Theft, Conversion and Breach of Trust

Theft, Conversion and Breach of Trust

West Bros. Frame and Chair Ltd. v Yazbek 2019 BCSC 1844 discussed the legal principles for  suing an employee book keeper for theft of over $600,000, and distinguished between conversion and breach of trust in doing so.

There is no independent tort of theft. The theft of property engages a number of overlapping legal, equitable and restitutionary doctrines, including conversion, unjust enrichment, and breach of trust, each with their own distinct logic, purpose and scope.

In the case of an employee bookkeeper who misappropriates over $600,000, the court found that the bookkeeper stood in a fiduciary relationship with the plaintiff, occupied a position of trust and responsibility over the plaintiff financial affairs, and took advantage of a vulnerable plaintiff with the unilateral exercise of her power and discretion.

Accordingly, an ad hoc fiduciary relationship arose between the plaintiff and the defendant, and the court awarded judgment on the basis of breach of trust.

The court distinguished between the overlap of conversion and breach of trust.

Conversion is a tort, and is defined as the wrongful taking, using are destroying of goods or the exercise of control over them in a manner which is inconsistent with the title of the owner. Erhardt v Kendrick 2017 BCSC 813 at para. 26.

A theft of money would constitute a conversion.

A breach of trust on the other hand, is an equitable wrong, which occurs within the context of a fiduciary relationship. It refers to the breach of an equitable obligation owed to the beneficiary of a trust or other form of fiduciary relationship. The theft of money by an employee under such an obligation would constitute a breach of trust, in addition to conversion.

The court applied the test as to whether or not an employee falls under a fiduciary obligation in the nature of their duties and responsibilities as set out in Eagle Ridge Animal & Bird Hospital v Sharpe BCSC 1486 at 91.

Knowing Assistance of a Breach of Trust

Knowing Assistance of a Breach of Trust

In Trustees of the IWA v Wade 2019 BCSC 1085 the court successfully sued the defendant for knowingly assisting in the breach of a trust upon the plaintiff.

The leading case with respect to knowing assistance in breach of trust is the Supreme Court of Canada decision in Air Canada v M&L Travel Ltd. (1993) 3 SCR 787.

In that case, a travel agency breached a contractual trust by failing to hold funds it collected from the sale of Air Canada airline tickets in trust for Air Canada as required by contract. The funds were retained in the travel agency’s general operating account rather than in the trust account set up for the purpose of holding such funds.

The directors of the travel agency were found to be personally liable to Air Canada for the amount the of the ticket sales.

The court discussed the general principles regarding personal liability of a third-party, or “ stranger to a trust” for knowingly participating in a breach of trust at 808 – 811.

The court stated “ having found that the relationship between the travel agency and the respondent airline was a trust relationship, there is no question that the travel agency’s actions were in breach of trust. The travel agency failed to account to the respondent for the monies collected through sales of tickets. What remains to be decided is whether the directors of the travel agency should be held personally liable for the breach of trust on the basis they were constructive trustees. Whether personal liabilities is imposed on the stranger to a trust depends on the basic question of whether the stranger’s conscience is sufficiently affected to justify the imposition of personal liability.”

The only basis upon which the directors could be held personally liable as constructive trustees is under the “ knowing assistance “ head of liability. Persons who assist with knowledge in a dishonest, and from the fraudulent design on the part of the trustees will be liable for the breach of trust as constructive trustees. This basis of liability raises two main issues: the nature of the breach of trust and the degree of knowledge required of the stranger.

A stranger to a trust will be liable if he or she knowingly assisted the trustee in a fraudulent and dishonest breach of 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 strangers to the trust twos liability is an issue.

The standard best accords with the basic rationale for the imposition of personal liability on a stranger to a trust, which is 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 beneficiaries is sufficient to prove personal liability. To find liability for knowing assistance in a breach of trust, the court described the necessary degree of knowledge of the stranger to a trust as follows:

“the knowledge requirement for this type of liability is actual knowledge; reckless or willful blindness will also suffice. To be held liable the stranger must have had both actual knowledge of the trust existence and actual knowledge that what is being done is improperly in breach of that trust—though, of course, in both cases, a person willfully shutting his eyes to the obvious is no different position than if you’d kept them open.

