An Ontario court has overturned a lower court decision ruling that the Ontario Securities Commission (OSC) can seek to challenge a historic real estate transaction as it collects a disgorgement order.
In an earlier decision, a motions judge struck down the OSC’s argument that a transaction that took place back in 1996 represented an effort to shield assets from potential future creditors.
Specifically, the judge ruled that the regulator could not bring a claim of “fraudulent conveyance” against Camerlengo Holdings Inc., its sole director and officer Fred Camerlengo and his wife Mirella Camerlengo. The claim was in connection with a transaction that saw Fred transfer to Mirella ownership of their jointly-owned house for no payment.
That transfer, it argued, was done to prevent future collection by possible creditors against Fred and his company. The allegation has not been proven.
The OSC effectively became one of those creditors when it pursued collection of a disgorgement order against Bluestream Investments Inc. — the target of an OSC enforcement case — that was owed $200,000 by Camerlengo Holdings as part of a loan that hadn’t been repaid.
In 2015, the OSC ordered $1.5 million and US$311,667 in disgorgement (among other sanctions) against Bluestream and other respondents after finding they traded without registration and illegally distributed securities in an investment scheme.
The regulator pursued collections against Camerlengo as part of its efforts to recover money for victims of the Bluestream investment scheme. Camerlengo was among those victims and reportedly lost over $600,000 to the scheme.
However, a motions judge struck out the regulator’s fraudulent conveyance claim “on the basis that the facts pleaded in the statement of claim were not sufficient to establish standing,” the appeal court said.
Now that decision has been overturned after the appeal court ruled the motion judge erred.
“The claims were pleaded with sufficient particularity, the OSC had standing to bring the claims, and we allow the appeal,” it said.
The appeal court found that the law on fraudulent conveyances allows a creditor to attack a past transaction (the transfer of the house in 1996) if that transaction was made with the intention of defrauding future creditors.
“It is enough, on the case law, to plead facts that support the allegation that at the time of the conveyance the settlor perceived a risk of claims from a general class of future creditors and conveyed the property with the intention of defeating such creditors should they arise,” the appeal court said.
In this case, according to the appeal court decision, the OSC argued that the transfer occurred just four months after Fred incorporated his contracting business, which sought larger, riskier projects; that the Camerlengos were concerned about the new company’s larger litigation risk; and that Fred continued to live in the house and had his wife take out mortgages against it to provide financing to the business.
“The pleadings identify, with sufficient particularity, the facts that could support the inference of an intention to defraud future creditors, including the general class of creditors — creditors arising out of Fred’s electrical contracting business, which was poised to bid on much larger contracts than had previously been the case,” the appeal court said in its decision.
As a result, the court allowed the appeal and dismissed the lower court’s ruling.