In episode 5 of our Talking Real Estate with Peter and George video series, George Dube interviews fraud lawyer Allison Speigel, a partner at Speigels Nichols Fox LLP, on how to protect your real estate business from fraud, and what constitutes fraud. It may surprise you.
George Dube:
Good day. This is George Dube, and I have the pleasure of speaking with Allison Spiegel today. And we’re going to be talking actually from a real estate construction investor perspective, but with a lawyer that’s focusing on helping people, I guess it depends on which side you are on the equation, but helping them in what I’ll call fraudulent situations and protecting businesses that way. Allison, would you like to say a few words about yourself?
Allison Spiegel:
Hi, my name is Allison Spiegel and I’m very grateful to be here with George today, so thank you for having me. I’m a partner at the law firm of Speigel Nichols Fox, located in Mississauga. My practice is a litigation-based practice and I do a mixture of construction, general commercial and fraud-based work.
George Dube:
Awesome. So, not that long ago Allison, we had the opportunity of talking with Allison as part of a panel that BDO had for our national real estate and construction conference. And maybe the first few minutes, we’ll just talk a little bit, or I’ll ask you to speak a little bit in terms of what would you normally be doing for your clients in that capacity? And then we’re going to jump into another topic that I found astounding myself, and I’m still learning an incredible amount from, but let’s start with the basics.
Allison Spiegel:
So, we act often on behalf of people with judgment debt. So, you go through the litigation process, there’s a court order at the end, it says, “You owe person X a certain sum of money.” And then person X goes to try and collect and they find out that they can’t. That’s when they would come to us and say, “Is there anything that you can do?” And I kind of think about it as the lower level collection work, which is collection agencies that call and say, “You owe me money, you owe me money.” That’s not really what we’re doing. We’re in the area where there’s more of fraud-based angle to what’s going on. So, we have an investigator who goes out, who’s sifting through people’s lives to see where there are assets that they are hiding. And then, I work with our investigator to bring legal action in order to put those assets back into the debtor’s name so that we can seize and collect on them.
George Dube:
Excellent. And what might be a typical scenario that… Maybe that’s not even possible to describe as a typical scenario, but what will you find that you and your team are spending a fair bit of time on in terms of general scenarios and maybe a scenario is a better word?
Allison Spiegel:
Well, the interesting part about my fraud-based work is that, whenever you think you’ve seen it all, they come up with a new way and sometimes it turns into a game of whack-a-mole where you’re trying to… Every time you come up with something, somebody comes up with something new. But typically, we’re looking for assets. I’d say, a lot of the actions that we bring, we found assets and we’re saying, for some reason or another, that asset is rightly considered the debtor’s asset. And so, to give you kind of from… I’ll try and take it from legal to layman, and this is the example I always go to. Lots of people have heard of something called a Fraudulent Conveyance and that is the concept that you give something away in order to defeat your creditor.
So, you get a judgment and the next day you transfer the property, your house to your spouse. That is going to be attackable because it’s likely a Fraudulent Conveyance. There is a lesser known concept that’s called a Resulting Trust. And, a Fraudulent Conveyance and a Resulting Trust are in many ways, two sides of the same coin. And, a lot of people don’t actually deal with Resulting Trust. A lot of lawyers don’t bring up the concept of Resulting Trust because it’s a concept that is mostly used in marriage breakdown. So, when husband and wife are getting divorced and husband says, “Hey, we put that property in your name, but we always knew it was supposed to be 50/50, we just did it to defeat our creditors.” Now there is no creditor in sight, it’s just a fight between husband and wife.
And so, husband will say, “Well, all of the money that went into it was mine or 50% was mine and so I’m claiming a Resulting Trust, which is in effect just claiming that I own a beneficial interest in the property that’s not shown on legal title.” And so, all of that sounds very confusing. So, this is the example that I kind of give to people to understand what it is that you’re claiming. So, in a fraudulent conveyance, this is the scenario.
