Chung v. Chung

When a trustee or other fiduciary profits from a breach of their obligations, the court may award the profits to beneficiaries. This discourages trustees from wrongdoing,  and is referred to as disgorgement. The principle is illustrated by a British Columbia Supreme Court decision earlier this year.

In Chung v. Chung, 2022 BCSC 1592, Mr.  Justice Taylor imposed a constructive trust over the fiduciary’s residence and order him to pay occupational rent to the plaintiff in order to disgorge the benefit the fiduciary received through his breach of trust.

The plaintiff, Jae Chung, and the defendant Won Chung were brothers. They invested in two apartment buildings in the west end of Vancouver. The titles were held in two nominee companies, which were subject to bare trust agreements proportionate to the brothers’ respective interests. Won Chung managed the properties, while the plaintiff was a more passive investor. Won Chung refinanced the apartment buildings, Jae Chung also signing the necessary documents, but Won Chung deposited $1,664,966 in his personal account, without his brother’s knowledge. He later put the proceeds into GICs.

Subsequently, Won Chung cashed in 1,581,860 of the GICs and applied the funds to the purchase of a residence on South West Marine Drive (the “Marine Drive Property”) in 2014.  The total purchase price including GST was a little more $1,682,306, the difference made up in cash. Jae Wong was not aware of the use of funds until later.

After Jae Chung sued, the brothers entered into a partial settlement agreement which required certain accountings, but left open Jae Chung’s disgorgement, tracing and constructive trust claims in respect of the Marine Drive Property.

Jae Chung sought a 45% interest over the Marine Drive Property through a remedial constructive trust, representing his 45% equitable interest in the mortgage proceeds. Won Chung argued that Jae Chung’s remedy was limited to a return of his share of the funds improperly taken plus interest. He argued on the basis of Hallett’s Estate, (1880) 13 Ch D 696 (Eng. C.A.), that because he mixed his own funds with the trust funds the remedy is limited to a lien for the amount of funds taken in breach of trust.

Given the increase in value of Vancouver real estate, the difference is significant. The Marine Drive Property was appraised at $3,600.000 in 2021.

Mr. Justice Taylor rejected the argument that Jae Chung was limited to the amount of funds wrongfully appropriated, noting that Hallett’s Estate has been rejected by courts in both England and British Columbia. An award limited to the amount of funds plus interest would not further the goal of discouraging breaches of fiduciary duties. He wrote:

[77]         Further, it is my view that an award of interest only, as asserted by the defendants, would not serve the necessary prophylactic purpose in this context. If I were to grant the remedy sought by the defendants, it would have the effect of allowing Won to benefit from his breach of trust, since the more than doubling in market value of the Marine Drive Property (of just under $2 million) clearly substantially exceeds the value of any notional interest payments over that same period, with the result that Won would benefit from his breach of trust. Such a result is inconsistent with the policy objective of the disgorgement remedy, which is to deter faithless fiduciaries.

The trial judge applied the reasoning in Soulos v.Korkontzilas, 1997 CanLII 346, in holding that the criteria for a remedial constructive trust had been met imposed a constructive trust to the extent of a 45% interest in the Marine Drive Property.

Wong Chung argued that funds he used for renovations should be taken into consideration, but Mr. Justice Taylor did not find sufficient evidence that the renovations enhanced the value of the Marine Drive Property.

Mr.  Justice Taylor also found that Jae Chung was entitled to occupational rent equal to 45% of the rental value of the house less 45% of Wong Chung’s expenditures on utilities, insurance and property, for a total award of $128,314.

Moore v. Sweet

On November 23, 2018, the Supreme Court of Canada released its decision in Moore v. Sweet, 2018 SCC 52, in which the majority imposed a remedial constructive trust on the proceeds of a life insurance policy in favour of the life insured’s former spouse. The life insured, and owner of the policy, Lawrence Anthony Moore, had orally agreed with his former spouse, Michelle Constance Moore, that he would retain her as the beneficiary of his life insurance policy, if she paid the insurance premiums. She did so, paying approximately $7,000 in premiums after her separation from Mr. Moore. He broke his promise to her, by appointing his new common-law spouse, Risa Lorraine Sweet, as the irrevocable beneficiary. The policy paid out $250,000. At death, Mr. Moore’s estate was insolvent.

