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.

Land Title Fraud: Oehlerking Estate

[Since I wrote the post below, the British Columbia Court of Appeal has allowed an appeal by The Land Title and Survey Authority of British Columbia. The effect of this appeal is that the mortgage is declared invalid, and it is no longer necessary for the Authority to compensate the victim of the fraud. The Court of Appeal decision is at 2009 BCCA 138. See my more up-to-date post here.]

Oehlerking Estate, 2008 BCSC 1648, is a case about real estate fraud.

Sarah Michele Mullen and some person whose identity is not known, but who is referred to as is customary as “John Doe,” went to a lawyer in Vancouver. (I pity the real John Doe, whose name is wrongly brandied about in respect of all kinds of misdeeds.) John Doe had a fake driver’s license identifying him as Roy Oehlerking. He told the lawyer he wanted to transfer his house to his niece, Ms. Mullen. She, in turn, arranged for a mortgage with GET Acceptance Corporation. The transfer of the house into Ms. Mullen’s name was completed, and she had the mortgage in the amount of $320,000 registered against the title. The GET Acceptance gave Ms. Mullen most of the funds.

Roy Oehlerking was never aware of the fraud that had been perpetrated against him. He died, and his widow was his executor. Mrs. Oehlerking instructed her lawyers to transfer the title to the house into her name as executor. It was then that she found out the house was no longer in her husband’s name.

By then, the money together with John Doe was long gone.

Mrs. Oehlerking sued John Doe, Sarah Mullen, the lawyer who handled the transfer and mortgage, GET Acceptance and the Land Title and Survey Authority of British Columbia, among others.

Mr. Justice Barrow ordered the title transferred from Ms. Mullen’s name to Mrs. Oehlerking’s name has her late husband’s executor. That part was easy.

The mortgage presented a more difficult issue. GET Acceptance Corporation was not aware that Ms. Mullen had obtained the title fraudulently. The lender was entitled to rely on the registration of title to the house, which was in Ms. Mullen’s name when the house was mortgaged. Under British Columbia’s Land Title Act, the state of the title is conclusive in respect of innocent third parties who give value.

The court held that the mortgage was valid, and binding on Mrs. Oehlerking, despite the fraud.

Fortunately, there is a fund available through the Land Title and Survey Authority to compensate people who are deprived by fraud (or other wrongful actions) of an interest in land. The legislative provisions are in Part 19.1 of the Land Title Act. To get compensation Mrs. Oehlerking must show that she was deprived of an interest, in this case the mortgage, because of both the fraud, and because of the law that title is conclusive. She must also take all reasonable steps to recover compensation from the wrongdoers.

Mr. Justice Barrows awarded compensation to Mrs. Oehlerking against both John Doe and Ms. Mullen. But he did not require her to take any further steps to collect from John Doe and Ms. Mullen. He found that there was no hope she would be able to collect from them. Accordingly, Mr. Justice Barrows ordered the Authority to compensate her for the cost of paying out the mortgage.

[Since posting this, I have become aware of the typographical error in the second paragraph. But after reading the comment by Mr. Sigalet below, I have decided that I like the word "brandied" just fine.]

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.

Singh Estate v. Shandil

In a previous post, I wrote about a case in which the Supreme Court of British Columbia found that documents purporting to forgive a loan on the creditor's death were invalid. The reason they were in valid was that the documents were testamentary, but did not comply with the formal requirements for making a valid will in the Wills Act, RSBC 1996, c. 489.

Today, I am going to write about a similar attack on a statutory declaration in which a father forgave a $100,000 loan to his daughter. The case is called Singh Estate v. Shandil, 2007 BCCA 303, and the British Columbia Court of Appeal released its reasons for judgment today.

Mr. Ram Singh lent his daughter $100,000 in 2000 to help her and her husband with their mortgage. Mr. Singh later became ill, and moved in with his daughter and son-in-law. In June 5, 2003, he made a new will leaving his daughter $20,000. He also made a statutory declaration.