Whether the trust is created by statute or by contract may have an impact on the question of the stranger’s knowledge of the trust. If the trust was imposed by statute, then he or she will be deemed to have known of it. If the trust was contractually created, then whether the stranger knew the trust will depend in his or her familiarity or involvement with the contract or it.

If the stranger received a benefit as a result of the breach of trust, this may ground an inference that the stranger knew of the breach– the receipt of a benefit will be neither a sufficient nor necessary condition for the drawing of such an inference.

Suing Parents For Breach of Fiduciary Duty

Suing Parents For Breach of Fiduciary Duty

In Hughes v Hughes 2019 BCSC 1109 a daughter sued her parents for breach of fiduciary duty for forcing her to have an abortion when she was 17 years of age.

The claim was dismissed for being outside of the statute of limitations, but the court reviewed the leading case relating to the nature of parental fiduciary duty, as set out in KLB v British Columbia 2003 SCC 51 at paragraphs 48-49:

48. “ What then is the content of the parental fiduciary duty? This question returns us to the cases in the wrong at the heart of breaches of this duty. The traditional focus of breach of fiduciary duty is breach of trust, with the attendant emphasis on disloyalty and promotion of one’s own or others’ interests at the expense of the beneficiary’s interests. Parents stand in a relationship of trust and owe fiduciary duties to their children. But the unique focus of the parental fiduciary duty, as distinguished from other duties imposed on them by the law, is breach of trust. Different legal and equitable duties may arise from the same relationship and circumstances. Equity does not duplicate the common-law causes of action, but supplements them. Where the conduct evinces breach of trust, it may extend liability, but only on that basis. In Norberg v Wynrib (1992) to SCR 226. it was stated in negligence and contract, the parties are taken to be independent and equal actors, concerned primarily with their own self-interest. The essence of the fiduciary relationship, by contrast, is that one party exercises power on behalf of another, and pledges himself or herself to act in the best interests of the other. “

49. “ I have said that concern for the best interests of the child informs the parental fiduciary duty. But the duty imposed is to act loyally, and not to put one’s own or others’ interests ahead of the child’s in a manner that abuses the child’s trust. This explains the cases referred to above. The parent who exercises undue influence over the child in economic matters for his own gain has put his own interests ahead of the child’s, in a manner that abuses the child’s trust in him. The same may be said of the parent or uses a child for his sexual gratification or parent who, wanting to avoid trouble for herself or her household, turns a blind eye to the abuse of a child by her spouse. The parents need not, as the Court of Appeal suggested in the case at bar, be consciously motivated by a desire for profit or personal advantage; nor does it have to be her own interests, rather than those of a third-party, that she puts ahead of the child’s.

It is rather a question of disloyalty – of putting someone’s interests ahead of the child’s in a manner that abuses the child’s trust. Negligence, even aggravated negligence, will not ground parental fiduciary liability, unless it is associated with breach of trust in this sense.

Executor Denied Fees For Breach of Trust

Executor Denied Fees For Breach of Trust - Disinherited

An executor/trustee who has committed a breach of trust may be denied fees for such egregious behavior.

The court has in its discretion to allow full compensation, deny any compensation, or allow a reduced compensation.

Where the compensation is reduced or denied, this is done not for the purpose of imposing a penalty on the executor/trustee for committing a breach of trust, but on the ground that he/she has not properly performed the services for which compensation is given. Simone v Cheifetz 1998 OJ 3267, upheld at 2000 OJ No.4194.

The operative words in the previous excerpt from the Simone decision is that a court “may deny him all compensation “.

There is a fine line between what disentitles a trustee from receiving some compensation and being disentitled to receive any compensation.

