Ch7 Public Policy Flashcards
Public policy generally
Last requirement for the creation of an express trust is that the trust is unenforceable if it is contrary to public policy
(1)Public policy may be expressed in statutory form -unenforceable ex. Avoiding creditors
(2)Courts may find a purpose to be contrary to public policy, often it is expressed as imposing an unacceptable cost or consequence on other persons. Example: perpetuities, restraints on alienation, discriminator conditions, conditions that interfere w charge of parental duties
Public policy shifts over time but courts tend to respond slowly… Stare decisis
Be able to provide an example of a trust likely to be found void or unenforceable on the basis that it is for an illegal purpose.
Trusts that are set up for fraudulent or illegal purposes are invalid.
Example: a trust that putts assets in the hands of trustees, usually for the benefit of family members, to make the assets unavailable to creditors.
Trusts for non-charitable purposes, other than the narrow set of non-charitable purpose trusts that are considered valid, shall be declared to be made for “illegal purposes”
Discuss the potential consequences of finding that the trust is for an illegal purpose + Skill Objective: Apply the cases discussed below to a particular fact situation.
It it fails due to illegality, the normal result is that the trust is unenforceable. Trustee cant be forced to account and may end up keeping the transferred property (as opposed to void, where trust prop goes back)
Void = effect as if never happened, leaves intended trustee holding property that belongs to purported settlor in circumstances where settlor never meant it ot be a gift - consequence is resulting trust so property goes back to purported settlor
Unenforceable = trust is valid, exists, but court will not enforce it. Person you gave it to keeps it rather than it coming back to you. Beneficiaries cant enforce so no action for acct of secret profits or damages for breach of contract
Unenforceability and Return of Trust Property
Symes v Hughes
S coneys to M to avoid creditor. S pays off creditor, asks property back. M conveys to someone else in exchange for room and board. M dies. S insolvent w new creditors and arrangement with creditors is that he seek to have house returned to him
The settlor was allowed to get the trust property back where the illegal purpose of the trust was not carried out. The mere intention to effect an illegal object when the assignment was executed does not deprive the assignor of this right to recover the property from the assignee, where no consideration was given for it.
Re Great Berlin Steamboat Company
Facts: company wanted to sell company shares to Bank A. Mr. Bowden transfers funds to company bank account in Bank B resolution of company board that funds to be held in account on trust for one month, purpose was to make company financial situation look good if Bank A, in considering buying company shares, looked to see what was in company bank account at Bank B, but Bank A made no inquiry and did not buy company shares. funds nonetheless left in the account for company purposes. later when co. wound up Bowden sought to have the funds returned arguing the fraudulent purpose never carried into effect
Held: Where the illegal purpose was said to have been carried out and the settlor was not allowed to get the property back even though others may not have been harmed by the illegal purpose. The difference was that in this case the fraud was achieved and so the property could not result.
Unenforceable but not void
Early english position: person w fraud intent could get back if fraud not carried into effect. Court would order resulting trust and prop could be returned. (symes and steamboat)
Arguably gives person w fraud intent a downside risk protection since if fraud succeeds the transferor benefits but if not they get it back.
Other view: court shouldnt order return even if fraud not carried out - doing so allows person w fraud intent to benefit if achieved but avoid if not, encouraging fraud.
Cda Position: not clear. Both views supported.
In Canada the view that the court should refuse to order a resulting trust that allows a settlor to have property returned from a prior transfer that was intended to perpetrate a fraud regardless of whether the intended fraud was achieved. This was adopted in Scheuerman. SCC has not taken up this issue and so there is a lack of clear direction on this topic.
Scheuerman v Scheuerman (1916)
⅗ judges say cant get back even if no fraud effected, but arguably this is obiter since no proof of fraud effected.
Krys v Krys (1929)
Property conveyed by dad to son top avoid creditors that might arise. No creditors are ever prejudiced. Father wants returned. Held he could since no creditors prejudiced (takes symes road - can return if fraud not received)
Goodfriend v Goodfriend (1972)
Wife persuades husband to transfer property to her to avoid future creditors. None ever prejudiced. Husband wants property back. Held that settlor can get back if fraud not effected. Wife cant rely on presumption of advancement where she misled husband to believe transfer was necessary to avoid creditors so husband didnt have to introduce evidence of illegal intent to establish a resulting trust.
