Month: June 2021

B.C. Case Comment: Creditor Entitled to Shares that Deceased tried to Settle into a Trust

June 25, 2021

A creditors may make a claim against a debtor’s estate. However, a creditor is sometimes disappointed to find that the debtor’s estate is insolvent or has insufficient assets to satisfy their claim. The creditor may look at other steps taken by the deceased debtor to strip their estate of assets. While the courts have recognized alter ego trusts, transfers into joint tenancy, etc.. as valid estate planning tools, creditors still have remedies available if the deceased has taken steps to defeat the claims of their creditors.

In the recent case of Lau v. McDonald 2021 BCSC 1207, the B.C. Supreme Court was asked to determine who owned shares of 319344 B.C. Ltd. (“319344”) which were previously held by the deceased. A creditor of the deceased wanted to execute against the shares to satisfy a debt owed by the deceased.

The deceased’s spouse argued that she was entitled to receive the shares. She said that she was the beneficiary of an alter ego trust settled by the deceased, and that the shares were settled into the trust pursuant to a deed of gift. However, the deed did not on its face transfer shares in 319344 to the trust. Instead, the deed referred to the transfer of shares in Noramco Capital Corp. (“Noramco”), a subsidiary of 319344. The Deceased did not own any shares in Noramco, only in 319344.

The 319344 shares were valued at almost $1,900,000 at the deceased’s date of death.

The creditor of the estate took the position that the 319344 shares formed part of the estate (as opposed to the trust), so that she could claim against them to satisfy the debt owed to her by the deceased.

There was a good argument that the deed contained a drafting error, and the issue became whether there was some legal basis to fix the error, and whether the spouse was able to keep the shares and avoid execution against them by the creditor.

First, the spouse argued that the deed should be interpreted to include the 319344 shares. However, the deed stated that it transferred “all of the issued shares of Noramco Capital Corp. which are beneficially held by [the deceased] as of the date hereof.” The Court was not willing to interpret this to include shares in 319344 when the deed clearly only referred to Noramco.

Next, the spouse asked that the deed be rectified, to give effect to the true agreement of the parties. Where a written instrument does not accord with the true agreement between the parties, equity has the power to rectify the document so that it reflects the true agreement. The mistake is not in the transaction itself, but the way that the transaction has been expressed in writing. This is a discretionary remedy.

In Lau, the Court held that there was sufficient evidence to establish an agreement by the deceased to transfer “all of his known material assets” into the trust.   The deed clearly failed to reflect this agreement, since it left out the 319344 shares and instead purported to transfer Noramco shares that the deceased did not even own.

As a result, the court concluded that rectification was available. If the discrepancy was pointed out to the deceased at the time of the transaction, the deceased would have obviously agreed to the necessary revision. It was ultimately an error by the deceased’s professional advisor (lawyer) who drafted the documents. In the end, the court characterized this as a “simple drafting mistake in inserting the name of a subsidiary rather than the parent company.” Equity ought to step in and fix this mistake.

However, this was not the end of the matter. The creditor made other arguments. She sought to argue that the shares were not properly transferred, and that the court may not generally assist a claimant in enforcing an imperfect gift. However, the court held that the transfer of the 319344 shares was properly completed. She sought to argue that the transfer of the shares to the trust was a fraudulent conveyance under the Fraudulent Conveyance Act, intended to defeat her claims. The court held that the deceased did not have this intention, and so there was no fraudulent conveyance.

The creditor’s last argument was that the transfer was contrary to s. 96 of the Bankruptcy and Insolvency Act, which provides that a transfer at undervalue is void as against the trustee if it occurred within a specified period of time (which is set out in the section), and if the debtor was insolvent at the time of transfer or was rendered insolvent by it, or intended to defeat creditors. The Court in Lau held that the creditor established the test for s. 96.  The transfer of the shares rendered the deceased insolvent, even though he may not have intended to defeat his creditors.

Success on this one argument was enough for the creditor to be entitled to the shares.

