)

This paper will attempt to address issues and questions that lawyers face, and potential

liability that could arise, when counsel is retained to advise a client respecting disposition(s) of

property, and to perform services for a client, where the disposition(s) may result in a fraudulent

conveyance, fraudulent preference or a settlement by the client. A general overview of

fraudulent conveyances, fraudulent preferences and settlements is therefore required in order to

put in context the types of issues that lawyers may have to deal with. However, an exhaustive

review of the complex legal principles and multitude of cases dealing with fraudulent

preferences, fraudulent conveyances and settlements is not intended (and that will be apparent in

the material that follows).

1. PREFERENCES, CONVEYANCES AND SETTLEMENTS

There are three ways in which a transfer of property by a debtor can be challenged by creditors:

(a) claims that assets have been fraudulently conveyed to third parties to prevent

creditors from taking possession of those assets - which is a fraudulent conveyance

(and generally would be dealt with under the Statute of Elizabeth referred to

below). A fraudulent conveyance is a conveyance of the debtor's property to a

third party (that is not a creditor) to immunize that property from the creditors of

the transferring debtor;

(b) claims that the debtor has transferred assets to certain creditors to prefer those

creditors over other creditors (which is generally dealt with under The Fraudulent

Preferences Act or, in bankruptcy situations, under s. 95 of the Bankruptcy and

Insolvency Act). A fraudulent preference occurs when a debtor that is insolvent or

on the eve of insolvency, transfers property to a creditor with the intent to give that

creditor a preference over other creditors. A preference is something more than

the creditor would otherwise be entitled to receive; and

(c) a settlement upon another party - which arises in the context of the Bankruptcy and

Insolvency Act and a transfer of property to a third party. A settlement is a

#420904

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disposition of property by a bankrupt where the intent is that the property or

traceable proceeds of the property remain in the transferee for the benefit of the

transferor (the bankrupt).

2. STATUTORY PROVISIONS

The statutory references for fraudulent conveyances, fraudulent preferences and settlements are

contained in The Fraudulent Preferences Act (Saskatchewan), The Fraudulent Conveyances Act,

1570, 13 Eliz. 1, c. 5 (the "Statute of Elizabeth") and the Bankruptcy and Insolvency Act. These

provisions are as follows:

The Fraudulent Preferences Act (Saskatchewan) s. 3 & 4:

Transfers to defeat creditors3. Subject to sections 8, 9, 10 and 11 every gift, conveyance, assignment or transfer,delivery over or payment of goods, chattels or effects or of bills, bonds, notes orsecurities or of shares, dividends, premiums or bonus in a bank, company or corporation,or of any other property real or personal, made by a person at a time when he is ininsolvent circumstances or is unable to pay his debts in full or knows that he is on the eveof insolvency, with intent to defeat, hinder, delay or prejudice his creditors or anyone ormore of them, is void as against the creditor or creditorsinjured, delayed or prejudiced.

R.S.S. 1978, c.F-21, s.3.

Transfers to prefer creditors. 4. Subject to sections 8, 9, 10 and 11 every gift, conveyance, assignment or transfer,delivery over or payment of goods, chattels or effects or of bills, bonds, notes orsecurities or of shares, dividends, premiums or bonus in a bank, company or corporation,or of any other property real or personal, made by a person at a time when he is ininsolvent circumstances or is unable to pay his debts in full or knows that he is on the eveof insolvency to or for a creditor, with intent to give that creditor preference over hisother creditors or over anyone or more of them, is void as against the creditor orcreditors injured, delayed, prejudiced or postponed.

R.S.S. 1978, c.F-21, sA.

)

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Bankruptcy and Insolvency Act s. 91, 92, 93, 95 & 96:

Definitions 2. (1) In this Act,

"settlement" includes a contract, covenant, transfer, gift and designation of beneficiary inan insurance contract, to the extent that the contract, covenant, transfer, gift ordesignation is gratuitous or made for merely nominal consideration;

Settlements and Preferences

Certain settlements void91. (1) Any settlement of property made within the period beginning on the day that isone year before the date of the initial bankruptcy event in respect of the settlor andending on the date that the settlor became bankrupt, both dates included, is void againstthe trustee.

If bankrupt within five years(2) Any settlement of property made within the period beginning on the day that is fiveyears before the date of the initial bankruptcy event in respect of the settlor andending on the date that the settlor became bankrupt, both dates included, is void againstthe trustee if the trustee can prove that the settlor was, at the time of making thesettlement, unable to pay all the settlor's debts without the aid of the property comprised

. in the settlement or that the interest of the settlor in the property did not pass on theexecution thereof.