Initially, the Canadian courts were reluctant to even reduce compensation, but gradually overcame such reluctance to entirely eliminate compensation for misconduct and the test now is something like the court should attempt to strike some balance between the gravity of the act and the harm done.

Estate of Lowe 2002 BCSC 81 the executor was a lawyer who presented accounts that the registrar was very critical of to the extent that he recommended a nominal fee of $500.

The Supreme Court on a confirmation hearing of the registrars report, reduce the fee to nil.

Generally speaking executor should be fairly compensated for the work they undertake –Baker v. Baker (1995) BCJ 1039.

In the Loewe decision , the court reviewed many critical findings of the actions an accounting of the executor/trustee, starting with her taking one and a half years to provide a copy of the will to the beneficiaries, unacceptable delays in other aspects of the claim, overcharging, failure to account and other such behavior.

The court found that the executor had demonstrably failed to exercise an appropriate level of skill and ability.

While she did ultimately turn over the assets, she caused the beneficiaries to incur a number of losses in the meantime. She did not do her best to manage the affairs of the estate, which is what the law requires of her.

Zimmerman v McMichael Estate 2010 ONSC 2947 is an often quoted decision when denying an executor trustee compensation. In that decision, the executor did not comply with his duty to provide an accounting and breached his fiduciary duties.

The court held that a trustee must make a proper accounting is a condition precedent to been awarded compensation. Without a proper accounting, the court is unable to assess the conduct of the fiduciary and to determine the compensation to which he or she is entitled. Where trustee’s founder failed to keep proper accounts and have been grossly indifferent to his or her fiduciary obligations, he or she may be disentitle the compensation.

The court adopted the following statement from Sheard and Hull on probate practice, fourth edition. At pages 358 – 59:

“The conduct of an executor or trustee in carrying out his or her duties may be such as to justify the court and depriving him or her or the right to remuneration; and an executor must make a proper accounting as a condition precedent to being awarded compensation. But only exceptional misconduct should deprive him or her of the right to remuneration– in general, although an executor may be guilty of neglect and defaults, these, if not dishonest, and capable of being made good in money, do not deprive the executor of the right to compensation, although they may influence the amount allowed”

Ponzi Schemes

Ponzi Schemes

Two recent British Columbia decisions Kriegman v Dill 2018 BCCA 86 and Boale Wood & Co Ltd v Whitmore 2017 BCSC 1917 have dealt with various legal aspects arising out of Ponzi schemes.

The growth of international commerce has given rise to cross-border fraud schemes that are increasingly coming before the courts.

The Boale case involved a notary, who was instrumental in setting up a $100 million Ponzi scheme where most of the participants lost considerable sums of money.

In Boale Wood and CO Ltd v Whitmore 2017 BCSC 1917, the court adopted the United States Securities and Exchange Commission definition of a Ponzi scheme as:

“an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claim to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.”

The Ponzi scheme typically is a fraudulent investment in which money contributed by later investors generates artificially high dividends for the original investors, whose example attract even larger investments. Money from the new investors is used directly to repay, or pay interest to old investors, usually without any operation or revenue producing activity other than the continual raising of new funds.

Most Ponzi schemes come to court after the scheme has collapsed and the creditors seek recovery under bankruptcy legislation or provincial legislation dealing with fraudulent conveyances or preferences. The Kriegman v. Dill decision involved a bankruptcy, while the Boale Wood decision involved the Fraudulent Conveyance act and the Fraudulent Preference act , and adopted the reasoning of Titan investments Limited Partnership, 2005 A.B.Q.B 637 that a Ponzi scheme is insolvent from its commencement.

There is a large body of case law in the United States concerning Ponzi schemes, where U.S. Bankruptcy Court’s have exercised their equitable jurisdiction to bring together all of the entities, whether insolvent or not, that have participated in gathering funds from investors, consolidate those funds into one pool, and apply equitable subordination to permit all creditors to share the monies equitably. The goal is to distribute the wrongly obtained gains to all creditors of the scheme. The lucky early investors are obliged to share with the unlucky later investors in the scheme.