B.C. Case Comment: Alleged Victim of Elder Abuse Not Forced to Undergo Further Mental Capacity Assessment

June 18, 2021

In B.C., a proceeding brought by a person under legal disability must be started by his or her litigation guardian. This often arises in the context of alleged elder abuse. A loved one may seek to remedy an incident of elder abuse (for example, undue influence), by bringing an action on behalf of the victim. However, what if the alleged victim of elder abuse denies the undue influence or other abuse, and does not want a claim to be brought on their behalf? This can be further complicated when the loved one bringing the claim on behalf of the victim ultimately benefits if that claim is successful (for example, by receiving part of the victim’s estate upon their death).

If the alleged victim insists that they have capacity to decide whether they want/need to bring a claim, and the loved one insists that they lack capacity, can the court order a medical assessment?

This was recently considered by the B.C. Supreme Court in Hambleton (Litigation Guardian of) v. Hambleton 2021 BCSC 1155.  In Hambleton, a daughter took the position that her mother suffered from severe dementia, and that she lacked capacity to make decisions regarding her financial affairs and was subject to undue influence by her other daughter (Alice).

The mother transferred title to her property to herself and Alice, and took out a reverse mortgage. Her daughter started an action, on behalf of her mother, seeking to challenge and set aside the transfer. The mother said she was capable of making her own decisions, and said that the transfer was consistent with the terms of her will made back in 2010 (where there was no suggestion of lack of capacity). The mother retained her own lawyer and applied to strike the action which was brought in her name by her daughter (and to remove her daughter as litigation guardian).

The Court had previously ordered that the mother attend a mental capacity examination at a time and place to be arranged by her care center, before any further steps were taken in the litigation. While there is a presumption that a person is capable, there was some medical evidence from 2015-2016, which indicated that the mother suffered a mental health event and was involuntarily committed to a facility. There was a gap in the evidence as to whether the mother was capable, which needed to be addressed with a medical assessment.

The mother did not arrange with her care facility to attend a medical assessment as ordered. Eventually, she was discharged from that facility. Instead, the mother unilaterally attended an assessment with a geriatric psychiatrist. The doctor concluded that the mother had mild cognitive impairment but was capable of personal financial decision making, and had testamentary capacity to sign legal documents.

The daughter took the position that the doctor’s assessment was inadequate, and sought an order that her mother undergo a more extensive medical capacity evaluation.

The Court was satisfied that the assessment was adequate. It is an invasion of an individual’s rights to require them to undergo a mental capacity assessment, and the court should not make such an order without sufficient evidentiary basis for doing so. In this case, the mother had obtained an assessment to address the Court’s concern about capacity, and requiring her to undergo a further mental capacity assessment would not be appropriate. It would be stretching the court’s parens patriae jurisdiction (the Court’s powers to make orders protecting persons under disability or potential disability) too far.

As a result, the mother had established that she had the requisite capacity, and she could proceed with her application to remove her daughter as litigation guardian (and presumably with her application to strike the claim that her daughter brought on her behalf).

A competent adult can deal with their assets during their lifetime as they see fit, and there is a presumption of competency. A court will only order a mental capacity assessment in extraordinary circumstances. A court will certainly not order an assessment as a matter of course when there are allegations of undue influence or elder abuse. This case also serves as a reminder that care needs to be taken to ensure someone is actually under a legal disability before a claim is brought on their behalf (especially when they are opposed to taking the action).

Bernard and Honey Sherman Estates Update: Supreme Court of Canada Releases Decision Allowing Public Access to Estate Files

June 11, 2021

This morning the Supreme Court of Canada released its decision on the sealing of the court files relating to the estates of Bernard and Honey Sherman, the wealthy victims of murders that remain unsolved, and that were widely reported in the media. I previous wrote about the case here, after the Supreme Court of Canada heard submissions on whether the media ought to have access to the court files.

The Supreme of Canada dismissed the appeal brought by the trustees of the estates. The Court held that the sealing orders should not have been issued by the lower court, and the files were open to the public. The decision of the Supreme Court of Canada can be found here: Sherman Estate v. Donovan 2021 SCC 25

There is a strong presumption in favor of open courts. Court openness is a constitutional guarantee. Public scrutiny can cause inconvenience and even embarrassment to those who feel that the court system has intruded on their private lives. However, the Court confirmed that this discomfort is not enough to overturn “the strong presumption that the public can attend hearings and that court files can be consulted and reported upon by the free press.”

