When is a Transfer of Property a Fraudulent Conveyance?

November 14, 2017 Hull & Hull LLP Estate & Trust, Estate Planning, Hull on Estates 0 Comments

In many circumstances, spouses may transfer property to one another as joint tenants. If this transfer occurs when a party is insolvent, creditors are quick to deem the transaction a fraudulent one.

The Fraudulent Conveyance Act (“FCA”) authorizes the court to aside, for the benefit of the creditor, transactions that are entered into with the intent to defeat the claims of a creditor.

Section 2 of the FCA:

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.

Section 3 of the FCA:

Section 2 of the FCA, Section 2 does not apply to an estate or interest in real property or personal property conveyed upon good consideration and in good faith to a person not having at the time of the conveyance to the person notice or knowledge of the intent set forth in that section.

Where a plaintiff establishes that a conveyance was made with fraudulent intent and without good consideration, the conveyance is subject to be set aside. If the  defendant can establish that either the transferor lacked the fraudulent intent or that the conveyance was made for good consideration and that the transferee acted in good faith and without notice or knowledge of the fraudulent intent of the transferor, the court will uphold the transaction.

The court will consider certain badges of fraud which indicate the debtor’s intent:

  • Continuance and possession of the debtor and some benefit retained,
  • The non-arm’s length relationship between the parties,
  • Inadequate consideration, and
  • Knowledge of a pending action.

In Mitchell Jenner & Associates Inc v Saunders, a husband transferred his matrimonial home into the name of his wife for no consideration at a time when he was facing a  lawsuit. The wife had knowledge of the lawsuit against her husband when the conveyance took place. The court found that the purpose of the transfer was to make sure the property was not available to the husband’s creditors and the conveyance was barred by the FCA.

In the case of CIT Financial Ltd v Zaidi, the defendant transferred title to his residential property to his wife. The reasons for the conveyance were stated to be for natural love and affection. The plaintiff argued that the defendant commenced the transfer at a time when the plaintiff, was seeking satisfaction on a debt. After the husband completed the transfer he moved out of the property. The court found the husband no longer retained a beneficial interest in the property and the transfer did not convene the FCA.

It is important to note that in these types of cases, the court will consider the intent of both spouses.

Thanks for reading,
David Morgan Smith

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