TRUSTS SUMMARY Chancery Equitable Maxims o Developed in Courts of Chancery o Relate to moral idea of justice – not binding principles, just general guides. o There are about 30 1. Equity looks to be seen as done that which ought to be done: will overlook little trivial mistakes because equity is concerned with basic intent 2. Equity acts in persona: equity acts on the person and is individualized 3. Equity will not assist a volunteer: if you don’t pay for something, equity won’t necessarily assist you, but if you are a bona fide purchaser, your rights are highest 4. Equity will not allow a … to become a purchaser for fraud: people couldn’t rely on writing to allow a person to commit fraud. Won’t allow a statute to be interpreted in a way that commits fraud 5. Equity will follow the law 6. Whoever comes to equity must come with clean hands: someone who is not fair or just will not be favoured by equity 7. Where the equities are equal, the law prevails: if you have 2 people who have equally equitable claims, CL will resolve it. 8. Where equities are equal, the first in time prevails. 9. Equity aids the diligent not the tardy: there are no limitation periods, but you can’t let damages pile up etc… element of reasonableness Chancery o Judge only- individualized law depended on the facts, didn’t want artificial distinction between fact and law o A way to allow the King to have his own court system. o A gloss on the CL, to remedy when you thought CL didn’t work. o At first set up to be a moral court, to fulfill the moral obligations of the people o You could seek relief if someone’s conduct was contrary to conscience o No precedents or record keeping. Common Law o Separation of govt and judiciary o Operated as courts of equity didn’t exist, never alluded to in CL reporting. o CL lawyers went only to CL courts- were in competition. 16th Century o Threats to the Chancery court, pressures to change o Huge amounts of litigation o 1480-1590: staggering amounts of cases, especially in chancery, way more than today, and the Chancery courts became overloaded. o 17th Century: Attempts to end Chancery. This lead to change- more rules o 1615- Earl of ____ case: proved that Chancery had primacy. Ratio: Equity has the jurisdiction to prevent a plaintiff from exercising a CL verdict. o Late 1600’s- Equity courts sucked, and used most of the trappings of CL (e.g.: precedents, reports, certainty, continuity became more important than conscience) o 1873-5: Judicature Acts attempted to meld the 2 systems by abolishing the Chancery courts and having just one system The Present o There has been a renaissance of conscience-based decision making in the SCC o Lac Minerals, Guerin, Petkas- court is looking back to original ideals of equity, and make D’s act in a certain morally correct way. History of Trusts o Trusts were developed because the courts of equity were conscience based o Began with the use o A B to use C o A owns property, transfers to B, so that C can use it. o CL didn’t recognize it, so it existed purely in Chancery Reasons for Uses: o Basically it was a way to avoid rules in place at the time o C is not trustworthy o C is far away and B is going to give it to her o C is unable to hold property o Avoiding taxes was properly the most common o Primogeniture- first born son inherits. This allows females to use property o Provide charitable donations The Statute of Uses o Much of the land in England became tied up in uses, so the King lost half his original revenue o Difficult to tell who owned land o 1535: Statute of Uses: all uses would be executed as of the date of the statute, so B’s interest was executed, and it became a transfer to C o 1550- Got around this by adding another use, because the statute only executes the first use o A B to use C to use D o C would be the trustee, and D had the use o This was challenged in court, and at first courts found it invalid, slowly, lawyers continued to use it, and by the end of the 1500’s, it was accepted as a valid use of property o By mid-1600’s, property was all tied up again o Current uses of trusts: pensions Trusts Defined Maitland: “any person who has property vested in him/her who is subject to an equitable obligation to hold that property for the benefit of another, or for a purpose recognized by law, is a trustee of that property. If the obligation arises by an intention to create than it’s an express or charitable trust, if it’s from a presumed intention, the trust is resulting, and if it arises by operation of law, it is a constructive trust.” Donovan Waters: “a trustee is compelled in equity to hold property, whether by law or equitable title for the benefit of some persons called “beneficiaries” or for some objects permitted by law, so that the real benefit accrues not to the trustee, but to the beneficiary or other objects.” Types Express: created on purpose by the originator Resulting: Constructive: Components of the Definitions A B C A- creator, settlor (inter vivos trust), testator (as part of a will) B- holds legal title to the property. Trustee, cestui qui trust C- beneficiary, cestui que use, has equitable title (person or charitable purpose) * Property has 2 aspects, equitable and legal title. Not possible in CL. Features: 1. B has an equitable obligation because it was enforced in Chancery. It arises because the trustee has been determined to be a fiduciary- original form of fiduciary, and has equitable obligations. 2 types of obligations: personal and proprietary due to CL/equity split and title split. 2. You must have trustee, but your trust won’t fail for lack of one, as long as it’s clear you meant to have one. If creator by accident sets up something that fails to appt a trustee, courts will appt one for you. 3. Trust property is held legally by the trustee. Notion of what property can be held in trust has evolved in the case law over time (e.g.: intangibles, personal properties, land) 4. Very broad range of possible beneficiaries. Originator can also be the beneficiary- set up a trust for yourself. Beneficiaries have rights, because otherwise there wouldn’t be a real person. Beneficiaries don’t have to be alive (i.e.: persons to be). Example Trusts? A B A (yes) A B B (no- title isn’t separated) A B B+C (yes- title is split) A B A+B (yes) A B C D (yes- SUBTRUST- C gives part or all of her equitable interest to D, holds it in trust) A B C1+C2+C3 (yes- you can have an infinite no. of beneficiaries, or B could choose such as in awarding a scholarship) A B1+B2+B3 C (numerous trustees- board) A B C1+C2+C3 D1+D2 A B Clife Dremainder A B Cpurpose A B Cdog (no- can’t creates subtrusts or anything- no jurisprudence) A B Cdog for life Dremainder A B Cif C marries William Public policy (chancery), other prop. principles A B Cif Cdoes not marry William Trusts and … FIDUCIARY RELATIONSHIPS o All trustees are fiduciaries, but not all fiduciaries are trustees o Trustees were the first fiduciaries, and the highest because they have proprietary interest in the property, which regular fiduciaries don’t have o Has the greatest discretion in looking after the property o The fiduciary acts on behalf of the beneficiary, and the beneficiary has a right in equity, whereas a the beneficiary of a trust has a proprietary interest BAILMENT Differences: 1. No trust because bailee has an interest, but not title, and bailor is required to return the property once whatever it is is finished 2. Bailee, because he doesn’t have title, can’t pass title. 3. Intention behind the relationship is different- no transfer of title in bailment. 4. Bailee is not a fiduciary- have lower duties of care 5. The types of property that can be subject to trust or bailment are different (i.e.: trusts can be limitless, bailment is restricted to real and personal property) Similarities: 1. Bailee transfers property to bailor for some reason (e.g.: car to mechanic to fix it) 2. Bailee and trustees have duty of care towards the property- bailor to take reasonable care, trustees a whole bunch more 3. Bailees and beneficiary can rely on tracing remedies if stuff goes on (allow the party to trace the property thru to other 3 parties) CONTRACTUAL AGREEMENTS No proprietary rights Similarities: 1. Trusts and Ks define relationships between people Differences: 1. Ks governed by CL, trusts are equitable 2. Ktors are an equal relationship where there is agreement, in trusts there is no agreement between settlor, trustee, beneficiary 3. K’l terms can be varied by the parties, where the creator of the trust is in charge of varying it- also statute 4. Ks can be terminated by agreement, but trusts generally aren’t revocable by settlor or trustee 5. Ks governed by personal rights, trusts by fiduciary rights (due CL/equity split) 6. Transfer of title fundamental to trust, but Ks can be about many things, including transfer of title 7. Ks enforceable only by parties that entered into them, where trusts can enforced by 3 parties AGENCY Similarities: 1. one person is acting for another in both 2. Both are fiduciaries Differences: 1. Agents don’t have to have legal title. 2. trustees have more say in what happens to the property 3. Principals monitor their agents LIMITED PARTNERSHIPS Differences: 1. creature of statute 2. only limited liability (where trustee has absolute) 3. no title change 4. no separation of legal/equitable DEBTOR/CREDITOR RELATIONSHIPS o CL duty, personal obligation to pay off creditor. o Same facts that give rise to C/D relationship may give rise to trust relationship. o Was the intention to create a trust, or was it just C/D. Can just sue for $, not the property OTHER Gifts: “I give my house to B in hopes she maintains it in good condition.” Could be a gift or trust- intention determines which. Expectation that house is maintained, but it is not a legal duty. Gifts are absolute beneficial interests, no obligation. “Provide a home for Chelsea”- more like trust- intended to provide home for C, or give it to B? Conditions: intention is important, did the originator want the condition to always function? Equitable Charges: Flat given to son absolute to maintain daughter- court said this is more than a condition, it’s an equitable charge that the daughter could enforce. She could claim for equitable relief in the courts, and get $ for not being maintained, or some sort of SP. Equitable Personal Obligation: courts say no equitable charge on the property, just a personal obligation on you, B must maintain C. Different remedies. look at each situation to determine intent- was there reliance, does C need a house, or to be maintained? Hilary Lim Article: “Mapping Equity’s Place: Here be Dragons” Law is specialized discourse, and once you enter it, you must use the language of law Equity may be slightly different because it doesn’t have the baggage of law, and it tried to bring in marginalized people who might have been left out by law Georgina Nestle: is marginalized because she is a woman, also possible that all beneficiaries are marginalized, because they have no control over what happened to their property Trust law is the area of a very small, elite portion of society Trusts, in general, were a preserve the rich, so there is a tension between equity and trust law Middle and lower classes, until 20thC, wouldn’t have known what they were. Equity can be a constructive force for society because of the ideals of individualized justice, ordinary citizen can raise a claim One realm of private law that can be progressive and even activist, so we shouldn’t ignore the entire private law sphere The use of equity where real changes can be made without the overt pretence of being activist, such as every time you raise a Charter claim/Constitutional case in public law. The tide will be slow because these are single judgements, chipping away at it. Even SCC is thinking of equity as a progressive force. THE EXPRESS TRUST o The first trust (other 2 are just corollaries) o The legal title is held by one person (trustee), and the equitable interest is held by another (beneficiary) o Management of property is split from enjoyment of it. o Is created when settlor is alive by transferring property to the trustee, or the settlor can do it in a will o In Canada (and most CL countries), there is no common repository for trusts- they can be held anywhere (e.g.: by lawyer, under bed etc…) o Unlike K’s, there is no consideration o They can be oral, but most are written THE CREATION OF AN EXPRESS TRUST FOUR REQUIREMENTS 1. Settlor must have legal capacity 2. The three certainties must be satisfied - intention - subject matter - objects 3. the trust must be constituted by the transfer of property to the trustee(s) 4. Any requisite formalities must be met 1. CAPACITY The Settlor: must have capacity to deal with property i) Age: Minors cannot create a trust by way of will as they cannot, with certain exceptions, create a valid will. With inter vivos trusts, the trust is voidable and will become binding only if he ratifies the trust upon reaching the age of majority, or, in the case of trusts concerning long-term interests in property, he fails to repudiate the trust within a reasonable time after attaining the age of majority. ii) Incompetency: A person may be found incompetent to create a trust where it is found that they are not capable of properly understanding the nature and effect of the transaction. In the case of a testamentary trust, the testator must also be able to understand the extent of the property being disposed of and appreciate the needs of dependants. iii) Not Bankrupt: don’t want A to create a trust that will tie up a property that creditors are after. The Trustee: Any individual who can hold an interest in property can be a trustee. i) Anyone who can hold property, can be individuals or corporations. ii) Minors can’t hold property, and neither can unincorporated associations iii) Must have capacity to hold property Beneficiaries: All persons whether individuals or incorporated entities can be beneficiaries. i) All persons can be beneficiaries: Minors and unborn children ii) Charitable purpose trusts are ok. iii) Beneficiary is not supposed to be a company, it is not supposed to be a profit driven thing, so generally corporations can’t. iv) Unincorporated associations and partnerships can’t be because they can’t hold equitable title either 2. THE THREE CERTAINTIES · All trusts must meet these requirements. They are not truly distinct categories- they do interact. · 2 possible ways to interpret trust-like grant: a) Life Estate to B, Remainder to C, b) gift with a condition- B gets the pie, obligation to give a bit to C. · The three certainties are a way of analyzing and determining if a trust exists or not. Commissioner of Stamp Duties v. Joliffe: Facts: Bill opens an acct for himself, and one for his wife, with bank as trustee- he did it to avoid taxes. Majority: Courts found no trust because there was no intention to create a trust- never wanted his wife to have the money. Using the word “trust” is not enough Minority: How can the courts let a person who objectively created a trust subvert the law due to subjective intention- trying to rely on equity to say it is wrong to take the $ away from the wife. Ratio: there is a subjective element to intent. Jones v. Lock: Facts: Business trip, comes back, wife asks if husband brought back a gift for their new baby. He takes a chq for $1000 and says “I give this to baby, I’ll put it away for her.” He promises to complete the next day, but died that night. Issue: Is there a trust on behalf of baby? Majority: There is no trust; no intention to create a trust, the intention was to give baby a gift. The gift was invalid. Ratio: there is an objective manifestation of a trust, the subjective intent to give the money to baby was not enough. i) Certainty of Intention · Refers to the intention to create a trust which is itself an intention that another person who is to receive property will be obliged to hold that property for the benefit of some other person · Intention must relate to more than a mere wish or moral obligation · The expression can be oral, written, and it can be showed thru conduct. · The absence of words like “trust”, or the absence of conduct showing it may indicate it is not a trust. Re: Shamas (pp.74) Facts: provision causing problem: “I give all my belongings to my wife. I want her to pay my debts – raise the family. All will belong to my wife until the last one comes to the age of 21 years old. If my wife marries again she should have her share like the other children, if not, she will keep the whole thing and see that every child gets his share when she dies.” Is the wife the beneficiary of a gift, or just a trustee? Decision: This is a trust with qualifications. Reasoning: The wife is a life beneficiary, children get the remainder. “The widow is entitled to encroach on capital for her maintenance after the youngest child became 21 years of age and during her widowhood.” Power of Encroachment: allows the life beneficiary to take away from the capital, rather than just use the interest, which is normal. Paul v. Constance: Facts: Unmarried couple, living in sin. Man is separated from his first wife. They started to share finances, wanted to get a joint acct, but couldn’t because they weren’t married. The man opens the acct in his name, intending to share, puts in $500. They put in bingo winnings- over 10 years $500 goes in and they use it to spend on xmas gifts. The man dies, and his wife comes back, and says the acct is all hers because they never divorced. Common-law spouse says no, it’s held in trust for me- ½ is mine. Issue: is there an intention to create a trust? Decision: Yes Reasons: over a period of time, they put money in together, with the understanding that it was held in trust for her. ** Haigh on the moral element: Gifts are a moral act, but you divest yourself totally of the gift- a trust is even more generous because what you are doing is giving the use (equivalent to gift), but you are assuming obligations to look after them of an ongoing nature- more than one time gift ii) Certainty of Subject Matter · This has two aspects: · Certainty of the property subject to the trust obligation · Certainty of the amount beneficiaries are to receive · The subject matter must be ascertainable at the time the person dies, not at the time the will is written · In an inter vivos trust, the time of ascertainability and the time the trust arises are the same. · Separation agreement with trust of 3/5 of husband’s net property at his death for wife until she remarries and then for her kids. So trust was supposed to arise immediately, but the amt couldn’t be determined until his death. Sprange v. Bernard (1789), 2 Bro. CC 585; 29 ER 320 Facts: Testator willed $300 to her husband with the stipulation that the remainder “that he does not want for his own wants and use” should be divided among two others at his death. Ratio/Judgment: The held that husband was entitled to the gift absolutely. As the property and person to whom property is given must be certain, the remainder was void for uncertainty as the will suggested that there might be nothing left and thus nothing to hold in trust. Re Romaniuk (1986), 48 Alta. LR (2d) 225; 23 ETR 294 Facts: Testator’s will attempted to create a trust in favour of her nieces and nephews. The will contained two paragraphs which raise some uncertainty as to the subject matter of the trust. In one paragraph she wrote: “The rest of the contents of the house and my personal belongings are to be available to my brothers to divide among [X] and [Y] and the rest sold as well as the house and car”. In a following paragraph, she wrote “The money from the sale of my house, car and other property as well as the money from my bonds and bank accounts is to be divided into four equal shares and put in trust to be given to [nieces and nephews] on their each reaching 21…” Issue: Is the description of the subject matter uncertain such as to void the trust as a result of the relationship between the two paragraphs? Judgment: The phrase “and other property” is capable of several interpretations. The Court has no clear grounds upon which to determine which interpretation was intended. As a result the subject matter of the trust in favour of the nieces and nephews fails for lack of certainty. Green v. Queen (1973, Ont HCJ) Facts: Green tries to stop development of a provincial park by arguing that the govt was holding the provincial park in trust for the people of the province. Decision: There is no trust Reasoning: o The judge found Green had no standing as a citizen to make a claim o Cement company contract was made before the park o s.3(2) of the act makes it clear that the province can change the size of the park, or cancel it all together, means there is no certainty of subject matter. Implications: Haigh says it would make more sense to say no certainty of intention: nothing about trusts in the legislation. Pp. 4 s.2: says “for the use of the people, and future generations.” Last part sounds like a trust. Because trust law came from a tradition of small, individual justice, it is easier to find it in individual cases, rather than on the part of an entire province. US: 15 years ago a case like this was successful. iii) Certainty of Objects Three types: 1. Fixed Trust: amt is fixed, trustee doesn’t have to determine how much to give, or who to give it to. 2. Discretionary T: trustee has discretion to determine amts, and/or who is entitled 3. Power o Has probably produced the most litigation- many pitfalls o Settlor wants to make sure trustee carries out your intention, and those you intend to benefit, do. o Important for monitoring the trustee and making sure they are carrying out their obligations o Clearly beneficiary wants to know what and if they are entitled o Courts need to know because if they are advising on a trust, need to know who can come to court to enforce a trust o Beneficiaries aren’t entitled to their benefits unless trustee knows how to deliver their property, so need objective way to determine. o The test for certainty depends of whether the trust is fixed or discretionary; 1. Fixed Trust Test: List Certainty Test- two components, both of which need to be ascertainable, need a complete list of all the beneficiaries. a. Trustee must be able to determine if a person is on the list, b. you have to be able to determine the entire list- create a class. There are different levels of failure of List Certainty: a. Conceptual/language uncertainty: you can’t create a class by virtue of the language- improperly drafted (e.g.: to all my old friends- time, age, how long …). Consequence: whole trust failed b. Evidential Uncertainty: concept is certain, but hard to track everyone down (e.g.: all of my flying mates in the RAF from 1942- all were identifiable, but many had scattered and couldn’t be found). Consequence: court will find the trust voidable but not void, so the trust doesn’t fail. 2. Discretionary Trust o Test: a. Determine whether any given person is or is not a member of the class b. One need not identify every single potential member of the class; however, o Required to determine who in a potential class of people will get property, how much o Beneficiary has some form of proprietary interest, but not in a power. o Until the Baden (has 2 names) case, a person had to meet the list certainty test. o New test establishes the dame test for powers and trusts o Conceptual/Evidentiary uncertainty applies here to. 3. Powers of Appointment o Power is given to a donee, the one who receives (object) is the appointee of power o A donee is a fiduciary – duty to carry out the power as prescribed- can’t go outside their power o A type of relationship in law, sometimes part of a trust, but are a separate entity. o Under a discretionary trust, the trust has the power to appt beneficiaries o Definition: an authorized owner invests in someone else the legal authority to deal with property that is not theirs. There is no obligated to use the property, but the power is there. EXAMPLES: 1. I will allow my daughter the authority to drive my car – this is a power 2. Consignment; your property is on consignment, and they have the power to sell it, and you expect some return 3. Leaving your car with a mechanic, who has the power to drive it if necessary 4. Most common: Power of Attorney Test for discretionary power: o IN/OUT TEST: you don’t have to draw up a list of potential appointees. As long as the drafter created enough certainty that you could determine if an individual was or wasn’t part of the class, that is sufficient. o Trustees have lots of powers attached to their duties (E.g.: investment powers, to advance money to life tenants) o Major difference between trusts and powers is that trusts are imperative – trustee must perform, where powers are discretionary o Consequences: Trustee who doesn’t perform can be liable for breach of trust, and if trustee fails to exercise, courts can intercede to compel them to act o You can’t find a power liable for failure to act o Lower level of legal standard than in trusts. EXAMPLE: o “I allow my son Bob to give my car to whichever of my children he wishes, including himself.” o This is a power of appt, Bob is in the position of donee, and is entitled to choose any of the children including himself, there is no compulsion o If the Bob dies without exercising the power, it goes back to original owner (estate of the father) o Types of powers: 1. General: power to appt anybody 2. Specific: restricted to a class, group or list 3. Hybrid/intermediate: anyone except a certain group 4. Gifts o Creator’s intention is what governs in determining if a gift, trust or power has been given o Gift over and default of appointment clause: E.g.: “I give my car to Sam for life, remainder to such of her children as she may appoint, failing which, it shall go to Fred” o To Fred is a gift over clause, and means you the creator have considered that Sam will not appoint anyone, and because you’ve considered that, this is not a trust because there is no compulsion- it must be a power of appt to her, and a pure gift to Fred. Re Frame  Ch.700; 2 All ER 865 (Ch.) Facts: Testator gave X funds and insurance policy proceeds on condition that she adopt his daughter. X was unsuccessful in adopting daughter. Issue: Did the gift to X fail? If not, was it subject to any trusts in favour of the daughter? Ratio/Judgment: A devise on condition that the devisee makes certain payments does not import a condition in the strictest sense of the word, but a trust. The intent of the testator was that X receive the money on the terms that she “adopt” the daughter; however, what was envisioned was not a single act, the adoption itself, but was a series of acts that involve the maintenance of the daughter. As it is a trust, the Court will not strike it down in its entirety simply because one aspect of it cannot be fulfilled. Telling the difference: 1. is there compulsion- donee and trustee are fiduciaries, but donee is only liable if acts outsides power. Trustee has many other aspects to the role – improperly exercising your trust is only one of many things you can be liable for 2. Intention of the Creator McPhail v. Dualton/Badens Deed Case: Facts: terms in a discretionary trust where a testator wanted to benefit staff of his company, or their relatives and dependants. Issue: are the words “relatives and Dependants” sufficiently certain Trial (Lord Goth): this is a power, not a trust, so test is not list test Appeal Court (1970): a test for powers had been changed in a different case HL: discretionary trust- decided to adopt the in/out test for powers, and sent it back to trial to be decided using the new test Trial: all 3 judges had different interpretations of how “relatives and dependants” met new test. Are they linguistically certain? Issue: How close of a relative does it need to be? Each said it passed, but came to the same conclusion in a different way Decision: discretionary trust just needs powers test Reasoning: o fixed trust- amts and people are fixed, so if you are operating under that regime, list certainty test make sense. o If operating under discretionary regime, you can pick who and how many from the class, so it’s not as important to know whole list. Old idea was that if there was inaction, courts said you need the whole class to give equal distribution. o In Badens Deed, Wilberforce said that is against the point of a discretionary trust, the creator would have created a fixed trust o As a result, the test can be different, don’t need entire list, creator didn’t intend to distribute equally to the entire class. o It’s enough if you can determine if someone is in the class or not o Wilberforce also added (pp.88 last para): there may be a 3 rd case where the meaning of the words clear, but the definition of the beneficiaries is so wide that it can’t be used