Thursday, September 22, 2011

Easingwood v. Cockroft (Part 2)

In Part 1 of my posts on Easingwood v. Cockroft, 2011 BCSC 1154, I wrote that Madam Justice Dillon held that Reginald Henry Easingwood’s children validly settled a trust into which they transferred most of his wealth using their enduring power of attorney, while he was incapable of managing his affairs. After his death, Henry Easingwood’s widow, Kathleen Easingwood, challenged the trust and the transfer, but the Court held that they had the authority under the enduring power of attorney to settle the trust, and they had not misused it in doing so. You may read a summary of the facts in Part 1.

In this Part, I will discuss the second ground on which Mrs. Easingwood challenged the trust. She argued that the transfer was a fraudulent conveyance.

Under British Columbia’s Fraudulent Conveyance Act, if someone transfers assets “to delay, hinder or defraud creditors and others of their just and lawful remedies,” the creditor is entitled to have the transfer set aside. In a simple example, someone is sued, and they transfer their house to a family member or friend so that if they lose the lawsuit, their creditor cannot have the house sold to satisfy the court judgment. That is an example of a fraudulent conveyance, and that transfer is liable to be set aside by the court if the creditor asks the court to do so.

Mrs. Easingwood was making a claim under the Wills Variation Act to vary her late husband’s will. But the Wills Variation Act only gives the court the power to vary a will, and would not give the court any power to vary the provisions of the trust settled for Mr. Easingwood by his children during his lifetime. For this reason, it would be to her advantage if the trust and transfer of assets to it were set aside.

In previous court cases, claims to set aside a transfer as a fraudulent conveyance by someone who is making a claim under the Wills Variation Act have not been successful. A couple of these cases have been claims by children, who have asked the court to set aside transfers made by a parent as part of an estate plan that disinherited the child. The Supreme Court of British Columbia has said that if a child did not have any legal claim against the parent before the parent died, the child was not a “creditor or other,” and could not have the transfer set aside. (I wrote about a previous case, Mordo v. Nitting, 2006 BCSC 1761, in which a child unsuccessfully tried to have a transfer by his parent to a trust to avoid his future Wills Variation Act claim here.)

But, Mrs. Easingwood argued that when her husband’s children settled the trust, she did have a potential legal claim under the Family Relations Act. If there had been a breakdown of their marriage, Mrs. Easingwood could have claimed an interest in her husband’s assets under that Act. Accordingly, her argument went, she was a “creditor or other,” and the transfer should be set aside on the basis that it was intended to put the assets out of her reach.

Madam Justice Dillon rejected Mrs. Easingwood argument that she was “a creditor or other.” She wrote:

[51] In my view, in order to qualify as a potential claimant so to be a creditor or other within the meaning of the FCA [Fraudulent Conveyance Act], a spouse must either have begun an action under the FRA [Family Relations Act] or there must be an evidential basis to reasonably conclude that the claimant has a potential right or claim to have asserted entitlement to family assets on marriage breakup under s. 56 of the FRA. The plaintiff does not qualify under any of these criteria. Kay and Reg were happily married at all material times and there was no likelihood that the marriage was about to break up in November 2008. There were no irreconcilable differences between them, no periods of separation, or indicators of strife except for the stress of Reg’s illness. Kay always knew the terms of Reg’s will and the Trust does not depart from those terms. Kay had never said that the provision for her under the will was inadequate or indicated that she would contest it. She was never involved in decisions about Reg’s business or investments as she had recognized Reg’s desire for Hank and Lauren to manage his affairs in June 2007. She could have had access to the information in Reg’s accounts at the bank and she participated in discussions at the bank where it was clear that she was neither the decision-maker nor the beneficiary. There is no reality to a claim under the FRA when there is no evidence as to the value of any of either Reg's or Kay’s assets at the time of the marriage and no description of Kay’s present needs, notwithstanding the presumption in s. 60 and the provisions of s. 65 of the FRA. The marriage agreement which, I find, was applied by both Reg and Kay, kept Reg’s business and other assets that were transferred to the Trust as separate property of Reg. Kay kept her own property to herself. It is not sufficient for Kay to now maintain that she is a creditor or other because she might have brought a claim under the FRA if she and Reg had separated.

Madam Justice Dillon also rejected Mrs. Easingwood’s argument that she would have had a legal claim in unjust enrichment.

Even if Mrs. Easingwood were a “creditor or other,” Madam Justice Dillon found that Mr. Easingwood’s children settled and transferred the assets into the trust for the legitimate reason of ensuring continued management of Mr. Easingwood’s affairs if his son, Hank Easingwood, died before him. The trust was consistent with Mr. Easingwood’s will, and it was not set up to put the assets out of Mrs. Easingwood’s reach.

This case may narrow the circumstances in which a spouse may successfully have a transfer made by his or her deceased spouse set aside as a fraudulent conveyance on the grounds that the transfer would defeat a claim under the Family Relations Act. It suggests that the surviving spouse’s claim must be more than theoretical. There must be an air of reality to the Family Relations Act claim, such as a breakdown of the marriage, or the likelihood that the surviving spouse would have been successful in making a Family Relations Act claim. But I don’t read this case as precluding a surviving spouse from successfully set aside a transfer, and then pursuing the claim under the Wills Variation Act, in different circumstances than those found by Madam Justice Dillon in Easingwood v. Cockroft.

No comments: