January 2011

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Resulting Trusts, Clean Hands and Who Gets the Cottage

January 16, 2011 by Charles Wagner | 1 comment

Albert was always a bully and Dad loved him best.  Judy became a successful doctor and, in part to get away from her dysfunctional family, she moved to Montreal.  When Dad died, Judy was happy to see that her father left his $1,000,000.00 estate equally to both his children.  But, Albert had other ideas.

Albert went to court and claimed that 20 years ago he bought a cottage which was now in their father’s name.  That cottage, now worth 400,000.00, was transferred to Dad 20 years ago because Albert was being investigated by the Canada Revenue Agency for failing to pay taxes for five years.  Albert feared that the Canada Revenue Agency would take the cottage away so he transferred the property to his father for $50,000.00 except Dad never paid Albert a dime.  Albert claimed that his father had held the cottage in a resulting trust for him and it now had to be transferred back to Albert.  With the evidence presented there could be no doubt that Albert paid for the cottage, maintained the property and that the father participated in the scheme to protect the asset from the Canada Revenue Agency. 

In our fictional scenario Albert could argue that in Ontario there is a legal presumption that people make bargains and not gifts.  Accordingly, if Albert paid for everything the court should presume that he has a beneficial interest in the cottage.  This is the basis of his resulting trust(FN1) claim.

Judy might argue that even if Albert’s story was true he still does not deserve to get the cottage when the whole thing was based on a scheme by Albert to cheat Revenue Canada.  As Professor Waters stated in his text Waters’ law of Trusts in Canada, “The basic principle is that a person may not have the assistance of equity if the person does not come with clean hands”.(FN2).   Arguably,  if Albert tried to cheat on his taxes he did not have clean hands and should not benefit from the equitable remedy of a resulting trust.  How could it be fair for Albert to have it both ways?  To the Canada Revenue Agency Albert said the cottage belonged to Dad and now to Judy he is saying it belonged to him.  Given his intention to cheat Canada Revenue Agency does Albert deserve the benefit of an equitable remedy? 

In Holland v Holland (FN3) Justice Reilly of the Ontario Superior Court of Justice faced a similar question.  A husband transferred a cottage into his wife’s name in exchange for $15,000.00.  No money changed hands and the whole thing was a plan to avoid having an asset that would be seized for unpaid taxes.  When the couple split up the husband claimed to have a beneficial interest in the cottage. This is an excerpt of the judge’s decision “…a declaration of resulting trust is an equitable remedy. In order to obtain such remedy, the applicant must approach the court with clean hands.  In this case, Mr. Holland did not do so. ….It is for Mr. Holland to persuade the court that he is entitled to an equitable remedy and I conclude he has failed to do so.”

Would this reasoning in a family law dispute apply to an estate litigation matter?  Maybe.  Having dealt with these types of cases I can only repeat that these are very complicated matters and some courts have taken the view that despite the improper intention, if no one was in fact defrauded (for example, if it turned out that Albert never really owed Canada Revenue any money) then he might get the cottage back.

This short review of the case law should not be taken as legal advice. Based on my experience in dealing with these cases, they often turn on the specific facts. If you have a legal question relating to something similar, you are best advised to seek out competent legal counsel to determine your best course of action.

Charles B. Wagner is a partner at Wagner Sidlofsky LLP. This Toronto office is a boutique litigation law firm whose practice is focussed on estate, commercial and tax litigation.

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FN1. There is a difference between a resulting trust and a constructive trust. A constructive trust has nothing to do with the intention of the parties. It is a flexible tool used by the courts to redirect funds or property which has been wrongly taken. It is an equitable remedy used by the courts to address an unjust enrichment. Waters, Law of Trusts in Canada, 2nd ed. (Toronto: Carswell, 1984) at p. Defines a resulting trust as an equitable trust that arises whenever one party buys property and has it gratuitously conveyed to another or into the joint names of himself and another.”:

FN2. See Waters’ Law of Trusts in Canada, 3rd Ed. 9 — Revocation: Setting the Trust Aside
9.II — Setting the Trust Aside B. Fraud by Settlor.