Non-application of section(3) This section does not extend to any settlement made in favour of a purchaser orincumbrancer in good faith and for valuable consideration.

R.S., 1985, c. B-3, s. 91; R.S., 1985, c. 31 (1st Supp.), s. 70;1992,c.27,s.40(F); 1997,c. 12,s. 75;2000,c. 12, s. 11.

92. and 93. [Repealed, 2000, c. 12, s. 12]

Avoidance of preference in certain cases95. (1) Every conveyance or transfer of property or charge thereon made, every paymentmade, every obligation incurred and every judicial proceeding taken or suffered by anyinsolvent person in favour of any creditor or of any person in trust for any creditor with aview to giving that creditor a preference over the other creditors is, where it is made,incurred, taken or suffered within the period beginning on the day that is three monthsbefore the date of the initial bankruptcy event and ending on the date the insolvent personbecame bankrupt, both dates included, deemed fraudulent and void as against the trusteein the bankruptcy.

When view to prefer presumed. (2) Where any conveyance, transfer, charge, payment, obligation or judicial proceedingmentioned in subsection (1) has the effect of giving any creditor a preference over othercreditors, or over anyone or more of them, it shall be presumed, in the absence ofevidence to the contrary, to have been made, incurred, taken, paid or suffered with a viewto giving the creditor a preference over other creditors, whether or not it was

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made voluntarily or under pressure and evidence of pressure shall not be admissible tosupport the transaction. Exception (2.1) Subsection (2) does not apply in respect of amargin deposit made by a clearing member with a clearing house.

R.S., 1985, c. B-3, s. 95; 1997, c. 12, s. 78.

Extended period96. Where the conveyance, transfer, charge, payment, obligation or judicial proceedingmentioned in section 95 is in favour of a person related to the insolvent person, the periodreferred to in subsection 95(1) shall be one year instead of three months.

R.S., 1985, c. B-3, s. 96; 1997, c. 12, s. 79.

Statute ofElizabeth

An act against fraudulent deeds, alienations, & c.

For the avoiding and abolishing of feigned, covinous and fraudulent feoffments, gifts,grants, alienations, conveyances, bonds, suits, judgments and executions, as well of landsand tenements as of goods and chattels, more commonly used and practised in these daysthan hath been seen or, heard of heretofore: which feoffments, gifts, grants, alienations,conveyances, bonds, suits, judgments and executions, have been and are devised andcontrived of malice, fraud, covin, collusion or guile, to the end, purpose, and intent, todelay, hinder or defraud creditors and others of their just and lawful actions, suits, debts,accounts, damages, penalties, forfeitures, heriots, mortuaries and reliefs, not only to thelet of hindrance of the due course and execution of law and justice, but also to theoverthrow of all true and plain dealing, bargaining, and chevisance between man andman, without the which no commonwealth or civil society can be maintained orcontinued.

1. Be it therefore declared, ordained and enacted that all and every feoffment, gift, grant,alienation, bargain, and conveyance of lands, tenements, hereditaments, goods andchattels, or of any of them or of any lease, rent, common, or other profit or charge out ofthe same lands, tenements, hereditaments, goods and chattels, or any of them, by writingor otherwise, and all and every bond, suit, judgment and execution at any time had or

. made sithence the beginning of the Queen's majesty's reign that now is, or at any timehereafter to be had or made, to or for any intent or purpose before declared andexpressed, shall be from henceforth deemed and taken (only as against that person orpersons, his or their heirs, successors, executors, administrators and assigns, and every ofthem, whose actions, suits, debts, accounts, damages, penalties, forfeitures, heriots,mortuaries, and reliefs, by such guileful, covinous or fraudulent devices and practices asis aforesaid, are, shall or might be in any wise disturbed, hindered, delayed or defrauded)to be clearly and utterly void, frustrate, and of no effect; any pretence, colour, feignedconsideration, expressing of use, or any other matter or thing to the contrarynotwithstanding.

