Chichak v. Chichak

 

In Chichak v. Chichak, 2021 BCCA 286, the British Columbia Court of Appeal confirmed that a creditor who has registered a judgment against real property held in the name of a debtor cannot enforce the judgement in respect of an interest of another person who has an equitable interest in the property. This is so even when the equable interest is not registered on the title to the land. The creditor may only enforce the judgement to the extent of the debtor’s interest in the land.

Derek Chichak and his wife Jennifer Chichak bought real property together. The title was transferred to Ms. Chichak’s name and then later she transferred the title into Mr. Chichak’s name. Mr. Chichak was sued by two creditors, who registered their judgment against the property. Another creditor had a mortgage against the property and when mortgage went into default, the property was sold in a foreclosure proceeding brought by another creditor. After the amount of the mortgage was paid, there remained surplus funds from the sale of the property, and the two creditors with registered judgements sought to have the funds paid out to them. Ms. Chichak, however, claimed that she had a 50% interest in the equity in the property because of her contribution to the purchase price. When one person pays for or transfers property to another, there is a presumption that the recipient of the property holds the property, or in this case half of it, on a resulting trust for the person who paid the purchase price or transferred the property. Ms. Chichak claimed that because her husband held a half interest in the property in trust for her, his judgment creditors were only entitled to recover one-half of the surplus funds, with Ms. Chichak entitled to the other half.

The Supreme Court of British Columbia did not make any finding as to whether Mr. Chichak held an interest in the property on a resulting trust for Ms. Chichak, but held that even if he did, the judgment creditors were entitled to be paid first. Their judgment on the title took priority to Ms. Chichak’s claim. Ms. Chichak appeal.

Madam Justice Saunders in allowing the appeal held that a judgment creditor who registered the judgment against the title to real property could not enforce the receive a greater interest in the property than that held by the judgment debtor. This principle is referred to in Latin as “nemo dat quod non habet” which loosely translated means “you can’t give what you ain’t got.” If Mr. Chichak was only entitled to a one-half interest in the property, then his creditors can only take his half interest; they are not entitled to the other half interest if he holds it in trust for Ms. Chichak.

This common-law principle that a judgment creditor may only enforce a judgment to the extent of the debtor’s interest in property is supported by the wording of the Court Order Enforcement Act. Section 83 (3) (a) and (7) provides:

(3)   From the time of its registration the judgment forms a lien and charge on the land of the judgment debtor specified in the application referred to in section 88 in the same manner as if charged in writing by the judgment debtor under his or her signature and seal,

(a)     to the extent of his or her beneficial interest in the land,

….

(7)   A judgment creditor is not a bona fide purchaser for value.

 [emphasis in decision]

The creditors pointed to section 23 (2) of the Land Title Act, which provides that subject to certain specific exceptions the title “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 described in the indefeasible title….” In other words, people dealing with the registered owner of real property are entitled to rely on the owner’s title. This protects, for example, buyers of property from the owner on title form others later claiming that the seller did not in fact own the property.

However, Madam Justice Saunders, noting the distinction between a judgment creditor and a purchaser, held that section 23 (2) of the Land Title Act does not apply:

[14]         By the registration system, all interests in the property that will affect a prospective purchaser for value are recorded in the register, with the intention that the true state of the title – of all the interests pertaining to the property – will be evident, subject to these few statutory exceptions, and a bona fide purchaser for value will take priority over the holder of an unregistered interest. Section 86(7) of the Court Order Enforcement Act, of course, explicitly provides that a judgment creditor is not a bona fide purchaser for value.

[15]         In my respectful view, the judge misapplied the Land Title Act by effectively equating a judgment creditor, a person who seeks to collect on a judgment in likely unrelated litigation, to the position of a person who has relied on the register in acquiring their indefeasible interest in the land. This would allow a judgment creditor to obtain greater recovery from the land than even the judgment debtor could derive. This result could be legislated, no doubt. However, in my view, it has not; the current legislation does not reach this far. The result, in my view, is contrary to decided authority presented to us but, it appears, not to the judge of first instance.

The Court Appeal ordered that the case be remitted to the Supreme Court of British Columbia to determine whether Ms. Chichak in fact had a beneficial interest in the property.  If she can establish her resulting trust claim, the judgment creditors will not be entitled to the funds representing Ms. Chichak’s share of the surplus proceeds from the sale.

Petrick (Trustee) v. Petrick

 

I have always urged caution in using joint tenancies as an estate-planning tool for the transfer of wealth from a parent to a child. One of my earliest blog posts, from September 17, 2005 is entitled “Six PotentialPitfalls Parents Should Consider Before Transferring Real Estate Into a JointTenancy with Their Children.” Jointures, including joint bank accounts, appear to be deceptively simple. On the death of a joint owner, the title to the asset passes by right-of-survivorship to the other joint co-owner (or owners). But it is not really that simple. In many cases, there is a question about whether the survivor is really entitled to keep the property or whether it is held in trust for the now deceased co-owner. There may also be unintended consequences of owning property in a joint tenancy. The nuances and risks are illustrated in the case I am about to discuss.

Dena Chilton and her son Rock Petrick purchased a condominium in New Westminster, British Columbia. Ms. Chilton contributed the down payment for the purchase and she lived in the condominium. Mr. Petrick did not live with her. They were both on the mortgage. There was conflicting evidence as to whether Mr. Petrick made any mortgage payments, but Ms. Chilton paid the bulk of the mortgage payments and other expenses associated with the condominium. Mr. Petrick later had financial problems, and Ms. Chilton asked him to transfer his interest in the title to her. He did so in July 2014.

Mr. Petrick went bankrupt, and following his bankruptcy, his trustee in bankruptcy applied to court to set aside the transfer of his half interest to his mother. The trustee in bankruptcy argued that the transfer was a fraudulent conveyance intended to defeat Mr. Petrick’s creditors.

