Patrick (Trustee) v Patrick 2019 BCSC 1329 found in favour of a trustee in bankruptcy that a transfer of property done by a co borrower on a mortage that gave him a true joint tenancy with his mother in the property , made completely gratuitously from him to her, was a fraudulent conveyance as it was done with the intent of putting property out of reach of the transferor‘s creditors.
The transfer was done without consideration just one day before an application for judgement was made against the transferor.
The court found the transfer to be void and of no legal effect and ordered that the one half of the property that was transferred be instead transferred to the trustee in bankruptcy.
The Law
Pursuant to S.1 of the Fraudulent Conveyance act ( FCA) a disposition of property, if made to delay, hinder or defraud creditors or others of their just and lawful remedies, be void and of no effect against those persons.
The legislation is to be given a fair, large and liberal interpretation. Vancouver Coastal Health Authority v Moscipan 2019 BCCA 17 at par. 98.
In order to meet the intent requirements of the FCA, it must be shown that the transferor intended to put assets out of the reach of his or her creditors. No further dishonest or morally blameworthy intent is required. Botham Holdings Ltd. V Braydon Investments Ltd. 2009 BCCA 521 at para. 73.
The intent to defeat creditors and others must be proven as a matter of fact. This often involves drawing an inference from the surrounding circumstances. Mawdsley v Meshen 2012 BCCA 91 at para. 7
In Ocean Construction Supplies Ltd v Creative Prosperity Capital Corp. (1995) 34 CBR (3d) BCSC the court stated:
“In essence, a fraudulent conveyance is a transfer of an interest in property which is made with the intention, and which has the effect, of hindering or impairing the right of a creditor or other person to satisfy a claim against the transferor. It is not necessary for the person seeking relief to show that the transferor was insolvent at the time the transfer was made, and the applicant need not establish that he or she was a creditor, or an unsecured creditor at the time the transfer was made. Re Skinner (1960) 27 DLR (2d) 74 BCSC
Chung estate v. Chan 1995 BCJ 2195 was a decision of the BC Court of Appeal that held that a transfer of real property from a deceased person to himself and another person as joint tenant, was valid despite the fact it was registered at the land title office after the deceased’s death.
This decision was subsequently followed in the Supreme Court of British Columbia in Plecas v Plecas 2015 BCSC 464 , which stated that the form A transfers were effective as against her, upon execution, and were intended to do so, and the transfers carried with them the right to apply for registration even after death.
In Plecas the plaintiff sought to set aside various transfers from the deceased to her son, that were registered after the death of the deceased.
The court allowed the validity of those transfers.
The Supreme Court of Canada had considered the effect of section 20 of the Land Title act RSBC in the decision Davidson V. Davidson 1946 SCR 115.
In the Davidson case, the defendant was the registered owner of the lands.
He executed and delivered a transfer of the lands. The transfer was neither registered no was an application made to register.
The plaintiff registered judgments against the registered title of the defendant.
The majority of the Supreme Court of Canada held that the instrument was bona fide and validly executed, and was entitled to priority over the judgment creditor under the circumstances.
The court followed the common law rule with respect to the rights of judgment creditors, that stated the execution creditor can only attach that interest which exists in the execution debtor. In Davidson the respondent had disposed of his entire interest before the registration of the judgment, and the judgment could not attached to the lands and questions even though the transfer was registered after death.
In Feinstein fee. Ashford 2005 BC SC 1379, the court considered section 20 of the Land Title act in the context of a joint tenancy.
A joint tenant executed, but did not register a form a transfer, which purported to sever the joint tenancy at Institute instead a tenancy in common.
The petitioner argued that the severance of the joint tenancy was not binding, as it failed to meet the common-law requirement of delivery.
The court rejected that argument, ruling instead that ”the application for reregistration that was executed by the respondent was effective as against himself on the date that it was signed”.
In other words, the application did indeed sever the joint tenancy on the date it was signed, even though it was not registered until after the respondent’s death .
In the decision Mordo v. Nitting 2006 BCSC 1761 the court found that the grantor had done everything necessary to create a valid trust by completing a form a transfer and declaration of trust.
The declaration of trust confirmed that although the executed for me was not registered, the grantor thereafter held legal title as trustee only. The documents were then left with the grantor’s solicitor. The court found that section 20 of the Land Title act was engaged, rendering the transfer effective against the person making it, even before it was registered.
Boale Wood Ltd v Whitmore and Samji Notary 2017 BCSC 1917 involved a Fraudulent Conveyance action brought by a trustee in bankruptcy alleging a fraudulent conveyance.
A notary public was involved in a Ponzi scheme whereby $110 million was received into notary public account from investors and returned to investors using new investment funds. The fraud was discovered, the notary public was convicted of fraud and entered bankruptcy. The defendant was one of a few investors who received more money than he had given to the notary public The Trustee brought action against the defendant for disgorgement of excess received in operation of scheme. The action was allowed as the disposition was void under the Fraudulent Conveyance Act. The Ponzi scheme was insolvent by nature and constituted fraud.
Ponzi Schemes
46 Canadian courts have described Ponzi schemes similarly. In Titan Investments Ltd. Partnership (Re), 2005 ABQB 637, Justice Hawco held:
[8] Ponzi schemes are fraudulent investment schemes whereby individuals are enticed by a conman or fraudster to make investments in an operation promising an unreasonably high rate of return. Once the first few investments are made, subsequent investors are enticed to invest partly through reported gains and partly through the high payouts of earlier investors. Ultimately, the conman either spends or disappears with the remaining money, or the scheme collapses on itself as funds are exhausted by payouts to earlier investors.
47 In Millard v. North George Capital Management Ltd. (2006), 26 B.L.R. (4th) 231 (Ont. S.C.J.), Justice Cumming, at para. 11, described a Ponzi scheme as: [a fraud] whereby the source of distributions to the early investors consist primarily of a return of their own capital or moneys obtained from new investors and with the payment ultimately stopping when there are no further investors. The result is that everyone loses money except the perpetrators of the fraud. It is clear, and, indeed, conceded by the defendant that the Excess monies he received came from the investments made by the Investors.
The Fraudulent Conveyance Act (FCA)
48 The FCA provides, in its entirety, as follows:
1. If made to delay, hinder or defraud creditors and others of their just and lawful remedies (a) a disposition of property, by writing or otherwise, (b) a bond, (c) a proceeding, or (d) an order is void and of no effect against a person or the person’s assignee or personal representative whose rights and obligations are or might be disturbed, hindered, delayed or defrauded, despite a pretence or other matter to the contrary.
2. This Act does not apply to a disposition of property for good consideration and in good faith lawfully transferred to a person who, at the time of the transfer, has no notice or knowledge of collusion or fraud.
49 In Titan Investments, Hawco J. acknowledged that there was no Canadian authority on the subject of when Ponzi schemes are deemed to be insolvent and adopted the American approach that a Ponzi scheme is insolvent from its inception. I agree with and adopt his reasoning.
50 An intention to defraud creditors may be inferred from that fact that a debtor is operating a Ponzi scheme, as no other reasonable inference is possible: Merrill v. Abbott (In Re Independent Clearing House Co.), 77 B.R. 843, 871 (D. Utah 1987). In that case, the United States District Court for the District of Utah stated, at p. 860 — 861: One can infer an intent to defraud future [investors] from the mere fact that a debtor was running a Ponzi scheme. Indeed, no other reasonable inference is possible. A Ponzi scheme cannot work forever. The investor pool is a limited resource and will eventually run dry. The perpetrator must know that the scheme will eventually collapse as a result of the inability to attract new investors. The perpetrator nevertheless makes payment to present investors, which, by definition, are meant to attract new investors. [The perpetrator] must know all along, from the very nature of his activities, that investors at the end of the line will lose their money . . . . . . the question of intent to defraud is not debatable given the fact that the debtor was carrying on a Ponzi scheme . . .
51 Even apart from a Ponzi scheme, fraudulent intent to defeat creditors may be inferred from the circumstances surrounding the transaction where “badges” of fraud exist: Ocean Construction Supplies Ltd. v. Creative Prosperity Capital Corp., [1995] B.C.J. No. 1814 (S.C.) at paras. 25 — 28; Firstar Investment & Financial Co. v. Xu, 2017 BCSC 271at para. 39; Botham Holdings Ltd. (Trustee of) v. Braydon Investments Ltd., 2009 BCCA 521at para. 75. 52 The following badges of fraud in this case support the inference that Samji intended to defraud her creditors (the Investors):
a) the Scheme, by its very nature, was insolvent from the outset; b) the Excess payments made to the defendant were sourced entirely from funds invested by others with the clear objective of defeating their respective investments; and c) the inference is overwhelming and uncontroverted that Samji knew, or at the very least ought to have known, that each transfer to the defendant had the effect of further defrauding the Investors.