Like normally husband would have to say this isnt a gift it was an illegal trust. But here since it was wife defrauding then she cant rely on the presumption and husband doesnt need to say that was his intent.
More recent English Cases: more in line with scheuerman minority that said an intent isnt enough, must carry out purpose
Tinsley v Milligan (1993)
2 women shared funds to buy house understood to be joint owned. Registered in plf name reducing dfd assets to allow her to get social assistance. Dfd later repends and discloses fraud to social agency. Later women have falling out, Plf evicts dfd. Dfd claims resulting trust. Held: dfd wins, because it is a resulting trust (not presumption of advancement) so she did not need to prove the trust by showing fraudulent intent.
Gillen: Can get property back as long as not having to introduce fraud intent? Why is it different for presumption of advancement vs presumption of resulting trust? Not logical policy
Tribe v Tribe (1995)
Father avoiding creditor by advancing to son, son refused to return shares, presumption of advancement so father had to prove trust by showing no gift intended and that required showing fraudulent intent to avoid creditor.
Thus fraud intent could be presented as long as fraudulent purpose had not been carried out.
FORFEIT: It is also possible that the consequence of an illegal purpose is that the property involved is forfeit. Property may be confiscated where it is the proceeds of crime. Example: funds settled on trust may also be forfeit where the trust is being used for money laundering or to finance terrorism.
S462.3 to 462.5 of CC → applies to designated crimes (any indictable offense) and property is forfeit, trust no longer operates and does not go back to settlor. applies to acts outside of Canada.
Proceeds of Crime (Money Layndering) and Terrorist Financing Act
S3 - record keeping required of financial institutions and of some professions that might be used for money laundering or financing of terrorist activities (listed in s5)
S7 - reporting of suspicious transactions and currency or monetary transactions cross border over $10,000
S6.1 - must report identity of persons/entities
if transaction connected to money laundering or terrorism then funds subject to forfeiture
list of organizations presumed to support terrorism – money held for them subject to forfeiture
s5 Proceeds of Crime (Money Layndering) and Terrorist Financing Act
- professions that might be used for money laundering or financing of terrorist activities
(i) domestic banks; (ii) foreign banks authorized to operate in Canada; (iii) cooperative credit societies; (iv) savings and credit unions; (v) caisses populaire; (vi) life insurance companies; (vii) trust companies; (viii) securities dealers; (ix) portfolio managers;(x) foreign exchange dealers; (xi) casinos; (xii) accountants; (xiii) real estate brokers; and (xiv) the employees of such persons
Provide an outline of the possible outcomes where a condition or determinable interest in a trust is contrary to public policy.
Effect of Illegal Purpose in a Determinable Interest
● Determinable interest contrary to public policy - If words of limitation indicate an illegal purpose then the interest that is being granted is not a valid interest and the gift fails
● Conditions precedent contrary to public policy
○ Real property - gift fails
○ Personal property
■ Malum in se (void) - gift fails
■ Malum Prohibitum (forbidden by law/statute/regulation) - gift operates free of the condition
● Condition subsequent contrary to public policy - condition is struck out, operates free of condition (same for both real and personal property)
1) Condition Precedent
● Must be fulfilled before gift can occur
● What if it is contrary to public policy>
○ If there is a gift of real property → the gift is void, presumably because the settlor did not intend to make the gift if the condition could not be fulfilled.
○ If the property is personal property → renders the gift void only if the condition is malum in se (bad/void in and of itself). If the condition is merely malum prohibitum (forbidden by law), the gift operates free of the condition.
2) Condition Subsequent (defeasible interest)
● Gift effective but divested if condition fulfilled
● A condition subsequent contrary to public policy results in the condition being struck out and the gift operates without the condition. This is the case for both real and personal property.
● Condition sub vs words of limitation: WOL limit length of gift ex “as long as”. Whereas condition subsequent uses words like “but if” or “if it happens that”, which defeats the interest given.
