Wednesday, August 15, 2012

Scholz v. Scholz

Michael and Carolyn Scholz bought property in 1998 for $515,000. They had the house on it demolished and built a new one. The cost of building the new house is not clear, but Michael Scholz estimated it to be $2,100,000. They invited Michael Scholz’s mother, Ruth Scholz, to have a coach house built on their property for her to live in. After hip surgery, her doctor said she could not live on her own anymore. She spent $94,400 to have the coach house built.

As with many family arrangements, there was no written agreement spelling out what, if any, right to the property Ruth Scholz acquired by spending funds to build the coach house. There was not even a discussion about whether Ruth Scholz would receive anything if her son and daughter-in-law sold the property. Again, I don’t think it is unusual for families to go ahead with arrangements like this without addressing, or perhaps even considering, their legal rights and obligations. There is an assumption that they will work things out as they go along. Unfortunately, as in the case of the Scholz family, that doesn’t always happen.

Michael and Carolyn Scholz sold the property for $3,053,000 in 2011. Ruth Scholz felt she should receive some of the proceeds, but Michael and Carolyn Scholz didn’t agree. In addition to buying the land, they had paid for her utilities, most of her telephone and cable costs, and arranged for nannies they employed to deliver meals to her and clean the coach house.

Ruth Scholz sued. The case is Scholz v. Scholz, 2012 BCSC 1172.

One of the arguments she put forward was that because of her financial contribution to the construction of the coach house, her son and daughter-in-law held an interest in the property for her on a resulting trust. This is a presumption that arises when one person purchases property and puts it in the name of another. The presumption is that the person who receives title holds it in trust for the person who paid the purchase price.

Mr. Justice Saunders rejected this argument. He noted that Ruth Scholz did not in fact contribute to the original purchase price. Although she paid for the coach house which became part of the property as a fixture, she had given evidence that she did not consider that she was acquiring an interest in the land itself. Rather she considered that she owned the coach house.

Ruth Scholz also argued that she was entitled to part of the proceeds on the basis of constructive trust or unjust enrichment. The decision deals with these as two separate arguments, but I suggest they are really one. To prove unjust enrichment, Ruth Scholz would need to establish that her contributions enriched Michael and Carolyn Scholz, that she suffered a corresponding deprivation, and that there was no juristic reason for the enrichment. In other words, she would have to establish that there was not reason in law that her son and daughter-in-law should retain the benefit of her contribution to the property. If she could prove these, the court could either give her an interest in the property through a remedial constructive trust, or award her a sum of money to compensate her.

In this case, Mr. Justice Saunders found that she was not able to establish that Michael and Carolyn Scholz were enriched. The coach house did not conform to the requirements of the District of West Vancouver bylaws, where it was located, which may be a detriment to the property. The purchaser who paid over $3 million to buy the property never inspected the coach house. In these circumstances, it is doubtful that Ruth Scholz’s expenditure on the coach house contributed to the ultimate sale price.

But Mr. Justice Saunders found that Ruth Scholz did have a valid claim. His reasoning is, I suggest, somewhat novel in British Columbia. He found that in expending funds on the coach house, she had a reasonable expectation that if the property were sold, she would be entitled to some return of the funds she expended. Although they did not have an express agreement, Mr. Justice Saunders imputed one to the Scholz family based on their reasonable expectations. He considered what they would reasonably have agreed to had they turned their minds to the issue of what Ruth Scholz would receive on the sale of the property.

[31]        The plaintiff’s failure to establish an equitable claim does not, however, leave her without recourse.  This is because it is open to the court to find that there were intended to be legal consequences to this family arrangement, and to impute terms to that relationship consistent with the parties’ reasonable expectation.  The basis for the court doing so is explained by Denning M.R. in Hardwick v. Johnson, [1978] 2 All E.R. 935 at 938, [1977] EWCA Civ 4: 
In the well-known case of Balfour v Balfour, [[1919] 2 K.B. 571 at 579], Atkin LJ said that family arrangements made between husband and wife "are not contracts because the parties did not intend that they should be attended by legal consequences". Similarly, family arrangements between parent and child are often not contracts which bind them, see Jones v Padavatton,[[1969] 2 All E.R. 616]. Nevertheless these family arrangements do have legal consequences; and, time and time again, the courts are called on to determine what is the true legal relationship resulting from them. This is especially the case where one of the family occupies a house or uses furniture which is afterwards claimed by another member of the family, or when one pays money to another and afterwards says it was a loan and the other says it was a gift, and so forth. In most of these cases the question cannot be solved by looking to the intention of the parties, because the situation which arises is one which they never envisaged and for which they made no provision. So many things are undecided, undiscussed, and unprovided for that the task of the courts is to fill in the blanks. The court has to look at all the circumstances and spell out the legal relationship. The court will pronounce in favour of a tenancy or a licence, a loan or a gift, or a trust, according to which of these legal relationships is most fitting in the situation which has arisen; and will find the terms of that relationship according to what reason and justice require. In the words of Lord Diplock in Pettitt v. Pettitt, [[1969] 2 All E.R. 385 at 413-4]:
. . .“the court imputes to the parties a common intention which in fact they never formed and it does so by forming its own opinion as to what would have been the common intention of reasonable men as to the effect [of the unforeseen event if it] had been present to their minds . . .”.
 [32]        In the present case, I do not think it likely that the plaintiff would have built the Coach House on the understanding that she could never hope to recoup at least some portion of the construction costs, no matter how long she was able to live in it.  I do not think it likely that Mr. Scholz would have assumed his mother to be proceeding on that basis.  Rather, I find that had the parties turned their minds to the subject in 2001, they would reasonably have recognized the possibility of the defendants obtaining some benefit upon the Coach House being vacated by the plaintiff. It is difficult to believe that Mr. Scholz, had he turned his mind to the subject, would not have been willing to recognize the possibility of some value being conferred on him through construction of the Coach House, in the event of his mother needing to move elsewhere, or perhaps in the event of her early demise.

How should her claim be quantified? Mr. Justice Saunders took the initial cost of the coach house, and then depreciated it to reflect the benefits Ruth Scholz received from living in it and the declining value of the coach house itself. He wrote:

[33]        I think it likely that if the parties turned their minds to the subject in 2001, they would have agreed to a mechanism which would provide the plaintiff with a fair measure of compensation upon termination of her occupation of the Coach House, and would avoid the possibility of the defendants obtaining a windfall gain.  The most reasonable mechanism, and one which I find appropriate to impute to the parties, is that the value of the Coach House would be viewed by them as depreciating at a fixed rate on a declining balance, from year to year.  The concept of depreciation is one which Mr. Scholz would have been familiar with given his business background. It is not a difficult concept to grasp, and I have no reason to believe that it would not have been understandable to, and attractive to, the plaintiff. 
 [34]        The question then is, what would an appropriate rate of depreciation be?  If this were a commercial agreement, the parties might very well have agreed on the 5% rate for non-farm buildings under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.).  At that rate, over nine years the plaintiff’s total investment of $94,408 would have declined in value to $59,500.  However, given the circumstances - that this was not a commercial relationship; that the defendants had no great personal desire for a Coach House on their property; that the Coach House was non-conforming with the District’s bylaws; that the plaintiff was to be occupying the land rent-free; and that the defendants were going to be incurring expense in caring for the plaintiff - it is likely that a higher rate would have been viewed as appropriate.

Mr. Justice Saunders considered a declining rate of ten percent per year for the nine years she lived in the coach house to be appropriate, and awarded Ruth Scholz the sum of $36,576.

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