S.58 WESA Does Not Apply to Wills With “Pour Over” Revocable Trusts

S.58 WESA Does Not Apply to Wills With "Pour Over" Revocable Trusts

Re Quinn Estate 2018 BCSC 365 held that the curative provisions of section 58 WESA did not apply to a will, with a ”pour over” clause that created revocable and amendable trusts.

Mr. Quinn was a well know when general manager in the National Hockey League, including with the Vancouver Canucks.

In 1996, he executed a will in respect to his Canadian assets situated in Canada. At the time of his death in 2014 his Canadian assets consisted primarily of shares in the capital of several private corporations. Subject to the resolution of a particular liability, the value of the estate was either $750,000 or near nil.

The will was prepared by a US attorney and was executed in British Columbia.

Under clause 6 of the will, the residue of the testator’s Canadian estate was to ”pour over” into a revocable amendable inter vivos family trust to be added to principal and thereafter, but to be held, administered and distributed under the terms of such agreement.

The trust was settled in 1996, prior to the execution of the will. The testator executed the trust declaration, contemporaneously with the execution of his will.

Under the trust, the settlers, namely the deceased and his wife, were the first beneficiaries. Following the death of the surviving settlor, the beneficiaries were their two daughters.

The petitioner sought the court’s determination as to whether the pour over clause was invalid, and if so, whether it was cured by recent legislation, namely section 58 WESA.

The court held that the clause was invalid and was not saved by the curative provisions of section 58 WESA.

A “pour over” clause is generally viewed as a dispositive provision directing that all or part of the estate should be added to the corpus of existing trusts, the terms of which were not reiterated in the will itself.

Trusts are not a legal person, and is only a relationship.

Accordingly, a devise or bequest to trusts is not like a devise or bequest to an individual. The “pour over” trust doctrine is not a probate doctrine, but rather concerns the construction of wills. It is based upon the doctrine of independent significance. Under that doctrine, if a fact or an entity exists which has significance independent of the will extrinsic evidence is admissible to identify the fact or entity.

Properly established trusts are such a fact of independent significance. The disadvantage of the “pour over” trust is similar to that which attends the doctrine of incorporation by reference, namely that a reference to a trust which is revocable or which may be replaced with another is not acceptable, since the trust is not then have independent significance in the testator is purporting to reserve the right to make a future under tested codicil to the will.

The court held that subject to the possible application of section 58 of WESA, the pour over clause of the will was invalid.

The court then discussed the policy reasons behind section 58 and held that it is to enable the court to step in where a person has taken real steps to make a will, but the formalities of fallen short. Section 58 does not exist to enable the court to bless structures that circumvent the formalities altogether, which is what a “poor over” clause to an amendable trust does.

The family trust in question by providing its own amendment or revocation by the testator and his wife, created a mechanism to avoid the execution strictures of section 37 WESA. Such provisions for revocation or amendment also do not reflect the requisite deliberate or fixed and final intention “ for testamentary dispositions. The clause was not saved by section 58 WESA given that the testator made the will requiring the of opinion of the court, the parties were each entitled to their costs from the estate. On the full indemnity basis. ”

In Waters Law of Trusts in Canada , the learned author describes a trust as follows:
“ a trust is the relationship which arises whenever a person called the trustee is compelled in equity to hold property, whether real or personal, and whether by legal or equitable title, for the benefit of some persons of whom he may be one, and who are turned beneficiaries, or for some object permitted by law, in such a way that the real benefit of the property, cruise, not to the trustees, but to the beneficiaries or other objects of the trust“

In Kellogg Estate 2013 BCSC 2292 the court held that a pour over clause to a revocable, amendable inter vivos trust to be invalid.

The court stated at paragraph 70 “the gift cannot “pour over” to be held by the trustee of the trust on the terms which existed at the time the will was executed, because that trustee is not obliged to follow the terms set out in the amendment to the trust. The gift cannot “pour over” to be held by the trustee on the basis of the amendment to the trust because the effect would be to permit the trustee to have effectively amended his will, without complying with the Wills act”

The definition of will in section 1 of WESA contemplates a testamentary disposition. This solemn duty of making one’s will, as reflected in section 37 (1) of WESA and its requirement for proper execution .

WEAS’s purpose and requiring particular formalities for the proper execution of a will is to ensure certainty as to the deceased final wishes and to avoid controversy, and possible litigation. The possible use of a revocable, amendable inter vivos trust as the recipient of a testamentary gift, bequest, or devise creates the uncertainty that the legislation sought to avoid.

A person could not one day execute his or her will, fully observant execution strictures of sections 37 of WESA, leaving the residue to of his or her estate to a revocable amendable inter vivos trust, which he or she can then revoke or amend the following day without regard to any execution strictures.

Section 58 of Wesson must be read in context of sections 37 and 59 of WESA.

Section 58 WESA is not an independent provision. From its language, even though the making, revocation, alteration or revival of the will does not comply with this act, section 58 is tethered to section 37 WESA.

The court stated that the policy reason behind section 58 is to enable the courts to step in where a person has taken real steps to make a will, but the formalities have fallen short. It does not exist to enable the court to blessed structures that circumvent the formalities altogether, which is what a “pour over” clause to an amenable trust does. If the policy behind S. 58 were to do away with testamentary formalities, then WESA would not contain testamentary formalities. Rather, what section 58 reflects is a policy to ensure that a document that reflects the deliberate, fixed and final intention of the deceased person is not set aside on the basis of failure to comply with the formality.

The court referred to Re Hadley Estate 2017 BCCA 311 that reviewed the purpose of section 58 WESA and stated at paragraph 34 “ section 58 of WESA is remedial in nature, it confers a broad discretion on the court to order that a record or document or writing or marking on a will or document be fully effective, despite noncompliance with the statutory requirements. Although section 58 cannot be used to uphold the will that is substantially invalid, it permits the court to cure issues of formal invalidity in prescribed circumstances.