53 Plainly, the Excess constitutes a “disposition of property”. I find that it was paid by Samji with the intent to delay, hinder, or defraud her creditors.
54 However, that is not the end of the enquiry. Section 2 of the FCA stipulates that the Act does not apply to a disposition made for “good consideration and in good faith lawfully transferred to a person who, at the time of the transfer, has no notice or knowledge of” the fraud. “Good consideration”
55 The courts have stated that, where the disposition was made for “good consideration”, the plaintiff must prove that both the transferor (Samji) and the transferee (the defendant) intended to delay, hinder, or defraud creditors: Chan v. Stanwood, 2002 BCCA 474at paras. 19 — 21.
56 Can it be said, in the context of a claim to recover “profits” paid to Net Winners in a Ponzi scheme, that there was good consideration for the disposition and that the transfer was made “lawfully” and in “good faith”?
57 The defendant submits that the Excess was received by him in the form of the payment of interest pursuant to a pre-existing, legitimate lending agreement and that it, therefore, constitutes “good consideration”. Accordingly, he says, the plaintiff’s claim must fail because there is no evidence of an intent on his part to delay, hinder, or defraud Samji’s creditors.
58 “Good consideration” under s. 2 of the FCA means “valuable consideration” or more than nominal consideration: Liu v. Wang, 2009 BCSC 1792at para. 24; Chan at para. 19.
59 The question of whether a net winner in a Ponzi scheme has provided good consideration for the profits has received only passing mention in Canada. However, United States jurisprudence has held that the perpetrator of a Ponzi scheme does not receive good consideration for payments made to investors in excess of their principal investment, because such payments are merely used to perpetrate and continue the fraud. They are not profits from a legitimate enterprise. One example is the decision of the United States Court of Appeals, Ninth Circuit, in Donell v. Kowell, 533 F. 3d 762 (9th Cir 2008) where the court stated, at p. 777 — 779: Fifth, Kowell argues that even if [California’s Uniform Fraudulent Transfer Act “UFTA”] applies to this case, he should not be found liable because his initial investment provided “reasonable equivalent value” in exchange for the profits he earned in the scheme . . . Despite the intuitive appeal of Kowell’s argument, we reject it by considering the economic exchange in a Ponzi scheme. UFTA identifies an avoidable transfer as one made “[w]ithout receiving a reasonably equivalent value in exchange.” . . . Unlike contract law, which requires only that “adequate” consideration be given, UFTA requires that, to escape avoidance, a transfer have been made for “reasonably equivalent value”. The purpose is not to identify binding agreements, but to identify transfers made with no rational purpose except to avoid creditors . . .
Payouts of “profits” made by Ponzi scheme operators are not payments of return on investment from an actual business venture. Rather, they are payments that deplete the assets of the scheme operator for the purpose of creating the appearance of a profitable business venture … The appearance of a profitable business venture is used to convince early investors to “roll over” their investment instead of withdrawing it, and to convince new investors that the promised returns are guaranteed . . . Up to the amount that “profit” payments return the innocent investor’s initial outlay, these payments are settlements against the defrauded investor’s restitution claim. Up to this amount, therefore, there is an exchange of “reasonably equivalent value” for the defrauded investor’s outlay. Amounts above this, however, are merely used to keep the fraud going by giving the false impression that the scheme is a profitable, legitimate business. These amounts are not a “reasonably equivalent” exchange for the defrauded investor’s initial outlay.
In this case, Kowell never actually possessed an interest in a company purchasing account receivables from Malaysian glove manufacturers. The investment strategy promised by Wallenbrock’s officers was a lie to induce Kowell and investors like him to fund Wallenbrock. What Wallenbrock did was return to Kowell his own money, plus money from subsequent “investors,” to persuade Kowell to continue to invest and to secure testimonial evidence from people like Kowell to induce others to invest. Although Kowell was putting real money into Wallenbrock, and was getting what looked like real profits in return, in fact he never received “reasonably equivalent value” for his investment, just cash that moved around in an elaborate shell game. [Citations omitted.] [Emphasis added.]
Fraud is a deception deliberately practiced in order to secure unfair or unlawful gain (adjectival form fraudulent; to defraud is the verb, and the Badges of Fraud are used by the court s as rough gauge as to whether Fraud exists in the situation or not..
As a legal construct, fraud is both a civil wrong (i.e., a fraud victim may sue the fraud perpetrator to avoid the fraud and/or recover monetary compensation) and a criminal wrong (i.e., a fraud perpetrator may be prosecuted and imprisoned by governmental authorities).
Defrauding people or organizations of money or valuables is the usual purpose of fraud, but it sometimes instead involves obtaining benefits without actually depriving anyone of money or valuables, such as obtaining a drivers license by way of false statements made in an application for the same.
There are a number of articles relating to fraud on this website, most of which deal with Fraudulent Transactions or conveyances to try and hinder creditors such as beneficiaries.
Undue influence is also a civil form of fraud and yesterdays blog discusses in some detail the fraudulent aspect involved in undue influence
The Badges of Fraud
Suspicious circumstances which our courts may characterize as “badges of fraud” include the following: 1) Secrecy surrounding the transaction 2) Cash payments were made 3) No change of possession occurred after the conveyance; 4) Transfer to non-arm’s-length person; 5) The transferor has few remaining assets; 6) The transfer was effected with unusual haste; 7) Grossly inadequate consideration was paid; 8) A benefit was retained by the transferor under the settlement; 9) The transfer was made in the face of potential litigation; 10) Lack of accurate documentation supporting the transaction.
These “badges of fraud” are enumerated in Bank of Montreal v. Vandine (1953) 1 D.L.R. 456;
Prodigy Graphics Group Inc. V. Fitz- Andrews, (2000) O.J. No. 1203 ( Ont. S. C. J.);
It is often difficult for a court to determine if a claim should be paid on an hourly rate for services performed( quantum meruit), or if the test of unjust enrichment has been met.
I recently provided a second opinion in a case involving a claim for unjust enrichment. The facts were reasonably simple. An elderly man had died leaving an estate of just less than $2 million to his nephew. For the last six years of his life, his closest neighbors had provided extensive services for him. They basically did everything for him including driving, cooking, shopping, and generally looking out for his best interests. They alleged they had expended in excess of 12,000 hours of care.
There had never been a promise of inheritance nor any prior discussion between the deceased and his neighbours about payment for their services. When the entire estate was left to a nephew however, their lawyer sued in unjust enrichment claiming a constructive trust or alternatively, damages based on quantum meruit.
Having reviewed the facts and case law, my opinion was that the neighbours were unlikely to succeed in their claim for a constructive trust against the estate assets. I expected instead that a court would try to compensate them on quantum meruit basis for their time and effort. In my view their time would be valued at $10-11 per hour . The case ultimately settled for $150,000.
My research lead me to the law of unjust enrichment. From the plaintiff’s perspective, I tried to establish a constructive trust. My conclusion was that the plaintiff’s claim for a constructive trust would likely fail. The plaintiff would instead likely succeed on a claim for quantum meruit. It appeared to me that the courts have established a threshold of sorts that must be met before the courts will award a claim for constructive trust. If the threshold is not met, then the courts are more likely to make an award for quantum meruit. In my opinion, the guidelines for meeting the threshold are not yet well defined by the courts.
My experience is that many lawyers plead unjust enrichment and claim the equitable remedies of constructive trust and in the alternative quantum meruit. There are however, very few reported cases dealing with quantum meruit. It occurred to me that a paper on this interesting area of the law might be helpful.
What is Quantum Meruit ? Blacks Law Dictionary, Fifth Edition, defines quantum meruit as follows:
Quantum meruit means “as much as he deserves”. It is an expression that describes the extent of liability on a contract implied by law. It is an equitable doctrine, based on the concept that no one who benefits by the labor and materials of another should be unjustly enriched thereby. The law implies a promise to pay a reasonable amount for the labor and materials furnished, even absent a specific contract.