2. All and every the parties to such feigned, covinous or fraudulent feoffment, gift, grant,alienation, bargain, conveyance bonds, suits, judgments, executions and other thingsbefore expressed, and being privy and knowing of the same or any of them; which at any

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time after the 10th day of June next coming shall wittingly and willingly put in ure,avow, maintain, justify, or defend the same or any of them, as true, simple, and done, hador made bona fide and upon good consideration; or shall alien or assign any of the lands,tenements, goods, leases or other things before mentioned, to him or them conveyed as is

. afforded, or any part thereof; shall incur the penalty and forfeiture of one year's value ofthe said lands, tenements and hereditaments, leases, rents, commons, or other profits, ofor out of the same; and the whole value of the said goods and chattels; and also so muchmoney as are or shall be contained in any such covinous and feigned bond; the onemoiety whereof to the Queen's majesty, her heirs and successors, and the other moiety tothe party or parties grieved by such feigned and fraudulent feoffment, gift, grant,alienation, bargain, conveyance, bonds, suits, judgments, executions, leases, rents,commons, profits, charges, and other things aforesaid, to be recovered in any of theQueen's courts of record by action of debt, bill, plaint, or information, wherein no essoin,protection or wager of law shall be admitted for the defendant or defendants; and alsobeing thereof lawfully convicted, shall suffer imprisonment for one half year without bailor mainprise.

5. Provided also, and be it enacted that this act, or anything therein contained, shall notextend to any estate or interest in lands, tenements, hereditaments, leases, rents,commons, profits, goods or chattels, had, made, conveyed or assured, or hereafter to behad, made, conveyed or assured, which estate or interest is or shall be upon goodconsideration and bona fide lawfully conveyed or assured to any person or persons, orbodies politic or corporate, not having at the time of such conveyance or assurance tothem made any manner of notice or knowledge of such covin, fraud, or collusion as isaforesaid; anything before mentioned to the contrary hereof notwithstanding.

3. LEGAL PRINCIPLES

As stated above, it is not the intention of the writer to exhaustively reVIew the issues and

principles dealing with fraudulent preferences and fraudulent conveyances. That could be a

whole seminar unto itself. For a much more detailed discussion of the issues, as well as the

legislative history to fraudulent preference and conveyance legislation and law, the writer would

refer readers to Dunlop, Creditor-Debtor Law in Canada, Carswell Thomson Professional

Publishing, (2nd ed. 1995), as well as to Boulden and Morawetz, Bankruptcy and Insolvency

Law of Canada, Carswell Thomson Professional Publishing, (3rd ed. 2004); Springman, Stewart,

Morrison and MacNaughton, Fraudulent Conveyances and References, Thomson Canada

Limited, (2001).

) Generally speaking, the legislation is (not surprisingly) aimed at preventing debtors from

alienating their assets to hide them from creditors or to prevent creditors from recovering claims

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against the debtors. As a general statement, any transfer of property made with the intent to

defeat, delay or hinder the transferor's creditors, can be attacked and under appropriate

circumstances, set aside. While general statements of principle have evolved, it must be

remembered that each case is decided on its own facts and credibility of the transferring debtor is

often a significant factor in the cases (as the argument often is made that the transfer was not

intended to defeat or delay or hinder creditors, but was being done for some other purpose or

intent, or it is argued that the transfer was made for fair value and on a bonafide basis). This is

particularly the case in bankruptcy cases where settlements are being dealt with or preferences

have occurred because the sections don't apply, generally speaking, where there have been

transfers or settlements for good faith and valuable consideration.

4. IMPLICATIONS AND ISSUES FOR COUNSEL

The focus of this paper is on the issues and potential risks facing the lawyer who is asked by a

debtor client to advise upon a transfer of property by a debtor, or to generally undertake a

transfer of property by a debtor, where that transfer is subsequently attacked as a fraudulent

preference, fraudulent conveyance or settlement.

There are three sources of potential liability, exposure or risk for a lawyer when dealing with a

client in this area:

(a) Professional Responsibility - reference will be made to the CBA Code of Conduct

and to the Law Society of Saskatchewan Code of Professional Conduct. The

question is when and to what extent lawyers in these circumstances may find

themselves in breach of the ethical standards and when they might be faced with

charges that the actions of the lawyer constitute conduct unbecoming a solicitor,

which involves professional discipline.

(b) Civil Liability - will the lawyer be liable to the debtor/client or to the creditors of

the debtor/client, and if so on what basis.

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(c) Criminal Liability - can a lawyer be subject to criminal proceedings in the event

that he or she has advised a client to complete, or facilitated the completion of, a

fraudulent conveyance, fraudulent preference or settlement?