Both Ms. Chilton and Mr. Petrick argued that he never had a beneficial interest in the condominium. That is, although he had an interest in the title, he held it in trust for his mother. There is a presumption of law, referred to as a resulting trust, that if someone pays the purchase price for property, but puts it in the name of another, who did not contribute to the purchase, the other person who received the tittle gratuitously, holds in trust for the person who paid the purchase price. This presumption applies to the interest in the title of a joint tenant who has received his interest gratuitously. Ms. Chilton’s evidence was that she had her son’s name on the condominium as a joint tenant so that on her death, the condominium would pass to him, without the requirement that he obtain a grant of probate of her will.

If in fact Mr. Petrick held his interest in the title in trust for his mother, then the transfer of title to his mother was not a fraudulent conveyance. His creditors would not have been entitled to a half-interest in the condominium if he did not have a beneficial interest in it.

Madam Justice Francis, in Petrick (Trustee) v. Petrick, 2019 BCSC 1319, held that Mr. Petrick did have a beneficial interest in the condominium and set aside the transfer to his mother as a fraudulent conveyance.

In her reasons for judgement, Madam Justice Francis nicely summarized three alternative possible ownership interests that joint tenants may have in property. She wrote at paragraph 40:

[40]         Not all jointly owned property is subject to a true joint tenancy. Pursuant to the Supreme Court of Canada’s decision in Pecore v. Pecore, 2007 SCC 17 [Pecore], property that is held in joint tenancy can give rise to three potential scenarios in terms of the beneficial interests of the title holders:

a)    A true joint tenancy, in which the joint tenants are each owner of the whole. Each enjoys the full benefit of property ownership and the ultimate survivor will enjoy the whole title for him or herself.

b)    A resulting trust, wherein only one joint tenant has any beneficial interest in the property and the other joint tenant, usually a gratuitous transferee, holds title in trust for the other and has no beneficial interest in the property.

c)     A scenario which is sometimes referred to as a “gift of the right of survivorship,” wherein a joint tenant is gratuitously placed on title and has no beneficial entitlement to the property during the lifetime of the donor, but if the donee survives the donor, the donee will receive the entire property by right of survivorship.  In Bergen v. Bergen, 2013 BCCA 492 at para. 37 [Bergen], Newbury J.A. described a gift of the right of survivorship in a joint account as “an immediate gift of a joint interest consisting of whatever balance exists in the account on the transferor’s death, assuming he or she dies first.”

Madam Justice Francis found that Ms. Chilton and Mr. Petrick were true joint tenants. She found that he did not receive his interest gratuitously. Because he was a co-borrower under the mortgage, he took a financial risk if the mortgage went into default. The presumption of resulting trust only applies when someone on title has acquired his interest gratuitously. The contributions of the co-owners for property do not have to be equal to avoid the presumption of resulting trust. Pledging credit is a contribution, even if Ms. Chilton could have qualified for a mortgage without Mr. Petrick being a co-borrower. As set out in Madam Justice Francis' reasons:

[65]         Ms. Chilton deposed that Mr. Petrick was not required to pledge his credit in order for her to obtain mortgage financing on the Property and that “he was added on the mortgage simply because he was going to be registered on title.”

[66]         I am not persuaded that simply because Ms. Chilton may have been able to purchase the property without Mr. Petrick pledging his credit, Mr. Petrick did not give up something of value when he became a co-borrower. The pledging of credit exposed Mr. Petrick to risk. Irrespective of Ms. Chilton’s means, Mr. Petrick remained jointly and severally liable on the mortgage debt. Further, it appears that from 2006 to 2011, Mr. Petrick may have been in better financial circumstances than his mother. In his affidavit evidence, he deposed that during that period he made cash gifts in the range of $2,000 to $5,000 to his mother, not exceeding $10,000 a year. Therefore, while it may not have been necessary for Mr. Petrick to have been named on the mortgage, he certainly had the means to service the mortgage and indeed, I find it more likely than not that he did make some payments on the mortgage over the years.

[67]         Therefore, I find that Mr. Petrick gave value for his interest in the Property and Ms. Chilton did not gratuitously make Mr. Petrick a joint tenant. As this was not a gratuitous transfer, the presumption of resulting trust does not apply.

Madam Justice Francis also found that Ms. Chilton did intend for her son to have a beneficial interest in the condominium. Ms. Chilton’s argument that she intended for Mr. Petrick to hold his interest in trust for her, and following her death, for her estate, was inconsistent with her evidence that she did not want the condominium to be subject to probate on her death.

Madam Justice Francis did provide some relief to Ms. Chilton from the potential hardship of having the condominium sold while she resides in it. Madam justice Francis ordered that Ms. Chilton could continue to reside in the condominium for her life, but if she ceased to occupy the condominium, or on her death, the condominium would be sold, and the trustee in bankruptcy would be entitled to half of the net sale proceeds.   

Enforcing a Judgment Against a Beneficiary of a Trust Against Lands Held in the Trust

 

Can a judgment against a beneficiary of a trust be registered and enforced against land held in the trust? As illustrated by the decision in Clarke v. Braich, 2021 BCSC 121, in British Columbia the answer depends on the nature of the beneficiary’s interest in the trust. If the beneficiary does not yet have the right to the property held in trust, then a judgment may not be registered against the land.

Kenny Braich is both a trustee and beneficiary of a trust that had been settled by his mother, Surjeet Singh. The terms of the trust are that during Ms. Singh’s lifetime, all of the income was payable to her, and no one else was entitled to any of the capital until her death. This is a popular estate-planning tool, often referred to as an “alter-ego trust.” The trust assets, which included four parcels of land (the "Trust Lands"), are to be distributed in accordance with a deed of appointment that she signed. The deed of appointment provides for a “Final Distribution Date,” which was the date of her death, and a “Division Date,” three years later. During the period between the Final Division Date and the Distribution Date, the trustees have the power to distribute income from the trust property to the capital beneficiaries. The trustees and the capital beneficiaries are Kenny Braich and his brother, Bobby Braich. The deed of appointment provides that on the Division Date, the trust property will be divided equally between the Braich brothers, but if either of them dies before that date, his share will go to his children, or if he does not have any children, to his brother.

