Air Canada v. M & L Travel Ltd.

My legal obligations to you if you transfer $10,000 to me may vary depending on whether the transfer is a gift, a loan, or a trust. If a gift, I may keep it. If a loan, I have an obligation to repay you the amount loaned. But if it is a trust, I have additional responsibilities to you as a trustee. The law distinguishes between debtor-creditor relationships (such as loans), and trustee-beneficiary relationships. In some cases, this can have very important practical implications on the rights of the people involved.

In Air Canada v. M & L Travel Ltd., [1993] 3 S.C.R. 787, the Supreme Court of Canada considered whether the defendant travel agency held funds from the sale Air Canada tickets as a trustee for Air Canada, or was merely indebted to Air Canada. This was an important issue because the travel agency did not have the funds to pay Air Canada what it owed to the airline. If the relationship was one of debtor-creditor, Air Canada was out of luck. But, if the travel agency was a trustee, and if the travel agency’s directors knowingly assisted in a breach of trust by the travel agency, Air Canada could seek to recover from the directors personally.

The travel agency, M & L Travel Ltd., sold Air Canada tickets. The agreement with Air Canada provided that, “All monies, less applicable commissions to which the Agent is entitled hereunder, collected by the Agent for air passenger transportation…shall be the property of the Airline, and shall be held in trust by the Agent until satisfactorily accounted for to the airline.”

The agreement did not expressly require the travel agency to keep the funds received from the sale of Air Canada tickets in a separate trust account.

The travel agency had a line of credit with its bank, and deposited the receipts from the sale of tickets with its other funds in its bank account. The line of credit was personally guaranteed by the travel agents directors. The two directors of the travel agent had a falling out, and they issued stop payment orders to the bank. The bank withdrew the funds in the travel agent’s account to pay M & L Travel Ltd’s debt to the bank.

The Supreme Court of Canada held that the travel agent held the funds as a trustee for Air Canada, despite the fact the agreement did not expressly require that the travel agency hold the funds in a separate trust account. The three certainties required to create an express trust were present:

1. the certainty of intent to create a trust (set out in the agreement);
2. the certainty of the subject matter of the trust (the funds from the sale of air tickets less commissions); and
3. the certainty of the object of the trust (Air Canada was the beneficiary).

The court’s finding that M & L Travel Ltd. was a trustee was not sufficient by itself to make the directors liable for the travel agency’s failure to remit the funds. Air Canada also had to prove that the directors’ conduct was wrongful, and that the wrongful conduct was such that the law imposes personal liability on the directors. Keep in mind that the law treats companies as independent persons from the companies’ shareholders and directors.

In this case, the Supreme Court of Canada held that the directors were liable to Air Canada for knowingly assisting M & L Travel Ltd. in breaching its trust obligations. In imposing liability on the directors, the court considered the following:

1. The directors knew of the terms of the agreement with Air Canada, and that the funds were trust funds;

2. They knew that the bank could take funds from the travel agency’s account after demand to pay the debt to the bank;

3. By intermingling the trust funds with their other funds in the general account, the directors took a risk they had not right to take with the funds to the prejudice of Air Canada;

4. Because they guaranteed the travel agency’s debt to the bank, the directors personally benefited by putting the funds into the general account, thereby reducing their personal liability to the bank.

Christmas 2006: Partners in the Horn of Africa

Rural schools in Ethiopia defy understanding by people coming out of the North American school system. Ethiopia, a country the size of British Columbia, has more than 60 million inhabitants and a per capita income of less than $200.00 per year. Poverty is crushing and the resources available for education are scant. Schools run in two shifts: from 7 a.m. to noon and from noon to 5 p.m. In the rural areas classrooms are typically built from mud over a eucalyptus frame and usually have neither electricity nor running water. Inside between 60 and 100 kids sit on benches, often without desks, writing on notebooks balanced on their knees. Light comes from two or three window-like openings cut out of the walls. Schools in the urban areas usually have outdoor pit latrines. But in the rural areas pit latrines are rare and kids must relieve themselves around the perimeter of the school grounds. The first step in improving educational facilities is to make schools fit places to spend time.

I have quoted from the Partners in the Horn of Africa website. Partners is a small Canadian organization, based north of Kelowna, in Enderby, British Columbia. It was founded by some very caring people, including several lawyers. Partners is a registered charity in Canada, and may issue receipts allowing Canadian taxpayers to claim a tax credit. This charity works in the Horn of Africa on small projects, and requires local community participation in these projects. I assume that local participation is the reason for the name “Partners.”

Here is a little more information about one of Partners in the Horn of Africa’s projects from its website:

Partners has build pit latrines in two elementary schools in West Gojam which are novel, useful and educational. In each case two structures were built on the school grounds. The first building consists of four latrines on each side of a central wall - one set for girls, the other for boys. Waste from each latrine drains into a sealed, underground concrete tank. Another intake pipe outside the structure allows school kids to add cattle manure to the tank. The tank itself is a bio-gas system creating methane gas which is transmitted through a copper line to a second cement block structure about 100 feet away. This is a lunch room where the methane fires burners so meals can be heated and tea warmed. A large outflow trough from the concrete tank allows neutralized waste to be extracted and applied to a vegetable garden. New water lines from the town bring clean water to the latrines and to the cookhouse. Water is now available at the school; waste no longer soils the ground and threatens the health of students. And in the process methane gas is created in a living educational experiment.

I wrote about Partners in the Horn of Africa today, because I think of Christmas as a holiday that embodies a spirit of giving and of hope.
Merry Christmas.

Wills and Travel

I notice that quite a few people make appointments with me to give me will instructions before they go south for the winter, or go on a vacation. I encourage this. After all it is good for business.

I don't think my clients really fear that something will happen on their trips. Rather the planned trip provides people with a self-imposed time-limit for getting their estate planning done. When we go on a vacation, it may also give us peace-of-mind to know that we have done our estate planning.

In any case, doing estate planning before a trip appears to me to be good for your health. I am pleased to say that all of the people who have had me draft wills for them before travelling have returned home safely.

If you are travelling this holiday season, I wish you a safe and happy trip.

Why I Leave People in the Waiting Room

Pennsylvania lawyer and Professor Neil Hendershot, in a post entitled "Left in an Attorney's Waiting Room," writes,

Would it be polite for an attorney to keep family members of an elderly client in the law firm's waiting room, and not invite them into the conference room with the client?

His answer?

Maybe not; but it might be the ethical thing to do under certain circumstances.

In my practice I sometimes have awkward moments when I explain to a client and his or her family that I need to meet with my client alone to discuss a power of attorney, estate planning, or other legal matter. Many people do not deal with lawyers frequently. Some may feel a little nervous in meeting with a lawyer for the first time. They do not know what to expect. They may prefer to have a family member with them for support.

Neil refers to an excellent brochure, published by the American Bar Association, called "Understanding the Four C's of Elder Law Ethics."

The brochure explains the importance of a lawyer meeting alone with his or her client, so that
1. it is clear whom the lawyer is representing,
2. conflicts of interest are avoided,
3. the client's confidentiality is respected, and
4. the lawyer is able to assess the client's competency.

I have acted in lawsuits involving challenges to the validity of wills. In these cases one party may allege that the testator did not have the capacity to make the will, or that someone unduly influenced the testator. In such cases, the most important evidence may be the evidence of the testator's lawyer. If other family members who may take a benefit under the will were always present, the lawyer's evidence may be of little or no benefit to those seeking to uphold the will.

What I Like About the B.C. Justice Review Report

I have now read the full British Columbia Justice Review Task Force report, Effective and Affordable Civil Justice. I summarized the main recommendations here. I like the general approach proposed by the Task Force, and I will write a little bit about that today. Not surprisingly--I am a lawyer--I have some concerns about a few of the details in the proposals. I intend to write a future post about my concerns, which I will probably cleverly entitle, "What I Don't Like About the B.C. Justice Review Report."

The proposals are intended to address the problems in civil disputes of high costs, delay, and dissatisfaction with the process.

The report is proposing a shift in how lawyers, and the legal system, looks at civil dispute resolution. Instead of a straight line from the filing of the court documents, through discoveries (getting information from the other side), to a conventional trial, the Task Force is proposing a model that looks more like a wheel with spokes from the inside to the outer rim. At the center is an early case conference with a judge or master, in which the parties discuss the issues, procedure, dispute resolution, and timelines. The spokes are the different paths from the center to a resolution at the outer rim. Some spokes might lead to mediation, others to a summary trial, and others to a full trial. Some spokes may have experts, and full pre-trial discovery processes, and others may have less pre-trial process.

The idea is to make the system proportional to what is at stake in the dispute. It does not make sense to have the same procedures in a $30,000 claim as in a $10 million dollar claim.

What I like most about this proposal is that it will force lawyers to think through their cases, and get the parties to talk about how to proceed, early in the process. There is a certain inertia in lawsuits. Like other people, lawyers work toward deadlines. In many cases most of the work is done as court motions, discoveries, or trial dates approach, instead of at the outset. Similarly, the people involved in disputes sometimes don't negotiate until a trial or other major event is near.

If sufficient time is allocated to a case conference, and everyone takes the process seriously, the case management conference will assist in resolving many disputes much earlier than is currently the case. There may be some more costs for clients upfront for their lawyers to prepare for and attend the case conference, but I agree that the case conference will save costs in many cases. Lawyers spend a great deal of time preparing for trials, although a small percentage of cases--less than 3 percent, according to the report--are decided by a trial. If the case conference can result in short-cutting the process to resolution, the overall costs should decrease.

Wills Variation Act: Moral Obligations in Second Marriages

In a claim by a spouse in British Columbia to vary his or her spouse's will under the Wills Variation Act, RSBC 1996, c. 490, the courts consider, first, the deceased's legal obligations to his or her spouse, and then any moral obligations to the spouse. These principles are set out in the leading case, Tataryn v. Tataryn, [1994] 2 S.C.R. 807, which I have written about here.

Many of the cases considering claims by spouses to vary a will arise in the context of second marriages. The deceased spouse leaves all or a substantial portion of his or her assets to children from a previous marriage. The surviving spouse then makes application to vary the will on the basis that the deceased did not make adequate provision for the surviving spouse.

In Saugestad v. Saugestad, 2006 BCSC 1839, released on December 13, 2006, Madam Justice Russell considered a claim brought by a second wife to vary her husband's will, in which he left his estate to his two adult sons. Both sons were independent, and in their early thirties.

Ragnar Saugestad was 63 years old when he passed away. His first wife had died in 1989. He married the plaintiff, Joan Saugestad, in 1992. At the time of their marriage, he had substantial assets, while Joan Saugestad's assets were more modest, worth about $200,000.

Although Mr. Saugestad's will did not make provision for Mrs. Saugestad, their principal residence, a condominium worth about $381,000, passed to her by right of survivorship as the surviving joint tenant. Additionally, she received RRSPs as a designated beneficiary, and various joint accounts and cars. She also held a half-interest in a condominium at Whistler and in a rental condominium in Vancouver, which the couple owned as tenants in common. (His half-interest in the Whistler and Rental condominiums fell into his estate.)

Mr. Saugestad also owned a condominium in Florida, shares of a holding company holding about a million dollars of investments jointly with his two sons, a $125,000 bank account, and a $374,000 inheritance from his mother.

Madam Justice Russell first considered what Mrs. Saugestad would have been entitled to under British Columbia's Family Relations Act if the marriage had broken down in order to determine Mr. Saugestad's legal obligations to Mrs. Saugestad. She held that Mrs. Saugestad would have been entitled to about $909,000, and Mr. Saugestad would have been entitled to about $2,063,000. Madam Justice Russell thought it unlikely that Mrs. Saugestad would have been entitled to compensatory support if the relationship had broken down.

On Mr. Saugestad's death, Mrs. Saugestad had assets, including her own, and those she received by surviviorship or as a designated beneficiary from her husband, of $958,000. Accordingly, Mr. Saugestad met his legal obligations.

Madam Justice Russell considered Mr. Saugestad's moral obligations to Mrs. Saugestad, but did not consider that those obligations were as strong as in those cases where a couple has had a longer term marriage or relationship and accumulated most of the assets together. She wrote at paragraph 123,

...this is a second marriage of moderate length; the testator has children from a previous marriage and much of his estate was accumulated during that first marriage; each party has their own assets and is largely financially independent; and the testator made clear his intention that he wanted his estate to benefit his children, and not the plaintiff's heirs. Society's reasonable expectations of what a judicious husband and father would do in such circumstances may vary much more widely than they might in the case of a life-long marriage in which neither party entered the relationship with significant assets, as was the case in Tataryn.