The doctrine of quantum meruit is one part of the law of restitution, more commonly known as the law of unjust enrichment. In the law of unjust enrichment there are two distinct, but related, remedies – quantum meruit; and – constructive trust.
It is frequently open to the plaintiff, on the same facts, to claim in both. Although both claims may be based upon unjust enrichment, both the basis for the awards and the remedies differ. Depending on which remedy the court grants, the results are very different.
Generally speaking when the Courts find unjust enrichment and impose a constructive trust, the awards are higher than when they award damages based on quantum meruit.
Constructive Trust
A constructive trust is always imposed by law. When the court makes a declaration of a constructive trust this, in effect, creates an enforceable interest in real or personal property. .
Quantum Meruit
A claim in quantum meruit may either be: – based on the intent of the parties; or – imposed by law (in the absence of proven intent)
Quantum meruit is a claim for the payment of money to put the plaintiff back in to the position he or she would otherwise have been in. In other words it is a monetary award that is restitutionary remedy. It does not create any enforceable interest in property.
Range of Claims in Quantum Meruit.
The doctrine of quantum meruit encompasses a wide range of claims.
The range of claims however can generally be divided into two categories: – those where the claim is asserted as a remedy in aid of an enforceable contract,or; – those where there is no enforceable contract or no contract at all.
In estate litigation these claims of quantum meruit frequently involve a plaintiff claiming restitution for services rendered to the deceased before death.
Enforceable Contracts
If the parties enter into a contract for services and services are rendered, the courts will impose an obligation on the person who has benefited to pay reasonable compensation even though no contract price had been agreed. Graves v. Okanagan Trust Company (1956) 20 W.W.R. (N.S.) 17 ( B.C.S.C.)
What is Reasonable Compensation?
A brief review of the case law reveals the courts may appear somewhat arbitrary in deciding what is “reasonable”. It is difficult to reconcile some of the cases. In some cases, the Courts have attempted to just “ballpark” the value of the everyday services performed services such as shopping, driving, cleaning and paying bills.
Let us look at some examples.
1. Mikita v Lick 1992 Carswell BC 2199 .
An action was brought to set aside a will and transfer . Both documents had been signed by an elderly gentleman shortly before his death. He had transferred his home to himself and his housekeeper in joint tenancy. He had executed a will disinheriting his children and leaving everything to the housekeeper.
When she was first hired, the agreement had been that the housekeeper to be paid for her services. This contract was later superseded by the transfer and the will.
The judge set aside both the will and the transfer of land based on his finding that the deceased had lacked mental capacity. The judge also found the housekeeper to be untruthful. Nevertheless he allowed her claim of quantum meruit and awarded the sum of $20,000 for about one year of nursing care.
In doing do, Justice Selbie stated inter alia:
Lick claims by way of counter-claim k) alternatively, compensation in equity “quantum meruit. I find justification for this claim. Putting all else aside there is no question that she looked after the deceased for a period of time especially after his release from hospital in July of 1989. It was a role someone would have had to undertake as he could no longer function by himself. The difficulty is in determining just how much time she spent with him. Her lack of credibility colours any such determination. Her evidence is really all that there is except for the sometime observations of various persons. The question of whether he paid her on a regular or irregular basis or whether she obtained monies on an informal basis is quite unanswerable on the evidence. She certainly lived in his home during the last months of his life receiving at least room and board for her services. It is my view that equity should recognize a claim by her for compensation. In that case Mikita argues that the $19,000 she received in December should be set off against any such right and that $19,000 and, presumably, the car, was in excess of any entitlement. I appreciate the argument but, taking everything into consideration, and recognizing the need to be arbitrary in setting any amount, I allow her claim for quantum meruit in the amount of $20,000.”
1. Emmerling v Eschment 1998 Carswell BC 1013
This case deals with the difficulty in assessing the merits of a claim for care provided in expectation of an inheritance. This case is also illustrates some factors considered by the court to determine which remedy to accord.
In this case the deceased died intestate. The plaintiff applied for a declaration that defendants held real and personal property of deceased in trust for him. In the alternative, the plaintiff claimed restitution on the basis of quantum meruit.
In his claim the plaintiff alleged that the deceased had told him and others that he intended to provide for the plaintiff after his death. The plaintiff asserted that not only cared for the deceased, he contributed to upkeep and maintenance of deceased’s home. He sought to establish a claim to an interest in the real property.
The evidence showed that plaintiff did minor repairs, routine maintenance, and lawn-mowing. Evidence of a home inspector however, was that home appeared neglected and poorly maintained.
The Court found that the contributions by the plaintiff fell far short of establishing that he maintained or enhanced the value of the property significantly. Thus they found these contributions did not create any equitable interest in the land.
There was no evidence that plaintiff made any contribution to the acquisition of the deceased’s other assets directly or indirectly. Therefore there was no basis for plaintiff’s claim through constructive or other trust .
The plaintiff however had lived in the deceased’s home for six years. He claimed they became friends. During the last two years of deceased’s life, the plaintiff took care of routine daily chores, helped with meal preparation and laundry, drove him to appointments, and helped administer medication
The plaintiff helped the deceased live out his final years in his own home without paid help that was otherwise required .The plaintiff was unemployed while living with deceased, but obtained employment paying $31,000 per year after deceased’s death.
The Court inferred, from the plaintiff’s subsequent employment, that he had the capacity to earn income. They further inferred that the plaintiff could have done so had he not instead cared for deceased for the last two years of his life.
The plaintiff was entitled to an award of $40,000 for unjust enrichment, on a “value received” basis, or quantum meruit.
In this decision the court followed the B.C.C.A. decision of Clarkson v McCrossen Estate (1995) 3 B.C.L.R. (3d) 80 which suggest the amount awarded is a matter of impression rather than calculation. This approach was also followed in Beattie v Badger Estate ( December 14, 1995) , Doc. Vancouver C933150 (B.C.S.C.), and in Mikita v. Lick supra.
3. Clarkson v McCrossen Estate (1995) 3 B.C.L.R. (3d) 80.
This case stands for the proposition that when services are rendered out of a sense of familial duty, that fact alone does not preclude a legitimate expectation of compensation.
Where the services are provided by a close family member, the Courts may start from the position that the services were provided out of a sense of love or obligation without any expectation of compensation. The Courts may then deny making any award.
Quantum Meruit in the Absence of an Enforceable Contract.
Where there is no contract or where it is unenforceable, the court may nevertheless impose an obligation to pay reasonable compensation. This obligation is designed to prevent the unjust enrichment of the recipient. Often the unenforceability arises from a failure to comply with the Statutes of Frauds, or an inability to subdivide real property.
Let us review some cases.
1. Deglman v. Guaranty Trust Co. of Canada S.C.C.(1954) 3 D.L.R. 785
Deglman is a classic case of an unjust enrichment leading to damages for a quantum meruit claim. The case stands for the proposition that if services are rendered pursuant to an unenforceable contract the court will impose an obligation to pay for those services.
In this case, the Supreme Court of Canada upheld an award of damages for quantum meruit to a nephew of the deceased. He had performed certain personal services for his deceased aunt. They had had an oral contract that his aunt would leave him her house in return for his care.
The Court held that even though the contract was not enforceable the law imposed an obligation to prevent an unjust enrichment. (The Statute of Frauds requires a contract to transfer land must be in writing to be enforceable) The Court awarded an amount valuing the services “on a purely business basis.”
Mr. Justice Cartwright stated at page 794:
” I agree with the conclusion of my brother Rand, that the respondent is entitled to recover the value of these services form the respondent administrator. This right appears to me to be based, not on the contract, but on an obligation imposed by law.”
2. West v Wilson 1998 CarswellBC 840
The plaintiff performed unpaid work on the defendant’s farm. In return the defendant promised to give the him part of the farm land. The parties executed an agreement of sale for that part of the land. Because the property was within the agricultural land reserve it could not be subdivided. The parties were therefore unable to register the agreement.
The plaintiff brought an action claiming, inter alia, quantum meruit for farm work that he performed.
The Court found that the defendant intended to make a gift of the parcel of land to the plaintiff but the gift was not perfected or completed. They also found the plaintiff’s labour had enriched the defendant and that the plaintiff had suffered a corresponding deprivation without juristic reason. Accordingly the plaintiff established his claim in quantum meruit.
