Understanding the Fraudulent Conveyance Act

Understanding the Fraudulent Conveyance Act - Disinherited
A person giving money to another.
A person giving money to another.

The British Columbia  Fraudulent Conveyance Act is a  statute designed to give a remedy to creditors frustrated in collecting their debts by a debtor who has disposed of his/her assets.

The Fraudulent Conveyance act permits  a creditor to impugn or set aside a transfer of property, where that property has been transferred in an effort to defeat the legitimate claims of creditors.

Our law relating to fraudulent conveyances dates back to the English Middle Ages when England became a trading nation commercial laws were developed to resolve the trade disputes. Throughout history  debtors have been tempted to convey their property to friends or family, hoping to avoid their creditors by putting their property out of the reach.

As early as 1571, the Statute of Elizabeth, the first Fraudulent Conveyance Act, was passed. Since that time our courts have developed a large body of case law, which largely supports the claims of “creditors and others” to set aside fraudulent conveyances.

Our law requires a debtor to honour his or her legal obligations first before transferring property to others (usually family or friends) thus attempting to put it out of reach of legal claimants.
In Freeman v. Pope (1870), L.R. 5 Ch. App 538 this principle is stated as follows: “persons must be just before they are generous, and that debts must be paid before gifts can be made”.
What is a Fraudulent Conveyance?
A fraudulent conveyance is a transfer of an interest in property, in circumstances where:
a) the transfer hinders or impairs the rights of a creditor or other claimant to satisfy a claim against the transferor (debtor) of the property; and
b) the transferor intends such a purpose in making the transfer

Burden Of Proof

In an action to set aside a fraudulent conveyance, the plaintiff (creditor) has the burden of proving that the transfer was done with the intention of defrauding “creditors or others”.
Intention is a state of mind and a question of fact which must be proven in court. However because the defendant’s intention not usually directly known, the caselaw permits a plaintiff creditor to rely on circumstantial evidence to raise an inference of fraud which the defendant debtor must then rebut.
The courts have identified a number of suspicious circumstances, known as the “badges of fraud” which may raise this inference of fraud. The more suspicious the circumstances, the stronger the inference of fraudulent intent.
It is not necessary to prove numerous badges of fraud, as a single badge may be sufficient to give rise of an intent to defraud, deceit or delay creditors in the absence of an explanation from the defendant. Re Fancy (1984) 46 O.R. (2d) 153
The courts will examine all of the circumstances surrounding the conveyance of the property to determine if there are any “badges of fraud.”
The Supreme Court of Canada in Koop v. Smith (1915) 51 S.C.R. 355 held that the burden of establishing the bona fides ( good faith) of the transaction in such a situation shifts from a plaintiff (creditor) to the defendant ( debtor), and that care is required in scrutinizing the testimony of the parties to the transaction.
In examining transfers made between near relations under suspicious circumstances, the Supreme Court went on to rule that the principle of res ipsa loquitor applies, i.e. the facts speak for themselves. Thus, the court ruled, in such a situation the defendant must establish the transfer was bona fides by presenting corroborative evidence, independent of the testimony of interested parties.

Badges of Fraud

Suspicious circumstances which our courts may characterize as “badges of fraud” include the following:
1) Secrecy surrounding the transaction
2) Cash payments were made
3) No change of possession occurred after the conveyance;
4) Transfer to non-arm’s-length person;
5) The transferor has few remaining assets;
6) The transfer was effected with unusual haste;
7) Grossly inadequate consideration was paid;
8) A benefit was retained by the transferor under the settlement;
9) The transfer was made in the face of potential litigation;
10) Lack of accurate documentation supporting the transaction.

These “badges of fraud” are enumerated in Bank of Montreal v. Vandine (1953) 1 D.L.R. 456; Prodigy Graphics Group Inc. V. Fitz- Andrews, (2000) O.J. No. 1203 ( Ont. S. C. J.); and Ferguson v. Lastewka et al ( 1946 ) O. R. 577

Legal Or Equitable Claim Necessary

Both the original Statute of Elizabeth and our modern Fraudulent Conveyance Act provide a statutory remedy to “creditors and others” and these words have been broadly interpreted.
Specifically in Hossay v. Newman 22 E. T. R. (2d) 150 (BCCA) our court adopted the reasoning of the Alberta Supreme Court in Dower V. Alberta Public Trustee (1962) 35 D. L.R. (2d) 29. The court found that the words “creditors and others” in the Statute of Elizabeth should be given a broad interpretation, but should only include such persons who have “legal or equitable” claims against the grantor or settler.

In the Hossay decision the plaintiff was an adult son of the deceased. He was effectively disinherited when shortly before his death, the father placed his major assets in joint tenancy with one of the defendants. The result was that the deceased’s assets passed to the defendant by operation of law and did not form part of the testator’s estate.

The plaintiff argued that the transfer of the deceased’s assets into joint tenancy was a fraudulent conveyance made to defeat his claim under the Wills Variation Act. Since a WVA claim can only be maintained against the deceased’s estate, the plaintiff sought to set aside the transfer so as to bring the assets back into the estate of his late father.

The court dismissed the plaintiff’s claim on the basis that he did not have any legal or equitable claim against his father during his lifetime. The son’s claim arose solely on death under the provisions of the Wills Variation Act, and as a result the son did not come within the meaning of the words “creditors or others” under the Fraudulent Conveyance Act.

