The Doctrine of Knowing Receipt of Trust Assets

Knowing receiptThe doctrine of knowing receipt of trust assets is a principle of law that governs situations when a third party receives a trust property that itself has been realized through a  breach of  trust.

 Simply put, a party cannot, with knowledge of a trust, receive trust property in breach of that trust: see Citadel General Assurance Co. v. Lloyds Bank Canada, [1997] 3 S.C.R. 805 (S.C.C.).

 

The elements of the doctrine of knowing receipt were summarized by the Ontario Court of Appeal in Waxman v. Waxman (2004), 186 O.A.C. 201 (Ont. C.A.), leave to appeal refused [2004] S.C.C.A. No. 291 (S.C.C.), at paras. 553 as follows:

“The elements of the doctrine of knowing receipt are set out in the Perell article, supra, at 110: a trust or fiduciary relationship; the third party receiving property from the trust or fiduciary relationship in his or her own personal capacity; and the third party having actual or constructive knowledge that the property was transferred in breach of trust or fiduciary duty. Thus liability for knowing receipt does not extend beyond the property which the third party knows (or is deemed to know) has been received in breach of trust or fiduciary duty.”

 

This doctrine was also discussed by the Supreme Court of Canada in Gold v. Rosenberg, [1997] 3 S.C.R. 767, [1997] S.C.J. No. 93 (S.C.C.) 22     In Gold v. Rosenberg , Iacobucci J. explained:

“26 A person who has not been appointed as a trustee may, under certain circumstances, attract the liabilities of trusteeship. In Barnes v. Addy (1874), L.R. 9 Ch. App. 244, Lord Selborne L.C. explained that there are three situations in which a breach of trust may give rise to liability in a person who is a stranger to the trust.

First, a person may be liable as a trustee de son tort. The facts of this case do not require consideration of this category of liability.

Second, a person will be liable if he or she knowingly assisted in a fraudulent and dishonest breach of trust. This type of liability is referred to as “knowing assistance”.

And third, depending upon considerations of notice, equity may impose liability if the defendant received, in his or her own right, property obtained through breach of trust. This last category of liability is referred to as “knowing receipt”…

41 The essence of a knowing receipt claim is that, by receiving the trust property, the defendant has been enriched. Because the property was subject to a trust in favour of the plaintiff, the defendant’s enrichment was at the plaintiff’s expense. The claim, accordingly, falls within the law of restitution. As Denning J. said in Nelson v. Larholt, [1948] 1 K.B. 339, at p. 343:”

 

In Citadel General Assurance Co. v. Lloyds Bank Canada, [1997] 3 S.C.R. 805 (S.C.C.)  the court outlines a two-part test for liability:

liability under the doctrine of “knowing receipt” requires a stranger to have received monies for his own use or benefit and requires the stranger to have knowledge or constructive knowledge — i.e. the stranger knew or should have known — that the funds were received by him unlawfully. In order for Lloyd to be liable in “knowing receipt” for the amount of monies directed to his invoices, the plaintiff has to establish that Lloyd knew, or ought to have known that the monies paid against his account were owing to Nash.

What Is an Express Trust?

What Is an Express Trust?

Chambers v Chambers 2012 BCSC 81 involves  litigation between a 90-year-old brother and his younger 79-year-old brother regarding the percentage of ownership in a house that the older brother  (A)  purchased so that the younger brother ( B)  could live in.

The house was purchased in 2005 by A with his own money.

The idea was that brother B would have a place to live until he died.

A  had initially told B that he would register the house in joints tenancy, but after meeting with a lawyer, he subsequently told B that he would give him 1% interest on title as a tenant in common, which he did.

In 2010 the house was sold over the objections of B who refused to sign the sale documents because he objected to receiving only 1% of the sale proceeds.

By agreement one half of the sale proceeds were held by a lawyer while B brought an application to court for a finding that 50% of the sale proceeds of the home were held in trust for him.

His application was dismissed and he was only entitled to 1%.

His first argument was that of  Express Trust, and this was dismissed on the basis of no evidence of such a trust:

 

An express trust requires a settlor, a beneficiary, a trust corpus, words of settlement, certainty of object and certainty of obligation.

In order for an express trust to arise there must be certainty of intention, subject matter and object. There must also be a transfer of property to the trustee

In order to create an express trust in circumstances such as these, the three requisite certainties must be present.