So, let’s say dad got into trouble and dad has a 20-year old son and dad comes to son and says, “Son, the cottage up North, it’s worth a lot of money, I was going to give it to you when I die anyways, but the creditors are after me. I just got this judgment. I want to get it out of my name because I don’t want them to have access to you. Given that I was going to give it to you anyways, I am just going to fast forward. I’m going to give you that cottage property. It’s yours. Do with it as you please. You pay the utilities. You take care of it. That’s yours. That’s a gift.” Now, if we can show, as the example sets out, that the gift was done defeating dad’s creditors, that’s a Fraudulent Conveyance, and you can go to the court and say, I want to unwind that transaction because it was done for fraudulent reasons.
Now, a resulting trust is kind of the flip side of that. Resulting Trust is, dad comes to son and says, “Son, the creditors are after me and I want to transfer the cottage into your name. Now, understand it’s in your name, but it’s mine. Mom and I are still going to go up every weekend. I’m going to continue paying the mortgage. I’ll pay the utilities. If you want to come up, you have to ask me. It’s mine. We’re just putting it into your name so that creditors aren’t able to get at it.”
In that scenario, unlike in a Fraudulent Conveyance, you’re talking about a fraudulent gift. In a Resulting Trust, you’re talking about a beneficial ownership interest. And so the Resulting Trust says, “Even though that property’s in his name, I’m going to show that it really should be in your name.” The reality of the situation is that you own it. And as a creditor, I can go to court and say, “No, I know it’s in son’s name, but really dad owns it. Let’s look at who’s paying the bills, what they’re doing with it, who uses it. Son lives in Australia, that’s not his cottage. It doesn’t make any sense.” And that’s how you can get them on Resulting Trust.
We have been very successful in a number of cases of bringing this action from a creditor standpoint. Most of the time Resulting Trusts are fought about in the context of marital breakdown. So the husband will say, “No, that’s not really yours wife, we all knew sitting around the table that it was mine.” And that’s the idea of who’s the real owner. So, people talk about a beneficial ownership interest versus a legal ownership interest. The legal ownership is, who’s registered on title or who is the legal owner of the property and the beneficial owners, who’s the real owner.
When you cut away all the legal stuff, whose is it? Who believes that they’re the owner? And so, those are kind of the two scenarios. So, when we’re looking for assets that someone owns, we’re looking for, who did you give property away to in an effort to defeat creditors? Or, what property do you own that you’re making it seem like you don’t own? So, that’s kind of the… From an action point of view. But really there’s… I mean, there’s fraudulent mortgages. The amount of fraud and the number of different ways that people come up with ways to hide their assets in a fraudulent manner is many, many ways.
George Dube:
So admittedly, when we started talking, I guess, month and a half ago or so, in preparation for our real estate event. I walked into the conversation… Was introduced to you and I was thinking, “Oh, this is awesome, we’re going to learn about some of the different ways that my clients can protect themselves against… Whether it be employees or contractors or somebody that they’re in a relationship with and fraud is committed against them.” And then all of a sudden we started talking further and realizing, wait a minute, “If I’ve transferred… I mean, I don’t think a huge secret I found funny from a funny side, from a tax perspective for years and years and years.” From a tax perspective, I couldn’t necessarily write in a letter, “By the way, I am going to complete those tax planning on your behalf, you’re going to save X amount of dollars.”
Because if I wrote that down, a court could say, “From a tax perspective, [inaudible 00:00:09:49]… For tax purposes, we’re going to unwind the transaction.” And so, we would perhaps now naively say, “Oh, we’re going to do this for credit or protection, succession planning, estate planning reasons.” And then having a conversation with Allison to say, “Wait a minute, maybe as business owners, if we’re transferring a property to our spouse, I can understand three days after the judgment or as I get into trouble, I’m in trouble.” But it sounds Allison, we actually have to be paying attention to this a lot sooner and we may be doing things we’re not supposed to and not even know it.
