Release of claim in settlement agreement in favour of spouse deemed fraudulent transfer by court

The Court of Appeal of Alberta has ruled that the release of a party’s claim in a settlement agreement in favour of their spouse may constitute a fraudulent transfer of interest and thereby void against the party’s creditors.

In Fish Creek Finish Carpentry Ltd v Lindner, 2021 ABCA 348, the respondent obtained judgments against the appellant’s husband. In enforcing the debt, the respondent learned of the appellant and her husband’s settlement agreement in a property action, in which they sought damages against a third person. The settlement agreement contained a provision that once payment was made to the appellant, both the appellant and her husband agreed to discontinue and release their individual claims against the third party. Counsel for the respondent requested that the funds received by the appellant be kept by her counsel, but the funds were released.

The respondent was granted an ex parte interim attachment order prohibiting the appellant and her husband from disbursing any of the funds received under the settlement agreement. The respondent applied for an order directing that half of the settlement be paid to the appellant’s husband’s creditors, arguing that the settlement was a fraudulent transfer of his interest in the property action. A Master granted the order, declaring that the settlement agreement contravened the Fraudulent Preferences Act, RSA 2000, c F-24 and the Statute of Elizabeth, 1571 (UK) 13 Eliz 1, c 5.

Before the chambers judge, the appellant filed new affidavit evidence on appeal, arguing that the settlement agreement was not a conveyance or transfer of property under either statute. The chambers judge admitted the new evidence but upheld the Master’s ruling.

On appeal, the appellant claimed that the chambers judge erred in concluding that the settlement agreement was a transfer or conveyance of property under the statutes.

The Court ruled that there was a transfer of property since the appellant’s husband had a quantifiable and ascertainable interest in the settlement property. The release of his individual claim effectively transferred it to his wife, the appellant, for her benefit, “defeating and prejudicing [the appellant’s husband’s] creditors by taking all the settlement proceeds for herself,” said the Court.