Sunday, April 30, 2006

Notes Forgiving Loans Invalid: Failure to Comply with Wills Act Not Forgiven

As I have posted here, British Columbia has strict technical requirments for making a valid will. With limited exceptions, a will is not valid unless it is in writing, and signed at its end by the testator (or signed in the testator’s name by some other person in the testator’s presence and by the testator’s direction), the testator makes or acknowledges the signature in the presence of two witnesses, and the witnesses sign their names in the presence of the testator.

This rule can catch other documents that one might not consider wills, such as a document in which a creditor purports to forgive loans on the creditor's death.

This issue arose in Anderson Estate v. Polson, 2003 BCSC 1721.

The defendants, Ronald John Polson and Polson Investments Ltd., had each given the deceased demand promissory notes. The corporate defendant executed a demand note dated December 11, 1991 for $200,000 and Mr. Polson signed a note dated February 1, 1998 for $55,000.

Mr. Anderson signed a document dated December 31, 1991 that proved that the December 11, 1991 note would be considered paid at Mr. Anderson’s death. There was a further provision that if Mr. Anderson’s wife survived him, Polson Investments Ltd. would be required to continue making payments of $1500 to his wife during her lifetime. This document was witnessed by a lawyer in the State of Washington. Mr. Polson also signed this document on behalf of Polson Investments Ltd., acknowledging that he had read and understood the agreement, in front of a Notary Public in British Columbia,.

Mr. Anderson added a similar statement dated March 31, 1999 to the February 1, 1998 note purporting to forgive the balance owing on that note on his death.

When Mr. Anderson died his executor took the position that the statements purporting to forgive the balance owing under the notes were testamentary in nature (in other words, in the nature of a will). The statements forgiving the debts on death were void, because they were not signed in accordance with the Wills Act, RSBC 1996, c. 489.

Mr. Justice Truscott agreed with the executor’s position. Applying the test in Cock v. Cooke (1986), L.R. 1 P. 241, a document is testamentary if the person making it intends that it will not take effect until his death, and if it is dependent on his death for its vigour and effect.

In finding that the statements were testamentary, Mr. Justice Truscott applied the following factors from the judgment in Elliott v. Turner and Turner (1944) 2 D.L.R. 313 (Ont. H.C.):

1) no consideration passes,
2) the document has no immediate effect,
3) the document is revocable,
4) the position of the deceased and the donee does not immediately change.

Mr. Justice Truscott found that Mr. Anderson intended that the forgiveness would only take effect on his death. The statements were dependant on his death for their vigour and effect. There was no consideration. Because Mr. Anderson could demand payment during his lifetime, the statements were revocable. Mr. Anderson’s and the debtors’ positions did not change immediately.

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