Fraudulent Conveyances and Estate Litigation

Stone v. Stone – 18 years later

It has been 18 years since the Court of Appeal for Ontario decided Stone v. Stone.¹ In this case the Court characterized inter vivos gifts from a father to his adult children as a fraudulent conveyance because the gifts were intended to thwart a spouse’s entitlement under the Family Law Act.² Let’s see how courts have applied this seminal case.

While a foundational premise of Estate law in Ontario is that each one of us has testamentary freedom to do what we want with our assets upon death,³ the courts rely on legal mechanisms like constructive trusts to protect disinherited spouses. Similarly, the legislature has passed laws that provide spouses with the right not to take under a will and elect to take a division of net family property. As well, the legislature has provided dependants, like children, spouses and common law spouses, with rights to receive support if the deceased failed to make proper provision for their adequate support in the will.⁴ Arguably, Stone v. Stone just applied a framework that was already in place. But let’s consider the facts of that case:

Mr. Stone and his first wife had two children. He divorced his first wife and stayed married to the second Mrs. Stone until his death 24 years later.  It was a second marriage for Mrs. Stone as well and she also had children from her first marriage. When Mr. Stone learned that he was terminally ill he did not want his assets to go to his then wife or her children. To achieve this, he transferred all of his property to the children of his first marriage so that upon his demise there would be nothing left in his estate.  His wife commenced a claim for equalization under section 7 of the Family Law Act and argued that the inter vivos gifts to his children were void because they were fraudulent conveyances.

At issue was whether Mrs. Stone was a “creditor or other”, which would provide her with the status to challenge the inter vivos transfers as fraudulent conveyances.

The Court of Appeal analysis started with s. 2 of the Fraudulent Conveyances Act R.S.O. 1990, c. F.29, which provides:

Every conveyance of real property or personal property and every bond, suit, judgment and execution heretofore or hereafter 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.

The evidence was clear that Mr. Stone wanted to thwart his wife’s rights under the Family Law Act because he wanted his money to go to his children. But, for those gifts to be set aside the Court had to find that the wife was a “creditor or other“.  As the court notes in paragraph 25 of its decision, for the wife to fall under the definition of creditor or other she had to have had:

“… an existing claim against her husband at the time of the impugned conveyances, that is a right which she could have asserted in an action (emphasis added)

The Court of Appeal acknowledged that the spouses each owned their separate property throughout the marriage. For the impugned conveyance to be fraudulent it had to take place on the occurrence of a “triggering event” under s. 5 of the Family Law Act.⁵ Trigger events occur if there is a permanent separation, if a spouse dies, or if there is a danger that one spouse would improvidently deplete his/her net family property.

Until Mr. Stone died, the couple was still cohabiting. As such, in order for Mrs. Stone to be a creditor, Mr. Stone would have to be guilty of improvidently depleting his estate and Mrs. Stone would have had to exercise her rights under section 5(3) to stop her husband if she had known what he was doing.  In paragraphs 30 – 33 of the decision, the Court of Appeal explained:

Because Mr. Stone’s death was known by all to be imminent, Mrs. Stone’s claim to a right to equalization was also imminent and would have been triggered by his death.⁶

The Court spent a lot of time dealing with s. 5(3) which provides:

When spouses are cohabiting, if there is a serious danger that one spouse may improvidently deplete his or her net family property, the other spouse may on an application under section 7 have the difference between the net family properties divided as if the spouses were separated and there were no reasonable prospect that they would resume cohabitation.

In the Annotation found in the reported case, they share the following observation:

…under s. 2 of the Fraudulent Conveyances Act and concluded that “others” included anyone who had a claim for unliquidated damages against the transferor at the time of the impugned transactions. The simple question was whether the wife had a claim against the husband at the time of the transfers that was compromised by the transfers.  At the time of the transfers, the husband knew that the wife would survive him, that the value of her assets was less than the value of his, and that she would not accept her legacy under his will. However, until the occurrence of a “triggering event” under s. 5 of the Family Law Act, the wife had no right to claim an equalization entitlement. ……Since the parties were cohabiting at the time of the transfers, the wife’s only hope was to establish a case under s. 5(3) Family Law Act (improvident depletion)….since he kept everything a secret, he deprived her of this opportunity…  the wife could have applied under s. 5(3) of the Family Law Act to stop the husband if she had known what he was doing. ….

At para. 30, Feldman J.A. stated: “One of the effects of s. 5(3) of the Act is to provide a remedy to a spouse in those circumstances where the other spouse seeks to divest himself or herself of his or her property in anticipation of death in order to defeat the spouse’s claim to equalization”. The Court of Appeal appears to be saying that by concealing his plan, Mr. Stone disentitled Mrs. Stone from exercising her rights under s. 5(3) and in these circumstances the conveyance was fraudulent.

In an article concerning this issue, Robert Klotz suggested that the whole standing issue is a red herring. In the June 2005 National Creditor/Debtor Review, Volume 20, No 2, Mr. Klotz stated:

The issue of standing is somewhat of a red herring, because a well-accepted line of authority establishes that even a transaction that is made at a time when the transferor has no creditors at all, may be set aside if the intention was to defeat foreseeable future creditors. This line of cases has not yet been considered in connection with a challenge to a prenuptial transaction intended to protect the future husband from the future wife’s equalization claims.⁷

In the past 18 years since Stone v. Stone, it has been judicially considered at least 42 times. For the most part, Stone v. Stone has been followed. Where courts have come to a different result it usually revolves around different facts specific to the particular case being litigated.

