Navigating the Fraudulent Conveyance Maze:

(And How This Little Statute May Affect Estate Planning)

E. Jane Milton, QC of Bull, Housser and TupperJanuary 15, 2014

• “Persons must be just before they are generous, and debts must be paid before gifts can be made”.

Lord Hatherley - Freeman v. Pope (1870) LR 5CH APP 538

Fraudulent Conveyances Act (B.C.) Prior to Recent Amendents

1. If made to delay, hinder or defraud creditors and others of their just and lawful remedies

(a) a disposition of property, by writing or otherwise(b) a bond,(c ) a proceeding, or(d) an order

is void and of no effect against a person or the person’s assignee or personal representative whose rights and obligations by collusion, guile, malice or fraud are or might be disturbed, hindered, delayed or defrauded, despite a pretense or other matter to the contrary.

2. This Act does not apply to a disposition of property for good consideration and in good faith lawfully transferred to a person who, at the time of the transfer, has no notice or knowledge of collusion or fraud.

FCA is Old Legislation

Statute of Elizabeth 1571

Criminal sanctions until 1987

Amended in 2012 to delete references to collusion, guile, malice or fraud

Key Points to Note“Creditors and Others”

– Very broad interpretation– Includes future creditors, and persons who may have a

claim, legal, equitable or contingent, that arose during the lifetime of the transferor. Hossay v. Newman et al

– Do not need to be a creditor or to have even commenced an action at the time of the transfers – “it is sufficient to fix the defendant with liability if they foresaw potential creditors who might be defeated by the conveyance” .Jaston & Co v. McCarthy (1996) 41 C.B.R. (3d) 212 (BCSC)CIBC v. Boukalis (1987) 11 B.C.L.R. (2d) 190 (leave to appeal to SCR refused)

Key Points to Note

• “Property” – very broad. Covers every type of property. Does not apply to property that is not otherwise exigible (i.e. held as a bare trustee), property received by mistake, and property that is exempt from execution.

• “Disposition” – very broad. Covers transfers, assignments, redesignations of beneficiaries under life insurance, allowing property to be sold in a tax sale, granting of an option to purchase property, etc.

• Property transferred by operation of law (ie joint tenancy) is not fraudulent.

Key Points to Note

• Intent to Delay, Hinder or Defraud - the Key Element!

• Generally direct evidence not available, and intent is established through “Badges of Fraud”. Twyne’s Case (1601), 76 E.R. 809

• If valuable consideration for transfer is paid, can still be a fraudulent conveyance, but you must prove fraudulent intent of both transferor and transferee. Transferee must “actively” participate in the fraud, beyond mere knowledge or notice.

Sutton v. Oshoway and Walker 2010 BCSC 1440

Abakhan Case

1. William Botham & Family Trust own Botham Holdings Ltd. (“BHL”)

2. BHL sells land – large capital gain

3. Through a complex set of transactions, BHL transferred all of its assets to Brayden Investments Ltd. (“Brayden”)

4. BHL becomes the general partner of JW Auto Group (“JW Auto”), which generated capital cost allowance claims. This allowed BHL to obtain refunds of capital gains tax.

Abakhan Case

• Venture failed – both partnership and BHL assigned into bankruptcy. Creditors claims – $20 million.

• BHL’s Trustee brought a FC action, claiming that the transfer of assets to Brayden was a fraudulent conveyance.

• Trial judge found fraudulent conveyance – statute requires only an intent to put assets out of the reach of creditors.

Appeal to BCCA

• Question: is a transfer of property made with a view to protecting assets from creditors, present or future, if made honestly, without moral blameworthiness, and for other legitimate business purposes, prohibited by the Fraudulent Conveyance Act?

• YES

• Leave to Appeal to Supreme Court of Canada denied

How did they get there?

Key Facts:

1. Botham admitted that the purpose of the transfer of assets from BHL to Brayden was twofold:

(a) To ensure creditors of JW Auto couldn’t access the assets; and

(b) To take advantage of the tax free rollover under s. 85 of Income Tax Act.

How did they get there?

2. Trustee conceded that Botham had no “dishonest intent” or any intent to defraud creditors.

3. Trustee conceded that Botham could have incorporated a new company to become the general partner of JW Auto, and creditors would have had not recourse.

The Court found that

• While the words “by collusion, guile, malice or fraud” remain in the Act, these words should be struck. They have not been necessary since the repeal of the penal provisions of the Act in 1987.

• The only “intent” now necessary is the intent to “put one’s assets out of the reach of one’s creditors. No further dishonest or morally blameworthy intent is required.

The Court found that

• Intent is a state of mind and a question of fact in each case. In many cases there is no direct evidence of this intent. Intent can only be proven by drawing an inference from the grantor’s conduct, the effect of the transfer or other circumstances.

• Statute is remedial in nature and should be broadly interpreted.

• Question: can the FCA apply to inter vivos dispositions by a person which may have the effect of hindering or defeating claims against one’s estate (such as a disposition of assets into a trust?)

• In some circumstances – Yes.

• Hossay v. Newman: “creditors and others” contemplates only a situation where a claim arose during the debtor’s lifetime

• Stone v. Stone: Family Law Act of Ontario gives spouse a remedy during lifetime of testator

• Robins v. Robins: different decision from Stone, but different facts

Mawdsley v. Meshen2010 BCSC 1099, aff’d 2012 BCCA 91

• Claim by CL Spouse that transfers to alter ego trust void due to operation of FCA

• Transactions also attacked on basis of incapacity and undue influence - dismissed

• Also claimed unjust enrichment and WVA• Succeeded on resulting trust claim for joint bank accounts

and SD Box • Will varied to give whole residue to CL spouse

Mawdsley cont.

