Saturday, September 24, 2022

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.

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