Presumably it would be otherwise for a claim brought by a spouse. In contrast to a child of a deceased, a spouse likely does have a legal or equitable claim against the other spouse, during his or her lifetime. For example, a spouse might have a an equitable claim of unjust enrichment or constructive trust, or a legal claim under the provisions of the Divorce Act, or under provincial family law.

Creditors Need Not Exist At Time of Conveyance
In Canadian Imperial Bank of Commerce v. Boukalis ( 1987( 34 D.L.R. (4th) 481 at page 487 (BCCA) the court stated “A conveyance can be set aside even if there were no creditors when it was made.”
The transfer may be set aside if the defendants simply foresaw potential creditors who might be defeated by the conveyance. Newlands Sawmills Ltd. v. Bateman 31 B.C.R. 351.
This is especially so where a potential debtor embarks on a risky business venture knowing that there might likely be future creditors should the business fail.

Dishonest Intention Not Required

In order for the Fraudulent Conveyance Act to apply it is not necessary to prove any dishonest intention on the part of the defendant. What is required is simply proof of an intention to move the property out of reach of potential creditors,. Royal Bank of Canada v. Clarke 2009 BCSC 481.

In a judgment released February 2, 2010, Abakhan & Associates Inc. Braydon Investments Ltd 2009 BCCA 521 the Court of Appeal upheld the trial judgment. At trial, the judge had set aside a conveyance as fraudulent in spite of finding that the debtor had no dishonest intent and had acted on professional advice to effect legitimate business purposes. Certainly there were bona fide business reasons for the transfer however nevertheless, once the debtor admitted an ancillary purpose was to shield the assets from potential creditors, the trial judge found the conveyance to be fraudulent.

Similarly in Chan v. Stanwood 2002 BCCA 474, the court upheld a finding of fraudulent conveyance where the defendants, on the advice of professionals, transferred their exigible (easily collectible) assets into shares in holding companies that were not “effectively exigible”. This exchange of exigible assets for preferred shares delayed, hindered, or defaulted the creditors, and the defendants did so by design. That design or purpose constituted the fraudulent intent required by the Act.

Conclusion

There are centuries of jurisprudence relating to fraudulent conveyances. Historically our courts have always interpreted the statute liberally and in favour of creditors. Most recently our courts have ruled there need not be a dishonest intention proven. Even a transfer made with advice for legitimate ends as limiting personal liability, may be set aside when a transfer is also intended to help to frustrate the claims of creditors.

We can expect that more and more “estate planning” type arrangements may be challenged as fraudulent conveyances by disappointed spouses who would otherwise have a substantial Wills Variation Act claim.

Molester’s Transfer of Assets to Avoid Victim’s Judgement

Molester’s Transfer of Assets to Avoid Victim’s Judgement

Kirk (Guardian ad litem of) v Kirk estate 2012 BCSC 1346.

The infant plaintiffs, through their father, were the granddaughters of the deceased, and claimed general damages against their grandfather for his assaults upon them.

On 30 October 2009 grandfather wrote a letter to a niece. On page 3 he complained about the charges being made against him and wrote:

I personally think that they have been promised money from a civil suit against me if I’m found guilty, little do they know that my house money is not in the family anymore, it’s untouchable and I’d die first anyway.

Criminal charges were laid against him in 2009 after which time the grandfather sold his house and realized $310,000.

He committed suicide in July 2010, a day before he was to be sentenced.

All of the $310,000 had been dissipated.

The plaintiffs applied for inter alia tracing order of those funds, and a declaration that the transfer of same was a Fraudulent Conveyance.

After reviewing the materials, the court concluded that $185,000 of the fund fell within the ambit of the fraudulent conveyance legislation, but not gifts that he made to his sons totalling some $11,500, or amounts paid for legal fees and for his care.

The plaintiffs rely solely on the Fraudulent Conveyance Act, R.S.B.C. 1996, c. 163, and in particular, the recent judgments of the Court of Appeal in Abakhan & Associates Inc. v. Braydon Investments Ltd., 2009 BCCA 521, and the decision of Mr. Justice Johnston in G.M.S. v. W.W.R., 2010 BCSC 1741.

[30] In the course of the Chief Justice’s judgment in Abakhan, he wrote, “It is sufficient to fix the defendants with liability if they foresaw potential creditors who might be defeated by the conveyance.” With respect to the words in the Fraudulent Conveyance Act in s. 1 “by collusion, guile, malice or fraud”, he noted those words should be struck: see para. 72, as they are surplus to the fact that the case law demonstrates that one does not need to prove a dishonest intent or mala fides but simply an intent to avoid creditors

The Remedial Constructive Trust

1. INTRODUCTION

Constructive trusts have been evolving for more than two centuries. However, it has only been in the last several years that it is now developed to the point where it is almost impossible to predict and define all the circumstances in which its equitable principles might apply .

As Chief Justice McEachern stated only a few years ago in Clarkson v McCrossen Estate (1995) 13 R.F.L. (4th) 237 (BCCA):

“I wish to mention that the law of unjust enrichment is in its early formative stages; it will continue to mature incrementally. The few cases that have been decided cannot be taken as the final word on any of these matters. They point the direction the law is taking, but not the many contours that must be traversed along the way.”

The purpose of this article is to briefly review the development of the law of constructive trusts, and to then focus on three significant recent decisions that reflect where this important area of the law has now reached.