3) Conditions Impossible of Performance
● A gift of personal property subject to a condition precedent that could not possibly be fulfilled at the date the gift was made will be free of the condition (i.e., presumption that had donor known condition impossible of performance then would have made gift without the condition) – if for real property, gift is void
● If the settlor clearly intended the condition should operate (it was possible at date of gift) and it became impossible of being fulfilled at a date after the trust was created for reasons beyond the control of the settlor then the gift fails (whether real or peronal property)… . interpretation is that settlor intended gift not to operate if it later became impossible for the condition to be fulfilled
4) Uncertain Conditions
● Conditions that are uncertain are void.
● If a condition precedent is void for uncertainty the gift fails. Presumably the idea is that the settlor would not have made the gift without the condition that has been found to be uncertain.
● If the condition is a condition subsequent and it fails for uncertainty, the gift is an absolute gift not subject to that condition
● Three questions need to be asked (1) is the condition impossible to perform? (2) is the condition a condition precedent or a condition subsequent and (3) is the condition uncertain
5) Conditions Contrary to Public Policy
● Courts have, however, generally been slow to add to or reduce the scope of matters that are contrary to public policy, often leaving the decision on such matters to the legislature.
(ii) Identify situations in which courts have historically found a condition or determinable interest in a trust contrary to public policy.
6 ways: Restraint of marriage Interference w marital relationships Discharge of parental duties Discriminatory conditions Adherence to religion Restraint on alienation or interference with enjoyment of property
Restraint of Marriage
● Conditions have been held to be void if their purpose is to impose lifetime celibacy. In the past these conditions took the form of a restraint of marriage.
● Words might have been interpreted as a condition subsequent indicating that marriage would bring an end to the gift.
● e.g., Re McBain (1915), 8 O.W.N. 330 [gifts to daughters but gifts over if they were to marry – held to be condition subsequent but not contrary to public policy since just to provide for daughters until married]
● e.g., Re Cutter (1916), 37 O.L.R. 42, 31 D.L.R. 382 (Ont. C.A.) [gift to testator’s sister for life but gift over if she remarries held to be condition subsequent that was contrary to public policy (restraint on marriage) so condition struck and gift took effect without condition]
Interference with Marital Relationships
● A condition which encourages the separation of married couples or discourages separated couples from getting back together
● e.g., Re Hurshman (1956), 6 D.L.R. (2d) 615 (B.C.S.C.) [gift of personal property to daughter on condition that she not be married to a Jewish person – daughter already married to a Jewish person – condition void (contrary to public policy) - gift took effect without the condition]
● e.g., Re Nurse (1921), 20 O.W.N. 248 [fund to daughter but if she in any way support or aid her husband or permit him to reside with her then fund to accumulate – daughter separated at the time – condition subsequent held void (contrary to public policy) so gift takes effect without the condition]
● e.g., Re Blanchard (sub nom Eastern Trust Co. v. McTague) (1963), 39 D.L.R. (2d) 743 (P.E.I. C.A.) [gift of real property to housekeeper if she is still living away from her husband and gift of personal property divested if she returns to her husband – court of appeal holds both are conditions subsequent and contrary to public policy so gifts took effect without the conditions]
○ She was still living away at time, so interpd as con sub. Ie “dont go back or ill divest you of gift”
Interference with Discharge of Parental Duties
● Example: a gift to a minor subject to forfeiture of the gift if the child resides with his or her parents is contrary to public policy.
● e.g., Clarke v. Darraugh (1884), 5 O.R. 140 [gift to minor but would be divested if child lived with father at any time before age of majority – held to be void condition subsequent (contrary to public policy) – gift took effect without the condition]
● e.g., Re Thorne (1922), 22 O.W.N. 28 [gift to minor who was living with her uncle – divested if she went to live with her mother – held to be void condition subsequent so gift took effect without the condition]
Discriminatory Conditions
● Example: Re Drummond contrary to public policy where there was a condition prohibiting the sale of the property to Jewish persons.