In his statutory declaration, Mr. Singh declared: “I have executed my last Will today. This declaration is made as an explanation of the provisions of my Will.” Further in the document, he declared: “As a token of my appreciation, I have forgiven Chandra the $100,000 originally loaned to her, to pay her mortgage. This forgiveness of debt is intended as an immediate gift to Chandra for her use personally and is not to be considered part of my estate.” He gave his daughter a copy of the statutory declaration.

Mr. Singh and his daughter later had a falling out. Mr. Singh made a new will on February 26, 2004, which provided: “I hereby revoke my Will of June 5, 2003 and Statutory Declaration to this Will.”

Mr. Singh died on March 22, 2004.

After Mr. Singh's death, his executor sued Mr. Ram Singh's daughter to recover the $100,000 loan. The executor argued that the statutory declaration was testamentary, and Mr. Singh revoked it in his later will dated February 26, 2004.

Both Mr. Justice Romilly in the Supreme Court of British Columbia, rejected the executor's arguments. Mr. Singh made a gift to his daughter by making the statutory declaration and giving her a copy. Mr. Singh was clear in the statutory declaration that he was making an immediate gift during his lifetime. He was not making a gift that was effective on his death. Accordingly, it was not testamentary.

Because Mr. Singh did not retain a right to revoke the gift when he made the statutory declaration, he could not later revoke the gift.

The Court of Appeal agreed with Mr. Justice Romilly. Mr. Singh's daughter did not have to repay the loan.

Life Insured Mortgages for Canadian Soldiers

The Edmonton, Alberta, law firm of Gorman & Koski LLP have an interesting post entitled "War Widows and Mortgage Insurance" on their blog, The Estate House, about the recent controversy over some insurers refusing (at least initially) to pay out life insured mortgages for Canadian soldiers killed in action. Apparently, some insurers took the position that a war exclusion applied in these cases.

Gorman & Koski address quite well the legal issues, and the difference between buying a life insurance and insuring your mortgage.

I don't know if the insurers were within their rights to deny coverage or not. But, setting aside the legal issues, it amazes me how some large insurers and financial institutions can spend millions of dollars on advertising to attempt to create good will, and then squander it by taking a hard line with their own customers.

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.

Who Pays the Mortgage on the Death of a Joint Tenant?

If two people own real estate that they have mortgaged in a joint tenancy, and one of them dies, does the estate of the deceased have to contribute to the mortgage, or does the surviving joint tenant have to pay it all?

Mr. Justice Sigurdson of the Supreme Court of British Columbia considered this issue in Parrott-Ericson v. Stockwell, 2006 BCSC 1409. Helen Parrott-Ericson and her husband, Goran Ericson, borrowed $420,000, which they used to buy two condominiums. They were both responsible to the lender for paying the loans. The loans were secured by mortgages of the condominiums.

Mr. Ericson and Mrs. Parrott-Ericson were registered on title to the condominiums as joint tenants.

When Mr. Ericson died, Mrs. Parrott-Ericson became the sole owner of the condominiums by right-of-survivorship. Mrs. Parrott-Ericson asked the executor of Mr. Ericson's estate to pay one-half of the loans out of Mr. Ericson's estate. When the executor refused, Mrs. Parrott-Ericson sued.

Mr. Justice Sigurdson held that in the circumstances, Mrs. Parrott-Ericson was not entitled to contribution from her husband's estate.

When two or more people are both liable on a loan, the general rule (or in legal terms the prima facie rule) is that they will share it equally, unless they have agreed on some other proportions. If one pays more than an equal share, the person paying more is entitled to contribution from the other debtor or debtors. Otherwise, the other debtor or debtors would be unjustly enriched.