to determine a class, making it administratively unworkable. E.g.: all the residents of greater London- this is not conceptually unworkable, but it’s too difficult for trustee to decide who to appt to among that class- no criteria to determine what creator intended (but there is no criteria for smaller classes either – so this has created many problems, judgment doesn’t really help much) o So added a requirement for administrative workability. This created an addition to the discretionary powers test. Ratio: McPhail Test: don’t need to create entire list, just need to meet the test for discretionary power (is an individual in or out of the class?). Also, administrative workability is now cited as part of the test, so drafters try to keep class size smaller, but don’t focus on that- has never been used in Canada to strike down a trust. Values that May Influence Findings on the Three Certainties i) Maximizing property values o importance attributed to freedom to dispose of property ii) Evidence of owner’s intention iii) Deliberation by owner o Consider if decision made in haste or with reflection iv) Reliance v) Unjust enrichment vi) Enforceability and administrative costs o How vague is the trust? o How easy/difficult would the administration of the trust be? vii) Distributional equity o Is one of the interested parties more deserving or in need? viii) Balancing of these underlying concerns 3. PROPERLY CONSTITUTED · when creating a trust, you must split the legal and equitable title · needed because intention isn’t enough. This extra step is ensure that there is more than just intention to create a trust · Protects against off-hand statements and uncareful comments a. Transfer by creator: Most common, basic rule is that the settlor must comply with all formalities with transfer to give trustee legal title, and “all the formalities” depend on the type of property. Most times, we will see transfer by possession, shares or houses. Issue: when transfer is completed. i. Cash: simple possession is enough under the law ii. Cheques: must be endorsed on the back iii. Shares: look into articles of incorporation CASES: Milroy v. Lord (late 1800’s, England) Facts: Settlor (Medley) purported to transfer shares to Lord, who was then to act as trustee for Milroy. S thought he had created a trust – no issue of intention. The shares were in Bank of Louisiana, and its constitution required transfer of shares to go thru a number of steps, none of which were done. Issue: Was Milroy entitled to the benefit of the shares? Decision: She is not a beneficiary under a trust. Reasons (Lord Turner on pp.96-7): “I take the law of this court to be settled that in order to render a voluntary settlement valid and effectual, the settlor must have done everything which, according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property and render the settlement binding upon him.” Ratio: Settlor must do everything which, according to the nature of the property, must be done In re: Rose (1952, England) Facts: Intended trust created by transfer of 10,000 shares to his wife. Intention was clear, certainties met. Transfer was not registered in company shareholder registry. Mr. Rose gave the share certificate to the secretary as required, assuming she would get it registered. Issue: Is there a properly constituted trust? Decision: Yes, there is a trust. Reasons: (Lord Evershed on pp. 99): Distinguished from Milroy (pp.102) because Milroy didn’t take any of the required steps. Here, everything was done properly, so it follows that so far as lay in his power, the deceased did all that he could. Ratio: Settlor must do all that he or she can do to effect a transfer of property. Implications: This case is now settled law. TEST: has the settlor done everything that was within his/her power? This test is a bit more subjective than that in Milroy. The question is now what will the courts do with cases where the settlor has done everything possible, but a third party (i.e.: secretary in this case) is required to take steps, but doesn’t. Any other kind of property transfer is straightforward and everyone knows what has to be done. b. Transfer by third party: Less common, can have a trust constituted whereby creator asks 3 rd party to transfer property to a trustee. There are tests to determine that transfer took place, and it varies depending on the property in question. Cases in 1600’s where property was in possession of 3rd party, and settlor would ask them to transfer it over to a trustee – this is possible at law. No trust until transfer takes place, and settlor can revoke it right up until that moment. c. Declaration by creator: Creator declares that title has been split. No physical act for the courts to focus in on when looking for separation of legal and equitable interests. (A A C). Timing is important because it is by declaration, so when can a court say that title has split and a trust has arisen and A can no longer revoke. Issue: at which point after the statement does a trust arise? Jones v. Locke- · A trust is not constituted until transfer has taken place · It is binding on the settlor unless this is specifically allowed by the deed · Beneficiary can only enforce rights on the settlor or trustee after the constitution, as well as against 3 rd parties (except innocent purchaser) Paul v. Constance Facts: see above under intention Issue: when did he declare that the property was both of theirs – at what point did it become a trust? Decision: There is a trust, and it arose over time. Reasons: Words, on several occasions, “this money is as much yours as mine”, is enough. Court seems to say that over a period of time, the trust became constituted. But strictly speaking, there must be a fixed occasion where title passes and it became a trust. Ratio: this case doesn’t really meet the requirements for constitution. EXAMPLES: 1. If A declares she will transfer $5000 cash to B in trust for C, is there a trust? Answer: o No, because possession is necessary to effect the transfer. Under this scenario C is referred to a gratuitous volunteer, because she is about to benefit although there is a no relationship with A. This is just a moral expectation or hope. o If a) C has given consideration for the promise, or if b) the promise was made under a seal, it will affect court’s interpretation of constitution. o Contractual principles have driven the interpretation of constitution, as much as the rules of trust. o Where there is no consideration or deed under seal, that is where you see the equitable maxim “equity will not assist a volunteer”, so the courts will not create a trust. o This means equity will assist someone who has given consideration, so this is a more contractual obligation. o Exceptions to the maxim: 1. Where there has been part performance (term of art) on behalf of the settlor 2. Where equitable estoppel arises – it would be unjust to allow A to say there is no trust 3. Strong v. Bird: relates to gifts made during donors lifetime (not relevant) 4. If covenants/promises are made under seal. Could be between A and B, and then B could sue for damages. So what about C, who is not a party to the covenant, but shouldn’t she have rights because she was promised something? BASIC RULE: · Once a trust is constituted, it is irrevocable by the settlor, in effect the property belongs to the beneficiary · A trust relationship is governed by a trust deed. · What if trustee promises to transfer to a trustee, but doesn’t? · What if beneficiary gives consideration? · At this stage beneficiary has rights, and can use CL to obtain rights for breach of K · If B can prove damages are insufficient, can get SP (i.e.: creation of a trust) · In equity, the term consideration is wider than at CL · The situation is more difficult when promise to create a trust is but no consideration is given- equity will not assist a volunteer · If the promise is under seal or covenant, the courts will assist. CL treats the seal as being equivalent to consideration, so beneficiary is entitled to damages. But equity will not allow SP because seal isn’t consideration, so can’t compel SP because damages are inadequate WAYS TO CIRCUMVENT THE REQUIRMENT OF CONSTITUTION: 1. Beneficiary is party to covenant 2. Trustee is party to covenant 3. Re-characterizing of subject matter. Cases: Category 1: Beneficiary is party to covenant Canon v. Hartley (pp.120) Facts: there is a deed of separation husband, P, entered. Anytime he received money over 1000L, he had to give to his wife for life, and then his daughter for life. Got 50,000L, refused to set up a trust for his daughter Decision: can’t set up a trust because there is just a covenant under seal, but daughter can sue for damages because she is a party to the covenant. Category 2: Trustee is party to covenant Issue: should the trustee be able to recover? The beneficiary has the loss. General Trend: CL seems to find that trustee can’t recover Re Pryce  Facts: Marriage settlement between H and W in 1887. Property and funds belonging to W were settled on trust which provided life interest for wife. Remainder to wife’s children, if no children, to her statutory next of kin. H promised in the settlement that funds to which he might become entitled, pursuant to existing future interests (including money from his parents’ marriage settlement in 1849) would be added to the trust. He deeded this future interest to his wife in 1904, and died in 1907, with no children of the marriage. The H’s mother died in 1913, and the H became entitled to money under her marriage settlement. Issue: the trustees of the 1894 marriage settlement sought a determination of whether they should enforce the terms of the 1887 marriage settlement to have the funds to which the H was entitled settled on the trust created by the 1887 marriage settlement. Outcomes: (conflict between W and her statutory next of kin) A. if t’ees of 1887 marriage settlement had to take steps to enforce the covenant of the J to settle the AAP, then the wife would have a life interest in the property and remainder would go to her statutory next of kin B. if the t’ees ought not toe enforce H’s covenant, then the amt to which H became entitled under the 1849 settlement would go to his wife absolutely by virtue of the 1904 deed of gift that H made to his wife. Judgment/Ratio: Court held that the relatives could not enforce the marriage settlement against the wife. Reasons: · To what extent might the next of kin have relied upon getting something from the 1887 settlement? It depended on H becoming entitled to money under 1857 settlement or something else, also depended on there being no children – hard to say relatives had relied · To enforce the trust would mean that any future arrangements the couple made (i.e.: 1904 gift) would be precluded. · The relatives were volunteers, and volunteers have no right whatever to obtain SP performance of a mere covenant which has remained as a covenant and never been performed. Re: Kay Settlement (pp.116) Facts: Unmarried woman settlor executed a voluntary settlement under covenant saying she would settle all her after acquired property in favour of herself, and then her issue if she had any. At the time, she was a spinster. She got married (unexpectedly) and had 3 kids (they didn’t exist at time of trust, so weren’t considered parties). She got some property thru her parents, which, on the face, properly fell within the terms of the original covenant. But she didn’t want to put the property in trust, so the trustee thought he should get it and it should form part of the trust. Trustee applied to court. Decision: followed court in Price case, found the trustee can’t enforce the trust. Trustee also can’t enforce damages for failing to transfer the property. Reasons: Trustee can’t enforce the trust, and the beneficiaries weren’t parties to the covenant. If the Bs can’t, the trustee can’t have a better claim than them. Bs can’t indirectly (through trustee) what you can’t get directly (through the covenant). Implications: large majority of cases say there is not right on the part of the trustee to get damages or compel performance. If the trustee were to succeed, the requirement for constitution of a trust will be whittled away. Category 3: Re-characterizing of subject matter If you as settlor promise to convey property to a trustee, will the courts enforce that promise to convey property? Is it a promise to take property and put in trust for someone else, or is it something different? (e.g.: promise to repay a debt such as chose in action.) If the covenant contains that promise/chose in action, trustee can sue on that promise. Beneficiary is the equitable owner of that promise- you characterize the promise, not the property. Fletcher v. Fletcher Facts: A testator covenanted with trustee, saying that in one year, money would be provided to trustee in trust for his son. Beneficiary is a volunteer, not a party to the covenant. Decision: Property doesn’t need to properly constituted, the beneficiary owns the promise, and can get relief. Reasons: Seems results driven because it seemed unfair for the son to not participate in the trust- the property came through a deed and the executors knew what it consisted of. Implications: Difficulty with intention: they intend to give property, they don’t intend to give a promise as an end. Problematic to say promise is subject matter of trust. Not widely accepted, there are some cases in Canada that follow this, but generally courts prefer Kay and Re: Price, but it has never been overruled. Future Property Price and Kay both dealt with future property. How does trust law deal with future property? How to constitute a trust when the subject matter is an expectancy?? You don’t know that the property will arise. Problem right away because equity doesn’t regard expectancy as property for the purposes of trust law- certainty of property is not met by future property. You can’t constitute this trust as it is missing a certainty But there is an intersection between CL and equity, so CL does allow future property to be subject to contracts If consideration is given for some sort of trust-like conveyance, then you can use K principles to enforce the conveyance of future property If you have a declaration of trust made gratuitously and it involves future property, equity will not assist But if it is under seal, then it is back into Fletcher- settlor can try to force the trust by making the subject matter the promise (chose in action). Beneficiary can argue that it is constituted because shows declaration of intention which is a promise to convey which forms the subject matter of the trust which has been conveyed because it is in the document there fore it has been constituted There is no way to fit the situation into #1, so instead of doing that (and because #2 is not sufficient to enforce the trust), the courts just say that it is irrelevant who is party to the covenant because the trust is already constituted and conveyed to the beneficiary in the form of a promise. Subject matter is promise by settlor to give trustee stuff when they have it, even though they might never get it. This only comes up when B is not party to covenant. GOLDEN RULE: Unless the beneficiaries give valuable consideration for creation of a trust, in these kinds of situations, the trust cannot be constituted until the future expectation is realized. 4. LEGAL FORMALITIES Mostly related to writing requirements- there might be other formal requirements in other jurisdictions, etc… but we aren’t looking at those One that is more universal- requirement for trust in writing Writing requirements are statutorily based, and the statues are usually enacted to correct problems- mischief: 1. Proof 2. Intention 3. People who aren’t around (unborn) The more abstract something is, the more you need to formalize it for others to understand it There may be differences between inter vivos and testamentary trusts. There is no recourse to creator in testamentary trusts Statutes of Frauds were developed in 1500’s- UK statute that came into Canada, adopted on Confederation, is in every province Is a terribly written statute that was never updated S.4, 7, 11 affect trust law Most trusts these days trust are in writing, written by lawyers Issues only arise when trusts are claimed to have been made orally. We are moving further away from seeing oral trusts made, but it sometimes happens. Argument against is that it violates statute of frauds. STATUTE OF FRAUDS Section 4: Contracts creating trusts No action shall be brought upon any K or sale of lands, tenements or hereditaments, or upon any interest in or concerning them … Applies to land This will apply to trusts if they arise through K or sale of land … Unless the agreement upon which such action shall be brought, or some memorandum or note thereof shall be in writing, … Need evidence of writing, but doesn’t need to be created by writing At some point it must be reduced to writing If not in writing, the trust will be void, but courts have ignored this and have held s.4 to make a trust void, just unenforceable if there is a dispute or claim If A sells property to B, expecting B to undertake to support C for life, that is outside the statute because the support part is collateral to the sale of land. Doesn’t need to be in writing … and signed by the party to be charged therewith, or some other person thereunto by him lawfully authorized. Section 7: Creation of trusts in land All declarations or creations of trusts or confidences or any lands, tenements or hereditaments,… Speaks more directly to trusts Relates only to land again Covers declaratory trusts, and the situation where property is transferred to trustee …shall be manifested and proved by some writing only need evidence of writing, same as section 4, doesn’t need to be created by writing although this deals with lands, because it refers to trusts it means that it deals with legal and equitable interests signed by the party who is by law enabled to declare such trust, or by his last will in writing, or else they shall be utterly void and of no effect Courts ignore this, it is unenforceable, not void This is a evidentiary statute, it isn’t about procedure, so don’t have to make it void Section 11: Assignments of equitable interests in trusts All grants or assignments of a trust shall be in writing signed by the party granting or assigning the same, or by his or her last will or devise, or else are void and of no effect Applies to land and other forms of property Doesn’t say creation of a trust, says grants or assignments, so different to other sections Interpreted to mean a trust is already there, and you’re assigning it. Deals with equitable interests only Nothing about notes or memos, so courts have held that creation must be in writing: creation must be contemporaneous with assignment Not found void, just unenforceable Trusts not Caught by Statute of Frauds There a lots of places where none of these apply, so you can have oral trusts Newly created trust of personal property isn’t covered (e.g.: Jones v. Locke): trust for money isn’t covered Why do we have formalities? Idea of equity is supposed to be less harsh and formalistic, and deals with merits of the case, not relying on formal requirements This is true in most cases- courts will frequently circumvent writing requirements to get to what they see as just or right outcome E.g.: There was a written agreement for sale of land, and on the side an oral agreement for the buyer to act as trustee for someone else, and the transferee denies knowledge. If the trustee says that it is only writing that counts, courts of equity would have said that trustee can’t rely on a statute to commit fraud if there is a way of proving the oral agreement existed. What would a court of chancery do? Rochefoucauld v. Boustead (pp.130) Courts will deny the existence of the Statute of Frauds where someone is going to benefit unfairly because of it. Less likely that someone would make up an oral agreement, than try to defraud someone by using statute of frauds to disallow an oral agreement Secret Trusts Testamentary Trusts: if the statutory formalities to create a valid will are not met, then any testamentary trusts purportedly created by the alleged will are also invalid. In spite of this, courts have, in some instances, enforced testamentary trusts that do not comply with the statutory formalities for wills. Secret Trust are one example of this Quite common historically. Where settlors want to provide for certain beneficiaries without public knowing. So leave beneficiary out of writing (e.g.: in a will, name a trustee who is privy to a side agreement in the form of an oral agreement or letter, which tells them they aren’t owners of the land, but just a trustee) Often used to provide for illegitimate children in the old days Problems because trustee would want the property, and would deny the existence of the side agreement Courts have over time found these trusts to be legit, because they want to give effect to the settlor’s intentions- don’t use Statute of Frauds to create an unfair situation LIMITATIONS ON TRUSTS These are limitations on individual authority of the settlor. But there are external controls on settlor’s autonomy So this is social policy CL A trust founded a long time under old rules can be found invalid under modern conditions 1. TRUSTS CONTRARY TO PUBLIC POLICY ETC… a) ILLEGAL TRUSTS AND IMMORAL TRUSTS ILLEGAL TRUSTS: Where the purposes are actually illegal. Case law has tended to limited to actual illegality (Criminal or civil wrongs) E.g.: 1920’s in England, a trust attempted to establish a school that teaches prostitution, one for pick-pockets (although this one had educational intention). Both struck down. Included are trusts for fraudulent purposes If a trust fails for illegality, property reverts back to creator IMMORAL TRUSTS: Miller case Historically, most common ones related to illegitimate children (not a problem today) If it was obvious the trust was intended to illegitimate children (i.e.: they were specifically mentioned), the courts would strike them down More difficult where the trust was mixed, involving legitimate and illegitimate children Burden on illegitimate children to prove that they are within the trust Case where husband conveyed a house for himself and his mistress for their joint use for their lives. Remainder to children of their liaison. Court struck down the remainder part as contrary to morality because it was clear that any children of these 2 were illegitimate. No illegality/immorality to base striking down the life terms for. If a trust is carried out without the courts being brought into play, they will usually leave it alone Could avoid this by giving gifts, and avoid dealing with trust law Punished the children to avoid encouraging further immorality Canada Trust v. Ontario Human Rights Commission Facts: Trust set up around 1930s. Set out in the recital that the world depends on strong white males, and would be a better place if white males were allowed to rule. There are 4 paragraphs to this effect. You don’t need recitals; it could have just been set up. The trust set up a scholarship for young white men going to college (1940-1990). Then HRC challenged it as being contrary to social policy. Was probably valid when set up. Problems: was once valid, is it now? What about the settlor’s intentions? Decision: Found invalid, and read in that it should apply to all potential applicants. Reasons: Didn’t want to limit the opportunities for students going to college. The court’s goal was to preserve the scholarship. Implications: This was the exact opposite of the settlor’s intention. Miller (Ont, 1937) Facts: Trust created which will invest for 10 years, and then give it to the mother who had the most children, since the institution of the trust. In the event of a tie, to be split equally. It was challenged right away. Problems: It meets all the certainties etc..., so how to defeat it. Decision: Trust struck down for policy reasons. Reasons: it would encourage adultery, encourage irresponsible procreation by people who maybe couldn’t afford it. The idea of a race or contest is not desirable. US Federal Court Facts: A prize was set up to be won by lottery. Contestants bought tickets in a foreign lottery, which is illegal. Organizers didn’t realize at the beginning that it was illegal. There was a winning ticket, winner announced, but before dispensing the money, the organizers learned it was illegal. They decided not to award the prize, and the winner brought an action to claim the money, which was held in trust for the winner. Decision: trust was upheld, money needs to be distributed. Reasons: Trust could be executed legally, and organizers intended to provide for the beneficiaries, so from the perspective of trust law it was valid. Didn’t want to compound illegalities, so applied trust law principles and avoided dealing with the illegality. b) TRUSTS IMPOSING INVALID CONDITIONS Common ones: restraining parties from marriage, or interfering with relationships between husbands and wives or parental responsibilities, racial discrimination, restraining freedom of religion E.g.: Children can only get the benefit of a trust if they 1) stay the member of a certain church, 2) don’t alienate property to people outside the family (or other named people), 3) don’t marry Jim/outside of Catholic Church Basic rule is that if the condition is determined to contravene public policy, the trust is void. Problem is the courts have refined it, making it more complicated and easy to recall Types of Conditions: 1. Conditions precedent: must be fulfilled before a gift takes effect. Can assess at the moment the gift takes effect E.g.: $1 million to Susan on her 25 th, if she is a member of the Catholic Church at that time. 2. Conditions subsequent: things that can bring the trust to end, could happen any time after the gift is made E.g.: $1 mill to Jane, but if she joins Catholic Church, 1 mill to Joe instead. CL rule is that if CP contrary to public policy, the entire trust is void/fails CL rule for CS is that if the condition is contrary to public policy, only the condition is invalid, and the gift will continue CL rules changed by courts of equity to have different rules, but only for personal property. Equity says that: If CP is malum in se: whole gift fails, but If the CP in equity is malum prohibitum: the condition only would be struck out and the gift will still take Malum in se: some kind of fundamental wrong, probably criminal, that goes to both moral and legal norms. Malum prohibitum: is legally wrong, but not necessarily morally wrong. ** Hard to determine which is which i. TRUSTS CONTRARY TO PUBLIC POLICY · Conditions Restraining Marriage: Prima facie, courts find them void because if you prevent someone from marrying, you are imposing life-long celibacy. Re: Goodwin (1969) Facts: Half an estate to daughter in law provided she didn’t get married. “my property to Jill if she remains unmarried”: interpreted as a limitation on enjoyment, not a condition, so it is just a gift Decision: valid WOL Reasons: Settlor’s intention is to provide for her while she is a widow. · Uncertain Conditions Hard to figure out if you are meeting them at the time that you are figuring it out, although it may be asked to be done ahead E.g.: must remain open and avowedly protestant, or conform to Church of England’s doctrines, not to marry someone not of Jewish parentage/faith CS – condition struck out CP – e.g.: Not marry a person of Jewish parentage/faith: gift struck down if they can’t determine if someone meets the condition · Impossible Conditions Those based on a state of facts which don’t/can’t exist. CP that are determined to be impossible, condition is struck down and beneficiary will get the property CS determined to be impossible: gift fails, B gets nothing Re: MacDonald Facts: Testator left part of estate in trust with a condition on beneficiary that historic home must be maintained, and provided that the municipality agreed not to move the home (wanted to keep house in place) Decision: This is an impossible condition Reasons: the municipality didn’t own the home, so they couldn’t agree not to move it. No authority on the part of the municipality. It was up to provincial authorities to move the house or not. 4. Discriminatory Conditions Haigh says they could fit under invalid for public policy as well. Drummon Case: prohibited sale of land to people of “objective nationality” (in property class) · Words of Limitation Courts interpret as not even being conditions. If a court determines something is a WOL, there are different consequences E.g.: if you set up a trust is which a farm is being held for Jill as long as she is married to William. “as long as” – CP? CS? Cold be WOL. In that case the court held hat those words were WOL and it was just