Fraudulent Conveyances - Do You Have to Prove Dishonesty?

A recent decision of the British Columbia Court of Appeal confirms that a creditor does not have to prove that a debtor acted dishonestly to set aside a conveyance as a fraudulent conveyance. It is sufficient for the creditor to prove that the debtor did so with intent to delay or hinder creditors, including future creditors.

William Botham was a shareholder and the principal of Botham Holdings Ltd, which held $20 million worth of real estate. After the company sold some of its real estate at a substantial profit, Mr. Botham decided to go into a joint venture car leasing business with a friend.

On the basis of legal and tax advice, Mr. Botham incorporated a new company, Braydon Investments Ltd., and through a series of transactions transferred Botham Holdings Ltd.’s assets to Braydon. Botham Holdings Ltd. went into the joint venture car leasing business. The reason Mr. Botham did not simply incorporate a new company for the car leasing business was that there were tax advantages in using Botham Holdings Ltd.

Unfortunately, the car leasing business failed. Botham Holdings Ltd. went bankrupt. The trustee in bankruptcy sought to set aside the transfer of assets to Braydon so that those assets would be available to the creditors of Botham Holdings Ltd.

The trustee in bankruptcy relied on section 1 of the British Columbia Fraudulent Conveyance Act, which says:

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 pretence or other matter to the contrary.

Mr. Botham acknowledged that the assets were transferred out of Botham Holdings Ltd. to insulate them from creditors of the car leasing business. But he argued that there were legitimate business and tax planning purposes for the transactions.

At trial, in Abakhan & Associates Inc. v. Braydon Investments, 2008 BCSC 1547, Mr. Justice Kelleher found that Mr. Botham had not acted dishonestly. But the court held that the transfer of assets was a fraudulent conveyance and was of no effect against the trustee in bankruptcy.

Braydon Investments Ltd. appealed to the British Columbia Court of Appeal. The reasons for judgment are at 2009 BCCA 521.

Chief Justice Finch upheld Mr. Justice Kelleher's decision and dismissed the appeal. He held that it was sufficient if one of the reasons for the transactions were to delay or hinder creditors, including future creditors. The court found that the words “by collusion, guile, malice or fraud” in the Fraudulent Conveyance Act were meaningless. They were likely a holdover from when the Act had penal sanctions. These sanctions were held to be unconstitutional and have been repealed.

Although Mr. Botham could have incorporated a new company to carry out the joint venture car leasing business--in which case the assets of Botham Holdings Ltd. would have been insulated from creditors of the car leasing business—having chosen to use Botham Holdings Ltd. because of some tax advantages, he could not then transfer the assets to delay or hinder creditors.

The result is that the assets Botham Holdings Ltd. transferred to Braydon Investments Ltd. will be available to satisfy the claims of Botham Holdings Ltd.’s creditors.

My Last Wills and Estates Presentation of 2009

I am pleased to be a guest speaker at an estate planning seminar hosted by Shannon Jones, Wealth Advisor, of ScotiaMcLeod in Kelowna, on Monday November 30, 2009 from 5:00 pm to 6:30 pm.

We’ll discuss 3 key strategies that will put your mind at ease:
► Using trusts to lower taxes and protect your beneficiaries
► Minimizing administration costs to leave more in your estate
► Making sure your Executor knows what they are getting into.

The focus of my talk will be on using testamentary trusts both for asset protection for beneficiaries and for tax planning for beneficiaries.

Anyone who is interested in attending may RSVP by November 27, 2008, Shannon Jones at 250.868.5535 or 1.800.663.2609, or by email to shannon_jones@scotiamcleod.com.

Gould v. Royal Trust Corp. of Canada

One of the factors the Supreme Court of British Columbia may consider in a claim by a child to vary her parent's will is whether the parent has made other provision for her during the parent’s life.