Ms. Singh died on July 11, 2019. Accordingly, that date was the Final Distribution Date, and the Division Date will be July 11, 2022.

Scott Clarke obtained a judgment against Kenny Braich and registered the judgment against the Trust Lands. Registering a judgment against real estate is a useful way of enforcing a judgment. The judgment takes priority over future registrations such as transfers and mortgages, and the creditor may also apply to court to have the property sold to satisfy the judgment. Kenny Braich brought an application to court to discharge the registration from the title to the Trust Lands.

Madam Justice Baker granted Mr. Braich’s application to discharge the registration. Although Kenny Braich is a beneficiary of the trust, he does not have a beneficial interest in the trust property, specifically the Trust Lands. This distinction is important. A beneficiary of a trust may have a personal claim against trustees if they don’t comply with their duties as trustees, but the beneficiary does not necessarily have a claim to the property held in trust. A personal claim against trustees is referred to as a claim “in personam.”

The reason Kenny Braich does not have a beneficial interest in the Trust Lands is that if he dies before the Division Date, the trust property that he would receive if he were then alive, will go to other beneficiaries, that is his children or his brother. It is only on the Division Date that we will know for sure if he will receive the Trust Lands, and until then, he is only entitled to receive income.

His creditors can have no greater rights to the Trust Lands than he.

Madam Justice Baker wrote at paragraphs 50 and 51:

[50]         Kenny Braich is in no different position than the residual legatee in the case of Hollebone [v. Paterson, (1982), 42 B.C.L.R. 132].  Until the Division Date, his interest in the Trust is strictly in personam. He has no rights against the Trust Lands before the Division Date, and neither do his creditors.

[51]         As such, I do not agree with Mr. Clarke when he argues he is entitled to register his judgment against the Trust Lands pursuant to COEA [Court Order Enforcement Act] s . 86.  Until the Division Date, Kenny Braich does not have a beneficial interest in the Trust property, which includes the Trust Lands, against which Mr. Clarke is entitled to register his judgment.

Madam Justice Baker ordered the registration discharged. If Mr. Clarke wishes to enforce the judgment against the Trust Lands, he will have to wait until July 11, 2022.

 

Johnson v. North Shore Yacht Works Corp.

In British Columbia, a trustee acting in the administration of a trust is generally entitled to be reimbursed for his or her reasonable expenses out of the trust assets. But what if the trustee makes a contract in respect of the trust assets, and there are insufficient assets in the trust to pay the amount owing? Might the trustee have to pay the shortfall out of his or her own pocket?

The answer is that unless the trustee has limited the trustee’s liability in the contact, he or she will be out of pocket.

This point is illustrated by the recent decision in Johnson v. North Shore Yacht Works Corp., 2017 BCSC 1229.

Garfield Johnson and Robin Macfarlane are the trustees of the Chester Allison Johnson Alter Ego Trust (which I will refer to simply as the trust). They contracted with North Shore Yacht Works Corp. (which I will refer to as North Shore) to repair a yacht which was an asset of the trust. Ultimately, more money was spent on the repairs than what the yacht could sell for. Mr. Johnson and Mr. Macfarlane as trustees sued North Shore, and North Shore made a counter claim against both Mr. Johnson and Mr. Macfarlane as trustees, and against Mr. Johnson personally. Mr. Justice Grauer ultimately found Mr. Johnson and Mr. Macfarlane in their capacity as trustees liable to North Shore for $166,219, but dismissed the counter claim against Mr. Johnson personally. (The contract dispute is reported at 2014 BCSC 2057.)

Some of the judgment debt to North Shore was satisfied by the seizure and sale of the yacht, but there remained a significant shortfall of over $140,000 and there were no assets left in the trust.

Mr. Johnson and Mr. Macfarlane argued that North Shore was not entitled to collect from them personally. Two or the arguments they advanced were that North Shore knew it was dealing with them as trustees, and Mr. Justice Grauer had dismissed the counter claim against Mr. Johnson personally.

Mr. Justice Grauer held that North Shore was entitled to collect from the trustees’ own assets. They had not limited their liability to the trust assets in the contract. The significance of finding that they were liable as trustees is that they are then entitled to be indemnified out of the trust assets for the liabilities, but it does not negate their personal responsibilities to satisfy the judgment. If the judgment had been against Mr. Johnson personally, he would not have been entitled to be indemnified out of the trust assets.

Mr. Justice Grauer wrote at paragraphs 8 through 10 and paragraphs 14 and 15:

[8]             The defendant [North Shore] submits that it is a long-standing principle of trust law that a trustee is personally liable on contracts into which it enters on behalf of the trust.  The trustee’s remedy is to seek indemnity from the trust for that liability.  The only exception to the trustee being personally liable is where he has specifically contracted to limit his liability to the assets of the trust.

[9]             The authorities bear this out: see, for instance, Benett v Wyndham (1862), 4 DeG F & J 259 (CA);  Muir v City of Glasgow Bank (1879), 4 App Cas 337 (HL); Davis v Sawkiw(1983), 38 OR (2d) 466 (H Ct J); Pettit, Equity and the Law of Trusts, 12^th ed (2012) at pp 413-414; and Underhill and Hayton, Law Relating to Trusts and Trustees, 18^th ed (2010), p. 1066, para 81.5. 

[10]         In Hall v MacIntyre, [1934] 2 WWR 145 (BCCA), Chief Justice Macdonald put it this way:

It is well-understood law that an executor or trustee who makes a contract in relation to his trust is personally liable to the contractor for the price agreed upon.

...

[14]         The plaintiffs [Mr. Johnson and Mr. Macfarlane] then assert that a trustee should not be liable in his personal capacity where the defendant was aware that it was dealing with him in his capacity as a trustee, relying on Gordon v Roebuck, [1992] OJ No. 1499 (CA) at para 16.  I had dismissed the counterclaim against Garfield Johnson in his personal capacity because of my finding that the defendant was aware, if somewhat vaguely, that the yacht was owned by a trust or an estate, not by Mr. Johnson personally.