For an order to be granted under section 58 WESA, the court must be satisfied that a document represents the testamentary intentions of the deceased person. However, unlike the curative provisions in some province, section 58 does not require a minimum level of execution or other formality for a testamentary document to be found fully effective. Regardless of its form, if the court grants an order under section 58 the document may be admitted to probate.

It is the amendable nature of trusts themself, not the actual amendments made to it, that renders is ineligible to be saved under section 58. In order for the gift to the trust in the Quinn case to be curable, under section 58 it would be necessary for the terms of the trust to represent the deliberate or fixed and final intentions of the deceased. By its very nature, the trust could never express the fixed and final intention of the deceased because it contemplated its own amendment. The trust was a vehicle that enabled the deceased to change his testamentary dispositions at any time. It was the very opposite of the fixed and final statement of the deceased’s intentions with respect to the disposition of his assets on his death.

Encroachment of a Spousal Trust

Encroachment of a Spousal Trust

Toigo Estate 2018 BCSC 936 reviewed the law of the court’s jurisdiction to grant an order approving a resolution of the trustees discretionary power to encroach upon the capital of a spousal trust created by the deceased in favor of his wife.

Pursuant to the spousal trust the spouse was to receive the net income from the estate during her lifetime, and the trustees having uncontrolled discretion to encroach on the capital of the residue of the estate in favor of the spouse during her lifetime.

The amount of the estate was substantial and the trustee approved a resolution allowing the spouse to encroach upon the capital of the estate in the amount of 50% so as to allow her to distribute the estate in accordance with her own estate planning.

The court reviewed the law and allowed the encroachment as recommended by the trustee.

Given the magnitude of the estate and the proposed encroachment, the trustee sought approval of the court prior to proceeding with the encroachment.

S. 86 (1) the Trustee act, RSBC governs the courts exercise of powers in relation to a trust. That section permits an executor or administrator to seek the following by way of petition:

“A trustee, executor or administrator may, without commencing any other proceeding, apply by petition to the court or by summons on a written statement to a Supreme Court judge in chambers, for any opinion, advice or direction of the court on a question respecting the management or administration of the trust property or the assets of the will maker or intestate.”

The court also retains inherent jurisdiction to supervise trust despite statutory enactments on the matter.

In Public Guardian and Trustee v Colwell 2004 BCSC 1622 qt para. 32 . The court stated:

“Donovan Waters Law of Trusts in Canada notes that courts have retained their inherent jurisdiction to supervise trusts – none of this legislation is taken away the inherent powers, so that the courts can fall back upon them should the statutory powers prove inadequate.

The key principle governing the courts inherent jurisdiction is the welfare of the beneficiaries of the trust.

In Mansbridge and Roulston 2004 BCSC 1605 , the court discussed section 86 of the Trustee act, and at paragraph 51 stated “ on an application for directions under section 86 of the Trustee act, the court should not exercise the trustee’s powers, but rather confine itself to advice on any legal issues that arise in connection with the trustees obligations. The principle is enunciated In re Fulford (1913) 29 )LR 375 at 382.

In Tomlinson Estate 2016 BCSC 1223 at paragraph 53-54, the court quoted Waters Law of Trusts in Canada, stating” the issue of management or administration as a limitation upon the trust the act power of the court to give his advice, opinion, or direction as being more particularly raised in connection with motions which turned out to involved a conflict as the ownership of the assets. The courts refused to give such assistance when there is essentially a conflict between interested parties, and this is not merely because the court has not necessary evidence before it, because it is felt that a fight whether or not it is patent, is not a matter of management or administration”

The court relied upon the inherent jurisdiction of the court to permit the substantial encroachment sought by the petitioner, as the encroachment would affect the residual beneficiaries being the grandchildren of the deceased in and to the substantial estate.

In Courage estate 1975 10 NFLD & PEIR 511 the court stated that the law is long settled that were trustees are given the right to encroach on capital, coupled with broad discretionary powers, the courts will not interfere with the exercise of these powers unless they are exercised unfairly and there are no mala fides with regard to their exercise.

“It is the noted that in this case, the trustees are given power to encroach on the capital of the whole residuary estate, not just a portion thereof, and I can find nothing in the will to support the contention that the amounts to be divided amongst the children after the way staff, are to be placed in any special category during her lifetime.”

Essentially, the court is in effect making a declaration that the trustees proposed exercise of the power is lawful, in other words, that the proposed exercises within the proper ambit of the power, but the trustees are acting honestly, as in reaching their decision.

The trustees have taken into account all relevant matters, have taken into account no irrelevant matters, and have not reached a decision that no reasonable body of trustees could have reached. The effect is to protect the trustees from any challenge to the decision by persons interested in the trust, and to make clear that the trustees are entitled to indemnity from the trust assets in respect of the costs or other financial consequences of their decision. It is immaterial that the court had it been exercising a discretion of its own, would’ve exercised it in a way different from that proposed by the trustees.
The court, however, should exercise caution, and not act as a rubberstamp or take a lax approach.

The court found that all of the above-noted legal considerations are consistent with section 86 (1) of the Trustee act

The court found that the trustee’s decision was made in good faith, that he did not stand to gain from the encroachment in any way, and the proposed division, that is equal shares between each of the deceased children and equal shares between the grandchildren, is a desirable and proper encroachment by the spouse of the deceased in order to more equitably distribute the estate amongst the grandchildren of the deceased.

Trustees Breach of Duties Denied Fees

Trustees Breach of Duties Denied Fees

Zimmerman v McMichael Estate 2010 ONSC 2947 involved a passing of accounts hearing where a trustee was denied any compensation for his breach of duties as acting as trustee, denied fees, and ordered to re-pay $450,000  that he had pre-taken as compensation.