These facts raised some interesting issues of law and policy. Both Ms. Moore and Ms. Sweet were innocent parties. There is no question that Ms. Moore could sue his estate for his breach of the agreement, but that would be a hollow victory, given that the debts of his estate exceeded the assets. In order for her to receive what she bargained for, the proceeds of the life insurance proceeds, she would need to persuade the court to impose a trust on the proceeds, but on what basis? In Canada, constructive trusts are most frequently imposed when someone proves that another has been unjustly enriched. This is not the only basis on which a constructive trust may be imposed: it may be imposed when someone has acted wrongfully. In other words, it may be imposed on someone who holds property in circumstances when it is against good conscience for them to do so. I would argue that constructive trusts may also be imposed in other circumstances.

Ms. Moore was initially successful, but the majority of the Ontario Court of Appeal reversed the application judge’s decision. The Court of Appeal held that she was limited to receiving the amount of the premiums she paid. She appealed to the Supreme Court of Canada, the majority of which based its decision on unjust enrichment, holding that it would be unjust for Ms. Sweet to retain the insurance proceeds.

To succeed in a claim of unjust enrichment, Ms. Moore need to prove that Ms. Sweet was enriched, that Ms. Moore suffered a corresponding deprivation, and that there was no juristic reason for the enrichment. Madam Justice Cote, for the majority, found both that Ms. Sweet was enriched by the receipt of the insurance proceeds, and that Ms. Moore suffered a corresponding deprivation, having paid the premiums. It is not necessary that the enrichment be the same amount as the deprivation, nor, Madam Justice Cote wrote, does “the corresponding deprivation element…require that the disputed benefit be conferred directly by the plaintiff on the defendant.”

Much of the controversy in this case revolved around the third element: whether there was a juristic reason for the enrichment. The approach mandated by the Supreme Court of Canada decision in Garland v.Consumers’ Gas Co., 2004 SCC 25, is to consider first whether the defendant is entitled to retain the benefit on the basis of an established category for juristic benefit, such as a gift, a statutory, common law or equitable obligation. For example, if I give you a $100 as a birthday present, you are enriched and I have suffered a corresponding detriment, but my intent to make a gift is a juristic reason that you are entitled to retain the $100. Similarly, there is a juristic reason for the government to retain my taxes, namely the legislation pursuant to which I am required to pay the taxes. The burden is on the person making the claim to show that there is no juristic reason in accordance with an established category. If not, the person defending the unjust enrichment claim may then show that there is some other reason he or she should be able to retain the benefit which may include the expectations of the parties and public policy.

In this case, the insurer was required to pay the proceeds to Ms. Sweet in accordance with the Insurance Act, which includes protections of the proceeds against creditors of the deceased. Are the provisions of the legislation a juristic reason for Ms. Sweet’s enrichment? The minority thought so; the majority not.

Madam Justice Cote distinguished between the obligations of the insurer to pay out the proceeds to the designated beneficiary and the right of the beneficiary to retain the proceeds as against the claimant, in this case, Ms. Moore. She wrote:

[73]                          Accepting that contractual rights to claim policy proceeds can exist outside of the Insurance Act, can an irrevocable designation under the Insurance Act nonetheless constitute a juristic reason for Michelle’s deprivation? In my view, it cannot. This is because the applicable statutory provisions do not require, either expressly or implicitly, that a beneficiary keep the proceeds as against a plaintiff, in an unjust enrichment claim, who stands deprived of his or her prior contractual entitlement to claim such proceeds upon the insured’s death. By not ousting prior contractual or equitable rights that third parties may have in such proceeds, the Insurance Act allows an irrevocable beneficiary to take insurance money that may be subject to prior rights and therefore does not give such a beneficiary any absolute entitlement to that money (Shannon, at p. 461). Put simply, the statute required that the Insurance Company pay Risa, but it did not give Risa a right to keep the proceeds as against Michelle, whose contract with Lawrence specifically provided that she would pay all of the premiums exclusively for her own benefit. Neither by direct reference nor by necessary implication does the statute either (a) foreclose a third party who stands deprived of his or her contractual entitlement to claim insurance proceeds by successfully asserting an unjust enrichment claim against the designated beneficiary — whether revocable or irrevocable — or (b) preclude the imposition of a constructive trust in circumstances such as these (see Central Guaranty Trust Co. v. Dixdale Mortgage Investment Corp. (1994), 24 O.R. (3d) 506 (C.A.); see also KBA Canada).