[15]         But the conclusion in Gordon was that judgment should not be entered against the trustee in his personal capacity when the other party knew it was dealing with a trustee.  I agree it should not, and that was the basis on which I dismissed the claim against Mr. Johnson personally.  A judgment against the trustee qua trustee permits the trustee to seek indemnity from the trust.  A judgment against the trustee in his personal capacity would deprive him of that ability.  The distinction is therefore important.  Here, the issue is quite different: where the trustee is found liable qua trustee, can the judgment creditor execute against the trustee’s personal assets thereby giving rise to the right to claim indemnity?  In my view, the Gordon case does not address that issue.  The authorities cited above do. 

When acting as a trustee, it is important to keep in mind that a trust is not a separate legal person like a corporation. Usually, directors are not personally liable for contracts made on behalf of a corporation (there are exceptions). In contrast, trustees act personally and as this case demonstrates may end up personally on the hook for commitments they make as trustees. 

The Rule in Cherry v. Boultbee

If you wait too long to sue on a debt, your claim may be statute-barred by the applicable limitation legislation. But can the personal representative of a deceased person require a beneficiary to bring into account an amount the beneficiary owed to the deceased even though the limitation period for the deceased to bring a claim has expired?

The answer in British Columbia is yes.

The principle is known as the rule in Cherry v. Boultbee, and was recently applied by Madam Justice Church in Re: Johnston Estate, 2017 BCSC 272.

The applicant and the respondent in Johnston Estate were the two sons and sole beneficiaries of their father, William Leonide Johnston's will. William Johnston had lent the respondent son $70,000 in 1996 and the respondent had not made any payment since 2000. Under the applicable limitation legislation, William Johnston's claim would have been statute-barred. (There have been significant changes to British Columbia's limitation legislation in respect of debts.) The applicant, as his father's personal representative following his father's death, sought to have a debt brought into account and deducted from his brother's share.

In holding that the applicant was entitled to deduct the amount owing from the respondent's share, Madam Justice Church described the rule in Cherry v. Boultbee as follows:

[28]         The applicant relies on what is commonly referred to as the rule in Cherry v. Boultbee which provides that where a legatee of a share of the residue is a debtor of the estate, he or she is not entitled to receive his or her legacy without bringing his or her debt into account.   The rule derives from the case of Cherry v. Boultbee (1839), 4 My. & Cr. 442.  It is an equitable principle designed to ensure fairness.  The purpose of the rule was to prevent a beneficiary who owed money to an estate from receiving more than his or her fair share of the estate.  In the case of Re: Akerman, Akerman v. Akerman, [1891] 3 Ch. 212, Kekewich J. stated: 

A person who owes an estate money, that is to say, who is bound to increase the general mass of the estate by contribution of his own, cannot claim an aliquot share given to him out of that mass without first making the contribution which completes it.  Nothing is in truth retained by the representative of the estate; nothing is in strict language set off; but the contributor is paid by holding in his own hand a part of the mass, which, if the mass were completed, he would receive back.

[29]         The rule has been held to apply even where the debt is statute-barred: see  Re: Akerman.

The respondent argued that the rule no longer applied in Canada, citing a decision of Mr. Justice Clark in the Alberta case, Re: Moody Estate, 2011 ABQB 222. But Madam Justice Church declined to follow Moody Estate:

[36]         With all due respect to Clark J., I cannot agree with either his reasoning or his conclusion.  In my view, he begins his analysis from the premise that the “rule permits an executor to recoup the amount owing, even though the deceased would have been unable to do so.”  In my view, that is not an accurate description of the application of the rule.  The rule in Cherry v. Boultbee does not confer on the estate any right to recoup the amount owing but rather operates to ensure fairness in the distribution of an estate, recognizing that the relationship between a testator and his or her beneficiaries is typically not at arm’s length.   The fundamental purpose of the rule is to ensure that beneficiaries are treated fairly and it embodies the principal that he who seeks equity must do equity.  As the court noted in Re: Akerman, nothing is being retained by the representative and nothing is being set off but rather, the contributor is paid by what he is holding in his own hand.  The court in Re: Goy & Co Ltd. [1900] 2 Ch. 149, also noted that the claimant has in his own hands that which is applicable to the payment and should pay himself out of that.  The question of whether the testator or the estate can recover the debt or whether the debt is statute barred is therefore largely irrelevant to the application of the rule.  In my view, the change in approach to limitation provisions by the Supreme Court of Canada in Tolofson does not affect the application of the rule in Cherry v. Boultbee.

In the result, the respondent's debt will be brought into account when his father's estate is distributed. 

Coffee (Estate) v. Coffee (Part 2)

I wrote previously about the Supreme Court of British Columbia decision in Coffee (Estate) v. Coffey, 2014 BCSC 110 that a woman who had defrauded her mother of about $1.6 was  entitled to a gift in her mother’s will despite the fraud.

Chief Justice Hinkson was also asked to decide the following question:

Whether the balance owing by Josephine Frances Coffey to the estate of Elizabeth Margaret Annie Featonby Coffey pursuant to a Restitution Order of the Provincial Court of British Columbia dated May 22, 2007 should be deducted from or set-off against any bequest or legacy owing to Josephine Frances Coffey by the estate of Elizabeth Margaret Annie Featonby Coffey….

This question is significant because Josephine Coffee had declared bankruptcy. If she received the gift under her mother’s will, then it would go to her trustee-in-bankruptcy, and would be available to all of her creditors. Although her mother’s estate might get some of the funds payable to Josephine Coffee back as a creditor, the estate would not receive all of the funds back to apply to Josephine Coffee’s debt to her mother. But if Josephine Coffee’s debt could be set-off against her entitlement as a beneficiary, then the Elizabeth Coffee estate administrators would only have to pay out any amount owing after setting-off the full amount of Josephine Coffee’s debt.

The Chief Justice considered section 97(3) of the Bankruptcy and Insolvency Act which says that:

The law of set-off or compensation applies to all claims made against the estate of the bankrupt and also to all actions instituted by the trustee for the recovery of debts due to the bankrupt in the same manner and to the same extent as if the bankrupt were plaintiff or defendant, as the case may be, except in so far as any claim for set-off or compensation is affected by the provisions of this Act respecting frauds or fraudulent preferences.

