January Estate Planning Council of Abbotsford presentation

1. Navigating the Fraudulent
Conveyance Maze:
(And How This Little Statute May
Affect Estate Planning)
E. Jane Milton, QC of Bull, Housser and Tupper
January 15, 2014

2. • “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

3. 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.

4. FCA is Old Legislation
Statute of Elizabeth 1571
Criminal sanctions until 1987
Amended in 2012 to delete references to collusion, guile,
malice or fraud

5. 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)

6. 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.

7. 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

8. 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.

9. 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.

10. 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

11. 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.

12. 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.

13. 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.

14. 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.

15. • 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.

16. • 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

17. Mawdsley v. Meshen
2010 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

18. 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

19. 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

20. 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

21. 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.

22. 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

23. 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

24. 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

25. 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.

26. 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

27. 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

28. 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.).”

29. 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

30. 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; or
b) Establish evidentiary basis that spouse had a potential
right or claim under FRA .
Appeal to BCCA dismissed.

31. 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.

32. 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.

33. 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.