In Canada, there are no specific prohibitions in the securities legislation of the provinces and in the criminal code that address such Ponzi schemes specifically. Such scheme however, typically contravene the Securities act such as in British Columbia for example, that provides in section 57 that a person must not, directly or indirectly, engaging or participate in conduct relating to securities or exchange contracts of the person knows, or reasonably should know, that the conduct results in our contributes to a misleading appearance of trading activity in, or an artificial price for a security or exchange contract, or perpetrates a fraud on any person.

The criminal code of Canada also contains a general fraud offense at section 380.

Damages For Breach of Trust

Damages in Equity for Breach of Trust

Huff v Price 1990 (BCCA) 51 BCLR 282 held that the amount of damages in equity  in an action for breach of trust will be equal to the highest price at which the property of which that person was deprived could have been sold in the period before the breach of duty was discovered.

It is no defence, where there has been a breach of trust for the defendant to argue that there would have been a loss that would have occurred in any event, notwithstanding the breach of trust.

Island Realty Investments ltd v Douglas (1985) 56 ETR dismissed an unfaithful trustees argument that a loss in the real estate market would have occurred in any event, despite his breach of trust. The court distinguished the amount of damages that may have followed as a result of a breach of contract and held that in actions for breach of trust, the measure of damages must be the highest price that the property attained during the period of the breach of trust.

These passages of law have been approved by the Supreme Court of Canada in Guerin v. The Queen (1984) 2 SCR 335 that stated ” just as it is to be presumed that a beneficiary would have wished to sell his securities at the highest price available during the period they were wrongfully withheld from him by the trustee, so also it should be presumed that the band would’ve wished to develop its land in the most advantageous way possible. During the period covered by the unauthorized lease.

Trustee Personally Liable For Trust Contract

Trustee Personally Liable For Trust Contract

In Johnson v North Shore Yacht Works Corp. 2017 BCSC 1229 the court held that a trustee of a trust was personally liable for a contractual debt that was entered into by the trust.

 The case concerned responsibility for the costs of repairs carried out to a yacht that was an asset of the Chester Allison Johnson Alter Ego Trust (the “trust”). The plaintiffs are the trustees of that trust.
They claimed that the defendant had undertaken to complete the repairs for a fixed-price amount of $80,000, and claimed damages for wrongful seizure and negligent storage.
The defendant counterclaimed for all of its parts and labour charges and storage costs.
 Reasons for Judgment released November 3, 2014, indexed as Johnson v North Shore Yacht Works Corp., 2014 BCSC 2057, awarded net damages of $118,219 plus costs on the counterclaim against the plaintiff trustees.
Information obtained on an examination in aid of execution  indicated that substantially all of the assets of the trust had been transferred to its sole beneficiary, and that the trust was insolvent.
The defendant then registered a certificate of judgment against two parcels of land owned in whole or in part by Mr. Johnson,
It is a long-standing principle of trust law that a trustee is personally liable on contracts into which it enters on behalf of the trust. The trustee’s remedy is to seek indemnity from the trust for that liability. The only exception to the trustee being personally liable is where he has specifically contracted to limit his liability to the assets of the trust.
The authorities bear this out: see, for instance, Benett v Wyndham (1862), 4 DeG F & J 259 (CA); Muir v City of Glasgow Bank (1879), 4 App Cas 337 (HL); Davis v Sawkiw (1983), 38 OR (2d) 466 (H Ct J); Pettit, Equity and the Law of Trusts, 12th ed (2012) at pp 413-414; and Underhill and Hayton, Law Relating to Trusts and Trustees, 18th ed (2010), p. 1066, para 81.5.
 In Hall v MacIntyre, [1934] 2 WWR 145 (BCCA), Chief Justice Macdonald put it this way:
It is well-understood law that an executor or trustee who makes a contract in relation to his trust is personally liable to the contractor for the price agreed upon.