Professional Responsibility

If the lawyer's only obligation, duty and responsibility was to do what was in the best interests of

the client or to simply follow the client's instructions, the answer in this area would be extremely

straight forward, all that the lawyer would have to do is to follow the client's wishes after

providing the client with professional and competent legal advice. However, a lawyer's

responsibility goes much deeper then the responsibility to the client. In Campion and Dimmer's

Professional Liability in Canada, Carswell Thompson Professional Publishing, (1994), (at p. 7­

1), the authors state:

The practice of law has historically and consistently been recognized as one of thelearned professions. Even more than other professionals, lawyers are expected to becommitted to high ethical, moral and professional standards and act in a manner not onlyfor the benefit of the client but for the community as a whole. A lawyer is expected todischarge with integrity all duties owed to clients, the court, the public and other

. members of the profession. Lawyers are intimately involved in all aspects of theadministration of justice. It is this role which is unique to lawyers that gives lawyersgreater powers not permitted to other professionals. Public confidence in both theadministration of justice and the legal profession could be eroded by irresponsible,incompetent or dishonest conduct.

[Emphasis added]

The Canadian Bar Association ("CBA") in the preface to The Code of Professional Conduct

states:

The essence of professional responsibility is that the lawyer must act at all timesuberrimae fidei, with utmost good faith to the court, to the client, to other lawyers, and tomembers of the public. '" The Code of Professional Conduct that follows is to beunderstood and applied in light of its primary concern for the protection of the publicinterest.

The Code of Professional Conduct of the Law Society of Saskatchewan is in many respects

) identical to and certainly consistent with The Code of Professional Conduct by the CBA.

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Reference will be made to The Code of Professional Conduct (the

"Code") of the Law Society of Saskatchewan (but at least in this respect there are no substantive

differences between the CBA Code and the Code of the Law Society).

Reference is made to chapters 1 & 3 of the Code, as well as the commentaries thereon as follows:

Ch.l Integrity

. Rule. The lawyer shall discharge with integrity all duties owed to the client, the court,other members of the profession and the public.

Ch. 3 Advising Clients

Rule. The lawyer must be both honest and candid when advising clients.

Commentary 7. Dishonesty or Fraud by Client7. When advising the client the lawyer must never knowingly assist in or encourage anydishonesty, fraud, crime or illegal conduct, or instruct the client on how to violate the lawand avoid punishment. Lawyers should be on guard against becoming the tool or dupe ofan unscrupulous client or persons associated with such a client.

The above commentary seems to be pretty clear and explicit. If a lawyer has knowingly advised,

assisted or encouraged a client in the completion of a fraudulent conveyance, fraudulent

preference, it is submitted the lawyer will have breached this provision of the Code.

The consequences for such a breach can, in a professional standards context, range from a

consideration of the ethics of the conduct before the Ethics Committee and the Benchers, a

professional competency concern (and that can ultimately lead to a practice review or practice

restrictions) and could go so far as to the presentation of a charge that the solicitor has engaged in

conduct unbecoming a barrister and solicitor. That disciplinary question can of course involve

the entire spectrum of discipline sentencing upon a finding of conduct unbecoming. Depending

upon the nature of the conduct and the case, the lawyer's ability to continue to practice as a

barrister and solicitor can be at risk if there is a finding of conduct unbecoming..

)

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Criminal Liability

Many debtors who may be considering a transfer of property to keep it out of the hands of their

creditors may not be aware of s.380 or s.392 of the Criminal Code. Those sections provide:

380(1)(a) Fraud

380. (1) Everyone who, by deceit, falsehood or other fraudulent means, whether or not itis a false pretence within the meaning of this Act, defrauds the public or any person,whether ascertained or not, of any property, money or valuable security or any service,(a) is guilty of an indictable offence and liable to a term of imprisonment not

exceeding ten years, where the subject-matter of the offence is a testamentaryinstrument or the value of the subject-matter of the offence exceeds five thousanddollars;

392. Everyone who,(a) with intent to defraud his creditors,

(i) makes or causes to be made any gift, conveyance, assignment,sale, transfer or delivery of his property, or

(ii) removes, conceals or disposes of any of his property, or. (b) with intent that anyone should defraud his creditors, receives any property by

means of or in relation to which an offence has been committed under paragraph(a), is guilty of an indictable offence and liable to imprisonment.

R.S., c. C-34, s. 350.

A colleague has recently relayed to me the story of a business person who had discussed with the

lawyer an intention to transfer certain property to prevent creditors from getting that property.

When advised of the fraud that may result, the client's initial response was that "everyone does

it". The solicitor, being a knowledgeable practitioner, pointed out these two sections of the

Criminal Code to the businessman who was shocked to learn of the possibility of criminal

proceeding being instituted against him if it was considered that he engaged in conduct that

amounted to a fraudulent preference, fraudulent conveyance or settlement.

Where does that leave the lawyer? Section 21 of the Criminal Code provides:

21. (1) Everyone is a party to an offence who

) (a)(b)

actually commits it;does or omits to do anything for the purpose of aiding any person to commit it; or

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(c) abets any person in committing it.