● Christie v. York Corp., [1940] S.C.R. 139 [refusal to serve coloured persons held not to be contrary to public policy]
● BUT Noble v. Alley, [1949] O.R. 503 (Ont. C.A.) [covenant in deed prohibits sale to “any person of the Jewish, Hebrew, Semitic, Negro or coloured race” not contrary to public policy and public policy in Canada not to be determined by international conventions, etc. until made part of the law of Canada]
● HOWEVER Leonard Foundation case (Canada Trust Company v. Ontario (Human Rights Commission) (1990), 69 D.L.R. (4th) 321 (Ont. C.A.) [trust contrary to public policy (with reference to international conventions but also reflected in Canada in Charter and Ontario Human Rights Code) where it allowed scholarships only to white Anglo-Saxon protestant students and restricted scholarships to female students]
○ Note that court says not all discriminatory conditions are contrary to public policy if ameliorating effects of historical discrim
Restraints on Alienation or Interference with Enjoyment of Property
● Question of degree of restraint
● Example: restriction on the sale of property to a person outside of the family is likely to be considered an invalid restraint on alienation
Adherence to Particular Religion
● Conditions that require a person to adhere to a particular religion have not been considered contrary to public policy but have often been struck down on the basis that they were uncertain.
● then 1990 Leonard Foundation condition of non-Catholic Christian persons struck down (but condition also had non-white and restriction on number of women) and in Murley Estate (Nfld. 1995) held condition that person be in “mainstream Christian Churches” held contrary to public policy
● later Re Ramsden (PEI 1996) scholarship to Protestant students held not contrary to public policy distinguishing Leonard Foundation as “based on blatant religious supremacy and racism” and University of Victoria Foundation (BC 2000) scholarship to Roman Catholic students held not contrary to public policy distinguishing Leonard Foundation condition as “clearly offensive”
(i) The basic common law rule against remoteness of vesting.
● The main rule is often referred to as the remoteness of vesting rule, but it is sometimes also referred to as the “modern rule” ○ “an interest is valid if it must vest, if it is going to vest at all, within a period calculated by taking the lives in being, at the date the instrument takes effect, plus 21 years” ○ puts a constraint on the period of time by limiting the time to lives in being plus twenty-one years ● the modern rule applies to contingent interests. It does not apply to vested interests. ○ Contingent interest - something that may or may not happen has to happen before the interest arises (ex kid must be born/ reach certain age before can have a future interest) ○ A contingent interest must vest within the perpetuity period or it will be invalid ■ If there is an interest that may or may not arise depending on whether a particular event occurs, the event must occur within the perpetuity period. If the possibility exists of vesting outside the period, then it is invalid. ■ not enough that contingency might, or even probably, or almost certainly, will be determined within the perpetuity period – it must be determined within the perpetuity period (any possibility that it will best outside the perpetuity period then invalid) [e.g., Lucas v. Hamm 364 P.2d 685 (Cal. S.C. 1961)] ■ Where there is a class of beneficiaries, the size of their relative interests must be known within the perpetuity period, if it is possible that the trustee could exercise the discretion outside the perpetuity period then the gift is void. Robinson v. Adair (2004), 8 E.T.R. (3d) 307 (Sask. Q.B.)] ■ If the interest of any member of a class could vest outside the perpetuity period then the whole gift will be void (subject to class closing rule) ● An interest does not have to vest in the perpetuity period. It simply has to be clear that it will or will not vest within the perpetuity period ○ e.g., inter vivos gift “to my first grandchild to marry within 21 years of my death” valid even though it might happen that donor had no grandchildren at 21 years after his death or that no grandchild had married since then no one would take (i.e., it would be known that the interest would not vest) ● Lives in being: one looks to the individuals that have some connection to the grant being made. ○ e.g., settlor and living beneficiaries of an inter vivos trust or living beneficiaries of a testamentary trust at the time the trust takes effect ○ may include lives implicitly referred to – e.g., “to all my grandchildren who turn 21” implicitly includes the children ○ can specifically refer to persons other than settlor and beneficiaries – e.g., Royal lives clause – but reference must be clear – uncertainty or administratively unworkability then not valid ○ Royal lives clause - after death of last lineal descent of queen elizabeth II or queen vicoria → questions about validity for uncertainty. Queen victoria not valid for testators dying after 1943.
Steps to Applying the Modern Rule
- Is the interest contingent?
a. If any of those gifts are contingent on something, there is a potential application of the remoteness of vesting rule - What are the relevant lives in being referred to in the instrument?
a. This may be explicitly or implicitly - Is there a possibility that an interest will vest outside the perpetuity period?
- Aso check whitby v mitchell
- If the property is located in a wait and see legislation reform jurisdiction, how do the leg modifications affect the application of the CL rule?