2. WHAT IS A CONSTRUCTIVE TRUST ?

“A constructive trust comes into existence, regardless of any party’s intent, when the law imposes upon a party an obligation to holds specific property for another. The person obligated becomes by force of law a constructive trustee towards the person to whom he owes performance of the obligation.”

Law of Trusts on Canada – Donovan Waters, page 378

Lord Denning in Hussey v Palmer (1972) 3 All E.R. 70 (CA) described a constructive trust as:

“by whatever name it is described, it is a trust imposed by law whenever justice and good conscience require it. It is a liberal process, founded upon large principles of equity, to be applied in cases where the defendant cannot conscientiously keep the property for himself alone, but ought to allow another to have the property or a share in it. It is an equitable remedy where the court can enable an aggrieved party to obtain restitution”.

The principle of “unjust enrichment” lies at the heart of the constructive trust. The principle of “unjust enrichment” has played a significant role in the development of this equitable remedy.

Lord Mansfield in Moses v Macferlan (1760) , 2 Burr. 1005, 97 E.R. 676, stated:

“the gist of this kind of action is the defendant, upon the circumstances of the case, is obliged by the ties of natural justice and equity to refund the money”.

One of the earliest situations that a constructive trust was imposed concerned the acquisition of a secret profit by persons who were employed to act for others. Since then, it has been applied to countless different fact patterns, though it is perhaps best known for its application in matrimonial and cohabitation property cases.

3. WHAT IS A REMEDIAL CONSTRUCTIVE TRUST?

A remedial constructive trust is a trust imposed by court order as a remedy for a wrong. The entitlement to that remedy may be a matter of substantive law, but the trust itself is not created by the acts of the parties, or even by the obligation to make restitution, but by the order of the court. As with other court orders, the trust will come into being when the order is pronounced, unless, in an appropriate case, the order is made retroactive or its coming into force is deferred. It may be that in many cases where a remedial constructive trust is imposed, the court will order that it be imposed with effect from the time when the situation arose which gave rise to the unjust enrichment.

There must, of course, be a causal connection between the property in question and the unjust enrichment. See Sorochan v. Sorochan, supra, and Rosenfeldt v. Olson, 1 B.C.L.R. (2d) 108, [1986] 3 W.W.R. 403, 25 D.L.R. (4th) 472 (C.A.).

The remedial constructive trust must be distinguished from the substantive constructive trust which the court declares to have arisen, as a result of the conduct of the parties, and by the force of that conduct alone, at the earlier time when the relevant conduct occurred. If a substantive constructive trust is found to have arisen in that way, then there is no discretion remaining in the court to refuse to declare the existence of the trust.

The ordering of a remedial constructive trust is only one of the remedies which may be ordered as a result of a wrong committed by one person against another that is properly categorized as unjust enrichment. The available remedies include an order to pay money, as damages, and they include other remedies stemming either from legal origins or equity origins, as the circumstances of the case may require.

“It must be emphasized that the constructive trust is remedial in nature. If the court is asked to grant such a remedy and determines that a declaration of constructive trust is warranted, then the proprietary interest awarded pursuant to that remedy will be deemed to have arisen at the time when the unjust enrichment first occurred.” LeClair v Leclair Estate, May 1998, B.C.C.A

4. THE RESURRECTION OF “GOOD CONSCIENCE”

Prior to the Supreme Court of Canada’s decision in Soulos v Korkontzilas (1997) SCR 217, it had become trite law that to support a finding of a constructive trust one had to prove an unjust enrichment comprised of :

1) an enrichment,

2) a corresponding deprivation,

3) no juristic reason for the enrichment

( see inter alia Pettkus v Bekker (1980) 19 RFL (2d) 165, Sorochan v Sorochan (1986) 2 SCR 39 and Peter v Beblow (1993) 1SCR 980.)

The decision in Soulos has radically changed what had been trite law by holding that despite the absence of an enrichment and a corresponding deprivation, the doctrine of constructive trust may still be imposed “to hold persons in different situations to high standards of trust and probity and prevent them from retaining property which in “good conscience” they should not be permitted to retain.”

In Soulos, a realtor Korkontzilas had negotiated a commercial building for his client, but then decided to purchase the property for himself, which he did. He lied to his client that the deal had fallen through, but three years later his client found out what had really occurred.

The client sued Korkontzilas and alleged a breach of fiduciary duty that gave rise to a constructive trust. The problem for the plaintiff however, was that property values had fallen from the time of the purchase, so that the plaintiff could not prove actual damages. At trial, the court found a breach of fiduciary duty, but declined to order a constructive trust because since the property value had fallen, Korkontzilas had not been enriched. The Ontario Court of Appeal reversed this decision, and the Supreme Court upheld the reversal.

McLaughlin J. reviewed the history of the remedy of constructive trust in detail, and found that the principle of “good conscience” has always been at the center of the doctrine of constructive trust, and lies at the very foundation of equitable jurisdiction.

By applying the principle of “good conscience”, the court found that it applies to constructive trusts where the defendant has not obtained a benefit or where the plaintiff has not suffered a loss.

Justice McLaughlin boldly stated that “It thus emerges that a constructive trust may be imposed where good conscience so requires. I conclude that in Canada, under the broad umbrella of good conscience, constructive trusts are recognized both for wrongful acts like fraud and breach of duty of loyalty, as well as to remedy unjust enrichment and corresponding deprivation.”