But in this case, the court found that the general rule that each debtor is required to contribute equally does not apply. Because Mrs. Parrott-Ericson has received the benefit of sole ownership of the condominiums, the estate would not be unjustly enriched if Mrs. Parrott-Ericson is required to pay the full amount owing on the loans. It would be unfair to the beneficiaries of Mr. Ericson's estate if they had to bear part of the burden of the debt, without receiving an interest in the condominiums.

In Mr. Justice Sigurdson's words, at paragraph 27,

Here, on the evidence, I find that the mortgage debt and the land were clearly connected in this sense. The joint and several loan was the basis upon which the property was acquired. It was still a substantial burden on the property at the time of the deceased’s death. There was no arrangement that the estate would be liable for one-half of the debt. Of course, equity will impose that obligation in order to avoid unjust enrichment. That is the usual rule, because ordinarily there is unjust enrichment if the liability is not shared. However, here on the facts of the case at bar, I think that, given the joint debt was used to acquire the land and the petitioner received the land entirely, I find that she would be unjustly enriched if the estate had to pay one-half of the debt. On that basis, the petitioner’s claim must fail.

In cases where the surviving joint tenant is also the sole beneficiary of the deceased's estate, and no one is making a claim to vary the will (or some other claim against the estate), this issue will be academic. Mr. Justice Sigurdson's reasons for judgment do not say who is the beneficiary of Mr. Ericson's will, but Mr. Ericson's children from a previous marriage were making claims to vary the will under the Wills Variation Act, RSBC 1996, c. 490. Accordingly, if the estate had to contribute to the loans, the contribution would reduce the amount available to be varied under the will.

This decision does not affect the rights of the lender. The lender could still proceed against the estate to recover the loans if there is a default. If the executor paid some or all of the debts out of the estate, the executor could presumably seek reimbursement from the surviving joint tenant on the grounds that the survivor would be unjustly enriched by the payments. But, if there is a default, the lender is most likely to start foreclosure proceedings, and seek an order for sale of the condominums to pay the loans, in which case the burden will fall on the surviving joint tenant anyway.

B.C. Duplicate Certificates of Title

As I wrote in my previous post on real estate fraud here, cases of crooks forging a real estate owner’s signature on a transfer or mortgage document to fraudulently obtain sale or loan proceeds are rare in British Columbia.

But if you are really worried about that happening, and you don’t have a mortgage registered against your real estate, you could apply to the land titles office for a duplicate certificate of indefeasible title of your property. If your duplicate certificate of title is out, you must deposit it to register a mortgage or transfer title. This makes it very difficult for someone to fraudulently register a mortgage or transfer the title to your real estate.

Forty years ago, it used to be common practice to take out the duplicate certificate of title to protect against fraud. This is no longer common practice, but you can do it.

The downside is that you could lose the duplicate certificate of title. If you lose it, you have to apply to the registrar of land titles to issue a provisional certificate. This can be costly, and may take a couple of months. Unfortunately, people usually don’t realize the duplicate certificate is missing until they are required to register a mortgage or close a sale. If a sale is closing the following week, the deal may collapse.

The duplicate certificate of title is sometimes used as security for a loan. A lender may take possession of the duplicate certificate of title instead of requiring a registered mortgage. I see this occasionally, but lenders are probably more protected by a registered mortgage.

If you would like to read the relevant sections of the Land Title Act, RSBC 1996, c. 250, see Part 11, Division 2, Part 12 and Part 13.

Re Hawkins Estate: Who Pays the Repair Bill

In your will, you can allow people to enjoy your residence successively. For example, you might allow a friend or relative to live in your residence after your death, but then provide that if he or she moves out, or dies, someone else gets the residence.

Typically, the person who lives in the residence is required to pay for property insurance, property taxes, and upkeep while living there.

What if the residence requires major repairs?

This issue arose in a recent British Columbia case: Re: Estate of Lynn Louise Hawkins, 2006 BCSC 1374.