FN3. Holland v. Holland 2007 CarswellOnt 7195, [2008] W.D.F.L. 49, 49 R.F.L. (6th) 97, 161 A.C.W.S. (3d) 767. Justice Reilly’s decision considered a number of cases involving a transfer of property where the intent was to defeat creditors. Most persuasive was His Honour’s quote of Lord Denning in Tinker v. Tinker, [1970], 1 All E.R. 540 at 542:
“… I am quite clear that the husband cannot have it both ways. So he is on the horns of a dilemma. He cannot say that the house is his own and, at one and the same time say that it is his wife’s. As against his wife, he wants to say that it belongs to him. As against his creditors, that it belongs to her. That simply will not do. Either it was conveyed to her for her own use absolutely; or it was conveyed to her as trustee for her husband. It must be one or the other. The presumption is that it was conveyed to her for her own use; and he does not rebut that presumption by saying that he only did it to defeat his creditors. I think that it belongs to her.”

Suing an Ontario Defendant – Security for Costs

January 13, 2011 by Charles Wagner

Tal lives in Tel Aviv.  He invests $500,000 with Allen for a business venture located in Toronto Canada.  An additional $1,500,000.00 is borrowed and then Allen ignores Tal’s calls and refuses to report about the business.  Upon investigation Tal finds out there was no business.  Allen refuses to give Tal his money back and a law suit is launched.  The first hurdle Tal will face is a motion brought by Allen for security for costs.

In Ontario the loser of the law suit is often ordered to pay a portion of the winner’s legal costs.  Allen argues that if Tal loses his law suit there is a concern that any cost order against him would be unenforceable.  In cases like this the Ontario Rules of Civil Procedure provides a mechanism for the Ontario defendant to ask the court to order Tal to provide security for costs (FN1). 

Allen will argue that Tal is ordinarily resident outside Ontario, that there is good reason to believe that the law suit is frivolous and vexatious and/or that Tal has insufficient assets in Ontario to pay the costs of the defendant.

Tal might respond that the reason he has no assets in Ontario is because Allen took it all for an apparently bogus business deal.  Tal will argue that his claim has merit and that Israel has a statute (FN2) that provides for reciprocal enforcement of judgments so the risk of an unpaid cost order is minimized.  Further, Tal has a home in Israel which is worth more than enough to satisfy any Ontario court cost order.

Under Ontario law a foreign plaintiff can possibly defeat an order for security by establishing that he has assets that can be used to satisfy a cost order in a reciprocating jurisdiction.  However, Allen will argue that under Israeli law (FN3) there are restrictions on the ability to take someone’s home away to pay a debt so Tal should pay the security for costs. What would the court say?

There is a very interesting case relevant to our scenario that was heard by the Superior Court of Justice in Ontario called Uribe v. Sanchez (FN 4).  In that case a Florida plaintiff claimed he had no money to pay security for costs and that Florida had legislation permitting the enforcement of foreign money judgments that would include a judgment for costs made in Ontario.  So – argued the plaintiff, there was no risk to the defendant.  The judge disagreed. 

The problem with the Florida plaintiff’s argument was that Florida law exempts a person’s primary place of residence from such a judgment. In this case the court ruled that this does not meet the test as to sufficiency and quality of assets in the reciprocating jurisdiction. Despite the merits of the plaintiff’s claim, the judge was not satisfied that the plaintiff could not post security or that the plaintiff would be prevented from pursuing a meritorious claim if he were required to do so.  Would an Ontario Judge see the Israeli legislation called the “Execution Law” the same way? It provides that a property that is the family home is not to be sold unless the Execution Office is convinced that the family has reasonable alternate accommodation.

This short review of the case law should not be taken as legal advice. Based on my experience in dealing with these cases, they often turn on the specific facts. If you have a legal question relating to something similar, you are best advised to seek out competent legal counsel to determine your best course of action.
 
Charles B. Wagner is a partner at Wagner Sidlofsky LLP. This Toronto office is a boutique litigation law firm whose practice is focused on estate, commercial and tax litigation.

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(FN1)  See Rule 56 Security for Costs RULES OF CIVIL PROCEDURE – R.R.O. 1990, Reg. 194

(FN2)  See Foreign Judgments Enforcement Law – 1958

http://www.israelinsurancelaw.com/foreign-judgments/foreign-judgments-enforcement-law-1958.html

(FN3) See the Israeli statute called the ‘Execution Law’, which says that a property that is the family home is not to be sold unless the Execution Office is convinced that the family has reasonable alternate accommodation.

