Improper Use of Caveats in Estate Disputes

[Since I wrote this post, the decision I discuss below has been overturned by the British Columbia Court of Appeal at 2010 BCCA 111.]

As I wrote in a previous post, In British Columbia, if you wish to oppose probate of a will you believe to be invalid, you can file a caveat, which will prevent the issuance of probate for six months, unless the will is proven in solemn form in court.

But you should not file a caveat unless you have some basis for challenging a grant of probate of a will or a grant of letters of administration. It is not appropriate in every case.

For example, in a recent decision of the Supreme Court of British Columbia, Chang Estate v. Chang, 2009 BCSC 529, Madam Justice Loo ordered that a caveat filed by one of the deceased’s sons be cancelled, and ordered him to pay special costs to the executor.

The deceased’s son, Da Wei Chang, had a dispute for several years with his parents concerning property they bought in Surrey. They had put the title into a joint tenancy with him, but severed the joint tenancy after he sued them in Small Claims Court.

After his mother’s death (his father having died earlier), he filed several caveats, which prevented his sister, the executor, from obtaining a grant of probate. The claims as set out in his caveats and in his Statement of Defense and Counterclaim are very confusing. His claims seem to be that his mother owed him money, and that his parents acted improperly in severing the joint tenancy. There was also some dispute over property they once had in Shanghai.

On an application by his sister to cancel the caveat, Madam Justice Loo found that Da Wei Chang did not have any valid claim to prevent probate and ordered the caveat cancelled.

She found that his actions in filing several caveats without foundation were vexations and an abuse of process. Accordingly, she ordered special costs against him. An award of special costs will fully or almost fully cover the other party’s actual legal costs. In British Columbia, the court may order special costs to punish a party for his conduct in the litigation.

Is A Gun Collection “Household Furnishings?”

This is one of the issues raised in Zeitler v. Zeitler Estate, 2009 BCSC 500.

Alfons Zeitler died without a Will on April 26, 2007, leaving a common law spouse, Dina Zeitler, three children, and a complex mess of an estate (see a previous post on another court decision involving his estate here).

He owned a gun collection that he stored in his house. Dina Zeitler’s evidence was that

about a quarter of the residence gun collection was on display in the residence at any one time, while the remainder was stored in two large security vaults located in the residence. She stated that she and Alfons enjoyed the residence gun collection, rotating them for display, cleaning and polishing them, and showing them to guests. According to Dina, she and Alfons discussed the “make,” model and history of each rifle and upon occasion, would sit and visit while cleaning the guns. She said that Alfons taught her how to polish the guns although he did most of it himself.

On the other hand, one of Alfons Zeitler’s children gave quite different evidence:

According to Gregory, Dina disliked guns, and except on a few occasions when she came out into the yard with air rifles, she wanted nothing to do with them. He said that the guns in the display cases at the residence were never shot and rarely moved, and further, that the collection was not rotated, as Dina stated. Gregory also deposed that he never saw Dina clean, polish, or display any interest in the residence gun collection.

In British Columbia, the Section 96 of Estate Administration Act provides that when a spouse dies without a will leaving descendants the surviving spouse is entitled to the spousal home for her life, and the “household furnishings.” (The surviving spouse is also entitled to the first $65,000 and a share of the residue of the estate.) The definition of spouse includes common law spouses.

The term “household furnishings” is defined as “chattels associated with the enjoyment by the spouses of the spousal home.”

Madam Justice Arnold-Bailey rejected Dina Zeiler’s argument that the gun collection fell within the definition of “household furnishings.” The Judge looked at whether the “predominant characteristic” of the gun collection was as personal effects, or as something used or enjoyed by the spouses of the spousal home. In this case she found that the guns were in the nature of personal effects owned by Alfonse Zeitler.

Although this decision deals with a gun collection, Madam Justice Arnold Bailey’s reasoning set out below will provide a useful guide in future cases dealing with other chattels:

[ 34] To accept the submission of Dina’s counsel, any items of value owned by Alfons that he brought into the spousal home that the two of them enjoyed, even in a
transitory way, would constitute household furnishings. In my mind, to accept that submission would undermine the notion of a spouse’s personal property or the personal effects of one spouse vis-à-vis the other, and the notion of “household furnishings.” If one were to accept the logic of the proposition urged by Dina’s counsel, one might imagine that if Alfons had an antique missile collection, or an antique car collection stored in the garages of the spousal home or kept in a heated show room, such items could and would become household furnishings, just as long as both spouses enjoyed the same, even occasionally.

