Under the Wills Variation Act (WVA), a spouse or child of a deceased person who has left a will can petition the court to vary the terms of the will in their favour on the basis that the testator has not made adequate provision for their proper maintenance and support.
The WVA represents a significant encroachment on testamentary autonomy – the right to determine the distribution of one’s estate in accordance with one’s own wishes. It also creates a great deal of uncertainty, as it is difficult to predict whether any potential claimant will actually bring a WVA claim against the estate and, if so, what degree of success they might have in court or on the settlement of the claim. Accordingly, individuals who foresee potential WVA claims usually wish to take any available steps to reduce that uncertainty.
Because the only remedy available under the WVA involves the court ordering a change to the terms of the will, planning to avoid these claims almost always involves reducing the estate that passes under the will. Gifting property during one’s lifetime, transfers into joint tenancy, making insurance and retirement plan designations, and settling property onto trusts created during one’s lifetime are all common ways to decrease the estate that is governed by the will. The WVA contains no specific anti-avoidance rules addressing such transfers and, accordingly, transfers made to avoid WVA claims are generally effective in achieving that purpose, except where they are voided as fraudulent conveyances.
What is a fraudulent conveyance?
The Fraudulent Conveyance Act (FCA) deems a disposition of property to be void and of no effect if it was “made to delay, hinder or defraud creditors and others of their just and lawful remedies”, unless the disposition was for good consideration to a third party who had no notice or knowledge of the fraud.
The wording of the FCA also appears to require a dishonest intention on the part of the transferor if a transaction is to be voided by the Act. However, the recent decision of the Court of Appeal in Abakhan & Associates v. Braydon Investments Ltd., 2009 BCCA 521 seems to have removed that additional requirement. The case involved a businessman, Mr. Botham, who, upon causing a company of his to enter into a new business partnership, transferred out of the company certain non-related assets. The admitted purpose of the transfers was to place the assets out of the reach of the creditors of the partnership, but all parties agreed that in doing so, Mr. Botham had no fraudulent or other dishonest intent. The Court of Appeal held that although the transfers were made honestly, without moral blameworthiness, and for other legitimate business purposes, they were still caught by the FCA. The Braydon decision makes it clear that the FCA can have the effect of voiding conveyances that involve no fraudulent intent.
The pre-existing claim principle
The BC Supreme Court in the case of Hossay v. Newman (1998), 22 E.T.R. (2d) 150, considered the question of whether the provisions of the FCA apply to dispositions made by a person during his lifetime which may have the effect of defeating or hindering claims that may be made against his estate pursuant to the WVA.
In coming to its decision, the court laid down the pre-existing claim principle: a WVA claimant has standing to invoke the FCA only if he had a legal or equitable claim which predated the testator’s death. Mr. Justice Mackenzie enunciated this principle as follows:
In my view, s. 1 of the Fraudulent Conveyance Act in using the term “creditors and others” contemplates a situation where the person claiming, if not a creditor, at least has some legal or equitable claim against the debtor during the debtor’s lifetime. I cannot interpret s. 1 as extending to claims that arise solely on the death of the debtor/testator.
The pre-existing claim principle articulated in Hossay has been upheld in a number of subsequent cases, a number of which will be discussed later in this article.
In summary then, the law in BC is that if you transfer property to avoid potential claims that may be made under the WVA after your death, the disappointed beneficiaries will not have standing to challenge the transfers as being fraudulent conveyances solely because of their claim under the WVA. However, if they have some legal or equitable claim against you during your lifetime, any transfer of property you make for the purpose of circumventing their claims may be voidable as a fraudulent conveyance.
Unfortunately, although Hossay seems to set down a clear rule, it leaves some tough questions about how it might be applied. Although a full review of the case law is beyond the scope of this article, the following sections of this article offer some general comments with respect to the application of the pre-existing claim principle in various circumstances.
Unjust enrichment claims
A spouse (married or common law) or child may be able to establish a pre-existing claim of constructive trust in respect of the deceased’s assets, based on unjust enrichment (see our article in the July edition of Your Estate Matters on Unjust Enrichment and Estate Claims). A claim of unjust enrichment requires demonstrating that there was an enrichment to one party, a corresponding deprivation of the other, and that there was no juristic reason for the enrichment. Where unjust enrichment is claimed, the remedy usually sought is a declaration that the property in question is held on a constructive trust for the plaintiff.