a gift. WOL can be fine, so they apply and act accordingly. If they are contrary to public policy, the words will be struck down and the entire gift will take. Generally WOL are ok, it is if conditions violate public policy that the trust will be struck down 2. TRUSTS TO DEFRAUD CREDITORS Thought of as illegal because they contravene CC, Bankruptcy Act Provisions etc… They have a body of case law of their own because there is an act dealing specifically with fraudulent conveyances in each province Basis for these trusts is different from previous ones, where settlor had a good intention to help people These trusts are set up specifically to avoid creditors. Someone is in financial difficulty, and set up a trust to hide the property by giving it to someone else – they still want use of the property. Most common example is husbands settling property on wives and children to avoid creditors, used to happen all the time with no sanction until 1640’s. Then UK parliament enacted legislation declaring it fraud Fraudulent Conveyances Act (2): Every conveyance of real or personal property and every bond, suit, judgment and execution heretofore or hereafter made with intent to defeat hinder, delay or defraud creditors or others of their just and lawful actions, suits, debts, accounts, damages, penalties or forfeitures are void against such persons and their assigns · “Intent” – the onus is on those trying to defeat the transaction; however, as these conveyances are often voluntary, it is difficult to rebutt a claim of fraud, so there is often a de facto presumption of fraud. · Note that FCA has no time limit. Fraudulent Preferences: preferring one category of people over another (certain categories of creditors) Bankruptcy Act deals with some fraudulent conveyances and each province also has statutes dealing with fraudulent conveyances Bankruptcy and Insolvency Act 91(1): Any settlement of property, if the settlor becomes bankrupt within one year after the date of the settlement, is void against the trustee. (2) Any settlement of property, if the settlor becomes bankrupt within five years after the date of the settlement is void against the trustee if the trustee can prove that the settlor was, at the time of making the settlement, unable to pay all his debts without the aid of the property comprised in the settlement or that the interest of the settlor in the property did not pass on the execution thereof. (3) This section does not extend to any settlement made a) before and in consideration of marriage b) in favour of a purchaser or incumbrancer in good faith and for valuable consideration; or c) on or for the spouse or children of the settlor of property that has accrued to the settlor after marriage in right of the settlor’s spouse of children Most of the statutes state that fraudulent conveyances are void ab initio, but the courts hold them to be voidable, not simply void. The creditors need to bring actions in order to have a conveyance declared void There are exceptions to fraudulent trust being void when valuable consideration has been given. This does not include nominal consideration (i.e.: love and affection- .s92(3)) Ex Parte Russel (1882) Facts: Baker sets up grocery business, even though he was a baker and knew nothing. He also created a trust on his home at the time to protect it from any potential creditors (concerned that business may go under). Within six months of setting up the company, it fails. Issue: Is the trust fraudulent? Decision: The trust is voidable Reasons: The intention behind the trust was to protect family assets to provide for his family even if the business fails. Likelihood of failure was higher than normal because he didn’t know about grocery business. Badges of fraud: b. secrecy c. no consideration (but not within families) d. set up to defeat creditors Ramgotra Case (1996, SCC) * issues of jurisdiction: how does the interplay between the federal act and provincial act work Facts: R converted RRSP into a RRIF, which you do when you’re 65 to start withdrawing from it. Within 2 years he became bankrupt. Wife is the beneficiary under the retirement income trust. Is this trust available to creditors now that he is bankrupt? Creditors Argue: the transfer is meant to defraud creditors. Provincial Act: RRIF: is exempt from seizure by creditors in provincial act (S.67) Federal Bankruptcy Act: the trust is voidable if the transfer is done fraudulently (s.91) Decision: monies are not transferable to creditors, but trustee could use the money to pay off any of the direct expenses to pay off TIB. Reasons: RRIF is not seizable under s.67, but the transfer to wife is voidable under s.91. this is a compromise. The sections are both valid pieces of legislation Implications: courts want to protect retirement income, to allow people to have sustainable income to support them. The crucial element is to understand the settlor’s intention. Onus on creditor to prove it. 3. RULE AGAINST PERPETUITIES Policy consideration: there needs to be a way to get property out into the marketplace and not be held by a small group of families forever It applies to things outside trusts – no differentiation between conveying by sale, transfer, trust Trust: have them to limit how long testator can 1) withdraw property from the normal workings of the commercial world, 2) control future enjoyment of an infinite number of future generations. Want certainty so that at some point it can be freely alienated Many problems with perpetuities arise in trusts – they are specifically set up to provide for future generations Not about how long the trust lasts, it’s the time at which the interest commence (vesting in interest), because they will always eventually end (i.e.: death) Original Rule: no interest was valid unless, when the trust takes effect, the interest would vest within the life of the beneficiary plus 21 years (some future interests are allowed – unborn). Still in effect in a couple of provinces a) REMOTENESS OF VESTING Ask if the gift can vest in the life plus 21 years at the time the gift is given Ontario: Wait and See Rule: see if the gift will vest, use hindsight. More interests will be saved. Closes off the fertile octogenarian rule: i.e.: all the children a woman has. Policy: is the idea behind the rule important today? Manitoba has abolished it 1. It used to be that there was no reason for a family not to keep a property forever, but now taxes etc… create disincentives for people to own property 2. Don’t have the class divisions where only a select few families could own land, and most just expect work it for their lifetimes 3. We’ve developed principles in trust law that allow trusts to be terminated without settlor’s consent 4. There is a rule that allow beneficiaries to terminate trusts under certain circumstances. Exam: most important question is whether we need it anymore b) RULE AGAINST ACCUMULATION A trust cannot accumulate income without dispersing it forever Concerned with making sure remoteness of control doesn’t last too long. I.e.: interest is vested, but it is controlled by the settlor so the beneficiary loses out Don’t want it sitting forever with no disbursement – no one enjoys it It was as a result of a case in England that modern day accumulation rules started Rare because most people want someone alive now to benefit Thelluson v. Woodbird (1400’s) Facts: T left will – wanted to accumulate income from property during the lives of sons, grandsons, great- grandsons, who are now living, and then the death of the surviving great-grandson would entitle the dot to the benefit of the trust. Decision: Judge wanted to strike down the provision, but had no basis for doing so. Parliament would have to do. Reasons: all the great-grandchildren were lives in being, so didn’t violate perpetuities. It was estimated that the fund would be worth millions of pounds. Judge wanted to strike it down for policy reasons of not keeping it out of circulation – like reasons for rules against perpetuities. Accumulations Act R.S.O. 1990, c. A.5 Maximum accumulation periods 1.--(1) No disposition of any real or personal property shall direct the income thereof to be wholly or partially accumulated for any longer than one of the following terms: 1. The life of the grantor 2. Twenty-one years from the date of making an inter vivos disposition. 3. The duration of the minority or respective minorities of any person or persons living or conceived but not born at the date of making an inter vivos disposition 4. Twenty-one years from the death of the grantor, settlor or testator 5. The duration of the minority or respective minorities of any person or persons living or conceived but not born at the death of the grantor, settlor or testator 6. The duration of the minority or respective minorities of any person or persons who, under the instrument directing the accumulations, would, for the time being, if of full age, be entitled to the income directed to be accumulated. … (3) The restrictions imposed by subsection (1) apply to every disposition of real or personal property, whether made before or after its enactment. … (6) Where an accumulation is directed contrary to this Act, such direction is null and void, and the rents, issues, profits and produce of the property so directed to be accumulated shall, so long as they are directed to be accumulated contrary to this Act, go to and be received by such person as would have been entitled thereto if such accumulation had not been so directed Want to make sure that at some point, income that is accumulated is dispersed. Reasons for this: stop current generation from benefiting, increasing how much you give away Anything beyond allowed accumulation period is struck down, and it goes to the intended recipient National Trust Co. v. McIntyre; In the Estate of Clara Lucile Adamson (1997) Facts: Terms of trust provided for monthly allowance for testator’s sister. It earned more income than was needed. From time to time, the trustee has drawn on the capital of the fund, as they were authorized to do. However, for 21 years, amounts accumulated that exceeded capital encroachments and the monthly allowance. Issue: Trustees sought direction of the court as to who should receive the “extra income” in the estate when the Accumulation Act bars further accumulation. Is this an intestacy or is the residual beneficiary entitled to it? Judgment: Partial intestacy and income to be distributed accordingly. Ratio: An intestacy is found in the event that the intention of the testator cannot be determined or inferred unless it falls into an exception. 4. RESTRAINTS ON ALIENATION AND SPENDTHRIFT TRUSTS Restraints on alienation are generally contrary to public policy with certain exceptions Trusts that impose limitations for the well-being of beneficiaries – often called “spendthrift” or “protective” trusts. These trusts, if so named, are valid even though there is a restraint on alienation built into them. Turns often on whether or not the clause is determined to be a CS or a determinable limitation. That distinction is sometimes apparent, sometimes not. I.e. to my daughter as long as she stays in the Catholic Church – words of limitation. To my daughter unless she leaves the Catholic Church – held to be a condition subsequent therefore invalid. Conditions are usually concerned with ifs – if something happens; words of limitations are usually concerned with when – duration. Not always obvious. Spendthrift trusts are allowed because the courts determine that restraint to be a word of limitation and not a condition. There are alternatives if you are drafting and want to protect your legacy from falling into the hands of creditors. One of the most common ways is to provide for a discretionary trust whereby the trustees have discretion to pay all the heirs, so given the discretion, the trustee could hold off giving money to “wasteful heirs”. Could also give the trustees a mere power to pay the wasteful heir, so they may not even exercise the power at all. Can do this on the income side, and could have that discretion when it comes time to dealing with the capital as well. Modern times, it is probably more common to do it that way, putting a discretionary trust in place, than setting up a spendthrift trust. No legislation governing spendthrift trusts. Concerned about restraints on alienation – issue is whether trust is valid and whether settlor can restrain alienation to some extent. Classic example is Re Fox where the settlor inserted a clause in will giving executors the power to maintain a 5 year probation over his son and empowered them to sell the property if son did not remain sober. In upholding the provision the judge stated that “[i]t would be unfortunate if the court was obliged to impose difficulties in giving effect to the intentions of the testator so obviously framed fro the well-being, and well-doing, of the objects of his bounty, and especially so when these objects are his own children” Courts are sympathetic to these sorts of trusts, there are technical barriers to achieving the objectives of these kinds of trusts. Re Driscoll (1983) Facts: Father of 6 kids set up a trust only concerned with 2 of them. Main asset of trust was family farm. At the time of the hearing the farm was valuable as it could be developed for residential purposes. One of the beneficiaries (X) was the testator’s son who was also an alcoholic on welfare. Y was a businessman who made his own way. According the will, wife was to have a life interest, after which each son, X and Y, were to have a half interest provided X continue to work on the farm. X could initiate a sale, Y couldn’t, but Y had to give consent for any sale, so there was a possible conflict in that Y could refuse consent and then later benefit. If X requested that the farm be sold, and Y consented, then each son would have a half interest in the proceeds. If the farm was not sold, then X had a life interest which would go to Y upon his death. X requested farm be sold Issue: What kind of interest was set up for X – was it a protective trust, or was there restraint on alienation? The judge had two interpretations: 1) This was a spendthrift/protective trust. This is what Y was arguing. He was saying that Y’s right to hold consent was built in, it was obvious that was what testator wanted. 2) X was really the primary interest holder, Y was just in there to make sure that an improvident bargain was not made. Judgment: Condition subsequent which called for X to work on the farm void for uncertainty. X had more than a life interest as he had the power to initiate a sale of the land. Judge characterizes this as a determinable life interest with a power of disposition and therefore an interest in half the estate (in trust). Y does not have a general veto power over a decision to sell that land. Rather, the requirement that he consent was intended to protect X from making an improvident sale but this condition is a repugnant condition subsequent and is therefore void. The general and dominant intent of the testator was to care for X Trust was really set up for X’s benefit. X had the power to initiate a sale, with Y’s consent. Y didn’t have the power to initiate any sale. Focus was on X, intention was that X would live there, at least until the death of testator’s wife. Y merely had veto for improvident sale. Ratio: A condition that serves to limit the right of a beneficiary to alienate land is void (though only when they acquire a fee simple). Example from Re O’Mullane “to X provided that the property is not sold without consent of executors” was found to be invalid. OVERRIDING THE TRUST INSTRUMENT 1. EARLY TERMINATION All trusts must come to an end/close at some point. If they are valid trusts, met the rule against perpetuities and accumulation requirements, will still terminate within the correct period. What happens upon termination is that the trustees pass the final accounts and discharge the trusts when that is carried out. Trustees usually transfer property to beneficiaries, final transfer takes place, trust dies out. In the normal course of things, as a settlor or testator, you want the trust to last as you planned it, usually means that you wanted to have the beneficiaries take the land, the capital of the trust. EXAMPLES: 1) A to B as trustee, C takes entire property when turns 25. C is 17 at the time. What happens from 17 to 25 is that C will take the income that is allotted to him under the trust, at 25 the whole property, the capital, will be transferred along with title to him. 2) “T to wife for life then to wife’s children in equal shares.” Normally, W would live out her remaining years as life tenant, income set up under trust would go to her on that trust. On her death, the children would say to trustee that they would like to receive their share of the capital. Basically they ask the trustee to terminate the trust by sharing the capital equally between them. What about the possibility of ending the trust ahead of its natural term? (I.e.: before the settlor actually wished the trust to end) It is possible to do this. There are possibilities for terminating trusts early, two main ones: a. Rule in Saunders v. Vautier. Termination without the assistance of the court. b. Through the power of the courts – the statutory power of the courts to vary or revoke set out in the Variation of Trusts Act, also the inherent power of the courts in very limited situations to terminate the trust early. c. Revocation by the settlor. S herself could terminate the trust early if there is a power built in to the trustee to do that. Has to be expressly stated. Or, where a trust isn’t fully constituted. A. THE RULE IN SAUNDERS v. VAULTIER Saunders v. Vautier Facts: In 1832, a man died leaving 3,000 pounds in shares for his great nephew, who was to take the shares when he reached 25. But, at age 21, he went to court and said he wanted his shares. Issue: was what to do with that request. Background: There were hints in previous case law that beneficiaries could do something like this, but it was here that rule was laid down as a defined principle. Decision: Court said yes, you can terminate the trust. Reasons: There is one main reason why you can, and two conditions that we are going to put on this. The reason why you can is that you are the owner of the property. The whole reason the trust was set up was to benefit you, and although T wanted you to wait until 25, but court can’t tell you what to do once you reach the age of majority, so if you want to terminate the trust, you can do it. Basis is that beneficiaries own the property. Limitations: Two main controls on this – two main rules behind it: 1) Beneficiaries must be sui juris – adult and of sound mind. You must be an adult and you must be of sound mind or full mental capacity in legal terms. 2) You must be absolutely entitled to the property. If there is one beneficiary, then just have to look and see that he/she has absolute entitlement. If there are a number of beneficiaries, have to make sure that collectively they have absolute entitlement. Here, the court said that the actual gift vested right upon the rising up of the trust upon the death of T. He had to wait, by virtue of words of limitation, until he was 25. It was not a condition that created contingent interests. These two requirements, especially the second, have created a lot of difficulty in trust law because we’re back to the difficulty of determining determinable vs. limitation. Problems as to whether contingent interests can be included – i.e. what if you have beneficiaries that have contingent interests, but can get their consent. EXAMPLES WHERE IT APPLIES: 1) Where you have a beneficiary who is already an adult and of sound mind. · By virtue of the rule, will be entitled to whole beneficial interest and can require the trustee to transfer and terminate · A is to get $5 million payable on her 27th birthday and until that time is to receive an annual income of X dollars. · Even though have income stream set up, that person can simply terminate that trust despite the fact that T has set up the income trust until the 27th birthday. 2) Where you have a number of concurrent beneficiaries, all adult and of sound mind. · If between them the entire beneficial interest is covered, then between them, they can terminate the trust. · For the children of the Testator with an $8 million trust. · Capital to be divided equally between them until youngest reaches 30. In the meantime they are entitled to some income. · In that situation, you have more beneficiaries. · Again, once the youngest reaches the age of majority, by virtue of the fact that they all have the entire interest, however many there are can band together and say they would like to terminate the trust and divide the capital. · Assuming they all agree and the youngest is past majority age, it doesn’t matter how many there are, they can band together and terminate the trust. 3) Where you have a number of beneficiaries entitled in succession. · In this situation, whether those interests are vested or contingent, can combine them all to terminate if they are all adult and of sound mind and cover the entire property of the trust between themselves. · Trust to my husband for life, remainder to go to my children B and C provided each attains his 25 th birthday. If either dies before the age of 25, the survivor gets the entire share and if both die before the age of 25, then it goes to D absolutely. · What happens now, because have successive interests, also have contingent interests, because if children die, it goes to somebody else. The rule would say that once the children are both adults, and assuming that D is also an adult, if the four get together – the husband, the two children and D, then by virtue of getting them all together and in agreement, covered the absolute entitlement because as a group the entire interest is covered. · Here, it doesn’t look like the testator wanted the trust to end early, because have all these contigents, etc, but by virtue of the way the rule is applied, can terminate early, as long as you get D on side. CONCLUSION So, all you have to do is have all the beneficiaries be adults and of sound mind, and get them together to have the entire interest, and the rule will apply. In every common law country except the U.S., the Saunders v. Vautier rule is in effect, the reason is mainly because of the view that it is the beneficiaries that the whole thing is set up for, they have ultimate use of it and you shouldn’t prevent them from gaining access to that property. P. 258 of Bernstein article – two main rationales of the rule: 1. A trust is the equitable equivalent of a common law gift. 2. Settlor should not have any control once the trust is set up and operating. It is not quite that simplistic. At common law, if you give somebody a gift, there is nothing further in mind, you don’t have any intention other than giving the gift, not attempting control over somebody/something. Trusts, by their very nature, have been set up differently. There are lots of things when settlors have when they set up the trust that gives them some interest. As a settlor, you can set up a spendthrift trust, and you can also put in the deed a power of revocation. This shows that there is something there that gives the settlor some right, something more than a straightforward CL gift. To develop a rule that excludes the settlor from the picture is somewhat harsh (Haigh). In the U.S., they don’t like the rule, and give more rights to settlor. But, it is really easy to get around the rule. If you are a settlor and you don’t want the beneficiaries to terminate early, you can draft around it. You can prevent it from arising. If it is so easy to prevent from arising, is it worth worrying about? Is it really a trap for the unwary and privileges the sophisticated person drafting the trust over other people who may try and draw up trusts on their own? Is it a good rule for that reason alone? Is a rule that catches the unwary worth having? In other provinces they have statutorily changed the rule to allow a variation of Saunders v. Vautier, but only through courts intervention, so can’t have self terminating beneficiaries, it is only through the help of the court. TECHNIQUES TO AVOID THE RULE: 1) Include a generation of beneficiaries that will prevent it from happening too early (the sui juris component). If you include another generation in the trust, you might prevent it from vesting too early, you might have a beneficiary who will not become an adult until you want the trust to vest. · EXAMPLE: to my widow, the remainder equally to my children’s children when the youngest reaches 30. The children of a child pre-deceasing the widow will take in the parents place. Here, there is no way that the child of a child will reach the age of majority before the youngest turns 30. No way that all the beneficiaries can band together. 2) Provide for a contingency not to a person, but to a charitable entity. · EXAMPLE: to my children when they reach 50 but if they fail to reach 50 then it goes to the Toronto Zoo (assuming the Zoo is a charitable purpose). By adding that in there, the gift over upon a contingency, you are now forced to wait and see if the children reached 50. No way to know if they are going to reach 50 until they do. There is no way to get the Zoo on side as one of the beneficiaries because it is not a person. Variation of this idea is to have another person be involved, and make sure that that person is not going to agree with the other beneficiaries to terminate early. If the rule can be avoided so easily, is it worth bothering about, or is it worth having? Part of the rationale for the jurisdictions that have modified or gotten rid of the rule is based on this rationale. It benefits those who are or who have sophisticated draft persons. The unsophisticated person is not going to know/think about easy ways to draft around the rule. And, if you are a settlor and you want the beneficiaries to hold off on getting the whole trust property until they are a certain age, why should a rule from an old English case affect this and subvert your intention? EXAMPLE: Situation of simple trust 4 beneficiaries (22, 19, 15, 10) Each gets a 25% share of the property Can AB server the trust using to rule in Saunders v. Vautier and leave CDs intact In some cases, the income earned by CD would be the same in that situation, because interest earned on 50,000 2 people is the same as 4 people on 100,000 In Canada, the rule of Saunders v. Vautier won’t apply and this can’t be done, but in Australia, if remaining beneficiaries won’t be in a worse situation, then it can be done. We have variation of trust legislation in most Canadian provinces B. REVOCATION A settlor may reserve the right to end a trust early This does not represent “overriding” the express trust as the right to revoke must be expressly stated in the trust Exercise of any right to revoke may be affected by K obligations the settlor has Note that a large reason for not including this right of revocation is the likelihood that income from the trust will be treated as that of the settlor for tax purposes as assets have not been fully divested 2. V ARIATION OF TRUSTS Variation of Trusts Act RSO 1990, c. V.1 Jurisdiction of courts to vary trusts 1.