[35] In my view, the definition of household furnishings as “chattels usually associated with the enjoyment by the spouses of the spousal home” precludes such chattels that have as their predominant characteristic “personal effects” or “personal chattels” and are without a household use or a recognizable connection to the use, enjoyment or proper functioning of the spousal home.

[36] For example, an art collection belonging to one spouse and stored in crates in the basement of the spousal home, likely constitutes part of that spouse’s personal effects, but if all or the majority of the art collected was hung throughout the spousal home, then the same could legitimately be recognized as part of its “household urnishings.”

[37] In the present case, I am sceptical about Dina’s evidence about what she and Alfons used to do together in relation to the residence gun collection. I find that Dina’s claim that the guns were regularly rotated stretches common sense, and in that regard, I accept Gregory’s evidence to the contrary. However, even if I were to accept that evidence, I find that only one quarter of the collection was “on display” in the show cases at any one time.

[38] I find that the residence gun collection fulfilled no identified purpose or function associated with “the enjoyment by the spouses of the spousal home.” The enjoyment of the residential gun collection by Alfons, and to a lesser extent, Dina, was predominantly related to the gun collection itself, and not to their enjoyment of the spousal home. I do not regard the fact that a portion of it was on display in the spousal home as sufficient to make the entire residence gun collection “usually associated with the enjoyment by the spouses of the spousal home.”

[39] By definition, gun collections, like stamp collections, jewellery collections, art collections and the like, are, in the context of s. 96 of the EAA, the personal property of the person who collected them and to whom they belong, unless that predominant characteristic is overcome by their enjoyment by the spouses of the spousal home.

[40] The guns in the residence gun collection belonged to and were registered in Alfons’ name alone. I find that the fact that they were stored and maintained there with some involvement by Dina, with a portion of them on display, does not make them “household furnishings” within the definition contained in s. 96(1) of the EAA.

Accordingly, the gun collection will not go to Dina Zeitler.

Can Someone Who Obtains Title To Land Fraudulently Grant a Valid Mortgage?

Fraudman forges the signature of the owner of a house to transfer title to Conwoman. In turn Conwoman borrows money from the Bank of Innocence, granting the Bank a mortgage on the house the title to which she acquired from Fraudman. The Bank knows nothing of the fraud.

Fraudman and Conwoman spend the money or disappear.

Mr. Rightful Owner finds out about the fraud, and sues to get the title to his house back. He also sues the Bank of Innocence to have the mortgage declared invalid.

With these facts, there is no doubt in British Columbia that Mr. Rightful Owner is entitled to get the title back into his own name.

The more difficult issue is whether Mr. Rightful Owner is stuck with the mortgage. If the mortgage is declared invalid, the Bank of Innocence is out the money. If the mortgage is valid, then Mr. Rightful Owner must payout the Bank to have the mortgage discharged from his title, although he will likely be entitled to compensation from the Land Title and Survey Authority of British Columbia.

There are competing legal principles. On the one hand, in British Columbia our Torrens land title system is designed to protect innocent people who rely on the state of the title. The idea is that if you are buying land, you should not have to do an extensive investigation of the title to the land to buy the land without worrying that someone will later claim your title is invalid. You should be able to rely on a title search.

On the other hand, we have the Latin maxim, nemo dat quod non habit, which roughly means “you can’t give what you ain’t got.” If Conwoman doesn’t have a valid interest in the land, then how can the Bank take a valid interest through her title?

The British Columbia considered this issue in two cases that were released together on April 6, 2009. They are Gill v. Bucholtz, 2009 BCCA 137, and Re Oehlerking Estate, 2009 BCCA 138. Both were appeals by the Land Title and Survey Authority of British Columbia. In both cases, the Supreme Court of British Columbia held that the mortgages were valid. The lower court found that the lenders were not aware of the fraud and that they were entitled to rely on the state of the title when lending money. I wrote about the Supreme Court of British Columbia decision in Re Oehlerking Estate here.

The British Columbia Court of Appeal held in both cases that the mortgages were not valid. Madam Justice Newbury in Gill relied on the wording of the Land Title Act. She held that s. 23, which says that the title, “as long as it remains in force and unconcealed, is conclusive evidence at law and in equity, as against the Crown and all other persons, that the person named in the title as registered owner is indefeasibly entitled to an estate in fee simple to the land…” subject to certain exceptions, did not afford the same level of protection to the holder of a charge, such as a mortgagee, as to an owner. If the true owner can prove that his signature was forged, which is one of the listed exceptions, then an innocent lender claiming a mortgage through someone who was a party to the fraud, does not have a valid charge.