(2) Where two or more persons form an intention in common to carry out an unlawfulpurpose and to assist each other therein and anyone of them, in carrying out the commonpurpose, commits an offence, each of them who knew or ought to have known that thecommission of the offence would be a probable consequence of carrying out the commonpurpose is a party to that offence.

RS., c. C-34, s. 21.

In essence, the solicitor who aids or abets the debtor in the conduct of the fraudulent act is also

subject to criminal charges under either s. 380 or 392. I am not aware of any case or proceeding

where a charge has been laid against a solicitor in these circumstances. However, do you want to

take that risk? Reference is made later in this paper to a B.C. decision in which the Criminal

Code was mentioned.

Civil Liability

There are two possibilities that ought to be considered in regards to the question of whether the

lawyer can be faced with civil liability in this situation. Firstly, is there a possible claim that the

debtor/client can make against the solicitor for aiding and abetting or counselling the

debtor/client to undertake the action that is the fraudulent conveyance, fraudulent preference or

settlement? Secondly, can the solicitor by sued by the creditor or creditors that have been

damaged by the fraudulent conveyance, fraudulent preference or settlement?

If the solicitor advises the debtor/client to commit the fraudulent act, it is very likely that the

debtor/client could sue the solicitor for negligence and breach of professional responsibility. It is

not difficult to conceive of a situation where the solicitor, believing that the advice provided to

the debtor/client is in the debtor/client's best interest, advises the client to undertake a course of

action that is subsequently found to be fraudulent, and thereafter the debtor sues the solicitor in

negligence for providing the bad advice. Liability would be assessed like any other negligence

claim against the solicitor. Although it is no answer to a finding of negligence, it may be

debatable what damages the client may have suffered as a result of the negligence in this

situation (and it might be argued that there is little, if any, damage suffered by the debtor).

)

)

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The second scenario in which I submit a solicitor may be found negligent is if the solicitor

doesn't advise the client that proposes to pursue a fraudulent conveyance, fraudulent preference

or settlement that the transaction the client proposes to undertake may be a fraudulent preference,

fraudulent conveyance or settlement. In Foster v. Barry (1983) 5 W.W.R. 315, the B.C.

Supreme Court dealt with a case of a debtor-client suing his former lawyer for damages. The

Plaintiff had transferred land to his children during divorce proceedings with his wife. The

children were to hold the land until the divorce proceedings were concluded and then were to

transfer the land back to the Plaintiff. One of the children refused to transfer the land back to her

father. When the father commenced action against the daughter to compel the land to be

transferred back, the Court refused to order her to transfer the land back, concluding that there

was a presumption of advancement by the father to the daughter of the land. The father sued the

lawyer who had completed the transfer of the land from the father to his children. The lawyer

had advised the father that the transfers of the land may have been considered by the Court to be

a fraudulent conveyance, but the lawyer had not advised the father of the issues that could arise

from the presumption of advancement when the father transferred the land to his children.

It is interesting to note that Proudfoot, J. in reciting the facts of the case said this about the

lawyer's actions in completing the transfers of the land for the father:

The Defendant [the defendant lawyer in this action] did, however, allow himself to bepersuaded to assist in this illegal course of conduct. The Defendant was clearly "the toolor dupe of an unscrupulous client".

The court concluded that the lawyer had failed to adequately advise the plaintiff (the father) of

the presumption of advancement, but the court found there was no causal connection between

that breach and the resulting loss claimed by the plaintiff. The court concluded that the father

would have transferred the land to his children even if the defendant lawyer had advised the

father of the presumption of advancement. As a result, the damages that the plaintiff suffered

were in no way caused by the negligence of the solicitor in failing to advise the father about the

presumption of advancement. Quite apart from that finding, the court also concluded on a matter

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of public policy that the court would not assist the plaintiff father in this case in enforcing an

illegal contract by allowing the father's claim against his lawyer to succeed.

On the basis of this latter principle, the lawyer that has assisted the client in carrying out a

fraudulent conveyance, fraudulent preference or settlement may be able to defend a claim by that

client on the basis that any claim by the client against the lawyer would be afforded the same

treatment by the court on public policy grounds, thereby preventing the client from suing their

lawyer for damages arising from their illegal act. This argument would not prevail, in my

opinion, if the lawyer had counselled the client to pursue the fraudulent conveyance, fraudulent

preference or settlement.