In Saugestad v. Saugestad, 2006 BCSC 1839, the Court said the following at para. 82:

The requirements for the creation of an express trust include the three certainties:

1) the language of the settlor must be imperative,

2) the subject matter or trust property must be certain,

3) and the objects of the trust must be certain

Purported Gift Set Aside – Resulting Trust Found

NO gift wrappedPurported Gift Set Aside

Resulting Trust Found

Sutherland, Committee of Fountain v Dorland and Rendell 2012 BCSC 615 involves a plaintiff, as committee of her deceased mother’s estate, seeking to recover funds transferred by her mother in the last years of her life to the defendants, the plaintiff’s sister and nephew.

The plaintiff alleged that the deceased lacked mental capacity when she purportedly signed 35 cheques amounting to more than $153,000.

The deceased died shortly thereafter at the age of 90 years.

The plaintiff  also alleged that there was no consideration for any of the cheques the defendants  received, and consequently , the monies were impressed by a resulting trust in favor of the deceased estate.

The defendants asserted that the monies were gifts, but were l;argely unable to explain why or much about why they were gifts, especially at a time when the defendants were financially in need.

The court awarded judgment for the plaintiff for the amount of $131,000, and allowed a claim of $29,000 for services rendered, finding that at the time the services were rendered, the deceased had capacity.
The Court reviewed the law of resulting trusts from the most recent Supreme Court of Canada case on the topic:

[62]    The first legal concept relevant to the analysis is that of the resulting trust. As explained by Rothstein J. in Pecore v. Pecore, 2007 SCC 17 at paragraph 20:

A resulting trust arises when title to property is in one party’s name, but that party, because he or she is a fiduciary or gave no value for the property, is under an obligation to return it to the original title owner…

The law presumes a resulting trust in certain situations. Again, as explained by Rothstein J. at paragraph 24 of Pecore:
The presumption of resulting trust is a rebuttable presumption of law and general rule that applies to gratuitous transfers. When a transfer is challenged, the presumption allocates the legal burden of proof. Thus, where a transfer is made for no consideration, the onus is placed on the transferee to demonstrate that a gift was intended…

To rebut the presumption, the transferee must show on a balance of probabilities that the transferor had an intention contrary to or inconsistent with the intention the law presumes in relation to gratuitous transfers (Pecore at paragraph 43).

disinherited.com is pleased that a perceptible trend seems to be developing that the trial court’s are now more willing to rely upon the presumption of resulting trust more strongly than perhaps they have in the past, despite the fact that the presumption has existed for hundreds of years in various forms.

The courts appear to be more willing to impose the existing law in these types of circumstances, to say that if a party receives a substantial gift without consideration, then the onus of proof is on the recipient of the gift to discharge the presumption of law and to prove that a gift was intended

What Are Trusts and Where Do They Come From

What Are Trusts?

It is not always easy to define exactly what a trust is.

Essentially a trust is an equitable obligation binding a person called a trustee, to deal with property over which he or she has control (the trust property), for the benefit of others who are called the beneficiaries.

The trustee may also be a beneficiary, and any one of the beneficiaries may enforce the obligation.

In law, a trust is not a separate legal entity( such as a corporation), except for specific purposes such as for income tax.

Simply put, it is a relationship where one party ( the settlor or testator in a will ) holds and administers  property on certain terms ( the trusts) for the benefit of another ( the beneficiary).

Where Did They Come From?

Trusts developed in England from the times of the crusades, and continue to do so  up to the present.

The law of trusts initially developed through co-operation between English barristers and the Courts, in order to avoid exorbitant taxes and to protect property for the benefit of widows and infants.

Trust settlements primary purpose then was to preserve capital, and Victorian trusts often obliged the eldest son the obligation to maintain widows, educate younger sons, and provide financial inducements for the marriage of sisters.

The entire system of trusts depended very much upon the incorruptibility of the trustee, usually the eldest son.

The Courts of Chancery gradually developed the concepts of “equity” and many of the legal principles relating to trusts were developed to protect beneficiaries against exploitation

For example,  two principal rules developed very early by the Courts of Chancery  were that the trustee must not profit from being trustee, and must not put him or herself in a position in which his or her interests conflict with his or her duty.

There was historical friction between the King’s representative and the Lord Chancellor who established the Courts of Equity.

The Courts of equity began to over rule the King as they had the discretion to declare that the real owner of property, in equity , ( fairness), was another person than found by the King.