Facts: • two prior marriages for Deceased; she had three children

from these relationships • one prior marriage for Plaintiff• Lived together for 18 years• Dec. inherited successful family business and real property

from her husband

Mawdsley cont.

• Dec, her children and brother-in-law worked in the business for low wages

• Dec worth $10 million gross at her death

• Pl originally had a condo in West Van he later sold and kept proceeds

• He had a disability pension and some other assets

Mawdsley cont.

• Dec and Pl met with professional advisors: lawyer, accountants, planners; regarding her estate on her death; discussed her estate in a trust for children (as her kids had personal problems) and new Will; nothing finalized

• One year later Dec diagnosed with terminal cancer and renew planning

• Pl went to most of meetings and understood options

Mawdsley cont.

• Discussed that nothing significant to be left to Pl – Ct found they had agreed to keep their assets separate, despite Pl testimony to the contrary that he would be looked after and that he was to get the matrimonial home

• Dec settled Alter Ego Trust, set up joint accounts, transferred properties, did new Will shortly before her death

• Result: her children and brother-in-law share business and properties, nothing to Pl.

Mawdsley cont.

• On issue of FCA, trial Judge found as a fact that Dec did these transactions with no intent to delay hinder or defraud Pl of his remedies

• Decision upheld on appeal by BCCA

• Leave to Appeal to the SCC denied

Mawdsley cont.

• BCCA confirmed Abakhan that if one of the purposes of the transaction was to avoid creditors, the FCA applies; i.e., it was not saved because there was a primary legitimate purpose – there must be no creditor avoidance component to the intention

• Intention is a question of fact and it may be inferred in the circumstances

Mawdsley cont.

• The Court reviewed the “Badges of Fraud” that can support an inference of intention:

– Financial situation– Relationship of the parties– Effect of disposition– Haste– Timing in relation to notice of debt

Mawdsley cont.

• Valuable consideration given (if none this leads to a presumption of intention to defraud creditors)

• Continuing to remain in possession

• Secrecy of the transactions

• Pl argued that a person intends the natural consequence of their acts, so if the effect of the transaction avoided creditors, the transaction was void under FCA – BCCA held this was not conclusive and that the court can make a finding of fact on the transferor’s intention.

Mawdsley cont.

• BCCA dealt with standing of a CL spouse to benefit from the FCA in relation to WVA

• A Pl must have a right to make a claim as a creditor or other before death in order for FCA to apply

• A CL spouse cannot make a claim for property under the current FRA and if there is no unjust enrichment or contractual claim, the FCA does not apply

• This is the same for children

Mawdsley cont.

• The result is that married spouses could still use the FCA to set aside transactions even if had not commenced FRA action before death

• Under the new FLA, CL spouses will have property division rights as of March 2013, so presumably the FCA will apply to CL spouses

• Spouses or children can still have unjust enrichment or contract claims that will allow the FCA to apply

Duca Financial Services Credit Union Ltd. v. Bozzo, 2010 ONSC 3104, rev’d 2011 ONCA 455

• “[54] In my view, it has not been established on a balance of probabilities by Duca that Mr. Bozzo in executing the January 29, 1988 trust declaration had the intent to defeat an unknown, possible future creditor. He wanted to avoid subjecting the shares of the Abbas Group to any possible claims by his personal creditors in the future. A person is not prevented from rearranging his affairs to isolate his personal assets from future, as opposed to present, liabilities. Generereux v. Carlstrom [2002] O.J. No. 184 (S.C.J.).”

Duca Financial Services Credit Union Ltd. v. Bozzo Cont.

• [65] There is also dicta to suggest that an honest intent to remove assets from the reach of future creditors through a conveyance of property may be void under s. 2 of the FCA. Botham Holdings Ltd. v. Braydon Investments Ltd. [2004] S.C.J. No. 758 (Q.B.). However, as I have stated above, in my view, the law allows a person to rearrange his affairs to isolate his personal assets from future creditors, as opposed to present creditors. At the time of the execution of the January 29, 1988 trust declaration, Abbas Group had not even purchased the subject property, and the future borrowing from Duca was not in contemplation.

• OntCA: did not really put into trust – lacked intention, retained control,

hadn’t separated ownership in his own mind

Easingwood v. Cockroft

• Claim by spouse that transfer of assets to alter ego trust was void due to FCS

• Also attached on basis of unjust enrichment and WVA.• Claim dismissed. For spouse to be “creditor or other” must

either:a) have commenced action under FRA to assert

entitlement to assets; orb) Establish evidentiary basis that spouse had a potential

right or claim under FRA .

Appeal to BCCA dismissed.

What are our obligations?• You cannot engage in a fraudulent transaction. If you

understand that a disposition is being made to avoid, hinder or delay creditors, you must refuse to act.

• Prepare notes to the file regarding the reasons for the disposition. If the effect of the transfer is to hinder, delay or avoid creditors, you and your client may be called upon to refute a presumed intent.

• Always make certain that your client is aware of potential challenges under this legislation. It should not come as a surprise to the client down the road.

• Involve the family in the plan, get them independent advice and have them approve it.

Possible Proactive Steps

• If there are current creditors, consider getting their consent to the transaction

• Consider insurance for future claims

• Set aside cushion of funds to deal with future claims

• Re future creditors – advise client to ensure that any future creditor is aware of current financial situation when funds are advanced.

Possible Proactive Steps

• New corporations can still be utilized effectively to enter into new transactions.

• Document reasons for the transactions so courts are less likely to infer intent.