Madam Justice Russell, did vary the will in Mrs. Saugestad's favour, but not by very much. She varied the will to provide Mrs. Saugestad with $29,000 out of the estate, offsetting an amount that Mrs. Saugestad owed the estate, and to provide Mrs. Saugestad with a life estate in her husband's half interest in the rental condominium. Mrs. Saugestad would receive all of the rents generated by the rental condominium during her lifetime. On Mrs. Saugestad's death, Mr. Saugestad's sons would then be entitled to Mr. Saugestad's half-interest in the rental condominium.

The Law Courts, Edmonton, Alberta

This photograph was taken by my wife, Michele Rule, this August. The Alberta Court of Appeal, Alberta Court of Queen's Bench, and the Provincial Court all sit at 1A Sir Winston Churchill Square, Edmonton, Alberta.

Jung v. HSBC Trust Company

Yesterday, the British Columbia Court of Appeal ordered a new trial in Jung v. HSBC Trust Company, 2006 BCCA 549.

I wrote about the trial court's decision in Jung, Re Estate of Horace Lee, 2005 BCSC 1537, in this post on November 5, 2005. At trial, Mr. Justice Burnyeat found that the testator, Hubert Lee, had inserted the names of the beneficiaries of a will he made in 1985, after the witnesses to the will had signed the will. The trial judge held that although the 1985 will was valid, the additions made after the will was witnessed could not be given effect. Mr. Justice Burnyeat considered in depth the doctrine of dependent relative revocation, and held that the revocation clause in the 1985 will did not revoke Mr. Hubert Lee's earlier will leaving his estate to his brother Horace Lee.

In the Court of Appeal, the appellants, who were named as beneficiaries in the 1985 will, challenged the trial judge's finding of fact that the beneficiaries' names were inserted after the 1985 will was witnessed. At trial both witnesses testified that the beneficiaries' names were already in the 1985 will when they witnessed it. But, the trial judge had preferred the evidence of a lawyer who testified that one the witnesses had told the lawyer on the telephone that the portions of the will containing the gifts to the beneficiaries were blank when the testator and the witnesses signed the will.

The Court of Appeal held that the trial judge ought not to have relied on the lawyer's testimony of what the witness told the lawyer as proof that the names of the beneficiaries were not present when the will was signed. The lawyer's evidence of the telephone conversation could be used to impeach the witness' evidence at trial. For example, the trial judge was entitled to find that the witness' evidence at that the will was complete was not reliable on the basis of the witness' previous inconsistent statement to the lawyer. But, the Court of Appeal held that the trial judge could not make a finding of fact that the will was blank on the basis of the lawyer's evidence.

The difficulty with the lawyer's evidence is that it was hearsay. In other words, it was a statement made of what the witness told the lawyer for the purpose of proving that what the witness told the lawyer was true. Although in some cases hearsay evidence is admissible to prove the truth of the contents of the statements, there must first be sufficient indicia that the hearsay statements are both necessary and reliable. In this case, the Court of Appeal held that there were insufficient indicia of reliability to admit the witness' statement to to the lawyer as evidence that the names of the beneficiaries were not in the 1985 will at the time the testator and witness' signed it.

The Court of Appeal did not comment on Mr. Justice Burnyeat's analysis of the doctrine of dependant relative revocation.
[After a new trial, reported here, Mr. Justice Silverman found that the portion of the will containing the gifts to the other siblings was in the will when Henry Lee and the witnesses signed the will. I have now written about the decision here.]

Will British Columbia End Mandatory Retirement at 65?

The Premier's Council on Aging and Seniors Issues published its report Aging Well in British Columbia, in November, 2006. The report discusses a wide range of matters including work, health, neighbourhoods, independence and financial security.

The one recommendation that I expect will get the most publicity is the recommendation to amend the Human Rights Code, RSBC 1996, c. 210 to extend the prohibition against discrimination based on age to those aged 65 and over. Currently the Code defines age to mean "an age of 19 years or more and less than 65 years," which allows employers to have mandatory retirement policies for employees at 65. The Premier's Council on Aging and Seniors is proposing to abolish mandatory retirement that is based on age alone.

