Fraud on the Power: TLC The Land Conservancy of British Columbia v. The University of British Columbia

In her will, dated February 15, 2007, Jessie Binning, expressed the hope that her home, designed by her late husband, architect and artist, Bertram Charles Binning, would be preserved as a historic site.  Specifically, her will provided:

(i)         the lands and buildings at 2968 Mathers Crescent, West Vancouver, British Columbia, … which my late husband, B.C. BINNING and I used as our residence (the “Residence”), have been designated a National Heritage Site and have been listed on the heritage inventory of West Vancouver, British Columbia;

(ii)        it is my hope that the Residence and historic household furnishings will be preserved for historical purposes;

(iii)       if my Trustees decide it is feasible and practical to do so, to establish a foundation or other organization, society, association or corporation (the “Entity”), as my Trustees decide, and to transfer any interest (the “Property”) I have in the Residence, along with those household furnishings selected by my Trustees, to the Entity to hold, maintain and use the Property and those household furnishings for those purposes it decides are desirable;

(iv)       if the Property is transferred to the Entity and, due to unforeseen circumstances, the Entity decides it is no longer feasible or practical to retain the Property and it subsequently sells the Property, it is my hope that it will give the net sale proceeds to the B.C. BINNING MEMORIAL FELLOWSHIP FUND, administered by THE UNIVERSITY OF BRITISH COLUMBIA, for the purpose of creating additional scholarships to be awarded by it each year from the income earned by those proceeds;

(v)        if my Trustees decide not to retain the Property and historic household furnishings, the Trustees will sell the Property, and sell or otherwise dispose of those household furnishings, and give the net sale proceeds to the B.C. BINNING MEMORIAL FELLOWSHIP FUND, for the purpose of creating additional scholarships to be awarded by it each year from the income earned by those proceeds;

She also provided in her will that if the Entity were established, the residue of her estate would be divided equally between the Entity and the B.C.Binning Memorial Fellowship Fund, or if the Entity were not established it would go to the Fellowship Fund.

Mrs. Binning died in May 2007.

Her executors and trustees sought to give effect to Mrs. Binning’s hope that the residence, or the Binning House as it is known, would be preserved for historic purposes. The practical difficulty they faced was that after various bequests were paid out of her estate there was no residue left to pay to a new Entity to maintain the Binning House.

A more practical alternative would be to donate Binning House to an established entity to maintain, such as the TLC The Land Conservancy of British Columbia, which I will refer to as TLC. The problem is that the will did not give the executors and trustees the authority to do so.

After receiving legal advice from their lawyers, the executors and trustees decided to incorporate a non profit society. They then transferred title to the Binning House to the new society, which in turn, immediately transferred the title to the TLC. The new society also executed a deed of gift giving TLC the residence “for the purpose of restoring, developing and preserving the Binning House, formerly the home of B.C. Binning, for historical purposes with a view to educating the public and commemorating the site”.

In this way, the executors and trustees sought to both follow the letter of the will, by setting up a new entity and transferring the Binning House to the new entity, while finding a more practical manner of giving effect to Mrs. Binning’s hope to preserve the historic residence. Clever. Perhaps, too clever?

Unfortunately, TLC has had some significant financial problems in recent years, and has sought protection under the federal Companies’ Creditors Arrangement Act. When TLC received an offer to purchase the Binning House for $1.6 million to a collector of Bertram Binning’s art, it applied to court for approval of the sale, with the proceeds to be used to assist with TLC’s restructuring.

The University of British Columbia did not oppose the sale, but took the position that the proceeds should be paid to UBC for the B.C. Binning Memorial Fellowship Fund. UBC argued that executors and trustees acted outside of the scope of their authority in transferring the Binning House to TLC indirectly through the new society.

UBC was unsuccessful in the Supreme Court of British Columbia, and appealed to the British Columbia Court of Appeal.

In reasons released earlier this week, in TLC The LandConservancy of British Columbia, v. The University of British Columbia, 2014 BCCA 473, the Court of Appeal found that the executors and trustees had committed a fraud on their powers under the will by transferring the Binning House to the TLC through the new society. Despite the strong term “fraud,” this does not mean that they acted dishonestly, but rather that what they did was beyond the scope of their powers under the will. Mr. Justice Tysoe explained what a fraud on the power is at paragraphs 42 and 43:

[42]         In order to succeed in having the transfer of the Binning House declared void, UBC had the onus of proving that the transfer was a fraud on the power contained in the Will authorizing the Trustees to transfer it.  The phrase “fraud on a power” is a term of art, and it does not connote fraud in the usual sense of dishonesty.  This is explained by Geraint Thomas in Thomas on Powers, 2d ed. (Oxford: Oxford University Press, 2012) at para. 9.03:

The doctrine of fraud on a power is not founded upon a state of conscience imputed to the donee in equity.  Dishonesty of some kind is often present, but it is not essential.  Indeed, the donee’s intention or motive may be perfectly honest.  Thus, the doctrine may apply where the donee honestly believes that, by his exercise of the power, he is disposing of the property in a more beneficial manner, or in a way which is consonant with what he believes would have been the real wish of the donor of the power …
[Footnotes omitted.]

[43]         The parties are agreed, as they were before the chambers judge, that the two basic elements of a fraud on a power are as set out in Thomas on Powers at para. 9.02:

 (a)      “a disposition beyond the scope of the power by the donee, whose position is referable to the terms, express or implied, of the instrument creating the power;” and

 (b)      “a deliberate breach of the implied obligation not to exercise that power for an ulterior purpose”.

Mr. Justice Tysoe found that the will required that the executors and trustees would need to determine whether it was practical and feasible not only to establish the Entity and transfer the Binning House to it, but also that it was practical and feasible for the Entity to hold, maintain and use it. But in this case the executors and trustees knew it would not be feasible for the society they incorporated to retain the Binning House in view of the fact that there was no cash available to do so.

Although the executors and trustees transferred the Binning House to a new Entity, the purpose of doing so was so that the Binning House would end up with TLC, which was not an “object of the power,” or in other words, a beneficiary of Mrs. Binning’s will. Although the executors and trustees acted in good faith, they had an ulterior purpose when they incorporated the new society and transferred the Binning House to it. In this sense, they exercised their powers fraudulently.

Mr. Justice Tysoe wrote at paragraph 67:

The Trustees had received legal advice from the Estate Lawyers that the Binning House could not be transferred directly to TLC or, in other words, TLC was not a proper object of the power given to them under the Will.  The Trustees then set out to do indirectly that which they knew could not be done directly.  They transferred the Binning House to the New Society with the intention that the New Society would immediately transfer it to a non-object, TLC.  The Trustees deliberately used the power in the Will for the purpose of benefiting a non-object.  They used it for an ulterior purpose.

 The Court of Appeal ordered TLC to transfer the Binning House back to Mrs. Binning’s estate. The result is that when it is sold, the net proceeds will go to UBC for the B.C. Binning Memorial Fellowship Fund.