In her will, Ms. Hawkins created several successive interests in her condominium. First her mother could live in the condominium. When her mother no longer wished to live in it (or on her death), her friend Ms. Craig could live in it, followed by Mr. Henderson. Finally, if Mr. Henderson did not wish to live or continue to live in the condominium, it would be sold, with half of the sale proceeds going to Mr. Henderson, and half to other beneficiaries.

Unfortunately, the condominium was located in the Land of Leaky Condos. It was in North Vancouver, B.C. (We don’t seem to have that problem in relatively dry Kelowna. But, out of a sense of fair play among the regions of British Columbia, one developer built some expensive—and apparently collapsible--condominiums here. I digress.)

While Ms. Craig was living in the condominium, the Strata Corporation made special levy assessments against her condominium unit of $71,650 for repairs to fix the building leaks (total costs to fix the building were about $3,200,000), and $4,478 for legal costs to recover the repair expenditures.

Ms. Craig paid the special levies, but sought to recover the costs from Ms. Hawkins' estate by a mortgage against the condominium in her favor providing for repayment when she moved out or died. The main asset of the estate was the condominium, and there were insufficient other funds in the estate to reimburse Ms. Craig.

Under Ms. Hawkins, will, while Ms. Craig was living in the condominium, Ms. Craig would “pay all maintenance costs and repairs that appear to my Trustee to be reasonable and necessary.”

Payment of the special levy was both reasonable and necessary. The issue was whether Ms. Craig or the capital beneficiaries (in other words, those who would ultimately get the proceeds of the condominium when it is sold) should bear the costs.

Mr. Justice Ralph agreed with Ms. Craig. He held that Ms. Hawkin’s will should be interpreted in accordance with the general principle that the person with the right to live in the residence is required to pay day-to-day repairs, or those of a recurrent nature. Major structural repairs should be borne by the capital beneficiaries.

Mr. Justice Ralph noted that it would be unfair to hold Ms. Craig responsible “by the ‘luck of the draw’” for the full costs of the repair, especially in light of the appraisal evidence that the repairs would increase the value of the condominium for the capital beneficiaries when it is sold.

Although the will did not give the executor and trustee any borrowing powers, Mr. Justice Ralph authorized the executor to grant the mortgage in favor of Ms. Craig to secure the special levy. He relied on section 11 of the Trustee Act, RSBC 1996, c 464.

As a lawyer who drafts wills, I take two points from this case.

First, it is useful to distinguish in the will between day-to-day repairs and major structural repairs. Usually, it will make sense to require the person who has the right to live in the residence to pay day-to-day repairs, while major repairs can be borne by the estate.

It may not always be clear if a given repair falls into one category or the other, in which case the will could give the trustee power to decide. But, if the trustee were also one of the beneficiaries, this power would put the trustee in a conflict of interest.

Secondly, where the size of the estate permits, it is a good idea to have funds set aside for major repairs and any other unforeseen expenses.

How Seniors May Defer Property Taxes in B.C.

The cost of property taxes can be significant for seniors on fixed incomes. This can be particularly troublesome for homeowners whose property values have gone up significantly more than the average increases in values, such as owners of lakefront or oceanfront property in British Columbia. There are many seniors who have had modest incomes and lifestyles over the years, whose property values and property tax burden have increased considerably. What if a senior can’t afford to pay the property taxes, but doesn’t want to sell his or her home?

In British Columbia, you can enter into an agreement with the provincial government to defer property taxes on your principal residence if you are 60 years or over [since writing this post, the age has been lowered to 55 years or over], have lived in British Columbia for at least one year, are a Canadian Citizen or Permanent Resident, and have at least 25% equity in your property. The agreement is registered against the title to your home, and the provincial government pays the taxes. When the agreement ends, you repay the province the amount of the property taxes, plus interest. The interest is relatively low.

If you wish to sell your house, you must pay the deferred property taxes and the interest. The Land Title Office will not allow the title to be transferred unless the amount owing under the agreement is being paid out. There is an exception for property transferred at death to a surviving spouse.