The trustee was denied fees as a result of innumerable improper actions after the death of the deceased. Prior to her death, the trustee had exercised complete control over her $5 million of property and finances using a power of attorney until her death.

Some of the improper findings on the part of the attorney used to deny him fees are as follows:

1) he did not display any skill or diligence in the administration of the trusts;

2) his conduct fell well below the standard expected of a trustee – he breached some of the most basic obligations of a trustee;

3) he failed to perform his most basic duty to properly account for the administration of the trusts and the accounts, he presented to the beneficiaries and the court were manifestly inaccurate, incomplete and false;

4) he deliberately obstructed the respondents in their attempts to obtain a proper accounting;

5) he failed to comply with court orders requiring that he properly respond to the objections to the accounts;

6) he made improper and unauthorized payments to himself, or for his benefit out of the trusts;

7) he mingled trust property with his own property and use the two interchangeably for his own purposes;

8) he pre-paid himself compensation of $450,000 without keeping any proper records for his alleged pre-takings or the calculation thereof, and without the consent of the beneficiaries.

9) The attorney was a lawyer and his shortcomings were in total breach of his fiduciary duties owed to his client

Accordingly, the court denied him any compensation for his services as attorney and trustee.

Duties of a trustee

An attorney using a power of attorney is a fiduciary whose powers and duties must be exercised and perform diligently, with honesty and integrity and in good faith, for the incapable persons benefit only.
An attorney who receives compensation for managing property must exercise that degree of care, diligence and skill that a person in the business of managing the property of others is required to exercise.

3 Principal duties of a trustee:

1) To carry out the terms of the trust with honesty and due care and attention;

2) to personally carry out the responsibilities entrusted to him or her and not to delegate those responsibilities;

3) to ensure that his own interest. Do not conflict anyway with his duty to the beneficiaries that he serves.

A trustee has an obligation to keep proper accounts. A trustee must keep a complete record of his or her activities and be in a position at all times to prove that he or she administered the trust prudently and honesty. He or she must have the accounts ready and give full information whenever required.

–Sandford v Porter (1889) OJ 43

A trustee must make a proper accounting as a condition precedent to being awarded compensation. Without a proper accounting. The court is unable to assess the conduct of the fiduciary and determine the compensation to which he or she is entitled where trustee has failed to keep proper accounts and to have been grossly indifferent to his or her fiduciary obligations, he or she may be disentitled to compensation.

An attorney who fails to retain receipts supporting substantial cash withdrawals or expenses charged against the incapable persons property has not adequately carried out his or her duties and will be held personally liable for the unsubstantiated withdrawals.

It is a basic principle of trust law that a trustee is not entitled to use the trust property for his or her own personal benefit. If the trustee cannot account for or explain disbursements or expenses charged against a trust, he or she is personally liable to the trust for those disbursements and expenses.

If a trustee has mixed his or her own funds with the funds being held for another, all of the property must be taken to be the others property until the trustee is able to prove what part of it is his or her own.

–Norman Estate (1951) OJ 501 (CA)

It is an inflexible rule of the court of equity that a fiduciary must not make a profit or to put himself or herself in a position where his or her interests or his or her duty conflict unless the trust instrument expressly so provides. As a fiduciary, an attorney for property is not entitled to exercise that power for his or her own benefit unless expressly authorized to do so.

The trustee, not the beneficiaries bears the onus of establishing that the management and disbursement of funds is consistent with the terms of the trust.

A trustee who improperly enjoys the benefit of trust assets without authority and allows non-beneficiary such as his family, to also benefit is liable to the trust for the amounts of the value of the benefits received.

–Langston V Landen affd 2008 ONCA 321

There is also authority for the proposition that the fees paid by a trustee in respect of the preparation of accounts must be borne by the trustee and deducted from the amount of compensation payable.

There is also authority for the proposition that where the trustee delegates the care and management of a trust to a professional, the professional fees incurred by the trust are deducted from the compensation paid to the trustee.

Notaries May Not Draw Wills with Trusts or Life Interests

Notaries May Not Draw Wills with Trusts or Life Interests

The BC Court of Appeal upheld a Supreme Court decision that notaries are not allowed to prepare wills in British Columbia that create life estates or trusts under the Notaries act – in the decision Society of Notaries v Law Society of British Columbia 2017 BCCA 448.

The decision largely revolved around an interpretation of section 18 of the Notaries act RSBC , and in particular section 18 (b) (1) that states:

A member enrolled and in good standing may do the following:

b) draw and supervise the execution of wills

1) by which the will- maker directs the will makers estate to be distributed immediately on death;

2) that provide that if the beneficiaries named in the will predecease the will maker, there is a gift over to alternative beneficiaries vesting immediately on the death of the will maker, or

3) that provide for the assets of the deceased to vest in the beneficiary or beneficiaries as members of a class not later than the date when the beneficiary or beneficiaries or the youngest of the class attains majority.

The court reviewed the history of the legislation in British Columbia pertaining to notaries and referred to a previous decision in Law Society of British Columbia v. MacDonald 2013 BC SC 1204, that restrained the notary from engaging in the unauthorized practice of law, wherein the notary had drawn a will that included a trust and a life estate.

The McDonald decision stated that the notaries act appears directed at simple wills, where the gift is distributed both legally and beneficially immediately

The McDonald decision stated that the interpretation of the words distributed immediately on death in section 18 (B)(1) referred to the immediate distribution of the estate, and did not mean that some beneficial interest will be distributed immediately with rights to full legal title and to possession to be distributed later because the remainder man’s right to distribution is postponed by the life tenant’s right to possession, a will that contains a life estate does not affect immediate distribution.