Allison Spiegel:
Yeah. So, the way that we ended up in this conversation is, I was explaining to you that there is a line of cases out there and a well-accepted line of cases that when you’re looking at a fraudulent transfer… So, now we’re back into the realm of who did you give that property to? And did you gift it away for fraudulent reasons? And the fraudulent reasons are simply just to defeat creditors. And, we were talking about the fact that when the courts discussed this fraudulent intent, they have said, “It doesn’t matter whether the intention is to defeat current creditors or future creditors.” And so, what does that mean, future creditors? That means that, if a transfer happened 20 years ago and a creditor 20 years down the line comes and says, “I’m going to attack that transfer because I’m going to show that when you did it 20 years ago, you were doing it and the sole reason that you were doing it, was to protect yourself from future creditors.” That constitutes a fraudulent intent and I can unwind the transaction.
And we have succeeded in doing that from transactions that have happened 20 years ago. And people are kind of shocked to learn that saying, “I transferred this property to protect myself from future creditors.” That’s a problem. And, I understand why people think that because it’s so common that you would say, “Oh, well, who’s going in? Who between my spouse and I are going into business.” Who’s more likely to get into trouble and therefore let’s put the property in the other person’s name. And that’s something that is seems to be widely accepted. And so, people are kind of shocked at the idea that, that’s bad or that’s wrong, or the court would have something to say about that.
And to that, I kind of always say, “Well, take a step back from what it is and think about what the concept of fraud is.” And fraud really just is lying in some way, shape or form in order to take more money or not pay money or, something to do with money. You’re trying to lie, to cheat and steal. That is in essence what fraud is. And, when you’re talking about an intent to defraud your creditors, and what they’re saying is, “It doesn’t matter when those creditors are going to be coming.” So, if you take a step back from the concept again of, “I’m putting it in my spouse’s name.”
Really, what you’re saying as between you and your spouse, when you’re having this conversation is, “If I end up owing someone money, let’s make it look like you own the property so that I don’t have to pay.” And when you start thinking about that in those terms, that is fraud, you’re kind of lying. You’re gifting things away for the sole purpose of not having to pay your debts. And that is fraud. That’s a fraudulent intent. You’re doing it in order to cheat someone that you owe money to-
George Dube:
Sorry to interrupt. So, what would happen, for example, if instead of gifting an existing asset, husband and wife… Wife, successful entrepreneur hopes to [inaudible 00:13:54] that shortly. So, she says, “Okay, Mr. Husband, you buy the house in your name, this is the first time we’ve ever done something.” If we do this early enough, do we potentially get around this? Or, are we still in the same boat?
Allison Spiegel:
So, that’s interesting and I just had this come up in one of my actions. And so, the person said, “I’ve got you, there’s no transfer here because the property was never owned by husband, it was always registered in wife’s name.” And then I say, “Okay, where did wife get the money?” He said, “Oh, well wait, the money came from husband.” So then, it’s an argument that’s raised, but it’s… That’s kind of smoking mirrors because, then you’re talking about whether you want to talk about it as a fraudulent transfer of money. So, if husband takes a million dollars, transfers it to wife’s bank account in order to buy the house, then it’s a fraudulent transfer of the money. It’s a gift of the money and that’s what you can attack as being fraudulent. Or you would say that the minute the house was bought, he had a beneficial interest in it and he transferred that to her.
But one way or another, if you were taking your money and trying to give it away to somebody for the sole purpose of defeating your creditors, that is attackable. Now, in a lot of cases, if husband and wife put an asset into one of their names and nothing’s happening in and around the time that they do that, it might be very difficult for a creditor to establish fraudulent intent. But, if husband does this and transfer three months before he starts his new Forex trading company, that might be enough to say, “Hey, you’re about to engage in a risky business venture of some kind.” There are badges of fraud. So, it’s all the circumstances that come together to be able to prove fraud. But, if in the end what you admit is that the reason that you were doing it, was in order to defeat your creditors, you’re admitting an intention to commit fraud and because they don’t care whether it’s future, or existing creditors.
