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Settlement of property on trust

The facts in this case were as follows:

‘B’ (husband) pleaded that the court should accept his plea that it had no jurisdiction to consider this case and filed an incidental appeal. The court, however, refused to consider this plea as it had been raised fuori termine

The parties married on October 4, 1996, and had two children. They later separated amicably in terms of a separation contract dated August 22, 2002. Under their contract of separation, ‘B’ (husband) was obliged to pay her a maintenance allowance for the children as well as for her own upkeep.

‘A’ wife complained that her husband failed to pay her maintenance as agreed, accumulating a debt in her favour. ‘B’ (husband) was also found guilty and condemned by the Court of Magistrates to pay her maintenance.

Soon after their separation, ‘B’ (husband) created a trust called the Phoenix Trust on February 28, 2005, and appointed as trustees Equinox International Ltd. ‘B’ (husband) was both the settlor and the sole beneficiary of the trust.

Later, by a contract dated April 28, 2005, ‘B’ husband settled in trust his only immovable property in Malta, a villa in Marsaxlokk. His wife felt aggrieved by this manoeuvre. She had claims against her husband and, by transferring his property to the trust, she feared that she could no longer consider the villa in Marsaxlokk as a guarantee for her claims against him.

She felt that this was stratagem employed by ‘B’ husband to avoid having assets in his name in Malta.

The villa was settled in trust without consideration.

No mention was made in the trust deed of their separation.

Faced with this situation, ‘A’ (wife) proceeded to file legal proceedings against her husband and the trustees in terms of article 1144 (2) of the Civil Code (actio Pauliana). Article 1144 of the Civil Code provides that:

“1. It shall also be competent to any creditor in his own name to impeach any act made by the debtor in fraud of his claims, subject to the right of the defendant to plead the benefit of discussion under the provisions of articles 795 to 801 of the Code of Organisation and Civil Procedure.

2. Where such acts are under an onerous title, the creditor must prove that there was fraud on the part of both contracting parties.

3. Where such acts are under a gratuitous title, it shall be sufficient for the creditor to prove fraud on the part of the debtor…”

She requested the court:

1. To declare that the act of settlement of property on trust dated April 28, 2005, was fraudulent and prejudicial to her rights;

2. To order its rescission;

3. To appoint a notary to rescind the contract;

4. To declare both the trustees and her husband jointly liable for damages.

In reply, the trustees, Equinox International Ltd, contested the legal action against them. They submitted in defence that:

• The elements of actio Pauliana were lacking against them. ‘A’ (wife) was obliged to prove fraud;

• The creation of the trust was lawful;

• The trustees disputed, acting fraudulently. They were not aware that the villa was ‘B’’s (husband) sole property in Malta. Nor was there any irregularity in the trust deed. The trust deed did not have to state ‘B’’s marital status.

The trustees argued that the fact that no consideration was stated did not render it unlawful nor did this imply bad faith.

‘B’ husband, also disputed his wife’s legal action against him. He said that her claims were unfounded and that he did not owe her anything. He also pleaded that the Maltese courts lacked jurisdiction to consider this case against him as he was absent from Malta.

On February 27, 2009, the First Hall of the Civil Court dismissed the wife’s requests. It assumed jurisdiction and accepted the trustees’ pleas that:

• The elements of actio Pauliana were missing; and

• The trust was lawful and that the trustees did not act fraudulently.

The court considered wife ‘A’ as a creditor for purposes of the actio Pauliana. As the trust was deemed to be an onerous contract, the court said that the elements of actio Pauliana had to subsist vis-à-vis both her husband and the trustees.

The two elements of the actio Pauliana were:

• damage/harm; and

• knowledge of the fraud (consiluim fraudis). There was no need to show the intention to defraud (animus nocendi).

The court was not satisfied that wife ‘A’ proved fraud on the part of the trustees. As the contract of trust was onerous in nature, she had to show that the trustees were aware that the act was harmful to B’s creditors. She could also have attacked the trust as a sham and that the trustees were only acting as the agent of the settlor.

Aggrieved by the decision of the Court of First Instance, ‘A’ (wife) entered an appeal, reiterating her claims that the property was settled in trust, fraudulently.

‘B’ (husband) pleaded that the court should accept his plea that it had no jurisdiction to consider this case and filed an incidental appeal. The court, however, refused to consider this plea as it had been raised fuori termine.

The court did not agree with the Trustees that the contract whereby property was settled on trust was ‘onerous’.

The court drew a distinction between the contract, creating the trust which was onerous in nature, from the contract whereby property was settled on trust which was gratuitous, and without consideration. Reference was made to Claxton John B.’s Studies on the Quebec law of Trusts.

It noted that the contract relating to the settlement of the property on trust was gratuitous. As the wife ‘A’ was attacking this settlement, there was no need to show that the trustees also acted in bad faith.

The partecipatio fraudis of the trustees was not an element which had to be proven, pointed out the court.

Wife ‘A’ was a creditor of her husband and she was prejudiced by the settlement of property on trust by her husband. ‘B’ husband could have pleaded the benefit of discussion under article 795 of chapter 12, and show that he had sufficient property in Malta, but he failed to do so.

The court maintained that wife ‘A’ brought sufficient evidence to prove damages (eventus damni) and the consilum fraudis of her husband in transferring his only asset in Malta to the trust, to the prejudice of his wife.

For these reasons, on November 9, 2012, the Court of Appeal gave judgment by accepting wife’s ‘A’ appeal. It declared that the contract of settlement of the property on trust dated April 28, 2005, to be fraudulent and ordered its rescission.

The court appointed Notary Burlò to publish the act. Dr A. Cutajar was authorised to appear for the contract in case husband ‘B’ failed to appear. The court left unprejudiced the wife’s claim for damages and reserved her right to raise this plea in a separate lawsuit. The court, in addition, declared null and void ‘B’’s (husband) incidental appeal, that the Maltese court lacked jurisdiction.

Dr Karl Grech Orr is a partner at Ganado & Associates.

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