In a recent case, Gould v. Royal Trust Corp. of Canada, 2009 BCSC 1528, Mr. Justice Pearlman refused to vary Silvia Gould’s will even though she made little provision in her will for her daughter, Barbara Gould.

In her will, Silvia Gould left some silver, jewelry, paintings and personal effects to her daughter, but left the residue of her estate, worth a net amount of approximately $900,000, to her three sons. She provided her reasons for not leaving anything in her will to her daughter. She and her daughter were at the time she made the will, joint tenants on a recreational property in Ontario. Barbara Gould would receive the property by right-of-survivorship on Silvia Gould’s death. Silvia Gould wrote in her will that Barbara Gould would receive a roughly equal inheritance to each of her brothers.

Before Silvia Gould died she had transferred her interest in the vacation property to her daughter as a gift. At trial the property was worth $210,000 according to an appraisal.

Mr. Justice Pearlman held that Silvia Gould’s reasons for leaving the residue of her estate to her three sons—that her daughter would receive the vacation property—were rational and valid. In light of the gift of the vacation property to her daughter, Silvia Gould’s dispositions in her will “falls within the range of acceptable dispositions made by a judicious parent in the fulfillment of her moral obligation to the plaintiff as one of the four adult children.” Mr. Justice Pearlman then wrote: “Because I am satisfied that the testatrix [Silvia Gould] made just, adequate and equitable provision for the plaintiff and met her moral claim, the testamentary autonomy of the testatrix is entitled to deference.”

Barbara Gould was, however, entitled to an award of $75,000 for her expenses and the care she provided her mother during the last few years of her mother’s life. Mr. Justice Pearlman awarded the $75,000 for unjust enrichment.

Silvia Gould’s three sons opposed the claim for unjust enrichment in part because Barbara Gould had removed their mother from British Columbia to Guatemala at a time when their mother had dementia, and did not have capacity to consent. She did so without telling her brothers, and despite the fact that her mother had made one of her brothers her representative under a representation agreement.

Although Mr. Justice Pearlman was critical of Barbara Gould’s conduct, he found that she did spend funds on her mother, and took good care of her. She had a reasonable expectation that her mother’s resources would be used for her expenses. Her mother would have had to incur similar expenses if she had remained in British Columbia.

Accordingly Mr. Justice Pearlman found that Barbara Gould had met the criteria for proving unjust enrichment.

[Since I wrote this post, the British Columbia Court of Appeal dismissed Barbara Gould's appeal. See my update here.]

The Prescribed Affidavit of Executor in B.C. is Outdated

In British Columbia, one of the forms required in an application for probate of a will, or letters of administration, is an affidavit of executor, with a schedule of the deceased’s assets, liabilities and distribution. This schedule is often referred to as the “disclosure document.”

The form of affidavit required is set out as Form 69, in Appendix A, of the Supreme Court Rules.

The disclosure document requires the executor to state whether an asset is “within” or “without” British Columbia. This is not always as straightforward as it may seem. It is pretty easy to tell if certain kinds of assets such as land are within British Columbia. But it is much more complex to determine if other kinds of assets, such as financial investments, are within British Columbia.

You can distinguish between physical assets, or “tangible assets,” such as cars and tables, from “intangible assets,” such as bank accounts, shares in corporations, and mutual funds. If the deceased owned mutual funds that are made up of securities of companies located all over the world, where are the funds located?

In law, how do you determine whether intangible assets are within or without British Columbia? This question was answered in respect of securities by Mr. Justice Ehrck, in Re: The Estate of Bessie Bloom, 2004 BCSC 70. The securities are situated in the place where “the financial investment intermediary on whose books the interest of the deceased is recorded and where her personal representative must go to effect the transmission.”

To set out whether an intangible asset is within or without British Columbia, the executor will often have to make inquiries of financial institutions to determine where the deceased’s interest is recorded.

What is the point of requiring an executor to say whether an intangible asset is within or without British Columbia? None.