Mother’s Advancement to Son Found to Be Loan and Not Gift On Appeal

Mother's Advancement of ,000 to Son , Found to Be Loan and Not Gift

Mother’s Advancement of $50,000 to Son Who Died Found to Be a Loan and Not a Gift By Appeal Court

It is often difficult to determine the intention of the grantor when monies are advanced for no consideration from one party to another and it is not properly.

This is often the case where one parent for exaple advances significant monnies to a child without stipulataing properly whether the moneis were a GIFT or a  LOAN.

This was the situation in the Beaverstock appeal decision Beaverstock v Beaverstock 2011 BCCA 413

In May, 2005, the appellant advanced $50,000 to her son Dan Beaverstock which he applied to refinancing the purchase of some property in Alberta. Dan Beaverstock subsequently died in December 2007. The respondent is his widow and is the executrix and sole beneficiary of his estate.

The appellant pleaded the $50,000 was a loan to her son and the respondent jointly, repayable on demand. Alternatively, she pleaded it was a loan to her son and that the respondent, as executrix, had improperly distributed the proceeds of the estate to herself without first paying this debt from the estate. She sought judgment for $50,000 against the respondent personally and in her capacity as executrix and a declaration that the respondent held all sums received from the estate in trust for her pending satisfaction of her claim. The respondent denied the advance was a loan to her and her husband and pleaded it was a gift to him. It was common ground that the appellant had demanded payment before action and that the respondent had refused to pay.

The parties agreed the action should be resolved on a summary trial pursuant to Rule 18A, summary trial

The appellant deposed that her son asked to borrow $50,000 to help him refinance the purchase of property that he had purchased in Alberta, since he was having difficulty meeting the mortgage payments. She said he “was very clear that he wanted to ‘borrow’ the money from me and that he was seeking a ‘loan’.” She said she agreed to lend him the money and that she caused it to be deposited in the joint account of her son and the respondent. She said she did not discuss the loan again with him until a few weeks before his death when he told her he was going into business with a friend and was optimistic that he “should be able to repay the loan very soon.” The appellant also filed affidavits of three persons who said her son had told them he had borrowed the money from the appellant and that he owed her the money.

The respondent deposed that she was Dan Beaverstock’s wife at the material times and that they had separated about two weeks before his death. She said she had no knowledge, at the time, of the transaction between her husband and his mother and did not know that $50,000 had been deposited in their joint account. She said, as well, that her husband told her prior to their separation that the appellant had given him $50,000 and that he believed this amount to be an advance on his inheritance and that he would never have to repay it. She also asserted facts calculated to cast doubt on the reliability of the evidence of the witnesses who deposed that Dan Beaverstock told them he had borrowed the money from his mother. The respondent also filed the affidavit of her mother, who deposed that the appellant told her “on numerous occasions” that Dan Beaverstock and the respondent “owed her $50,000 relating to money provided to assist with the Alberta property.” She said she told the appellant to talk to Dan Beaverstock about it and leave her out of it.

There was also conflicting evidence concerning whether the respondent had acknowledged to the appellant and others that the advance was a loan and had admitted an obligation to repay it.

The correct approach to the resolution of this dispute is not in dispute. It is set out in Pecore v. Pecore, 2007 SCC 17, [2007] 1 S.C.R. 795. Whether the transfer was a loan or a gift depends on the actual intention of the appellant when she made the advance, which is a question of fact. As the advance was gratuitous, the onus was on the respondent to demonstrate that the appellant intended a gift, since equity presumes bargains, not gifts (para. 24). This equitable principle gives rise to a presumption the son received the money on a resulting trust, which is a rebuttable presumption of law. The trial judge was therefore required to presume the advance was not a gift and to determine whether the respondent had satisfied the burden of rebutting the presumption of resulting trust on a balance of probabilities (para. 44).

The trial judge made no mention of the presumption. Further, he made no finding of fact as to the appellant’s actual intention. Indeed, it appears he did not consider that question. Rather, it appears he considered the burden was on the appellant to establish certain specified things and that, since she failed to do so, her claim was unsustainable as a matter of law

The factors to which the trial judge referred are not substantive elements of a claim that a gratuitous transfer was a loan and not a gift. Rather, they are items of circumstantial evidence relevant to the transferor’s actual intention. Moreover, they are not exhaustive of the evidence that may be considered in determining the transferor’s intention. They are to be weighed by the trial judge along with all of the other evidence in determining the transferor’s actual intention as a matter of fact, which is the pivotal fact on which the action turned. It is not evident from the trial judge’s reasons that he turned his mind to this question.