The Court found the plaintiff was entitled to $40,000 as compensation for 4,000 hours of farmwork.
Constructive Trust or Quantum Meruit?
A claim for unjust enrichment , if successful, may be found to either warrant the imposition of a constructive trust or merely damages for quantum meruit (based on a reasonable fee for the services provided.)
As noted above, generally speaking, the awards of constructive trust are far higher than those of quantum meruit. Plaintiffs counsel should therefore plead unjust enrichment and claim the remedy of a constructive trust. Alternatively they should claim damages for quantum meruit. Defence will want to try to limit any successful claim to damages rather than a declaration of trust.
What Is A Constructive Trust ?
“A constructive trust comes into existence, regardless of any party’s intent, when the law imposes upon a party an obligation to holds specific property for another. The person obligated becomes by force of law a constructive trustee towards the person to whom he owes performance of the obligation.”
Law of Trusts on Canada Donovan Waters, page 378
Lord Denning in Hussey v Palmer (1972) 3 All E.R. 70 (CA) described a constructive trust as follows:
“by whatever name it is described, it is a trust imposed by law whenever justice and good conscience require it. It is a liberal process, founded upon large principles of equity, to be applied in cases where the defendant cannot conscientiously keep the property for himself alone, but ought to allow another to have the property or a share in it. It is an equitable remedy where the court can enable an aggrieved party to obtain restitution”.
The principle of “unjust enrichment” lies at the heart of the constructive trust. The principle of “unjust enrichment” has played a significant role in the development of this equitable remedy.
Lord Mansfield in Moses v Macferlan (1760) , 2 Burr. 1005, 97 E.R. 676, stated:
“the gist of this kind of action is the defendant, upon the circumstances of the case, is obliged by the ties of natural justice and equity to refund the money”.
One of the earliest situations that a constructive trust was imposed concerned the acquisition of a secret profit by persons who were employed to act for others. Since then, it has been applied to countless different fact patterns.
Though the doctrine of constructive trust is perhaps best known for its application in matrimonial and cohabitation property cases, it is by no means limited to those cases.
In Clarkson v McCrossen Estate (1995) 13 R.F.L. (4th) 237 (BCCA), Chief Justice McEachern stated
“I wish to mention that the law of unjust enrichment is in its early formative stages; it will continue to mature incrementally. The few cases that have been decided cannot be taken as the final word on any of these matters. They point the direction the law is taking, but not the many contours that must be traversed along the way.”
As seen in Emmerling and many other cases, the Courts will examine the extent of the contributions. They will decide whether or not the contributions maintained or enhanced the value of the property to the extent necessary to create an equitable interest in it. They will ask questions such as; – Were there any contributions either directly or indirectly to acquire any of the assets? – Would an award of quantum meruit be inadequate?
In effect, the Courts impose an undeclared “threshold” test to meet. Depending on the plaintiff’s contributions they may warrant either the imposition of a constructive trust or merely reasonable compensation for the services provided. Usually the Courts require that the unjust enrichment to be referable to a specific property before the plaintiff will be given an interest in the property under a constructive trust.
Common Law Marriages
Recent decisions illustrate the approach of the courts in deciding between constructive trust or quantum meruit in claims arising in common law marriages
1. Verbeke v. Hirst Estate, 2000 BCSC 1387.
In this case, the plaintiff had lived in common law relationship with the deceased for 43 years. The judge found she had given up a career to provide domestic services and health care to the deceased. The plaintiff also made substantial financial contributions to the household. The couple lived essentially on the plaintiff’s pension and food that she grew.
The estate’s major asset was property registered solely in the deceased’s name. Elements of unjust enrichment were established and there was a direct link between the services rendered and the deceased’s property .The Court found that an award of money on the basis of quantum meruit would be inadequate for the contribution made.
In this case the court allowed the plaintiff’s claim for a declaration of a constructive trust. She was granted a half interest in the property and in the net cash in the estate.
In reaching its decision, the Court cited one of the leading authorities in Canada on unjust enrichment, stating as follows:
“The claim for an interest in the estate by way of constructive trust depends on whether the plaintiff has established the three elements of unjust enrichment set out in Becker v. Pettkus, [1980] 2 S.C.R. 834 (S.C.C.):
(a) an enrichment; (b) a corresponding deprivation; and (c) the absence of any juristic reason for the enrichment.
The contribution of domestic service and health care at the expense of a career and employment income can clearly form the basis of unjust enrichment and found a claim in constructive trust: Peter v. Beblow, [1993] 1 S.C.R. 980 (S.C.C.). As McLachlin J. (now C.J.C.) recognized, these services are of great value to the family economy.”
The defendant had argued that the plaintiff had been given a roof over her head, and was responsible for her own choices. The defendant said therefore that any award should be based on quantum meruit, and $40,000 would be adequate.
With the imposition of a constructive trust however, the plaintiff received more than twice that amount.
1. Soulos v Korkontzilas (1997) SCR 217
Here the Supreme Court of Canada ruled a constructive trust may be imposed “to hold persons in different situations to high standards of trust and probity and prevent them from retaining property which in “good conscience” they should not be permitted to retain.” This was in spite of an absence of enrichment and a corresponding deprivation.
2. Atkinson v. Carrell 47 B.C.L.R. ( 3d) 265
The parties to the litigation had lived common law for seven years. During that time the female defendant used funds from a divorce settlement to purchase certain assets as investments including a residence, mobile home park and mobile homes. The plaintiff only contributed $100 as a deposit on the house, and nothing on the other properties.
The male plaintiff brought an action seeking an interest in the defendant’s assets. Their total value was $530,000.
The Court examined what the plaintiff had contributed towards the properties and awarded him $25,000 for quantum meruit.
3. Baird v. Iaci 37 B.C.L.R. (3d) 1.
This case illustrates a situation where even though the plaintiff could not establish a constructive trust, the Courts made a significant award based on quantum meruit.
The plaintiff and the defendant entered into a sexual relationship in 1987. At that time the plaintiff had a dream of owning a farm. She needed money to finance her dream.
The defendant started paying the plaintiff’s rent and expenses. He bought a farm which the plaintiff managed in exchange for being allowed to live in the farmhouse rent-free. The farm increased in value during their relationship. The defendant stayed at the farm one or two nights a week, during which time the parties occupied the same bed.
The relationship subsequently deteriorated and the plaintiff later brought an action for the imposition of a constructive trust on both in the farm and on a portfolio of mortgages. In the alternative, she sought judgment on a quantum meruit basis.p>
The Court held that the plaintiff could not satisfy the requirements for proving the existence of a constructive trust in the farm or in the mortgage portfolio. The plaintiff had not contributed in any way to the defendant’s portfolio or to any other of the farm’s expenses.
Furthermore, the plaintiff benefited financially from her relationship with the defendant since he provided her with a free place to live and he paid her expenses. Since she had not provided any enrichment to the farm or to the portfolio, and did not suffer any deprivation, she could not claim that the defendant had been unjustly enriched so as to support her constructive trust claim.
Notwithstanding this finding, the court found that it was through the plaintiff’s diligence that the farm investment had been discovered. Further she had contributed $3,500 towards its purchase. Based on these factors they ruled the plaintiff was entitled to receive some damages from the net appreciation in value of the farm..
The Court held that she was entitled to damages in quantum meruit equal to one third of the farm’s value (after subtracting its original cost and renovation expenses).
Conclusion
As we have seen, the law of unjust enrichment creates a complicated relationship between the remedy of unjust enrichment and the constructive trust.
If I may summarize in the most important points for practitioners to remember
1. The Courts have in effect set up a threshold that must be met before they will make an award for constructive trust upon the assets in dispute. It is not very clear just what proof the courts will require in order to meet the threshold. If the threshold is not met then the courts will likely make an award for quantum meruit.
It is generally advisable for plaintiff’s counsel to plead unjust enrichment and a constructive trust, and alternatively damages for quantum meruit.
2. Defence counsel will usually argue that if there is to be an award of damages, they should be limited to a quantum meruit award.
3. Generally the courts will award a greater sum of money or interest in assets if the plaintiff is able to establish the basis a constructive trust.
4. If the plaintiff is unable to establish a constructive trust, then the Courts may well award damages on a quantum meruit basis. Damages will then be calculated on a comparatively low hourly rate to be paid for the services provided.
The British Columbia Fraudulent Conveyance Act is a statute designed to give a remedy to creditors frustrated in collecting their debts by a debtor who has disposed of his/her assets.