Madam Justice Newbury wrote at paragraph 27 of the Gill decision:

It may be that in a perfect Torrens system, any person lending money bona fide on the security of a mortgage granted by the registered owner, would have a valid charge. But there are sound policy arguments on both sides of the question. The Legislature of British Columbia would appear to have adopted the policy that the cost of frauds perpetrated against mortgagees and other chargeholders should be borne not by the public (as the funders of the Assurance Fund) but by lenders and other chargeholders themselves. Whether this policy choice is a good one or not is not for us to decide. We must give effect to the language of the statute in its ordinary and grammatical meaning.

It is implicit in the decision that if a buyer of the house with no knowledge of the fraud paid the fraudulent title holder for the title, the buyer would be entitled to keep the title. The innocent buyer could then grant a valid mortgage. But someone who lends money to a person who fraudulently obtains title will not be afforded the same protection.

Transfers Between Spouses to Avoid Debts: Royal Bank v. Clarke

Sometimes a business person will attempt to insulate the main family assets from business risks. For example, the family home might be held in only the businessperson’s spouse’s name. The theory is that if the business goes under, the creditors will not be able to have the home sold to pay the business debts.

In British Columbia, there are legitimate ways of protecting your assets and ways that are not. The line between what you can legally do and what you cannot is not always clear.

In Royal Bank of Canada v. Clarke, 2009 BCSC 481, a married couple, Mr. and Mrs. Clarke owned a house together. In 2003, when they bought the land on which they built their house, they talked about buying the land in Mrs. Clarke’s name only to insulate it from Mr. Clarke’s business. But they decided to register the land in both names.

In 2004, Mr. Clarke’s business borrowed funds from the Royal Bank. He personally guaranteed the loan.

In 2008, Mr. Clarke transferred his interest in the family home to Mrs. Clarke gratuitously. At the time the business debt was over $146,000, but was in good standing.

After the transfer of the house, no further payments were made on the business loan, which went into default.

The Royal Bank sued Mr. and Mrs. Clarke seeking to set aside the transfer of Mr. Clarke’s interest in the house to Mrs. Clarke. If the Royal Bank were successful, it could then register any judgment against Mr. Clarke pursuant to his guarantee against the house, and then apply to sell the house to apply Mr. Clarke’s share of the sale proceeds to the business debt.

The Royal Bank relied on section 1, of the Fraudulent Conveyance Act, R.S.B.C. 1996, c. 163, which says (in not-so-plain language):

1 If made to delay, hinder or defraud creditors and others of their just and lawful remedies
(a) a disposition of property, by writing or otherwise,
(b) a bond,
(c) a proceeding, or
(d) an order
is void and of no effect against a person or the person's assignee or personal representative whose rights and obligations by collusion, guile, malice or fraud are or might be disturbed, hindered, delayed or defrauded, despite a pretence or other matter to the contrary.

Mr. and Mrs. Clarke acknowledged that Mr. Clarke transferred the property to insulate the house from his business. But he acted honestly, and was not acting “by collusion, guile, malice or fraud.” He had never identified the family house as a source of security for the business loan.

Madam Justice Griffin held that it was not necessary for the Royal Bank to show that Mr. Clarke had acted dishonestly. Fraud, as that term is used in the Fraudulent Conveyance Act, does not require criminal fraud. It is sufficient if the transfer was done for the purpose of hindering a creditor. She relied on an earlier decision of the Supreme Court of British Columbia, Abakhan & Associates Inc. v. Braydon Investments Ltd., 2008 BCSC 1547.

The Court ordered that the transfer of Mr. Clarke’s interest to Mrs. Clarke be set aside. Mr. Clarke’s interest in the house will be available to satisfy his guarantee to the Royal Bank.

What if Mr. and Mrs. Clarke had purchased the land in Mrs. Clarke’s name alone, before Mr. Clarke’s business incurred the debt?

According to Madam Justice Griffin at paragraph 13,

Couples commonly arrange their affairs so that family assets are not at risk of business creditors. As fairly conceded by counsel for RBC, there would have been no problem for the Clarkes had they purchased the property in Mrs. Clarke’s name alone for the reason of trying to keep their residence out of reach of Mr. Clarke’s creditors. The problem is, having purchased the property in their names jointly, the subsequent transfer of Mr. Clarke’s interest was a “disposition”, thereby engaging the Fraudulent Conveyance Act.

Canada Bar Association B.C. Branch Law Day

Over the next couple of weeks, the Canadian Bar Association will be presenting Law Day at various locations throughout British Columbia.