I think that this recommendation makes sense. The best argument for mandatory retirement is that some jobs have physical requirements that employees might no longer meet when they get older. Fine, but what is magic about 65? In some cases the age might be lower. I can only think of a few players in the National Hockey League who are still playing at the age of 40. In other cases, employees can do the job well beyond 65. It seems to me that employers should be able to have retirement policies based on the requirements of the job without an arbitrary age.

Pump-and-Dump Scam

I have been deleting at least a dozen identical emails a day lately. The emails promise me vast riches if I get in on the ground floor of some hot new stock. The emails are getting past my spam filters. Here is one that I received today:

These days it's like the dot com revolution round two. The only difference is, this time there will be no crash. Everyone is wiser and the internet has already proven that it is THE place to do business.
Acquisitions are happening at a record pace. Google picking up Youtube. News corp picking up Myspace, the list goes on.
In all of these acquisitions those that are already holding an interest in these smaller companies are making a fortune in the process. Word on the street is that our next pick is about to be acquired by a big player!
[Name of stock deleted]
Symbol:[deleted]
Current Price:
0.37
Target price: 1.35
[Name deleted] is a high tech company involved in a wide range of internet related businesses from broadband to online commerce. This is one hot item!
Remember, we get you the inside scoop BEFORE it hits the street. With the acquisition set to be announced shortly the time to act is now. Once the word is out it will be too late to get in, as we expect this one to go up quickly.

Is there money to be made here? Sure, for the crooks sending these emails. They get enough people interested in buying the stock to get the price up, and then sell. The investors are then left with worthless stocks. The pump-and-dump scam is not new, but spam emailing makes it easier and potentially more lucrative for the crooks.

The emails are clever. I think that they appeal to more than just greed. They appeal to the desire among us to be in-the-know. It is as if someone has chosen to give me some special inside information. Of course, the email is sent to thousands of people. I am really not special to the crooks sending out this email.

I will continue to just delete these emails. I hope you do too.

Gravesite Recitals

Professor Gerry Beyer at Wills, Trusts & Estates Prof Blog quotes a will clause here, which was sent to him by a lawyer in San Antonio, Texas, as follows:

The [Charitable Beneficiary] will have a group of people minimum of five (5), sing, anything they choose, in English, at my late wife's * * * gravesite, in the City Cemetery * * * at noon, every 27th day of the month, every month, in perpetuity whether it falls on Sundays or Holidays, for at least fifteen (15) minutes. The participants do not have to be professional singers or even be able to carry a tune.

If the group is unable to carry a tune, is this clause void as against public policy?

Using Trusts to Avoid the Wills Variation Act

In reasons for judgment released a couple of days ago, Madam Justice Wedge considered a vigorous challenge to a trust created for the purpose of avoiding a claim by an independent adult child to vary his mother's will under the Wills Variation Act, RSBC 1996, c. 490. Mordo v. Nitting, 2006 BCSC 1761, is a fascinating case on a number of levels, with interesting facts, multiple issues, leading lawyers, and thorough reasons for judgment. Today, I am going to deal with some of the issues relating to the trust.

Mrs. Eida Mordo had two children: Viviane Nitting, who was very devoted to her parents, and Alexander Mordo, who had a more difficult relationship with his parents. Eida Mordo's husband, Gabriel Mordo,died before her. Alexander Mordo is a very wealthy, successful business person in Vancouver. Viviane Nitting has lived more modestly, and has not done as well financially as her brother.

Mrs. Mordo wanted to leave most of her wealth her daughter, and nothing to her son. She was concerned (rightly, as it turned out) that her son would dispute her will, and she wanted to protect her daughter.

In British Columbia, an adult child may make an application to vary a will pursuant to the Wills Variation Act, on the grounds that adequate provision has not been made for the child. If the court finds that adequate provision has not been made, the court may order such provision as the court considers adequate, just and equitable in the circumstances.

Although the Wills Variation Act gives the courts considerable discretion to vary gifts made in wills, it only applies to wills. It does not give the court jurisdiction to vary a property that is transferred to a trust by a parent during the parent's life .

One of Mrs. Mordo's most valuable assets was a warehouse in Vancouver. To avoid a claim to this property under the Wills Variation Act, she settled a trust in which she appointed one of her solicitors as the trustee. The terms of the trust provided that she would receive all of the income from the trust during her lifetime. She would also have the right to have trust property transferred to her. On her death, the trust property would go to her Viviane Nitting if alive, or to Viviane's issue per stirpes if her Viviane died first. The trust was set up to comply with the Income Tax Act, Canada provisions for an alter ego trust to avoid Mrs. Mordo having to pay tax at the time of the transfer of the warehouse to the trust.