[74]                          On this basis, the applicable Insurance Act provisions are distinguishable from other legislative enactments that have been found to preclude recovery, such as valid statutory provisions requiring the payment of taxes to the government (see GST Reference, at pp. 476-77; Zaidan Group Ltd. v. London (City) (1990), 71 O.R. (2d) 65 (C.A.), at p. 69, aff’d [1991] 3 S.C.R. 593). In that context, the plaintiff’s unjust enrichment claim must fail because the legislation permits the defendant to be enriched even when the plaintiff suffers a corresponding deprivation. The same cannot be said about the statutory framework at issue in this case, however; there is nothing in the Insurance Act that justifies the fact that Michelle, who is contractually entitled to claim the policy proceeds, is nevertheless deprived of this entitlement for Risa’s benefit. 

Madam Justice Cote held that there were no other juristic reasons for the enrichment.

Mr. Justice Gascon, writing for the minority dissent, would have held that the provisions of the Insurance Act constituted a juristic reason for Ms. Sweet’s enrichment. The designation was made in accordance with the Insurance Act, which also provided protections from creditors for an irrevocable beneficiary. It was his view that Ms. Moore’s claim was purely contractual, and she had no equitable claim to the proceeds. She had a claim against Mr. Moore’s estate in contract, but a contractual claim was insufficient grounds for the court to impose a constructive trust in unjust enrichment. Mr. Justice Garson emphasized the importance of certainty if that the legislation provides.

I should note that Madam Justice Cote declined to consider whether a good conscience constructive trust for wrongful acts could have also been imposed (I think it could), or whether there were other categories of constructive trust.

The result is that Ms. Moore is entitled to the insurance proceeds.

Unjust Enrichment and Constructive Trusts Article

Last November I was one of the speakers at a Continuing Legal Education Course on estate litigation. The Continuing Legal Education Society of British Columbia has posted my paper here.

The Wills Variaton Act and Unjust Enrichment

In British Columbia, a child or spouse can apply under the Wills Variation Act to vary their parent or spouse’s will if the deceased did not make adequate provision for the child or spouse. The court considers the deceased’s legal obligation to the child or spouse. Then the court considers any moral obligations the deceased may have owed to the claimant.

Sometimes the claimant may also have a claim in unjust enrichment. To succeed the claimant must prove:

1. that claimant enriched (in other words benefited) the deceased;
2. that the claimant suffered a corresponding depravation (gave up something or contributed labour); and
3. that there is no juristic reason for the enrichment (such as a contract or a gift.)

In a Wills Variation Act claim, the court can take into account any unjust enrichment in deciding whether to vary the will in favour of the claimant.

Wilcox v. Wilcox, 2000 BCCA 491, illustrates how unjust enrichment principles dovetail with the Wills Variation Act. The plaintiff was one of Edith Wilcox’s four children. The plaintiff lived with their mother in a house they owned together from 1970 until Edith Wilcox’s death in 1996. The plaintiff and her mother both contributed financially to the house and household expenses, but the court found that the plaintiff contributed more funds over the years. The plaintiff also provided did the household chores and provided personal care and services to their mother after 1989 when their mother became ill. The plaintiff and her mother’s relationship became strained in about 1993. The plaintiff and her mother held title to the house in a joint tenancy until August 1995, when Edith Wilcox unilaterally severed the joint tenancy. Edith Wilcox also made a new will in December 1995, leaving substantially all of her estate to the plaintiff’s three siblings.

After Edith Wilcox’s death, the plaintiff brought a Wills Variation Act claim. The main asset of the estate was Edith Wilcox’s half-interest in the house. At trial, the trial judge held that Edith Wilcox had been unjustly enriched by the plaintiff’s financial contributions and personal care and services. He imposed a constructive trust on Edith Wilcox’s half-interest in the house in favour of the plaintiff. He also awarded the plaintiff insurance monies in respect of some damage to the house and the sum of $6,500.

On appeal, Madam Justice Saunders agreed that Edith Wilcox was unjustly enriched by the plaintiff’s contributions. The plaintiff had an expectation that she would receive her mother’s interest in the house by right of survivorship. But Madam Justice Saunders also said that the unjust enrichment did not entitle the plaintiff to the entire interest in the house. The extent of the unjust enrichment was more limited. After considering the plaintiff’s legal claim in unjust enrichment, Madam Justice Saunders turned to the plaintiff’s moral claims. She found that the plaintiff had a stronger moral claim than her siblings. On the basis of both the plaintiff’s legal and moral claims, Madam Justice Saunders upheld the award of the house and insurance monies to the plaintiff. She did allow the appeal to the extent of eliminating the award of $6,500 to the plaintiff. Instead, the Court of Appeal held that the small amount of cash in the estate would be divided equally among Edith Wilcox’s four children.

