Hiding Assets in Divorce Proceeding Backfires

To some extent, the court process depends on the integrity of the people involved, including the parties to a lawsuit, as well as their lawyers. Of course, some people do lie. The process allows for pre-trial document disclosure and examinations under oath. At a trial, there are usually several witnesses, and lawyers have the opportunity to question opposing parties as well as all of the witnesses. After a full trial, the judge then weighs the evidence, considering such things as the internal consistency of a witness’s own evidence, as well as each witness’s evidence when weighed against the evidence of others.  Finally, is the evidence overall believable, or, to use the language of the courts, does it meet the preponderance of probabilities? My sense is that judges do quite a good job in weeding out fabrications, but they cannot see into the hearts and minds of those who appear before them.

The majority of the cases settle before trial, without the benefit of a judge assessing credibility. It must be tempting for some in a bitter dispute to lie, or in the case of a divorce, to hide assets. Doing so may backfire.

In divorce proceedings, Rosa Donna Este was required to disclose her assets to her former husband. She disclosed some, but apparently not all. She and her former husband settled the proceedings; their assets were divided in accordance with a consent order, and the Court granted the divorce.

Subsequently, after a falling out with her mother, Mina Esteghamat-Ardakan, and her brother, Francis Amir Este, Ms. Este sued them alleging that they held millions of dollars worth of assets in trust for her. She alleged that they held the assets belonging to her to avoid creditors, and in particular, the claim by her former husband.

According to Ms. Este’s own allegations, in her Further Amended Notice of Civil Claim,

11C.    From approximately 1990 to late 2014, the Plaintiff, Mina and Francis regularly engaged in discussions and planning regarding the manner in which properties that they owned or proposed to acquire should be held, including the name or names in which title should be held and trust arrangements or other agreements amongst themselves that should be made related to them. The primary objectives which the Plaintiff, Mina and Francis sought to advance through those discussions and planning measures included maximizing the extent to which the capital gains exemption available for gains realized on the sale properties claimed as their principal residences could be claimed, and protecting those properties from potential claims that their present or potential future spouses, romantic partners or creditors might make against them.

Her claim set out that,

(a)    From approximately late-May of 2013 through to October of 2013, Mina, with Francis’ participation and assistance, counseled and encouraged the Plaintiff to propound a false and concocted story, devised by Mina, that Mina was the true owner of assets that were then owned by the Plaintiff in defending a family law action that the Plaintiff’s (then) husband had commenced against her in May of 2013 (“Family Law Action”).

Other particulars of her claim include signing “fake back-dated trust declarations,” adding her mother as an account holder, and then deleting her own name, and giving false evidence.   

After four weeks of trial, Ms. Este’s mother and brother brought an application to dismiss her claim on the basis that there was no evidence to support her claim, and that her claims were an abuse of the court’s process.

Mr. Justice Funt, in Este v. Esteghamat-Ardakani, 2017 BCSC 878, set out the main issue before him:

[1]             Is it an abuse of process for a plaintiff to claim ownership of Blackacre that the defendant claims to own when that plaintiff, in recent divorce proceedings, swore falsely and pleaded not to own Blackacre, thereby deceiving then spouse, counsel, and the Court? Does it matter that the defendant knew of the deception and participated by preparing false documents? These questions are at issue before the Court.

[2]             It is an abuse of process for a plaintiff to ask the Court to perfect a fraud designed to cheat financially one’s spouse in divorce proceedings. An exception does not exist where the defendant knew of and participated in the deception, even where the defendant will enjoy a windfall.

[3]             The foregoing rule protects the administration of justice from being brought into disrepute. The Court will not help to perfect a fraud.

[4]             In the case at bar, the foregoing rule is engaged. The trial of the action is underway with the plaintiff having closed her case in which she seeks to have her claim to ownership in significant funds and various real estate properties recognized (and a particular mortgage declared invalid). Before proceeding further, the defendants seek to have the plaintiff’s claim dismissed as an abuse of process. They say that the plaintiff’s case is not one that a court would put to a jury.