The court confirmed that there may be exceptional circumstances which justify a restriction on the open court principle.  An applicant for a sealing order or similar relief must demonstrate that openness presents a serious risk to a competing interest of public importance. This is a high bar.  Next, the applicant must show that the order is necessary to prevent the risk, and that the benefits of the order restricting openness outweigh its negative effect.

The estate trustees in the Sherman case argued that the concerns for (1) privacy, and (2) public safety were important public interests that are at such serious risk that the files should be sealed.

With respect to privacy concerns, the respondents to the appeal argued that virtually every court proceeding requires some intrusion on privacy.  The Court held that proceedings in open court can lead to the dissemination of highly sensitive personal information, that could result in discomfort or embarrassment, or even an affront to dignify. In the latter case, an exception to the open court principle may be necessary.

However, the Court was not convinced that there was such a risk in these circumstances. The Court is not concerned with the mere fact of the dissemination of sensitive personal information – this happens in almost every court proceeding. The focus must be on the impact of the dissemination. The trustees failed to show how the lifting of the sealing order engages the dignity of the affected individuals. The Court observed that “the information in the court files about which the Trustees are concerned must be sufficiently sensitive in that it strikes at the biographical core of the affected individuals.” The trustees also failed to establish that there was serious risk of physical harm to the affected individuals.

The court did not accept that the matters in a probate file are quintessentially private or fundamentally administrative.  The information contained in the files did not reveal anything particularly private about the affected individuals. It was acknowledged that there was near certainty that the media would publish at least parts of the estate files. Again, the risk of inconvenience and embarrassment resulting from publication is not enough.

In the end, the estate files will show the type of information found in any probate file. They may shed light on the relationship between the deceased and the affected individuals, in that we will see who they named as beneficiaries of their estate, and who they trusted to administer their estate. The only difference between this case and any other probate application is the high profile murders and intense media interest which will result in a larger audience for what are, in the normal course, publicly available documents. In those circumstances, a sealing order was not appropriate.

Recent B.C. Case Illustrates Importance of Documenting Transactions Between Family Members

June 11, 2021

All too often, transactions between family members (loans, gifts, property transfers, etc…) are not properly documented or are not documented at all. I see this repeatedly in transactions between parents and children.  The other children (i.e. the transferees’ siblings) seek to challenge the transaction after the parents’ deaths, so that the transferred asset forms part of the parents’ estates, causing fractures within the family.

This was the case in the recent B.C. Supreme Court decision in Cadwell Estate v. Martin 2021 BCSC 1089.   The Court observed:

[1] As this case shows, when a significant financial transaction is casually entered into between parents and their adult children, tragic consequences may occur, if the terms of the transaction are not clear to the members of the family at the outset, or are not properly, legally documented

In 2004, Bill and Ruth Cadwell (the parents) paid $170,000 to their daughter and her husband (the defendants). The payment was used to assist with the purchase and construction of a new house by the defendants. The house was modified to include a suite suitable for the parents.

The house was built, and the defendants and the parents moved into the house in 2005. No agreement was put in writing. Bill Cadwell died in 2007. Ruth Cadwell lived in the suite for 12 more years until she died in 2019.

The $170,000 payment lead to “considerable friction over the years” between various family members, and eventually lead to this litigation.

The plaintiff (the executor of Ruth Cadwell’s estate) claimed that the payment was an equity investment in the property, or that a resulting trust in the property was created. In the alternative, the plaintiff claimed in unjust enrichment, or for repayment of the amount as a loan, with interest.

The defendants said that the payment was a loan, which was paid off by notional payments of rent applied against the loan over the years. In the alternative, they argued that the loan claim was statute barred because the limitation period had expired.  The defendants relied upon a loan repayment schedule document initialed by Bill Cadwell. The plaintiff argued that this document was a forgery, created for the purpose of the litigation.

The Court concluded that there was no equity investment. While Ruth may have referred to the payment as an “investment”, that was not sufficient to establish that the parents were investing the $170,000 to acquire a beneficial interest in the property. The Cadwells had some business experience. They knew they were not going to be registered on title. There was no evidence of any discussions regarding proportionate ownership shares, sharing of expenses, etc…  On the evidence, the parents did not expect to have an ownership interest in the property. Instead, they expected to remain in the suite, free of charge, for some period of time, and the parents would be able to rely upon the defendants for help as needed.