Limitation Period for Constructive Trusts in British Columbia

[Since I wrote this post, a new Limitation Act, has come into effect which significantly changes the law. I summarized the new legislation here.]

As I wrote in my post Limitation Periods in British Columbia, there are different limitation periods for different kinds of claims. Sometimes how you characterize a claim can make the difference between finding that you are out of time, and being permitted to pursue the claim.

In Smith v. Vancouver City Savings Credit Union, 2007 BCSC 771, the plaintiff, Marcia Smith, started a proposed class action suit against Van City on behalf of herself and others whom, she says, Van City overcharged prior to February 1997. Her claim is that Van City's overdraft charges were interest charges exceeding the maximum allowable interest rate of 60 % per year under section 347(1) of the Canadian Criminal Code.

Van City sought to have the claim dismissed on the basis that it was brought after the limitation period expired for filing the suit. Van City argued that the limitation period was six years pursuant to section 3(5) of the Limitation Act, RSBC 1996, c. 266.

Ms. Smith argued that because she was seeking an order declaring that Van City holds the overcharges as a constructive trustee for her and the other members of the proposed class, the limitation period is ten years. Section 3(3)(c) and (d) of the Limitation Act provides that the limitation period for claims against trustees to recover trust property is ten years.

Van City argued that the ten year limitation period for trust claims were for those claims where there was a pre-existing trust. Ms. Smith claim, Van City argued, was not really based on an existing trust. Rather she was asking the court to impose a trust as a remedy for the alleged overcharge.

In her reasons for judgment released on June 2, 2007, Madam Justice Gray held that Ms. Smith could proceed with her claim on the basis that if she is successful in her constructive trust claim, the longer ten-year limitation would apply. Section 1 of the Limitation Act defines “trust” to include a “constructive trust.” Madam Justice Gray applied the reasoning in another recent case, Sun-Rype Products Ltd. v. Archer Daniels Midland Co., 2007 BCSC 640. In Sun-Rype, Mr. Justice Rice held that constructive trusts included remedial constructive trusts.

If Ms. Smith had just asked for an order that Vancouver pay a monetary damages, instead of asking for a constructive trust, her claim might very well have been dismissed on the basis that the limitation period had expired. Even though the facts are the same, by asking for the right legal remedy, she can proceed with her claim. She has not proven that Van City acted wrongfully, and she has not won her case, but she can still have her day (or week or month) in court.

Claims by a Common-law Spouse to Inherited Property on Breakdown of the Relationship

When a common-law relationship breaks down in British Columbia, one common-law spouse may have a claim against the other common-law spouse on the basis of unjust enrichment. To succeed the spouse making the claim must prove three things. She must show that she contributed money, other assets, or services to the other common-law spouse. She must show that the other common-law spouse benefited. Finally, she must show that there is no principled reason to allow the other common-law spouse to keep the benefit without compensating her.

Sometimes the courts will award money (a monetary award), and other times, the courts will award an interest in specific property (a constructive trust) to the contributing common-law spouse.

Can a common-law spouse make an unjust enrichment claim in respect of property the other inherited?

The British Columbia Court of Appeal considered this issue in Hughes v. Miller, 2007 BCCA 116.

Bambii Hughes and Bryan Miller lived in a common-law relationship for twelve years. The trial judge found that during some of those years, Ms. Hughes contributed the larger proportion of their modest living expenses. She also provided care and assistance to Mr. Miller.

Mr. Miller had inherited an interest in some land from his father. During the common-law relationship, Mr. Miller inherited a further interest in the land, and some money from his aunt’s estate. When the parties separated, the land was worth about $ 1.75 million.

The trial judge found that Mr. Miller had been unjustly enriched by Ms. Hughes contributions during their relationship, but did not consider it appropriate to award Ms. Hughes an interest in the land. The trial judge took into consideration the fact that Mr. Miller inherited the land, and Ms. Hughes did not contribute to the acquisition of the land. The trial judge ordered Mr. Miller to pay Ms. Hughes $75,000.

The Court of Appeal agreed with the trial judge’s analysis, but increased the award to $100,000. From the time the Mr. Miller inherited his aunt’s interest in the land to the couple’s separation, the land increased in value by about $300,000. Mr. Justice Hall, in the Court of Appeal, considered it appropriate to award Ms. Hughes of one-third of the increase in value.