The effect of this provision is that when it applies it gives certain creditors, those who are indebted to the debtor, a priority over other creditors. In a decision cited by Chief Justice Hinkson, Husky OilOperations Ltd. v. Minister of National Revenue, [1995] 3 S.C.R. 453, 128 D.L.R. (4th) 1, the Supreme Court of Canada had considered the argument that this priority was unfair. Mr. Justice Gonthier wrote:

57        In the bankruptcy context, a right to set-off necessarily has the effect of securing the claim of the party claiming set-off against assets of the bankrupt's estate. This was recently recognized in unambiguous terms by Lord Hoffman in his speech for the unanimous House of Lords in Stein v. Blake, [1995] 2 All E.R. 961. His Lordship stated at p. 964:

Bankruptcy set-off ... affects the substantive rights of the parties by enabling the bankrupt's creditor to use his indebtedness to the bankrupt as a form of security. Instead of having to prove with other creditors for the whole of his debt in the bankruptcy, he can set off pound for pound what he owes the bankrupt and prove for or pay only the balance.

…
 59        Indeed, as a result of creating a type of security interest in the estate, the operation of set-off in bankruptcy has been the subject of academic criticism: see Palmer, supra, at pp. 204-7; Judge and Grottenthaler, supra, at p. 117; John C. McCoid, “Setoff: Why Bankruptcy Priority?”(1989), 75 Va. L. Rev. 15, and for counterpoint, Philip T. Lacy, “Setoff and the Principle of Creditor Equality” (1992), 43 S. Cal. L. Rev. 951. The central criticism has been that while outside of bankruptcy set-off strikes a fair balance between two parties with mutual obligations, in bankruptcy the material inquiry should be the rights of the estate's creditors inter se. An inquiry which considers the rights of creditors inter se must necessarily consider a broader range of interests than an inquiry limited to ensuring fairness between only two parties (McCoid, supra, at p. 43). Thus, allowing set-off in bankruptcy has been considered as unfairly limiting the class of relevant interests. The concern has also been voiced that allowing set-off in bankruptcy (Judge and Grottenthaler, supra, at p. 117):

... is disruptive of a complex and sophisticated system developed for establishing priorities amongst creditors of various types, particularly where registration of a secured interest is required.

This second concern is thus to the effect that allowing set-off gives a claimant the benefit of a security interest without imposing the important concomitant obligation of registering that interest.

 60        While this academic debate is undoubtedly interesting, the fact remains that our Parliament has recognized in s. 97(3) of the Bankruptcy Act that the “law of set-off applies to all claims made against the estate of the bankrupt”. As a result, in the bankruptcy context, the law of set-off allows a debtor of a bankrupt who is also a creditor of the bankrupt to refrain from paying the full debt owing to the estate, since it may be that the estate will only fulfil a portion, if that, of the bankrupt's debt. Consequently, in this limited sense the party claiming set-off has Parliament's blessing for the “reordering” of his priority in bankruptcy by virtue of the operation of the law of set-off.

Chief Justice Hinkson held that section 97(3) applied to allow the administrators of Elizabeth Coffee’s estate to set-off the amount Josephine Coffee owed to the estate from her share of the estate. He wrote:

[45]         I am satisfied that the requirements for legal set-off have been made out, and therefore answer the second of the questions framed by the petitioners in the affirmative and direct that the petitioners’ are entitled to the set off the amount owing to Ms. Coffey under the Testatrix’ will against the amount still owed to her estate pursuant to the restitution order. While this may have the effect of elevating the claim of the Testatrix’ estate to that of a secured creditor, to the detriment of others, the Supreme Court of Canada made clear in Husky Oil that this reordering of priorities is what was intended by Parliament under s. 97(3) of the Bankruptcy and Insolvency Act.

Joint Tenancy Risks: Re: Eng

One of my earliest posts, back in 2005, was about the potential pitfalls of a parent transferring his or her home into a joint tenancy with a child. A parent may have all sorts of reasons for putting her home, or bank account into a joint tenancy with a child. The one I have heard most often is that it will save probate fees. It might, but as I wrote almost seven years ago, the risks to the parent often outweigh any benefit.

I don’t know why when she bought a house in 1976, Ms. Eng put the title into the names of herself and her then 21 year old son Davie Eng as joint tenants. There was some suggestion that she put it into a joint tenancy for estate planning so that her son would receive it on her death. She held other real estate in joint tenancies with her other children. Perhaps it was done in recognition of his contribution to the family through his work in the restaurant she owned. Or she did so in order for him to establish credit.

Whatever the reason, fortunately for Ms. Eng, Master Scarth found after a 10 day hearing in Re Eng, 2012 BCSC 1096, that the evidence did not establish that she made a gift of an interest in the house to Davie Eng, or that she made a gift to him in 2008 when she put $184,000 into a joint account with him.

In October 2010, Davie Eng filed for bankruptcy. His trustee in bankruptcy claimed a half-interest in both the house and in the bank account for the benefit of Mr. Eng’s creditors.

Ms. Eng immigrated to Canada in 1955 from China. She was married, and had four children. Her husband had another child from a previous relationship. In 1972, she moved to Vancouver and opened a restaurant on property she bought in the 60s. Her children, including Davie, worked in the restaurant.

In 1976, she bought a house on Beatrice Street in Vancouver where she and three of her children lived. She put the title into a joint tenancy with Davie Eng. Eventually, two of the children moved out, and Davie Eng continued to live with her. The court found that she made all of the down payment to buy the house, and financed the rest of it with a mortgage. She did not need Davie Eng, who was 21 with no significant assets, on title to qualify for the mortgage.

Over the years Davie Eng made some payments to her, but she said it was only when he had funds, and that it was generally in the neighbourhood of $200 or $300 per month.