--(1) Where any property is held on trusts arising under any will, settlement or other disposition, the Ontario Court (General Division) may, if it thinks fit, by order approve on behalf of, (a) any person having, directly or indirectly, an interest, whether vested or contingent, under the trusts who by reason of infancy or other incapacity is incapable of assenting; (b) any person, whether ascertained or not, who may become entitled, directly or indirectly, to an interest under the trusts as being at a future date or on the happening of a future event a person of any specified description or a member of any specified class of persons; (c) any person unborn; or (d) any person in respect of any interest of the person that may arise by reason of any discretionary power given to anyone on the failure or determination of any existing interest that has not failed or determined, any arrangement, by whomsoever proposed and whether or not there is any other person beneficially interested who is capable of assenting thereto, varying or revoking all or any of the trusts or enlarging the powers of the trustees of managing or administering any of the property subject to the trusts. (2) The court shall not approve an arrangement on behalf of any person coming within clause (1) (a), (b) or (c) unless the carrying out thereof appears to be for the benefit of that person. Prior to enactment of variation legislation, courts of equity held there was very little room to vary trusts except for Saunders v. Vaultier Only 4 ways: 1. Conversion: to get court to reverse personal property or real property held for a minor to the other 2. Compromise: trusts could be changed in the event of a law suit not related to the trust (family, tort). Need to change to meet requirements of the suit 3. Emergency reasons: circumstances unforeseen by the settlor and threatens the existence of the trust 4. Maintenance Purposes: if a trust was accumulating income, and it was hurting the beneficiaries to the point that they were couldn’t subsist Sometimes trustees can vary trusts if they were given wide discretion – Haigh calls this discretionary trust rather than variation 1958: UK enacted Variation of Trusts Act. We followed suit, except for NFLD, which retains inherent variation only pp.167: basic for all provinces, except Alberta and Manitoba, who’s legislation is slightly different (PHOTO COPY) Legislation focuses on those unable to act for themselves – unborn, incapacitated, minors (focuses on Saunders v. Vaultier rule) Court speaks on their behalf Case law developed so that there is more to it than just those unable to act for themselves. Anyone can propose an arrangement S.2: court will decide to offer approval or not Note: who can apply, who can the court approve benefits on behalf of, criteria for approval a. WHO CAN APPLY Seems to allow anyone “any arrangement by whosoever propose” i. But generally, applications to vary are made by trustees because it is them who have to deal with beneficiaries, conflicts, divergent interest Want assistance from the courts Legislation is meant to help those who can’t help themselves Trustee have to treat beneficiaries the same Official guardian in most cases in Canada because they are the person who acts on behalf of minors or unborn Settlors, in inter vivos trusts, may have reason to bring forth arrangement to vary. Often in small family trusts, settlor is also beneficiary b. WHO THE COURTS CAN APPROVE BENEFITS ON BEHALF OF Legislation seems to say that if you are a fully capacitated adult, the court shouldn’t really get involved because they are capable of looking after themselves. Court concerned with those unable to consent However, courts have used it against adults. England : trust with 27 beneficiaries, 2 did not want a variation. Courts used this legislation to do it anyway S.1(a): infants and mentally incompetent: incapable of consenting. Courts have held that people who are weak or infirm can be dealt with under this clause (b): people who will be beneficiaries on the happening of a future event. Example: to A and his then wife, 10 years after my death. If A is unmarried and has a wife, she would be covered under this clause. (c): unborn. Official guardians involved here. Alta and Man. vary here – have untraceable beneficiaries (d): people with discretionary interest that hasn’t been terminated. Usually there is a life interest already in place, followed by a discretionary interest. Those who may possibly take under this are covered by (d). Mostly infirm, minors and unborn c. CRITERIA FOR DETERMINING IF A VARIATION IS ACCEPTABLE 1. Objective Prudent Adult Test is used: courts have determined this is the proper test. CASE: Finnell v. Schumacher Estate Facts: original trust had tax issue not foreseen by settlor. Variation proposal driven by desire to save a lot in taxes. Made up by many lawyers ORIGINAL TRUST VARIATION REQUESTED Schumacher Estate: - $800,000/year income Capital Schumacher fnd’n – 75% Capital Fnd’n – 66 2/3 % Issue Mike Finnel – 25% Issue – 16.7% Issue Remote – 16.7% Income 5/8 to fnd’n Income Fnd’n – 55.5% 2/8 to M and his issue Sister – 11.1% 1/8 to sis, rest to fnd’n on Issue Remote: 5.6% then her death 16.7% after M dies Issue – start at 5.6% then 16.7% after M dies Comments: All beneficiaries with vested interests consented to this, because vested interest beneficiaries were going to benefit. Issue: should court approve variation on behalf of infant or remote interests? Decision: the court will not vary the trust, it would not be prudent from the perspective of the unborn etc… Reasons (Carthy): The beneficiaries who were vested and had consented gained the most, the benefits to the unborn or remote are much more speculative. Court must look at the situation thru the eyes of the unborn, if it is not their best interests, tax purposes is not enough to conclude that they would want it. If not, it is not prudent. Huge gain to current beneficiaries, compared with small benefits to unborn, and possible losses to most remote, unborn interests makes this imprudent in the eyes of those beneficiaries. 2. Intention of settlor is considered: should the variation keep alive the settlor’s intent. On the face, the legislation doesn’t say. Finnell – pg. 171: the variation was inconsistent with intention of the original trust. Irving (Ontario, 1975): Facts: Courts assessing a variation looked to settlor’s intention as first and most important consideration. s.1(2): benefit of beneficiary is the main consideration Implications: has since been overturned in UK and BC, whittled down in other jurisdictions – not clear on what role intention should play. In Ontario, import needs to be placed on settlors intent. However, every variation, to some extent, moves away from original trust and therefore intention. Haigh: intention is not relevant, because Saunders v. Vautier rule says that you can terminate without settlor’s intention. Also, not in the act. But in Canada we have a patchwork. 3. Extent of Variation: how far can you vary before you’re actually creating a whole new trust. Cases have interpreted this legislation to say court only has jurisdiction to say whether a variation is acceptable, they don’t have jurisdiction to approve a whole new trust. English case says that: “Courts cannot approve a change in the whole substratum of a trust.” Hard to find line between new variation and new trust – not likely to be allowed to redraw a trust. If structure and beneficiaries are similar, it is likely safe to say it is just a re-draw, not a re- settlement. Irving: reconstruction of a trust goes against settlor’s intent, which was reason for the trust. Combines issues of extent into a question of intent – blurs the distinction. However, there are cases that do talk about a jurisdictional issue as separate. 4. Actual Benefits Allowed: will the beneficiaries benefit in the same way they did before the variation. a. Economic Benefits: Most common, easy to assess. Courts look at the new variation monetarily. Examples: 1. Risk and return: 5% chance of $1million could be changed to smaller, vested gain now 2. Tax: Alleviation of liability b. Non-Economic, Indirect Benefits: Moral or social reasons (e.g.: bring family together, case excluded 4 th, accidental child. Monetary benefit of original 3 beneficiaries was less, but for moral reasons, court approved the variation.) Case: Re: Kovish Facts: Variation brought to court for approval where children and grandchildren given $ immediately, at the expense of possible unborn children covered under original trust. Official guardian was representing unborn children. Evidence: wanted immediate money to invest in a decorating business that would eventually benefit all. Guardian brought no evidence that the business was risky – but everyone was very optimistic, judge seems to accept it as guaranteed that the business will succeed. Decision: Variation approved. Reasons: because it is a small family business and this a small family trust, the unborn will ultimately benefit of the success of the business. So they aren’t really losing out because their interest under the trust is reduced. Their interest under the business will compensate for that. Non-financial interests are considered in variation in Ontario on the basis of case law, but it is not written into the statute like in Manitoba. Question is how much weight to put on it. These cases crop up in pension cases (e.g.: wrap them up, deal with surplus) where variation will affect future beneficiaries. Is it better to give money now at expense of future generations, or should we not take that risk. A pensioner electing to lump sum cash now rather that a structured payout, may be approved due to immediate benefits to the family ADMINSTRATION OF TRUSTS Pp.269-300’s Focusing on trustee as administrator of a trust. Settlors and beneficiaries, in principal, have no rights unless provided for specifically provided for in that trust. Settlor can keep power to remove/replace trustee, can appoint an overseer – can remain engaged without being part of the trust 3 sources for trustees roles and duties 1. Trust instrument: specific duties which may differ from general statutes and laws 2. Case law: equitable jurisdiction 3. Statutory sources: Trustee Act in Ontario, Red Tape Reduction Act. Not a comprehensive scheme dealing with all the duties, just piecemeal problems where problems have arisen. Any person capable of holding property can be a trustee. Standard, capacitated adult is the norm. Doesn’t deal with the fact that you can have old, infirm, unstable trustee. Inability to exercise judgment. What if the trustee is not good at the job? Corporations can be trustee if allowed under the articles. Also public trustees – crown provides a trustee Statutory trustees – statutes set up trust entities Fiduciary duties: important position, under highest civil law duty created in CL world. Higher than all other fiduciary categories, higher than public office. Appointment, Retirement and Removal of Trustees Maxim: a trust will not fail for want of a trustee. If a settlor doesn’t name one, or a trustee is unable or willing to perform, the court will appt a trustee. In Ontario there is no minimum or maximum. The maximum is limited pragmatically because another maxim is there must be unanimity among them (average is 1-6) A. APPOINTMENT i) The Trust instrument The trust instrument will usually appoint the first trustee No person can be compelled to act as a trustee Any appointee, even if they have given an advanced indication of willingness, is free on the creation of the trust to accept or disclaim an appointment Acceptance can be express or implied It may be necessary to appoint trustees during the lifetime of a trust. This can be dealt with by the trust instrument and is also covered by the Trustee Act. ii) Statute Subject to a contrary intention in the trust instrument, Trustee Act has a section conferring on specified persons the power to appoint trustees in specified circumstances. Trustee Act RSO 1990, c. T.23 Appointment of New Trustees [Power of appointing new trustees] 3.--(1) Where a trustee dies or remains out of Ontario for more than twelve months, or desires to be discharged from all or any of the trusts or powers reposed in or conferred on the trustee, or refuses or is unfit to act therein, or is incapable of acting therein, or has been convicted of an indictable offence or is bankrupt or insolvent, the person nominated for the purpose of appointing new trustees by the instrument, if any, creating the trust, or if there is no such person, or no such person able and willing to act, the surviving or continuing trustees or trustee for the time being, or the personal representatives of the last surviving or continuing trustee, may by writing appoint another person or other persons (whether or not being the persons exercising the power) to be a trustee or trustees in the place of the trustee dying, remaining out of Ontario, desiring to be discharged, refusing or being unfit or incapable. [Survivorship] (2) Until the appointment of new trustees, the personal representatives or representative for the time being of a sole trustee, or where there were two or more trustees, of the last surviving or continuing trustee, are or is capable of exercising or performing any power or trust that was given to or capable of being exercised by the sole or last surviving trustee. [Authority of surviving trustee to appoint successor by will] 4. Subject to the terms of any instrument creating a trust, the sole trustee or the last surviving or continuing trustee appointed for the administration of the trust may appoint by will another person or other persons to be a trustee or trustees in the place of the sole or surviving or continuing trustee after his or her death. [Power of court to appoint new trustees] 5.--(1) The Superior Court of Justice may make an order for the appointment of a new trustee or new trustees, either in substitution for or in addition to any existing trustee or trustees, or although there is no existing trustee. [Limitation of effect of order] (2) An order under this section and any consequential vesting order or conveyance does not operate as a discharge from liability for the acts or omissions of the former or continuing trustees [What may be done] 6. On the appointment of a new trustee for the whole or any part of trust property, [increase in number] (a) the number of trustees may be increased; and [separate trustees for distinct trusts] (b) a separate set of trustees may be appointed for any part of the trust property held on trusts distinct from those relating to any other part or parts of the trust property, even though no new trustees or trustee are or is to be appointed for other parts of the trust property, and any existing trustee may be appointed or remain one of such separate set of trustees or, if only one trustee was originally appointed, then one separate trustee may be so appointed for the first-mentioned part; and [where not less than two to be appointed] (c) it is not obligatory to appoint more than one new trustee where only one trustee was originally appointed or to fill up the original number of trustees where more than two trustees were originally appointed but, except where only one trustee was originally appointed, a trustee shall not be discharged under section 3 from the trust unless there will be a trust corporation or at least two individuals as trustees to perform the trust; and [execution and performance of requisite deeds and acts] (d) any assurance or thing requisite for vesting the trust property, or any part thereof, in the person who is the trustee, or jointly in the persons who are the trustees, shall be executed or done. [Powers of new trustee] 7. Every new trustee so appointed, as well before as after all the trust property becomes by law or by assurance or otherwise vested in the trustee, has the same powers, authorities and discretions, and may in all respects act as if the trustee had been originally appointed a trustee by the instrument, if any, creating the trust. [Application of Act] 8. The provisions of this Act relative to the appointment of new trustees apply to the case of a person nominated trustee in a will but dying before the testator. iii) Judicial Appointment Court have an inherent jurisdiction to appoint trustees and is also conferred on the court by statute Section 5 of the Trustee Act (above) permits the Court to appointment a new trustee In re Tempest (1866) Ratio: In appointing trustees, the discretion of the court must not be exercised arbitrarily. The Court ought to be guided by general rules and principles: Should have regard to the wishes of the settlor if such wishes can be ascertained from the trust instrument Court will not appoint a person as trustee with a view to the interest of some of the persons interested under the trust, in opposition either to the wishes of the settlor of the beneficiaries (as the trustee must hold an even hand between interests) Will have regard to whether the person’s appointment will promote or impede the execution of the trust B. RETIREMENT AND DISCHARGE i) Non-Judicial Trust may provide for the retirement/discharge of trustees. Subject to this, statute deals with retirement/discharge: Trustee Act RSO 1990, c. T.23 RETIRMENT OF TRUSTEES 2.--(1) Where there are more than two trustees, if one of them by deed declares a desire to be discharged from the trust, and if the co-trustees and such other person, if any, as is empowered to appoint trustees, consent by deed to the discharge of the trustee, and to the vesting in the co- trustees alone of the trust property, then the trustee who desires to be discharged shall be deemed to have retired from the trust, and is, by the deed, discharged therefrom under this Act without any new trustee being appointed. (2) This section does not apply to executors or administrators. ii) Judicial Courts have inherent jurisdiction to permit a trustee to retire and to give a discharge. Note that trustees hold title as joint tenants and thus the right of survivorship operates upon the death of one trustee If a sole trustee dies, under Trustee Act [2(3)] title vests in his personal representative who may act as trustee until new trustee appointed C. REMOVAL i) Non-Judicial Trust instrument may provide for removal of trustees in certain circumstances and may confer power of removal on someone By implication, s.3 of Trustee Act confers power of removal in the circumstances dealt with in the legislation iii) Judicial Courts have inherent jurisdiction to remove trustees. Conroy v. Stokes: Facts: 2 of 5 beneficiary wanted trustee removed and replaced. Court said there was no evidence of breach, unfitness, misconduct. Actual problem was friction between the trustee and the B’s bringing the motion. Issue: is friction between some B’s and T enough to bring about the court’s inherent jurisdiction to act for the best interest of B and remove T. Decision: No! Reasons: need to show that the friction endangered the B’s entitlement under the trust. Here, friction had nothing to do with B concerns about their entitlement. Problem here stemmed from the fact that the 2 were children of a different marriage from the other 3. Re: Consigilio Trusts (No.1) Facts: 3 trustees. At trial, all 3 were removed. Only 1 appealed this. Case dealt with bitterness among the trustees, who couldn’t agree on any policies for effectively managing the trust. Guardian was concerned about this. Reply by the trustees that they hadn’t breached anything – only had differences of opinion, no misconduct. Decision: When the issue is dissention amongst the trustees, misconduct is unnecessary. Reasons: Evidence showed that the dissention affected the continuing management of the trust, so Bs interests were at stake. If it is impossible or improbable for Ts to act in best interests of Bs, courts can act to remove them. Implications: It is a rebuttable presumption that dissention between the Ts will harm the Bs – if the dissention doesn’t affect the administration of the trust, then it won’t be necessary to remove them. Situations where Trustees have been removed: 1. Petefield v. Benn (1853): breach of trust 2. Re. Ex. Parte Reynolds: Trustee purchasing part of trust estate (breaches fiduciary duty to avoid conflict) 3. Moore v. McGlynn (1890): Trustee starting up a rival business 4. Millard v. Ayre (1793): Trustee absconding after charge, but no conviction, of forgery. 5. Paileref v. Karoo (1863): Refusal to execute the trust. 6. Trustee is not impartial, favours one set of Bs over the other (maxim that you have to treat them equally) * in some cases, they will be liable to damages or compensation. What if all the Bs want a trustee removed? Question to ask: Does Conroy turn on the fact that 3 of the Bs didn’t want removal. Answer: No! But could use appt powers to reduce influence of objectionable trustee. Ultimate club: can always terminate under the rule in Saunders v. Vautier. Can change the number of trustees if the trust instrument allows for it. Duties of Trustees Duties are becoming more and more onerous – riskier Currently, there is talk about investment duties, and necessity of making money for the Bs. There are a number of duties and standards Ts must know about, and often they enter into a trusteeship lightly Sources of duties: 1. Trust instrument: will specify scope of duties that have been ingrained in trust law for centuries 2. Statutory/Legislation: not much spelled out in Trustee Act, most relate to investment powers which are contained in amendments and recent, new acts such as The Red Tape Reduction Act (spells out new rules for investment by trustee – quite different from old rules). 3. Trust law principles from equity, established thru the CL over time. Most of these stem from the fact that trustees are fiduciaries. You’re administering property on behalf of a B, whose interests must come first A. DUTIES Can be divided into initial duties and ongoing Initial: right from the start there are fairly onerous duties, most trustees don’t do any of this because they don’t know what the role entails. For new trustees and new trusts: a. familiarize with nature of the property b. ensure it’s invested in accordance with instrument and legislation: courts allow time to convert unauthorized investments into authorized ones. c. ensure property is held in proper custody Additional duties for newly appointed trustees for ongoing trustees: a. reasonable steps to ensure accts, books, administration of property is up to date. b. take action to recoup losses from possible breaches (especially if previous trustee was removed for breach of trust) Ongoing: a. Loyalty: to the trust and the B’s. This includes honesty, candour (can’t do anything without Bs knowledge), diligences (not profit or act in conflict). Not expressed in recent cases because it is so engrained. There a number of specific duties which flow directly from this: b. must perform personally and not delegate. c. duty to invest, so Bs will benefit d. act impartially as between life interest and remainder, or capital and income. e. Keep proper accts f. duty to provide information RE: Tempest: Facts: Beneficiaries wanted the trustees to purchase the family home as part of assets of the trust. The Ts had that power. But Ts determine that they would need to mortgage to do so. One T said let’s do it, other didn’t want to. Issue: was the exercise of discretion reasonably done? Decision: T was within his discretion in deciding not to mortgage Reasons: court can interfere where Ts exercise discretion wrongfully, B. POWERS Different from duties – consequences differ depending if a trustee is under a power or duty. Duties are compulsory or mandatory, powers are discretionary. There are tests for determining which something falls under, depending on the discretionary element, but test is not clear cut. Courts say that if you have a discretionary power, you must exercise some judgment in deciding if you are, or are not, going to be exercising it. You can’t exercise the discretion with mala fide (i.e.: with improper purpose/motive, irrelevant considerations) Court must decide if it there was mala fide, discretion, duty Courts must analyze as a power and a duty Further complicated because there may be both duties and powers in a trust instrument, which add to the difficulties of figuring out if something is a duty (must adhere to principles of trust law), and powers (can use discretion, as long as mala fide is avoided) Key area of confusion is in investing – general duty to invest, but instruments may give powers as to how to invest (may fail to use power correctly, and invest wrong) Re: Wright Facts: Ts wanted to sell shares, but hadn’t received a reasonable offer yet. Issue: Was there: 1) An absolute duty to sell the shares, 2) An absolute duty to retain the shares, or 3) An equal duty to sell or retain depending on situations. Decision: Ts were within their powers of discretion. Reasons: Court will not interfere with proper exercise of discretion. Court said that you have to properly characterize the trust. Look at the instrument as a whole. Likely #3, and definitely there was not a duty to sell at an unreasonable price. Instrument gave Ts discretion. Here they would sell, just waiting for right price. Gisborne v. Gisborne Issue: should trustees take extra money from the trust to provide for an incompetent widow in an asylum. She had an annual stipend, but could she have extra. Decision: amt that is necessary for her upkeep is best decided by the Ts, this is what the testator wished. Reasons: If there is mala fide in the exercise of discretion, the courts will interfere. Fox v. Fox Estate (CB 286) Facts: Husband gave 75% of his estate to his widow Myriam, and son Walter got 25%, and W would get remainder of 75% when M died. M was allowed to encroach on the capital, 1) on Ws behalf, or 2) on behalf of his children. Will was set up when W was married; he divorced his Jewish wife and married his non-Jewish secretary. M encroached to the point that the capital was reduced to zero and gave it to the children of his first marriage. W was upset because he lost his family trust money, and he felt the motivation was something other than his kids’ best interest. It was accepted at trial that a large part of Ms motivation was disapproval of second wife, in addition to concern for kids. Issues: a) What is mala fide? b) did M act with mala fide? Decision: a) Mala fide doesn’t have to be fraud, it can be behaviour that is seen as wrongful, improper conduct, b) M acted improperly in her exercise of discretion. Reason: if there is mala fide, the court can intercede. The marriage to the non-Jewish woman was not a valid consideration. This was improper exercise of discretion. Public policy aspect: this was an abhorrent way to motivate exercise of discretion. Re: Blow Facts: Two trustees are arguing over encroaching on capital. One was a father who wanted to advance money from capital to his daughter. Other T was a professional trust company, and claimed that they have a memo the other doesn’t that said this wasn’t allowed. Decision: Court can interfere because company was not exercising discretion – they were being directed by the memo. Haigh: inaction is based on a memo, so isn’t that an exercise of discretion based on something extraneous? Schipper v. Guaranty Trust Co. of Canada (1989) (CA) Facts: Testator created trust with life interest for W with “so much thereof as remains” to son and then to his children. W, son and Trust Co. were trustees. Will gave trustees a discretion to encroach on capital for the “general welfare, benefit, comfort and enjoyment” of W. W wanted to do so (as did son), but Trust Co. refused on the basis that it wanted to preserve the capital for the benefit of future unborn beneficiaries. Judgment: Testator’s primary intention was to provide for W. Trust Co. failed to properly exercise discretion by (1) prioritizing future beneficiaries despite clear indication in instrument that W was priority; (2) by having undue concern for interest of remote unborn whose interest “was speculative to say the least”; and (3) by having no regard to the unanimous consent of all living residual beneficiaries. Ratio: While the court will generally refuse to intervene with the “uncontrolled” discretion of a trustee where they are acting bona fide, the court is entitled to do so where the trustee is attempting to exercise discretion to achieve a purpose not intended under the terms of the trust. Summary of the cases: Basic principles: 1) courts will back off in most cases and let trustees exercise discretion 2) only at the margins were courts are concerned (I.e.: when the (non)exercise might be unjust) C. GENERAL DUTIES OF TRUSTEES 1. STANDARD OF CARE Normally trustees have a large number of discretionary powers, even more today (e.g.: where to vest, who shall benefit in what amt) Courts have been asked to police the exercise of discretion Based on the duties of trustees. a) honest, loyal etc… b) exercise discretion c) act within confines of your authority (this ties in mala fides) d) understand your powers i) General Principles Trustee Act RSO 1990, c. T.23 Relief of trustees committing technical breach of trust 35. (1) If in any proceeding affecting a trustee or trust property it appears to the court that a trustee, or that any person who may be held to be fiduciarily responsible as a trustee, is or may be personally liable for any breach of trust whenever the transaction alleged or found to be a breach of trust occurred, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust, and for omitting to obtain the directions of the court in the matter in which the trustee committed the breach, the court may relieve the trustee either wholly or partly from personal liability for the same THE case: Fales v. Canada Permanent Trust Co.