The court concluded that when comparing the wording of the Legal Profession act and the Notaries act, it was evident that the legislative assembly authorize notaries to draw only the three types of wills described in sections 18 B, (1), (2), and (3).

That provision is disjunctive in that each of its subsections describes a different type of will.

The court then looked at several dictionary interpretations of the words distribute or distribution and found a distinguishing interpretation between the use of the word distributed and the use of the word vested into other subsections, that failed to support the legal argument advanced by the notaries.

The court referred to Jarman on Wills, as approved in the decision Browne v. Moody 1936 AC 635 that stated:

“ Even though there is no other gift than in the direction to pay or distribute in future: yet if such payment or distribution appeared to be postponed for the convenience of the fund their property, the vesting will not be deferred until the period in question. Thus, where a sum of stock is bequeathed to A for life, and after his decease, to trustees, upon trust to sell and pay and divide the proceeds to in between C and D, or to pay certain legacies there out to C. Indeed, as the payment or distribution is evidently deferred until the deceased of A, for the purpose of giving precedence to his life interest, the alternator legatees take a vested interest at the decease of the testator.”

Accordingly, the court rejected the notaries argument that the legislature had authorized notaries to draw wills that contain life estates and trusts in which the beneficial interest or interests vest immediately on the death of the will maker.

Valid Inter Vivos Trusts

Valid Inter Vivos Trusts

An inter vivos trust is where property transfers from one living person to another pursuant to a trust.

“A trust is the relationship that arises whenever a person called the trustee is compelled in equity to hold property, whether real or personal, and whether by legal or equitable title, for the benefit of some persons, of whom he may be one, and who are termed beneficiaries, or for some object permitted by law, in such a way that the real benefit of the property accrues, not to the trustees, but to the beneficiaries or other objects of the trust.” ( Waters Law of Trusts, 4th d. 2012, at page 3)

The creation of a valid inter vivos trust requires a valid active transfer to that clearly identified trustee.

The initial rule as to the formation of a valid trust was stated in Milroy v. Lord (1862) , 45 ER 1185:

“In order to render of voluntary settlement valid and effectual, the settler must have done everything which, according to the nature of the property compromised in the settlement, was necessary to be done in order to transfer the property and render the settlement binding upon him.”

In Milroy, the trustee was given share certificates in a power of attorney under which he could transfer the shares into his own name. The shares were such that legal title did not pass until the new owner’s name was entered into the share register, and that was not done until after the settlor’s death.
The court concluded it was not sufficient that the trustee was capable of transferring the shares. The transaction was incomplete without the actual transfer having occurred. The court would not compel the agent of the settlor to complete the transfer because he could not compel the settler to complete the transfer due to the death.

Accordingly, the court in Milroy refuse to hold that the settler held the legal title on trust for the trustee.

This strict test set out in Milroy, however has been relaxed over the years in such decisions as Pennington v. Waine (2002) 1 WLR 2075, where the English Court of Appeal held that it would have been unconscionable for the executors of the giftor to refuse to hand over share certificates, and found that the gift was valid when the share registry had not been updated in the name of the new owner, and the donor had completed the share transfer forms rather than handing them to her nephew.

In so concluding the court relaxed the rule in Milroy and imposed a trust on the setlorr such that she held the legal title to the shares in trust for the trustee until the transfer of ownership was completed.

With respect to land transfers, in Davidson v. Davidson (1946) 2 DLR 289 SCC the Supreme Court of Canada considered the language of the land title act, which is contained in section 20, and held that an unregistered transfer of land took effect on the day the transfer was executed and not on the day it was registered.

This was followed in Chung Estate v . Chan (1995) 4 BCLR 370, and affirmed in the BC Court of Appeal (1995) 13 BCLR 157, where the court held that the if the transfer has property completed a freehold transfer form, the opening words of section 20 – “except as against the person making it” – applied such that the form may be registered after the transferor’s death to affect the transfer of the property.

The court cases indicate that the intention of the transferor is crucial. If the transferor intends to transfer the property, the transfer will be complete when the transferor has relinquished control of the property and put the transferee in a position to complete the transfer.

A conveyance, whether absolute or in trust, is ineffective if the transferor does not surrender control of the property. A conveyance interest is incomplete unless the settler has passed the title to the property to the trustee by delivery of the subject matter of the trust or an instrument of transfer.

If the conveyance interest is completed by such delivery, the trust is not incomplete merely because the settlor reserves power to revoke, or to alter the trust. There is a sufficient surrender of control over the property if the settlor transfers the title to it to the trustee, even though he reserves power to undo what he had done.

Termination of Trusts: Saunders v Vautier

Termination of Trusts: Saunders v Vautier

Ward v Roberts 2017 BCSC 1768 allowed the termination of a trust on the basis that there was no ” gift over” and thus it violated the rule in Saunders v Vautier.

The deceased executed a will in 2009 that provided that placed equal share of residue of estate in separate trusts for son and daughter. The will provided that if daughter pre-deceased the deceased, then her share would pass to her brother’s children.

The daughter brought a petition for termination of trust which the court allowed as the daughter was the only person with a vested interest in the trust.

Her brother’s children only had contingent interests if she died within 10 years and there was no “gift over” to other persons in the event that she did die within 10 years.

The daughter was entitled to the entire beneficial interest of trust and could terminate trust as the daughter met the requirements for termination of trust in accordance with modern statement of rule in Saunders v. Vautier.