The court found four conditions that should be present for a constructive trust to be applied based on wrongful conduct, namely:

(1) The defendant must have been under an equitable obligation, that is, an obligation of the type that courts of equity have enforced, in relation to the activities giving rise to the assets in his hands;

(2) The assets in the hands of the defendant must be shown to have resulted from deemed or actual agency activities of the defendant in breach of his equitable obligation to the plaintiff;

(3) The plaintiff must show a legitimate reason for seeking a proprietary remedy, either personal or related to the need to ensure that others like the defendant remain faithful to their duties and;

(4) There must be no factors which would render imposition of a constructive trust unjust in all the circumstances of the case; e.g., the interests of intervening creditors must be protected.

The doctrine of “good conscience” was subsequently applied by the B.C.C.A in the 1998 decision of Roberts v Martindale 21 ETR (4th) 475.

The reasoning of Roberts v Martindale is in my view, a good example of a fact pattern where the application of a remedial constructive trust will increasingly be applied by the courts.

FACTS : The deceased and the defendant were formerly husband and wife. The deceased named the husband as the beneficiary of a group life insurance policy, and later divorced him due to his infidelity. The divorce was marked by great bitterness .The deceased intended that the plaintiff would be the beneficiary of the policy. Both the plaintiff and the deceased believed that steps had been taken to revoke the designation in favour of the husband and appoint the plaintiff as beneficiary in his place. The husband remained beneficiary, and the plaintiff claimed recovery of money paid to the husband .

HELD: The court held that the husband should not be allowed to keep the money because he had surrendered any right he might have had to property of the deceased in their separation agreement. The breach of their separation agreement by the husband was sufficient for the court to invoke the doctrine of remedial constructive trust, and the money was declared to be properly owing to the plaintiff.

Southin J. followed the maxim of equity that will not permit even an act of Parliament to be used as an instrument of fraud, and applied the notion of “good conscience” to impose a remedial constructive trust, because Mr. Martindale had, by the separation agreement surrendered any right he may have had to the property of the deceased.

5. MUTUAL WILLS

Mutual wills are wills made by two or more people, usually a husband and wife which are drawn on virtually identical terms. Frequently, the parties will leave everything to each other, with gifts over to their children, or to strangers.

A constructive trust may be imposed on the survivor of the parties or on his or her personal representative if it can be shown that there was an agreement between the parties not to revoke their wills, and to dispose of their property in a particular way if the survivor has subsequently broken the agreement and made another will. The personal representative of the survivor will then be required to hold the property on trust for the beneficiaries of the mutual wills.

The property that will be the subject of the constructive trust depends upon the agreement between the parties. It may include only the property of the first to fie, or the property of both until the death of the first, and it may include property acquired by the survivor after that date.

A recent example of the courts imposing a constructive trust on a mutual will situation was in the decision of the B.C.C. A. in University of Manitoba v Sanderson (1998) 155 D.L.R. (4th) 40.

FACTS: On 9 July 1970, Michael Daniel Sanderson and his wife, Katherine Velma Sanderson, executed an agreement under seal (the “Agreement”) and mutual wills. The Sandersons had no children.

The Agreement provided:

WITNESSETH that in consideration of the premises the Parties hereto agree as follows

1. That the Party of the First Part will execute a Will of even date in the form of the Will annexed as Schedule I to this Agreement.

2.That the Party of the Second Part will execute a Will of even date in the form of the Will annexed as Schedule II to this Agreement.

3. That during the joint lives of the Parties hereto neither of the said Wills will be revoked or altered without the written consent of both the Parties hereto.

4. That after the death of one of the Parties hereto the said Will of the survivor will not be altered or revoked.

5. That should either of the said Wills be revoked by operation of law the surviving Party hereto will execute a new Will leaving the residue of his or her estate to the University of Manitoba upon the same terms and conditions as are contained in the said Wills.

6. This Agreement shall enure to the benefit of and be binding upon the Parties hereto and their respective personal representatives and assigns.

Clause 1 of the mutual wills provided:

I DECLARE that my wife … [husband …] and I have agreed with one another to execute wills of even date and in similar terms and in consideration thereof we have agreed that such respective wills

shall not hereafter be revoked or altered either during our joint lives or by the survivor after the death of one of us AND I FURTHER DECLARE that the provisions of this my will are made in consideration of such agreement.

The mutual wills further provided that the estate of the first spouse was to be held in trust for the surviving spouse for his or her life, or until remarriage, and the trustees were granted discretion to employ income and capital for the benefit of the surviving spouse. The residue was left to the appellant, the University of Manitoba, in trust to establish a perpetual bursary fund “to assist talented prospective teacher-students who demonstrate ability in scholastic fields of study such as mathematics science foreign languages (including Ukrainian and Polish) worthy research work and in other worthy subjects pertaining to the teaching profession”.

The Sandersons executed codicils to the mutual wills on 20 July 1973. The codicils stated that their domicile was British Columbia and the reference to “teacher-students” was changed to “undergraduate student teachers”. They executed second codicils to the mutual wills on 13 July 1977 which substituted Montreal Trust Company for The Royal Trust Company as the co-executor of the mutual wills. Both the 1973 and 1977 codicils contained the statement: “In all other respects I confirm my said Will”.

On 29 March 1984, Montreal Trust wrote to the Sandersons suggesting a review of their wills. On 21 April 1984, Mr. Sanderson responded by endorsing the letter, “Keep the Will in force please”, and returned it to Montreal Trust.

On 18 July 1985, Mrs. Sanderson died and shortly thereafter Mr. Sanderson made a new will, the provisions of which were inconsistent with the terms and provisions of the mutual wills.

When Mrs. Sanderson died, almost all of her assets were held jointly with Mr. Sanderson. The trial judge found that Mr. Sanderson obtained ownership of all the assets by right of survivorship or “right of transfer”. The assets were transferred into his sole name on 30 August 1985. Montreal Trust renounced its right to probate Mrs. Sanderson’s estate, because “there was no estate to probate” and, as a result, Mrs. Sanderson’s will was never probated.

On 30 August 1985, Mr. Sanderson executed a new will (the “1985 will”), naming Montreal Trust Company of Canada as the sole executor and trustee. In his 1985 will, Mr. Sanderson divided the residue of his estate between the following beneficiaries: a one-quarter share to his sister-in-law, the

defendant, Julia Milne; a one eighth share to each of his nephew, the defendant, Michael Seneshen and the defendant, Victoria Scott; a one/twelfth share to each of the defendants, Jean Andruchuk and Mary Wus, and a one/twelfth share to Peter Seneshen, with the balance to the University on the identical trust to that contained in the mutual wills. Mr. Peter Seneshen’s gift lapsed as he predeceased Mr. Sanderson and the gifts to the beneficiaries were on condition that the beneficiary survive Mr. Sanderson.

On 31 January 1994, Mr. Sanderson died. His estate, which was then made up almost entirely of treasury bills, investment certificates and cash, had a value of $1,733,855.88 as at 21 June 1996.

On the application of Montreal Trust, which was granted administration of the estate, letters probate were issued on 6 February 1995 in relation to the 1985 Will.

The University filed a Caveat on 22 July 1994 which read, in part:

The Caveator is the beneficiary under trust created under the terms of the Mutual Wills of the deceased Michael Daniel Sanderson and his deceased spouse, Katherine Velma Sanderson dated July 9, 1970. The Caveator claims to be entitled to the entire residue of the estate of Michael Daniel Sanderson under the said Mutual Will of July 9, 1970 ….

Montreal Trust declined to bring an application to resolve the conflicting claims of the University and the individual defendants and, as a result, the University commenced an action seeking a declaration that the defendant executor, Montreal Trust, holds all of the assets of the estate of Michael Daniel Sanderson as constructive trustee for the sole benefit of the University.

HELD :

“This is a case in which there was an express agreement made that the mutual wills would not be revoked or altered during the joint lives of the parties to the agreement and that after the death of the first, the will of the survivor would not be altered or revoked. There was an exchange of promises

and Mrs. Sanderson did not revoke her will, although she had the legal right to do so, before her death.

Equity considers it a fraud upon the deceased, who has acted upon and relied upon the mutually binding nature of the agreement, for the survivor to change the will and break the agreement. As the deceased cannot intervene to enforce the obligation, equity will enforce the survivor’s obligation, despite the survivor’s subsequent intentions.”

It is important to remember that just because a husband and wife have simultaneously made mutual wills, giving each to the other a life interest with similar provisions in remainder, is not in itself evidence of an agreement not to revoke the wills. In the absence of a definite agreement to that effect, there is no implied trust precluding the wife from making a fresh will inconsistent with her former will, even though her husband has died and she has taken the benefits conferred by his will. It is only where an agreement has been made, that equity will cause the court to enforce the contract and require the survivor to dispose of the property in a manner consistent with the terms of the will. The survivor will be precluded from making a subsequent will to deal with that property or to dispose of the property in a manner inconsistent with the trusts imposed.

6. CONCLUSION

The court will only intervene where the facts show that the judicious parent , acting in full knowledge of the true facts, would have made a different disposition of the estate among his adult children. Griffin v McCarthy 36 E.T.R. 129

In Chernecki v Vangolen 1997 3 W.W.R. 589 (C.A.), the Court of Appeal found that a will that left $1.16 million dollars equally to two children should not be interfered with, as the will had made adequate provision for each child.

In Cavadini v Mahaffey Estate ( 1995) B.C.A.C. 220 it was held that the law does not require a testator to treat all children equally.

Breach of Fiduciary Duty In Widow’s Reliance On Family

Breach of trust 2

A breach of fiduciary duty was found when following her husband’s death, a widow relied upon  family members  to enter into improvident land transfers based on assertions that the widow relied upon.

It is a fact that families financially abuse each other and often in the nature of a breach of fiduciary duty, such as a power of attorney

Buccilli v Pillitteri 2012 ONSC 6624, involved a family estate dispute after a tragic death where all the parties had a one third interest in a family business.

After the deceased’s death, his surviving widow, on the advice of her brothers-in-law, signed transfers of all her interest in the deceased estate, including the interest in the family business and real property, to one of the defendants in trust, in exchange for receiving a condominium.

Eventually the widow brought court action to set aside the transfer agreement, and the action was allowed on the grounds of undue influence, and other reasons including MISREPRESENTATION. In a nutshell, the court found that there was an inequality of positions of the parties, and the widow relied upon her brother-in-law’s for advice and was misrepresentented to enter into the contract.. The transfer agreement was an improvident bargain whereby the widow gave up her interest in the deceased’s estate, which was worth a very substantial amount, in exchange for a condominium worth only $610,000.Patricia also asks that the Transfer Agreement be set aside on the basis that the widow relied upon the sons in law and they breached the fidciary duty that they owed to her.

