In Dealing with Fraudulent Conveyances—The Rebuttable Presumption of Fraudulent Intent—IE CA 3 Holdings Ltd. v NYDIG ABL LLC, 2024 BCCA 244

August 14, 2024

Written By David Gruber, Ty Fox and Alexandra Doane

Overview

A requirement of proving a fraudulent conveyance occurred is establishing that the conveyance was fraudulently intended. Courts in British Columbia will rely on the presence of ‘badges of fraud’, such as whether the conveyance occurred for substantially less than what it was worth, to establish a presumption that the conveyance was fraudulently intended.

However, the presumption of fraudulent intent is rebuttable.

In IE CA 3 Holdings Ltd. v NYDIG ABL LLC, 2024 BCCA 244 (IE CA 3 Holdings), the BCCA overturned a chambers judge’s decision, finding that the judge did not properly consider whether the presumption of fraudulent intent had been rebutted. Specifically, the BCCA found that because the conveyances in question had been disclosed to the creditor before it contracted with the debtors, the presumed fraudulent intent of the arrangements had been rebutted.

Background

IE CA 3, IE CA 4 (the Subsidiaries or the Debtors), and their parent company, Iris Energy Ltd. (the Parent), are companies involved in the Bitcoin mining industry.

The Subsidiaries borrowed money from NYDIG ABL LLC (the Creditor or NYDIG) to finance the purchase of equipment used to mine a product called ‘hashpower’ (the Loan). The mined hashpower would then be sold by the Subsidiaries to the Parent via certain inter-company agreements to use the hashpower to generate Bitcoin (the Arrangements).

Prior to entering the Loan, the Creditor was aware of the Arrangements. To protect its interest under the Loan, the Creditor sought a guarantee from the Parent and to include the Bitcoin obtained by the Parent through the Arrangements as collateral. That guarantee and pledge of collateral were expressly declined by the Parent and removed from the Loan. The Creditor and Debtors only ever agreed to include the mining equipment as security.

In late 2022, the market for Bitcoin dropped, resulting in a significant decrease in the market value of both the hashpower and the mining equipment which served as collateral for the debt owed to NYDIG. The Debtors defaulted on the Loan, and in an attempt to collect the Bitcoin and proceeds generated therefrom, NYDIG sought a declaration that the Arrangements between the Debtors and the Parent were fraudulent conveyances.

The Court’s Analysis and Decision

In this case, whether a fraudulent conveyance occurred turned on the question of whether the Debtors had the necessary fraudulent intent under the Fraudulent Conveyance Act, RSBC 1997, c 163 (FCA) (at para 52).

The BCCA found that the chambers judge made a combination of errors:

(i) that “he assumed fraudulent intent from “badges of fraud” without recognizing that these were rebutted by NYDIG’s agreement to the business model”; and

(ii) that “he buttressed his finding of fraudulent intent by making findings as to NYDIG’s subjective expectations and implied contractual terms that were unsupported by evidence and directly inconsistent with the express terms of the contract” (at para 54).

In respect of (i), the BCCA considered the badges of fraud found by the chambers judge, including that: (1) the transfer of hashpower was between parties not at arm’s length; (2) the business model allowed the Parent to reap most of the financial benefit generated by the mining equipment, leaving the Debtors with most of the burden; (3) the effect of the business model meant that the Debtors would need ongoing subsidies from the Parent in order to meet their financial obligations; and (4) the Parent bought the hashpower from the Debtors for substantially less than it was actually worth (at para 58).

The BCCA found that the judge’s analysis was missing a recognition that all of this was disclosed or available to NYDIG before it entered into the Loan, and this disclosure rebutted any presumption of fraudulent intent (at paras 59-63). In making this finding, the BCCA followed the analysis made in Mawdsley v Meshen, 2012 BCCA 91, where the court applied the words of the FCA in the full context of what was known to the claimant at the time of the transactions being challenged (at paras 64-65).

Concluding its reasoning on (i), the BCCA stated:

“In my view, the judge erred in not appreciating that NYDIG agreed not to have any remedy in relation to the inter-company transfer of hashpower, other than that which it expressly negotiated would occur if the debtors went into default. Given the debtors’ disclosure to NYDIG and NYDIG’s agreement to the entire business model, the debtors could not have intended to deprive NYDIG of any “just and lawful” remedy when they transferred hashpower to Iris under the hashpower agreements. This is a complete answer to the claim under the FCA.” (at para 67).

For its reasoning on (ii), the BCCA found that findings of fact made by the chambers judge were “inferences that are unsupported by direct evidence and inconsistent with the actual business negotiations and contracts entered into by the parties, and do not make sense given the disclosure to NYDIG prior to the transactions” (at para 69). Specifically, the findings that:

(a) NYDIG had reason to believe that the consideration paid to the Debtors for their hashpower was not confined to the fees payable under the respective hashpower agreements;

(b) when NYDIG took security in all the property of the Debtors, including proceeds from sale of the hashpower, it had a “right to expect fair consideration to be paid for it”;

(c) NYDIG did not know that the Parent would consider itself free to cease advancing supplemental funds to the Debtors without obligation to NYDIG; and

(d) under the Parent Letter Agreement, the Parent had an implied good faith obligation to fund the Debtors.

Additionally, the BCCA found that the chambers judge’s ruling of an implied duty of good faith was unsupported and contrary to the express terms of the Arrangement (at para 78).

Last, the BCCA considered whether the chambers judge erred in disposing of relief pursuant to the statutory oppression remedy, which the judge only devoted one paragraph of its reasons to. Given the BCCA is not a court of first instance in analyzing an alternative basis for relief, and given the conclusion that the judge erred in granting relief pursuant to the FCA, the BCCA remitted this ground of NYDIG’s application to the trial court for consideration (at para 81).

In the end, the BCCA allowed the appeal, setting aside the lower court’s declaration of fraudulent conveyances on the basis that the presumption of fraudulent intent had been rebutted (at paras 83 and 84).

Key Takeaway

The BCCA’s decision in IE CA 3 Holdings reminds us that in fraudulent conveyance matters the presumption of fraudulent intent is rebuttable.

In IE CA 3 Holdings, the presumption was rebutted based on the Creditor’s prior knowledge of the Arrangements which put the Debtors’ assets out of its reach.

If you or your business require assistance in respect of issues relating to fraudulent conveyances or related matters, please contact the authors or a member of the Bennett Jones Commercial Litigation group.

Authors