The Fraudulent Conveyance act permits a creditor to impugn or set aside a transfer of property, where that property has been transferred in an effort to defeat the legitimate claims of creditors.
Our law relating to fraudulent conveyances dates back to the English Middle Ages when England became a trading nation commercial laws were developed to resolve the trade disputes. Throughout history debtors have been tempted to convey their property to friends or family, hoping to avoid their creditors by putting their property out of the reach.
As early as 1571, the Statute of Elizabeth, the first Fraudulent Conveyance Act, was passed. Since that time our courts have developed a large body of case law, which largely supports the claims of “creditors and others” to set aside fraudulent conveyances.
Our law requires a debtor to honour his or her legal obligations first before transferring property to others (usually family or friends) thus attempting to put it out of reach of legal claimants. In Freeman v. Pope (1870), L.R. 5 Ch. App 538 this principle is stated as follows: “persons must be just before they are generous, and that debts must be paid before gifts can be made”. What is a Fraudulent Conveyance? A fraudulent conveyance is a transfer of an interest in property, in circumstances where: a) the transfer hinders or impairs the rights of a creditor or other claimant to satisfy a claim against the transferor (debtor) of the property; and b) the transferor intends such a purpose in making the transfer
Burden Of Proof
In an action to set aside a fraudulent conveyance, the plaintiff (creditor) has the burden of proving that the transfer was done with the intention of defrauding “creditors or others”. Intention is a state of mind and a question of fact which must be proven in court. However because the defendant’s intention not usually directly known, the caselaw permits a plaintiff creditor to rely on circumstantial evidence to raise an inference of fraud which the defendant debtor must then rebut. The courts have identified a number of suspicious circumstances, known as the “badges of fraud” which may raise this inference of fraud. The more suspicious the circumstances, the stronger the inference of fraudulent intent. It is not necessary to prove numerous badges of fraud, as a single badge may be sufficient to give rise of an intent to defraud, deceit or delay creditors in the absence of an explanation from the defendant. Re Fancy (1984) 46 O.R. (2d) 153 The courts will examine all of the circumstances surrounding the conveyance of the property to determine if there are any “badges of fraud.” The Supreme Court of Canada in Koop v. Smith (1915) 51 S.C.R. 355 held that the burden of establishing the bona fides ( good faith) of the transaction in such a situation shifts from a plaintiff (creditor) to the defendant ( debtor), and that care is required in scrutinizing the testimony of the parties to the transaction. In examining transfers made between near relations under suspicious circumstances, the Supreme Court went on to rule that the principle of res ipsa loquitor applies, i.e. the facts speak for themselves. Thus, the court ruled, in such a situation the defendant must establish the transfer was bona fides by presenting corroborative evidence, independent of the testimony of interested parties.
Badges of Fraud
Suspicious circumstances which our courts may characterize as “badges of fraud” include the following: 1) Secrecy surrounding the transaction 2) Cash payments were made 3) No change of possession occurred after the conveyance; 4) Transfer to non-arm’s-length person; 5) The transferor has few remaining assets; 6) The transfer was effected with unusual haste; 7) Grossly inadequate consideration was paid; 8) A benefit was retained by the transferor under the settlement; 9) The transfer was made in the face of potential litigation; 10) Lack of accurate documentation supporting the transaction.
These “badges of fraud” are enumerated in Bank of Montreal v. Vandine (1953) 1 D.L.R. 456; Prodigy Graphics Group Inc. V. Fitz- Andrews, (2000) O.J. No. 1203 ( Ont. S. C. J.); and Ferguson v. Lastewka et al ( 1946 ) O. R. 577
Legal Or Equitable Claim Necessary
Both the original Statute of Elizabeth and our modern Fraudulent Conveyance Act provide a statutory remedy to “creditors and others” and these words have been broadly interpreted. Specifically in Hossay v. Newman 22 E. T. R. (2d) 150 (BCCA) our court adopted the reasoning of the Alberta Supreme Court in Dower V. Alberta Public Trustee (1962) 35 D. L.R. (2d) 29. The court found that the words “creditors and others” in the Statute of Elizabeth should be given a broad interpretation, but should only include such persons who have “legal or equitable” claims against the grantor or settler.
In the Hossay decision the plaintiff was an adult son of the deceased. He was effectively disinherited when shortly before his death, the father placed his major assets in joint tenancy with one of the defendants. The result was that the deceased’s assets passed to the defendant by operation of law and did not form part of the testator’s estate.
The plaintiff argued that the transfer of the deceased’s assets into joint tenancy was a fraudulent conveyance made to defeat his claim under the Wills Variation Act. Since a WVA claim can only be maintained against the deceased’s estate, the plaintiff sought to set aside the transfer so as to bring the assets back into the estate of his late father.
The court dismissed the plaintiff’s claim on the basis that he did not have any legal or equitable claim against his father during his lifetime. The son’s claim arose solely on death under the provisions of the Wills Variation Act, and as a result the son did not come within the meaning of the words “creditors or others” under the Fraudulent Conveyance Act.
Presumably it would be otherwise for a claim brought by a spouse. In contrast to a child of a deceased, a spouse likely does have a legal or equitable claim against the other spouse, during his or her lifetime. For example, a spouse might have a an equitable claim of unjust enrichment or constructive trust, or a legal claim under the provisions of the Divorce Act, or under provincial family law.
Creditors Need Not Exist At Time of Conveyance In Canadian Imperial Bank of Commerce v. Boukalis ( 1987( 34 D.L.R. (4th) 481 at page 487 (BCCA) the court stated “A conveyance can be set aside even if there were no creditors when it was made.” The transfer may be set aside if the defendants simply foresaw potential creditors who might be defeated by the conveyance. Newlands Sawmills Ltd. v. Bateman 31 B.C.R. 351. This is especially so where a potential debtor embarks on a risky business venture knowing that there might likely be future creditors should the business fail.
Dishonest Intention Not Required
In order for the Fraudulent Conveyance Act to apply it is not necessary to prove any dishonest intention on the part of the defendant. What is required is simply proof of an intention to move the property out of reach of potential creditors,. Royal Bank of Canada v. Clarke 2009 BCSC 481.
In a judgment released February 2, 2010, Abakhan & Associates Inc. Braydon Investments Ltd 2009 BCCA 521 the Court of Appeal upheld the trial judgment. At trial, the judge had set aside a conveyance as fraudulent in spite of finding that the debtor had no dishonest intent and had acted on professional advice to effect legitimate business purposes. Certainly there were bona fide business reasons for the transfer however nevertheless, once the debtor admitted an ancillary purpose was to shield the assets from potential creditors, the trial judge found the conveyance to be fraudulent.
Similarly in Chan v. Stanwood 2002 BCCA 474, the court upheld a finding of fraudulent conveyance where the defendants, on the advice of professionals, transferred their exigible (easily collectible) assets into shares in holding companies that were not “effectively exigible”. This exchange of exigible assets for preferred shares delayed, hindered, or defaulted the creditors, and the defendants did so by design. That design or purpose constituted the fraudulent intent required by the Act.
Conclusion
There are centuries of jurisprudence relating to fraudulent conveyances. Historically our courts have always interpreted the statute liberally and in favour of creditors. Most recently our courts have ruled there need not be a dishonest intention proven. Even a transfer made with advice for legitimate ends as limiting personal liability, may be set aside when a transfer is also intended to help to frustrate the claims of creditors.
We can expect that more and more “estate planning” type arrangements may be challenged as fraudulent conveyances by disappointed spouses who would otherwise have a substantial Wills Variation Act claim.
Kirk (Guardian ad litem of) v Kirk estate 2012 BCSC 1346.
The infant plaintiffs, through their father, were the granddaughters of the deceased, and claimed general damages against their grandfather for his assaults upon them.
On 30 October 2009 grandfather wrote a letter to a niece. On page 3 he complained about the charges being made against him and wrote:
I personally think that they have been promised money from a civil suit against me if I’m found guilty, little do they know that my house money is not in the family anymore, it’s untouchable and I’d die first anyway.
Criminal charges were laid against him in 2009 after which time the grandfather sold his house and realized $310,000.
He committed suicide in July 2010, a day before he was to be sentenced.
All of the $310,000 had been dissipated.
The plaintiffs applied for inter alia tracing order of those funds, and a declaration that the transfer of same was a Fraudulent Conveyance.