Kelowna Law Day is on Saturday, April 18, 2009. According to the press release,

On Saturday, April 18th from 10AM to 2PM all residents of Kelowna are invited to the Kelowna Courthouse at 1355 Water Street to learn about what the justice system is doing to keep us safe on the streets and in our homes, while upholding the rights of all Canadians under the Charter of Rights and Freedoms.

The Law Day Open House will include a mock trial, lawyers in attendance who can answer questions in various areas of law, an immigration ceremony, informative displays and community booths, courthouse tours, police and fire department demonstrations, and many more exciting events.

On Law Day, the Canadian Bar Association British Columbia Branch will also hold its province-wide “Dial-A-Lawyer” as part of Law Week­­. Kelowna area residents are invited to call 1.800.663.1919 between 10:00 am and 2:00 pm to speak with a lawyer for up to 15 minutes at no cost.

Other Law Day locations and times include:

in Kamloops at the the Kamloops Law Courts on Thursday, April 16th from 5:30 – 8:00PM;

in Vancouver at the Central Vancouver Public Library on Saturday, April 25th from 10AM to 3PM;

in Terrace at Terrace Legal Services Society and the Terrace Courthouse on Law Day, Thursday, April 16th from 12-4 PM;and

in Fort St. John April 16th at the Courthouse and RCMP Detachment there are
• Courthouse Tours 5:30 PM – 7:00 PM
• Mock Trial of Goldilocks 7:00 PM
• RCMP Detachment Tours 5:30 PM – 7:00 PM
as well as other events on April 8 and 30.

For more information, including events in other cities, check out the Law Week website.

B.C. Court of Appeal Finds that Public Guardian and Trustee Fees Are Not Excessive

In a previous post , I wrote about a Supreme Court of British Columbia decision in which the court refused to order that the proceeds of a settlement of a lawsuit brought on behalf of a minor be held by the Public Guardian and Trustee of British Columbia. The Court found that the fees charged by the Public Guardian and Trustee were excessive.

The Public Guardian and Trustee has successfully appealed the Supreme Court decision in British Columbia (Public Guardian and Trustee) v. Strand, 2009 BCCA 158. The Court of Appeal found that the fees charged by the Public Guardian and Trustee over the course of the trust for the minor children would be lower than the fees that comparable trust companies in the private sector would charge.

Mr. Justice Frankel, in the Court of Appeal, wrote:

[26] In my view, the chambers judge did make a palpable and overriding error in his finding that the fees charged by the Public Guardian are excessive. This error is evinced by the chambers judge’s treatment of the 5% “capital commission fee”, which he considered to be an unwarranted set-up-fee. His treatment of that fee indicates that he misapprehended its purpose. It is not simply a file-opening fee. Rather, it is part of the overall fees that the Public Guardian charges to cover his services during the period of a trust. Those services include providing money management, trust officer services, accounting, and issuing documents required for tax purposes.

[27] The chambers judge also fell into error by failing to properly consider how fees are charged by the Public Guardian over the life of a trust. In this case, the trusts will be administered over several years. The affidavit evidence presented both to the chambers judge and to this Court indicates that, over the long-term, the Public Guardian’s fees will be substantially less than those charged by a private trust company such as the Bank of Nova Scotia (assuming such a company would be prepared to act, which appears not to be the case). This differential will exist regardless of the rate of return generated by the trust funds.

[28] Given that fees charged by the Public Guardian are not excessive, and appear to be significantly lower over the life of the trust than those charged by private sector trustees, there is, in my view, no foundation for the critical language used by the chambers judge in his characterization of the manner in which the Public Guardian fulfilled his statutory duties.

Does British Columbia Have Jurisdiction to Decide the Validity of a Codicil Concerning Land in Barbados?

In Armour v. Fuller, 2009 BCSC 409, Mr. Justice Halfyard held that the Supreme Court of British Columbia has jurisdiction to determine the validity if a codicil made in British Columbia, by a resident of British Columbia, but dealing with land in Barbados.

Elizabeth Armour had five children. She signed a will, and four codicils amending her will. She made the fourth codicil while she was living with her daughter, the Defendant Vikki Fuller. The fourth codicil left her villa in Barbados to the Vikki Fuller.

After Elizabeth Armour’s death on May 16, 2007, her other four children sued Vikki Fuller, alleging that the fourth codicil is invalid. They allege that their mother did not have testamentary capacity to make the fourth codicil, and that their sister unduly influenced their mother. If the plaintiff children are successful, the Barbados villa will fall into the residue of Elizabeth Armour’s estate, to be divided equally among her five children.

