Chung v Chung 2022 BCSC 1592 examined the legal obligations of trustees and held that their principle obligation is to preserve the assets subject to the trust.
The primary obligation of a trustee is to preserve the property of the trust on behalf of the beneficiaries. Trustees must strictly avoid self-interest wherever their interest could conflict with the interests of those they are bound to protect: Clock Holdings Ltd. v. Braich, 2008 BCSC 1697 at para. 183.
Trustees are bound by both the “no conflict” rule and the “no profit” rule, which were explained by the Court of Appeal in Louie v. Louie, 2015 BCCA 247 at para. 23:
The two most fundamental and long standing obligations of fiduciaries – the “no conflict” rule and the “no profit” rule. These have been stated on many occasions over several centuries, but this passage from the judgment of the High Court of Australia in Chan v. Zacharia (1984) 154 C.L.R. 178, summarizes the historic approach succinctly:
The first is that which appropriates for the benefit of the person to whom the fiduciary is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest. The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage. … [T]he two themes, while overlapping, are distinct. Neither theme fully comprehends the other and a formulation of the principle by reference to one only of them will be incomplete. [At 198-9.]
Bray v. Ford [1896] AC 44 (H.L.) stated at 51: “It is an inflexible rule of a Court of Equity that a person in a fiduciary position … is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict.”
The Court of Appeal in Meng Estate v. Liem, 2019 BCCA 127 explained at para. 35 that a breach of a trustee’s duty of loyalty can arise in “circumstances in which there is a breach of the duty of loyalty owed by the fiduciary and includes circumstances involving acting in the face of a conflict, preferring a personal interest, taking a secret profit, acting dishonestly or in bad faith, or a variety of similar or related circumstances.” In this case, the first three of these circumstances were clearly established at trial. In addition, Won’s failure to disclose his secret profit for years and the misinformation he provided when pressed by Jae did not in my view meet the requisite standards for honesty and good faith.
In 0731431 B.C. Ltd. v. Panorama Parkview Homes Ltd., 2021 BCSC 607 [Panorama], Justice Sewell affirmed the existence of a fiduciary relationship between a bare trustee and the trust’s beneficiary, and rejected the argument that a bare trustee could treat the subject matter of the trust as its own property:
[243] The Trustee relied on the fact that 690174 was a bare trustee of Lot 1 and cited a number of cases in support of the proposition that a bare trustee owes only a limited fiduciary duty to the beneficiaries of the trust. However, those cases do not stand for the proposition that the bare trustee may treat the subject matter of the trust as its own property. As pointed out in one of the Trustee’s authorities, Scoretz v. Kensam Enterprises Inc., 2018 BCCA 66 at paras. 21-30, at a minimum a bare trustee has the obligation to transfer legal title to the beneficiaries of the trust upon request.
[244] Despite arguing that 690174 owed only limited fiduciary duties as a bare trustee, the Trustee argues that 690174 had full authority to subdivide Lot 1 and transfer title to the subdivided lots to purchasers. These submissions are inconsistent. More importantly, they ignore the fact that 690174 used its registered title to take steps that profoundly affected the beneficial ownership rights of the 2007 Joint Venturers.
[245] 690174 not only held title to Lot 1 in trust but also undertook the responsibility to apply for all necessary permits required for the development and subdivision of Lot 1. It is clear that by virtue of holding legal title to Lot 1, 690174 had the ability to affect the rights of all of the 2007 Joint Venturers. This made them vulnerable to the actions of 690174. The elements necessary to establish both an ad hoc fiduciary duty (as set out in more detail at para. 474 of these reasons) and a per se fiduciary duty on 690174 were therefore present in this case.
[Emphasis added.]
In Panorama, Justice Sewell also found that the director and principal of a corporate trustee pursuant to a bare trust agreement owes the beneficiary a fiduciary duty:
[241] In this case 690174 held title to Lot 1 in trust for the 2007 Joint Venturers. 690174 agreed that as bare trustee of Lot 1 it was responsible for applying for all necessary permits required for the development and subdivision of Lot 1. The development and subdivision of Lot 1 was the very object of the 2007 Joint Venture. In addition, Jaswant was personally appointed manager of the 2007 Joint Venture project and was the sole director and directing mind of 690174. In my view this gave rise to a per se fiduciary duty on 690174 and Jaswant.
A trustee’s duty of loyalty demands that in the absence of authorization, a trustee is accountable for any right, profit or benefit acquired “by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it”: Donovan Waters, Waters’ Law of Trusts in Canada, (2021 Online Edition), Ch. 18 “Duties of Loyalty” at 18.II. A trustee also has a fundamental duty to account for trust property and to report on how it has been dealt with: N-Krypt International Corp. v. LeVasseur, 2016 BCSC 1539 at paras. 38-39; rev’d on other grounds 2018 BCCA 20.