As in Fargey, the petitioner in this case relied on the rule in Saunders v. Vautier (1841), 1 Cr. & Ph. 240, 41 E.R. 482 (Eng. Ch. Div.). Deschamps J. most recently defined the rule in Buschau v. Rogers Communications Inc., 2006 SCC 28 (S.C.C.) [Buschau], at para. 21:

[21] The common law rule in Saunders v. Vautier can be concisely stated as allowing beneficiaries of a trust to depart from the settlor’s original intentions provided that they are of full legal capacity and are together entitled to all the rights of beneficial ownership in the trust property. More formally, the rule is stated as follows in Underhill and Hayton: Law of Trusts and Trustees (14th ed. 1987), at p. 628:

If there is only one beneficiary, or if there are several (whether entitled concurrently or successively) and they are all of one mind, and he or they are not under any disability, the specific performance of the trust may be arrested, and the trust modified or extinguished by him or them without reference to the wishes of the settlor or trustees.

23 Bastarache J. concurring with Deschamps J. noted at para. 98 that “[t]he rule in Saunders v. Vautier requires the consent of all parties who have an interest or who own rights of enjoyment in the trust property.”

24 I agree with the petitioner’s submission that Buschau constitutes the modern and broader form of the rule in Saunders v. Vautier.

25 The respondent did not provide authority for his position that the Trust and Settlement Variation Act, R.S.B.C. 1996, c. 463 [Act], restricts application of the rule in Saunders v. Vautier in British Columbia. There is no authority to that effect. Section 1 of the Act empowers the court to consent to trust variations on behalf of persons incapable of consenting due to age or other incapacity, as well as on behalf of those with contingent interests. In Fargey, J, the second petitioner was only 17, therefore under disability due to his age. M’s Petition was disposed of without reference to the Act but due to J’s disability due to his age, the court had to dispose of his interest under the Act.

26 Section s. 1 of the Act does not apply in this case. It does not empower the court to consent on behalf of an adult person who is not legally incapacitated: Buschau at para. 98. As already mentioned, in this case, the petitioner and all potential beneficiaries are adult, none under a disability. The Act does not apply in these circumstances, Saunders v. Vautier does.

27 Further the Supreme Court did not declare the statement of law in Saunders v. Vautier in error; only that it had no application in the context of a statutorily regulated pension plan: Waters’ Law of Trusts in Canada, 4th ed. (Toronto: Carswell, 2012) p. 1237. In sum, Professor Waters concluded:

In general, then, the rule will not apply to regulated pension plan trusts. It can be said that there are broadly three situations in which the rule in Saunders v. Vautier operates.

28 The petitioner cited those three situations passages which Professor Waters set out at p. 1237 of his text, as follows:

1. Where the “beneficiary . . . is adult, of sound mind, and entitled to the whole beneficial interest may require the trustees to transfer the trust properly to him. [p. 1237.]

2. Where “[s]everal concurrently interested beneficiaries . . . all adult, of sound mind, and between them entitled to the whole beneficial interest may collectively compel transfer.” [p. 1238.]

3. Where “[s]everal beneficiaries . . . entitled in succession, whether their interests are vested or contingent, may combine to require transfer, provided they are all adult, of sound mind, and between them entitled to the whole beneficial interest.” [p. 1238.]

Trustee Cannot Be in Conflict With Duty

Trustee Cannot Be in Conflict With Duty

Equity will not allow a person who is in a position of trust to carry out a transaction where there is a conflict between his or her duty and his or her interest.

It is a rule of universal application that no trustee shall be allowed to enter into engagements in which he or she has, or can have, a personal interest, conflicting, or which may possibly conflict, with the interests of those whom he or she is bound by fiduciary duty to protect. So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness, or unfairness, of the transaction; it is enough that the interested parties object. It may be that the terms on which a trustee has attempted to deal with the trust estate are as good as could have been obtained from any other quarter or better, but so inflexible is the rule that no inquiry into that matter is permitted. It makes no difference whether the contract refers to real estate, personalty, or mercantile transactions, as the disability arises not from the subject matter of the contract, but from the fiduciary character of the contracting party. Broadly speaking, the reason for the rule is that the trustee should not be placed in a position in which his or her interests are liable to conflict with his or her duty to the cestui que trust. This reason applies equally to a person acting as an agent of the trustee.

For example in Butcher Estate v Hamilton 1997 CarswellBC 1917 (B.C. S.C.) a mother transferred substantial sums of money to her daughter. The transfers were not an  outright gift to the daughter, but were intended to be held in trust by her to use for care of mother and father. The mother and father lacked mental capacity at time of transfers. The daughter breached her  duty as trustee by dealing with funds as though her own.

Breach of Trust: “Knowingly Participating”

Breach of Trust: "Knowingly Participating"

In Scoretz v Kensam Enterprises Ltd 2017 BCSC 1356 a director of a corporate bare trust was found liable for damages for “knowingly participating” in the breach of trust by failing to deliver shares held in trust .

The court found that it is clear that Mr. Sai knowingly assisted in the breach of trust. Mr. Sai had actual knowledge of the existence of the trust and that the refusal of Kensam to deliver up the shares was a breach of trust. He failed to take the necessary steps to have the release of the LIM Shares and the Napier Shares to Mr. Scoretz and, at the same time, he received a benefit as a result of the breach of trust as LIM Shares were made available to him through his control of Kensam.

He was in a position to sell his LIM Shares in the market without competition from the shares that should have been available for Mr. Scoretz. Mr. Sai knowingly assisted in the breach of trust by failing to cause Kensam to deliver the LIM Shares as was required. Whether by intention, recklessness, or wilful blindness, Mr. Sai participated in the breach of trust which benefited himself. In those circumstances, Mr. Sai is personally liable for the breach of trust of Kensam.

THE  LAW

The leading case on the personal liability of strangers to a trust is Air Canada v. M & L Travel Ltd., [1993] 3 S.C.R. 787. There, a travel agency was obliged to hold in trust the proceeds from its sale of Air Canada tickets, breached the trust, and did not provide Air Canada with approximately $25,000 that was owed. The issue was exactly the same as the issue here: whether or not the director and shareholder of the travel agency could be held personally liable for the loss.

