Case Comment: Easingwood v. Cockcroft, 2011 BCSC 154

This is a case comment on the recent decision of Easingwood v. Cockcroft, with neutral citation of 2011 BCSC 1154.  The judge presiding over the summary trial was Madame Justice Dillon, and was delivered on August 26, 2011, and is currently being appealed by the Plaintiff.

This was a trial within a trial, in that the action is a Wills Variation Act action, and was a summary trial application brought on by the trustees of an alter ego trust, concerning the alleged fraudulent conveyance of the majority of the testator’s assets into an alter ego trust one year prior to the testator’s passing by the Plaintiff’s wife.

This case is very noteworthy because it purports to do what Justice Balance declined to do in the case of Mawdsley v. Meshen, 2010 BCSC 1099, which is to determine the test of a spouse of a testator to qualify as a “creditor or other” under the Fraudulent Conveyances Act.  It also provides useful commentary regarding the law of unjust enrichment applying the recent landmark case ofKerr v. Baranow in the estate litigation context.  This case also firmly fuses family law analysis regarding marriage agreements regarding fraudulent conveyances in the estate litigation context, continuing on the trend started in the Wills Variation Act cases of handed down in 1994 with Tataryn v. Tataryn, and which was confirmed in 2008 in Saugestad v. Saugestad to calculate a spouse’s legal obligation owing to his or her spouse by performing a notional analysis of what would the surviving spouse be entitled to under the matrimonial property legislation.

1. Facts:

The facts of the case are as follows.   For the purposes of ease of reference, I will refer to the parties largely by their first names in the same way as Justice Dillon did in her judgment, and mean no disrespect to the parties in doing so.

1. Kay and Reg Easingwood were married for 26 years before Reg’s death in 2009.  This was a second marriage for the both of them, where they had both had children from their first marriages, and had acquired assets from their first marriages.  The value of their respective assets at the time of marriage was never disclosed to each other.
2. Reg had 4 children, including Hank, Lauren, Edward Joseph and Vicki.  Hank Easingwood is a name that I’m sure many of you are familiar of, as he was a partner with his firm Cherrington Easingwood and Kearl and practiced for over 30 years, specializing in real estate and estate planning.  Kay has 2 daughters, Marion and Kathleen.
3. Reg was a successful businessman who had assets worth approximately $5.5 million.
4. Hank and his law firm represented his father for all his business and personal legal needs during Reg’s life.
5. Prior to Reg and Kay’s marriage, Hank prepared a marriage agreement for Reg and Kay to sign, that acknowledges that both Reg and Kay were widows who had independent children from their first marriages, had acquired an individual estate through each other’s efforts and that of their former spouses, and that each desired to keep their individual estates as separate property.  While Reg’s assets were listed, no values were provided, and the agreement provided that Reg was to pay for household and living expenses, and to provide the use of a residence for their mutual cohabitation.  Both parties released any claim to the other’s estate except as set out in the agreement or as provided in the other’s will upon death, including any claim under the Wills Variation Act.
6. This agreement was apparently not negotiated and was presented by Hank to Reg and Kay to sign, although there was a certificate of independent legal advice regarding Kay’s signature to the agreement.
7. The marriage agreement was never set aside or varied.  The validity of the marriage agreement was not disputed by any of the parties.
8. During the marriage, Kay assisted in Reg’s business doing various tasks including bookkeeping and administrative work, and also performed all the domestic duties at home, including cooking, cleaning and grocery shopping.
9. Reg granted a joint power of attorney to Hank and Lauren in 2001, and executed a will in 2004 that provided for a trust fund of the greater of either $525,000 or 15% of the gross value of his estate to pay for Kay’s personal comforts during her lifetime, at a monthly rate, a life estate in the matrimonial home to Kay, a separate house trust to take care of household expenses, and to divide the residue of the estate into 8 equal shares, to pay 2 shares to each to Lauren, Hank and Vicki, and one share each to his deceased son’s Edward Joseph’s children, Kayla and Edward James.
10. The power of attorney was a standard enduring power of attorney, with no special provisions.
11. Kay knew about the 2001 Power of Attorney and 2004 will and never contested these documents while Reg was alive.
12. In June 2005, Hank was diagnosed with advanced cancer, and his health continued to deteriorate, with his dementia, which had begun in 2002, worsening and later diagnosed as Alzheimer’s disease in April 2007.  From June 2007 onwards, Lauren and Hank took over Reg’s financial affairs, invoking the 2001 Power of Attorney.  Hank, himself, was undergoing cancer treatments in 2007, with his health failing in 2008.  Because the Power of Attorney did not allow Lauren to act without Hank, and did not appoint any alternate attorney to Hank, Lauren testified that for tax planning purposes, and to save the estate the fees of a committeeship hearing, Hank and Lauren used their Power of Attorney to transfer the bulk of Reg’s estate into an irrevocable alter ego trust, bearing the same terms of the 2004 will in 2008.  Hank and Lauren never advised Reg or Kay about this trust.