Ms. Eng denied that she intended to make a gift of an interest in the house to her son. She testified that she expected all of her children to receive an equal share from the house on her death (her husband had passed away).

Ms. Eng held other real estate with her other children, and shared the proceeds of sales with them, but in each case the other children contributed some funds to the purchase.

After she sold her restaurant, she put $183,000 out of the last installment of the proceeds into a joint bank account with Davie Eng. She denied that she made a gift, and testified that she did put it into a joint account so that her son could assist her with her banking. It should be noted that she spoke very little English, her first language being Cantonese, and that she claimed all of the interest on the account on her income tax.

The trustee in bankruptcy argued that Davie had made contributions to the house and the restaurant. The trustee in bankruptcy maintained that he did not receive his interest in the house or bank accounts gratuitously. He worked for her in the restaurant and finding and dealing with tenants for her on properties she owned. She intended to giver her son a beneficial interest in these assets. He also listed an interest in the house on various credit applications.

But, Master Scarth found that Ms. Eng had paid the purchase price on the house, and that the funds in the joint account came from the sale of the restaurant, which Ms. Eng had also purchased. She had gratuitously put title of the house into joint names with Davie Eng, and put the funds into a joint account with him. Accordingly, there is a presumption of resulting trust, which is a presumption that Ms. Eng was not conferring a gift on Davie Eng. Master Scarth found that the trustee in bankruptcy had not rebutted that presumption.

In the result, although Davie Eng was on title to the house, and was on the joint account, the beneficial interest in the house and the funds in the joint account belong to his mother. The real ownership is with her. Because the trustee in bankruptcy can have no great rights to the assets than Davie Eng, it is not entitled to take half of the joint account, or to have the house sold and half of the proceeds used to pay Davie Eng’s creditors.

Had Master Scarth found that Ms. Eng had intended a gift, the result would have been quite different.

I cannot stress the risk to a parent in a similar situation. Although Ms. Eng successfully resisted the trustee in bankruptcy’s claim, she did so after 10 days of hearings. A ten-day hearing is a very expensive proposition.

I also wonder if a creditor might successfully argue in a similar case that in extending credit to the son, the creditor relied on the fact that the son had a half-interest in the title to the house. Even if as between mother and son, the property belonged to the mother, by putting her son on the title she made a representation to anyone who searched the title that he was an owner of the property. If a creditor relied on the title, could the creditor say she is estopped, in other words prevented because of her representation, from denying her son’s interest?

What if the son had severed the joint tenancy and granted a creditor a mortgage of his half-interest. Then on default, the creditor could apply to court for an order selling the house if the debt were not repaid.

Court of Appeal Reaffirms When Limitation Period Begins to Run for Delayed-demand Notes

The British Columbia Court of Appeal has reaffirmed the rule that the limitation period of six years in British Columbia does not begin to run until the creditor has made a demand for payment under a promissory note that was made payable after a specified period of time from demand (a delayed-demand note). The case is Ewachniuk Estate v. Ewachniuk, 2011 BCCA 510.

In that case, the defendant’s mother had lent him $750,000 in 1980. He signed a promissory note stating that the $750,000 was “payable one (1) year after demand, without interest.”

After the defendant’s mother’s death, the administrator of her estate demanded payment under the note on November 29, 2008. The defendant refused to pay, and the administrator sued on July 23, 2009.

The Supreme Court of British Columbia relying on previous cases, including Zeitler v. The Estate of Alfonse Zeitler, 2008 BCSC 775 (which I wrote about here), held that the limitation period did not begin to run until a year after the administrator demanded payment. The cause of action, or right to sue, only arises after the demand, and the time for payment has expired. The limitation period does not begin to run until the creditor has a cause of action.

A delayed-demand note may be contrasted with a demand note, which is a promissory note payable “on demand.” In the case of a demand note, the limitation period begins to run when it is signed, even if the creditor does not demand payment. (In the case of a demand note, the running of the limitation period may still be postponed if within six years of the date the note is made, the debtor makes payments or acknowledges the debt in writing.)

The defendant appealed the Supreme Court of British Columbia’s decision, challenging the authority of cases and texts going back 200 years relied upon by the trial judge. He also argued that a delayed-demand note function like demand notes and it is anomalous to treat them differently. In both cases, the defendant argued, there should be a “finite and predictable limitation period.” Furthermore, because the creditor does not have to make a demand, there is effectively no limitation period.

The Court of Appeal rejected the defendant’s arguments and held that the limitation period does not begin to run until after the creditor has demanded payment, and the period of time for payment under the note has expired.

With respect to the argument that there is effectively no limitation period if demand is not made, Chief Justice Finch noted that there are other equitable defenses if a creditor unreasonably delays in perusing a claim that may apply to a claim when the Limitation Act does not apply.

The distinction between a demand promissory note and a delayed-demand promissory note is an important one in practice. I often see these in loans within a family. Parents may make a loan to a child to assist her. The parents may not have any real need for repayment, but may wish the loan to be repaid in some circumstances, such as if there is a breakdown of the child’s marriage. If the loan is a demand loan, they may find out that the limitation period has expired when they demand repayment. A delayed-demand note affords greater protection to the parents, by delaying the time from which the limitation period begins to run.

Do-It-Yourself Trust: Canada v. Rudolf

Mr. Jozef Rudolf owes over $185,000 in taxes. Canada Revenue Agency has registered a judgment against land registered in Mr. Rudolf’s name, and is seeking to have the land sold to collect the taxes from Mr. Rudolf.

Mr. Rudolf bought the land in 1989 for $30,000. In 1999, he transferred the land from himself to himself in trust. He also registered a document entitled “Orol 120 Trust.”

When Canada Revenue Agency brought the proceedings to have the land sold, Mr. Rudolf argued that he really held the land in trust for his sister, Ludmila Kukuckova. He didn’t have any beneficial interest in the land.

If the court accepted Mr. Rudolf’s claim that he held the land in trust—and if the transfer to himself at trustee was not done for the improper purpose of fraudulently avoiding his creditors—then Canada Revenue Agency would not be entitled to have the land sold. This is because the essence of a trust is that although the trustee has title, the beneficial ownership belongs to the beneficiaries. Canada Revenue Agency can’t take something that doesn’t really belong to Mr. Rudolf to satisfy his debt.

