In upholding Madam Justice Ballance’s decision at trial, which is reported at 2010 BCSC 1099, the Court of Appeal made two rulings that are likely to have a significant impact on estate planning. First, the Court of Appeal held that the fact that a transfer of assets may have the effect of defeating a claim does not require the court to find that the person making the transfer intended to do so. For a transaction to be a fraudulent conveyance, the transferor must have the intent to delay, hinder or defraud someone. Secondly, the Court of Appeal upheld a number of Supreme Court of British Columbia decisions that a person who does not have a claim during his or her parent or spouse’s lifetime, and whose only claim arises on the death of the parent or spouse under the Wills Variation Act, is not a “creditor or other” with standing to challenge a transfer by their parent or spouse.
Joan Meshen had considerable wealth, much of which she accumulated together with, or received from, her late second husband, who died in 1983. Her assets included real estate properties in Greater Vancouver, and shares in three companies. She had three children, Shirley Meshen and Harry Meshen from her first marriage and Michael Meshen from her second marriage.
In February, 2006, Ms. Meshen was diagnosed with cancer.
After her diagnosis, she made a new will, transferred property to her children, and transferred a $3,250,000 investment account and the shares of her three companies into an alter ego trust. The trust provided that during her lifetime she would receive all of the income from the trust assets. On her death the beneficiaries of the trust were her three children, and her second husband’s brother, Bill Meshen, who had been active in the family business. She died shortly thereafter.
Ms. Meshen made no provision for her common-law spouse of 18 years, Dennis Mawdsley, either in her will, or by a transfer of property before her death.
Mr. Mawdsley brought a Wills Variation Act claim. The Wills Variation Act provides that a spouse or child may apply to court to vary the will if the will-maker did not make adequate provision for the claimant. The court may then vary the will to make such provision as the court decides is “adequate, just and equitable in the circumstances.” The Wills Variation Act allows the court to vary the will, but does not give the court the power to vary a trust settled during the will-maker’s lifetime. Because the Wills Variation Act only applies to assets that fall into the estate, there would be little for Mr. Mawdsley to claim unless he were successful in challenging the transfers Ms. Meshen made before her death, including the tansfer of assets to the trust.
In dismissing Mr. Mawdsley's claim that the transfer of assets into the trust was a fraudulent conveyance at trial, Madam Justice Ballance found that Joan Meshen was not motivated by an intention to defeat any claim by Mr. Mawdsley in setting up the trust. Although her lawyer had told her that Mr. Mawdsley had a potential Wills Variation Act claim, Ms. Meshen dismissed the idea that her common law husband would make such a claim. She said that she and Mr. Mawdsley had an agreement that each would keep her or his property. Madam Justice Ballance found that they did have an agreement that apart from sharing some expenses, they would keep their property separate, and each was free to deal with her or his own property.
Furthermore, Mr. Mawdsley had been in on meetings with Joan Meshen’s estate-planning advisers as far back as 2000 in which she had discussions about transferring assets into a trust to benefit her children and Bill Meshen. He knew that she did not intend to leave him anything, and he did not object during her lifetime.
One of the arguments that Mr. Mawdsley made on appeal was that if the effect of the transfer was to remove assets from her estate, then as a matter of law, she must have intended to delay, hinder or defraud him. Madam Justice Newbury rejected this argument. Although the person challenging a transaction as a fraudulent conveyance only needs to show that one of the purposes of the transaction is to delay or hinder creditors, and in some cases the court may infer from the effect of the transfer that the transferor intended to delay or hinder creditors, the court may consider evidence that the transferor had no such intent. Madam Justice Newbury wrote at paragraph 71,
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 [Fraudulent Conveyance Act] 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 transactionIn this case, the Court of Appeal upheld the trial judge’s finding that Ms. Meshen did not intend to hinder Mr. Mawdsley.
The second-- and from an estate-planning perspective the most significant holding-- is that Mr. Mawdsley was not a “creditor or other” within the meaning of the Fraudulent Conveyance Act.
At trial, Madam Justice Ballance found that during Ms. Meshen’s lifetime, Mr. Mawdsley did not have any legal claim to her assets. Because they were not married, he had no claim under the Family Relations Act, and the court found that he had not made sufficient contributions to the family business or to Ms. Meshen to be entitled to make a claim in unjust enrichment. His only claim was a Wills Variation Act claim, which only arose on Ms. Meshen’s death. In fact he was successful in varying the will.
In a few cases brought by children challenging transfers of assets made by their parents under the Fraudulent Conveyance Act in order to have the assets brought into the estate so that they would be subject to Wills Variation Act claims, the Supreme Court of British Columbia has held that the children did not have grounds to apply under the Fraudulent Conveyance Act, a potential Wills Variation Act claim being an insufficient basis to give the child standing as a “creditor or other” to set aside the transactions. These cases include Hossay v. Newman (1998), 22 E.T.R. (2d) 150 (B.C.S.C.) and Mordo v. Nitting, 2006 BCSC 1761.
Estate planners have relied on these cases in setting up estate plans for parents concerned that their adult children will try to upset their estate plans by bringing Wills Variation Act claims. A parent can transfer assets into a trust during the parent’s lifetime to provide for the parent’s spouse, to provide more for some children than others, or to provide for charity. Because the Wills Variation Act does not apply to a trust settled during the parent’s lifetime, a disappointed adult child will not able to use the Wills Variation Act to gain assets that were transferred to the trust. This was done in Mordo by a mother who wished to leave her wealth to her daughter to the exclusion of her estranged son.
In Mawdsley v. Meshen, the Court of Appeal has now upheld these earlier Supreme Court of British Columbia decisions, including Hossay and Mordo.
Madam Justice Newbury considered the implications of Mr. Mawdsley’s argument that Ms. Meshen had a moral obligation to him pursuant to the Wills Variation Act that crystallized at her death, and on the basis of which he argued he should have standing as a “creditor or other” to challenge the transfer of assets into the trust as a fraudulent conveyance:
 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.Although Mawdsley lends support for using trusts to avoid Wills Variation Act claims, it is important to note that a key to this decision was the initial finding at trial that Ms. Meshen did not have any legal obligations to Mr. Mawdsley during her lifetime. In other cases, transactions may still be set aside under the Fraudulent Conveyance Act by claimants under the Wills Variation Act if those claimants can show that the transaction was intended to defeat a legal obligation that the will-maker had to them during the will-maker’s lifetime. For example, if the person making a transfer does so with the intent to delay or hinder the legal claims of his married spouse under the Family Relations Act, or claims of a common law spouse or child in unjust enrichment, then the transfer to a trust is liable to be set aside as a fraudulent conveyance if the spouse or child had a valid legal claim.