The Probate Fee Act used to provide that British Columbia probate fees were calculated on assets situated in British Columbia (but not on the value of assets situated outside of British Columbia). Accordingly, it made sense to require executors to disclose whether an assets was within or without of B.C. so that the probate fees would be calculated only on assets within British Columbia.

But the effect of the decision in Re: Bloom was to significantly reduce the probate fees the government collected. Many British Columbians hold investments through financial institutions that keep their books recording the interests of their customers in Toronto or other cities outside of British Columbia.

So the Provincial Government amended the wording of the Probate Fee Act so that probate fees were payable in respect of all “intangible personal property of the deceased, wherever situated,” if the deceased was ordinarily resident in British Columbia immediately before death. This was done by amending the definition of “value of the estate” in section 1. (The constitutionality of taxing assets outside of British Columbia is open to doubt, but it has not as yet been challenged.)

Accordingly, now that the probate fees apply to intangible assets of British Columbia residents, irrespective of the location of those assets, there is no point in making the executor find out and disclose whether those assets are within or without B.C.

But in its haste to protect its tax base, the British Columbia did not amend the prescribed form of the disclosure document so that it is in keeping with the information required to calculate the probate fees. I note that new Supreme Court Civil Rules that will come into affect on July 1, 2010, keep the outdated form of disclosure document (Appendix A, Form 91). In fairness, the reform of the Supreme Court Rules was directed toward law suits, rather than estates. The British Columbia Law Institute has a Probate Rules Revision Project. I hope it will look at this issue.

The probate forms could be amended to require the applicant to state whether to the best of his or her knowledge the deceased was “ordinarily resident” in British Columbia immediately before death. The disclosure document would then deal with intangible assets separate from tangible assets. The applicant would disclose whether each of the tangible assets is within or without B.C., but would not be required to state the location of intangible assets.

San Francisco Hall of Justice

I took these photographs of the Hall of Justice in San Francisco during my summer trip with my sons. In addition to housing court rooms, a jail and police station, the Hall of Justice has appeared in my favourite movies.

Continuing Legal Education: Wills, Estates and Trusts Conference

I am going to be speaking on the topic of secret trusts on Friday, November 27, 2009, on the second day of the Continuing Legal Education, British Columbia, Wills, Estates and Trusts Conference.

The conference starts at 9:30 am on Thursday, November 26, 2009. The first day covers estate planning and administration. Registration information for Thursday is available here.

The second day is on estate litigation, and runs from 8:30 am to 3:30 pm. You can find out about registration here.

Those who cannot attend in person, can participate on line. There will also be video repeats throughout B.C.

Both courses will be held at the Pan Pacific Hotel in downtown Vancouver.

Legislation Will Clarify Test for Capacity to Make a Power of Attorney in B.C.

I wrote a post in December 2005 on the test for capacity to make a power of attorney in British Columbia. The case law is not clear on whether a person must be able to understand the extent of his or her property to meet the legal tests for capacity.

The Adult Guardianship and Planning Statutes Amendment Act, 2007, which was passed by the Legislative Assembly, but is not yet in force, will help clarify the tests for capacity to make a power of attorney in British Columbia.

Section 12 provides as follows:

12 (1) An adult may make an enduring power of attorney unless the adult is incapable of understanding the nature and consequences of the proposed enduring
power of attorney.

(2) An adult is incapable of understanding the nature and consequences of the proposed enduring power of attorney if the adult cannot understand all of the following:

(a) the property the adult has and its approximate value;

(b) the obligations the adult owes to his or her dependants;

(c) that the adult's attorney will be able to do on the adult's behalf anything in respect of the adult's financial affairs that the adult could do if capable, except make a will, subject to the conditions and restrictions set out in the enduring power of attorney;

(d) that, unless the attorney manages the adult's business and property prudently, their value may decline;

(e) that the attorney might misuse the attorney's authority;

(f) that the adult may, if capable, revoke the enduring power of attorney;

(g) any other prescribed matter.

Although this legislation is not in effect as of the date of this post, these criteria are useful guidelines to consider when assessing whether someone does have the capacity to make a power of attorney.

Speaking Engagement on Monday, November 9.

I am going to be speaking on Monday, November 9th, 7-8:30 PM at the Rotary Centre for the Arts as part of a series on "Securing Your Financial Future," presented by the MacBeth Group, Financial Strategies Inc. The Rotary Centre for the Arts is located at 421 Cawston Avenue, Kelowna, BC, Canada.

I will be speaking about Estate Planning and Wills.

Brad MacBeth will also be speaking. His topic is "Securing Tax Efficient Retirement Income."

The discussion starts at 7:00 PM, and is held in the Pacific Safety Products Boardroom, upstairs in the Rotary Centre for the Arts.

You can RSVP by contacting Brad MacBeth at info@macbethgroup.com .

Is the Executor Required to Probate the Will Before Suing on Behalf of an Estate?

The answer in British Columbia appears to be not necessarily. But if someone challenges the validity of the will appointing the executor, the court may require that the executor prove the will before the executor can proceed with the lawsuit.

The British Columbia Court of Appeal recently considered this issue in Romans Estate v. Tassone, 2009 BCCA 421. Before he died, Andries Rudolph Romans transferred his house (subject to his right to live in it for ten years) to Angelo Tassone. He transferred the house in December, 2002. He later signed a will dated November 5, 2004, in which he named Carole Cardinal as his executor and left his estate to her.

After Mr. Romans' death, Ms. Cardinal filed a suit on behalf of his estate against Mr. Tassone claiming that Mr. Romans did not have the legal capacity to give the house to Mr. Tassone, and that Mr. Tassone exercised undue influence over Mr. Romans. She also sued the lawyer who acted for Mr. Romans in the transaction, alleging that he was negligent.

Ms. Cardinal asked for the conveyance file from the lawyer, who refused on the grounds that it was subject to solicitor and client privilege. Both Mr. Tassone and the lawyer also challenged Ms. Cardinal’s right to sue on behalf of the estate, arguing that the will appointing her was invalid.

In the Supreme Court of British Columbia (at 2009 BCSC 194), Mr. Justice Savage granted an order staying Ms. Cardinal’s suit against Mr. Tassone and the lawyer until she proved the will in solemn form. In other words, she would have to establish in a trial that the will is valid before proceeding in the claim against Mr. Tassone and the lawyer. Unless the will is valid, she would not have the right to sue on behalf of Mr. Romans’ estate.
Mr. Justice Savage wrote at paragraph 40,

[40] The authorities in my view make several matters clear: (1) an action can be commenced without obtaining probate, as an executor’s authority is based on the
will, (2) before proceeding with an action already commenced, the parties to an action may require that the Plaintiff prove their authority by producing letters probate, (3) the court may require that a Plaintiff prove their authority, by producing letters probate, of its own motion, when appropriate and (4) the court may order a stay of proceedings any time after the commencement of an action where it is in the interests of justice to do so, pending the issuance of letters probate.

After hearing Ms. Cardinal’s appeal, the Court of Appeal upheld Mr. Justice Savage’s order.

On the issue of whether an executor may start a suit without probate, Mr. Justice Low wrote at paragraph 17:

[17] The law seems to be clear that an executor can bring an action in his or her capacity as executor before probate is granted but cannot obtain judgment in the action without probate having been granted: see Chetdy v. Chetdy, [1916] 1 A.C. 603 (P.C.), cited by Allen J. in Harshenin v. Bayoff, [1991] B.C.J. No. 3161 (S.C.).

The Court of Appeal also upheld Mr. Justice Savage’s ruling that the lawyer’s conveyance file is subject to solicitor and client privilege. But if Ms. Cardinal is successful in proving the will, she will be entitled to waive the privilege on behalf of the estate. This is because as executor she would have the authority Mr. Romans had while he was alive.