Constructive Trusts and the Rights of Creditors

Some of the leading Canadian cases dealing with constructive trusts have arisen out of common-law relationships. One common-law spouse (let’s say the common-law wife) contributed money or work to property owned by the other (the common-law husband). The relationship breaks down. The common-law wife who contributed the money or work sues the common-law husband, claiming that he has been unjustly enriched by her contributions. The court agrees. The court then imposes a constructive trust on the common-law husband’s property, giving the common-law wife an ownership interest. See for example Peter v. Beblow, [1993] 1 SCR 980.

But what if in the above example, the common-law husband has borrowed money from another person. Should the common-law wife’s claim have priority over the creditor? If the court imposes a constructive trust in her favor, she might get priority.

Suppose we take this a step further. The common-law couple is still together. The common-law husband runs into financial difficulty. He has given a lender security over a valuable asset that he held in his name only. The common-law wife says she contributed to the asset, and is entitled to an interest in the asset in priority to the lender.

This was one of the issues in Melchior v. Pricewaterhouse Coopers, 2007 BCSC 136, a recent Supreme Court of British Columbia decision.

Mr. Cable and Ms. Melchior lived in a common-law relationship for about 10 years. Mr. Cable had invented and patented a wood gluing apparatus and process. He also had the majority interest through a holding company in a wood production and sale business: Interact Wood Products Inc. Ms. Melchior also had a smaller interest in the holding company.

Both Mr. Cable and Ms. Melchior were involved in the business. In order to get some capital, Interact Wood Products borrowed $3.5 million from a private lender. He gave a personal guarantee, and gave the lender a security interest in his patent rights.

Sadly, the business failed. Both Interact Wood Products and Mr. Cable personally went bankrupt.

Ms. Melchior asserted a claim in the bankruptcy proceedings to an interest in the patent rights. She claimed that Mr. Cable held the rights as a resulting or constructive trustee for her. If she were successful, she would have the rights of a co-owner to the patent. She could set up another operation with Mr. Cable’s assistance, and use the patent rights. She could use the patent and compete against a co-owner.

One of the arguments Ms. Melchior made was that Mr. Cable, and his creditors, was unjustly enriched by her efforts in the business. To succeed she needed to prove the following:
1. Mr. Cable and his creditors were enriched by her work;
2. She suffered a corresponding deprivation; and
3. There was no juristic reason for the enrichment.

Mr. Justice Masuhara found against Ms. Melchior on all three counts.

First, Ms. Melchior was well paid for her work in the business. She drew salaries, and Interact Wood Products Ltd. covered some of her expenses such as some of her meals. Although she received benefits from the business, including the loan, she was insulated from most of the financial risks.

Secondly, the deprivation was the loss of business because of market reversals. It was not the type of deprivation against which the law of unjust enrichment afforded protection.

Thirdly, there were juristic reasons for the lender to benefit from its security ahead of any claims by Ms. Melchior. The lender made the loan in good faith on the basis of its agreement with Mr. Cable and Interact Wood Products Ltd. The patent was registered in Mr. Cable’s sole name. Ms. Melchior was aware of the terms of the loan agreements, but raised no objection to Mr. Cable giving the lender a security interest in the patent when the loan was made. Ms. Melchior did not assert any claim to an interest in the patent until after Interact Wood Products defaulted on the loan. She had no reasonable expectation to an interest in the patents.

Mr. Justice Masuhara distinguished between the cases where one common-law spouse is making an unjust enrichment claim against the other in the context of a breakdown in the relationship, and the claim by a common-law spouse to defeat a creditor of her common-law spouse. He wrote at paragraph 84:

The somewhat unique feature of this case is that while Ms. Melchior’s claim is a claim of unjust enrichment against her spouse, this is not a case where the court is being asked to divide the remnants of a spousal relationship that has come to an end. Rather, the sought after interest is in a business assets and the relief claimed is to enable Ms. Melchior and Mr. Cable to continue on together with their business by limiting the scope of security available to creditors of Mr. Cable, and in particular, 568 a secured creditor.

In a nutshell, the court found that it would have been unjust for the court to impose a constructive trust in favor of Ms. Melchior to the prejudice of Mr. Cable’s creditors.

Mutual Wills: Agreements Not To Revoke a Will

The law of British Columbia allows you to revoke your will as long as you have the mental capacity to do so. What if you make an agreement that you will not revoke your will? Is the agreement enforceable? What if you change your will anyway?

Let me give an example of how this question might arise. Let's take a couple in a second marriage. Each of the wife and the husband has children from a previous marriage. They make wills leaving all of their wealth to each other, but each also provides that if he or she is the last to die, one half of the estate will go to his or her children, and one half to the spouse’s children.