In this action, Kay was seeking to set aside the trust as a fraudulent conveyance, and to vary the will under the Wills Variation Act to increase her inheritance under the 2004 Will.  This judgment was for a summary trial application brought on by the trustees of the trust to dismiss Kay’s fraudulent conveyance claims.

2. Issues:

Madame Justice Dillon delineated the 2 main legal issues to be determined to be:

a)      Was the Trust valid? and

b)      Was the transfer of Reg’s assets to the Trust a fraudulent conveyance?

3. Results:

a)      Trust is valid

b)      Transfer of Reg’s assets to the Trust was not a fraudulent conveyance

4. Findings:

1.       General enduring Power of Attorney can be used to create an irrevocable inter vivos trust with the same terms of the testator’s will, even if it depletes substantially the entire estate.

a.       This is because the attorney is merely following the testator’s intentions.  Here, Justice Dillon found that Hank and Lauren’s actions did not constitute a breach of fiduciary duty because they were only carrying out Reg’s wishes according to his will, and there was a real danger of the estate not being able to be administered with Hank’s impending death.  The standard of care was of the prudent investor, and Hank and Lauren were found to not have breached this standard, having sought advice from tax planners in order to save on probate fees and committeeship proceedings.

b.      What was key in Justice Dillon’s decision was her finding that Kay had never expressed any desire to contest the Will, which was drawn up with the marriage agreement in mind, which waived any right to a Wills Variation Act action.

c.       Justice Dillon relied on the 1998 Ontario court of justice case of Banton v. Banton, the 2000 BCCA case of BC PGT v. Bradley Estate, and the 2006 BCSC case of Mordo v. Nitting to come to this finding

d.      What must be noted is that this finding of law is in direct contradiction with ss. 19-21 in the new Power of Attorney Act, effective on September 1, 2011 (whereas this decision was rendered on August 26, 2011), which provides that an attorney may not create a will or change an existing will, and cannot receive a gift from the donor without court approval.

2.       The test for a spouse to have standing to claim under the Fraudulent Conveyances Act as a “creditor or other” is finally delineated at para. 51 of the decision, stating that “a spouse must have either begun an action under the Family Relations Act (“FRA”) or there must be an evidential basis to reasonably conclude that the claimant has a potential right or claim to have asserted entitlement to family assets on marriage breakup under s. 56 of the FRA.”

a.       The Plaintiff Kay in this case, did not meet this test and did not have standing as a creditor or other because there was “no reality to her claim under the FRA” due to the fact that she had not adduced any evidence as to the value of any of either of Reg’s or her assets at the time of the marriage, and did not lead any evidence of her present needs, notwithstanding the presumption in s. 60 and the provisions of s. 65 of the FRA, which were argued to claim that all of Reg’s assets are presumed to be family assets.  In addition, Justice Dillon placed much emphasis on the facts that Reg and Kay enjoyed a happy marriage, with no periods of separation, and where Kay never asserted her entitlement to the family assets, unlike all the other cases argued at trial, includingJack v. Parkinson, Chan v. Chan, and Stone v. Stone.  On the contrary, Justice Dillon held this case was similar to Maudsley v. Meshen,where the parties in both cases knew and had an intention to keep their property separate, and where the parties never contested such an arrangement during the testators’ lifetimes.

b.      This test, in my opinion, is problematic in that a broad interpretation of this test could be construed as entrenching an advantage to spouses with bad marriages over spouses with good marriages.  In effect, where spouses with difficult marriages where the subject of division of family assets had been regularly discussed, clearly have standing to claim fraudulent conveyance, whereas spouses with good marriages and who have not spent time quarreling over the division of assets during the marriage have somehow given up their rights to family property.  This, I submit, does not make sense given we operate in a no-fault divorce statutory regime, where parties’ rights to family property are not dependent on their good or bad behavior during the marriage, but on how the parties chose to share their life together, given the s. 65 factors of fairness of length of marriage, roles of the parties during the marriage regarding child care, earning income, etc.

c.       As a result of the problems associated with the broad interpretation of this test, I submit that a narrow interpretation of the test would make more sense, which would merely state that if a spouse wishes to claim under the Fraudulent Conveyance Act, he/she has the onus and burden of proof to adduce evidence as to the family asset pool at the time of marriage, and to adduce evidence as to the current financial need of the surviving spouse.