Mr. Justice Funt, in dismissing Ms. Este’s claim, held that her conduct engaged three aspects of abuse of process: illegality, the pursuit of inconsistent rights, and bringing the administration of justice into disrepute.

It is illegal to transfer assets to defeat, delay or defraud creditors. Mr. Justice Funt noted that had Ms. Este sued her mother and brother for the assets before her divorce, she would not have been precluded from pursuing her claim. But in this case, she was relying on evidence of her own illegal conduct, and was accordingly precluded from recovery of the assets.

Secondly, Ms. Este was assertion of rights was inconsistent with her assertions in her divorce proceedings that she did not own the assets she was seeking to recover from her mother and brother. Mr. Justice Funt wrote at paragraph 33,

A litigant cannot use the Court’s process to state one set of rights in a proceeding and then in a subsequent proceeding assert rights inconsistent with the rights first stated. Otherwise, uncertainty would result and many paths for mischief would be introduced into our law for the avaricious, the malicious, and the vexatious. The litigant must elect at the outset which set of rights the litigant wishes the Court to recognize.

Thirdly, allowing Ms. Este to recover the assets in this context would tend to impair the integrity of, and public confidence in, the administration of justice.

The Court will not assist fraud. Mr. Justice Funt wrote,

[76]         In sum, in the divorce proceedings, the plaintiff chose to take steps to defeat her then husband’s legal rights by representing falsely, including in Court documents and under oath, the properties and funds she now claims she rightfully owns. She now wishes to perfect her fraud in the divorce proceedings — a fraud designed to cheat financially her then husband engaging the past unwitting help of officers and a judge of the Court.

[77]         Bluntly stated, the plaintiff now asks the Court to help her with her illegal artifice because her mother and brother no longer will. Such, the Court will not do.

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.

Transfers Between Spouses to Avoid Debts: Royal Bank v. Clarke

Sometimes a business person will attempt to insulate the main family assets from business risks. For example, the family home might be held in only the businessperson’s spouse’s name. The theory is that if the business goes under, the creditors will not be able to have the home sold to pay the business debts.

In British Columbia, there are legitimate ways of protecting your assets and ways that are not. The line between what you can legally do and what you cannot is not always clear.

In Royal Bank of Canada v. Clarke, 2009 BCSC 481, a married couple, Mr. and Mrs. Clarke owned a house together. In 2003, when they bought the land on which they built their house, they talked about buying the land in Mrs. Clarke’s name only to insulate it from Mr. Clarke’s business. But they decided to register the land in both names.

In 2004, Mr. Clarke’s business borrowed funds from the Royal Bank. He personally guaranteed the loan.

In 2008, Mr. Clarke transferred his interest in the family home to Mrs. Clarke gratuitously. At the time the business debt was over $146,000, but was in good standing.

After the transfer of the house, no further payments were made on the business loan, which went into default.

The Royal Bank sued Mr. and Mrs. Clarke seeking to set aside the transfer of Mr. Clarke’s interest in the house to Mrs. Clarke. If the Royal Bank were successful, it could then register any judgment against Mr. Clarke pursuant to his guarantee against the house, and then apply to sell the house to apply Mr. Clarke’s share of the sale proceeds to the business debt.

The Royal Bank relied on section 1, of the Fraudulent Conveyance Act, R.S.B.C. 1996, c. 163, which says (in not-so-plain language):

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. and Mrs. Clarke acknowledged that Mr. Clarke transferred the property to insulate the house from his business. But he acted honestly, and was not acting “by collusion, guile, malice or fraud.” He had never identified the family house as a source of security for the business loan.

Madam Justice Griffin held that it was not necessary for the Royal Bank to show that Mr. Clarke had acted dishonestly. Fraud, as that term is used in the Fraudulent Conveyance Act, does not require criminal fraud. It is sufficient if the transfer was done for the purpose of hindering a creditor. She relied on an earlier decision of the Supreme Court of British Columbia, Abakhan & Associates Inc. v. Braydon Investments Ltd., 2008 BCSC 1547.

The Court ordered that the transfer of Mr. Clarke’s interest to Mrs. Clarke be set aside. Mr. Clarke’s interest in the house will be available to satisfy his guarantee to the Royal Bank.