I was advised by a representative of the Ministry responsible for the deferment program that the amount must be repaid if an agreement for sale is registered on title.

Persons under 55 with disabilities may also be eligible to defer the property taxes.

Because the interest rates are low, the land tax deferral program may be preferable to a reverse mortgage.

The Ministry of Small Business and Revenue has more information about the property tax deferment program here, and you can read the Land Tax Deferment Act, RSBC 1996, c. 249, here.

Family Loans and Limitation Periods

I suggest to people who wish to assist their children financially that they consider lending money to their children instead of making an outright gift. The loan can be at made at a low or no interest, and the parent can forgive the loan in the future. But, by making a loan, instead of a gift, the parent can retain the right to be repaid if things don’t work out as well as planned. From the parent’s perspective, it is best if the loan is secured by a mortgage.

For example, if a mother makes gives money to her daughter to buy a house, and the daughter’s marriage later breaks down, the daughter’s husband may have a claim to a share of the house. But, if it is a loan, secured by a mortgage to her mother, the daughter won’t have as much equity in the house, and the husband’s potential claim on the marriage breakdown is reduced accordingly.

If a parent provides a loan, it is important for the parent to be aware of limitation periods. In British Columbia, there are limitation periods for starting lawsuits, and if a limitation period is missed, the claim is said to be statute barred. In other words, if you wait too long, you are out-of-luck.

In a recent case, Paterson v. Ridout, 2006 BCSC 1016, in Duncan, Gertrude Ridout created a trust for her son David Ridout. The trustees then lent David Ridout and his wife Ruby Ridout $124,500 to assist them to buy a house. The loan was without interest, and David and Ruby Ridout would have to repay the loan to the trustees when the trustees demanded repayment. The loan was made on September 28, 1995, and was secured by a mortgage against the house.

In 2001, David and Ruby Ridout separated. In January 2002, the trustees asked for repayment, and on April 11, 2006, they started foreclosure proceedings in the Supreme Court of British Columbia.

Ruby Ridout applied to court for a declaration that the limitation period expired before the trustees started the foreclosure proceeding. Master McCallum agreed. Section 3 (6) (a) of the Limitation Act, RSBC 1996, c. 266 , set a 6 year limitation period. Master McCallum held that the six years began to run in the case of a loan payable on demand from the time that the loan was made. The trustees could not recover the loan to David and Ruby Ridout.

I suspect that many people do not realize that in British Columbia the limitation period begins when the demand loan is made, rather than when the demand for repayment is made. This differs from a loan for a fixed term, such as five years. Demand loans may be common in loans between family members, and the limitation period is a potential trap for the unwary.

How could the trustees have better protected the trust funds? Section 5 of the Limitation Act, says that, if the borrower acknowledges the debt in writing or makes a payment before the limitation period expires, this extends the time for bringing a claim. The time before the acknowledgment or payment is not included in reckoning the limitation period. If the loan had required small annual payments, of say $100 a year, and David and Ruby Ridout complied, then the time limit would have been extended, and the trustees could have sued to recover the loan.

Do they take Visa, Mastercard, or American Express in Heaven?

Jennifer Sawday has a hilarious post today in her California Estate Planning Practice Blog. She makes the point that it is important to cancel a deceased person's credit cards to prevent their fraudulent use. Jennifer then relates a conversation between the relative of a deceased person and a bank that is charging the deceased credit card holder interest and service charges accruing after death. I don't know if the conversation is fictional, real or real with some embellishments, but it rings too true to me. Read her post "Be Sure And Cancel Your Credit Cards Before You Die" here.

In my own practice, I admit I get some amusement from reading letters that collection agents for financial institutions occasionally send to deceased people threatening to wreak havoc with their credit ratings.