In Vhora v. Vhora, ⁸ the Ontario Superior Court of Justice distinguished Stone v. Stone on its facts.  As stated in paragraph 94:

This situation is distinguishable from the facts in Stone v. Stone, 2001 CanLII 24110, (2001), 55 O.R. (3d) 491 (Ont. C.A.). In that case, the deceased and his children knew that his death was near and he transferred certain assets to his children as inter vivos gifts with the intention of depleting his estate and defeating his wife’s claims under either his will or the Family Law Act. In that case, the deceased knew his death would trigger an equalization claim by his wife; in the present case, Mr. Vhora had no idea that there was the possibility of such a claim when the note was signed in 2007.

In Reisman v, Reisman,⁹ the Court of Appeal for Ontario also distinguished Stone v. Stone. In that case, the husband and wife were married for 20 years. They separated in 2006. One of the issues at trial was that in 1998 the husband’s father effected an estate freeze reducing the size of the husband’s assets. The wife claimed that his was a fraudulent conveyance. In paragraphs 59- 61 the Court of Appeal explained:

59      In Stone, Feldman J.A. extensively canvassed the meaning of “creditor” and of “creditors or others” under s. 2 of the Fraudulent Conveyances Act. She rejected the proposition that spouses are in a “constant debtor-creditor relationship”. Instead, she held that the debtor-creditor relationship between married spouses arises only when one spouse has the right to claim an equalization payment from the other; in other words, a debtor-creditor relationship arises when one of the events triggering an equalization claim under the Family Law Act occurs: for example, on death, on divorce or separation with no real prospect of the resumption of cohabitation. Unquestionably, in 1998, Linda was not a creditor of Howard. Back then she had no entitlement to an equalization payment.

60      Feldman J.A. also considered the long line of decisions interpreting “creditors or others”. She noted that “others” includes persons who, though not judgment creditors at the time of the challenged conveyance, nonetheless have a claim for unliquidated damages. Feldman J.A. concluded, at para. 25, that in the family law context: In order for a spouse to qualify as a person who is intended to be protected from conveyances of property made with intent to defeat her interest, she must have had an existing claim against her husband at the time of the impugned conveyance that is a right which she could have asserted in an action.

61      Linda testified that she did not know about the reorganization and the estate freeze when it took place. However, her lack of knowledge does not help her. The claim Linda asserts is a claim to an equalization payment. But she had no claim for equalization in 1998. She does not claim, for example, that she would have even contemplated separation had she known about the estate freeze. Thus, she was not an “other” person with standing to assert a claim under s. 2 of the Fraudulent Conveyances Act.

In Robins v. Robins Estate,¹⁰ a couple were in a relationship for three years and then decided to get married. Two days before the marriage, Mr. Robins implemented a share sale agreement which would provide him with an income and primarily benefit his son from a former marriage. As a result, the bulk of the wealth in the husband’s estate was transferred out prior to the marriage, but during the time the couple lived together.

Mrs. Robins argued that at the time the impugned transaction took place the deceased was obliged to support her pursuant to s. 30 of the Family Law Act. She argued that Stone v. Stone stood for the proposition that an inter vivos transfer intending to defeat a spouse’s entitlement to support made her a creditor within the meaning of the Fraudulent Conveyances Act and the transfer was a fraudulent conveyance.  The Ontario Superior Court of Justice disagreed and distinguished the Stone decision for the following reasons:

1. In Stone v. Stone it was an issue of equalization of property with the analysis centering in s.5(3) and s.7 of the Family Law Act. This case was for support centering on s. 30 and s. 40.
2. In Stone the issue was the conveyance of property accumulated during a 24 year marriage.  In this case the assets in the sale of shares were owned by the husband well before the cohabitation.
3. At best Mrs. Robins could argue the sale of shares, at the time it took place, was intended to avoid support obligations. But Stone dealt with the transfer of assets that impacted upon the spouse’s rights to a division of net family property under the Family Law Act.¹¹

Conclusion

Our review of the secondary sources and case law over the last 18 years suggests that Stone v. Stone remains good law. What is also clear is that some courts have clarified the instances when inter vivos transfers are characterized as fraudulent.  In summary:

1. An inter vivos transfer or gift is not considered to be fraudulent when
   1. at the time the gift was made the spouse making the gift did not know of the other spouse’s claim; or
   2. it takes place with the knowledge of the spouse and there is sufficient time for that spouse to exercise his/her rights under section 5(3) of the Family Law Act;
2. Depending on the facts, an inter vivos transaction that takes place prior to a marriage may not be characterized as fraudulent because at that point the spouse’s entitlement to a division of net family property does not yet exist;
3. It is the marriage that, pursuant to the Family Law Act, entitles spouses to a division of net family property. Common law spouses’ statutory entitlement to support stems from the Family Law Act or Succession Law Reform Act. We have found no case that suggests that a common law spouse’s efforts to thwart the other spouse’s entitlement to support by making inter vivos transfers of property constitute a fraudulent conveyance.  The Robinson v. Robinson case suggests the opposite.¹²