Asset protection: pitfalls for practitioners
In the last edition of STEP Journal, I explained how the Superior Court of Ontario in Peake v Dashney1 had deftly sidestepped the so called Collateral Attack Rule. The Rule has been used, in many common law jurisdictions, to prevent bankruptcy courts setting aside orders made in family courts. The orders in question were, typically, those obtained by unscrupulous (usually) husbands, constructively misleading the family court, to transfer assets to their wives, ahead of them bankrupting themselves. In his judgment, Mr Justice IM Gordon said that to allow the rule to prevail where orders have been obtained through such fraud and illegality involving a lack of financial disclosure, would ‘surrender substance to illusory form where merits should enjoy preference.’
The facts of this case highlight boundaries for practitioners in assisting potential bankruptcy clients to protect their assets against creditors.
In short compass, the Dashneys, who had been married for many years, entered into a separation agreement, whereunder the wife received virtually all the joint assets and the majority of the husband’s monthly income. The husband assumed virtually all the joint liabilities. The agreement was embodied in a Family Court Order. The husband thereupon bankrupted himself, defeating the claims of his creditors.
This type of fraudulent scheme is common and, in many cases, would have gone without sanction. Those who effected the illicit scheme presumably did not envisage that the trustee in bankruptcy, Mr Peake, would be so thorough in his investigation and so determined in litigating the matter through to a successful conclusion.
During his investigations into the affairs of the bankrupt, the trustee discovered what became referred to at trial as the ‘smoking gun letter.’ This was written to the bankrupt by his lawyer J Robert Leblanc as follows:
You can now feel free to attend upon Mr Peake in order to make an Assignment in Bankruptcy.
You should be separated at the time that you make the Assignment in Bankruptcy. As I understand it you and Mrs Dashney may be considering reconciliation, however, my strongest recommendation that there be no reconciliation and no resumption of cohabitation until some time has passed after the making of your Assignment in Bankruptcy.
When filing this Order, there is a form that is filed which is sent to the Family Responsibility Office for automatic enforcement of the terms of the Order. You have indicated to me that Marlene may not wish to have this Order and the payment thereunder enforced by FRO. If that is the case, then Marlene should immediately write to FRO at the address noted …instructing FRO that she wishes FRO not to enforce the terms of the Order…
You may wish to call me now that this matter has finalized and I would urge you to do so.
Counsel for the bankrupt described this letter as ‘unfortunate.’ Gordon J observed as follows:
‘Mr Leblanc’s letter after the (Family Court) order to Mr Dashney:
- shows bankruptcy was contemplated before the (Family Court) order
- counsels against reconciliation before bankruptcy
- advises Mr Dashney how Mrs Dashney should deal with the elimination of Family Responsibility Office involvement in the order (to) … eliminate automatic enforcement in the event of Mr Dashney’s non-payment.
That he is advising Mr Dashney as to how Mrs Dashney should proceed, would indicate more than cooperation between the parties and rather approaches complicity.
If ‘Badges of Fraud’ are relevant here, the above in my view may be so considered.
The significance of that which cannot be directly adjudicated upon, but adds a certain flavour to the proceeding, is apparent from His Honour’s observation below:
‘The ultimate line of the letter: “You may wish to call me now that this matter has been finalised and I would urge you to do so”, is unexplained.’
In a previous proceeding to remove Mr Leblanc from the record,2 Mr Justice David Nadeau relied upon Supreme Court of Canada authority for waiving solicitor client confidentiality in the case of such communications ‘made in order to facilitate the commission of a crime or a fraud.’ Applying this test to the ‘smoking gun letter’, His Honour described Mr Leblanc’s letter as ‘more than suspicious’ and observed that ‘such communication does not appear designed to facilitate the administration of justice.’
This letter, although highly prejudicial, was but one element in the downfall of the Dashneys.
The structuring of maintenance for the wife attracted His Honour’s attention thus:
‘…his income (was) USD3302.48 per month, of which USD2500 per month is payable to his spouse leaving him approximately one quarter of his monthly income to live upon… (and) some 19 months after the separation agreement, and 11 months after the order, Mr Dashney’s full monthly income cheque was going into the same account it went into prior to the separation…(the bankrupt explained ).. ‘It’s the same account it went into prior to separation. It just became a joint account…‘
Another element was the Dashneys’ decision to engage lawyers and avail themselves of a court some considerable distance away. The bankrupt and his wife had always lived in the City of North Bay. Some 340km North of Toronto, this attractive city has a number of resident Superior Court Judges and ample skilled lawyers, practising in family law and bankruptcy. Instead, the Dashney’s travelled to the judicial centre of Sudbury, some 125km distant, where presumably no one would know if they were genuinely separated. This was another factor that His Honour found suspicious, and which corroborated the evidence of dishonesty.
This is not to say that assisting a client from afar will lead to a finding of dishonesty. In some parts of the globe, there could not possibly be any suspicion attached to a person travelling much further to obtain a lawyer, as there may not be a closer judicial centre.