68  The starting point for liability for “knowing assistance” is the decision of the Court of Appeal in Chancery in Barnes v. Addy (1874), L.R. 9 Ch. App. 244where Lord Selborne L.C. stated at p. 252 that a stranger to a trust can be liable if they “assist with knowledge in a dishonest and fraudulent design on the part of the trustees”.
69  In Air Canada, supra, the Court noted that actual knowledge is required but that reckless or wilful blindness will also suffice. The Court also noted that, if a stranger receives a benefit as a result of the breach, it may be grounds to infer that the stranger had knowledge of the breach of trust.
70 Given that Kensam is a closely held company and Mr. Sai was the directing mind, this requirement of knowledge is easily satisfied. I have no hesitation in concluding that Mr. Sai had actual knowledge of the refusal of Kensam to deliver up the LIM Shares and the Napier Shares.
71  Concerning the nature of the breach of trust, the Court in Air Canada noted that there had developed two lines of authority: most English authorities required participation by the stranger in a dishonest and fraudulent design as set out originally in the Barnes decision whereas a line of Canadian authorities has developed holding that a person who is the controlling or directing mind of a corporate trustee can be liable for an innocent or negligent breach of trust if the person knowingly assisted in the breach of trust and that, in those circumstances, proof of fraud and dishonesty by the controlling mind of the corporate trustee is not a requirement if a finding can be made that the breach of trust amounts to fraud and dishonesty. In this regard, it is necessary to show that there is proof of fraud and dishonesty by the trustee and not by the controlling and directing mind of the trustee.
72  In Air Canada, supra, Iacobucci J. stated that the divergence in the case law was a result of the application of the traditional rule in the context where the corporate trustee is actually controlled by the stranger to the trust:
Where the trustee is a corporation, rather than an individual, the inquiry as to whether the breach of trust was dishonest and fraudulent may be more difficult to conceptualize, because the corporation can only act through human agents who are often the strangers to the trust whose liability is in issue. Regardless of the type of trustee, in my view, the standard adopted by Peter Gibson J. in the Baden case, following the decision of the English Court of Appeal in Belmont Finance, supra, [Belmont FinanceCorp. v. Williams Furniture Ltd. (No. 1), [1979] 1 All E.R. 118], is a helpful one. I would therefore “take as a relevant description of fraud ‘the taking of a risk to the prejudice of another’s rights, which risk is known to be one which there is no right to take’.” In my opinion, this standard best accords with the basic rationale for the imposition of personal liability on a stranger to a trust which was enunciated in Re Montagu’s Settlement Trusts, supra, [Re Montagu’s Settlement Trusts, [1987] Ch. 264] namely, whether the stranger’s conscience is sufficiently affected to justify the imposition of personal liability. In that respect, the taking of a knowingly wrongful risk resulting in prejudice to the beneficiary is sufficient to ground personal liability. This approach is consistent with both lines of authority previously discussed.
(at para. 60)
73  In British Columbia, there is a line of authority which is binding on me which provides that a person who is a controlling or directing mind of a corporate trustee can be liable for an innocent or negligent breach of trust if the person knowingly assisted in the breach of trust: Horsman Bros. Holdings Ltd. v. Panton, [1976] 3 W.W.R. 745 (B.C.S.C.); Trilec Installations Ltd. v. Bastion Construction Ltd. (1982), 135 D.L.R. (3d) 766 (B.C.C.A.); Henry Electric Ltd. v. Farwell (1986), 5 B.C.L.R. (2d) 273 (C.A.). In Scott v. Riehl (1958), 15 D.L.R. (2d) 67 (B.C.S.C.), Craig J. stated regarding an “innocent” breach of trust:
If a person deals with the funds, which are within the meaning of s. 3 [what was then the Mechanics’ Lien Act, 1956, S.B.C. 1956, c. 27] in a manner inconsistent with the trust, he breaches the trust, even though he may do so “innocently”.
74  Similarly, the courts in other jurisdictions have concluded that proof of fault and dishonesty is not required: Andrea Schmidt Construction Ltd. v. Glatt (1979), 25 O.R. (2d) 567. (C.A.); Austin v. Habitat Development Ltd. (1992), 94 D.L.R. (4th) 359 (N.S.C.A.).
 

Bare Trusts

The Liability and Duties of a Trustee of Bare Trust

Scoretz v Kensam Enterprises Inc 2017 BCSC 1356 was an action for breach of trust brought by the beneficiary of a bare trust  and discusses the liability and duties of a trustee of a bare trust.

The Court found that the trustee was liable in damages for failing to hand over the  shares when directed to do by the beneficiary who suffered damages as a result.

40      In Waters Law of Trust in Canada, 3rd ed. (Toronto: Thomson Carswell), 2005, the learned author makes this statement regarding the nature of a bare trust and the duties of a bare trustee:

The usually accepted meaning of the term “bare,” “naked” or “simple” trust is a trust where the trustee or trustees hold property without any duty to perform except to convey it to the beneficiary or beneficiaries upon demand. It is true, of course, that so long as a trustee holds property on trust he had the duty to account for the property, keeping it secure and unharmed. The trustee cannot divest himself of this duty, and, if that is his sole duty, he must transfer that property to the beneficiary on demand. . . .

(at pp. 33 and 34)

41      In Bronson v. Hewitt, 2010 BCSC 169, Goepel J. (as he then was), made this statement regarding the nature of a bare trust:

In Trident Holdings Ltd. v. Danand Investments Ltd. (1988), 64 O.R. (2d) 65 at 75, the Ontario Court of Appeal described a bare trust and the role of its trustee as follows, quoting from Maurice C. Cullity, “Liability of Beneficiaries-A Rejoinder” (1985-86), 7 E. & T.Q. 35 at 36.:

The distinguishing characteristic of the bare trust is that the trustee has no independent powers, discretions or responsibilities. His only responsibility is to carry out the instructions of his principals  the beneficiaries. If he does not have to accept instructions, if he has any significant independent powers or responsibilities, he is not a bare trustee.