(SCC) Last big trust case SCC has heard Facts: There is a simple family trust in which Mr. W appointed his widow trustee and the trust company as co- trustee. Estate was left in trust for widow for life, and remainder to the children equally. The estate was worth half a million. The trust instrument did not contain a power of investment (it can be wide open, or say nothing, then fallback is statute, which gives a list of conservative, mostly govt related authorized investments), so had to invest in authorized statutory list. The Case: One of the assets was shares in a company called Boils Brothers, which weren’t marketable, so Ts needed a way of trading them. Did by exchange agreement where they obtained shares in a company called Inspiration – this was done very early on, but this company was not on the list of authorized investments. They held on to I shares for 2.5 years, which became worthless – slow decline, then dropped like a rock, company went bankrupt. The estate lost a lot of money. The children sued the trust company only for not investing in authorized investments. The trust company joined the widow as well. The problem with deadlock had not been considered, the role of each trustee was not laid out. Problems of the Court: 1) Trust Co. said that they told Mrs. W that they needed to sell shares in I at least 5x over the 2.5 years. She adamantly refused, so the Trust Co. used the defense that they had done all they needed to do. 2) What is the period of relevance – when should they sell? Trial court and CA had different ones, SCC said that it was from the time they obtained the I shares, until 6 mos. prior to I’s de-listing. There was always a duty to sell in this period. Issue 1: was there a breach of trust when Ts failed to carry out the activities? General rule: that beneficiary is compensated by both trustees, and both will be liable to compensate. At trial: company should have higher standard, they shouldn’t have allowed her to oppose the sale. SCC: Company shouldn’t have let her oppose the sale, they should have gone to court for direction – duty is more than asking to sell (but they said that the standard was the same). Issue 2: should there be a different standard of care for lay person trustees, as opposed to professional trustees. SCC: There should be just one standard of care. Application to the facts: the court found a middle ground. The basic standard is the skill of the trust company – widows and friends are likely to fail, but will be allowed to escape thru statutory exoneration. In this case, professional didn’t meet the lowest possible standard. a. does this apply to other professionals (lawyers, accountants?) Yes Issue 3: What’s the obligation of disclosure on the part of Ts, when one is party to information and the other isn’t? Does it matter if the information is publicly available? SCC: Trust Co. knew much more about Is financial situation than the widow, but they only told the widow that they should sell cuz they can’t hold unauthorized shares . They argued that was ok because the info was publicly available, but court said that the duty to provide the info was still there, they should have disclosed, if she still refused, should have gone to the court to get direction. Issue 4: statutory power of relief, which allows courts to exonerate Ts who are found to be in breach. (s.96 of BC Act, s.35 of Ontario Act) SCC: Both trustees were held in breach. Trust Co. because they didn’t disclose or go to court, widow because she didn’t exercise her powers. However, she gets a statutory out, and trust co. had fully compensate the loss. She tried to the best of her ability to act as a trustee. This is subjective: At Trial: She was characterized as intelligent, capable, strong willed, independent minded, who from time to time sought the opinion of professional advisors, sometimes she followed, sometimes not. SCC: Housewife with 4 young children, school teacher who took night school course on “how to invest your money.” She had minimal investment experience, no trustee experience, she tried to the best of her ability to be aware of info and act. Unsophisticated and vulnerable, therefore professional trustee should have done more. mplications: court says there is only one standard of care, but this result seems to provide different standards. If you generalize more, the SCC is really saying that where both co-Ts failed in their duties, and only one failed to communicate info, it’s the knowing trustee who will have to bear the whole amt of the loss, professional or not. This scared off professional trustees for awhile because of fear that they wouldn’t be able use this. This allows a remedy to be tailored for the situation. Dickson: 3 past instances where one trustee should bear entire loss: 1) T acts fraudulently, 2) Lawyers acting as Ts and non-lawyer Ts rely on incorrect advice, 3) where Ts are also beneficiaries, therefore do something breach fiduciary duty to benefit themselves. Only other instance is where they can be relieved under statutory power. This is the first time it has been applied between co-Ts. The point of the s. was to relieve all the Ts in situations where Bs had undergone a loss, but the harsh rules of trust law needed flexibility. Never enacted to allow this use between co-Ts. SCC has used this remedy in a new way. He says this is what it was used for. Haigh: says D was being disingenuous when he said it was created for this. Court has a single standard for all with ability to use remedial power. Court never intended to excuse one trustee vis-à-vis another, rather to excuse all Ts vis-à-vis the Bs. This use gives implication of an indirect double standard of care. Damages: Facts: The loss was half a million dollars, and an additional $60 thousand was added by how the SCC calculated. There are different ways of measure the loss: 1. Value of shares at beginning when they should have sold, value of shares at end and subtract: this gives the highest 2. Average price over the period 3. Most common/consistent price The number of shares that a trust holds may affect the price – more difficult to sell a large number of shares. Another factor to consider is a case where the beneficiaries are minors, because they can’t control anything. SCC: Took the average price during the period in question. They didn’t discuss their reasons. Highest value is not sole criteria – other factors are best addressed with average. The breach was a continuing breach, so it is easier to accept the averaging principle. If it were a fixed point of breach, perhaps taking the value at that time would help. It is uncertain how we do it in Canada Discussion re: Twinning of professional and lay trustees: the trust companies promote this arrangement because: they will have the knowledge and experience to administer the trust – insurance, accounting, and especially investments and tax The lay person can decide which beneficiaries should get what, in terms of income and capital, as well as advancement Fales case gives examples of problems with this theory, What happens in the case of a dispute? The normal rule is action must be unanimous, so disputes resolution must be built into the trust instrument, because deadlocks can be considered to be a breach of trust Perhaps direction from the court could be sought, but the Gisborne and Blow show that courts are loathe to interfere in this Resignation provisions could be included (i.e.: such and such party must resign) How to determine what each Ts role is, what if lay T wants to participate DEADLOCK Is the division between admin and matters relating to beneficiaries interests really so distinct that one party can deal with each Boils down to problem of selecting trustees Having a single trustee doesn’t solve the problem either/ Testator often think that a T would do the same thing they would if they were still around – lawyer must convince testator of this, and convince them to put boundaries etc… Summary: SCC’s decision was quite controversial, with new principles in any CL jurisdiction The court took a very dim view of TrustCo’s behaviour, which Haigh says colours their judgment The “reasonably prudent person managing her own affairs” is the standard, and sometimes that person will be looked at as the “reasonably prudent business person” This made the trustee industry start to examine its own practices, and they became reluctant to pair up with a lay person. Joint lay/professional trustee twinnings are more common again Now trustee companies are better when it comes to giving info to lay trustees. They may not analyze or interpret the info, but they pass it on. It is argued that they sould be held to a higher standard of care (argued in Fales, accepted in some US states) because they advertise themselves as having expertise The result might be different today because information is so much more widely available Today you would need stronger evidence that she is unsophisticated – there is even a difference between trial and SCC characterization However, maybe the trustee company would be required to provide more analysis today But Haigh pulled up a brochure for an trust guy who talks about how much more complex the business world is today, and how he is experienced and professional in this. We made fun of it for like 10 minutes ii) Exculpation Clauses: Re Poche (1984) Facts: Trustee committed various breaches of trust. Will contain clause that trustee “shall not be liable for any loss not attributable (a) to her own dishonesty, or (b) to be a willful commission of any act known by her to be a breach of trust”. Loss in question was the result of gross negligence. Ratio: While exculpation clauses afford a considerable amount of protection to trustees, Court holds that a trustee is liable for any loss resulting from gross negligence regardless of exculpatory clause. [but see below] Armitage v. Nurse  (CA) Facts: Action for breach of trust. Clause stated that trustees were not to be liable for any loss “unless such loss or damage shall be caused by his own actual fraud”. Judgment: The Court considered that broadly speaking fraud requires dishonesty and that many breaches of trust are not the result of dishonesty (may breach in good faith and with honest belief that they at in best interests of trust). On its surface, the clause serves to exempt the trustee from liability “no matter how indolent, imprudent, lacking in diligence, negligent or willful… so long as he has not acted dishonestly”; however, Ratio: The court accepts the proposition that there is an irreducible core of obligation owed by the trustees to the beneficiaries which is fundamental to the concept of trust. If the beneficiaries have no right enforceable against the trustee than there are no trusts These core obligations do not include duties of skill and care, prudence and diligence The minimum necessary duty is to perform honestly and in good faith for the benefit of the beneficiaries The law draws a distinction between negligence (however gross) and fraud, bad faith and willful misconduct. “Gross negligence may be evidence of mala fides, but it is not the same thing”. There is no authority for the proposition that a clearly worded clause cannot exclude gross negligence. 2. Duty Not to Delegate Trustees are expected to do everything related to the trust themselves Delegation refers to talking to expert – legal requirements and interpretation of trust instrument, tax advice from accountants, fund managers and business advisors. Once you’ve accepted the obligation to do it, you can’t shift onto someone else. This rule was strictly followed in the past, now the rule isn’t as strict, and Ts have way too much to do, so they try to delegate some responsibilities Most of the time, you are looking at whether the trust instrument permit delegation/ Often in modern trusts, there are allowances to delegate specific duties There are statutory provisions which allow delegation because experts are needed because the 21st C is complicated Ultimately, you can delegate to an expert now, but T must make the decision. When may Trustees Delegate? Speight v. Gaunt (1883, HL, CB 314) *Leading case on duty to delegate Facts: G was a trustee under will for family trust who wanted to invest in municipal bonds. In accordance with usual practice at the time, he enlisted aid of a stockbroker, RC to purchase the municipal bonds. RC used the funds for something else, and his company went bankrupt. He never bought the bonds, so the fund lost all the money. Issue: Was G liable for breach of trust because he delegated that task to someone else? Court Asks: what is the usual custom for purchasing municipal bonds? Decision: it was proper to delegate to RC, and to pay him in advance, Reasons: this was usual practice in London, one of the only ways to get the bonds. T is not to blame if, without knowledge that will make the transaction risky, she acts in the normal business manner to delegate. Speight and Fales Standard of Care is similar: Fales: business person of ordinary prudence managing their affairs – if prudence requires delegation, the prudent standard will allow you to do so Speight: Trustee can delegate to the extent that normal business practices requires her to do so. If you don’t allow delegation: No one would want to be a trustee, or it would cost a lot of money because so much work You would catch people for breach of trust for reasons they don’t understand because the couldn’t consult an expert. When delegating: Do you homework on the agent and make sure they are reputable Give them clear instruction from statutes or instrument Agent must know the scope of their role 3. Trustee Must Keep Proper Accounts the accts must be ready for inspection by the Bs at any time, since they beneficially own the trust you should keep inventory of the property, what the estate consists of, what the original estate consisted of, money that’s been received and paid out, the current state of the property 4. Duty of Impartiality no preferential treatment of Bs individually or as a group settlors can create “partiality” if they want to – in this case, T must make sure they understand how the creator wanted to favour one set of Bs over the other. A B C D Life remainder Must strike an even balance between C and D – assets of trust must deal with them impartially It is tied to duty and powers to invest BC: Pp. 354: excerpt from Trustee Act: has statutory list of investments. The old fashioned way of preserving impartiality was to provide a statutory list of things you can invest in. Hope is that by investing in the list, you’ll get a good balance between income and capital Ontario: Pp. 357: has prudent investment standard, rather than a list. Still trying to establish a balance, but of remainder. administration fees/expenses of incurred are taking out of income, which reduces life tenant’s interest In the Fales case, there was no list, so receiving unauthorized investments at the start of the trust can create partiality. There must be a conversion to authorized ones that provides enough for life tenant and enough for remainder. One way to settle the conflict is to look at the language of the trust about conversion and postponement If there is a simple situation like the one above, there is a general presumption that you intend both to get something – equal value. If there are wasting assets (e.g.: shares in a mine), which don’t last forever, you want to convert However, sometimes a more specific duty exists and can be inferred (e.g.: if there is no duty to convert the mine shares, courts have said that because it was a mining share, there is less duty to act impartially because it was obviously intended that C would be favoured over D, because it brings income, rather than long term capital growth.) Re Smith (1971) Facts: Testator willed shares to son. In will requested that son give 25% of income to wife. Son created a trust to do so, giving wife (his mother) a life interest with himself as the remainderman, and appointed Trust Co. as trustee. Trust included power to sell or convert and invest proceedings therein in listed investments. Shares split etc. and W requested that investment portfolio be altered. Trust Co. answered but stated that they had contacted son with the intent of getting his opinion of the request and never contacted wife again. Issue: Breach of duty for failure to be impartial between life tenant and remainder person? Judgment: Trustee failed to maintain even hand. They ignored wife’s request for variation of investment which would afford her a much enhanced income (Evidence that they could easily and without risk have increased interest by 6%). The evidence seemed to suggest that the shares were retained rather than converted because for “some unspecified reason” this was in the interest of the remainder person (who was also the settlor). The Trust Co. acted under the assumption that the shares were not to be sold, though the Court notes that there was nothing in the trust instrument that suggested this limitation. With regard to the deference the Trust Co. had shown to the opinions of the remainder person, it is impossible to restore confidence in them with respect to the future administration of the trust and they were therefore removed as trustees. i) Trusts for Sale Problem re impartiality arise in the case of trusts for sale – where the trustees are under a duty to sell assets (so far as not in authorized investments) and invest the proceeds of the sale in authorized investments If a trust for sale exists, life tenant is entitled to net income from authorized investments Trustees should sell and invest as instructed but the time may not be opportune to sell hence many trusts give trustees the authority to retain. Note: The Rule in Howe v. Lord Dartmouth If the court finds either an express or implied duty to convert then the rule in Howe v. Lord Dartmouth applies. The rule states that: “Where residuary personally is settled on death for the benefit of persons who are to enjoy it in succession, the duty of the trustee is to convert all such parts of it as are of a wasting or future or reversionary nature, or consist of unauthorized securities, into property of a permanent and income bearing character” Rule “requires a trustee to deal even handedly between life interest and remainderman by converting wasting or unproductive assets and investing the proceeds of conversion. This enables all interest to be protected and the assets preserved so that the benefits provided in the will may pass in succession to the respective beneficiaries” (Lottman v. Stanford) Note that the rule: o applies only to testamentary trusts created (residual is settled upon death) o only applies to personal property (not real property) o applies to the residue where there are successive interests (Life interest followed by a remainder) o Rule does not apply if will shows a contrary intention o In these circumstances there is a duty to convert and failure to do so will be found a breach of trust o property of a “wasting nature” (eg vehicles, furniture, boats) must be sold o “unauthorized” property refers to those unauthorized by either the trust instrument or statute Lotman v. Stanford Background: Need to understand how the rule in Howe v. Lord Dartmouth is applied in Ontario. The rule says that “you must convert assets that are in trust that arise under a will that are wasting or future, reversionary, or unauthorized, unless the trust instrument says otherwise.” The rule only applies to personal property, not land. If you don’t do this, it is a breach of the duty of impartiality because it treats life and remainder differently. Issue: Does the rule apply to land in Canada? Rationale was that it makes sense to apply it to all property in Canada. UK has the special treatment because of historical concerns of land, the place of land in trust law there. Decision: No, we are going to stick to longstanding rule, and apply it to personal property and not land Reasons: Lawyers in the wills and estates field know the rules and plan for it. They draft wills that would deal with it, and changing the rule would create great inconvenience. If this is to be reformed, it will need to be done so statutorily. Haigh: Lawyers are capable dealing with change, this was flimsy. Conclusion: there is a duty to convert personal property investments that fall under the 4 circumstances in the rule. 5. Duty of Loyalty Most of other duties come from this duty Loyalty means observing terms of trust, manage property properly, Bs interest first, you are a fiduciary so no unauthorized profits, no conflicting behave between yourself and duty as trustee, treating both classes of Bs the same The duty of loyalty overarches everything T does, but there are exceptions To rule of taking unauthorized profits: You can purchase trust property in very limited conditions. E.g.: if it is authorized by the settlor – always look at instrument first, because even the most integral duty can be authorized. You can also have the court intercede in rare circumstances consent of all Bs who are fully informed and have full capacity, and T pays a fair price. Not act in conflict: didn’t do an example C. SPECIFIC DUTIES OF TRUSTEES 1. Duty to Invest Ontario – “prudent investor” as captured in i) Permitted Investments a. Trust Instrument: common to include clauses expressly conferring powers of investment. b. Statute: at one time most jurisdictions had a list of legal authorized investments, · Now most jurisdictions (including ON) have replaced this with “prudent investor” regimes under which they are not confined to specified investments but may investment in any investment which a prudent investor might. · (see the Red Tape Reduction Act). · Reasons: Attempt is to let Ts invest according to “modern portfolio” theory – you need to balance your risks and your return by diversifying. What you want to have is some shares that will do well in certain conditions and if those conditions change, you want to have shares that will do well in those changed conditions. EXAMPLE: if you are going to invest in shares in sunscreen, you should also invest in umbrellas (Example by Haigh) Theory also means that prudence means that that standard is applied to your overall strategy of investments, not particular items. Trustee Act RSO 1990, c. T.23 Investments 27. (1) In investing trust property, a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments. Authorized investments (2) A trustee may invest trust property in any form of property in which a prudent investor might invest. Note: Prudent investor v. Prudent trustee A “prudent trustee” may invest in any kind of property, “but in doing so must exercise the judgment and care that a man of prudence, discretion and intelligence would exercise as the trustee of the property of others” [New Brunswick Trustee Act] ii) Duties and Powers in Relation to Investments a. General Principles Cowin v. Scargill (CB 362) Context: Scargill was head of union, represented the union – a thorn in Thatcher’s side. NCB wanted to get rid of him; this case was one aspect of a strategy to get rid of the union. Facts: involved pension fund for coal miner union in UK. T board of 10 – 5 from National Coal Board, 5 from union. The NCB reps wanted to invest in overseas land, and in natural gas and oil. The position of the union members was that this would indirectly harm the coal industry because they were investing directly into its competitors. Issue: Was this a breach of trust, can the NCB Ts make these investments? Decision: Trustee must be allowed to invest in the overseas investments. Reasons: First duty of trustee is to best invest to provide for future and present Bs. There was nothing in the pension scheme that said that you couldn’t invest overseas, or in competing industries. Point is to provide for financial best interest of the Bs, and so Ts strong personal views are not a consideration. Discussion re: Exceptions: there may be situation where Bs financial interest is not sole consideration. Trust can be set up for financial benefit plus something else, which will affect investment decisions. Courts e.g.: small group of Bs with strict views against tobacco/alcohol captured in the trust instrument – type of investments could be considered here. This is a very rare case, and there would be a heavy burden to show that best interest is not best financial instrument. In the case of a large institutional trust, it will always be financial because the group will be too diverse to have the same view. Exceptions will mostly apply to small family trusts. CB 366: excerpt from s.27 of Ontario Guidelines – can see Towne case in s.27(5)(4) and 27(5) Trustee Act As amended by Red Tape Reduction Act RSO 1990, c. T.23 27. (3) Any rule of law that prohibits a trustee from delegating powers or duties does not prevent the trustee from investing in mutual funds, pooled funds or segregated funds under variable insurance contracts, and sections 27.1 and 27.2 do not apply to the purchase of such funds. (4) If trust property is held by co-trustees and one of the co-trustees is a trust corporation as defined in the Loan and Trust Corporations Act, any rule of law that prohibits a trustee from delegating powers or duties does not prevent the co-trustees from investing in a common trust fund, as defined in that Act, that is maintained by the trust corporation and sections 27.1 and 27.2 do not apply. (5) A trustee must consider the following criteria in planning the investment of trust property, in addition to any others that are relevant to the circumstances: 1. General economic conditions. 2. The possible effect of inflation or deflation. 3. The expected tax consequences of investment decisions or strategies. 4. The role that each investment or course of action plays within the overall trust portfolio. 5. The expected total return from income and the appreciation of capital. 6. Needs for liquidity, regularity of income and preservation or appreciation of capital. 7. An asset's special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries (6) A trustee must diversify the investment of trust property to an extent that is appropriate to, (a) the requirements of the trust; and (b) general economic and investment market conditions. (7) A trustee may obtain advice in relation to the investment of trust property. (8) It is not a breach of trust for a trustee to rely on advice obtained under subsection (7) if a prudent investor would rely on the advice under comparable circumstances. (9) This section and section 27.1 do not authorize or require a trustee to act in a manner that is inconsistent with the terms of the trust. […] 28. A trustee is not liable for a loss to the trust arising from the investment of trust property if the conduct of the trustee that led to the loss conformed to a plan or strategy for the investment of the trust property, comprising reasonable assessments of risk and return, that a prudent investor could adopt under comparable circumstances. 