After reviewing the materials, the court concluded that $185,000 of the fund fell within the ambit of the fraudulent conveyance legislation, but not gifts that he made to his sons totalling some $11,500, or amounts paid for legal fees and for his care.
The plaintiffs rely solely on the Fraudulent Conveyance Act, R.S.B.C. 1996, c. 163, and in particular, the recent judgments of the Court of Appeal in Abakhan & Associates Inc. v. Braydon Investments Ltd., 2009 BCCA 521, and the decision of Mr. Justice Johnston in G.M.S. v. W.W.R., 2010 BCSC 1741.
[30] In the course of the Chief Justice’s judgment in Abakhan, he wrote, “It is sufficient to fix the defendants with liability if they foresaw potential creditors who might be defeated by the conveyance.” With respect to the words in the Fraudulent Conveyance Act in s. 1 “by collusion, guile, malice or fraud”, he noted those words should be struck: see para. 72, as they are surplus to the fact that the case law demonstrates that one does not need to prove a dishonest intent or mala fides but simply an intent to avoid creditors
Telfer v Henry Estate 2013 ONSC 303, involves a situation where the court imposed a constructive trust on the insurance proceeds of the deceased, who had entered into a separation agreement with his former spouse agreeing to pay child maintenance, but failed to do so.
The insurance policy was the security for same.
The separation agreement between the applicant mother and the deceased father provided for child support until their two children ceased to reside with the mother. The deceased was to designate the mother as the beneficiary of $90,000 of proceeds of and insurance from his employer.
The deceased changed employers and in breach of the agreement, named his common-law spouse as the beneficiary of a new insurance policy.
The deceased left a will leaving everything to his common-law wife, who in turn paid no child maintenance for the children support.
The mother succeeded in her application to have a constructive trust imposed upon the insurance proceeds, in lieu of payment of the child maintenance. The estate of the deceased was judgment proof.
The court followed a decision Britton v Britton 1995 Carswell Ont 892, which essentially held that if the insurance proceeds were not made available by the imposition of a constructive trust, it would result in an inconsistent result with equity and good conscience.
Frame v Rai 2012 BCSC 1876 is a good illustration of how the law of unjust enrichment pertains rebutting the presumption of indefeasible title at the land title office. The case involved a multifamily cooperative use of property where the property was registered in the names of 3 family members equally as tenants in common, and one of the parties claimed a greater beneficial ownership.
The deceased and his plaintiff sister, along with his wife decided to purchase a property for the entire family to live in. The sister and her husband contributed much more to purchase the property that did the deceased and his defendant wife, but the property was registered in the names of the four them equally. Both parties live in the house at various times, and pulled together financial resources to pay expenses.
The wife claimed that she was the sole or alternatively two thirds beneficial owner of the property after the death of her husband.
His sister brought a court action for a declaration of equitable one half interest in the property, and that action was allowed.
The court held that the statutory presumption of indefeasibility of title was rebutted by the sister, as there would be unjust enrichment if the title were upheld.
If the state of title were upheld, the wife would be enriched and the sister would suffer a corresponding deprivation.
There was no juristic reason for any enrichment.
The court held that it was the parties intention to own the house in equal shares by the sister on one hand and the deceased and wife on the other, based on an agreement among family members to purchase the home.
The remedy of a remedial constructive trust was an appropriate remedy, and a constructive trust entitled the sister to have her 50% interest registered on title.
THE LAW
On this basis, it is my view that the rejection of the common intention resulting trust in Kerr, as applied in Dhalhval(2012), requires that Skender be read to permit a displacement of the s.23 (2) statutory presumption in cases where unjust enrichment would otherwise result. In the case of resulting trust, all that needs to be established is that there was no gift, and that the funds were not intended by the donor to be a loan. In the case of a constructive trust, evidence of an agreement is considered, albeit in a limited sense. Put another way, these recent cases explain that a party can no longer rely solely on the common intention resulting trust, which was relied upon in DhaliwaL as the basis for rebutting the statutory presumption in cases where individuals enter into joint equity or co-investment ventures. Furthermore, it would appear that the equitable principles set out in Skender are in fact not an exhaustive list, but are subject to adaptation as the doctrinal development of trust principles necessitates. This is a logical conclusion given the recognition in recent years of the presumption of resulting trust as a third equitable principle that can be used to displace the statutory presumption: see Chuang v. Wong. 2012 BCSC 233 (B.C. S.C.) at para 9, citing Bajwa v. Pannu. 2007 BCCA 260(B.C. C.A.); Dhaliwal (2012), at para 40.
If I am wrong in finding that the common intention resulting trust is not discredited as it pertains to the relationship between these parties, and in the related conclusion that Skender must be modified, it does not impact my ultimate conclusion in this case, as I have decided that there was an agreement between Harjinder and Jaswinder that they were contributing to the purchase of the property as co-owners.
While the common intention resulting trust has fallen out of favour, application of the doctrine of unjust enrichment (and the associated monetary award or remedial constructive trust remedy), as clarified in Kerr, has emerged as the appropriate vehicle to use in instances where the operation of the traditional resulting trust would be inadequate to balance the equities between the parties. As Cromwell J. stated in Kerr, “at the heart of the doctrine of unjust enrichment lies the notion of restoring a benefit which justice does not permit one to retain”: at para 31.
Applied to this case, the question is whether the evidence supports displacing the statutory presumption of the discussed above.
The two equitable concepts that could potentially bear on the resolution of this dispute include the common law doctrine of unjust enrichment and the remedial resulting trust (sometimes referred to as a “purchase money resulting trust”). In my view, the former is the appropriate route to the applicable remedy in this case given the facts as I have found them and context of the parties’ financial dealings.
The facts of the Dhaliwal case bear some resemblance to the circumstances of the present case, but for one important point. In DhalhvaL the property was first and foremost an investment property; a third party renter provided the funds to pay the mortgage every month and it was possible to determine the post-purchase contributions made by the Olleks.
Whereas here, the facts as I have found them demonstrate that both parties resided at the property at various times, and due to the financial integration of the family unit it is extremely difficult, if not impossible, to tell what portion of the mortgage payments were comprised of rent monies contributed by other family members. The parties’ relationship, even considering the Rai family as a whole, is not akin to the “joint family venture” as described in Kerr. however, the way that the property was used (as an extended family home) and the means through which both parties contributed to the purchase price, as well as the ongoing maintenance of the Surrey Property, leads me to conclude that it would be inappropriate to settle the interests of the parties through the vehicle of the “purchase money resulting trust”. Use of the doctrine of unjust enrichment is supported by the plaintiffs pleadings and evidence surrounding the financial transactions and makes sense in light of the cultural and family milieu that was evidenced at trial. Unjust Enrichment
135 The requirements for unjust enrichment are well established. To prove unjust enrichment the party claiming unjust enrichment must advance evidence to demonstrate:
i. an enrichment;
ii. a corresponding deprivation; and
iii. the absence of any juristic reason for the enrichment.
(See: Becker v. Pettkus. T19801 2 S.C.R. 834 (S.C.C.))
136 Here, I will consider contributions made to the purchase of the property and its maintenance up to an including the date that the first mortgage was paid off. I find on the balance of probabilities that the plaintiff contributed $55,321.25 (-66%) towards the purchase price of the Surrey Property, whereas the contribution of defendant and her late husband amounted to $28,321.25 (-34%). These figures represent the respective initial cash contributions which relate directly to the acquisition of the property. The plaintiffs greater contribution, coupled with
(a) the risk the plaintiff took by using her credit to apply for and be named on the mortgage
(b) my acceptance of the plaintiffs evidence that she and Alex assumed sole responsibility for the mortgage payments for the period of October 1995 to March 2003, and
(c) her contribution to the preservation and maintenance of the property through payments made by her or her husband, Alex Frame, I have no trouble finding that if the state of the title were upheld, the defendant would be enriched, and the plaintiff would suffer a corresponding deprivation.
As to whether there is a juristic reason for the enrichment, I must be satisfied “that there is no reason in law or justice for the defendant’s retention of the benefit conferred by the plaintiff: Kerr at para 40. It is here that the plaintiffs assertion as to an agreement amongst the family members, and in particular as between her and the defendants, comes into play.