(ii) Describe the rule against perpetual duration.
● Where there are no lives against which to measure the perpetuity period, the period is 21 years. This is commonly the case for the limited types of valid non-charitable purpose trusts – if the purpose trust is valid it can operate for 21 years then property must vest
Describe (iii) The rule in Whitby v. Mitchell.
● Invalidates a gift of a life interest to an unborn person w a remainder to the issue of the unborn person with the life interest.
● Issue with this rule is that gifts that would not be invalid under the remoteness of vesting rule might nonetheless be invalid under the Whitby v Mitchell rule.
○ EXAMPLE of Sara’s gift to Bertha etc. – invalid under “old rule” since life interest to Bertha (who is alive) but then life interest to Bertha’s yet unborn daughter followed by remainder to first-born daughter of Bertha’s as yet unborn daughter – also invalid under “modern rule”
○ EXAMPLE of Dave and Mary to Ted in trust for as yet unborn daughter for life then remainder to daughter’s children born in life of Dave and Mary that reach age 20 – valid under “modern rule” but not valid under the “old rule”
Reform around remoteness of vesting rule
*not an objective
The remoteness of vesting rule led to many problems and there have been many law reform reports in common law jurisdictions around the world examining the rule and suggestions reforms
Legislative Modifications
● Man. (1988), Sask. (in 2010) and N.S. (in 2013) have abrogated the rules
● Nfld., N.B., P.E.I. have the common law rule
● Ont., Alta., B.C., and Territories have “wait and see” legislation
● “wait and see” legislation has abrogated the Whitby v. Mitchell (“old rule”) [e.g., B.C. Perpetuity Act, s. 6(2)]
○ but retains “modern rule” (e.g., for B.C. it is s. 6(1)) so common law rule still applies but is modified by series of saving provisions to be applied in a particular order [see B.C.P.A. s. 3]
1. Age at Which Persons can have Children
● s. 14 – female presumed not to be able to have child after age 55 – for male evidence can be advanced to show he is no longer able to have a child
2. Wait and See
● ss. 8 and 9 – don’t determine validity at time gift takes effect but wait and see if interests vest within perpetuity period
○ s. 8 (wait and see) says amere possibility that a contingent interest will vest beyond the perpetuity will not make a gift void.
○ S. 9: the contingent gift remains valid until actual events establish that it cannot take effect within the perpetuity period. If it does not vest in the perpetuity period,
○ or if it becomes clear that it cannot vest in the perpetuity period, one moves on to consider other saving provision
3. Age Reduction
● s. 11 – gift to person on reaching certain age then age can be reduced to bring within the rule
4. Class Splitting
● s. 12 – gift vests in some members of a class within the perpetuity period others that might vest beyond the period then those whose interests might vest beyond the period are cut off
5. Cy Pres
● s. 13 - if other provisions do not save the gift then court can vary the gift to make it fit within the perpetuity rule in a way that fits with the general intention of the donor
6. Eighty-year Rule
● s. 7 – Act allows for an express provision that an interest must vest, if at all, not later than 80 years from the date of the creation of the interest (i.e. it must vest by that time – if it does not it is cut off)
● When there is a grant of contingent interest the law that governs the grant is the law of the jurisdiction in which the property is located.
● With chattels the applicable law is generally the law of the jurisdiction where the chattel is located.
● With a chose in action such as a debt it is normally the jurisdiction of the debtor.
Conflicts Issues
● look to where the property is
● land – jurisdiction in which it is located
● chattels – where the chattel is located (but perhaps could be moved)
● choses in action – normally the jurisdiction where the chose in action can be enforced against the grantor of the right – common situation of a debtor is that it would be enforced in the jurisdiction of the debtor (e.g., bank account then debtor is the bank and enforced in the jurisdiction where the account is held)
Applying the Tests
● First step is to check the jurisdiction in which property subject to the trust is located, then check the position on perpetuities in that jurisdiction. If the property is in a location that has the unreformed common law rule, one should apply the checklist:
- Is the interest contingent?
- What are the relevant lives in being referred to in the instrument?
- Is there a possibility that the interest will vest outside the perpetuity period?
- Even if the interest complies with the modern rule, does it violate the rule in Whitby v Mitchell?