But Canada Revenue Agency argued that Mr. Rudolf did not create a valid trust. The document registered on the title to the land identifies Mr. Jaroslav Stepan, who is a friend of Mr. Rudolf, as the “grantor.” This document then says that Mr. Rudolf would receive and hold the land for the “use and benefit” of his sister. But Mr. Stepan had no interest in the land when he signed the document. He could not be the grantor or settlor of the trust.

Mr. Justice McEwan, in Canada v. Rudolf, 2009 BCSC 77, agreed with Canada Revenue Agency’s position that the trust was invalid. He found that the trust documents did not meet all of what are known as the three certainties of a trust: certainty of the intention to create a trust, certainty of the trust property, and certainty of the beneficiaries. Mr. Justice McEwan wrote at paragraphs 11 and 12:

[11] It is clear that Mr. Stepan had no interest in the property that could qualify him as a grantor. He maintained that when Canada Revenue asked him and he testified to that effect. Mr. Rudolf’s evidence is to the effect that he had advice from non-lawyers he trusted who told him this was the way he had to do it. No property passed from Mr. Stepan to Mr. Rudolf as Trustee. It was his own property.

[12] The document itself only identifies Ms. Kukuckova’s interest as the “use and benefit” of the property. There is no provision for her, as beneficiary, to ultimately take the property. There is a 25 year limit with a provision that it “may” be renewed. There is an incomplete and unspecified transfer.

With respect to the 25 year limit, Mr. Justice McEwan also wrote that this provision was inconsistent with a transfer the beneficial interest in the land to Mr. Rudolf’s sister. He wrote at paragraphs 14 and 15:

[14] The trust instrument in this case offends these principles in giving the purported “use and benefit” of the property over to Ms. Kukuckova and then depriving her of it 25 years later.

[15] On the facts it is evident that nothing changed with the registration of the trust. The property continues to be Mr. Rudolf’s residence, and Ms. Kukuckova has never exercised anything that could be described as “use and benefit” except to visit occasionally.

In the result, Mr. Rudolf lost the argument that he had validly transferred the land to a trust for the benefit of his sister. Mr. Justice McEwan did leave open the possibility that his sister might have a claim to an interest in the land if she can show that she contributed funds to the purchase of the land.

A British Columbia lawyer with experience in trust law could have created a binding trust for Mr. Rudolf, which would have shielded the land from Canada Revenue Agency-- provided that it was not done for the improper purpose of defrauding creditors. Mr. Rudolf would still owe the taxes, but the land would have been protected.

This case illustrates what can go wrong when people try to create trusts without using a lawyer.

British Columbia Government Announces Plan to Exempt RRSPs From Creditors

The Provincial Government announced on Saturday that it plans to exempt funds in Registered Retirement Savings Plans from seizure by creditors. Here is an excerpt from the press release:

The Province will act to protect from creditors RRSP investments that are made with banks, just as they are protected now with insurance companies. The Province will introduce legislation to exempt RRSPs and similar prescribed plans from seizure by creditors. Currently, investments with insurance companies are protected from seizure. This will provide the same protection for RRSPs invested in banks. The current law is unfair, as pension and insurance products that are essentially identical to RRSPs are exempt from seizure. It will also end the inconsistent treatment of RRSPs under provincial law and federal law.

I note that this is an announcement only, and the Province has not brought in legislation or regulation exempting RRSPs as of the date of this post.

Canadian Parliament Exempts RRSPs and RESPs on Bankruptcy

In December, 2007, Parliament passed Bill C-12, amending the Bankruptcy and Insolvency Act. One significant amendment that will affect retirement savings is to exempt funds held in Registered Retirement Savings Funds and Registered Retirement Income Funds from the property available to creditors on bankruptcy.

There is an exception for funds contributed to a plan during the year before the bankruptcy. Property contributed during the year before the bankruptcy will be available to creditors. The reason for the one year exception is to prevent people from transferring funds into a Registered plan on the eve of bankruptcy to avoid paying their creditors.

You can read a legislative summary of Bill C-12 here. Bill C-12 has received Royal Assent, although some portions will come into affect at a later date.

The exemption from seizure in bankruptcy may not protect funds in registered plans from seizure by creditors under British Columbia law if the annuitant does not make a proposal under the Bankruptcy and Insolvency Act. As I have written before, the Canadian Bar Association, British Columbia Branch has been lobbying for provincial legislation in B.C. to protect Registered Retirement Savings Plans and Registered Retirement Income Funds from seizure by creditors.

Demand Loans: What a Difference Thirty Days Make

I wrote an earlier post, “Family Loans and Limitation Periods” in which I discussed a case where a claim on a loan was dismissed because the limitation period had expired. If you lend money, and the borrower signs a promissory note stating that the loan is repayable “on demand,” the limitation period may expire before you even make a demand. This is because in British Columbia, the clock on the limitation period begins to tick when the loan is made, rather than when the lender demands repayment. (Although the time will be extended if the debtor makes a payment or acknowledges the debt before the limitation period expires.)

But in a recent case, Zeitler v. The Estate of Alfons Zeitler, 2008 BCSC 775, Madam Justice Arnold-Bailey of the Supreme Court of British Columbia, held that limitation period on loan payable 30 days after demand, did not begin to run on the date of the note. It would only begin to run after the creditor demanded repayment and the time for repayment had elapsed.

Alberdina Zeitler transferred two properties to her husband, Alfons Zeitler, in 1985. In return he agreed to assume the mortgages on the properties, and gave his wife a promissory note for $92,000 plus interest at ten percent per year, payable “30 days after demand.”

He never made any payment to his wife during his lifetime. Nor did he do anything else to acknowledge the debt. Mrs. Zeitler did demand payment of interest in the amount $25,000 in 1992. But Alfons Zeitler didn’t pay it.