What if Mr. and Mrs. Clarke had purchased the land in Mrs. Clarke’s name alone, before Mr. Clarke’s business incurred the debt?

According to Madam Justice Griffin at paragraph 13,

Couples commonly arrange their affairs so that family assets are not at risk of business creditors. As fairly conceded by counsel for RBC, there would have been no problem for the Clarkes had they purchased the property in Mrs. Clarke’s name alone for the reason of trying to keep their residence out of reach of Mr. Clarke’s creditors. The problem is, having purchased the property in their names jointly, the subsequent transfer of Mr. Clarke’s interest was a “disposition”, thereby engaging the Fraudulent Conveyance Act.

The Charitable Purposes Preservation Act

The Charitable Purposes Preservation Act, S.B.C. 2004, c. 59, came into force on March 8, 2007.

This purpose of this British Columbia legislation is to protect assets donated to a charity for a specific purpose from the claims of the charity's creditors. To protect the assets, the charity must adminster the donated assets for the donor's purpose, and keep the assets separate from the charity's other assets.

The impetus for this law arises from the decision of Ontario of Appeal in Christian Brothers of Ireland in Canada, (2000), 184 D.L.R. (4th) 445. The court held that all of the assets of the Christian Brothers of Ireland in Canada were available to satisfy judgments for the victims of sexual assault in a Newfoundland orphanage. This decision had the effect of making the assets of two schools in British Columbia beneficially owned by the Christian Brothers of Ireland in Canada available to those who had successfully sued the Christian Brothers for the assaults.

This case raises interesting policy questions. On the one hand, the decision helps innocent victims of sexual assault get compensated for their injuries. On the other hand, the decision does not respect the intentions of people who donanted to the charity for the specific purpose of assisting schools in Vancouver that had nothing to do with the sexual assaults.

The British Columbia Legislative Assembly has come down on the side of donors who contribute to a charity for a specific purpose.

The Charitable Purposes Preservation Act expressly provides that it "does not affect the settlement by the provisional liquidator of The Christian Brothers of Ireland in Canada with respect to Vancouver College Limited and St. Thomas More Collegiate Ltd."

Doyle, Asset Protection

I do not think of myself as an asset protection lawyer. But, after reading Kelly R. Doyle, Asset Protection, LexisNexis Canada Inc., 2005, available here, I realize that as an estate planning lawyer, I deal with asset protection on several levels.

I have often suggested to clients who have concerns about the stability of their children’s marriages, or businesses, that they consider setting up trusts for their children instead of leaving outright gifts in their wills. I help plan for the possibility that my clients will lose their capacity to look after themselves. I also give advice to clients about minimizing their risks of successful lawsuits against them, or against their estates.

In his book, Kelly Doyle deals with professional responsibility issues, risk management analysis, and substantive areas of law including taxation, offshore trusts, family law, insolvency, and estate planning.

I find the ethical issues he raises most challenging. We are not allowed to transfer assets with the intent to “delay, hinder or defraud creditors.” There are civil and criminal consequences. Where is the line between legitimate estate planning and asset protection on the one hand, and fraud on the other? He does not offer a bright line test—and I doubt that there is one. He does say that lawyers have to ask the right questions.

For example, he says that in context of advising on the transfer of assets as part of an estate plan, the lawyer needs to ensure that:

…transfers are not being made with the intent to delay, hinder or defraud creditors. If the settlor [the person transferring the assets] does not volunteer the reason for the transfer, it should be requested. If the lawyer is dubious as to the reasons for the transfer which are offered by the settlor, the financial circumstances of the settlor at the time of the proposed disposition should be considered. If the settlor is insolvent or is in questionable financial circumstances, the provisions of provincial fraudulent conveyance and preference legislation, the Bankruptcy an Insolvency Act and the Criminal Code should be summarized for the settlor so that he or she is well aware of those provisions. If the lawyer believes that the disposition is being made to avoid creditors, he or she must refuse to act...

You do not need to be a lawyer to read this book, which I think should also be of interest to accountants, risk managers and financial planners.

