Monday, 5 March 2012

Intent is Still Required under the Fraudulent Conveyance Act

As many may recall, in the now-seminal decision in Abakhan & Associates Inc. v. Braydon Investments Ltd., the BCCA held that, notwithstanding the language of section 1 of the Fraudulent Conveyance Act, a claimant does not need to prove dishonest or morally blameworthy intent on the part of the transferor.  All that's required is proof of any intent to place assets out of reach of existing or possible future creditors.

Abakhan was a commercial case, where the defendants structured their affairs in a certain way before engaging in a new business venture.  In Mawdsley v. Meshen, 2012 BCCA 91, the court considered application of the post-Abakhan FCA to estate planning.  Specifically, the court considered and and rejected two arguments: (1) that effect of a transaction - defeating creditors - is sufficient to invalidate the transaction under the FCA without proof of intent to defeat creditors; and, (2) that the FCA should apply to invalidate inter vivos transactions intended to defeat future claims under the Wills Variation Act. 

Firstly, the court considered whether to invalidate a transaction under the FCA, the claimant needs to prove that the transferor actually intended to "delay, hinder or defraud creditors or others", or whether it would be sufficient to simply prove that the transaction has such effect.  The court rejected the latter approach, finding that intent had to be proven, whether directly or by inference:
[71]         I do not agree ... that Braydon did away with the requirement of intention on the part of the transferor for the FCA to apply.  In some cases, of course, that intention may be inferred from the effect of the transaction, and indeed a presumption may arise in some circumstances from that effect.  If there is no credible evidence to the contrary, the FCA may be satisfied; but there is no rule of law that in every case, an intention to defeat creditors must be inferred from the effect of the impugned transaction.  As Freedman J.A. stated in Mandryk, evidence that the effect of the impugned transfer was to defeat or delay creditors “is not conclusive.”
Secondly, the court considered whether the FCA applied to parties structuring their affairs to avoid the operation of the WVA - e.g., transferring assets into an alter ego trust.  The court decided that there was no reason to disturb the well-established principles from Hossay v. Newman, which provide a claimant under WVA is not a "creditor or other" entitled to claim under the FCA unless he or she had a legal or equitable claim against the deceased prior to his death.  As Newbury J.A. explained:
[7] ... given that the broad and uncertain consequences such a change would involve, it would be for the Legislature rather than a court of law to do so.
The rationale for this decision, surprisingly emotional, is also worthy of note:
[90]         This argument may conform to one’s moral sense in a particular case, but as has been seen, no case has gone so far as to suggest that “creditors and others” in the FCA includes a person who has no claim at the time of the transfer in question ‒ or for that matter, during the transferor’s lifetime.  The implications of so interpreting the phrase would be enormous.  Persons qualifying as spouses or children under the WVA would be entitled, at least prima facie, to challenge every disposition of property, whether for valuable consideration or not, made by their spouse or parent during his or her lifetime, and even to seek to prevent such dispositions by court action.  The courts would find themselves assessing the consequences of various forms of transfers, including dispositions in the course of business, dispositions carried out years earlier and dispositions proposed to be carried out in the future, all in the name of protecting “moral” obligations that cannot truly be judged until the parent or spouse has lived his or her life and died leaving an estate and a will.  I cannot imagine that courts should take on this role of arbiter of personal and business decisions throughout a parent or spouse’s lifetime without the Legislature’s clearly directing us to do so.