הגנת דירת המגורים (תיקון מס’ 15) תשנ”ד-1994 (תיקון מס’ 29) תשס”ט-2008

38.   (א)  היו המקרקעין שעוקלו משמשים, כולם או מקצתם, דירת מגורים לחייב, לא יהיה רשם ההוצאה לפועל רשאי להורות על מכירת המקרקעין ועל פינוי החייב ובני משפחתו הגרים עמו מהמקרקעין, אלא לאחר שהוכח, להנחת דעתו, שיהיה לחייב ולבני משפחתו הגרים עמו מקום מגורים סביר או שיש לו ולבני משפחתו הגרים עמו יכולת כלכלית המאפשרת מימון מקום מגורים סביר, או שהועמד לרשותם סידור חלוף.

 

(FN4)  Uribe v. Sanchez 2006 CanLii 19498 (ON S.C.)

Are Adult Children Legally Entitled To Inheritance?

January 6, 2011 by Charles Wagner

While their father loved both Samantha and Reuben equally, in his will, and in accordance with his culture, all the assets of the father were left to the male heir.  Is this legal?

The legality of father’s will may depend on which province’s law applies.  If the law of British Columbia governed there is a very good chance that Samantha would succeed and the Court would order the estate be split equally.  If Ontario law applied and there were no other legal issues raised concerning the validity of the will then Samantha would have a less likely chance to win.  Why the uncertainty?  Let’s look at three cases to explain, Tataryn v Tataryn (FN1), Cummings v. Cummings (FN2) and Johnson v. Huchkewich(FN3).

Tataryn was a case in British Columbia.  It was ultimately decided by the Supreme Court of Canada.  In summary, the deceased’s will favoured one son and disinherited the other son and gave less money to the deceased’s wife.  The court varied the will based on the deceased’s moral obligation to his wife and disinherited adult son.  In British Columbia, unless there is some debt or the favoured child is a dependent, or there is a valid reason for disinheriting a person, each child has a moral and legally enforceable claim against the estate.

The importance of “moral claims” as set out in the Tataryn case was adopted by the Ontario Court of Appeal in 2004 in Cummings v Cummings.  In this unfortunate case a second wife was litigating against dependent adult children of a first marriage.  The son, Paul, suffered from a progressively debilitating incurable neuromuscular disease known as Becker’s muscular dystrophy.  Paul, was arguably entitled to the all of the small estate.  Citing Tataryn, Justice Cullity explained, “The issue of the weight to be given to moral considerations is relevant in this case: it is posed quite directly by the [second wife’s] concession that she is not in need of support. On a strictly needs-based approach, I might well be justified in ordering that the entirety of the net testamentary estate be transferred to the support of Paul…I do not think that this would be the correct disposition of the case. I believe that, apart from any residual value that is to be attributed to freedom of testamentary disposition….moral considerations continue to play a part in the analysis.”

So has Ontario followed British Columbia’s lead?  Maybe, maybe not. 

I have reviewed many related Ontario cases post Cummings.  To the best of my knowledge no Ontario court has understood Cummings to mean that the moral claim of a disinherited adult non dependent child was legally enforceable.  As you recall both the adult children in Cummings were dependants which means that the father was providing support or was under a legal obligation to provide support immediately before his death.  It may be that the courts apply the moral obligation only for dependents.  For example, in a recent Ontario case, Johnson v. Huchkewich, one disinherited daughter challenged her mother’s will.  The judge did not even address whether a child’s moral claim constitutes a legal claim.  The only relevance of “moral claims” was how it reflected on capacity.  The daughter argued that her mother lacked the ability to assess and appreciate the moral claims of her children and therefore did not have capacity.  The judge did not accept that argument.

So will the winds of non dependent adult children’s moral claims from British Columbia blow through Ontario?  It still remains to be seen.  However, there are a number of lawyers who believe it’s coming.  In her article on this topic, prepared for the Law Society of Upper Canada’s continuing legal education program, Susan Woodley (a very well respected member of the bar in Ontario) answered the question this way,  “almost, possibly, probably”.

This short review of the case law should not be taken as legal advice. Based on my experience in dealing with these cases, they often turn on the specific facts. If you have a legal question relating to something similar, you are best advised to seek out competent legal counsel to determine your best course of action.
 
Charles B. Wagner is the managing partner at Wagner Sidlofsky LLP. This Toronto office is a boutique litigation law firm whose practice is focused on estate, commercial and tax litigation.

FN1  Tataryn v Tataryn 3 E.T.R. (2d) 229 S.C.C.

FN2  Cummings v. Cummings ( (2004), 5 E.T.R. (3d) (81) (Ont. S.C) (Cullity, J.); see Cummings v.Cummings (2004) 5 ETR (3rd) 97 (Ont. C.A.)

FN3  Johnson v. Huchkewich, 2010 ONSC 6002