Mr. Doyle is a lawyer in Vancouver, British Columbia. For more information about Kelly Doyle, and his firm Doyle Professional Law Corporation, their website is here.

Canadian Bar Association Submits Brief on Protecting RRSPs from Creditor Remedies

The Canadian Bar Association British Columbia Branch has submitted a brief to the Minster of Finance advocating legislation exempting Registered Retirement Savings Plans from creditor remedies. The brief has a summary of arguments in favour of exempting Registered Retirement Savings Plans at page 9 as follows:

There are many practical reasons to enact the Registered Plan (Retirement Income) Exemption Act. First, Canadian law encourages retirement savings and the Registered Plan (Retirement Income) Exemption Act promotes and protects this worthy policy goal. Second, the data on retirement savings show that Registered Plans are essential for a healthy and adequate standard of living for British Columbians in retirement. Third, the data show that Registered Plans need to be protected from creditors to maintain this healthy and adequate standard of living. Fourth, the current law inflicts an unfairness on holders of Registered Plans and simple justice requires this unfairness to end now. Fifth, self-employed British Columbians need the protection from enforcement against Registered Plans. Sixth, the Registered Plan (Retirement Income) Exemption Act would yield many benefits, including injecting needed certainty into the law, harmonizing British Columbia law with federal law and encouraging growth in the British Columbia economy. In all, the benefits by enacting the Registered Plan (Retirement Income) Exemption Act would make British Columbia a leader across Canada.

Currently, British Columbia law affords creditor protection for Registered Pension Plans, and some life insurance products, while other Registered Plans are not afforded similar protection during the lifetime of the owner.

The brief is available here.

Estate Planning to Protect Your Child's Inheritance from a Failed Marriage

In British Columbia, the Family Relations Act, RSBC 1996, c. 128, governs how assets are divided on a marriage breakdown. If an asset is owned by one spouse, and is used for a family purpose, that asset may be taken into account by the court when the family assets are divided between the husband and wife on the breakdown of the marriage. Even if one spouse inherited the asset, if it is used for a family purpose, the other spouse may have an interest in the asset on the breakdown of the marriage.

This is not to say that the spouse who inherited the asset will always be required to share the inheritance equally: the courts may take the fact that it was inherited by one spouse, and apportion the value of the inheritance unequally in favor of the inheriting spouse.

What can you do if you are planning on leaving a large amount of your wealth in your will to a child whose marriage you believe is at risk of breaking down?

Instead of leaving your child his or her inheritance outright in your will, you could put some or all of the inheritance into a trust. A trust involves having one or more persons, called trustees, hold the assets for the benefit of others, called the beneficiaries. The trust could either be set up during your lifetime with funds that you will not require, or in your will. You would appoint one or more trustees to hold the assets for the life of your child. The trust would have several beneficiaries, including your child. You might want to include your child’s own children and grandchildren. The trustee would have complete discretion to make distributions to or for the benefit of your child out of the trust assets. This is called a discretionary trust.

The advantage of a discretionary trust is that your child does not own the trust assets. Arguably, only those distributions that the trustee has made to the child before the breakdown of the marriage are family assets subject to the claims of the child’s spouse. Although, the child’s interest in the trust could be a family asset, the value of the child’s interest in the trust is small, because the child cannot force the trustee to make any further distributions to the child. If on a marriage breakdown the court ordered that future distributions to the child must be shared with the spouse, the trustee could decline to make any further payments.

If the discretionary trust is set up in your will rather than leaving the inheritance to your child outright, there may also be some tax advantages to your child by having the trust’s income taxed separately in the trust.

There are trade offs. Your child might prefer to have his or her inheritance outright to use as he or she wishes, and may resent the fact that you set up a trust instead. If the trust is set up in your will, the child could even apply to court to vary the will to get his or her share outright. Accordingly, it is recommended that if you are planning to set up a trust for your child, you discuss this with your child first.

There will be additional costs to have a proper trust drawn up. There will also be the costs of administering the trust, including trustee fees and accounting fees. It probably is not worthwhile to set up a trust with a very modest inheritance.