Archive for February, 2012

February 29, 2012

Interesting Article from Forbes on Elder Fraud

http://www.forbes.com/sites/johnwasik/2012/02/28/why-elder-financial-fraud-is-on-the-rise/

February 27, 2012

More on Joint Tenancy and Challenges to the Right of Survivorship on Death

In a February 23 post, we looked at a case involving a bank challenge the right of a spouse to take title to property held with her husband as joint tenants where the estate of the husband was later declared bankrupt.  The Ontario  Court of Appeal has recently looked at another attack on joint tenancy in applying the common law rules of severance in a spousal separation scenario where one spouse died before conclusion of an agreement on property rights.

In this instance, the spouses were joint tenants of matrimonial property.  They had separated and were living apart.  Through counsel, they had commenced negotiations for a division of property.  The husband died before any offers were exchanged or proceedings commenced.  The wife, who was not included in the husband’s new will, claimed sole title to the property by right of survivorship.  That right was challenged by children of the husband’s previous marriage, the beneficiaries under his will.

The case centered on the common-law rules concerning severance of a joint tenancy.  In short those rules state that a joint tenancy will be severed in one of three scenarios.  Firstly, where a party unilaterally acts on one’s own share, such as by selling or encumbering her or his interest.  Secondly, where there is a mutual agreement between the co-owners to sever.  Thirdly, where there is any course of dealing sufficient to intimate that the interests of the co-owners were mutually treated as constituting a tenancy in common.  This case turned on an application of this third rule, known as the “course of dealing” rule. 

The application judge found on the facts that the course of dealing between the spouses was not sufficiently advanced to meet the test under this rule and found that the joint tenancy had not been severed, entitling the wife to sole ownership.  The Court of Appeal disagreed and allowed the appeal.

The Court of Appeal reviewed the test for the course of dealing rule and noted as follows:

  • The rule operates in equity to prevent a party from asserting a right of survivorship where doing so would not do justice between the parties;
  • The expression of intention by the co-owners as evidenced by their conduct is determinative;
  • No explicit agreement need be found between the parties. Mutuality can be inferred from the course of dealing between the parties;
  • The test does not require proof of an explicit intention communicated by each owner to the other;
  • The co-owners must know of each other’s position and that they treated their respective interests in the property as no longer being held jointly.  Such knowledge can be inferred from communications or conduct;
  • Even failed or uncompleted negotiations can lead to a severance because such can show that the notional unity of ownership under a joint tenancy has been abandoned.

Here, the Court of Appeal found that the application judge failed to apply the test properly to the facts.  The Court found that in the months immediately prior to the husband’s death, he and his wife engaged in a course of conduct that involved separating their lives and dividing their assets.  The wife moved out of the matrimonial home and leased her own apartment while the husband remained in the home and took responsibility for it.  The parties retained separate lawyers and commenced negotiations for the division of property.  In reviewing the facts in their totality, the Court found that indeed the parties engaged in a course of dealing whereby each considered the joint tenancy to have been severed.

The Court of Appeal made a few additional interesting remarks.  Firstly, it found that while it is valid law that disposition of property in a will is insufficient to sever a joint tenancy, such can be used as evidence of severance if supported by other reliable evidence.

In addition, based on the Court’s analysis, it appears that the test in Ontario may differ from that in British Columbia.  The Ontario Court reviewed the current British Columbia Court of Appeal position on the course of dealing rule and disagreed with the test applied there.  The BC Court defined the test somewhat differently, finding that in order for severance to be established by a course of dealing, there must be evidence of detrimental reliance as the rule operates primarily as an estoppel.  In other words, in order to establish the severance, a party would have to show that some representation was made by one joint tenant which representation was relied on by the other to his or her detriment.  The Ontario Court disagreed, taking the position that it is not necessary to show detrimental reliance because the rationale for severing the joint tenancy relates to the inappropriateness of the right to survivorship in circumstances where the co-owners have mutually treated their interest in the property is being held in common.  No detriment need be shown.

The Ontario Court also disagreed with the BC position that the rule required the presence of facts that preclude one of the parties from asserting that there was no agreement to sever.  The Ontario Court held that there is no need to show evidence of an agreement, only the mutual intention to no longer treat the property as jointly held.

Hansen Estate v. Hansen

February 23, 2012

Can a Joint Tenant’s Right of Survivorship be Trumped by the Bankruptcy of an Estate?

Recently, a bank challenged the right of a spouse to take title to property held by her and her husband as joint tenants where the estate of the husband was later declared bankrupt.  Of course, as joint tenants, the property devolved to the wife through her right of survivorship.  The bank tried to employ s.  96 of the Bankruptcy and Insolvency Act (Canada) to challenge the spouse’s interest.  Section 96 permits a Court to declare void a transfer undervalue made between non-arm’s length parties within one year prior to bankruptcy.  This is a change from the old Act where the challenging party was required to show an intention to prefer parties over other creditors.  The element of intention has now been removed.