29. If a trustee is liable for a loss to the trust arising from the investment of trust property, a court assessing the damages payable by the trustee may take into account the overall performance of the investments. iii) Standards of Care of Professional and Non-Professional Trustees Many trustees are Trust Co.’s and investment managers They are subject to the same SoC as applies to non-professionals (“prudent person managing his own property”). Debate over whether professionals should be subject to a higher SoC. Arguments in favour focus on the fact that professionals hold themselves out as having special skill and knowledge. Arguments against state that “prudence is prudence” and any attempt to distinguish between professional and non-professional trustees is artificial. In US, professionals are held to a SoC commensurate with their skill level. In other words, they can be found to be in breach of trust if they do not perform at the level of similarity skilled trustees. iv) Delegation of Decision Making Power a. General Basic rule that trustee must act personally. [see section on Duty not to Delegate for more] It is however, generally recognized that the financial market is complex and that the ordinary prudent person now “as a matter of course” will obtain investment advisors and that most trustees will require day-to-day assistance in management of assets. b. Mutual funds: see Trustee Act s.27(3) though note that without statutory authority mutual funds would be a breach of trust as an abdication of decision making power c. Permissible Delegation of Portfolio Management While a trustee can delegate to some degree he must exercise due care in selecting a competent manager, acting within the terms of the trust, and reviewing the manager’s performance closely to ensure the trust portfolio is adequately administered 2. Duty to Provide Information Must regularly provide the Bs with information about the trust. What the property is, how it’s been invested, related to the assets Includes other information such as expected growth Trust documents i) General Principles General rule, the beneficiaries may, on reasonable notice, require trustees trustee to produce for their inspection any trust documents they wish to see This right may be exercised by all beneficiaries, including those with contingent interests Trustee are under no obligation to provide info if it is not requested with one exception: when a minor beneficiary reaches the age of majority trustees must inform them of their interest and its nature. Some unsettled aspects of the law are: o What is a trust document? (see Re Londonderry’s Settlements) o Must trustees disclose documents that record reasons for making discretionary decisions? (see Re Londonderry’s Settlements) o Is a clause in trust instrument prohibiting the disclosure of info the beneficiaries valid? (see Jones v. Shipping Federation of BC) Re: Londonderry’s Settlements (1965, Eng): Facts: trustee had discretion to decide how much to give Bs. One B was dissatisfied, and wanted to see documents – minutes of trustee minutes, documents between Ts. T didn’t want to show this, just the trust documents. Issue: distinguishing between trust documents and discretionary documents. Decision: T is not required to produce documents that show motivation. Easier if they are kept separately. Salmon J: three characteristics of trust documents: 1) In possession of trustees as trustees, 2) Contain info B are entitled to know, 3) B has proprietary interest in them Harmon J: there are some documents which you might be able to say are trust documents, but there is an exception for a category of protected documents which should not be disclosed to Bs. There might be instances where documents that would normally be produced won’t be. I.e.: cause discord among family members. He felt this would aggravate pre-existing dissention. To know why would make it worse. Implications: The cases in this area have not developed a universal standard about Ts duty to provide info. In a breach of trust case, in Ontario, disclosure rules would require production of those documents. ii) Accounts In accordance with general rule, beneficiaries can request to inspect accounts and can make copies (at their own expense) Trustees should therefore maintain a record of the financial affair of the trust Sandford v. Porter (1889) Facts: Beneficiary requested accounts of trust. Initial request made on May 15, but no names given. On 18 th names given. On 25th trustee stated that account being prepared. but on June 2nd that he required some time to prepared them as costs due by estate were being revised without which the proper accounts could not be prepared. The beneficiary alleged neglect and commenced action on June 2nd ; accounts given on 7th Ratio/Judgment: Absolutely no grounds for negligence claim. Conduct of trustee completely proper. Fault altogether on the side of the plaintiff. Beneficiary seemed to operate under the false assumption that once asked for documents it was the duty of the trustee to lay absolutely everything aside and prepare them as fast as humanly possible. But the law is not so unreasonable. The trustee is not required to always have a copy of accounts on hand for when beneficiary request it, he is rather under a duty to prepare a copy within a reasonable amount of time and is entitled to that reasonable period. [note that trustee was given costs on solicitor and client basis from trust] Jones v. Shipping Federation of BC (1963) (BCSC) Ratio: A clause in a trust document which limits which beneficiaries may bring action against the trustees is void on public policy and illegal as purporting to oust the jurisdiction of the courts. Remuneration and Indemnity of the Trustee A. REMUNERATION Ignore the cases – they are about calculating fair and reasonable sums Old rule was that Ts weren’t paid for acting as a trustee, historically they were volunteers This was because it was thought that if you were paid, you’d be in a conflict of interest between you and best interest of Bs because they money would come out of the trust fund, which would benefit T at Bs expense From 1400-1800 not paid, were usually lawyers not paid for their services 1800 – settlors started putting remuneration clause in instrument in England In Canada, we didn’t have the same history, so early on we had remuneration provisions in our statutes It is standard for ours to be paid, but the general CL is they are unpaid, which is why it had to go into statute In Canada, to not pay, you would have to put it in instrument (opposite of England) CB 378 – statute explaining how compensation is calculated. Different for lawyers than for others. Factors the courts will consider: 1. size of the trust, 2. care and responsibility required of the T (how active are they – look at instrument), 3. time put in (most important factor) 4. skill and ability required 5. amount of discretion required 6. success of trust – how good a trustee 7. special circumstances B. INDEMINIFACTION Ts can not only get paid in Canada for acting as T, but there is a provision in all trust instruments (it is a principle of general trust law, so you would have to take it out specifically) Deals with expenses incurred by Ts as a result of carrying out the trust Pay for investment advice, legal advice, maintain property (e.g.: insurance, fees such as property taxes) General rule: Ts make properly incurred expense payments out of trust fund first Beneficiaries personally may be liable personally for expense incurred on behalf of the trust fund B is ultimately the owner, so B is ultimately responsible B must check trust instrument to see if personal liability is excluded, usually not Ts look for trust fund first, but if they aren’t liquid, or if there are provisions divesting to get money for expenses. Hardune v. Beluliose: source for general rule, says if you are sole B, or B together constitute entire interest, they can be required to indemnify T for expenses incurred on behalf of the trust. 3 cases where T can recover from Bs: 1) T undertakes a trust at request of Bs, 2) where the B of a trust is also the creator of it, 3) where all the Bs together are absolutely entitled. Even if T is found to breach in K or tort, if certain acts were reasonably and prudently performed under trust law principles, but a tort results, Bs can still be personally liable. Stringham (Arizona) Facts: indemnification and tax liability. A will was directed that taxes be paid out of estate. A US bank held estate in trust. Arizona Court: held that they should be paid out of the estate, so there was attempt to get the money from trust assets held the assets. Alberta Court: No, for 2 reasons: 1) T couldn’t sell Alberta stuff to pay Arizona taxes, 2) If T wants the money, they can go after the B, who is a US resident. Hardune: B can liable unless there is a good reason not to do so. US v. Harden (SCC): one good reason to not enforce on B is if the money will be used to pay taxes in another jurisdiction. Implications: indemnification doesn’t require someone in Canada to indemnify for US taxes. THE CONSTRUCTIVE TRUST Arise by operation of law or the courts, rather than the intention of the creator Imposed on you You must still have property to comprise subject matter It is a remedy the court imposes on the situation Even if some of the elements exist, courts may impose an alternative Personal obligations in equity, accounting of profits, tracing remedies can be applied with or separately from a constructive trust EXAMPLE: 1. Trustee gets property knowing it is improper, invests in improperly, makes money and absconds. Accounting, or disgorgement of profits personal remedies attached to trustee. No need for constructive trust if you can get disgorgement. Could also have constructive. 2. Invests, but loses the money. Here there is a loss, so maybe no property to attach a remedy to, so do personal remedy on T. 3. Makes money, but uses it to buy a car. Court may use equitable remedy of trading to find the profits. To get the money back to rightful owner, can put constructive trust over title of car, so T is holding car for benefit of B. Mostly today the courts use them as remedial devices, often to prevent unjust enrichment Secondary use, from SCC can be used in situations of misconduct to punish breaching fiduciaries. In these cases, it provides a better remedy that punishes T. Often comes up in matrimonial property case There are 2 types: purely remedial, and one used for misconduct. Traditionalist camps say it is for fiduciaries who make unwarranted profits – it is just like an express trust (but the original intention was not to create a trust), and arises when fiduciary engages in misconduct. The trust is imposed to punish wrong behaviour Remedialists say it is a property right created by the court, based largely on unjust enrichment. Courts will remove unjust enrichment and attach a constructive trust. In Canada, we use both applications. We have institutional and remedial constructive trusts In one situation, fiduciary is involved prior to trust, wrongfully taking the property (traditional) In the other, courts retroactively impose f.r., or trust where f.r is not needed because there is already a relationship with trust like norms They were developed in 17/18th C, by courts of chancery creature of the court Keach v. Sanford (1726) Facts: fiduciary made a profit where he went and renewed the lease of profits on his own behalf, since he couldn’t do it as a fiduciary for the trust. He intended to benefit the child, but did it improperly. He didn’t want to give all the profits to B. Decision: A trust was created over the property he earned for himself Reasons: no chance of him benefiting, all improperly made profits go back to B. Didn’t fit under old express trust, because it was new profits made independently. Implications: for the next 200 years, this was the only constructive trust that existed. Should have been express trust, but court needed to stamp it. ORIGINS OF CONSTRUCTIVE TRUSTS Spousal disputes in the 1950’s-1970’s · Common Law spouses lived together sharing property and businesses · They would separate, and party that left the home (usually woman because man held title), family law act didn’t apply to CL · Wanted courts to address imbalance of asset sharing · Until 1970 – courts would decide for the woman, but on the basis of common intention resulting trusts (trusts that are formed when you don’t properly constitute a trust) · 1960-70’s: this came under criticism because they didn’t doctrinally work. There was no common intention to create a resulting trust, because male didn’t intend to confer any beneficial interest, which is why woman had to go to court. Courts thought this was the opposite of common intent, so had to come up with something else · So constructive trust for disgorgement of unjust enrichment · Leading case: Pettkus v. Becker Facts: a couple lived together, pool resources for 20 years. Had a beekeeping business. Man held property title. After 20 years, he told her to get lost and they separated. SCC: principle of unjust enrichment lies at the heart of constructive trusts. Implications: people starting thinking unjust enrichment must be present to impose a constructive trust. Not until the 1990’s that the court remembered the other branch. Today: Still open-ended, courts will apply it as remedy or punishment, court won’t define because there might be future instances for it they don’t know about today. This doesn’t mean they are a remedy for everything, there is appropriate situations. Factors: 1. Relationship between parties: f.r, commercial relationship, co-habitation. 2. What did the defendant do – serious breach or misconduct? (it is a strong remedy, and might not be appropriate for unserious breaches), 3. Where did property come from? Is it Ps property, it makes more sense to have a constructive trust, because P can get back. If 3rd party, compensation may be more appropriate, 4. Is the D insolvent at the time? B will rank ahead of other creditors, which may be unfair to other creditors, sp don’t want to impose CT at that time. 5. is it a commercial relationship that could be governed by contract? I.e.: difference between cohabitation and commercial arrangements. MODERN SITUATIONS WHERE COURTS WILL IMPOSE A CT: 1. Stranger as T, who come into contact with trust property, and depending on their level of knowledge about whether it has been improperly dealt with, court will impose to get it back to B 2. Fiduciary obligation is breached so that F makes a gain 3. Lac Minerals: Breach of confidence – not a f.r., but CTs can be used 4. Biggest Category: Unjust enrichment Breaches by Fiduciaries: Fiduciaries are bound to not profit from their positions. They will liable for any unauthorized gains. Common to used CT to hold them accountable to B, disgorgement of gains. Also based on idea that F must be loyal to B, so this punishes those who make gains. CT is a deterrent to other Fs who might want to get unauthorized profits Highest form a remedy because you get the profits back, and you beat all the other creditors in line. Case: Most Recent: Hodgkinson v. Simms (SCC) Facts: P gets investment advice from D, and the advice made him into a F. He was getting kickbacks for investments in a certain condo development. Condo investments lost money, so P sued because of breach of conflict rule. The money was lost because the market crashed, not because the D made gains. Decision: D breached the no conflict rule Reasons: P would never have purchased those shares had he known D was getting kickbacks, so the determinative factor is breach, not market crash. If D had told P about kickbacks, then D would probably have won. Profiteering and Constructive Trusts Cases Company Directors: Regal (Hastings) Ltd. v. Gulliver  (HL) Facts: Regal. owned a cinema and sought to acquire two more cinemas in order to sell the resulting group at an enhanced price. The cinemas were to be bought by a subsidiary company. The landlord was prepared to lease the cinemas but only if the rent was personally guaranteed by directors or if the paid-up capital of the subsidiary was $5000. Regal planned to hold shares of subsidiary but could only afford $2000 and directors unwilling to give guarantee for the rest. Directors arranged to take $2000 worth of shares and the company’s lawyer took the remaining $3000. They subsequently sold the shares in the subsidiary and made a profit of $2.75/share. The new owners of Regal and subsidiary sought to recover this profit from directors and lawyer on the basis that they were in a fiduciary relationship toward the company and therefore unable to make a profit at its expense. Judgment: The directors were in a fiduciary relationship to Regal. They obtained the shares by reason and only by reason of their relationship with Regal. The fact that Regal could not purchase the shares due to lack of funds does not mean that the directors are not still accountable. Ratio: The rule of equity insisting that those who make a profit from their fiduciary position account for this profit does not require that there be fraud or absence of bona fides, or even if the profit gained should rightly have gone to the person’s to whom a duty is owed, or if he was acting for the benefit of the person or if the person has in fact been damaged or benefited by his action. The general rule is that no one under a fiduciary obligation can entered into engagements in which he has, or potentially could have, a personal interest conflicting with the interests of those to whom he owes a duty. If he holds any property so acquired as trustee, he is bound to account for it to his cestui que trust. Information as Trust Property Boardman v. Phipps * High watermark of preventative use of CT Facts: Trustees were a professional, the senile widow and a daughter Phipps. Beneficiaries were all the Phipps. Boardman and Tom Phipps (a B) decided that their 8000 shares in a private company were undervalued. They wanted to obtain info about the company, and went to AGM. Said they were acting on behalf of the trustees. Got info which told them the company was performing poorly. They tried to get Tom Phipps on the board of the company, but were unsuccessful, and then tried to take over. Tried again, sought the approval of the professional and daughter Phipps to get 22,000. But 8,000 was the most the trust allowed them to hold, so Boardman and TP did it on their own, and ended up owning the company. They restructured and managed the company, which made a lot more money and share value increased. Trust and Boardman and TP got richer. The case: Plaintiff was a sister, sued Boardman the lawyer, and Tom Phipps, a beneficiary. Decision: there was a breach. Put a CT on the 22,000, so that it all went to beneficiaries, minus a sum to Boardman and Phipps for expertise and skill. Reasons: Fs actions increased the Bs wealth substantially, but court fixated on the fact that they increased their own too. Boardman and TP’s opportunity to buy the shares arose because of Boardman’s position. They only got the info from the company in their position of fiduciaries – if the info had been public, the result would probably have been different. They can’t used the opportunity to purchase shares for yourself without acting outside authority of f.r.. Boardman had a conflict. Needed consent of the Beneficiaries. Boardman acted with honesty and integrity (Got consent of Ts – but 2/3 not good enough). Dissent: accepted Boardman of a fiduciary, but there was no way for trustee to purchase the shares because of 8000 limits, so F had to. No conflict if both profit. Bs did way better than they could have if this hadn’t happened. Implications: Extremely strict interpretation of what F can do. Haigh says it isn’t unreasonable, because Boardman could have gone to court to ask permission to do this – not a heavy burden. Courts would have to assess the risk. Fs must understand that their ultimate duty was to Bs, it’s not enough that Bs will make more $. Wasn’t purely for Bs. Never overturned, but not all courts have held Fs to such a high standard- can be used to come down hard on F behaviour. Other cases on the other side though. Bribes and Secret Profits: Attorney-General for Hong Kong v. Reid  (PC) Facts: D was a public defender who was convicted of taking bribes in breach of duty to Hong Kong gov’t and the Crown. Gov’t sought declaration of CT against 3 properties D held in New Zealand which could only have been derived from the bribes. Judicial History: Gov’t declaration denied in Court of Appeal based on principle that the relationship of a fiduciary who received a bribe and his principal was one of debtor/creditor as the principal had no proprietary interest in the bribe or property representing it. Gov’t appealed to PC. Ratio: When a bribe is accepted in money or property, this money or property becomes the property of the recipient fiduciary in law; however, equity insists that it is unconscionable for a fiduciary to obtain and retain a benefit in breach of duty. The breaching fiduciary must pay and account for the bribe to the person to whom the duty was owed. They become a debtor in equity; further, If the bribe consisted of property which increases in value or money which is invested, the breaching fiduciary will receive a benefit from his breach unless he is accountable not only for the original amount or value but also for its increase. “Equity considers done that which ought to be done” therefore as soon as the bribe was received, it was held on CT for the persons to whom a duty was owed Equity therefore can provide two remedies: the first as debtor/creditor and the second as CT. If CT were not employed, the breaching fiduciary would be allowed to retain the increase in value which equity will not allow as it is to benefit from breach. Commercial Context, not Fiduciary Lac Minerals v. International Corona Resources (1989) (SCC) Facts: LAC entered into negotiations with Corona regarding development of gold field owned by Corona. In course of negotiation, Corona revealed confidential information with a view to LAC either buying Corona or joining in a joint venture. This info suggested that property adjacent to Corona property was likely desirable. Corona attempted to acquire this property, but LAC outbid them. Corona alleged that property was held by LAC on CT for them, or, alternatively a right to damages because the purchase of the property by LAC was motivated by the confidential information. Issues: (1) Is a fiduciary relationship required to found a CT remedy? (2) Was there an obligation of confidence and a breach thereof by LAC? (3) Is the appropriate remedy a proprietary remedy, accounting for profits, or damage? Judgments: Several long judgments: (1) Unanimous that LAC misused confidential info entrust to it by Corona (2) Sopinka and Lamer (McIntyre concurring) held that parties not in fiduciary relationship. Sopinka – misuse of confidential into not sufficient to establish fiduciary relationship (3) La Forest and Wilson (dissenting) held that there was a fiduciary relationship (4) Court held that the appropriate remedy (Sopinka and McIntyre dissenting) was imposition of CT. Sopinka J. Ratio: Fiduciary Duty: A fiduciary duty should not be found where parties are acting in a commercial transaction at arm’s length. K remedies suffice. The general characteristic of a relationship in which fiduciary obligations have been imposed are: (1) The fiduciary has scope for the exercise of some discretion or power (2) Fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests (3) Beneficiary is particularly vulnerable to or at the mercy of the fiduciary holding the discretion or power While a fiduciary relationship can be found if not all of these characteristics are present, the existence of dependency or vulnerability is the core of the fiduciary relationship. Remedy: No support for imposition of CT over property acquired as a result of use of confidential info (except in extremely rare circumstances). The best remedy in a particular circumstance is that which corrects the unjust enrichment without contravening other established legal doctrines; hence, The conventional remedies for breach of confidence are an accounting of profits or damages A breaching fiduciary is subject to remedies that go far beyond mere compensation for loss as equity, unlike K, has regard to the gain obtained by the wrongdoer and not simply the need to compensate. Also, notes that when the extent of the connection between the confidential info and the acquisition of property is uncertain, it would be unjust to award CT. Judgment: No fiduciary relationship. Essential element of dependency is lacking. If Corona placed itself in a vulnerable position by disclosing info, then this dependency was gratuitously incurred. Nothing prevented them from getting assurance from LAC that the info would not be used but they failed to do so. Damages appropriate remedy. LaForest J. Ratio: Fiduciary Relationship: There is an established practice in industry that confidential information is not to be used for the detriment of the confide. The two conducts of the parties gave rise to an informational understanding as to how each would conduct itself in anticipation of the conclusion of a formal business relationship. As a result, both parties would reasonably expect that a legal obligation would be imposed not to act in a manner contrary to the interests of the other in respect to the property The combination of these factors (trust and confidence, industry practice, vulnerability) support the finding of a fiduciary relationship. Remedies for breach of fiduciary obligation and breach of trust are equally available to each. A claim for breach of confidence will only be made out when it is shown that the confidee has misused the info to the detriment of the confidor (and therefore differs from fiduciary law which does not require harm to be established). Where it is established that one party (LAC) has been enriched by the acquisition of an asset (property) that would have, but for the actions of that party been acquired by the other party (Corona) and if he acquisition amounts to a breach of duty of confidence, then CT is one available remedy. The measure of restitutionary recovery is the gain the defendant made at the plaintiff’s expense Given the difficulty in calculating damages (estimates range from $700 million to 1.5 billion) and the fact that the property had yet to be fully explored (and therefore there could be more gold then known at the present) CT is an appropriate remedy. Policy: The essence of the imposition of a fiduciary obligation is the promotion and preservation of desired social behaviour and institutions. Likewise with the protection of confidences. IN the modern world exchange on info is both necessary and expected. The “institution of bargaining in good faith” is worthy of legal protection in those circumstances where the protection accords with the expectations of the parties. No Financial Loss to Plaintiff Korkontzilas v. Soulos (SCC): Facts: P wants to purchase property on the Danforth, broker went and found one. Made an offer, which was refused. Owner counter-offered, and it was rejected. Deal almost dead. Vendor told broker to accept the offer, but the broker didn’t pass this on, and bought it himself. P sued. The property lost value in the period between purchaser and going to trial. Arguments: Plaintiff: Lawsuit for CT or damages – there was value besides monetary reasons for owing the property. Defense was that there was no damage because property has devalued – no loss. Also no unjust enrichment. Decision: CT Reasons: tried to remedy loose language in Lac Minerals. Two branches of CT – one for enrichment, and one for breaching f.d, even if there is no monetary loss. Used CT to punish breach, not concerned with the fact that there is no loss. Fiduciary Duties and Local Government Hawrelak v. City of Edmonton (1975) (SCC) Facts: Prior to becoming mayor, purchased land. Land was annexed and assigned to Building Co. in which mayor held 40% interest. City was negotiating to acquire land adjacent to Mayor’s land as part of development project. As part of plan, city agreed to purchase land from Building Co. in 1963 but formal arrangement did not take place until 1964 but which time person was elected Mayor. Chrysler Co. wanted to purchase some city land in order to develop but did not want to develop right away. Had required development within 6 months so it suggested that Chrysler purchase non-city land adjacent to that of Mayor which it could later exchange. Chrysler did so. In order for city land to be of use to Chrysler it would have to be rezoned. This was refused. Chrysler sold the land to the city, which began redeveloping all the land. This had the effect of enriching the Mayor by drastically increasing value of property held by Building Co. which was subsequently sold to the city. Important to note that Mayor had, at several Council meetings, made his interest known and had abstained from relevant votes. City sought to recover this profit as improperly gained. Judgment/Ratio: While there is a dilemma when city wants to act in a way that is a public advantage but will also enhance the value in which Council members have a direct or indirect interest, this dilemma can be avoided if members declare their interest and refrain from voting. Dissent: Notes rules governing the conduct of a person in a fiduciary relationship: (1) Member of city council is an agent or trustee accountable to the municipality and accordingly his duties are fiduciary (2) No one under a fiduciary duty may enter into a transaction in which his personal interests are or may be in conflict (3) It is irrelevant if the person to whom a duty is owed did or did not suffer any injury (4) It is irrelevant if the trustee acted in good faith (5) Any gain or advantage arising out of such transaction must be accounted for. The Value of the Traditional Trust Even Where the Plaintiff Has No Financial Loss Cohabitation One party makes a contribution to home/land/biz, no financial contribution, but the other person hold title to the property. Most often man and woman cohabitating, but also filial or friendship CT became much more common to deal with this situation Issues of unjust enrichment if the parties split P gets nothing, cuz D has title and won’t share Courts look to see if a CT can be invoked over entire property, and make D a trustee on behalf of Ps share. Petkus v. Becker * happened before Lac Minerals and SCC clarification of what CTs are for Facts: Lothar P and Rosa B unmarried couple who lived together for 20 years and had a beekeeping/honey biz. P held title to the property and all the assets. He dumped her, and since they weren’t married, she thought she would get nothing. He made no effort to give her anything. She brought a novel claim for CT, claimed she had contributed much to the value of the enterprise, even though she had no title. Trial: judge characterized her domestic support of LP as a risk capital investment, in the hopes of seducing a younger man into marriage. Her involvement in beekeeping – her help was seasonal and marginal, and LP got help at peak periods. (but this doesn’t help his case either – he didn’t do the work either) Decision: RB got ½ interest in the property. Reasons: LP was unjustly enriched, and CT was a suitable remedy. Implications: This was the first time used in a cohabitation situation – previously had used resulting trust incorrectly. After SCC judgment: Judgment in 1980. Five years later, RB had only gotten $68,000 out of $100,000. Most of this had been used in legal fees to get the money, and she was penniless. In those 5 years, LP married someone else, and got her to make a claim for ½ the interest in the property, because she was married to him. RB had to go to court to say that this claim was illegitimate. She won. 1984 she made claims to have beehives seized, LP appealed, so another court action, she won. He stopped feeding the bees, so she had to get a court application to force him to do so, but they died. 1984 – property sold, assets paid into court, awarded to RB, but they were devalued. 