FIDUCIARY DUTY 179 Elder Advocates of Alberta Society v. Alberta, [2011) 2 S.C.R. 261 (S.C.C.) is the latest S.C.C. case dealing with the tests for recognition of a fiduciary duty. In Frame v. Smith. \ 19871 2 S.C.R. 99 (S.C.C.) Wilson J. stated her view of when a fiduciary duty has been recognized. Her words have been adopted by the Supreme Court and other courts for many years.

 

Relationships in which a fiduciary obligation has been imposed seem to possess three general characteristics:

 

(1) The fiduciary has scope for the exercise of some discretion or power.

2012 ONSC 6624, 84 E.T.R. (3d) 208,225 A.C.W.S. (3d) 115

The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests.
The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.

In Elder Advocates of Alberta Society, however, McLachlin C.J. stated that as useful as the three “hallmarks” referred to in Frame are in explaining the source fiduciary duties, they are not a complete code for identifying fiduciary duties. She laid down three tests to be applied.
First, the evidence must show that the alleged fiduciary gave an undertaking of responsibility to act in the best interests of a beneficiary. What is required in all cases is an undertaking by the fiduciary, express or implied, to act in accordance with the duty of loyalty reposed on him or her. The existence and character of the undertaking is informed by the norms relating to the particular relationship. The party asserting the duty must be able to point to a forsaking by the alleged fiduciary of the interests of all others in favour of those of the beneficiary, in relation to the specific legal interest at stake. The undertaking may be found in the relationship between the parties, in an imposition of responsibility by statute, or under an express agreement to act as trustee of the beneficiary’s interests.
Second, the duty must be owed to a defined person or class of persons who must be vulnerable to the fiduciary in the sense that the fiduciary has a discretionary power over them. Fiduciary duties do not exist at large. They are confined to specific relationships between particular parties. Historically recognized per se fiduciary relationships exist as a matter of course within the traditional categories of tmstee-cestui que trust, executor-beneficiary, solicitorciient, agent-principal, director-corporation, and guardian-ward or parent-child. By contrast, ad hoc fiduciary relationships must be established on a case-by-case basis.
Finally, to establish a fiduciary duty, the claimant must show that the alleged fiduciary’s power may affect the legal or substantial practical interests of the beneficiary. In the traditional categories of fiduciary relationship, the nature of the rela­tionship itself defines the interest at stake. However, a party seeking to establish an ad hoc duty must be able to point to an identifiable legal or vital practical interest that is at stake. The most obvious example is an interest in property, although other interests recognized by law may also be protected.
.

The remedy for breach of fiduciary duty is discretionary. The only realistic remedy to make Patricia whole from the breach is that the Transfer Agreement should be set aside and an accounting of profits of the defendants from the lands and developments that were the subject of the Transfer Agreement should be taken and one-third should be paid to Patricia.

Misrepresentation

Buyer BewareBuccilli v Pillitteri 2012 ONSC 6624, is a misrepresentation case.

It involved a family estate dispute after a tragic death where all the parties had a one third interest in a family business. After the deceased’s death, his surviving widow, on the advice of her brothers-in-law, signed transfers of all her interest in the deceased estate, including the interest in the family business and real property, to one of the defendants in trust, in exchange for receiving a condominium. Eventually the widow brought court action to set aside the transfer agreement, and the action was allowed on the grounds of undue influence, and other reasons including MISREPRESENTATION. In a nutshell, the court found that there was an inequality of positions of the parties, and the widow relied upon her brother-in-law’s for advice and was misrepresentented to neter into the contract.. The transfer agreement was an improvident bargain whereby the widow gave up her interest in the deceased’s estate, which was worth a very substantial amount, in exchange for a condominium worth only $610,000.Patricia also asks that the Transfer Agreement be set aside on the basis that it was induced by a misrepresentation. An agreement induced by a misrepresentation can be set aside if the representation was as to a material fact and reasonably relied on. This applies to a representation whether innocent, negligent or fraudulent. See Waddams at paras. 419-421.
It is necessary for a plaintiff to establish that the misrepresentation was a material inducement upon which the plaintiff relied. It is not necessary for a plaintiff to establish that the misrepresentation was the sole inducement for acting and it matters not if the misrepresentation was only one of several factors contributing to the plaintiffs decision. See Sidhu Estate v. Bains (1996).25B.C.L.R.(3d)41 (B.C. C.A.) at paras 35-36; Kripps v. Touche Ross & Co. (1997). 89 B.C.A.C. 288 (B.C. C.A.) at paras. 102-103; NBD Bank, Canada v. Dofasco Inc. (1999). 46 O.R. (3d) 514 (Ont. C.A.) at para 81.
175 In Sidhu Estate, supra, Finch J. A. (as he then was) quoted with approval from Fleming, The Law of Torts, 7th ed.
(Sydney: Law Book, 1987), which stated at 604

At the same time, a defendant cannot excuse himself by proving that his misrepresentation was not the sole inducing cause, because it might have been precisely what tipped the scales…

 

2012 CarswellOnt 15064, 2012 ONSC 6624, 84 E.T.R. (3d) 208,225 A.C.W.S. (3d) 115

and from Barton v. Armstrong (1973). T19761 A.C. 104 (New South Wales P.C.) in which Lord Cross, who wrote for the majority, in part stated at 118

If on the other hand Barton relied on the misrepresentation Armstrong could not have defeated his claim to relief by showing that there were other more weighty causes which contributed to his decision to execute the deed, for in this field the court does not allow an examination into the relative importance of contributory causes.

