marketology, ordering DGA to pay Marketology $1.1 million in damages, plus pre-judgment interest. That prompted the appeal by DGA.

The results

Both sides in the appeal agreed that the trial judge’s reasons were inadequate. However, DGA claimed that her rejection of the fraudulent conveyance claim was inconsistent with her findings on oppression. In any case, the oppression remedy should be overturned, they argued, because it was made on a basis that was not the subject of pleadings.

In their own cross-appeal, Marketology argued that the trial judge got it right when she found DGA’s actions oppressive, asking the Appeal Court panel to substitute their own finding that the transfers were fraudulent conveyances.

Ultimately, the unanimous three-judge appeal panel agreed that it was procedurally unfair for the trial judge to have decided the oppression issue on her own theory, which was neither pleaded nor argued by either side.

Based on the pleadings, the panel noted that there appeared to be no viable path for a judge to dismiss the allegation of fraudulent conveyance while also accepting the oppression claim.

“The two were inextricably linked; they were alternate characterizations of the same act of wrongdoing. Marketology argued that the transfers of funds were fraudulent conveyances and, for that reason, oppressive,” the Appeal Court’s decision reads.

However, the Appeal Court panel were unwilling to substitute their own findings on oppression or fraudulent conveyance, writing that the trial judge’s reasons on both issues were “more conclusory than explanatory” and did not “permit meaningful appellate review.”

“In short, the record does not inevitably yield a particular outcome. We find that the only proper remedy in this case is to set aside the judgment of the trial judge, including her decision on costs, and remit the matter back for a new trial,” they added.

The lessons

Disposing of assets on the eve of insolvency is likely to be met with a claim for oppression, fraudulent conveyance or both, especially if the transfers were made in the face of a legal claim from one of your creditors.

The test for fraudulent conveyance is potentially an easier one for creditors to meet than the one for oppression in a case like this one, where the oppression claim is founded on allegedly fraudulent conveyances.

Unfortunately, with the parties in this case returning to square one, we will have to wait for further guidance on the interaction between oppression and fraudulent conveyances.