The Court concluded that the parents intended the $170,000 payment to be a loan. The next issue was whether there had been repayment. The Court concluded there was no agreement for repayment by way of notional rent.

The Court held that the repayment schedule document was a forgery: “it represents the agreement that the defendants wish they had made with the Cadwells, but did not make.” It’s existence did not make sense in the circumstances, which included a conversation that Ruth surreptitiously recorded between her and one of the defendants, in which she asked for the return of her money.  The plaintiff went so far as to call an expert in computer fonts, who testified that the font used for the repayment schedule document did not reach public use until January 2007 (the defendants claimed the document was prepared in 2004).

However, the defendants were fortunate because the Court held that the claim was statute barred. The former Limitation Act applied to the claim, and so the six-year limitation period for the demand loan began to run on the day the loan was made. It should be noted that the current Limitation Period provides for a two year limitation period, which starts on the date that a demand is made.

As a result, the defendants did not have to repay the $170,000 amount due to the passage of time, even though they attempted to rely upon a forged document at trial (although they were not awarded their costs at trial due to their conduct).

There is a lesson here.  As observed by the Court:

[11]         As I am confident that everyone involved now recognizes, it would have been quite easy to document an agreement about the payment at the outset, thereby avoiding years of conflict.

Case Comment: No Executor’s Fee for Executor who Breached Fiduciary Duty

June 4, 2021

Under the B.C. Trustee Act, an executor is entitled to remuneration for administration of an estate, unless the Will states otherwise. However, executors should not expect to receive a fee regardless of their conduct. Executor misconduct, for example breach of fiduciary duty, may disentitle the executor to any fees, despite their efforts and time spent to administer the estate.

The B.C. Supreme Court recently considered executor misconduct in the context a passing of accounts and approval of executors’ fees in Zaradic Estate (Re) 2021 BCSC 1037. In Zaradic, The sole beneficiary was a friend of the deceased. The joint executors were a husband and wife, who were also friends of the deceased.  The executors sought to pass their accounts, which included payment of an executors’ fee.

The Trustee Act provides that an executor is entitled to remuneration of up to a maximum of 5% of the gross aggregate value of the estate (including all capital and income) unless the will provides otherwise. In Zaradic, the Will allowed for the executors to claim a fee up to 10%.

The criteria for determining an appropriate fee includes:

  1. The magnitude of the trust;
  2. The care and responsibility involved;
  3. The time occupied administering the trust;
  4. The skill and ability displayed; and
  5. The success achieved in the final result.

The beneficiary argued that the executors ought to be denied any fees for administering the estate by reason of their alleged breach of trust in attempting to sell the deceased’s house to their daughter for roughly 50% of its market value. The beneficiary had to commence a legal action and obtain a certificate of pending litigation to prevent the sale of the deceased’s home. The executors had also loaned their daughter $13,000 of estate monies to ensure she had enough money to complete the sale.

The executors tried to place the blame on (1) their experience with property ownership generally, and (2) a notary who allegedly advised them to take this course of action. The property eventually sold for fair market value, but the beneficiary incurred legal costs in order to make sure that this happened.

The Will provided as follows with respect to remuneration:

. . . My trustees may claim remuneration for acting as Trustees in the amount of Ten Percent (10%) of the net value of the residue of my estate to be shared equally between them, in lieu of any Executor or Trustees Fee’s.

The executors argued that this wording meant that they were entitled to a 10% fee regardless of their conduct. The Court did not agree. The Will said that the executors may “claim” for remuneration, but the amount of the fee was not fixed and had to be approved by the court if the beneficiary did not agree.

In terms of the amount of the fee, the Court concluded that the actions of the executors in relation to the attempted sale for less than market value to their daughter were “an egregious breach of their fiduciary duty,” which disentitled them to any fee.

The executors were denied any fee for their time spent administering the estate.  While there was a measure of care and responsibility involved in handling the estate, the executors’ efforts were a “dismal failure” when it came to the skill and ability displayed and the success achieved.  In other words,  all of their time and effort spent on the estate was eclipsed by their breach of fiduciary duty.