Choice of lawyer
Next, His Honour had regard to the fact that the bankrupt chose a bankruptcy lawyer for the matrimonial proceedings.
As to the wife’s choice of lawyer, His Honour’s finding of fact is that that the bankrupt’s own lawyer, Mr Leblanc ‘enlisted’ another Sudbury lawyer, Mr Michael Keenan, to act for her.
His Honour continued: ‘There is evidence of haste in the exchange and signature of the separation agreement and transfer and the registration of the latter.’ This evidence arose from a second rather unfortunate letter write by Mr Leblanc, this time to Mr Keenan:
‘I enclose the Interim Separation Agreement for your review. You can reach Marlene Dashney at (telephone number) …She resides at (address in) North Bay…You already have the Transfer, which has been prepared. I would appreciate it if you could call your client and perhaps arrange to meet with her tomorrow so that this registration can take place Monday, next.’
His Honour dissected the actions of the two lawyers thus:
‘Though it is alleged the agreement was prepared by Solicitor Keenan, none of the copies in the record include a back cover page with his firm name inscribed thereon. From the wording of the letter referred to, it seems more likely it was prepared by Mr Leblanc. If he did not prepare it, why would he be sending it to Mr Keenan ‘for review’?
‘The letter provided solicitor Keenan with a phone number for Mrs Dashney, states that Mr Keenan already has the transfer of (the matrimonial home) and asks that he contact Mrs Dashney the next day so that registration could take place shortly.
‘If Mr Keenan had prepared the separation agreement he surely would have had Mrs Dashney’s telephone number. The transfer…reveals it was prepared by Mr Leblanc and obviously had been forwarded previously to Mr Keenan.
‘Though the agreement purports to have been signed by both parties on 20 June 2003 in the presence of their respective counsel with a declaration that they have each received independent legal advice, for some reason the certificates of the solicitors are not signed until July 11 2003.’
Returning to the ‘smoking gun letter’, His Honour wrote:
‘It can only be inferred bankruptcy was contemplated at the time the order was taken and there had been discussions between the solicitor and Mr Dashney in that regard. Further, the wording confirms intentional timing of the order to necessarily precede a planned assignment in bankruptcy’.
On the basis of the whole evidence His Honour held:
‘There is ample on the face of the evidence to support ... a hypothesis (that) the respondents realised the financial difficulties facing them, decided they would try to save what they could of their assets and to that end professed to separate and under the guise of an engineered illegal or fraudulent separation agreement and a Family Court order arranged that the assets be sheltered thereunder.’
Accordingly an Order was issued to reverse the transaction.
The above has been tabulated, largely, without comment. The lessons for practitioners are clear from the findings of Justice Gordon.
Finally, the multiplicity of litigation this case gave rise to also highlighted another important truism. Those lawyers who have acted for a bankrupt in such circumstances are ill-advised to continue representing the bankrupt once the arrangement is challenged in hostile litigation. What follows next is the sorry spectacle that arose when this maxim was ignored.
Mr Leblanc refused to withdraw as solicitor of the record and counsel for the bankrupt. He was removed by order of the Superior Court.3
The following are extracts from the judgment of Mr Justice Nadeau:
‘I am clearly of the view that J Robert Leblanc may be required to explain his actions in the impugned transaction.
‘It is my determination that the dual roles that J Robert Leblanc intends to fulfil in this application compromises the integrity of the administration of justice. I have been satisfied by the trustee that the disqualification of J Robert Leblanc in these circumstances is the necessary and appropriate solution that maintains regard for the dictates of a proper administration of justice. In these circumstances, J Robert Leblanc cannot be permitted to continue to act for the Bankrupt on this application. If the Court were to exercise its discretion and permit J Robert Leblanc to continue, further procedural problems may very well arise during the hearing of the application arising from the fact that his testimony is relevant and may be necessary for a proper determination of a significant issue in the application… If J Robert Leblanc does not become a witness, there still remains the serious concern regarding his obligations of objectivity and detachment to the Court in being Counsel for the Bankrupt. The Bankrupt’s right to his legal counsel of choice on this application must give way to the maintenance of high standards for lawyers and the integrity of our system of justice.’
- 1. #31/0434764 (ON S.C., 15 July 2009) (I.M. Gordon J). The writer appeared as counsel for the Trustee in bankruptcy, Kenneth Peake. This case has not been reported yet, but the author will be pleased to supply a pdf copy upon request to [email protected] At the proof reading stage of this article, news was received that the bankrupt intended appealing.
- 2. #31/0434764 (ON S.C., March 23, 2009) (David Nadeau J). The writer appeared as counsel for the Trustee in bankruptcy, Kenneth Peake. This case has not been reported yet, but the author will be pleased to supply a pdf copy upon request to [email protected]
- 3. Note 2, ibid.
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