Mawdsley v. Meshen, 2010 BCSC 1099 and Chowdhury v. Argenti Estate, 2007 BCSC 1207, both represent unsuccessful attempts to use an unjust enrichment/constructive trust claim as the basis to bring a claim against a common law spouse under the FCA.
Antrobus v. Antrobus, 2009 BCSC 1341 is an example of a successful claim of unjust enrichment/constructive trust and fraudulent conveyance brought by a child against her parents. The plaintiff was able to demonstrate that over a period of approximately 30 years she contributed a considerable amount of labour to her parents, disproportionate to that of her siblings. After a falling out with the plaintiff, the parents conveyed the property to the plaintiff’s siblings in joint tenancy with themselves, to her exclusion. The plaintiff was successful in voiding the transfers and obtaining damages equal to approximately one-quarter of the value of the property in question.
The unjust enrichment cases raise questions about the relevance of the Hossay principle in this context, however. If the plaintiff succeeds in maintaining a claim of constructive trust in respect of a property based on unjust enrichment, and in voiding a transfer as a fraudulent conveyance, in most cases it would not seem necessary to also bring an action to vary the will as the plaintiff would already have been awarded an interest in the property in question.
Spousal claims to family property
Under the Family Relations Act (FRA), a married spouse is entitled to an interest in all “family assets” upon the occurrence of one of certain triggering events which include the making of a separation agreement or a divorce. Common law spouses do not have the same rights to division of family property under the FRA on the breakdown of a relationship, unless they have specifically agreed to such rights.
In the case of Jack v. Parkinson (1994), 91 BCLR (2d) 96 (BC SC), Mr. Jack died in 1988, having been separated from Mrs. Jack since 1986. Mr. Jack had filed a petition for divorce in 1986, and Mrs. Jack had filed a counter-petition claiming maintenance and an order for division of family assets. However, the parties had taken no further steps to finalize the divorce. Shortly before his death, Mr. Jack severed joint tenancy on the house owned by both of them, and transferred his half-interest to the woman he had been living with since the separation. The court held that Mrs. Jack had standing under the FCA as a “creditor or others”, although in the end it held that Mr. Jack had not made the conveyance with the intention to delay, hinder or defraud her.
Mr. Justice Mackenzie in Hossay referred to the Jack case and in particular, that Mrs. Jack “because of the divorce proceedings and her claim to family assets” had a claim against Mr. Jack’s assets during his lifetime.
However, the courts have not clearly stated whether an uncrystallized potential claim to family assets or to support during the lifetime of a spouse constitute a sufficient pre-existing claim to establish standing under the FCA after the spouse’s death.
A married spouse may have a claim for spousal support under the FRA or the Divorce Act. Common law spouses may have obligations to provide support and maintenance to one another depending on the circumstances listed in section 89 of the FRA. Under section 88 of the FRA, each parent is responsible for and liable for the support and maintenance of a minor child.
However, all of these support obligations remains uncrystallized until a court order is made for support or a binding support agreement is entered into.
The case law does not clearly establish whether a potential claim for support against a spouse, common law spouse, or parent during that person’s lifetime would be sufficient to establish standing to bring a claim under the FCA after his or her death in respect of a transfer of property made prior to death. A crystallized support obligation may be a sufficient pre-existing claim on which to base such an action, even though under our current law the support obligation itself will generally cease on death unless the court order or agreement provides otherwise.
Adult dependent children
In many cases an adult child will not be able to establish pre-existing equitable or legal claims against a deceased parent, so that they will be precluded from bringing an FCA claim to bring assets back into the parent’s estate. In Hossay, for example, the plaintiff Mr. Hossay was the adult son of the testator, who had conveyed most of his assets into joint tenancy during his lifetime. Mr. Hossay had no claim against the testator apart from his claim under the WVA, and therefore was unsuccessful in overturning the transfers under the FCA.
Similarly, in the case of Mordo v. Nitting, 2006 BCSC 1761, the deceased Mrs. Mordo used transfers into joint tenancy, gifts of property during her lifetime, and the settlement of property upon an inter vivos trust, all for the express purpose of ensuring her son would not receive a share in those assets upon her death. Relying on Hossay, the court stated in no uncertain terms that the son had no standing to challenge the transactions.