Locus Poenitentiae

The recent Supreme Court of British Columbia decision in Tribe v. Soiseth, 2006 BCSC 652, contains an in-depth analysis of the affect of evidence of an illegal scheme is admissible to rebut a presumption that when a parent contributes funds to a child to purchase property in the child’s name the parent intends to make a gift to the child. This presumption of gift is called the presumption of advancement, and I have previously written about it here. [Since I wrote this post, the law on the presumption of advancement has changed. See this post for more information.]

The presumption of advancement is an exception to the presumption that when one person buys property in another’s name, the one who has title to the property is holding the property as a trustee for the benefit of the person who paid the purchase price. This is called the presumption of resulting trust, and I have written about it here.

Tribe v. Soiseth is a matrimonial case, but deals with trust law issues.

Ms. Tribe’s parents paid about $216,000 to purchase a condominium that was purchased in Ms. Tribe’s name. The rest of the purchase price was financed by a mortgage to a financial institution for $250,000, which was signed by Ms. Tribe and co-signed as covenantors by her parents. Ms. Tribe also granted her parents a second mortgage for the funds they had advanced to pay for the condominium. The second mortgage was without interest, payable on demand. She also gave her parents an option to buy the condominium for $10.

Ms. Tribe and her husband moved into the condominium, and made the mortgage and strata fee payments. Ms. Tribe’s parents paid the property taxes.

Unfortunately, Ms. Tribe’s marriage broke down about a year and a half later. Her husband, Mr. Soiseth, acknowledged the mortgage to Ms. Tribe’s parents, but argued that the equity belonged to Ms. Tribe, and was a family asset subject to division under the Family Relations Act. The condominium had increased in value significantly, and was appraised at between $825,000 to $850,000.

Ms. Tribe and her father testified that they always intended that the equity in the condominium belonged to the parents. They bought the condominium as an investment, but on the advice of an accountant, arranged with their daughter that she take the title in her own name so that if they sold it in the future at a profit, Ms. Tribe could claim the principal residence exemption from taxes under the Income Tax Act, Canada. Mr. Justice Sigurdson accepted their evidence.

Mr. Soiseth argued that Ms. Tribe and her parents were relying on evidence of a scheme to defraud Canada Revenue Agency to rebut the presumption of advancement. He further argued that evidence of an illegal scheme was not admissible for this purpose. Without evidence of the scheme, the presumption of advancement between parent and child applies, and he could claim an interest in the condominium on the breakdown of their marriage.

Mr. Justice Sigurdson analyzed two lines of authority in Canada, both stemming from an old decision of the Supreme Court of Canada in Scheuerman v. Scheuerman (1916) 52 S.C.R. 625. In Scheuerman, the husband transferred property into his wife’s name in order to avoid his creditors. When the husband sought to get the property back, the majority of the court refused on the grounds that to rebut the presumption of advancement, the husband had to rely on evidence of an illegal scheme. The majority stated that he could not recover even if the husband did not in fact avoid his creditors; it was sufficient if he transferred the property with the intent to avoid his creditors. The minority concurring and dissenting judges in Scheuerman said that intent was not enough; the husband would be prevented from recovering the property only if he did avoid creditors by transferring the property into his wife’s name.

Subsequent decisions, including Krys v. Krys (1928), [1929] S.C.R. 153, and the minority concurring judgment in Goodfriend v. Goodfriend (1971),[1972] S.C.R. 640, have cast doubt on whether the majority decision in Scheuerman remains good law, but have not expressly reversed the older authority.

Mr. Justice Sigurdson also considered English and Australian cases.

Mr. Justice Sigurdson held that because the condominium had not sold, and Ms. Tribe had not claimed a principal residence capital gains exemption, Ms. Tribe’s parents had not actually defrauded Canada Revenue Agency. Accordingly, it was not too late for Ms. Tribe’s father “to repent from the scheme and give evidence of his true intention in registering the property in his daughter’s name in order to rebut the presumption of advancement and recover the property.” In latin, this is called locus poenitentiae, which means place of repentance.