The plaintiffs position throughout these proceedings was that it was the intention of Jaswinder and Harjinder, prior to the purchase of the Surrey Property, that Harjinder would be a half owner of the property. In light of this agreement, it would be contrary to the legitimate expectations of the parties that Harjinder could now be entitled to the greater share that would result if the presumption of resulting trust were to operate to apportion their respective shares at the time the property was acquired.
I conclude that the statutory presumption of the Land Title Act has been successfully rebutted by the plaintiff, as there would be an unjust enrichment if the title were upheld. The plaintiff is entitled to an equitable 50% interest in the Surrey Property.
As to the issue of the second mortgage, I find that there would be a further unjust enrichment to the defendants if Harjinder’s 50% interest were to be reduced through the repayment of the amount owing.
Appropriate Remedy
I find that the remedial constructive trust is the appropriate remedy in this case as a monetary award would be inappropriate in these circumstances. The plaintiff has demonstrated a causal connection between her contributions and the acquisition, preservation and maintenance of the property (see: Kerr at para 50). This entitles her to have her 50% interest registered on title.
See more at: http://www.disinherited.com/blog/constructive-trust-imposed-rebutt-presumption-indefeasibility-title-land-title-office#sthash.S0Y27yuh.dpuf
Constructive trusts have been evolving for more than two centuries. However, it has only been in the last several years that it is now developed to the point where it is almost impossible to predict and define all the circumstances in which its equitable principles might apply .
As Chief Justice McEachern stated only a few years ago in Clarkson v McCrossen Estate (1995) 13 R.F.L. (4th) 237 (BCCA):
“I wish to mention that the law of unjust enrichment is in its early formative stages; it will continue to mature incrementally. The few cases that have been decided cannot be taken as the final word on any of these matters. They point the direction the law is taking, but not the many contours that must be traversed along the way.”
The purpose of this article is to briefly review the development of the law of constructive trusts, and to then focus on three significant recent decisions that reflect where this important area of the law has now reached.
2. WHAT IS A CONSTRUCTIVE TRUST ?
“A constructive trust comes into existence, regardless of any party’s intent, when the law imposes upon a party an obligation to holds specific property for another. The person obligated becomes by force of law a constructive trustee towards the person to whom he owes performance of the obligation.”
Law of Trusts on Canada – Donovan Waters, page 378
Lord Denning in Hussey v Palmer (1972) 3 All E.R. 70 (CA) described a constructive trust as:
“by whatever name it is described, it is a trust imposed by law whenever justice and good conscience require it. It is a liberal process, founded upon large principles of equity, to be applied in cases where the defendant cannot conscientiously keep the property for himself alone, but ought to allow another to have the property or a share in it. It is an equitable remedy where the court can enable an aggrieved party to obtain restitution”.
The principle of “unjust enrichment” lies at the heart of the constructive trust. The principle of “unjust enrichment” has played a significant role in the development of this equitable remedy.
Lord Mansfield in Moses v Macferlan (1760) , 2 Burr. 1005, 97 E.R. 676, stated:
“the gist of this kind of action is the defendant, upon the circumstances of the case, is obliged by the ties of natural justice and equity to refund the money”.
One of the earliest situations that a constructive trust was imposed concerned the acquisition of a secret profit by persons who were employed to act for others. Since then, it has been applied to countless different fact patterns, though it is perhaps best known for its application in matrimonial and cohabitation property cases.
3. WHAT IS A REMEDIAL CONSTRUCTIVE TRUST?
A remedial constructive trust is a trust imposed by court order as a remedy for a wrong. The entitlement to that remedy may be a matter of substantive law, but the trust itself is not created by the acts of the parties, or even by the obligation to make restitution, but by the order of the court. As with other court orders, the trust will come into being when the order is pronounced, unless, in an appropriate case, the order is made retroactive or its coming into force is deferred. It may be that in many cases where a remedial constructive trust is imposed, the court will order that it be imposed with effect from the time when the situation arose which gave rise to the unjust enrichment.
There must, of course, be a causal connection between the property in question and the unjust enrichment. See Sorochan v. Sorochan, supra, and Rosenfeldt v. Olson, 1 B.C.L.R. (2d) 108, [1986] 3 W.W.R. 403, 25 D.L.R. (4th) 472 (C.A.).
The remedial constructive trust must be distinguished from the substantive constructive trust which the court declares to have arisen, as a result of the conduct of the parties, and by the force of that conduct alone, at the earlier time when the relevant conduct occurred. If a substantive constructive trust is found to have arisen in that way, then there is no discretion remaining in the court to refuse to declare the existence of the trust.
The ordering of a remedial constructive trust is only one of the remedies which may be ordered as a result of a wrong committed by one person against another that is properly categorized as unjust enrichment. The available remedies include an order to pay money, as damages, and they include other remedies stemming either from legal origins or equity origins, as the circumstances of the case may require.
“It must be emphasized that the constructive trust is remedial in nature. If the court is asked to grant such a remedy and determines that a declaration of constructive trust is warranted, then the proprietary interest awarded pursuant to that remedy will be deemed to have arisen at the time when the unjust enrichment first occurred.” LeClair v Leclair Estate, May 1998, B.C.C.A
4. THE RESURRECTION OF “GOOD CONSCIENCE”
Prior to the Supreme Court of Canada’s decision in Soulos v Korkontzilas (1997) SCR 217, it had become trite law that to support a finding of a constructive trust one had to prove an unjust enrichment comprised of :
1) an enrichment,
2) a corresponding deprivation,
3) no juristic reason for the enrichment
( see inter alia Pettkus v Bekker (1980) 19 RFL (2d) 165, Sorochan v Sorochan (1986) 2 SCR 39 and Peter v Beblow (1993) 1SCR 980.)
The decision in Soulos has radically changed what had been trite law by holding that despite the absence of an enrichment and a corresponding deprivation, the doctrine of constructive trust may still be imposed “to hold persons in different situations to high standards of trust and probity and prevent them from retaining property which in “good conscience” they should not be permitted to retain.”
In Soulos, a realtor Korkontzilas had negotiated a commercial building for his client, but then decided to purchase the property for himself, which he did. He lied to his client that the deal had fallen through, but three years later his client found out what had really occurred.
The client sued Korkontzilas and alleged a breach of fiduciary duty that gave rise to a constructive trust. The problem for the plaintiff however, was that property values had fallen from the time of the purchase, so that the plaintiff could not prove actual damages. At trial, the court found a breach of fiduciary duty, but declined to order a constructive trust because since the property value had fallen, Korkontzilas had not been enriched. The Ontario Court of Appeal reversed this decision, and the Supreme Court upheld the reversal.
McLaughlin J. reviewed the history of the remedy of constructive trust in detail, and found that the principle of “good conscience” has always been at the center of the doctrine of constructive trust, and lies at the very foundation of equitable jurisdiction.
By applying the principle of “good conscience”, the court found that it applies to constructive trusts where the defendant has not obtained a benefit or where the plaintiff has not suffered a loss.
Justice McLaughlin boldly stated that “It thus emerges that a constructive trust may be imposed where good conscience so requires. I conclude that in Canada, under the broad umbrella of good conscience, constructive trusts are recognized both for wrongful acts like fraud and breach of duty of loyalty, as well as to remedy unjust enrichment and corresponding deprivation.”
The court found four conditions that should be present for a constructive trust to be applied based on wrongful conduct, namely:
(1) The defendant must have been under an equitable obligation, that is, an obligation of the type that courts of equity have enforced, in relation to the activities giving rise to the assets in his hands;
(2) The assets in the hands of the defendant must be shown to have resulted from deemed or actual agency activities of the defendant in breach of his equitable obligation to the plaintiff;
(3) The plaintiff must show a legitimate reason for seeking a proprietary remedy, either personal or related to the need to ensure that others like the defendant remain faithful to their duties and;
(4) There must be no factors which would render imposition of a constructive trust unjust in all the circumstances of the case; e.g., the interests of intervening creditors must be protected.
The doctrine of “good conscience” was subsequently applied by the B.C.C.A in the 1998 decision of Roberts v Martindale 21 ETR (4th) 475.
The reasoning of Roberts v Martindale is in my view, a good example of a fact pattern where the application of a remedial constructive trust will increasingly be applied by the courts.