An interesting case of note is Centre Star Mining Co. v. Rossland Minors Union, et al, 1905, 1

W.L.R. 244, Carswell B.C. 59. In that case the British Columbia Supreme Court faced a

situation where the defendant had transferred property it owned to its solicitors immediately

following a trial at which the defendant had been found liable to the plaintiff. Counsel for the

plaintiff and the defendant were asked to submit written argument on the application for the

issuance of the judgment in favour of the plaintiff. Immediately after that occurred, certain

property belonging to the defendant was transferred to its counsel, arguably for a portion of the

fees owing by the defendant to its counsel. A letter had been written to one of the defendant

parties, or a principal of one of the defendants (that part is unclear) by counsel in which counsel

stated:

... therefore that it is very necessary if you have any property in your name to makedisposition of it at once. It is very dangerous to convey to your wife, because the law is

. that a voluntary conveyance on the eve of a trial of lawsuit against you is no good.

The court was sitting on appeal from a decision by the trial judge that had dismissed the

plaintiffs application to have the defendant's solicitor return the transferred property to the

sheriff. The appeal was allowed by the majority of the court. Mr. Justice Martin dissented and

concluded that the matter should go to a trial to determine some very grave and complicated

issues. Mr. Justice Martin took some time to write a decision. The other judges of the court on

appeal granted their judgment immediately. Hunter, C.J. wrote a rather scathing judgment with

)

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respect to the solicitor's conduct. The learned Chief Justice, after referring to the portion of the

letter referred to above stated:

Now, that letter was evidently not written by inadvertence, as it was apparently a circularletter written to all the clients for whom he [the solicitor] was acting. I think a solicitor

. who can write a letter of that sort has a very poor notion of the dictates of professionalhonour; and not only that, but that he is floundering in a quagmire of ignorance andmoral obliquity. He evidently does not know that it is an offence at common law, that itis an offence under the Statute of Elizabeth, that it is a crime under the Criminal Code ofthis country for anyone to transfer his property with the intention of defrauding acreditor. And of course, if that is so, then it must be a crime for anyone, and especially asolicitor, to counsel the commission of such an act. I have not the smallest doubt that thesolicitor who wrote that letter was guilty of an indictable offence, and that he alsocommitted a gross contempt of the Court. As, however, no one has seen fit to bring thematter before the court in a formal way, I do not think it is necessary on this occasion totake any further notice of it than to mark our sense of the misconduct revealed by thematerial before us.

The Chief Justice was not persuaded by the argument of counsel for the lawyer whose conduct

was so obviously called into question, that the transfer could only be attacked on the basis of the

Fraudulent Preference Act (B.C.), as it was a transfer to a creditor. The argument that was being

urged upon the court was that there was a legitimate indebtedness owing by the defendant to its

counsel, and counsel was exerting pressure on the defendant to transfer the assets to its counsel

in payment or part-payment of the amounts owing to counsel. Mr. Justice Martin felt that there

was to be recognized a difference between the solicitor acting as a solicitor, and the solicitor

acting as a creditor of the defendants. Mr. Justice Martin felt that the case was not entirely clear

on the facts and therefore he was prepared to refer the matter back for a trial. He would have

dismissed the appeal, stayed the proceedings by the plaintiff for return of the property, and

directed a reference on the issues and a trial on that reference. He did, however, state (at p. 26):

I do not wish it to be understood that if it was clearly established that during thependency of an action a solicitor had obtained possession of the property of his clientwith the fraudulent intention of defeating and delaying other creditors, that the Court hadnot and would not exercise summary jurisdiction over him and call him to account; onthe contrary, it could and should do so, even of its own motion and a proper case ...

The result of the majority decision is that the action and proceeding by the plaintiffs against

counsel for the defendants respecting the transfer of property was successful. The majority also

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seems very clearly to telegraph that the action of counsel in that case was such that not only

would criminal proceedings have been warranted, but also proceedings before the governing Law

Society would have been certainly warranted.

It might be argues that this case is of narrow application because the property in question was

transferred by the defendant to its counsel as opposed to third parties. However, I think that

distinction is for the most part insignificant in the context of any fraudulent preference. The

majority felt that the defendants were acting to delay, defeat and hinder their creditors. Certainly

the fact that the property was transferred to the solicitor raised the ire of the majority of the court

as regards the claim against the lawyer, but the outcome as against the debtors, it is submitted,

likely would have been the same if the same general intent was established. It is also important

to note that the decision by the majority of the court was that the property had to be transferred to

the sheriff, or in default of such transfer, the value of the property paid to the sheriff. For the

most part, this was nothing more than setting aside the fraudulent preference/conveyance that had

occurred. It doesn't appear that the defendant solicitor was liable for anything more in the way of

damages or costs.