● If the property is located in a “wait and see” legislation reform jurisdiction, one must apply that same checklist substituting (4) for: how do the legislative modification affect the application of the common law rule?
Key Point
● still must watch for the creation of contingent interests and assess whether the interest might vest outside the perpetuity period
● must identify the relevant jurisdiction depending on the nature of the particular property and apply the rules of that jurisdiction
○ e.g., Nfld., N.B. and P.E.I. common law rule;
○ “wait and see” jurisdictions (B.C., Alta., Yukon, N.W.T., Nunavut and Ont.) common law plus statute;
○ Manitoba, Saskatchewan or Nova Scotia then no perpetuity concern since those jurisdictions have abrogated the common law perpetuity rules
Exception to perpetuities rule for charitable purpose trusts
*not an objective
Charitable Purpose Trusts
● An exception to the application of rules against perpetuities to charitable purpose trusts. These trusts can last for indefinitely long periods of time – perpetuity problem dealt with by cy pres doctrine, courts can redirect the use of the property to some other use that is reasonably close to the settlor’s original intended purpose.
● but watch for property on trust subject to condition subsequent on which event the property is to be held on trust for charitable purposes
● also watch for charitable remainder trust with series of prior interests in favour of persons (e.g., life interests) followed by the creation of a charitable purpose trust when the other interests come to an end
Perpetuities Intro
Introduction:
● Rule against perpetuities has been said to promote alienability of property.
● Also considered an economically efficient rule since it prevents property from being tied up in a particular use indefinitely, thereby allowing the property to be put to different uses.
● perpetuity problems can arise in grants of legal interests in real property BUT in the modern context these problems are most likely to arise in the context of trusts that can create conditional interests in real property or personal property
● perpetuity rules are part of general concern with restraints on alienation – can restrain alienation of property for a period of time but not indefinitely
● vesting of interests in property conditional on future events effectively restrains alienation of property
○ EXAMPLE: Sara in trust for Bertha (who as yet has no children) for life then to Bertha’s first-born daughter, remainder to the first-born daughter of Bertha’s first-born daughter – prospective purchaser of fee simple interest can’t deal with Bertha’s first-born daughter who is not yet born, or the first-born daughter of Bertha’s first-born daughter who is also not yet born - so can’t buy fee simple interest until contingencies resolved – this inalienability of the property is tolerated but only for a limited period of time
● several rules over the years can be understood as rules trying to reign in the problem of property being inalienable for long periods of time
● two rules remain under the common law (so “rules” is arguably correct):
(1) the “modern rule” (sometimes referred to as the “remoteness of vesting rule” – although all the rules against perpetuities might be said to be remoteness of vesting rules) from Re Duke of Norfolk
(2) the rule in Whitby v. Mitchell (also known as the “old rule”) (repealed in some jurisdictions w wait and see legislation)
(a) there is sometimes also said to be a rule against perpetual duration but it is said to be related to, or to come from, the modern rule
(3) there has also been a separate statutory rule against accumulations (although Ontario is now the only Canadian jurisdiction with such a statutory rule)
Skill Objective: Be able to identify situations in which the transfer of property to another person on trust may be voidable pursuant to fraudulent conveyance legislation, fraudulent preference legislation or the federal Bankruptcy and Insolvency Act.
Legislation
● English Fraudulent Conveyance Act of 1571
● English 1571 Act applies in Alberta, Saskatchewan, PEI, Nova Scotia, New Brunswick and the Territories
● similarly worded provincial enactments in B.C., Man., Ont., and Nfld.