In failing to begin his analysis with the presumption of resulting trust and in failing to make a finding as to the critical fact – the appellant’s actual intention – the trial judge erred in law.

 

Appeal Allowed- Mother Wins back the $50,000.

Presumption of Resulting Trust Applies to Transfer of Land

Until recently there had been some questions in BC estate litigation as to whether or not the presumption of resulting trust applies to gratuitous transfers of real property, in light of the provisions of the Land Title Act, section 31 that provides that under the torrens system, the indefeasible title is conclusive evidence in law and in equity, that the person named in the title is entitled to an estate in fee simple in the land.

The court in Aujula v Kaila 2010 BCSC 1739, held that the conclusive evidence of title found under the Land Title act can be rebutted in some circumstances

as such  the operation of the presumption of resulting trust where there is an agreement between the parties that is contrary to the registered title, or to take into

account the underlying equitable interests between the parties.

 

In Fuller v. Harper, 2010 BCCA 421 at para. 43, (sub nom Fuller v. Fuller Estate)[2010] B.C.J. No. 1901 [Fuller], the Court of Appeal noted the existence of

appellant authority that appears to support the view that a presumption of resulting trust could be applied to a gratuitous transfer of real property.  Smith D. J.A.

, relying on Pecore, described how the burden of proof is affected by the presumption of resulting trust by placing the onus on the transferee to lead evidence of

the transferor’s contrary intention in order to rebut the presumption on a balance of probabilities: Fuller at paras. 44-47.

 

The relationship between the statutory presumption found in the Land Title Act and the presumption of resulting trust was addressed in Aujla.  Under the

statutory presumption, the party challenging the state of title has the onus of displacing the presumption that title, as currently registered, is conclusive of legal

and beneficial ownership.  However, at para. 37, Harris J. found that this burden could be discharged through the operation of the presumption of resulting trust

if the transfer was gratuitous. If no consideration was exchanged, the onus shifts to the transferee to prove on a balance of probabilities that the transfer was

intended as a gift.

$20 Million Lottery Jackpot Claim Dismissed Under Trust Law

$20 Million Lottery Jackpot Dismissed due to trust law.Lottery

It is not uncommon to hear about litigation claiming entitlement to share in lottery jackpots arising out of former friends or co- employees.

Invariably the claim is that for quite a long period of time, often years, a group of friends or co-workers contributed money to a lottery scheme with an intention to share the winningsContinue reading

“Gift” Set Aside – Resulting Trust Imposed on Asset

Gift v Resulting trust

Pan v Pan Estate 2011 BCSC 856 is an excellent example of a court case that deals between the “tug of war” in legal terms  of a gift versus a resulting trust.

In 1994 the plaintiff withdrew $450,000 from her bank in Taiwan and transferred into an account in the name of her husband in Vancouver.Continue reading

Presumption of Resulting Trust Rebutted

Presumption of Resulting Trust Rebutted

Gift of House and Bank Accounts to Spouse Upheld as Gifts

In disinherited.com’s last blog, we discussed the Zukanovic v Malkoc case.

There, the court set aside various “gifts” made during the lifetime of the deceased, and found they were held in trust for the estate.

Hamilton v. Jacinto 2011 BCSC 52, although involving different facts altogether, also involved the same legal arguments of one side arguing that the asset was transferred to him or her without consideration, with the intention of gifting that asset, while the opposing party typically arguing that no intention of a gift was shown and that the asset accordingly, is held in trust for the estate.

In this decision, the court held that the transfer of various assets to his 2nd spouse, after the death of his wife of 59 years, was intended by the deceased to be a gift to his new spouse, and that he was competent, and free of undue influence to do so.

In 2003, the plaintiff’s elderly father, a Washington state resident, purchased a house in British Columbia in joint names with the defendant, and opened joint bank accounts with her,using assets of a Washington state trust, of which he was the sole trustee and beneficiary. She contributed no monies to the bank accounts or the house.

After the father’s death in 2004 at age 84, the plaintiff children commenced a court action to set aside the house and bank transactions.

The plaintiffs argued that the defendant held the property in trust for their father’s estate.

The evidence however showed that the father knew what he was doing and acted freely.

The court found that the presumption of resulting trust was rebutted, that there was no undue influence.

Accordingly the action was dismissed in favor of the defendant spouse.

The two contrasting decisions indicate how difficult it can be even for very senior estate specialists such as at disinherited.com, to predict the outcome of such court actions.

The next blog will show how the court penalized the plaintiffs with an award of double costs for failure to accept an offer to settle.