1986 – she killed herself at age 60 suicide note: said legal system failed her – she never got any of $150,000 she was owed Implications: failure of our justice system to address problems. Not good lawyer action: she should have petitioned for a partition and sale with the original claim, and valuation of the property. then a personal claim could have been brought against him for the whole amt personally for the rest of his life. To Prevent Criminals from Profiting Re Crippin  Facts: H killed W to marry his mistress. H made will making mistress his beneficiary Judgment: Any title H had acquired from W’s estate was held on CT for her estate and thence to her next-of-kin Brissette Estate v. Westbury Life Insurance et al. (1993) (SCC) Facts: Life insurance policy insured lives of H and W. H killed W. H renounced appointment as executor under W’s will and waived rights to proceeds of the policy. Insurer refused to pay and action brought by W’s estate. Judgment: SCC held that intention of policy was that payment should be made to surviving spouse and could not be construed as requiring payment to estate. Public policy prevented payment to survivor, CT not relevant, and accordingly, insurer did not have to pay To Prevent Statute of Frauds Requirements from Being Used to Commit Fraud Bannister v. Bannister  (CA) Facts: P requesting possession of cottage that he had bought from D. D had understood, based on oral assurances, that she could stay in one of the cottages rent-free as long as she wanted and she had reduced price of cottage for that reason. P tried to invoke requirement of writing for a K involving land Judgment: Court rejected P’s argument re writing requirement and held that P held property on CT for D who had an equitable right to live there as long as she liked. CT: Strangers to a Trust In a normally functioning trust, 3rd parties (strangers) will usually deal with trustee – contact not usually with Bs. Strangers who breach the trust, usually wrongful, voluntary meddling. CT trust is put over a stranger If stranger is innocent, doesn’t receive notice, or doesn’t receive consideration, no liability. Trustee can take action against strangers in 3 situations: 1. Trustee de son tort: a stranger who meddles to the point that court says they have assumed the role of trustee, and are liable. E.g.: trustee in another jurisdiction, so a family member in home jurisdiction starts to get involved, helping out and taking over. 2. a) Knowing receipt: person who receives and becomes chargeable with trust property. Trustee ends up handing over trust property to a 3rd party stranger. Knowing has been defined as actual knowledge of a breach, reckless, wilful blindness, constructive knowledge (should have known) b) Knowing Assistant: assist trustee without receiving the property. (Air Canada v. ML Travel), active, reckless, wilful blindness count. Constructive knowledge is not sufficient. RESULTING TRUSTS Second kind that arise by law (CT are first), different from express trust. Have been around much longer than CT because they deal with situations that have arisen since trust law began Vernacular: trusts not clearly expressed by the creator – no properly created An express trust that is imperfectly expressed gives rise to RT. Began back when the trusts were still called USES If settlor creates a use that doesn’t deal with entire beneficial interest, the other stuff results back to creator. CATEGORIES OF RESULTING TRUSTS a. Presumed Resulting Trust: Creator has voluntarily conveyed property from one person to another, but doesn’t intend a beneficial trust relationship. E.g.: trust created in spouse’s name to avoid creditors (illegal trust). You intend it to be yours, so it will be. Presumption that the property is not to be taken beneficially. b. Automatic Resulting Trust: Express Trust where beneficial interest is not disposed of, in whole or in part. Part not dealt with is held on resulting trust for grantor. No intention to create trust, mistake on part of settlor. Failure to exhaust beneficial interest. Reasons: i) portion of the trust is illegal, or void for failing to meet public policy, Louth v. Diprose (Australia) Facts: Man met a woman in one city, tried to seduce her, but she wasn’t interested. He pursued her to another city, she slept with him twice. He supported her – paid taxes, washer, dryer. She started seeing someone else, he bought her a house. She had her new b/f move in. He brought a suit to get his house back. Claimed he never intended her to have the trust, it was supposed to be his all along – Resulting trust. Decision: No resulting trust, but gave him the house on other grounds. Implications: if a resulting trust arises, she would be holding it in trust for him. 1. PRESUMED RESULTING TRUSTS GIFTS AND RESULTING TRUSTS Happens often in gifts – I didn’t mean to give it, I wanted them to hold it for me. Presumption in equity against gifts, u need proof it was a gift. Where you have gifts to related people: rebuttable presumption of gift – in those situations you meant to give gift, title meant to go to donee. Historically this has been made from husband to wife, father to child. Not wife to husband, mother to child, friend to friend. Statutes overridden this in some jurisdiction that will allow wife to husband gifts. Now husband to wife presumption is overridden, so that no longer is a gift presumed. I.e.: statutes say we have no presumptions anymore. Daigle (CB 516) Facts: two sons promised land under identical wills, one by husband, one by wife. Husband dies, and wife transfers property to just her favourite son. Issue: Do we assume that the transfer from mother to child is a gift? Trial: you can’t rebut the presumption that just because second child didn’t get it the gift doesn’t mean anything CA: assume it is a gift. The second child was self-serving on the stand, didn’t want to give him anything. Implications: some people argue it stands for assumption from mother to child, haigh doesn’t think so Tinker v. Tinker  (Eng. CA) Facts: H ran a business and placed house he bought in wife’s name alone on the advice of his lawyer who was worried that business might fail and creditors might seize it. Marriage broke down and question arose regarding presumption of advancement. Ratio/Judgment: (Denning) H cannot say that the house is his as against his wife, but hers as against creditors. Either it was conveyed absolutely or it was conveyed to her as trustee for her husband. The presumption is that it was conveyed to her for her own use and he does not rebut that presumption by saying that he only did it to defeat his creditors. (Ha ha sucker) Goodfriend v. Goodfriend (1972, SCC) Facts: spouses who swap (the Goodfriend’s and the Cox’s). Mr. G owned large farm on Howe Island. He transferred title to Mrs. G to protect them from a lawsuit for adultery/enticement as a result of the swapping. Then regretted this, and wanted it to result back to him, since it was never intended to a gift for his wife? G’s ended up separating. Issue: gift or trust? Decision: presumption of advancement is rebutted, it is a trust. Reasons: cause of action (A or E) doesn’t exist, plus you had other assets that you didn’t transfer – no evidence of suffering creditors, which would have rebutted gift. Turns out it was Mrs. G who thought they would be sued, and got Mr. G to transfer property into her name. He didn’t intend anything, she created a situation that would make him transfer. Scheuerman v. Scheuerman (1915) (SCR) Facts: H bought land and built house. Title was taken in W’s name. W sold house was H was away. When H found out he sought to recover purchase prince from W alleging he was beneficiary under resulting trust. Claimed that transfer was to avoid creditors and was therefore void. Judicial History: CA was divided. Creditor in question was paid and therefore at time of proceeding no creditor was defeated, delayed or hindered. Judgment/Ratio: H argues that the presumption of advancement is rebutted by the agreement between H and W that property was to be held for H for the purpose of protecting him against creditors. He could also argue that there was an express trust by virtue of the agreement and that the wife is guilty of equitable fraud for breach But in order to make either argument H must rely on a fraudulent argument and he failed to in proving that he had recanted his illegal purpose or that the arrangement never put a creditor at risk. There are ways to rebut the assumptions Depends who it’s going to JOINT BANK ACCOUNTS Niles v. Lake Facts: Joint bank accts, 2 sisters. Purposes of convenience. There was a large chnuk of money put in from Mrs. Arnott’s husband (who had died). Bank form sets out rights and responsibilities of acct holders, and says that the money must be split 50/50. So K law v.s. trust law. Issue: Who owned the large sum of money in the acct? Arguments: Mrs. Niles: shared 50/50 Mrs. Arnott: there for convenience, resulting trust for Mrs. A. Decision: no assumption of a gift. Reasons: uphold both arugments by saying the K defines the right between bank and acct holders and vice versa, but it doesn’t speak to the relationship between the acct holders. There we rely on trust law principles – there is no assumption of a gift, so resulting trust. TRANSFERS OF LAND TO VOLUNTEERS Has been separated into its own category Back in the day of uses (14th C) if A conveyed land to B for no consideration and the 2 were strangers, it was presumed B would hold it for the use of A. Law of Property Act (England, 1925): changed presumption, said there was no presumption of a resulting trust in cases where land is transferred to a stranger for no consideration. Leaves option to raise evidence of a RT, but got rid of presumption. Neezor v. Hoyle (Alberta, 1923) Facts: Kathleen Neesor married John when she 15 and he was 33. 1954 they formally separated – had never lived as a couple. In 1954 J transferred farm to his sister so K couldn’t get it. He continued to collect rent and income, but sister paid taxes. He dies and left it all to the sister, K applies for widow support Decision: It was a gift. Reasons: It was a voluntary transfer with no consideration, so there’s a presumption of resulting trust because it’s land. Sister must establish a gift. No affection between J and K, was fond of his sister, promised his parents he would look after her, she always gave him money, she sold a piece and never gave J proceeds, J’s will showed his affection, she paid substantial taxes. The onus to rebut presumption of a RT is met. Haigh: there is no one factor that rebuts the trust, so is it an accumulation? This case doesn’t tell you what you need to prove to rebut the presumption. Things to consider: If you have a voluntary transfer, is it land or personal property? Personal property: presumed resulting trust for sure Real property: presumed resulting trust maybe ?? Advancement: certain close relations may have presumption of gifts. father to child, in contemplation of marriage, has been removed between spouses Dagle: seems to suggest mother to child In the old days, it went Father to child, Husband to wife because of obligation to provide, now we’ve moved to a time when mothers provide, and children to parents. Haigh: is there a better way to characterize who has the presumption – sibs? Don’t have to worry about the presumptions unless there is a dispute. Other possibilities: Love and affection, natural obligation to provide 2. AUTOMATIC RESULTING TRUSTS Settlor fails to dispose of entire beneficial interest Vandervell v. IRC (1967) Facts: creators attempt to create charitable trust for university professorship. Lawyers told Vandervell, the settlor, that if he ever took is his company public, there is a possibility that university will dilute it. Set up a system so he could buy back shares etc… The trust didn’t deal with entire beneficial interest. Decision: results back to V Court said: must presume a RT if there is a failure to dispose of the interest. Beneficial interest was never really declared, depended on the language of the trust. Failure of the Trust Re: Ames Settlement (1946) Facts: trust set up by the father for the son and his issue would get an interest if he had any. If no kids, was to go to next of kin. Was dependant on the son getting married, which he did, but it was annulled after 18 years cuz he never consummated. Wife remarried, and son died. Issue: Was there a trust for next of kin, or was there a resulting to father’s estate. Decision: RT Reasons: the trust was based on marriage, but there was no marriage, so the trust never arose. Therefore there is a RT to the father’s estate. Gillingham Bus Disaster Fund (1958) Facts: Bus accident, and a fund was set up to collect money on behalf of victims. People contributed to fund, and then pay-out to victims. There was $9000 left over. Couldn’t be funnelled into another charity (illegal under charity law), so dispute arose between ttwo options: 1. Return to donors: would have to be a RT 2. Some other way (to the crown, something else) Decision: it goes back to donors on RT. Reasons: it was complicated and hard to determine who to give back to, but that’s what trust law says. Implications: has been statutorily overridden. As a direct result of this case, the law now says money will be dealt with in other ways – the crown, another charity. Haigh: probably put ad in newspaper telling donors to be somewhere at a certain time to get money back. SECRET TRUSTS Generally two cases to be considered: The secret trust arises where: (1) According to the terms of the will a person appears to be given a complete beneficial interest in property (2) but this disguises the fact that only the legal interest in property is intended to pass to the recipient, who is actually intended to act as trustee on trusts that have been disclosed to him or her The requirements for establishing a secret trust are: (1) There must be a definite intent to create a trust and not a mere moral obligation [see Re Snowden, below] (2) There must be communication of the trust to the devisee or legatee in the testator’s lifetime (3) Devisee or legatee must consent to it (either expressly or by actions that he knows must give the testator the impression that he has assented to the testator’s request) McCormick v. Grogan (1869) (HL) Facts: Three years before death testator left estate to D. As he was dying, T told D that there was an accompanying letter which indicated various beneficiaries and the gifts they were to receive, but also gave D considerable discretion. D later decided that an illegitimate child in the letter should be excluded. Ratio: Just as a person cannot rely on statute to perpetrate fraud, neither can they rely on a gift fraudulently obtained. When a person agree or gives the testator the impression that he agrees to act as secret trustee, then equity will regard them as such on the principle that an individual will not be allowed to benefit by his own fraud. Judgment: While there are times when a court of equity will enforce a secret trust those circumstances did not apply. D had committed nothing resembling fraud. The semi-secret trust: arises where (1) it is evident from the face of the will that the recipient is not be given a complete beneficial interest in property (2) but the beneficiaries (or purposes) of the trusts are not disclosed in the will A. Time of Communication of the Trust For a secret trust: “if the trust was not declared when the will was made, it is essential in order to make it binding that it should be communicated to the devisee or legatee in the testator’s lifetime” Note that if the ostensible beneficiary (the secret trustee) is not told of the existence of the trust and has no knowledge he could take absolutely under the will, whereas if he does know he is obliged to hold property on trust. For a semi-secret trust: must be communicated at the same time or before the will is drawn up (Johnson v. Ball) B. The Proof Required Re Snowden  Facts: Testator left residue to brother to split up as he saw fit. Her expectations seem to have been that nephews and nieces should take equally but left exact division to brother. Died 6 days after making will. Brother died 6 days later leaving everything to his son. Judgment: The loose arrangement between testator and brother were insufficient to create any sort of trust. Brother took interest absolutely and therefore so did son. Ratio: The proof advanced to prove the existence of the trust must go beyond that necessary to establish a moral obligation or a family arrangement No single standard of proof for secret trusts. There could be cases where it would be appropriate to impose trust where it would be fraudulent for the legatee to assert full beneficial ownership. Proof required depends on nature and gravity of the issue Note: What happens when a secret trust fails? Depends on whether there is a fully secret or semi-secret trust If semi-secret: you know there is a trust, so donee will hold property on a resulting trust for the donor. If fully secret trust: you have a donee who has received property but with no indication at all as to who the beneficiary should be, so therefore there is an absolute gift to the donee. Donee keeps property free and clear. C. Classification of Secret and Semi-Secret Trusts: Express or Constructive? Depends on whether they are regarded as turning on the words of the settlor or the written declaration in the will which suggest express trusts; or, where fraud is concerned they may also be treated as constructive trusts and the recipient of the trust property as constructive trustee Blackwell v. Blackwell  (HL) Facts: Testator altered will by codicil that transferred funds to trustees to invest and apply income “for purposes indicated by me to them”. A power to encroach on capital given to trustees in favour of “such person or person indicated [to them] by me”. One of the trustees was given details of the testator’s plans while the others knew nothing. The testator wanted to benefit a woman “other than his wife” and her 16 year old son. Testator’s wife challenged arguing that semi-secret trusts failed and funds fell into residue. Judgment: The will clearly creates a trust. While the requirements of wills are such that they must be written, a secret trust will be enforced by equity so long as it is communicated to the trustee and acquiesced or accepted by him. IMPLIED TRUSTS Some difficulty in distinguishing between constructive, resulting and implied trusts While it might have been thought that an implied trust turned on actual (but implied) intention of the parties is Lloyds Bank v. Gissing the House of Lords held that unless there was some detrimental reliance by a spouse based on the parties common but unwritten intention that a non-owing party would acquire an interest in property, no interest is favour of the non-owing party would arise One area where implied trusts are relevant is the trust that arises between the K for purchase of property and its completion/conveyance, where the K is specifically enforceable. While such trusts are supported by consideration, their content is based on the implied expectations of the vendor and purchaser. Implied trusts also arise in the case of mutual wills. Where mutual wills are prepared and the second to die alters his or her will contrary to the agreed on terms of the mutual will, equity steps in to remedy the situation of the prejudiced beneficiaries and to enforce the wishes of the first to die. Arguably this is either a constructive trust situation or an implied trust situation. Re Cleaver  Facts: Couple prepared mutual wills in which property was divided among their children except one daughter’s share was later reduced to a life interest (by both spouses). After death of H, W prepared 3 more wills: 1 consistent with the mutual will and 2 others in which she increased the daughter’s share. Other children contested will. Issue: Can the beneficiaries under the mutual will claim estate held on trust of first will and not last will? Ratio: Mutual wills are part of a larger category in which equity will intervene to impose a constructive trust. The principle is that a court of equity will not permit a person to whom property is transferred by way of gift, but on faith of an agreement or clear understanding that it is to be dealt with in a particular way for the benefit of a third party, to deal with that property inconsistently with that agreement of understanding. The agreement or understanding must be such as to impose on the donee a legally binding obligation to with the property in a particular way and that the two other certainties (subject matter & object) must also be satisfied. FIDUCIARY DUTIES ORIGINS Court of chancery developed idea of equity To provide a role corrective for harsh, inflexible CL Equity provided remedies based on conscience, for fraud etc… Often gave different results from CL courts Judges were more able to fashion to meet conscience of the situation CL typically only allowed damages Most of this exist in the unified court today (Judicature Act) Main invention of courts of chancery are trusts These allowed wealth individuals to control their distribution and handling of assets Over generations Support for dependants Money in a position whereby king and his representatives couldn’t get it for tax revenues and feudal duties (tax avoidance) Today one of the biggest reason for trusts (pension, corporate, family) is a legitimate way to avoid tax Prior to 19th C, there was looser usage of words, so the courts of chancery used the word “trusts” loosely, referring to describe affairs of persons others than trustees, who were in a relationship where it was important they remain faithful or loyal to a person or obligations (agent and principals, guardians and wards, lawyers and clients) Basis of f.r. is that they are similar to those duties owed by trustee to beneficiaries Differences: fs have narrower duties, and no title DUTIES 1. No conflict rule: you have to avoid even the possibility of conflicting with those you are bound to protect. You must scrupulously avoid conflicts of any type (i.e.: in Boardman, everything they did benefited the beneficiaries, but they were more concerned with their own interests, so courts ruled against them) example: Paul Martin transferred ownership of his business from himself to his sons, so he is a fiduciary. The potential conflict of his sons operating the company is huge, and that is the test, not whether Martin is running or not. Consent is needed for conflict to be ok, in Boardman didn’t give enough info to Bs and Ts Can’t profit from opportunity afforded by your position (e.g.: Regal, Boardman) Remedies: strip fiduciary of ill-gotten gains, rescission to set a transaction aside, fire fiduciary, personal remedy of accounting of profits/disgorgement of profits, proprietary remedies such as constructive trust, obtain increase in value of property, ranking ahead of unsecured creditors in insolvency, trace into other hands property moving around) 2. Modern Doctrine of Fiduciary Obligations in Canada Since 1984, in Canada, SCC has carved out a general theory of fiduciary obligatins that is much more elaborate than elsewhere. Have grappled with a number of issues that have come up in various fact scenarios which has allowed them to create a grand theory. Include: 1. Definition of fiduciary 2. Extent of f.d. 3. Expansive treatment of remedies for breach DEFINITION Can’t be defined in abstract, must take place in context So what facts give rise to f.r., what is a f.r? 3 cases that have tried to form a definition: Frame v. Smith, Lac Minerals case, Hodgkinson case synthesis of these 3 and other cases, two main categories created by SCC caselaw: a. TRADITIONAL (PER SAY) FIDUCIARY Have been recognized by law/society for a long time. Still not a closed category. There are one way and mutual relationships Often a vulnerability because of huge difference in knowledge and expertise or psychological vulnerability, Different kind in others, where no difference in knowledge (e.g.: agent and principal, corporate, partners) E.g.: trustees and beneficiaries, lawyers and clients, principals and agents, executors and administrators of property, directors and corporation, partners, joint venturers, guardians and wards, parent and child, doctor and patient. Test: The fiduciary must have undertaken to act in the interests of the other Undertaking can come about in a number of ways – contract, gratuitous (parent child – not necessarily by contract or consideration) This has developed over time Hodgkinson (LaForest): It is critical when determining the f.r. that one party could reasonably expect the other to act in her best interest. Backs away from Lac Minerals saying vulnerability not determinative or necessary Lac Minerals: dependence, trust and responsibility, vulnerability b. NON-TRADITIONAL FIDUCIARY (ARISE FROM CONTEXT) It isn’t accepted that the ones here will move into category A Fiduciary obligation arises in the course of dealings, or in context of relationship. Very open and textured – may be undertaking, but more likely Wilson’s idea Frame v. Smith (Wilson’s Dissent): 3 things: 1. fiduciary has scope to act with discretion 2. fiduciary can unilaterally use that power and affect the B 3. beneficiary is vulnerable to that power this is mentioned in all subsequent cases JUDICIAL UNCERTAINTY Still no test or definition, or how to classify. B can be used in a results driven manner Common elements? This is all very unclear, don’t know if things can move from b. to a. SCC may be saying real concern is nature of duties, rather than certain characteristics Traditionally it was assumed B expected F to act on their behalf, duty is to act consistently with that, which is where no profit, no conflict rule came from In the last 20 years of adding to the f.r., duties have been added as well Guerin: Crown has f.o. to follow the principal’s (Indian band in BC) instructions in negotiating a lease. No question of profit or conflict during the transaction, what was important was duty to negotiate fairly and in concert with directions from Band – duty to negotiate, new duty for fiduciaries. Kansen: fiduciary was a lawyer who was acting in RE transaction, court found a general f.d. to disclose all relevant info, even if no issue of profit or conflict. MacInary: first case where dr. is fiduciary – obligation to disclose all info in client’s file arising from fiduciary duty. Nothing in code of conduct etc, just because of SCC ruling that you have to disclose file contents. Norberg v. Weinrib: sex with patient, court said sexual assault is a breach of f.o. – not negligence or criminal MK v. MH: incest is breach of f.o. owed by parent to child The last two really pushed the envelope, prior to these, breaches only involved taking money away from Bs. Australia shot down our ideas, stuck with conflict and profit – wouldn’t say that dr. is fiduciary with regards to providing files Don’t need profit/conflict in Canada, although some say that the definition of conflict has been expanded beyond just financial (self-interest, sexual assault of patient,) Usually the judges create these remedies and force things into f.r. because statutes or CL is so unjust that no other remedy is available. (i.e.: dr and patient because consent made it impossible to find him criminally liable) NOVEL USES OF FIDUCIARY Mel Lastman Case Facts: Kids born in 1958 and 1962. Ended in 1971, small monthly payments in the separation of agreement – not adequate for 2 kids today. Issue: fiduciary obligation on Mel to provide for them. Brought fiduciary claim because it was the only way to get a positive judgment. Decision: they lost Implications: the bringing of the claim is significant. It means the fiduciary realm is still open. Fehringer v. Sun Media Facts: class action suit, there are a number of published decisions on it. F was a Sunshine girl bringing a claim on behalf of a number of