[Emphasis Finch J.A.’s]

In this case, I have found that before Patricia signed the Transfer Agreement, Christina told Patricia that she would hold the shares of CDC and Birchland in trust for Patricia. This was a representation of a present fact, i.e. she intended to hold the shares in trust for Patricia. However, Christina was quite clear in her evidence that from the time of the Transfer Agreement, she intended to transfer Patricia’s shares in CDC and Birchland to Ron Venture and Pat Pillitteri. This was a misrepresentation of fact.
Reliance can be inferred from all of the circumstances and it is not necessary for Patricia to have testified that she relied on the representation of Christina. See NBD Bank, Canada v. Dofasco Inc. (1999). 46 O.R. (3d) 514 (Ont. C.A.) at para 81. However, Patricia did testify that she relied on the representation of Christina, and I accept that. In any event, in my view it is an obvious inference from the evidence of Patricia that it was a material inducement to her signing the Transfer Agreement that Christina told her that she would hold the shares of CDC and Birchland in trust for her. Patricia testified that she did not think that she would have signed the Transfer Agreement had she known that Christina intended on transferring the shares to Ron Venture and Pat Pillitteri, and while that is not the issue, the issue being if she relied on what she was told rather than if she would have relied on the statement if told something else, I accept her evidence. It would have been completely different from what she had been told and what she relied on.

Unconscionable Inequality In Bargaining Power

unconscionable

Some transactions are so unconscionably bad that the law will set them aside.

Buccilli v Pillitteri 2012 ONSC 6624, involved a family estate dispute after a tragic death where all the parties had a one third interest in a family business. After the deceased’s death, his surviving widow, on the advice of her brothers-in-law, signed transfers of all her interest in the deceased estate, including the interest in the family business and real property, to one of the defendants in trust, in exchange for receiving a condominium. Eventually the widow brought court action to set aside the transfer agreement, and the action was allowed on the grounds of undue influence, and other reasons including unconscionability. In a nutshell, the court found that there was an inequality of positions of the parties, and the widow relied upon her brother-in-law’s for advice. The transfer agreement was an improvident bargain whereby the widow gave up her interest in the deceased’s estate, which was worth a very substantial amount, in exchange for a condominium worth only $610,000.

153 Unconscionability is closely aligned to undue influence, as stated by LaForest J. in Hodekinson v. Simms. In Norberg v. Wvnrib.  19921 2 S.C.R. 226 (S.C.C.) LaForest J. stated the doctrine of unconscionability to be as follows:

30. An unconscionable transaction arises in contract law where there is an overwhelming imbalance in the power rela­tionship between the parties. In Morrison v. Coast Finance Ltd. (1965). 55 D.L.R. (2d) 710 (B.C.C.A.). at p. 713, Davey J. A. outlined the factors to be considered in a claim of unconscionability:

… a plea that a bargain is unconscionable invokes relief against an unfair advantage gained by an unconscientious use of power by a stronger party against a weaker. On such a claim the material ingredients are proof of inequality in the position of the parties arising out of the ignorance, need or distress of the weaker, which left him in the power of the stronger, and proof of substantial unfairness of the bargain obtained by the stronger. On proof of those circumstances, it creates a presumption of fraud which the stronger must repel by proving that the bargain was fair, just and rea­sonable.

33. An inequality of bargaining power may arise in a number of ways. As Boyle and Percy, Contracts: Cases and Com­mentaries (4th ed. 1989), note, at pp. 637-38:

[A person] may be intellectually weaker by reason of a disease of the mind, economically weaker or simply situationally weaker because of temporary circumstances. Alternatively, the “weakness” may arise out of a special relationship in which trust and confidence has been reposed in the other party. The comparative weakness or special relationship is, in every case, a fact to be proven.

©2013 Thomson Reuters. No Claim to Orig. Govt. Works

 

Page 34

2012 CarswellOnt 15064,2012 ONSC 6624, 84 E.T.R. (3d) 208,225 A.C.W.S. (3d) 115

As the last sentence of this passage suggests, the circumstances of each case must be examined to determine if there is an overwhelming imbalance of power in the relationship between the parties.

40. It must be noted that in the law of contracts proof of an unconscionable transaction involves a two-step process: (1) proof of inequality in the positions of the parties, and (2) proof of an improvident bargain.

Fraudulent Conveyance: Defeat of Future Creditor’s Claim

Fraudulent Conveyance: Defeat of Future Creditor's Claim

Mitchell Jenner v Saunders  2012 Carswell Ont 5299 is an Ontario Court of Appeal case that upholds a finding that the sale of a husband and wife’s property was a fraudulent conveyance intended to defeat creditors.

The married couple had purchased a house together but it was registered only in the wife’s name.

The property was subsequently put into joint names as a condition of obtaining a mortgage. After the mortgage proceeds were received the property was transferred back into only the wife’s name.

No consideration was paid by the wife to the husband for the transfer, and when the house was sold, the sale proceeds were put into a joint account.