Mr. Justice Sigurdson also found that there was ample evidence for him to find that Ms. Tribe and her father rebutted the presumption of advancement without relying on the evidence of the illegal scheme. He said at paragraphs 84 and 85:

[82] In both Scheuerman and Tinsley v. Milligan, the courts found that it is only if the claimant’s confession of the illegal scheme is his sole or central means to contradict that presumption that he must fail.

[83] In the case at bar, I think that there is ample credible evidence, beyond the evidence of the illegal scheme, that persuades me that the intention of the parties to the transaction was that the beneficial ownership would remain in the parents. As I noted above, this case is unusual in that the presumption of advancement usually arises in cases where the parties are adverse or one party has died. Here, Mr. Tribe and, more significantly, his daughter, to whose benefit the presumption operates, have both testified that it was their mutual intention, at the time the property was purchased, that the parents would have the beneficial interest. I recognize that it may be convenient for the plaintiff and her father to take the position that they are taking now, given the divorce proceedings, but I have considered that in assessing their evidence, which I found to be credible.

[84] As well, I think that the documents drawn up at the time, the mortgage and, in particular, the option to purchase, both of which were registered, show an intention on the part of the parties that the true value of the land would be for the benefit of the parents. The effect of the documents signed by the daughter was to give the parents the means to ensure that that intention could be realized. These are not new or secret documents. The parents had full control of the property and these documents were registered on the closing of the transaction. The parents could have put legal title in their names at that time if they wished.

With respect, I have some difficulty with Mr. Justice Sigurdson’s reasoning in so far as the second mortgage is concerned. Arguably, the mortgage is evidence that Ms. Tribe’s parents lent her funds to enable her to buy herself a condominium, and is inconsistent with the notion that they were advancing funds as purchasers for themselves. If I am right, the relationship between Ms. Tribe and her parents is one of a debtor and creditors; rather than of a trustee and beneficiaries.

I suggest that apart from the evidence of the scheme to avoid income taxes, the evidence that Mr. Justice Sigurdson refers to in his reasons for judgment is at least as consistent with the notion that Ms. Tribe’s parents were endeavoring to assist her to get into a rising real estate market for her benefit, while protecting their advance of funds with the second mortgage and the option to purchase against such a contingency as a breakdown of their daughter’s marriage as with the notion that Ms. Tribe’s parents were buying the condominium as an investment for themselves.

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

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

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

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

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

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

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

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

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

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

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

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

Abatement

[This post describes common law rules of abatement which are replaced under the Wills, Estates and Succession Act, which comes into effect March 31, 2014. Since I wrote the post below, I have written about the changes here.]

When there are insufficient assets in an estate to both pay the deceased’s debts in full and to make all of the gifts to the beneficiaries set out in the deceased’s will, the debts must be paid first. This means that at least some of the beneficiaries will be disappointed. When gifts must bear the burden of the deceased’s debts, the gifts are said to abate.

Not all gifts are treated alike. Some types of gifts are sold to pay the debts before others.

In British Columbia, the law distinguishes between the following types of gifts:

1. a gift of specific land;
2. a gift of specific personal property (assets other than land);
3. a demonstrative legacy, which includes a sum of money that the will says is to be paid out of a specific investment or out of the proceeds of sale of some other asset;
4. a general legacy, such as a specific amount of cash;
5. a residual gift of land, such as a gift of “the residue of my real estate,” rather than a specific parcel or specific parcels of land;
6. a residual gift of personal property; such as a gift of all of “the residue of my estate.”

Unless the will provides otherwise, of these gifts, the type of gift described in 6 (the residue of personal property) is used to pay debts first, followed by 5, then 4 and so on.

