B.C. Case Comment: Creditor Entitled to Shares that Deceased tried to Settle into a Trust

A creditors may make a claim against a debtor’s estate. However, a creditor is sometimes disappointed to find that the debtor’s estate is insolvent or has insufficient assets to satisfy their claim. The creditor may look at other steps taken by the deceased debtor to strip their estate of assets. While the courts have recognized alter ego trusts, transfers into joint tenancy, etc.. as valid estate planning tools, creditors still have remedies available if the deceased has taken steps to defeat the claims of their creditors.

In the recent case of Lau v. McDonald 2021 BCSC 1207, the B.C. Supreme Court was asked to determine who owned shares of 319344 B.C. Ltd. (“319344”) which were previously held by the deceased. A creditor of the deceased wanted to execute against the shares to satisfy a debt owed by the deceased.

The deceased’s spouse argued that she was entitled to receive the shares. She said that she was the beneficiary of an alter ego trust settled by the deceased, and that the shares were settled into the trust pursuant to a deed of gift. However, the deed did not on its face transfer shares in 319344 to the trust. Instead, the deed referred to the transfer of shares in Noramco Capital Corp. (“Noramco”), a subsidiary of 319344. The Deceased did not own any shares in Noramco, only in 319344.

The 319344 shares were valued at almost $1,900,000 at the deceased’s date of death.

The creditor of the estate took the position that the 319344 shares formed part of the estate (as opposed to the trust), so that she could claim against them to satisfy the debt owed to her by the deceased.

There was a good argument that the deed contained a drafting error, and the issue became whether there was some legal basis to fix the error, and whether the spouse was able to keep the shares and avoid execution against them by the creditor.

First, the spouse argued that the deed should be interpreted to include the 319344 shares. However, the deed stated that it transferred “all of the issued shares of Noramco Capital Corp. which are beneficially held by [the deceased] as of the date hereof.” The Court was not willing to interpret this to include shares in 319344 when the deed clearly only referred to Noramco.

Next, the spouse asked that the deed be rectified, to give effect to the true agreement of the parties. Where a written instrument does not accord with the true agreement between the parties, equity has the power to rectify the document so that it reflects the true agreement. The mistake is not in the transaction itself, but the way that the transaction has been expressed in writing. This is a discretionary remedy.

In Lau, the Court held that there was sufficient evidence to establish an agreement by the deceased to transfer “all of his known material assets” into the trust.   The deed clearly failed to reflect this agreement, since it left out the 319344 shares and instead purported to transfer Noramco shares that the deceased did not even own.

As a result, the court concluded that rectification was available. If the discrepancy was pointed out to the deceased at the time of the transaction, the deceased would have obviously agreed to the necessary revision. It was ultimately an error by the deceased’s professional advisor (lawyer) who drafted the documents. In the end, the court characterized this as a “simple drafting mistake in inserting the name of a subsidiary rather than the parent company.” Equity ought to step in and fix this mistake.

However, this was not the end of the matter. The creditor made other arguments. She sought to argue that the shares were not properly transferred, and that the court may not generally assist a claimant in enforcing an imperfect gift. However, the court held that the transfer of the 319344 shares was properly completed. She sought to argue that the transfer of the shares to the trust was a fraudulent conveyance under the Fraudulent Conveyance Act, intended to defeat her claims. The court held that the deceased did not have this intention, and so there was no fraudulent conveyance.

The creditor’s last argument was that the transfer was contrary to s. 96 of the Bankruptcy and Insolvency Act, which provides that a transfer at undervalue is void as against the trustee if it occurred within a specified period of time (which is set out in the section), and if the debtor was insolvent at the time of transfer or was rendered insolvent by it, or intended to defeat creditors. The Court in Lau held that the creditor established the test for s. 96.  The transfer of the shares rendered the deceased insolvent, even though he may not have intended to defeat his creditors.

Success on this one argument was enough for the creditor to be entitled to the shares.