BC Fraudulent Conveyance Legislation
● s. 1 - disposition of property made to delay, hinder or defraud creditors and others of their just and lawful remedies is void [but this word has been read to mean only “voidable”] and of no effect against creditors (or their personal representatives or assignees) whose rights are delayed, hindered or defrauded
● s. 2 – this does not apply to disposition of property
(i) for good consideration
(ii) in good faith
(iii) lawfully transferred to a person not having notice or knowledge of the collusion or fraud
BC Fraudulent Preferences Act
● s. 2 –
(i) insolvency or eve of insolvency of debtor; and
(ii) voluntarily or by collusion with a creditor agrees to judgment against debtor
(a) with intent to defeat or delay creditors or
(b) to give one or more creditors a preference over other creditors, or some of them then judgment void against creditors
then judgment void against debtor’s creditors
● s. 3 – disposition when insolvent or person knows he is on the eve of insolvency void against injured creditor if made
(i) with intent to defeat, hinder, delay or prejudice creditors and
(ii) to or for a creditor with intent to give that creditor a preference over other creditors
● s. 6 – does not apply if for consideration in good faith
Bankruptcy and Insolvency Act
a. Arm’s Length Transfer at Undervalue
● s96(1)(a) An arm’s length transaction is void as against trustee in bankruptcy if:
(i) Undervalue: that the transfer was at undervalue;
(ii) One Year: the transfer occurred within one year prior to the date of the initial bankruptcy event;
(iii) Insolvency: the debtor was insolvent at the time of the transfer or was rendered insolvent by the transfer; and
(iii) Intention: the debtor intended to defraud, defeat or delay a creditor.
● An arm’s length transfer of property for less than its fair market value by an insolvent person, or that makes a person insolvent, within one year prior to the person’s bankruptcy and that was made by that person with an intent to defraud, delay or defeat a creditor is void against the person’s trustee in bankruptcy.
● Date of initial bkruptcy is in s2 of act and includes:
○ Assignment w official receiver appointed under act
○ A proposal
○ A notie of intent to make a proposal
○ The first application for a bankruptcy order
● Transfer at undervalue in s2 is : disposition w/o consideration received by debtor or consideration received is less than FMV of consideration given by debtor
● Creditor: person w claim provable under act
b. Non-arm’s Length Transfer at Undervalue (s96(1)(b))
● A non-arm’s length transfer is void as against a trustee in bankruptcy if:
(i) Undervalue: The transfer was at an undervalue
and
(ii) One Year: that the transfer occurred within one year prior to the date of the initial bankruptcy event;
or
A non-arm’s length transfer is void as against a trustee in bankruptcy if:
(iii)
(a) Five Years: the transfer occurred within five years prior to the date of the initial bankruptcy event; and
(b) Insolvency or Intent: the debtor was either insolvent at the time of the transfer (or was rendered insolvent by it), or intended to defraud, defeat or delay a creditor.
● A non-arm’s length transfer at an undervalue is void against a trustee in bankruptcy if made within one year prior to the bankruptcy.
● A non-arm’s length transfer at an undervalue can also be void against a trustee in bankruptcy if made within five years prior to the bankruptcy if either the debtor was insolvent (or was made insolvent by the transfer) or the debtor intended to defraud, defeat or delay a creditor
● Court may order persons privy to transfer to pay the difference btwn consideration given vs received
c. Preferences (s95(1))
● Arm’s Length
● A transfer is void against the trustee in bankruptcy if it is:
(i) To an Arm’s Length Creditor: made in favour of a creditor dealing at arm’s length with an insolvent person, or in favour of a person in trust for that creditor;
(ii) To Give Preference: the transfer was made with a view to giving that creditor a preference over another creditor;
and
(iii) Three Months: the transfer was made within three months prior to the date of the initial bankruptcy event.
● Non-arm’s Length
○ A non-arm’s length transfer is also void against the trustee in bankruptcy if:
(i) To a Non-arm’s Length Creditor: it is made in favour of a creditor who is not dealing at arm’s length with the insolvent person, or in favour of a person in trust for that creditor;
(ii) To Give a Preference: it has the effect of giving that creditor a preference over another creditor;
and
(iii) One Year: is made within one year prior to the date of the initial bankruptcy event
Summary
● i. Transfer at undervalue
● Bankruptcy and Insolvency Act - can be ordered to be void against the trustee in bankruptcy under Bankruptcy and Insolvency Act if there has been an bankruptcy event (e.g., an assignment in bankruptcy; notice of intention to make an assignment in bankruptcy; application for a bankruptcy order against a person)
○ (a) arm’s length – (i) undervalue; (ii) one year; (iii) insolvent; and (iv) intent
○ (b) non-arm’s length - undervalue; (i) one year; OR (ii) five years plus insolvency or intent
● ii. Preference in favour of a creditor of an insolvent person
○ Bankruptcy and Insolvency Act:
○ (a) arm’s length – void against trustee in bankruptcy if (i) made in favour of a creditor of an insolvent person; (ii) preference; and (iii) three months
○ (b) non-arm’s length – void against trustee in bankruptcy if (i) made in favour of a creditor of an insolvent person; (ii) preference; and (ii) one year
○ Also Provincial fraudulent preference legislation – e.g., B.C. Fraudulent Preference Act, s. 2 or s. 3
● iii. No bankruptcy, no preference, no insolvency – fraudulent conveyance legislation may still apply
○ no bankruptcy event and no preference when insolvent or on eve of insolvency then fraudulent conveyance legislation may apply to make transaction void if made to delay, hinder or defraud creditors whose rights are delayed, hindered or defrauded
Describe The nature of legislation on accumulations.