After Mr. Zeitler died without a will on April 26, 2007, his wife sued the administrator of his estate. She asked the court to declare that the administrator held the properties in trust for her, but the court rejected her claims in this respect. She also claimed to be entitled to repayment of the loan, plus interest.

The administrator of Alfons Zeitler’s estate argued that it was too late for Mrs. Zeitler to sue. The administrator that the loan was a demand loan, and the six-year limitation period expired six years after the promissory note was made. The limitation period had expired.

Madam Justice Arnold-Bailey disagreed. She held that the limitation period had not expired on the entire amount of the promissory note. She held that the limitation period would not begin to run until after the demand for payment was made, and the time for payment had expired. Relying on previous cases, Madam Justice Arnold Bailey held that if a note is payable after a contingent event, then the limitation period does not begin to run until the event occurs. If a promissory note is payable after a period of time following demand, the note falls into the category of a note payable after a contingent event, and is treated differently than a note payable on demand.

Mrs. Zeitler had demanded that her husband pay $25,000 in interest in 1992. The limitation period had expired in respect of that $25,000 only.

In the result, Mrs. Zeitler is entitled to payment on the promissory note of $412,700.33 out of her husband’s estate, including interest. If the note had said that it was payable on demand, instead of 30 days after demand, she would not have been entitled to any repayment.

When making loans between family members, consider making the loan repayable after a specified period of time following demand, rather than on demand.

Beneficiaries with Financial Problems

If you leave an inheritance to someone who has significant financial problems, the inheritance will be available to your beneficiary’s creditors. This may help the beneficiary get back on his or her feet. But if the beneficiary’s circumstances are bad enough, the inheritance may go to his or her creditors, without really benefiting your intended beneficiary.

What options do you have if you are concerned that a child or other person you wish to benefit on your death has financial problems?

Instead of leaving a share of your estate to the beneficiary as an outright gift in your will, you can have your lawyer draft your will to create a trust for the beneficiary. You appoint someone in your will, called a trustee, to hold and manage a share of your estate for the benefit of the beneficiary. In your will, you can give the trustee the power to decide if and when to make payments to the financially troubled beneficiary. This is called a discretionary trust. You will need a provision in your will saying who receives anything left in the trust on the death of the financially troubled beneficiary. You can also allow the trustee to make distributions during the financially troubled beneficiary’s lifetime to other beneficiaries, such as the financially troubled beneficiary’s spouse and children.

The advantage of using a discretionary trust for a financially troubled beneficiary is that funds can be available to assist the beneficiary, without the funds being available to the creditors. For example, your will could contain a provision allowing the trustee to buy a home for the beneficiary to live in. The trustee could register the home in his or her name in trust. Because the home is held in trust, and there are other beneficiaries of the trust, the creditors will not have the right to seize the home.

If is important that the will be drafted well to make sure that a discretionary trust is created. It is also a good idea to make the terms of the trust flexible enough to meet potential changes in circumstances. You might to give the trustee the flexibility to transfer the trust assets to the beneficiary. Then if the beneficiary is able to overcome his or her financially difficulties, the trustee can then transfer the assets, and wind up the trust.

You also need to choose the trustee carefully. The trustee will have responsibilities that could go on for many years. He or she should have the ability to manage funds or other assets, and be sensitive to the needs of the financially troubled beneficiary.

It is also important to consider your whole estate plan, and not just your will. For example, if you name the financially troubled beneficiary as the sole beneficiary of your Registered Retirement Savings Plans, life insurance policies, and put funds in joint accounts with right of survivorship with the financially troubled beneficiary, those assets will be available to the beneficiary’s creditors. There may be little point to having a carefully considered, professionally drawn will with a discretionary trust for the financially troubled beneficiary, if you leave most of your assets outright to that beneficiary outside of your estate.

Re Baxevanidis Estate

Grammata Baxevanidis left her daughter, Agapie Kennell, a rental property in her will. The will provided that the residue of her estate (what remained after payment of debts and the transfer of the rental property) would be divided equally between her daughter and her son. (Before she died, she had transferred her home to her son.)

After Grammata Baxevanidis died, her executor found that she probably did not have sufficient assets in her estate to pay her debts, including over $70,000 to Canada Revenue Agency, without selling the rental property.

The executor made an application to the Supreme Court of British Columbia seeking directions. The executor asked the court to decide whether the balance of the proceeds of the sale of the rental property would go to the daughter or be divided equally between the son and the daughter, if the rental property had to be sold to pay debts. The executor also asked the court whether the daughter could pay the debts herself in order to receive the property.

In a decision released November 16, 2007, Re Baxevanidis Estate, 2007 BCSC 1657, Mr. Justice Cohen held that if the rental property were sold, the balance of the proceeds after payment of the debts would go to the daughter.

When there are insufficient funds to pay all of the debts and the gifts in the will, some of the assets must be sold to pay the creditors. To the extent that assets are sold, the gifts to the beneficiaries are said to abate. Unless a will says something different, there are rules for determining the priorities among different types of gifts.

Mr. Justice Cohen, quoting from a Saskatchewan case, Re Smith Estate, 2003 SKQB 361, set out the order in which types of gifts abate as follows:

First, residuary personalty;
Second, residuary real property;
Third, general legacies, which include pecuniary bequests from the residue;
Fourth, demonstrative legacies, that is bequests from the proceeds of a specific asset or fund not forming part of the residue; [See Re Culbertson (1967), 62 D.L.R. (2d) 134 (Sask. C.A.)]
Fifth, specific bequests of personalty;
Sixth, specific devises of real property.

In this case, the rental property falls into the sixth category: a specific gift of real property.Accordingly, it is the last to abate. To the extent that there are proceeds of sale remaining, the executor is required to pay them to the daughter.

Mr. Justice Cohen also found that the will authorized the executor to transfer the rental property to the daughter if the daughter paid the estate debts. He found authority in the will for this in an administrative clause which authorized the executor to “compromise, settle and waive any claim or claims at any time due to or due by my said Estate for such consideration and upon such terms and conditions as my Trustees may deem advisable.”

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.

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.