The bank took the position that the interest a joint tenant takes through survivorship is a “transfer” and is therefore caught by s. 96.  The Court disagreed, holding that on death a deceased does not dispose or part with property held in joint tenancy.  Rather his or her interest is extinguished, leaving nothing to transfer.  The Court also noted that assets that vest in a survivor in joint tenancy do not form part of the deceased’s estate.

The Court also reviewed the issue of whether the interest taken by the surviving spouse was “undervalue”.  The Court held that it was not, given the nature of a joint tenancy and in particular a joint tenancy between spouses.  The Court found that the law presumes that each spouse contributed as much as the other to the acquisition of the property whether by way of money or money’s worth.  In addition, each acquired an inchoate right to sole survivorship at the time the property was acquired, which right crystallized at the moment of the other joint tenant’s death.

The bank also contended that the wife held the property as constructive trustee for the bank, claiming unjust enrichment in the spouse.  The Court found that the elements of unjust enrichment had not been met as there was (1) no enrichment (2) no corresponding deprivation and (3) no absence of any juristic reason for the enrichment.  The Court held that no right in the property was acquired as of the date of death but was acquired at the time the property was purchased.  There was mutual consideration between the spouses as each spouse acquired the chance of acquiring the whole if he or she survived but risked that he or she might predecease the other spouse and to lose all rights in the property.  As a result, as there was consideration, there was no “enrichment”.  As well, there was no deprivation as the property never devolved to the estate of the deceased spouse because it was automatically vested in the surviving spouse.  Finally, the Court held that the operation of a joint tenancy at law in and of itself is a juristic reason for any perceived enrichment.

The timing here is important as death and the devolution of the property to the spouse occurred before bankruptcy.  Had the deceased been bankrupt prior to death, the bankruptcy would have severed the joint tenancy and there would have been a different result.

Re Cameron

February 22, 2012

How Not to Do Estate Planning

Family vacation property has been a thorny issue in estate planning since time immemorial.  Here is one way not to do it.

In a recent Ontario Supreme Court of Justice case, a father purchased farm property in the Oak Ridges Moraine near Toronto.  He had three children.  The property was registered in the name of one of the children, apparently for tax reasons (there was no mention of a trust arrangement).  In 1987, the father encouraged another of his children to purchase the property, apparently to dissuade her from moving from the province.  In order to keep the nonpurchasing siblings happy, all three siblings entered into an agreement whereby the nonpurchasing siblings would have a right of first refusal should the purchasing sibling intend to sell.  On such a sale, the purchasing sibling would receive from any sale the original purchase price, interest, and money spent on renovations or improvements.  Any proceeds in excess of this amount would be split evenly between the siblings.  The agreement was registered on title to the property.  To complicate the matter further, the father entered into a separate agreement with the nonpurchasing siblings whereby he agreed to be bound by the sibling agreement in return for a conveyance to him of an undivided one-half interest in the property.  No reason was given for this transfer.

Of course, such agreements are fraught with difficulty.  What is the father’s real interest?  How does one assess costs of renovation or improvement?  What mechanism is used to determine whether the right of first refusal is properly exercised?  An additional issue was the effect of the agreement on subsequent generations; i.e. were they bound by the agreement and how otherwise would any interest in the property be determined upon death of the siblings?

Some 30 years later, the purchasing sibling sought an order declaring that the sibling agreement was void and should be deleted from title.  The rationale was that the original purchase price, plus interest and costs of renovation and improvement, far exceed the value of the property so the agreement was effectively moot.

The Court held on contract principles that the agreement was valid and properly registered, thereby dismissing the application.  While the decision answered the narrow question of validity of the agreement, the dismissal of the application does nothing to answer the question of what happens with the property on death of the siblings (given that all three were alive, that issue could not have been before the Court).  While the Court found that subsequent generations are bound by the sibling agreement because of a clause stating an intention to bind “respective heirs, administrators, executors, successors and assigns”, the interests of the next generation will surely end up a matter for a Court down the road.

The lesson appears to be that in estate planning, like life, an attempt to please everyone will usually please no one.

Benzie v. Kunin

February 21, 2012

Ontario says tougher rules expected for drivers with dementia

http://www.thestar.com/news/canada/politics/article/1134253–ontario-says-tougher-rules-expected-for-drivers-with-dementia

February 21, 2012

Interesting Article on Aging and Muscle Loss – Not Quite What We Have Been Led to Believe?

http://www.theglobeandmail.com/life/health/fitness/exercise/fitness-research/with-muscles-use-it-or-lose-it-rings-true/article2342273/

February 17, 2012

Removal of Estate Trustees – Recent Caselaw

The law concerning when a Court will and will not remove an estate trustee was recently reviewed by the Ontario Superior Court of Justice.

At issue were a series if disputes between step-brothers in connection with the estate of their late grandfather. The first grandson was a co-trustee of the estate. The second was attorney for the other co-trustee, their mother.  The terms of the will set up a trust from which income was to be paid to the mother for her lifetime with the capital paid out to the brothers on her death.