Prior to the sale of the property, a plaintiff creditor brought action against the husband for unpaid commissions owed and obtained judgement after the sale.

The creditor successfully sued the wife at trial on the basis that the transaction was fraudulent and intended to defeat creditors.

The evidence of the couple was that the impugned transaction was to prevent the husbands’ creditors from having access against the matrimonial home.

The court found that the fact that couple intended to prejudice future creditors was contrary to the Fraudulent Conveyance act of Ontario, which is very similar in its wording to that of British Columbia’s

The appeal was dismissed but for also providing for pre judgement and post judgement interest.

The Court had little difficulty in holding that it was open for the trail judge to find that the intention of the debtor husband and his wife was to defeat existing and future creditors.

disinherited.com opines that the same legal result would likely also occur in British Columbia.

Passing of Accounts Hearing Reveals Executor’s Theft

Passing of Accounts Hearing Reveals Executor's Theft

Passing of Accounts Occur When the Executor Applies To Court to Approve the Estate Accounts- Guardian ordered to repay missing funds.

It presents a very familiar fact pattern to many estate litigants.

The Court followed  Zimmerman v. McMichael Estate (2010), 103 O.R. (3d) 25 (Ont. S.C.J.), in which Strathy J. awarded no compensation for a guardian of property, where significant amounts of money had disappeared from an estate without adequate explanation.

The applicant was the guardian of property for his mother . In Ontario, this is the same as a court appointed committee of a patient in British Columbia under the Patients Property Act of RSBC.

The  guardian of her property passed accounts in 2001 and not again until 2010 shortly after mother’s death.

The total revenue from 2001 to 2010 was $195,776.41 and total disbursements totaled $207,036.44 .

His mother’s investment account had value of $152,055.71 in 2001 and $46,562.91 in 2010 .

The guardian made cash withdrawals from investment account of $122,534.40 between 2001 and 2010, without explanation.

The guardian brought an application to passing of accounts and for his compensation for being guardian.

The guardian’s brother objected  and the  application was  dismissed.

Instead, the guardian was ordered to pay $132,628.33 and repay $12,699 to mother’s estate .

The guardian was not entitled to compensation as the guardian’s conduct was shocking, as he withdrew thousands of dollars from his mother’s estate for his own benefit.

The estate was not complicated.

The guardian adversely affected the estate leaving the  investment account  reduced to fraction of its original size with no explanation.

The Court instead ordered the guardian to personally pay the brother’s  costs of the court application.

Reduce Financial Abuse – 15 Good Suggestions

reduce Financial abusePart Two in a Series on Financial Abuse

Reduce Financial Abuse

The key to reducing financial abuse is to plan appropriately to avoid it. It is crucial to begin this planning while the elder person is still competent. It is essential to engage the advice of a legal professional with an expertise in that area.

Although there is no foolproof method of avoiding financial abuse, here are a few simple strategies that may reduce the risk. These are in addition to frequent contact and visits with the elder.

Engage a legal professional with expertise in estate planning and in minimizing elder abuse.

Help simplify the vulnerable person’s finances. Set up automatic deposits and bill payments to reduce the need for bank visits or Powers of Attorney.

Be very cautious in granting unlimited enduring Powers of Attorney to others.

Do a full inventory of the vulnerable person’s household belongings and property; a video record and photos will assist. Make multiple copies and keep one outside the home.

Whenever possible, hire a caregiver through a reputable agency.

Conduct a thorough background check; insist on having and checking multiple references.

Before any caregiver is engaged—friend, family, or stranger—agree in writing on the terms of engagement.

The terms should be fair to both sides. Thus, any caregiver should be properly recompensed, whether family or stranger.

An appropriate termination period should be included so that upon the death of the elder, for example, the caregiver is not left homeless and unemployed. A provision for 3 months further pay and lodging may well alleviate his or her fears and ensure the caregiver is fully focused on the elder until the end of the contract.

The caregiver should acknowledge in writing his or her understanding of the vulnerability of the elder and agree not to accept anything more than a token gift from his or her charge.

The contract should provide for mandatory weekly respite care for the caregiver and annual respite care of at least 2 weeks. Respite care is crucial for the mental health of the caregiver, to ensure independent input into the care of the elder and to ensure there can be no complete isolation of the vulnerable person.

The agreement should provide for impromptu visits with no notice.

Keep banking and financial records off the premises.

Provide for the semi-annual review of accounts by designated parties.

Designate “gatekeepers” that may include neighbours, banking staff, family physicians, and legal professionals. Make them aware of the arrangements and give them contact numbers for the family and the Public Guardian and Trustee.

Last, if all else fails, to report financial abuse in British Columbia, visit the Website of the Public Guardian and Trustee. www.trustee.bc.ca

BC Estate Lawyer- What Is Financial Abuse and How to Identify It?

Trevor Todd and Jackson Todd have handled contested estates for over sixty combined years and have experience in handling financial, abuse cases.
What Is Financial Abuse and How to Identify It?

At disinherited.com we frequently encounter estates depleted by financial abuse. Elders are by no means the only victims of this abuse. Less commonly we see the financial abuse of children or disabled adults who are the beneficiaries of trust funds, usually by a trustee in a conflict of interest.

With our aging population however, the potential for elder financial abuse is increasing greatly. This should be no surprise given that the elderly, often savers rather than spenders, apparently control over 70% of the nation’s wealth.Continue reading