The final case that I will comment upon is Chan v. Stanwood, 2001, Carswell B.C. 546

(B.C.S.c.) and 2002 Carswell B.C. 1982; 2002 216 D.L.R. (4th) 625 (B.C.C.A.). In this case,

the plaintiffs had obtained a judgment against the defendant debtors. The defendant debtors

sought the advice of counsel) after the judgment, regarding their assets. Counsel suggested that

the defendants transfer their property from a partnership to a new corporation. The plaintiff

creditors applied to set aside the transfer under the Fraudulent Conveyance Act (B.C.), and

claimed damages against the defendants as well as against the counsel that had advised the

defenclants to establish the corporation and transfer the assets.

Gill J., of the British Columbia Supreme Court dismissed the application as against the

defendant's lawyer. The judge was concerned that the pleadings against the debtor's lawyer were

inadequate in that it was only alleged that the lawyer when advising the defendant debtors had

committed a tort, and didn't specify what tort was the basis of the claim. The judge on the

application also felt that the solicitor had the honest belief that the conveyance was not

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)fraudulent. The solicitor had provided evidence that it was his opinion that the transfer was not a

fraudulent conveyance as the defendants had done nothing to deplete or diminish their net worth,

having chosen simply to transfer their assets to a corporation which they held shares in. The

assertion of the defendant lawyer was that the assets were now held by a corporation, but the

debtor's shares in the corporation were exigible.

The solicitor deposed that it was his opinion that a debtor could not intentionally diminish their

assets to the prejudice of creditors, but as long as the overall value of their assets did not

diminish, creditors would not be delayed or hindered. The defendants had received shares of the

new company in exchange for the assets transferred by them into the new company.

The B.C. Supreme Court had to consider whether the transfer was made for valuable

consideration. The argument of the defendants was that the issuance of the shares was for

valuable consideration and therefore the conveyance could not be set aside as a fraudulence

conveyance under the provincial act unless there was an actual intention to delay, defeat and

defraud creditors. Although the court struggled with the issue of valuing the shares, it concluded

that the value of the transferred assets exceeded the value of the shares, and that therefore

"valuable consideration" had not been received for the transferred assets. The court also stated

that even if valuable consideration had been received, the transfer could still be set aside because

the specific purpose in establishing the corporation was to transfer the assets to shelter those

assets from the claims of creditors.

As regards the liability of the solicitor, the plaintiff sought judgment for damages on the basis

that the solicitor was liable to them in tort. The pleadings did not specify what intentional tort

was the basis of the plaintiffs claim. The conclusion of the court was that the solicitor's honestly

held opinion, that a fraudulent conveyance had not occurred, although wrong at law, was

sufficient given the lack of specificity in the pleading to find the defendant solicitor not liable for

the plaintiffs damages. The court, however, did express the view that a claim against a solicitor

in these circumstances could be conceptually for participation in a fraud, conspiracy to defraud

) or deceit.

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The Court of Appeal upheld the decisions of the judge. On the liability of the defendant debtors,

the Court of Appeal concurred that the intent to delay and defeat creditors had been sufficiently

established, and that the defendants had the intent to put their assets beyond the reach of the

plaintiffs. The fact that the net value of the defendants had not changed dramatically was

irrelevant. The fact that assets of one kind had been exchanged for another (shares) was no

answer because the shares, while exigible in theory, were much more difficult to execute against

given the corporate structure. In short, the exchange of assets for preferred shares delayed,

hindered and defrauded creditors and had the effect of so doing, thereby bringing the Fraudulent

Conveyance Act (B.C.) into effect.

As regards the liability of the defendant's solicitor to the plaintiffs, the Court of Appeal agreed

with the trial judge that the nature of the tort claim by the plaintiffs against the solicitor had not

been adequately plead, and that the pleadings could not be amended at that late stage to deal with

that. However, even though the Court of Appeal dismissed the claim, it very clearly left open the

ability to claim against a solicitor on at least the basis of the tort of conspiracy, if not on the basis

of deceit and fraud. The Court of Appeal concluded that the solicitor had been counselling the

debtors on a course of action that was intended to delay and hinder creditors at a time when the

defendants were insolvent. It is interesting to observe that counsel for the defendant lawyer had

argued that imposing liability upon a lawyer for advice given to a client would interfere with the

lawyer's duty to advise clients and to act in the client's best interests. The Court of Appeal

rejected that argument and in doing so referred to the Code of Professional Conduct and

specifically those provisions that stated lawyers are not to assist the client in participating in a

fraudulent act (in British Columbia Rule 6 of Ch. 4 of the Handbook of Professional Conduct

provides, "a lawyer shall not knowingly assist a client to make, receive or participate in a

fraudulent conveyance, preference or settlement". While more specific than the Saskatchewan

Code referred to above, the intent, it is submitted, is the same).