The step-brothers exhibited a long history of hostility towards each other and one complained that the other had acted contrary to the terms of the trust by, among other matters, failing to consult him with respect to investments made, reducing payments of interst to the mother and charging management fees to interest rather than to capital.

The Court reviewed the law concerning the power of the Court to remove trustees and reiterated that it will do so only on rare occasions as the Court will not lightly interfere with the wishes of the testator.  The guiding principles at all times remain (1) the welfare of the beneficiaries; (2) whether there is any danger to trust property; and (3) whether the trustee continuing to act is likely to prevent the trust from being properly administered.  The Court added that it will be more likely to interfere where the dispute is as between co-trustees as opposed to a trustee and beneficiary.

Here the Court treated the matter largely as a dispute between co-trustees given that the second brother acted as attorney for a co-trustee and because earlier minutes of settlement required that the first brother consult with him on certain matters before acting.  The Court found the first brother to be incapable of acting in the face of his conflict of interest as a beneficiary and his questionable actions in the administration of the trust.  Combined with what was certain to be continued hostility between the brothers, the Court found it was justified in these circumstances in removing the first brother and appointing a professional trustee.

Venables v. Gordon Estate

February 16, 2012

Budget likely to set direction, rather than launch discussion, on pensions

http://www.theglobeandmail.com/news/politics/budget-likely-to-set-direction-rather-than-launch-discussion-on-pensions/article2340391/

February 16, 2012

Constructive Trusts – The Problem of a Duty to Inquire

The development of the law with respect to constructive trusts and its interrelation with the remedy of unjust enrichment continues to evolve.  Where the subject matter of the alleged trust is proceeds connected to a fraud, the issue of whether a trust exists relies on a difficult factual determination as to whether the alleged constructive trustee either had knowledge of the fraud or otherwise failed to make proper inquiry in circumstances where an honest and reasonable person would realize that the funds were from a suspicious or improper source.

In a recent Ontario Superior Court of Justice decision, the Court had to make such a determination.  The defendants, who had loaned funds to a fraudster, were repaid by the fraudster with funds obtained from the plaintiff, also on a fraudulent basis.  On the scheme being exposed, the plaintiff sought judgment requiring the payment of such funds from the defendants based on grounds that they were constructive trustees for the plaintiff. 

In its reasoning, the Court determined that in order for a constructive trust to arise, there must have been either knowledge of the fraudulent source of the funds or circumstances whereby the defendants ought to have inquired as to the source of the funds.  Of course, determining this is highly reliant on the facts of each situation.  In this instance, the Court found that while there was concern regarding repayment of the funds as the defendants’ money had not been invested as they had been informed it would and they had gone so far as to involve counsel, there was no obligation on the defendants to go behind the cheques received from the fraudster in order to determine their source.  In recognition of the difficulty faced by a Court dealing in hindsight, the Judge stated “Whatever is required to demonstrate that there is a duty to inquire, it cannot be such that it fails to accept that we are all human and can be misled”.

As constructive trust claims are generally coupled with claims for unjust enrichment, the Court was not able to conclude that there was no juristic reason for the payments to the defendants.  They were owed money and were paid.  Without more, there was no reason to find unjust enrichment.

Sarhan v. Chojnacki

February 15, 2012

When Is a Lawyer Negligent in the Drafting of a Will?

A recent Alberta Court decision reminds us of the pitfalls for a lawyer in drafting a will.

The lawyer was asked by a demanding client to prepare a will for execution the next day.  The will was to provide that certain property be gifted to the client’s brother.  Unfortunately, the client did not hold title to the property.  It was held by one of his companies.  As a result, following the death of the client, the gift failed.  The issue for the Court was whether the lawyer was negligent in the preparation of the will by failing to determine the ownership status of the property or whether he was entitled to rely on his client’s information that he owned the property.

The lawyer was found to have been negligent and liable to the brother with damages assessed at the value of the property at the date of death of the testator.  The Court reiterated the common law that a lawyer owes a duty of care to a beneficiary under a will prepared by the lawyer.  Basically, that duty is to prepare the will with the skill and care of a prudent lawyer.

At issue was whether the lawyer had a duty to go beyond the information provided by his client to determine whether the client was in a position to make the gift intended.  The Court found that while a solicitor is entitled to rely on the instructions provided by a client, there is an obligation to ensure that the instructions are complete and sufficiently accurate to achieve the desired result.  This includes a duty to make necessary inquiries in order for the lawyer to satisfy himself or herself that the wishes of the testator will be honoured.  In the circumstances of this case, the Court found that the lawyer had an obligation, even under significant time restraints, to make appropriate searches and inquiries concerning title to the property.  The Court took into consideration the long-standing relationship between the lawyer and the client and the admission by the lawyer that the client was not a “details” person and relied on the lawyer in past dealings to ensure that his wishes were complied with legally.

http://www.canlii.org/en/ab/abqb/doc/2012/2012abqb82/2012abqb82.html