3.       Regarding Kay’s unjust enrichment claim, she held the following:

a.       Because Kay was paid a salary for her business services, and because Kay had admitted that she had not expected to be compensated for her homemaking and care-giving services, Justice Dillon found that her claim was barred;

b.      Furthermore, Justice Dillon applied the latest authority on unjust enrichment, Kerr v. Baranow, to emphasize on its joint family enterprise model to deny Kay of a remedy.  This model states that your entitlement to a remedy for unjust enrichment lies in the proof of joint family enterprise, where the spouses embarked on joint efforts towards an enterprise that built assets together.  Because the majority of Hank’s assets were not accumulated by the joint efforts of Kay and Reg during their relationship, Kay was barred from relief.

c.       Finally, Justice Dillon held that a valid marriage agreement provides a juristic reason for any benefit and corresponding detriment that spouses incurred because a contract is a recognized category of bar of relief:

i.      Of note is that the marriage agreement was not pleaded to be invalid in this case, despite facts that could support the agreement to be claimed as invalid, which ultimately led to the dismissal of the unjust enrichment claim.

ii.      As a practice point, this case teaches us that Plaintiff’s counsel should always claim that the marriage agreement is invalid so that the unjust enrichment claim is not barred.  The leading cases on the validity of a marriage agreement are the Supreme Court of Canada cases of Rick v. Brandsema, 2009 SCC 10, and Hartshorne v. Hartshorne, 2004 SCC 22.  In Rick, the court set aside a separation agreement as unconscionable because there was deficient financial disclosure, which led to exploitation of the weaker party, and because the agreement did not adhere to the provisions of matrimonial legislation.  Hartshornesays that a marriage agreement should not be varied unless it can be shown the agreement does not substantially comply with the overall objectives of family law statutes, and if there were unforeseeable circumstances that have unfolded since the agreement was executed.  The court must also consider how accurately the parties predicted what their actual circumstances would be at the time of distribution, whether the parties truly considered the impact of their decision and whether the parties adjusted their agreement during the marriage to meet the demands of a situation different from the one expected either because the circumstances were different or proved to be unrealistic.  However, if the parties thought the agreement was fair when they made it, and nothing unexpected happened afterwards, the courts will not interfere with a negotiated bargain.  The existence of independent legal advice is also a factor to consider.

iii.      Furthermore, practitioners must also note that we cannot rely on the established authorities of Ward v. Ward, 2006 BCSC 448 and Steernberg v. Steernberg 2006 BCSC 1672 that say that marriage agreements are but a factor to be considered in Wills Variation Act cases, and are not a bar to relief to a Wills Variation Act claim for fraudulent conveyance cases.  While Justice Dillon did not explicitly state in her decision as to why she did not follow these lines of authority which were argued, my best guess would be the reason for distinguishing the cases is that in both Ward and Steernberg, the court had stated that marriage agreements are useful to consider in potentially extinguishing a testator’s legal obligation owed, but not the moral obligation owed to his or her spouse.  As such, a marriage agreement could not be a bar to relief for a Wills Variation Actclaim.  This is a different situation than the unjust enrichment claim made in this case, where a marriage agreement, in its capacity as a valid contract, can act as a bar to relief.

d.      Finally, in considering the reasonable expectations of the parties and public policy reasons to provide unjust enrichment relief to Kay, Justice Dillon held that because the marriage agreement was conceded to be valid, and insufficient evidence was adduced to prove that the agreement was unfair, the agreement was presumed to be fair, and this branch of the test was held against Kay.

i.      As a practice point, it is very important to note that the court is looking for evidence akin to proving a family claim in an estate litigation context, with evidence sufficient to provide the financial situation at the time of the marriage took place and at other relevant times, such as right before the alleged fraudulent conveyance, and at the time of the death.  As a tool, counsel can review the provisions of the prescribed form financial statement used for matrimonial cases to make sure that the burden of proof is met.

As the court’s findings regarding the fraudulent intent in the case are largely determinant on findings of fact, I will not discuss them in this case comment.

The final matters to be noted in this case comment are the issues that were argued at trial, but which were not addressed in the judgment.  These issues include:

1.       The Plaintiff’s constructive trust claim against the assets of the Trust based not on unjust enrichment, but based on “good conscience” as introduced in the 1997 Supreme Court of Canada case of Soulos v. Korkontzilas; and

2.       The fact that the Trust should be set aside based on the apparent and actual conflict of interest of Hank in drafting the Trust as Reg’s lawyer when he had a direct, personal financial interest in benefitting from the Trust.  In this case, Reg never obtained any independent legal advice regarding this conflict of interest, and never signed any express waiver of such a conflict of interest.  These facts were not addressed at trial, and will likely be argued on appeal.

As this matter contains many contentious issues with precedential value, it will be important to watch for the result of the appeal.