The defendant Vikki Fuller applied to court for a declaration that the Supreme Court of British Columbia does not have jurisdiction. She argued that both at common law and pursuant to the Court Jurisdiction and Proceedings Transfer Act, British Columbia courts do not have jurisdiction. She argued that the validity of the codicil must be dealt with by the courts in Barbados.

The plaintiff’s acknowledged that the law of Barbados will govern the validity of the codicil because it deals with land in Barbados. But the plaintiffs maintained that there is a sufficient connection with British Columbia for the case to be decided here.

Mr. Justice Halfyard agreed with the plaintiffs. There was a real and substantial connection to British Columbia, because Elizabeth Armour signed all of the codicils in British Columbia, and died in British Columbia. All of the relevant events happened in British Columbia.

The plaintiffs also met the provisions of the Court Jurisdiction and Proceedings Transfer Act, specifically section 3(d) and (e). The proceeding was brought against a resident of British Columbia, and there is a real and substantial connection to British Columbia.

Accordingly, the lawsuit will be allowed to proceed in British Columbia.

Do-It-Yourself Trust: Canada v. Rudolf

Mr. Jozef Rudolf owes over $185,000 in taxes. Canada Revenue Agency has registered a judgment against land registered in Mr. Rudolf’s name, and is seeking to have the land sold to collect the taxes from Mr. Rudolf.

Mr. Rudolf bought the land in 1989 for $30,000. In 1999, he transferred the land from himself to himself in trust. He also registered a document entitled “Orol 120 Trust.”

When Canada Revenue Agency brought the proceedings to have the land sold, Mr. Rudolf argued that he really held the land in trust for his sister, Ludmila Kukuckova. He didn’t have any beneficial interest in the land.

If the court accepted Mr. Rudolf’s claim that he held the land in trust—and if the transfer to himself at trustee was not done for the improper purpose of fraudulently avoiding his creditors—then Canada Revenue Agency would not be entitled to have the land sold. This is because the essence of a trust is that although the trustee has title, the beneficial ownership belongs to the beneficiaries. Canada Revenue Agency can’t take something that doesn’t really belong to Mr. Rudolf to satisfy his debt.

But Canada Revenue Agency argued that Mr. Rudolf did not create a valid trust. The document registered on the title to the land identifies Mr. Jaroslav Stepan, who is a friend of Mr. Rudolf, as the “grantor.” This document then says that Mr. Rudolf would receive and hold the land for the “use and benefit” of his sister. But Mr. Stepan had no interest in the land when he signed the document. He could not be the grantor or settlor of the trust.

Mr. Justice McEwan, in Canada v. Rudolf, 2009 BCSC 77, agreed with Canada Revenue Agency’s position that the trust was invalid. He found that the trust documents did not meet all of what are known as the three certainties of a trust: certainty of the intention to create a trust, certainty of the trust property, and certainty of the beneficiaries. Mr. Justice McEwan wrote at paragraphs 11 and 12:

[11] It is clear that Mr. Stepan had no interest in the property that could qualify him as a grantor. He maintained that when Canada Revenue asked him and he testified to that effect. Mr. Rudolf’s evidence is to the effect that he had advice from non-lawyers he trusted who told him this was the way he had to do it. No property passed from Mr. Stepan to Mr. Rudolf as Trustee. It was his own property.

[12] The document itself only identifies Ms. Kukuckova’s interest as the “use and benefit” of the property. There is no provision for her, as beneficiary, to ultimately take the property. There is a 25 year limit with a provision that it “may” be renewed. There is an incomplete and unspecified transfer.

With respect to the 25 year limit, Mr. Justice McEwan also wrote that this provision was inconsistent with a transfer the beneficial interest in the land to Mr. Rudolf’s sister. He wrote at paragraphs 14 and 15:

[14] The trust instrument in this case offends these principles in giving the purported “use and benefit” of the property over to Ms. Kukuckova and then depriving her of it 25 years later.

[15] On the facts it is evident that nothing changed with the registration of the trust. The property continues to be Mr. Rudolf’s residence, and Ms. Kukuckova has never exercised anything that could be described as “use and benefit” except to visit occasionally.

In the result, Mr. Rudolf lost the argument that he had validly transferred the land to a trust for the benefit of his sister. Mr. Justice McEwan did leave open the possibility that his sister might have a claim to an interest in the land if she can show that she contributed funds to the purchase of the land.

A British Columbia lawyer with experience in trust law could have created a binding trust for Mr. Rudolf, which would have shielded the land from Canada Revenue Agency-- provided that it was not done for the improper purpose of defrauding creditors. Mr. Rudolf would still owe the taxes, but the land would have been protected.

This case illustrates what can go wrong when people try to create trusts without using a lawyer.