George Dube:
And what would happen, scenario again with the two spouses. The soon to be entrepreneur says something with the rationale of, “Well, if everything goes well, I’m going to have a very successful business, it’s going to be in my name and I want to ensure that the other spouse has some other assets here for retirement estate planning purposes, et cetera.” Now, it’s not perhaps the only purpose, but maybe… I don’t know, I’m guessing, it depends on which side you’re arguing on.
You’re going to also argue, whether there’s a kind of a purpose to it as well. And if I could add one more part to that, as I was just thinking when we’re talking from an income tax perspective, some of what you’re describing reminds me of what we call the attribution rules, which in English means, where Revenue Canada says, “If the higher income spouse lent or gave money, say a million bucks, and your example to the lower income spouse. The lower income spouse and in turn invested that well, that profit should go back to the high income spouse, because it was their money.” Which I think is in some ways what you’re describing.
But, from an income tax perspective, appropriate way to do it, where there’s a prescribed rate of interest charge. So, it’s a legitimate loan and that loan now is used to make whatever type of investment is done. So, in other words, can I, as the… Have a higher income spouse for example, or in our example, I guess maybe it’s the less risky person, loan money, charge an interest rate, get paid over a period of time. Does that do the trick or am I still committing fraud?
Allison Spiegel:
I guess, you would have to look at, all of this comes back to the various fact patterns and you… What in the world of a Fraudulent Conveyance where you’re really looking at is like, what’s the reality? Was it a loan? There’s nothing that stops one spouse from lending money to another. And then, if you do all the things that make it a loan and make it appropriate as a loan, then it’s probably going to be looked at as a loan. Now, if you sign a loan agreement and then no interest is paid and nothing happens on the loan and the loan was never called and it’s just a piece of paper. Then I’d say, “That’s just a piece of paper, that wasn’t a real loan.” So, there are ways for property to transfer where the purpose of it wasn’t in order to defeat creditors.
But, if in the end, what I’m able to establish in court is that, “That’s a sham, it wasn’t a loan.” You’re doing this for all sorts of reasons, but really, you’re making it seem like there’re all sorts of reasons. But the only reason is because you were about to engage in a risky business and it was to defeat your future creditors. And if I can show that, that’s the essence of it, I am likely to succeed in showing that it was a Fraudulent Conveyance. Now, what’s interesting about it is that, most people attack these transactions between husband and wife as Fraudulent Conveyances. And the part that’s interesting about it in most of the time, it’s actually more applicable to talk about a Resulting Trust because most of the time, husbands and wives own property together. They don’t actually gift the house from one to the other.
If they were sitting at a dinner table talking, and one of them was to say, “Well, this is my house, so get out of here.” And the other one would say, “What are you talking about? Of course, it’s not your house, it’s our house.” And so, in most scenarios where you’re talking about the… And I hate that it’s always in my examples, the husband gifting it to the wife as if the wife is never the one has any money. But unfortunately, that’s many of the cases today. But, in this scenario where it’s one person giving 50%, they own it as joint tenants and then it ends up in the hands of one of them, I would say that’s really more theoretically in the realm of a Resulting Trust because it’s not that they actually gave it away, they still believe they’re both owners.
And so, I think that the law has kind of… There’s a huge body of law with respect to fraudulent transfers. There’s far less in the world of a creditor claiming Resulting Trust. But, I think a lot of these joint tenants to one of the spouses, is actually more appropriately considered a Resulting Trust. Because, I think in many situations, if you were to ask the two of them, they’d say, “Of course, we’re both the owners, it’s just on title like that. Just because… We just have it there like that because…”
George Dube:
So, if I were to set up a corporation for my new business or investment activities, did I just commit fraud because I was trying to set up a corporation? Which amongst the reason beyond tax reasons or other things may be looking for protection?