Mrs. Mordo also signed a transfer document to transfer the warehouse to the trustee, but left the transfer document with the trustee, instead of having the transfer registered immediately. The trustee held onto the transfer until after Mrs. Mordo's death, thereby deferring payment of property transfer tax until she passed away. Mrs. Mordo also signed a declaration that she was holding title to the warehouse in trust for the trustee.

Mrs. Mordo's son challenged the trust on several grounds. His arguments included the following:

1. because the transfer of the warehouse was not registered when the trust was created, there was no valid transfer of the warehouse to the trust;
2. the trust was a sham;
3. the trust was testamentary in nature, and did not comply with the requirements of the Wills Act;
4. Mrs. Mordo retained a degree of control over the trust property that was inconsistent with a trust; and
5. the trust was invalid because it offended public policy.

The court rejected all of these arguments as well as few others advanced on behalf of the son.

With respect to the transfer, the court held that Mrs. Mordo by signing the transfer, and leaving it with the trustee, as well as signing a declaration of trust, she did all that was required of her. Madam Justice Wedge consider both the common law requirements, and section 20 of the Land Title Act, RSBC 1996, c. 250, which made the transfer binding as against Mrs. Mordo (if not third parties).

The court rejected the allegation that the trust was a sham. Mrs. Mordo intended to create a binding trust. The property of the trust was certain, as were the beneficiaries. In contrast to a sham, which is intended to mask the parties true intentions, there was nothing misleading about the trust document. The fact that she could call upon the trustee to transfer trust property back to her as long as she was competent to do so, did not negate the binding nature of the trust.

The argument that the trust was testamentary (in the nature of a will), also failed. Madam Justice Wedge found that Mrs. Mordo intended for the trust to take immediate effect. It was not dependant on her death for its force and vigour.

The fourth argument I mention is that Mrs. Mordo exercised a degree of control such that the trust was not a true trust. The argument is that the trustee was really Mrs. Mordo's agent, subject to her directions. She had the power to appoint and remove trustees, and could require the trustee to give her property from the trust. Again, the court rejected this argument. The trustee had full powers to manage the trust property, including selling the warehouse. His powers came from the trust document itself. The right to remove or replace a trustee does not make the trustee a mere agent. With respect to Mrs. Mordo's right to require that property be transferred to her, Madam Justice Wedge distinguished between a power of appointment, which is what Mrs. Mordo's had, and a direct right in, and control over, the trust property. Mrs. Mordo's power of appointment was consistent with a properly constituted trust. She did not have the degree of control required to render the trustee her agent.

Mrs. Mordo's son also argued that the trust was invalid on public policy grounds. He argued that it offended public policy as an attempt to avoid probate fees, and to avoid the Wills Variation Act. Madam Justice Wedge held that it was not against public policy for Mrs. Mordo to engage in estate planning that avoided probate fees. With respect to the Wills Variation Act, she applied the decision in Hossay v. Neuman, in which the court held that estate planning to avoid a moral claim of an independent adult under the Wills Variation Act, does not offend the Fraudulent Conveyance Act, RSBC 1996, c. 163.

Madam Justice Wedge dismissed Mrs. Mordo's son's claims under the Wills Variation Act, in any event, but I will save a discussion of those reasons for another post.

Mordo v. Nitting lends support to the use of trusts created by a parent during the parent's lifetime to disinherit an independent adult child, and to avoid the Wills Variation Act. It is important that the parent's intentions are well document, the trust is carefully drafted, and the trust property is properly transferred to the trust. Such a trust may leave some flexibility for the parent to get access to the trust property, but it is important to take care that the trustee has sufficient management and control to avoid a successful challenge on the grounds that the trust is a mere agency relationship.

I do not read this case, or Hossay, as saying that you can avoid all claims under the Wills Variation Act by transferring assets into a trust before death. In the case of a claim by a spouse, or a child who has a legal claim apart from the Wills Variation Act, the transfer could still be successfully challenged under the Fraudulent Conveyance Act.