In this example, let’s assume that the wife dies first, and the husband inherits all of his wife’s wealth. He then changes his will, leaving everything to his children, and nothing to his wife’s children. Can the husband do this?

Yes. Although it may not be fair to his wife or her children, he is entitled to change his will.

However, what if when the couple made their wills they entered into a mutual wills agreement that they would not revoke their wills?

British Columbia courts have held that where two people expressly agree that they will not revoke their wills, and one of them dies without revoking his or her will, the agreement binds the surviving person. See, for example, University of Manitoba v. Sanderson Estate (1998), 155 D.L.R. (4th) 40; [1998] 7 W.W.R. 83; 47 B.C.L.R. (3d) 25 (BCCA).

In our example, if the couple made a mutual wills agreement that neither one would revoke his or her will, then the wife’s children could sue the husband’s estate and ask the court to require that one half of the estate be paid to them. Technically, the court does not prevent the husband from revoking his will—he has already done that—but imposes a constructive trust over one half of the husband’s estate for the wife’s children.

Before finding a mutual wills agreement, the courts require clear evidence that each party agreed that they would not revoke their wills, usually an express written agreement or statement in the wills. It is not enough to show that each was honor bound to keep the provisions of his or her will. In making a mutual will agreement each party is agreeing that he or she will abide by the agreement even if after the other’s death, he or she remarries, or has children.

In Brynelsen Estate v. Verdeck, 2002 BCCA 187, Mrs. Forrester’s two stepdaughters from her second marriage claimed that when their father and Mrs. Forrester had made wills in which they left everything to each other, with the survivor leaving everything to the two stepdaughters, Mrs. Forrester and their father agreed that on the death of one, the survivor would not revoke the gifts to the stepdaughters. After her second husband—the plaintiffs' father—died, Mrs. Forrester remarried. The remarriage revoked her will, and Mrs. Forrester (whose name had by then become Mrs. Brynelsen) died without a valid will.

In rejecting the stepdaughters’ claim, Madam Justice Southin, for the B.C. Court of Appeal, set out the following test:

[25] The critical time in this case is the time of the making of the wills when the Forresters had been married but a few months. The evidence simply does not warrant a conclusion that Mrs. Forrester, as she then was, was close to the respondents whom she had met but a few months before.
[26] Suppose, at the time of these 1973 wills, Mr. Forrester had been asked whether he was binding himself to leave not only what he might inherit from her but also his own estate to the respondents no matter what happened? Was he depriving himself, if he married yet again and had children by a third wife - it is not unheard of for a man in his sixties or seventies to marry a young wife and father children - of the means of providing for them? What of Mrs. Forrester if she had been asked, 'What if he dies and you marry again - are you committing yourself to leaving nothing to your next husband or his children, of whom you might become fond, or, to put it another way, to leave anything a third husband might leave to you or give to you to Mr. Forrester's daughters?'
[27] To my mind the answer each would have given to these questions is 'no'. For them to have given any other answer would have been irrational.

Even where it is clear that a couple intends to be bound by an agreement that they will not revoke their wills, there are several potential problems enforcing mutual will agreements. Let's return to our earlier example. The husband and wife have agreed that neither will revoke his or her will if the other dies first. The wife dies before the husband. Suppose that the husband does not revoke the will at all, but transfers his property into a joint tenancy with right of survivorship with his children, leaving little or nothing to pass under his will to his late wife's children? What if he gives all of his wealth away before he dies?

It is possible that a court would enforce the agreement if husband has transferred assets into a joint tenancy or given assets away. The court might impose a constructive trust on those assets. However, the outcome would be uncertain.

British Columbia Court of Appeal Reduces Award in Schnogl v. Blazicevic

The British Columbia Court of Appeal has reduced the award to the Plaintiff in Schnogl v. Blazicevic, 2005 BCCA 575, from a constructive trust over 90% of the deceased's home to 66 2/3% of the home. (See my October 30 post, "Unjust Enrichment: Schnogl v. Blazicevic," for a summary of the facts and a discussion of the trial judge's decision.)