Allison Spiegel:
No. So, there’s proper creditor proofing activities and improper creditor proofing activities. Now, if you set up a corporation everyone understands that the purpose of a corporation is to provide some protection between the owners, directors of the corporation and the corporation itself. It becomes its own body, it takes on its own debt and, society has deemed that, that is helpful from a business perspective. And so, by very virtue of the fact that you are setting up a corporation, that is perfectly legal kind of creditor proofing. Now, if you do things with that corporation, the sole purpose of which is to do bad things or commit fraud, then there’s a separate concept which talks about piercing the corporate veil. So, if you fall into certain categories, what somebody can try and do is pierce right through that corporation back to the directing mind of the corporation.
So, if for instance, I’m about to enter into a contract with someone, and I know all along that I’m going to stiff them, I’m going to take the product, I’m never going to pay them a cent. And I set up a corporation, I’m like, “Great, I’m going to set up this corporation. I’m going to step on and they’re going to sue the corporation and I’ll walk away with 10 million bucks.” Well, that’s not going to work because you’re going to be able to pierce through the corporate veil back to the directing mind and say, “The only reason that this thing was set up like this, was to commit fraud and we’re not going to allow that to stand.” Proper creditor proofing is, I’m about to engage in business and I want the reason that we created the concept or the corporation is so that people could take risk without risking everything personally.
So, they wanted people to be able to set up businesses that could take risk and that could kind of go on in the business world without being on the hook personally at all points. Because, if you were to do that, people would take far less risk. And where I’m talking about it more, is with respect to transfers of property. So, the concept of a Fraudulent Conveyance is really when a person or a corporation, an entity is transferring some type of property from one to another. So, I guess the short answer is, you can set up a corporation for legitimate reasons and part of the legitimate reasons is protecting yourself at a personal level. But, if you go too far and there are various ways that you can pierce the corporate veil, if you’ve done bad things through that corporation, then you can pierce at it to get to the person.
George Dube:
And this might be blindsiding you. I don’t know if you can speak to this, but would a similar sort of explanation [inaudible 00:24:06] if I was to create a family trust, which in turn on the corporation? In other words, did the fact that I create a family trust is that and there’s again, a variety of very, very in my mind, legitimate tax succession, estate planning reasons for that. But, there can also be a legal reason for that as I understand it, would that be similar to setting up a corporation? Or did I just go down a rabbit hole I didn’t want to?
Allison Spiegel:
I think that there are all sorts of different vehicles that you can use to do all sorts of things. And some of those things are legitimate and some of those things are illegitimate. If you were sitting and you are thinking about, “How can I make sure that when someone comes at me personally, I don’t have money to pay them.” If that’s the concept underlying whatever you’re doing, then I can attack it and I’ll find some way to attack it. Whether it’s a Fraudulent Conveyance, whether I say it’s just all fraud, it’s all fraud, it’s all a sham, undo the whole thing and realize, it’s this one guy and he’s done all these things. So, I guess the short answer is, it depends. It depends on the scenario that you’re giving me. It depends on the facts, but I would say when we’re looking at a file and saying, “Is there anything we can go after?”
What we often use is the smell test, does this seem right? Does it smell right? And if it doesn’t smell right, if it looks like a fraud and smells like a fraud, it’s likely a fraud. And what you’re doing then is saying, “Here are various legal theories.” Which ones am I going to put together to say, “Court, this is ridiculous.” All this is, is this one guy who’s committing fraud, or these two guys, or these three guys, or this woman, whatever it is. And they’ve used this vehicle and this vehicle and they’ve transferred money here, here and there. The more complicated the fraud and the kind of more the smarter the fraudster and often the more money they have and more lawyers that they’ve used. It’s a web and sometimes there’s proper corporate protection and there’s nothing you can do because there are different entities and this one own shares and this one in their own shares and this one.