FACTS : The deceased and the defendant were formerly husband and wife. The deceased named the husband as the beneficiary of a group life insurance policy, and later divorced him due to his infidelity. The divorce was marked by great bitterness .The deceased intended that the plaintiff would be the beneficiary of the policy. Both the plaintiff and the deceased believed that steps had been taken to revoke the designation in favour of the husband and appoint the plaintiff as beneficiary in his place. The husband remained beneficiary, and the plaintiff claimed recovery of money paid to the husband .
HELD: The court held that the husband should not be allowed to keep the money because he had surrendered any right he might have had to property of the deceased in their separation agreement. The breach of their separation agreement by the husband was sufficient for the court to invoke the doctrine of remedial constructive trust, and the money was declared to be properly owing to the plaintiff.
Southin J. followed the maxim of equity that will not permit even an act of Parliament to be used as an instrument of fraud, and applied the notion of “good conscience” to impose a remedial constructive trust, because Mr. Martindale had, by the separation agreement surrendered any right he may have had to the property of the deceased.
5. MUTUAL WILLS
Mutual wills are wills made by two or more people, usually a husband and wife which are drawn on virtually identical terms. Frequently, the parties will leave everything to each other, with gifts over to their children, or to strangers.
A constructive trust may be imposed on the survivor of the parties or on his or her personal representative if it can be shown that there was an agreement between the parties not to revoke their wills, and to dispose of their property in a particular way if the survivor has subsequently broken the agreement and made another will. The personal representative of the survivor will then be required to hold the property on trust for the beneficiaries of the mutual wills.
The property that will be the subject of the constructive trust depends upon the agreement between the parties. It may include only the property of the first to fie, or the property of both until the death of the first, and it may include property acquired by the survivor after that date.
A recent example of the courts imposing a constructive trust on a mutual will situation was in the decision of the B.C.C. A. in University of Manitoba v Sanderson (1998) 155 D.L.R. (4th) 40.
FACTS: On 9 July 1970, Michael Daniel Sanderson and his wife, Katherine Velma Sanderson, executed an agreement under seal (the “Agreement”) and mutual wills. The Sandersons had no children.
The Agreement provided:
WITNESSETH that in consideration of the premises the Parties hereto agree as follows
1. That the Party of the First Part will execute a Will of even date in the form of the Will annexed as Schedule I to this Agreement.
2.That the Party of the Second Part will execute a Will of even date in the form of the Will annexed as Schedule II to this Agreement.
3. That during the joint lives of the Parties hereto neither of the said Wills will be revoked or altered without the written consent of both the Parties hereto.
4. That after the death of one of the Parties hereto the said Will of the survivor will not be altered or revoked.
5. That should either of the said Wills be revoked by operation of law the surviving Party hereto will execute a new Will leaving the residue of his or her estate to the University of Manitoba upon the same terms and conditions as are contained in the said Wills.
6. This Agreement shall enure to the benefit of and be binding upon the Parties hereto and their respective personal representatives and assigns.
Clause 1 of the mutual wills provided:
I DECLARE that my wife … [husband …] and I have agreed with one another to execute wills of even date and in similar terms and in consideration thereof we have agreed that such respective wills
shall not hereafter be revoked or altered either during our joint lives or by the survivor after the death of one of us AND I FURTHER DECLARE that the provisions of this my will are made in consideration of such agreement.
The mutual wills further provided that the estate of the first spouse was to be held in trust for the surviving spouse for his or her life, or until remarriage, and the trustees were granted discretion to employ income and capital for the benefit of the surviving spouse. The residue was left to the appellant, the University of Manitoba, in trust to establish a perpetual bursary fund “to assist talented prospective teacher-students who demonstrate ability in scholastic fields of study such as mathematics science foreign languages (including Ukrainian and Polish) worthy research work and in other worthy subjects pertaining to the teaching profession”.
The Sandersons executed codicils to the mutual wills on 20 July 1973. The codicils stated that their domicile was British Columbia and the reference to “teacher-students” was changed to “undergraduate student teachers”. They executed second codicils to the mutual wills on 13 July 1977 which substituted Montreal Trust Company for The Royal Trust Company as the co-executor of the mutual wills. Both the 1973 and 1977 codicils contained the statement: “In all other respects I confirm my said Will”.
On 29 March 1984, Montreal Trust wrote to the Sandersons suggesting a review of their wills. On 21 April 1984, Mr. Sanderson responded by endorsing the letter, “Keep the Will in force please”, and returned it to Montreal Trust.
On 18 July 1985, Mrs. Sanderson died and shortly thereafter Mr. Sanderson made a new will, the provisions of which were inconsistent with the terms and provisions of the mutual wills.
When Mrs. Sanderson died, almost all of her assets were held jointly with Mr. Sanderson. The trial judge found that Mr. Sanderson obtained ownership of all the assets by right of survivorship or “right of transfer”. The assets were transferred into his sole name on 30 August 1985. Montreal Trust renounced its right to probate Mrs. Sanderson’s estate, because “there was no estate to probate” and, as a result, Mrs. Sanderson’s will was never probated.
On 30 August 1985, Mr. Sanderson executed a new will (the “1985 will”), naming Montreal Trust Company of Canada as the sole executor and trustee. In his 1985 will, Mr. Sanderson divided the residue of his estate between the following beneficiaries: a one-quarter share to his sister-in-law, the
defendant, Julia Milne; a one eighth share to each of his nephew, the defendant, Michael Seneshen and the defendant, Victoria Scott; a one/twelfth share to each of the defendants, Jean Andruchuk and Mary Wus, and a one/twelfth share to Peter Seneshen, with the balance to the University on the identical trust to that contained in the mutual wills. Mr. Peter Seneshen’s gift lapsed as he predeceased Mr. Sanderson and the gifts to the beneficiaries were on condition that the beneficiary survive Mr. Sanderson.
On 31 January 1994, Mr. Sanderson died. His estate, which was then made up almost entirely of treasury bills, investment certificates and cash, had a value of $1,733,855.88 as at 21 June 1996.
On the application of Montreal Trust, which was granted administration of the estate, letters probate were issued on 6 February 1995 in relation to the 1985 Will.
The University filed a Caveat on 22 July 1994 which read, in part:
The Caveator is the beneficiary under trust created under the terms of the Mutual Wills of the deceased Michael Daniel Sanderson and his deceased spouse, Katherine Velma Sanderson dated July 9, 1970. The Caveator claims to be entitled to the entire residue of the estate of Michael Daniel Sanderson under the said Mutual Will of July 9, 1970 ….
Montreal Trust declined to bring an application to resolve the conflicting claims of the University and the individual defendants and, as a result, the University commenced an action seeking a declaration that the defendant executor, Montreal Trust, holds all of the assets of the estate of Michael Daniel Sanderson as constructive trustee for the sole benefit of the University.
HELD :
“This is a case in which there was an express agreement made that the mutual wills would not be revoked or altered during the joint lives of the parties to the agreement and that after the death of the first, the will of the survivor would not be altered or revoked. There was an exchange of promises
and Mrs. Sanderson did not revoke her will, although she had the legal right to do so, before her death.
Equity considers it a fraud upon the deceased, who has acted upon and relied upon the mutually binding nature of the agreement, for the survivor to change the will and break the agreement. As the deceased cannot intervene to enforce the obligation, equity will enforce the survivor’s obligation, despite the survivor’s subsequent intentions.”
It is important to remember that just because a husband and wife have simultaneously made mutual wills, giving each to the other a life interest with similar provisions in remainder, is not in itself evidence of an agreement not to revoke the wills. In the absence of a definite agreement to that effect, there is no implied trust precluding the wife from making a fresh will inconsistent with her former will, even though her husband has died and she has taken the benefits conferred by his will. It is only where an agreement has been made, that equity will cause the court to enforce the contract and require the survivor to dispose of the property in a manner consistent with the terms of the will. The survivor will be precluded from making a subsequent will to deal with that property or to dispose of the property in a manner inconsistent with the trusts imposed.
6. CONCLUSION
The court will only intervene where the facts show that the judicious parent , acting in full knowledge of the true facts, would have made a different disposition of the estate among his adult children. Griffin v McCarthy 36 E.T.R. 129
In Chernecki v Vangolen 1997 3 W.W.R. 589 (C.A.), the Court of Appeal found that a will that left $1.16 million dollars equally to two children should not be interfered with, as the will had made adequate provision for each child.
In Cavadini v Mahaffey Estate ( 1995) B.C.A.C. 220 it was held that the law does not require a testator to treat all children equally.
