Fraudulent conveyances in family law

BY: VALERIE DYE 

Quite often one spouse may choose to transfer his or her property to children in an effort to defeat or avoid an equalization claim by the other spouse after the death of the transferring spouse. This will ensure that the children of the deceased spouse obtain full interest in the property without being subjected to an equalization claim by the surviving spouse.

The 2001 case of Stone v Stone provides an example of such a transfer. Both Mr. and Mrs. Stone had children before their marriage to each other. Although they were married for 24 years Mrs. Stone had no property in her name, as Mr. Stone did not want any property to pass to her children after their death. When Mr. Stone found out that he had lung cancer and had weeks to live he transferred the matrimonial home and all other assets to his children, leaving nothing in his estate when he died. His reason for doing this was to prevent Mrs. Stone from being able to apply for equalization of his net family. There being no assets meant that there would be nothing to equalize.

After Mr. Stone’s death, Mrs. Stone successfully brought an action against Mr. Stone’s estate under the Fraudulent Conveyances Act, to set aside the transfer on the basis that it was a fraudulent transfer. Section 2 of the Fraudulent Conveyances Act (the ‘Act’) provides that:

Every conveyance of real property or personal property…… made with intent to defeat, hinder, delay or defraud creditors or others of their just and lawful actions, suits, debts, accounts, damages, penalties or forfeitures, are void as against such persons and their assigns.

On behalf of Mr. Stone’s estate, it was argued that Mrs. Stone was not a creditor as described in section 2 of the Act. The Court of Appeal determined that since the transfer was done without her knowledge she did not have the opportunity to bring an action to stop the transfer. If she had been made aware of the transfer she could have brought an action under section 5(3) of the Family Law Act (FLA). That section states that where there is a serious danger that one spouse may deplete his or her net family property, the other spouse may bring an application to have the difference between the net family properties divided just as if the spouses were separated. If Mrs. Stone had brought such an action she would have been a creditor.  As such the court found that she was a creditor and could, therefore, have the transfer set aside. Once the transfer was set aside the property would revert back to the estate and Mrs. Stone could pursue her claim for equalization.

It should be noted that by transferring the matrimonial home to his children Mr. Stone breached section 21(1) of the Family Law Act. Under that provision, no spouse should dispose of or encumber the matrimonial home without the other spouse’s consent. Apart from seeking a remedy under the Fraudulent Conveyance Act, Mrs. Stone had the option of proceeding under section 21(2) of the Family Law Act which states that:

If a spouse disposes of or encumbers an interest in a matrimonial home in contravention of subsection (1), the transaction may be set aside … unless the person holding the interest or encumbrance at the time of the application acquired it for value, in good faith, and without notice, … that the property was a matrimonial home.

This simply means that despite the ability to set aside a transfer this will not take place if the property was acquired by an innocent purchaser for value.