(at para. 636)

42      In Bronson, supra, Goepel J. held that a trustee breached the terms of the trust which had required the trustee to return the trust property on demand when the trustee required the beneficiaries to sign a release and indemnification before releasing proceeds of a share transaction. I find that what was prohibited in Bronson, supra, is prohibited here.

43      As a bare trustee, Kensam was obligated to deliver the trust property upon demand and, as the principal of Kensam, Mr. Sai was required to take whatever steps that were required so that Kensam would make such a delivery to Mr. Scoretz. The failure to deliver the LIM Shares to Mr. Scoretz when they were demanded constitutes a breach of trust. The failure to deliver the Napier Shares to Mr. Scoretz when they were demanded also constitutes a breach of trust.

44      I am also satisfied that Kensam and Mr. Sai have acted other than in accordance with the obligation to act in the interests of Mr. Scoretz to the exclusion of the separate interests of Kensam and Mr. Sai.

45      One of the fundamental duties owed by a bare trustee to a beneficiary was set out by Gow, J. in MacDonald v. Thompson (1988), 26 C.C.E.L. 269 (B.C.S.C.) in the following statement:

A trustee in his dealings with one who has an interest in the fund which the trustee administers is under a duty to that someone of exceptional honesty. The standard is known “fiduciary” and was recently described by our Court of Appeal in Litwin Construction (1973) Ltd. v. Peter Pan et al., [1988] B.C.J. No. 1145 (No. CA006245/6/7 June 28, 1988) at p. 23 as follows:

It arises where the obligation that is undertaken or imposed is the obligation of loyalty or selflessness arising from the fiduciary having entered a relationship where the other party is entitled to expect that the fiduciary will act in the other party’s interests, or in the interests of both parties (where those interests coincide), to the exclusion of the fiduciary’s own separate interests (where those interests are opposed), and where the fiduciary has the power to affect the other party’s interests in a legal or practical sense, giving rise to a position of vulnerability in the other party.

In order to perform properly that fiduciary duty a trustee when considering and dealing with the interest of that someone must rid himself of bias (prejudice) and be scrupulous to act with fairness and impartiality c.f. Boe v. Alexander, (supra), at pp. 113-114

(at paras. 73 and 74)

46      The standard of care and diligence required of a trustee was also set out in Fales v. Canada Permanent Trust Co., [1977] 2 S.C.R. 302 where Dickson J., on behalf of Court stated:

Traditionally, the standard of care and diligence required of a trustee in administering a trust is that of a man of ordinary prudence in managing his own affairs (Learoyd v. Whitely, at p. 733; Underhill’s Law of Trusts and Trustees, 12th ed., art. 49: Restatement of the Law on Trusts, 2nd ed., para. 174) and traditionally the standard has applied equally to professional and non-professional trustees. The standard has been of general application objective though, at times, rigorous.

(at p. 315)

47      A beneficiary is entitled to expect that a trustee will act in his or her best interests to the exclusion of the interests of a trustee: Litwin Construction, supra at p. 95.

Constructive Trust Remedy and Tracing

Constructive Trust Remedy and Tracing

Li v Li 2017 BCSC 1312 involved a father suing his daughter for the wrongful conversion of monies and the court finding for the father based on the remedy of constructive trust and tracing the monies.

THE  LAW

[225]     Mr. Li seeks a declaration that he is entitled to a constructive trust in respect of the Townhouse. His claim is grounded in both conversion and unjust enrichment. The approach to the remedy is the same.

[226]     A constructive trust is one of several remedies potentially available to Mr. Li. What is the remedy in cases where, as here, it is money as opposed to a tangible asset that has been converted? Where the funds remain with the tortfeasor, judgment is for the dollar amount converted unless a proprietary claim can be made out. The monetary claim is often referred to as one in detinue. In the case at bar, the parties did not distinguish between conversion and detinue, and instead referred to Mr. Li’s claim as one of conversion. The potential proprietary remedy is usually, but not always, looked at from the perspective of the nature of the loss to, and the reasons for recognizing a right of property in, the claimant.

[227]     To establish a proprietary remedy, Mr. Li must prove a direct link between his misappropriated funds and the Townhouse. He must also prove that a monetary award is inadequate, inappropriate, or insufficient: Harraway at paras. 51-52; Kerr v. Baranow, 2011 SCC 10 at para. 50; Peter v. Beblow,  [1993] 1 S.C.R. 980; Tracey v. Instaloans Financial Solution Centres (BC) Ltd., 2008 BCSC 669; Pro-Sys Consultants Ltd. v. Microsoft Corporation, 2013 SCC 57 at para. 92; Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 S.C.R. 574.

[228]     In Kerr, the Court described the constructive trust remedy as follows:

[50]      The Court has recognized that, in some cases, when a monetary award is inappropriate or insufficient, a proprietary remedy may be required. Pettkus is responsible for an important remedial feature of Canadian law of unjust enrichment: the development of the remedial constructive trust. Imposed without reference to intention to create a trust, the constructive trust is a broad and flexible equitable tool used to determine beneficial entitlement to property (Pettkus, at pp. 843-44 and 847-88). Where the plaintiff can demonstrate a link or causal connection between his or her contributions and the acquisition, preservation, maintenance or improvement of the disputed property, a share of the property proportionate to the unjust enrichment can be impressed with a constructive trust in his or her favour (Pettkus, at pp. 852-53); Sorochan, at p. 50).