There is an exception for a mortgage of land. Unless the will indicates otherwise, section 30 of the Wills Act, RSBC 1996, c. 489, provides that if mortgaged land is left to a beneficiary, the beneficiary takes the land subject to the mortgage. In other words, the mortgage must be paid off out of the beneficiary’s interest in the land.

In a recent case, Thompson v. Gollan, 2005 BCSC 1814, Arthur Thompson in his will left his wife the house, and provided that two other parcels of land he owned were to be sold with the proceeds divided among the Mr. Thompson’s wife and two of his children. There were a few other assets in the estate, but they were not worth enough to pay off Mr. Thompson’s debts when he died. The daughters asked the court to decide whether the parcel of land with the house that Mr. Thompson left to his wife would have to bear part of the burden of paying the debts proportionally with the other two parcels of land, or if the proceeds from the sale of the other parcels of land would have to bear the full burden of paying the debts.

If the gift of the proceeds of the sale of the two parcels of land abates first, Mr Thompson’s daughters—who were from a previous marriage—would end up with less money out of the estate, than if the house had to share the burden of the debts ratably with the other two parcels of land.

Mr. Justice Melnick of the Supreme Court of British Columbia held that the gift of the house to Mr. Thompson’s wife was a specific gift of land, while the gift of the proceeds from the sale of the other parcels of land were either specific or general legacies, rather than a specific gift of land. Accordingly, the proceeds of sale from the other parcels of land would be used first to pay Mr. Thompson’s debts, before the house would bear any part of the burden of the debts. Mr. Justice Melnick noted, however, that if the debts included a mortgage on the house, the wife would take the house subject to the mortgage.

Reverse Mortgages

Reverse mortgages are promoted as a means for seniors to use the equity in their homes to finance their needs and lifestyles.

Like a conventional mortgage, a reverse mortgage is a loan secured by a mortgage against the borrower’s home. Unlike a conventional mortgage, the borrower is generally not required to repay the loan until the borrower sells the home, or until the borrower’s death. The principal and interest on the loan becomes due when the home is sold, or within a specified period after the borrower’s death.

Often, reverse mortgages will provide that the borrower’s liability to the lender for the principal and interest is limited to the value of the home. This means that the borrower or the borrower’s estate will not have to make up any shortfall if the amount owing on the loan exceeds the value of the home when the home is sold, or when the borrower dies.

There are both advantages and disadvantages of reverse mortgages. A reverse mortgage does offer people who are house rich and cash poor a way to stay in their homes, while maintaining their lifestyles.

The main disadvantage of a reverse mortgage is that, because interest rates on a reverse mortgage tend to be higher than on a conventional first mortgage, interest is compounded, and the borrower is not required to make monthly payments of interest and principal, the amount that the borrower or the borrower’s estate will have to eventually repay will increase substantially over a long period of time. For example, if you borrow $50,000 at 7 % per year interest, and do not make any payments, the amount owing on the loan will double to $100,000 within ten years, and double again to $200,000 within another ten years. (The interest rates on reverse mortgages usually fluctuate, moving up and down over time, which makes it difficult to calculate the amount the borrower will ultimately have to pay.)

The increase in the amount owing on a reverse mortgage can create a hardship for the borrower if the borrower later decides to sell the home to move into a smaller place. If under the terms of the reverse mortgage, the loan becomes due when the house is sold, and if the amount owing has grown substantially there may not be enough equity in the home left to buy another, even if less expensive, home.

Before deciding whether to enter into a reverse mortgage agreement, one should carefully consider the potential costs of the loan in the future if the home is sold, get legal advice on the terms and the reverse mortgage, and get financial advice on alternatives. For example, in British Columbia, seniors may be able to defer property taxes on their homes under the Land Tax Deferment Act, RSBC 1996, c. 249.

The Canadian Centre for Elder Law Studies has published a “Consultation Paper on Reverse Mortgages” which provides more information on reverse mortgages and a discussion on ideas for law reform on this topic. The Consultation Paper can be found here.