The Court of Appeal stated that while it agreed that the solicitor for the defendants was not liable

in damages to the plaintiffs, it was not merely a question of the sufficiency of the plaintiffs

pleadings. The Court of Appeal observed that the plaintiffs had, throughout the trial, not alleged

any fraud on the part of the defendant's counsel. Therefore, to assert a claim based upon a

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fraudulent action at that date would have been inconsistent with their position at the trial. The

Court also considered whether an allegation of the tort of conspiracy could be made against the

solicitor. That tort arises where there is an agreement of the conspirators to do an unlawful act or

to do a lawful act by unlawful means. Again, it had not been alleged that there had been a

conspiracy, and the Court pointed out that even if there had been, such an argument may have

been a "tortuous one". The Court of Appeal also raised the question or whether counselling or

inducing someone to perform a fraudulent conveyance would have been a separate tort in and of

itself.. The Court of Appeal referred to Chief Justice Hunter's comments in the Centre Star

Mining Co. case referred to above. The Court of Appeal expressed some reservation on this

aspect pointing out that in a fraudulent conveyance action, the claim is not generally a claim for

damages but rather a claim to have the transfer set aside and the assets returned to the

transferor/debtor. Therefore, in my opinion, the decision of the Court of Appeal raises some real

doubt as to whether a solicitor could successfully be sued by the affected creditors for damages

arising from a fraudulent conveyance, fraudulent preference or settlement, particularly in those

cases where the transferred assets were available to be conveyed back to the debtor. In those

situations where the assets cannot be reconveyed, the possibility of civil liability to the solicitor

is, it is submitted, improved. At that point, it is really a question of what is the appropriate

remedy, and in most cases the remedy against the defendants (whether it is the debtor defendant

or their counsel as defendant) is to have the conveyance, preference or settlement set aside. In

those cases where that is not practical or possible, perhaps civil liability for damages would, in an

appropriate case, with appropriate pleadings and evidence, be made.

6. CONCLUSION

Lawyers need to be concerned about becoming involved in a client's efforts to conclude or

engage in a fraudulent conveyance, fraudulent preference or settlement. It is no answer to simply

say that the lawyer was following the instructions of their client or acting in the best interests of

their client. At a very minimum, the lawyer exposes himself or herself to professional

proceedings for breach of ethics or potentially for activities that could be found to be conduct

unbecoming a solicitor.

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Perhaps at an extreme, criminal charges could be pursued against counsel if counsel is

considered to have aided and abetted the commission of a criminal offence.

Perhaps the most difficult issue to prove in that circumstance might be whether the counsel had

the necessary mens rea for the conviction. In that respect, if there was an honest belief that the

action was not a fraudulent conveyance, fraudulent preference or settlement, perhaps a

conviction could not be obtained. However, it is submitted that the lawyer would have a difficult

time proving lack of mens rea where the evidence established that there was a clear case of a

fraudulent conveyance, fraudulent preference or settlement.

In cases where the fraudulent preference, fraudulent conveyance or settlement can be "undone"

the remedy of reversing the transaction and restoring the assets to the debtor is likely such that it

would be difficult to obtain an award of damages against the solicitor (although query whether

the costs of the proceedings might not be a heading of damage that could be pursued against the

solicitor fairly easily). In those cases where the fraudulent transfer cannot be successfully

undone, I venture to suggest that the claim against the solicitor is more likely to be successful

than in the case where the transfer can be reversed. In either situation, I submit that liability on

the part of the solicitor can be proven either on the basis of fraud, conspiracy or deceit.

Counsel need to be vigilant to know what the circumstances are when dealing with their clients.

Counsel should take care to ensure that they know enough about the circumstances so that they

can make an informed judgment as to whether there is a possibility that the transfer of assets

could be attacked as a fraudulent conveyance, fraudulent preference or settlement. This may

mean making extensive inquiries of your client as to what their circumstances are and what their

intentions are. In those cases where counsel suspects that a fraudulent conveyance, fraudulent

preference or settlement is going to occur, not only is it necessary to completely advise the client

of the risk of pursuing the action that they are considering, but I think the matter has to go so far

as counsel choosing not to act for the client. Where there is any doubt or concern, counsel

should proceed with caution and consultation with another lawyer that is unbiased and impartial

is always advisable.