SSG, that a photographer (Norm Betts), from 1970 until he was fired 25 years later. He engaged in inappropriate behaviour. Class of plaintiffs needed to be certified. Issue: There was a motion to strike the fiduciary claim as having no cause of action (rule 21) heard in June 2000 in Ont. Sup. Ct. Arguments (Plaintiffs): Frame v. Smith – vulnerability, trust and confidence Decision (Cumming): Not a f.r., dismisses claim. Reasons: Lists all the different requirements and realises the difficulty. Two ways to establish f.r.: 1. breach of duty between her and the defendant (traditional category), 2. show defendants owed f.d. that arose out of specific facts, even if f.r. wasn’t inherent (non-traditional). Key: Sunshine Girls don’t have a true relationship with Sun and NB. Arms length commercial encounters. Both benefited – model to further career, Sun needed models. Radical defect in the cause of action is that nowhere does the pleading say that the sun was under an obligation to act in best interest of plaintiffs – this must be specifically pleaded, and is a requirement for f.r.. Comment: Best interest is almost always there, but the cases don’t seem to have raised it to a necessary element. Court of Appeal: Cumming is wrong, there is enough in the claim to give rise to possibility of breach of f.d. Nordheimer (2002): claim based on f.r. can stand, he is dealing with certifying the class – doesn’t certify because of problems with individual claims and determinations of proof. Implications: lower courts are having trouble applying the SCC tests. SCC seems to allow the crafting of f.r. in novel cases. Vulnerability and confidence is helpful but not needed Lac Minerals: commercial dealings isn’t enough FIDUCIARY DUTIES The Guerin case set in motion all the other ones Crown/native f.r. is most developed Long, abusive history Beginning of 20th C, courts not supportive of native rights Sheldon v. Ramsey (1852) Decision: Crown should protect the interest of natives, treat them as people under their care (paternalistic aspect). Natives people who can’t dispose of their own possessions because of their non-status. Colonialist attitude in court, but hint that crown should protect them 1867 onwards (After Indian Act) Natives treated as children, wards of the state Paternalistic – couldn’t understand society or administer their own affairs. Moral obligation on crown to protect them (but this is not a binding relationship, so in instances where crown didn’t protect, no recourse) St. Catherine Mills (Early 20th C) Decision: Hint that natives should be treated with consideration for just claims and demands. But the obligation is moral, not legal. Parliamentary sovereignty can’t be challenged. Implications: set the tone for next 80 years, biggest case. After this, further entrenchment of idea that they were unable to look after themselves. Indian Act was practically constitutional Constitutional changes in 1982 Royal Proclamation of 1763: Eng win over Fr, New Fr ceded to Br. All kinds of provisions dealings with natives. More mutual respect, natives considered equal partners, so the proclamation treated them as a nation. Since then it became clear that the mutuality was for strategic reasons only. Treaties were entered on its basis, early treaties were equitable, but became more and more one sided over time – mutuality gave way to dominion. Assimilation was policy from 1800 on, which decimated native rights Indian Act (1876): obligations between natives and state, very patronizing, set out all aspect of aboriginal life, governmental authority – wills, estates, family law, tax. Definition of who was native was created by the state. Was far worse than Royal Proclamation and treaties, as well as cases that hinted at their ability to have more say in their lives. But it was entrenched. Prevented judges from doing much. However, the concept of trust with regards to land was in the first Indian Act, “held in trust for their benefit” 1971: revised and took out the reference to trust 1982: constitution s.35 suggested all existing aboriginal rights were recognized, s.25 said charter rights (s.1-15) don’t derogate from rights given to aboriginal peoples US – trust concepts debated, held to be determinative in cases in 1950’s GUERIN v. THE QUEEN Facts: Band agreed to surrender land to the Crown so that it might be leased as a golf course. The Crown subsequently leased it out on terms that were less favourable then those that had been agreed upon in discussion between the Band council and DIAND without notice or consultation with the band. Band asserted that had they known the terms they would not have accepted a surrender. Ratio: The Crown owes aboriginal peoples a fiduciary duty This fiduciary duty has its roots in native title to land and its inalienability to anyone other than the Crown The surrender requirement, and the responsibility it entails are the source of the obligation owed by the Crown. Native title is an independent legal right that predates the Royal Proclamation and predates and survived the claims to sovereignty made by the British Crown The policy with respect to the inalienability of native lands but through surrender to the Crown has been maintained since the Proclamation and still exists in the Indian Act. The purpose of the surrender requirement was and is to interpose the Crown between the Indians and prospective purchasers to prevent the Indians from being exploited and there is a historic responsibility which the Crown has undertaken to act on behalf of the Indians This discretion of the Crown in dealing with Indian lands has the effect of transforming the Crown’s obligations into a fiduciary one. Where one party has an obligation to act for the benefit of another, and that obligation carries with it a discretionary power, the party thus empowered becomes a fiduciary. Where land is surrendered to the Crown, a fiduciary obligation is imposed and regulates the manner in which the discretion is exercised. The Crown must hold surrendered land for the use and benefit of the surrendering band. While similar to a trust relationship, the fiduciary obligation owed by the Crown to aboriginal peoples is sui generis. The fact that the discretion of the Crown is limited by the Indian Act does not eliminate the fiduciary obligation. It means only that failure to adhere to the conditions will be a prima facie breach of the obligation. “Political trust” inapplicable as they concerned the distribution of public funds or other property held by the government. IN each case the party claiming to be beneficiary under the trust depended on statute, ordinance, or treaty as the basis for its claim to an interest in the land. With aboriginals in Canada, the interest they rely on (interest in land) predates any and all legal instruments including the Proclamation and the Indian Act. Blueberry River Indian Band v. Canada (DIAND)  4 SCR 344 Facts: Band surrendered mineral rights in reserve to DIAND in 1940 “in trust to lease”. Second general surrender in 1945 (They desired lands closer to trap line). In 1948, DIAND sold land to another gov’t organization who desired it for agricultural purposes. DIAND did not reserve mineral rights in 1948 despite the fact that this was common practice. In 1976, land was found to have considerable amount of oil and gas (valued at $300 million). Judgment: The 1945 surrender imposed on the Crown a duty to ensure that the land was dealt with in the best interests of the Band. The general choice to sell the land rather than lease it was not a breach of duty as DIAND considered the interests of the band throughout; however, Failure to reserve mineral rights was a breach of fiduciary duty o The failure to reserve mineral rights was a result of “inadvertence” and was contrary to common DIAND practice. o Crown had issued permits to prospectors for oil and gas which suggests they new that in general mineral rights could be valuable o “A [reasonably prudent] person does not inadvertently give away a potentially value asset which has already demonstrated earning potential. Nor does [he] give away for no consideration what it will cost him nothing to keep and which may one day possess value, however remote the possibility. The Crown managing its own affairs reserved out its minerals. It should have done the same for the Band”. Further breached duty by failing to exercise its authority under Indian Act to revoke sale and rectify errors prejudicing the interests of the Band. Ratio: The duty of the Crown in relation to surrenders is to protect bands from improvident and exploitative arrangements. A fiduciary obligation arises where one person possesses unilateral power or discretion on a matter affecting a second peculiarly vulnerable person. The vulnerable person is in the power of the party possessing the power or discretion, who is in turn obligated to exercise it solely for the benefit of the vulnerable party. A fiduciary involved in “self-dealing” (conflict of interest) bears the onus of demonstrating that its personal interest did not benefit from its fiduciary powers. Note: summary of significance of Guerin and Blueberry River federal Crown owes a fiduciary duty in the context of surrender of reserve lands the fiduciary obligation is sui generis and it arises out of Crown’s exclusive right to have lands surrendered to them – acts as an intermediary after surrender, obligation requires the Crown to deal with the land in the best interest of the band (required to put the interest of the band first) however, the fid has an obligation to consult with the the band, in relation to the terms of the deal (sale or lease) – if Crown does this, cannot ignore the opinion of the band (unless the band is likely to be exploited) if Crown breaches obligations, will be liable for loss, that is “restitution” or putting the band back in the place would have been in had the breach not occurred APPROACHES IN GUERIN: 1. Este: Crown as an agent for first nations when they surrendered the land. Not followed at all. 2. Dickson: Sui Generis finding is important in future decisions. Did not say there was a trust, fiduciary – like a trust, like fiduciary, but not exactly like either. 3. Wilson: was fiduciary due to history, uses, reserve lands. But went on to say there is also a trust that arises on surrender. Crown becomes like a trustee, and you start out as a fiduciary, and this was extended, with crown becoming full blown trustee upon surrender. Also not followed. What has been followed is a continuum of obligation of the crown, which changes depending on the context of the situation. Might not reach pure trustee, but is a continuum. E.g.: idea of fiduciary than it used to be – not just enough to be a lawyer, depends on what you are doing as a lawyer. COMMENTS Fiduciary language used by SCC is unfortunate because they are indicators of relationships of inequality – fiduciary law requires an inequality, so it won’t ultimately benefit FNs. This was likely the intention of the court. Most of traditional categories have this quality, but Haigh says you don’t need this – it may be there, but it’s not necessary (e.g.: traditional categories like partners and joint venturers) Another question that arises is what is meant by the Crown’s f.o.’s to FN? Dickson said it just meant they should have negotiated in good faith, but doesn’t deal with other circumstances or scope. Does it extent to provincial crown? (what about s.91 and previous precedents, which makes it only federal) No decision has answered this yet Obviously does include land surrender, where it is ceded to the crown But what about other things such as medical services or programs support agriculture, or funding of self- government Sparrow case constitutionalized f.r., but didn’t explore scope or extent Continuum: Strong Weak ================================================================= Reserve: Trad’l lands Off-Rez Non-Trad’l, Services Self-govt, almost trustee Covered by resource rights – political rights like Wilson treaty duty to consult? (consult) To figure anything out on the continuum, you need to litigate. Judge have extreme power over the shape of the doctrine. Haigh says the judges have used historical context and reason to reach their conclusions, so there is some control on their subjectivity Fiduciary history and FN history create constraints f.o are fact specific, which allows judges creativity and lets “equity flourish” Points: There is an overarching obligation, and specific obligation between crown and individual aboriginal peoples Also individual ones that apply in specific circumstances General: Crown should not be able to unilaterally be able to ignore promises long ago, or the situation of dependence it created without legal consequences Crown was able to achieve many of its goals because some native group was forced to give land to imperialist British invaders – SCC didn’t decide this until 1985 Flip-side: you can’t fault FN people for not enforcing their rights way back when Problems in 19th/20th C left them powerless, only courts in late 20th C were able to recognize these rights Honour of crown is at stake Specific: Accounts for special instance in question Could be duties in some situations but not in others Specific situation where crown’s honour is at stake SLatterly: f.d. between individual first nations people and individual Canadians? (not followed) SPARROW Incorporated f.d. into constitution. S.35(1) can be read to include f.o., which means SCC can’t overrule the Guerin Decision IMPLICATIONS Hasn’t changed daily lives of FN people’s, especially those on reserves under the Indian Act Still disproportionate number in prison TRUST REMEDIES Deals with equitable remedies All remedies in equity are discretionary, never automatic even if defendant has breached In CL, once a breach is proved, remedy is automatic (damages once breach of K is proven) In equity, P must prove a remedy is needed. Actions of the plaintiff in equity are important, in contrast to CL 2 main situations where equitable remedies are applied: 1. Where you have an equitable cause of action – automatically entitled to equitable remedy 2. Where you have CL cause of action, but CL remedy is insufficient – P must prove. SP is an equitable remedy that applies to things considered unique because damages were inadequate Equitable remedies come in 2 forms: 1. Personal equitable remedies: apply to the person. In trust: compensation for loss claim on breaching trustee who lost money a. SP: order that a party perform in accordance with an agreement or K, used in specific situations – unique items (art, autos, land) b. Injunctions: court orders requiring a person to do something (positive or negative) to prevent or compel an act e.g.: Lac Minerals negative to stop mining c. Rescission: court order to set aside a k, to put parties back in original position (exact opposite of SP) d. Rectification: seldom used, where K doesn’t accurately reflect original understanding between the parties – can change the K – like a typo. e. Accounting: of profits made (e.g.: Boardman) f. Compensation for loss: equitable version of damages (don’t call it damages) 2. Proprietary Remedies: attach to property, not persons a. Constructive trust b. Tracing – straddles personal and proprietary, mechanism to get a final remedy Remedies can be added to one another – i.e.: injuction and compensatioin A. PERSONAL REMEDIES Maxims that Apply 1. Equity will not suffer a wrong to be without a remedy a. Wrong: equitable wrong, not legal. Expanded definition of wrong (E.g.: CL fraud is hard to prove, but equitable fraud doesn’t have requirements to show intention). Rights not enforceable at CL will be protected by equity. 2. Equity follows the law i. Provides a gloss on the law, or when the law doesn’t deal sufficiently with the situation. If there is a proper CL/statutory remedy, equity won’t overrule. In trust, Tee has legal, B has equitable title. Does law provide remedy in situation of K’l breaches, at equity, no SP unless damages are shown to be inadequate 3. Those who seek equity must do equity. i. P seeking injunction must show that s/he is going to carry out their part of the bargain – looks to future conduct of Ps. 4. Those who come to equity must do so with clean hands Where 3 looks forward, this looks back. If p proves K’l breach, at CL can still get damages if P acted wrongfully, but in equity you might get nothing. 5. Where equity is equal, the law prevails. If the P and D both have legit claims, one with CL on their side will prevail. (E.g.: Bonafide purchaser for value without notice will prevail against everyone) 6. Equity regards as done that which ought to be done. If you have a final step only to do make a deal complete, equity will act as though it has been done – rubber stamp exercise. (E.g.: share transfer just needs to be registered on the books) 7. Equity is equality If 100,000 in trust for 4 kids, settlor doesn’t divide, equity assumes they are entitled to equal share. Cant be disputed if shown that settlor intended some other way. 8. Equity looks to intent not form Substance of matter, not form. (E.g.: trusts created with using word trust, especially oral trusts with unsophisticated participants) 9. Delay defeats equity. Equity acts on the vigilant, not on the indolent. (e.g.: Laches equity’s idea of limitation period – must exercise your rights when you know u have them, but this is malleable – Crown Fiduciary obligation – court argued that the Band should have pursued this long ago, but the band didn’t know their rights existed, so time wasn’t up.) 1. Equitable Compensation CB 538 Canson Enterprises v. Boughton (SCC)) Facts: Land purchase with shady lawyer involved. He was acting for the V, but had made a secret arrangement whereby payment price quoted by lawyer was lower than what V got – lawyer took the rest. The P subsequently developed the land, putting up a warehouse. Engineers didn’t do their job properly, and it sunk. P Sued the engineers for negligence, but there was a $1 mill short-fall in their recovery because developers couldn’t afford to pay. P learned of secret deal, so a lawyer on behalf of Canson, the purchasers, wanted to seek the short-fall for breach fiduciary. At trial it was accepted that land wouldn’t have been purchased had P known about the secret deal. In Equity: Hallmarks of CL recovery, such as mitigation and remoteness, don’t necessarily apply. Damages were far down the road, and based on something else that happened down the road. Issue: is the shortfall recoverable for the breach of f.d.? Decision: Lawyer not liable. In both decisions: breach of f.d. doesn’t cover anything beyond an independent act. Reasons (Laforest): Court needs to make a distinction between situation in land where there is trustee, and a fiduciary. What’s most important in damages is fairness and justice, both in CL and equity. This means you should use CL principle in equitable situations, unless there is a good reason not to. Agrees that fiduciaries should be held to a strict standard. What would be gained by making the lawyer responsible for the engineers negligence – would it be a deterrent if lawyer was responsible for every single consequence of the deal. Dissent (McLachlin): fiduciary/T’ee distinction is a false one, this shouldn’t matter. Wants to keep equity and CL separate, and looks at breach of f.d. as a wrong in itself. Consequences of actions wrong in themselves are different from negligence, where there needs to be a connection. But there has to be a connection between breach and consequences. CB 554: “Common sense view of causation.” – not the same as foreseeability and remoteness – hindsight can be used to tie damages to fiduciary breach. Where the T’ee’s breach permits the wrongful act permits the loss, then there is recoverability. Hodgkinson v. Simms Facts: Accountant advised his clients to invest in condo development because he was getting kickbacks. Condos purchased, market dropped, so money was lost. Plaintiff sued, saying they would’ve have invested in something else if they had known that the accountant was getting kick backs. Reasons: problem because of decision in Camson, because damages not directly related to the kickback scheme. Decision: in favour of plaintiff Reasons: the loss does relate to the breach of fiduciary duty. Dissent: no, loss relates to market falling. Reconciling the cases: maybe that what the fiduciary did in Hodgkinson was worse than what happened in Canson. Clear and quantifiable how much the lawyer screwed the purchasers for ($600,000 instead of $200,000) – easy to sue him and get that amount back – they should have just sued for that. In Hodgkinson, it was hard to quantify investment advice that depends on the market. Or maybe its foreseeability – lawyer couldn’t see the losses arises from 3rd party, where accountant could’ve foreseen market collapse. Foreseeability, you can be liable up to intervening act. But SCC expressly says this isn’t the reason. Hodgkinson gloss – act must not be attributable to a third party. (don’t use common law language). Implications of these cases · Lawyer in Canson is liable for his improprieties – future lawyers will know this · Accountant is punished for funnelling his clients into one direction – will accountants try harder to avoid doing this because they will be liable for changes in the market. · Will this change behaviour? Hopefully yes, but will the different results have different effects in the future? 2. Accounting for Profits · Of profits made improperly by trustees, beneficiaries are entitled to them · Can be restitutionary, because usually the trust loses the amt the T’ee gains, but not necessarily (e.g.: Boardman) · Where there is no equivalent loss, the accounting is for deterrence, not compensation MacMillan Bloedel v. Binstead Facts: MB is logging company that always had excess unused logs. B set up a secret company to make money off the logs, which he was supposed to sell. He was supposed to give them money for them, but the amt he gave back tipped off the company. Accepted at trial that B was a fiduciary. Issue: is B liable for breach of f.d. in making money from the logs. How do you account for the profit? Decision: B’s entitled to accounting of profits are net profits after expenses. Reasons: Straightforward bookkeeping (reasonable ones incurred by defendant’s actions – admin costs, towing costs, salaries, taxes, interest payments). Salary B paid himself didn’t count. Personal Remedies Summary · When you have a breaching trustee, you are entitled to recover, but the rule is generally choosing between accounting for profits or compensation – mutually exclusive. · Compensation – losses suffered by trust are greater than profits made by T’ee. · Smart for lawyer for plaintiff to do an assessment of this beforehand to choose best remedy · B. PROPRIETARY REMEDIES · In Canada we have remedial constructive trusts, which are proprietary · Where a T’ee still has property or assets, then often Ps will look to seeking a proprietary remedy, one that attaches to property, not an obligation put on the person · Powerful because they attach to the property, meaning that whatever happens to property with certain limits, it will provide a remedy · Personal remedies can be harder to access – D leaves jurisdiction, D has no assets · If D is insolvent, these issues are avoided, because trust has certain priority in insolvency situations. (main advantage) · Access to property is what the B’s want · CTs over a property because of breaching t’ee means you have access to the property can get it placed back into trust, or sell it to get the proceeds to compensate · Not useful where there is no property to attach to. · Includes tracing and CTs 1. Tracing WHEN? 1. Trustees take trust property and claim it as their own, or convert to some other form of property. 2. Takes property, mixes it with his own property, not kept separate as in first instance (e.g.: put money from trust is put in t’ees bank acct) 3. Trust property taken and mix with other trust property, and B’s from different trusts want to be compensated 4. Trustee mixes trust property and then invests/converts/purchases, something else beyond that WHY? · because property belongs to B · stops at bona fide purchaser for value without notice · but if given to a friend, it can be traced if B can prove that whatever the friend buys (shares/boat) is from original trust money · used when defendant is bankrupt/insolvent, or when personal remedies are unavailable or barred by limitation periods · can’t trace to disposal goods (i.e.: vacations) CATEGORIES: 1. Trustee claims the property as his/her own 2. Other 3 – trustee mixes trust property in some way or another 1. Trustee Claims the property as his/her own · E.g.: asserts it as his own, or transform it into a boat · B can take the property if it still exists, or trace to the proceeds of a sale if the original proceeds don’t exist. · Tracing applies as long as the proceeds still exist in tangible form. · Can follow transfers if 3rd party if that person takes with notice, or it was a gift or insufficient consideration is given. · Tracing remedy stops if services are purchased. 2. Mixed trust property a. Mixing not in bank acct: two options - i. Trace to funds mixed with or what was bought with it, get equitable lien (better if there has been decrease in property value. ii. Claim a proportionate share of the mixed funds (like getting a CT) – better if there has been a decrease. Example: Scott v. Scott: wife leaves her property (main is family home) to husband for life, remainder to kids. Husband got B’s consent, sold the home (for L1,400) and bought a new one for l,000 worth l7,000. put it in his own name, worth L55,000 when he died. Kids wanted this. Kids got tracing, and CT over proportionate increase of the value they put into the house. (got 10/17 of 5,000) b. Mixing in bank acct: * can still seek equitable lien (personal remedy) or trace thru for proprietary remedy. Rule in Hallet’s Case: Facts: Lawyer got control from T’ee over marriage settlement, he was also life tenant under the trust, acting for another client as well. Put money sale from settlement into the acct, as well as money from the other client. Breached trust, money from various sources. Original bank acct is L15,000, L400 from Mrs. C, and L700 from marriage settlement, L18,000 from Mrs. C. Withdrawals were made, at lowest it was L17,000. At death of husband, L32,000. Case: Trustee sued for L700, Mrs. C sued too. Issue: who does the L32,000 belong to Reasons: no B can claim all the amts, e.g: of coins in a bag (old rule: Clayton’s case was in first, out first.) Not fair – trustees are assumed to take out their own money first – should assume people are acting lawfully. Date T’ees own T$ WD Balance 1 L1,000 1000 2 3000 4000 3 3500 500 4 1500 2000 Total 2500 3000 3500 Assume on the day of withdrawal, most is his own. When he puts it back in, Hallet’s Rule is glossed by LIBR – only amount the trust fund can seek is lowest intermediate value, so here the 500. Because the original 1000 may belong to other creditors. So trust fund will suffer 2500. Tracing in this acct can only go after the 500 – trustee can’t replenish the trust later on. But can still seek personal remedy against the trustee. If Bs can prove that day 4 deposit was intended to replenish the trust fund, then may be able to claim for this. c. Trustee mixes trust funds and purchases assets with mixed funds c. Trustee mixes trust property and then invests/converts/purchases, something else beyond that. i.e.: if he buys car for 3500, 1000 is his own, 2500 is trust money. Oakway: Purchase shares reducing the acct to 0. Can’t argue that a proportion is your own as you spend trust money. This means you can trace to an asset, but only to the proportion that the trust fund is allowed (so 2500/3500 would be purchased with trust money, could get equitable lien on it) Date T1 T2 T3 WD Balance 1 1000 1000 2 5000 6000 3 3000 9000 4 4000 5000 Total Clayton’s rule: of 4000 WD, 1000 is from T1, 3000 from T2, T3 is protected. Greymack (Ontario): Altered Clayton’s rule Facts: Greymack was a lawsuit between two different beneficiaries. Issue: Does Clayton’s rule apply for competing Bs, then the pro rata analysis should be fair. Apply total proportionally to Bs interests. Implications: Didn’t deal with how Clayton’s rule might apply between T’ee and B – might still apply, but not sure where the law stands. Court says that there may be cases where proportionality analysis was too complicated, might apply Clayton’s rule because it’s easy. * Clayton’s rule is based on fiction – no good reason to say first in first out, but it was used for simplicity. * Hallett rule an attempt at justice, but hard because you have to track sometimes over many years to find LIB.
Pages to are hidden for
"TRUSTS SUMMARY"Please download to view full document