In reducing the award, Madam Justice Prowse for the court said that trial judges have considerable discretion in determining awards in unjust enrichment cases. However, in this case the award was disproportionately high compared to the benefits received by the deceased and the sacrifices made by the Plaintiff. It was also high when compared to awards made in other cases. The award failed to fully take into consideration the benefits the Plaintiff had received from his relationship with the deceased. She said at paragraph 21:

[21] In determining whether the trial judge erred in awarding Mr. Schnogl a 90% interest in the property, I do not lose sight of the fact that these cases are essentially fact-driven. For that reason, it is of limited assistance to compare awards in one case with those in another. Trial judges are given considerable leeway to tailor an award to fit the precise circumstances before them. In this case, however, I am satisfied that the trial judge’s determination did not adequately take into account the fact that Mr. Schnogl continued to work full-time during the time that he provided his services to the Balens, and that he continued to benefit from a significantly reduced cost of room and board during the time he lived with them. While the services he rendered were extensive and prolonged, and while he gave up the valuable opportunity to purchase his own residence, the extent of the unjust enrichment obtained by Mr. Balen must take into account these additional factors.

Unjust Enrichment: Schnogl v. Blazicevic

Heinz Schnogl met and became friends with Mary and Richard Balen in about 1969. They were about 20 years his senior, and did not have any children.

The Balens had purchased a home on West 10th Avenue in Vancouver in 1967, for $12,000. In 1976 and 1977, they had their house renovated to include a basement suite. Mr. Schnogl, who was a journeyman plumber, did the plumbing and some other work for them. A year later he rented the suite.

Mr. Schnogl paid rent to the Balens, and half of the utility bills. He often ate with the Balens, and paid them for the food. He did the gardening, cut the grass, painted the trim on the house, repaired the fence, and other maintenance. He also spent money on the house, contributing $1,300 toward the replacement of the roof.

Over the years Mary Balen had health problems. In the 1980s she developed osteoarthritis, and required dialysis. Mr. Schnogl gave her messages to help with her respiration. When she was in the hospital, he drove Richard Balen to the hospital to visit her.

A couple of times, Mr. Schnogl considered moving out and buying his own home. Mr. Balen dissuaded him, telling him that someday the house on West 10th would be his.

Mary Balen died in 1986. Heinz Schogl continued to rent the suite from Mr. Balen, who died on October 29, 1998.

When Mr. Balen died, his last Will was dated July 9, 1973. It provided that if Mrs. Balen died before him, half of his estate would go to her brothers, and the other half to his parents, or if they were dead, his brother. Both Mr. Balens parents and his brother died before him, but his niece is entitled to the brother’s share.

Two or three months before he died, Mr. Balens went to see a lawyer about making a new Will. The lawyer drew up a will for him, leaving Mr. Schnogl $10,000, and the right to live in the house for ten years. However, Richard Balens never signed the new Will.

After Richard Balen died, Mr. Schnogl sued his estate. Mr. Schnogl claimed that there was a contract between them that in exchange for his services over the years, Mr. Balens promised to leave him the house. Alternatively, he argued that he should either get the house or monetary compensation based on the legal principles of unjust enrichment.

The court found that there was no contract in the circumstances.

To succeed in an unjust enrichment claim, Mr. Schnogl was required to prove the following three things:

1. Mr. and Mrs. Balen benefited or were enriched by his services and contributions to the house;
2. Mr. Schnogl suffered a corresponding deprivation; and
3. There was no juristic reason for the Balens’ enrichment.

Clearly, Mr. Schnogl’s services and money contributions enriched the Balens. He suffered a corresponding deprivation in that he contributed labour without pay, and money without reimbursement. He also gave up the opportunity to own his own home, and take advantage of Vancouver’s rising real estate prices.

It was the third element that was the most contentious. The executor of Richard Balen’s will argued that over the years Mr. Schnogl was charged a lower than market rent in exchange for his services. The services were, according to the executor, part of a contract between the Balens and Mr. Schnogl. If Mr. Schnogl were contractually obligated to do the maintenance and other services, then this would preclude Mr. Schnogl from getting anything from the estate. According to the executor, Mr. Schnogl already received the reduced rent, and this was a “juristic reason” for the enrichment.

In Schnogl v. Blazicevic, 2004 BCSC 1335, Mr. Justice Cullen, of the Supreme Court of British Columbia, rejected the executor’s argument. He found that although the relationship may have started out as a landlord and tenant relationship, it was not bound by it. Mr. Schnogl’s services included personal care that was not related to the house. The relationship took on more of a parent and child relationship.

The executor also argued that Mr. Schnogl’s services and other contributions were a gift, made without any expectation of reward, and that Richard Balen’s estate was not required to compensate him. The court also rejected this argument. The court found that the Balens had led Mr. Schnogl to expect that he would get an interest in the house.