Skill: Identify potential perpetuity (or accumulation) problems.
Accumulations
Intro
● common law rule allowed accumulation for full length of the perpetuity period (lives in being plus 21 years)
● then came will of Peter Thelluson in 1798 that deliberately provided for accumulation on a large fund for the full perpetuity period and lives in being chosen to make that period last a very long time (probably would have lasted over 100 years)
● origins in the English Accumulations Act 1800 (also known as Thelluson’s Act) was a response to this – don’t want more nouveau riche like Peter Thelluson and his progeny
● The Accumulations Act prohibits the accumulation of income for periods of longer than the life of the grantor or twenty-one years from a serious of starting times set out in the Act.
○ Act was received in western provinces but has been repealed in BC, Alberta, Manitoba, Saskatchewan. It was copied in Ontario legislation and Ont still has it (only jurisdiction in canada w this)
Ontario Legislation: Accumulation cant be longer than one of the following
○ Much shorter permitted period for accumulation of income than the common law remoteness of vesting perpetuity period. It sets out six periods during which income can be accumulated
■ (1) relevant to the inter vivos trust – the life of the grantor
■ (2) 21 year from the date of making the inter vivos disposition
■ (3) duration of the minorities of persons living or conceived but not born at the date of making an inter vivos disposition.
■ (4) 21 years from the death of the grantor, settlor or testator
■ (5) duration of the minorities of any person living or conceived but not born at the death of the grantor, settlor or testator
■ (6) duration of the minorities of persons who, under the instrument directing the accumulation, would, if of full age, be entitled to the income directed to be accumulated.
○ Not clear if shortest applicable of the 6 applies or just if it fits any of the 6
○ If contrary to periods it is null and void
■ if accumulation directed in a way that would run beyond the periods allowed then the direction is invalid and the income is to be paid to the person who would have been entitled to it if the accumulation had not been so directed
● National Trust v McIntyre (1997, Ont)
○ Income of trust was more than enough to cover costs so accumulated extra. Period was 21 yrs from death of testator, period was coming to an end and the residue was to go to charity. The provision in the will said if legacy fails then amt falls into residue. Charity argued accumulation beyond period means failed legacy so money held in trust goes back to estate and into residue, so charity would get it. It was held not to be a failed legacy. Excess income hadnt been anticipated and thus wasnt dealt with in the will and thus is intestate property (goes back into estate to distribute to next of kin).
Problems with the Accumulation Period
● Complication on perpetuity analysis - need to assess not just CL rule but also statute provision that shortens the period for accumulation
○ If goes beyond period should prevent accumulation or indicate to whom that accumulation income will go
● Limited period during which rainy day fund can be accumulated – problem for disabled persons
● Potential application to charitable purpose trusts
Skill: (ii) Assess the effect of the British Columbia Perpetuity Act.
British Columbia’s Perpetuity Act Modifications
● The perpetuity Act in BC has repealed the application of the English Accumulations Act and replaced the common law rule
● BC Act restores CL rule re accumulations as otherwise modified by legislation
● S. 25: if property is disposed of in such a manner that all or part of the income of it may be accumulated, the power or direction to accumulate that income is valid if the disposition of the accumulated income is or may be valid, but not otherwise” – the disposition of the accumulated income would therefore be valid if it complied with the common law remoteness of vesting rule as modified in the Perpetuity act.
○ Looks to see whether accumulation fits in CL lives in being + 21 yrs as modified by act
● National trust v macintyre wouldnt arise under BC leg