[Emphasis added]

[229]     Where converted funds have been used to acquire an asset by the tortfeasor, as is the case in this action, another possible remedy may be a tracing order and an equitable lien: see, e.g., B.C. Teachers Credit Union v. Betterly, [1975] B.C.J. No. 1158 (S.C.). In some circumstances, punitive damages are awarded: Kolody v. Neil, 1998 ABQB 1009 at para. 24. Punitive damages have not been pleaded in Mr. Li’s notice of civil claim.

[230]     In B.C. Teachers Credit Union, Mr. Justice Bouck granted an equitable lien to the plaintiff whose funds in the amount of $45,000 were stolen by a Mr. Smith who then used nearly all of those funds to purchase property in the name of a related person (the defendant) in the amount of $45,154.24. The plaintiff sought a declaration that it owns the property and an order conveying title to it, or alternatively a lien to the extent of $45,000. Bouck J. found that Mr. Smith had contributed $1,000 and ordered an equitable lien in favour of the plaintiff in accordance with its interest, i.e., $44,154.42/$45,154.42 or 98% of its value.

[231]     In reaching his decision, Bouck J. made these remarks, which I find of assistance to this case:

[26]      The $1,000 equity paid by Smith has caused me some concern since he had the land conveyed into the name of the defendant. Usually, when a person buys property with his own funds and then has the conveyance registered in the name of a stranger there is a presumption of a resulting trust. The stranger is then presumed to hold the land in trust for the purchaser. The presumption is of course rebuttable. If that principle is applied to Smith and the defendant then I would have to hold there is a presumption of a resulting trust in favour of Smith. …

[27]      But the concept of a resulting trust is an equitable rule. The question then arises whether equity should play any part in assisting Smith to recover his $1,000. I think not. The greater part of the purchase price was made up of stolen money. Without it Smith could not have bought the house. The rules of equity should not be extended in any way to aid a thief in his unlawful intrigues.

[Emphasis added]

[232]     This approach has been considered with approval in this province and others: Ruwenzori Enterprises Ltd. v. Walji, 2006 BCCA 448 at para. 36; Toronto-Dominion Bank v. Storr, 2014 ONSC 4278 at paras. 129-131; Kolody v. Neil, 1998 ABQB 1009 at para. 24.

[233]      Consequential losses suffered by the wronged party may also be recovered, subject to the principles of remoteness: Columere Park Developments Ltd. v. Enviro Custom Homes Inc., 2010 BCSC 1248 at para. 35. For example, where the value of a converted chattel has increased, the claimant is entitled to the increase as consequential damages (which some case authorities have referred to as special damages): Cash v. Georgia Pacific Securities Corp., 1990 BCSC 1052; Asamera Oil Corp. Ltd. v. Sea Oil& General Corp. et. al., [1979] 1 S.C.R. 633.

[234]     Mr. Li’s claim that he suffered a consequential loss due to rising property values since 2015 might also be considered within the realm of consequential loss. According to Columere Park, at paras. 31-32, a broad interpretation consequential loss is warranted:

[31]      Conversion usually results in what can essentially be characterized as a forced sale of the chattel. The remedy of forced sale is an exceptional one, this confines the tort of conversion to major interferences which are serious enough to warrant the recovery of the full value of the goods. Typically, the value of the chattel is assessed at the time of conversion. This is different from the tort of detinue which is a continuing wrong for which the cause of action may be defeated by a return of the chattel any time before judgment. Damages for detinue are thus assessed at the time of trial. When conversion occurs, however, plaintiffs are expected to mitigate by replacing the chattel promptly.

[32]      This remedial distinction between detinue and conversion is the subject of some debate and has led to the recent support for bridging the gap by awarding in conversion any increase in the value of goods as consequential damages which, ideally, would lessen the evil of having remedies dependant on procedural technicalities: The Law of Torts at 292; see also the words of Estey J. in obiter in Asamera Oil Corp. Ltd. v. Sea Oil & General Corp. [citation omitted]. With respect to acts of conversion, consequential loss typically refers to the change in value of the chattel(s) at issue, however, where funds are at issue, the valuation is simple. A somewhat broader characterization of consequential loss is appropriate in this case, and such an interpretation accords generally with the remedial principle of compensatory damages in tort law.

[Emphasis added]

[235]     Damages for conversion are also subject to a plaintiffs duty to mitigate: Columere Park at para. 35. Mitigation does not arise in this case. Mr. Li acted promptly to recover the funds converted by his daughter. His counsel also conducted a title search at the early stages of the litigation to determine if she had purchased any real property with the funds. The search results were negative.

[236]     Keeping those possible remedies in mind, it was only through cross-examination of Ms. Li at trial, after Mr. Li had closed his case, that he learned of Ms. Li’s purchase of the Townhouse. During closing argument, Mr. Li sought and obtained an order amending his notice of civil claim to allege a constructive remedy in respect of the Townhouse. Even without that amendment, the decision of the Court of Appeal in BNSF Railway Co. v. Teck Metals Ltd., 2016 BCCA 350 makes it clear at para. 83 that the availability of constructive trust remedy need not be decided on the basis of the pleadings:

[83] 6. Contrary to the plaintiff’s submission, all constructive trusts (whether remedial or institutional) require that the plaintiff show a monetary award would be inadequate or inappropriate, and identify property or proceeds thereof to which the plaintiff’s labour or money contributed. The process of tracing is available to enable a plaintiff to determine whether the second condition can be met.

7. There is clear authority for the proposition that the availability of a constructive trust need not be decided on the basis of pleadings. Being dependent on facts found at trial, the issue can be resolved once the plaintiff is able to make an informed choice prior to final judgment being pronounced: Tracy; Waxman; Lac Minerals.