The court awarded Heinz Schnogl a 90% interest in the house by granting Mr. Schnogl a remedial constructive trust. [Since I wrote this post, the Court of Appeal has reduced the award to a 66 2/3% interest in the house. See my post of December 15, 2005, on the Court of Appeal decision here.]

The house on 10th Avenue, in Vancouver, that the Balens bought in 1967 for $10,000 was appraised in January 2004, at $490,000.

Life Insurance Policy Beneficiary Designations Are Not Sacrosanct

I have been to presentations where the speaker describes all manner of claims that can be made to dispute someone’s Will, and then suggests that people would be much better advised to arrange that their affairs so that their wealth is transferred to their beneficiaries on death by some other means, such as a trust, joint accounts, or through life insurance products. The unstated messages of these presentations are that Wills get challenged a lot, and other types of estate planning tools are somehow immune from challenge. Neither of these unstated messages are true.

I agree that a Will is just one of many tools for transferring wealth at death, and it may make sense in some circumstances to structure one’s affairs to transfer wealth outside of the estate, particularly when the beneficiary is a spouse. I also agree that in British Columbia, Wills are vulnerable to claims under the Wills Variation Act from spouses and children. However, in many cases, no one has any reason to challenge a Will.

Nor are other estate planning tools immune from attack. Take life insurance policy designations.

Joan Mary Martindale designated her then husband John Edward Martindale as the beneficiary of a group life insurance policy in 1979. Joan and John Martindale later separated and in January 1981, they signed a separation agreement dividing the family assets. The separation agreement provided that each gave up any further claim to the other’s property. They later divorced.

Joan Martindale died in July 1994.

Before her death, Joan Martindale told friends and colleagues that she arranged her affairs so that her sister Georgina Roberts would get everything. She told her sister a few days before she died that she did not need to fill in a change of beneficiary form for the life insurance policy, and that she had taken care of everything.

However, Joan Martindale never did change the designated beneficiary of the life insurance, and after her death her ex husband John Martindale claimed the insurance proceeds. He collected the proceeds and transferred them to Linda Martindale.

Georgina Roberts, who was also the executor of Joan Martindale's Will, sued John and Linda Martindale for the life insurance benefits. The trial judge held that because Joan Martindale mistakenly believed she had changed the beneficiary of the life insurance policy, John Martindale was not entitled to the proceeds, which then fell into Joan Martindale’s estate.

John and Linda Martindale appealed to the British Columbia Court of Appeal. In Martindale Estate v. Martindale, (1998), 162 D.L.R. (4th) 475; (1998), [1999] 1 W.W.R. 778; (1998), 55 B.C.L.R. (3d) 63, 1998 CanLII 4561, Madam Justice Southin rejected the trial judge’s analysis, but arrived at the same result.

The Insurance Act, RSBC 1979, c. 200, [now RSBC 1996, c. 226], required that a designation or change in designation of a beneficiary be in writing and signed by the insured. According to the Insurance Act, where a beneficiary is designated, the insurance money “is not part of the estate of the insured and is not subject to the claims of creditors of the insured.”

According to Southin J., Joan Martindale’s intent was not relevant. To change the beneficiary, the insured had to sign a change of beneficiary form.

However, because John Martindale had signed a separation agreement giving up any further claim to Joan Martindale’s property, it was against good conscience for him to receive the insurance proceeds, and the court imposed a constructive trust on the life insurance proceeds for Joan Martindale’s estate.

Southin J.A. stated:

[25] There is in this proposition the very great danger of judges invoking their personal predilections. "Good conscience" is an infinitely variable concept upon which reasonable men and women, and therefore reasonable judges, may have widely divergent opinions.

[26] But I am comfortable in this case in saying that it would be against good conscience for the appellants to keep this money because Mr. Martindale had, by the separation agreement, surrendered any right he might have had to the property of the deceased. A policy of life insurance is a species of property of the insured, albeit the amount payable under the contract
of insurance does not fall into possession until the insured's death, and, by law, cannot be taken by the insured's creditors.

[27] For the appellant, Mr. Martindale, to claim from the insurer the proceeds was a breach of the separation agreement and such a breach is sufficient, in my opinion, to call in aid the doctrine of the remedial constructive trust. To put it another way, it is not the mistaken belief of Mrs. Martindale which gives rise to a remedy; it is the bargain which Mr. Martindale made.

Martindale v. Martindale Estate proves that despite the clear language of the Insurance Act, life insurance policy designations are not immune from challenge in appropriate circumstances.