Tracing Assets

Tracing Assets | Disinherited Vancouver Estate Litigation

The classic statement of law relating to the process of tracing assets is found in the decision of the Ontario High Court of Justice in McTaggart v Boffo (1976) 10 OR (2d) 733 at 749-750:

“The general principle for the tracing of trust funds is found in Pettit, Equity and the Law of Trusts :

Whenever there is an initial fiduciary relationship, the beneficial owner of an equitable proprietary interest in property can trace it into the hands of anyone holding the property, except a bona fide purchaser for value without notice who is title is as usual inviable

Tracing is only possible so long as the fund can be followed in a true sense ie so long as, whether mixture and mix, it can be located and identified. It presupposes the continued existence of the money either as a separate fund or as part of a mixed fund or as latent in property acquired by the means of such a fun. Simply put, two things will absolutely prevent the tracing of trust monies:

a) If, on the fact of an individual case, such continued existence of the identifiable trust fund is not established, equity is helpless to trace it;

b) The chain for tracing is also broken with the trust fund either in its initial form or converted form has found its way into the hands of a third person purchaser for value without notice.

This statement has been cited with approval in the decision of the British Columbia Court of Appeal in Tracy v Instaloons Financial Solutions Centres (BC) ltd 2010 BCCA 357 at para. 42.

The ability to trace assets can only be a matter of consequence with a wrongdoer is unable to meet his obligations are worthy asset that is the subject matter of the legal proceedings is of personal importance to the victim.

The decision in McTaggart v Boffo identifies two categories of litigants that are adverse and interest to a claimant:

1. The wrongdoers creditors, who otherwise have the right to share in the proceeds of the wrongdoers assets, hence the need to determine whether the acid can be said to be truly the property of the victim;

2. third-party purchasers at arms length in good faith of acquired the asset from the wrongdoer without notice that the acid in truth belongs to another person.

The decision in McTaggart refers to the tracing of trust funds because the fundamental concept underlying this remedy is that it is aimed at achieving a return of funds /assets wrongfully converted.

If a person steals/converts an item of personal property that person may then be compelled to return it to its rightful owner; and that circumstance, equity need not intervene through tracing since the court merely recognizes and declares the victims property right.

However if the wrongdoer converts an asset and then sells or assigns it to another person in exchange for valuable consideration, tracing then becomes available assuming that this consideration can be followed in a true sense because it can be located and identified.

Treat the tracing process is often complicated by circumstances such as co-mingling into blended funds that may fall into the following broad categories:

1. Co-mingled funds comprised of funds/assets belonging to both the trustee/wrongdoer and to the victim;
2. co-mingled funds comprised of funds obtained from two or more victims as in the case of investment schemes
3. co-mingled funds comprised of funds obtained from two or more victims blended with the wrongdoers own funds.

The requirement that the converted asset can be followed in a true sense because it can be located and identified astringent, even in the context of an equitable and discretionary remedy, because of the injustice be following up on the wrongdoers other creditors were this cannot be proven.

Tracy v Instaloons made the point that the right to trace is not in itself a discretionary remedy. That case involved victims of a criminal scheme of charging interested a criminal rate, and the victim sought to recover the legal charges they had actually paid to the defendant. The Court of Appeal confirmed that once an equitable proprietary right has been established, the holder of that proprietary right can then traced the subject matter of the right farther up the transactional chain and even into commingled accounts.

The court stated that it may be difficult to identify the funds or other property and to which the claim charges of being transformed or with which they have been mingled; and the process will come to a halt in certain conditions, including were the balance in an account is fallen below the amount being traced.

Constructive Trust Remedy and Tracing

Constructive Trust Remedy and Tracing

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


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

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

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

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

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

[Emphasis added]

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

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

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

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

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

[Emphasis added]

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

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

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

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

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

[Emphasis added]

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

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

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

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