And sometimes you can pierce through the whole thing, because it’s all just fraud. And you can say how you’re set up the entire existence, the entire raise on debt of this whole thing is fraud. And, if you can show that, the courts really don’t like fraud. And so, the interesting part about the fraudulent conveyance legislation is that they speak about it as being remedial legislation, which is to be given the broadest possible interpretation. And the reason for that is that they recognize that fraud comes in every different shape and size, and people are always coming up with new ways to transfer assets and move assets and hide assets. And they didn’t want to be pigeonholed to saying, “Well, I’m just going to allow it to attack this one time.”
So, even the language of the legislation, when it talks about fraudulent transfers, it talks about who has standing, who has the right to sue on it. They talk about creditors or others, and they’ve interpreted or others to be this huge swath of people, including future creditors down the line. And the reason that they’ve kind of gone there is because the courts don’t like fraud. They don’t like when people don’t pay a [inaudible 00:27:40] owing and do things in order not to pay. And, if you step back from what you’re doing, and you realize that what you’re trying to do is set yourself up in a scenario where if you owe someone money, you’re going to not pay them. Not because you don’t have the money, but because you want to pretend you don’t have the money, that’s fraud.
George Dube:
Enlightening again. I think a lot, if not every one of my clients should be really taking a look and seeing what… They may be not realize what risks they potentially have I guess, in some cases. Not that I don’t think any of them were specifically trying to intentionally do something wrong, but they may have escalated belief to the degree of protection what they actually have in place, in some cases-
Allison Spiegel:
I think a lot of it, and I see this a lot in kind of the first conversations we have with people where they say, “What are you talking about? No, you can’t come after this.” And I’m like, “I can.” I can because it was [inaudible 00:28:42]. And they look at you and they think that’s everyone does this. That might be true. Everyone might do this, but you just got caught. And that’s, I think where the… If you ask 10 people on the street, they’d probably all say, “Oh yeah, that happens all the time, that’s fine.” And then you say, “Do you think it’s fine to make it seem like you don’t have assets so that when you owe someone money, you don’t have to pay them. Do you actually believe that that’s a good concept? That, that’s fine?” They’d probably say, “No, when you put it that way, that’s seems a little bit shady, that doesn’t seem great.” And that’s the essence of it. It’s not fraud.
George Dube:
So, I think to me anyway, part of that takeaway is yes, there are some legitimate ways to set up, but there’s also taken it too far, maybe as an easy way of describing it and the need to go and reach out to professionals that actually know what they’re talking about in terms of the details as compared to, “This is what everybody else does. Well, that’s great, but it’s my ticket, my lawsuit.”
Allison Spiegel:
Yes. And I think that the two things that people should be aware of, which I’m always kind of blown away that they’re not, is this kind of deep seated belief that because you did it, it’s fine. And so, what I find is that, you’ll challenge people on it. And even though they know in their heart of hearts, that’s of course, that’s exactly why I did it. They’re content to fight you and the problem with that position is that, then you get into a world where the legal costs get so high in fighting it and when you’re dealing in the world of Fraudulent Conveyances and fraud, you get elevated costs. And so, the costs amounts sometimes exceed what you’re even fighting about in the first place.
But, it stems from this truly innate belief that, “Of course I was allowed to do that.” And I’m always kind of just surprised by how deep that belief is. How hard people are willing to fight. And you’re not allowed to do that. And so that’s, sometimes it’s not, “You can do it.” But you also have to accept the risk that if you get caught and then you double down and fight, you might just be [inaudible 00:31:07] a lot of money at the end.
George Dube:
Great advice. Thank you so much, Allison, for-
Allison Spiegel:
No problem.
George Dube:
… Sharing some time and thoughts with us, and I’m sure as people listen to this, similar to myself the first time I spoke with you, “Pardon are you sure?” And I think it will be shocking for many people. Thank you for sharing so much.
Allison Spiegel:
No problem. Thanks for having me.
To contact Peter or George you can email pcuttini@bdo.ca or gdube@bdo.ca. To contact Allison, you can reach her at allison@ontlaw.com.
Tags: fraud
